10-Q 1 k72411e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 09/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to _____________________ Commission File Number: (Under the Securities Act of 1933) 33-37977 MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MICHIGAN 38-2726166 ---------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 PROGRESS PLACE, MIDLAND, MICHIGAN 48640 ---------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (989) 839-6000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS

-1- PART I. FINANCIAL INFORMATION Item 1. Financial Statements MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS AS OF (In Thousands)

The accompanying condensed notes are an integral part of these statements. -2- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands)

The accompanying condensed notes are an integral part of these statements. -3- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (Unaudited) (In Thousands)

The accompanying notes are an integral part of these statements. -4- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)

The accompanying notes are an integral part of these statements. -5- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS These consolidated financial statements and condensed notes should be read along with the audited financial statements and notes as contained in the Annual Report on Form 10-K for the year ended December 31, 2001 of Midland Cogeneration Venture Limited Partnership ("MCV"), which includes the Report of Independent Public Accountants. In the opinion of management, the unaudited information herein reflects all adjustments (which include only normal recurring adjustments) necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. Prior period amounts have been reclassified for comparative purposes. These reclassifications had no effect on net income. The consolidated financial statements include the accounts of MCV and its wholly-owned subsidiaries. All material transactions and balances among entities, which comprise MCV, have been eliminated in the consolidated financial statements. (1) THE PARTNERSHIP AND ASSOCIATED RISKS MCV was organized to construct, own and operate a combined-cycle, gas-fired cogeneration facility (the "Facility") located in Midland, Michigan. MCV was formed on January 27, 1987, and the Facility began commercial operation in 1990. In 1992, MCV acquired the outstanding common stock of PVCO Corp., a previously inactive company. MCV and PVCO Corp. entered into a partnership agreement to form MCV Gas Acquisition General Partnership ("MCV GAGP") for the purpose of buying and selling natural gas on the spot market and other transactions involving natural gas activities. Currently, MCV GAGP is not actively engaged in any business activity. The Facility was originally designed to provide approximately 1,370 megawatts ("MW") of electricity and approximately 1.5 million pounds of process steam per hour. Subsequent improvements to the Facility have increased net electrical generating capacity to approximately 1,500 MW. MCV has entered into three principal energy sales agreements. MCV has contracted to (i) supply up to 1,240 MW of electric capacity ("Contract Capacity") to Consumers Energy Company ("Consumers") under the Power Purchase Agreement ("PPA"), for resale to its customers, (ii) supply electricity and steam to The Dow Chemical Company ("Dow") under the Steam and Electric Power Agreement ("SEPA") and (iii) supply steam to Dow Corning Corporation ("DCC") under the Steam Purchase Agreement ("SPA"). From time to time, MCV enters into other sales agreements for the sale of excess capacity and/or energy available above MCV's internal use and obligations under the PPA, SEPA and SPA. Results of operations are primarily dependent on successfully operating the Facility at or near contractual capacity levels and on Consumers' ability to perform its obligations under the PPA with MCV. Sales pursuant to the PPA have historically accounted for over 90% of MCV's revenues. The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the Michigan Public Service Commission ("MPSC") does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA (the "regulatory-out" provision). Until September 15, 2007, however, the capacity charge may not be reduced below an average capacity rate of 3.77 cents per kilowatt hour for the available Contract Capacity notwithstanding the "regulatory-out" provision. Consumers and MCV are required to support and defend the terms of the PPA. The Facility is a qualifying cogeneration facility ("QF") originally certified by the Federal Energy Regulatory Commission ("FERC") under the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"). In order to maintain QF status, certain operating and efficiency standards must be maintained on a calendar-year basis and certain ownership limitations must be met. In the case of a topping-cycle generating plant such as the Facility, the applicable operating standard requires that the portion of total energy output that is put to some useful purpose other than facilitating the production of power (the "Thermal Percentage") be at least 5%. In addition, the Facility must achieve a PURPA efficiency standard (the sum of the useful power output plus one-half of the useful thermal energy output, divided by the energy input (the "Efficiency Percentage")) of at least 45%. If the Facility maintains a Thermal Percentage of 15% or higher, the required Efficiency Percentage is reduced to 42.5%. Since 1990, the Facility has achieved the applicable Thermal and Efficiency Percentages. For the nine months ended September 30, 2002, the Facility achieved a Thermal Percentage of 17.4% and a PURPA Efficiency Percentage of 46.9%. The loss of QF status could, among other things, cause the Facility to -6- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) lose its rights under PURPA to sell power to Consumers at Consumers' "avoided cost" and subject the Facility to additional federal and state regulatory requirements. MCV believes that the Facility will meet the required Thermal and the corresponding Efficiency Percentages in 2002 and beyond, as well as the PURPA ownership limitations. The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility's operating expenses consist of the costs of natural gas. MCV recognizes that its existing gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of the existing gas contracts. In addition, to the extent that the costs associated with production of electricity rise faster than the energy charge payments, MCV's financial performance will be negatively affected. The amount of such impact will depend upon the amount of the average energy charge payable under the PPA, which is based upon costs incurred at Consumers' coal-fired plants and upon the amount of energy scheduled by Consumers for delivery under the PPA. However, given the unpredictability of these factors, the overall economic impact upon MCV of changes in energy charges payable under the PPA and in future fuel costs under new or existing contracts cannot accurately be predicted. Beginning in July 2000, in response to the rapidly escalating cost of natural gas, MCV and Consumers agreed to reduce the dispatch level of the Facility, from time to time. In the event of reduced dispatch, MCV agreed to share the savings realized by not having to generate the electricity. For the nine months ended September 30, 2002 and 2001, MCV estimates that these electric dispatch reduction transactions resulted in net savings of approximately $1.0 million and $7.6 million, respectively, a portion of which will be realized in reduced maintenance expenditures in future years. MCV anticipates entering into similar transactions in the future to mitigate the impact of high market gas prices, if circumstances warrant such use. At both the state and federal level, efforts continue to restructure the electric industry. One significant issue to MCV is the issue of stranded cost recovery by utilities for PPA charges. At the state level, the MPSC entered a series of orders from June 1997 through February 1998 (collectively the "Restructuring Orders"), mandating that utilities "wheel" third-party power to the utilities' customers, thus permitting customers to choose their power provider. MCV, as well as others, filed an appeal in the Michigan Court of Appeals to protect against denial of recovery by Consumers of PPA charges. The Michigan Court of Appeals found that the Restructuring Orders do not unequivocally disallow such recovery by Consumers and, therefore, MCV's issues were not ripe for appellate review and no actual controversy regarding recovery of costs could occur until 2008, at the earliest. In June 2000, the State of Michigan enacted legislation which, among other things, states that the Restructuring Orders (being voluntarily implemented by Consumers) are in compliance with the legislation and enforceable by the MPSC. The legislation provides that the rights of parties to existing contracts between utilities (like Consumers) and QFs (like MCV), including the rights to have the PPA charges recovered from customers of the utilities, are not abrogated or diminished, and permitted utilities to securitize certain stranded costs including PPA charges. In 1999, the U.S. District Court granted summary judgment to MCV declaring that the Restructuring Orders are preempted by federal law to the extent they prohibit Consumers from recovering from its customers any charge for avoided costs (or "stranded costs") to be paid to MCV under PURPA pursuant to the PPA. In 2001, the United States Court of Appeals ("Appellate Court") vacated the U.S. District Court's 1999 summary judgment and ordered the case dismissed based upon a finding that no actual case or controversy existed for adjudication between the parties. The Appellate Court determined that the parties' dispute is hypothetical at this time and the QFs' (including MCV) claims are premised on speculation about how an order might be interpreted by a future MPSC. MCV continues to monitor and participate in these industry restructuring matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. MCV management cannot, at this time, predict the impact or outcome of these matters. -7- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS Fair Value of Financial Instruments The carrying amounts of cash, cash equivalents and short-term investments approximate fair value because of the short maturity of these instruments. MCV's short-term investments, which are made up of investment securities held-to-maturity, as of September 30, 2002 and December 31, 2001, have original maturity dates of approximately one year or less. The unique nature of the negotiated financing obligation discussed in Note 5 makes it impractical to estimate the fair value of the lessor group ("Owner Participants") underlying debt and equity instruments supporting such financing obligation. Accounting for Derivative Instruments and Hedging Activities Effective January 1, 2001, MCV adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was issued in June 1998 and then amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities - An amendment of FASB Statement No. 133" (collectively referred to as "SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges in some cases allows a derivative's gains and losses to offset related results on the hedged item in the income statement or permits recognition of the hedge results in other comprehensive income, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Electric Sales Agreements On June 27, 2001, and subsequently on December 19, 2001, the Financial Accounting Standards Board ("FASB") issued Derivative Implementation Group ("DIG") Issue C-15, extending the normal purchase and sales exception to electric power purchase or sales agreements that meet specific criteria. MCV believes that its electric sales agreements currently do not qualify as derivatives under SFAS No. 133, and as such does not record the fair value of these contracts on its balance sheet. Forward Foreign Exchange Contracts An amended service agreement was entered into between MCV and Alstom Power Company ("Alstom") (the "Amended Service Agreement"), under which Alstom will provide hot gas path parts for MCV's twelve gas turbines through the ninth series of major gas turbine generator ("GTG") inspections, which are expected to be completed by year-end 2008. The payments due to Alstom under the Amended Service Agreement are adjusted annually based on the U.S. dollar to Swiss franc currency exchange rate. To manage this currency exchange rate risk and hedge against adverse currency fluctuations impacting the payments under the Amended Service Agreement, MCV maintains a foreign currency hedging program. Under this program, MCV periodically enters into forward purchase contracts for Swiss francs. Under SFAS No. 133, the forward foreign currency exchange contracts qualify as fair value hedges, since they hedge the identifiable foreign currency commitment of the Amended Service Agreement. The gains and losses on these forward contracts, as well as the change in value of the firm commitment, are to be recognized currently in earnings. Since the currency, notional amounts and maturity dates on the hedged transactions and forward contracts essentially match, the January 1, 2001 adoption of SFAS No. 133 resulted in an immaterial cumulative effect accounting change and is expected to have an immaterial earnings impact on an ongoing basis. The final gains and losses on these transactions, accounted for as hedges, will be included in the measurement of the underlying capitalized major renewal costs when incurred. As of September 30, 2002 and December 31, 2001, MCV had forward purchase contracts involving Swiss Francs in the notional amount of $5.0 million and $10.0 million, respectively, these hedges are considered highly effective, therefore, there is no material gain or loss recognized during the periods ended September 30, 2002 and December 31, 2001. -8- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Natural Gas Supply Contracts MCV Management believes that its long-term natural gas contracts, which do not contain volume optionality, qualify under SFAS No. 133 for the normal purchases and normal sales exception. Therefore, these contracts are currently not recognized at fair value on the balance sheet. The FASB issued DIG Issue C-16, which became effective April 1, 2002, regarding natural gas commodity contracts that combine an option component and a forward component. This guidance requires either that the entire contract be accounted for as a derivative or the components of the contract be separated into two discrete contracts. Under the first alternative, the entire contract considered together would not qualify for the normal purchases and sales exception under the revised guidance. Under the second alternative, the newly established forward contract could qualify for the normal purchases and sales exception, while the option contract would be treated as a derivative under SFAS No. 133 with changes in fair value recorded through earnings. MCV currently has nine long-term gas contracts that contain both an option and forward component. At April 1, 2002, MCV had not separated these contracts. As such, they are no longer accounted for under the normal purchases and sales exception and MCV began mark-to-market accounting of these nine contracts through earnings. Based on the natural gas prices, at the beginning of April 2002, MCV recorded a $58.1 million gain for the cumulative effect of this accounting change. As of September 30, 2002, MCV recorded in "Fuel costs" an additional $11.9 million net mark-to-market gain in earnings, associated with these contracts. As of September 30, 2002, MCV recorded "Derivative assets" in Current Assets and Other Assets in the amounts of $40.8 million and $29.2 million, respectively, representing the mark-to-market gain on these long-term contracts. MCV expects these contracts to cause future earnings volatility, since changes to this mark-to-market gain will be recorded on a quarterly basis during the remaining life of approximately five years for these gas contracts. In October 2002, MCV removed the option component from two of the nine long-term gas contracts discussed above and is currently working to remove the optionality presently contained in some of the other contracts, which should reduce the earnings volatility. Natural Gas Supply Futures and Options To manage market risks associated with the volatility of natural gas prices, MCV maintains a gas hedging program. MCV enters into natural gas futures and option contracts in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are being utilized principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize MCV's existing gas supply, storage and transportation arrangements. These financial instruments are derivatives under SFAS No. 133 and the contracts that are utilized to secure the anticipated natural gas requirements necessary for projected electric and steam sales qualify as cash flow hedges under SFAS No. 133, since they hedge the price risk associated with the cost of natural gas. MCV also engages in cost mitigation activities to offset the fixed charges MCV incurs in operating the Facility. These cost mitigation activities include the use of futures and options contracts to purchase and/or sell natural gas to maximize the use of the transportation and storage contracts when it is determined that they will not be needed for Facility operation. Although these cost mitigation activities do serve to offset the fixed monthly charges, these cost mitigation activities are not considered a normal course of business for MCV and do not qualify as hedges under SFAS No. 133. Therefore, the resulting mark-to-market gains and losses from cost mitigation activities are flowed through MCV's earnings. Cash is deposited with the broker in a margin account at the time futures or options contracts are initiated. The change in market value of these contracts requires adjustment of the margin account balances. The margin balance, recorded as a current asset in "Broker margin accounts and prepaid expenses," was $10.0 million and $32.0 million as of September 30, 2002 and December 31, 2001, respectively. Upon the January 1, 2001 adoption of SFAS No. 133, under the transaction rules, the cumulative effect accounting gain related to the fair value of the derivative instruments held for cost mitigation activities and derivatives that do not qualify for hedge accounting, were reflected in other comprehensive income based on previous hedging relationships. These futures and options totaled 1.9 Billion cubic feet ("Bcf") with a total -9- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) fair value loss of $2.2 million. Fair value changes in these contracts were recognized currently in income and the amount reflected in other comprehensive income was reclassified to income when the original underlying transactions occurred during the first quarter of 2001. The adoption of SFAS No. 133 resulted in a total cumulative effect accounting gain, including cost mitigation activities of $15.7 million, which was recognized in other comprehensive income. For the nine month period ended September 30, 2002, MCV has recognized in other comprehensive income, an unrealized and realized $38.6 million increase on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas, resulting in a net $14.3 million gain balance in other comprehensive income as of September 30, 2002. This balance represents natural gas futures and options with maturities ranging from October 2002 to December 2005, of which $12.6 million of this gain is expected to be reclassified into earnings within the next twelve months. MCV also has recorded, as of September 30, 2002, a $15.0 million derivative asset in "Derivative assets," representing the mark-to-market gain on natural gas futures for anticipated projected electric and steam sales accounted for as hedges. In addition, for the nine months ended September 30, 2002, MCV has recorded a net $14.7 million loss in earnings from hedging activities related to MCV natural gas requirements for Facility operations and a net $.4 million gain in earnings from cost mitigation activities. For the nine months ended September 30, 2001, MCV recognized an unrealized and realized $45.4 million decrease in other comprehensive income on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas, resulting in a $29.7 million loss in other comprehensive income as of September 30, 2001. In addition, for the nine months ended September 30, 2001, MCV recorded a net $2.4 million gain in earnings from hedging activities and cost mitigation activities. Interest Rate Swaps To manage the effects of interest rate volatility on interest income while maximizing return on permitted investments, MCV established an interest rate hedging program. The notional amounts of the hedges are tied directly to MCV's anticipated cash investments, without physically exchanging the underlying notional amounts. Cash is deposited with the broker in a margin account at the time the interest rate swap transactions are initiated. The change in market value of these contracts may require further adjustment of the margin account balance. The margin balance recorded as a current asset in "Broker margin accounts and prepaid expenses," was approximately $25,000 and $30,000 for the periods ending as of September 30, 2002 and December 31, 2001, respectively. As of September 30, 2002 and December 31, 2001, MCV did not have any interest rate swap transactions outstanding which qualified for cash flow hedge accounting. The January 1, 2001 adoption of SFAS No. 133 resulted in an immaterial cumulative effect accounting change gain recognized in other comprehensive income, and for the nine months ended September 30, 2001, MCV recorded a gain of approximately $100,000 in earnings for the cash flow hedging activity. MCV has one interest rate swap, with a notional amount of $20 million with a period of performance that extends until December 1, 2002, which does not qualify as a hedge under SFAS No. 133. The gains and losses on this swap are recorded currently in earnings. For the nine months ended September 30, 2002 and 2001, MCV recorded an immaterial loss and a gain of approximately $800,000 in earnings, respectively. -10- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) RESTRICTED CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES HELD-TO-MATURITY Current and non-current restricted cash and cash equivalents and investment securities held-to-maturity consist of the following as of (in thousands):

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

(5) LONG-TERM DEBT

Financing Obligation In 1990, MCV obtained permanent financing for the Facility by entering into sale and leaseback agreements ("Overall Lease Transaction") with a lessor group, related to substantially all of MCV's fixed assets. Proceeds of the financing were used to retire borrowings outstanding under existing loan commitments, make a capital distribution to the partners of MCV and retire a portion of the notes issued by MCV to MEC Development Corporation ("MDC") in connection with the transfer of certain assets by MDC to MCV. In accordance with SFAS No. 98, "Accounting For Leases," the sale and leaseback transaction has been accounted for as a financing arrangement. -11- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The financing obligation utilizes the effective interest rate method, which is based on the minimum lease payments required through the end of the basic lease term of 2015 and MCV management's estimate of additional anticipated obligations after the end of the basic lease term. The effective interest rate during the remainder of the basic lease term is approximately 9.4%. Interest and fees incurred related to long-term debt arrangements during the nine months ended September 30, 2002 and 2001 were $89.7 million and $94.1 million, respectively. Interest and fees paid for the nine months ended September 30, 2002 and 2001 were $122.1 million and $131.7 million, respectively. -12- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (6) PARTNERS' EQUITY AND RELATED PARTY TRANSACTIONS The following table summarizes the nature and amount of each of MCV's Partner's equity interest, interest in profits and losses of MCV at September 30, 2002, and the nature and amount of related party transactions or agreements that existed with MCV's partners or affiliates as of September 30, 2002 and 2001, and for each of the nine month periods ended September 30 (in thousands).

Footnotes to Partners' Equity and Related Party Transactions (1) A letter of credit was issued and recorded as a note receivable from El Paso Midland, this amount included their share of cash available, as well as, cash available to MEI, MLP and SMLP. (2) Alanna's capital stock is pledged to secure MCV's obligation under the lease and other overall lease transaction documents. -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP This MD&A should be read along with the MD&A in the Annual Report on Form 10-K for the year ended December 31, 2001 of the Midland Cogeneration Venture Limited Partnership ("MCV"). Results of Operations: Operating Revenues Statistics The following represents significant operating revenue statistics for the following periods (dollars in thousands except average rates):

Comparison of the Three Months ended September 30, 2002 and 2001: Overview: For the third quarter of 2002, MCV recorded net income of $9.0 million, which includes a $3.4 million quarterly mark-to-market loss recorded at September 30, 2002 in "Fuel costs", resulting from the April 1, 2002 change in method of accounting for long-term gas derivative option contracts. Certain natural gas contracts that contain optionality are now being marked-to-market through earnings, as required by a newly effective interpretation of SFAS No. 133. MCV's recorded net income, without the effects of the mark-to-market change of $3.4 million, was $12.4 million as compared to net income of $13.5 million for the third quarter of 2001. The earnings decrease, for the third quarter of 2002 compared to 2001, was primarily due to higher natural gas prices under MCV's long-term contracts, lower capacity and energy revenues under summer option agreements, a lower electric dispatch under the PPA and lower interest income on MCV's invested cash reserves. This decrease was partially offset by the 2001 expensing of development costs and lower interest expense on MCV's financing arrangements. -14- Operating Revenues: For the third quarter of 2002, MCV's operating revenues decreased $9.2 million from the third quarter of 2001. This decrease is due primarily to lower capacity and energy revenues under summer option agreements with Consumers and other third parties, a lower electric dispatch under the PPA with Consumers and lower energy rates under the SEPA with Dow. This decrease was partially offset by higher energy rates under the PPA. Operating Expenses: For the third quarter of 2002, MCV's operating expenses were $120.2 million, which includes $82.0 million of fuel costs, including a $3.4 million quarterly mark-to-market loss on the natural gas contracts that contain optionality. During this period, MCV purchased approximately 21.6 Bcf of natural gas, and a net 1.0 Bcf was injected into storage and used for transportation fuel. During this same period, MCV consumed 21.1 Bcf of which .5 Bcf of this total was gas provided by Dow. The average commodity cost of fuel for the third quarter of 2002 was $3.32 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. Without the effects of the disposition of the excess gas supplies, the average commodity cost of fuel for the third quarter of 2002 would have been $3.33 per MMBtu. For the third quarter of 2001, MCV's operating expenses were $125.1 million, which includes $78.5 million of fuel costs. During this period, MCV purchased approximately 25.5 Bcf of natural gas, and a net 1.9 Bcf was injected into storage and used for transportation fuel. During this same period, MCV consumed 23.6 Bcf. The average commodity cost of fuel for the third quarter of 2001 was $2.85 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. Without the effects of the disposition of the excess gas supplies, the average commodity cost of fuel for the third quarter of 2001 would have been $2.86 per MMBtu. Fuel costs for the third quarter of 2002 compared to 2001 increased by $.1 million, excluding the $3.4 million quarterly mark-to-market loss. This slight fuel cost increase was due to higher natural gas prices under MCV's long-term gas contracts, offset by lower gas usage resulting from Dow's election to toll gas in 2002. For the third quarter of 2002, operating expenses other than fuel costs decreased $8.4 million from the third quarter of 2001, primarily resulting from the 2001 expensing of $6.7 million of development costs. All other expenses incurred in these periods were considered normal expenditures to achieve the recorded operating revenues. Other Income (Expense): For the third quarter of 2002, interest and other income decreased $2.1 million compared to 2001, primarily resulting from lower interest rates on MCV's invested cash and a lower average invested balance. The decrease in interest expense for the third quarter of 2002 compared to 2001 of $2.0 million is due to a lower principal balance on MCV's financing obligation. Comparison of the Nine Months ended September 30, 2002 and 2001: Overview: For the first nine months of 2002, MCV recorded net income of $105.3 million, which includes the April 1, 2002 change in method of accounting for long-term gas derivative option contracts. Certain natural gas contracts that contain optionality are now being marked-to-market through earnings, as required by SFAS No. 133. The cumulative effect of this accounting change as of April 1, 2002 increased earnings by approximately $58.1 million and the additional quarterly mark-to-market adjustments as of September 30, 2002 resulted in an additional net earning increase of $11.9 million, in "Fuel costs". MCV's recorded net income, without the effects of the accounting change of $70.0 million, was $35.3 million as compared to net income of $43.7 million for the first nine months of 2001. The earnings decrease, for the first nine months of 2002 compared to 2001, was primarily due to higher natural gas prices under MCV's long-term contracts, lower interest income on MCV's invested cash reserves and lower capacity and energy sales under summer option agreements. This decrease was partially offset by the 2001 expensing of development costs, lower costs associated with the electric dispatch reduction transactions entered into with Consumers, lower interest expense on MCV's financing arrangements and increased electric rates under the PPA. -15- Operating Revenues: For the first nine months of 2002, MCV's operating revenues decreased $3.0 million from the first nine months of 2001. This decrease is due primarily to lower capacity and energy revenues under summer option agreements with Consumers and other third parties; and by lower energy rates under the SEPA with Dow. This decrease was partially offset by an increase in the electric dispatch and higher energy rates both under the PPA with Consumers. Operating Expenses: For the first nine months of 2002, MCV's operating expenses were $317.7 million, which includes $203.1 million of fuel costs, including an $11.9 million mark-to-market net gain on the natural gas contracts which contain optionality. During this period, MCV purchased approximately 58.3 Bcf of natural gas, and a net 1.8 Bcf was used for transportation fuel and as a net change to gas in storage. During this same period, MCV consumed 58.4 Bcf of which 1.9 Bcf of this total was gas provided by Dow. The average commodity cost of fuel for the first nine months of 2002 was $3.24 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. Without the effects of the disposition of the excess gas supplies, the average commodity cost of fuel for the first nine months of 2002 would have been $3.33 per MMBtu. For the first nine months of 2001, MCV's operating expenses were $329.1 million, which includes $203.1 million of fuel costs. During this period, MCV purchased approximately 61.7 Bcf of natural gas, and a net 4.2 Bcf was injected into storage and used for transportation fuel. During this same period, MCV consumed 57.5 Bcf. The average commodity cost of fuel for the first nine months of 2001 was $2.94 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. Without the effects of the disposition of the excess gas supplies, the average commodity cost of fuel for the first nine months of 2001 would have been $3.22 per MMBtu. Fuel costs for the first nine months of 2002 compared to 2001 increased by $11.9 million, excluding the $11.9 million mark-to-market net gain. This fuel cost increase was due to higher natural gas prices under MCV's long-term gas contracts and a higher electric dispatch under the PPA. This increase was partially offset by lower costs associated with the electric dispatch reduction transaction entered into with Consumers and a lower gas usage resulting from Dow's election to toll gas. For the first nine months of 2002, operating expenses other than fuel costs decreased $11.4 million from the first nine months of 2001, primarily resulting from the 2001 expensing of $6.7 million of development costs and lower depreciation expense. All other expenses incurred in these periods were considered normal expenditures to achieve the recorded operating revenues. Other Income (Expense): For the first nine months of 2002, interest and other income decreased $9.5 million compared to 2001, primarily resulting from lower interest rates on MCV's invested cash and a lower average invested balance. The decrease in interest expense for the first nine months of 2002 compared to 2001 of $4.5 million is due to a lower principal balance on MCV's financing obligation. Cumulative Effect of Accounting Change: Effective April 1, 2002, the FASB issued guidance regarding natural gas commodity contracts that combine an option component and a forward component. This guidance requires either that the entire contract be accounted for as a derivative or the components of the contract be separated into two discrete contracts. As of April 1, 2002 MCV had nine long-term gas contracts that each contain both an option and forward component. As such, they are no longer accounted for under the normal purchases and sales exception and MCV began mark-to-market accounting of these nine contracts through earnings. Based on the natural gas prices, at the beginning of April 2002, MCV recorded a $58.1 million gain for the cumulative effect of this accounting change. MCV expects these contracts to cause future earnings volatility, since changes to this mark-to-market gain will be recorded on a quarterly basis during the remaining life of the gas contracts, which approximates five years. In October 2002, MCV removed the option component from two of the nine long-term gas contracts discussed above and MCV is currently working to remove the optionality presently contained in some of the other contracts, which should reduce the earnings volatility. -16- Liquidity and Capital Resources During the nine months ended September 30, 2002 and 2001, net cash generated by MCV's operations was $144.3 million and $56.4 million, respectively. The primary use of net cash was for the payment of principal on the financing obligation required under the Overall Lease Transaction and capital expenditures. MCV's cash and cash equivalents have a normal cycle of collecting six months of revenues less operating expenses prior to making the semiannual payments under the financing obligation due in January and July for the next thirteen years. During 2002 and 2001, MCV paid financing obligation requirements of $304.1 million and $287.1 million, respectively, as required under the Overall Lease Transaction. MCV also has a $50 million working capital line ("Working Capital Facility") from the Bank of Montreal to provide temporary financing, as necessary, for operations. The Working Capital Facility has been secured by MCV's natural gas inventory and earned receivables. At any given time, borrowings and letters of credit are limited by the amount of the borrowing base, defined as 90% of earned receivables and 50% of natural gas inventory. The borrowing base varies over the month as receivables are earned, billed and collected and as natural gas inventory balances are built and depleted. In addition, earned receivables borrowing base can be effected by Consumers credit rating. The Working Capital Facility term currently expires on August 29, 2003. MCV did not utilize the Working Capital Facility during the first nine months of 2002, except for letters of credit associated with normal business practices. MCV believes that amounts available to it under the Working Capital Facility along with available cash reserves will be sufficient to meet any working capital shortfalls that might occur. For the foreseeable future, MCV expects to fund current operating expenses and payments under the amended Service Agreement primarily through cash flows from operations. Due to uneven future scheduled financing obligation payments (high summer payment, low winter payment), MCV anticipates that it will be drawing on its cash reserves to fund temporary cash flow shortfalls. These cash flow shortfalls are anticipated to be replenished annually. If necessary, MCV could fund any ongoing operating cash flow shortfalls from cash reserves to the extent available for such purposes. As of September 30, 2002, there was approximately $221.2 million of cash reserves. Disclosure about Contractual Obligations MCV has assumed various financial obligations and commitments in the normal course of its business. These obligations are considered to represent expected cash payments that MCV is required to make under its existing contractual arrangements. As of September 30, 2002, MCV has the following contractual financial obligations and commitments:

(1) Represents obligations from October - December 2002. (2) Represents expected cash payments including interest. (3) Represents estimated minimum commitments under current long-term natural gas contracts, natural gas transportation reservation charges, spare parts purchases and ground lease agreement. (4) Represents the cost of current Facility maintenance service agreements. -17- Outlook "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995. The following discussion of the outlook for MCV contains certain "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995 (the "Act"), including without limitation, discussion as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed reflecting MCV's current expectations of the manner in which the various factors discussed therein may affect its business in the future. Any matters that are not historical facts are forward-looking and, accordingly, involve estimates, assumptions, and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Accordingly, this "Safe Harbor" Statement contains additional information about such factors relating to the forward-looking statements. There is no assurance that MCV's expectations will be realized or that unexpected events will not have an adverse impact on MCV's business. Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include governmental policies, legislation and other regulatory actions (including those of the Michigan Legislature, Congress, Federal Energy Regulatory Commission and the Michigan Public Service Commission) with respect to cost recovery under the PPA, industry restructuring or deregulation, operation and construction of plant facilities including natural gas pipeline and storage facilities, Consumers' ability to perform its obligation under the PPA and present or prospective wholesale and retail competition, among other factors. The business and profitability of MCV is also influenced by other factors such as pricing and transportation of natural gas, changes in accounting standards (such as accounting for derivative instruments and hedging activities) and environmental legislation/regulation. All such factors are difficult to predict, contain uncertainties which may materially affect actual results, and are beyond the control of MCV. Results of operations are largely dependent on successfully operating the Facility at or near contractual capacity levels, the availability of natural gas, the level of energy rates paid to MCV relative to the cost of fuel used for generation and maintenance of the Facility's QF status. Operating Outlook. During the first nine months of 2002, approximately 71% of PPA revenues were capacity payments under the PPA, which are billed on availability, subject to an annual availability cap of 98.5% pursuant to a settlement agreement between MCV and Consumers. Actual PPA availability was 98.5% for the first nine months of 2002, 99.5% for the year 2001 and 98.5% for the year 2000. Availability will depend on the level of scheduled and unscheduled maintenance outages, and on the sustained level of output from each of the GTGs and the steam turbines. MCV expects long-term PPA availability to meet or exceed the capped level of 98.5%, though prolonged equipment outages could materially reduce the level of availability. Natural Gas. The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility's operating expenses consist of the costs of natural gas. While MCV continues to pursue the acquisition of a portion of its expected fuel supply requirements in future years, MCV recognizes that its existing long term gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of its existing fixed price gas contracts or for gas that may be required by the Facility in excess of the gas that MCV has under contract. Energy Rates and Cost of Production. Under the PPA, energy charges are based on the costs associated with fuel inventory, operations and maintenance, and administrative and general expenses associated with certain of Consumers' coal plants. However, MCV's costs of producing electricity are tied, in large part, to the cost of natural gas. To the extent that the costs associated with production of electricity with natural gas, rise faster than the energy charge payments, which are based largely on Consumers' coal plant operation and maintenance costs, MCV's financial performance would be negatively affected. In addition, the extent to which the Facility is dispatched by Consumers can exacerbate the divergence between variable revenues and costs of production. For the period 1999 through September 2002, the unit energy charge (fixed and variable) paid to MCV has risen by 1.5%, while the average unit variable cost of delivered fuel for approximately the same period has risen by 19.7%. The divergence between variable revenues and costs will become greater if the energy charge (based largely on the cost of coal) declines or escalates more slowly than the spot market or contract prices under which MCV purchases fuel. Currently, MCV continues to purchase the majority of its natural gas requirements under long-term fixed-price -18- contracts, with a smaller portion of gas purchased on the spot market. MCV has maintained a hedging program to mitigate risk associated with volatile prices in the spot market. For the year 2002, MCV has entered into gas purchase and hedging arrangements with respect to most of its expected gas needs not provided for under its long-term contracts. MCV expects that its purchase and hedging arrangements will mitigate the effects of rises in natural gas prices for 2002, although high gas prices for an extended period of time could adversely affect operating results. In March 1998, Consumers began economically dispatching the Facility by scheduling energy deliveries on an economic basis relative to the cost of other energy resources available to Consumers, resulting in an average dispatch of approximately 75% from April 1998 through September 2002. Previously, the Facility was being dispatched on an uneconomic basis (relative to the cost of other energy resources) averaging approximately 90%. A return to uneconomic dispatch could negatively affect MCV's financial performance. Capacity and Energy Payments Under the PPA. The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the MPSC does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA (the "regulatory-out" provision). Until September 15, 2007, the capacity charge may not be reduced below an average capacity rate of 3.77 cents per kWh for the available Contract Capacity notwithstanding the "regulatory-out" provision. Consumers and MCV are required to support and defend the terms of the PPA. Michigan Electric Industry Restructuring. The MPSC issued orders in 1997 and 1998 (collectively the "Restructuring Orders"). The Restructuring Orders provide for a transition to a competitive regime whereby electric retail customers would be able to choose their power supplier and pay negotiated or market-based rates for such power supply. The Restructuring Orders also mandated that utilities "wheel" third-party power to the utilities' customers. An issue involved in restructuring, which could significantly impact MCV, is stranded cost recovery. The Restructuring Orders allow recovery by utilities (including Consumers) of net stranded costs, which include capacity charges from QFs, including MCV, previously approved by the MPSC, incurred during the regulated era that will be above market prices during the new competitive regime. However, it appears that stranded cost recovery of above-market capacity charges in power purchase contracts (including MCV's PPA) is limited to customers who chose an alternative power supplier and are only paid for the period 1998 through 2007 (MCV's PPA expires in 2025). Customers who chose to remain power supply customers of Consumers will continue to pay capacity charges as part of rates charged by Consumers, subject to MPSC rate regulation. The Restructuring Orders do not otherwise specifically address the recovery of PPA capacity charges after 2007. MCV, as well as others, filed appeals in state and federal courts challenging the Restructuring Orders. The Michigan Court of Appeals found that the Restructuring Orders do not unequivocally disallow recovery of PPA charges (capacity and energy) by Consumers and, therefore, MCV's issues were not ripe for appellate review and no actual controversy regarding recovery of costs could occur until 2008, at the earliest. This order is now final. In June 2000, the State of Michigan enacted legislation which, among other things, states that the Restructuring Orders (being voluntarily implemented by Consumers) are in compliance with the legislation and enforceable by the MPSC. The legislation provides that the rights of parties to existing contracts between utilities (like Consumers) and QF's (like MCV), including the rights to have the PPA charges recovered from customers of the utilities, are not abrogated or diminished, and permitted utilities to securitize certain stranded costs including PPA charges. In MCV's federal court challenge to the Restructuring Orders, the U.S. District Court granted summary judgment to MCV declaring, among other things, that the Restructuring Orders are preempted by federal law to the extent they prohibit Consumers from recovering from its customers any charge for avoided costs (or "stranded costs") to be paid to MCV under PURPA pursuant to the PPA. In June 2001, the United States Court of Appeals ("Appellate Court") vacated the U.S. District Court's summary judgment and ordered the case dismissed based upon a finding that no actual case or controversy existed for adjudication between the parties. The Appellate Court determined that the parties' dispute is hypothetical at this time and the QFs (including MCV) claims are premised on speculation about how an order might be interpreted in the year 2007 or beyond by a future MPSC. Federal Electric Industry Restructuring. FERC has jurisdiction over wholesale energy sales and is moving towards "market" based pricing of electricity as opposed to traditional cost-based pricing. In April 1996, FERC issued Order No. 888 requiring all utilities that FERC regulates to file uniform transmission tariffs providing for, among other -19- things, non-discriminatory "open access" to all wholesale buyers and sellers, including the transmission owner, on terms and conditions established by FERC. Order No. 888 also requires utilities to "functionally unbundle" transmission and separate transmission personnel from those responsible for marketing generation. In December 1999, FERC issued a final rule, Order No. 2000, designed to encourage all owners and operators of interstate electric transmission lines to join regional transmission organizations. Order No. 2000 is intended to increase competition and remedy continuing problems with wholesale transmission access and reliability. Order No. 2000 does not directly impact MCV since MCV does not own transmission lines, but could indirectly impact MCV in selling electricity in the wholesale market. Order No. 2000 and subsequent related orders were affirmed by the United States Court of Appeals for the D.C. Circuit. In 2002, FERC issued a Notice of Proposed Rulemaking ("NOPR") to examine remedying undue discrimination through open access transmission service and standardized electricity market design. Interested parties have until mid-November 2002 to file comments on the NOPR. MCV management cannot predict the outcome of the NOPR or the impact it may have on MCV's business, if any, at this time. Maintaining QF Status. In the case of a topping-cycle generating plant such as the Facility, to maintain QF Status the applicable operating standard requires that the portion of total energy output that is put to some useful purpose other than facilitating the production of power (the "Thermal Percentage") be at least 5%. In addition, the plant must achieve and maintain an average PURPA efficiency standard (the sum of the useful power output plus one-half of the useful thermal energy output, divided by the energy input (the "Efficiency Percentage")) of at least 45%. However, if the plant maintains a Thermal Percentage of 15% or higher, the required Efficiency Percentage is reduced to 42.5%. The tests are applied on a calendar year basis. The Facility has achieved the applicable Efficiency Percentage of 42.5% in each year since commercial operation, and in the years 1995 through 2001 the Facility achieved an Efficiency Percentage in excess of 45%. MCV believes that the Facility will be able to maintain QF status and be capable of achieving a 45% PURPA Efficiency Percentage on a long-term basis. In addition, MCV believes annual steam sales will be sufficient to allow the Facility to exceed the 15% Thermal Percentage. However, no assurance can be given that factors outside MCV's control will not cause the Facility to fail to satisfy the annual PURPA qualification requirements and thus lose its QF status. In 2001, MCV achieved an Efficiency Percentage of 47.0% and a Thermal Percentage of 18.3%. During the first nine months of 2002, MCV achieved an Efficiency Percentage of 46.9% and a Thermal Percentage of 17.4%. The loss of QF status could, among other things, cause the Facility to lose its right under PURPA to sell power to Consumers at Consumers' "avoided cost" and subject the Facility to additional federal and state regulatory requirements, including the Federal Power Act, as amended (under which FERC has authority to establish rates for electricity, which may be different than existing contractual rates). If the Facility were to lose its QF status, the Partners of MCV, the Owner Participants, the Owner Trustees and their respective parent companies could become subject to regulation under the Public Utility Holding Company Act of 1935 (under which, among other things, the Securities and Exchange Commission has authority to order divestiture of assets under certain circumstances). The loss of QF status would not, however, entitle Consumers to terminate the PPA. Under the PPA, Consumers is obligated to continue purchasing power from MCV at FERC-approved rates (provided that the FERC-approved rates do not exceed the existing contractual rates) and MCV, not Consumers, is entitled to terminate the PPA (which MCV has covenanted not to do under the Participation Agreements). There can be no assurance that FERC-approved rates would be the same as the rates currently in effect under the PPA. If the FERC-approved rates are materially less than the rates under the PPA, MCV may not have sufficient revenue to make financing obligation payments under the Overall Lease Transaction. The loss of QF status would constitute an Event of Default under the Lease (and a corresponding Event of Default under the Indenture) unless, among other requirements, FERC approves (or accepts for filing) rates under the PPA or other contracts of MCV for the sale of electricity sufficient to meet certain target coverage ratios (as defined in the Overall Lease Transaction). Critical Accounting Policies In preparing MCV's financial statements in accordance with accounting principles generally accepted in the United States, management must make a number of estimates and assumptions related to the reporting of assets, liabilities, -20- revenues and expenses. The following areas represent those that management believes are particularly important to the financial statements and that require the use of significant estimates and assumptions. Electric Industry Restructuring. At both the state and federal level, efforts continue to restructure the electric industry. In 1997 and 1998, the MPSC entered a series of orders, now final, permitting customers to choose their power provider over a four-year phase-in period, which started in 1999. In addition, Michigan enacted restructuring legislation in June 2000. Proposed restructuring legislation also exists at the federal level. One significant issue to MCV is the possible future regulatory denial of stranded cost recovery by Consumers of above-market PPA costs. Over 90% of MCV's revenues come from sales pursuant to the PPA. To date, restructuring has not negatively impacted MCV, but if restructuring results in denying stranded cost recovery of above-market PPA costs, MCV's cash flows may be negatively impacted, especially in the period after 2007. MCV continues to monitor and participate in these matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. Any future adjustment to property, plant and equipment, if required, would result in a one-time negative earnings impact. At this time, MCV management cannot predict the outcome of these matters or the magnitude of any possible adjustment. Natural Gas Contracts. Effective January 1, 2001, MCV adopted SFAS No. 133, which establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges in some cases allows a derivative's gains and losses to offset related results on the hedged item in the income statement or permits recognition of the hedge results in other comprehensive income, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. MCV management believes that MCV's current long-term natural gas contracts that do not contain volume optionality qualify under SFAS No. 133 for the normal purchases and sales exception. These long-term gas contracts are not being marked-to-market with gains or losses recorded in earnings. Should significant changes in the level of Facility operational dispatch or purchases of long-term gas occur, MCV would be required to re-evaluate its accounting treatment for these long-term gas contracts. This re-evaluation may result in recording mark-to-market activity on some contracts, which could add to earnings volatility. Effective April 1, 2002, the FASB issued guidance regarding natural gas commodity contracts that combine an option component and a forward component. This guidance requires either that the entire contract be accounted for as a derivative or that the components of the contract be separated into two discrete contracts. Under the second alternative, the newly established forward contract could qualify for the normal purchases and sales exception while the option contract would be treated as a derivative under SFAS No. 133, with changes in fair value recorded through earnings. MCV currently has nine long-term gas contracts that each contains both an option and forward component. As of April 1, 2002, MCV had not separated these contracts. As such, they are no longer accounted for under the normal purchases and sales exception and MCV began mark-to-market accounting of these contracts through earnings. MCV expects these contracts to cause future earnings volatility, since these contracts will be adjusted on a mark-to-market basis and affect future earnings through 2007 (the expiration date of the last contract). In October 2002, MCV removed the option component from two of the nine long-term gas contracts discussed above and is currently working to remove the optionality contained in some of the other contracts, which should reduce the earnings volatility. Property Tax Appeals. MCV currently accrues property taxes on the basis of the taxable value as assessed by the taxing authorities. MCV has filed property tax appeals contesting its property taxes for tax years 1997 through 2002. If MCV is successful in lowering its taxable value for these years, a one-time favorable earnings adjustment would be recorded. In addition, future property tax expense would be reduced. At this time, MCV management cannot predict the outcome of these appeals. -21- Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risks relating to MCV's operations result primarily from changes in commodity prices, interest rates and foreign exchange rates. To address these risks, MCV enters into various hedging transactions as described herein. MCV does not use financial instruments for trading purposes and does not use leveraged instruments. Fair values included herein have been determined based on quoted market prices. The information presented below should be read in conjunction with Part I, Item 1, "Condensed Notes to Unaudited Consolidated Financial Statements - Note 2, Risk Management Activities and Derivative Transactions and Note 5, Long-Term Debt". Interest Rate Risk. In 1990, MCV obtained permanent financing for the Facility by entering into sale and leaseback agreements ("Overall Lease Transaction") with a lessor group, related to substantially all of MCV's fixed assets. In accordance with SFAS No. 98, "Accounting For Leases," the sale and leaseback transaction has been accounted for as a financing arrangement. Under the terms of the Overall Lease Transaction, MCV sold undivided interests in all of the fixed assets of the Facility for approximately $2.3 billion, to the Owner Trusts established for the benefit of the Owner Participants. The financing arrangement, entered into for a basic term of 25 years, maturing in 2015, has an effective interest rate of approximately 9.4%, payable in semi-annual installments of principal and interest. Due to the unique nature of the negotiated financing obligation it is impractical to estimate the fair value of the Owner Participants' underlying debt and equity instruments supporting this financing obligation. To manage the effects of interest rate volatility on interest income while maximizing return on permitted investments, MCV has established an interest rate hedging program. The carrying amounts of MCV's short-term investments approximate fair value because of the short term maturity of these instruments. MCV's short-term investments are made up of investment securities held to maturity and as of September 30, 2002, have original maturity dates of approximately one year or less. For MCV's debt obligations, the table below presents principal cash flows and the related interest rate by expected maturity dates. The interest rate reflects the fixed effective rate of interest of the financing arrangement. For the interest rate swap transactions, the table presents the notional amounts and related interest rates by fiscal year of maturity. The variable rates presented are the average of the forward rates for the term of each contract, as valued at September 30, 2002:

Commodity Risk. MCV enters into natural gas futures and option contracts in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are being utilized principally to secure anticipated natural gas requirements necessary for projected electric sales and to lock in sales prices of natural gas previously obtained in order to optimize MCV's existing gas supply, storage and transportation arrangements. -22- The following table provides information about MCV's futures and option contracts that are sensitive to changes in natural gas prices; these futures and option contracts have maturity dates ranging from November 2002 to December 2005. The table presents the carrying amounts and fair values at September 30, 2002:

Foreign Currency Risk. MCV periodically enters into foreign exchange forward purchase contracts for Swiss Francs to hedge its foreign currency exposure against adverse currency fluctuations impacting the payments under the amended Service Agreement with Alstom. The gains and losses on these transactions, accounted for as hedges, are included in the measurement of the underlying capitalized major renewal costs when incurred. Forward contracts entered into by MCV have maturity dates of less than one year. As of September 30, 2002, MCV had forward purchase contracts involving Swiss Francs in the notional amount of $5.0 million, with a deferred $.8 million gain. See Part I, Item 1, "Condensed Notes to Unaudited Consolidated Financial Statements - Note 1" for a further discussion of associated risks and contingencies. Item 4. Controls and Procedures Disclosure Controls and Procedures Within the 90 days prior to the date of the filing of this report, MCV carried out an evaluation, under the supervision and with the participation of MCV's management, including the President and Chief Executive Officer, and the Chief Financial Officer, Vice President and Controller; of the effectiveness of the design and operation of MCV's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended). Based on such review of MCV's disclosure controls and procedures, the President and Chief Executive Officer, and the Chief Financial Officer, Vice President and Controller; have concluded that MCV's disclosure controls and procedures are effective. Changes in Internal Controls There have been no significant changes in MCV's internal controls or in other factors that could significantly affect these controls subsequent to the date MCV completed its evaluation. -23- PART II. OTHER INFORMATION Item 1. Legal Proceedings The discussion below is limited to an update of events or developments that have occurred in various judicial and administrative proceedings since June 13, 2002. A complete summary of all outstanding legal proceedings is set forth in MCV's Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 25, 2002. Property Tax Appeals In June 1997, MCV filed a property tax appeal against the City of Midland at the Michigan Tax Tribunal contesting MCV's 1997 property taxes. Subsequently, MCV filed appeals contesting its property taxes for tax years 1998 through 2002 at the Michigan Tax Tribunal. MCV is seeking a reduction of its annual property taxes on the basis that the City of Midland has over assessed the property's taxable value for ad valorem property tax purposes. MCV management cannot predict the outcome of these proceedings. Item 6. Exhibits and Reports on Form 8-K a.) List of Exhibits 99.1 President and Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Chief Financial Officer, Vice President and Controller Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 b.) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter for which this report was filed. -24- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP ---------------------------- (Registrant) Dated: November 12, 2002 /s/ James M. Kevra -------------------- ------------------------------------- James M. Kevra President and Chief Executive Officer Dated: November 12, 2002 /s/ James M. Rajewski -------------------- ------------------------------------- James M. Rajewski Chief Financial Officer, Vice President and Controller -25- CERTIFICATIONS I, James M. Kevra, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Midland Cogeneration Venture Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ James M. Kevra ------------------------------------- James M. Kevra President and Chief Executive Officer 26 I, James M. Rajewski, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Midland Cogeneration Venture Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; d) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and e) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): b) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and c) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ James M. Rajewski ----------------------------------------------- James M. Rajewski Chief Financial Officer, Vice President and Controller 27 10-Q EXHIBIT INDEX EXHIBIT NO. DESCRIPTION EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP 10-Q