10-Q 1 k79075e10vq.txt QUARTERLY REPORT 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 June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ----------------------- 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 --- --- 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 JUNE 30, 2003 TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page Item 1. Consolidated Financial Statements (Unaudited).....................2 Consolidated Balance Sheets ......................................2 Consolidated Statements of Operations ............................3 Consolidated Statements of Partners' Equity.......................4 Consolidated Statements of Cash Flows.............................5 Condensed Notes to Unaudited Consolidated Financial Statements....6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................15 Item 3. Quantitative and Qualitative Disclosures About Market Risk ......23 Item 4. Controls and Procedures..........................................24 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................25 Item 6. Exhibits and Reports on Form 8-K.................................25 Signatures.......................................................26 Certifications...................................................27 -1- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) 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 condensed notes are an integral part of these statements. -4- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)

The accompanying condensed notes are an integral part of these statements. -5- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS These consolidated financial statements and condensed notes should be read along with the audited financial statements and notes as contained in the Annual Report on Form 10-K for the year ended December 31, 2002 of Midland Cogeneration Venture Limited Partnership ("MCV"), which includes the Report of Independent Accountants, covering such financial statements. 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. Interim results may not be indicative of results that may be expected for any other interim period or for 2003 as a whole. (1) THE PARTNERSHIP AND ASSOCIATED RISKS MCV was organized to construct, own and operate a combined-cycle, gas-fired cogeneration facility (the "Facility") located in Midland, Michigan. MCV was formed on January 27, 1987, and the Facility began commercial operation in 1990. In 1992, MCV acquired the outstanding common stock of PVCO Corp., a previously inactive company. MCV and PVCO Corp. entered into a partnership agreement to form MCV Gas Acquisition General Partnership ("MCV GAGP") for the purpose of buying and selling natural gas on the spot market and other transactions involving natural gas activities. Currently, MCV GAGP is not actively engaged in any business activity. The Facility has a net electrical generating capacity of approximately 1500 MW and approximately 1.5 million pounds of process steam capacity per hour. MCV has entered into three principal energy sales agreements. MCV has contracted to (i) supply up to 1240 MW of electric capacity ("Contract Capacity") to Consumers Energy Company ("Consumers") under the Power Purchase Agreement ("PPA"), for resale to its customers through 2025, (ii) supply electricity and steam to The Dow Chemical Company ("Dow") under the Steam and Electric Power Agreement ("SEPA") through 2015 and (iii) supply steam to Dow Corning Corporation ("DCC") under the Steam Purchase Agreement ("SPA") through 2011. From time to time, MCV enters into other sales agreements for the sale of excess capacity and/or energy available above MCV's internal use and obligations under the PPA, SEPA and SPA. Results of operations are primarily dependent on successfully operating the Facility at or near contractual capacity levels and on Consumers' ability to perform its obligations under the PPA. Sales pursuant to the PPA have historically accounted for over 90% of MCV's revenues. The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the Michigan Public Service Commission ("MPSC") does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA (the "regulatory-out" provision). Until September 15, 2007, however, the capacity charge may not be reduced below an average capacity rate of 3.77 cents per kilowatt hour for the available Contract Capacity notwithstanding the "regulatory-out" provision. Consumers and MCV are required to support and defend the terms of the PPA. The Facility is a qualifying cogeneration facility ("QF") originally certified by the Federal Energy Regulatory Commission ("FERC") under the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"). In order to maintain QF status, certain operating and efficiency standards must be maintained on a calendar-year basis and certain ownership limitations must be met. In the case of a topping-cycle generating plant such as the Facility, the applicable operating standard requires that the portion of total energy output that is put to some useful purpose other than facilitating the production of power (the "Thermal Percentage") be at least 5%. In addition, the Facility must achieve a PURPA efficiency standard (the sum of the useful power output plus one-half of the useful thermal energy output, divided by the energy input (the "Efficiency Percentage")) of at least 45%. If the Facility maintains a Thermal Percentage of 15% or higher, the required Efficiency Percentage is reduced to 42.5%. Since 1990, the Facility has achieved the applicable Thermal and Efficiency Percentages. For the six months ended June 30, 2003, the Facility achieved a Thermal Percentage of 21.3% and an Efficiency -6- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Percentage of 47.5%. The loss of QF status could, among other things, cause the Facility to 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 2003 and beyond, as well as the PURPA ownership limitations. The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility's operating expenses consist of the costs of natural gas. MCV recognizes that its existing gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of the existing gas contracts. In addition, to the extent that the costs associated with production of electricity rise faster than the energy charge payments, MCV's financial performance will be negatively affected. The extent of such impact will depend upon the amount of the average energy charge payable under the PPA, which is based upon costs incurred at Consumers' coal-fired plants and upon the amount of energy scheduled by Consumers for delivery under the PPA. However, given the unpredictability of these factors, the overall economic impact upon MCV of changes in energy charges payable under the PPA and in future fuel costs under new or existing contracts cannot accurately be predicted. Beginning in July 2000, in response to the rapidly escalating cost of natural gas, MCV and Consumers agreed to reduce the dispatch level of the Facility, from time to time. In the event of reduced dispatch, MCV agreed to share the savings realized by not having to generate the electricity. For the six months ended June 30, 2003 and June 30, 2002, MCV estimates that these electric dispatch reduction transactions resulted in net savings of approximately $5.7 million and $.9 million, respectively, a portion of which will be realized in reduced maintenance expenditures in future years. MCV anticipates entering into similar transactions in the future to mitigate the impact of high market gas prices, if circumstances warrant such use. At both the state and federal level, efforts continue to restructure the electric industry. A significant issue to MCV is the potential for future regulatory denial of recovery by Consumers from its customers of above market PPA costs Consumers pays MCV. At the state level, the MPSC entered a series of orders from June 1997 through February 1998 (collectively the "Restructuring Orders"), mandating that utilities "wheel" third-party power to the utilities' customers, thus permitting customers to choose their power provider. MCV, as well as others, filed an appeal in the Michigan Court of Appeals to protect against denial of recovery by Consumers of PPA charges. The Michigan Court of Appeals found that the Restructuring Orders do not unequivocally disallow such recovery by Consumers and, therefore, MCV's issues were not ripe for appellate review and no actual controversy regarding recovery of costs could occur until 2008, at the earliest. In June 2000, the State of Michigan enacted legislation which, among other things, states that the Restructuring Orders (being voluntarily implemented by Consumers) are in compliance with the legislation and enforceable by the MPSC. The legislation provides that the rights of parties to existing contracts between utilities (like Consumers) and QFs (like MCV), including the rights to have the PPA charges recovered from customers of the utilities, are not abrogated or diminished, and 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 the MPSC, in the future. MCV continues to monitor and participate in these industry restructuring matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. MCV Management cannot, at this time, predict the impact or outcome of these matters. -7- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS Fair Value of Financial Instruments The carrying amounts of cash, cash equivalents and short-term investments approximate fair value because of the short maturity of these instruments. The majority of MCV's short-term investments, which are made up of investment securities held-to-maturity, as of June 30, 2003 and December 31, 2002, have original maturity dates of approximately one year or less. The unique nature of the negotiated financing obligation discussed in Note 8 makes it unnecessary to estimate the fair value of the lessor group ("Owner Participants") underlying debt and equity instruments supporting such financing obligation, since Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments" does not require fair value accounting for the lease obligation. Accounting for Derivative Instruments and Hedging Activities Effective January 1, 2001, MCV adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was issued in June 1998 and then amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133," SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- An amendment of FASB Statement No. 133" and SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activity (collectively referred to as "SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges in some cases allows a derivative's gains and losses to offset related results on the hedged item in the income statement or permits recognition of the hedge results in other comprehensive income, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Electric Sales Agreements MCV believes that its electric sales agreements currently do not qualify as derivatives under SFAS No. 133, due to the lack of an active energy market in the State of Michigan, as defined by SFAS No. 133, and the transportation cost to deliver the power under the contracts to the closest active energy market at the Cinergy hub in Ohio and as such does not record the fair value of these contracts on its balance sheet. If an active energy market emerges, MCV intends to apply the normal purchase normal sales exception under SFAS No. 133 to its electric sales agreements; to the extent such exception is applicable. Forward Foreign Exchange Contracts An amended service agreement was entered into between MCV and Alstom Power Company ("Alstom") (the "Amended Service Agreement"), under which Alstom will provide hot gas path parts for MCV's twelve gas turbines. The payments due to Alstom under the Amended Service Agreement are adjusted annually based on the U.S. dollar to Swiss franc currency exchange rate. To manage this currency exchange rate risk and hedge against adverse currency fluctuations impacting the payments under the Amended Service Agreement, MCV 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, an immaterial earnings impact on an ongoing basis is expected. The final gains and losses on these transactions, accounted for as hedges, are included in the measurement of the underlying capitalized major renewal costs when incurred. As of June 30, 2003, MCV did not have any such transactions -8- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) outstanding and does not anticipate any future transactions since the Amended Service Agreement is expected to be terminated in the near future. As of June 30, 2002, MCV had a forward purchase contract involving Swiss francs in the notional amount of $5.0 million. This hedge was considered highly effective, therefore, there was no material gain or loss recognized in earnings during the six months ended June 30, 2002. Natural Gas Supply Contracts MCV management believes that its long-term natural gas contracts, which do not contain volume optionality, qualify under SFAS No. 133 for the normal purchases and normal sales exception. Therefore, these contracts are currently not recognized at fair value on the balance sheet. The FASB issued DIG Issue C-16, which became effective April 1, 2002, regarding natural gas commodity contracts that combine an option component and a forward component. This guidance requires either that the entire contract be accounted for as a derivative or the components of the contract be separated into two discrete contracts. Under the first alternative, the entire contract considered together would not qualify for the normal purchases and sales exception under the revised guidance. Under the second alternative, the newly established forward contract could qualify for the normal purchases and sales exception, while the option contract would be treated as a derivative under SFAS No. 133 with changes in fair value recorded through earnings. At April 1, 2002, MCV had nine long-term gas contracts that contained both an option and forward component. As such, they were no longer accounted for under the normal purchases and sales exception and MCV began mark-to-market accounting of these nine contracts through earnings. Based on the natural gas prices, at the beginning of April 2002, MCV recorded a $58.1 million gain for the cumulative effect of this accounting change. During the fourth quarter of 2002, MCV removed the option component from three of the nine long-term gas contracts, which should reduce the earnings volatility. Since April 2002, MCV has recorded an additional mark-to-market gain of $47.6 million for these gas contracts for a cumulative mark-to-market gain through June 30, 2003 of $105.7 million, which will reverse over the remaining life of these gas contracts, ranging from 2004 to 2007. For the six months ended June 30, 2003, MCV recorded in "Fuel costs" a $25.7 million mark-to-market gain in earnings associated with these contracts. In addition, as of June 30, 2003 and December 31, 2002, MCV recorded "Derivative assets" in Current Assets in the amount of $66.5 million and $48.9 million, respectively, and for the same periods recorded "Derivative assets" in Other Assets in the amount of $39.2 million and $31.0 million, respectively, representing the mark-to-market gain on these long-term natural gas contracts. Natural Gas Supply Futures and Options To manage market risks associated with the volatility of natural gas prices, MCV maintains a gas hedging program. MCV enters into natural gas futures and option contracts in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are being utilized principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize MCV's existing gas supply, storage and transportation arrangements. These financial instruments are derivatives under SFAS No. 133 and the contracts that are utilized to secure the anticipated natural gas requirements necessary for projected electric and steam sales qualify as cash flow hedges under SFAS No. 133, since they hedge the price risk associated with the cost of natural gas. MCV also engages in cost mitigation activities to offset the fixed charges MCV incurs in operating the Facility. These cost mitigation activities include the use of futures and options contracts to purchase and/or sell natural gas to maximize the use of the transportation and storage contracts when it is determined that they will not be needed for Facility operation. Although these cost mitigation activities do serve to offset the fixed monthly charges, these cost mitigation activities are not considered a normal course of business for MCV and do not qualify as hedges under SFAS No. 133. Therefore, the resulting mark-to-market gains and losses from cost mitigation activities are flowed through MCV's earnings. -9- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 June 30, 2003 and December 31, 2002 was recorded as a current asset in "Broker margin accounts and prepaid expenses," in the amount of $1.6 million and $.8 million, respectively. For the six months ended June 30, 2003, MCV has recognized in other comprehensive income, an unrealized $14.3 million increase on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas. This resulted in a net $40.6 million gain balance in other comprehensive income as of June 30, 2003. This balance represents natural gas futures and options with maturities ranging from July 2003 to May 2007, of which $25.3 million of this gain is expected to be reclassified into earnings within the next twelve months. MCV also has recorded, as of June 30, 2003, a $37.3 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 six months ended June 30, 2003, MCV has recorded a net $25.7 million gain in earnings from hedging activities related to MCV natural gas requirements for Facility operations and a net $.5 million gain in earnings from cost mitigation activities. For the six months ended June 30, 2002, MCV recognized an unrealized $28.5 million increase in other comprehensive income on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas, resulting in a $4.2 million gain in other comprehensive income as of June 30, 2002. As of June 30, 2002, MCV had recorded a current derivative asset in "Derivative assets" in the amount of $5.9 million. For the six months ended June 30, 2002, MCV had recorded a net $9.1 million loss in earnings from hedging activities related to MCV natural gas requirements for Facility operations. In addition, for the six months ended June 30, 2002, MCV has recorded a net $.3 million gain in earnings from cost mitigation activities. Interest Rate Swaps To manage the effects of interest rate volatility on interest income while maximizing return on permitted investments, MCV established an interest rate hedging program. The notional amounts of the hedges are tied directly to MCV's anticipated cash investments, without physically exchanging the underlying notional amounts. Cash is deposited with the broker in a margin account at the time the interest rate swap transactions are initiated. The change in market value of these contracts may require further adjustment of the margin account balance. The margin account balance at December 31, 2002, of approximately $25,000, which was recorded as a current asset in "Broker margin accounts and prepaid expenses," was returned to MCV during the month of January 2003 since MCV currently does not have any outstanding interest rate swap transactions. As of June 30, 2002, MCV had one interest rate swap, with a notional amount of $20.0 million with a period of performance that extended to December 1, 2002, which did not qualify as a hedge under SFAS No. 133. The gains and losses on this swap were recorded currently in earnings. For the six months ended June 30, 2002, MCV recorded an immaterial gain in earnings. -10- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) NEW ACCOUNTING STANDARDS In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This SFAS amends SFAS No. 133 for decisions made (1) as part of the Derivative Implementations Group process that effectively required amendments to SFAS No. 133, (2) for other Financial Accounting Standards Board projects dealing with financial instruments and (3) for implementation issues raised in relation to the application of this definition of a derivative. The changes in this SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly, which will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This standard is effective for contracts entered into or modified after June 30, 2003, with some exceptions. MCV has adopted this standard and does not expect the application to materially affect its financial position or results of operations. (4) GAS TURBINE SERVICE AGREEMENT Under the Amended Service Agreement, Alstom provides MCV spare parts for MCV's GTGs and provides qualified service personnel and supporting staff to assist MCV to perform scheduled inspections on the GTGs, and to repair the GTGs at MCV's request. The Amended Service Agreement commenced on January 1, 1990, and will expire upon the earlier of the completion of the ninth series of major GTG inspections or December 31, 2009, unless terminated sooner by MCV for convenience. Effective December 31, 2002, MCV has signed a new maintenance service and parts agreement with General Electric International Inc. ("GEII") ("GEII Agreement"). GEII will provide maintenance services and hot gas path parts for MCV's twelve GTGs under terms and conditions similar to the Amended Service Agreement. The GEII Agreement is expected to replace the Amended Service Agreement during the first half of 2004, but in no event later than January 1, 2005. Should the Amended Service Agreement be terminated, at that time, MCV would be expected to pay approximately $5.8 million to Alstom in cancellation payments and Alstom is expected to provide MCV with one set of hot gas path spare parts. At this time, MCV has not recognized a liability for the cancellation payments or an asset for the spare parts to be received. (5) RESTRICTED INVESTMENT SECURITIES HELD-TO-MATURITY Non-current restricted investment securities held-to-maturity consist of the following as of (in thousands):

-11- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following as of (in thousands):

(7) GAS SUPPLIER FUNDS ON DEPOSIT Pursuant to individual gas contract terms with counterparties, deposit amounts may be required by one party to the other based upon the net amount of exposure. The net amount of exposure will vary with changes in market prices, credit provisions and various other factors. Collateral paid or received will be posted by one party to the other based on the net amount of the exposure. Interest is earned on funds on deposit. As of June 30, 2003, $77.5 million in current liabilities "Gas supplier funds on deposit" represents funds on deposit from El Paso Corporation ("El Paso"), a related party. (8) LONG-TERM DEBT Long-term debt consists of the following as of (in thousands):

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 -12- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 six months ended June 30, 2003 and 2002 were $58.7 million and $61.8 million, respectively. Interest and fees paid for the six months ended June 30, 2003 and 2002 were $29.3 million and $60.4 million, respectively. -13- MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (9) 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 June 30, 2003, and the nature and amount of related party transactions or agreements that existed with MCV's partners or affiliates as of June 30, 2003 and 2002, and for each of the six month periods ended June 30 (in thousands).

Footnotes to Partners' Equity and Related Party Transactions (1) Reflects cash collateral paid to MCV based on the net amount of exposure on MCV's natural gas contracts with El Paso. (2) Alanna's capital stock is pledged to secure MCV's obligation under the lease and other overall lease transaction documents. -14- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP This MD&A should be read along with the MD&A in the Annual Report on Form 10-K for the year ended December 31, 2002 of the Midland Cogeneration Venture Limited Partnership ("MCV"). Results of Operations: Operating Revenues Statistics The following represents significant operating revenue statistics for the following periods (dollars in thousands except average rates):

(1) Beginning in July 2000, in response to the rapidly escalating cost of natural gas, MCV entered into transactions with Consumers whereby Consumers agreed to reduce the dispatch level of the Facility. In the event of reduced dispatch, MCV agreed to share the savings realized by not having to generate the electricity. Comparison of the Three Months ended June 30, 2003 and 2002: Overview: For the second quarter of 2003, MCV recorded net income of $29.6 million, which includes a $15.4 million mark-to-market gain. The gain is the result of long term gas contracts that began being marked-to-market on April 1, 2002, as required by SFAS No. 133. MCV's net income for the second quarter of 2002 was $85.0 million, which includes the April 1, 2002 change in method of accounting. The cumulative effect of this accounting change as of April 1, 2002 increased earnings by approximately $58.1 million and the additional quarterly mark-to-market gain recorded at June 30, 2002 resulted in an additional earnings increase of $15.3 million. MCV's net income without the effects of the accounting change was $14.2 million for the second quarter of 2003 as compared to net income of $11.6 million for the second quarter of 2002. The earnings increase of $2.6 million, excluding the effects of the accounting change, was primarily due to lower natural gas prices, lower interest expense on MCV's financing arrangements and higher -15- electric and steam energy rates under the SEPA with Dow. This increase was partially offset by lower energy rates under the PPA with Consumers. Operating Revenues: For the second quarter of 2003, MCV's operating revenues decreased $3.4 million from the second quarter of 2002. This decrease is due primarily to a lower electric dispatch under the PPA with Consumers resulting from an increase in the electric dispatch reduction transactions and due to lower energy rates under the PPA. This decrease was partially offset by higher energy rates under the SEPA with Dow, resulting from Dow's election to cease natural gas tolling. Operating Expenses: For the second quarter of 2003, MCV's operating expenses were $84.0 million, which includes $44.8 million of fuel costs, including a $15.4 million quarterly mark-to-market gain on the natural gas contracts which contain optionality. During this period, MCV purchased approximately 20.7 Bcf of natural gas and a net 4.7 bcf was used for transportation fuel and as a net change in storage. During this same period, MCV consumed 16.0 Bcf of natural gas. The average commodity cost of fuel for the second quarter of 2003 was $3.22 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. For the second quarter of 2002, MCV's operating expenses were $88.5 million, which includes $50.7 million of fuel costs, including a $15.3 million quarterly mark-to-market gain on the natural gas contracts which contain optionality. During this period, MCV purchased approximately 18.4 Bcf of natural gas and a net 1.7 Bcf was used for transportation fuel and as a net change to gas in storage. During this same period, MCV consumed 17.3 Bcf, of which .6 Bcf of this total was gas provided by Dow. The average commodity cost of fuel for the second quarter of 2002 was $3.30 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. Fuel costs for the second quarter of 2003 compared to 2002, decreased by $5.8 million, excluding the effects of the quarterly mark-to-market adjustments for both periods. This fuel cost decrease was due to lower costs associated with the electric dispatch reduction transactions entered into with Consumers, lower long-term natural gas prices due to the commencement of several new contracts with favorable pricing terms and lower natural gas hedged prices of market priced gas. This decrease was partially offset by a higher gas usage resulting from Dow's election to cease tolling gas. For the second quarter of 2003, operating expenses other than fuel costs increased $1.4 million from the second quarter of 2002, primarily resulting from increased property taxes expense. All other expenses incurred in these periods were considered normal expenditures to achieve the recorded operating revenues. Other Income (Expense): For the second quarter of 2003 compared to 2002, interest expense decreased $1.6 million due to a lower outstanding principal balance on MCV's financing obligation. Comparison of the Six Months ended June 30, 2003 and 2002: Overview: For the first six months of 2003, MCV recorded net income of $54.3 million, which includes a $25.7 million mark-to-market gain. The gain is the result of long term gas contracts that began being marked-to-market on April 1, 2002, as required by SFAS No. 133. MCV's net income for the first six months of 2002 was $96.2 million, which includes the April 1, 2002 change in method of accounting. The cumulative effect of this accounting change as of April 1, 2002 increased earnings by approximately $58.1 million and the additional quarterly mark-to-market gain recorded at June 30, 2002 resulted in an additional earnings increase of $15.3 million. MCV's net income without the effects of the accounting change was $28.6 million for the first six months of 2003 as compared to net income of $22.8 million for the first six months of 2002. The earnings increase of $5.8 million, excluding the accounting change, was primarily due to lower natural gas prices, lower interest expense on MCV's financing arrangements and higher electric and steam energy rates under the SEPA with Dow. This increase was partially offset by lower energy rates under the PPA with Consumers. -16- Operating Revenues: For the first six months of 2003, MCV's operating revenues increased $.4 million from the first six months of 2002. This increase is due primarily to higher energy rates under the SEPA with Dow, resulting from Dow's election to cease natural gas tolling. This increase was partially offset by a lower electric dispatch under the PPA with Consumers resulting from an increase in the electric dispatch reduction transactions and due to lower energy rates under the PPA. Operating Expenses: For the first six months of 2003, MCV's operating expenses were $184.4 million, which includes $104.7 million of fuel costs, including a $25.7 million quarterly mark-to-market gain on the natural gas contracts which contain optionality. During this period, MCV purchased approximately 37.2 Bcf of natural gas and a net .2 bcf was used for transportation fuel and as a net change in storage. During this same period, MCV consumed 37.0 Bcf of natural gas. The average commodity cost of fuel for the first six months of 2003 was $3.06 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. For the first six months of 2002, MCV's operating expenses were $197.5 million, which includes $121.1 million of fuel costs, including a $15.3 million quarterly mark-to-market gain on the natural gas contracts which contain optionality. During this period, MCV purchased approximately 36.7 Bcf of natural gas and a net .7 Bcf was used for transportation fuel and as a net change to gas in storage. During this same period, MCV consumed 37.4 Bcf, of which 1.4 Bcf of this total was gas provided by Dow. The average commodity cost of fuel for the first six months of 2002 was $3.19 per MMBtu, which includes the effects of the disposition of excess gas supplies not required for generation. Fuel costs for the first six months of 2003 compared to 2002, decreased by $6.0 million, excluding the effects of the quarterly mark-to-market adjustments for both periods. This fuel cost decrease was due to lower costs associated with the electric dispatch reduction transactions entered into with Consumers, lower long-term natural gas prices due to the commencement of several new contracts with favorable pricing terms and lower natural gas hedged prices of market priced gas. This decrease was partially offset by a higher gas usage resulting from Dow's election to cease tolling gas. For the first six months of 2003, operating expenses other than fuel costs increased $3.3 million from the first six months of 2002, primarily resulting from increased property taxes expense. All other expenses incurred in these periods were considered normal expenditures to achieve the recorded operating revenues. Other Income (Expense): For the first six months of 2003 compared to 2002, interest expense decreased $3.1 million due to a lower outstanding principal balance on MCV's financing obligation. Liquidity and Capital Resources During the six months ended June 30, 2003 and 2002, net cash generated by MCV's operations was $199.4 million and $154.5 million, respectively. Included in MCV's net cash generated as of June 30, 2003 is $99.9 million of cash collateral paid to MCV, based upon the net amount of exposure on MCV's long term natural gas contracts with El Paso and MCV's natural gas futures. This collateral balance will vary as the calculated net exposure between the company's changes. MCV's cash and cash equivalents have a normal cycle of collecting revenues less operating expenses prior to making the semiannual payments under the financing obligation due in January and July for the next twelve years. During the six months ended June 30, 2003 and 2002, MCV paid financing obligation requirements of $29.2 million and $125.6 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 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. The borrowing base varies over the month as receivables are earned, billed and collected and as natural gas inventory balances are built and depleted. In addition, earned receivables borrowing base can be affected by Consumers' -17- credit rating. The Working Capital Facility term currently expires on August 29, 2003; MCV is currently in the process of renewing its Working Capital Facility through syndication and does not anticipate any delays in completing this renewal prior to the expiration date. MCV did not utilize the Working Capital Facility during the first six months of 2003. As of June 30, 2003, MCV had no outstanding borrowings or letters of credit. MCV believes that amounts available to it under the Working Capital Facility along with available cash reserves will be sufficient to meet any working capital shortfalls that might occur. For the foreseeable future, MCV expects to fund current operating expenses, capital expenditures and financing obligations primarily through cash flows from operations. Due to uneven 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 June 30, 2003, there were approximately $480.7 million of cash reserves, of which $138.2 million had been reserved for the debt portion of the financing obligation. Disclosure about Contractual Obligations MCV has assumed various financial obligations and commitments in the normal course of its business. These obligations are considered to represent expected cash payments that MCV is required to make under its existing contractual arrangements. As of June 30, 2003, MCV has the following contractual financial obligations and commitments:

(1) Represents expected cash payments, including interest. (2) Represents estimated minimum commitments under current long term natural gas contracts, natural gas transportation reservation charges, GTG compressor parts and the ground lease agreement. (3) Represents the cost of current Facility maintenance service agreements and spare parts. (4) Represents obligations from July to December 2003. Outlook "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995. The following discussion of the outlook for MCV contains certain "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995 (the "Act"), including without limitation, discussion as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed reflecting MCV's current expectations of the manner in which the various factors discussed therein may affect its business in the future. Any matters that are not historical facts are forward-looking and, accordingly, involve estimates, assumptions, and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Accordingly, this "Safe Harbor" Statement contains additional information about such factors relating to the forward-looking statements. MCV has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are correct, reasonable and complete. There is no assurance, however, that MCV's expectations will be realized or that unexpected events will not have an adverse impact on MCV's business. -18- Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include governmental policies, legislation and other regulatory actions (including those of the Michigan Legislature, Congress, FERC and the MPSC) with respect to cost recovery under the PPA, industry restructuring or deregulation, operation and construction of plant facilities including natural gas pipeline and storage facilities, Consumers' ability to perform its obligations under the PPA and present or prospective wholesale and retail competition, among other factors. The business and profitability of MCV is also influenced by other factors such as pricing and transportation of natural gas, changes in accounting standards (such as accounting for derivative instruments and hedging activities) and environmental legislation/regulation. All such factors are difficult to predict, contain uncertainties which may materially affect actual results, and are beyond the control of MCV. Results of operations are largely dependent on successfully operating the Facility at or near contractual capacity levels, the availability of natural gas, the level of energy rates paid to MCV relative to the cost of fuel used for generation and cost of maintenance of the Facility's QF status. Operating Outlook. During the first six months of 2003, approximately 68% of PPA revenues were capacity payments under the PPA, which are billed on availability, subject to an annual availability cap of 98.5% pursuant to a settlement agreement between MCV and Consumers. Actual PPA availability was 99.8% for the first six months of 2003, 98.8% for 2002 and 99.5% for 2001. Availability will depend on the level of scheduled and unscheduled maintenance outages, and on the sustained level of output from each of the GTGs and the steam turbines. MCV expects long term PPA availability to meet or exceed the capped level of 98.5%, though prolonged equipment outages could materially reduce the level of availability. Natural Gas. The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility's operating expenses consist of the costs of natural gas. While MCV continues to pursue the acquisition of a portion of its expected fuel supply requirements in future years, MCV recognizes that its existing long term gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of its existing fixed price gas contracts or for gas that may be required by the Facility in excess of the gas that MCV has under contract. Energy Rates and Cost of Production. Under the PPA, energy charges are based on the costs associated with fuel inventory, operations and maintenance, and administrative and general expenses associated with certain of Consumers' coal plants. However, MCV's costs of producing electricity are tied, in large part, to the cost of natural gas. To the extent that the costs associated with production of electricity with natural gas rise faster than the energy charge payments, which are based largely on Consumers' coal plant operation and maintenance costs, MCV's financial performance would be negatively affected. In addition, the extent to which the Facility is dispatched by Consumers can exacerbate the divergence between variable revenues and costs of production. The divergence between variable revenues and costs will become greater if the energy charge (based largely on the cost of coal) declines or escalates more slowly than the spot market or contract prices under which MCV purchases fuel. Currently, MCV continues to purchase the majority of its natural gas requirements under long term fixed price gas contracts, with a smaller portion of gas purchased under long term market priced contracts and on the spot market. MCV maintains a hedging program to mitigate risk associated with volatile market prices in the gas market. As of June 30, 2003, MCV has entered into natural gas purchase and hedging arrangements with respect to most of its 2003 expected gas needs not provided for under its long term fixed price gas contracts. MCV expects that its purchase and hedging arrangements will mitigate the effects of rises in natural gas prices for 2003, 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 79% from April 1998 through June 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 April 2003, Consumers informed MCV that effective January 1, 2004, Consumers expects to return to dispatching the Facility on an uneconomic basis, pursuant to the Settlements. If such an event were to occur, such uneconomic dispatch could negatively affect MCV's financial performance by approximately $38 million per year, based upon projected spot gas prices of approximately $4.83/MMBtu. MCV is in discussions with Consumers regarding means to minimize the potential impact of high -19- dispatch, but cannot predict whether those discussions will be successful or whether state regulatory approval, if required, can be obtained. Capacity and Energy Payments Under the PPA. The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the MPSC does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA (the "regulatory-out" provision). Until September 15, 2007, the capacity charge may not be reduced below an average capacity rate of 3.77 cents per kWh for the available Contract Capacity notwithstanding the "regulatory-out" provision. MCV and Consumers entered into a settlement agreement ("Settlement Agreement"), effective January 1, 1999, which resolves all of the previously Disputed Issues under the PPA and includes definitive obligations for Consumers to make energy payments calculated in accordance with the PPA, irrespective of any MPSC or the reviewing courts decision which may affect those issues or payments. The Settlement Agreement also provides that, not withstanding modifications to the Facility increasing its capacity, in billing Consumers for capacity charges (at the rates set forth in the PPA) availability would be capped at 98.5% of the 1240 MW ("98.5% cap") on a calendar-year basis for the term of the PPA irrespective of any MPSC or the reviewing courts decision, which may affect this issue or payment. Provided, however, that if Consumers transfers (subject to MCV's prior consent) its rights of up to 1240 MW of capacity and associated energy under the PPA to a third party for an extended period of time, the 98.5% cap will not apply except that the 98.5% cap is, in any event, reinstated on September 15, 2007. Notwithstanding the Settlement Agreement, after September 15, 2007, an issue could exist as to whether or not Consumers can exercise the "regulatory out" provision to reduce capacity payments to MCV based upon the "availability caps" of 88.7% of the 1240 MW (both on and off peak) of contract capacity as provided for in the 915 MW Settlement and the 325 MW Settlement. Consumers and MCV are required to support and defend the terms of the PPA. Michigan Electric Industry Restructuring. The MPSC issued orders in 1997 and 1998 (collectively the "Restructuring Orders"). The Restructuring Orders provide for a transition to a competitive regime whereby electric retail customers would be able to choose their power supplier and pay negotiated or market-based rates for such power supply. The Restructuring Orders also mandated that utilities "wheel" third-party power to the utilities' customers. An issue involved in restructuring, which could significantly impact MCV, is stranded cost recovery. The Restructuring Orders allow recovery by utilities (including Consumers) of net stranded costs, which include capacity charges from QFs, including MCV, previously approved by the MPSC, incurred during the regulated era that will be above market prices during the new competitive regime. However, it appears that stranded cost recovery of above-market capacity charges in power purchase contracts (including MCV's PPA) is limited to customers who chose an alternative power supplier and are only paid for the period 1998 through 2007 (MCV's PPA expires in 2025). Customers who chose to remain power supply customers of Consumers will continue to pay capacity charges as part of rates charged by Consumers, subject to MPSC rate regulation. The Restructuring Orders do not otherwise specifically address the recovery of PPA capacity charges after 2007. MCV, as well as others, filed appeals in state and federal courts challenging the Restructuring Orders. The Michigan Court of Appeals found that the Restructuring Orders do not unequivocally disallow recovery of PPA charges (capacity and energy) by Consumers and, therefore, MCV's issues were not ripe for appellate review and no actual controversy regarding recovery of costs could occur until 2008, at the earliest. This order is now final. In June 2000, the State of Michigan enacted legislation which, among other things, states that the Restructuring Orders (being voluntarily implemented by Consumers) are in compliance with the legislation and enforceable by the MPSC. The legislation provides that the rights of parties to existing contracts between utilities (like Consumers) and QFs (like MCV), including the rights to have the PPA charges recovered from customers of the utilities, are not abrogated or diminished, and 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 -20- parties' dispute is hypothetical at this time and the QFs (including MCV) claims are premised on speculation about how an order might be interpreted in the year 2007 or beyond by the MPSC. Federal Electric Industry Restructuring. FERC has jurisdiction over wholesale energy sales and is moving towards "market" based pricing of electricity as opposed to traditional cost-based pricing. In April 1996, FERC issued Order No. 888 requiring all utilities that FERC regulates to file uniform transmission tariffs providing for, among other things, non-discriminatory "open access" to all wholesale buyers and sellers, including the transmission owner, on terms and conditions established by FERC. Order No. 888 also requires utilities to "functionally unbundle" transmission and separate transmission personnel from those responsible for marketing generation. In December 1999, FERC issued a final rule, Order No. 2000, designed to encourage all owners and operators of interstate electric transmission lines to join regional transmission organizations. In July 2001, FERC issued a Notice of Proposed Rulemaking to establish a standard market design ("SMD") in order to remedy remaining undue discrimination in transmission and wholesale energy markets. The SMD requires all FERC jurisdictional transmission providers to transfer control of their transmission facilities to an independent transmission provider. The independent transmission provider will provide transmission service under a standardized tariff and administer market based wholesale energy markets for day-ahead and real-time sales. The SMD proposal has drawn strong criticism from certain State regulators and others asking Congress to block the proposal. This criticism has had the effect of delaying issuance of a final SMD rule. In addition, apart from the SMD proceeding, the Midwest Independent System Operator ("Midwest ISO") has committed to FERC to implement in December 2003 a day-ahead and real-time energy market similar to that proposed in the SMD proceeding. The Midwest ISO provides transmission service in most parts of the Midwest, including Michigan. The SMD could impact MCV in selling electricity in the wholesale market. MCV management cannot predict the outcome of the NOPR or the impact the rulemaking may have on MCV's business, if any, at this time. Maintaining QF Status. In the case of a topping-cycle generating plant such as the Facility, to maintain QF Status the applicable operating standard requires that the portion of total energy output that is put to some useful purpose other than facilitating the production of power (the "Thermal Percentage") be at least 5%. In addition, the plant must achieve and maintain an average PURPA efficiency standard (the sum of the useful power output plus one-half of the useful thermal energy output, divided by the energy input (the "Efficiency Percentage")) of at least 45%. However, if the plant maintains a Thermal Percentage of 15% or higher, the required Efficiency Percentage is reduced to 42.5%. The tests are applied on a calendar year basis. The Facility has achieved the applicable Efficiency Percentage of 42.5% in each year since commercial operation, and in the years 1995 through 2002 the Facility achieved an Efficiency Percentage in excess of 45%. MCV believes that the Facility will be able to maintain QF status and be capable of achieving a 45% PURPA Efficiency Percentage on a long term basis. In addition, MCV believes annual steam sales will be sufficient to allow the Facility to exceed the 15% Thermal Percentage. However, no assurance can be given that factors outside MCV's control will not cause the Facility to fail to satisfy the annual PURPA qualification requirements and thus lose its QF status. During the first six months of 2003, the Facility achieved an Efficiency Percentage of 47.5% and a Thermal Percentage of 21.3%. 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 -21- corresponding Event of Default under the Indenture) unless, among other requirements, FERC approves (or accepts for filing) rates under the PPA or other contracts of MCV for the sale of electricity sufficient to meet certain target coverage ratios (as defined in the Overall Lease Transaction). Critical Accounting Policies In preparing MCV's financial statements in accordance with accounting principles generally accepted in the United States, management must make a number of estimates and assumptions related to the reporting of assets, liabilities, revenues and expenses. The following areas represent those that management believes are particularly important to the financial statements and that require the use of significant estimates and assumptions. Electric Industry Restructuring. As stated above, at both the state and federal level, efforts continue to restructure the electric industry. To date, restructuring has not negatively impacted MCV, but if restructuring results in denying Consumers recovery of above-market PPA costs, MCV's cash flows may be negatively impacted, especially in the period after 2007. Over 90% of MCV's revenues come from sales pursuant to the PPA. MCV continues to monitor and participate in these matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. Any future adjustment to property, plant and equipment, if required, would result in a one-time negative earnings impact. At this time, MCV management cannot predict the outcome of these matters or the magnitude of any possible adjustment. Natural Gas Contracts. Effective January 1, 2001, MCV adopted SFAS No. 133, which establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges in some cases allows a derivative's gains and losses to offset related results on the hedged item in the income statement or permits recognition of the hedge results in other comprehensive income, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. MCV management believes that MCV's current long term natural gas contracts that do not contain volume optionality qualify under SFAS No. 133 for the normal purchases and sales exception. These long term gas contracts are not being marked-to-market with gains or losses recorded in earnings. Should significant changes in the level of Facility operational dispatch or purchases of long term gas occur, MCV would be required to re-evaluate its accounting treatment for these long term gas contracts. This re-evaluation may result in recording mark-to-market activity on some contracts, which could add to earnings volatility. The FASB issued Derivative Implementation Group ("DIG") Issue C-16, which became effective April 1, 2002, regarding natural gas commodity contracts that combine an option component and a forward component. This guidance requires either that the entire contract be accounted for as a derivative or the components of the contract be separated into two discrete contracts. Under the first alternative, the entire contract considered together would not qualify for the normal purchases and sales exception under the revised guidance. Under the second alternative, the newly established forward contract could qualify for the normal purchases and sales exception, while the option contract would be treated as a derivative under SFAS No. 133 with changes in fair value recorded through earnings. At April 1, 2002, MCV had nine long term gas contracts that contained both an option and forward component. As such, they were no longer accounted for under the normal purchases and sales exception and MCV began mark-to-market accounting of these nine contracts through earnings. During the fourth quarter of 2002, MCV removed the option component from three of the nine long term gas contracts discussed above, which should reduce the earnings volatility. MCV expects future earnings volatility on the six remaining long term gas contracts that contain volume optionality, since changes to this mark-to-market gain will be recorded on a quarterly basis during the remaining life of approximately five years for these gas contracts. Based on the natural gas prices, at the beginning of April 2002, MCV recorded a $58.1 million gain for the cumulative effect of this accounting change. Since April 2002, MCV has recorded an additional mark-to-market gain of $47.6 million for these gas contracts for a cumulative mark-to-market gain through June 30, 2003 of $105.7 million, which will reverse over the remaining life of these contracts, ranging from 2004 to 2007. -22- Property Tax Appeals. MCV currently accrues property taxes on the basis of the taxable value as assessed by the taxing authorities. In 1997, MCV filed a property tax appeal against the City of Midland at the Michigan Tax Tribunal contesting MCV's 1997 property taxes. Subsequently, MCV filed appeals contesting its property taxes for tax years 1998 through 2003 at the Michigan Tax Tribunal. A trial was held for tax years 1997 -- 2000 and for the appeals for tax years 2001-2003 are being held in abeyance pending the resolution of the aforesaid trial. MCV is seeking a reduction of its annual property taxes on the basis that the City of Midland has over assessed the property's taxable value for ad valorem property tax purposes. If MCV is successful in lowering its taxable value for these years, a one-time favorable earnings adjustment would be recorded. In addition, future property tax expense would be reduced. At this time, MCV Management cannot predict the outcome of the trial and these appeals. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risks relating to MCV's operations result primarily from changes in commodity prices, interest rates and foreign exchange rates. To address these risks, MCV enters into various hedging transactions as described herein. MCV does not use financial instruments for trading purposes and does not use leveraged instruments. Fair values included herein have been determined based on quoted market prices. The information presented below should be read in conjunction with Part I, Item 1, "Condensed Notes to Unaudited Consolidated Financial Statements -- Note 2, Risk Management Activities and Derivative Transactions and Note 5, Long Term Debt". Interest Rate Risk. In 1990, MCV obtained permanent financing for the Facility by entering into sale and leaseback agreements ("Overall Lease Transaction") with a lessor group, related to substantially all of MCV's fixed assets. In accordance with SFAS No. 98, "Accounting For Leases," the Overall Lease Transaction has been accounted for as a financing arrangement. Under the terms of the Overall Lease Transaction, MCV sold undivided interests in all of the fixed assets of the Facility for approximately $2.3 billion, to the Owner Trusts established for the benefit of the Owner Participants. The financing arrangement, entered into for a basic term of 25 years, maturing in 2015, has an effective interest rate of approximately 9.4%, payable in semi-annual installments of principal and interest. Due to the unique nature of the negotiated financing obligation it is unnecessary to estimate the fair value of the Owner Participants' underlying debt and equity instruments supporting this financing obligation, since SFAS No. 107 "Disclosure about Fair Value of Financial Instruments" does not require fair value accounting for the lease obligation. To manage the effects of interest rate volatility on interest income while maximizing return on permitted investments, MCV has established an interest rate hedging program. The carrying amounts of MCV's short-term investments approximate fair value because of the short term maturity of these instruments. MCV's short-term investments are made up of investment securities held to maturity and as of June 30, 2003, 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 as of June 30, 2003. The interest rate reflects the fixed effective rate of interest of the financing arrangement:

Commodity Risk. MCV enters into natural gas futures and option contracts in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are utilized principally to secure anticipated natural gas requirements necessary for projected electric -23- sales and to lock in sales prices of natural gas previously obtained in order to optimize MCV's existing gas supply, storage and transportation arrangements. The following table provides information about MCV's futures and option contracts that are sensitive to changes in natural gas prices; these futures and option contracts have maturity dates ranging from August 2003 to May 2007. The table presents the carrying amounts and fair values at June 30, 2003:

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 June 30, 2003, MCV did not have any such transactions outstanding and does not anticipate any future transactions. 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 As of the end of the period covered by 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-15(e) and 15d-15(e) 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. -24- PART II. OTHER INFORMATION Item 1. Legal Proceedings The discussion below is limited to an update of events or developments that have occurred in various judicial and administrative proceedings since March 25, 2003. A complete summary of all outstanding legal proceedings is set forth in MCV's Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 26, 2003. Property Tax Appeals In 1997, MCV filed a property tax appeal against the City of Midland at the Michigan Tax Tribunal contesting MCV's 1997 property taxes. Subsequently, MCV filed appeals contesting its property taxes for tax years 1998 through 2003 at the Michigan Tax Tribunal. A trial was held for tax years 1997 -- 2000 and for the appeals for tax years 2001-2003 are being held in abeyance pending the resolution of the aforesaid trial. MCV is seeking a reduction of its annual property taxes on the basis that the City of Midland has over assessed the property's taxable value for ad valorem property tax purposes. MCV management cannot predict the outcome of these proceedings. Item 6. Exhibits and Reports on Form 8-K a.) List of Exhibits 31.1 Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer, Vice President and Controller Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer, Vice President and Controller Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 b.) Reports on Form 8-K Current report dated July 28, 2003 containing Item 9, "Disclosure of Results of Operations and Financial Condition," reporting MCV's 2003 second quarter and year-to-date earnings results. -25- 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: August 13, 2003 /s/James M. Kevra ---------------------- ------------------------------------- James M. Kevra President and Chief Executive Officer Dated: August 13, 2003 /s/James M. Rajewski ---------------------- ------------------------------------- James M. Rajewski Chief Financial Officer, Vice President and Controller -26- 10-Q EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 31.1 Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer, Vice President and Controller Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer, Vice President and Controller Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP 10-Q