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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from _____________________________ to _____________________________

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

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

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

     NONE

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

     NONE

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

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

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

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MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

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

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PART I

Item 1. BUSINESS

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

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

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

C.		Major Issues Facing MCV
		MCV faces several major issues crucial to its future success. These issues, briefly summarized here, are discussed more fully in the sections cross referenced below:
		Electric Industry Restructuring. At both the state and federal level, efforts continue to restructure the electric industry. In 1997 and 1998, the Michigan Public Service Commission (“MPSC”) entered a series of orders, permitting customers to choose their power provider over a four-year phase-in period which started in 1999 (“Restructuring Orders”) (these orders are further described in Item 1, Section F, “Regulation — Michigan Electric Industry Restructuring Proceedings”). In addition, Michigan enacted restructuring legislation in June 2000. A significant issue to MCV is the potential for future regulatory denial of recovery by Consumers from its customers of above market costs Consumers pays MCV under the parties’ Power Purchase Agreement (“PPA”). Over 90% of MCV’s revenues come from sales pursuant to the PPA. To date, restructuring has not negatively impacted MCV, but if restructuring results in denying Consumers’ recovery of above-market PPA costs, MCV’s cash flows may be negatively impacted, especially after 2007. See Item 1, Section F, “Regulation — Michigan Electric Industry Restructuring Proceedings and Federal Electric Industry Restructuring”, Item 7, “Managements Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Outlook — Michigan Electric Industry Restructuring Proceedings and Federal Electric Industry Restructuring”, and Notes to Consolidated Financial Statements, Note 1, “The Partnership and Associated Risks”.
		Energy Rate and Cost of Production. Since January 1992, MCV has experienced an overall reduction in the energy charges it is paid for electricity under the PPA, primarily due to declining coal costs at Consumers’ generating plants. In addition, MCV’s costs associated with production of electricity have continued to rise. These circumstances have negatively affected MCV’s cash flow. While MCV has the majority of its expected natural gas needs under contract for the next several years, sustained periods of high market gas prices could adversely affect MCV’s earnings and cash flow. See Item 1, Section F, “Regulation — MPSC and Other Proceedings Relating to Capacity and Energy Charges”, Item 1, Section D, “Contracts — Gas Supply Agreements,” Item 1, Section H, “Overall Lease Transaction”, and Item 7, “MD&A — Liquidity and Financial Resources”. In addition, MCV has credit exposure to suppliers who have entered into fixed price natural gas contracts with MCV. To the extent that the aforementioned suppliers fail to deliver natural gas under their fixed price contracts which are not backed by credit support requirements, and the cost to replace such gas is in excess of the contract rate, MCV could experience higher natural gas prices in the future. See Item 1, Section D, “Contracts — Credit Support Requirements for MCV’s Gas Arrangements”.

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

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

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

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

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

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

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		In 1997, Consumers informed MCV of several other potential payment issues it would pursue, pursuant to the “regulatory out” and other provisions of the PPA. These issues related to Consumers’ special contract customers, pricing of the energy delivered during off-peak ramp hours (when MCV adjusts its output to match Consumers’ dispatch) and energy delivered in the band width (energy delivered above dispatch, within certain limits). In addition, Consumers notified MCV that it did not believe that MCV could use the approximately 15 MW of generating capacity and energy attributable to the back pressure turbine, which was placed into service in July 1997, towards available Contract Capacity or electric deliveries under the PPA. Consumers had also indicated that they would take a similar position on the incremental energy and capacity resulting from MCV’s installation of 11NM upgrade packages on the GTGs (collectively the “Disputed Issues”). MCV and Consumers entered into a settlement agreement (“Settlement Agreement”), effective January 1, 1999, which resolves (for the various time periods specified in the Settlement Agreement) all of the previously Disputed Issues under the PPA and includes definitive obligations for Consumers to make energy payments calculated in accordance with the PPA, irrespective of any MPSC or the reviewing courts’ decision which may affect those issues or payments. The Settlement Agreement also provides that, notwithstanding modifications to the Facility increasing its capacity, in billing Consumers for capacity charges (at the rates set forth in the PPA) availability would be capped at 98.5% of the 1240 MW (“98.5% cap”) on a calendar-year basis for the term of the PPA irrespective of any MPSC or the reviewing courts’ decision, which may affect this issue or payment. Provided, however, that if Consumers transfers (subject to MCV’s prior consent) its rights of up to 1240 MW of capacity and associated energy under the PPA to a third party for an extended period of time, the 98.5% cap will not apply except that the 98.5% cap is, in any event, reinstated on September 15, 2007. Notwithstanding the Settlement Agreement, after September 15, 2007, an issue could exist as to whether or not Consumers can exercise the “regulatory out” provision to reduce capacity payments to MCV based upon the “availability caps” of 88.7% of the 1240 MW (both on and off peak) of contract capacity as provided for in the 915 MW Settlement and the 325 MW Settlement. See Item 1, Section F, “Regulation — MPSC and Other Proceedings Relating to Capacity and Energy Charges.” The Settlement Agreement has not materially affected MCV’s earnings and cash flows.
		MCV currently delivers its electric power to purchasers through transmission lines owned and operated by Trans-Elect, Inc. (“Trans-Elect”). Such lines were previously owned by Consumers. MCV and Consumers previously entered into the Facilities Agreement which provides for transmission service of excess capacity and energy available at the Facility. The sale of the transmission facilities to Trans-Elect does not change, in any respect, the contractual relationship and obligations of Consumers under the Facilities Agreement. Trans-Elect is serving as Consumers’ agent to perform Consumers’ obligations under the Facilities Agreement.
		Steam and Electric Power Agreement; Related Dow Agreements
		SEPA. Pursuant to the SEPA, Dow has agreed to purchase steam from the Facility for an initial term of 25 years from the Commercial Operation Date and to purchase electricity from the Facility for 15 years (any electricity to be purchased thereafter at Dow’s option, although MCV remains obligated to make certain amounts of electricity available for an additional 10 years). The SEPA is subject to automatic extensions for up to 10 additional years after its 25-year term in the absence of a three-year notice of termination from either party.
		In any year, MCV is not obligated to deliver more than 691,900 pounds of steam per hour and 60 MW of electricity on an annual average basis except as Dow may increase its entitlement as discussed below. Dow has agreed to take as much steam as is necessary for the Facility to retain its QF status under the FERC regulations in effect on November 1, 1986 (which regulations have not been revised in relevant part in any material respect). However, Dow’s obligation with respect to minimum annual steam purchases is an average of 440,000 pounds per hour (less amounts supplied by certain standby facilities owned by Dow and less 50% of amounts purchased by any other steam customers of MCV) and is binding only for the initial 25-year term of the SEPA.
		Dow may increase its steam or electricity entitlement to 110% of the steam or electricity delivered in the previous 12-month period, plus any steam or electricity required by any addition to or modification of the Dow plant, provided that any increase above an annual average of 1,000,000 pounds of steam per hour or 75 MW of

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

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		Gas Supply Arrangements
		The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility’s operating expenses consist of the costs of natural gas. MCV recognizes that its existing gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA, and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of the existing gas contracts.
		MCV has a portfolio of long term natural gas purchase contracts (contracts that provide for gas purchases for a term of greater than one year), having remaining terms of 1 to 10 years, with U.S. and Canadian suppliers for an annual average maximum supply of natural gas for 2004 of 227,561 MMBtu/day. As of January 1, 2004, no single gas contract accounts for more than 16.1% of MCV’s portfolio, though, El Paso Corporation (“El Paso”) and its subsidiaries now account for 38.1% of MCV’s portfolio. Gas contracts with U.S. suppliers provide for a 2004 annual average purchase of 149,423 MMBtu/day, while gas contracts with Canadian suppliers provide for the purchase of 78,138 MMBtu/day. In addition to purchasing natural gas under long term contracts, MCV also purchases gas under short term (“spot”) agreements for a term of less than one year. During 2003, MCV’s gas purchases were supplied 88% from long term gas contracts and 12% from spot gas contracts.

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

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

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

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

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

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

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

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

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

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

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		In 1993, Consumers exercised its rights under the PPA to obtain a determination through arbitration proceedings of whether Consumers could exercise the “regulatory out” provision of the PPA in view of Consumers’ acceptance of the 915 MW Settlement. In a Final Order issued in 1995, the arbitrator ruled that Consumers may withhold the fixed energy charges for available but undelivered energy, as well as for energy delivered between the “caps” contained in the 915 MW Settlement and 915 MW.
		In 1995, Consumers and the MPSC staff asked the MPSC to approve a settlement agreement (“325 MW Settlement”) which proposed approving recovery by Consumers from its ratepayers of an additional 325 MW of capacity purchased from MCV beginning January 1, 1996 through the term of the PPA. The costs recovered for this 325 MW of MCV Contract Capacity was essentially the same as the 915 MW Settlement already approved by the MPSC after a phase in of the capacity rate between 1996 and 2004 including the same “availability caps” as the 915 MW Settlement. On November 14, 1996, the MPSC approved, with modifications not material to MCV, the 325 MW Settlement effective January 1, 1996 (“325 MW Settlement”).
		In 1997, Consumers informed MCV of several other potential payment issues it would pursue, pursuant to the “regulatory out” and other provisions of the PPA. These issues related to Consumers’ special contract customers, pricing of the energy delivered during off-peak ramp hours (when MCV adjusts its output to match Consumers’ dispatch) and energy delivered in the band width (energy delivered above dispatch, within certain limits). In addition, Consumers notified MCV that it did not believe that MCV could use the approximately 15 MW of generating capacity and energy attributable to the back pressure turbine, which was placed into service in July 1997, towards available Contract Capacity or electric deliveries under the PPA. Consumers had also indicated that they would take a similar position on the incremental energy and capacity resulting from MCV’s installation of 11NM upgrade packages on the GTGs (collectively the “Disputed Issues”). MCV and Consumers entered into a settlement agreement (“Settlement Agreement”), effective January 1, 1999, which resolves (for the various time periods specified in the Settlement Agreement) all of the previously Disputed Issues under the PPA and includes definitive obligations for Consumers to make energy payments calculated in accordance with the PPA, irrespective of any MPSC or the reviewing courts’ decision which may affect those issues or payments. The Settlement Agreement also provides that, notwithstanding modifications to the Facility increasing its capacity, in billing Consumers for capacity charges (at the rates set forth in the PPA) availability would be capped at 98.5% of the 1240 MW (“98.5% cap”) on a calendar-year basis for the term of the PPA irrespective of any MPSC or the reviewing courts’ decision, which may affect this issue or payment; provided, however, that if Consumers transfers (subject to MCV’s prior consent) its rights of up to 1240 MW of capacity and associated energy under the PPA to a third party for an extended period of time, the 98.5% cap will not apply except that the 98.5% cap is, in any event, reinstated on September 15, 2007. Notwithstanding the Settlement Agreement, after September 15, 2007, an issue could exist as to whether or not Consumers can exercise the “regulatory out” provision to reduce capacity payments to MCV based upon the “availability caps” of 88.7% of the 1240 MW (both on and off peak) of contract capacity as provided for in the 915 MW Settlement and the 325 MW Settlement. The Settlement Agreement has not materially affected MCV’s earnings and cash flows.
		In July 2000, in response to rapidly escalating natural gas prices and since Consumers electric rates were frozen, MCV entered into transactions with Consumers whereby Consumers agreed to reduce MCV’s dispatch level and MCV agreed to share with Consumers the savings realized by not having to generate electricity (“Dispatch Mitigation”). On January 1, 2004, Dispatch Mitigation ceased and Consumers began dispatching MCV pursuant to the 915 MW Settlement and the 325 MW Settlement “availability caps” provision (i.e., minimum dispatch of 1100 MW on- and off-peak (“Forced Dispatch”)). On February 12, 2004, MCV and Consumers entered into a Resource Conservation Agreement (“RCA”) which, among other things, provides that Consumers will economically dispatch MCV, if certain conditions are met. Such dispatch is expected to reduce electric production from what would have occurred under the Forced Dispatch, as well as decrease gas consumption by MCV. The RCA provides that Consumers has a right of first refusal to purchase, at market prices, the gas conserved under the RCA. The RCA further provides for the parties to enter into another agreement implementing the terms of the RCA including the sharing of savings realized by not having to generate electricity. The RCA is subject to MPSC approval and MCV and Consumers must accept the terms of the MPSC order as a