<PAGE>   1
                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934

For the fiscal year ended December 31, 1998

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

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         (517)  839-6000
                                                        ------------------------

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]


<PAGE>   2

                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP

                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                TABLE OF CONTENTS


PART I                                                                      Page
------                                                                      ----

Item 1.   Business.............................................................1
          A.  General..........................................................1
          B.  The Partners.....................................................1
          C.  The Facility.....................................................2
          D.  Major Issues Facing MCV..........................................2
          E.  Contracts........................................................3
          F.  Employees.......................................................10
          G.  Regulation......................................................10
          H.  Environmental Matters...........................................15
          I.  Overall Lease Transaction.......................................17

Item 2.   Properties..........................................................20

Item 3.   Legal Proceedings...................................................20

Item 4.   Submission of Matters to a Vote of Security Holders.................20

PART II 

Item 5.   Market for Registrant's Common Equity and Related Stockholder 
            Matters...........................................................21

Item 6.   Selected Financial Data.............................................21

Item 7.   Management's Discussion and Analysis of Financial Condition and 
            Results of Operations.............................................21

Item 8.   Financial Statements and Supplementary Data.........................31

Item 9.   Changes In and Disagreements with Accountants on Accounting and 
            Financial Reporting Matters.......................................31

PART III

Item 10.  Directors and Executive Officers of the Registrant..................32

Item 11.  Executive Compensation..............................................34

Item 12.  Security Ownership of Certain Beneficial Owners and Management......37

Item 13.  Certain Relationships and Related Transactions......................38

PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.....39



<PAGE>   3

                                     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 Power Company, now known as 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 (the
      "Commercial Operation Date") in 1990 and is capable of generating in
      excess of 1370 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 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.

      MCV has entered into three principal energy sales agreements. The first is
      a Power Purchase Agreement (the "PPA") effective in 1990, providing for
      the sale to Consumers of electric capacity and related energy from the
      Facility for a term of 35 years. Under the terms of the PPA, MCV will
      supply up to 1240 MW of electric capacity and related energy to Consumers
      for resale to its customers. The second is a Steam and Electric Power
      Agreement (the "SEPA") also effective in 1990, providing for the sale to
      The Dow Chemical Company ("Dow") of steam and electricity produced by the
      Facility for terms of 25 years and 15 years, respectively. The third is a
      Steam Purchase Agreement (the "SPA") effective in 1996, providing for the
      sale of steam produced by the Facility to Dow Corning Corporation ("DCC")
      for a term of 15 years. From time to time, MCV enters into other
      short-term sales agreements for the sale of excess capacity and/or energy
      available above MCV's internal use and obligations MCV has to Consumers,
      Dow and DCC.

B.    The Partners

      The current general partners of MCV are CMS Midland, Inc. ("CMS Midland"),
      a wholly-owned subsidiary of Consumers, Source Midland Limited Partnership
      ("Source Midland"), a wholly-owned limited partnership of MCN Energy Group
      Inc., Coastal Midland, Inc. ("Coastal Midland"), a wholly-owned subsidiary
      of The Coastal Corporation ("Coastal") and MEI Limited Partnership
      ("MEI"), which is a general and limited partner, owned 50% by Coastal
      Midland and 50% by Source Midland. MCV's other limited partners are Dow,
      Micogen Limited Partnership, owned by subsidiaries of Coastal, and Alanna
      Corporation ("Alanna"), a wholly-owned subsidiary of Alanna Holdings
      Corporation ("Alanna Holding"). The capital stock of Alanna Holding is
      owned by Dow, CMS Energy Corporation ("CMS Energy"), an affiliate of
      Consumers, Coastal Natural Gas Company, an affiliate of Coastal, MCN
      Energy Group Inc. and Panhandle Eastern Corporation. On April 30, 1998,
      Coastal Midland and an affiliate of The Coastal Corporation acquired all
      of the partnership interests in Micogen Limited Partnership from Fluor
      Corporation, the previous parent company. On June 16, 1998, MEI was
      acquired by Coastal Midland and Source Midland, with each company
      acquiring a 50% interest in MEI from Asea Brown Boveri, Inc., the previous
      parent company. C-E Midland Energy Inc., a previous limited partner, was
      acquired by MEI just prior to the acquisition of MEI by Coastal Midland
      and Source Midland. The general partners and limited partners of MCV are
      referred to herein as the "Partners." The ownership interests of the
      Partners are described in Part III, Item 12, "Security Ownership of
      Certain Beneficial Owners and Management."

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<PAGE>   4

C.    The Facility

      MCV's principal business is the operation of the Facility and the sale of
      electric capacity and related energy (principally to Consumers) and steam
      (to Dow and DCC) produced at the Facility. The Facility is located on an
      approximately 1,200-acre site that is leased from Consumers (the "Site").

      The Facility consists of the following:

      -   12 gas turbine generators ("GTGs") originally designed to produce
          approximately 1045 MW (gross) under design ambient conditions;

      -   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 355
          MW (gross) under design ambient conditions from the 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, capable of producing approximately 15
          MW;

      -   Pollution control assets;

      -   A 25-mile gas pipeline connecting the interstate gas pipeline system
          to the Facility;

      -   Pipelines to deliver steam to Dow and DCC; and

      -   Various associated equipment and improvements.

      The Facility was originally designed to have a net electrical generating
      capacity of approximately 1370 MW and to produce approximately 1.5 million
      pounds per hour of process steam under design ambient conditions.
      Electricity is produced from the 12 GTGs, and the steam is produced by the
      12 HRSGs using the heat from the GTG exhaust. Subsequent improvements to
      the Facility have increased the net electrical generating capacity. The
      Unit 1 Steam Turbine is designed to produce electricity from the steam
      generated by the HRSGs and process steam that is provided to Dow and DCC.
      Demineralized water is sold by Dow to MCV from the Dow plant. Electricity
      is sold by MCV to Consumers through an interconnect and to Dow through
      dedicated transmission lines.

D.    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 on restructuring the electric industry. In 1997 and 1998,
      the Michigan Public Service Commission ("MPSC") entered a series of
      orders, now final at the MPSC level, permitting customers to choose their
      power provider over a four-year phase-in period which was to start in 1998
      ("Restructuring Orders"), (these orders are further described in Part I,
      Item 1, Section G, "Regulation - Michigan Electric Industry Restructuring
      Proceedings"). Similar efforts, in the form of proposed legislation, exist
      at the federal level. Two issues generally involved in these restructuring
      efforts which could significantly impact MCV are stranded assets or
      transition cost recovery by utilities for PPA charges and contract (PPA)
      sanctity. Over 90% of MCV's revenues come from sales pursuant to the PPA.
      To date, these restructuring efforts have not negatively impacted MCV, but
      if the MPSC's Restructuring Orders are construed so as to deny stranded
      cost recovery of above-market PPA costs, and if such order is not reversed
      on appeal, MCV's cash flows may be negatively impacted especially in the
      period after 2007. MCV, as well as others, filed an appeal in the Michigan
      Court of Appeals and a complaint in the US District Court for the Western
      District of Michigan challenging the Restructuring Orders. MCV continues
      to monitor and participate in these matters, as appropriate. 



                                       2
<PAGE>   5

      (See Part I, Item 1, Section G, "Regulation - Michigan Electric Industry
      Restructuring Proceedings and Federal Electric Industry Restructuring",
      Part II, Item 7, "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 and Consumers' exercise of the "regulatory
      out" provision of the PPA with respect to fixed energy charges. In
      addition, MCV's costs associated with production of electricity have
      continued to rise. These circumstances have negatively affected cash flow.
      (See Part I, Item 1, Section G, "Regulation -- MPSC and Other Proceedings
      Relating to Capacity and Energy Charges", Section I, "Overall Lease
      Transaction", and Part II, Item 7, "Management's Discussion and Analysis
      of Financial Condition and Results of Operations ("MD&A") -- Liquidity and
      Financial Resources.")

      Plant Availability. In 1998, approximately 70% of PPA revenues were
      capacity payments based on the Facility's availability to generate
      electricity. PPA availability will depend on the level of scheduled and
      unscheduled maintenance and on the level of output from the GTGs and steam
      turbines. In 1996, some of the GTGs experienced cracking in the hot gas
      casings. As a result of these cracking problems, MCV and ABB Power
      Generation, Inc. ("ABB Power") implemented a program of hot gas casing
      inspections for all GTGs. MCV and ABB Power continue to address equipment
      reliability issues to alleviate future outages. (See Part II, Item 7,
      "MD&A -- Outlook -- Operating Outlook."

E.    Contracts

      MCV has entered into a number of contracts; the material operating
      contracts include the PPA, which provides for the sale to Consumers of
      electric capacity and related energy; the SEPA, which provides for the
      sale of steam and electricity to Dow; the 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 ABB Power and an agreement covering steam turbine
      inspection services and parts with General Electric Company ("GE"). MCV's
      interests in all the foregoing contracts, except the SPA, 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 Part I, Item 1, Section I, "Overall Lease Transaction.")
      The 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, for an initial
      35-year term commencing on the Commercial Operation Date, and thereafter
      subject to yearly extensions that are automatic in the absence of a
      termination notice from either party. Beginning in 1995 and thereafter,
      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, 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, for the first 17-1/2 years of the term of the PPA the capacity
      charge may be reduced by Consumers to a level of no less than an average
      of 3.77 cents per kWh.

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<PAGE>   6

      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 1991,
                  Consumers asserted that, under the PPA, it 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. In a final order issued in 1995, an
                  arbitrator ruled that Consumers was entitled under the PPA to
                  reduce its payments of fixed energy charges for energy
                  available but not delivered. (See Part I, Item 1, Section G,
                  "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.

      As noted above, 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). For the
      first 17-1/2 years of commercial operation, 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 Part I, Item 1, Section G, "Regulation -- MPSC and Other
      Proceedings Relating to Capacity and Energy Charges.")

      Under the PPA, MCV must provide initial assurances that it has adequate
      gas supplies under contract to generate at least 60% of the maximum annual
      output of Contract Capacity for the period commencing on the Commercial
      Operation Date through 1999. Consumers has acknowledged that MCV has
      provided such initial assurances to Consumers. In addition, commencing in
      1998 and each year thereafter, MCV must provide at Consumers' request
      continuing annual assurances of such capability for each succeeding
      five-year period. MCV believes it can meet the requirement of continuing
      assurances. 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:

<TABLE>
<CAPTION>
                                                                   Maximum Possible
                    Consecutive Months That                          Reduction in
                      MCV Fails to Provide                          Capacity Charge
                  Adequate Continuing Assurance                       (cents/kWh)      
                  -----------------------------                    ----------------
                 <S>                                                  <C>  
                           1-12......................................      .1885
                         13-24.......................................      .5655
                         25-36.......................................     1.5080
                         37 and thereafter...........................     2.6390
</TABLE>

      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

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      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. Consumers' determination of the amount
      of energy that it dispatches from the Facility will be subject to its
      contractual relationships with The Detroit Edison Company, with which
      Consumers established a Michigan Electric Coordinated System ("MECS") to
      coordinate generation between the two utilities. The operation and
      management of the MECS is subject to FERC Order 888 - "Open Access and
      Stranded Costs Rulemaking". Through December 31, 1995, Consumers was
      scheduling deliveries of electricity pursuant to a March 31, 1993 MPSC
      Order. Beginning January 1, 1996, Consumers began dispatching MCV at
      higher levels, consistent with the Consumers/MPSC staff proposed
      settlement agreement, filed with the MPSC on September 8, 1995, which
      settlement was approved, with modifications, by the MPSC on November 14,
      1996. (See Part I, Item 1, Section G, "Regulation -- MPSC and Other
      Proceedings Relating to Capacity and Energy Charges.") In March 1998,
      Consumers began dispatching the Facility by scheduling energy deliveries
      on an economic basis relative to the cost of other energy resources,
      instead of at the higher dispatch levels experienced over the prior
      several years.

      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.

      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 1998 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, 1999 and does not anticipate any
      substantial problems.

      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 commencing in 1990 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.

      Under the SEPA, Dow has agreed to notify MCV quarterly of the amount of
      steam and annually of the amount of electricity expected to be delivered.
      In any year, MCV is not obligated to deliver more than 691,900 pounds of
      steam 



                                       5
<PAGE>   8

      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. During 1998, MCV sold an average of 529,993 pounds of steam
      and 62 MW of electricity per hour to Dow.

      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 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. During 1997, Dow gave notice to MCV that
      pursuant to the SEPA it was increasing its electric entitlement to 67.75
      MW/hr beginning April 1, 1997; no such increase was requested during 1998.

      On November 1, 1994, MCV and Dow entered into the Seventh Amendment to
      SEPA. This amendment provided that Dow would install a steam line to the
      Dow Corporate Center for the purpose of delivering MCV-generated steam for
      heating and air conditioning purposes. In return, MCV agreed to a 30%
      price discount on steam used at the corporate center for a period of five
      years for up to 262.8 million pounds of steam per year (an average of
      30,000 pounds per hour). In 1995, steam deliveries to the Dow Corporate
      Center began under this provision.

      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 to provide the gas
      necessary to generate Dow's take of steam and electricity ("toll"). In
      1996, MCV and Dow entered into an agreement (the "April 15, 1996
      Agreement") concerning gas tolling. The April 15, 1996 Agreement provides
      that Dow may toll up to 9,000 MMBtu per day, subject to certain
      limitations and conditions, until January 1, 2002, at which time Dow's
      tolling rights revert to the provisions in the SEPA. 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 gas from MCV. Dow has
      been tolling gas under the April 15, 1996 Agreement since April 1, 1997.
      In addition, Dow made 36 consecutive quarterly installment payments of
      $3,817,500 each, through the year 1998, to MCV in consideration for the
      delivery of steam and electricity.

      In order to assure reliable steam for the Dow plant, Dow owns and
      maintains certain standby facilities consisting of certain package
      boilers, which are not part of the Facility (the "Standby Facilities").
      The Seventh Amendment to SEPA also provided that Dow would retire certain
      of the Standby Facilities located on the MCV site and would progressively
      reduce the annual standby fees payable to Dow from $700,000 per year to a
      level of $350,000 per year in 1998 and thereafter. These fees are subject
      to adjustment each quarter based on changes in fuel costs, capital
      equipment costs and wage rates. In addition, the fee charged by Dow for
      each use of the Standby Facilities, necessitated by MCV's failure to
      deliver steam under the SEPA, was increased from $100,000 to $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 60
      hours in the first year after the Commercial Operation Date, 40 hours in
      the second year and 24 hours in any subsequent 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 



                                       6
<PAGE>   9

      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 generally provides that
      MCV will 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. Under the SPA, MCV expects to supply steam at the
      rate of up to 180,000 pounds per hour with a minimum of 90,000 pounds per
      hour. 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 payment of
      damages for such termination.

      Gas Supply Arrangements

      MCV has a portfolio of natural gas purchase contracts (the "Gas
      Contracts"), having remaining terms of 1 to 12 years, with U.S. and
      Canadian suppliers for a maximum supply of natural gas as of January 1,
      1999 of 236,500 Mcf/day. No single Gas Contract currently accounts for
      more than 8% of MCV's portfolio, and no single supplier accounts for more
      than 14% of MCV's portfolio. Gas Contracts with U.S. suppliers ("U.S. Gas
      Contracts") provide for the purchase of 156,500 Mcf/day as of January 1,
      1999, while Gas Contracts with Canadian suppliers ("Canadian Gas
      Contracts") provide for the purchase of 80,000 Mcf/day.

      The Gas Contracts have a fixed price in a base year which is subject to
      adjustment under various methods -- a fixed price; a fixed price with an
      escalator; an index based on Consumers' energy charges under the PPA; or a
      combination thereof -- which permits the seller to increase the price by
      the greater of the fixed escalator or the energy charge index. Over the
      terms of the contracts, approximately 32% of the volume is priced with a
      fixed price or a fixed price with an escalator, 28% is priced with the
      energy index and 40% with a combination thereof. While the price of gas
      under the U.S. Gas Contracts is exclusive of transportation charges
      (beyond the point of delivery into a pipeline servicing MCV), the Canadian
      Gas Contracts require the payment of a monthly charge whether or not MCV
      buys any gas (the "Demand Charge") to cover the costs incurred by Canadian
      suppliers for the provision of transportation capacity to the U.S.-Canada
      border.

      Current U.S. Gas Contracts. The U.S. Gas Contracts provide for either a
      corporate "warranty of deliverability" or a "dedication of reserves."
      Under a dedication of reserves, specific reserves are dedicated to fulfill
      the supplier's obligations and under a corporate warranty, reserves are
      not dedicated but generally MCV is indemnified for the cost of purchasing
      supplies elsewhere if the gas is not delivered as warranted.

      Most of the U.S. Gas Contracts contain "take-or-pay" provisions obligating
      MCV to purchase at least a specified percentage (generally 75%) 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. 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). Most U.S. Gas Contracts 



                                       7
<PAGE>   10

      allow a "make-up period" ranging from one to five years to make up the
      deficiency. Apache currently has the right to reduce the MDQ under one of
      its contracts by 5,000 Mcf/day because MCV purchased gas quantities at
      less than 75% of the MDQ during the first five years of the contract.

      Most U.S. 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. 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 Gas Contracts. All Canadian Gas 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 less than ten.

      Prices under the Canadian Gas 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 Gas 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"), MCV pays each Canadian supplier a
      Demand Charge to cover the transportation demand 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 Gas 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 Gas Contracts establish specific minimum annual takes
      (generally 75%). Generally, MCV is required to make deficiency payments to
      the Canadian suppliers equal to all or some percentage of the Commodity
      Charge multiplied by any deficiency. MCV has make-up rights in some
      circumstances under some of the Canadian Gas Contracts.

      If a Canadian supplier underdelivers 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 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. Another supplier may reduce the
      MDQ after the 7th year if the Facility's operating load factor is above
      75% but MCV's nominations under the contract during the particular year
      are less than 75% 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 Coastal. CMS Energy is currently in
      the final stage of its acquisition of Panhandle and Trunkline. In
      addition, certain of the gas suppliers will 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.

                                       8
<PAGE>   11

      MCV has also 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. Michigan gas produced by suppliers is currently
      transported to Consumers' pipeline system by the supplier under contracts
      the suppliers have with Michigan Consolidated Gas Company ("MichCon"), a
      wholly-owned subsidiary of MCN Energy Group, on the MichCon pipeline
      system in northern Michigan.

      The remaining terms of MCV's agreements with the U.S. transporters range
      from 3 to 26 years. The transportation rates of ANR, Panhandle, Trunkline,
      Great Lakes and Michigan Gas Storage Company are subject to FERC
      regulation.

      The suppliers under the Canadian Gas 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 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.

      Gas Turbine Service Agreement

      Under a service agreement between MCV and ABB Power (the "Service
      Agreement"), ABB Power sold MCV an initial inventory of 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, as amended, commenced on
      January 1, 1990, and will expire upon the earlier of the completion of the
      sixth series of major GTG inspections or December 31, 2009. ABB Power does
      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.

      MCV must pay a $358,361 (in 1998 dollars) per month inspection fee (which
      escalates based upon various wage level indices, is payable on the basis
      of operating hours as they occur over the same period and may be increased
      under certain events of force majeure or change of laws), and maintenance
      and repair fees (equal to material and other direct costs, amounts payable
      to subcontractors, and ABB Powers' out-of-pocket costs, plus 15% except in
      the case of fees relating to certain service engineers, supervisors and
      specialists where the maintenance fee shall be equal to the ABB Power
      rate). ABB Power warrants that all repairs performed and all spare parts
      supplied by it will be free of defects for one year from the date of
      completion or date of use, respectively.

      The Service Agreement terminates (i) if either ABB Power or MCV fails to
      perform the duties outlined under the Service Agreement, at the option of
      the other party; or (ii) at MCV's option, if MCV is unable to operate the
      Facility for 60 consecutive days due to force majeure. Upon cessation of
      the force majeure, the Service Agreement may be reinstated by either party
      upon 60 days' notice, together with payment by MCV of a $.4 million
      remobilization fee. Upon termination of the Service Agreement (except for
      nonperformance by ABB Power), MCV must pay a cancellation payment ($1.5
      million in 1999, $1.0 million in 2000 and $.5 million in any year
      thereafter, escalated in 1988 dollars).

      On March 22, 1994, MCV and ABB Power signed an agreement effective
      December 31, 1993, to amend the Service Agreement with respect to
      supplying hot gas path parts. Under the amended Service Agreement, ABB
      Power will provide hot gas path parts for MCV's twelve gas turbines
      through the fourth series of major GTG inspections. In January 1998, MCV
      and ABB Power amended the length of the amended Service Agreement to
      extend through the sixth series of major GTG inspections, which are
      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 



                                       9
<PAGE>   12

      over the same period. The amendment is severable and may be terminated
      separately from the existing Service Agreement.

      In addition to the January 1998 amendment to the term of the amended
      Service Agreement, MCV has contracted to purchase from ABB Power 11NM GTG
      upgrade packages for eleven of the gas turbine generators for $41.6
      million. The purchase of these upgrades comes after successfully testing
      one upgrade package at the Facility in 1997. The upgrade packages are
      expected to add to available capacity and significantly improve the
      efficiency of the Facility. Five upgrade packages were installed during
      1998 with the remaining six expected to be completed by the end of 1999.
      Maintenance and spare parts for the upgrade packages are covered by the
      amended Service Agreement. The installation of the upgrade packages is
      severable and may be terminated separately from the Service Agreement and
      amended Service Agreement. Upon termination of the amendment (except for
      non-performance of ABB Power), MCV must pay a cancellation payment of
      $15.0 million, which is reduced to $5.0 million upon completion of the
      fourth major inspection or July 1, 2003, whichever comes last. As part of
      this amended Service Agreement, MCV agreed to purchase a spare GTG rotor
      to facilitate maintenance activities and improve reliability.

      Steam Turbine Service Agreement

      MCV has 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. In addition, this contract includes performance incentives and
      penalties which are based on the length of each scheduled outage and the
      number of forced outages during a calendar year. MCV is to make monthly
      payments over the life of the contract totaling $13.0 million (in 1995
      dollars).

F.    Employees

      As of February 28, 1999, MCV had 132 employees, including 89 engineering,
      operating and maintenance personnel. 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 new
      agreement effective March 1, 1999. It is a five year contract with a wage
      reopener in each of the last two years. MCV believes that its relationship
      with its employees is good.

G.    Regulation

      Introduction

      The Facility is 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 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 Facility has achieved the required Thermal and
      Efficiency Percentages. During 1998, the Facility achieved a Thermal
      Percentage of 17.3% and an Efficiency Percentage of 45.7%.

      The Facility's QF certification by FERC became effective when portions of
      the Facility were first synchronized to Consumers' system in June 1989. As
      a QF, the Facility is 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 



                                       10
<PAGE>   13

      structure in which MCV owns the Facility and in the context of a leveraged
      lease transaction in which the Facility is owned by owner trustees on
      behalf of institutional investors. In September 1997, MCV filed a Notice
      of Self-Recertification with the FERC to reflect technical changes in the
      configuration and equipment of the Facility as modified to date, changes
      in MCV Partnership ownership (which changes did not result in a change in
      the percentage of utility ownership) and elimination of Dow's
      back-pressure turbine from the Facility description because it was never
      installed. In 1998, MCV filed two Notices of Self-Recertification with the
      FERC to reflect changes in MCV Partnership ownership (which changes did
      not result in a change in the percentage of utility ownership). (See Part
      II, Item 7, "MD&A -- Outlook -- Maintaining QF Status".)

      MPSC and Other Proceedings Relating to Capacity and Energy Charges

      Background. Michigan law requires Consumers to file on an annual basis a
      "Power Supply Cost Recovery Plan" (the "PSCR Plan") describing, among
      other things, the anticipated sources of electric power to be purchased
      during the upcoming year. The PSCR Plan must be filed at least three
      months before the beginning of the 12-month period covered by the plan. If
      the MPSC fails to allow or disallow the costs of purchased power in the
      PSCR Plan by the beginning of the year covered thereby, Consumers may
      adjust its rates to recover such costs, as proposed by Consumers, until
      the MPSC acts. Actual costs are reconciled with the costs billed to
      customers in a subsequent filing (made by March 31 of the year subsequent
      to the plan year) known as the "Power Supply Cost Recovery Reconciliation
      Proceeding" ("Reconciliation Case"). The MPSC believes it has the
      authority to suspend the PSCR plan and reconciliation process. By law, the
      MPSC must disallow in the Reconciliation Case any capacity charges
      associated with power purchases for periods in excess of six months unless
      the MPSC has previously approved the capacity charge. Under a Michigan
      statute known as Act 81, once a capacity charge in a contract for a
      purchase from a QF has been approved by the MPSC, the MPSC may not
      disallow recovery by the utility of that capacity charge from its
      customers for a 17-1/2 year period commencing with commercial operation of
      the QF.

      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.
      For the first 17-1/2 years after the Facility's Commercial Operation Date,
      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 comply with the
      prior approval requirement for contracts exceeding six months and to
      obtain the benefit of the 17-1/2 year rate protection provided by Michigan
      law, MCV requested MPSC approval of the 4.15 cents per kWh capacity rate
      provided for in the PPA. The MPSC hearing held on the request was
      consolidated with numerous dockets involving other qualifying facility
      projects, and resulted in a number of MPSC orders. During the pendency of
      this matter before the Court of Appeals, Consumers, MPSC staff and other
      parties negotiated a Revised Settlement Proposal which was submitted to
      the MPSC for approval.

      On March 31, 1993, the MPSC issued an order, effective January 1, 1993
      (the "Settlement Order"), which approved with modifications the Revised
      Settlement Proposal filed by Consumers, the MPSC staff and ten small power
      and cogeneration developers. Although MCV was not a party to the Revised
      Settlement Proposal, the MPSC staff required that MCV file a letter of
      non-objection to the Revised Settlement Proposal. The Settlement Order
      addressed, among other things, the amount Consumers could recover from its
      electric customers for the costs of capacity and energy purchased by it
      from MCV. Generally, the Settlement Order approved cost recovery of 915 MW



                                       11
<PAGE>   14

      of MCV capacity subject to certain "availability caps" associated with
      on-peak and off-peak periods of time each day 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 Settlement Order 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 Settlement Order. 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 Settlement Order would be implemented for rate-making
      purposes in 1993 and subsequent years. Opponents to the Revised Settlement
      Proposal unsuccessfully filed appeals of the Settlement Order and the
      decision is now final.

      Because the Settlement Order did not approve the capacity charges
      authorized for recovery in the PPA, and thereby denied the protection
      provided under Michigan law from reconsideration for a 17-1/2 year period,
      Consumers' cost recovery relating to purchases prior to January 1, 1998,
      from MCV has been reviewed in the annual PSCR Plan and Reconciliation
      Cases. On January 14, 1998, the MPSC issued a ruling suspending Consumers'
      annual PSCR Plan and Reconciliation Cases and set a PSCR "rate freeze"
      effective January 1, 1998. This PSCR rate freeze is subject to a final
      adjustment in Consumers' 1997 PSCR Reconciliation Case, which is in
      progress. This case will determine the level at which Consumers' PSCR
      rates will be frozen during the period 1998 through 2001.

      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 Part I, Item 1, Section I, "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 Settlement Order up to 915 MW. The Offer of
      Relief represented a "floor" for the arbitration of this dispute below
      which payments to MCV of fixed energy charges in dispute could not fall.
      Consumers would schedule deliveries of this energy in accordance with the
      provisions of the PPA. 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.

      On June 23, 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 Settlement Order. In a Final Order issued on February
      16, 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 Settlement Order and 915 MW,
      subject to completion of appellate review in all regulatory and judicial
      proceedings with respect to the Settlement Order and then pending PSCR
      cases.

      On February 23, 1995, the MPSC applied the Settlement Order to Consumers'
      1993 Reconciliation Case and ruled that Consumers could not recover from
      its retail customers the full 915 MW of MCV capacity and fixed energy
      charges. Instead, the MPSC "allocated" approximately 25 MW of MCV capacity
      to "non-jurisdictional" customers (i.e. customers not subject to PSCR
      rates) resulting in a disallowance to Consumers of approximately $7.4
      million of which approximately $.7 million relates to fixed energy charges
      (the "Jurisdictional Issue"). On October 19, 1995, Consumers notified MCV
      that, pursuant to the "regulatory out" provision of the PPA, it would be
      increasing the amount being escrowed each month to reflect its calculation
      of fixed energy charge payments allocated to non-jurisdictional customers
      disallowed by the MPSC and Michigan Court of Appeals due to the
      Jurisdictional Issue. In addition, Consumers requested a refund from MCV
      of $1.9 million plus interest, for the calendar years 1993 and 1994 and
      the first eight months of 1995. On November 21, 1995, MCV responded to
      Consumers indicating that MCV would, pursuant to the PPA, refund the
      appropriate funds, if any, and determine the appropriate calculation of
      the correct escrow amount, if any, at such time as a final and
      non-appealable order disallowing these recoveries is entered. The decision
      involving the Jurisdictional Issue has become final, affirming the MPSC's
      decision. Based on this decision, Consumers notified MCV that it would
      continue withholding the fixed energy charges on the Jurisdictional Issue
      (currently averaging approximately $39,000 per month in 1998). In
      addition, MCV agreed to 



                                       12
<PAGE>   15

      release to Consumers the escrowed funds of approximately $1.0 million plus
      interest (covering the period of September 1995 through December 1996),
      subject to a final resolution between MCV and Consumers as to the
      appropriate escrow amount, and to refund the $1.9 million (discussed
      above), as a result of the finality of the Jurisdictional Issue. MCV has
      not recognized any of these amounts related to the Jurisdictional Issue as
      operating revenues.

      The MPSC ruled in the 1993 Reconciliation Case that Consumers could not
      recover from its retail customers fixed energy charges payable to MCV for
      energy delivered above the off-peak cap of 732 MW (the "off-peak cap
      issue"). Consumers and MCV unsuccessfully appealed the MPSC's ruling and
      the case is now final.

      In addition, as part of its order in Consumers' 1994 PSCR Plan
      proceedings, the MPSC ruled that for 1994 Consumers would not be permitted
      to recover fixed energy costs for energy associated with the off-peak cap
      issue. MCV believed the MPSC order on this issue was erroneous and filed
      an appeal of the MPSC decision. The Michigan Court of Appeals affirmed the
      MPSC. MCV has petitioned the Michigan Supreme Court to review this case.
      Other PSCR Plan and Reconciliation Cases for the years 1996 and 1997 are
      pending before the MPSC at this time. Consumers has escrowed approximately
      $2.8 million in 1996 and $1.0 million for the years 1994 and 1995 of fixed
      energy charges payable to MCV based on the MPSC ruling. MCV Management
      cannot predict the outcome of these proceedings.

      On September 8, 1995, Consumers and the MPSC staff filed a motion to
      create a consolidated proceeding for the purpose of reviewing a settlement
      agreement ("325 MW Proposed Settlement") entered into between the MPSC
      staff and Consumers. The settlement agreement proposed approving
      one-hundred percent jurisdictional cost recovery of an additional 325 MW
      of capacity purchased from MCV. Cost recovery approval for the 325 MW of
      MCV Contract Capacity was in addition to the 915 MW already approved by
      the MPSC with recovery from Consumers retail customers to begin January 1,
      1996. On September 22, 1995, MCV filed a position statement not objecting
      to the settlement agreement, but reserving all of its rights and
      privileges under the PPA. Consumers increased MCV's dispatch in 1996
      consistent with the terms of the settlement agreement. On November 14,
      1996, the MPSC approved, with modifications, the settlement agreement
      effective January 1, 1996 ("325 MW Settlement Order"). The modifications
      were related to issues not material to MCV, except the Jurisdictional
      Issue, which the MPSC deferred to the 1996 PSCR plan proceeding. As a
      result of the approval of the 325 MW Settlement Order, Consumers notified
      MCV in February 1997, that it would cease escrowing for the off-peak cap
      issue and has released to MCV the 1996 escrowed funds of approximately
      $2.8 million discussed in the preceding paragraph. In addition, Consumers
      has paid MCV approximately $2.5 million for the year 1998 and $2.8 million
      for the year 1997 for energy deliveries relating to the off-peak cap
      issue, subject to a final decision upholding the 325 MW Settlement Order
      on this issue. The $1.0 million escrowed in 1994 and 1995 remains in
      escrow. MCV has not recognized any of these amounts related to the
      off-peak issue as operating revenues. Various parties have appealed the
      325 MW Settlement Order to the Michigan Court of Appeals. MCV Management
      cannot predict the outcome of this proceeding.

      Michigan Electric Industry Restructuring Proceedings

      On December 20, 1996, the MPSC issued an order on its own motion to
      consider the restructuring of the electric industry in Michigan. After
      public hearings and contested case hearings the MPSC issued its initial
      order on June 5, 1997, intermediate orders in related dockets on October
      29, 1997, its final order on January 14, 1998, and a clarification order
      on February 11, 1998 (collectively the "Restructuring Orders"). While the
      Restructuring Orders are not entirely clear, they generally provide for a
      transition to a competitive regime whereby electric retail customers will
      be able to chose their power supplier and pay negotiated or market-based
      rates for such power supply. The MPSC ordered a phased-in program (from
      1998 through 2001) for this competitive regime known as "direct access"
      whereby all customers (industrial, commercial and residential) would be
      eligible to select the power supplier of their choice. The MPSC also
      addressed many transition issues including reliability, stranded cost (or
      transition cost) recovery, rates, and other issues. As noted above (Part
      I, Item 1, Section D, "Major Issues Facing MCV - Electric Industry
      Restructuring"), the two issues involved in this restructuring which could
      significantly impact MCV are contract sanctity and stranded cost recovery.
      On the issue of contract sanctity, the Restructuring Orders indicate that
      it was not the intent of the MPSC to take any action that would affect the
      contractual rights of QFs, including MCV. On the issue of stranded cost
      recovery, the Restructuring Orders allow recovery by utilities (including
      Consumers) of 



                                       13
<PAGE>   16

      stranded costs including capacity charges previously approved by the MPSC
      in power contracts 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 (i.e., MCV's PPA) is limited to the period 1998 through 2007
      (MCV's PPA expires in 2025). The Restructuring Orders do not specifically
      address the recovery of PPA capacity charges after 2007. The Restructuring
      Orders permitted Consumers to elect to suspend the PSCR process and freeze
      its PSCR rate factor through which charges under the PPA are recovered
      from retail customers. The MPSC has suspended the annual PSCR (Plan and
      Reconciliation Case) process indefinitely, and froze Consumers' PSCR rate
      factor. The suspension of the PSCR process and the PSCR "rate freeze" were
      effective January 1, 1998. This PSCR rate freeze is subject to the final
      outcome of Consumers' 1997 PSCR Reconciliation Case which is in progress.
      This case will determine the level at which Consumers' PSCR rates
      (including recovery of MCV capacity and energy charges) will be frozen
      during the period 1998 through 2001. MCV is a party in the 1997 PSCR
      Reconciliation Case.

      In the restructuring cases before the MPSC, MCV has advocated, among other
      things, full recovery of PPA charges (capacity and energy) for the life of
      the PPA. MCV, as well as others, filed an appeal in the Michigan Court of
      Appeals and a complaint in the U.S. District Court for the Western
      District of Michigan challenging the Restructuring Orders. MCV's appeal
      seeks, among other things, enforcement of prior MPSC orders (the
      Settlement Order and the 325 MW Settlement Order). MCV's complaint seeks,
      among other things, a declaration that the Restructuring Orders are
      preempted by PURPA to the extent that they fail to provide for assured
      retail rate recovery of payments made by Consumers to MCV pursuant to
      PURPA and an injunction barring enforcement of the Restructuring Orders to
      the extent they are preempted by PURPA. The Michigan legislature has also
      begun the process to consider electric industry restructuring and
      deregulation. While restructuring could have a material impact on MCV, MCV
      Management cannot, at this time, predict the impact or the outcome of
      these administrative, judicial and legislative proceedings.

      Federal Electric Industry Restructuring

      FERC has jurisdiction over wholesale energy sales in interstate commerce
      and is moving towards "market" based pricing of electricity in some
      circumstances as opposed to traditional cost-based pricing. In April 1996,
      FERC issued Order No. 888 requiring all utilities 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. Appeals of Order No. 888 and subsequent related
      orders are pending before the United States Court of Appeals for the D.C.
      Circuit. In addition, several bills have been introduced in Congress to
      require states to permit consumers to choose their supplier of electricity
      and manage other issues such as transition cost recovery and FERC
      jurisdiction of retail electric sales. MCV Management cannot predict the
      impact on MCV or the outcome of these proceedings.

      Other Regulatory Issues

      MCV has been granted a permanent exemption from the Power Plant and
      Industrial Fuel Use Act of 1978, as amended, relating to the use of
      natural gas as its primary energy source. This exemption permits MCV to
      consume gas without restriction as to hours of operation or the capacity
      of the Facility to consume an alternate fuel.

      The Canadian Gas Contracts require permits from both Canadian and U.S.
      authorities. All of the suppliers have received approval from Canadian
      provincial authorities to lift and remove sufficient gas volumes to meet
      MCV contract requirements and from the National Energy Board ("NEB") to
      export these volumes. The U.S. Gas Contracts are not subject to regulatory
      approvals.

      PPA - Sale or Assignment

      In October 1998, Consumers initiated a process for the solicitation of
      bids to acquire Consumers' rights to the 1240 MW of Contract Capacity and
      associated energy under the PPA. On March 10, 1999, Consumers announced
      that it signed a contract with PECO Energy Company ("PECO") whereby
      Consumers will sell 1240 MW of capacity and associated energy to PECO from
      the MCV PPA beginning January 1, 2002 and ending in September 2007. In



                                       14
<PAGE>   17
       addition, the announcement states Consumers will sell PECO between 100 MW
       to 150 MW in 1999 through 2001. The announcement also states the contract
       with PECO is subject to satisfactory regulatory approvals.  On March 19,
       1999, Consumers filed an application with the MPSC seeking regulatory
       approval of various ratemaking and accounting treatments associated with
       the PECO contract. The PPA prohibits a party from transferring or
       otherwise alienating the agreement without the prior written consent of
       the other party, which consent shall not be unreasonably withheld. At
       this time, MCV Management has not been requested by Consumers to approve
       any assignments. MCV is currently evaluating this proposed sale, however,
       it cannot predict the outcome or potential impacts of this issue.

      Great Lakes Pricing of Gas Transportation Costs

      In 1990, Great Lakes expanded its interstate pipeline system to
      accommodate gas purchases from MCV and other customers. Historically, such
      capital costs were "rolled-in" to the rate base, thus combining the
      capital cost of common use facility additions with the cost of existing
      common use facilities for the purpose of determining the transportation
      rates to be charged to all system shippers. In 1991, FERC issued an order
      that rejected rolled-in pricing for the MCV-related expansion costs and,
      instead, imposed incremental pricing which, for MCV, took effect April 1,
      1993. The incremental method allocates the capital cost of facility
      additions solely to the new shippers who will gain access to the expanded
      facilities. FERC's decision was successfully appealed by MCV and as a
      result thereof, in August 1996, MCV recognized in its current operating
      results approximately $19.0 million (which represented $17.6 million in
      transportation costs included as a reduction in fuel costs and $1.4
      million of accrued interest subsequent to October 1, 1995) of the Great
      Lakes refund. Further, in January 1998, the United States Court of Appeals
      ruled that MCV should have been paid additional interest for the period
      prior to October 1, 1995 on the Great Lakes refund. This case is now
      final.

H.    Environmental Matters

      MCV has obtained all material federal, state and local environmental
      permits necessary to construct and operate the Facility. MCV believes that
      the Facility complies in all material respects with all applicable
      federal, state and local environmental regulations and laws. There is no
      litigation or, to the knowledge of MCV, any administrative proceeding or
      investigation pending or threatened with respect to environmental issues
      at the Facility. It is possible that applicable environmental laws and
      regulations may change, making compliance more costly, time consuming and
      difficult. Any such changes, however, are likely to apply to similarly
      situated power plants and not only to the Facility.

      Water Quality. On two instances in March 1998, MCV exceeded the discharge
      limits of oil and grease from the oily waste treatment system. Treated
      waste water from this system discharges into MCV's 4.1 billion gallon
      cooling pond. The system along with various plant sumps were cleaned and
      pumped out. Through proper operational controls, the oily waste treatment
      system should not see large amounts of oil and grease and since March
      1998, no further exceedances have occurred. The Michigan Department of
      Environmental Quality ("MDEQ") has taken no action to date on this issue.

      Application for National Pollutant Discharge Elimination System permit
      renewal was submitted to the MDEQ on March 26, 1998, and MCV received
      notification that it was "administratively complete" on September 2, 1998.
      The permit reissuance is scheduled to occur before October 1, 1999. MCV
      does not expect any difficulty in its reissuance.

      Air Quality. In September 1996, MCV submitted a Renewable Operating Permit
      ("ROP") Application and received notification that it was administratively
      complete on October 2, 1996. This determination affords the Facility an
      "application shield", which authorizes operation of the plant in
      accordance with its current permits and rules until such time as the ROP
      application is formally acted upon by the MDEQ Air Quality Division.
      Although the requirements that might be imposed at this time are not yet
      known, MCV does not currently foresee any impediments to issuance of that
      ROP. MDEQ Air Quality Division may request additional information during
      the technical review of the application followed by the issuance of a
      draft permit for public notice and comment. This process is presently in
      progress with MCV's comments incorporated into the draft permit. Public
      notice/comment period is scheduled for March 1999.

                                       15
<PAGE>   18

      In September 1998, the United States Environmental Protection Agency
      ("EPA") announced three rulemaking actions to address interstate and
      regional transport of ground level ozone, namely the NOXSIP Call Final
      Rule ("SIP Call Rule"), Proposed Federal Implementation Plan ("FIP Plan")
      and Section 126 Petitions. The SIP Call Rule requires 22 states (including
      Michigan) to submit state implementation plans ("SIPs") which address the
      regional transport of ground level ozone through reductions in nitrogen
      oxide ("NOX") emissions from combustion sources, including gas turbines.
      States must submit plans to meet certain overall reduction percentages
      established in the SIP Call Rule by September 30, 1999, with emission
      reduction measures in place by May 1, 2003 and overall compliance by
      September 30, 2007. The FIP Plan includes the same NOX reduction
      requirements and time tables contained in the SIP Call Rule. The FIP Plan
      will be implemented in any state which fails to submit an approvable NOX
      SIP by September 30, 1999 or otherwise fails to require applicable NOX
      emission reduction requirements to be in place. The Section 126 Petitions
      deal with eight petitions filed by northeastern states under Clean Air
      Act, Section 126, against sources in "upwind" states in the Midwest,
      including Michigan. The EPA proposes to postpone taking action on the
      petitions pending completion of the SIP Call Rule process. Public hearings
      were held and comments have been filed on all three of these rulemaking
      actions. MCV management cannot predict the outcome of these proceedings or
      their impact on MCV.

      Dow Operations. Portions of the Site were previously owned by Dow. At one
      time, Dow had a brine pond, a portion of which was on the Site. Brine
      pipelines previously crossed the Site. Some underground brine lines were
      capped and abandoned in place. Dow had brine lines running near the Site.
      One brine well was used by Dow on the Site. Dow brine pipeline spills off
      the Site are listed on Michigan's "List of Sites of Environmental
      Contamination" established under Michigan Environmental Response Act
      ("MERA"). The principal contaminant of concern at the pipeline spill
      locations is brine. The Site also may have been used for the testing of
      explosives during the 1950s or the 1960s.

      The Dow Plant, immediately across the Tittabawassee River from the Site,
      is on Michigan's "List of Sites of Environmental Contamination"
      established under MERA. The principal contaminants of concern at the Dow
      Plant are dioxins believed to have originated from chemical product
      manufacturing.

      While it is possible that MCV or Consumers could incur liability under the
      Comprehensive Environmental Response, Compensation, and Liability Act of
      1980 ("CERCLA") or MERA for Site conditions from previous Dow activities,
      MCV does not know of any conditions on the Site that MCV believes require
      cleanup. In any event, to the extent that such liability could be shown to
      be due to Dow's activities, MCV or Consumers would seek contribution from
      Dow for any costs incurred in connection with Dow's activities.

      Michigan Department of Natural Resources and the United Stated
      Environmental Protection Agency required Dow to install a groundwater
      collection tile system to prevent migration of tertiary treatment pond
      leakage from Dow's property. The system involves hydraulic monitoring and
      collection of groundwater at the border of the MCV Site. Installation of
      the system has been completed. MCV retained an engineering firm (Gilbert
      Commonwealth Corporation) to review Dow's plans and evaluate the effects
      on Facility operations and the MCV Site of the groundwater collection tile
      system. In 1992, Gilbert Commonwealth Corporation issued a report which
      concluded that the installation of the system "will not materially involve
      or adversely affect the occupation, use, possession, ownership, operation
      and maintenance of the Facility." As a result, MCV granted the requested
      easement to Dow and the groundwater collection tile system was completed
      in early 1993.

      Noise. To minimize noise from normal plant operations, MCV has installed
      silencers in all of the exhaust stacks, a silencer on the hogging air
      ejector and anti-noise insulation on the gas knockout drum. Additionally,
      steam venting silencers have been installed on all 12 HRSGs to control
      noise in connection with startup and shutdown operation. In 1996, MCV
      installed mufflers on the atmospheric dump valves to reduce noise in the
      event of a steam turbine trip or during periods when the steam turbines
      are out of service.

      Environmental Indemnity Agreements. CMS Energy has executed environmental
      indemnity agreements in favor of the Senior Bond Trustee, the Subordinated
      Bond Trustee, the Tax-Exempt Trustee (all as defined in Part I, Item 1,
      Section I, "Overall Lease Transaction"), MCV and the holders, from time to
      time, of the Bonds. Pursuant to these indemnity agreements, CMS Energy has
      agreed to indemnify these parties and certain related parties against all
      expense, damage and liability suffered or incurred by them at any time and
      which is caused by certain classes of 



                                       16
<PAGE>   19

      environmental matters to the extent these occurred at the Site before June
      15, 1990 (with certain exceptions). These matters include (i) the presence
      of any environmentally hazardous materials at the Site, (ii) any
      environmentally hazardous activity at the Site and (iii) any event which
      is a violation of environmental laws affecting the Site (including
      amendments and supplements to such laws whenever enacted except, in the
      case of such enactments after June 15, 1990, to the extent they would
      require installation or modification of equipment). CMS Energy has entered
      into a similar environmental indemnity agreement for the benefit of the
      Owner Trustee (in its individual and trust capacities), the Owner
      Participants (as defined in Part I, Item 1, Section I, "Overall Lease
      Transaction") and certain related parties. In the agreement in favor of
      MCV, payments by CMS Energy are subject to a deductible of $20,000 per
      occurrence and $240,000 in the aggregate. The agreement in favor of MCV
      terminates when all the Senior Bonds (as defined in Part I, Item 1,
      Section I, "Overall Lease Transaction") have been paid in full and all the
      holders of the Bonds (as defined in Part I, Item 1, Section I, "Overall
      Lease Transaction") have been paid all amounts owed under the general
      indemnity in the Participation Agreements, except that such indemnity
      shall not terminate with respect to certain rights arising prior to such
      final payment.

      MCV has also executed an environmental indemnification agreement in favor
      of CMS Energy under which it has agreed to indemnify CMS Energy in
      connection with (i) any violation of the environmental laws by MCV with
      respect to the Site after June 5, 1988, (ii) the release or disposal of
      any hazardous materials at, on or to the Site after June 5, 1988 (unless
      caused by CMS Energy or resulting from hazardous materials at or on the
      Site prior to June 5, 1988), and (iii) any hazardous activities at the
      Site after June 5, 1988, provided that CMS Energy may satisfy these
      obligations only from amounts that are otherwise available for
      distribution to Partners under the Participation Agreements.

I.    Overall Lease Transaction

      General

      Permanent financing for the Facility has been provided through five
      separate but contemporaneous sale and leaseback transactions (the "Overall
      Lease Transaction"), pursuant to which MCV sold undivided interests in all
      of the fixed assets comprising the Facility to the Owner Trustee under
      five separate owner trusts (the "Owner Trusts") established for the
      benefit of certain institutional investors ("Owner Participants"). State
      Street Bank and Trust Company serves as Owner Trustee under each of the
      Owner Trusts (in each such capacity, an "Owner Trustee" and, collectively,
      the "Owner Trustees"). Each Owner Trustee leases its undivided interest in
      the Facility to MCV under one of five separate leases, each having a
      25-year base term (the "Basic Lease Term") commencing in 1990. The Overall
      Lease Transaction was closed in two phases. The first closing (involving
      pollution control and certain related assets) occurred on March 16, 1990,
      (the "First Closing" or the "First Closing Date") and the second closing
      (involving the remainder of the Facility) occurred on June 16, 1990 (the
      "Second Closing" or the "Second Closing Date").

      Each purchase of an undivided interest in the Facility by an Owner Trustee
      and the lease of such undivided interest back to MCV constitutes a
      separate transaction (each, a "Lease Transaction"). The undivided
      interests are in varying "undivided interest percentages" ranging from
      approximately 4.4% to 75.5%. Each Lease Transaction was effected through
      separate, but substantially identical, documents relating to a particular
      undivided interest, including a Trust Agreement pursuant to which the
      Owner Participant established the Owner Trust with the Owner Trustee and
      authorized the Owner Trustee to hold title to its undivided interest on
      its behalf and lease the same to MCV (each a "Trust Agreement"), a
      Participation Agreement pursuant to which MCV, the Owner Participant, the
      Owner Trustee and the various other parties to such Lease Transaction
      agreed to the terms and conditions thereof (each, a "Participation
      Agreement"), a Lease Agreement pursuant to which the Owner Trustee leases
      the undivided interest to MCV (each, a "Lease") and two separate Trust
      Indentures pursuant to which the Owner Trustee issued Senior Notes (as
      defined in this Section I, "Overall Lease Transaction -- The Lease
      Funding") (each, a "Senior Note Indenture") and Subordinated Notes (as
      defined in this Section I, "Overall Lease Transaction -- The Lease
      Funding") (each, a "Subordinated Note Indenture" and, together with the
      Senior Note Indentures, the "Note Indentures"). The United States Trust
      Company and First Union National Bank are note trustees under the Senior
      Note Indenture and the Subordinated Note Indenture, respectively (the
      "Note Trustees"). There is, however, a single Collateral Agency and
      Intercreditor Agreement (the "Intercreditor Agreement"), executed by the
      Owner Trustees, MCV, the Note Trustees, the Working Capital Lender (as
      defined below) and First Trust Michigan as collateral Agent (the
      "Collateral Agent"), 



                                       17
<PAGE>   20

      which provides for the creation and maintenance of certain reserves, the
      deposit of all revenues generated by the Facility, the payment of
      operating expenses, and the distribution of remaining revenues according
      to the priorities set forth therein to or for the account of the Working
      Capital Lender, the Note Trustees, the Owner Trustees, MCV and the
      affiliates of certain Partners. MCV has arranged for a $50 million working
      capital line (the "Working Capital Facility") with Bank of Montreal (the
      "Working Capital Lender") which expires August 31, 1999. As security for
      its obligation to repay advances made under the Working Capital Facility,
      MCV has granted to the Working Capital Lender a first priority security
      interest in certain receivables earned by MCV through the sale of
      electricity, electric generating capacity, natural gas, or steam to third
      parties, including Dow, Consumers and DCC (the "Earned Receivables") and
      in MCV's natural gas inventory (the "Natural Gas Inventory"). Payments due
      under the Working Capital Facility are direct obligations of MCV and will
      in general have a priority in payment over payments under the Leases (and
      thus on the Notes, as defined in this Section I, "Overall Lease
      Transaction -- The Lease Funding," and the Bonds).

      Pursuant to separate Tax Indemnification Agreements between MCV and the
      Owner Participants (the "Tax Indemnification Agreements"), MCV has agreed
      to indemnify the Owner Participants against certain adverse federal income
      tax consequences.

      Statement of Financial Accounting Standards ("SFAS") No. 98, which applies
      to sale and leaseback transactions entered into after June 30, 1988,
      specifies the accounting required by generally accepted accounting
      principles for a seller-lessee's sale and simultaneous leaseback
      transaction involving real estate, including real estate with equipment.
      In accordance with SFAS No. 98, the Overall Lease Transaction must be
      accounted for as a financing obligation and not a sale, since MCV has the
      option to purchase the undivided interests in the Facility at the end of
      the Basic Lease Term, which expires on July 23, 2015, and has other forms
      of continuing involvement with the Facility throughout the Basic Lease
      Term.

      The Lease obligation is recorded as long-term debt, at the present value
      of future minimum Lease payments. There is no change to property, plant
      and equipment, on the Consolidated Balance Sheet, as the transaction was
      accounted for as a financing arrangement for financial reporting purposes.
      Certain Lease transaction expenses of MCV are recorded as deferred
      financing costs and amortized using the interest method over the term of
      the Lease. On an ongoing basis, the monthly accrual for the semi-annual
      Lease payments will be divided between interest and principal components
      using the effective interest method.

      The Lease Funding

      Each Owner Trustee has financed the purchase of its undivided interest in
      the Facility through a combination of equity invested by its related Owner
      Participant ($556,320,000 in the aggregate) and debt incurred through the
      issuance of nonrecourse notes by the Owner Trustee under the related Note
      Indentures, consisting of senior secured notes ($1,200,000,000 in the
      aggregate) (the "Senior Notes") and subordinated secured notes
      ($567,180,000 in the aggregate) (the "Subordinated Notes," and together
      with the Senior Notes, the "Notes"). In order to facilitate the sale of
      this debt (other than the debt evidenced by the Subordinated Notes pledged
      to secure the Tax-Exempt Bonds) (as defined below), two funding
      corporations have been established. Midland Funding Corporation I was
      established for the purpose of issuing various series of senior bonds (the
      "Senior Bonds"), each series secured by a pledge of the corresponding
      series of Senior Notes issued by the five Owner Trustees. Midland Funding
      Corporation II was established for the purpose of issuing various series
      of subordinated bonds (the "Subordinated Bonds" and, together with the
      Senior Bonds, the "Bonds"), each series secured by a pledge of the
      corresponding series of the Subordinated Notes issued by the five Owner
      Trustees. These pledged Subordinated Notes are secured pari passu with the
      Subordinated Notes pledged to secure the Tax-Exempt Bonds issued by the
      Tax-Exempt Issuer (as defined below). The use of the funding corporations
      facilitated the sale of debt by permitting the offer and sale of three
      series of Senior Bonds and two series of Subordinated Bonds, each secured
      equally and ratably by the corresponding series of Notes issued by each of
      the five Owner Trusts, thus eliminating the need to offer a greater number
      of separate series of Notes to the investor. In addition, the use of a
      corporate obligor facilitates compliance with certain investment laws by
      certain institutional purchasers of the Senior and Subordinated Bonds. The
      aggregate principal amount, maturity date, interest rate, redemption
      provisions and other material terms of each series of the Bonds are
      identical to those of the Notes pledged as security therefore.

                                       18
<PAGE>   21

      The Economic Development Corporation of the County of Midland (the
      "Tax-Exempt Issuer") has issued certain series of tax-exempt bonds (the
      "Tax-Exempt Bonds"), which are issued under and secured by a tax-exempt
      collateral trust indenture. The proceeds from the issuance and sale of the
      Tax-Exempt Bonds were used to finance certain pollution control assets
      constituting a portion of the Facility. Each series of Tax-Exempt Bonds is
      secured solely by a corresponding series of Subordinated Notes issued by
      the Owner Trustees, which are secured by a junior security interest in the
      undivided interests of the Owner Trustees in the Facility and certain of
      their rights under and to the related Leases, including rents thereunder
      and the Lease Collateral, including (subject to the rights of the Working
      Capital Lender, which include a prior security interest in certain of
      MCV's receivables and natural gas inventory securing the Working Capital
      Facility) the revenues and other payments received thereunder. The
      Subordinated Notes securing the Tax-Exempt Bonds and the Subordinated
      Notes issued by the Owner Trustees to secure the Subordinated Bonds are
      secured by junior security interests in a shared collateral pool.

      Security and Sources of Payment

      The sole sources of payment for the Senior Bonds and Subordinated Bonds
      are certain pledged Senior Notes and pledged Subordinated Notes,
      respectively, issued by each of the five Owner Trustees and pledged under
      the Senior Bond Indenture and Subordinated Bond Indenture, respectively.
      The pledged Senior Notes and pledged Subordinated Notes of each Owner
      Trustee are nonrecourse obligations of such Owner Trustee payable solely
      from the rental payments made by MCV under its related Lease and the other
      security therefor. The Senior Notes are secured by a senior security
      interest in such Owner Trustee's undivided interest in the Facility and
      certain of its rights under and to the related Lease, including rents
      thereunder and the Lease collateral, including (subject to the rights of
      the Working Capital Lender) the revenues and other payments received
      thereunder. The Pledged Subordinated Notes are secured on a pari passu
      basis with the Subordinated Notes pledged to secure the Tax-Exempt Bonds,
      by a junior lien on and security interest in such collateral. Such lien,
      security interest and assignment are subordinated to the senior lien,
      security interest and assignment securing the Senior Notes issued by such
      Owner Trustee (and pledged to secure the Senior Bonds).

      Additional Senior Notes may be issued (i) to refinance the Senior Notes,
      in whole but not in part, and (ii) to provide funds for the payment of all
      or any portion of certain costs associated with certain modifications to
      the Facility. Additional Subordinated Notes may be issued (i) to refinance
      any series of Subordinated Notes, in whole or in part, and (ii) to provide
      funds for the payment of all or any portion of certain costs associated
      with modifications to the Facility. Any additional Senior and Subordinated
      Notes will rank pari passu with all Senior and Subordinated Notes,
      respectively, then outstanding. The aggregate principal amount of Senior
      and Subordinated Bonds that may be issued is unlimited, provided that at
      no time may the aggregate principal amount of Senior and Subordinated
      Bonds exceed the aggregate principal amount of Senior and Subordinated
      Notes, respectively, then outstanding. The future issuance of additional
      Senior and Subordinated Bonds (other than for refinancing purposes) would
      create additional claims against the security for the Note Indentures and
      the amounts available to repay amounts in respect of the Bonds currently
      outstanding in the event of foreclosure.

      The rental payments under the Leases are established to provide funds
      sufficient to service the debt issued by the Owner Trustees and to provide
      the Owner Participants with a return on their equity investment. MCV is
      unconditionally obligated to make rental payments under the Leases in
      amounts sufficient to provide for scheduled payments of the principal of,
      premium, if any, and interest on the Notes, which amounts, in turn, are
      equal to scheduled payments of principal of, premium, if any, and interest
      on the Bonds. MCV has pledged to each Owner Trustee an undivided interest
      percentage of all revenues to be derived from the operation of the
      Facility, together with its rights with respect to the PPA, the SEPA, and
      various other contracts of MCV relating to the Facility (the "Lease
      Collateral") to secure its rental obligations under the Leases. Neither
      the Bonds nor the Notes are direct obligations of, or guaranteed by, MCV
      nor do any Partners of MCV have any liability under the terms of the
      Notes, the Bonds or the Leases. Neither the Partners nor the Partner
      Affiliates have any obligations under the Leases, and the obligations of
      MCV under the Leases and the other documents related to the Overall Lease
      Transaction are nonrecourse to the Partners and the Partner Affiliates.

      Any default or foreclosure with respect to the undivided interest of an
      Owner Trustee relates solely to such undivided interest. There is no
      cross-collateralization among Owner Trustees and the Subordinated Bond
      trustee as holder of the pledged Subordinated Notes. The Leases, however,
      contain identical events of default including an event of 



                                       19
<PAGE>   22

      default related to a failure by MCV to pay principal of or interest on any
      indebtedness for borrowed money or other financing obligations (including
      lease obligations) with respect to an amount greater than $10 million.

      Pursuant to the Intercreditor Agreement, a reserve account has been
      created for the benefit of the holders of the Notes, which had been
      initially funded with $90 million in cash (the "Reserve Account"). The
      Intercreditor Agreement further sets forth circumstances under which
      amounts in the Reserve Account will be adjusted to equal the greater (for
      so long as the Senior Bonds are outstanding) or the lesser (after the
      Senior Bonds have been paid in full) of $137 million or the debt portion
      of basic rent under the Leases payable on the next succeeding basic rent
      payment date, and limited circumstances under which no more than $10
      million contained therein may be withdrawn therefrom to provide working
      capital. As of December 31, 1998, MCV had funds of $142.5 million in the
      Reserve Account. Excess funds in the Reserve Account are periodically
      transferred to MCV.

Item 2.    PROPERTIES

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

The Facility is located on the Site, previously the location of Consumers'
abandoned Midland Nuclear Generating Plant in Midland County, Michigan. The Site
contains approximately 1,200 acres, including an 880-acre cooling pond. By a
lease dated as of December 29, 1987, Consumers, as fee simple owner, leased the
land on which the Facility is located to MCV, CMS Midland and MDC (the "Original
Lease"). By Amended and Restated Agreement of Lease dated as of June 9, 1988,
such parties amended and restated the Original Lease in its entirety. By five
separate instruments, each dated as of June 1, 1990, Consumers and MCV created
undivided interests in the amended Original Lease and amended and restated the
lease to reflect the creation of such interests (the Original Lease as so
amended and restated is referred to as the "Ground Lease"). In connection with
the Overall Lease Transaction, MCV assigned to each Owner Trustee an undivided
interest in the Ground Lease equal to such Owner Trustee's undivided interest
percentage. Each Owner Trustee in turn subleased its undivided interest back to
MCV pursuant to separate subleases of the Site.

In addition to leasing the Site, the Ground Lease assigns to MCV appurtenant
easement rights for a gas pipeline in Midland and Isabella Counties, Michigan
and easements in the City of Midland for a railroad spur track and a water
pipeline. The Ground Lease is for a term commencing on December 29, 1987 and
ending on December 31, 2035, with two renewal terms of five years each and with
additional renewal terms of two years each as provided therein. The annual
rental under each of the Ground Leases is equal to the undivided interest
percentage of $600,000 per annum through the two five-year renewal terms;
thereafter, it is fair market rental. The Ground Leases are fully net leases.

Item 3.    LEGAL PROCEEDINGS

MCV has filed property tax appeals contesting the assessed value of MCV's
property for 1997 and 1998 taxes, which are pending before the Michigan Tax
Tribunal. MCV also filed an appeal for 1999 taxes. MCV Management cannot predict
the outcome of these proceedings.

Other than as discussed in Part I, Item 1, Section G, "Regulation" there are no
other pending legal proceedings to which MCV is a party and to which any of its
property is subject, that are material in relation to the consolidated financial
statements.

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

Not applicable.



                                       20
<PAGE>   23



                                     PART II

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

Not applicable.

Item 6.   SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data of MCV. The
selected operating and financial position data as of December 31, 1998, 1997,
1996, 1995 and 1994 and for each of the five years ended December 31, 1998 have
been derived from audited financial statements. This information should be read
in conjunction with Part II, Item 7, "MD&A" and the financial statements and
notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                    -----------------------------------------------------------------------
                                                        1998           1997           1996           1995          1994
                                                    -----------------------------------------------------------------------
                                                                             (Dollars in Thousands)
<S>                                                 <C>              <C>             <C>           <C>            <C>      
STATEMENT OF OPERATIONS DATA:
  Operating Revenues                                $   627,054      $ 651,581       $ 645,168     $ 617,818      $ 578,741
  Operating Income                                      222,461        216,499         227,883       232,347        200,593
  Cumulative Effect on Prior Years (to                       --         15,533              --            --             --
   Dec-ember 31, 1996) of Change in Method of
   Accounting for Property Taxes (1)
  Net Income (Loss)                                      80,327         77,737          65,524        60,936         17,689

BALANCE SHEET DATA: (2)
  Total Assets                                        2,286,506      2,351,271       2,363,945     2,360,530      2,372,106
  Capitalization
    Partners' Equity                                    357,548        277,221         199,484       133,960         73,024
    Long-Term Debt, Excluding Current Maturities      1,723,960      1,788,291       1,929,241     2,007,815      2,080,005
</TABLE>

(1)Effective January 1, 1997, MCV changed its method of accounting for property
   taxes so that such taxes are expensed monthly during the fiscal period of the
   taxing authority for which the taxes are levied. This change provides a
   better matching of property tax expense with both the payment for services
   and those services provided by the taxing authorities. Prior to January 1,
   1997, the Partnership expensed property taxes monthly during the year
   following the assessment date (December 31). Also see Part II, Item 7, MD&A
   "Cumulative Effect of Accounting Change" and Notes to Consolidated Financial
   Statements, Note 3, "Change in Method of Accounting for Property Taxes."
(2)Balance sheet data consists of the balances at December 31.


Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS ("MD&A")

Results of Operations

Overview

For the year ended December 31, 1998, MCV recorded net income of $80.3 million
as compared to 1997 net income of $77.7 million. The increase in 1998 earnings
is primarily the result of lower interest expense on MCV's financing obligation,
lower depreciation expense and higher available PPA capacity. This increase was
partially offset by the 1997 change in method of accounting for property taxes
(the cumulative effect on prior years of this change increased 1997 earnings by
$15.5 million) and an increase in the average cost of gas.

For the year ended December 31, 1997, MCV's recorded net income was $12.2
million higher than the 1996 net income of $65.5 million. The increase in 1997
earnings was primarily the result of the 1997 change in method of accounting for


                                       21
<PAGE>   24

property taxes (the cumulative effect on prior years of this change increased
earnings for the year 1997 by approximately $15.5 million while the current year
effect increased 1997 earnings by approximately $.6 million). Contributing to
the higher earnings was higher available PPA capacity and lower interest expense
on MCV's financing obligation, partially offset by the recognition of a Great
Lakes Gas Transmission Company ("Great Lakes") gas transportation refund in
1996.

Operating Revenues

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

<TABLE>
<CAPTION>
                                                        1998            1997           1996
                                                     -----------    -----------    -----------
<S>                                                  <C>            <C>            <C>        
Operating Revenues                                   $   627,054    $   651,581    $   645,168

Capacity Revenue                                     $   407,518    $   405,488    $   396,244
   PPA Contract Capacity (MW)                              1,240          1,240          1,240
   PPA Availability                                         99.4%          98.9%          96.4%

Electric Revenue                                     $   192,258    $   218,219    $   220,803
   PPA Delivery as Percentage of Contract Capacity          79.3%          91.2%          89.4%
   PPA, SEPA and Other Electric Deliveries (MWh)       9,194,474     10,455,717     10,286,934
   Average PPA Variable Energy Rate ($ / MWh)        $     16.76    $     16.87    $     17.00
   Average PPA Fixed Energy Rate ($ / MWh)           $      3.75    $      3.94    $      4.10

Steam Revenue                                        $    12,008    $    12,604    $    12,851
   Steam Deliveries (Mlbs)                             5,584,273      5,717,720      5,215,537

Other Revenue                                        $    15,270    $    15,270    $    15,270
</TABLE>


For the year ended December 31, 1998, MCV's operating revenues decreased $24.5
million over 1997. This decrease primarily resulted from lower electric
deliveries under the PPA with Consumers, resulting from Consumers' change to
economic dispatch of the facility (See Part II, Item 7, MD&A, "Outlook -
Operating Outlook") and to lower variable and fixed energy rates. This decline
in electric revenue is largely offset by a decline in fuel costs also associated
with the decrease in dispatch. The decrease in energy related revenues was
partially offset by higher capacity payments generated under the PPA.

For the year ended December 31, 1997, MCV's operating revenues increased $6.4
million over 1996 due primarily to higher capacity revenue generated under the
PPA. The capacity revenue increase of $9.2 million is the result of higher
capacity payments under the PPA due to fewer 1997 scheduled and unscheduled
maintenance outages. In the first quarter of 1996, MCV experienced severe
cracking in the hot gas casings of several of the GTGs which reduced the
capacity payments under the PPA during that period. Also contributing to the
increase in operating revenues are increases in the Consumers electric dispatch
and DCC steam deliveries. The increase in operating revenues was partially
offset by lower Dow electric and steam revenues due to the credit given to Dow
for the tolling of gas.

Operating Expenses

For the year ended December 31, 1998, MCV's operating expenses were $404.6
million, which includes $244.7 million of fuel costs. During this period, MCV
purchased approximately 85.7 bcf of natural gas, of which 4.4 bcf was used
either for transportation fuel or a net change to gas in storage. During this
same period, MCV consumed 84.1 bcf of natural gas at the plant to produce
energy, of which 2.8 bcf of this total was gas provided by Dow. The average
commodity cost of fuel for the year 1998 was $2.45/MMBtu. For the year ended
December 31, 1997, MCV's operating expenses were $435.1 million, which includes
$266.4 million of fuel costs. During this period MCV purchased approximately
96.1 bcf of natural gas, of which 3.5 bcf was used either for transportation
fuel or a net change to gas in storage. During this same period, MCV 



                                       22
<PAGE>   25

consumed 95.0 bcf of natural gas at the plant to produce energy, of which 2.4
bcf of this total was gas provided by Dow. The average commodity cost of fuel
for the year 1997 was $2.42/MMBtu. Fuel costs for the year 1998 compared to 1997
decreased $21.7 million. This decrease was primarily due to lower gas usage
resulting from a lower electric dispatch by Consumers, and Dow's election to
provide its own gas to generate part of its take of steam and electricity. This
decrease was partially offset by a higher 1998 average cost of gas due to
increases in the long-term natural gas prices.

In 1998, operating expenses other than fuel costs decreased $8.8 million from
the year 1997. This decrease is primarily due to lower depreciation expense,
resulting from a revision to the useful lives of the gas turbines and certain
related capital spares to more closely reflect the economic lives of these
assets. Other expenses incurred in these periods were considered normal
expenditures to achieve the recorded operating revenues.

In 1997, MCV's operating expenses increased $17.8 million, which includes a
$15.9 million increase in fuel costs. The 1996 fuel costs include the
recognition of a Great Lakes gas transportation refund of approximately $17.6
million (excluding interest). Excluding the Great Lakes refund, fuel costs for
1997 were $1.7 million lower than 1996 due to a decrease in fuel usage resulting
from Dow's providing gas to generate part of its take of steam and electricity,
partially offset by higher gas prices primarily due to the escalation of prices
in MCV's long-term contracts.

In 1997, operating expenses other than fuel costs increased $1.9 million over
1996 due primarily to higher legal fees and higher operating costs due to the
increased energy dispatch and higher maintenance material and service costs.
This increase was partially offset by the 1996 establishment of a provision for
the insurance claims on two gas turbine failures in January 1996. Other expenses
incurred in these periods were considered normal expenditures to achieve the
recorded operating revenues.

Other Income (Expense)

The increase in interest and other income for the year 1998 compared to 1997
reflects an interest income refund from Great Lakes, pursuant to a Federal
Appeals Court decision made in January, 1998. The increase in interest and other
income for the year 1997 compared to the year 1996 is due to maintaining a
higher average cash investment balance and to higher interest rates. This
increase was partially offset by the 1996 receipt of approximately $1.4 million
of interest income on a related Great Lakes gas transportation refund. The
decrease in interest expense for the year 1998 compared to the year 1997 and in
1997 compared to 1996 is due to a lower principal balance on MCV's financing
obligation.

Cumulative Effect of Accounting Change

Effective January 1, 1997, MCV changed its method of accounting for property
taxes so that such taxes are expensed monthly during the fiscal period of the
taxing authority for which the taxes are levied. This change provides a better
matching of property tax expense with both the payment for services and those
services provided by the taxing authorities. Prior to January 1, 1997, the
Partnership expensed property taxes monthly during the year following the
assessment date (December 31). The cumulative effect on prior years of this
change increased earnings for the year 1997 by approximately $15.5 million while
the current year effect increased 1997 earnings by approximately $.6 million.

Market Risk Sensitivity

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 below. MCV does
not use financial instruments for trading purposes and does not use leveraged
instruments. Fair values included herein have been determined based upon quoted
market prices. The information presented below should be read in conjunction
with Note 2, " Significant Accounting Policies" and Note 6, "Long-Term Debt" to
the Consolidated Financial Statements of MCV.

Interest Rate Risks. In 1990, MCV obtained permanent financing for the Facility
by entering into sale and leaseback agreements ("Overall Lease Transaction")
with a lessor group, related to substantially all of MCV's fixed assets. In
accordance with SFAS No. 98, "Accounting For Leases," the sale and leaseback
transaction has been accounted for as a financing arrangement. Under the terms
of the Overall Lease Transaction, MCV sold undivided interests in all of the
fixed assets of the Facility for approximately $2.3 billion, to the Owner Trusts
established for the benefit of the Owner 



                                       23
<PAGE>   26

Participants. The financing arrangement, entered into for a term of 25 years,
maturing in 2015, has an effective interest rate of approximately 8.7%,
payable in semi-annual installments of principal and interest. Due to the unique
nature of the negotiated financing obligation it is impractical to estimate the
fair value of the Owner Participants' underlying debt and equity instruments
supporting this financing obligation.

In addition, 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 December 31, 1998 have original maturity dates of
less than one year.

For MCV's debt obligations, the table below presents principal cash flows and
the related interest rate by expected maturity dates. The interest rate reflects
the fixed effective rate of interest of the financing arrangement. For the
interest rate swap transactions, the table presents the notional amounts and
related interest rates by fiscal year of maturity. The variable rates presented
are the average of the forward rates for the term of each contract, as valued 
at December 31, 1998.

<TABLE>
<CAPTION>
                                                              Expected Maturity Date
                           -----------------------------------------------------------------------------------------------

                             1999        2000        2001        2002        2003     Thereafter     Total      Fair Value
                           -------      ------      ------      ------      ------    ----------    --------    ----------
<S>                        <C>          <C>         <C>         <C>         <C>       <C>           <C>         <C>                
Debt:
Long-Term Debt Fixed
Rate                       $ 221.7      $288.6      $292.2      $309.2      $214.0    $  1,790.1    $3,116.2        N/A
    (in millions)
Avg. Interest Rate             8.7%        8.7%        8.7%        8.7%        8.7%          8.7%        8.7%

Interest Rate Swaps:
Variable to Fixed          $  20.0                                                                               Immaterial
    (in millions)
Avg. Pay Rate                 4.90%
Avg. Receive Rate             4.89%

Floating to Floating                                            $ 20.0                                             $(.1)
    (in millions)
Avg. Pay Rate                                                     4.93%
Avg. Receive Rate                                                 4.75%
</TABLE>

Commodity Risk. MCV is a purchaser of natural gas. 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 only to secure
anticipated natural gas requirements necessary for projected electric sales at a
cost of gas less than that available under MCV's long term natural gas contracts
and to hedge sales of natural gas previously obtained in order to optimize MCV's
existing gas supply, storage and transportation arrangements. The natural gas
futures and option contracts qualify as hedges under SFAS No. 80, "Accounting
for Futures Contracts," since the contracts cover probable future transactions.
MCV's futures and forward contracts generally have maturities not exceeding
twelve months.

The following table provides information about MCV's futures contracts that are
sensitive to changes in natural gas prices; these futures contracts have
maturity dates ranging from one to ten months. The table presents the carrying
amounts and fair values at December 31, 1998:

<TABLE>
<CAPTION>
                                             Expected Maturity in 1999            Fair Value
                                             -------------------------            ----------
<S>                                               <C>                              <C>   
Futures Contracts:
    Contract Volumes (Net)
    (10,000 MMBtu) Long (Buy)                         174                               --
Weighted Average Price
    (per MMBtu)                                    $1.997                           $1.902
Contract Amount ($US in Millions)                  $  2.5                           $  3.4
</TABLE>


                                       24
<PAGE>   27
Foreign Currency Risks. 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 ABB Power. The gains and losses on these transactions,
accounted for as hedges, are deferred on the balance sheet and included in the
measurement of the underlying capitalized major renewal costs when incurred.
Forward contracts which are entered into have maturity dates of less than one
year. MCV did not have any such forward purchase contracts for Swiss Francs
outstanding as of December 31, 1998.

Liquidity and Financial Resources

During the years ended December 31, 1998 and 1997, net cash generated by MCV's
operations was $162.9 million and $121.1 million, respectively. The primary use
of net cash was for the payment of principal on the financing obligation and
capital expenditures. No distributions to the Partners for federal tax
obligations were made in the last three years; instead, funds totaling $23.2
million, $13.2 million and $18.1 million were retained by MCV as working capital
in 1998, 1997 and 1996, respectively, since the Reserve Account was funded to
the maximum amount of $137 million in 1994, per the Intercreditor Agreement.
MCV's cash and cash equivalents have a normal cycle of collecting six months of
revenues less operating expenses prior to making the semiannual interest and
principal payments of the financing obligation due in January and July for the
next sixteen years. During 1998, 1997 and 1996, MCV paid the basic rent
requirements of $309.0 million, $254.6 million and $254.7 million, respectively,
as required under the Overall Lease Transaction.

MCV also has arranged for a $50 million working capital line ("Working Capital
Facility") from the Bank of Montreal to provide temporary financing, as
necessary, for operations. The Working Capital Facility has been secured by
MCV's natural gas inventory and earned receivables. At any given time,
borrowings and letters of credit are limited by the amount of the borrowing
base, defined as 90% of earned receivables. The borrowing base varies over the
month as receivables are earned, billed and collected. At December 31, 1998, the
borrowing base was $45.2 million. The Working Capital Facility term currently
extends to August 31, 1999. MCV did not utilize the Working Capital Facility
during 1998, except for letters of credit associated with normal business
practices. MCV believes that amounts available to it under the Working Capital
Facility will be sufficient to meet any working capital shortfalls which might
occur.

For the foreseeable future, MCV expects to fund current operating expenses,
payments under the amended Service Agreement and rental payments primarily
through cash flow from operations. If necessary, MCV could fund any operating
cash flow shortfalls from cash reserves to the extent available for such
purposes. As of December 31, 1998, there was $313.3 million (which includes
$76.8 million reserved for capital improvements and spare parts purchases),
including accrued interest, in available reserves for such purposes.

Inflation

MCV does not expect inflation to have a significant effect on future results of
operations in the near term. MCV's gas contracts have a fixed price in a base
year which is subject to adjustment under various methods -- a fixed price, a
fixed price with an escalator, an index based on Consumers' energy charges under
the PPA, or a combination thereof -- which permits the seller to increase the
price by the greater of the fixed escalator or the energy charge index.
Management believes these provisions provide a measure of relief from inflation
risks inasmuch as none of the long term gas contracts are indexed either to the
price of natural gas or to the rate of general inflation. Under the terms of
MCV's financing obligations under the Overall Lease Transaction, all of the
outstanding long-term borrowings are at fixed rates.


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 which 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.

                                       25
<PAGE>   28
There is no assurance that MCV's expectations will be realized or that
unexpected events will not have an adverse impact on MCV's business.

Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include the
final outcome of the MPSC Restructuring Orders and challenges thereto,
governmental policies, legislation and other regulatory actions (including those
of the Michigan Legislature, Congress, Federal Energy Regulatory Commission and
the Michigan Public Service Commission) with respect to cost recovery under the
PPA, industry restructuring or deregulation, operation and construction of plant
facilities including natural gas pipeline and storage facilities, and present or
prospective wholesale and retail competition, among others. The business and
profitability of MCV is also influenced by other factors such as weather
conditions, pricing and transportation of commodities, environmental
legislation/regulation, Year 2000 compliance issues and inflation, among other
important factors. In October 1998, Consumers announced that it is offering for
sale and assignment, its rights under the PPA. On March 10, 1999, Consumers
announced that it signed a contract with PECO Energy Company ("PECO") whereby
Consumers will sell 1240 MW of capacity and associated energy to PECO from the
MCV PPA beginning January 1, 2002 and ending in September 2007. In addition, the
announcement states Consumers will sell PECO between 100 MW to 150 MW in 1999
through 2001. The announcement also states the contract with PECO is subject to
satisfactory regulatory approvals. MCV's business and profitability may also be
materially affected by the results of such sale of the PPA. 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, Consumers' performance of its obligations under the PPA, capacity
payments made by Consumers and maintenance of the Facility's QF status.

Operating Outlook. In 1998, approximately 70% of PPA revenues were capacity
payments which are based on the Facility's availability. PPA availability was
99.4% in 1998, 98.9% in 1997 and 96.4% in 1996. 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 exceed 90%.

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, instead of at the higher dispatch levels experienced over the
past several years. MCV consequently expects both electric operating revenues
and operating costs to decline. However, MCV Management does not expect this
change to have a material impact on MCV's financial position.

GTG Equipment Problems. In 1996, several of the GTGs experienced severe cracking
in the hot gas casings, which in some cases caused extensive damage to the
turbine blades and vanes. After each such incident, MCV and ABB Power have
identified and modified each of the GTGs to eliminate the problems and have
implemented a program of hot gas path inspections for all GTGs, which are
currently being performed every 3,000 hours. MCV and ABB Power continue to
address reliability issues to alleviate future outages, and MCV believes that
with the modifications that have been made to date there should be no
significant future impacts on plant availability or efficiency, although no
assurance can be given that additional equipment problems will not occur.


The cost of casing replacements and modifications is covered by ABB Power (with
the exception of insurable events) pursuant to the amended Service Agreement,
under which ABB Power is providing hot gas path parts for MCV's twelve gas
turbines through the sixth series of major GTG inspections which are expected to
be completed by year-end 2008.

MCV's insurance carriers continue to monitor and review all the GTG inspection
findings. At this time, MCV currently maintains property insurance policies that
include the hot gas casing equipment and are in effect through the second
quarter of 1999. Failure to maintain insurance, subject to certain exceptions,
is an Event of Default under the Overall Lease Transaction.

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 fuel
supply beyond the year 2004, MCV recognizes that its existing gas contracts are
not sufficient to satisfy the anticipated gas needs

                                       26
<PAGE>   29
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.

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. For
the period April 1990 through December 1998, the energy charge (fixed and
variable) paid to MCV has declined by .29 cents per kWh, while the average
variable cost of delivered fuel for the period 1990 - 1998, has risen by $0.26
per MMBtu.

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
(contract prices generally escalate at either the total PPA energy charge or 4%
per year). The difference could be further exacerbated in approximately six
years as MCV's gas contracts begin to expire if the cost of uncontracted fuel is
materially higher than the prices in the expiring contracts.

Energy Payments Under the PPA

PPA - "Regulatory Out" Provision. Under the "regulatory out" provision of the
PPA, Consumers may, under certain conditions, be relieved of paying capacity
and/or energy charges to MCV to the extent the MPSC does not allow Consumers to
recover such charges from its customers. Consumers is not permitted for the
first 17 1/2 years of the PPA to reduce capacity payments to MCV below an
average rate of 3.77 cents per kWh for available contract capacity as a result
of a regulatory disallowance.

         PPA - Jurisdictional Allocation. In February 1995, the MPSC in Case No.
         U-10155-R (the power supply cost recovery ("PSCR") reconciliation
         proceeding for 1993, "1993 Reconciliation Case," conducted by the MPSC
         to reconcile actual costs incurred by Consumers in 1993 in providing
         power supply to its retail customers with actual revenues it collected
         that same year), ruled that Consumers could not recover from its retail
         customers the full 915 MW of MCV capacity and fixed energy charges.
         Instead, the MPSC "allocated" approximately 25 MW of MCV capacity to
         "non-jurisdictional" customers (i.e., customers not subject to MPSC
         jurisdiction) (the "Jurisdictional Issue"). In October 1995, Consumers
         notified MCV that, pursuant to the "regulatory out" provision of the
         PPA, it would increase the amount escrowed each month to reflect its
         calculation of fixed energy charge payments allocated to
         non-jurisdictional customers in accordance with the MPSC order which
         was upheld by the Michigan Court of Appeals. In addition, Consumers
         requested a refund from MCV of $1.9 million plus interest, for the
         calendar years 1993 and 1994 and the first nine months of 1995. In
         November 1995, MCV responded to Consumers indicating that MCV would,
         pursuant to the PPA, refund the appropriate funds, if any, and
         determine the appropriate calculation of the correct escrow amount, if
         any, at such time as a final and non-appealable order disallowing these
         recoveries is entered. The Michigan Court of Appeals decision involving
         the Jurisdictional Issue became final in January 1998. Based on this
         decision, Consumers notified MCV that it would continue withholding the
         fixed energy charges on the Jurisdictional Issue (currently averaging
         approximately $39,000 per month in 1998). MCV released to Consumers the
         escrowed funds of approximately $1.0 million plus interest (covering
         the period of September 1995 through December 1996), subject to a final
         resolution between MCV and Consumers of the Jurisdictional Issue. MCV
         has not recognized any of these amounts related to this Jurisdictional
         Issue as operating revenues.

         PPA - Fixed Energy Payments for Deliveries Above the Caps. The MPSC
         ruled in the 1993 through 1997 Reconciliation and/or Plan Cases that
         Consumers would not be permitted to recover from its retail customers
         fixed energy costs for energy delivered above the off-peak cap ("the
         off-peak cap issue"). MCV and Consumers unsuccessfully appealed the
         MPSC order for 1993 and that case is final. The 1994 Reconciliation
         Case is currently on appeal to the Michigan Supreme Court. Consumers
         escrowed approximately $2.8 million for 1996 and $1.0 million for the
         period 1994 and 1995 of fixed energy charges payable to MCV based upon
         the MPSC rulings. MCV has not recognized any of these amounts related
         to the off-peak cap issue as operating revenues.

                                       27
<PAGE>   30
         PPA - Additional 325 MW. In September 1995, Consumers and the MPSC
         staff filed a motion to create a consolidated proceeding for the
         purpose of reviewing a settlement agreement ("325 MW Proposed
         Settlement") entered into between the MPSC staff and Consumers. The
         settlement agreement proposed approving one-hundred percent
         jurisdictional cost recovery of an additional 325 MW of capacity
         purchased from MCV. Cost recovery approval for the 325 MW of MCV
         Contract Capacity was in addition to the 915 MW already approved
         (subject to the Jurisdictional Issue) by the MPSC. In November 1996,
         the MPSC approved, with modifications, the settlement agreement
         effective January 1, 1996 ("325 MW Settlement Order"). The
         modifications were generally related to issues not material to MCV,
         except the Jurisdictional Issue which the MPSC deferred to the 1996
         PSCR Plan Case. In the 1996 PSCR Plan Case, which is subject to further
         proceedings, the MPSC ordered, on May 7, 1997, that the 325 MW of
         additional MCV capacity would be allocated between jurisdictional and
         non-jurisdictional customers of Consumers in the same manner as the
         original 915 MW. As a result of the approval of the 325 MW Settlement
         Order, Consumers notified MCV in February 1997, that it would cease
         escrowing for the off-peak cap issue. Consumers released to MCV the
         1996 escrowed funds of approximately $2.8 million discussed in the
         preceding paragraph and Consumers has paid to MCV approximately $2.5
         million for the year 1998 and $2.8 million for the year 1997, for
         energy delivered above the off-peak cap, subject to a final decision
         upholding the 325 MW Settlement Order on this issue. MCV has not
         recognized these amounts paid to MCV as operating revenues. MCV
         Management cannot predict the outcome of either the 325 MW Settlement
         Order proceeding, the 1996 PSCR Plan Case, subsequent PSCR proceedings,
         or appeals, if any.

         PPA - 1998 PSCR Rate Freeze. On January 14, 1998, the MPSC issued a
         ruling suspending Consumers annual PSCR Plan and Reconciliation Cases
         and set a PSCR "rate freeze" effective January 1, 1998. This PSCR rate
         freeze is subject to a final adjustment in Consumers' 1997 PSCR
         Reconciliation Case, which is in progress. This case will determine the
         level at which Consumers' PSCR rates will be frozen during the period
         1998 through 2001. Beginning with the payment of the March 1998
         invoice, Consumers began paying MCV fixed energy payments based upon
         MCV's availability up to 915 MW and on deliveries above 915 MW, rather
         than the higher level established in the PSCR rate freeze. MCV disputes
         Consumer's contention that availability based payments occur only up to
         915 MW and is continuing to discuss this issue with Consumers. MCV has
         recognized the fixed energy payment based on availability up to the
         caps in the 915 MW Settlement Order and on deliveries above 915 MW as
         operating revenues. At this time, MCV Management cannot predict the
         outcome of this issue.

         PPA - Other Issues. In 1997, Consumers informed MCV of several other
         potential payment issues it may pursue, pursuant to the "regulatory
         out" and other provisions of the PPA. These issues relate 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). Consumers has estimated that
         the financial impact of these issues for 1996 would decrease MCV's
         operating revenues by an estimated $2.5 million. In addition, Consumers
         notified MCV that it does not believe that MCV can 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 has also indicated that they may take a similar position
         on the incremental energy and capacity resulting from MCV's
         installation of 11NM upgrade packages on the GTGs. MCV has recognized
         amounts related to the above issues as operating revenues, except for
         revenues associated with the band width (currently averaging
         approximately $7,000 per month in 1998). MCV and Consumers have
         continued to negotiate a settlement of the above issues. At this time,
         MCV Management cannot predict the outcome of these negotiations or
         issues.

         PPA - Sale and Assignment. In October 1998, Consumers initiated a
         process for the solicitation of bids to acquire Consumers' rights to
         the 1240 MW of Contract Capacity and associated energy under the PPA.
         On March 10, 1999, Consumers announced that it signed a contract with
         PECO Energy Company ("PECO") whereby Consumers will sell 1240 MW of
         capacity and associated energy to PECO from the MCV PPA beginning
         January 1, 2002 and ending in September 2007. In addition, the
         announcement states Consumers will sell PECO between 100 MW to 150 MW
         in 1999 through 2001. The announcement also states the contract with
         PECO is subject to satisfactory regulatory approvals. On March 19,
         1999, Consumers filed an application with the MPSC seeking regulatory
         approval of various ratemaking and accounting treatments associated
         with the PECO contract. The PPA prohibits a party from transferring or
         otherwise alienating the agreement without the prior written

                                       28
<PAGE>   31
         consent of the other party, which consent shall not be unreasonably
         withheld. At this time, MCV Management is currently evaluating this
         proposed sale, however, it cannot predict the outcome or potential
         impacts of this issue.

Michigan Electric Industry Restructuring Proceedings. On December 20, 1996, the
MPSC issued an order on its own motion to consider the restructuring of the
electric industry in Michigan. After public hearings and contested case hearings
the MPSC issued its initial order on June 5, 1997, intermediate orders in
related dockets on October 29, 1997, its final order on January 14, 1998, and a
clarification order on February 11, 1998 (collectively the "Restructuring
Orders"). While the Restructuring Orders are not entirely clear, they generally
provide for a transition to a competitive regime whereby electric retail
customers will be able to chose their power supplier and pay negotiated or
market-based rates for such power supply. The MPSC ordered a phased-in program
(from 1998 through 2001) for this competitive regime known as "direct access"
whereby all customers (industrial, commercial and residential) would be eligible
to select the power supplier of their choice. The MPSC also addressed many
transition issues including reliability, stranded cost (or transition cost)
recovery, rates, and other issues. The two issues involved in this restructuring
which could significantly impact MCV are contract sanctity and stranded cost
recovery. On the issue of contract sanctity, the Restructuring Orders indicate
that it was not the intent of the MPSC to take any action that would affect the
contractual rights of QFs, including MCV. On the issue of stranded cost
recovery, the Restructuring Orders allow recovery by utilities (including
Consumers) of stranded costs including capacity charges previously approved by
the MPSC in power contracts 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 (i.e., MCV's PPA) is limited to the period 1998 through 2007 (MCV's
PPA expires in 2025). The Restructuring Orders do not specifically address the
recovery of PPA capacity charges after 2007. The Restructuring Orders permitted
Consumers to elect to suspend the PSCR process and freeze its PSCR rate factor
through which charges under the PPA are recovered from retail customers. The
MPSC has suspended the annual PSCR (Plan and Reconciliation Case) process
indefinitely, and froze Consumers' PSCR rate factor. The suspension of the PSCR
process and the PSCR "rate freeze" were effective January 1, 1998. This PCSR
rate freeze is subject to the final outcome of Consumers' 1997 PSCR
Reconciliation Case which is in progress. This case will determine the level at
which Consumers' PSCR rates (including recovery of MCV capacity and energy
charges) will be frozen during the period 1998 through 2001. MCV is a party in
the 1997 PSCR Reconciliation Case.

In the restructuring cases before the MPSC, MCV has advocated, among other
things, full recovery of PPA charges (capacity and energy) for the life of the
PPA. MCV, as well as others, filed an appeal in the Michigan Court of Appeals
and a complaint in the U.S. District Court for the Western District of Michigan
challenging the Restructuring Orders. MCV's appeal seeks, among other things,
enforcement of prior MPSC orders (the Settlement Order and the 325 MW Settlement
Order). MCV's complaint seeks, among other things, a declaration that the
Restructuring Orders are preempted by PURPA to the extent that they fail to
provide for assured retail rate recovery of payments made by Consumers to MCV
pursuant to PURPA and an injunction barring enforcement of the Restructuring
Orders to the extent they are preempted by PURPA. The Michigan legislature has
also begun the process to consider electric industry restructuring and
deregulation. While restructuring could have a material impact on MCV, MCV
Management cannot, at this time, predict the impact or the outcome of these
administrative, judicial and legislative proceedings.

Federal Electric Industry Restructuring. FERC has jurisdiction over wholesale
energy sales in interstate commerce and is moving towards "market" based pricing
of electricity in some circumstances as opposed to traditional cost-based
pricing. In April 1996, FERC issued Order No. 888 requiring all utilities 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. Appeals of Order No. 888 and subsequent related orders are pending
before the United States Court of Appeals for the D.C. Circuit. In addition,
several bills have been introduced in Congress to require states to permit
consumers to choose their supplier of electricity and manage other issues such
as transition cost recovery and FERC jurisdiction of retail electric sales. MCV
Management cannot predict the impact on MCV or the outcome of these proceedings.

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 


                                       29
<PAGE>   32
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 1998 the Facility achieved
an Efficiency Percentage in excess of 45%.

The Facility's achievement of a Thermal Percentage of 15% (thereby requiring
compliance with the reduced Efficiency Percentage of 42.5%) is dependent upon
both the amount of Dow and DCC steam purchases and the level of electricity
generated by the Facility. 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), subject to an annual average purchase obligation of no
less than approximately 440,000 lbs/hr. of steam (less amounts supplied by the
Standby Facilities and less 50% of the amount sold by MCV to other steam
customers). The SEPA can be terminated by Dow under certain circumstances. Such
termination would likely lead to a loss of QF status for the Facility. Dow and
DCC steam purchases for 1998 averaged 637,474 lbs/hr. Actual steam usage has
varied and will vary with product mix, seasonal delivery fluctuations and other
factors which may change over time. MCV believes annual steam sales will be
sufficient to allow the Facility to exceed the 15% Thermal Percentage.

MCV believes that, given projected levels of steam and electricity sales, the
Facility will be able to maintain QF status and be capable of achieving a 45%
PURPA Efficiency Percentage on a long-term basis. However, no assurance can be
given that factors outside MCV's control will not cause the Facility to fail to
satisfy the annual PURPA qualification requirements and thus lose its QF status.
In 1998, MCV achieved an Efficiency Percentage of 45.7% and a Thermal Percentage
of 17.3%.

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 FPA (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 bank acting as the Owner Trustee and their respective parent
companies could become subject to regulation under the 1935 Act (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
rent payments under the Overall Lease Transaction. The loss of QF status would
constitute an Event of Default under the Lease (and a corresponding Event of
Default under the Indenture) unless, among other requirements, FERC approves (or
accepts for filing) rates under the PPA or other contracts of MCV for the sale
of electricity sufficient to meet certain target coverage ratios (as defined in
the Overall Lease Transaction).

Year 2000
Risks of MCV's Year 2000 Issues. MCV utilizes information technologies and
non-information technologies (collectively "Systems") in the Facility, some of
which may be affected by the year 2000 ("Y2K") date change. If uncorrected, the
Y2K date change could cause, among other things, MCV to incur failures and
outages of the Facility's generating equipment, the equipment operating systems
and business systems. In particular, if MCV's critical systems, i.e., GTGs,
steam turbines and the control system, are adversely affected, these negative
conditions could result in a failure to keep the GTGs running and inhibit MCV's
ability to produce electricity and steam.

Because of the integrated nature of MCV's business with third party suppliers,
customers and other vendors (collectively "associates") MCV may also be affected
by Y2K compliance complications of these associates. MCV's key associates
include vendors supplying MCV's plant control system, natural gas vendors,
Consumers as a transmission provider and certain financial institutions. Y2K
compliance complications of these associates could adversely impact MCV's
ability to transmit power and cause difficulties in obtaining natural gas to
fuel the Facility, among other things.

MCV expects that all new equipment software and hardware installations or other
modifications to its Systems will be completed prior to 2000. However, there can
be no guarantee that costs, plans or time estimates will be achieved, and



                                       30
<PAGE>   33
adverse implications of Y2K non-compliance will not occur. Specific factors that
may cause such adverse results include, but are not limited to, the availability
of personnel trained in this area, the ability to locate and correct all
relevant computer code and the Y2K readiness of MCV's associates.

State of Readiness. In 1997, MCV staff developed a Y2K plan to address the
Systems. The MCV's Y2K plan addresses the Y2K issues in four phases: (1) the
awareness phase, completed in April 1998, brought the Y2K issues to the
attention of all employees; (2) the assessment phase, completed in September
1998, which identified, inventoried and prioritized all Systems; (3) the
renovation phase, expected to be completed by the end of August 1999, which
consists of converting and replacing Systems or components and applications in
Systems which are business critical and non Y2K compliant. Currently, MCV is
concentrating on configuration of new equipment and software supporting the
plant control system, GTG vibration monitoring replacements and natural gas
metering and regulating equipment; and (4) the validation and testing phase,
scheduled to be completed by October 1999, which is being done simultaneously
with the renovation phase.

MCV's work to date indicates that the GTGs appear to have no Y2K problems and
could be operated in a manual mode, if necessary. The main steam turbines also
appear to have no Y2K problems. Testing results to date on the plant control
system have been positive, but validation is incomplete at this time.

In late 1997, MCV began contacting key associates to determine their
organizations' Y2K state of preparedness and is continuing to follow up based on
each entity's Y2K target completion dates.

Contingency Plans. MCV is currently in the process of developing contingency
plans and procedures which include alternative operating plans for the most
reasonably likely worst-case scenarios, including associates in such plans where
appropriate. These plans and procedures will outline alternate methods of
operations (manual or otherwise) and all resources required, including staffing
needs where necessary. These contingency plans and procedures are targeted for
completion in the second quarter of 1999.

Costs. Anticipated spending to make the Systems Y2K compliant will be expensed
as incurred, except costs for new software which will be capitalized and
amortized over the software's useful life. At this time, MCV estimates the
aggregate expenditures for Y2K compliance and new software to be $300,000. This
estimate does not include any estimated costs that may be incurred by MCV as a
result of the failure of any associate to become Y2K compliant or costs to
implement any contingency plans.

See Part II, Item 8, "Financial Statements and Supplementary Data -- Notes 1 and
8 to the Consolidated Financial Statements" for a further discussion of
associated risks and contingencies.

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Report of Independent Public Accountants and Financial Statements are set
forth on Pages F-2 to F-21 of this Annual Report on Form 10-K and are hereby
incorporated herein.

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

None.



                                       31
<PAGE>   34

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

Management Committee

William T. McCormick, Jr.      (54)      Management Committee Chairman

David A. Arledge               (54)      Management Committee Member

Joseph L. Roberts, Jr.         (44)      Management Committee Member

Executive Officers

James M. Kevra                 (50)      President and Chief Executive Officer

Bruce C. Grant                 (52)      Vice President of Human Resources, 
                                         Communications and Public Affairs

James A. Mooney                (59)      Vice President of Engineering, 
                                         Operations and Construction

Gary B. Pasek                  (43)      Vice President, General Counsel and 
                                         Secretary

James M. Rajewski              (51)      Vice President and Controller

Stephen A. Shulman             (42)      Chief Financial Officer and Treasurer

LeRoy W. Smith                 (57)      Vice President of Energy Supply and 
                                         Marketing


William T. McCormick, Jr. has served as Chairman of the Management Committee of
MCV since its creation in January, 1987. Mr. McCormick has served as Chairman of
the Board, Chief Executive Officer and Director of CMS Energy (diversified
energy holding company) since it was incorporated in February 1987 and as
Chairman of Consumers since November 1985.

David A. Arledge has served as a member of the Management Committee since July
1988. Mr. Arledge is Chairman, President and Chief Executive Officer of The
Coastal Corporation, a diversified energy holding company. Prior to becoming
Chief Executive Officer in October 1995, Mr. Arledge was Chief Operating Officer
of The Coastal Corporation from March, 1994. He is also a Director of Coastal
and of Coastal Midland, Inc., a subsidiary of Coastal and has held these
positions since February 1988 and April 1989, respectively. He has held various
executive positions in Coastal and numerous subsidiaries of Coastal for at least
the last five years.

                                       32
<PAGE>   35

Joseph L. Roberts, Jr. has served as a member of the Management Committee since
May 1997. Mr. Roberts is President and Chief Executive Officer of MCNIC Power
Company since July 1998 and a member of the Board of Directors of MCN Investment
Corporation since August 1997. Prior to becoming President and Chief Executive
Officer, Mr. Roberts was President of MCNIC Pipeline & Processing Company since
August 1997 and Vice President of MCNIC Power Company, a position he held since
1993. From 1993 through 1997 Mr. Roberts was also Vice President of MCNIC
Pipeline & Processing Company. MCN Investment Corporation, MCNIC Power Company
and MCNIC Pipeline & Processing are subsidiaries of MCN Energy Group, Inc.


James M. Kevra has served as President and Chief Executive Officer of MCV since
July 1995. Mr. Kevra has served as a member of the Management Committee from
April 1992 to June 1995. Mr. Kevra has previously served as President of Pan
National Gas Sales, Inc. (engaged in the marketing of liquefied natural gas), a
subsidiary of PanEnergy, and held that position from February 1995 to June 1995,
was Vice President of Centana Energy Corporation (engaged in the gathering and
processing of natural gas), a subsidiary of PanEnergy, and was Vice President of
Planning for Panhandle Eastern Pipe Line Company (engaged in the interstate
transportation of natural gas). Mr. Kevra also served as the President of Source
Cogeneration Company, Inc., and served in that capacity from April 1992 to June
1995.

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

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

Gary B. Pasek has served as General Counsel and Secretary of MCV since May 1995
and was elected Vice President in February 1998. From 1991 until joining MCV,
Mr. Pasek was Assistant General Counsel and Assistant Secretary of the Illinois
Power Company ("IP") (an investor owned electric and gas utility) as well as
General Counsel and Secretary of Illinova Generating Company ("IGC") (an
independent power generation company); both IP and IGC are affiliates of
Illinova Corporation.

James M. Rajewski has served as Vice President and Controller of MCV since
January 1988.

Stephen A. Shulman has served as Chief Financial Officer and Treasurer since
February 1999. From February 1994 to January 1999, he served as Vice President
of Finance and Treasurer.

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




                                       33
<PAGE>   36



Item 11. EXECUTIVE COMPENSATION

Compensation

The following table sets forth certain compensation data with respect to the
chief executive officer and four other most highly compensated executive
officers of MCV for each of the three years ended December 31, 1998, 1997 and
1996.

<TABLE>
<CAPTION>
                                               Summary Compensation Table
                                               --------------------------

                                                                              Annual Compensation
                                                      ----------------------------------------------------------------
          Name and                                                                                        All Other
     Principal Position                Year           Salary ($)             Bonus ($)(a)              Compensation($)
------------------------------         ----           ----------             ------------              ---------------
<S>                                    <C>              <C>                     <C>                       <C>      
James M. Kevra                         1998             226,008                 225,000                   46,519(b)
President and                          1997             221,750                 127,302                   45,942    
Chief Executive Officer                1996             200,535                 112,300                   40,270    


James A. Mooney                        1998             176,900                 122,559                   38,279(c)
Vice President of                      1997             169,139                  63,639                   37,126    
Engineering, Operations                1996             163,247                  57,991                   35,637    
and Construction


LeRoy W. Smith                         1998             152,335                 103,173                   25,321(d)
Vice President of Energy               1997             145,505                  59,813                   24,306    
Supply and Marketing                   1996             140,425                  57,525                   23,551    


Gary B. Pasek                          1998             152,169                 106,287                   22,794(e)
Vice President,                        1997             142,380                  51,195                   21,329    
General Counsel & Secretary            1996             134,403                  49,347                   20,135    



Stephen A. Shulman                     1998             137,100                  95,116                   20,538(f)
Chief Financial Officer                1997             129,932                  46,303                   19,465    
and Treasurer                          1996             122,382                  42,439                   18,335     
</TABLE>

------------------------------

(a)   Represents bonuses accrued under the Senior Management Incentive Plan.

(b)   Includes company contributions of $8,000 to the 401(k) Savings Plan,
      $12,000 to the Defined Contribution Retirement Plan, $12,769 to the
      Supplement Retirement Plan and $13,750 to the Excess Benefit Plan.

(c)   Includes company contributions of $8,000 to the 401(k) Savings Plan,
      $12,000 to the Defined Contribution Retirement Plan, $11,914 to the
      Supplemental Retirement Plan and $6,365 to the Excess Benefit Plan.

(d)   Includes company contributions of $7,571 to the 401(k) Savings Plan,
      $12,429 to the Defined Contribution Retirement Plan, $2,608 to the
      Supplemental Retirement Plan and $2,713 to the Excess Benefit Plan.

(e)   Includes company contributions of $7,598 to the 401(k) Savings Plan,
      $12,402 to the Defined Contribution Retirement Plan and $2,794 to the
      Excess Benefit Plan.

(f)   Includes company contributions of $6,846 to the 401(k) Savings Plan,
      $13,154 to the Defined Contribution Retirement Plan and $538 to the Excess
      Benefit Plan.

                                       34
<PAGE>   37


                       1998 Long-Term Incentive Plan Table
                       -----------------------------------


<TABLE>
<CAPTION>
                                      Performance or Other Periods          Estimated Future Payout Under
             Name                    Until Maturation or Payout (a)           Non-Stock Price Based Plan
-------------------------------     -------------------------------         -----------------------------
                                                                                      Maximum($)
<S>                                             <C>                                     <C>  
James M. Kevra                                  3-5 years                               73,000
James A. Mooney                                 3-5 years                               57,500
Gary B. Pasek                                   3-5 years                               49,800
LeRoy W. Smith                                  3-5 years                               49,500
Stephen A. Shulman                              3-5 years                               44,800
</TABLE>

(a)  In 1998, MCV established a new long-term incentive plan under which
     officers and certain management personnel could receive cash payouts based
     on achieving certain targeted cashflows on a projected basis, thus enabling
     cash distributions to be made to the Partners for their annual federal tax
     obligations pursuant to provisions in the Participation Agreement. If, in
     any of the years 2000 through 2002, MCV is able to make a cash distribution
     to its Partners greater than 75% of the Partners' estimated tax obligation,
     each participant in the plan could receive a payout equal to a range of
     1%-30% of their base salary depending on the specific amount of cash
     distributed to the Partners and the year that such distribution occurs.
     Where the cash distribution to the Partners is 75% or less of the estimated
     tax obligation for each of these three years, no cash payout to
     participants will occur under this plan.

Compensation Committee Interlocks and Insider Participation

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

Mr. Arledge is a member of the Compensation Committee of MCV as well as
Chairman, President and Chief Executive Officer and a Director of Coastal and a
Director of Coastal Midland, Inc. Coastal Midland, Inc. and affiliates of
Coastal have engaged in numerous transactions in the ordinary course of business
to provide services or products to MCV. In 1998, Coastal affiliates engaged in
transactions with MCV which included the sale of natural gas, sale of natural
gas transportation, various natural gas marketing services and the purchase of
electricity that amounted in aggregate to approximately $36.3 million. A similar
level of transactions is expected to occur in 1999. In addition, as of December
31, 1998, Coastal had an outstanding cash withdrawal from the Partnership in the
amount of $16.2 million (including accrued interest) in exchange for a letter of
credit, pursuant to the Participation Agreement.

Mr. McCormick is Chairman of the Compensation Committee of MCV as well as
Chairman of the Board and Director of CMS Energy and Consumers. CMS Energy and
its affiliates have the following direct and indirect interests in MCV and the
Facility: CMS Midland Holdings Company has a partnership interest in MCV,
representing indirectly a 35% equity interest in the Facility; CMS Midland has a
49% general partnership interest in MCV; and Consumers has contractual
obligations under the PPA to purchase electric capacity and related energy from
MCV, has contractual obligations under various backup agreements among MCV,
Consumers and Dow to assure a continuous supply of steam and electricity to Dow
in the event the SEPA is terminated, has contractual obligations to enter into
transmission service agreements with other utilities for MCV's benefit, and has
leased undivided interests in the Site to the Owner Trustees (as MCV's
assignees) pursuant to the Ground Lease. In 1998, Consumers purchased electric
capacity and related energy from the Facility that aggregated approximately
$583.7 million. In addition, CMS Energy affiliates have engaged in numerous
transactions in the ordinary course of business to provide services or products
to MCV. In 1998, CMS Energy affiliates engaged in transactions with MCV which
included the sale of natural gas, the sale of natural gas transportation, the
sale of natural gas 



                                       35
<PAGE>   38

storage and the purchase of natural gas that amounted in aggregate to
approximately $23.8 million. A similar level of transactions is expected to
occur in 1999.

Mr. Roberts is a member of the Compensation Committee of MCV, as well as
President and Chief Executive Officer of MCNIC Power Company and a member of the
Board of Directors of MCN Investment Corporation. Affiliates of MCN Energy Group
Inc. have engaged in numerous transactions in the ordinary course of business to
provide services or products to MCV. In 1998, MCN Energy Group Inc. affiliates
engaged in transactions with MCV which included the sale of natural gas and the
purchase of natural gas that amounted in aggregate to approximately $20.2
million. A similar level of transactions is expected to occur in 1999. In
addition, as of December 31, 1998, MCN Energy Group Inc. had an outstanding cash
withdrawal from the Partnership in the amount of $18.3 million (including
accrued interest) in exchange for a letter of credit, pursuant to the
Partnership Agreement.

For further detailed discussions of MCV's contracts and leases with Partners,
see Part I, Item 1, Section E, "Contracts", Item 2, "Properties" and Part II,
Item 8, "Financial Statements and Supplementary Data -- Note 10 to the
Consolidated Financial Statements."




                                       36
<PAGE>   39



Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

Security Ownership of Certain Beneficial Owners

<TABLE>
<CAPTION>
                                                                                   Amount and Nature of Beneficial Ownership (a)
                                                                                ---------------------------------------------------
                                                                                 Approximate Percent        Approximate Percent of
Name and Address of Beneficial Owner            Title of Class                     of Voting Rights          Partnership Interest
---------------------------------------------   ----------------------------    --------------------        -----------------------
<S>                                             <C>                                     <C>                         <C>
CMS Midland, Inc.                               General Partnership Interest            49.0%                       49.0%
212 West Michigan Avenue
Jackson, MI 49201

Source Midland Limited Partnership              General Partnership Interest            24.2%                       18.1%
500 Griswold Street
Detroit, MI 48226

Coastal Midland, Inc.                           General Partnership Interest            14.6%                       10.9%
Coastal Tower
Nine Greenway Plaza
Houston, TX 77046

MEI Limited Partnership (b)                     General Partnership Interest            12.2%                        9.1%
Source Midland Limited Partnership and          Limited Partnership Interest              --                         0.9%
Coastal Midland, Inc. each own a 50%
interest in both the General and Limited
partnership interests of MEI Limited
Partnership, see previous addresses listed
for these companies

The Dow Chemical Company                        Limited Partnership Interest              --                         7.5%
2030 Dow Center
Midland, MI 48674

Micogen Limited Partnership (c)                 Limited Partnership Interest              --                         4.5%
Coastal Tower
Nine Greenway Plaza
Houston, TX 77046

Alanna Corporation                              Limited Partnership Interest              --                       0.00001%
c/o MCV Limited Partnership
100 Progress Place
Midland, MI 48640

                                                                                --------------------        -----------------------
                                                                                        100.0%                      100.0%
</TABLE>




                                       37
<PAGE>   40



--------------------

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

(b)  On June 16, 1998, Coastal Midland, Inc. ("Coastal Midland") and Source
     Midland Limited Partnership ("Source Midland") each acquired a 50% interest
     in MEI Limited Partnership ("MEI") from Asea Brown Boveri, Inc., the
     previous parent company. In addition, C-E Midland Energy, Inc., a previous
     limited partner, was acquired by MEI just prior to the acquisition of MEI
     by Coastal Midland and Source Midland.

(c)  On April 30, 1998, Coastal Midland and an affiliate of the Coastal
     Corporation acquired all of the partnership interests in Micogen Limited
     Partnership from Fluor Corporation, the previous parent company.


Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Part III, Item 11, "Executive Compensation -- Compensation Committee 
Interlocks and Insider Partnerships."





                                       38
<PAGE>   41



                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

      1.   Financial statements.

           The following consolidated financial statements are as of December
           31, 1998 and 1997 or for each of the three years ended December 31,
           1998, 1997 and 1996.
                                                                            Page
                                                                            ----
           Index to Consolidated Financial Statements and Supplemental 
             Schedules                                                       F-1
           Report of Independent Public Accountants                          F-2
           Consolidated Balance Sheets                                       F-3
           Consolidated Statements of Operations                             F-4
           Consolidated Statements of Partners' Equity                       F-5
           Consolidated Statements of Cash Flows                             F-6
           Notes to Consolidated Financial Statements                        F-7

      2.   All schedules are omitted because they are inapplicable, not required
           or the information is included in the financial statements or notes
           thereto.

      3.   The Exhibits that are filed or incorporated by reference as part of
           this report are listed in the Exhibit Index filed herewith.

(b) Reports on Form 8-K.

      No reports on Form 8-K were filed during the last quarter of 1998.














                                       39

<PAGE>   42

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                      Page Reference
                                                                  in Annual Report on
                                                                       Form 10-K     
                                                                  -------------------
<S>                                                                        <C>
Report of Independent Public Accountants                                   F-2

Consolidated Balance Sheets as of December 31, 1998 and 1997               F-3

Consolidated Statements of Operations for the Years Ended 
  December 31, 1998, 1997 and 1996                                         F-4

Consolidated Statements of Partners' Equity for the Years 
  Ended December 31, 1998, 1997 and 1996                                   F-5

Consolidated Statements of Cash Flows for the Years Ended 
  December 31, 1998, 1997 and 1996                                         F-6

Notes to Consolidated Financial Statements                                 F-7
</TABLE>












                                      F-1
<PAGE>   43



                               ARTHUR ANDERSEN LLP




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Partners and the Management Committee of the
Midland Cogeneration Venture Limited Partnership:


We have audited the accompanying consolidated balance sheets of the MIDLAND
COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and
subsidiaries (MCV) as of December 31, 1998 and 1997, and the related
consolidated statements of operations, partners' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of MCV's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Midland
Cogeneration Venture Limited Partnership and subsidiaries as of December 31,
1998 and 1997, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

As discussed in Note 3 to the financial statements, effective January 1, 1997,
MCV changed its method of accounting for property taxes.


                                                   Arthur Andersen LLP


 Detroit, Michigan,
 January 29, 1999.






                                      F-2
<PAGE>   44

                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
                                 (In Thousands)

<TABLE>
<CAPTION>
ASSETS                                                                                  1998            1997
------                                                                               -----------    -----------
<S>                                                                                  <C>            <C>        
CURRENT ASSETS:
  Cash and cash equivalents (Note 2)                                                 $   193,116    $   222,365
  Restricted cash and cash equivalents (Notes 2 and 4)                                     8,913         12,161
  Accounts and notes receivable (Notes 6 and 10)                                         104,315         93,674
  Gas inventory (Notes 2 and 6)                                                           15,144         12,910
  Unamortized property taxes (Note 3)                                                     15,742         16,097
  Prepaid expenses and other                                                               4,031          4,578
                                                                                     -----------    -----------

    Total current assets                                                                 341,261        361,785
                                                                                     -----------    -----------

PROPERTY, PLANT AND EQUIPMENT (Notes 2 and 6):
  Property, plant and equipment                                                        2,392,829      2,439,651
  Pipeline                                                                                21,222         21,222
                                                                                     -----------    -----------

    Total property, plant and equipment                                                2,414,051      2,460,873

  Accumulated depreciation                                                              (640,659)      (640,170)
                                                                                     -----------    -----------

    Net property, plant and equipment                                                  1,773,392      1,820,703
                                                                                     -----------    -----------

OTHER ASSETS:
  Restricted investment securities held-to-maturity (Notes 2 and 4)                      143,444        138,898
  Deferred financing costs, net of accumulated amortization of $10,416 and $9,358,
    respectively (Notes 2 and 6)                                                           8,161          9,219
  Prepaid gas costs, materials and supplies (Note 2)                                      20,248         20,666
                                                                                     -----------    -----------

    Total other assets                                                                   171,853        168,783
                                                                                     -----------    -----------
TOTAL ASSETS                                                                         $ 2,286,506    $ 2,351,271
                                                                                     ===========    ===========

LIABILITIES AND PARTNERS' EQUITY
--------------------------------
CURRENT LIABILITIES:
  Accounts payable and accrued liabilities (Notes 5 and 10)                          $    60,718    $    58,942
  Interest payable (Note 6)                                                               78,959         85,183
  Current portion of long-term debt (Note 6)                                              64,331        140,950
                                                                                     -----------    -----------

    Total current liabilities                                                            204,008        285,075
                                                                                     -----------    -----------

NON-CURRENT LIABILITIES:
  Long-term debt (Note 6)                                                              1,723,960      1,788,291
  Other                                                                                      990            684
                                                                                     -----------    -----------

    Total non-current liabilities                                                      1,724,950      1,788,975
                                                                                     -----------    -----------

COMMITMENTS AND CONTINGENCIES (Notes 1, 6, 7 and 8)

TOTAL LIABILITIES                                                                      1,928,958      2,074,050
                                                                                     -----------    -----------

PARTNERS' EQUITY (Note 10)                                                               357,548        277,221
                                                                                     -----------    -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY                                               $ 2,286,506    $ 2,351,271
                                                                                     ===========    ===========

</TABLE>

        The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>   45


                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
     CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
                                 (In Thousands)


<TABLE>
<CAPTION>
                                                                          1998        1997          1996
                                                                       ---------    ---------    ---------
<S>                                                                    <C>          <C>          <C>      
OPERATING REVENUES (Notes 2, 7, 8 and 10):
  Capacity                                                             $ 407,518    $ 405,488    $ 396,244
  Electric                                                               192,258      218,219      220,803
  Steam and other                                                         27,278       27,874       28,121
                                                                       ---------    ---------    ---------

    Total operating revenues                                             627,054      651,581      645,168
                                                                       ---------    ---------    ---------

OPERATING EXPENSES:
  Fuel costs                                                             244,670      266,417      250,511
  Depreciation                                                            97,239      104,755      104,189
  Operations                                                              14,880       16,080       15,585
  Maintenance                                                             12,596       13,403       13,885
  Property and single business taxes                                      25,687       26,044       25,947
  Administrative, selling and general                                      9,521        8,383        7,168
                                                                       ---------    ---------    ---------

    Total operating expenses                                             404,593      435,082      417,285
                                                                       ---------    ---------    ---------

OPERATING INCOME                                                         222,461      216,499      227,883
                                                                       ---------    ---------    ---------

OTHER INCOME (EXPENSE):
  Interest and other income                                               21,092       19,645       18,420
  Interest expense                                                      (163,226)    (173,940)    (180,779)
                                                                       ---------    ---------    ---------

    Total other income (expense), net                                   (142,134)    (154,295)    (162,359)
                                                                       ---------    ---------    ---------

INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                      80,327       62,204       65,524

Cumulative effect on prior years (to December 31, 1996) of change in
  method of accounting for property taxes (Note 3)                            --       15,533           --
                                                                       ---------    ---------    ---------

NET INCOME                                                             $  80,327    $  77,737    $  65,524
                                                                       =========    =========    =========
</TABLE>







        The accompanying notes are an integral part of these statements.



                                      F-4
<PAGE>   46



                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
  CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
                                 (In Thousands)


<TABLE>
<CAPTION>
                                            General       Limited
                                            Partners      Partners        Total
                                            --------      ---------     --------
<S>                                         <C>           <C>           <C>     
BALANCE, DECEMBER 31, 1995                  $105,264      $ 28,696      $133,960

Net income                                    57,048         8,476        65,524
                                            --------      --------      --------

BALANCE, DECEMBER 31, 1996                   162,312        37,172       199,484

Net income                                    67,680        10,057        77,737
                                            --------      --------      --------

BALANCE, DECEMBER 31, 1997                   229,992        47,229       277,221

Net income                                    69,935        10,392        80,327
                                            --------      --------      --------

BALANCE, DECEMBER 31, 1998                  $299,927      $ 57,621      $357,548
                                            ========      ========      ========
</TABLE>













        The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>   47



                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
     CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                                        1998         1997        1996
                                                                                     ---------    ---------    ---------
<S>                                                                                  <C>          <C>          <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                         $  80,327    $  77,737    $  65,524

  Adjustments to reconcile net income to net cash provided by operating activities

  Depreciation and amortization                                                         98,297      105,882      105,361
  Cumulative effect of change in accounting principle                                       --      (15,533)          --
  Increase in accounts and notes receivable                                            (10,641)     (19,863)      (9,790)
  (Increase) decrease in gas inventory                                                  (2,234)         629          857
  (Increase) decrease in unamortized property taxes                                        355         (564)          --
  (Increase) decrease in prepaid expenses and other                                        547         (500)      (3,025)
  (Increase) decrease in prepaid gas costs, materials and supplies                         418      (14,816)      (1,110)
  Increase (decrease) in accounts payable, accrued and other liabilities                 1,776       (8,597)      13,149
  Decrease in interest payable                                                          (6,224)      (3,469)      (3,188)
  Increase in other non-current liabilities                                                306          229          120
                                                                                     ---------    ---------    ---------
    Net cash provided by operating activities                                          162,927      121,135      167,898
                                                                                     ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Plant modifications and purchases of plant and equipment                             (49,928)     (36,186)     (45,919)
                                                                                     ---------    ---------    ---------
    Net cash used in investing activities                                              (49,928)     (36,186)     (45,919)
                                                                                     ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of financing obligation                                                   (140,950)     (78,574)     (72,190)
  Purchase of restricted investment securities held-to-maturity                       (414,541)    (138,898)          --
  Maturity of restricted investment securities held-to-maturity                        409,995           --           --
  (Increase) decrease in restricted non-current cash and cash equivalents                   --      143,049       (3,197)
                                                                                     ---------    ---------    ---------
    Net cash used in financing activities                                             (145,496)     (74,423)     (75,387)
                                                                                     ---------    ---------    ---------

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT        (32,497)      10,526       46,592

CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT BEGINNING OF PERIOD           234,526      224,000      177,408
                                                                                     ---------    ---------    ---------

CASH, CASH EQUIVALENTS AND RESTRICTED CASH - CURRENT, AT END OF PERIOD               $ 202,029    $ 234,526    $ 224,000
                                                                                     =========    =========    =========
</TABLE>











        The accompanying notes are an integral part of these statements.




                                      F-6
<PAGE>   48


                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)  THE PARTNERSHIP AND ASSOCIATED RISKS

     Midland Cogeneration Venture Limited Partnership ("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 entered into commercial operation in
     1990. The Partners, their respective equity interests and interests in the
     profit and losses of the Partnership and transactions between MCV and
     affiliates of the Partners are discussed in Note 10.

     In 1992, MCV acquired the outstanding common stock of PVCO Corp., a
     previously inactive company. MCV and PVCO Corp. entered into a partnership
     agreement to form MCV Gas Acquisition General Partnership ("MCV GAGP") for
     the purpose of buying and selling natural gas on the spot market and other
     transactions involving natural gas activities. Currently, MCV GAGP is not
     actively engaged in any business activity.

     The Facility was originally designed to provide approximately 1370
     megawatts ("MW") of electricity and approximately 1.5 million pounds of
     process steam per hour. Subsequent improvements to the Facility have
     increased the net electrical generating capacity. MCV has contracted to
     supply up to 1240 MW of electric capacity ("Contract Capacity") to
     Consumers Energy Company, ("Consumers") for resale to its customers, to
     supply electricity and steam to The Dow Chemical Company ("Dow") under the
     Steam and Electric Power Agreement ("SEPA") and to supply steam to Dow
     Corning Corporation ("DCC") under the Steam Purchase Agreement ("SPA").
     Results of operations are primarily dependent on successfully operating the
     Facility at or near contractual capacity levels and on Consumers honoring
     its obligations under the Power Purchase Agreement ("PPA") with MCV. Sales
     pursuant to the PPA have historically accounted for over 90% of MCV's
     revenues.

     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. During 1998, the Facility achieved a Thermal
     Percentage of 17.3% and a PURPA Efficiency Percentage of 45.7%. 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, given projected levels of steam and
     electricity sales, the Facility will meet the required Thermal and the
     corresponding Efficiency Percentages in 1999. In addition, MCV currently
     meets the ownership limitations of PURPA.

     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.
     Commencing in 1998, and each year thereafter, MCV must provide, at
     Consumers request, continuing annual assurances of such capability for each
     succeeding five-year period. 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. MCV
     believes it can meet the requirement of continuing assurances. In addition,
     to the extent that the costs associated with production of electricity rise
     faster than the energy charge payments, MCV's financial performance will be
     negatively affected. The amount of such impact will depend upon the amount
     of the average energy charge payable under the PPA, which is based upon
     costs incurred at Consumers' coal-fired plants and upon the amount of
     energy scheduled by Consumers for delivery under the PPA. However, given
     the unpredictability of these factors, the overall economic impact upon MCV
     of changes in energy charges payable under the PPA and in future fuel costs
     under new or existing contracts cannot accurately be predicted.

                                      F-7
<PAGE>   49

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


     At both the state and federal level, efforts continue on restructuring the
     electric industry. In 1997 and 1998, the Michigan Public Service Commission
     ("MPSC") entered a series of orders, now final at the MPSC level,
     permitting customers to choose their power provider over a four-year
     phase-in period which was to start in 1998. Similar efforts, in the form of
     proposed legislation, exist at the federal level. Two issues generally
     involved in these restructuring efforts which could significantly impact
     MCV are stranded assets or transition cost recovery by utilities for PPA
     charges and contract (PPA) sanctity. To date, these restructuring efforts
     have not negatively impacted MCV, but if the MPSC's Restructuring Orders
     are construed so as to deny stranded cost recovery of above-market PPA
     costs, and if such order is not reversed on appeal, MCV's cash flows may be
     negatively impacted especially in the period after 2007. MCV, as well as
     others, filed an appeal in the Michigan Court of Appeals and a complaint in
     the U.S. District Court for the Western District of Michigan challenging
     the restructuring orders. 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. MCV management cannot, at this time, predict the impact or
     outcome of these matters.


(2)  SIGNIFICANT ACCOUNTING POLICIES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period. Actual results could differ from those
     estimates. Following is a discussion of MCV's significant accounting
     policies.

     Principles of Consolidation

     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.

     Revenue Recognition

     MCV recognizes revenue for the sale of variable energy and fixed energy
     when delivered (see Notes 7 and 8). Capacity and other installment revenues
     are recognized based on plant availability or other contractual
     arrangements.

     Inventory

     MCV's inventory of natural gas is stated at the lower of cost or market,
     and valued using the last-in, first-out ("LIFO") method. Inventory includes
     the costs of purchased gas, variable transportation and storage. The amount
     of reserve to reduce inventories from first-in, first-out ("FIFO") basis to
     the LIFO basis at December 31, 1998 and 1997, was $2.7 million and $1.9
     million, respectively. Inventory cost, determined on a FIFO basis,
     approximates current replacement cost.

     Materials and Supplies

     Materials and supplies are stated at the lower of cost or market using the
     weighted average cost method.

     Deferred Financing Costs

     Financing costs incurred with the issuance of debt are deferred and
     amortized using the interest method over the life of the related financing
     obligation. Deferred financing costs of approximately $1.1 million were
     amortized in each of the years 1998 and 1997 and $1.2 million was amortized
     in 1996.

                                      F-8
<PAGE>   50
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

     Depreciation

     Plant, equipment and pipeline are valued at cost for new construction and
     at the asset transfer price for purchased and contributed assets, and are
     depreciated using the straight-line method over an estimated useful life of
     3 to 35 years. Major renewals and replacements which extend the useful life
     of plant and equipment are capitalized, while maintenance and repairs are
     expensed when incurred. Personal property is depreciated using the
     straight-line method over an estimated useful life of 3 to 15 years. The
     cost to remove an asset is assumed to equal the proceeds of any asset
     disposition. The cost of assets and related accumulated depreciation are
     removed from the accounts when sold or retired, and any resulting gain or
     loss reflected in operations.

     Effective January 1, 1998, MCV prospectively revised its useful lives of
     the gas turbine generators ("GTGs") and certain related capital spares, to
     more closely reflect the economic useful lives of these assets. These
     assets are serviced and maintained by ABB Power Generation ("ABB Power")
     under the amended service agreement, which will extend through the sixth
     series of major GTG inspections, with expected coverage through 2008. The
     effect of this change in accounting estimate resulted in a decrease to
     operating expenses of approximately $9.0 million for the year ending
     December 31, 1998.

     Federal Income Tax

     MCV is not subject to Federal income tax. Partnership earnings are taxed
     directly to each individual partner.

     Statement of Cash Flows

     All liquid investments purchased with a maturity of three months or less at
     time of purchase are considered to be current cash equivalents.

     Fair Value of Financial Instruments

     The carrying amounts of cash and cash equivalents and short-term
     investments approximate fair value because of the short maturity of these
     instruments. MCV's short-term investments, which are made up of investment
     securities held-to-maturity, as of December 31, 1998 have original maturity
     dates of less than one year. The unique nature of the negotiated financing
     obligation discussed in Note 6 makes it impractical to estimate the fair
     value of the Owner Participants' underlying debt and equity instruments
     supporting such financing obligation.

     Forward Foreign Exchange Contracts

     An amended service agreement was entered into between MCV and ABB Power
     (the "amended Service Agreement"), under which ABB Power will provide hot
     gas path parts for MCV's twelve gas turbines through the sixth series of
     major GTG inspections, which are expected to be completed by year-end 2008.
     The payments due to ABB Power under this amended Service Agreement are
     adjusted annually based on the ratio of the U.S. dollar to Swiss franc
     currency exchange rate. MCV maintains a foreign currency hedging program to
     be used only with respect to MCV payments subject to foreign currency
     exposure under the amended Service Agreement.

     To manage this currency exchange rate risk and hedge against adverse
     currency fluctuations impacting the payments under this amended Service
     Agreement, MCV enters into forward purchase contracts for Swiss francs. The
     forward foreign currency exchange contracts qualify as hedges under
     Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
     Currency Translation," since they hedge the identifiable foreign currency
     commitment of the amended Service Agreement. The gains and losses on these
     transactions, accounted for as hedges, are deferred on the balance sheet
     and included in the measurement of the underlying capitalized major renewal
     costs when incurred. On December 29, 1998 and December 29, 1997, MCV closed
     out its forward purchase contracts involving Swiss francs in the notional
     amount of $10.0 million in each of the two years, resulting in a deferred
     $1.0 million and $.2 million gain, respectively, recorded in current
     liabilities.

                                      F-9
<PAGE>   51
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

     Natural Gas Options and Futures

     To manage market risks associated with the volatility of natural gas
     prices, MCV maintains a gas hedging program. MCV enters into natural gas
     options and futures 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 only to secure
     anticipated natural gas requirements necessary for projected electric sales
     at a cost of gas less than that available under MCV's long-term natural gas
     contracts and to hedge sales of natural gas previously obtained in order to
     optimize MCV's existing gas supply, storage and transportation
     arrangements. The natural gas futures contracts qualify as hedges under
     SFAS No. 80, "Accounting for Futures Contracts," since the contracts cover
     probable future transactions.

     Cash is deposited with the broker in a margin account, at the time futures
     or options contracts are initiated. The change in market value of these
     contracts requires adjustment of the margin account balances. The margin
     balance, recorded in prepaid expenses and other, was $.5 million and $1.6
     million as of December 31, 1998 and December 31, 1997, respectively. MCV's
     deferred gains and losses on futures and options contracts, recorded in
     current liabilities, will be offset by the corresponding underlying
     physical transaction and then included in operating expenses as part of
     fuel cost in the same period the natural gas is burned to operate the
     Facility. As of December 31, 1998, MCV had net open futures and options
     contracts of 1.7 Bcf with a deferred gain of $.9 million. As of December
     31, 1997, MCV had net open futures and options contracts of .3 Bcf with a
     deferred loss of $.1 million. In addition, MCV recorded approximately $.2
     million in net deferred gains on contracts closed prior to December 31,
     1998, related to 1999 purchase commitments, and had approximately $.6
     million in net deferred gains on contracts closed prior to December 31,
     1997, related to 1998 purchase/sales commitments.

     Interest Rate Swap Hedges

     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. These agreements will maximize the yield on
     MCV's investments and minimize the impact of fluctuating interest rates.

     Cash may be deposited with the broker at the time the interest rate swap
     transactions are initiated. The change in market value of these contracts
     may require further adjustment of the margin account balance. The margin
     balance recorded in prepaid expenses and other, was approximately $181,000
     and $25,000, as of December 31, 1998 and December 31, 1997, respectively.
     In December 1998 and December 1997, MCV entered into separate interest rate
     swap hedges in the notional amount of $20 million each, with the periods of
     performance from July 23, 1999 through January 23, 2000 and from April 1,
     1998 through December 1, 2002, respectively. The difference between the
     amounts received and paid under the interest rate swap transaction is
     accrued and recorded as an adjustment to the interest income over the life
     of the hedged agreement. As of December 31, 1998, MCV had a loss under the
     December 1997 interest rate swap hedge of approximately $61,000.

     New Accounting Standard

     In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
     130, "Reporting Comprehensive Income." MCV adopted this standard effective
     January 1, 1998. Since the MCV does not currently have activity classified
     as other comprehensive income, the application of this standard does not
     have any impact on MCV's financial position, results of operations and
     financial statement disclosure.

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
     Instruments and Hedging Activities". This statement establishes accounting
     and reporting standards requiring that every derivative instrument be
     recorded in the balance sheet as either an asset or liability measured at
     its fair value. The statement 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. SFAS No. 133 is effective for
     fiscal years beginning after June 15, 1999. MCV expects to adopt the new
     statement effective 



                                      F-10
<PAGE>   52
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

     January 1, 2000. MCV is continuing to study the impact of SFAS No. 133,
     however, MCV does not expect the application of this standard to materially
     affect its financial position or results of operations.

     Emerging Issues Task Force ("EITF") Issue 98-10 is effective for financial
     statements issued for fiscal years beginning after December 15, 1998 and
     requires derivatives contracts entered into under trading activities to be
     marked to market with the gains and losses shown net in the income
     statement. Derivative contracts that are designated as and effective as
     hedges of nontrading activities would continue to be accounted for in
     accordance with an entity's existing hedge accounting policy. Since MCV
     does not engage in trading activities, the current accounting policy of MCV
     for derivative contracts is unaffected by this EITF.

     Reclassifications

     Certain prior year amounts have been reclassified for comparative purposes.
     These reclassifications have no effect on net income.


(3)  CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES

     Effective January 1, 1997, MCV changed its method of accounting for
     property taxes so that such taxes are expensed monthly during the fiscal
     period of the taxing authority for which the taxes are levied. This change
     provides a better matching of property tax expense with both the payment
     for services and those services provided by the taxing authorities. Prior
     to January 1, 1997, the Partnership expensed property taxes monthly during
     the year following the assessment date (December 31). The cumulative effect
     of this change in accounting for property taxes increased earnings for the
     year 1997 by approximately $15.5 million. The pro forma effect on 1997 and
     prior years' consolidated net income, including all interim periods, of
     retroactively recording property taxes as if the new method of accounting
     had been in effect for all periods presented is not material.


(4)  RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENT SECURITIES 
     HELD-TO-MATURITY

     Current and non-current restricted cash and cash equivalents consist of the
following at December 31 (in thousands):

<TABLE>
<CAPTION>
Current:                                          1998       1997
--------                                        --------   --------
<S>                                             <C>        <C>     
Funds restricted for plant modifications        $  8,913   $ 12,161
                                                ========   ========

Non-current:
Funds restricted for rental payments pursuant
  to the Overall Lease Transaction              $142,453   $138,242

Funds restricted for management non-qualified
  plans                                              991        656
                                                --------   --------

Total                                           $143,444   $138,898
                                                ========   ========
</TABLE>




















                                      F-11
<PAGE>   53
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

(5)  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     Accounts payable and accrued liabilities consist of the following at
     December 31 (in thousands):

<TABLE>
<CAPTION>
                                      1998      1997
                                     -------   -------
<S>                                  <C>       <C>    
Accounts payable
   Related parties                   $17,231   $15,382
   Trade creditors                    27,457    28,531
Property and single business taxes    11,822    12,379
Other                                  4,208     2,650
                                     -------   -------

Total                                $60,718   $58,942
                                     =======   =======
</TABLE>

(6)  LONG-TERM DEBT

     Long-term debt consists of the following at December 31 (in thousands):

<TABLE>
<CAPTION>
                                                    1998           1997
                                                 -----------    -----------
<S>                                              <C>            <C>        
Financing obligation, maturing through
2015, effective interest rate of approximately
8.7%, payable in semi-annual installments of
principal and interest, secured by property,
plant and equipment                              $ 1,788,291    $ 1,929,241


Less current portion                                 (64,331)      (140,950)
                                                 -----------    -----------

Total long-term debt                             $ 1,723,960    $ 1,788,291
                                                 ===========    ===========
</TABLE>

     Financing Obligation

     In June 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 and retire a
     portion of notes issued by MCV to MEC Development Corporation ("MDC") in
     connection with the transfer of certain assets by MDC to MCV. In accordance
     with SFAS No. 98, "Accounting For Leases," the sale and leaseback
     transaction has been accounted for as a financing arrangement.

     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 five separate owner trusts ("Owner Trusts") established for the
     benefit of certain institutional investors ("Owner Participants"). State
     Street Bank and Trust Company serves as owner trustee ("Owner Trustee")
     under each of the Owner Trusts, and leases undivided interests in the
     Facility on behalf of the Owner Trusts to MCV for an initial term of 25
     years. CMS Midland Holdings Company ("CMS Holdings"), currently a wholly
     owned subsidiary of Consumers, acquired a 35% indirect equity interest in
     the Facility through its purchase of an interest in one of the Owner
     Trusts.

     The Overall Lease Transaction requires MCV to achieve certain rent coverage
     ratios and other financial tests prior to a distribution to the Partners.
     Generally, these financial tests become more restrictive with the passage
     of time. Further, MCV is restricted to making permitted investments and
     incurring permitted indebtedness as specified in the Overall Lease
     Transaction. The Overall Lease Transaction also requires filing of certain
     periodic operating and financial reports, notification to the lessors of
     events constituting a material adverse change, significant litigation or
     governmental investigation, and change in status as a qualifying facility
     under FERC proceedings or court decisions, among others. Notification and
     approval is required for plant modification, new business activities, and
     other 



                                      F-12
<PAGE>   54
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

     significant changes, as defined. In addition, MCV has agreed to indemnify
     various parties to the sale and leaseback transaction against any expenses
     or environmental claims asserted, or certain Federal and state taxes
     imposed on the Facility, as defined in the Overall Lease Transaction.

     Under the terms of the Overall Lease Transaction, approximately $18.6
     million of transaction costs were a liability of MCV and have been recorded
     as a deferred cost. These costs are being amortized using the interest
     method over the 25-year lease term.

     Revolving Credit Agreement

     MCV has also entered into a revolving credit agreement with the Bank of
     Montreal ("Working Capital Lender") which expires August 31, 1999. Under
     the terms of the existing agreement, MCV can borrow up to the $50 million
     commitment, in the form of revolving credit loans or letters of credit
     secured by MCV's natural gas inventory and earned receivables. A fee of
     .25% per annum is payable on the average daily unused portion of the
     commitment in addition to a letter of credit fee of .625% per annum.
     Outstanding borrowings under this agreement are limited to 90% of earned
     accounts receivable. At December 31, 1998, the borrowing base calculated
     under this agreement was $45.2 million. During 1998, MCV did not utilize
     the Working Capital Facility, except for letters of credit associated with
     normal business practice. At December 31, 1998, MCV had letters of credit
     outstanding of $27.2 million related to gas purchase transactions.

     Intercreditor Agreement

     MCV has also entered into an Intercreditor Agreement with the Owner
     Trustee, Working Capital Lender, First Trust Michigan as Collateral Agent
     ("Collateral Agent") and the Senior and Subordinated Indenture Trustees.
     Under the terms of this agreement, MCV is required to deposit all revenues
     derived from the operation of the Facility with the Collateral Agent for
     purposes of paying operating expenses and rent. In addition, these funds
     are required to pay construction modification costs and to secure future
     rent payments. As of December 31, 1998, MCV has deposited $142.5 million
     into the reserve account and $8.9 million into the construction repair
     account. The reserve account is to be maintained at not less than $40
     million nor more than $137 million (or debt portion of next succeeding
     basic rent payment, whichever is greater). Excess funds in the reserve
     account are periodically transferred to MCV. This agreement also contains
     provisions governing the distribution of revenues and rents due under the
     Overall Lease Transaction, and establishes the priority of payment among
     the Owner Trusts, creditors of the Owner Trusts, creditors of MCV and the
     Partnership.

     Summary

     Interest and fees incurred related to long-term debt arrangements during
     1998, 1997 and 1996 were $162.1 million, $172.8 million and $179.6 million,
     respectively.

     Interest and fees paid during 1998, 1997 and 1996 were $168.3 million,
     $176.2 million and $182.8 million, respectively.

     Minimum payments due under these long-term debt arrangements over the next
     five years are (in thousands):

<TABLE>
<CAPTION>
                                             Principal       Interest            Total
                                            -----------     -----------       -----------
<S>                                         <C>             <C>               <C>        
                    1999                    $    64,330     $   157,332       $   221,662
                    2000                        139,095         149,554           288,649
                    2001                        155,210         136,999           292,209
                    2002                        185,791         123,379           309,170
                    2003                        103,109         110,866           213,975
                                            -----------     -----------       -----------

                                            $  647,535      $   678,130       $ 1,325,665
                                            ===========     ===========       ===========
</TABLE>


                                      F-13
<PAGE>   55
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

(7)  COMMITMENTS AND OTHER AGREEMENTS

     MCV has entered into numerous commitments and other agreements related to
     the Facility. Principal agreements are summarized as follows:

     Power Purchase Agreement

     MCV and Consumers have executed the PPA for the sale to Consumers of a
     minimum amount of electricity, subject to the capacity requirements of Dow
     and any other permissible electricity purchasers. Consumers has the right
     to terminate and/or withhold payment under the PPA if the Facility fails to
     achieve certain operating levels or if MCV fails to provide adequate fuel
     assurances. In the event of early termination of the PPA, MCV would have a
     maximum liability of approximately $270 million if the PPA were terminated
     in the 12th through 24th years. The term of this agreement is 35 years from
     the commercial operation date and year-to-year thereafter.

     Steam and Electric Power Agreement

     MCV and Dow executed the SEPA for the sale to Dow of certain minimum
     amounts of steam and electricity for Dow's facilities. In addition to the
     contractual steam and electric charges, Dow paid 36 quarterly payments,
     pursuant to the agreement, of $3.8 million each. These installment payments
     commenced in the first quarter of 1990 and continued through the fourth
     quarter of 1998, notwithstanding performance of the Facility.

     If the SEPA is terminated, and Consumers does not fulfill MCV's commitments
     as provided in the Backup Steam and Electric Power Agreement, MCV will be
     required to pay Dow a termination fee, calculated at that time, ranging
     from a minimum of $60 million to a maximum of $85 million. This agreement
     provides for the sale to Dow of steam and electricity produced by the
     Facility for terms of 25 years and 15 years, respectively, commencing on
     the commercial operation date and year-to-year thereafter.

     Steam Purchase Agreement

     MCV and DCC executed the SPA for the sale to DCC of certain minimum amounts
     of steam for use at the DCC Midland site. Steam sales under the SPA
     commenced in July 1996. Termination of this agreement, prior to expiration,
     requires the terminating party to pay to the other party a percentage of
     future revenues which would have been realized had the initial term of 15
     years been fulfilled. The percentage of future revenues payable is 50% if
     termination occurs prior to the fifth anniversary of the commercial
     operation date and 33-1/3% if termination occurs after the fifth
     anniversary of this agreement. The term of this agreement is 15 years from
     the commercial operation date of steam deliveries under the contract and
     year-to-year thereafter.

     Gas Supply Agreements

     MCV has entered into gas purchase agreements with various producers for the
     supply of natural gas. The current contracted volume totals 236.5 million
     cubic feet ("MMcf") per day as of January 1, 1999. As of January 1, 1999,
     gas contracts with U.S. suppliers provide for the purchase of 156.5 MMcf
     per day while gas contracts with Canadian suppliers provide for the
     purchase of 80.0 MMcf per day. Some of these contracts require MCV to pay
     for a minimum amount of natural gas per year, whether or not taken. The
     estimated minimum commitments under these contracts for gas for the years
     1999 through 2003 are $112.5 million, $116.7 million, $118.4 million,
     $129.1 million and $144.6 million, respectively. A portion of these
     payments may be utilized in future years to offset the cost of quantities
     of natural gas taken above the minimum amounts.

     Gas Transportation Agreements

     MCV has entered into firm natural gas transportation agreements with
     various pipeline companies. These agreements require MCV to pay certain
     reservation charges in order to reserve the transportation capacity. MCV
     incurred 



                                      F-14
<PAGE>   56
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

     reservation charges in 1998, 1997 and 1996, of $35.9 million, $34.4 million
     and $36.5 million (excluding the Great Lakes Gas Transportation Refund of
     $17.6 million), respectively. The estimated minimum reservation charges
     required under these agreements for each of the years 1999 through 2003 are
     $35.9 million, $35.9 million, $35.9 million, $35.5 million and $35.3
     million, respectively. These projections are based on current commitments.

     Gas Turbine Service Agreement

     MCV entered into a service agreement, as amended, with ABB Power which
     commenced on January 1, 1990 and will expire upon the earlier of the
     completion of the sixth series of major GTG inspections or December 31,
     2009. Under the terms of this agreement, ABB Power sold MCV an initial
     inventory of 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. Upon
     termination of the Service Agreement (except for nonperformance by ABB
     Power), MCV must pay a cancellation payment of $1.5 million in 1999, $1.0
     million in 2000 and $.5 million in any year thereafter escalated in 1988
     dollars. MCV and ABB Power amended the Service Agreement, effective
     December 31, 1993, to include the supply of hot gas path parts. Under the
     amended Service Agreement, ABB Power will provide hot gas path parts for
     MCV's twelve gas turbines through the fourth series of major GTG
     inspections. In January 1998, MCV and ABB Power amended the length of the
     amended Service Agreement to extend through the sixth series of major GTG
     inspections, which are 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. MCV has made payments
     totaling approximately $98.7 million under this amended Service Agreement
     through December 31, 1998.

     In addition to the January 1998 amendment to the term of the amended
     Service Agreement, MCV has contracted to purchase from ABB Power 11NM GTG
     upgrade packages for eleven of the gas turbine generators for $41.6
     million. The purchase of these upgrades comes after successfully testing
     one upgrade package at the Facility in 1997. The upgrade packages are
     expected to add to available capacity and significantly improve the
     efficiency of the Facility. Five upgrade packages were installed during
     1998, with the remaining six expected to be completed by the end of 1999.
     Maintenance and spare parts for the upgrade packages are covered by the
     amended Service Agreement. As part of this amended Service Agreement, MCV
     agreed to purchase a spare GTG rotor to facilitate maintenance activities
     and improve reliability.

     Steam Turbine Service Agreement

     MCV entered into a nine year Steam Turbine Maintenance Agreement with
     General Electric Company effective January 1, 1995, which is designed to
     improve unit reliability, increase availability and minimize unanticipated
     maintenance costs. In addition, this contract includes performance
     incentives and penalties which are based on the length of each scheduled
     outage and the number of forced outages during a calendar year. MCV is to
     make monthly payments over the life of the contract totaling $13.0 million
     (in 1995 dollars).

     Site Lease

     In December 1987, MCV leased the land on which the Facility is located from
     Consumers ("Site Lease"). MCV and Consumers amended and restated the Site
     Lease to reflect the creation of five separate undivided interests in the
     Site Lease as of June 1, 1990. Pursuant to the Overall Lease Transaction,
     MCV assigned these undivided interests in the Site Lease to the Owner
     Trustees, which in turn subleased the undivided interests back to MCV under
     five separate site subleases.

     The Site Lease is for a term which commenced on December 29, 1987, and ends
     on December 31, 2035, including two renewal options of five years each. The
     rental under the Site Lease is $.6 million per annum, including the two
     five-year renewal terms.


                                      F-15
<PAGE>   57
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

(8)  CONTINGENCIES

     PPA - "Regulatory Out" Provision

     Under the "regulatory out" provision of the PPA, Consumers may, under
     certain conditions, be relieved of paying capacity and/or energy charges to
     MCV to the extent the MPSC does not allow Consumers to recover such charges
     from its customers. Consumers is not permitted for the first 17 1/2 years
     of the PPA to reduce capacity payments to MCV below an average rate of 3.77
     cents per kWh for available contract capacity as a result of a regulatory
     disallowance.

         PPA - Jurisdictional Allocation
         In February 1995, the MPSC in Case No. U-10155-R (the power supply cost
         recovery ("PSCR") reconciliation proceeding for 1993, "1993
         Reconciliation Case," conducted by the MPSC to reconcile actual costs
         incurred by Consumers in 1993 in providing power supply to its retail
         customers with actual revenues it collected that same year), ruled that
         Consumers could not recover from its retail customers the full 915 MW
         of MCV capacity and fixed energy charges. Instead, the MPSC "allocated"
         approximately 25 MW of MCV capacity to "non-jurisdictional" customers
         (i.e., customers not subject to MPSC jurisdiction) (the "Jurisdictional
         Issue"). In October 1995, Consumers notified MCV that, pursuant to the
         "regulatory out" provision of the PPA, it would increase the amount
         escrowed each month to reflect its calculation of fixed energy charge
         payments allocated to non-jurisdictional customers in accordance with
         the MPSC order which was upheld by the Michigan Court of Appeals. In
         addition, Consumers requested a refund from MCV of $1.9 million plus
         interest, for the calendar years 1993 and 1994 and the first nine
         months of 1995. In November 1995, MCV responded to Consumers indicating
         that MCV would, pursuant to the PPA, refund the appropriate funds, if
         any, and determine the appropriate calculation of the correct escrow
         amount, if any, at such time as a final and non-appealable order
         disallowing these recoveries is entered. The Michigan Court of Appeals
         decision involving the Jurisdictional Issue became final in January
         1998. Based on this decision, Consumers notified MCV that it would
         continue withholding the fixed energy charges on the Jurisdictional
         Issue (currently averaging approximately $39,000 per month in 1998).
         MCV released to Consumers the escrowed funds of approximately $1.0
         million plus interest (covering the period of September 1995 through
         December 1996), subject to a final resolution between MCV and Consumers
         of the Jurisdictional Issue. MCV has not recognized any of these
         amounts related to this Jurisdictional Issue as operating revenues.

         PPA - Fixed Energy Payments for Deliveries Above the Caps
         The MPSC ruled in the 1993 through 1997 Reconciliation and/or Plan
         Cases that Consumers would not be permitted to recover from its retail
         customers fixed energy costs for energy delivered above the off-peak
         cap ("the off-peak cap issue"). MCV and Consumers unsuccessfully
         appealed the MPSC order for 1993 and that case is final. The 1994
         Reconciliation Case is currently on appeal to the Michigan Supreme
         Court. Consumers escrowed approximately $2.8 million for 1996 and $1.0
         million for the period 1994 and 1995 of fixed energy charges payable to
         MCV based upon the MPSC rulings. MCV has not recognized any of these
         amounts related to the off-peak cap issue as operating revenues.

         PPA - Additional 325 MW
         In September 1995, Consumers and the MPSC staff filed a motion to
         create a consolidated proceeding for the purpose of reviewing a
         settlement agreement ("325 MW Proposed Settlement") entered into
         between the MPSC staff and Consumers. The settlement agreement proposed
         approving one-hundred percent jurisdictional cost recovery of an
         additional 325 MW of capacity purchased from MCV. Cost recovery
         approval for the 325 MW of MCV Contract Capacity was in addition to the
         915 MW already approved (subject to the Jurisdictional Issue) by the
         MPSC. In November 1996, the MPSC approved, with modifications, the
         settlement agreement effective January 1, 1996 ("325 MW Settlement
         Order"). The modifications were generally related to issues not
         material to MCV, except the Jurisdictional Issue which the MPSC
         deferred to the 1996 PSCR Plan Case. In the 1996 PSCR Plan Case, which
         is subject to further proceedings, the MPSC ordered, on May 7, 1997,
         that the 325 MW of additional MCV capacity would be allocated between
         jurisdictional and non-jurisdictional customers of Consumers in the
         same manner as the original 915 MW. As a result of the approval of the
         325 MW Settlement Order, Consumers notified MCV in February 1997, that
         it would cease escrowing for the off-peak cap issue. 



                                      F-16
<PAGE>   58
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

         Consumers released to MCV the 1996 escrowed funds of approximately $2.8
         million discussed in the preceding paragraph and Consumers has paid to
         MCV approximately $2.5 million for the year 1998 and $2.8 million for
         the year 1997, for energy delivered above the off-peak cap, subject to
         a final decision upholding the 325 MW Settlement Order on this issue.
         MCV has not recognized these amounts paid to MCV as operating revenues.
         MCV Management cannot predict the outcome of either the 325 MW
         Settlement Order proceeding, the 1996 PSCR Plan Case, subsequent PSCR
         proceedings, or appeals, if any.

         PPA - 1998 PSCR Rate Freeze
         On January 14, 1998, the MPSC issued a ruling suspending Consumers
         annual PSCR Plan and Reconciliation Cases and set a PSCR "rate freeze"
         effective January 1, 1998. This PSCR rate freeze is subject to a final
         adjustment in Consumers' 1997 PSCR Reconciliation Case, which is in
         progress. This case will determine the level at which Consumers' PSCR
         rates will be frozen during the period 1998 through 2001. Beginning
         with the payment of the March 1998 invoice, Consumers began paying MCV
         fixed energy payments based upon MCV's availability up to 915 MW and on
         deliveries above 915 MW, rather than the higher level established in
         the PSCR rate freeze. MCV disputes Consumer's contention that
         availability based payments occur only up to 915 MW and is continuing
         to discuss this issue with Consumers. MCV has recognized the fixed
         energy payment based on availability up to the caps in the 915 MW
         Settlement Order and on deliveries above 915 MW as operating revenues.
         At this time, MCV Management cannot predict the outcome of this issue.

         PPA - Other Issues
         In 1997, Consumers informed MCV of several other potential payment
         issues it may pursue, pursuant to the "regulatory out" and other
         provisions of the PPA. These issues relate 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). Consumers has estimated that the
         financial impact of these issues for 1996 would decrease MCV's
         operating revenues by an estimated $2.5 million. In addition, Consumers
         notified MCV that it does not believe that MCV can 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 has also indicated that they may take a similar position
         on the incremental energy and capacity resulting from MCV's
         installation of 11NM upgrade packages on the GTGs. MCV has recognized
         amounts related to the above issues as operating revenues, except for
         revenues associated with the band width (currently averaging
         approximately $7,000 per month in 1998). MCV and Consumers have
         continued to negotiate a settlement of the above issues. At this time,
         MCV Management cannot predict the outcome of these negotiations or
         issues.

         PPA - Sale or Assignment
         In October 1998, Consumers initiated a process for the solicitation of
         bids to acquire Consumers' rights to the 1240 MW of Contract Capacity
         and associated energy under the PPA. On March 10, 1999, Consumers
         announced that it signed a contract with PECO Energy Company ("PECO")
         whereby Consumers will sell 1240 MW of capacity and associated energy
         to PECO from the MCV PPA beginning January 1, 2002 and ending in
         September 2007. In addition, the announcement states Consumers will
         sell PECO between 100 MW to 150 MW in 1999 through 2001. The
         announcement also states the contract with PECO is subject to
         satisfactory regulatory approvals. On March 19, 1999, Consumers filed
         an application with the MPSC seeking regulatory approval of various
         ratemaking and accounting treatments associated with the PECO
         contract.  The PPA prohibits a party from transferring or otherwise
         alienating the agreement without the prior written consent of the other
         party, which consent shall not be unreasonably withheld. At this time,
         MCV Management is currently evaluating this proposed sale, however, it
         cannot predict the outcome or potential impacts of this issue.


                                      F-17
<PAGE>   59
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

(9)  RETIREMENT BENEFITS

     Postretirement Health Care Plans

     In accordance with SFAS No. 132, "Employers' Disclosures about Pensions and
     Other Postretirement Benefits," which was issued in 1998 by the FASB, this
     standard requires expanded disclosures which are effective for 1998 and
     have been reflected below.

     In 1992, MCV established defined cost postretirement health care plans that
     cover all full-time employees. The plans provide health care credits which
     can be utilized to purchase medical plan coverage and pay qualified health
     care expenses. Participants become eligible for the benefits if they retire
     on or after the attainment of age 65 or upon a qualified disability
     retirement, or if they have 10 or more years of service and retire at age
     55 or older. The plans granted retroactive benefits for all employees hired
     prior to January 1, 1992. This prior service cost has been amortized to
     expense over a five year period. MCV annually funds the current year
     service and interest cost as well as amortization of prior service cost to
     both qualified and non-qualified trusts.

     The following table reconciles the change in the plans' benefit obligation
     and change in plan assets as reflected on the balance sheet as of December
     31 (in thousands):

<TABLE>
<CAPTION>
                                                                          1998               1997
                                                                      -----------        -----------
<S>                                                                   <C>                <C>        
                  CHANGE IN BENEFIT OBLIGATION
                  Benefit obligation at beginning of year             $   1,413.1        $   1,089.1
                  Service cost                                              200.9              146.8
                  Interest cost                                             119.5               92.7
                  Actuarial gain                                            (51.5)              84.5
                                                                      -----------        -----------
                  Benefit obligation at end of year                       1,682.0            1,413.1
                                                                      -----------        -----------

                  CHANGE IN PLAN ASSETS
                  Fair value of plan assets at beginning of year          1,400.0            1,140.6
                  Actual return on plan assets                              148.0              140.0
                  Employer contribution                                     176.1              119.4
                                                                      -----------        -----------
                  Fair value of plan assets at end of year                1,724.1            1,400.0
                                                                      -----------        -----------

                  Unfunded (funded) status                                  (42.1)              13.1
                  Unrecognized net gain                                     252.9              176.6
                                                                      -----------        -----------
                  Accrued (prepaid) benefit cost                      $     210.8        $     189.7
                                                                      ===========        ===========
</TABLE>

     Net periodic postretirement health care cost for years ending December 31,
     included the following components (in thousands):

<TABLE>
<CAPTION>
                                                                               1998          1997          1996
                                                                            ----------    ----------    ----------
<S>                                                                         <C>             <C>         <C>       
                  COMPONENTS OF NET PERIODIC BENEFIT COST
                  Service cost                                              $    200.9      $  146.8    $    136.6
                  Interest cost                                                  119.5          92.7          76.0
                  Expected return on plan assets                                (119.0)        (97.0)        (73.5)
                  Amortization of unrecognized net (gain) or loss                 (4.2)         (6.8)        (10.0)
                  Amortization of unrecognized transition
                      (asset)/obligation                                            --            --          77.2
                                                                            ----------    ----------    ----------

                  Net periodic benefit cost                                 $    197.2      $  135.7    $    206.3
                                                                            ==========    ==========    ==========
</TABLE>

                                      F-18
<PAGE>   60
                MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:

<TABLE>
<CAPTION>
                                                                               1-Percentage-Point    1-Percentage
                                                                                   Increase         Point Decrease
                                                                               ------------------   --------------
<S>                                                                            <C>                  <C>          
                  Effect on total of service and interest cost components      $        46.0        $      (39.1)
                  Effect on postretirement benefit obligation                  $       181.7        $     (157.3)
</TABLE>

     Assumptions used in accounting for the Post-Retirement Health Care Plan 
were as follows:

<TABLE>
<CAPTION>
                                                                                    1998          1997          1996
                                                                                 ----------    ----------    -----------
<S>                                                                                <C>           <C>            <C>  
                  Discount rate                                                    6.75%         7.00%          7.50%
                  Long-term rate of return on plan assets                          8.50%         8.50%          8.50%
                  Inflation benefit amount
                      1996 through 2001                                            0.00%         0.00%          0.00%
                      2002 and later years                                         4.00%         4.00%          4.00%
</TABLE>


     Retirement and Savings Plans

     MCV sponsors a defined contribution retirement plan covering all employees.
     Under the terms of the plan, MCV makes contributions to the plan of either
     five or ten percent of an employee's eligible annual compensation dependent
     upon the employee's age. MCV also sponsors a 401(k) savings plan for
     employees. Contributions and costs for this plan are based on matching an
     employee's savings up to a maximum level. In 1998, 1997, and 1996, MCV
     contributed $1.0 million, $1.0 million and $.9 million, respectively, under
     these plans.

     Supplemental Retirement Benefits

     MCV provides supplemental retirement and excess benefit plans for key
     management. These plans are not qualified plans under the Internal Revenue
     Code; therefore, earnings of the trusts maintained by MCV to fund these
     plans are taxable to the Partners and trust assets are included in the
     assets of MCV.





                                      F-19
<PAGE>   61



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


(10)   PARTNERS' EQUITY AND RELATED PARTY TRANSACTIONS

       The following table summarizes the nature and amount of each of MCV's
       Partner's equity interest, interest in profits and losses of MCV at
       December 31, 1998, and the nature and amount of related party
       transactions or agreements that existed with the Partners or affiliates
       as of December 31, 1998 and 1997, and for each of the twelve month
       periods ended December 31, (in thousands).


<TABLE>
<CAPTION>
 Equity Partner, Type of Partner and   Equity
     Nature of Related Party          Interest  Interest Related Party Transactions and Agreements     1998       1997       1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>        <C>     <C>                                        <C>         <C>        <C>     
CMS Midland, Inc.                     $175,198   49.0%   Power purchase agreements                  $583,662    $608,640   $598,127
  General Partner; wholly-owned                          Purchases under gas transportation 
  subsidiary of Consumers Energy                             agreements                                9,678       9,713      9,507
  Company (formerly Consumers                            Purchases under spot gas agreements             520       6,490      2,352
  Power Company)                                         Purchases under gas supply agreements         9,855       9,543     10,121
                                                         Gas storage agreement                         2,563       2,563      2,563
                                                         Land lease/easement agreements                  600         600        600
                                                         Accounts receivable                          48,652      53,513     52,048
                                                         Accounts payable                             13,682       9,276      5,469
                                                         Gas exchanges                                 1,148       1,674      3,444
                                                         
The Dow Chemical Company                39,803    7.5    Steam and electric power agreement           42,141      42,937     47,041
  Limited Partner                                        Steam purchase agreement - Dow Corning        
                                                             Corp (affiliate)                          3,256       3,167      1,239 
                                                         Purchases under demineralized water           
                                                             supply agreement                          6,280       7,336      6,292
                                                         Accounts receivable                           2,246       1,896      2,247
                                                         Accounts payable                                580         678      1,427
                                                         Standby and backup fees                         743         792      1,156

Source Midland Limited Partnership      59,394   18.1    SMLP - Under Ownership of MCNIC Power Co
  ("SMLP") General Partner; wholly-                      Purchases under spot gas agreements           6,810         578         --
  owned limited partnership of MCN                       Purchases under gas supply agreements        13,230       8,364         --
  Energy Group Inc. (1)                                  Accounts receivable                              --       1,125         --
                                                         Accounts payable                              1,178         588         --
                                                         Partner cash withdrawal (incl. accrued       
                                                             interest) (2)                            18,341      11,922         --
                                                         Gas exchanges                                   169       1,845         --

                                                         SMLP - Under Ownership of Pan Energy Corp
                                                         Purchases under gas transportation           
                                                             agreements                                   --       4,648     15,393
                                                         Purchases under spot gas agreements              --         911      3,313
                                                         Gas Exchanges                                    --          50      2,082
                                                         Accounts Payable                                 --          --      1,272

Coastal Midland, Inc. ("Coastal         35,637   10.9    Purchases under gas transportation           
Midland")                                                    agreements (7)                           13,547      13,593     (3,296)
  General Partner; wholly-owned                          Purchases under spot gas agreement           10,382       9,920     13,986
  subsidiary of The Coastal                              Purchases under gas supply agreement          4,339       4,188      4,018
  Corporation                                            Gas agency agreement                          1,604       1,497      1,314
                                                         Deferred reservation charges under gas        
                                                             purchase agreement                        4,925       3,940      2,955
                                                         Accounts receivable                              16       2,271         --
                                                         Accounts payable                              1,791       4,569      2,257
                                                         Gas exchanges                                 5,253       5,486      4,494
                                                         Partner cash withdrawal (incl. accrued       
                                                             interest) (2)                            16,157       7,343         -- 
                                                         Electric power purchase agreement               216          --         --

MEI Limited Partnership ("MEI") (3)                      MEI - Under Ownership of Coastal and SMLP
  A General and Limited Partner;                         See related party activity listed under
  50% interest owned by Coastal                               Coastal Midland, Inc.
  Midland, Inc. and 50% interest                              and Source Midland Limited Partnership
  owned by SMLP
                                                         MEI - Under Ownership of ASEA Brown
                                                             Boveri, Inc.
      General Partnership Interest      29,698    9.1    Gas turbine maint. and spare parts           
                                                             agreement                                23,377      29,900     30,623 
      Limited Partnership Interest       2,969     .9    Accounts payable                                 --          88      1,043
                                                         Partner cash withdrawal (including           
                                                             accrued interest) (2)                        --          --      4,284
</TABLE>



                                      F-20
<PAGE>   62




<TABLE>
<CAPTION>
 Equity Partner, Type of Partner and   Equity
       Nature of Related Party         Interest   Interest  Related Party Transactions and Agreements    1998      1997       1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>       <C>                                        <C>         <C>        <C>
Micogen Limited Partnership             14,848    4.5       MLP - Under Ownership of The Coastal
 ("MLP") Limited Partner; owned                                 Corporation
  by subsidiaries of The Coastal                            See related party activity listed under
  Corporation (4)                                               Coastal Midland Inc.

                                                            MLP - Under Ownership of Fluor Corporation
                                                            Partner cash withdrawal (including            --       3,142      1,925
                                                                accrued interest) (2)

C-E Midland Energy, Inc. ("C-E") (5)        --     --       C-E  - Under Ownership of ASEA Brown
 Interest in MCV acquired by MEI                                Boveri, Inc.
  Limited Partnership                                       Service Agreement                          1,252       2,195      5,983


Alanna Corporation                        1 (6)   .00001    Note receivable                                1           1          1
  Limited Partner; wholly-owned
  subsidiary of Alanna Holdings
  Corporation
</TABLE>


Footnotes to Partners' Equity and Related Party Transactions

(1)  On May 16, 1997, MCNIC Power Company acquired all of the partnership
     interests in Source Midland Limited Partnership ("SMLP") from PanEnergy
     Corp. The SMLP amounts listed Under Ownership of MCNIC Power Company are as
     of December 31, 1998 and for the twelve month period ended December 31,
     1998; and as of December 31, 1997 and for the period May 16, 1997 to
     December 31, 1997. The SMLP amounts listed Under Ownership of PanEnergy
     Corp. are for the period January 1, 1997 to May 15, 1997; and for the
     twelve month period ended December 31, 1996, and as of December 31, 1996.
(2)  Letters of credit have been issued and recorded as notes receivables from
     various equity partners, pursuant to the Participation Agreement. In the
     case of SMLP, the amount includes their share of the cash available to MEI
     Limited Partnership ("MEI"). In the case of Coastal Midland, Inc. ("Coastal
     Midland"), the amount includes their share of cash available of MEI and
     Micogen Limited Partnership ("MLP").
(3)  On June 16, 1998, Coastal Midland and SMLP, each acquired a 50% interest in
     MEI. All MEI related party activity under the ownership of Coastal Midland
     and SMLP is shown under the equity partners, Coastal Midland and SMLP. All
     MEI related party activity under the ownership of ASEA Brown Boveri, Inc.
     is for the period January 1, 1998 to June 16, 1998, and as of December 31,
     1997 and 1996 and for the twelve month periods ended December 31, 1997 and
     1996.
(4)  On April 30, 1998 Coastal and an affiliate of The Coastal Corporation
     acquired all of the partnership interests in MLP from Fluor Corporation
     ("Fluor"). All MLP related party activity under the ownership of The
     Coastal Corporation is shown under the equity partner, Coastal Midland,
     which is also wholly-owned by The Coastal Corporation.
(5)  C-E Midland Energy, Inc.'s ("C-E") limited partnership interest was
     acquired by MEI, which was subsequently acquired by Coastal and SMLP. All
     C-E related party activity under the ownership of ASEA Brown Boveri, Inc.
     is for the period January 1, 1998 to June 16, 1998, and for the twelve
     month periods ended December 31, 1997 and 1996.
(6)  Alanna's capital stock is pledged to secure MCV's obligation under the
     lease and other overall lease transaction documents.
(7)  1996 includes the Great Lakes gas transportation refund of $17.6 million.





                                      F-21
<PAGE>   63

                            SUPPLEMENTAL INFORMATION


Supplemental information is to be furnished with reports filed pursuant to
Section 15 (d) of the Act by registrants which have not registered securities
pursuant to Section 12 of the Act. No such annual report or proxy statement has
been sent to security holders.























                                      S-1
<PAGE>   64

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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



Date:  March 25, 1999                    By  /s/ James M. Kevra
                                           -------------------------------------
                                                       James M. Kevra
                                           President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature                                       Title                                     Date
---------                                       -----                                     ----
<S>                                    <C>                                           <C>
 /s/ James M. Kevra                    President and Chief Executive Officer         March 25, 1999
------------------------------------   (Principal Executive Officer)
James M. Kevra                      



 /s/ Stephen A. Shulman                Chief Financial Officer and Treasurer         March 25, 1999
------------------------------------   (Principal Financial Officer)
Stephen A. Shulman                     



 /s/ James M. Rajewski                 Vice President and Controller                 March 25, 1999
------------------------------------   (Principal Accounting Officer)
James M. Rajewski                      



 /s/ William T. McCormick, Jr.         Chairman, Management Committee                March 25, 1999
------------------------------------
William T. McCormick, Jr.



 /s/ Joseph L. Roberts, Jr.            Member, Management Committee                  March 25, 1999
------------------------------------
Joseph L. Roberts, Jr.



 /s/ David A. Arledge                  Member, Management Committee                  March 25, 1999
------------------------------------
David A. Arledge
</TABLE>




                                      S-2
<PAGE>   65
                                  EXHIBIT INDEX

Exhibit
Number                                    Description
-------         ----------------------------------------------------------------
3.1        -    Restated Certificate of Limited Partnership dated June 13, 1988 
                ((a), Exhibit 3.1)).

3.2        -    Amended and Restated Limited Partnership Agreement of MCV dated 
                as of June 13, 1988 ((a) (Exhibit 3.2)).

3.2 (a)    -    Amendment  No. 1 dated as of May 26, 1989 to Amended and 
                Restated  Limited Partnership Agreement ((a) (Exhibit 3.3)).

3.2 (b)    -    Amendment  No. 2 dated as of November 28, 1989 to Amended and 
                Restated  Limited Partnership Agreement ((a), Exhibit 3.4)).

3.2 (c)    -    Amendment  No. 3 dated as of June 1, 1990 to Amended and 
                Restated Limited Partnership Agreement (incorporated by 
                reference to Exhibit  (2)(b) to CMS Energy 0Corporation's Form 
                10-K dated March 21, 1990, File No. 1-9513).

3.3        -    Memorandum of Agreement, dated March 2, 1990, relating to 
                Amended and Restated Partnership Agreement ((a), (Exhibit 3.6)).

4.1        -    Senior Trust Indenture, Leasehold Mortgage and Security 
                Agreement  dated as of June 1, 1990 between Shawmut Bank and 
                United  States  Trust  Company of New York ((a), Exhibit 4.1)).

4.1 (a)    -    Senior Trust Indenture Supplement No. 1 dated as of June 1, 1990
                ((a),  (Exhibit 4.2)).

4.2        -    Subordinated Trust Indenture, Leasehold Mortgage and Security 
                Agreement dated as of June 1,  1990 between Shawmut Bank and 
                Meridian Trust Company ("Subordinated Trust Indenture")((a), 
                (Exhibit 4.5)).

4.2(a)     -    Subordinated Trust Indenture Supplement No. 1 dated as of June 
                1,   1990 ((a), (Exhibit 4.6)).

4.2(b)     -    Subordinated Trust Indenture Supplement No. 2 dated as of July 
                1, 1990 ((a), (Exhibit 4.7)).

4.3        -    Collateral Trust Indenture dated as of June 1, 1990 among 
                Midland  Funding Corporation I, MCV and United States Trust 
                Company of New York (incorporated by reference to Exhibit No. 
                (28)(b) to CMS Energy Corporation's Form 10-Q for the quarter 
                ended June 30, 1990, File No. 1-9513).

4.3(a)     -    Collateral Trust Indenture Supplement No. 1 dated June 1, 1990 
                ((a), (Exhibit 4.4)).

4.4        -    Collateral Trust Indenture dated as of June 1, 1990 among 
                Midland Funding Corporation II, MCV and Meridian Trust Company
                (incorporated  by reference to Exhibit No. (284)(d) to CMS 
                Energy  Corporation's  Form 10-Q for the quarter ended June 30, 
                1990, File No. 1-9513).

4.4(a)     -    Collateral Trust Indenture Supplement No. 1 dated June 1, 1990 
                ((a), (Exhibit 4.9)).

4.5        -    Amended and Restated Trust Agreement dated as of March 1, 1990 
                between Shawmut Bank and Owner Participant ((a), (Exhibit 
                4.10)).

4.6        -    Lease Agreement, dated as of March 1, 1990 between MCV and 
                Shawmut  Bank ((a), (Exhibit 4.11)).

4.6(a)     -    Amended and Restated Lease Agreement dated as of June 1, 1990 
                between MCV and Shawmut Bank ((a), (Exhibit 4.12)).

                                      E-1
<PAGE>   66
                                 EXHIBIT INDEX

Exhibit
Number                                    Description                 
-------         ----------------------------------------------------------------

4.6(b)     -    Amendment No. 1 dated as of January 1, 1992 to Amended and 
                Restated Lease  Agreement ((d), (Exhibit 4.17)).

4.6(c)     -    Second Amended and Restated Agreement of Lease [Part A] dated as
                of June 1, 1990 among Consumers, MCV, CMS  Midland, Inc. and  
                MEC Development Corporation ((a), (Exhibit 4.14)).

4.7        -    Amended and Restated Participation Agreement dated as of June 1,
                1990 among MCV, Owner Participant, Shawmut Bank, United States 
                Trust Company, Meridian Trust Company, Midland Funding 
                Corporation I, Midland Funding Corporation II, MDC and
                Institutional Senior Bond Purchasers ((a), (Exhibit 4.13)).

4.8        -    Ground Lease Assignment and Assumption Agreement dated as of 
                June 1,  1990 among Shawmut Bank and MCV ((a), (Exhibit 4.15)).

4.9        -    Collateral Agency and Intercreditor Agreement dated as of June 
                1, 1990  between Shawmut Bank, MCV, United States Trust Company,
                Meridian Trust Company, Bank of Montreal and Manufacturers 
                National Bank of Detroit ((a), (Exhibit 4.16)).

10.1       -    Tax Exempt Collateral Trust Indenture dated as of July 1, 1990 
                among The Economic Development Corporation of the County of 
                Midland, MCV and Meridian  Trust Company (incorporated by 
                reference to Exhibit  No. (28)(g)  to CMS  Energy  Corporation's
                Form 10-Q for the quarter ended June 30, 1990, File No. 1-9513).

10.1(a)    -    Tax Exempt Collateral Trust Indenture Supplement No. 1 dated  
                July 1, 1990 ((a), (Exhibit  10.2)).

10.2       -    Credit Agreement dated as of June 16, 1990 among Bank of 
                Montreal as Agent, the Lenders named therein and MCV ((a), 
                (Exhibit 10.3)).

10.3       -    CMS Transfer Agreement dated as of January 27, 1987, as amended 
                as of June 13, 1988, among Consumers Power Company, CMS Midland,
                Inc. and MCV  (incorporated  by reference to Exhibit (19)(a) to 
                Consumers Power Company's  Form 10-Q for the quarter ended June 
                30, 1988, File No. 1-5611).

10.4       -    Amended and Restated MDC Transfer Agreement dated as of June 13,
                1988, among Consumers Power Company, MEC Development Corporation
                and MCV, as amended by the March 2, 1990 Memorandum of Agreement
                with respect to the Amended and Restated Partnership Agreement
                (incorporated by reference to Exhibit No. (19)(b) to Consumers
                Power Company's Form 10-Q for the quarter ended June 30, 1988,
                File No. 1-5611), as amended by the March 2, 1990 Memorandum of
                Agreement with respect to the Amended and Restated MDC Transfer
                Agreement (incorporated by reference to Exhibit (2)(b) to CMS
                Energy Corporation's Form 8-K dated March 21, 1990, File No.
                1-9513).

10.5       -    Amended and Restated Tax Indemnification  Agreement, dated as 
                of June 1, 1990, among MCV and Owner Participant ((a), (Exhibit
                10.70)).

10.6       -    Capacity Support Agreement dated as of June 9, 1988, between 
                CMS Energy Corporation and MCV (incorporated by reference to
                Exhibit No. 10(m) to CMS Energy Corporation's Annual Report on
                Form 10-K, for the year ended December 31, 1988, File No.
                1-9513).

10.7       -    Registration Rights Agreement dated as of December 17, 1993 
                among Midland Funding Corporation I, MCV, Consumers and Morgan
                Stanley & Co. Incorporated and Donaldson, Lufkin & Jearette
                Securities Corporation ((e), (Exhibit 10.97)).

                                      E-2
<PAGE>   67
                                 EXHIBIT INDEX

Exhibit
Number                                    Description
-------         ----------------------------------------------------------------

10.8       -    Power Purchase Agreement, dated as of July 17, 1986, between 
                MCV and Consumers Power Company ("PPA") ((a), (Exhibit 10.4)).

10.8(a)    -    Amendment No. 1 to PPA dated September 10, 1987 ((a), 
                (Exhibit 10.5)).

10.8(b)    -    Amendment No. 2 to PPA dated March 18, 1988 ((a), 
                (Exhibit 10.6)).

10.8(c)    -    Amendment No. 3 to PPA dated August 28, 1989 ((a), 
                (Exhibit 10.7)).

10.8(d)    -    Amendment No. 4A to PPA dated May 25, 1989 ((a), 
                (Exhibit 10.8)).

10.9       -    Special Facilities/Interconnection Agreement dated as of 
                July 8, 1988 between MCV and Consumers Power Company ((a),
                (Exhibit 10.25)).

10.10      -    Residual Open Access Interconnection Service Purchase
                Agreement between Consumers Power Company and MCV, dated
                December 5, 1991 ((c), (Exhibit 10.83)).

10.11      -    Agreement with respect to the transmission of power dated as of
                June 9, 1988, between Consumers Power Company and MCV ((a),
                (Exhibit 10.69)).

10.12      -    MCV Backup Agreement dated June 9, 1988 between MCV and
                Consumers Power Company with respect to Alternative Generating
                Equipment ((a), (Exhibit 10.27)).

10.13      -    Interconnection Option between MCV, Consumers Power Company,
                Michigan Gas Storage Company and The Dow Chemical Company dated
                April 27, 1988 ((a), (Exhibit 10.14)).

10.14      -    Steam and Electric Power Agreement between The Dow Chemical 
                Company and MCV dated January 27, 1987 (the "SEPA") ((a),
                (Exhibit 10.10)).

10.14(a)   -    First Amendment to SEPA ((a), (Exhibit 10.11)).

10.14(b)   -    Exhibit "A" to SEPA ((a), (Exhibit 10.13)).

10.14(c)   -    Fourth Amendment to SEPA ((a), (Exhibit 10.15)).

10.14(d)   -    Fifth Amendment to SEPA ((a), (Exhibit 10.16)).

10.14(e)   -    Sixth Amendment to SEPA, dated November 20, 1989 ((f), 
                (Exhibit 10.14(e)).

10.14(f)   -    Seventh Amendment to SEPA, dated November 22, 1994 ((f), 
                (Exhibit 10.14(f)).

10.15      -    Demineralized Water Supply Agreement dated as of January 27,  
                1987 between MCV and The Dow Chemical Company ((a), (Exhibit
                10.31)).

10.16      -    Package Boiler Sale and Support Agreement between The Dow 
                Chemical Company, Consumers Power Company and MCV dated as of
                January 27, 1987 ((a), (Exhibit 10.32)).

10.17      -    Equipment Lease dated as of January 27, 1987 between The Dow 
                Chemical Company and MCV (the "Equipment Lease") ((a), (Exhibit
                10.71)).

10.17(a)   -    First Amendment to Equipment Lease effective March 1, 1988 and 
                dated as of May 4, 1988 ((a), (Exhibit 10.72)).

                                      E-3
<PAGE>   68
Exhibit
Number                                    Description
-------         ----------------------------------------------------------------

10.17(b)   -    Second Amendment to Equipment Lease effective December 1, 1989  
                and dated November 20, 1989 ((a), (Exhibit 10.73)).

10.18      -    Equipment Lease Easement dated as of January 27, 1988 between 
                The Dow Chemical Company and MCV ((a), (Exhibit 10.74)).

10.18(a)   -    First Amendment to Equipment Lease Easement effective March 1,  
                1988 and dated May 4, 1988 ((a), (Exhibit 10.75)).

10.18(b)   -    Second Amendment to Equipment Lease Easement effective December 
                1, 1989 and dated November 20, 1989 ((a), (Exhibit 10.76)).

10.19      -    Service Agreement dated as of June 9, 1988 between MCV and ABB 
                Power Generation, Inc. (Previously ABB Energy Services, Inc.)
                ((a), (Exhibit 10.22)).

10.19(a)   -    Hot Gas Path Parts Addendum to the Service Agreement dated March
                22, 1994 ((e), (Exhibit 10.99)).

10.19(b)   -    Amendment No. 1 to the Service Agreement dated April 1, 1995 
                ((g), (Exhibit 10.20(b))).

10.19(c)   -    Amendment No. 2 to the Service Agreement dated January 15, 1998 
                ((h),  (Exhibit 10.19(c))).

10.20      -    Operating Agreement, dated as of June 1, 1990, between MCV and 
                Shawmut Bank, as Owner Trustee ((a), (Exhibit 10.23)).

10.21      -    Lessee Mortgage and Security Agreement, dated as of June 1,
                1990, between Shawmut Bank, as Owner Trustee, and MCV ((a),
                (Exhibit 10.24)).

10.22      -    Cogeneration Agreements Assignment, dated as of June 1, 1990, 
                between Shawmut Bank, Owner Trustee, and MCV ((a), (Exhibit
                10.26)).

10.23      -    Support Facilities License and Easement Agreement dated as of 
                June 1, 1990 between MCV and Shawmut Bank ((a), (Exhibit
                10.29)).

10.24      -    Facility Agreements and Governmental Actions Assignment
                Agreement dated as of June 1, 1990 between MCV and Shawmut Bank
                ((a), (Exhibit 10.30)).

10.25      -    Development Agreement, dated as of June 1, 1990 between MCV, 
                Shawmut Bank, as Owner Trustee, and MCV2 ((a), (Exhibit 10.33)).

10.26      -    Amended and Restated Consent and Agreement, dated as of June 1,
                1990, between The Dow Chemical Company, Shawmut Bank, as Owner
                Trustee, Meridian Trust Company and United States Trust Company,
                MCV and Consumers Power Company ((a), (Exhibit 10.34)).

10.27      -    Consent and Agreement, dated as of June 1, 1990, between 
                Consumers Power Company, MCV, Shawmut Bank, as Owner Trustee,
                Meridian Trust Company and United States Trust Company ((a),
                (Exhibit 10.35)).

10.28      -    Natural Gas Purchase Agreement, dated as of May 1, 1989 between 
                Northern Michigan Gas Exploration Company ("Nomeco"), CMS Energy
                Corporation and MCV ((a), (Exhibit 10.39)).

10.28(a)   -    Amendment dated March 1, 1992 to the Natural Gas Purchase
                Agreement dated as of May 1, 1989 between Nomeco, CMS Energy
                Corporation and MCV ((e), (Exhibit 10.95)).

                                      E-4
<PAGE>   69
                                 EXHIBIT INDEX

Exhibit
Number                                    Description
-------         ----------------------------------------------------------------

10.28(b)   -    Amendment dated May 11, 1994 to the Natural Gas Purchase
                Agreement dated as of May 1, 1989 between Nomeco, CMS Energy and
                MCV,((f), (Exhibit 10.29(b)).

10.29      -    Natural Gas Purchase Agreement, dated as of May 13, 1988 between
                ANR  Production Company and MCV ((a), (Exhibit 10.41)).

10.30      -    Natural Gas Purchase Contract dated August 18, 1994, between 
                Coastal Gas Marketing and MCV ((f), (Exhibit 10.32)).

10.31      -    Natural Gas Purchase Agreement, dated May 1, 1989 between 
                CoEnergy Trading Company (previously Northern Michigan Gas
                Exploration Company before being assigned to CoEnergy Trading
                Company on March 14, 1995) and MCV ((a), (Exhibit 10.40)).

10.32      -    Natural Gas Purchase Agreement, dated February 1, 1992 between 
                CoEnergy Trading Company (previously Nomeco Oil and Gas Company
                before being assigned to CoEnergy Trading Company on July 22,
                1994) and MCV ((d), (Exhibit 10.84)).

10.33      -    Natural Gas Purchase Agreement, dated as of June 2, 1997 between
                MCV and CMS Marketing, Services and Trading Company ((h),
                (Exhibit 10.33)).

10.34      -    Transportation Service Agreement, dated as of May 25, 1988 
                between Great Lakes Gas Transmission Company and MCV and letter
                agreements dated May 25, 1988 and May 26, 1988 ((a), (Exhibit
                10.60)).

10.35      -    Transportation Agreement (#17800) dated November 24, 1993 
                between ANR Pipeline Company and MCV ((f), (Exhibit 10.35)).

10.36      -    Transportation Agreement (#17850) dated November 24, 1993 
                between ANR Pipeline Company and MCV ((f), (Exhibit 10.36)).

10.37      -    Gas Exchange Agreement (Interruptible Service), dated as of 
                March 2, 1988, between Consumers Power Company and MCV, as
                amended September 21, 1988 ((a), (Exhibit 10.62)).

10.38      -    Gas Exchange Agreement (Firm Service), dated as of March 2,
                1988, between Consumers Power Company and MCV, as amended
                September 21, 1988 ((a), (Exhibit 10.63)).

10.39      -    Gas Storage Agreement (Firm Service) between MCV and Consumers 
                Power Company dated March 2, 1988 ((a), (Exhibit 10.68)).

10.40      -    Gas Transportation Agreement (Firm Service), dated as of March 
                2, 1988, between Michigan Gas Storage and MCV and amendment
                thereto dated September 21, 1988 ((a), (Exhibit 10.64)).

10.41      -    The Gas Supply Option dated as of January 27, 1987, between The 
                Dow Chemical Company and MCV ((a), (Exhibit 10.67)).

10.42      -    MCV Senior Management Incentive Plan (*).

10.43      -    MCV Supplemental Retirement Plan dated July 6, 1992 ((d), 
                (Exhibit 10.87)), (*).

10.44      -    MCV Supplemental Benefit Plan dated January 1, 1989 ((d), 
                (Exhibit 10.88)), (*).

10.45      -    MCV Excess - Benefit Plan dated July 1, 1989 ((d), (Exhibit 
                10.89)), (*).

                                      E-5
<PAGE>   70
                                 EXHIBIT INDEX

Exhibit
Number                                    Description
-------         ----------------------------------------------------------------

10.46      -    MCV Long-Term Incentive Plan. (*)

21         -    Subsidiaries of Registrant -- MCV  subsidiaries are in the 
                aggregate not significant subsidiaries as defined in Rule 1-02
                (v) of Regulation S-X.

27         -    Financial Data Schedule for year Ended 1998.

99.01      -    Unaudited - MCV Selected Proforma  Operating Cash Flow Data for 
                the years ended 1998 and 1997.

      --------------------
      (a)  Incorporated by reference to MCV's registration statement on Form S-1
           (File No. 33-37977) as the bracketed numbered exhibits.

      (b)  Incorporated by reference to MCV's registration statement on Form S-1
           (File No. 33-37977) originally filed on November 23, 1990, as
           amended, in Amendment No. 1 to File No. 33-37977 as the bracketed
           numbered exhibits.

      (c)  Incorporated by reference to MCV's Annual Report on Form 10-K for the
           year ended December 31, 1991 as the bracketed numbered exhibits.

      (d)  Incorporated by reference to MCV's Annual Report on Form 10-K for the
           year ended December 31, 1992 as the bracketed numbered exhibits.

      (e)  Incorporated by reference to MCV's Annual Report on Form 10-K for the
           year ended December 31, 1993 as the bracketed numbered exhibits.

      (f)  Incorporated by reference to MCV's Annual Report on Form 10-K for the
           year ended December 31, 1994 as the bracketed numbered exhibits.

      (g)  Incorporated by reference to MCV's Annual Report on Form 10-K for the
           year ended December 31, 1995 as the bracketed numbered exhibits.

      (h)  Incorporated by reference to MCV's Annual Report on Form 10-K for the
           year ended December 31, 1997 as the bracketed numbered exhibits.

      (*)  Exhibits represent Management Contracts and Compensatory Plans and
           Arrangements.



                                      E-6