Fitch Comments on Midland Cogeneration Venture; Places on Rtg Watch Neg.

Business Editors

CHICAGO--(BUSINESS WIRE)--July 19, 2002

Fitch Ratings has placed its 'BB+' rating on Midland Cogeneration Venture LP's (MCV) $567 million subordinate lease obligation bonds (the MCV bonds) on Rating Watch Negative. The rating action follows the recent downgrade of the senior unsecured debt of Consumers Energy Co. (Consumers), MCV's principal offtaker, to 'BB+' from 'BBB'; Consumers remains on Rating Watch Negative. Absent counterparty credit concerns, Fitch views the credit quality of the subordinate lease obligations to be of low investment grade quality once MCV's senior bonds have matured. Fitch rates MCV's senior secured lease obligation bonds, series C, due July 23, 2002, at 'BBB'.

MCV is a nominal 1,500 MW gas-fired cogeneration facility located in Midland, MI. MCV sells electrical energy to Consumers under a long-term power purchase agreement (PPA). Revenues under the PPA provided approximately 94% of MCV's total revenue for the year ended December 31, 2001. The remaining revenue was earned primarily from steam and electric sales under long-term contracts with nearby Dow Chemical and Dow Corning facilities. Considering the economic significance of the Consumers PPA, MCV's credit quality is constrained by the counterparty rating of Consumers.

On July 15, 2002, Fitch downgraded the senior unsecured debt of CMS Energy (CMS) to 'BB-' from 'BB+'. The rating remains on Rating Watch Negative due to concerns surrounding CMS' weak liquidity position, high parent debt levels, and limited financial flexibility. The downgrade of Consumers, a subsidiary of CMS, reflects Fitch's notching criteria with respect to parent and subsidiary ratings. While Consumers is fundamentally sound, the company's financial condition and credit ratings may be adversely affected by the financial stress of its parent.

The credit quality of MCV is significantly enhanced by the amount of cash reserved at the project. Due to terms of the project financing documents, distributions to MCV partners are severely restricted and all residual cash flow to date has been retained at the project, with the exception of a $9.5 million partner tax distribution made in 1991. Fitch expects a significant portion of future residual cash flow to be retained and for cash reserves to build and eventually exceed the amount of outstanding debt. Going forward, withdrawal of cash reserves may be required to supplement operating cash flow and fulfill MCV's rental lease payments in the event of unfavorable market conditions or regulatory actions. Fitch believes the cash reserve should be adequate to offset reasonably foreseeable events and, thus, provide timely payment of debt service until the MCV bonds mature in 2009.

The MCV bonds were issued by Midland Funding Corp. II ($367 million taxable due 2005 and 2006) and Midland County Economic Development Corp. ($200 million tax-exempt due 2009).