Fitch Downgrades Midland Cogeneration Venture Bonds.

CHICAGO -- Fitch Ratings has downgraded to 'B+' from 'BB-' the ratings on Midland Cogeneration Venture LP's (MCV) taxable secured lease obligation bonds due 2006. Fitch has also downgraded to 'CCC+' from 'BB-' MCV's tax-exempt secured lease obligation bonds due 2009. The ratings on the taxable and tax-exempt bonds have been removed from Rating Watch Negative with the completion of Fitch's analysis of MCV's projected financial performance.

Fitch projects that MCV could fully deplete its cash reserves and default on the debt service portion of rent in 2008. MCV will rely upon its cash reserves to meet rent payments, as revenues earned under the power purchase agreement are insufficient to fully cover both natural gas costs and rent obligations. Fitch's financial projections incorporate Fitch's current outlook for natural gas prices and the assumption that Consumers Energy Co. (Consumers) will exercise the regulatory out provision in the power purchase agreement in 2007, reducing capacity payments thereafter. While MCV could default if actual results track Fitch's projections, there are several factors that could improve MCV's financial performance, such as lower than anticipated natural gas prices, further reductions in dispatch, or a favorable resolution to outstanding property tax litigation.

Though high natural gas costs have negatively affected financial performance, the value of MCV's hedging agreements has increased substantially with rising natural gas prices. However, MCV will lose a considerable proportion of the hedge's value when a number of hedging agreements expire in 2006 and, to a lesser extent, in 2007. Furthermore, MCV's exposure to natural gas price volatility will grow as it becomes more dependent upon spot market purchases of natural gas.

MCV's management has not indicated that the company will file for bankruptcy. However, taking into account MCV's projected financial performance and sizable but declining hedged position, Fitch cannot ignore the possibility of a voluntary bankruptcy. Thus, the rating on the taxable bonds reflects the potential for a voluntary bankruptcy filing before the taxable bonds mature in July 2006. The rating also reflects the recovery prospects for the taxable bonds under a hypothetical bankruptcy scenario, as bondholders would benefit from the substantial value of MCV's hedging agreements and cash reserves. In the event that MCV does not enter bankruptcy prior to the July 2006 payment date, Fitch expects that projected cash reserves will be sufficient to support full and timely payment of debt service on the taxable bonds.

Fitch views the credit quality of the tax-exempt bonds to fall below that of the taxable bonds. Similar to the rating on the taxable bonds, the rating on the tax-exempt bonds takes into consideration the possibility of a voluntary bankruptcy and the collateral value of both the hedges and the cash reserves. However, absent a near-term bankruptcy or a consensual restructuring of existing agreements, repayment of the tax-exempt bonds would be jeopardized by MCV's growing exposure to volatile natural gas prices as its hedged position declines over the long term. It is important to note that MCV's cash reserves and, consequently, the long-term credit quality of the tax-exempt bonds, continue to be highly dependent upon continued implementation of the Resource Conservation Plan. A favorable resolution to the property tax litigation could increase cash reserves and enhance the credit quality of the tax-exempt bonds, though the final outcome remains uncertain.

MCV consists of a nominal 1,500-MW gas-fired, combined-cycle cogeneration qualifying facility located in Midland County, Michigan, supplying electric energy and capacity to Consumers, electric energy and steam to Dow Chemical, and steam to Dow Corning. MCV is a limited partnership jointly owned by subsidiaries of CMS Energy, El Paso Corp., and Dow Chemical. The taxable debt was issued by Midland Funding Corp. II, a special-purpose funding vehicle created to finance partially the sale-leaseback of the facility in 1990. The tax-exempt debt was issued by the Economic Development Corp. of the County of Midland on behalf of the owner-trustees.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria, and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.