Fitch Ratings Lowers Midland Cogeneration Venture To 'BB'.

Business Editors

CHICAGO--(BUSINESS WIRE)--Sept. 5, 2002

Fitch Ratings has lowered the rating of Midland Cogeneration Venture LP's (MCV) $567 million subordinate lease obligation bonds (the MCV bonds) to 'BB' from 'BB+'. The rating remains 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 'BB+'; Consumers remains on Rating Watch Negative. Absent counterparty credit concerns, Fitch views the credit quality of the MCV bonds to be of low investment grade quality.

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 Dec. 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 Sept. 4, 2002, Fitch downgraded the senior unsecured debt of CMS Energy (CMS) to 'B+' 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 regulated utility and subsidiary of CMS, reflects Fitch's notching criteria with respect to parent and subsidiary ratings. The revised ratings for CMS and Consumers reflect concerns regarding projected cash constraints at each of the companies for the remainder of the year. Consumers' operating cash flow is forecasted to be negatively impacted over the next several months due to high capital expenditure requirements for environmental compliance, gas purchases made during the summer months and a $103 million dividend to CMS in October. Consumers and CMS continue to be constrained by the inability to access the capital markets due to CMS' need to restate its 2000 and 2001 financial statements to eliminate the effects of 'wash trades' with other energy companies.

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).