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Rating Update:

MOODY'S UPGRADES TO Aa1 FROM Aa2 THE LONG-TERM LETTER OF CREDIT BACKED RATINGS TO THE MICHIGAN STRATEGIC FUND VARIABLE RATE LIMITED OBLIGATION REFUNDING REVENUE BONDS (CONSUMERS ENERGY CO.), SERIES 2005 AND 2008 ; AFFIRMS SHORT-TERM VMIG 1 RATINGS

04 May 2011

$102,700,000 IN DEBT AFFECTED. RATINGS BASED ON SUBSTITUTE LETTERS OF CREDIT PROVIDED BY THE BANK OF NOVA SCOTIA.

Consumers Energy Company
Fully Supported
MI

Opinion

NEW YORK, May 4, 2011 -- Moody's Investors Service has upgraded to Aa1 from Aa2 the long-term ratings of the Michigan Strategic Fund Variable Rate Limited Obligation Refunding Revenue Bonds (Consumers Energy Company Project), Series 2008 and Michigan Strategic Fund Variable Rate Limited Obligation Refunding Revenue Bonds (Consumers Energy Company Project), Series 2005 (collectively, the Bonds) and affirmed the short-term VMIG 1 ratings on the Bonds.

SUMMARY RATING RATIONALE

The rating actions are occurring in conjunction with the substitutions of the irrevocable direct pay letters of credit to be provided by the Bank of Nova Scotia (the Bank) for the irrevocable direct pay letters of credit provided by Wells Fargo Bank, N.A. Substitution of the letters of credit will be effective May 4, 2011.

The ratings are based upon the letters of credit provided by The Bank of Nova Scotia (the Bank); the structure and legal protections of the transaction, which ensure timely payment of debt service and purchase price to bondholders; and Moody's evaluation of the credit quality of the bank providing the letters of credit.

Moody's currently rates the Bank of Nova Scotia's long-term obligations Aa1 and its short-term obligations Prime-1.

DETAILED CREDIT DISCUSSION

Interest Rate Modes and Payment

The Bonds currently bear interest at the weekly rate mode and pay interest on the first business day of each month. Each series of the Bonds may be converted, in whole, to bear interest at a daily, term, flexible, or PARS rate mode. The Bonds are subject to mandatory tender at a price of par plus accrued interest upon any such conversion. The rating will cover the Bonds in the daily and weekly rate modes only. Bonds bearing interest in the daily rate mode will also pay interest on the first business day of each month. The ratings will cover the Bonds in the daily and weekly rate modes only.

Additional Bonds

The indenture does not permit the issuance of additional bonds.

Flow of Funds

The trustee is instructed to draw under the letters of credit for principal and/or interest on the business day preceding each interest and principal payment date. The trustee is also instructed to draw under the letters of credit on each purchase date, for purchase price, to the extent remarketing proceeds received are insufficient. Bonds which are purchased by the Bank due to a failed remarketing are held by the trustee and will not be released until the trustee has received written confirmation from the Bank stating that the applicable letter of credit has been reinstated in the amount of the purchase price drawn for such Bonds.

Letters of Credit

The letters of credit are sized for full principal plus 50 days of interest at the maximum rate applicable to the Bonds (10%) and will provide coverage for the Bonds while they bear interest in the daily and weekly rate modes only. The letters of credit provided by the Bank of Nova Scotia is governed by the Uniform Customs and Practice for Documentary Credits (International Chamber of Commerce Publication No. 500) (the UCP).

Draws on the Letters of Credit

Conforming principal and interest draft draws received by the Bank by 3:00 p.m. Eastern time on a business day, will be honored by 10:00 a.m. Eastern time on the next business day. Conforming purchase price draws received by the Bank by 10:30 a.m. Eastern time on a business day, will be honored by 2:30 p.m. Eastern time on the same business day.

Reinstatement of Interest Draws

The interest component will be automatically reinstated effective at the open of business on the eighth (8th) business day after the Bank's honoring of such draw, unless the trustee receives notice from the Bank by the close of business on the seventh (7th) business day following the date on which the draft is honored that such amount is not so reinstated. Upon receipt of notice, the Trustee shall immediately declare the Bonds due and payable and draw on the letter of credit. Interest ceases to accrue upon the payment date, which shall be within four (4) calendar days of receipt of notice from the Bank that the interest component of the letter of credit is not reinstating.

Reimbursement Agreement Defaults

The Bank may send written notice to the Trustee stating that an event of default under the reimbursement agreement has occurred and directing acceleration. The Trustee shall immediately declare the Bonds due and payable. Interest will cease to accrue upon the payment date of the Bonds (which must occur within four days of declaration of acceleration). The letters of credit expires upon the Bank's honoring of an acceleration drawing.

Expiration/Termination of the Letters of Credit

Each letter of credit terminates upon the earliest to occur of: (i) May 4, 2013, the stated expiration date of the letter of credit, (ii) the date on which the Bank honors a drawing for payment at stated maturity, acceleration following an event of default, or upon redemption of all the Bonds, (iii) fifteen (15) days following conversion of the interest rate on the Bonds to the PARS mode, and (iv) the date on which (a) no Bonds remain outstanding, (b) all draws have been honored, or (c) a substitute letter of credit has been issued.

Substitution

The Bonds will be subject to mandatory tender no later than two business days prior to the effective date of an alternate letter of credit.

Optional Tenders

Bondholders may optionally tender their Bonds during the weekly rate mode on any business day with seven days prior written notice to the paying agent. Bondholders may also optionally tender their Bonds during the daily rate mode on any business day with written notice delivered to the paying agent by 10:00 a.m. New York, NY time on the purchase date.

Mandatory Purchases

Each series of the Bonds is subject to mandatory tender as follows: (i) on any interest rate conversion date, (ii) no later than two (2) business days prior to each credit facility substitution date, and (iii) no later than two (2) business days prior to the date on which the credit facility expiration date is to occur.

Mandatory Redemptions

Each series of the Bonds is subject to mandatory redemption upon a determination of taxability.

WHAT COULD MAKE THE RATINGS GO UP

An upward revision of Moody's long-term rating of the Bank of Nova Scotia would result in an upward revision of the long-term ratings of the Bonds.

WHAT COULD MAKE THE RATINGS GO DOWN

A downward revision of Moody's long-term rating of the Bank of Nova Scotia would result in a downward revision of the long-term ratings of the Bonds. A downward revision of Moody's short-term rating of the Bank of Nova Scotia would result in a downward revision of the short-term ratings of the Bonds.

KEY CONTACTS:

Trustee:

Series 2005 - Bank of New York Mellon

Series 2008 - Deutsche Bank National Trust Company

Remarketing Agent:

Series 2005 - Goldman Sachs & Co.

Series 2008 - Key Bank Capital Markets

PRINCIPAL METHODOLOGY USED

The principal methodology used in rating this issue was Moody's Rating Methodology for Rating U.S. Public Finance Transactions Based on the Credit Substitution Approach, published in August 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Thomas Jacobs
Analyst
Public Finance Group
Moody's Investors Service

Robert Azrin
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S UPGRADES TO Aa1 FROM Aa2 THE LONG-TERM LETTER OF CREDIT BACKED RATINGS TO THE MICHIGAN STRATEGIC FUND VARIABLE RATE LIMITED OBLIGATION REFUNDING REVENUE BONDS (CONSUMERS ENERGY CO.), SERIES 2005 AND 2008 ; AFFIRMS SHORT-TERM VMIG 1 RATINGS
No Related Data.
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