Rule 424(b)3
Registration Statement No. 333-119255
PROSPECTUS
[CMS ENERGY LOGO]
$150,000,000
CMS ENERGY CORPORATION
3.375% CONVERTIBLE SENIOR NOTES DUE 2023, SERIES B
We issued $150 million principal amount of our 3.375% Convertible Senior
Notes due 2023 (the "OLD NOTES") in a private placement in the third quarter of
2003 at an issue price of $1,000 per note. In December 2004 we completed an
exchange offer to exchange the Old Notes for 3.375% Convertible Senior Notes due
2023, Series B (the "NOTES"). Holders of $150 million principal amount of the
Old Notes tendered their Old Notes for exchange and received $150 million
principal amount of the Notes. Under this prospectus, the selling
securityholders named herein or in any supplements hereto may offer and sell
their Notes and the shares of our common stock issuable upon conversion thereof.
The Notes bear interest at the rate of 3.375% per year. Interest on the
Notes is payable on January 15 and July 15 of each year, beginning on July 15,
2005. The Notes are convertible by holders into shares of our common stock at a
conversion price of $10.671 per share (subject to adjustment in certain events),
unless we have previously redeemed the Notes or unless the Notes have matured,
under the following circumstances: (1) the price of our common stock issuable
upon conversion reaches specified thresholds described in this prospectus; (2)
if we call the Notes for redemption; (3) upon the occurrence of specified
corporate transactions described in this prospectus; or (4) subject to certain
exceptions, during the five business-day period after any ten consecutive
trading-day period in which the trading price per Note for each day of the ten
trading-day period was less than 95% of the product of the closing sale price of
our common stock and the conversion rate of such Note. The applicable conversion
rate will increase for holders converting in connection with a corporate
transaction that is a fundamental change other than a fundamental change
relating to the composition of our Board of Directors, and which occurs prior to
July 15, 2008. Under certain circumstances, in a cash take-over transaction by a
public company we may elect to change the conversion right so that holders of
the Notes will be able to convert their Notes into cash and shares of the public
acquirer's common stock.
The Notes mature on July 15, 2023. We may redeem some or all of the Notes
at any time after July 15, 2008.
The Notes are our unsecured obligations and rank equally with all of our
other unsecured senior indebtedness. Under certain circumstances, holders of the
Notes have the right to require us to repurchase all or any part of their Notes
at a repurchase price equal to 100% of the principal amount of the Notes, plus
accrued and unpaid interest and additional amounts, if any, to but excluding the
repurchase date.
Our common stock is listed on the New York Stock Exchange under the symbol
"CMS." The last reported price of the common stock on January 28, 2005, was
$10.35 per share.
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 15.
We will not receive any of the proceeds from the sale by any of the
selling securityholders of the Notes or the shares of our common stock. The
Notes and the shares of our common stock may be offered in negotiated
transactions or otherwise, at market prices prevailing at the time of sale or at
negotiated prices. The timing and amount of any sale are within the sole
discretion of the selling securityholders. In addition, our common stock may be
offered from time to time through ordinary brokerage transactions on the New
York Stock Exchange. See "Plan of Distribution." The selling securityholders may
be deemed to be "underwriters" as defined in the Securities Act of 1933, as
amended (the "SECURITIES ACT"). Any profits realized by the selling
securityholders may be deemed to be underwriting commissions. If the selling
securityholders use any broker-dealers, any commission paid to broker-dealers
and, if broker-dealers purchase any Notes or shares of common stock as
principals, any profits received by such broker-dealers on the resale of the
Notes or shares of common stock may be deemed to be underwriting discounts or
commissions under the Securities Act.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is February 3, 2005
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT OR TO MAKE ANY REPRESENTATIONS ABOUT US OR THE
TRANSACTIONS WE DISCUSS IN THIS PROSPECTUS. IF YOU RECEIVE INFORMATION ABOUT
THESE MATTERS THAT IS NOT INCLUDED IN THIS PROSPECTUS, YOU MUST NOT RELY ON THAT
INFORMATION. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF
THIS DOCUMENT.
TABLE OF CONTENTS
PAGE
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Where You Can Find More Information......................................................... 2
Forward-Looking Statements and Information.................................................. 3
Summary..................................................................................... 5
Risk Factors................................................................................ 15
Use of Proceeds............................................................................. 24
Ratio of Earnings to Fixed Charges.......................................................... 25
Price Range of Our Common Stock and Dividend Policy......................................... 25
CMS Energy.................................................................................. 26
Description of the Notes.................................................................... 30
Registration Rights......................................................................... 53
Description of our Capital Stock............................................................ 56
Material United States Federal Income Tax Considerations.................................... 63
Selling Securityholders..................................................................... 67
Plan of Distribution........................................................................ 69
Legal Matters............................................................................... 71
Experts..................................................................................... 71
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC under
File No. 1-9513. Our SEC filings are available over the Internet at the SEC's
web site at http://www.sec.gov. You may also read and copy any document we file
at the SEC's public reference room at 450 Fifth Street N.W., Room 1024,
Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms and their copy charges. You may also
inspect our SEC reports and other information at the New York Stock Exchange, 20
Broad Street, New York, New York 10005. You can find additional information
about us, including our Annual Report on Form 10-K/A (Amendment No. 2) for the
year ended December 31, 2003 and our Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, on our Web
site at http://www.cmsenergy.com. The information on this Web site is not a part
of this prospectus.
We are "incorporating by reference" information into this prospectus. This
means that we are disclosing important information by referring to another
document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this prospectus, except for any information
superseded by information in this prospectus. This prospectus incorporates by
reference the documents set forth below that we have previously filed with the
SEC. These documents contain important information about us and our finances.
- Annual Report on Form 10-K/A (Amendment No. 2) for the year ended
December 31, 2003 filed on December 16, 2004
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
filed on May 7, 2004, Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004 filed on August 6, 2004 and Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004 filed on November
4, 2004
- Current Reports on Form 8-K filed on January 22, 2004, March 18,
2004, April 14, 2004, June 3, 2004, August 20, 2004, August 31,
2004, September 1, 2004, October 6, 2004, October 12, 2004, October
13, 2004, October 19, 2004, November 9, 2004, December 6, 2004,
December 8, 2004, December 13, 2004, December 22, 2004, January 12,
2005, January 14, 2005, January 20, 2005 and January 27, 2005.
2
The documents filed by us with the SEC pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 (the "EXCHANGE ACT") after
the date of this prospectus and prior to the termination of this offering are
also incorporated by reference into this prospectus. . Any statement contained
in such document will be deemed to be modified or superseded for purposes of
this prospectus to the extent that a statement contained in this prospectus or
any other subsequently filed document modifies or supersedes such statement.
We will provide, upon your oral or written request, a copy of any or all
of the information that has been incorporated by reference in this prospectus
but not delivered with this prospectus. You may request a copy of these filings
at no cost by writing or telephoning us at the following address:
CMS Energy Corporation
One Energy Plaza
Jackson, Michigan 49201
Tel: (517) 788-0550
Attention: Office of the Secretary
FORWARD-LOOKING STATEMENTS AND INFORMATION
This prospectus contains forward-looking statements as defined in Rule 175
under the Securities Act and Rule 3b-6 under the Exchange Act and relevant legal
decisions. Our intention with the use of such words as "may," "could,"
"anticipates," "believes," "estimates," "expects," "intends," "plans" and other
similar words is to identify forward-looking statements that involve risk and
uncertainty. We designed this discussion of potential risks and uncertainties to
highlight important factors that may impact our business and financial outlook.
We have no obligation to update or revise forward-looking statements regardless
of whether new information, future events or any other factors affect the
information contained in the statements. These forward-looking statements are
subject to various factors that could cause our actual results to differ
materially from the results anticipated in these statements. Such factors
include our inability to predict and/or control:
- capital and financial market conditions, including the price of our
common stock and the effect of such market conditions on our pension
plan, interest rates and access to the capital markets, as well as
availability of financing to us, Consumers Energy Company, our
wholly-owned subsidiary ("CONSUMERS"), or any of our affiliates, and
the energy industry;
- market perception of the energy industry, us and Consumers, or any
of our affiliates;
- credit ratings of us, Consumers or any of our affiliates;
- currency fluctuations, transfer restrictions and exchange controls;
- factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs,
environmental incidents or electric transmission or gas pipeline
system constraints;
- international, national, regional and local economic, competitive
and regulatory policies, conditions and developments;
- adverse regulatory or legal decisions, including those related to
environmental laws and regulations;
- the extent of favorable regulatory treatment and regulatory lag
concerning a number of significant questions presently before the
Michigan Public Service Commission ("MPSC") relating to the Customer
Choice Act, including:
- recovery of stranded costs incurred due to customers choosing
alternative energy suppliers;
- recovery of Clean Air Act costs and other environmental and
safety-related expenditures;
- power supply and natural gas supply costs when energy supply
and oil prices are increasing rapidly;
3
- timely recognition in rates of additional equity investments
in Consumers; and
- adequate and timely recovery of additional electric and gas
rate-based expenditures;
- the impact of adverse natural gas prices on the Midland Cogeneration
Venture Limited Partnership (the "MCV PARTNERSHIP") investment and
regulatory decisions that limit our recovery of capacity and fixed
energy payments;
- federal regulation of electric sales and transmission of
electricity, including re-examination by federal regulators of the
market-based sales authorizations by which our subsidiaries
participate in wholesale power markets without price restrictions;
- energy markets, including the timing and extent of changes in
commodity prices for oil, coal, natural gas, natural gas liquids,
electricity and certain related products due to lower or higher
demand, shortages, transportation problems or other developments;
- the generally accepted accounting principles requirement that we
utilize mark-to-market accounting on certain of our energy commodity
contracts, and possibly other types of contracts in the future,
which may have, in any given period, a significant positive or
negative effect on earnings, which could change dramatically or be
eliminated in subsequent periods or could add to earnings
volatility;
- potential disruption, expropriation or interruption of facilities or
operations due to accidents, war, terrorism or changing political
conditions and the ability to obtain or maintain insurance coverage
for such events;
- nuclear power plant performance, decommissioning, policies,
procedures, incidents and regulation, including the availability of
spent nuclear fuel storage;
- technological developments in energy production, delivery and usage;
- achievement of capital expenditure and operating expense goals;
- changes in financial or regulatory accounting principles or
policies;
- outcome, cost and other effects of legal and administrative
proceedings, settlements, investigations and claims, including
particularly claims, damages and fines resulting from round-trip
trading and inaccurate commodity price reporting, including
investigations by the U.S. Department of Justice regarding
round-trip trading and price reporting;
- limitations on our ability to control the development or operation
of projects in which our subsidiaries have a minority interest;
- disruptions in the normal commercial insurance and surety bond
markets that may increase costs or reduce traditional insurance
coverage, particularly terrorism and sabotage insurance and
performance bonds;
- the efficient sale of non-strategic or under-performing domestic or
international assets and discontinuation of certain operations;
- other business or investment considerations that may be disclosed
from time to time in our or Consumers' SEC filings or in other
publicly issued written documents;
- other uncertainties that are difficult to predict, and many of which
are beyond our control; and
- the factors identified under "Risk Factors" beginning on page 15.
These are important factors, but not necessarily all of the important
factors, that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, us or our
subsidiaries.
4
SUMMARY
This summary may not contain all the information that may be important to
you. You should read this prospectus and the documents incorporated by reference
into this prospectus in their entirety before making an investment decision. The
terms "CMS," "CMS ENERGY," "OUR," "US" and "WE" as used in this document refer
to CMS Energy Corporation and its subsidiaries as a combined entity, except
where it is made clear that such term means only CMS Energy Corporation.
In this document, "BCF" means billion cubic feet, "GWH" means
gigawatt-hour, "KWH" means kilowatt-hour and "MW" means megawatts.
CMS ENERGY CORPORATION
CMS Energy, formed in Michigan in 1987, is an integrated energy holding
company operating through subsidiaries in the United States and in selected
markets around the world. Its two principal wholly-owned subsidiaries are
Consumers and CMS Enterprises Company ("ENTERPRISES"). Consumers is a public
utility that provides natural gas and/or electricity to almost 6.5 million of
Michigan's 10 million residents and serves customers in 61 of the 68 counties in
Michigan's Lower Peninsula. Enterprises, through subsidiaries, is engaged in
several energy businesses in the United States and in selected international
markets.
Our assets and services include: electric and natural gas utility
operations; independent power production; natural gas transmission, storage and
processing; and international energy distribution. Our principal businesses are:
- Consumers' electric utility, which owns and operates 30 electric
generating plants with an aggregate of 6,435 MW of capacity and
serves 1.77 million customers in Michigan's Lower Peninsula;
- Consumers' gas utility, which owns and operates over 27,463 miles of
transmission and distribution lines throughout the Lower Peninsula
of Michigan, providing natural gas to 1.67 million customers;
- CMS Generation Co. ("CMS GENERATION"), a wholly-owned subsidiary of
Enterprises that has ownership interests in independent power plants
in operation with 6,766 gross MW (3,157 net MW) throughout the
United States and abroad. The plants are located in the U.S.,
Argentina, Chile, Ghana, India, Jamaica, Morocco and the United Arab
Emirates. CMS Generation also has ownership interests in additional
plants totaling approximately 323 gross MW (69 net MW) that are
under construction or advanced stages of development. These plants
include the Saudi Petrochemical Company power plant, which is under
construction in the Kingdom of Saudi Arabia; and
- CMS Gas Transmission Company ("CMS GAS TRANSMISSION"), a
wholly-owned subsidiary of Enterprises that owns an interest in and
operates natural gas pipelines in various locations in North America
(aggregating 265 miles) and South America (aggregating 4,330 miles).
The pipelines are located in the U.S., Argentina and Chile. It also
owns gathering systems and processing facilities.
In 2003, we had consolidated operating revenue of approximately $5.5
billion.
Our principal executive offices are located at One Energy Plaza, Jackson,
Michigan 49201 and our telephone number is (517) 788-0550.
5
RECENT DEVELOPMENTS
THIRD QUARTER RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 2003 CHANGE
-------------------------------- ------- -------- -------
(UNAUDITED, DOLLARS IN MILLIONS
EXCEPT PER SHARE AMOUNTS)
Net Income (Loss)............................................................... $ 59 $ (69) $ 128
Preferred Dividends............................................................. 3 -- 3
------- -------- -------
Net Income (Loss) Available to Common Stock..................................... $ 56 $ (69) $ 125
======= ========= =======
Basic Earnings (Loss) Per Share................................................. $ 0.35 $ (0.46) $ 0.81
Diluted Earnings (Loss) Per Share............................................... 0.34 (0.46) 0.80
Electric utility................................................................ $ 49 $ 59 $ (10)
Gas utility..................................................................... (11) (19) 8
Enterprises..................................................................... 59 (24) 83
Corporate interest and other.................................................... (49) (87) 38
Discontinued operations......................................................... 8 2 6
------- -------- -------
CMS Energy Net Income (Loss) Available to Common Stock.......................... $ 56 $ (69) $ 125
======= ======== =======
For the three months ended September 30, 2004, our net income available to
common stock was $56 million, compared to a net loss available to common stock
of $69 million for the three months ended September 30, 2003. The $125 million
increase primarily reflects:
- a $35 million net gain from the 2004 sale of our Parmelia business
and our interest in Goldfields;
- a $24 million reduction in corporate interest expense;
- an $8 million increase in net income at our gas utility primarily
due to the 2004 annual unbilled gas revenue analysis increase in gas
revenues versus the 2003 analysis reduction in gas revenues;
- a $7 million increase in net income at CMS Marketing, Services and
Trading Company (now known as CMS Energy Resource Management
Company) ("CMS MST" or "CMS ERM") primarily due to the absence of
losses associated with wholesale gas and power contracts sold in
2003;
- a $6 million reduction in funded benefits expense due to the OPEB
plans accounting for the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 and the positive impact of prior year
pension plan contributions on pension plan asset returns;
- the absence in 2004 of a $46 million net impairment charge related
to our international energy distribution business recorded in 2003;
and
- the absence in 2004 of a $19 million debt retirement charge recorded
in 2003.
These increases were offset partially by:
- a $10 million reduction in net income at our electric utility
primarily due to reduced tariff revenues equivalent to Big Rock
nuclear decommissioning surcharges, milder weather and decreased
sales margins from deliveries to customers choosing alternative
electric suppliers;
- a $7 million reduction in earnings from our equity method
investments; and
- a $3 million declaration and payment of CMS Energy preferred
dividends.
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NINE MONTHS ENDED SEPTEMBER 30, 2004 2003 CHANGE
------------------------------- --------- --------- ---------
(UNAUDITED, DOLLARS IN MILLIONS
EXCEPT PER SHARE AMOUNTS)
Net Income (Loss) .............................................................. $ 74 $ (52) $ 126
Preferred Dividends ............................................................ 9 - 9
--------- --------- ---------
Net Income (Loss) Available to Common Stock .................................... $ 65 $ (52) $ 117
========= ========= =========
Basic Earnings (Loss) Per Share ................................................ $ 0.40 $ (0.36) $ 0.76
Diluted Earnings (Loss) Per Share .............................................. 0.40 (0.36) 0.76
Electric utility ............................................................... $ 124 $ 145 $ (21)
Gas utility .................................................................... 46 40 6
Enterprises .................................................................... 36 5 31
Corporate interest and other ................................................... (147) (198) 51
Discontinued operations ........................................................ 6 (20) 26
Accounting changes ............................................................. - (24) 24
--------- --------- ---------
CMS Energy Net Income (Loss) Available to Common Stock ......................... $ 65 $ (52) $ 117
========= ========= =========
For the nine months ended September 30, 2004, our net income available to
common stock was $65 million, compared to a net loss available to common stock
of $52 million for the nine months ended September 30, 2003. The $117 million
increase reflects:
- a $51 million reduction in corporate interest and other expenses;
- a $35 million net gain from the 2004 sale of our Parmelia business
and our interest in Goldfields;
- a $20 million reduction in funded benefits expense primarily due to
the OPEB plans accounting for the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 and the positive impact
of prior year pension plan contributions on pension plan asset
returns;
- a $12 million increase in net income at CMS ERM primarily due to the
absence of losses associated with wholesale gas and power contracts
sold in 2003;
- a $6 million increase in net income at our gas utility resulting
from favorable impacts of the December 2003 rate order outpacing
reductions in gas deliveries resulting from milder weather;
- the absence in 2004 of a $31 million deferred tax asset valuation
reserve established in 2003;
- the absence in 2004 of $24 million of charges related to changes in
accounting recorded in 2003;
- the absence in 2004 of $20 million of losses in Discontinued
Operations recorded in 2003; and
- the absence in 2004 of a $19 million debt retirement charge recorded
in 2003.
These increases were partially offset by:
- a $30 million increase in net asset impairment charges;
- a $21 million reduction in net income at our electric utility
primarily due to reduced tariff revenues equivalent to Big Rock
nuclear decommissioning surcharges, milder weather and decreased
sales margins from deliveries to customers choosing alternative
electric suppliers;
- an $11 million reduction in earnings from our equity method
investments;
- a $9 million declaration and payment of CMS Energy preferred
dividends; and
- the absence in 2004 of $30 million of Michigan Single Business Tax
refunds received in 2003.
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STRANDED COST ORDER
On November 23, 2004, the MPSC issued an order authorizing Consumers to
collect its combined 2002 and 2003 "net" stranded costs under the Customer
Choice Act, of approximately $63.2 million. The amount, including interest at an
annual rate of 7%, will be collected through use of a stranded cost recovery
charge of 1.2 mills per kilowatt-hour starting in December 2004 until fully
collected. The order also approved a methodology for the calculation of stranded
costs.
2003 GAS RATE CASE AND 2001 GAS DEPRECIATION CASE
On December 2, 2004, the MPSC issued orders in Consumers' rehearing
requests stemming from MPSC orders issued October 14, 2004 regarding Consumers'
2003 gas rate case and the 2001 gas depreciation case.
Regarding the 2003 gas rate case, the MPSC issued an order clarifying the
method of computing Consumers' rate of return on common equity, for purposes of
whether the rate of return on common equity exceeds the authorized 11.4% rate,
consistent with Consumers' rehearing request. The MPSC held that (i) the actual
current level of equity invested in Consumers should be used and (ii) actual
(not weather-normalized) results should be used for the rate of return
calculation required by the October 14, 2004 order.
Regarding the 2001 gas depreciation case, the MPSC issued an order
approving Consumers' rehearing request that the book depreciation rates be
restored to the levels set forth in the MPSC's December 18, 2003 interim gas
rate relief order, effective and retroactive to October 14, 2004.
ISSUANCE AND SALE OF SECURITIES
On December 13, 2004, CMS Energy issued and sold $287.5 million principal
amount of its 2.875% Convertible Senior Notes due 2024 pursuant to an effective
shelf registration statement and a Prospectus Supplement dated December 8, 2004
to a Prospectus dated September 21, 2004. CMS Energy used the proceeds to redeem
the $180 million principal amount of its outstanding 7% Extendible Tenor
Rate-Adjusted Securities ("X-TRAS"), plus accrued but unpaid interest and any
associated option payment, and for general corporate purposes.
On December 13, 2004, Consumers issued and sold $225 million principal
amount of its 5.00% First Mortgage Bonds due 2015 pursuant to an effective shelf
registration statement and a Prospectus Supplement dated December 8, 2004 to a
Prospectus dated December 1, 2004. Consumers used the proceeds (i) to redeem the
aggregate outstanding balance of $207.7 million of its 7.375% First Mortgage
Bonds due 2023, (ii) to pay the attendant call premium of $6,893,563, (iii) to
pay accrued interest to the redemption date and (iv) for general corporate
purposes.
On January 19, 2005, CMS Energy issued and sold $150 million principal
amount of its 6.30% Senior Notes due 2012 pursuant to an effective shelf
registration statement and a Prospectus Supplement dated January 13, 2005 to a
Prospectus dated September 21, 2004. CMS Energy used the proceeds to redeem its
outstanding general term notes. The outstanding general term notes being
redeemed have various interest rates ranging from 6 percent to 7.25 percent and
maturities ranging from February 2005 through April 2009. The average interest
rate for these outstanding general term notes is 6.88 percent and the average
maturity is 2.2 years.
On January 20, 2005, Consumers issued and sold $250 million principal
amount of its 5.15% First Mortgage Bonds due 2017 pursuant to an effective shelf
registration statement and a Prospectus Supplement dated January 13, 2005 to a
Prospectus dated December 1, 2004. Consumers used the proceeds (i) to redeem the
aggregate outstanding balance of $70 million of its 8.36 percent Trust
Originated Preferred Securities due 2015, (ii) to redeem the aggregate
outstanding balance of $120 million of its 8.20 percent Trust Originated
Preferred Securities due 2027 and (iii) to pay off its $60 million term loan due
November 2006 with a current floating interest rate of 3.79 percent.
CMS ENERGY ASSET IMPAIRMENTS
An affiliate of CMS Energy entered into a sale and purchase agreement on
February 25, 2004 to sell its 33% interest in the GVK facility, a 235 megawatt
power plant located in India, for approximately $25 million. CMS Energy expects
to complete this sale in the first quarter of 2005 and estimates it will record
an impairment resulting from the sale in the amount of approximately $29.5
million, with a resultant charge to its income statement of approximately $19
million, net of deferred income taxes, in the fourth quarter of 2004.
8
CMS Energy expects to sell its interest in the Scudder Latin American
Power Fund in the first quarter of 2005. CMS Energy estimates it will record an
impairment resulting from this sale in the amount of approximately $5 million,
with a resultant charge to its income statement of approximately $3.2 million,
net of deferred income taxes, in the fourth quarter of 2004.
APPROVAL OF RESOURCE CONSERVATION PLAN
Consumers purchases power under a long term contract from a natural
gas-fueled combined-cycle cogeneration facility (the "MCV FACILITY") operated by
the MCV Partnership, in which Consumers has a 49 percent interest. In February
2004, Consumers filed with the MPSC a request for approval of a resource
conservation plan (the "RCP"). On January 25, 2005, the MPSC issued an order
approving the RCP, with modifications. The terms of the order are consistent
with Consumers' expectations in the RCP proceeding. The purpose of the RCP is to
help conserve natural gas and thereby improve Consumers' investment in the MCV
Partnership as discussed below, without raising the costs paid by Consumers'
electric customers. The RCP allows for a change in the operation of the MCV
Facility to dispatch it on the basis of natural gas market prices. This change
will reduce the MCV Facility's production of electricity and consumption of
natural gas by an estimated 30 to 40 bcf. The substantial MCV Facility fuel cost
savings will be used first to offset fully the cost of replacement power to
Consumers' electric customers. Second, $5 million annually will be used to fund
a renewable energy program. Remaining savings will be split between the MCV
Partnership and Consumers. Consumers' direct savings will be shared 50 percent
with its customers in 2005 and 70 percent in 2006 and beyond. In addition, the
RCP subjects a larger portion of the MCV Facility's gas contracts to
mark-to-market accounting. Based upon current market gas prices, this is
expected to result in a gain in Consumers' 2005 earnings. Consumers and the MCV
Partnership's general partners have accepted the terms of the order and are
implementing the RCP.
9
THE NOTES
Issuer.............................. CMS Energy Corporation.
Securities Offered.................. $150 million aggregate principal amount of 3.375% Convertible Senior Notes due 2023,
Series B issued under the senior debt indenture.
Issue Price......................... Each Note was issued at a price of $1,000 per Note.
Maturity............................ July 15, 2023.
Interest Rate....................... The Notes bear interest at the rate of 3.375% per year which will accrue from the last
date on which interest was paid on the Old Notes, or if no interest has been paid,
from the date of issuance of the Notes, semiannually in arrears on January 15 and July
15, commencing on July 15, 2005, and at maturity.
Use of Proceeds..................... We will receive not receive any of the proceeds from sales of any of the securities
covered by this prospectus by the selling securityholders.
Optional Redemption................. Prior to July 15, 2008, the Notes will not be redeemable. On or after July 15, 2008,
we may redeem for cash all or part of the Notes at any time, upon not less than 30 nor
more than 60 days' notice before the redemption date by mail to the Trustee, the
paying agent and each holder of the Notes, for a price equal to 100% of the principal
amount of the Notes to be redeemed plus any accrued and unpaid interest, and
additional amounts owed, if any, to the redemption date. See "Description of the Notes
-- Optional Redemption."
Conversion Rights................... Holders may convert their Notes prior to maturity, in multiples of $1,000 principal
amount, into cash and shares of our common stock under any of the following
circumstances:
- during any calendar quarter (and only during such calendar quarter) if the last
reported sale price of our common stock for at least 20 trading days during the
period of 30 consecutive trading days ending on the last trading day of the
previous calendar quarter, is greater than or equal to 120% of the conversion
price per share of our common stock on such last trading day;
- subject to certain exceptions, during the five business-day period after any ten
consecutive trading-day period in which the trading price per Note for each day of
the ten trading-day period was less than 95% of the product of the closing sale
price of our common stock and the applicable conversion rate of such Note;
provided, however, a holder may not convert its Notes if the average closing sale
price of our common stock for such ten consecutive trading-day period was between
the then current conversion price on the Notes and 120% of the then applicable
conversion price on the Notes;
- if we call the Notes for redemption as described in this prospectus; or
- upon the occurrence of specified corporate transactions described under
"Description of the Notes -- Conversion Rights -- Conversion Upon Specified
Corporate Transactions."
Upon the occurrence of any of the circumstances described above, holders may convert
any outstanding Note into cash and shares of our common stock at an initial conversion
rate of 93.7137 shares of common stock per $1,000 principal amount of Notes
(equivalent to an initial conversion price of $10.671 per share of common stock) at
any time prior to the close of business on July 15, 2023. The conversion rate and the
equivalent conversion price in effect at any given time are referred to as the
"APPLICABLE CONVERSION RATE" and the "APPLICABLE CONVERSION PRICE," respectively, and
will be subject to adjustment as described below. Subject to certain exceptions, once
Notes are tendered for conversion, the value (the "CONVERSION VALUE") of the cash and
shares of our common stock, if any, to be received by a holder converting $1,000
principal amount
10
of the Notes will be determined by multiplying the conversion rate by the ten day
average closing stock price. We will deliver the conversion value to holders as
follows: (1) an amount in cash (the "PRINCIPAL RETURN") equal to the lesser of (a) the
aggregate conversion value of the Notes to be converted and (b) the aggregate principal
amount of the Notes to be converted; (2) if the aggregate conversion value of the Notes
to be converted is greater than the principal return, an amount in whole shares (the
"NET SHARES"), determined as set forth below, equal to such aggregate conversion value
less the principal return (the "NET SHARE AMOUNT"); and (3) an amount in cash in lieu
of any fractional shares of common stock. We will pay the principal return and cash in
lieu of fractional shares and deliver the net shares, if any, as promptly as
practicable after determination of the net share amount. The number of net shares to be
paid will be determined by dividing the net share amount by the ten day average closing
stock price. The "TEN DAY AVERAGE CLOSING STOCK PRICE" will be the average of the
closing per share prices of our common stock on the New York Stock Exchange on the ten
consecutive trading days beginning on the second trading day following the day the
Notes are submitted for conversion.
As described in this prospectus, the conversion rate may be adjusted for certain
reasons, but it will not be adjusted for accrued and unpaid interest. Except as
otherwise described in this prospectus, holders will not receive any payment
representing accrued and unpaid interest if any, upon conversion of a Note. Notes
called for redemption may be surrendered for conversion prior to the close of business
on the second Business Day immediately preceding the redemption date.
If we declare a cash dividend or cash distribution to all or substantially all of the
holders of our common stock, the applicable conversion rate shall be increased to equal
the number determined by multiplying the applicable conversion rate in effect
immediately prior to the record date for such dividend or distribution by the following
fraction:
(pre-dividend sale price)
(pre-dividend sale price - dividend adjustment amount)
provided that if the denominator of the foregoing fraction is less than $1.00
(including a negative amount), then in lieu of any adjustment, we shall make adequate
provision so that each holder of Notes shall have the right to receive upon conversion,
in addition to the cash and shares of common stock issuable upon such conversion, the
amount of cash such holder would have received had such holder converted its Notes
solely into shares of our common stock at the then applicable conversion rate
immediately prior to the record date for such cash dividend or cash distribution.
"PRE-DIVIDEND SALE PRICE" means the average of the last reported sale price of our
common stock price for the five consecutive trading days ending on the trading day
immediately preceding the record date for such dividend or distribution. "DIVIDEND
ADJUSTMENT AMOUNT" means the full amount of the dividend or distribution to the extent
payable in cash applicable to one share of our common stock.
Purchase of Notes by Us at the
Option of the Holder................ Holders have the right to require us to purchase all or any portion of the Notes for
cash on July 15, 2008, July 15, 2013 and July 15, 2018. In each case, we will pay a
purchase price equal to 100% of the principal amount of the Notes to be purchased
plus any accrued and unpaid interest, and additional amounts owed, if any, to but
excluding such purchase date. See "Description of the Notes -- Purchase of Notes by
Us at the Option of the Holder."
Fundamental Change.................. If we undergo a Fundamental Change (as defined under "Description of the Notes --
Fundamental Change Requires Purchase of Notes by Us at the Option of the Holder")
prior to July 15, 2008, holders will have the right, at their option, to require us
to purchase any or all of their Notes for cash, or any portion of the principal
amount thereof that is equal to $1,000 or an integral multiple of $1,000. The cash
price we are required to pay is equal to 100% of the principal amount of the Notes to
be purchased
11
plus accrued and unpaid interest, to the Fundamental Change purchase date. See
"Description of the Notes -- Fundamental Change Requires Purchase of Notes by Us at the
Option of the Holder."
Change of Control Make-Whole
Provision........................... If you elect to convert your Notes in connection with a corporate transaction as
described under "Description of the Notes -- Conversion Rights -- Conversion Upon
Specified Corporate Transactions" that occurs on or prior to July 15, 2008 that
constitutes a Fundamental Change as defined under "Description of the Notes --
Fundamental Change Requires Purchase of Notes by Us at the Option of the Holder"
(other than a Fundamental Change relating to the composition of our Board of
Directors) and 10% or more of the fair market value of the consideration for the
shares of common stock in the corporate transaction consists of (i) cash, (ii) other
property or (iii) securities that are not traded or scheduled to be traded
immediately following such transaction on a U.S. national securities exchange or the
NASDAQ National Market, we will increase the applicable conversion rate for the Notes
surrendered for conversion, which will increase the number of shares of our common
stock issuable upon conversion. The number of additional shares a holder will
receive and the applicable conversion rate upon such Fundamental Change is determined
by the table found in "Description of the Notes -- Conversion Rights -- Adjustment
to Conversion Rate upon the Occurrence of a Cash Take-Over Transaction."
Cash Take-Over Transaction by a
Public Company...................... A public company change of control is a cash take-over transaction where we would be
required to increase the conversion rate and the acquirer has a class of equity
securities traded on a U.S. national securities exchange or quoted on the NASDAQ
National Market. Upon the occurrence of a cash take-over transaction that
constitutes a public company change of control, in lieu of increasing the conversion
rate, we may elect to change the conversion right so that holders of the Notes will
be entitled to convert their Notes into the acquirer's common stock. See
"Description of the Notes -- Conversion Rights -- Conversion After a Public Acquirer
Change of Control."
Ranking............................. The Notes are unsecured and unsubordinated senior debt securities of ours ranking
equally with our other unsecured and unsubordinated indebtedness. As of September 30,
2004, we had outstanding approximately $2.7 billion aggregate principal amount of
indebtedness, including approximately $178 million of subordinated indebtedness
relating to our convertible preferred securities, but excluding approximately $5.1
billion of indebtedness of our subsidiaries. In August 2004, CMS Energy entered into
the Fifth Amended and Restated Credit Agreement in the amount of approximately $300
million. This facility is secured and the Notes are junior to such indebtedness. As
of December 31, 2004, there were approximately $106 million of letters of credit
outstanding under the Fifth Amended and Restated Credit Agreement. Except for the
amount outstanding under the Fifth Amended and Restated Credit Agreement, none of our
indebtedness is senior to the Notes. The Notes are structurally subordinated to
approximately $5.1 billion of our subsidiaries' debt.
Certain Covenants................... The senior debt indenture contains covenants that, among other things, limit our
ability to pay dividends or distributions, incur additional indebtedness, incur
additional liens, sell, transfer or dispose of certain assets, enter into certain
transactions with affiliates or enter into certain mergers or consolidations.
Form of Notes....................... One or more global securities held in the name of DTC in a minimum denomination of
$1,000 and any integral multiple thereof.
Trustee, Paying Agent and Conversion
Agent............................... J.P. Morgan Trust Company, N.A.
Trading............................. The Notes are not listed on any securities exchange or included in any automated
quotation system. Our common stock is listed on the New York Stock Exchange under the
symbol "CMS."
12
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from our audited
consolidated financial statements, which have been audited by Ernst & Young LLP,
independent registered public accounting firm, for the fiscal years ended
December 31, 2003, 2002, 2001 and 2000, except for amounts included from the
financial statements of the MCV Partnership and Jorf Lasfar Energy Company
S.C.A. ("JORF LASFAR"). The MCV Partnership represents an investment accounted
for under the equity method of accounting through December 31, 2003, which was
audited by another independent registered public accounting firm (the other
auditors for 2001 and 2000 have ceased operations), for the fiscal years ended
December 31, 2003, 2002, 2001 and 2000. Jorf Lasfar represents an investment
accounted for under the equity method of accounting, which was audited by
another independent accountant for the fiscal years ended December 31, 2003,
2002, 2001 and 2000. The following selected consolidated financial data for the
nine months ended September 30, 2004 and 2003 have been derived from our
unaudited consolidated financial statements. Please refer to our financial
statements for the fiscal year ended December 31, 2003 and for the quarter ended
September 30, 2004, which are each incorporated by reference herein. The
financial information set forth below should be read in conjunction with our
consolidated financial statements, related notes and other financial information
that are incorporated by reference herein. Operating results for the nine months
ended September 30, 2004 are not necessarily indicative of results that may be
expected for the entire year ended December 31, 2004. See "Where You Can Find
More Information."
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------
2004 (a) 2003 2003 2002 2001 2000
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Operating revenue .............................. $ 3,910 $ 4,141 $ 5,513 $ 8,673 $ 8,006 $ 6,623
Earnings from equity method investees .......... 78 125 164 92 172 213
Operating expenses ............................. 3,537 3,776 5,082 8,690 8,027 6,342
Operating income ............................... 451 490 595 75 151 494
Income (loss) from continuing operations ....... 68 (8) (43) (394) (327) (85)
-------- -------- -------- ------- ------- -------
Net income (loss) available to common
shareholder .................................. $ 65 $ (52) $ (44) $ (650) $ (459) $ 5
======== ======== ======== ======= ======= =======
Earnings per average common share:
Income (loss) from continuing operations
Basic and diluted ............................ $ 0.36 $ (0.06) $ (0.30) $ (2.84) $ (2.50) $ (0.76)
CMS Energy Basic and Diluted Net Income
(Loss) attributable to common stock .......... 0.40 (0.36) (0.30) (4.68) (3.51) 0.04
Dividends declared per average common share:
CMS Energy ................................... $ -- $ -- $ -- $ 1.09 $ 1.46 $ 1.46
BALANCE SHEET DATA (AT PERIOD END DATE):
Cash and cash equivalents ...................... $ 560 $ 669 $ 532 $ 351 $ 123 $ 143
Restricted cash ................................ 83 205 201 38 4 --
Net plant and property (a) ..................... 8,600 6,624 6,944 6,103 6,703 6,316
Total assets ................................... 15,377 13,234 13,838 14,781 17,633 17,801
Long-term debt, excluding current
maturities (a) ............................... 6,228 6,295 6,020 5,357 5,842 6,052
Long-term debt -- related parties .............. 684 -- 684 -- -- --
Non-current portion of capital and finance
lease obligations ............................ 318 116 58 116 71 49
Notes payable .................................. -- 4 -- 458 416 403
Other liabilities .............................. 5,328 4,786 5,113 6,807 8,012 7,705
Minority interest (a) .......................... 750 35 73 38 43 82
Company-obligated mandatorily redeemable trust
preferred securities of subsidiaries (b) ..... -- 173 -- 393 694 694
Company obligated trust preferred securities
of Consumers' subsidiaries (b) ............... -- 490 -- 490 520 395
Preferred stock ................................ 261 -- 261 -- -- --
Preferred stock of subsidiary .................. 44 44 44 44 44 44
Common stockholders' equity .................... $ 1,764 $ 1,291 $ 1,585 $ 1,078 $ 1,991 $ 2,377
OTHER DATA:
Cash Flow:
Provided by (Used in) operating activities ..... $ 194 $ -- $ (251) $ 614 $ 372 $ 600
Provided by (Used in) investing activities ..... (132) 332 203 829 (1,349) (1,220)
Provided by (Used in) financing activities ..... (208) (16) 230 (1,223) 967 629
Ratio of earnings to fixed charges (c) ......... 1.01 -- (d) -- (e) -- (f) -- (g) -- (h)
----------
(a) Under revised FASB Interpretation No. 46 "Consolidation of Variable
Interest Entities," we are the primary beneficiary of the MCV Partnership
and the First Midland Limited Partnership (the "FMLP"). As a result, we
have consolidated their assets, liabilities and activities into our
financial statements for the first time as of and for the quarter ended
March 31, 2004. These partnerships had third-party obligations totaling
$581 million at September 30, 2004. Property, plant and equipment serving
as collateral for these obligations had a carrying value of $1.440 billion
at September 30, 2004.
13
(b) CMS Energy and Consumers each formed various statutory wholly-owned
business trusts for the sole purpose of issuing preferred securities and
lending the gross proceeds to the parent companies. The sole assets of the
trusts are debentures of the parent company with terms similar to those of
the preferred securities. As a result of the adoption of FASB
Interpretation No. 46 on December 31, 2003, we deconsolidated the trusts
that hold the mandatorily redeemable trust preferred securities.
Therefore, $490 million, previously reported by us as Company-obligated
mandatorily redeemable trust preferred securities of subsidiaries, plus
$16 million owed to the trusts and previously eliminated in consolidation,
is now included in the balance sheet as Long-term debt -- related parties.
Additionally, $173 million, previously reported by us as Company-obligated
trust preferred securities of Consumers' subsidiaries, plus $5 million
owed to the trusts and previously eliminated in consolidation, is now
included in the balance sheet as Long-term debt -- related parties.
(c) For the purpose of computing the ratio, earnings represents the sum of
income from continuing operations before income taxes and income from
equity method investees, net interest charges and preferred dividends of
subsidiary, the estimated interest portion of lease rentals and
distributed income of equity method investees.
(d) For the nine months ended September 30, 2003, fixed charges exceeded
earnings by $36 million. Earnings as defined include $70 million of asset
impairment charges.
(e) For the year ended December 31, 2003, fixed charges exceeded earnings by
$59 million. Earnings as defined include $95 million of asset impairment
charges.
(f) For the year ended December 31, 2002, fixed charges exceeded earnings by
$475 million. Earnings as defined include $602 million of asset impairment
charges.
(g) For the year ended December 31, 2001, fixed charges exceeded earnings by
$393 million. Earnings as defined include $323 million of asset impairment
charges.
(h) For the year ended December 31, 2000, fixed charges exceeded earnings by
$225 million. Earnings as defined include a $329 million pretax impairment
loss on the Loy Yang investment.
14
RISK FACTORS
Before purchasing any of our securities offered by this prospectus, you
should carefully consider the following risk factors, as well as the other
information contained or incorporated by reference in this prospectus.
RISKS RELATING TO CMS ENERGY
WE DEPEND ON DIVIDENDS FROM OUR SUBSIDIARIES TO MEET OUR DEBT SERVICE
OBLIGATIONS. IF WE DO NOT RECEIVE ADEQUATE DIVIDENDS OR DISTRIBUTIONS FROM OUR
SUBSIDIARIES, WE MAY NOT BE ABLE TO MAKE PRINCIPAL OR INTEREST PAYMENTS ON THE
NOTES.
Due to our holding company structure, we depend on dividends from our
subsidiaries to meet our debt obligations, including the payment of any
principal or interest on the Notes. None of these entities are or will be
obligated to pay any amounts due on the Notes. Therefore, the Notes are
effectively subordinated to the payment of interest, principal, declared
dividends and preferred distributions on the debt, preferred securities and
other liabilities of Consumers and Enterprises and each of their subsidiaries.
Restrictions contained in Consumers' preferred stock provisions and other
legal restrictions limit Consumers' ability to pay dividends or acquire its own
stock from us. As of September 30, 2004, the most restrictive provisions in its
financing documents allowed Consumers to pay an aggregate of $300 million in
dividends to us during any year.
For additional information concerning restrictions on Consumers' ability
to pay dividends to us, see "Description of Our Capital Stock -- Primary Source
of Funds of CMS Energy; Restrictions on Sources of Dividends."
THE NOTES ARE STRUCTURALLY SUBORDINATED TO THE DEBT AND PREFERRED STOCK OF
OUR SUBSIDIARIES.
Of the approximately $7.8 billion of our consolidated indebtedness as of
September 30, 2004, approximately $5.1 billion was indebtedness of our
subsidiaries. Payments on that indebtedness and preferred stock are prior in
right of payment to dividends paid to us by our subsidiaries. See "Description
of the Notes -- Structural Subordination."
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT OUR FINANCIAL
FLEXIBILITY AND HENCE OUR ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS UNDER THE
NOTES.
As of September 30, 2004, we had outstanding approximately $2.7 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible preferred securities
but excluding approximately $5.1 billion of indebtedness of our subsidiaries. In
August 2004, we entered into the Fifth Amended and Restated Credit Agreement in
the amount of approximately $300 million. As of December 31, 2004, there were
approximately $106 million of letters of credit outstanding under the Fifth
Amended and Restated Credit Agreement. We and our subsidiaries may incur
additional indebtedness in the future.
The level of our present and future indebtedness could have several
important effects on our future operations, including, among others:
- a significant portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness and will not be available for other purposes;
- covenants contained in our existing debt arrangements require us to
meet certain financial tests, which may affect our flexibility in
planning for, and reacting to, changes in our business;
- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate and other
purposes may be limited;
- we may be at a competitive disadvantage to our competitors that are
less leveraged; and
- our vulnerability to adverse economic and industry conditions may
increase.
Our ability to meet our debt service obligations and to reduce our total
indebtedness will be dependent upon our future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors affecting
15
our operations, many of which are beyond our control. We cannot assure you that
our business will continue to generate sufficient cash flow from operations to
service our indebtedness. If we are unable to generate sufficient cash flow from
operations, we may be required to sell additional assets or obtain additional
financings. We also plan to refinance a substantial amount of our indebtedness
prior to its maturity. We cannot assure you that any such refinancing will be
possible or that additional financing will be available on commercially
acceptable terms or at all.
There can be no assurance that the requirements of our existing debt
arrangements or other indebtedness will be met in the future. Failure to comply
with such covenants may result in a default with respect to the related debt and
could lead to acceleration of such debt or any instruments evidencing
indebtedness that contain cross-acceleration or cross-default provisions.
In such a case, there can be no assurance that we would be able to
refinance or otherwise repay such indebtedness.
WE HAVE FINANCING NEEDS AND WE MAY BE UNABLE TO SUCCESSFULLY ACCESS BANK
FINANCING OR THE CAPITAL MARKETS.
As of September 30, 2004, CMS Energy had approximately $427 million of
debt maturities in 2004 and 2005, excluding debt maturities of Consumers. These
maturities included: approximately $176 million of senior notes due in November
2004 that has been extinguished; $180 million of senior notes due in January
2005 that has been extinguished; approximately $7 million of general term notes
that matured at various times in 2004; approximately $24 million of general term
notes that will mature at various times in 2005; approximately $7 million of
Enterprises subsidiary debt that matured in 2004; and approximately $33 million
of Enterprises subsidiary debt that will mature in 2005. In addition, we expect
to incur significant costs for capital expenditures, including future
environmental regulation compliance, especially compliance with clean air laws.
See "We could incur significant capital expenditures to comply with
environmental standards and face difficulty in recovering these costs on a
current basis" below. As of September 30, 2004, we had incurred $500 million in
capital expenditures to comply with these regulations and future capital
expenditures may total approximately $302 million between 2004 and 2011. We
could also be required to make additional cash contributions to our employee
pension and benefit plans and become subject to liquidity demands pursuant to
commercial commitments under guarantees, indemnities and letters of credit.
After giving effect to recent issuances of securities, along with asset sales,
capital markets or bank financing and cash flow from operations, we believe, but
can make no assurance, that we will have sufficient liquidity to meet our debt
maturities through 2005. Management is actively pursuing plans to refinance debt
and to sell assets. There can be no assurances that this business plan will be
successful and failure to achieve its goals could have a material adverse effect
on our liquidity and operations.
We continue to explore financing opportunities to supplement our financial
plan. These potential opportunities include: refinancing our bank credit
facilities; entering into leasing arrangements and/or vendor financing;
refinancing and issuing new capital markets debt, preferred stock and/or common
equity; and negotiating private placement debt. We cannot guarantee the capital
market's acceptance of our securities or predict the impact of factors beyond
our control, such as actions of rating agencies. If we are unable to access bank
financing or the capital markets to incur or refinance indebtedness, there could
be a material adverse effect upon our liquidity and operations.
Certain of our securities and those of our affiliates, including
Consumers, are rated by various credit rating agencies. Any reduction or
withdrawal of one or more of our credit ratings could have a material adverse
impact on our ability to access capital on acceptable terms. We cannot assure
you that any of our current ratings or those of our affiliates, including
Consumers, will remain in effect for any given period of time or that a rating
will not be lowered or withdrawn entirely by a rating agency.
WE MAY BE ADVERSELY AFFECTED BY A REGULATORY INVESTIGATION AND LAWSUITS
REGARDING "ROUND TRIP" TRADING BY ONE OF OUR SUBSIDIARIES AS WELL AS CIVIL
LAWSUITS REGARDING PRICING INFORMATION THAT TWO OF OUR AFFILIATES PROVIDED TO
MARKET PUBLICATIONS.
As a result of round trip trading transactions at CMS MST, we are under
investigation by the United States Department of Justice. We have received
subpoenas from U.S. Attorneys' Offices regarding investigations of those trades.
CMS Energy and Consumers have also been named in numerous class action lawsuits
by individuals who allege that they purchased CMS Energy securities during a
purported class period. These complaints generally seek unspecified damages
based on allegations that the defendants violated United States securities laws
and regulations by making allegedly false and misleading statements about the
company's business and financial condition. The cases have been consolidated
into a single lawsuit and an amended and consolidated complaint was filed on May
1, 2003. The judge issued an opinion and order dated March 31, 2004 in
connection with various pending motions, including the plaintiffs' motion to
amend the complaint and the motions to dismiss the complaint filed by us,
Consumers and other defendants. The judge directed the plaintiffs to file an
amended complaint under seal and ordered an expedited hearing on the motion to
amend, which was held on May 12, 2004. At the hearing, the judge ordered the
plaintiffs to file an amended complaint deleting certain counts related to
purchasers of CMS Energy-related securities, which the judge ordered dismissed
with prejudice. The plaintiffs filed this complaint on May 26, 2004. We,
Consumers and the individual defendants filed new motions to dismiss on June 21,
2004. A hearing on those
16
motions occurred on August 2, 2004 and on January 7, 2005, the judge ruled on
the motions to dismiss. The judge agreed to dismiss Consumers as well as three
individual defendants. The judge denied the motion to dismiss with respect to
CMS Energy and the other remaining individual defendants.
In March 2004, the SEC approved a cease-and-desist order settling an
administrative action against us relating to round-trip trading. The order did
not assess a fine and we neither admitted nor denied the order's findings.
Our Board of Directors has received a demand on behalf of a shareholder of
CMS Energy to commence civil actions (i) to remedy alleged breaches of fiduciary
duties by CMS Energy officers and directors in connection with round trip
trading at CMS MST and (ii) to recover damages sustained by CMS Energy as a
result of alleged insider trades alleged to have been made by certain current
and former officers of CMS Energy and its subsidiaries. In December 2002, two
new directors were appointed to our Board of Directors. A special litigation
committee was formed by the Board of Directors in January 2003 to determine
whether it is in the best interest of CMS Energy to bring the action demanded by
the shareholder. The disinterested members of the Board of Directors appointed
the two new directors to serve on the special litigation committee.
On December 2, 2003, during the continuing review by the special
litigation committee, we were served with a derivative complaint filed by the
shareholder in the Circuit Court of Jackson County, Michigan in furtherance of
his demands. The date for CMS Energy and other defendants to answer or otherwise
respond to the complaint was stayed by the court to February 21, 2005, subject
to such further stays as may be mutually agreed upon by the parties and
authorized by the court.
We have notified appropriate regulatory and governmental agencies that
some employees at CMS MST and CMS Field Services, Inc. (now Cantera Gas Company)
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
Energy is cooperating with an investigation by the United States Department of
Justice regarding this matter. On November 25, 2003, the Commodity Futures
Trading Commission ("CFTC") issued a settlement order regarding this matter. CMS
MST and CMS Field Services, Inc. agreed to pay a fine to the CFTC totaling $16
million. CMS Energy neither admitted nor denied the findings of the CFTC in the
settlement order.
We have also been named as a defendant in several gas industry civil
lawsuits regarding inaccurate gas trade reporting that include claims alleging
manipulation of natural gas prices and violations of the Commodities Exchange
Act and federal and state antitrust laws.
We cannot predict the outcome of the United States Department of Justice
investigation and the lawsuits. It is possible that the outcome in one or more
of the investigation or the lawsuits could adversely affect our financial
condition, liquidity or results of operations.
WE MAY BE NEGATIVELY IMPACTED BY THE RESULTS OF AN EMPLOYEE BENEFIT PLAN
LAWSUIT.
We are a defendant, along with Consumers, CMS MST and certain named and
unnamed officers and directors, in two lawsuits brought as purported class
actions on behalf of participants and beneficiaries of our 401(k) plan. The two
cases, filed in July 2002 in the United States District Court for the Eastern
District of Michigan, were consolidated by the trial judge and an amended and
consolidated complaint has been filed. Plaintiffs allege breaches of fiduciary
duties under the Employee Retirement Income Security Act of 1974 ("ERISA") and
seek restitution on behalf of the plan with respect to a decline in value of the
shares of our common stock held in the plan. The plaintiffs also seek other
equitable relief and legal fees. The judge issued an opinion and order dated
March 31, 2004 in connection with the motions to dismiss filed by us, Consumers
and the individuals. The judge dismissed certain of the amended counts in the
plaintiffs' complaint and denied our motion to dismiss the other claims in the
complaint. We, Consumers and the individual defendants filed answers to the
amended complaint on May 14, 2004. The judge issued an opinion and order dated
December 27, 2004 conditionally granting plaintiffs' motion for class
certification. A trial date has not been set, but is expected to be no earlier
than late in 2005.
We cannot predict the outcome of the ERISA litigation and it is possible
that an adverse outcome in this lawsuit could adversely affect our financial
condition, liquidity or results of operations.
WE CANNOT PREDICT THE OUTCOME OF CLAIMS REGARDING OUR PARTICIPATION IN THE
DEVELOPMENT OF BAY HARBOR OR OTHER LITIGATION IN WHICH SUBSTANTIAL MONETARY
CLAIMS ARE INVOLVED.
Certain subsidiaries of CMS Energy participated in the development of Bay
Harbor, a residential/commercial real estate project developed on the site of a
discontinued cement plant and quarry operation near Petoskey, Michigan. In the
various agreements to
17
develop Bay Harbor, CMS Land Company, a subsidiary of CMS Energy ("CMS LAND"),
and CMS Energy made certain indemnifications to various parties for
environmental conditions. CMS Energy has since sold its interests in Bay Harbor,
but on September 3, 2004, the Michigan Department of Environmental Quality (the
"MDEQ") issued a Notice of Noncompliance ("NON") directed to certain CMS Energy
subsidiaries and other parties that had participated in Bay Harbor and had
entered into an Administrative Agreement and Covenant Not To Sue ("CNTS") with
the State of Michigan in 1994.
In the sale agreement, CMS Land abandoned all interests and rights in Bay
Harbor but retained the responsibilities it and CMS Energy had under the
previous environmental indemnifications and the CNTS. One such responsibility
deals with the construction, operation and maintenance of a pH-lowering
treatment facility at Bay Harbor that collects and treats "seep water" from one
of several pre-existing cement kiln dust ("CKD") piles. The "seep water" has a
high pH level and requires treatment before the water can be discharged into the
City of Petoskey sewer system. While the pH treatment facility was out of
service for a number of months in 2004 to address maintenance issues, and to
resolve issues with the City of Petoskey, the MDEQ found higher than acceptable
levels of pH along the shore of Little Traverse Bay and issued the NON. The
treatment facility resumed operation in September 2004.
In addition, the United States Environmental Protection Agency (the "EPA")
has issued a General Notice of Potential Liability under Section 107(a) of the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
and has requested information pursuant to Section 104 of CERCLA. Follow-up
meetings with the EPA to discuss potential response activities and the potential
entry of an administrative order of consent have been held and are scheduled in
the future. CMS Energy filed a formal response to the Section 107(a) notice on
December 6, 2004. CMS Energy plans to file a formal response to the Section 104
information request on or before January 24, 2005. CMS Energy has also presented
plans to the MDEQ and the EPA to undertake a study concerning separate "seeps"
that are not currently subject to a water collection and treatment facility. In
addition, CMS Energy has submitted a proposed plan to undertake immediate
response activities, which is under discussion at the MDEQ and the EPA.
The regulatory agencies have advised the parties that they have reached an
understanding to split jurisdiction, under which the EPA would regulate
immediate response activities and the MDEQ would regulate a final response. In
the event that a suitable consent order is not negotiated, the EPA could issue a
unilateral order under CERCLA requiring that remedial work (both interim and
final) be performed, or, alternatively, the EPA could elect to perform the work
and seek damages, potentially including treble damages, from the parties. The
MDEQ could also elect to prosecute an enforcement action pursuant to its
statutory authority and the previously issued NON.
Several parties have issued demand letters to CMS Land and CMS Energy
claiming breach of the indemnification provisions, making requests for payment
of their expenses related to the NON and/or claiming damages to property or
personal injury with regard to the matter. CMS Energy responded to the
indemnification claim by stating that it had not breached its indemnity
obligations, it will comply with the indemnities, it has restarted the pH
treatment facility and it has responded to the NON. CMS Energy will defend
vigorously any property damage and personal injury claim.
Based on initial preliminary studies, CMS Energy has identified several
remediation options. The estimated potential capital and near-term expenditures
for these options range from $25 million to $40 million, with continuing yearly
operating and maintenance expenses ranging from $0.8 million to $1.6 million.
Final remediation and resulting claims against third parties for reimbursement
of remediation costs could increase or decrease these amounts. CMS Energy
estimates that it will record a liability for its obligations associated with
this matter in the amount of $45 million, with a resultant charge to its income
statement of $29 million, net of deferred income taxes, in the fourth quarter of
2004, reflecting CMS Energy's current best estimate of both the capital and
near-term costs as well as the present value of continuing future operating
costs.
An adverse outcome of this matter could, depending on the size of any
indemnification obligation or liability under environmental laws, have a
potentially significant adverse effect on CMS Energy's financial condition and
liquidity and could negatively impact CMS Energy's financial results. CMS Energy
cannot predict the ultimate cost or outcome of this matter.
In addition to the litigation and proceedings discussed above, CMS Energy
or various of our subsidiaries are parties in other pending litigation in which
substantial monetary damages are sought. These proceedings, certain of which are
described in CMS Energy's Annual Report on Form 10-K/A (Amendment No. 2) for the
year ended December 31, 2003 -- Notes to Consolidated Financial Statements --
Note 4, include arbitration and litigation relating to the Dearborn Industrial
Generation project and claims from various provinces in Argentina for stamp
taxes and associated penalties and interest arising from various gas
transportation transactions. An adverse outcome in one or more of these cases
could, depending on the timing and size of any award and the availability of
insurance or reimbursement from third parties, have an adverse effect on our
financial condition, liquidity or results of operations.
18
REGULATORY CHANGES AND OTHER DEVELOPMENTS HAVE RESULTED AND WILL CONTINUE
TO RESULT IN INCREASED COMPETITION IN OUR DOMESTIC ENERGY BUSINESS. GENERALLY,
INCREASED COMPETITION THREATENS OUR MARKET SHARE IN CERTAIN SEGMENTS OF OUR
BUSINESS AND CAN REDUCE OUR PROFITABILITY.
Consumers has in the last several years experienced, and expects to
continue to experience, a significant increase in competition for generation
services with the introduction of retail open access in the State of Michigan.
Pursuant to the Customer Choice Act, as of January 1, 2002, all electric
customers have the choice of buying electric generation service from an
alternative electric supplier. We continue to lose industrial and commercial
customers to other electric suppliers. As of December 2004, we had lost 926 MW
or 11 percent of our electric generation business to these alternative electric
suppliers. We expect the loss to be in the range of 1,000 to 1,200 MW by
year-end 2005. We cannot predict the total amount of electric supply load that
we may lose to competitor suppliers in the future.
ELECTRIC INDUSTRY REGULATION COULD ADVERSELY AFFECT OUR BUSINESS,
INCLUDING OUR ABILITY TO RECOVER OUR EXPENSES FROM OUR CUSTOMERS.
Federal and state regulation of electric utilities has changed
dramatically in the last two decades and could continue to change over the next
several years. These changes could adversely affect our business, financial
condition and profitability.
In June 2000, the Michigan Legislature enacted the Customer Choice Act
that became effective June 5, 2000. Pursuant to the Customer Choice Act,
residential rates were reduced by five percent and then capped through at least
December 31, 2005. Ultimately, the rate cap could extend until December 31, 2013
depending upon whether or not Consumers exceeds the market power supply test
established by the legislation (a requirement that Consumers believes itself to
be in compliance with at this time). Under circumstances specified in the
Customer Choice Act, certain costs can be deferred for future recovery after the
expiration of the rate cap period. The rate cap could, however, result in
Consumers being unable to collect customer rates sufficient to recover fully its
cost of conducting business. Some of these costs may be beyond Consumers'
ability to control. In particular, if Consumers needs to purchase power supply
from wholesale suppliers during the period when retail rates are frozen or
capped, the rate restrictions imposed by the Customer Choice Act may make it
impossible for Consumers to recover fully the cost of purchased power and
associated transmission costs through the rates it charges its customers. As a
result, it is not certain that Consumers can maintain its profit margins in its
electric utility business during the period of the rate freeze or rate cap.
Consumers filed an electric rate case with the MPSC in December 2004 for
approximately $320 million in rate increases. We cannot predict the outcome of
the electric rate case.
There are multiple proceedings pending before the Federal Energy
Regulatory Commission ("FERC") involving transmission rates, regional
transmission organizations and standard market design for electric bulk power
markets and transmission. FERC is also reviewing the standards under which
electric utilities are allowed to participate in wholesale power markets without
price restrictions. FERC is currently reviewing information submitted by
Consumers to support its ability to continue to sell power at market-based
rates. We cannot predict the impact of these electric industry-restructuring
proceedings on our financial position, liquidity or results of operations.
PENDING UTILITY LEGISLATION IN MICHIGAN MAY AFFECT US IN WAYS WE CANNOT
PREDICT.
In July 2004, as a result of legislative hearings, several bills were
introduced into the Michigan Senate that could change Michigan's Customer Choice
Act. The proposals include:
- requiring that rates be based on cost of service;
- establishing a defined Stranded Cost calculation method;
- allowing customers who stay with or switch to alternative electric
suppliers after December 31, 2005 to return to utility services, and
requiring them to pay current market rates upon return;
- establishing reliability standards that all electric suppliers must
follow;
- requiring electric utilities and electric alternative suppliers to
maintain a 15 percent power reserve margin;
- creating a service charge to fund the Low Income and Energy
Efficiency Fund;
19
- giving kindergarten through twelfth-grade schools a discount of 10
percent to 20 percent on electric rates; and
- authorizing a service charge payable by all customers for meeting
Clean Air Act requirements.
In September 2004, the Chair of the Senate Technology and Energy Committee
formed a workgroup, which analyzed the merits of the proposed legislation.
Workgroup activities have since concluded that the impact of the proposed
legislation is still uncertain. In October 2004, a substitute to one of the
bills was introduced, but has not yet been adopted by the Michigan Senate.
Although we do not believe the terms of the proposed bills, if enacted,
would have a material adverse effect on our business, the final form of any new
utility legislation may differ from the bills proposed in 2004. We cannot
predict whether these or other measures will be enacted into law or their
potential effect on us.
OUR ABILITY TO RECOVER CERTAIN REGULATORY ASSETS UNDER SECTION 10(d)(4) OF
THE CUSTOMER CHOICE ACT MAY AFFECT OUR FINANCIAL RESULTS.
Section 10(d)(4) of the Customer Choice Act allows deferred recovery of an
annual return of and on capital expenditures in excess of depreciation levels
and certain other expenses incurred prior to and throughout the current electric
rate freeze and rate cap periods. See "Electric industry regulation could
adversely affect our business, including our ability to recover our expenses
from our customers." In October 2004, Consumers filed an application with the
MPSC seeking recovery of $628 million in costs from 2000 through 2005 under
Section 10(d)(4). The request includes capital expenditures in excess of
depreciation, Clean Air Act costs and other expenses related to changes in law
or governmental action incurred during the rate freeze-cap period. Of the $628
million, $152 million relates to the cost of money.
As allowed by the Customer Choice Act, in January 2004, Consumers began
accruing and deferring for recovery the 2004 portion of its Section 10(d)(4)
regulatory assets. In November 2004, the MPSC issued an order in the Detroit
Edison Company's general electric rate case which concluded that the Detroit
Edison Company's return of and on Clean Air Act costs incurred from June 2000
through December 2003 are recoverable under Section 10(d)(4). Based on the
precedent set by this order, Consumers accrued and recorded an additional
regulatory asset of $55 million (pre-tax), $36 million net of tax, in November
2004 for its return of and on Clean Air Act expenditures incurred from 2000
through 2003. Additional accruals will continue to be recorded until a decision
on Consumers' request is issued by the MPSC. Certain aspects of the Detroit
Edison Company's electric rate case are different than Consumers' Section
10(d)(4) regulatory asset filing.
We cannot predict the ability of Consumers to recover certain regulatory
assets under Section 10(d)(4) of the Customer Choice Act and failure to recover
these regulatory assets could adversely affect our financial condition.
PERIODIC REVIEWS OF THE VALUES OF OUR ASSETS COULD RESULT IN ADDITIONAL
ACCOUNTING CHARGES.
We are required by U.S. generally accepted accounting principles to
periodically review the carrying value of our assets, including those that may
be sold. Market conditions, the operational characteristics of our assets and
other factors could result in our recording additional impairment charges for
our assets, which could have an adverse effect on our stockholders' equity and
our access to additional financing. In addition, we may be required to record
impairment charges and foreign currency translation losses at the time we sell
assets depending on the sale prices we are able to secure and other factors.
WE COULD INCUR SIGNIFICANT CAPITAL EXPENDITURES TO COMPLY WITH
ENVIRONMENTAL STANDARDS AND FACE DIFFICULTY IN RECOVERING THESE COSTS ON A
CURRENT BASIS.
We and our subsidiaries are subject to costly and increasingly stringent
environmental regulations. We expect that the cost of future environmental
compliance, especially compliance with clean air and water laws, will be
significant.
In 1998, the EPA issued regulations requiring the State of Michigan to
further limit nitrogen oxide emissions at our coal-fired electric plants. The
EPA and the State of Michigan regulations require us to make significant capital
expenditures estimated to be $802 million. As of September 30, 2004, Consumers
has incurred $500 million in capital expenditures to comply with the EPA
regulations and anticipates that the remaining $302 million of capital
expenditures will be incurred between 2004 and 2011. Additionally, Consumers
currently expects it will supplement its compliance plan with the purchase of
nitrogen oxide emissions credits for the years 2004 through 2009. The cost of
these credits based on the current market is estimated to average $7 million per
year for 2004-2006 and then decrease with Consumers' installation of control
technology; however, the market for nitrogen oxide
20
emissions credits and their price could change substantially. As new
environmental standards become effective, Consumers will need additional capital
expenditures to comply with the standards.
Based on the Customer Choice Act, beginning January 2004 an annual return
of and on these types of capital expenditures, to the extent they are above
depreciation levels, subject to an MPSC prudency hearing shall be accrued and
deferred for recovery. After notice and hearing, the MPSC shall determine the
amount of reasonable and prudent costs, if any, to be recovered and the recovery
period.
The EPA has proposed a Clean Air Interstate Rule that would require
additional coal-fired electric plant emission controls for nitrogen oxides and
sulfur dioxide. If implemented, this rule could potentially require substantial
additional expenditures. The rule proposes a two-phase program to reduce
emissions of sulfur dioxide by 70 percent and nitrogen oxides by 65 percent by
2015. Additionally, the EPA also proposed two alternative sets of rules to
reduce emissions of mercury and nickel from coal-fired and oil-fired electric
plants. Until the proposed environmental rules are finalized, an accurate cost
of compliance cannot be determined.
The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seek modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants and potentially pay fines.
Additionally, the viability of certain plants remaining in operation could be
called into question.
These and other required environmental expenditures, if not recovered from
customers in Consumers' rates, may require us to seek significant additional
financing to fund such expenditures and could strain our cash resources.
WE RETAIN CONTINGENT LIABILITIES IN CONNECTION WITH OUR ASSET SALES.
The agreements we enter into for the sale of assets customarily include
provisions whereby we are required to:
- retain specified preexisting liabilities such as for taxes and
pensions;
- indemnify the buyers against specified risks, including the
inaccuracy of representations and warranties we make; and
- require payments to the buyers depending on the outcome of
post-closing adjustments, audits or other reviews.
Many of these contingent liabilities can remain open for extended periods
of time after the sales are closed. Depending on the extent to which the buyers
may ultimately seek to enforce their rights under these contractual provisions,
and the resolution of any disputes we may have concerning them, these
liabilities could have a material adverse effect on our financial condition,
liquidity and results of operations.
We have received a request for indemnification from the purchaser of CMS
Oil and Gas Company, a former subsidiary of CMS. The indemnification claim
relates to the sale by CMS of its oil, gas and methanol projects in Equatorial
Guinea and the claim of the government of Equatorial Guinea that $142 million in
taxes is owed it in connection with that sale. Based on information currently
available, CMS and its tax advisors have concluded that the government's tax
claim is without merit and the purchaser of CMS Oil and Gas Company has
submitted a response to the government rejecting the claim. An adverse outcome
of this claim could have a material adverse effect on our financial condition,
liquidity and results of operations.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO RISKS THAT ARE
BEYOND OUR CONTROL, INCLUDING BUT NOT LIMITED TO FUTURE TERRORIST ATTACKS OR
RELATED ACTS OF WAR.
The cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, may adversely impact our results of
operations, financial condition and cash flows. The occurrence or risk of
occurrence of future terrorist activity and the high cost or potential
unavailability of insurance to cover such terrorist activity may impact our
results of operations and financial condition in unpredictable ways. These
actions could also result in disruptions of power and fuel markets. In addition,
our natural gas distribution system and pipelines could be directly or
indirectly harmed by future terrorist activity.
WE HAVE MADE SUBSTANTIAL INTERNATIONAL INVESTMENTS THAT ARE SUBJECT TO
POSSIBLE NATIONALIZATION, EXPROPRIATION OR INABILITY TO CONVERT CURRENCY.
21
Our investments in selected international markets in electric generating
facilities, natural gas pipelines and electric distribution systems face a
number of risks inherent in acquiring, developing and owning these types of
international facilities. Although we maintain insurance for various risk
exposures, including political risk from possible nationalization, expropriation
or inability to convert currency, we are exposed to some risks that include
local political and economic factors over which we have no control, such as
changes in foreign governmental and regulatory policies (including changes in
industrial regulation and control and changes in taxation), changing political
conditions and international monetary fluctuations. In some cases an investment
may have to be abandoned or disposed of at a loss. These factors could
significantly adversely affect the financial results of the affected subsidiary
and our financial position and results of operations.
International investments of the type we have made are subject to the risk
that they may be expropriated or that the required agreements, licenses, permits
and other approvals may be changed or terminated in violation of their terms.
These kinds of changes could result in a partial or total loss of our
investment.
The local foreign currency may be devalued, the conversion of the currency
may be restricted or prohibited or other actions, such as increases in taxes,
royalties or import duties, may be taken which adversely affect the value and
the recovery of our investment.
OUR OWNERSHIP OF A NUCLEAR GENERATING FACILITY CREATES RISK RELATING TO
NUCLEAR ENERGY.
Consumers owns the Palisades nuclear power plant and we are, therefore,
subject to the risks of nuclear generation, including the risks associated with
the operation of plant facilities and the storage and disposal of spent fuel and
other radioactive waste. The Nuclear Regulatory Commission ("NRC") has broad
authority under federal law to impose licensing and safety-related requirements
for the operation of nuclear generation facilities. In the event of
non-compliance, the NRC has the authority to impose fines or shut down a unit,
or both, depending upon its assessment of the severity of the situation, until
compliance is achieved. In addition, although we have no reason to anticipate a
serious nuclear incident at Consumers' plant, if an incident did occur, it could
harm our results of operations and financial condition. A major incident at a
nuclear facility anywhere in the world could cause the NRC to limit or prohibit
the operation or licensing of any domestic nuclear unit.
CONSUMERS CURRENTLY UNDERRECOVERS IN ITS RATES ITS PAYMENTS TO THE MCV
PARTNERSHIP FOR CAPACITY AND ENERGY, AND IS ALSO EXPOSED TO FUTURE CHANGES IN
THE MCV PARTNERSHIP'S FINANCIAL CONDITION THROUGH ITS EQUITY AND LESSOR
INVESTMENTS.
Consumers' power purchase agreement with the MCV Partnership ("PPA")
expires in 2025. We estimate that Consumers will incur estimated cash
underrecoveries of payments under the PPA aggregating $206 million through 2007.
For availability payments billed by the MCV Partnership after September 15,
2007, and not recovered from customers, Consumers would expect to claim a
"regulatory out" under the PPA which Consumers believes it has the right to do
after satisfying its obligation to "support and defend" full recovery of PPA
charges from customers. The MCV Partnership has indicated that it may take issue
with our exercise of the regulatory out clause after September 2007. The effect
of exercise of the regulatory out clause would be to reduce cash flow to the MCV
Partnership, which could in turn have an adverse effect on Consumers' equity and
lessor interests in the MCV Facility (the "MCV FACILITY").
Further, under the PPA, energy payments to the MCV Partnership are based
on the cost of coal burned at Consumers' coal plants and costs associated with
fuel inventory, operations and maintenance, and administrative and general
expenses associated with Consumers' coal plants. However, the MCV Partnership's
costs of producing electricity are tied, in large part, to the cost of natural
gas. Because natural gas prices have increased substantially in recent years,
while energy charge payments to the MCV Partnership have not, the MCV
Partnership's financial performance has been impacted negatively.
We cannot estimate, at this time, the impact of these issues on Consumers'
future earnings or cash flow from its interest in the MCV Partnership. The
forward price of natural gas for the next 20 years and the MPSC decision in 2007
or later related to Consumers' recovery of capacity payments are the two most
significant variables in the analysis of the MCV Partnership's future financial
performance. Natural gas prices have historically been volatile and presently
there is no consensus in the marketplace on the price or range of prices of
natural gas beyond the next five years. Further, it is not presently possible
for us to predict the actions of the MPSC in 2007 or later. Even with the
implementation of the RCP, if gas prices continue at present levels or increase,
the economics of operating the MCV Facility may be adverse enough to require
Consumers to recognize an impairment of its investment in the MCV Partnership.
For these reasons, at this time we cannot predict the impact of these issues on
Consumers' future earnings or cash flows or on the value of its equity interest
in the MCV Partnership.
22
CONSUMERS' ENERGY RISK MANAGEMENT STRATEGIES MAY NOT BE EFFECTIVE IN
MANAGING FUEL AND ELECTRICITY PRICING RISKS, WHICH COULD RESULT IN UNANTICIPATED
LIABILITIES TO CONSUMERS OR INCREASED VOLATILITY OF ITS EARNINGS.
Consumers is exposed to changes in market prices for natural gas, coal,
electricity and emission credits. Prices for natural gas, coal, electricity and
emission credits may fluctuate substantially over relatively short periods of
time and expose Consumers to commodity price risk. A substantial portion of
Consumers' operating expenses for its plants consists of the costs of obtaining
these commodities. Consumers manages these risks using established policies and
procedures, and it may use various contracts to manage these risks, including
swaps, options, futures and forward contracts. We cannot assure you that these
strategies will be successful in managing Consumers' pricing risk, or that they
will not result in net liabilities to Consumers as a result of future volatility
in these markets.
Natural gas prices in particular have historically been volatile. To
manage market risks associated with the volatility of natural gas prices, the
MCV Partnership maintains a gas hedging program. The MCV Partnership enters into
natural gas futures contracts, option contracts and over-the-counter swap
transactions 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 used principally to secure anticipated natural
gas requirements necessary for projected electric and steam sales, and to lock
in sales prices of natural gas previously obtained in order to optimize the MCV
Partnership's existing gas supply, storage and transportation arrangements.
Consumers also routinely enters into contracts to offset its positions, such as
hedging exposure to the risks of demand, market effects of weather and changes
in commodity prices associated with its gas distribution business. Such
positions are taken in conjunction with the gas cost recovery mechanism, which
allows Consumers to recover prudently incurred costs associated with such
positions. However, neither Consumers nor the MCV Partnership always hedges the
entire exposure of its operations from commodity price volatility. Furthermore,
the ability to hedge exposure to commodity price volatility depends on liquid
commodity markets. As a result, to the extent the commodity markets are
illiquid, Consumers may not be able to execute its risk management strategies,
which could result in greater open positions than we would prefer at a given
time. To the extent that open positions exist, fluctuating commodity prices can
improve or diminish our financial results and financial position.
In addition, Consumers currently has a power supply cost recovery
mechanism to recover the increased cost of fuel used to generate electricity
from its industrial and large commercial customers, but not from its residential
or small commercial customers. Therefore, to the extent that Consumers has not
hedged its fuel costs, it is exposed to changes in fuel prices to the extent
fuel for its electric generating facilities must be purchased on the open market
in order for Consumers to serve its residential and small commercial customers.
RISKS RELATED TO THE NOTES
THE MARKET PRICE OF THE NOTES COULD BE SIGNIFICANTLY AFFECTED BY THE
MARKET PRICE OF OUR COMMON STOCK.
We expect that the market price of the Notes could be significantly
affected by the market price of our common stock. This may result in greater
volatility in the market price of the Notes than would be expected for
nonconvertible debt securities. The market price of our common stock will likely
continue to fluctuate in response to factors including the following, many of
which are beyond our control:
- fluctuations in our operating and financial results;
- changes in financial estimates and recommendations by financial
analysts;
- changes in the ratings of the Notes or other securities of ours or
Consumers;
- developments related to litigation or regulatory proceedings
involving us;
- our asset sales and financings; and
- market perception of the energy industry and of us.
In addition, the stock markets in general, including the New York Stock
Exchange, recently have experienced significant price and trading fluctuations.
These fluctuations have resulted in volatility in the market prices of
securities that often has been unrelated or disproportionate to changes in
operating performance. These broad market fluctuations may affect adversely the
market prices of the Notes and our common stock.
23
WE MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK OR SECURITIES CONVERTIBLE
OR EXCHANGEABLE FOR OUR COMMON STOCK AND THEREBY MATERIALLY AND ADVERSELY AFFECT
THE PRICE OF OUR COMMON STOCK.
We are not restricted from issuing additional common stock or securities
convertible or exchangeable for our common stock during the life of the Notes
and have no obligation to consider the interests of Holders for any reason. If
we issue additional shares of common stock or securities convertible or
exchangeable for our common stock, it may materially and adversely affect the
price of our common stock and, in turn, the price of the Notes.
A HOLDER OF NOTES WILL NOT BE ENTITLED TO ANY RIGHTS WITH RESPECT TO OUR
COMMON STOCK, BUT WILL BE SUBJECT TO ALL CHANGES MADE WITH RESPECT TO OUR COMMON
STOCK.
A holder of Notes will not be entitled to any rights with respect to our
common stock (including, without limitation, voting rights and rights to receive
any dividends or other distributions on our common stock), but will be subject
to all changes affecting our common stock. Holders will only be entitled to
rights on our common stock if and when we deliver shares of common stock to
holders upon conversion of Notes into cash and common stock and in limited cases
under the conversion rate adjustments of the Notes. For example, in the event
that an amendment is proposed to our Articles of Incorporation or Bylaws
requiring stockholder approval and the record date for determining the
stockholders of record entitled to vote on the amendment occurs prior to
delivery of our common stock, holders will not be entitled to vote on the
amendment, although holders will nevertheless be subject to any changes in the
powers, preferences or special rights of our common stock.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO PAY THE CASH
COMPONENT UPON A CONVERSION OF THE NOTES OR PURCHASE THE NOTES UPON A
FUNDAMENTAL CHANGE OR OTHER PURCHASE DATE, AS REQUIRED BY THE SENIOR DEBT
INDENTURE.
Holders of the Notes upon conversion will be entitled to receive a cash
component equal to the principal amount of the Notes as described under
"Description of the Notes -- Conversion Rights". We cannot assure you that we
would have sufficient financial resources, or would be able to arrange
financing, to pay the cash component to a holder upon conversion. On July 15,
2008, July 15, 2013 and July 15, 2018, holders of the Notes may require us to
purchase their Notes for cash. In addition, holders of the Notes may require us
to purchase their Notes upon a Fundamental Change as described under
"Description of the Notes -- Fundamental Change Requires Purchase of Notes by Us
at the Option of the Holder." A Fundamental Change also may constitute an event
of default, and result in the acceleration of the maturity of our then existing
indebtedness, under another indenture or other agreement. We cannot assure you
that we would have sufficient financial resources, or would be able to arrange
financing, to pay the purchase price for the Notes tendered by holders. Failure
by us to purchase the Notes when required will result in an event of default
with respect to the Notes.
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE
NOTES.
We cannot assure you that an active trading market for the Notes will
develop or as to the liquidity or sustainability of any such market, the ability
of the holders to sell their Notes or the price at which holders of the Notes
will be able to sell their Notes. Future trading prices of the Notes will also
depend on many other factors, including, among other things, prevailing interest
rates, the market for similar securities, our performance and other factors. We
do not intend to apply for listing of the Notes on any securities exchange or
any automated quotation system.
USE OF PROCEEDS
We will not receive any of the proceeds from sales of any of the
securities covered by this prospectus by the selling securityholders.
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RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the nine months ended September
30, 2004 and each of the years ended December 31, 1999 through 2003 is as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 2004 2003 2002 2001 2000 1999
------------------ ---- ---- ---- ---- ----
Ratio of earnings to fixed charges.......................... 1.01 --(1) --(2) --(3) --(4) 1.33
----------
(1) For the year ended December 31, 2003, fixed charges exceeded earnings by
$59 million. Earnings as defined include $95 million of asset impairment
charges.
(2) For the year ended December 31, 2002, fixed charges exceeded earnings by
$475 million. Earnings as defined include $602 million of asset impairment
charges.
(3) For the year ended December 31, 2001, fixed charges exceeded earnings by
$393 million. Earnings as defined include $323 million of asset impairment
charges.
(4) For the year ended December 31, 2000, fixed charges exceeded earnings by
$225 million. Earnings as defined include a $329 million pretax impairment
loss on the Loy Yang investment.
For the purpose of computing the ratio, earnings represent income before
income taxes, net interest charges and the estimated interest portion of lease
rentals and distributed income of equity method investees.
PRICE RANGE OF OUR COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the New York Stock Exchange. The following
table sets forth for the periods indicated the range of high and low intraday
sales prices per share of our common stock as reported on the New York Stock
Exchange and the cash dividends declared on the common stock for the periods
indicated.
HIGH LOW DIVIDENDS
---------- ---------- ---------
Year Ended December 31, 2002
First Quarter........................................................................... $ 24.80 $ 20.97 $ 0.365
Second Quarter.......................................................................... 22.50 7.75 0.365
Third Quarter........................................................................... 11.55 6.89 0.180
Fourth Quarter.......................................................................... 10.48 5.45 0.180
Year Ended December 31, 2003
First Quarter........................................................................... 10.74 3.41 --
Second Quarter.......................................................................... 8.95 4.58 --
Third Quarter........................................................................... 8.04 6.03 --
Fourth Quarter.......................................................................... 8.67 7.40 --
Year Ending December 31, 2004
First Quarter........................................................................... 9.59 8.25 --
Second Quarter.......................................................................... 9.43 7.81 --
Third Quarter........................................................................... 9.88 8.58 --
Fourth Quarter.......................................................................... 10.65 8.80 --
Year Ending December 31, 2005
First Quarter (through January 28, 2005)................................................ 9.70 10.57 --
On January 28, 2005, the last sale price of our common stock as reported
on the New York Stock Exchange was $10.35 per share. On January 28, 2005 there
were approximately 58,455 holders of record of our common stock.
In January 2003, we suspended the payment of dividends on our common
stock.
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CMS ENERGY
OVERVIEW
CMS Energy, formed in Michigan in 1987, is an integrated energy holding
company operating through subsidiaries in the United States and in selected
markets around the world. Its two principal subsidiaries are Consumers and
Enterprises. Consumers is a public utility that provides natural gas and/or
electricity to almost 6.5 million of Michigan's 10 million residents and serves
customers in 61 of the 68 counties in Michigan's Lower Peninsula. Enterprises,
through subsidiaries and equity investments, is engaged in several energy
businesses in the United States and in selected international markets.
CONSUMERS
Consumers primarily consists of our electric and gas utility operations.
Consumers was formed in Michigan in 1968 and is the successor to a corporation
organized in Maine in 1910 and which did business in Michigan from 1915 to 1968.
Consumers' consolidated operations account for a majority of our total assets
and income, as well as a substantial portion of our operating revenue.
Industries in Consumers' service areas include automotive, metal, chemical, food
and wood products and a diversified group of other industries.
Electric Utility Operations
Consumers' electric utility operating revenue was $2.590 billion in 2003,
$2.648 billion in 2002 and $2.633 billion in 2001. Based on the average number
of customers, Consumers' electric utility operations, if independent, would be
the thirteenth largest electric utility company in the United States. The
electric operations of Consumers include the generation, purchase, distribution
and sale of electricity. In 2003, total electric sales were 36 billion kWh and
retail open access deliveries were 3 billion kWh. At year-end 2003, it served
customers in 61 of the 68 counties of Michigan's Lower Peninsula. Principal
cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo,
Midland, Muskegon and Saginaw. Consumers' electric utility customer base
includes a mix of residential, commercial and diversified industrial customers,
the largest segment of which is the automotive industry. Consumers' electric
operations are not dependent upon a single customer, or even a few customers,
and the loss of any one or even a few of such customers is not reasonably likely
to have a material adverse effect on its financial condition.
At December 31, 2003, Consumers owned and operated 30 electric generating
plants with an aggregate of 6,435 MW of capacity. Also, in 2003, Consumers
purchased up to 2,353 MW of net capacity from other power producers, which
amounted to 30.5% of Consumers' total system requirements, the largest of which
was the MCV Partnership in which Consumers has a 49% interest through CMS
Midland, Inc. Consumers also owns:
- 347 miles of high voltage distribution radial lines operating at 120
kilovolts and above;
- 4,164 miles of high voltage distribution overhead lines operating at
23 kilovolts and 46 kilovolts;
- 16 subsurface miles of high voltage distribution underground lines
operating at 23 kilovolts and 46 kilovolts;
- 54,922 miles of electric distribution overhead lines;
- 8,526 subsurface miles of underground distribution lines; and
- substations having an aggregate transformer capacity of 20,605,680
kilovoltamperes.
Consumers generates electricity principally from coal and nuclear fuel.
Consumers has four generating plant sites that use coal as a fuel source and
constituted 76% of its baseload capacity in 2003. In 2003, these plants produced
a combined total of 20,091 million kWhs of electricity and burned 10.1 million
tons of coal. Consumers owns Palisades, an operating nuclear power plant located
near South Haven, Michigan. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to the Nuclear Management Company
("NMC"). The Palisades nuclear fuel supply responsibilities are under the
control of NMC acting as agent for Consumers. During 2003, Palisades' net
generation was 6,151 million kWhs, constituting 23.3% of Consumers' baseload
supply.
Gas Utility Operations
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Consumers' gas utility operating revenue was $1.845 billion in 2003,
$1.519 billion in 2002 and $1.338 billion in 2001. Based on the average number
of customers, Consumers' gas utility operations, if independent, would be the
tenth largest gas utility company in the United States. Consumers' gas utility
operations purchase, transport, store, distribute and sell natural gas. In 2003,
total deliveries of natural gas sold by Consumers and by other sellers who
deliver natural gas through Consumers' pipeline and distribution network to
ultimate customers, including the MCV Partnership, totaled 388 bcf. As of
December 31, 2003, Consumers was authorized to provide service in 54 of the 68
counties in Michigan's Lower Peninsula. Principal cities served include Bay
City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as well as the
suburban Detroit area, where nearly 900,000 of the gas customers are located.
Consumers' gas operations are not dependent upon a single customer, or even a
few customers, and the loss of any one or even a few of such customers is not
reasonably likely to have a material adverse effect on its financial condition.
Consumers' gas distribution and transmission system consists of:
- 25,055 miles of distribution mains throughout Michigan's Lower
Peninsula;
- 2,405 miles of transmission lines throughout Michigan's Lower
Peninsula;
- 7 compressor stations with a total of 162,000 installed horsepower;
and
- 14 gas storage fields located across Michigan with an aggregate
storage capacity of 331 bcf and a working storage capacity of 130
bcf.
Total 2003 purchases of gas supply included 66% from United States
producers outside Michigan, 22% from Canadian producers and 3% from Michigan
producers. Authorized suppliers in the gas customer choice program supplied the
remaining 9% of gas delivered by Consumers. Consumers also has firm
transportation agreements with independent pipeline companies for the delivery
of gas. Consumers uses these agreements to deliver gas to Michigan for ultimate
deliveries to market. In total, Consumers' firm transportation and city gate
arrangements are capable of delivering over 95% of Consumers' total gas supply
requirements.
ENTERPRISES
Enterprises, through subsidiaries and equity investments, is engaged in
domestic and international diversified energy businesses including natural gas
transmission, storage and processing, independent power production and energy
services. Enterprises' operating revenue was $1.085 billion in 2003, $4.508
billion in 2002 and $4.034 billion in 2001.
BUSINESSES OF ENTERPRISES' SUBSIDIARIES
Natural Gas Transmission
CMS Gas Transmission, formed in 1988, owns, develops and manages domestic
and international natural gas facilities. In 2003, CMS Gas Transmission's
operating revenue was $22 million.
In 1999, CMS Gas Transmission acquired Panhandle Eastern Pipe Line Company
("PANHANDLE"), which was primarily engaged in the interstate transmission and
storage of natural gas and also provided liquefied natural gas terminalling and
regasification services. Panhandle operated a large natural gas pipeline
network, which provided customers in the Midwest and Southwest with a
comprehensive array of transportation services. Panhandle's major customers
included 25 utilities located primarily in the United States Midwest market
area, which encompassed large portions of Illinois, Indiana, Michigan, Missouri,
Ohio and Tennessee.
In February 2003, Panhandle sold its one-third equity interest in
Centennial Pipeline, LLC ("CENTENNIAL") for $40 million to Centennial's two
other partners, Marathon Ashland Petroleum, LLC and TE Products Pipeline
Company, Limited Partnership, through its general partner, Texas Eastern
Products Pipeline Company, LLC.
In March 2003, Panhandle transferred $63 million previously committed to
collateralize a letter of credit and its one-third ownership interest in
Guardian Pipeline, LLC ("GUARDIAN") to CMS Gas Transmission. CMS Gas
Transmission sold its interest in Guardian to a subsidiary of WPS Resources
Corporation in June 2003. Proceeds from the sale were $26 million and the $63
million of cash collateral was released.
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In June 2003, CMS Gas Transmission sold Panhandle to Southern Union
Panhandle Corp., a newly formed entity owned by Southern Union Company. Southern
Union Panhandle Corp. purchased all of Panhandle's outstanding capital stock for
approximately $582 million in cash and 3 million shares of Southern Union
Company common stock. Southern Union Panhandle Corp. also assumed approximately
$1.166 billion in debt. In July 2003, Southern Union Company declared a 5%
common stock dividend resulting in an additional 150,000 shares of common stock
for CMS Gas Transmission. In October 2003, CMS Gas Transmission sold its 3.15
million shares to a private investor for $17.77 per share.
In July 2003, CMS Gas Transmission completed the sale of CMS Field
Services, Inc. to Cantera Natural Gas, Inc. for gross cash proceeds of
approximately $113 million, subject to post closing adjustments, and a $50
million face value note of Cantera Natural Gas, Inc. The note is payable to CMS
Energy for up to $50 million subject to the financial performance of the Fort
Union and Bighorn natural gas gathering systems from 2004 through 2008.
In August 2004, we sold our interests in a business located in Australia
comprised of a pipeline, processing facilities and a gas storage facility in
which we held a 100 percent ownership interest ("PARMELIA") and a pipeline
business located in Australia in which we held a 39 percent ownership interest
("GOLDFIELDS") to Australian Pipeline Trust for approximately $204 million
Australian (approximately $147 million in U.S. dollars).
At December 31, 2003, CMS Gas Transmission had nominal processing
capabilities of approximately 0.33 bcf per day of natural gas in Michigan. At
December 31, 2003, CMS Gas Transmission had a total of 288 miles of gas
gathering and transmission pipelines located in the State of Michigan, with a
total capacity of approximately 0.95 bcf per day.
Internationally, at December 31, 2003, CMS Gas Transmission had ownership
interests in 5,517 miles of pipelines (including 988 miles from Goldfields and
Parmelia sold in August 2004) in Argentina, Australia and Chile.
Independent Power Production
CMS Generation, formed in 1986, invests in, acquires, develops, constructs
and operates non-utility power generation plants in the United States and
abroad. In 2003, the independent power production business segment's operating
revenue, which includes revenues from CMS Generation and CMS Operating, S.A., as
well as from Consumers' interests in the MCV Facility and the MCV Partnership,
was $204 million.
Independent Power Production Properties
As of December 31, 2003, we had ownership interests in operating power
plants totaling 8,766 gross MW (including 2,000 gross MW from Loy Yang that was
sold in April 2004) (4,149 net MW). At December 31, 2003, additional plants
totaling approximately 1,784 gross MW (420 net MW) were under construction or in
advanced stages of development. These plants include the Shuweihat power plant,
which is under construction in the United Arab Emirates, and the Saudi
Petrochemical Company power plant, which is under construction and is located in
the Kingdom of Saudi Arabia. We believe that the independent power production
business unit will continue to optimize the operations and management of its
remaining portfolio of assets in order to contribute to CMS Energy's earnings
and to maintain its reputation for solid performance in the construction and
operation of power plants.
The following table details our interests in independent power plants in
the United States as well as abroad as of year-end 2003 (excluding the plants
owned by CMS Operating, S.A. and CMS Electric and Gas Company and the MCV
Facility, discussed further below, as well as Loy Yang that was sold in April
2004 (2,000 gross MW)):
PERCENTAGE OF
GROSS CAPACITY
OWNERSHIP GROSS UNDER LONG-TERM
INTEREST CAPACITY CONTRACT
LOCATION FUEL TYPE (%) (MW) (%)
-------- ----------- --------- --------- ---------------
California ...................................... Wood 37.8 36 100
Connecticut ..................................... Scrap tire 100 31 100
Michigan ........................................ Coal 50 70 100
Michigan ........................................ Natural gas 100 710 85
Michigan ........................................ Natural gas 100 224 0
Michigan ........................................ Wood 50 40 100
Michigan ........................................ Wood 50 38 100
New York ........................................ Hydro 0.3 14 100
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North Carolina .................................. Wood 50 50 100
Oklahoma ........................................ Natural gas 8.8 124 100
-----
DOMESTIC TOTAL ................................ 1,337
Argentina ....................................... Hydro 17.2 1,320 20(a)
Chile ........................................... Natural gas 50 720 100(b)
Ghana ........................................... Crude oil 90 224 100
India ........................................... Coal 50 250 100
India ........................................... Natural gas 33.2 235 100
Jamaica ......................................... Diesel 42.3 63 100
Latin America ................................... Various Various 484 51
Morocco ......................................... Coal 50 1,356 100
United Arab Emirates ............................ Natural gas 40 777 100
-----
INTERNATIONAL TOTAL ........................... 5,429
TOTAL DOMESTIC AND INTERNATIONAL ................ 6,766
=====
PROJECTS UNDER CONSTRUCTION/ ADVANCED DEVELOPMENT 1,784
----------
(a) El Chocon is primarily on a spot market basis, however, it has a high
dispatch rate due to low cost.
(b) Atacama is not allowed to sell more than 440 MW to the grid. 100% of the
440 MW is under contract.
Through a CMS International Ventures, LLC subsidiary called CMS Operating,
S.R.L., we own a 128 MW natural gas power plant, and a 92.6% ownership interest
in a 540 MW natural gas power plant, each in Argentina. Through CMS Electric and
Gas Company, we have an 86% ownership interest in 287 MW of gas turbine and
diesel generating capacity in Venezuela. Through CMS Midland, Inc., Consumers
owns a 49% interest in the MCV Partnership and, through a trust, a 35% indirect
beneficial interest in the MCV Facility. The MCV Partnership was formed in
January 1987 to convert a portion of an abandoned Midland County, Michigan
nuclear plant owned by Consumers into the MCV Facility. The MCV Facility has a
net electrical generating capacity of approximately 1,500 W.
Oil and Gas Exploration and Production
CMS Energy used to own an oil and gas exploration and production company.
In October 2002, CMS Energy completed its exit from the oil and gas exploration
and production business.
International Energy Distribution
CMS Energy's international energy distribution business involves Sistemo
Electrico del Estado Nueva Esparta, C.A. in Venezuela and Companhia Paulista de
Energia Electrica in Brazil.
Energy Resource Management
In 2003, CMS ERM moved its headquarters from Houston, Texas to Jackson,
Michigan. In February 2004, CMS ERM changed its name from CMS Marketing,
Services and Trading Company to CMS ERM. CMS ERM has reduced its business focus
and in the future will concentrate on the purchase and sale of energy
commodities in support of CMS Energy's generating facilities. CMS ERM previously
provided gas, oil, and electric marketing, risk management and energy management
services to industrial, commercial, utility and municipal energy users
throughout the United States. In January 2003, CMS ERM closed the sale of a
major portion of its wholesale natural gas trading book to Sempra Energy Trading
Corp. The cash proceeds were approximately $17 million. In April 2003, CMS ERM
sold its wholesale electric power business to Constellation Power Source, Inc.
Also in April 2003, CMS ERM sold the federal business of CMS Viron, its energy
management service provider, to Pepco Energy Services, Inc. In July 2003, CMS
ERM sold CMS Viron's non-federal business to Chevron Energy Solutions Company, a
division of Chevron U.S.A. Inc. In 2003, CMS ERM marketed approximately 85 bcf
of natural gas and 5,314 gWh of electricity. Its operating revenue was $711
million in 2003, $4.137 billion in 2002 and $3.616 billion in 2001.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes were issued as a series of senior debentures under the senior
debt indenture as supplemented by the sixteenth supplemental indenture thereto
dated as of December 16, 2004 between us and J.P. Morgan Trust Company, N.A.
(the "SUPPLEMENTAL INDENTURE"), and are limited in aggregate principal amount to
$150 million. The senior debt indenture permits us to "re-open" this offering of
the Notes without the consent of the holders of the Notes. Accordingly, the
principal amount of the Notes may be increased in the future on the same terms
and conditions and with the same CUSIP numbers as the Notes being offered by
this prospectus. The Notes are unsecured and unsubordinated senior debt
securities of CMS Energy.
As of September 30, 2004, we had outstanding approximately $2.7 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible trust preferred
securities but excluding approximately $5.1 billion of indebtedness of our
subsidiaries. In August 2004, CMS Energy entered into the Fifth Amended and
Restated Credit Agreement in the amount of approximately $300 million. This
facility is secured and the Notes are junior to such indebtedness. As of
December 31, 2004 there were approximately $106 million of letters of credit
outstanding under the Fifth Amended and Restated Credit Agreement. Except for
the amount outstanding under the Fifth Amended and Restated Credit Agreement,
none of our indebtedness is senior to the Notes. The Notes are structurally
subordinated to approximately $5.1 billion of our subsidiaries' debt.
We may issue debt securities from time to time in one or more series under
the senior debt indenture. There is no limitation on the amount of debt
securities we may issue under the senior debt indenture.
The statements herein concerning the Notes and the senior debt indenture
are a summary and do not purport to be complete and are subject to, and
qualified in their entirety by, all of the provisions of the senior debt
indenture, which is incorporated herein by this reference. They make use of
defined terms and are qualified in their entirety by express reference to the
senior debt indenture, including the Supplemental Indenture, a copy of which
will be available upon request to the Trustee.
STRUCTURAL SUBORDINATION
CMS Energy is a holding company that conducts substantially all of its
operations through its subsidiaries. Its only significant assets are the capital
stock of its subsidiaries, and its subsidiaries generate substantially all of
its operating income and cash flow. As a result, dividends or advances from its
subsidiaries are the principal source of funds necessary to meet its debt
service obligations. Contractual provisions or laws, as well as its
subsidiaries' financial condition and operating requirements, may limit CMS
Energy's ability to obtain cash from its subsidiaries that it may require to pay
its debt service obligations, including payments on the Notes. In addition, the
Notes are effectively subordinated to all of the liabilities of CMS Energy's
subsidiaries with regard to the assets and earnings of CMS Energy's
subsidiaries. The subsidiaries are separate and distinct legal entities and have
no obligation, contingent or otherwise, to pay any amounts due pursuant to the
Notes or to make any funds available therefor, whether by dividends, loans or
other payments. CMS Energy's rights and the rights of its creditors, including
holders of Notes, to participate in the distribution of assets of any subsidiary
upon the latter's liquidation or reorganization will be subject to prior claims
of the subsidiaries' creditors, including trade creditors.
Of the approximately $7.8 billion of our consolidated indebtedness as of
September 30, 2004, approximately $5.1 billion was indebtedness of our
subsidiaries. Payments on that indebtedness are prior in right of payment to
dividends paid to us by our subsidiaries.
PAYMENT AND MATURITY
The Notes mature on July 15, 2023, and bear interest at the rate of 3.375%
per year. At maturity, CMS Energy will pay the aggregate principal amount of the
Notes then outstanding. Each Note bears interest from the original date of issue
or the date interest has last been paid on the Old Notes, payable semiannually
in arrears on January 15 and July 15, commencing on July 15, 2005, and at
maturity. Interest will be paid to the person in whose name the Notes are
registered at the close of business on the first calendar day of the month in
which the interest payment date occurs. Interest payable on any interest payment
date or on the date of maturity will be the amount of interest accrued from and
including the date of original issuance or from and including the most recent
interest payment date on which interest has been paid or duly made available for
payment to but excluding such interest payment date or the date of maturity, as
the case may be. Interest will be computed on the basis of a 360-day year
consisting of twelve 30 day months.
In any case where any interest payment date, redemption date, repurchase
date or maturity date (including upon the occurrence of a Fundamental Change) of
any Note shall not be a Business Day at any place of payment, then payment of
interest or principal (and
30
additional amount, if any) need not be made on such date, but may be made on the
next succeeding Business Day at such place of payment with the same force and
effect as if made on the interest payment date, redemption date, repurchase date
or maturity date (including upon the occurrence of a Fundamental Change); and no
interest shall accrue on the amount so payable for the period from and after
such interest payment date, redemption date, repurchase date or maturity date,
as the case may be, to such Business Day.
REGISTRATION, TRANSFER AND EXCHANGE
The Notes were initially issued in the form of one or more Notes in
registered, global form, without coupons, in denominations of $1,000 and any
integral multiple thereof as described under "Book-Entry System." The global
Notes are registered in the name of the nominee of DTC. Except as described
under "Book-Entry System," owners of beneficial interests in a global Note are
not entitled to have Notes registered in their names, do not receive nor are
entitled to receive physical delivery of any such Note and are not considered
the registered holder thereof under the senior debt indenture.
OPTIONAL REDEMPTION
No sinking fund is provided for the Notes. Prior to July 15, 2008, the
Notes will not be redeemable. On or after July 15, 2008, we may redeem for cash
or check all or part of the Notes at any time, upon not less than 30 nor more
than 60 days' notice before the redemption date by mail to the Trustee, the
paying agent and each holder of the Notes, for a price equal to 100% of the
principal amount of the Notes to be redeemed plus any accrued and unpaid
interest, including additional amounts, if any, to the redemption date.
If we decide to redeem fewer than all of the outstanding Notes, the
Trustee will select the Notes to be redeemed (in principal amounts of $1,000 or
integral multiples thereof) by lot, on a pro rata basis or by another method the
Trustee considers fair and appropriate.
If the Trustee selects a portion of a holder's Note for partial redemption
and the holder converts a portion of the same Note, the converted portion will
be deemed to be from the portion selected for redemption.
In the event of any redemption in part, we will not be required to:
- issue, register the transfer of or exchange any Note during a period
of 15 days before the mailing of the redemption notice; or
- register the transfer of or exchange any Note so selected for
redemption, in whole or in part, except the unredeemed portion of
any Note being redeemed in part.
CONVERSION RIGHTS
Subject to the conditions and during the periods and under the
circumstances described below, holders may convert each of their Notes into cash
and shares of our common stock initially at a conversion rate of 93.7137 shares
of common stock per $1,000 principal amount of Notes (equivalent to an initial
conversion price of $10.671 per share of common stock) at any time prior to the
close of business on July 15, 2023. The conversion rate and the equivalent
conversion price in effect at any given time are referred to as the "APPLICABLE
CONVERSION RATE" and the "APPLICABLE CONVERSION PRICE," respectively, and will
be subject to adjustment as described below. A holder may convert fewer than all
of such holder's Notes so long as the Notes converted are an integral multiple
of $1,000 principal amount.
GENERAL. Subject to certain exceptions described below under "Conversion
Upon Satisfaction of Trading Price Condition" and "Conversion Upon Specified
Corporate Transactions", once the Notes are tendered for conversion, holders
tendering the Notes will be entitled to receive, per $1,000 principal amount of
the Notes, cash and shares of our common stock, the aggregate value of which
(the "CONVERSION VALUE") will be equal to the product of:
(1) the applicable conversion rate then in effect; and
(2) the average of the common stock prices for the ten consecutive
trading days (appropriately adjusted to take into account the
occurrence during such period of stock splits, stock dividends
and similar events) beginning on the second trading day
immediately following the day the Notes are tendered for
conversion (the "TEN DAY AVERAGE CLOSING STOCK PRICE").
31
Subject to certain exceptions described below and under "Conversion Upon
Satisfaction of Trading Price Condition" and "Conversion Upon Specified
Corporate Transactions," we will deliver the conversion value of the Notes
surrendered for conversion to converting holders as follows:
(1) an amount in cash (the "PRINCIPAL RETURN") equal to the lesser
of (a) the aggregate conversion value of the Notes to be
converted and (b) the aggregate principal amount of the Notes
to be converted;
(2) if the aggregate conversion value of the Notes to be converted
is greater than the principal return, an amount in whole
shares (the "NET SHARES"), determined as set forth below,
equal to such aggregate conversion value less the principal
return (the "NET SHARE AMOUNT"); and
(3) an amount in cash in lieu of any fractional shares of common
stock.
The number of net shares to be paid will be determined by dividing the net
share amount by the ten day average closing stock price. The cash payment for
fractional shares also will be based on the ten day average closing stock price.
The conversion value, principal return, net share amount and the number of
net shares will be determined by us at the end of the ten consecutive trading
day period beginning on the second trading day immediately following the day the
Notes are tendered for conversion (the "DETERMINATION DATE").
We will pay the principal return and cash in lieu of fractional shares and
deliver the net shares, if any, as promptly as practicable after the
determination date, but in no event later than five Business Days thereafter.
Except as otherwise described below, holders will not receive any payment
(in cash or check, referred to as a "CASH PAYMENT") representing accrued and
unpaid interest or additional amounts, if any, upon conversion of a Note and we
will not adjust the conversion rate to account for the accrued and unpaid
interest or additional amounts, if any. Delivery of the principal return, net
shares and cash in lieu of fractional shares will be deemed to satisfy our
obligation to pay the principal amount of the Notes, including accrued and
unpaid interest or additional amounts, if any. Accrued and unpaid interest or
additional amounts, if any, will be deemed canceled, extinguished or forfeited
rather than paid in full. The Trustee will initially act as the conversion
agent. Notwithstanding conversion of any Notes, the holders of the Notes and any
common stock issuable upon conversion thereof will continue to be entitled to
receive additional amounts in accordance with the registration rights agreement.
See "Registration Rights."
If a holder converts Notes, we will pay any documentary, stamp or similar
issue or transfer tax due on the issue of shares of our common stock upon the
conversion, unless the tax is due because the holder requests the shares to be
issued or delivered to a person other than the holder, in which case the holder
will pay that tax.
If a holder wishes to exercise its conversion right, such holder must
deliver a conversion notice, together, if the Notes are in certificated form,
with the certificated security, to the conversion agent along with appropriate
endorsements and transfer documents, if required, and pay any transfer or
similar tax, if required. The conversion agent will, on the holder's behalf,
convert the Notes into cash and shares of our common stock. Holders may obtain
copies of the required form of the conversion notice from the conversion agent.
The conversion value will be paid in cash and a certificate for the number of
full shares representing net shares, if any, together with any cash payment for
fractional shares. Such conversion value will be delivered through the
conversion agent as soon as practicable, but no later than the fifth Business
Day, following the conversion date.
If a holder has already delivered a purchase notice as described under
"Purchase of Notes by Us at the Option of the Holder" or "Fundamental Change
Requires Purchase of Notes by Us at the Option of the Holder" with respect to a
Note, however, the holder may not surrender that Note for conversion until the
holder has withdrawn the purchase notice in accordance with the senior debt
indenture.
Holders of Notes at the close of business on a regular record date will
receive payment of interest, payable on the corresponding interest payment date
notwithstanding the conversion of such Notes at any time after the close of
business on such regular record date. Notes surrendered for conversion by a
holder during the period from the close of business on any regular record date
to the opening of business on the immediately following interest payment date
must be accompanied by payment of an amount equal to the interest that the
holder is to receive on the Notes; provided, however, that no such payment need
be made if we have specified a redemption date that is after a record date and
on or prior to the immediately following interest payment date, we have
specified a purchase date following a Fundamental Change that is during such
period or any overdue interest exists at the time of conversion with respect to
such Notes to the extent of such overdue interest. The holders of the Notes and
any common stock issuable upon conversion thereof will continue to be entitled
to receive additional amounts in accordance with the registration rights
agreement.
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Holders may surrender their Notes for conversion into cash and shares of
our common stock prior to stated maturity in only the circumstances described
below. For a discussion of the federal income tax consequences of a conversion
of the Notes into cash and our common stock, see "Material United States Federal
Income Tax Considerations."
CONVERSION UPON SATISFACTION OF SALE PRICE CONDITION. A holder may
surrender any of its Notes for conversion into cash and shares of our common
stock in any calendar quarter (and only during such calendar quarter) if the
last reported sale price of our common stock for at least 20 trading days during
the period of 30 consecutive trading days ending on the last trading day of the
previous calendar quarter is greater than or equal to 120% of the conversion
price per share of our common stock on such last trading day.
CONVERSION UPON REDEMPTION. If we redeem the Notes, holders may convert
Notes into cash and shares of our common stock at any time prior to the close of
business on the second Business Day immediately preceding the redemption date,
even if the Notes are not otherwise convertible at such time.
CONVERSION UPON SPECIFIED CORPORATE TRANSACTIONS. If we elect to:
- distribute to all holders of our common stock certain rights
entitling them to purchase, for a period expiring within 60 days
after the date of the distribution, shares of our common stock at
less than the last reported sale price of a share of our common
stock on the trading day immediately preceding the declaration date
of the distribution; or
- distribute to all holders of our common stock our assets, debt
securities or certain rights to purchase our securities, which
distribution has a per share value as determined by our Board of
Directors exceeding 15% of the last reported sale price of a share
of our common stock on the trading day immediately preceding the
declaration date for such distribution,
we must notify the holders of the Notes at least 20 Business Days prior to the
ex-dividend date (as defined herein) for such distribution. Once we have given
such notice, holders may surrender their Notes for conversion at any time until
the earlier of the close of business on the Business Day immediately prior to
the ex-dividend date or our announcement that such distribution will not take
place, even if the Notes are not otherwise convertible at such time; provided,
however, that a holder may not exercise this right to convert if the holder may
participate in the distribution without conversion. The "EX-DIVIDEND DATE" is
the first date upon which a sale of the common stock does not automatically
transfer the right to receive the relevant dividend from the seller of the
common stock to its buyer.
In addition, if we are party to a consolidation, merger or binding share
exchange pursuant to which our common stock would be converted into cash or
property other than securities, a holder may surrender Notes for conversion at
any time from and after the date which is 15 days prior to the anticipated
effective date of the transaction until 15 days after the actual effective date
of such transaction. If we engage in certain reclassifications of our common
stock or are a party to a consolidation, merger, binding share exchange or
transfer of all or substantially all of our assets pursuant to which our common
stock is converted into cash, securities or other property, then at the
effective time of the transaction, the right to convert a Note into cash and
shares of our common stock will be changed into a right to convert a Note into
the kind and amount of cash, securities or other property which the holder would
have received if the holder had converted its Notes immediately prior to the
transaction. If the transaction also constitutes a Fundamental Change, a holder
can require us to purchase all or a portion of its Notes as described below
under "Fundamental Change Requires Purchase of Notes by Us at the Option of the
Holder."
CONVERSION UPON SATISFACTION OF TRADING PRICE CONDITION
A holder may convert its Notes into cash and shares of our common stock
prior to maturity during the five business days immediately following any ten
consecutive trading-day period in which the trading price per $1,000 principal
amount of Notes (as determined following a request by a holder of Notes in
accordance with the procedures described below) for each day of that period was
less than 95% of the product of the sale price of our common stock and the then
applicable conversion rate of Notes; provided, however, a holder may not convert
its Notes if the average closing sale price of our common stock for such ten
consecutive trading-day period was between the then current conversion price on
the Notes and 120% of the then applicable conversion price on the Notes.
The "TRADING PRICE" of the Notes on any date of determination means the
average of the secondary market bid quotations per $1,000 principal amount of
Notes obtained by the Trustee for $5,000,000 principal amount of the Notes at
approximately 3:30 p.m., New York City time, on such determination date from
three independent nationally recognized securities dealers we select, provided
that if three such bids cannot reasonably be obtained by the Trustee, but two
such bids are obtained, then the average of the two bids shall be used, and if
only one such bid can reasonably be obtained by the Trustee, this one bid shall
be used. If the Trustee cannot
33
reasonably obtain at least one bid for $5,000,000 principal amount of the Notes
from a nationally recognized securities dealer, then the trading price per
$1,000 principal amount of the Notes will be deemed to be less than 95% of the
product of the sale price of our common stock and the then applicable conversion
rate.
In connection with any conversion upon satisfaction of the above trading
price condition, the Trustee shall have no obligation to determine the trading
price of the Notes unless we have requested such determination; and we shall
have no obligation to make such request unless a holder provides us with
reasonable evidence that the trading price per $1,000 principal amount of the
Notes would be less than 95% of the product of the sale price of our common
stock and the then applicable conversion rate; at which time, we shall instruct
the Trustee to determine the trading price of the Notes beginning on the next
trading day and on each successive trading day until the trading price is
greater than or equal to 95% of the product of the sale price of our common
stock and the then applicable conversion rate.
CONVERSION RATE ADJUSTMENTS.
The applicable conversion rate will be subject to adjustment, without
duplication, upon the occurrence of any of the following events:
(1) the payment of dividends and other distributions on our common
stock payable exclusively in shares of our common stock or our other
capital stock;
(2) the issuance to all holders of our common stock of rights or
warrants that allow the holders to purchase shares of our common stock for
a period expiring within 60 days from the date of issuance of the rights
or warrants at less than the market-trading price on the record date for
the determination of shareholders entitled to receive the rights or
warrants;
(3) subdivisions, combinations or certain reclassifications of our
common stock;
(4) distributions to all holders of our common stock of our assets,
debt securities or rights or warrants to purchase our securities
(excluding (A) any dividend, distribution or issuance covered by clauses
(1) or (2) above and (B) any dividend or distribution paid exclusively in
cash). In cases where (a) the fair market value per share of common stock
of the assets, debt securities or rights or warrants to purchase our
securities distributed to shareholders equals or exceeds the market price
of our common stock on the record date for the determination of
shareholders entitled to receive such distribution, or (b) the market
price of our common stock on the record date for determining the
shareholders entitled to receive the distribution exceeds the fair market
value per share of common stock of the assets, debt securities or rights
or warrants so distributed by less than $1.00, rather than being entitled
to an adjustment in the conversion rate, the holder will be entitled to
receive upon conversion, in addition to cash and shares of our common
stock, the kind and amount of assets, debt securities or rights or
warrants comprising the distribution that the holder would have received
if the holder had converted the holder's Notes immediately prior to the
record date for determining the shareholders entitled to receive the
distribution; and
(5) we declare a cash dividend or cash distribution to all or
substantially all of the holders of our common stock. If we declare such a
cash dividend or cash distribution, the applicable conversion rate shall
be increased to equal the number determined by multiplying the applicable
conversion rate in effect immediately prior to the record date for such
dividend or distribution by the following fraction:
(pre-dividend sale price)
(pre-dividend sale price - dividend adjustment amount)
provided that if the denominator of the foregoing fraction is less than
$1.00 (including a negative amount), then in lieu of any adjustment under
this clause (5), we shall make adequate provision so that each holder of
Notes shall have the right to receive upon conversion, in addition to the
cash and shares of common stock issuable upon such conversion, the amount
of cash such holder would have received had such holder converted its
Notes solely into shares of our common stock at the then applicable
conversion rate immediately prior to the record date for such cash
dividend or cash distribution. "PRE-DIVIDEND SALE PRICE" means the average
of the last reported sale price of our common stock price for the five
consecutive trading days ending on the trading day immediately preceding
the record date for such dividend or distribution. "DIVIDEND ADJUSTMENT
AMOUNT" means the full amount of the dividend or distribution to the
extent payable in cash applicable to one share of our common stock.
With respect to clause (4) above, in the event that we make a distribution
to all holders of our common stock consisting of capital stock of, or similar
equity interests in, a subsidiary or other business unit of ours, the conversion
rate will be adjusted based on the
34
market value of the securities so distributed relative to the market value of
our common stock, in each case based on the average closing sales prices of
those securities for the 10 trading days commencing on and including the fifth
trading day after the date on which "ex-dividend trading" commences for such
dividend or distribution on the New York Stock Exchange or such other national
or regional exchange or market on which the securities are then listed or
quoted.
Notwithstanding the foregoing, in no event will the conversion rate exceed
138.6963, which we refer to as the "MAXIMUM CONVERSION RATE," as a result of an
adjustment pursuant to clauses (4) and (5) above.
In addition to these adjustments, we may increase the applicable
conversion rate as our Board of Directors considers advisable to avoid or
diminish any income tax to holders of our common stock or rights to purchase our
common stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes. We may
also, from time to time, to the extent permitted by applicable law, increase the
applicable conversion rate by any amount, temporarily or otherwise, for any
period of at least 20 days if our Board of Directors has determined that such
increase would be in our best interests. If our Board of Directors makes such a
determination, it will be conclusive. We will give holders of Notes at least 15
days' notice of such an increase in the applicable conversion rate.
As used in this prospectus, "MARKET PRICE" means the average of the last
reported sale prices per share of our common stock for the 20 trading day period
ending on the applicable date of determination (if the applicable date of
determination is a trading day or, if not, then on the last trading day prior to
the applicable date of determination), appropriately adjusted to take into
account the occurrence, during the period commencing on the first of the trading
days during the 20 trading day period and ending on the applicable date of
determination, of any event that would result in an adjustment of the applicable
conversion rate under the senior debt indenture.
No adjustment to the applicable conversion rate or the ability of a holder
of a Note to convert will be made if the holder will otherwise participate in
the distribution without conversion or in certain other cases.
The applicable conversion rate will not be adjusted:
- upon the issuance of any shares of our common stock pursuant to any
present or future plan providing for the reinvestment of dividends
or interest payable on our securities and the investment of
additional optional amounts in shares of our common stock under any
plan;
- upon the issuance of any shares of our common stock or options or
rights to purchase those shares pursuant to any present or future
employee, director or consultant benefit plan or program of or
assumed by us or any of our subsidiaries;
- upon the issuance of any shares of our common stock pursuant to any
option, warrant, right or exercisable, exchangeable or convertible
security not described in the preceding bullet and outstanding as of
the date the Notes were first issued;
- for a change in the par value of the common stock; or
- for accrued and unpaid interest, including additional amounts, if
any.
Holders will receive, upon conversion of the Notes, in addition to cash
and shares of our common stock, rights under any rights plan we may adopt,
whether or not the rights have separated from the common stock at the time of
conversion unless, prior to conversion, the rights have expired, terminated or
been redeemed or exchanged.
No adjustment in the applicable conversion price will be required unless
the adjustment would require an increase or decrease of at least 1% of the
applicable conversion price. If the adjustment is not made because the
adjustment does not change the applicable conversion price by more than 1%, then
the adjustment that is not made will be carried forward and taken into account
in any future adjustment.
No adjustment in the applicable conversion price or applicable conversion
rate need be made for a merger or consolidation if holders are to participate in
the transaction on a basis and with notice that the Board of Directors
determines to be fair and appropriate in light of the basis and notice on which
holders of our common stock participate in the transaction; provided that the
basis on which the holders are to participate in the transaction shall not be
deemed to be fair if it would require the conversion of Notes at any time prior
to the expiration of the conversion period specified for such Notes.
35
ADJUSTMENT TO CONVERSION RATE UPON THE OCCURRENCE OF A CASH TAKE-OVER
TRANSACTION
If you elect to convert Notes in connection with a corporate transaction
as described under " -- Conversion Upon Specified Corporate Transactions" that
occurs on or prior to July 15, 2008 that constitutes a Fundamental Change as
defined under " -- Fundamental Change Requires Purchase of Notes by Us at the
Option of the Holder" (other than a Fundamental Change relating to the
composition of our Board of Directors) and 10% or more of the fair market value
of the consideration for the shares of our common stock in the corporate
transaction consists of (i) cash, (ii) other property or (iii) securities that
are not traded or scheduled to be traded immediately following such transaction
on a U.S. national securities exchange or the Nasdaq National Market, we will
increase the conversion rate for the Notes surrendered for conversion, which
will increase the number of shares of our common stock issuable upon conversion
(the "ADDITIONAL SHARES") as described below.
The number of additional shares will be determined by reference to the
table below, based on the date on which the corporate transaction becomes
effective (the "EFFECTIVE DATE") and the share price (the "SHARE PRICE") paid
per share of our common stock in the corporate transaction. If holders of shares
of our common stock receive only cash in the corporate transaction, the share
price shall be the cash amount paid per share. Otherwise, the share price shall
be the average of the closing sale prices of our common stock on the five
trading days prior to but not including the effective date of the corporate
transaction.
The share prices set forth in the first row of the table below (i.e.,
column headers) will be adjusted as of any date on which the applicable
conversion rate of the Notes is adjusted, as described above under " --
Conversion Rate Adjustments." The adjusted share prices will equal the share
prices applicable immediately prior to such adjustment, multiplied by a
fraction, the numerator of which is the conversion rate immediately prior to
such adjustment giving rise to the share price adjustment and the denominator of
which is the conversion rate so adjusted. The number of additional shares will
be adjusted in the same manner as the applicable conversion rate as set forth
above under " -- Conversion Rate Adjustments."
The following table sets forth the hypothetical share price and number of
additional shares to be received per $1,000 principal amount of Notes:
SHARE PRICE
---------------------------------------------------------------------------------------------------------------
EFFECTIVE DATE $ 7.21 $ 8.00 $ 9.00 $10.00 $11.00 $12.00 $13.00 $14.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $50.00
---------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
November 9, 2004 45.0 36.3 28.3 22.6 18.5 15.3 13.0 11.1 9.7 5.6 3.7 2.6 1.9 1.4 0.0
July 15, 2005 45.0 36.4 28.0 22.1 17.9 14.7 12.3 10.5 9.1 5.2 3.5 2.5 1.9 1.4 0.0
July 15, 2006 45.0 35.5 26.7 20.5 16.1 12.9 10.6 8.9 7.6 4.2 2.8 2.0 1.5 1.1 0.0
July 15, 2007 45.0 34.4 24.8 18.2 13.7 10.5 8.3 6.8 5.7 3.1 2.1 1.5 1.2 0.9 0.0
July 15, 2008 44.9 33.1 22.4 15.2 10.6 7.5 5.5 4.3 3.4 1.8 1.3 1.0 0.7 0.6 0.0
The share prices and additional share amounts set forth above are based
upon an initial conversion rate per share of 93.7137 per $1,000 principal amount
of Notes.
The exact share prices and effective dates may not be set forth in the
table above, in which case:
- If the share price is between two share price amounts in the table
or the effective date is between two effective dates in the table,
the number of additional shares will be determined by a
straight-line interpolation between the number of additional shares
set forth for the higher and lower share price amounts and the two
dates, as applicable, based on a 365-day year.
- If the share price is equal to or in excess of $50.00 per share
(subject to adjustment), no additional shares will be issued upon
conversion.
- If the share price is less than $7.21 per share (subject to
adjustment), no additional shares will be issued upon conversion.
Notwithstanding the foregoing, any adjustment to the applicable conversion
rate relating to the issuance of additional shares as described in this section
will not exceed the maximum conversion rate.
36
CONVERSION AFTER A PUBLIC ACQUIRER CHANGE OF CONTROL
Notwithstanding the foregoing, in the case of a public acquirer change of
control (as defined below), we may, in lieu of increasing the applicable
conversion rate by additional shares of our common stock as described in " --
Adjustment to Conversion Rate upon the Occurrence of a Cash Take-Over
Transaction," elect to adjust the applicable conversion rate and related
conversion obligation such that upon conversion we will deliver cash and a
number of shares of the public acquirer's common stock (as defined below). Such
adjustment will be permanent although your right to convert the Note will still
be subject to the satisfaction of the conditions to conversion described under "
-- Conversion Rights" above.
The applicable conversion rate will be adjusted by a fraction calculated
by dividing the average price of our common stock by the average price of the
public acquirer's common stock.
The average price of our common stock will be calculated based on the
closing sale price for the five consecutive trading days prior to but excluding
the effective date of such public acquirer change of control. The public
acquirer's common stock will be calculated based on the five consecutive trading
days commencing on the trading day next succeeding the effective date of such
public acquirer change of control.
A "PUBLIC ACQUIRER CHANGE OF CONTROL" means any event constituting a cash
take-over transaction that would otherwise obligate us to increase the
conversion rate as described above under " -- Adjustment to Conversion Rate upon
the Occurrence of a Cash Take-Over Transaction" and the acquirer has a class of
common stock traded on a U.S. national securities exchange or quoted on the
NASDAQ National Market or which will be so traded or quoted when issued or
exchanged in connection with such cash take-over transaction (the "PUBLIC
ACQUIRER COMMON STOCK"). If an acquirer does not itself have a class of common
stock satisfying the foregoing requirement, it will be deemed to have "public
acquirer common stock" if a parent corporation that directly or indirectly
wholly owns the acquirer, has a class of common stock satisfying the foregoing
requirement and that parent corporation provides a guarantee to the Notes; in
such case, all reference to "public acquirer common stock "shall refer to such
class of common stock.
We are required to notify holders of Notes of our election in our notice
of such transaction which notice shall be made five Business Days prior to the
effective date of such public acquirer change of control. As described under "
-- Conversion Upon Specified Corporate Transactions" above, you may convert your
Notes into cash and our common stock if we are a party to a consolidation,
merger or binding share exchange pursuant to which our common stock would be
converted into cash or property other than securities during the period
specified therein. In addition, a holder of Notes can also, subject to certain
conditions, require us to repurchase all or a portion of their Notes as
described under " -- Fundamental Change Requires Purchase of Notes by Us at the
Option of the Holder."
PURCHASE OF NOTES BY US AT THE OPTION OF THE HOLDER
Holders have the right to require us to purchase the Notes on July 15,
2008, July 15, 2013 and July 15, 2018 (each, a "PURCHASE DATE"). Any Note
purchased by us on a purchase date will be paid for in cash. We will be required
to purchase any outstanding Notes for which a holder delivers a written purchase
notice to the paying agent. This notice must be delivered during the period
beginning at any time from the opening of business on the date that is 20
Business Days prior to the relevant purchase date until the close of business on
the fifth Business Day prior to the purchase date. If the purchase notice is
given and withdrawn during such period, we will not be obligated to purchase the
related Notes. Our purchase obligation will be subject to some additional
conditions as described in the senior debt indenture. Also, as described in the
"Risk Factors" section of this prospectus under the caption "Risks Related to
the Notes -- We may not have the ability to raise the funds necessary to pay the
cash component upon a conversion of the Notes or purchase the Notes upon a
Fundamental Change or other purchase date, as required by the senior debt
indenture," we may not have funds sufficient to purchase the Notes when we are
required to do so. Our failure to purchase the Notes when we are required to do
so will constitute an Event of Default (as defined herein) under the senior debt
indenture with respect to the Notes.
The purchase price payable will be equal to 100% of the principal amount
of the Notes to be purchased plus any accrued and unpaid interest, and
additional amounts, if any, to but excluding such purchase date. For a
discussion of the United States federal income tax treatment of a holder
receiving cash, see "Material United States Federal Income Tax Considerations."
On or before the 20th Business Day prior to each purchase date, we will
provide to the Trustee, the paying agent and to all holders of the Notes at
their addresses shown in the register of the registrar, and to beneficial owners
as required by applicable law, a notice stating, among other things:
- the purchase price;
37
- the name and address of the paying agent and the conversion agent;
and
- the procedures that holders must follow to require us to purchase
their Notes.
A notice electing to require us to purchase a holder's Notes must state:
- if certificated Notes have been issued, the certificate numbers of
the Notes;
- the portion of the principal amount of Notes to be purchased, in
integral multiples of $1,000; and
- that the Notes are to be purchased by us pursuant to the applicable
provisions of the Notes and the senior debt indenture.
If the Notes are not in certificated form, a holder's notice must comply with
appropriate DTC procedures.
No Notes may be purchased at the option of holders if there has occurred
and is continuing an Event of Default other than an Event of Default that is
cured by the payment of the purchase price of the Notes.
A holder may withdraw any purchase notice in whole or in part by a written
notice of withdrawal delivered to the paying agent prior to the close of
business on the Business Day prior to the purchase date. The notice of
withdrawal must state:
- the principal amount of the withdrawn Notes;
- if certificated Notes have been issued, the certificate numbers of
the withdrawn Notes; and
- the principal amount, if any, which remains subject to the purchase
notice.
If the Notes are not in certificated form, a holder's notice must comply with
appropriate DTC procedures.
A holder must either effect book-entry transfer or deliver the Notes,
together with necessary endorsements, to the office of the paying agent after
delivery of the purchase notice to receive payment of the purchase price. A
holder will receive payment promptly following the later of the purchase date or
the time of book-entry transfer or the delivery of the Notes. If the paying
agent holds money or securities sufficient to pay the purchase price of the
Notes on the Business Day following the purchase date, then:
- the Notes will cease to be outstanding and interest will cease to
accrue (whether or not book-entry transfer of the Notes is made or
whether or not the Note is delivered to the paying agent); and
- all other rights of the holder will terminate (other than the right
to receive the purchase price upon delivery or transfer of the
Notes).
FUNDAMENTAL CHANGE REQUIRES PURCHASE OF NOTES BY US AT THE OPTION OF THE HOLDER
If a Fundamental Change occurs at any time prior to July 15, 2008, holders
will have the right, at their option, subject to the terms of the senior debt
indenture, to require us to purchase any or all of their Notes for cash on a
date selected by CMS Energy that is no earlier than 60 days nor later than 90
days (the "FUNDAMENTAL CHANGE PURCHASE DATE") after the mailing of written
notice by CMS Energy of the occurrence of such Fundamental Change. The cash
price we are required to pay is equal to 100% of the principal amount of the
Notes to be purchased plus accrued and unpaid interest, including additional
amounts, if any, to the Fundamental Change purchase date (the "FUNDAMENTAL
CHANGE PURCHASE PRICE"). If a Fundamental Change occurs on or after July 15,
2008, no holder will have a right to require us to purchase any Notes, except as
described above under "Purchase of Notes by Us at the Option of the Holder." For
a discussion of the United States federal income tax treatment of a holder
receiving cash, see "Material United States Federal Income Tax Considerations."
A "FUNDAMENTAL CHANGE" will be deemed to have occurred at the time after
the Notes are originally issued that any of the following occurs:
(1) our common stock or other common stock into which the Notes are
convertible is neither listed for trading on a United States national
securities exchange nor approved for trading on the Nasdaq National Market
or another established automated
38
over-the-counter trading market in the United States;
(2) a "person" or "group" within the meaning of Section 13(d) of the
Exchange Act other than us, our subsidiaries or our or their employee
benefit plans, files a Schedule TO or any schedule, form or report under
the Exchange Act disclosing that such person or group has become the
direct or indirect ultimate "beneficial owner," as defined in Rule 13d-3
under the Exchange Act, of our common equity representing more than 50% of
the voting power of our common equity entitled to vote generally in the
election of directors;
(3) consummation of any share exchange, consolidation or merger of
us pursuant to which our common stock will be converted into cash,
securities or other property or any sale, lease or other transfer in one
transaction or a series of transactions of all or substantially all of the
consolidated assets of us and our subsidiaries, taken as a whole, to any
person other than us or one or more of our subsidiaries; provided,
however, that a transaction where the holders of our common equity
immediately prior to such transaction have directly or indirectly, more
than 50% of the aggregate voting power of all classes of common equity of
the continuing or surviving corporation or transferee entitled to vote
generally in the election of directors immediately after such event shall
not be a Fundamental Change; or
(4) continuing directors (as defined herein) cease to constitute at
least a majority of our Board of Directors.
A Fundamental Change will not be deemed to have occurred in respect of any of
the foregoing, however, if either:
(1) the last reported sale price of our common stock for any five
trading days within the 10 consecutive trading days ending immediately
before the later of the Fundamental Change or the public announcement
thereof, equals or exceeds 105% of the applicable conversion price of the
Notes in effect immediately before the Fundamental Change or the public
announcement thereof; or
(2) at least 90% of the consideration, excluding cash payments for
fractional shares, in the transaction or transactions constituting the
Fundamental Change consists of shares of capital stock traded on a
national securities exchange or quoted on the Nasdaq National Market or
which will be so traded or quoted when issued or exchanged in connection
with a Fundamental Change (these securities being referred to as "PUBLICLY
TRADED SECURITIES") and as a result of this transaction or transactions
the Notes become convertible into such publicly traded securities,
excluding cash payments for fractional shares.
For purposes of the above paragraph, the term capital stock of any person
means any and all shares (including ordinary shares or American Depositary
Shares), interests, participations or other equivalents however designated of
corporate stock or other equity participations, including partnership interests,
whether general or limited, of such person and any rights (other than debt
securities convertible or exchangeable into an equity interest), warrants or
options to acquire an equity interest in such person.
"CONTINUING DIRECTOR" means a director who either was a member of our
Board of Directors on November 9, 2004 or who becomes a member of our Board of
Directors subsequent to that date and whose appointment, election or nomination
for election by our stockholders is duly approved by a majority of the
continuing directors on our Board of Directors at the time of such approval,
either by a specific vote or by approval of the proxy statement issued by us on
behalf of the Board of Directors in which such individual is named as nominee
for director.
Within 30 days after the occurrence of the Fundamental Change, CMS Energy
is obligated to mail to each holder of a Note a notice regarding the Fundamental
Change, which notice shall state, among other things:
- that a Fundamental Change has occurred, the date of such occurrence
and that each such holder has the right to require CMS Energy to
repurchase all or any part of such holder's Notes at the Fundamental
Change purchase price;
- the Fundamental Change purchase price;
- the Fundamental Change purchase date;
- the name and address of the paying agent and the conversion agent;
- the procedures that holders must follow to cause the Notes to be
repurchased;
- the last date on which a holder may exercise its purchase right;
39
- the Notes with respect to which a Fundamental Change purchase notice
has been given by the holder may be converted only if the holder
withdraws the Fundamental Change purchase notice in accordance with
the terms of the senior debt indenture; and
- the applicable conversion rate and any adjustments to the applicable
conversion rate.
To exercise this right, a holder must deliver a written notice (the
"FUNDAMENTAL CHANGE PURCHASE NOTICE"), along with the Notes to be purchased,
duly endorsed for transfer, to the paying agent at its corporate trust office in
Detroit, Michigan, or any other office of the paying agent maintained for such
purposes, not later than 30 days prior to the Fundamental Change purchase date.
The Fundamental Change purchase notice shall state:
- the portion of the principal amount of any Notes to be repurchased,
which must be $1,000 or an integral multiple thereof;
- that such Notes are to be repurchased by CMS Energy pursuant to the
applicable Fundamental Change provisions of the senior debt
indenture; and
- unless the Notes are represented by one or more global Notes, the
certificate numbers of the Notes to be repurchased.
If the Notes are not in certificated form, the Fundamental Change purchase
notice must comply with appropriate DTC procedures.
Holders may withdraw any Fundamental Change purchase notice (in whole or
in part) by a written notice of withdrawal delivered to the paying agent prior
to the close of business on the Business Day prior to the Fundamental Change
purchase date. The notice of withdrawal shall state:
- the principal amount of the withdrawn Notes;
- if certificated Notes have been issued, the certificate numbers of
the withdrawn Notes; and
- the principal amount, if any, which remains subject to the purchase
notice.
If the Notes are not in certificated form, the notice of withdrawal must
comply with the appropriate DTC procedures.
Payment of the Fundamental Change purchase price for a Note in registered,
certificated form (a "CERTIFICATED NOTE") for which a Fundamental Change
purchase notice has been delivered and not withdrawn is conditioned upon
delivery of such Certificated Note (together with necessary endorsements) to the
paying agent at its office in Detroit, Michigan, or any other office of the
paying agent maintained for such purpose, at any time (whether prior to, on or
after the Fundamental Change purchase date) after the delivery of such
Fundamental Change purchase notice. Payment of the Fundamental Change purchase
price for such Certificated Note will be made promptly following the later of
the Fundamental Change purchase date or the time of delivery of such
Certificated Note.
If the paying agent holds, in accordance with the terms of the senior debt
indenture, money sufficient to pay the Fundamental Change purchase price of a
Note on the Business Day following the Fundamental Change purchase date for such
Note, then, on and after such date, interest on such Note will cease to accrue,
whether or not such Note is delivered to the paying agent, and all other rights
of the holder shall terminate (other than the right to receive the Fundamental
Change purchase price upon delivery of the Note).
The definition of Fundamental Change includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our consolidated assets. There is no precise, established definition of the
phrase "substantially all" under applicable law. Accordingly, the ability of a
holder of the Notes to require us to purchase its Notes as a result of the
conveyance, transfer, sale, lease or other disposition of less than all of our
assets may be uncertain.
If a Fundamental Change were to occur, we may not have enough funds to pay
the Fundamental Change purchase price. See "Risk Factors" under the caption
"Risks Related to the Notes -- We may not have the ability to raise the funds
necessary to pay the cash component upon a conversion of the Notes or purchase
the Notes upon a Fundamental Change or other purchase date, as required by the
senior debt indenture." Our failure to purchase the Notes when required
following a Fundamental Change will constitute an event of default under the
senior debt indenture with respect to the Notes. In addition, we have, and may
in the future incur, other indebtedness with similar change in control
provisions permitting holders to accelerate or to require us to purchase our
indebtedness upon the occurrence of similar events or on some specific dates.
40
The senior debt indenture requires CMS Energy to comply with the
provisions of Regulation 14E and any other tender offer rules under the Exchange
Act which may then be applicable in connection with any offer by CMS Energy to
purchase Notes at the option of holders upon a Fundamental Change. The
Fundamental Change purchase feature of the Notes may in certain circumstances
make more difficult or discourage a takeover of CMS Energy and, thus, the
removal of incumbent management. The Fundamental Change purchase feature,
however, is not the result of management's knowledge of any specific effort to
accumulate shares of our common stock or to obtain control of us by means of a
merger, tender offer, solicitation or otherwise, or part of a plan by management
to adopt a series of anti-takeover provisions. Instead, the Fundamental Change
purchase feature is a term contained in many similar debt offerings and the
terms of such feature result from negotiations between CMS Energy and the
initial purchasers. Management has no present intention to propose any
anti-takeover measures although it is possible that CMS Energy could decide to
do so in the future.
The definition of Fundamental Change is limited to specified transactions
and may not include other events that might adversely affect our financial
condition. In addition, the requirement that we offer to purchase the Notes upon
a Fundamental Change may not protect holders in the event of a highly leveraged
transaction, reorganization, merger or similar transaction involving us.
No Note may be repurchased by CMS Energy as a result of a Fundamental
Change if there has occurred and is continuing an Event of Default (other than a
default in the payment of the Fundamental Change purchase price with respect to
the Notes). In addition, CMS Energy's ability to repurchase Notes may be limited
by its financial resources.
CERTAIN RESTRICTIVE COVENANTS
The senior debt indenture contains the covenants described below. Certain
capitalized terms used below are defined under the heading "Certain Definitions"
below.
LIMITATION ON RESTRICTED PAYMENTS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding and until the Notes are rated BBB -- or above (or an equivalent
rating) by Standard & Poor's Ratings Group, a division of The McGraw Hill
Companies, Inc. ("S&P") and one Other Rating Agency, at which time CMS Energy
will be permanently released from the provisions of this "Limitation on
Restricted Payments," CMS Energy will not, and will not permit any of its
Restricted Subsidiaries, directly or indirectly, to:
- declare or pay any dividend or make any distribution on the Capital
Stock of CMS Energy to the direct or indirect holders of its Capital
Stock (except dividends or distributions payable solely in its
Non-Convertible Capital Stock or in options, warrants or other
rights to purchase such Non-Convertible Capital Stock and except
dividends or distributions payable to CMS Energy or a Subsidiary);
- purchase, redeem or otherwise acquire or retire for value any
Capital Stock of CMS Energy; or
- purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity or scheduled repayment
thereof, any Subordinated Indebtedness (any such dividend,
distribution, purchase, redemption, repurchase, defeasing, other
acquisition or retirement being hereinafter referred to as a
"RESTRICTED PAYMENT"),
if at the time CMS Energy or such Subsidiary makes such Restricted Payment: (1)
an Event of Default, or an event that with the lapse of time or the giving of
notice or both would constitute an Event of Default, shall have occurred and be
continuing (or would result therefrom); or (2) the aggregate amount of such
Restricted Payment and all other Restricted Payments made since May 6, 1997
would exceed the sum of (a) $100,000,000 plus 100% of Consolidated Net Income
from May 6, 1997 to the end of the most recent fiscal quarter ending at least 45
days prior to the date of such Restricted Payment (or, in case such sum shall be
a deficit, minus 100% of the deficit) and (b) the aggregate Net Cash Proceeds
received by CMS Energy from the issue or sale of or contribution with respect to
its Capital Stock after May 6, 1997.
The foregoing provisions will not prohibit:
- dividends or other distributions paid in respect of any class of
Capital Stock issued by CMS Energy in connection with the
acquisition of any business or assets by CMS Energy or a Restricted
Subsidiary where the dividends or other distributions with respect
to such Capital Stock are payable solely from the net earnings of
such business or assets;
- any purchase or redemption of Capital Stock of CMS Energy made by
exchange for, or out of the proceeds of the substantially concurrent
sale of, Capital Stock of CMS Energy (other than Redeemable Stock or
Exchangeable Stock);
41
- dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividends would have complied
with this covenant; or
- payments pursuant to the Tax Sharing Agreement.
LIMITATION ON CERTAIN LIENS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding, CMS Energy shall not create, incur, assume or suffer to exist
any Lien, provided, that no event of default shall have occurred and be
continuing (or result therefrom) at the time of payment of such dividend upon or
with respect to any of its property of any character, including without
limitation any shares of Capital Stock of Consumers or Enterprises, without
making effective provision whereby the Notes shall be (so long as any such other
creditor shall be so secured) equally and ratably secured. The foregoing
restrictions shall not apply to (a) Liens securing Indebtedness of CMS Energy,
provided that on the date such Liens are created, and after giving effect to
such Indebtedness, the aggregate principal amount at maturity of all the secured
Indebtedness of CMS Energy at such date shall not exceed 5% of Consolidated Net
Tangible Assets or (b) certain liens for taxes, pledges to secure workman's
compensation, other statutory obligations and Support Obligations, certain
materialman's, mechanic's and similar liens and certain purchase money liens.
LIMITATION ON ASSET SALES
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding, CMS Energy may not sell, transfer or otherwise dispose of any
property or assets of CMS Energy, including Capital Stock of any Consolidated
Subsidiary, in one transaction or a series of transactions in an amount which
exceeds $50,000,000 (an "ASSET SALE") unless CMS Energy shall (1) apply an
amount equal to such excess Net Cash Proceeds to permanently repay Indebtedness
of a Consolidated Subsidiary or Indebtedness of CMS Energy which is pari passu
with the Notes, (2) invest an equal amount not so used in clause (1) in property
or assets of a related business within 24 months after the date of the Asset
Sale (the "APPLICATION PERIOD") or (3) apply such excess Net Cash Proceeds not
so used in clause (1) or (2) (the "EXCESS PROCEEDS") to make an offer, within 30
days after the end of the Application Period, to purchase from the holders on a
pro rata basis an aggregate principal amount of Notes on the relevant purchase
date equal to the Excess Proceeds on such date, at a purchase price equal to
100% of the principal amount of the Notes on the relevant purchase date and
unpaid interest, if any, to the purchase date. CMS Energy shall only be required
to make an offer to purchase Notes from holders pursuant to clause (3) if the
Excess Proceeds equal or exceed $25,000,000 at any given time.
The procedures to be followed by CMS Energy in making an offer to purchase
Notes from the holders with Excess Proceeds, and the acceptance of such offer by
the holders, shall be the same as those set forth above in "Fundamental Change
Requires Purchase of Notes by Us at the Option of the Holder" with respect to a
Fundamental Change.
LIMITATION ON CONSOLIDATION, MERGER, SALE OR CONVEYANCE
In addition to the terms of the senior debt indenture relating to
consolidations or mergers described below under "Consolidation, Merger or Sale
of Assets", so long as any of the Notes are outstanding and until the Notes are
rated BBB -- or above (or an equivalent rating) by S&P and one Other Rating
Agency, at which time CMS Energy will be permanently released from the
provisions of this "Limitation on Consolidation, Merger, Sale or Conveyance"
(but not from the provisions described below which permit a consolidation or
merger provided that the surviving corporation assumes the obligations of CMS
Energy under the Notes and the senior debt indenture and is organized and
existing under the laws of the United States, any state thereof or the District
of Columbia), CMS Energy shall not consolidate with or merge into any other
Person or sell, lease or convey the property of CMS Energy in the entirety or
substantially as an entirety, unless (1) immediately after giving effect to such
transaction the Consolidated Net Worth of the surviving entity is at least equal
to the Consolidated Net Worth of CMS Energy immediately prior to the transaction
and (2) after giving effect to such transaction, the surviving entity would be
entitled to incur at least one dollar of additional Indebtedness (other than
revolving Indebtedness to banks) pursuant to the first paragraph under
"Limitation on Consolidated Indebtedness." Notwithstanding the foregoing
provisions, such a transaction may constitute a Fundamental Change as described
in "Fundamental Change Requires Purchase of Notes by Us at the Option of the
Holder" and give rise to the right of a holder to require CMS Energy to
repurchase all or part of such holder's Note.
LIMITATION ON CONSOLIDATED INDEBTEDNESS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding and until the Notes are rated BBB -- or above (or an equivalent
rating) by S&P and one Other Rating Agency, at which time CMS Energy will be
permanently released from
42
the provisions of this "Limitation on Consolidated Indebtedness," CMS Energy
will not, and will not permit any of its Consolidated Subsidiaries to, issue,
create, assume, guarantee, incur or otherwise become liable for (collectively,
for this purpose, "ISSUE"), directly or indirectly, any Indebtedness unless the
Consolidated Coverage Ratio of CMS Energy and its Consolidated Subsidiaries for
the four consecutive fiscal quarters immediately preceding the issuance of such
Indebtedness (as shown by a pro forma consolidated income statement of CMS
Energy and its Consolidated Subsidiaries for the four most recent fiscal
quarters ending at least 30 days prior to the issuance of such Indebtedness
after giving effect to (1) the issuance of such Indebtedness and (if applicable)
the application of the net proceeds thereof to refinance other Indebtedness as
if such Indebtedness was issued at the beginning of the period, (2) the issuance
and retirement of any other Indebtedness since the first day of the period as if
such Indebtedness was issued or retired at the beginning of the period and (3)
the acquisition of any company or business acquired by CMS Energy or any
Subsidiary since the first day of the period (including giving effect to the pro
forma historical earnings of such company or business), including any
acquisition which will be consummated contemporaneously with the issuance of
such Indebtedness, as if in each case such acquisition occurred at the beginning
of the period) exceeds a ratio of 1.6 to 1.0.
The foregoing limitation is subject to exceptions for:
- Indebtedness of CMS Energy to banks not to exceed $1 billion in
aggregate outstanding principal amount at any time;
- Indebtedness outstanding on the date of the Supplemental Indenture
and certain refinancings thereof;
- certain refinancings and Indebtedness of CMS Energy to a Subsidiary
or by a Subsidiary to CMS Energy;
- Indebtedness of a Consolidated Subsidiary issued to acquire,
develop, improve, construct or provide working capital for a gas,
oil or electric generation, exploration, production, distribution,
storage or transmission facility and related assets; provided that
such Indebtedness is without recourse to any assets of CMS Energy,
Consumers, Enterprises, CMS Generation, CMS Electric and Gas, CMS
Gas Transmission, CMS MST or any other Designated Enterprises
Subsidiary;
- Indebtedness of a Person existing at the time at which such Person
became a Subsidiary and not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary;
- Indebtedness issued by CMS Energy not to exceed $150 million in
aggregate outstanding principal amount at any time; and
- Indebtedness of a Consolidated Subsidiary in respect of rate
reduction bonds issued to recover electric restructuring transition
costs of Consumers; provided that such Indebtedness is without
recourse to the assets of Consumers.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the senior
debt indenture. Reference is made to the senior debt indenture for a full
definition of all terms as well as any other capitalized terms used herein and
not otherwise defined.
"BUSINESS DAY" means a day on which banking institutions in New York, New
York or Detroit, Michigan are not authorized or required by law or regulation to
close.
"CAPITAL LEASE OBLIGATION" of a Person means any obligation that is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; the stated maturity thereof shall be the date of the last payment of
rent or any other amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty; and
such obligation shall be deemed secured by a Lien on any property or assets to
which such lease relates.
"CAPITAL STOCK" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) corporate stock, including any Preferred Stock or letter
stock; provided that Hybrid Preferred Securities are not considered Capital
Stock for purposes of this definition.
"CMS ELECTRIC AND GAS" means CMS Electric and Gas Company, a Michigan
corporation and wholly-owned subsidiary of Enterprises.
"CONSOLIDATED ASSETS" means, at any date of determination, the aggregate
assets of CMS Energy and its Consolidated Subsidiaries
43
determined on a consolidated basis in accordance with generally accepted
accounting principles.
"CONSOLIDATED COVERAGE RATIO" with respect to any period means the ratio
of (1) the aggregate amount of Operating Cash Flow for such period to (2) the
aggregate amount of Consolidated Interest Expense for such period.
"CONSOLIDATED CURRENT LIABILITIES" means, for any period, the aggregate
amount of liabilities of CMS Energy and its Consolidated Subsidiaries which may
properly be classified as current liabilities (including taxes accrued as
estimated), after (1) eliminating all inter-company items between CMS Energy and
any Consolidated Subsidiary and (2) deducting all current maturities of
long-term Indebtedness, all as determined in accordance with generally accepted
accounting principles.
"CONSOLIDATED INDEBTEDNESS" means, at any date of determination, the
aggregate Indebtedness of CMS Energy and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that Consolidated Indebtedness shall not include
any subordinated debt owned by any Hybrid Preferred Securities Subsidiary.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total interest
expense in respect of Consolidated Indebtedness of CMS Energy and its
Consolidated Subsidiaries, including, without duplication:
- interest expense attributable to capital leases;
- amortization of debt discount;
- capitalized interest;
- cash and noncash interest payments;
- commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;
- net costs under interest rate protection agreements (including
amortization of discount); and
- interest expense in respect of obligations of other Persons deemed
to be Indebtedness of CMS Energy or any Consolidated Subsidiaries
under the fifth or sixth bullet points of the definition of
Indebtedness;
provided, however, that Consolidated Interest Expense shall exclude (a) any
costs otherwise included in interest expense recognized on early retirement of
debt and (b) any interest expense in respect of any Indebtedness of any
Subsidiary of Consumers, CMS Generation, CMS Electric and Gas, CMS Gas
Transmission, CMS MST or any other Designated Enterprises Subsidiary, provided
that such Indebtedness is without recourse to any assets of CMS Energy,
Consumers, Enterprises, CMS Generation, CMS Electric and Gas, CMS Gas
Transmission, CMS MST or any other Designated Enterprises Subsidiary.
"CONSOLIDATED NET INCOME" means, for any period, the net income of CMS
Energy and its Consolidated Subsidiaries determined on a consolidated basis in
accordance with generally accepted accounting principles; provided, however,
that there shall not be included in such Consolidated Net Income:
- any net income of any Person if such Person is not a Subsidiary,
except that (A) CMS Energy's equity in the net income of any such
Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by
such Person during such period to CMS Energy or a Consolidated
Subsidiary as a dividend or other distribution and (B) CMS Energy's
equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income;
- any net income of any Person acquired by CMS Energy or a Subsidiary
in a pooling of interests transaction for any period prior to the
date of such acquisition;
- any gain or loss realized upon the sale or other disposition of any
property, plant or equipment of CMS Energy or its Consolidated
Subsidiaries which is not sold or otherwise disposed of in the
ordinary course of business and any gain or loss realized upon the
sale or other disposition of any Capital Stock of any Person; and
- any net income of any Subsidiary of Consumers, CMS Generation, CMS
Electric and Gas, CMS Gas Transmission, CMS MST or any other
Designated Enterprises Subsidiary whose interest expense is excluded
from Consolidated Interest Expense,
44
provided, however, that for purposes of this bullet point, any cash,
dividends or distributions of any such Subsidiary to CMS Energy
shall be included in calculating Consolidated Net Income.
"CONSOLIDATED NET TANGIBLE ASSETS" means, for any period, the total amount
of assets (less accumulated depreciation or amortization, allowances for
doubtful receivables, other applicable reserves and other properly deductible
items) as set forth on the most recently available quarterly or annual
consolidated balance sheet of CMS Energy and its Consolidated Subsidiaries,
determined on a consolidated basis in accordance with generally accepted
accounting principles, and after giving effect to purchase accounting and after
deducting therefrom, to the extent otherwise included, the amounts of:
- Consolidated Current Liabilities;
- minority interests in Consolidated Subsidiaries held by Persons
other than CMS Energy or a Restricted Subsidiary;
- excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors as evidenced by
resolutions of the Board of Directors;
- any revaluation or other write-up in value of assets subsequent to
December 31, 1996, as a result of a change in the method of
valuation in accordance with generally accepted accounting
principles;
- unamortized debt discount and expenses and other unamortized
deferred charges, goodwill, patents, trademarks, service marks,
trade names, copyrights, licenses organization or developmental
expenses and other intangible items;
- treasury stock; and
- any cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of
Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities.
"CONSOLIDATED NET WORTH" of any Person means the total of the amounts
shown on the consolidated balance sheet of such Person and its consolidated
subsidiaries, determined on a consolidated basis in accordance with generally
accepted accounting principles, as of any date selected by such Person not more
than 90 days prior to the taking of any action for the purpose of which the
determination is being made (and adjusted for any material events since such
date), as (1) the par or stated value of all outstanding Capital Stock plus (2)
paid-in capital or capital surplus relating to such Capital Stock plus (3) any
retained earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock and (C) any amounts attributable to
Exchangeable Stock.
"CONSOLIDATED SUBSIDIARY" means any Subsidiary whose accounts are or are
required to be consolidated with the accounts of CMS Energy in accordance with
generally accepted accounting principles.
"DESIGNATED ENTERPRISES SUBSIDIARY" means any wholly-owned subsidiary of
Enterprises formed after the date of the Supplemental Indenture which is
designated a Designated Enterprises Subsidiary by the Board of Directors.
"EXCHANGEABLE STOCK" means any Capital Stock of a corporation that is
exchangeable or convertible into another security (other than Capital Stock of
such corporation that is neither Exchangeable Stock nor Redeemable Stock).
"HOLDER" means the Person in whose name a Note is registered in the
security register kept by CMS Energy for that purpose.
"HYBRID PREFERRED SECURITIES" means any preferred securities issued by a
Hybrid Preferred Securities Subsidiary, where such preferred securities have the
following characteristics:
- such Hybrid Preferred Securities Subsidiary lends substantially all
of the proceeds from the issuance of such preferred securities to
CMS Energy or Consumers in exchange for subordinated debt issued by
CMS Energy or Consumers, respectively;
- such preferred securities contain terms providing for the deferral
of distributions corresponding to provisions providing for the
deferral of interest payments on such subordinated debt; and
- CMS Energy or Consumers (as the case may be) makes periodic interest
payments on such subordinated debt, which interest payments are in
turn used by the Hybrid Preferred Securities Subsidiary to make
corresponding payments to the holders of
45
the Hybrid Preferred Securities.
"HYBRID PREFERRED SECURITIES SUBSIDIARY" means any business trust (or
similar entity):
- all of the common equity interest of which is owned (either directly
or indirectly through one or more wholly-owned Subsidiaries of CMS
Energy or Consumers) at all times by CMS Energy or Consumers;
- that has been formed for the purpose of issuing Hybrid Preferred
Securities; and
- substantially all of the assets of which consist at all times solely
of subordinated debt issued by CMS Energy or Consumers (as the case
may be) and payments made from time to time on such subordinated
debt.
"INDEBTEDNESS" of any Person means, without duplication:
- the principal of and premium (if any) in respect of (A) indebtedness
of such Person for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable;
- all Capital Lease Obligations of such Person;
- all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
obligations under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business);
- all obligations of such Person for the reimbursement of any obligor
on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in the
bullet points above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn
upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third Business Day following receipt by such
Person of a demand for reimbursement following payment on the letter
of credit);
- all obligations of the type referred to in the bullet points above
of other Persons and all dividends of other Persons for the payment
of which, in either case, such Person is responsible or liable as
obligor, guarantor or otherwise; and
- all obligations of the type referred to in the bullet points above
of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser
of the value of such property or assets or the amount of the
obligation so secured.
"LIEN" means any lien, mortgage, pledge, security interest, conditional
sale, title retention agreement or other charge or encumbrance of any kind.
"NET CASH PROCEEDS" means (a) with respect to any Asset Sale, the
aggregate proceeds of such Asset Sale including the fair market value (as
determined by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by CMS Energy, net of (1) brokerage commissions and other
fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (2) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of CMS Energy and
its Restricted Subsidiaries, taken as a whole, (3) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (4) appropriate amounts to be
provided by CMS Energy or any Restricted Subsidiary of CMS Energy as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with generally accepted accounting principles and (b) with respect to any
issuance or sale or contribution in respect of Capital Stock, the aggregate
proceeds of such issuance, sale or contribution, including the fair market value
(as determined by the Board of Directors and net of any associated debt and of
any consideration other than Capital Stock received in return) of property other
than cash, received by CMS Energy, net of attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof, provided, however, that if
such fair market value as determined by the Board of Directors of property other
than cash is greater than $25 million, the value thereof shall be based upon an
46
opinion from an independent nationally recognized firm experienced in the
appraisal or similar review of similar types of transactions.
"NON-CONVERTIBLE CAPITAL STOCK" means, with respect to any corporation,
any non-convertible Capital Stock of such corporation and any Capital Stock of
such corporation convertible solely into non-convertible Capital Stock other
than Preferred Stock of such corporation; provided, however, that
Non-Convertible Capital Stock shall not include any Redeemable Stock or
Exchangeable Stock.
"OPERATING CASH FLOW" means, for any period, with respect to CMS Energy
and its Consolidated Subsidiaries, the aggregate amount of Consolidated Net
Income after adding thereto Consolidated Interest Expense (adjusted to include
costs recognized on early retirement of debt), income taxes, depreciation
expense, amortization expense and any noncash amortization of debt issuance
costs, any nonrecurring, noncash charges to earnings and any negative accretion
recognition.
"OTHER RATING AGENCY" shall mean any one of Fitch, Inc. or Moody's
Investors Service, Inc., and any successor to any of these organizations that is
a nationally recognized statistical rating organization.
"PAYING AGENT" means any person authorized by CMS Energy to pay the
principal of (and premium, if any) or interest on any of the Notes on behalf of
CMS Energy. Initially, the paying agent is the Trustee under the senior debt
indenture.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision of any government.
"PREFERRED STOCK" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation; provided that
Hybrid Preferred Securities are not considered Preferred Stock for purposes of
this definition.
"REDEEMABLE STOCK" means any Capital Stock that by its terms or otherwise
is required to be redeemed prior to the first anniversary of the stated maturity
of the outstanding Notes or is redeemable at the option of the holders thereof
at any time prior to the first anniversary of the stated maturity of the
outstanding Notes.
"RESTRICTED SUBSIDIARY" means any Subsidiary (other than Consumers and its
subsidiaries) of CMS Energy which, as of the date of CMS Energy's most recent
quarterly consolidated balance sheet, constituted at least 10% of the total
Consolidated Assets of CMS Energy and its Consolidated Subsidiaries and any
other Subsidiary which from time to time is designated a Restricted Subsidiary
by the Board of Directors, provided that no Subsidiary may be designated a
Restricted Subsidiary if, immediately after giving effect thereto, an Event of
Default or event that, with the lapse of time or giving of notice or both, would
constitute an Event of Default would exist or CMS Energy and its Restricted
Subsidiaries could not incur at least one dollar of additional Indebtedness
pursuant to the first paragraph under "Description of the Notes -- Certain
Restrictive Covenants -- Limitation on Consolidated Indebtedness," and (1) any
such Subsidiary so designated as a Restricted Subsidiary must be organized under
the laws of the United States or any State thereof, (2) more than 80% of the
Voting Stock of such Subsidiary must be owned of record and beneficially by CMS
Energy or a Restricted Subsidiary and (3) such Restricted Subsidiary must be a
Consolidated Subsidiary.
"S&P" shall mean Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., and any successor thereto which is a nationally
recognized statistical rating organization, or if such entity shall cease to
rate the Notes or shall cease to exist and there shall be no such successor
thereto, any other nationally recognized statistical rating organization
selected by CMS Energy which is acceptable to the Trustee.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of CMS Energy (whether
outstanding on the date of the Supplemental Indenture or thereafter incurred),
which is contractually subordinated or junior in right of payment to the Notes.
"SUBSIDIARY" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by CMS Energy or by one or more
other Subsidiaries, or by CMS Energy and one or more other Subsidiaries. For the
purposes of this definition, "voting stock" means stock which ordinarily has
voting power for the election of directors, whether at all times or only so long
as no senior class of stock has such voting power by reason of any contingency.
"SUPPORT OBLIGATIONS" means, for any person, without duplication, any
financial obligation, contingent or otherwise, of such person guaranteeing or
otherwise supporting any debt or other obligation of any other person in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such person, direct or indirect:
47
- to purchase or pay (or advance or supply funds for the purchase or
payment of) such debt or to purchase (or to advance or supply funds
for the purchase of) any security for the payment of such debt;
- to purchase property, securities or services for the purpose of
assuring the owner of such debt of the payment of such debt;
- to maintain working capital, equity capital, available cash or other
financial statement condition of the primary obligor so as to enable
the primary obligor to pay such debt;
- to provide equity capital under or in respect of equity subscription
arrangements (to the extent that such obligation to provide equity
capital does not otherwise constitute debt); or
- to perform, or arrange for the performance of, any non-monetary
obligations or non-funded debt payment obligations of the primary
obligor.
"TAX SHARING AGREEMENT" means the Amended and Restated Agreement for the
Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as
amended or supplemented from time to time, by and among CMS Energy, each of the
members of the Consolidated Group (as defined therein), and each of the
corporations that become members of the Consolidated Group.
"VOTING STOCK" means securities of any class or classes the holders of
which are ordinarily, in the absence of contingencies, entitled to vote for
corporate directors (or persons performing similar functions).
EVENTS OF DEFAULT
The occurrence of any of the following events with respect to the Notes
will constitute an "EVENT OF DEFAULT" with respect to the Notes:
- default for 30 days in the payment of any interest on any of the
Notes;
- default in the payment when due of any of the principal of or the
premium, if any, on any of the Notes, whether at maturity, upon
redemption, acceleration, purchase by CMS Energy at the option of
the holders or otherwise;
- default for 60 days by CMS Energy in the observance or performance
of any other covenant or agreement contained in the senior debt
indenture relating to the Notes after written notice thereof as
provided in the senior debt indenture;
- certain events of bankruptcy, insolvency or reorganization relating
to CMS Energy or Consumers;
- entry of final judgments against CMS Energy or Consumers aggregating
in excess of $25,000,000 which remain undischarged or unbonded for
60 days;
- a default resulting in the acceleration of indebtedness of CMS
Energy or Consumers in excess of $25,000,000, which acceleration has
not been rescinded or annulled within ten days after written notice
of such default as provided in the senior debt indenture;
- a default in our obligation to satisfy our conversion obligation
upon exercise of a holder's conversion right;
- a default in our obligation to redeem Notes after we exercised our
redemption option; or
- a default in our obligation to purchase Notes upon the occurrence of
a Fundamental Change or exercise by a holder of its option to
require us to purchase such holder's Notes.
If an Event of Default on the Notes shall have occurred and be continuing,
either the Trustee or the holders of not less than 25% in aggregate principal
amount of the Notes then outstanding may declare the principal of all the Notes
and the premium thereon and interest, if any, accrued thereon to be due and
payable immediately.
The senior debt indenture provides that the Trustee will be under no
obligation to exercise any of its rights or powers under the senior debt
indenture at the request, order or direction of the holders of the Notes, unless
such holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for indemnity and certain other limitations contained in the
senior debt indenture, the
48
holders of a majority in aggregate principal amount of the senior debentures of
each affected series then outstanding (voting as one class) will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the trustee, or exercising any trust or power conferred on the
Trustee, with respect to the senior debentures of such affected series.
The senior debt indenture provides that no holders of Notes may institute
any action against CMS Energy under the senior debt indenture (except actions
for payment of overdue principal, premium or interest) unless such holder
previously shall have given to the Trustee written notice of default and
continuance thereof and unless the holders of not less than 25% in aggregate
principal amount of senior debentures of the affected series then outstanding
(voting as one class) shall have requested the Trustee to institute such action
and shall have offered the Trustee reasonable indemnity, the Trustee shall not
have instituted such action within 60 days of such request and the Trustee shall
not have received direction inconsistent with such request by the holders of a
majority in aggregate principal amount of the senior debentures of the affected
series then outstanding (voting as one class).
The senior debt indenture requires CMS Energy to furnish to the Trustee
annually a statement as to CMS Energy's compliance with all conditions and
covenants under the senior debt indenture. The senior debt indenture provides
that the Trustee may withhold notice to the holders of the Notes of any default
affecting such Notes (except defaults as to payment of principal, premium or
interest on the Notes) if it considers such withholding to be in the interests
of the holders of the Notes.
CONSOLIDATION, MERGER OR SALE OF ASSETS
The senior debt indenture provides that CMS Energy may consolidate with or
merge into, or sell, lease or convey its property as an entirety or
substantially as an entirety to, any other corporation if the new corporation
assumes the obligations of CMS Energy under the Notes and the Supplemental
Indenture and is organized and existing under the laws of the United States, any
U.S. State or the District of Columbia. Notwithstanding the foregoing
provisions, such a transaction may constitute a Fundamental Change as described
in "Fundamental Change Requires Purchase of Notes by Us at the Option of the
Holder".
MODIFICATION AND WAIVER
CMS Energy and the relevant trustee may enter into supplemental indentures
without the consent of the holders of the Notes to establish the form and terms
of any series of securities under the senior debt indenture.
CMS Energy and the relevant trustee, with the consent of the holders of at
least a majority in total principal amount of senior debentures of all series
then outstanding and affected (voting as one class), to change in any manner the
provisions of the senior debt indenture or modify in any manner the rights of
the holders of the senior debentures of each such affected series. CMS Energy
and the relevant trustee may not, without the consent of the holders of each
senior debenture affected, enter into any supplemental indenture to:
- change the time of payment of the principal;
- reduce the principal amount of such senior debenture;
- reduce the rate or change the time of payment of interest on such
senior debenture;
- reduce the amount payable on any securities issued originally at a
discount upon acceleration or provable in bankruptcy;
- impair the right to institute suit for the enforcement of any
payment on any senior debenture when due;
- reduce the redemption price, purchase price or Fundamental Change
purchase price for the Notes or change the terms applicable to
redemption or purchase in a manner adverse to the holder;
- make any change that adversely affects the right to convert or
exchange any debt security, including the Notes, or decreases the
conversion or exchange rate or increases the conversion price of any
convertible or exchangeable debt security;
- waive any default in any payment of redemption price, purchase price
or Fundamental Change purchase price with respect to the Notes; or
- waive any default that constitutes a failure to convert any Note in
accordance with its terms and the terms of the senior debt
indenture.
49
In addition, no such modification may reduce the percentage in principal
amount of the senior debenture of the affected series, the consent of whose
holders is required for any such modification or for any waiver provided for in
the senior debt indenture.
Prior to the acceleration of the maturity of any senior debenture, the
holders, voting as one class, of a majority in total principal amount of the
senior debentures with respect to which a default or event of default shall have
occurred and be continuing may on behalf of the holders of all such affected
senior debentures waive any past default or event of default and its
consequences, except a default or an event of default in respect of a covenant
or provision of the senior debt indenture or of any senior debenture which
cannot be modified or amended without the consent of the holders of each senior
debenture affected.
DEFEASANCE, COVENANT DEFEASANCE AND DISCHARGE
The senior debt indenture provides that, at the option of CMS Energy:
- CMS Energy will be discharged from all obligations in respect of the
Notes (except for certain obligations to convert, register the
transfer of or exchange of the Notes, to replace stolen, lost or
mutilated Notes, to maintain paying agencies and to maintain the
trust described below); or
- CMS Energy need not comply with certain restrictive covenants of the
senior debt indenture (including those described under
"Consolidation, Merger or Sale of Assets"),
if CMS Energy in each case irrevocably deposits in trust with the relevant
trustee money and/or securities backed by the full faith and credit of the
United States which, through the payment of the principal thereof and the
interest thereon in accordance with their terms, will provide money in an amount
sufficient to pay all the principal and interest on the Notes on the stated
maturities of such Notes in accordance with the terms thereof.
To exercise this option, CMS Energy is required to deliver to the relevant
trustee an opinion of independent counsel to the effect that:
- the exercise of such option would not cause the holders of the Notes
to recognize income, gain or loss for United States federal income
tax purposes as a result of such defeasance, and such holders will
be subject to United States federal income tax on the same amounts,
in the same manner and at the same times as would have been the case
if such defeasance had not occurred; and
- in the case of a discharge as described above, such opinion is to be
accompanied by a private letter ruling to the same effect received
from the Internal Revenue Service, a revenue ruling to such effect
pertaining to a comparable form of transaction published by the
Internal Revenue Service or appropriate evidence that since the date
of the senior debt indenture there has been a change in the
applicable federal income tax law.
In the event:
- CMS Energy exercises its option to effect a covenant defeasance with
respect to the Notes as described above;
- the Notes are thereafter declared due and payable because of the
occurrence of any event of default other than an event of default
caused by failing to comply with the covenants which are defeased;
or
- the amount of money and securities on deposit with the relevant
trustee would be insufficient to pay amounts due on the Notes at the
time of the acceleration resulting from such event of default,
CMS Energy would remain liable for such amounts.
Our obligations with respect to the convertibility of the Notes into our
common stock will survive any such action by us.
THE TRUSTEE
J.P. Morgan Trust Company, N.A. (the "TRUSTEE") is the Trustee, paying
agent and conversion agent under the senior debt indenture for the Notes. CMS
Energy and its affiliates maintain lending depositary and other normal banking
relationship with J.P. Morgan Trust Company, N.A. J.P. Morgan Trust Company,
N.A. is also a lender to CMS Energy and its affiliates.
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CALCULATIONS IN RESPECT OF THE NOTES
We are responsible for making all calculations called for under the Notes.
These calculations include, but are not limited to, determinations of the market
prices of our common stock, accrued interest payable on the Notes, the
conversion rate and the conversion price of the Notes. We will make all these
calculations in good faith and, absent manifest error, our calculations will be
final and binding on holders of Notes. We will provide a schedule of our
calculations to each of the Trustee and the conversion agent, and each of the
Trustee and conversion agent is entitled to rely upon the accuracy of our
calculations without independent verification. The Trustee will forward our
calculations to any holder of Notes upon the request of that holder.
GOVERNING LAW
The senior debt indenture, the Supplemental Indenture and the Notes are
governed by, and construed in accordance with, the laws of the State of Michigan
unless the laws of another jurisdiction shall mandatorily apply.
BOOK-ENTRY SYSTEM
The Notes are represented by one or more global securities. Each global
security is deposited with, or on behalf of, DTC and is registered in the name
of a nominee of DTC. Except under circumstances described below, the Notes will
not be issued in definitive form.
The following is based upon information furnished by DTC:
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("PARTICIPANTS") deposit with DTC. DTC
also facilitates the settlement among participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
("DIRECT PARTICIPANTS") include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations. DTC is owned
by a number of its direct participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the SEC.
Investors who purchased Notes in offshore transactions in reliance on
Regulation S under the Securities Act may hold their interest in a global
security directly through Euroclear Bank S.A./N.V., as operator of the Euroclear
System ("EUROCLEAR"), and Clearstream Banking, societe anonyme ("CLEARSTREAM"),
if they are participants in such systems, or indirectly through organizations
that are participants in such systems. Euroclear and Clearstream will hold
interests in the global securities on behalf of their participants through their
respective depositaries, which in turn will hold such interests in the global
securities in customers' securities accounts in the depositaries' names on the
books of DTC.
Upon the issuance of a global security, DTC will credit on its book-entry
registration and transfer system the accounts of persons with the respective
principal amounts of the Notes represented by the global security. Ownership of
beneficial interests in a global security will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests in a global security will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of persons other than participants). The laws
of some states require that some purchasers of securities take physical delivery
of the securities in definitive form. Such limits and such laws may impair the
ability to transfer beneficial interests in a global security.
So long as DTC or its nominee is the registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by that global security for all
purposes under the senior debt indenture. Except as provided below, owners of
beneficial interests in a global security will not be entitled to have Notes
represented by that global security registered in their names, will not receive
or be entitled to receive physical delivery of Notes in definitive form and will
not be considered the owners or holders thereof under the senior debt indenture.
Principal and interest payments, if any, on Notes registered in the name of DTC
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the relevant global security. Neither we, the Trustee, any
paying agent or the security registrar for the Notes will have any
responsibility
51
or liability for any aspect of the records relating to nor payments made on
account of beneficial interests in a global security or for maintaining,
supervising or reviewing any records relating to such beneficial interests.
We expect that DTC or its nominee, upon receipt of any payment of
principal or interest, will credit immediately participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of the relevant global security as shown on the records of
DTC or its nominee. We also expect that payments by participants to owners of
beneficial interests in a global security held through these participants will
be governed by standing instructions and customary practices, as is the case
with securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of the participants.
Beneficial owners of interests in global securities who desire to convert
their interests into common stock should contact their brokers or other
participants or indirect participants through whom they hold such beneficial
interests to obtain information on procedures, including proper forms and
cut-off times, for submitting requests for conversion.
Unless and until they are exchanged in whole or in part for Notes in
definitive form, the global securities may not be transferred except as a whole
by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of
DTC. Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Clearstream will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Cross-market transfers between DTC, on the one hand, and directly or
indirectly through Euroclear or Clearstream participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(Brussels time). Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the global securities in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositaries for
Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in the global securities from a
DTC participant will be credited during the securities settlement processing day
(which must be a business day for Euroclear or Clearstream, as the case may be)
immediately following the DTC settlement date, and such credit of any
transactions interests in the global securities settled during such processing
day will be reported to the relevant Euroclear or Clearstream participant on
such day. Cash received by Euroclear or Clearstream as a result of sales of
interests in the global securities by or through a Euroclear or Clearstream
participant to a DTC participant will be received with value on the DTC
settlement date, but will be available in the relevant Euroclear or Clearstream
cash account only as of the business day following settlement in DTC.
If DTC at any time is unwilling or unable to continue as a depositary,
defaults in the performance of its duties as depositary or ceases to be a
clearing agency registered under the Exchange Act or other applicable statute or
regulation, and a successor depositary is not appointed by us within 90 days, we
will issue Notes in definitive form in exchange for the global securities
relating to the Notes. In addition, we may at any time and in our sole
discretion determine not to have the Notes or portions of the Notes represented
by one or more global securities and, in that event, will issue individual Notes
in exchange for the global security or securities representing the Notes.
Further, if we so specify with respect to any Notes, an owner of a beneficial
interest in a global security representing the Notes may, on terms acceptable to
us and the depositary for the global security, receive individual Notes in
exchange for the beneficial interest. In any such instance, an owner of a
beneficial interest in a global security will be entitled to physical delivery
in definitive form of Notes represented by the global security equal in
principal amount to the beneficial interest, and to have the Notes registered in
its name. Notes so issued in definitive form will be issued as registered Notes
in denominations of $1,000 and integral multiples thereof, unless otherwise
specified by us.
52
REGISTRATION RIGHTS
The following description of the material provisions of a registration
rights agreement that was entered into in connection with the issuance of the
Old Notes is a summary only. Because this section is a summary, it does not
describe every aspect of the registration rights agreement. This summary is
subject to and qualified in its entirety by reference to all the provisions of
the registration rights agreement, a copy of which will be made available to
holders of the Notes upon request to us.
We have granted holders of the Notes the registration rights given to
holders of Old Notes provided in the registration rights agreement. Under this
registration rights agreement, we agreed to, at our cost, use our reasonable
best efforts to:
- as soon as practicable after the time that we become eligible to
file registration statements on Form S-3 under the Exchange Act but
in any event within 15 months after the original issuance of the Old
Notes (the "SHELF REGISTRATION FILING DATE"), file a shelf
registration statement with the SEC covering resales of the Old
Notes and the common stock issuable upon conversion thereof;
- cause the shelf registration statement to be declared effective
under the Securities Act no later than 120 days after the Shelf
Registration Filing Date; and
- keep the shelf registration statement effective after its effective
date until the earliest to occur of the following:
- all securities covered by the registration statement have been
sold pursuant to an effective registration statement;
- the date on which all registrable securities have been sold
pursuant to Rule 144 under the Securities Act;
- such time as there are no longer any registrable securities
outstanding; and
- the second anniversary of the last date of original issuance
of the Old Notes.
A shelf registration statement on Form S-3 under the Exchange Act
regarding the Old Notes was filed with the SEC on September 24, 2004, which
satisfies our obligation under the registration rights agreement to file a shelf
registration statement with the SEC. Pursuant to the exchange offer whereby all
of the outstanding Old Notes were exchanged for Notes we agreed to, at our cost,
use our reasonable best efforts to:
- amend the shelf registration statement to cover resales of Notes and
any Old Notes that were not exchanged (or at our option file a new
registration statement relating to either Old Notes or Notes) and
cause the shelf registration statement to be declared effective
under the Securities Act no later than 120 days after the Shelf
Registration Filing Date; and
- keep the shelf registration statement effective after its effective
date until the earliest to occur of the following:
- all securities covered by the registration statement have been
sold pursuant to an effective registration statement;
- the date on which all registrable securities have been sold
pursuant to Rule 144 under the Securities Act;
- such time as there are no longer any registrable securities
outstanding; and
- the second anniversary of the last date of original issuance
of the old notes.
The shelf registration statement was declared effective on February 3,
2005 which satisfies our obligation to cause the shelf registration statement to
be declared effective. We refer to the Notes and the common stock issuable upon
conversion thereof as registrable securities. We will be permitted to suspend
the effectiveness of the shelf registration statement or the use of the
prospectus that is part of the shelf registration statement during specified
periods (not to exceed 45 consecutive days or an aggregate of 90 days in any
consecutive 12-month period) in specified circumstances, without being required
to pay additional amounts. We need not specify the nature of the event giving
rise to a suspension in any notice to the holders of the Notes of the existence
of a suspension.
If:
53
- after the effectiveness of the shelf registration statement, we fail
to file a post-effective amendment, prospectus supplement or report
with the SEC if required by applicable law within five business days
after a holder provides us with the questionnaire referred to below,
if such filing is necessary to enable the holder to deliver the
prospectus to purchasers of such holder's registrable securities;
- the registration statement ceases to be effective or fails to be
usable without being succeeded within 30 days by a post-effective
amendment, prospectus supplement or report filed with the SEC (other
than as permitted in the preceding paragraph) pursuant to the
Exchange Act that cures the failure of the registration statement to
be effective or usable; or
- the aggregate duration of any suspension periods in any period
exceeds the limits described above,
then, in each case, additional amounts will accrue on the Notes, from and
including the date on which any such registration default shall occur to, but
excluding, the date on which the registration default has been cured, at the
rate of 0.25% per year for the first 90 days following such date and at a rate
of 0.50% per year thereafter. With respect to shares of common stock issued, if
any, upon conversion of the Notes, additional amounts will accrue on the then
applicable conversion price from and including the date on which any such
registration default shall occur to, but excluding, the date on which the
registration default has been cured, at the rate of 0.25% per year for the first
90 days following such date and at a rate of 0.50% per year thereafter. Except
as mentioned above, we will have no other liabilities for monetary damages with
respect to our registration obligations. The receipt of additional amounts will
be the sole monetary remedy available to a holder if we fail to meet these
obligations.
A holder who elects to sell any securities pursuant to the shelf
registration statement:
- will be required to be named as a selling securityholder;
- will be required to deliver a prospectus to purchasers;
- will be subject to the civil liability provisions under the
Securities Act in connection with any sales; and
- will be bound by the provisions of the registration rights
agreement, which are applicable to the holder, including certain
indemnification obligations.
If we receive from a holder of registrable securities a completed
questionnaire, together with such other information as may be reasonably
requested by us, after the effectiveness of the shelf registration statement, we
will file an amendment to the shelf registration statement (or new registration
statement if required by applicable law) or supplement to the related prospectus
or to any document incorporated by reference therein within five business days
to permit the holder to deliver a prospectus to purchasers of registrable
securities. Questionnaires were originally provided in the offering memorandum
used in connection with the sale of the Old Notes and may be obtained from us
upon request. Any holder that does not complete and deliver a questionnaire or
provide such other information will not be named as a selling security holder in
the prospectus and therefore will not be permitted to sell any registrable
securities under the shelf registration statement. We will agree in the
registration rights agreement to give notice to all holders of the Notes of the
filing of the amendment to, and the effectiveness of, the shelf registration
statement.
Each Note contains a legend to the effect that the holder of the Notes, by
its acceptance of the Notes, agrees to be bound by the provisions of the
registration rights agreement. In that regard, if a holder receives notice from
us of:
(1) the issuance by the SEC or any state securities authority of any
stop order suspending the effectiveness of a registration statement
or the qualification of the Notes or the common stock issuable upon
conversion thereof to be offered or sold by any participating
broker-dealer or the initiation of proceedings for that purpose; or
(2) the happening of any event or the failure of any event to occur or
the discovery of any facts which makes any statement made in a
registration statement or related prospectus untrue in any material
respect or which causes that registration statement or the related
prospectus to omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which there were made, not misleading,
the holder, or participating broker-dealer, as the case may be, will suspend the
sale of Notes or the common stock issuable upon conversion thereof pursuant to
that prospectus until we have either:
54
- amended or supplemented the prospectus to correct the misstatement
or omission and furnished copies of the amended or supplemented
prospectus to the holder, or participating broker-dealer, as the
case may be; or
- given notice that the sale of the Notes or the common stock issuable
upon conversion thereof may be resumed.
The registration rights agreement is governed by, and construed in
accordance with, the laws of the State of New York.
55
DESCRIPTION OF OUR CAPITAL STOCK
The following summary of certain rights of the holders of CMS Energy
capital stock does not purport to be complete and is qualified in its entirety
by express reference to the Restated Articles of Incorporation of CMS Energy
(the "ARTICLES OF INCORPORATION") and the By-Laws of CMS Energy, which are
incorporated into this prospectus by reference. See "Where You Can Find More
Information." A copy of the By-Laws has been previously filed with the SEC. The
Articles of Incorporation are available on our website at
http://www.cmsenergy.com.
The authorized capital stock of CMS Energy consists of:
- 350 million shares of CMS Energy Common Stock, par value $0.01 per
share ("COMMON STOCK"); and
- 10 million shares of CMS Energy Preferred Stock, par value $0.01 per
share ("PREFERRED STOCK").
As of January 28, 2005, we had 5,000,000 shares of 4.50% Cumulative
Convertible Preferred Stock, Series B and 195,136,632 shares of common stock
issued and outstanding.
COMMON STOCK
DIVIDEND RIGHTS AND POLICY; RESTRICTIONS ON DIVIDENDS
Dividends on the common stock are paid at the discretion of the Board of
Directors based primarily upon the earnings and financial condition of CMS
Energy. Dividends are payable out of the assets of CMS Energy legally available
therefore.
In January 2003, the Board of Directors suspended the payment of common
stock dividends.
CMS Energy is a holding company and its assets consist primarily of
investments in its subsidiaries. As a holding company with no significant
operations of its own, the principal sources of its funds are dependent
primarily upon the earnings of its subsidiaries (in particular, Consumers),
borrowings and sales of equity. CMS Energy's ability to pay dividends on common
stock, is dependent primarily upon the earnings and cash flows of its
subsidiaries and the distribution or other payment of such earnings to CMS
Energy in the form of dividends, loans or advances and repayment of loans and
advances from CMS Energy. Accordingly, the ability of CMS Energy to pay
dividends on its capital stock will depend on the earnings, financial
requirements, contractual restrictions of the subsidiaries of CMS Energy (in
particular, Consumers) and other factors. CMS Energy's subsidiaries are separate
and distinct legal entities and have no obligation, contingent or otherwise, to
pay any amounts on the capital stock of CMS Energy or to make any funds
available therefor, whether by dividends, loans or other payments.
Dividends on capital stock of CMS Energy are limited by Michigan law to
legally available assets of CMS Energy. Distributions on common stock may be
subject to the rights of the holders, if any, of the Preferred Stock, including
the currently issued and outstanding 4.50% Cumulative Convertible Preferred
Stock, Series B. As long as the 4.50% Cumulative Convertible Preferred Stock,
Series B is outstanding, CMS Energy may not pay dividends on its common stock
unless certain conditions are met including, but not limited to, that dividends
on the 4.50% Cumulative Convertible Preferred Stock, Series B have been paid.
See "Preferred Stock -- Dividends".
CMS Energy is subject to the following contractual restrictions on its
ability to pay dividends:
CMS ENERGY'S SENIOR SECURED CREDIT FACILITY
Under the terms of our Fifth Amended and Restated Senior Credit Agreement
we have agreed that we will not, and will not permit certain of our
subsidiaries, directly or indirectly, to:
- declare or pay any dividend, payment or other distribution of
assets, properties, cash, rights, obligations or securities on
account of any shares of any class of CMS Energy Common Stock or the
capital stock or other ownership interests of certain subsidiaries
(other than stock splits and dividends payable solely in our
non-convertible equity securities (other than Redeemable Stock or
Exchangeable Stock (as such terms are defined in the senior debt
indenture on August 3, 2004)) and dividends and distributions made
to us or certain of our subsidiaries); or
56
- purchase, redeem, retire or otherwise acquire for value any such
capital stock or other ownership interests;
unless other than (i) pursuant to the terms of any class of our capital stock
issued and outstanding (and as in effect on August 3, 2004), any purchase or
redemption of our capital stock made by exchange for, or out of the proceeds of
the substantially concurrent sale of, our capital stock (other than Redeemable
Stock or Exchangeable Stock (as such terms are defined in the senior debt
indenture on August 3, 2004)) and (ii) payments made by us or certain
subsidiaries pursuant to our tax sharing agreement and (iii) after January 1,
2005 payments not to exceed certain amounts for any twelve-month period so long
as a certain amount of liquidity is held by CMS Energy.
SENIOR DEBT INDENTURE
Under the terms of the senior debt indenture we have the following issued
and outstanding securities: 9.875% Senior Notes Due 2007, 7.5% Senior Notes Due
2009, 8.9% Senior Notes Due 2008, 8.5% Senior Notes Due 2011, 3.375% Convertible
Senior Notes Due 2023 Series B, 7.75% Senior Notes Due 2010, 2.875% Convertible
Senior Notes Due 2024 and 6.30% Senior Notes Due 2012. So long as any of such
notes issued thereunder are outstanding and until those notes are rated BBB - or
above (or an equivalent rating) by S&P and one other rating agency, at which
time we will be permanently released from the provisions of this limitation, we
have agreed that we will not, and will not permit any of our restricted
subsidiaries, directly or indirectly, to:
- declare or pay any dividend or make any distribution on our capital
stock to the direct or indirect holders of our capital stock (except
dividends or distributions payable solely in our non-convertible
capital stock (as defined in the senior debt indenture) or in
options, warrants or other rights to purchase such non-convertible
capital stock and except dividends or other distributions payable to
us or one of our subsidiaries);
- purchase, redeem or otherwise acquire or retire for value any of our
capital stock; or
- purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to the schedule maturity or scheduled repayment
thereof, any of our subordinated indebtedness (each, for purposes of
the senior debt indenture, a "RESTRICTED PAYMENT"),
if at the time of any restricted payment described above (1) an event of default
under the senior debt indenture (or event that with the lapse of time or giving
of notice would constitute an event of default) has occurred and is continuing,
or would occur as a result of the restricted payment, or (2) after giving effect
to any restricted payment described above, the aggregate amount of all
restricted payments made since May 6, 1997 would exceed the sum of:
- $100 million;
- 100% of our consolidated net income from May 6, 1997 to the end of
the most recent fiscal quarter ending at least 45 days prior to the
date of the restricted payment (or, in the case of a deficit, minus
100% of the deficit); and
- the aggregate net proceeds we have received for any issuance or sale
of, or contribution with respect to, our capital stock subsequent to
May 6, 1997.
GENERAL TERM NOTE INDENTURE
Similarly, the indenture, dated as of January 15, 1994, as amended and
supplemented, between us and JPMorgan Chase Bank, as trustee, pursuant to which
we have issued our General Term Notes, Series D, Series E and Series F, provides
that so long as any general term notes issued thereunder are outstanding and
until the notes are rated BBB - or above (or an equivalent rating) by S&P and
one other rating agency, at which time we will be permanently released from the
provisions of this limitation, we have agreed that we will not, and will not
permit any of our restricted subsidiaries, directly or indirectly, to:
- declare or pay any dividend or make any distribution on our capital
stock to the direct or indirect holders of our capital stock (except
dividends or distributions payable solely in our non-convertible
capital stock (as defined in such indenture) or in options, warrants
or other rights to purchase such non-convertible capital stock and
except dividends or other distributions payable to us or one of our
subsidiaries); or
- purchase, redeem or otherwise acquire or retire for value any of our
capital stock (each, a "RESTRICTED PAYMENT");
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if at the time of any restricted payment described above (1) an event of default
under such indenture (or event that with the lapse of time or giving of notice
would constitute an event of default) has occurred and is continuing, or would
occur as a result of the restricted payment, or (2) after giving effect to any
restricted payment described above, the aggregate amount of all restricted
payments made since September 30, 1993 would exceed the sum of:
- $120 million;
- 100% of our consolidated net income from September 30, 1993 to the
end of the most recent fiscal quarter ending at least 45 days prior
to the date of the restricted payment (or, in the case of a deficit,
minus 100% of the deficit); and
- the aggregate net proceeds we have received for any issuance or sale
of, or contribution with respect to, our capital stock subsequent to
September 30, 1993.
The provisions described above do not prohibit (1) dividends or other
distributions in respect of capital stock issued in connection with the
acquisition of any business or assets by us where the payment of such dividends
or distributions are payable solely from the net earnings of such business or
assets, (2) any purchase or redemption of capital stock made by exchange for, or
out of the proceeds of the substantially concurrent sale of, our capital stock
(other than certain redeemable stock or exchangeable stock), (3) dividends paid
within 60 days after the date of declaration thereof if at the date of
declaration such dividends would have complied with the limitations described
above or (4) payments pursuant to the tax sharing agreement among us and our
subsidiaries.
TRUST PREFERRED SECURITIES
In June 1997, a CMS Energy affiliated trust issued $172.5 million of 7
3/4% Convertible Quarterly Income Preferred Securities. The preferred securities
are convertible at the option of the holder into shares of common stock at an
initial conversion rate of 1.2255 shares of common stock for each preferred
security (equivalent to a purchase price of $40.80 per share of common stock),
subject to certain adjustments. We may, at our option, cause the conversion
rights of the holders of the preferred securities to expire upon certain
conditions.
Under the terms of the indenture, dated June 1, 1997, between us and The
Bank of New York, as trustee, as amended and supplemented, and the guarantee
agreement dated June 20, 1997 between us and The Bank of New York relating to
the preferred securities of CMS Energy Trust I pursuant to which the preferred
securities and the related 7 3/4% Convertible Subordinated Debentures due 2027
were issued, we have agreed that we will not, and will not cause any of our
subsidiaries to, declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to, any of our
capital stock, if at such time:
- an event has occurred, of which we have actual knowledge, that with
the giving of notice or the lapse of time, or both, would constitute
an event of default and in respect of which we have not taken
reasonable steps to cure;
- we are in default with respect to the payment of any obligations
under the relevant guarantee agreement; or
- we have given notice of our selection of an extension period as
provided in such indenture with respect to the subordinated
debentures and have not rescinded such notice, or such extension
period (or any extension thereof) is continuing.
DIVIDEND RESTRICTIONS UNDER MICHIGAN LAW
Michigan law prohibits payment of a dividend or a repurchase of capital
stock if, after giving it effect, a corporation would not be able to pay its
debts as they become due in the usual course of business, or its total assets
would be less than the sum of its total liabilities plus, unless the Articles of
Incorporation provide otherwise, the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution (including the rights of
holders of preferred stock, if any).
VOTING RIGHTS
Each holder of common stock is entitled to one vote for each share of
common stock held by such holder on each matter voted upon by the shareholders.
Such right to vote is not cumulative. A majority of the votes cast by the
holders of shares entitled to vote thereon is sufficient for the adoption of any
question presented, except that certain provisions of the Articles of
Incorporation relating to special shareholder meetings, the removal,
indemnification and liability of the Board of Directors and the requirements for
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amending these provisions may not be amended, altered, changed or repealed
unless such amendment, alteration, change or repeal is approved by the
affirmative vote of at least 75% of the outstanding shares entitled to vote
thereon.
Under Michigan law, the approval of the holders of a majority of the
outstanding shares of common stock would be necessary for authorizing, effecting
or validating the merger or consolidation of CMS Energy into or with any other
corporation if such merger or consolidation would adversely affect the powers or
special rights of such common stock, and to authorize any amendment to the
Articles of Incorporation that would increase or decrease the aggregate number
of authorized shares of common stock or alter or change the powers, preferences
or special rights of the shares of common stock so as to affect them adversely.
The Articles of Incorporation also provide that unless the vote or consent of a
greater number of shares shall then be required by law, the vote or consent of
the holders of a majority of the shares of common stock then outstanding will be
necessary for authorizing, effecting or validating the merger or consolidation
of CMS Energy into or with any other entity if such merger or consolidation
would adversely affect the powers or special rights of the common stock, either
directly by amendment to the Articles of Incorporation or indirectly by
requiring the holders of the common stock to accept or retain, in such merger or
consolidation, anything other than (i) shares of such class or (ii) shares of
the surviving or resulting corporation, having, in either case, powers and
special rights identical to those of such commons stock prior to such merger or
consolidation. The effect of these provisions may be to permit the holders of a
majority of the outstanding shares of common stock to block any such merger or
amendment that would adversely affect the powers or special rights of holders of
such shares of common stock.
PREEMPTIVE RIGHTS
The Articles of Incorporation provide that holders of common stock will
have no preemptive rights to subscribe for or purchase any additional shares of
the capital stock of CMS Energy of any class now or hereafter authorized, or
Preferred Stock, bonds, debentures, or other obligations or rights or options
convertible into or exchangeable for or entitling the holder or owner to
subscribe for or purchase any shares of capital stock, or any rights to exchange
shares issued for shares to be issued.
LIQUIDATION RIGHTS
In the event of the dissolution, liquidation or winding up of CMS Energy,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of CMS Energy and after there shall have been paid
or set apart for the holders of Preferred Stock the full preferential amounts
(including any accumulated and unpaid dividends) to which they are entitled, the
holders of common stock will be entitled to receive, on a per share basis, the
assets of CMS Energy remaining for distribution to the holders of common stock.
Neither the merger or consolidation of CMS Energy into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with CMS Energy nor any sale, transfer or lease of all or any part of the assets
of CMS Energy, shall be deemed to be a dissolution, liquidation or winding up
for the purposes of this provision.
Because CMS Energy has subsidiaries which have debt obligations and other
liabilities of their own, CMS Energy's rights and the rights of its creditors
and its stockholders to participate in the distribution of assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
prior claims of the subsidiary's creditors, except to the extent that CMS Energy
may itself be a creditor with recognized claims against the subsidiary.
SUBDIVISION OR COMBINATION
If CMS Energy subdivides (by stock split, stock dividend or otherwise) or
combines (by reverse stock split or otherwise), the voting and liquidation
rights of shares of common stock will be appropriately adjusted so as to avoid
any dilution in aggregate voting or liquidation rights.
EXCHANGES
The Articles of Incorporation do not provide for either the mandatory or
optional exchange or redemption of common stock.
TRANSFER AGENT AND REGISTRAR
Common stock is transferable at Consumers Energy Company, One Energy
Plaza, Jackson, Michigan 49201. CMS Energy is the registrar and transfer agent
for common stock.
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PREFERRED STOCK
The authorized Preferred Stock may be issued without the approval of the
holders of common stock in one or more series, from time to time, with each such
series to have such designation, powers, preferences and relative,
participating, optional or other special rights, voting rights, if any, and
qualifications, limitations or restrictions thereof, as shall be stated in a
resolution providing for the issue of any such series adopted by CMS Energy's
Board of Directors. The Articles of Incorporation provide that holders of
Preferred Stock will not have any preemptive rights to subscribe for or purchase
any additional shares of the capital stock of CMS Energy of any class now or
hereafter authorized, or any Preferred Stock, bonds, debentures or other
obligations or rights or options convertible into or exchangeable for or
entitling the holder or owner to subscribe for or purchase any shares of capital
stock. The future issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of CMS Energy.
4.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
The Articles of Incorporation establish one series of preferred stock
designated as "4.50% Cumulative Convertible Preferred Stock Series B" consisting
of 5,000,000 shares with a liquidation preference of $50.00 per share (the
"CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B "). The Cumulative Convertible
Preferred Stock, Series B ranks prior to any series of our common stock as to
the payment of dividends and distribution of assets upon dissolution,
liquidation or winding up of CMS Energy, and is convertible into shares of
common stock. The holders of the Cumulative Convertible Preferred Stock, Series
B have no preemptive rights.
DIVIDENDS
Holders of shares of Cumulative Convertible Preferred Stock, Series B will
be entitled to receive, when, as and if declared by our board of directors out
of funds legally available for payment, cumulative cash dividends at the rate
per annum of 4.50% per share on the liquidation preference thereof of $50.00 per
share (equivalent to $2.25 per annum per share). Dividends on the Cumulative
Convertible Preferred Stock, Series B will be payable quarterly on March 1, June
1, September 1 and December 1 of each year at such annual rate, and shall
accumulate from the last date on which dividends were paid on shares of the old
preferred stock that was exchanged for the Cumulative Convertible Preferred
Stock, Series B pursuant to an exchange offer or, if no dividends have been
paid, from the issue date of the Cumulative Convertible Preferred Stock, Series
B, whether or not in any dividend period or periods there have been funds
legally available for the payment of such dividends. Accumulated unpaid
dividends accrue and cumulate dividends at the annual rate of 4.50%.
As long as any Cumulative Convertible Preferred Stock, Series B is
outstanding, we may not pay dividends or distributions on, or purchase, redeem
or otherwise acquire, subject to certain exceptions, shares of our common stock
unless all accumulated and unpaid dividends on the Cumulative Convertible
Preferred Stock, Series B have been paid or set aside for payment.
LIQUIDATION PREFERENCE
In the event of our voluntary or involuntary liquidation, winding-up or
dissolution, holders of Cumulative Convertible Preferred Stock, Series B will be
entitled to receive and to be paid out of our assets available for distribution
to our stockholders, before any payment or distribution is made to holders of
junior stock (including common stock), a liquidation preference in the amount of
$50.00 per share of Cumulative Convertible Preferred Stock, Series B, plus
accumulated and unpaid dividends on the shares to the date fixed for
liquidation, winding-up or dissolution. If, upon our voluntary or involuntary
liquidation, winding-up or dissolution, the amounts payable with respect to the
liquidation preference of the Cumulative Convertible Preferred Stock, Series B
and all parity stock are not paid in full, the holders of the Cumulative
Convertible Preferred Stock, Series B and the parity stock will share equally
and ratably in any distribution of our assets in proportion to the full
liquidation preference and accumulated and unpaid dividends to which they are
entitled.
VOTING RIGHTS
Except as required by Michigan law and our Articles of Incorporation, the
holders of Cumulative Convertible Preferred Stock, Series B have no voting
rights unless dividends payable on the Cumulative Convertible Preferred Stock,
Series B are in arrears for six or more quarterly periods (whether or not
consecutive). In that event, the holders of the Cumulative Convertible Preferred
Stock, Series B, voting as a single class with the shares of any other preferred
stock or preference securities having similar voting rights that are
exercisable, will be entitled at the next regular or special meeting of our
stockholders to elect two additional directors (or one director if fewer than
six directors comprise our board prior to appointment) and the number of
directors that comprise our board will be increased by the number of directors
so elected. These voting rights and the terms of the directors so elected will
continue until such time as the dividend arrearage on the Cumulative Convertible
Preferred Stock, Series B has been paid in full.
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REDEMPTION
We cannot redeem shares of the Cumulative Convertible Preferred Stock,
Series B.
MANDATORY CONVERSION
On or after December 5, 2008, we may, at our option, cause the Cumulative
Convertible Preferred Stock, Series B to be automatically converted into cash
and shares of common stock. We may exercise our conversion right only if, for 20
trading days within any period of 30 consecutive trading days (including the
last trading day of such 30-day period), the closing price of our common stock
exceeds 130% of the then prevailing conversion price of the Cumulative
Convertible Preferred Stock, Series B.
CONVERSION RIGHTS
A holder of record of Cumulative Convertible Preferred Stock, Series B may
convert its shares of Cumulative Convertible Preferred Stock, Series B at any
time into cash and shares of our common stock under any of the following
circumstances:
- during any calendar quarter (and only during such calendar quarter)
if the last reported sale price of our common stock for at least 20
trading days during the period of 30 consecutive trading days ending
on the last trading day of the previous calendar quarter is greater
than or equal to 120% of the applicable conversion price of the
Cumulative Convertible Preferred Stock, Series B on such last
trading day;
- upon the occurrence of specified corporate transactions; or
- subject to certain exceptions, during the five Business Day period
immediately following any ten consecutive trading-day period in
which the trading price per share of Cumulative Convertible
Preferred Stock, Series B for each day of that period was less than
95% of the product of the closing sale price of our common stock and
the applicable conversion rate of such share of Cumulative
Convertible Preferred Stock, Series B; provided, however, a holder
may not convert its shares of Cumulative Convertible Preferred
Stock, Series B if the average closing sale price of our common
stock for such ten consecutive trading-day period was between the
then applicable conversion price of the Cumulative Convertible
Preferred Stock, Series B and 120% of the then applicable conversion
price of the Cumulative Convertible Preferred Stock, Series B.
Upon the occurrence of any of the circumstances described above, holders
may convert any outstanding Cumulative Convertible Preferred Stock, Series B
into cash and shares of our common stock at an initial conversion rate of 5.0541
shares of common stock per share of Cumulative Convertible Preferred Stock,
Series B (equivalent to an initial conversion price of $9.893 per share of
common stock). The conversion rate and the equivalent conversion price in effect
at any given time are referred to as the "APPLICABLE CONVERSION RATE" and the
"APPLICABLE CONVERSION PRICE," respectively, and will be subject to adjustment
as described below. Subject to certain exceptions, once Cumulative Convertible
Preferred Stock, Series B is tendered for conversion, the value (the "CONVERSION
VALUE") of the cash and shares of our common stock, if any, to be received by a
holder converting a share of Cumulative Convertible Preferred Stock, Series B
will be determined by multiplying the conversion rate by the ten day average
closing stock price. We will deliver the conversion value to holders as follows:
(1) an amount in cash (the "PRINCIPAL RETURN") equal to the lesser of (a) the
aggregate conversion value of the Cumulative Convertible Preferred Stock, Series
B to be converted and (b) the aggregate liquidation preference of $50.00 per
share of Cumulative Convertible Preferred Stock, Series B to be converted; (2)
if the aggregate conversion value of the Cumulative Convertible Preferred Stock,
Series B to be converted is greater than the principal return, an amount in
whole shares (the "NET SHARES"), determined as set forth below, equal to such
aggregate conversion value less the principal return (the "NET SHARE AMOUNT");
and (3) an amount in cash in lieu of any fractional shares of common stock. We
will pay the principal return and cash in lieu of fractional shares and deliver
the net shares, if any, as promptly as practicable after determination of the
net share amount. The number of net shares to be paid will be determined by
dividing the net share amount by the ten day average closing stock price. The
"TEN DAY AVERAGE CLOSING STOCK PRICE" will be the average of the closing per
share prices of our common stock on the New York Stock Exchange on the ten
consecutive trading days beginning on the second trading day following the day
the Cumulative Convertible Preferred Stock, Series B is submitted for
conversion.
The conversion rate may be adjusted for certain reasons, but it will not
be adjusted for accumulated and unpaid dividends. Except as otherwise provided,
holders will not receive any payment representing accumulated and unpaid
dividends if any, upon conversion of a share of Cumulative Convertible Preferred
Stock, Series B; however, we will continue to pay additional dividends, if any,
on the Cumulative Convertible Preferred Stock, Series B and the common stock
issuable upon conversion thereof to the holder in accordance with the applicable
registration rights agreement.
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If we declare a cash dividend or cash distribution to all or substantially
all of the holders of our common stock, the applicable conversion rate shall be
increased to equal the number determined by multiplying the applicable
conversion rate in effect immediately prior to the record date for such dividend
or distribution by the following fraction:
(pre-dividend sale price)
(pre-dividend sale price - dividend adjustment amount)
provided that if the denominator of the foregoing fraction is less than $1.00
(including a negative amount), then in lieu of any adjustment, we shall make
adequate provision so that each holder of Cumulative Convertible Preferred
Stock, Series B shall have the right to receive upon conversion, in addition to
the cash and shares of common stock issuable upon such conversion, the amount of
cash such holder would have received had such holder converted its Cumulative
Convertible Preferred Stock, Series B solely into shares of our common stock at
the then applicable conversion rate immediately prior to the record date for
such cash dividend or cash distribution. "PRE-DIVIDEND SALE PRICE" means the
average of the last reported sale price of our common stock price for the five
consecutive trading days ending on the trading day immediately preceding the
record date for such dividend or distribution. "DIVIDEND ADJUSTMENT AMOUNT"
means the full amount of the dividend or distribution to the extent payable in
cash applicable to one share of our common stock.
PRIMARY SOURCE OF FUNDS OF CMS ENERGY; RESTRICTIONS ON SOURCES OF DIVIDENDS
The ability of CMS Energy to pay (i) dividends on its capital stock and
(ii) its indebtedness, including the Notes, depends and will depend
substantially upon timely receipt of sufficient dividends or other distributions
from its subsidiaries, in particular Consumers and Enterprises. Each of
Consumers' and Enterprises' ability to pay dividends on its common stock depends
upon its revenues, earnings and other factors. Consumers' revenues and earnings
will depend substantially upon rates authorized by the MPSC.
Consumers' Restated Articles of Incorporation ("ARTICLES") provide two
restrictions on its payment of dividends on its common stock. First, prior to
the payment of any common stock dividend, Consumers must reserve retained
earnings after giving effect to such dividend payment of at least (i) $7.50 per
share on all then outstanding shares of its preferred stock, (ii) in respect to
its Class A Preferred Stock, 7.5% of the aggregate amount established by its
Board of Directors to be payable on the shares of each series thereof in the
event of involuntary liquidation of Consumers and (iii) $7.50 per share on all
then outstanding shares of all other stock over which its preferred stock and
Class A Preferred Stock do not have preference as to the payment of dividends
and as to assets. Second, dividend payments during the 12 month period ending
with the month the proposed payment is to be paid are limited to: (i) 50% of net
income available for the payment of dividends during the base period, if the
ratio of common stock and surplus to total capitalization and surplus for 12
consecutive calendar months within the 14 calendar months immediately preceding
the proposed dividend payment (the "BASE PERIOD"), adjusted to reflect the
proposed dividend, is less than 20%; and (ii) 75% of net income available for
the payment of dividends during the base period if the ratio of common stock and
surplus to total capitalization and surplus for the base period, adjusted to
reflect the proposed dividend, is at least 20% but less than 25%.
In addition, Consumers' indenture dated as of January 1, 1996, between
Consumers and The Bank of New York, as trustee (the "PREFERRED SECURITIES
INDENTURE"), and certain preferred securities guarantees by Consumers dated
January 23, 1996, September 11, 1997 and October 25, 1999 (collectively, the
"CONSUMERS PREFERRED SECURITIES GUARANTEES"), in connection with which the 8.36%
Trust Originated Preferred Securities of Consumers Power Company Financing I,
the 8.20% Trust Originated Preferred Securities of Consumers Energy Company
Financing II, and the 9.00% Trust Preferred Securities of Consumers Energy
Company Financing IV (collectively, the "CONSUMERS TRUST PREFERRED SECURITIES")
were issued, provide that Consumers shall not declare or pay any dividend on,
make any distributions with respect to, or redeem, purchase or make a
liquidation payment with respect to, any of its capital stock if (i) there shall
have occurred any event that would constitute an event of default under the
Preferred Securities Indenture or the trust agreements pursuant to which the
Consumers Trust Preferred Securities were issued, (ii) a default has occurred
with respect to its payment of any obligations under the Consumers Preferred
Securities Guarantees or certain Consumers common stock guarantees or (iii) it
gives notice of its election to extend the interest payment period on the
subordinated notes issued under the Preferred Securities Indenture, at any time
for up to 20 consecutive quarters, provided, however, Consumers may declare and
pay stock dividends where the dividend stock is the same stock as that on which
the dividend is being paid.
Consumers' ability to pay dividends is also restricted by the Amended and
Restated Credit Agreement dated as of August 3, 2004 among Consumers, JPMorgan
Chase Bank, N.A., as agent, and the financial institutions named therein.
Pursuant to this loan agreement, so long as there exists no event of default
under the loan agreement, Consumers may pay dividends in an aggregate amount not
to exceed $300 million during any calendar year.
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Consumers' Articles also prohibit the payment of cash dividends on its
common stock if Consumers is in arrears on preferred stock dividend payments.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, Consumers or Enterprises would not be able to pay its debts as they
become due in the usual course of business, or its total assets would be less
than the sum of its total liabilities plus, unless the Articles permit
otherwise, the amount that would be needed, if Consumers or Enterprises were to
be dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
receiving the distribution. Currently, it is Consumers' policy to pay annual
dividends equal to 80% of its annual consolidated net income. Consumers' Board
of Directors reserves the right to change this policy at any time.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a discussion of the material U.S. federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
common stock issuable upon conversion thereof by a holder that will purchase the
Notes and hold them as capital assets within the meaning of the Internal Revenue
Code of 1986, as amended (the "CODE"). This discussion does not address any tax
considerations that may apply to holders subject to special tax rules, such as
banks, insurance companies, dealers in securities or currencies, persons that
mark-to-market their securities, tax-exempt entities, tax-deferred or other
retirement accounts, persons subject to the alternative minimum tax, persons
that hold Notes as a position in a straddle or as part of a hedging,
constructive sale or conversion transaction for U.S. federal income tax
purposes, or U.S. Holders (as defined herein) that have a functional currency
other than the U.S. dollar.
For purposes of this discussion, a "U.S. HOLDER" means a beneficial owner
of Notes that is, for U.S. federal income tax purposes:
- an individual who is a citizen or resident of the United States;
- a corporation, or other entity treated as a corporation for U.S.
federal income tax purposes, created or organized in or under the laws
of the United States, any State thereof or the District of Columbia;
- an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or
- a trust the administration of which is subject to the primary
supervision of a court in the United States and for which one or more
U.S. persons have the authority to control all substantial decisions.
The term "U.S. HOLDER" also includes certain former citizens and residents
of the United States.
If a partnership holds Notes, the U.S. federal income tax treatment of a
partner generally will depend on the status of the partner and the activities of
the partnership. Partners of partnerships that will hold Notes should consult
their tax advisors.
As used herein, a "NON-U.S. HOLDER" is a beneficial owner of Notes that is
not a U.S. Holder.
This summary is based on the Code, Treasury regulations promulgated under
the Code, and judicial and administrative interpretations thereof, all as in
effect on the date hereof and all of which are subject to change, which change
may be retroactive and may affect the tax consequences described herein.
THIS DISCUSSION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL
TAX CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE NOTES OR THE COMMON STOCK
ISSUABLE UPON CONVERSION THEREOF. IT DOES NOT TAKE INTO ACCOUNT THE INDIVIDUAL
CIRCUMSTANCES OF ANY PARTICULAR PROSPECTIVE INVESTOR, NOR DOES IT ADDRESS ANY
ASPECT OF ESTATE OR GIFT TAX LAWS OR OF STATE, LOCAL OR FOREIGN TAX LAWS. WE
STRONGLY URGE A HOLDER TO CONSULT ITS OWN TAX ADVISOR FOR ADVICE CONCERNING THE
APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THAT HOLDER'S PARTICULAR
SITUATION, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER STATE, LOCAL OR FOREIGN
TAX LAWS.
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U.S. HOLDERS
PAYMENTS OF INTEREST
Subject to the possible application of the amortizable bond premium market
discount rules, which may apply to a U.S. Holder who purchased the Old Notes at
a price other than the offering price, and under the assumption that the Old
Notes were issued with less than a de minimis amount of original issue discount
and that the exchange of the Old Notes for the Notes is not treated as a taxable
"exchange" for federal income tax purposes, interest paid on the Notes will be
included in the income of a U.S. Holder as ordinary income at the time it is
received or accrued, in accordance with such holder's regular method of
accounting for U.S. federal income tax purposes.
If the Notes' stated redemption price at maturity (generally, the sum of
payments under a Note other than payments of stated interest unconditionally
payable at least annually) exceeds their issue price by more than a de minimis
amount, a U.S. Holder will be required to include such excess in income as
original issue discount, as it accrues, in accordance with a constant yield
method based on a compounding of interest before the receipt of any cash payment
attributable to this accrued income. It is anticipated (and this discussion
assumes) that the Notes will be issued with less than a de minimis amount of
original issue discount.
We may be required to pay additional amounts on the Notes if we fail to
comply with certain obligations under the registration rights agreement
("ADDITIONAL AMOUNTS"). See "Registration Rights." If there were more than a
remote likelihood that we would pay additional amounts, the Notes could be
subject to the rules applicable to contingent payment debt instruments,
including mandatory accrual of interest determined by using the noncontingent
bond method, which method generally requires interest to be included in the
income of a U.S. Holder according to a projected payment schedule, subject to
adjustment at year end to reflect actual payments made during the year. We
believe (and this discussion assumes) that the likelihood of payment of
additional amounts is remote and, therefore, the noncontingent bond method will
not apply.
SALE, EXCHANGE, REDEMPTION OR REPURCHASE OF NEW NOTES
A U.S. Holder's tax basis in a Note generally will equal its cost. A U.S.
Holder generally will recognize gain or loss on the sale, exchange (other than
conversion) redemption or repurchase of a Note equal to the difference between
the amount realized on the disposition, excluding any amounts attributable to
accrued but unpaid interest (which will be taxable as such), and the U.S.
Holder's tax basis in the Note. This gain or loss will be capital gain or loss
and will generally be long-term capital gain or loss if the U.S. Holder has held
the Note for more than one year and otherwise will be short-term capital gain or
loss. Long-term capital gains of individuals are subject to U.S. federal income
tax at preferential rates, which have been reduced for long-term capital gains
recognized before January 1, 2009. Short-term capital gains are taxed at rates
applicable to ordinary income. The deductibility of capital losses is subject to
limitations.
CONVERSION OF THE NOTES
If a U.S. Holder surrenders a Note for conversion and we deliver a
combination of shares of common stock and cash, the tax treatment of the U.S.
Holder is uncertain. Assuming the Note is a "security" for U.S. federal income
tax purposes and the conversion is treated as a recapitalization within the
meaning of Section 368(a)(1)(E) of the Code, a U.S. Holder would be required to
recognize any gain (but not loss) realized, but only to the extent such gain
does not exceed the amount of cash received (other than any cash received in
lieu of a fractional share or attributable to accrued but unpaid interest, as
discussed below). Such gain should be long-term capital gain if the U.S. Holder
held the Note for more than one year at the time of the conversion. Furthermore,
a U.S. Holder's basis in the common stock received in the conversion (excluding
any shares of common stock attributable to accrued but unpaid interest) would be
equal to such U.S. Holder's adjusted tax basis in the Note, reduced by any cash
received in the conversion (other than any cash received in lieu of a fractional
share or attributable to accrued but unpaid interest) and increased by the
amount of any gain recognized on the conversion (other than gain with respect to
a fractional share). Alternatively, if the conversion is not treated as a
recapitalization, but rather as a sale of all or a portion of the Note, a U.S.
Holder could be required to recognize gain as described above under "Sale,
Exchange, Redemption or Repurchase of New Notes." If the conversion was treated
as a sale of only a portion the Note, a U.S. Holder's basis in the Note would be
allocated between the common stock received (including any fractional share
treated as received) and the portion of the Note that is treated as sold (in
both cases excluding any amounts attributable to accrued but unpaid interest).
U.S. Holders should consult their tax advisors regarding the proper treatment to
them of the receipt of a combination of cash and common stock upon a conversion
of the Notes, which could differ from the alternative tax treatments described
above.
64
If, upon conversion of Notes, cash is received in lieu of a fractional
share, the amount of gain or loss recognized by a U.S. Holder will be equal to
the difference between the amount of cash received in respect of the fractional
share and the portion of the U.S. Holder's adjusted tax basis in the Notes
allocable to the fractional share.
The amount of any cash and the fair market value of any common stock
received by the U.S. Holder that is attributable to accrued but unpaid interest
not previously included in income will be taxable to the U.S. Holder as ordinary
income. A U.S. Holder's tax basis in any such shares of common stock will equal
their fair market value on the date of conversion and the holding period will
begin on the day following the conversion.
The holding period for any common stock received upon conversion
(excluding any common stock received that is attributable to accrued but unpaid
interest) will include the holding period for the Note.
CONSTRUCTIVE DIVIDENDS
The conversion price of the Notes is subject to adjustment under certain
circumstances. Section 305 of the Code and the Treasury regulations issued
thereunder may treat the U.S. Holder of the Notes as having received a
constructive distribution, resulting in ordinary income characterized as a
dividend (subject to a possible dividends-received deduction in the case of
certain corporate U.S. Holders) to the extent of our current and accumulated
earnings and profits. This will occur if and to the extent that certain
adjustments in the conversion price (for example, an adjustment to reflect a
taxable dividend to holders of common stock) increase the proportionate interest
of a U.S. Holder of the Notes in the fully diluted common stock, whether or not
such U.S. Holder ever exercises its conversion privilege. Similarly, a failure
to adjust the conversion price of the Notes to reflect a stock dividend or
similar event could give rise to constructive dividend income to U.S. Holders of
our common stock in certain circumstances. In the case of any such constructive
dividend distribution, a U.S. Holder may recognize income even though such U.S.
Holder does not receive any cash or property as a result of the conversion price
adjustment. Generally, a U.S. Holder's basis in a Note will be increased by the
amount of any constructive dividend. Certain adjustments to the conversion
price, as provided in this prospectus, made pursuant to a bona fide, reasonable
adjustment formula which has the effect of preventing dilution of the interests
of the holders of the Notes, however, generally will not be considered to result
in a constructive dividend.
DISTRIBUTIONS ON COMMON STOCK
Distributions, if any, made on our common stock after a conversion
generally will be treated as a dividend to the extent of our current or
accumulated earnings and profits, calculated for U.S. federal income tax
purposes. Distributions in excess of our current and accumulated earnings and
profits will be treated as a non-taxable return of capital that reduces the U.S.
Holder's basis in the common stock until the basis has been reduced to zero, and
thereafter as capital gain. Dividends received by a corporate U.S. Holder may
qualify for a dividends-received deduction, and, for taxable years beginning
before January 1, 2009, dividends received by an individual may qualify for
preferential rates of taxation; however, in each case, certain holding period
requirements and other limitations may apply.
SALE OR EXCHANGE OF COMMON STOCK
Upon the sale or exchange of common stock, a U.S. Holder generally will
recognize capital gain or loss equal to the difference between the amount of
cash and the fair market value of any property received upon the sale or
exchange and such U.S. Holder's adjusted tax basis in the common stock. Such
capital gain or loss will be long-term capital gain or loss if the U.S. Holder's
holding period in common stock is more than one year and otherwise will be
short-term gain or loss. Long-term capital gains of individuals are subject to
U.S. federal income tax at preferential rates, which have been reduced for
long-term capital gains recognized before January 1, 2009. Short-term capital
gains are taxed at rates applicable to ordinary income, which, for gains
recognized before January 1, 2009, may be taxed at rates higher than those
applicable to dividends. The deductibility of capital losses is subject to
limitations.
NON-U.S. HOLDERS
PAYMENTS OF INTEREST
Interest on Notes paid to a Non-U.S. Holder will not be subject to U.S.
federal income tax unless: (i) the interest is "effectively connected" with the
conduct by the Non-U.S. Holder of a U.S. trade or business (and, if required
under an applicable income tax treaty, is attributable to a permanent
establishment maintained in the United States by the Non-U.S. Holder); (ii) the
Non-U.S. Holder owns, actually, indirectly or constructively, 10% or more of the
total combined voting power of all classes of our stock entitled to vote, is a
controlled foreign corporation related, directly or indirectly, to us through
stock ownership or is a bank which acquired the
65
Notes in consideration for an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of business; or (iii) the Non-U.S.
Holder fails to certify its nonresident status (as described below).
Except to the extent that an applicable income tax treaty otherwise
provides, generally a Non-U.S. Holder will be taxed in the same manner as a U.S.
Holder with respect to interest that is effectively connected with the Non-U.S.
Holder's conduct of a U.S. trade or business. A corporate Non-U.S. Holder may
also, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate (or such lower rate as may be specified by an applicable
income tax treaty) on any "effectively connected" interest on the Notes.
To certify its nonresident status and avoid as much as a 30 percent
withholding tax, a Non-U.S. Holder generally must provide an IRS ("INTERNAL
REVENUE SERVICE") Form W-8BEN (or appropriate substitute form) to us or our
paying agent. If a Non-U.S. Holder holds the Notes through a financial
institution or other agent acting on the Holder's behalf, the Non-U.S. Holder
will be required to provide appropriate documentation to the agent. The agent
will then be required to provide certification to us or our paying agent, either
directly or through other intermediaries. If a Non-U.S. Holder is engaged in a
U.S. trade or business, it would be required to provide to the withholding agent
a properly executed IRS Form W-8ECI (or appropriate substitute form) in lieu of
the certification of nonresident status to avoid withholding tax. Non-U.S.
Holders should consult their tax advisors concerning certification requirements.
CONVERSION OF THE NOTES
Except as set forth herein, a Non-U.S. Holder will not be subject to U.S.
tax upon the conversion of a Note. The amount of any cash and the fair market
value of any common stock received by a Non-U.S. Holder that is attributable to
accrued but unpaid interest will be treated as described above under "Non-U.S.
Holders -- Payment of Interest." To the extent a Non-U.S. Holder receives cash
upon conversion of a Note, such cash may give rise to gain that would be subject
to the rules described under "Non-U.S. Holders -- Sale, Exchange, Redemption or
Repurchase of the New Notes or Common Stock" below.
SALE, EXCHANGE, REDEMPTION OR REPURCHASE OF THE NOTES OR COMMON STOCK
If a Non-U.S. Holder requires us to purchase a Note or we redeem a Note of
a Non-U.S. Holder, any cash received by such Non-U.S. Holder attributable to
accrued but unpaid interest not previously included in income of the Non-U.S.
Holder will be subject to the rules described under "Non U.S. Holders -Payments
of Interest."
Except as set forth under "Non-U.S. Holders -- Conversion of the Notes"
above, gain recognized by a Non-U.S. Holder on the sale, exchange, redemption or
repurchase of Notes or the sale or exchange of common stock will not be subject
to U.S. federal income tax unless: (i) the gain is "effectively connected" with
the conduct by the Non-U.S. Holder of a U.S. trade or business (and, if required
under an applicable income tax treaty, is attributable to a permanent
establishment maintained in the United States by the Non-U.S. Holder); (ii) in
the case of gain recognized by a Non-U.S. Holder who is an individual, he or she
is present in the United States for a total of 183 days or more during the
taxable year in which such gain is recognized and certain other conditions are
met; or (iii) in certain circumstances, if we are, or have been, a U.S. real
property holding corporation within the meaning of Section 897(c)(2) of the Code
for U.S. federal income tax purposes. We do not believe that we are currently a
U.S. real property holding corporation or that we will become one in the future.
Except to the extent that an applicable income tax treaty otherwise
provides, generally a Non-U.S. Holder will be taxed in the same manner as a U.S.
Holder with respect to gain that is effectively connected with the Non-U.S.
Holder's conduct of a U.S. trade or business. A corporate Non-U.S. Holder may
also, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate (or such lower rate as may be specified by an applicable
income tax treaty) on any "effectively connected" gain on the Notes.
DISTRIBUTIONS ON COMMON STOCK
Distributions, if any, made on our common stock after a conversion
generally will be treated as a dividend to the extent of our current or
accumulated earnings and profits, calculated for U.S. federal income tax
purposes. Dividends paid on common stock held by a Non-U.S. Holder generally
will be subject to U.S. withholding tax at a 30% rate, unless an applicable U.S.
income tax treaty provides for the reduction or elimination of such withholding
tax or the dividends are effectively connected with the Non-U.S. Holder's
conduct of a U.S. trade or business. A Non-U.S. Holder generally will be
required to provide an IRS Form W-8BEN (or appropriate substitute form) to claim
a reduction or exemption from withholding.
Except to the extent that an applicable income tax treaty otherwise
provides, generally a Non-U.S. Holder will be taxed in the same manner as a U.S.
Holder with respect to dividends that are effectively connected with the
Non-U.S. Holder's conduct of a U.S. trade or business. A corporate Non-U.S.
Holder may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate (or such lower rate as may be specified by an
applicable income tax treaty) on any "effectively connected" dividends.
66
Distributions in excess of our current and accumulated earnings and
profits will be treated as a non-taxable return of capital that reduces the U.S.
Holder's basis in the common stock until the basis has been reduced to zero, and
thereafter as capital gain. Such capital gain will generally not be taxable to a
Non-U.S. Holder except under the circumstances described above relating to the
sale, exchange, conversion or redemption of the Notes or common stock.
A Non-U.S. Holder deemed to have received a constructive dividend in
respect of a change in the conversion rate of the Notes generally will be
subject to the rules relating to the U.S. federal income tax treatment of
dividends described herein.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
A U.S. Holder (other than an "exempt recipient," including a corporation
and certain other persons who, when required, demonstrate their exempt status)
may be subject to backup withholding at the applicable statutory rate on, and to
information reporting with respect to, payments of principal, premium, if any,
and interest on the Notes, payments of dividends on our common stock and to
proceeds from the sale, exchange or other disposition of the Notes or our common
stock if the U.S. Holder fails to supply an accurate taxpayer identification
number or otherwise fails to comply with applicable certification requirements.
Backup withholding tax is not an additional tax and may be credited against a
U.S. Holder's regular U.S. federal income tax liability or refunded by the IRS.
Non-U.S. Holders are generally exempt from information reporting and backup
withholding provided, if necessary, they certify their nonresident status or
otherwise demonstrate their exemption. Any backup withholding tax generally will
be allowed as a credit or refund against the Non-U.S. Holder's U.S. federal
income tax liability, provided that the required information is timely furnished
to the IRS.
SELLING SECURITYHOLDERS
The Old Notes were originally issued by us and sold by Citigroup Global
Markets Inc., Merrill, Lynch, Pierce, Fenner & Smith Incorporated, and Deutsche
Bank Securities Inc. (the "INITIAL PURCHASERS") in transactions exempt from the
registration requirements of the Securities Act to persons reasonably believed
by the initial purchasers to be "qualified institutional buyers" as defined by
Rule 144A under the Securities Act. The Old Notes were exchanged for Notes
pursuant to an exchange offer. The selling securityholders may from time to time
offer and sell pursuant to this prospectus any or all of the Notes listed below
and the shares of common stock issued upon conversion of such Notes. When we
refer to the "selling securityholders" in this prospectus, we mean those persons
listed in the table below, as well as the assignees, transferees, successors and
others who later hold any of the selling securityholders' interests in
restricted securities.
The table below sets forth the name of each selling securityholder, the
principal amount of Notes that each selling securityholder may offer pursuant to
this prospectus and the number of shares of common stock into which such Notes
are convertible. Unless set forth below, to our knowledge, none of the selling
securityholders has, or within the past three years has had, any material
relationship with us or any of our predecessors or affiliates or beneficially
owns in excess of 1% of our outstanding common stock.
The principal amounts of the Notes provided in the table below is based on
information provided to us by the selling securityholders at various dates
through January 31, 2005, and the percentages are based on $150 million
aggregate principal amount of Notes outstanding. The number of shares of common
stock that may be sold is based on the current conversion rate of 93.7137 shares
of common stock per $1,000 principal amount of Notes.
Since the date on which each selling securityholder provided the
information below, such selling securityholder may have sold, transferred or
otherwise disposed of all or a portion of its Notes in a transaction exempt from
the registration requirements of the Securities Act. Information concerning the
selling securityholders is expected to change from time to time. If we are
informed of any changed information, it will be set forth in supplements to this
prospectus to the extent required. In addition, the conversion ratio, and
therefore the number of shares of our common stock issuable upon conversion of
the Notes, is subject to adjustment under the circumstances described in this
prospectus. Accordingly, the number of shares of common stock issuable upon
conversion of the Notes may increase or decrease.
The selling securityholders may from time to time offer and sell any or
all of the securities under this prospectus. Because the selling securityholders
are not obligated to sell the Notes or shares of common stock issuable upon
conversion of the Notes, we cannot estimate the amount of Notes or common stock
that the selling securityholders will hold upon consummation of any such sales.
67
AGGREGATE
PRINCIPAL AMOUNT OF PERCENTAGE OF NUMBER OF SHARES OF
NOTES THAT MAY BE NOTES COMMON STOCK COVERED BY
NAME(1) SOLD OUTSTANDING THIS PROSPECTUS (2)
------- ------------------- ------------- ----------------------
Amaranth L.L.C.................................................... $26,650,000 17.8% 417,072
Associated Electric & Gas Insurance Services Ltd.................. 500,000 * 7,825
Banc of America Securities LLC.................................... 1,350,000 * 21,127
BNP Paribas Equity Strategies, SNC................................ 6,034,000 4.0% 94,432
CNH CA Master Account, L.P........................................ 1,500,000 1.0% 23,475
Context Convertible Arbitrage Fund LP............................. 425,000 * 6,651
Context Convertible Arbitrage Offshore, LTD....................... 1,375,000 * 21,518
CooperNeff Convertible Strategies (Cayman) Master Fund, L.P. ..... 3,799,000 2.5% 59,454
Highbridge International LLC...................................... 20,000,000 13.3% 313,000
Lyxor/Convertible Arbitrage Fund Limited.......................... 939,000 * 14,695
Lyxor / Context Fund LTD.......................................... 200,000 * 3,130
Pioneer High Yield Fund........................................... 10,550,000 7.0% 165,107
Pioneer U.S. High Yield Corp. Bond Sub Fund....................... 650,000 * 10,172
Polaris Vega Fund L.P............................................. 6,000,000 4.0% 93,900
Royal Bank of Canada.............................................. 20,000 * 313
San Diego County Employee Retirement Association.................. 2,300,000 1.5% 35,995
SingleHedge U.S. Convertible Arbitrage Fund....................... 1,401,000 * 21,925
Sturgeon Limited.................................................. 1,227,000 * 19,202
Sunrise Partners Limited Partnership.............................. 12,000,000 8.0% 187,800
Wachovia Bank National Association................................ 2,500,000 1.7% 39,125
Zazove Convertible Arbitrage Fund, L.P............................ 7,200,000 4.8% 112,680
Zazove Hedged Convertible Fund, L.P............................... 3,000,000 2.0% 46,950
Zazove Income Fund, L.P........................................... 1,000,000 * 15,650
Zurich Institutional Benchmarks Master Fund Ltd................... 2,000,000 1.3% 31,300
---------------
* Less than 1%
(1) Specific information about these holders will be set forth in supplements
or amendments to this prospectus, if required.
(2) Assumes a conversion at the initial contingent conversion price of $12.81
per share of common stock. This results in a settlement of 15.65 shares of
common stock per Note. This conversion rate is subject to adjustment as
described under "Description of the Notes - Conversion Rights - Conversion
Rate Adjustments." As a result, the amount of common stock issuable upon
conversion of the Notes may increase or decrease in the future.
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PLAN OF DISTRIBUTION
The selling securityholders are the only persons authorized to offer and
sell the securities covered by this prospectus. We will not receive any of the
proceeds from the offering of the Notes or the common stock by the selling
securityholders. In connection with the initial offering of the Old Notes, we
entered into a registration rights agreement. We granted certain registration
rights to holders of the Notes pursuant to our exchange offer. Securities may
only be offered or sold under this prospectus pursuant to the terms of the
registration rights agreement. However, selling securityholders may resell all
or a portion of the securities in open market transactions in reliance upon Rule
144 or 144A under the Securities Act, provided they meet the criteria and
conform to the requirements of one of these rules. We are registering the Notes
and shares of our common stock covered by this prospectus to permit holders to
conduct public secondary trading of these securities from time to time after the
date of this prospectus. We have agreed, among other things, to bear all
expenses, other than underwriting discounts, expenses of each holder's counsel,
selling commissions and transfer taxes, in connection with the registration and
sale of the Notes and shares of common stock covered by this prospectus.
We have been advised by the selling securityholders that the selling
securityholders may sell all or a portion of the securities offered hereby from
time to time:
- directly; or
- through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, commissions or concessions
from the selling securityholders or from the purchasers of the
securities for whom they may act as agent.
The Notes and the shares of our common stock may be sold from time to time
in one or more transactions at:
- fixed prices, which may be changed;
- prevailing market prices at the time of sale;
- varying prices determined at the time of sale; or
- negotiated prices.
These prices will be determined by the holders of the securities or by
agreement between these holders and underwriters or dealers who may receive fees
or commissions in connection with the sale. The aggregate proceeds to the
selling securityholders from the sale of the securities offered by them hereby
will be the purchase price of the securities less discounts and commissions, if
any.
The sales described in the preceding paragraph may be effected in
transactions:
- on any national securities exchange or quotation system on which the
Notes or shares of our common stock may be listed or quoted at the
time of sale, including the New York Stock Exchange in the case of
our common stock;
- in the over-the-counter market;
- in transactions otherwise than on such exchanges or services or in
the over-the-counter market; or
- through the writing of options or similar securities.
These transactions may include block transactions or crosses. Crosses are
transactions in which the same broker acts as an agent on both sides of the
trade.
In connection with the sales of the Notes and shares of our common stock
or otherwise, the selling securityholders may enter into hedging transactions
with broker-dealers. These broker-dealers may in turn engage in short sales of
the securities in the course of hedging their positions. The selling
securityholders may also sell the securities short and deliver the securities to
close out short positions, or loan or pledge the securities to broker-dealers
that in turn may sell the securities.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of the Notes or the shares of our
common stock covered by this prospectus. Selling securityholders may sell none,
some or all of the securities covered by this prospectus. In addition, we cannot
assure you that a selling securityholder will not sell, donate or otherwise
transfer the Notes or common stock by other means not described in this
prospectus.
Our common stock is listed for trading on the New York Stock Exchange.
69
The selling securityholders and any broker-dealers, agents or underwriters
that participate with the selling securityholders in the distribution of the
Notes or our common stock may be deemed to be "underwriters" within the meaning
of the Securities Act. In this case, any commissions received by these
broker-dealers, agents or underwriters and any profit on the resale of the Notes
or our common stock purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. In addition, any profits
realized by the selling securityholders may be deemed to be underwriting
commissions under the Securities Act. To the extent the selling securityholders
may be deemed to be underwriters, the selling securityholders may be subject to
statutory liabilities, including, but not limited to, liabilities under Sections
11, 12 and 17 or the Securities Act and Rule 10b-5 under the Exchange Act.
The selling securityholders will be subject to the prospectus delivery
requirements of the Securities Act. At any time a particular offer of the
securities is made, we will, if reasonably requested, prepare a revised
prospectus or prospectus supplement, if required, which discloses information
required to be disclosed under the registration rights agreement including:
- the name of the selling securityholders and any participating
underwriters, broker-dealers or agents;
- the aggregate amount and type of securities being offered;
- the offering price of the securities and other material terms
of the offering; and
- any discounts, commissions, concessions or other items
constituting compensation from the selling securityholders and
any discounts, commissions or concessions allowed or reallowed
or paid to dealers.
The prospectus supplement or a post-effective amendment will be filed with
the SEC to reflect the disclosure of additional information with respect to the
distribution of the securities.
We have agreed to indemnify the initial purchasers and each selling
securityholder, and each selling securityholder has agreed to indemnify us, our
directors, our officers who sign the shelf registration statement to which this
prospectus relates and each person, if any, who controls CMS Energy within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act, against specified liabilities arising under the Securities Act, the
Exchange Act or other applicable law.
The selling securityholders and any other person participating in such
distribution will be subject to certain provisions of the Exchange Act. The
Exchange Act rules include, without limitation, Regulation M, which may limit
the timing of purchases and sales of any of the Notes and the underlying shares
of our common stock by the selling securityholders and any such other person. In
addition, Regulation M of the Exchange Act may restrict the ability of any
person engaged in the distribution of the Notes and the underlying shares of our
common stock to engage in market-making activities with respect to the
particular Notes and the underlying shares of our common stock being distributed
for a period of up to five business days prior to the commencement of
distribution. This may affect the marketability of the Notes and the underlying
shares of our common stock and the ability of any person or entity to engage in
market-making activities with respect to the Notes and the underlying shares of
our common stock.
Under the registration rights agreement, we are obligated to use our
reasonable best efforts to keep the shelf registration statement of which this
prospectus forms a part effective until the earliest of:
- the time when all of the Notes have been sold pursuant to the
shelf registration statement of which this prospectus forms a
part;
- the time when the holders of the Notes are able to sell all
such Notes pursuant to Rule 144 under the Securities Act;
- the time when there are no longer any Notes outstanding; or
- July 17, 2005.
Our obligation to keep the shelf registration statement effective is
subject to specified, permitted exceptions set forth in the registration rights
agreement. In these cases, we may prohibit offers and sales of the Notes and
shares of our common stock pursuant to the shelf registration statement.
We may suspend the use of this prospectus upon the occurrence or existence
of certain specified events or conditions that, in our sole judgment, make it
appropriate for us to take such action. Each selling securityholder has agreed
not to trade securities from the time the selling securityholder receives notice
from us of this type of event or condition until the selling securityholder
receives a prospectus supplement or amendment, or is advised that this
prospectus may be used.
70
LEGAL MATTERS
Robert C. Shrosbree, Assistant General Counsel for CMS Energy Corporation,
will render opinions as to the legality of the Notes for CMS Energy. Jay M.
Silverman, Director of Tax Planning and Assistant Tax Counsel, will render
opinions as to certain tax matters regarding the Notes for CMS Energy.
EXPERTS
The consolidated financial statements and schedule of CMS Energy appearing
in its Annual Report (Form 10-K/A (Amendment No. 2)) for the year ended December
31, 2003 have been audited by Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon included therein and
incorporated herein by reference which are based in part on the report of Price
Waterhouse, independent accountants, for Jorf Lasfar and the reports of
PricewaterhouseCoopers LLP, independent registered public accounting firm, for
2003 and 2002 and Arthur Andersen LLP, independent accountants (who have ceased
operations), for 2001 for the MCV Partnership. Such consolidated financial
statements and schedule are incorporated herein by reference in reliance upon
such reports given on the authority of such firms as experts in accounting and
auditing.
The financial statements of Emirates CMS Power Company PJSC appearing in
CMS Energy's Annual Report (Form 10-K/A (Amendment No. 2)) for the year ended
December 31, 2003 have been audited by Ernst & Young, independent registered
public accounting firm, as set forth in their report thereon included therein
and incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of SCP Investments (No.1) Pty Ltd
for the year ended June 30, 2004 appearing in CMS Energy's Annual Report (Form
10-K/A (Amendment No. 2)) for the year ended December 31, 2003 have been audited
by Ernst & Young, independent registered public accounting firm, as set forth in
their report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of Jorf Lasfar as of December 31, 2003 and 2002
and for each of the three years in the period ended December 31, 2003
incorporated by reference in this prospectus supplement and the accompanying
prospectus have been so included in reliance on the report of Price Waterhouse,
independent accountants for Jorf Lasfar, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of the MCV Partnership as of and for
the years ended December 31, 2003 have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report
appearing in CMS Energy's Annual Report (Form 10-K/A (Amendment No. 2) for the
year ended December 31, 2003, which report is incorporated by reference herein.
Such financial statements, to the extent that they have been included in the
financial statements of CMS Energy, have been so included in reliance on the
report of such independent registered public accounting firm given on the
authority of said firm as experts in auditing and accounting.
The audited consolidated financial statements of the MCV Partnership for
the year ended December 31, 2001, incorporated by reference in this prospectus
supplement and the accompanying prospectus, have been audited by Arthur Andersen
LLP, independent accountants. Arthur Andersen LLP has not consented to the
inclusion of their report on the financial statements of the MCV Partnership for
the year ended December 31, 2001 in this prospectus supplement, and we have
dispensed with the requirement to file their consent in reliance upon Rule 437a
under the Securities Act. Because Arthur Andersen LLP has not consented to the
incorporation by reference of their report in this prospectus supplement, you
will not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Arthur Andersen LLP or any omissions to state a
material fact required to be stated therein.
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