AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 2004
REGISTRATION NO. _________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CMS ENERGY CORPORATION
(Exact name of registrant as
specified in its charter)
MICHIGAN
(State or other jurisdiction of
incorporation or organization)
38-2726431
(I.R.S. Employer Identification No.)
ONE ENERGY PLAZA
JACKSON, MICHIGAN 49201
(517) 788-0550
(Address, including zip code, and
telephone number, including area code, of
registrant's principal executive office)
THOMAS J. WEBB
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
CMS ENERGY CORPORATION
ONE ENERGY PLAZA
JACKSON, MICHIGAN 49201
(517) 788-1030
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
It is respectfully requested that the Commission send copies of all notices,
orders and communications to:
ROBERT C. SHROSBREE
ASSISTANT GENERAL COUNSEL
CMS ENERGY CORPORATION
ONE ENERGY PLAZA
JACKSON, MICHIGAN 49201
(517) 768-7323
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE (1) REGISTRATION FEE
----------------------------------------- -------------- -------------------------- -------------------------- ----------------
3.375% Convertible Senior Notes due 2023 $150,000,000 100% $150,000,000 $19,005
(1) Estimated pursuant to Rule 457(f) of the Securities Act solely for the
purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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PROSPECTUS
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion dated September 24, 2004
[CMS ENERGY LOGO]
$150,000,000
CMS ENERGY CORPORATION
3.375% CONVERTIBLE SENIOR NOTES DUE 2023
---------------
We issued the Notes in a private placement in the third quarter of 2003 at
an issue price of $1,000 per note. 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 of their
Notes.
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 January
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 Notes mature on July 15, 2023. We may redeem some or all of the Notes
at any time after July 15, 2008. The redemption prices are described under the
caption "Description of the Notes -- Optional Redemption."
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 September 22, 2004, was
$9.39 per share.
The Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automatic Linkages Market commonly referred to as the Portal
Market.
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INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
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.
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The date of this Prospectus is September 24, 2004
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.
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TABLE OF CONTENTS
PAGE
----
Where You Can Find More Information........................................................ 2
Forward-Looking Statements and Information................................................. 3
Summary.................................................................................... 5
Risk Factors............................................................................... 12
Use of Proceeds............................................................................ 21
Ratio of Earnings to Fixed Charges......................................................... 21
Price Range of Our Common Stock and Dividend Policy........................................ 22
CMS Energy................................................................................. 22
Description of the Notes................................................................... 26
Description of our Capital Stock........................................................... 47
Material United States Federal Income Tax Considerations................................... 54
Selling Securityholders.................................................................... 57
Plan of Distribution....................................................................... 58
Legal Matters.............................................................................. 60
Experts.................................................................................... 60
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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 for the year ended December
31, 2003 and our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2004 and June 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 for the year ended December 31, 2003
filed on July 21, 2004
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
filed on May 7, 2004 and Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 filed on August 6, 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
and September 1, 2004
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.
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
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FORWARD-LOOKING STATEMENTS AND INFORMATION
This prospectus contains forward-looking statements as defined in Rule
3b-6 of the Exchange Act, as amended, Rule 175 of the Securities Act, as
amended, 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:
- the efficient sale of non-strategic and under-performing domestic
and international assets and discontinuation of certain operations;
- capital and financial market conditions, including the current price
of our common stock and the effect on our pension plan, interest
rates and availability of financing to us, to Consumers Energy
Company ("CONSUMERS"), a wholly owned subsidiary, or any of their
affiliates and to the energy industry;
- ability to access the capital markets successfully;
- market perception of the energy industry, us and Consumers or any of
their affiliates;
- our and Consumers' or any of their affiliates' securities ratings;
- 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 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 environmental laws
and regulations;
- the impact of adverse natural gas prices on the Midland Cogeneration
Venture Limited Partnership (the "MCV PARTNERSHIP") investment,
regulatory decisions concerning the MCV Partnership resource
conservation plan ("RCP"), 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
and proposals by the Federal Energy Regulatory Commission ("FERC")
to change the way it currently lets our subsidiaries and other
public utilities and natural gas companies interact with each other;
3
- energy markets, including the timing and extent of unanticipated
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;
- 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 an
investigation 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;
- other business or investment considerations that may be disclosed
from time to time in our or Consumers' SEC filings or in other
publicly disseminated written documents; and
- other uncertainties, which are difficult to predict and many of
which are beyond our control.
The factors identified under "Risk Factors" on page 12 are also 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 to which we refer you to in their entirety
before making an investment decision. The terms "CMS," "CMS ENERGY," "OUR," "US"
and "WE" as used in this prospectus 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, "mmbbls" means million barrels, "mmcf"
means million cubic feet 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 and equity
investments, 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 6,431 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 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 currently has ownership interests in the Shuweihat
power plant, which is under construction in the United Arab
Emirates, and the Saudi Petrochemical Company power plant, which is
in advanced development and will be located in the Kingdom of Saudi
Arabia. These plants total approximately 1,784 gross MW (420 net MW)
of electric generation; and
- CMS Gas Transmission Company ("CMS GAS TRANSMISSION"), is a wholly
owned subsidiary of Enterprises that owns an interest in and
operates natural gas pipelines in various locations in North and
South America. 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.
RECENT DEVELOPMENTS
SECOND QUARTER 2004 RESULTS OF OPERATIONS
UNAUDITED, IN MILLIONS (EXCEPT FOR PER SHARE AMOUNTS)
RESTATED
THREE MONTHS ENDED JUNE 30 2004 2003 CHANGE
-------------------------- ---- ---- ------
Net Income (Loss) Available to Common Stock ................................ $ 16 $ (65) $ 81
Basic Earnings (Loss) Per Share Attributable to Common Stock ............... $0.10 $(0.45) $0.55
Diluted Earnings (Loss) Per Share Attributable to Common Stock ............. $0.10 $(0.45) $0.55
Electric utility ........................................................... $ 27 $ 35 $ (8)
Gas utility ................................................................ 1 5 (4)
Enterprises ................................................................ 38 8 30
Corporate interest and other ............................................... (50) (60) 10
Discontinued operations .................................................... -- (53) 53
----- ------ -----
CMS Energy Net Income (Loss) Available to Common Stock ..................... $ 16 $ (65) $ 81
===== ====== =====
5
For the three months ended June 30, 2004, our net income available to
common stock was $16 million, compared to a loss of $65 million for the three
months ended June 30, 2003. The $81 million increase in net income available to
common stock primarily reflects:
- the absence of a $53 million loss from discontinued operations
recorded in 2003, comprised mainly of the loss on the sale of
Panhandle Eastern Pipe Line Company and its subsidiaries
("PANHANDLE"),
- the absence of a $31 million deferred tax asset valuation
reserve established in 2003,
- an $11 million increase in mark-to-market valuation
adjustments on interest rate swaps and power contracts, and
- a $6 million reduction in funded benefits expense primarily
due to the postretirement benefit plans, other than pensions,
for retired employees ("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.
These increases were partially offset by:
- the absence of a $30 million Michigan Single Business Tax
refund received in 2003, and
- a reduction in Consumers' net income resulting primarily from
industrial and commercial customers choosing different
electricity suppliers and decreased gas deliveries caused
primarily by milder weather.
UNAUDITED, IN MILLIONS (EXCEPT FOR PER SHARE AMOUNTS)
RESTATED
SIX MONTHS ENDED JUNE 30 2004 2003 CHANGE
------------------------ ---- ---- ------
Net Income Available to Common Stock ..................... $ 9 $ 17 $ (8)
Basic Earnings Per Share Attributable to Common Stock .... $0.06 $0.12 $(0.06)
Diluted Earnings Per Share Attributable to Common Stock... $0.06 $0.14 $(0.08)
Electric utility ......................................... $ 75 $ 86 $ (11)
Gas utility .............................................. 57 59 (2)
Enterprises .............................................. (23) 29 (52)
Corporate interest and other ............................. (98) (111) 13
Discontinued operations .................................. (2) (22) 20
Accounting changes ....................................... -- (24) 24
----- ----- ------
CMS Energy Net Income Available to Common Stock .......... $ 9 $ 17 $ (8)
===== ===== ======
For the six months ended June 30, 2004, CMS Energy's net income available
to common stock was $9 million, compared to net income available to common stock
of $17 million for the six months ended June 30, 2003. The $8 million change
reflects:
- an $81 million charge to earnings related to the sale of our
Loy Yang A power plant ("LOY YANG");
- the absence of a $30 million Michigan Single Business Tax
refund received in 2003; and
- a reduction in Consumers' net income resulting primarily from
industrial and commercial customers choosing different
electricity suppliers and decreased gas deliveries caused
primarily by milder weather.
These losses were partially offset by:
- the exclusion in 2004 of a $24 million charge for changes in
accounting that occurred in the first quarter of 2003;
- the absence of a $31 million deferred tax asset valuation
reserve established in 2003;
- the decrease of $20 million in the net loss from discontinued
operations resulting from the sale of Panhandle and other
businesses in 2003;
- a $31 million increase in mark-to-market valuation adjustments
on interest rate swaps and power contracts; and
- a $13 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.
SALE OF AUSTRALIAN PIPELINES
On August 17, 2004, we sold our interests in a business located in
Australia comprised of a pipeline, processing facilities, and a gas storage
facility ("PARMELIA") and a pipeline business located in Australia in which we
held a 39.7% ownership interest ("GOLDFIELDS") to the Australian Pipeline Trust
("APT") for approximately $206 million Australian (approximately $147 million in
U.S. dollars).
6
SALE OF LOY YANG
In April 2004, we and our partners sold the 2,000-megawatt Loy Yang power
plant and adjacent coal mine located in Victoria, Australia for approximately
$3.5 billion Australian (approximately $2.6 billion in U.S. dollars), including
$145 million Australian for the project equity. We owned 49.6% of Loy Yang. NRG
Energy Inc. and Horizon Energy Australia Investments each owned about 25% of Loy
Yang. CMS Energy's share of the proceeds was approximately $44 million in U.S.
dollars, net of closing adjustments and transaction costs. We recognized an $81
million after-tax impairment charge in the first quarter of 2004, primarily
related to prior currency translation adjustments.
CONSOLIDATION OF THE MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP AND
THE FIRST MIDLAND LIMITED PARTNERSHIP
Under revised FASB Interpretation No. 46 "Consolidation of Variable
Interest Entities," we determined that we are the primary beneficiary of both
the MCV Partnership and the First Midland Limited Partnership ("FMLP"). We have
a 49% partnership interest in the MCV Partnership and a 46.4% partnership
interest in the FMLP. Consumers is the primary purchaser of power from the MCV
Partnership through a long-term power purchase agreement. In addition, the FMLP
holds a 75.5% lessor interest in the MCV Partnership's facility (the "MCV
FACILITY"), which results in Consumers holding a 35% lessor interest in the MCV
Facility. Collectively, these interests make us the primary beneficiary of these
entities. As such, we 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 $728
million at June 30, 2004. Property, plant and equipment serving as collateral
for these obligations had a carrying value of $1.453 billion at June 30, 2004.
The creditors of these partnerships do not have recourse to the general credit
of CMS Energy.
RECENT FINANCINGS AND SECURITIES OFFERINGS
We have initiated several transactions with various financial
institutions, lenders, banks and others to provide liquidity:
- As of August 3, 2004, we obtained an amended and restated $300
million secured revolving credit facility to replace both our $190
million facility and $185 million letter of credit facility. The
amended facility carries a three-year term and provides for a lower
interest rate.
- As of August 3, 2004, Consumers obtained an amended and restated
$500 million secured revolving credit facility to replace its $400
million facility. The amended facility carries a three-year term and
provides for a lower interest rate.
- On August 17, 2004, Consumers issued $800 million of first mortgage
bonds (the "BONDS") in a private placement to institutional
investors in three separate series. The $150 million Series K Bonds
will mature on August 15, 2009 and will bear interest at the rate of
4.40%. The $300 million Series L Bonds will mature on February 15,
2012 and will bear interest at the rate of 5.00%. The $350 million
Series M Bonds will mature on August 15, 2016 and will bear interest
at the rate of 5.50%.
7
THE NOTES
Issuer................................... CMS Energy Corporation.
Securities Offered....................... $150 million aggregate principal amount of 3.375% Convertible Senior Notes due 2023
(the "NOTES") 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, payable semiannually in
arrears on January 15 and July 15, commencing on January 15, 2005, and at maturity.
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.
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 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."
For each $1,000 principal amount of Notes surrendered for conversion, Holders will
receive 93.7137 shares of our common stock. This represents an initial conversion
price of $10.671 per share of common stock. 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 upon conversion
of a Note; however, we will continue to pay additional amounts, if any, on the Notes
and the common stock issuable upon conversion thereof to the Holder in accordance with
the registration rights agreement. 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.
8
Purchase of Notes by Us at the Option Holders have the right to require us to purchase all or any portion of the Notes for
of the Holder........................... 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 plus accrued and unpaid interest, and additional amounts owed, if any, 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."
Ranking.................................. The Notes are unsecured and unsubordinated senior debt securities of ours ranking
equally with our other unsecured and unsubordinated indebtedness. As of June 30, 2004,
we had outstanding approximately $3.2 billion aggregate principal amount of
indebtedness, including approximately $178 million of subordinated indebtedness
relating to our convertible preferred securities and $506 million of subordinated
indebtedness relating to Consumers' mandatorily redeemable trust preferred securities,
but excluding approximately $4.5 billion of indebtedness of our subsidiaries. None of
our indebtedness is senior to the Notes. 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 not senior to such indebtedness.
As of August 17, 2004 there were approximately $164 million of letters of credit
outstanding under the Fifth Amended and Restated Credit Agreement. The Notes are
senior to approximately $178 million of subordinated indebtedness relating to our
convertible preferred securities. The Notes are structurally subordinated to
approximately $4.5 billion of our subsidiaries' debt and approximately $506 million of
subordinated indebtedness relating to Consumers' mandatorily redeemable trust
preferred securities.
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. The Notes are eligible for trading in the Portal Market; however, no
assurance can be given as to the liquidity of or trading market for the Notes. Our
common stock is listed on the New York Stock Exchange under the symbol "CMS."
9
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") and by Arthur Andersen LLP, independent accountants (who
have ceased operations), for the fiscal year ended December 31, 1999. 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,
2000 and 1999. Jorf Lasfar represents an investment accounted for under the
equity method of accounting, which was audited by another independent registered
public accounting firm for the fiscal years ended December 31, 2003, 2002, 2001,
2000 and 1999. The following selected consolidated financial data for the six
months ended June 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 June 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 is incorporated
by reference herein. Operating results for the six months ended June 30, 2004
are not necessarily indicative of results that may be expected for the entire
year ending December 31, 2004. See "Where You Can Find More Information."
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------------------
2004(a) 2003 2003 2002 2001 2000 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED, DOLLARS IN
MILLIONS
EXCEPT PER SHARE (DOLLARS IN MILLIONS
AMOUNTS) EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Operating revenue........................ $ 2,847 $ 3,094 $ 5,513 $ 8,673 $ 8,006 $ 6,623 $ 5,114
Earnings from equity method
investees 60 97 164 92 172 213 136
Operating expenses....................... 2,614 2,779 5,082 8,690 8,027 6,342 4,549
Operating income......................... 293 412 595 75 151 494 701
Income (loss) from continuing
operations............................. 17 63 (43) (394) (327) (85) 191
Net income (loss) available to
common shareholder....................... $ 9 $ 17 $ (44) $ (650) $ (459) $ 5 $ 277
======== ======== ======== ======== ======== ======== ========
Earnings per average common share:
Income (loss) from continuing
operations
Basic.................................. $ 0.07 $ 0.43 $ (0.30) $ (2.84) $ (2.50) $ (0.76) $ 1.66
Income (loss) from continuing
operations
Diluted................................ 0.07 0.43 (0.30) (2.84) (2.50) (0.76) 1.66
CMS Energy Basic Net Income (Loss)
attributable to Common Stock............. 0.06 0.12 (0.30) (4.68) (3.51) 0.04 2.18(i)
CMS Energy Diluted Net Income
(Loss) attributable to Common Stock...... 0.06 0.14 (0.30) (4.68) (3.51) 0.04 2.17(i)
Dividends declared per average
common share:
CMS Energy............................... $ -- $ -- $ -- $ 1.09 $ 1.46 $ 1.46 $ 1.39
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 696 $ 917 $ 532 $ 351 $ 123 $ 143 $ 132
Restricted cash.......................... 213 205 201 38 4 -- --
Net plant and property(a)................ 8,528 6,674 6,944 6,103 6,703 6,316 8,995
Total assets............................. 15,307 13,939 13,838 14,781 17,633 17,801 16,336
Long-term debt, including current
Maturities(a)............................ 6,676 6,594 6,529 5,990 6,846 6,271 7,503
Long-term debt - related parties......... 684 -- 684 -- -- -- --
Non-current portion of capital
leases 338 119 58 116 71 49 88
Notes payable............................ -- -- -- 458 416 403 230
Other liabilities........................ 4,862 5,120 4,604 6,174 7,008 7,486 4,924
Minority interest........................ 740 43 73 38 43 82 222
Company-obligated mandatorily
redeemable trust preferred
securities of subsidiaries (b)......... -- 393 -- 393 694 694 474
Company obligated trust preferred
securities of Consumers'
subsidiaries (b)....................... -- 490 -- 490 520 395 395
10
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED, DOLLARS IN
MILLIONS
EXCEPT PER SHARE (DOLLARS IN MILLIONS
AMOUNTS) EXCEPT PER SHARE AMOUNTS)
Preferred stock.................. 261 -- 261 -- -- -- --
Preferred stock of subsidiary.... $ 44 $ 44 $ 44 $ 44 $ 44 $ 44 $ 44
Common stockholders' equity...... 1,702 1,136 1,585 1,078 1,991 2,377 2,456
OTHER DATA:
Cash Flow:
Provided by (Used in) operating $ 481 $ 147 $ (251) $ 614 $ 372 $ 600 $ 917
activities
Provided by (Used in) investing (214) 292 203 829 (1,349) (1,220) (3,564)
activities
Provided by (Used in) financing (276) 125 230 (1,223) 967 629 2,678
activities
Ratio of earnings to fixed --(d) 1.13 --(e) --(f) --(g) --(h) 1.33
charges(c)......................
(a) Under revised FASB Interpretation No. 46 "Consolidation of Variable
Interest Entities," we are the primary beneficiary of the MCV Partnership
and 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 have third-party
obligations totaling $728 million at June 30, 2004. Property, plant, and
equipment serving as collateral for these obligations has a carrying value
of $1.453 billion at June 30, 2004.
(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
convertible trust preferred securities of 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 six months ended June 30, 2004, fixed charges exceeded earnings by
$47 million. Earnings as defined include $125 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.
(i) Reflects the reallocation of net income and earnings per share as a result
of the premium on exchange of Class G Common Stock. As a result, CMS
Energy's basic and diluted earnings per share were reduced $0.26 and
$0.25, respectively, and Class G Common Stock's basic and diluted earnings
per share were increased $3.31.
11
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 and preferred
distributions on the debt, preferred securities and other liabilities of
Consumers and Enterprises and each of their subsidiaries.
On June 2, 2003, the Michigan Public Service Commission ("MPSC") issued a
financing order authorizing the issuance of $554 million of securitization
bonds. The order would prohibit Consumers from paying any extraordinary
dividends to us until further order of the MPSC. Pursuant to the order,
extraordinary dividends are considered any amount over and above Consumers'
earnings. On July 1, 2003, Consumers filed a petition for rehearing and
clarification of certain portions of the order with the MPSC, including the
portion dealing with dividend restrictions. In December 2003, the MPSC issued
its order on rehearing, which rejected our requests for rehearing and
clarification and remanded the proceeding to the administrative law judge
("ALJ") for additional proceedings. In March 2004, the ALJ conducted the
remanded hearings and the matter is presently before the MPSC awaiting a
decision.
In December 2003, the MPSC issued an order granting interim gas rate
relief in the amount of $19.34 million annually. In connection with this rate
relief, Consumers agreed to limit its dividends to CMS Energy to a maximum of
$190 million annually during the period in which Consumers receives the interim
relief. The MPSC stated in its order that it was not determining at that time
whether dividend restrictions should continue after the issuance of a final
order.
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 June 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 $7.7 billion of our consolidated indebtedness as of
June 30, 2004, approximately $5.1 billion was indebtedness of our subsidiaries,
including $506 million of subordinated indebtedness relating to Consumers'
mandatorily redeemable trust preferred securities. 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 June 30, 2004, we had outstanding approximately $3.2 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible preferred securities
and $506 million of subordinated indebtedness relating to Consumers' mandatorily
redeemable trust preferred securities but excluding approximately $4.5 billion
of indebtedness of our subsidiaries. None of such indebtedness would be senior
to the Notes. In August 2004, we entered into the Fifth Amended and Restated
Credit Agreement in the amount of approximately $300 million. This facility is
secured and the Notes would be effectively junior to such indebtedness to the
extent of the security pledged therefore. As of August 17, 2004, there were
approximately $164 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:
12
- 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 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 June 30, 2004, we had approximately $395 million of debt maturities
in 2004 and 2005 excluding subsidiaries. These maturities include: approximately
$176 million of senior notes due in November 2004; $180 million of senior notes
due in January 2005; and approximately $39 million of general term notes that
mature at various times in 2004 and 2005. In addition, we expect to incur
significant costs for 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 June 30, 2004 we had
incurred $489 million in capital expenditures to comply with these regulations
and future capital expenditures may total approximately $282 million between
2004 and 2009. We could also 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 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.
Standard & Poor's Ratings Group, a division of The McGraw Hill Companies,
Inc., ("S&P") has assigned the Notes a rating of B+, Moody's Investors Service,
Inc. has assigned the Notes a rating of B3 and Fitch, Inc. has assigned the
Notes a rating of B+. We cannot assure you that these credit ratings will remain
in effect for any given period of time or that one or more of these ratings will
not be lowered or withdrawn entirely by a rating agency. We note that these
credit ratings are not recommendations to buy, sell or hold our securities. Each
rating should be evaluated independently of any other rating. Any future
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.
13
Consumers accesses debt and other capital from various sources and carries
its own credit ratings. Any downgrade or other event negatively affecting the
credit ratings of Consumers could make its cost of borrowing higher or access to
funding sources more limited, which in turn could increase the need of CMS
Energy to provide liquidity in the form of capital contributions or loans, thus
reducing the liquidity and borrowing availability of the consolidated group.
Further, any adverse developments relating to Consumers, which provides
dividends to us, that result in a lowering of Consumers' credit ratings could
have an adverse effect on our credit ratings. Any lowering of the ratings on the
Notes would likely reduce the market value of the Notes.
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 Marketing Services
and Trading Company ("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 motions occurred on August 2, 2004
and the judge has taken the matter under advisement.
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 extended to December 1, 2004, subject to such
further extensions 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 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. In the settlement, CMS
Energy neither admits nor denies 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 a lawsuit
alleging violation of the Commodities Exchange Act and certain 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
14
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. 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.
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 without receiving compensation for
stranded costs caused by the lost sales. As of July 2004, we had lost 858 MW or
11% of our electric generation business to these alternative electric suppliers.
We expect the loss to be in the range of 900 MW to 1,100 MW by year-end 2004. 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 5% and then capped through at
least December 31, 2005; and
- small commercial and industrial customer rates were capped through
at least December 31, 2004.
Ultimately, the rate caps 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 caps could, however, result in
Consumers being unable to collect customer rates sufficient to fully recover 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 fully recover 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 caps.
There are multiple proceedings pending before FERC involving transmission
rates, regional transmission organizations and standard market design for
electric bulk power markets and transmission. 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;
15
- 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 utilities and alternative suppliers to maintain a 15%
power reserve margin;
- creating a service charge to fund the Low Income and Energy
Efficiency Fund;
- giving kindergarten through twelfth-grade schools a discount of 10%
to 20% on electric rates; and
- authorizing a service charge payable by all customers for meeting
Clean Air Act requirements.
Although we do not believe the terms of the pending bills would have a
material adverse effect on our business, the final form of any new utility
legislation may differ from the pending bills. We cannot predict whether these
or other measures will be enacted into law or their potential effect on us.
OUR ABILITY TO RECOVER OUR "NET" STRANDED COSTS IS UNCERTAIN AND MAY
AFFECT OUR FINANCIAL RESULTS.
The Customer Choice Act allows for the recovery, by an electric utility,
of the cost of implementing that Act's requirements and "net" Stranded Costs,
without defining the term. According to the MPSC, "net" Stranded Costs are to be
recovered from retail open access customers through a Stranded Cost transition
charge.
In 2002 and 2001, the MPSC issued orders finding that Consumers
experienced zero "net" Stranded Costs from 2000 to 2001. The MPSC also declined
to resolve numerous issues regarding the "net" Stranded Cost methodology in a
way that would allow a reliable prediction of the level of Stranded Costs for
future years. Consumers is currently in the process of appealing these orders
with the Michigan Court of Appeals and the Michigan Supreme Court.
In March 2003, Consumers filed an application with the MPSC seeking
approval of "net" Stranded Costs incurred in 2002 and for approval of a "net"
Stranded Cost recovery charge. In the application, Consumers' "net" Stranded
Costs incurred in 2002, including the cost of money, are estimated to be
approximately $47 million with the issuance of securitization bonds that include
Clean Air Act investments, or approximately $104 million without the issuance of
securitization bonds that include Clean Air Act investments. In July 2004, the
ALJ issued a proposal for decision in Consumers' 2002 "net" Stranded Cost case,
which recommended that the MPSC find that Consumers incurred "net" Stranded
Costs of $12 million. This recommendation includes the cost of money through
July 2004 and excludes Clean Air Act investments.
In April 2004, Consumers filed an application with the MPSC seeking
approval of "net" Stranded Costs incurred in 2003. Consumers also requested
interim relief for 2003 "net" Stranded Costs. In July 2004, Consumers revised
its request for approval of 2003 Stranded Costs incurred, including the cost of
money, to $69 million with the issuance of Securitization bonds that include
Clean Air Act investments, or $128 million without the issuance of
Securitization bonds that include Clean Air Act investments. The MPSC has
scheduled hearings for Consumers' 2003 Stranded Cost application for August
2004. In July 2004, the MPSC staff issued a position on Consumers' 2003 "net"
Stranded Cost application, which resulted in a Stranded Cost calculation of $52
million. The amount includes the cost of money, but excludes Clean Air Act
investments. We cannot predict how the MPSC will rule on Consumers' requests for
recoverability of 2002 and 2003 Stranded Costs or whether the MPSC will adopt a
Stranded Cost recovery method that will offset fully any associated margin loss
from retail open access.
We cannot predict the ability of Consumers to recover its "net" Stranded
Costs, including costs related to electric utility restructuring, and failure to
recover those "net" Stranded Costs could adversely affect our financial
condition.
16
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 laws, will be significant.
In 1998, the Environmental Protection Agency ("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 $771
million. As of June 30, 2004, Consumers has incurred $489 million in capital
expenditures to comply with the EPA regulations and anticipates that the
remaining $282 million of capital expenditures will be incurred between 2004 and
2009. Additionally, Consumers currently expects it will supplement its
compliance plan with the purchase of nitrogen oxide emissions credits for the
years 2004 through 2008. The cost of these credits based on the current market
is estimated to average $8 million per year; however, the market for nitrogen
oxide 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, is expected to be recoverable from customers, subject to an
MPSC prudency hearing.
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.
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.
OUR PLANNED ASSET SALES MAY NOT BE ACHIEVED OR MAY RESULT IN ADDITIONAL
ACCOUNTING CHARGES.
We are executing an ongoing asset sales program encompassing the sale of
non-strategic and under-performing assets, the proceeds of which are being and
will be used primarily to reduce debt. While we have successfully sold several
of our major properties, including most recently Goldfields, Parmelia, Loy Yang,
Panhandle and CMS Field Services, Inc., there are a number of additional assets
we are targeting for disposal through 2005. We cannot assure you that we will be
successful in selling these assets, most of which are located outside the United
States.
We are required by U.S. generally accepted accounting principles to
periodically review the carrying value of our assets, including those we are
targeting for sale. Market conditions, the operational characteristics of the
assets that may be sold 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 at the time we sell assets
depending on the sale prices we are able to secure.
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.
17
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.
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 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.
WE CURRENTLY DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.
We suspended the payments of dividends on our common stock in January 2003
and have no current plans to resume payment of a dividend. Our ability to
declare dividends in the future will depend on a variety of factors, including
improvement in our financial condition and liquidity and the terms of our
financing agreements. We cannot predict when resumption of dividends on our
common stock would occur, and if so the amount of any such dividends that might
be declared.
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. The effect of any such action 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.
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
18
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.
In February 2004, Consumers filed a RCP with the MPSC that is intended to
help conserve natural gas and thereby improve its investment in the MCV
Partnership. This plan seeks approval to:
- dispatch the MCV Facility based on natural gas market prices without
increased costs to electric customers;
- give Consumers a priority right to buy excess natural gas as a
result of the reduced dispatch of the MCV Facility; and
- fund $5 million annually for renewable energy sources such as wind
power projects.
The RCP would reduce the MCV Facility's annual natural gas consumption by
an estimated 30 to 40 bcf. This decrease in the quantity of high-priced natural
gas consumed by the MCV Facility would benefit Consumers' ownership interest in
the MCV Partnership. The amount of PPA capacity and fixed energy payments
recovered from retail electric customers would remain capped at 88.7%.
Therefore, customers would not be charged for any increased power supply costs,
if they occur. Consumers and the MCV Partnership have reached an agreement that
the MCV Partnership will reimburse Consumers for any incremental power costs
incurred to replace the reduction in power dispatched from the MCV Facility.
Presently, Consumers is in settlement discussions with the parties to the RCP
filing. However, in July 2004, several qualifying facilities filed for a stay on
the RCP proceeding in the Ingham County Circuit Court after their previous
attempt to intervene on the proceeding was denied by the MPSC. On August 11,
2004, the Judge granted the motion to stay the proceedings. We cannot predict if
or when the MPSC will approve the RCP or the outcome of the Ingham County
Circuit Court hearings.
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 an
approved 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.
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
position. 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
19
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 will 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.
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 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.
20
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO PURCHASE THE
NOTES UPON A FUNDAMENTAL CHANGE OR OTHER PURCHASE DATE, AS REQUIRED BY THE
SENIOR DEBT INDENTURE.
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 also 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.
The Notes are a new issue of securities for which there currently is no
active trading market. 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.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the six months ended June 30,
2004 and each of the years ended December 31, 1999 through 2003 is as follows:
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ---------------------------------
JUNE 30, 2004 2003 2002 2001 2000 1999
---------------- ---- ---- ---- ---- ----
Ratio of earnings to fixed charges.......... --(1) --(2) --(3) --(4) --(5) 1.33
(1) For the six months ended June 30, 2004, fixed charges exceeded earnings by
$47 million. Earnings as defined include $125 million of asset impairment
charges.
(2) For the year ended December 31, 2003, fixed charges exceeded earnings by
$59 million. Earnings as defined include $95 million of asset impairment
charges.
(3) For the year ended December 31, 2002, fixed charges exceeded earnings by
$475 million. Earnings as defined include $602 million of asset impairment
charges.
(4) For the year ended December 31, 2001, fixed charges exceeded earnings by
$393 million. Earnings as defined include $323 million of asset impairment
charges.
(5) 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.
21
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 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..................................................................... $ 24.62 $21.27 $0.365
Second Quarter.................................................................... 22.24 10.46 0.365
Third Quarter..................................................................... 11.28 7.49 0.18
Fourth Quarter.................................................................... 10.48 5.79 0.18
Year Ended December 31, 2003
First Quarter..................................................................... 10.59 3.49 --
Second Quarter.................................................................... 8.50 4.58 --
Third Quarter..................................................................... 7.99 6.11 --
Fourth Quarter.................................................................... 8.63 7.44 --
Year Ending December 31, 2004
First Quarter..................................................................... 9.51 8.36 --
Second Quarter.................................................................... 9.32 7.90 --
On September 22, 2004, the last sale price of our common stock as reported
on the New York Stock Exchange was $9.39 per share. On September 22, 2004 there
were approximately 59,226 holders of record of our common stock.
In January 2003, we suspended the payment of dividends on our common
stock.
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 6,431 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
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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
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.
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In 1999, CMS Gas Transmission acquired Panhandle, which was primarily
engaged in the interstate transmission and storage of natural gas and also
provided LNG 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.
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 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 Parmelia and Goldfields to APT
for approximately $206 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 in Argentina, Chile and Australia.
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 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 advanced development and will be located in
the Kingdom of Saudi Arabia. In 2004, CMS Generation plans to complete the
restructuring of its operations by narrowing the scope of its existing
operations and commitments from four to two regions: the U.S. and the Middle
East/North Africa. In addition, its plans include selling designated assets and
investments that are under-performing, non-region focused and non-synergistic
with other CMS Energy business units. 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.
24
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), as discussed in "Recent Developments" above):
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
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 MW.
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
In October 2001, CMS Energy discontinued the operations of its
international energy distribution business. In 2002, CMS Energy discontinued all
new development outside North America, which included closing all non-U.S.
development offices. In 2003, CMS Energy reclassified to continuing operations
SENECA, which is its energy distribution business in Venezuela, and CPEE, which
is its energy distribution business in Brazil, due to its inability to sell
these assets.
25
ENERGY RESOURCE MANAGEMENT
In 2003, CMS Energy Resource Management Company, formerly CMS MST, ("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. 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. 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.
DESCRIPTION OF THE NOTES
GENERAL
The Notes were issued as a series of senior debentures under the senior
debt indenture as supplemented by the thirteenth supplemental indenture thereto
dated as of July 16, 2003 (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 June 30, 2004, we had outstanding approximately $3.2 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible trust preferred
securities and $506 million of subordinated indebtedness relating to Consumers'
mandatorily redeemable trust preferred securities, but excluding approximately
$4.5 billion of indebtedness of our subsidiaries. None of our indebtedness is
senior to the Notes. 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 not senior to such indebtedness. As of
August 17, 2004 there were approximately $164 million of letters of credit
outstanding under the Fifth Amended and Restated Credit Agreement. The Notes are
senior to approximately $178 million of subordinated indebtedness relating to
our convertible trust preferred securities. The Notes are structurally
subordinated to approximately $4.5 billion of our subsidiaries' debt and
approximately $506 million of subordinated indebtedness relating to Consumers'
mandatorily redeemable trust preferred securities.
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.
26
Of the approximately $7.7 billion of our consolidated indebtedness as of
June 30, 2004, approximately $5.1 billion was indebtedness of our subsidiaries,
including $506 million of subordinated indebtedness relating to Consumers'
mandatorily redeemable trust preferred securities. Payments on that indebtedness
and preferred stock 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, payable semiannually in arrears on January 15 and July 15, commencing on
January 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 (as defined herein) at any place of
payment, then payment of interest or principal (and 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.
27
CONVERSION RIGHTS
Subject to the conditions and during the periods and under the
circumstances described below, Holders may convert each of their Notes into
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.
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 upon conversion of a Note and we will not adjust the conversion
rate to account for the accrued and unpaid interest. Upon conversion we will
deliver to Holders a fixed number of shares of our common stock and any cash
payment to account for fractional shares. The cash payment or check for
fractional shares will be based on the last reported sale price of our common
stock on the trading day immediately prior to the conversion date. Delivery of
shares of common stock will be deemed to satisfy our obligation to pay the
principal amount of the Notes, including accrued and unpaid interest. Accrued
and unpaid interest 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.
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 shares of our common stock. Holders may obtain copies of
the required form of the conversion notice from the conversion agent. A
certificate for the number of full shares of our common stock into which any
Notes are converted, together with any cash or check payment for fractional
shares, 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.
Holders may surrender their Notes for conversion into 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 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 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 our common stock at any time prior to
28
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 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 we
engage in any transaction described in the preceding sentence, the conversion
rate will not be adjusted. 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 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 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
29
conversion rate.
CONVERSION RATE ADJUSTMENTS. The 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 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 the 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) dividends and distributions made during any of our
quarterly fiscal periods consisting exclusively of cash to all
holders of outstanding shares of common stock, together with (A)
other all-cash distributions made during such quarterly fiscal
period and (B) any cash and the fair market value, as of the
expiration of the tender or exchange offer (other than consideration
payable in respect of any odd-lot tender offer) by us or any of our
subsidiaries for shares of common stock concluded during such
quarterly fiscal period.
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 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 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
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 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 conversion
rate under the senior debt indenture.
30
No adjustment to the 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
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 conversion price or 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.
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
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;
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- 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
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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 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 the date of this prospectus 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;
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- 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 conversion rate and any adjustments to the 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 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.
The senior debt indenture requires CMS Energy to comply with the
provisions of Regulation 14E and any other tender offer rules
34
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 and its inability to raise the
required funds because of restrictions on issuance of securities contained in
other contractual arrangements.
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 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);
35
- 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 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
36
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
37
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,
38
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 Board resolutions;
- 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
39
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
40
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 --
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:
41
- 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
42
indenture, the 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.
43
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.
44
CALCULATIONS IN RESPECT OF 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 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 purchase 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 designated
by the initial purchaser 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
45
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.
LISTING
The Notes are eligible to be traded on the Portal Market of the
National Association of Securities Dealers, Inc.
46
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 September 22, 2004, we had 5,000,000 shares of 4.50%
Cumulative Convertible Preferred Stock and 161,857,306 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. As long as the 4.50% Cumulative Convertible Preferred Stock 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 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
- purchase, redeem, retire or otherwise acquire for value any
such capital stock or other ownership interests;
47
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: 7 5/8% Senior Unsecured Notes Due 2004,
X-TRAS(SM) Pass-Through Trust I Certificates Due 2005, 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 and 7.75% Senior Notes Due
2010. 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.
At June 30, 2004, we could pay cash dividends of $113.8 million
pursuant to this restriction.
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");
48
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.
At June 30, 2004, we could pay cash dividends of $1.079 billion
pursuant to this restriction.
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).
Under the provisions of the Michigan Business Corporation Act, at
June 30, 2004, our net assets available for the payment of dividends were $1.702
billion.
49
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
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.
50
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.
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
The Articles of Incorporation establish one series of preferred
stock designated as "4.50% Cumulative Convertible Preferred Stock" consisting of
5,000,000 shares with a liquidation preference of $50.00 per share (the
"CUMULATIVE CONVERTIBLE PREFERRED STOCK"). The Cumulative Convertible Preferred
Stock 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 have no preemptive rights.
DIVIDENDS
Holders of shares of Cumulative Convertible Preferred Stock 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 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 most recent date as to which dividends shall have been paid
or, if no dividends have been paid, from the issue date of the Cumulative
Convertible Preferred Stock, 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 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 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 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, 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 and all parity stock are not paid in
full, the holders of the Cumulative Convertible Preferred Stock 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 have no
voting rights unless dividends payable on the Cumulative Convertible Preferred
Stock are in arrears for six or more quarterly periods (whether or not
consecutive). In that event, the holders of the Cumulative Convertible Preferred
Stock, 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
51
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 has been paid in full.
REDEMPTION
We cannot redeem shares of the Cumulative Convertible Preferred
Stock.
MANDATORY CONVERSION
On or after December 5, 2008, we may, at our option, cause the
Cumulative Convertible Preferred Stock to be automatically converted into that
number of shares of common stock for each share of Cumulative Convertible
Preferred Stock equal to $50.00 (the liquidation preference) divided by the
applicable conversion rate. 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.
CONVERSION RIGHTS
A holder of record of Cumulative Convertible Preferred Stock may
convert its shares of Cumulative Convertible Preferred Stock at any time into
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;
- upon the occurrence of specified corporate transactions;
and
- 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 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; provided, however, a holder
may not convert its shares of Cumulative Convertible
Preferred Stock 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
Cumulative Convertible Preferred Stock and 120% of the
then applicable conversion price on the Cumulative
Convertible Preferred Stock.
For each share of Cumulative Convertible Preferred Stock surrendered
for conversion, holders will receive 5.0541 shares of our common stock. This
represents an initial conversion price of $9.893 per share of common stock. The
conversion rate may be adjusted for certain reasons, but it will not be adjusted
for accumulated and unpaid dividends on the Preferred 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
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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, the 9 1/4% Trust Originated Preferred Securities of Consumers
Energy Company Financing III 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 several
existing loan agreements. The loan agreements are:
- The Amended and Restated Credit Agreement dated as of August
3, 2004 among Consumers, Bank One, N.A., as agent, and the
financial institutions named therein; and
- Term Loan Agreement dated as of November 7, 2003 among
Consumers, Bank One, N.A., as agent, and the financial
institutions named therein.
Pursuant to these loan agreements, so long as there exists no event
of default under these agreements, Consumers may pay dividends in an aggregate
amount not to exceed $300 million during any calendar year.
On June 2, 2003, the MPSC issued a financing order authorizing the
issuance of $554 million of securitization bonds. The order would prohibit
Consumers from paying any extraordinary dividends to us until further order of
the MPSC. Pursuant to the order, extraordinary dividends are considered any
amount over and above Consumers' earnings. The order also directed that the
securitization charges be designed such that retail open access customers would
pay a significantly smaller charge than would full service customers. On July 1,
2003, Consumers filed a petition for rehearing and clarification of certain
portions of the order with the MPSC, including the portion dealing with the
design of the securitization charges. In December 2003, the MPSC issued its
order on rehearing, which rejected our requests for rehearing and clarification
and remanded the proceeding to the administrative law judge for additional
proceedings.
In December 2003, the MPSC issued an order granting interim gas rate
relief in the amount of $19.34 million annually. In connection with this rate
relief, Consumers agreed to limit its dividends to CMS Energy to a maximum of
$190 million annually during the period in which Consumers receives the interim
relief. The MPSC stated in its order that it was not determining at that time
whether dividend restrictions should continue after the issuance of a final
order.
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.
53
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.
U.S. HOLDERS
PAYMENTS OF INTEREST
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 issues with less than a de
minimis amount of original issue discount.
54
SALE, EXCHANGE, REDEMPTION OR REPURCHASE OF 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
A U.S. Holder generally will not recognize any income, gain or loss
upon conversion of a Note into common stock except with respect to cash received
in lieu of a fractional share of common stock. Cash received in lieu of a
fractional share upon conversion will be treated as a payment in exchange for
the fractional share of common stock. Accordingly, the receipt of cash in lieu
of a fractional share of common stock generally will result in capital gain or
loss (measured by the difference between the cash received for the fractional
share and the Holder's adjusted tax basis in the fractional share).
A U.S. Holder's tax basis in the common stock received on conversion
of a Note will be the same as such Holder's adjusted tax basis in the Note at
the time of conversion (reduced by any basis allocable to a fractional share
interest), and the holding period for the common stock received on conversion
will generally include the holding period of the Note converted.
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 that 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,
55
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 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, a Non-U.S. Holder may 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.
SALE, EXCHANGE, CONVERSION OR REDEMPTION OF THE NOTES OR COMMON STOCK
Gain recognized by a Non-U.S. Holder on the sale, exchange
(including conversion) or retirement of Notes or on 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.
56
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 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 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 September 24, 2004, 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.
57
AGGREGATE PRINCIPAL PERCENTAGE OF NUMBER OF SHARES OF
AMOUNT OF NOTES NOTES COMMON STOCK COVERED
NAME THAT MAY BE SOLD OUTSTANDING BY THIS PROSPECTUS (1)
---- ------------------- ------------- ----------------------
Amaranth L.L.C................................................ $3,700,000 2.47%
BNP Paribas Equity Strategies, SNC............................ 5,545,000 3.70 519,681
Citigroup Global Markets...................................... 50,000 * 4,686
CNH CA Master Account, L.P.................................... 1,500,000 1.00 140,581
CooperNeff Convertible Strategies (Cayman) Master Fund, L.P... 6,151,000 4.10 576,476
DBAG London................................................... 36,700,000 24.47 3,439,550
DKR Sound Shore Strategic Holding Fund Ltd.................... 2,000,000 1.33 187,441
Evergreen Utility Fund........................................ 40,000 * 3,748
Goldman Sachs & Co............................................ 5,000 * 468
Highbridge International LLC.................................. 18,000,000 12.00 1,686,846
KdC Convertible Arbitrage L.P................................. 90,000 * 8,434
KdC Convertible Arbitrage Master Fund C.V..................... 30,000 * 2,811
Lyxor/Convertible Arbitrage Fund Limited...................... 1,030,000 * 96,532
McMahon Securities Co. L.P.................................... 1,000,000 * 93,720
Pioneer High Yield Fund....................................... 10,550,000 7.03 988,753
Pioneer US High Yield Corp Bond Sub Fund...................... 650,000 * 60,918
Polaris Vega Fund L.P......................................... 2,300,000 1.53 215,541
Royal Bank of Canada.......................................... 20,000 * 1,874
San Diego County Employee Retirement Association.............. 1,000,000 * 93,720
SingleHedge U.S. Convertible Arbitrage Fund................... 1,288,000 * 120,712
Sturgeon Limited.............................................. 1,136,000 * 106,466
Sunrise Partners Limited Partnership.......................... 4,700,000 3.13 440,454
Wachovia Bank National Association............................ 2,500,000 1.67 234,301
Zazove Convertible Arbitrate Fund, L.P........................ 4,500,000 3.00 421,743
Zazove Hedged Convertible Fund, L.P........................... 3,000,000 2.00 281,162
Zazove Income Fund, L.P....................................... 1,000,000 * 93,720
Zurich Institutional Benchmarks Master Fund Ltd............... 1,000,000 * 93,720
* Less than 1%
(1) Assumes conversion of all of the holders' Notes at a conversion rate of
93.7137 shares of common stock for each $1,000 principal amount of Notes.
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.
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 Notes, we
entered into a registration rights agreement. 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.
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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.
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;
59
- 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.
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.
EXPERTS
The consolidated financial statements and schedule of CMS Energy
appearing in its Annual Report (Form 10-K/A) 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, an 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.
60
The financial statements of Emirates CMS Power Company PJSC
appearing in CMS Energy's Annual Report (Form 10-K/A) 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 herein by reference have been so included in reliance on the report
of Price Waterhouse, independent accountants, 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 and 2002 incorporated herein by
reference have been so included in reliance on the report of
PricewaterhouseCoopers LLP, an 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 herein by reference, 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, and we have dispensed with the requirement to file their consent in
reliance upon Rule 437a of the Securities Act. Because Arthur Andersen LLP has
not consented to the incorporation by reference of their report in this
prospectus, 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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PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
AMOUNT
------
Filing fee -- Securities and Exchange Commission......... $ 19,005
Listing on New York Stock Exchange....................... 2,500
*Trustees expenses....................................... 10,000
*Printing and Engraving.................................. 30,000
*Services of counsel..................................... 5,000
*Services of Registered Public Accounting Firms.......... 25,000
*Rating Agency Fees...................................... 5,000
*Blue Sky fees and expenses.............................. 5,000
*Miscellaneous........................................... 5,000
--------
Total.......................................... $106,505
========
----------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following resolution was adopted by the Board of Directors of CMS Energy on
May 6, 1987:
RESOLVED: That effective March 1, 1987 the Corporation shall
indemnify to the full extent permitted by law every person (including the
estate, heirs and legal representatives of such person in the event of the
decease, incompetency, insolvency or bankruptcy of such person) who is or was a
director, officer, partner, trustee, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against all liability, costs, expenses,
including attorneys' fees, judgments, penalties, fines and amounts paid in
settlement, incurred by or imposed upon the person in connection with or
resulting from any claim or any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative, investigative or of whatever
nature, arising from the person's service or capacity as, or by reason of the
fact that the person is or was, a director, officer, partner, trustee, employee
or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise. Such
right of indemnification shall not be deemed exclusive of any other rights to
which the person may be entitled under statute, bylaw, agreement, vote of
shareholders or otherwise.
CMS Energy's Bylaws provide:
The Corporation may purchase and maintain liability insurance,
to the full extent permitted by law, on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such person
in any such capacity.
Article VIII of CMS Energy's Articles of Incorporation, as
amended reads:
A director shall not be personally liable to the Corporation
or its shareholders for monetary damages for breach of duty as a director except
(i) for a breach of the director's duty of loyalty to the Corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for a violation of
Section 551(1) of the Michigan Business Corporation Act, and (iv) any
transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this Article VIII, and no modification to its
provisions by law, shall apply to, or have any effect upon, the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment, repeal or
modification.
Article IX of CMS Energy's Articles of Incorporation, as
amended reads:
62
Each director and each officer of the Corporation shall be
indemnified by the Corporation to the fullest extent permitted by law against
expenses (including attorneys' fees), judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him or her in connection
with the defense of any proceeding in which he or she was or is a party or is
threatened to be made a party by reason of being or having been a director or an
officer of the Corporation. Such right of indemnification is not exclusive of
any other rights to which such director or officer may be entitled under any now
or thereafter existing statute, any other provision of these Articles, bylaw,
agreement, vote of shareholders or otherwise. If the Business Corporation Act of
the State of Michigan is amended after approval by the shareholders of this
Article IX to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Business Corporation Act of the State of Michigan, as so amended. Any repeal
or modification of this Article IX by the shareholders of the Corporation shall
not adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
Sections 561 through 571 of the Michigan Business Corporation
Act provides CMS Energy with the power to indemnify directors, officers,
employees and agents against certain expenses and payments, and to purchase and
maintain insurance on behalf of directors, officers, employees and agents.
Officers and directors are covered within specified monetary
limits by insurance against certain losses arising from claims made by reason of
their being directors or officers of CMS Energy or of CMS Energy's subsidiaries
and CMS Energy's officers and directors are indemnified against such losses by
reason of their being or having been directors of officers of another
corporation, partnership, joint venture, trust or other enterprise at CMS
Energy's request. In addition, CMS Energy has indemnified each of its present
directors by contracts that contain affirmative provisions essentially similar
to those in sections 561 through 571 of the Michigan Business Corporation Act
cited above.
ITEM 16. EXHIBITS.
PREVIOUSLY FILED
---------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
--------- --------- ---------- --------------------------------------------------------------------------
(4)(a) 33-47629 (4)(a) -- Indenture dated as of September 15, 1992 between CMS Energy and NBD
Bank, as Trustee (predecessor to ultimate successor, J.P. Morgan
Trust Company N.A.) (Form S-3 filed May 1, 1992)
-- Indentures Supplemental thereto:
(4)(a)(i) 333-37241 (4)(a) -- 4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
(4)(a)(ii) 1-9513 (4)(d) -- 6th dated as of 01/13/98 (1997 Form 10-K)
(4)(a)(iii) 1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K)
(4)(a)(iv) 333-48276 (4) -- 10th dated as of 10/12/00 (Form S-3 filed October 19, 2000)
(4)(a)(v) 333-58686 (4) -- 11th dated as of 03/29/01 (Form S-8 filed April 11, 2001)
(4)(a)(vi) 333-51932 (4)(a) -- 12th dated as of 07/02/01 (Form POS AM filed August 8, 2001)
(4)(a)(vii) 1-9513 (4)(e)(i) -- 13th dated as of 07/16/03 (2003 Form 10-K)
(4)(a)(viii) 1-9513 (4)(e)(ii) -- 14th dated as of 07/17/03 (2003 Form 10-K)
(4)(b) 1-9513 (4)(k) -- Registration Rights Agreement dated as of July 17, 2003 between
CMS Energy and the Initial Purchasers, all as defined therein (2003
Form 10-K)
(5) -- Opinion of Robert C. Shrosbree, Assistant General Counsel for CMS
Energy
(8) -- Opinion of Jay M. Silverman, Tax Counsel for CMS Energy regarding tax
matters
(12) -- Statement regarding computation of CMS Energy's Ratio of Earnings to
Fixed Charges
(23)(a) -- Consent of Robert C. Shrosbree, Assistant General Counsel for CMS
Energy (included in Exhibit 5 above)
(23)(b) -- Consent of Jay M. Silverman, Tax Counsel for CMS Energy (included in
Exhibit 8 above)
(23)(c) -- Consent of Ernst & Young LLP
(23)(d) -- Consent of PricewaterhouseCoopers LLP
(23)(e) -- Consent of Price Waterhouse
(23)(f) -- Consent of Ernst & Young
(24) -- Power of Attorney for CMS Energy
(25) -- Statement of Eligibility and Qualification of J.P. Morgan Trust
Company, N.A.
63
Exhibits listed above that have heretofore been filed with the
Securities and Exchange Commission pursuant to various acts administered by the
Commission, and which were designated as noted above, are hereby incorporated
herein by reference and made a part hereof with the same effect as if filed
herewith.
ITEM 17. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (a) To include
any prospectus required by Section 10(a)(3) of the Securities Act; (b) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the total, represent a fundamental change in
the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the total, the changes in volume and price
represent no more than a 20% change in the maximum total offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; (c) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
provided, however, that (a) and (b) do not apply if the registration statement
is on Form S-3 or Form S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the SEC by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act that are incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act that is
incorporated by reference in this registration statement shall be deemed to be a
new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that as
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
be governed by the final adjudication of such issue.
(6) That (a) for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and (b) for the
purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
64
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Jackson, and State of Michigan, on the 24th day of
September, 2004.
CMS ENERGY CORPORATION
By: /s/ Thomas J. Webb
---------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated and on the 24th day of September 2004.
NAME TITLE
---- -----
(i) PRINCIPAL EXECUTIVE OFFICER:
/s/ KENNETH WHIPPLE
------------------------------------ Chairman of the Board
Kenneth Whipple and Chief Executive Officer
(ii) PRINCIPAL FINANCIAL OFFICER:
/s/ THOMAS J. WEBB
------------------------------------ Executive Vice President and
Thomas J. Webb Chief Financial Officer
(iii) CONTROLLER OR PRINCIPAL ACCOUNTING OFFICER
/s/ GLENN P. BARBA
------------------------------------ Vice President, Controller and Chief
Glenn P. Barba Accounting Officer
*
------------------------------------
(Merribel S. Ayers) Director
*
------------------------------------
(Earl D. Holton) Director
*
------------------------------------
(David W. Joos) Director
*
------------------------------------
(Michael T. Monahan) Director
65
*
------------------------------------
(Joseph F. Paquette, Jr.) Director
*
------------------------------------
(William U. Parfet) Director
*
------------------------------------
(Percy A. Pierre) Director
*
------------------------------------
(S. Kinnie Smith, Jr.) Director
*
------------------------------------
(Kenneth L. Way) Director
*
------------------------------------
(Kenneth Whipple) Director
*
------------------------------------
(John B. Yasinsky) Director
*By: /s/ THOMAS J. WEBB
--------------------------------
Thomas J. Webb
Attorney in-fact
66
EXHIBIT INDEX
PREVIOUSLY FILED
---------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
--------- --------- ---------- --------------------------------------------------------------------------
(4)(a) 33-47629 (4)(a) -- Indenture dated as of September 15, 1992 between CMS Energy and NBD
Bank, as Trustee (predecessor to ultimate successor, J.P. Morgan
Trust Company N.A.) (Form S-3 filed May 1, 1992)
-- Indentures Supplemental thereto:
(4)(a)(i) 333-37241 (4)(a) -- 4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
(4)(a)(ii) 1-9513 (4)(d) -- 6th dated as of 01/13/98 (1997 Form 10-K)
(4)(a)(iii) 1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K)
(4)(a)(iv) 333-48276 (4) -- 10th dated as of 10/12/00 (Form S-3 filed October 19, 2000)
(4)(a)(v) 333-58686 (4) -- 11th dated as of 03/29/01 (Form S-8 filed April 11, 2001)
(4)(a)(vi) 333-51932 (4)(a) -- 12th dated as of 07/02/01 (Form POS AM filed August 8, 2001)
(4)(a)(vii) 1-9513 (4)(e)(i) -- 13th dated as of 07/16/03 (2003 Form 10-K)
(4)(a)(viii) 1-9513 (4)(e)(ii) -- 14th dated as of 07/17/03 (2003 Form 10-K)
(4)(b) 1-9513 (4)(k) -- Registration Rights Agreement dated as of July 17,
2003 between CMS Energy and the Initial Purchasers, all
as defined therein (2003 Form 10-K)
(5) -- Opinion of Robert C. Shrosbree, Assistant General Counsel for CMS
Energy
(8) -- Opinion of Jay M. Silverman, Tax Counsel for CMS Energy regarding tax matters
(12) -- Statement regarding computation of CMS Energy's Ratio of Earnings to
Fixed Charges
(23)(a) -- Consent of Robert C. Shrosbree, Assistant General Counsel for CMS
Energy (included in Exhibit 5 above)
(23)(b) -- Consent of Jay M. Silverman, Tax Counsel for CMS Energy (included in
Exhibit 8 above)
(23)(c) -- Consent of Ernst & Young LLP
(23)(d) -- Consent of PricewaterhouseCoopers LLP
(23)(e) -- Consent of Price Waterhouse
(23)(f) -- Consent of Ernst & Young
(24) -- Power of Attorney for CMS Energy
(25) -- Statement of Eligibility and Qualification of J.P. Morgan Trust
Company, N.A.
67