Pursuant to Rule 424(b)5
Registration Statement No. 333-51932
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 21, 2004)
[CMS ENERGY CORPORATION LOGO]
$150,000,000
CMS ENERGY CORPORATION
6.30% SENIOR NOTES DUE 2012
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The Notes will bear interest at the rate of 6.30% per year. Interest on the
Notes is payable on February 1 and August 1 of each year, beginning on August 1,
2005. The Notes will mature on February 1, 2012. We may redeem some or all of
the Notes at any time. The redemption price for the Notes will be 100% of their
principal amount, plus any Applicable Premium thereon at the time of redemption
plus accrued and unpaid interest to the redemption date. See "Description of the
Notes -- Optional Redemption." Under certain circumstances, Holders of the Notes
will have the right to require us to repurchase the Notes. See "Description of
the Notes -- Purchase of Notes Upon Change in Control." There is no sinking fund
for the Notes.
The Notes will be our unsecured obligations and will rank equally with all
of our other unsecured senior indebtedness.
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INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
S-14.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
------------------
PER SENIOR NOTE TOTAL
--------------- ------------
Public Offering Price 99.823% $149,734,500
Underwriting Discount 1.750% $ 2,625,000
Proceeds to CMS Energy (before expenses) 98.073% $147,109,500
Interest on the Notes will accrue from January 19, 2005 to date of
delivery.
------------------
The underwriters expect to deliver the Notes to purchasers on or about
January 19, 2005.
------------------
Joint Book-Running Managers
CITIGROUP DEUTSCHE BANK SECURITIES
------------------
BNP PARIBAS WEDBUSH MORGAN SECURITIES INC.
January 13, 2005
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR TO
DOCUMENTS WHICH WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT, AND THE UNDERWRITERS ARE
NOT, MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
---------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
About This Prospectus Supplement............................................................................. S-2
Forward-Looking Statements and Information................................................................... S-3
Where You Can Find More Information.......................................................................... S-5
Summary...................................................................................................... S-6
Risk Factors................................................................................................. S-15
Use of Proceeds.............................................................................................. S-25
Ratio of Earnings to Fixed Charges........................................................................... S-25
Capitalization............................................................................................... S-26
CMS Energy................................................................................................... S-27
Description of the Notes..................................................................................... S-31
Underwriting................................................................................................. S-48
Legal Matters................................................................................................ S-49
Experts...................................................................................................... S-49
PROSPECTUS
Summary...................................................................................................... 2
Where to Find More Information............................................................................... 2
CMS Energy Corporation....................................................................................... 4
CMS Energy Trusts............................................................................................ 4
Risk Factors................................................................................................. 5
Use of Proceeds.............................................................................................. 5
Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preference Dividends.. 5
Description of Securities.................................................................................... 6
Effect of Obligations Under the Debt Securities and the Guarantees........................................... 20
Plan of Distribution......................................................................................... 24
Legal Opinions............................................................................................... 26
Experts...................................................................................................... 26
ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part is this prospectus
supplement, which describes the terms of this offering of Notes and also adds to
and updates information contained in the accompanying prospectus and the
documents incorporated by reference into the accompanying prospectus. The second
part is the accompanying prospectus, which contains a description of the
securities registered by us. To the extent there is a conflict between the
information contained or incorporated by reference in this prospectus
supplement, on the one hand, and the information contained in the accompanying
prospectus or any document incorporated by reference therein, on the other hand,
the information in this prospectus supplement shall control.
This prospectus supplement and the accompanying prospectus are part of a
registration statement that we filed with the Securities and Exchange Commission
("SEC") using a "shelf" registration process. Under the registration statement,
we may sell securities, including Notes, up to a dollar amount of
$2,000,000,000, of which this offering is a part.
S-2
FORWARD-LOOKING STATEMENTS AND INFORMATION
This prospectus supplement contains forward-looking statements as defined
in Rule 175 under the Securities Act of 1933, as amended (the "SECURITIES ACT")
and Rule 3b-6 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT") and relevant legal decisions. Our intention with the use of such
words as "may," "could," "anticipates," "believes," "estimates," "expects,"
"intends," "plans" and other similar words is to identify forward-looking
statements that involve risk and uncertainty. We designed this discussion of
potential risks and uncertainties to highlight important factors that may impact
our business and financial outlook. We have no obligation to update or revise
forward-looking statements regardless of whether new information, future events
or any other factors affect the information contained in the statements. These
forward-looking statements are subject to various factors that could cause our
actual results to differ materially from the results anticipated in these
statements. Such factors include our inability to predict and/or control:
- capital and financial market conditions, including the price of our
common stock and the effect of such market conditions on our pension
plan, interest rates and access to the capital markets, as well as
availability of financing to us, Consumers Energy Company, our
wholly-owned subsidiary ("CONSUMERS"), or any of our affiliates, and
the energy industry;
- market perception of the energy industry, us and Consumers, or any
of our affiliates;
- credit ratings of us, Consumers or any of our affiliates;
- currency fluctuations, transfer restrictions and exchange controls;
- factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs,
environmental incidents or electric transmission or gas pipeline
system constraints;
- international, national, regional and local economic, competitive
and regulatory policies, conditions and developments;
- adverse regulatory or legal decisions, including those related to
environmental laws and regulations;
- the extent of favorable regulatory treatment and regulatory lag
concerning a number of significant questions presently before the
Michigan Public Service Commission ("MPSC") relating to the Customer
Choice Act, including:
- recovery of stranded costs incurred due to customers choosing
alternative energy suppliers;
- recovery of Clean Air Act costs and other environmental and
safety-related expenditures;
- power supply and natural gas supply costs when energy supply
and oil prices are increasing rapidly;
- timely recognition in rates of additional equity investments
in Consumers; and
- adequate and timely recovery of additional electric and gas
rate-based expenditures;
- the impact of adverse natural gas prices on the Midland Cogeneration
Venture Limited Partnership (the "MCV PARTNERSHIP") investment,
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;
- energy markets, including the timing and extent of changes in
commodity prices for oil, coal, natural gas, natural gas liquids,
electricity and certain related products due to lower or higher
demand, shortages, transportation problems or other developments;
S-3
- the generally accepted accounting principles requirement that we
utilize mark-to-market accounting on certain of our energy commodity
contracts, and possibly other types of contracts in the future,
which may have, in any given period, a significant positive or
negative effect on earnings, which could change dramatically or be
eliminated in subsequent periods or could add to earnings
volatility;
- potential disruption, expropriation or interruption of facilities or
operations due to accidents, war, terrorism or changing political
conditions and the ability to obtain or maintain insurance coverage
for such events;
- nuclear power plant performance, decommissioning, policies,
procedures, incidents and regulation, including the availability of
spent nuclear fuel storage;
- technological developments in energy production, delivery and usage;
- achievement of capital expenditure and operating expense goals;
- changes in financial or regulatory accounting principles or
policies;
- outcome, cost and other effects of legal and administrative
proceedings, settlements, investigations and claims, including
particularly claims, damages and fines resulting from round-trip
trading and inaccurate commodity price reporting, including
investigations by the U.S. Department of Justice regarding
round-trip trading and price reporting;
- limitations on our ability to control the development or operation
of projects in which our subsidiaries have a minority interest;
- disruptions in the normal commercial insurance and surety bond
markets that may increase costs or reduce traditional insurance
coverage, particularly terrorism and sabotage insurance and
performance bonds;
- the efficient sale of non-strategic or under-performing domestic or
international assets and discontinuation of certain operations;
- other business or investment considerations that may be disclosed
from time to time in our or Consumers' SEC filings or in other
publicly issued written documents;
- other uncertainties that are difficult to predict, and many of which
are beyond our control; and
- the factors identified under "Risk Factors" beginning on page S-15.
These are important factors, but not necessarily all of the important
factors, that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, us or our
subsidiaries.
S-4
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC under
File No. 1-9513. Our SEC filings are available over the Internet at the SEC's
web site at http://www.sec.gov. You may also read and copy any document we file
at the SEC's public reference room at 450 Fifth Street N.W., Room 1024,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms and their copy charges. You may also
inspect our SEC reports and other information at the New York Stock Exchange, 20
Broad Street, New York, New York 10005. You can find additional information
about us, including our Annual Report on Form 10-K/A (Amendment No. 2) for the
year ended December 31, 2003 and our Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, on our web
site at http://www.cmsenergy.com. The information on this web site is not a part
of this prospectus supplement and the accompanying prospectus.
We are "incorporating by reference" information into this prospectus
supplement and the accompanying 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 supplement and the accompanying prospectus, except for any
information superseded by information in this prospectus supplement and the
accompanying prospectus. This prospectus supplement and the accompanying
prospectus incorporate by reference the documents set forth below that we have
previously filed with the SEC. These documents contain important information
about us and our finances.
- Annual Report on Form 10-K/A (Amendment No. 2) for the year ended
December 31, 2003 filed on December 16, 2004
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
filed on May 7, 2004, Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004 filed on August 6, 2004 and Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004 filed on November
4, 2004
- Current Reports on Form 8-K filed on January 22, 2004, March 18,
2004, April 14, 2004, June 3, 2004, August 20, 2004, August 31,
2004, September 1, 2004, October 6, 2004, October 12, 2004, October
13, 2004, October 19, 2004, November 9, 2004, December 6, 2004,
December 8, 2004, December 13, 2004, December 22, 2004 and January
12, 2005
The documents filed by us with the SEC pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this prospectus supplement,
until the offering of the Notes pursuant to this prospectus supplement is
terminated, are also incorporated by reference into this prospectus supplement
and the accompanying prospectus. Any statement contained in such document will
be deemed to be modified or superseded for purposes of this prospectus
supplement and the accompanying prospectus to the extent that a statement
contained in this prospectus supplement and the accompanying prospectus or any
other subsequently filed document modifies or supersedes such statement.
We will provide, upon your oral or written request, a copy of any or all
of the information that has been incorporated by reference in this prospectus
supplement and the accompanying prospectus but not delivered with this
prospectus supplement and the accompanying 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
S-5
SUMMARY
This summary may not contain all the information that may be important to
you. You should read this prospectus supplement and the documents incorporated
by reference into this prospectus supplement in their entirety before making an
investment decision. The terms "CMS," "CMS ENERGY," "OUR," "US" and "WE" as used
in this document refer to CMS Energy Corporation and its subsidiaries as a
combined entity, except where it is made clear that such term means only CMS
Energy Corporation.
In this document, "BCF" means billion cubic feet, "GWH" means
gigawatt-hour, "KWH" means kilowatt-hour and "MW" means megawatts.
CMS ENERGY CORPORATION
CMS Energy, formed in Michigan in 1987, is an integrated energy holding
company operating through subsidiaries in the United States and in selected
markets around the world. Its two principal wholly-owned subsidiaries are
Consumers and CMS Enterprises Company ("ENTERPRISES"). Consumers is a public
utility that provides natural gas and/or electricity to almost 6.5 million of
Michigan's 10 million residents and serves customers in 61 of the 68 counties in
Michigan's Lower Peninsula. Enterprises, through subsidiaries, is engaged in
several energy businesses in the United States and in selected international
markets.
Our assets and services include: electric and natural gas utility
operations; independent power production; natural gas transmission, storage and
processing; and international energy distribution. Our principal businesses are:
- Consumers' electric utility, which owns and operates 30 electric
generating plants with an aggregate of 6,435 MW of capacity and
serves 1.77 million customers in Michigan's Lower Peninsula;
- Consumers' gas utility, which owns and operates over 27,463 miles of
transmission and distribution lines throughout the Lower Peninsula
of Michigan, providing natural gas to 1.67 million customers;
- CMS Generation Co. ("CMS GENERATION"), a wholly-owned subsidiary of
Enterprises that has ownership interests in independent power plants
in operation with 6,766 gross MW (3,157 net MW) throughout the
United States and abroad. The plants are located in the U.S.,
Argentina, Chile, Ghana, India, Jamaica, Morocco and the United Arab
Emirates. CMS Generation also has ownership interests in the Saudi
Petrochemical Company power plant, which is under construction 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"), a
wholly-owned subsidiary of Enterprises that owns an interest in and
operates natural gas pipelines in various locations in North America
(aggregating 265 miles) and South America (aggregating 4,330 miles).
The pipelines are located in the U.S., Argentina and Chile. It also
owns gathering systems and processing facilities.
In 2003, we had consolidated operating revenue of approximately $5.5
billion.
Our principal executive offices are located at One Energy Plaza, Jackson,
Michigan 49201 and our telephone number is (517) 788-0550.
S-6
RECENT DEVELOPMENTS
THIRD QUARTER RESULTS OF OPERATIONS
RESTATED
-------------------------------
2004 2003 CHANGE
---- ----- ------
THREE MONTHS ENDED SEPTEMBER 30, (UNAUDITED, DOLLARS IN MILLIONS
-------------------------------- EXCEPT PER SHARE AMOUNTS)
Net Income (Loss) .................................... $ 59 $ (69) $ 128
Preferred Dividends .................................. 3 -- 3
----- ------ -----
Net Income (Loss) Available to Common Stock .......... $ 56 $ (69) $ 125
===== ====== =====
Basic Earnings (Loss) Per Share ...................... $0.35 $(0.46) $0.81
Diluted Earnings (Loss) Per Share .................... 0.34 (0.46) 0.80
Electric utility ..................................... $ 49 $ 59 $ (10)
Gas utility .......................................... (11) (19) 8
Enterprises .......................................... 59 (24) 83
Corporate interest and other ......................... (49) (87) 38
Discontinued operations .............................. 8 2 6
----- ------ -----
CMS Energy Net Income (Loss) Available to Common
Stock................................................ $ 56 $ (69) $ 125
===== ====== =====
For the three months ended September 30, 2004, our net income available to
common stock was $56 million, compared to a net loss available to common stock
of $69 million for the three months ended September 30, 2003. The $125 million
increase primarily reflects:
- a $35 million net gain from the 2004 sale of our Parmelia business
and our interest in Goldfields;
- a $24 million reduction in corporate interest expense;
- an $8 million increase in net income at our gas utility primarily
due to the 2004 annual unbilled gas revenue analysis increase in gas
revenues versus the 2003 analysis reduction in gas revenues;
- a $7 million increase in net income at CMS Marketing, Services and
Trading Company (now known as CMS Energy Resource Management
Company) ("CMS MST" or "CMS ERM") primarily due to the absence of
losses associated with wholesale gas and power contracts sold in
2003;
- a $6 million reduction in funded benefits expense due to the OPEB
plans accounting for the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 and the positive impact of prior year
pension plan contributions on pension plan asset returns;
- the absence in 2004 of a $46 million net impairment charge related
to our international energy distribution business recorded in 2003;
and
- the absence in 2004 of a $19 million debt retirement charge recorded
in 2003.
These increases were offset partially by:
- a $10 million reduction in net income at our electric utility
primarily due to reduced tariff revenues equivalent to Big Rock
nuclear decommissioning surcharges, milder weather and decreased
sales margins from deliveries to customers choosing alternative
electric suppliers;
- a $7 million reduction in earnings from our equity method
investments; and
- a $3 million declaration and payment of CMS Energy preferred
dividends.
S-7
RESTATED
------------------------------
2004 2003 CHANGE
---- ----- ------
THREE MONTHS ENDED SEPTEMBER 30, (UNAUDITED, DOLLARS IN MILLIONS
-------------------------------- EXCEPT PER SHARE AMOUNTS)
Net Income (Loss) .................................... $ 74 $ (52) $ 126
Preferred Dividends .................................. 9 - 9
----- ------ -----
Net Income (Loss) Available to Common Stock .......... $ 65 $ (52) $ 117
===== ====== =====
Basic Earnings (Loss) Per Share ...................... $0.40 $(0.36) $0.76
Diluted Earnings (Loss) Per Share .................... 0.40 (0.36) 0.76
Electric utility ..................................... $ 124 $ 145 $ (21)
Gas utility .......................................... 46 40 6
Enterprises .......................................... 36 5 31
Corporate interest and other ......................... (147) (198) 51
Discontinued operations .............................. 6 (20) 26
Accounting changes ................................... - (24) 24
----- ------ -----
CMS Energy Net Income (Loss) Available to Common Stock $ 65 $ (52) $ 117
===== ====== =====
For the nine months ended September 30, 2004, our net income available to
common stock was $65 million, compared to a net loss available to common stock
of $52 million for the nine months ended September 30, 2003. The $117 million
increase reflects:
- a $51 million reduction in corporate interest and other expenses;
- a $35 million net gain from the 2004 sale of our Parmelia business
and our interest in Goldfields;
- a $20 million reduction in funded benefits expense primarily due to
the OPEB plans accounting for the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 and the positive impact
of prior year pension plan contributions on pension plan asset
returns;
- a $12 million increase in net income at CMS ERM primarily due to the
absence of losses associated with wholesale gas and power contracts
sold in 2003;
- a $6 million increase in net income at our gas utility resulting
from favorable impacts of the December 2003 rate order outpacing
reductions in gas deliveries resulting from milder weather;
- the absence in 2004 of a $31 million deferred tax asset valuation
reserve established in 2003;
- the absence in 2004 of $24 million of charges related to changes in
accounting recorded in 2003;
- the absence in 2004 of $20 million of losses in Discontinued
Operations recorded in 2003; and
- the absence in 2004 of a $19 million debt retirement charge recorded
in 2003.
These increases were partially offset by:
- a $30 million increase in net asset impairment charges;
- a $21 million reduction in net income at our electric utility
primarily due to reduced tariff revenues equivalent to Big Rock
nuclear decommissioning surcharges, milder weather and decreased
sales margins from deliveries to customers choosing alternative
electric suppliers;
- an $11 million reduction in earnings from our equity method
investments;
- a $9 million declaration and payment of CMS Energy preferred
dividends; and
- the absence in 2004 of $30 million of Michigan Single Business Tax
refunds received in 2003.
STRANDED COST ORDER
On November 23, 2004, the MPSC issued an order authorizing Consumers to
collect its combined 2002 and 2003 "net" stranded costs under the Customer
Choice Act, of approximately $63.2 million. The amount, including interest at an
annual rate of 7%, will be
S-8
collected through use of a stranded cost recovery charge of 1.2 mills per
kilowatt-hour starting in December 2004 until fully collected. The order also
approved a methodology for the calculation of stranded costs.
2003 GAS RATE CASE AND 2001 GAS DEPRECIATION CASE
On December 2, 2004, the MPSC issued orders in Consumers' rehearing
requests stemming from MPSC orders issued October 14, 2004 regarding Consumers'
2003 gas rate case and the 2001 gas depreciation case.
Regarding the 2003 gas rate case, the MPSC issued an order clarifying the
method of computing Consumers' rate of return on common equity, for purposes of
whether the rate of return on common equity exceeds the authorized 11.4% rate,
consistent with Consumers' rehearing request. The MPSC held that (i) the actual
current level of equity invested in Consumers should be used and (ii) actual
(not weather-normalized) results should be used for the rate of return
calculation required by the October 14, 2004 order.
Regarding the 2001 gas depreciation case, the MPSC issued an order
approving Consumers' rehearing request that the book depreciation rates be
restored to the levels set forth in the MPSC's December 18, 2003 interim gas
rate relief order, effective and retroactive to October 14, 2004.
ISSUANCE AND SALE OF CONVERTIBLE SENIOR NOTES AND FIRST MORTGAGE BONDS
On December 13, 2004, CMS Energy issued and sold $287.5 million principal
amount of its 2.875% Convertible Senior Notes due 2024 pursuant to an effective
shelf registration statement and a Prospectus Supplement dated December 8, 2004
to a Prospectus dated September 21, 2004. CMS Energy used the proceeds to redeem
the $180 million principal amount of its outstanding 7% Extendible Tenor
Rate-Adjusted Securities ("X-TRAS"), plus accrued but unpaid interest and any
associated option payment, and for general corporate purposes.
On December 13, 2004, Consumers issued and sold $225 million principal
amount of its 5.00% First Mortgage Bonds due 2015 pursuant to an effective shelf
registration statement and a Prospectus Supplement dated December 8, 2004 to a
Prospectus dated December 1, 2004. Consumers used the proceeds (i) to redeem the
aggregate outstanding balance of $207.7 million of its 7.375% First Mortgage
Bonds due 2023, (ii) to pay the attendant call premium of $6,893,563, (iii) to
pay accrued interest to the redemption date and (iv) for general corporate
purposes.
CONSUMERS PLANT OUTAGES
On Sunday, January 9, 2005, Nuclear Management Company, LLC ("NMC"), the
operator of the Palisades nuclear plant owned by Consumers, manually took the
plant offline after recording a rapid reduction in the vacuum of the main
condenser, the component that condenses steam from the turbine generators into
water. The cause of the reduction in the vacuum is the result of air in leakage
into the main condenser. NMC has maintained the plant in hot shutdown condition
and has identified the specific source of the vacuum reduction. The repairs have
been completed and the plant is expected to be returned to service within a few
days. The main condenser is part of the secondary non-nuclear safety-related
portion of the plant. There are no special Nuclear Regulatory Commission ("NRC")
reviews scheduled in relation to this outage or approvals needed for plant
restart.
On Tuesday, January 11, 2005, Consumers took the J H Campbell Plant Unit 3
offline in order to repair a tube leak in the super heater portion of the Unit 3
boiler. The source of the tube leak has been identified. The repair is routine
and the plant is expected to be returned to service within the next several
days.
Consumers expects to have sufficient power at all times to meet its load
requirements from its other plants and from purchase arrangements. This could
increase the cost of power to Consumers by an estimated $0.6 million (pre-tax)
per day during an outage at Palisades. Of this estimated amount, approximately
$0.24 million per day is not recoverable from ratepayers. The cost of power to
Consumers could increase by an estimated $0.3 million (pre-tax) per day during
an outage at Campbell. Of this estimated amount, approximately $0.12 million per
day is not recoverable from ratepayers. As long as both Palisades and Campbell
are offline, the proportion from power purchase arrangements will increase,
thereby increasing the combined cost of power to Consumers to an estimated $1.1
million (pre-tax) per day, of which approximately $0.44 million per day is not
recoverable from ratepayers.
S-9
CMS ENERGY ASSET IMPAIRMENTS
An affiliate of CMS Energy entered into a sale and purchase agreement on
February 25, 2004 to sell its 33% interest in the GVK facility, a 235 megawatt
power plant located in India, for approximately $25 million. CMS Energy expects
to complete this sale in the first quarter of 2005 and estimates it will record
an impairment resulting from the sale in the amount of approximately $29.5
million, with a resultant charge to its income statement of approximately $19
million, net of deferred income taxes, in the fourth quarter of 2004.
CMS Energy expects to sell its interest in the Scudder Latin American
Power Fund in the first quarter of 2005. CMS Energy estimates it will record an
impairment resulting from this sale in the amount of approximately $5 million,
with a resultant charge to its income statement of approximately $3.2 million,
net of deferred income taxes, in the fourth quarter of 2004.
S-10
THE OFFERING
Issuer............................................... CMS Energy Corporation.
Securities Offered................................... $150 million aggregate principal amount of 6.30% Senior Notes due 2012
(the "NOTES") to be issued under the indenture dated as of September 15,
1992 between us and J.P. Morgan Trust Company, N.A. (successor to NDB
Bank, National Association), as trustee (the "TRUSTEE"), and as amended
and supplemented from time to time (the "SENIOR DEBT INDENTURE").
Issue Price.......................................... Each Note will be issued at a price of $1,000 per Note, plus accrued
interest, if any, from January 19, 2005.
Maturity............................................. February 1, 2012.
Interest Rate........................................ The Notes will bear interest at the rate of 6.30% per year, payable
semiannually in arrears on February 1 and August 1, commencing on August
1, 2005, and at maturity.
Use of Proceeds...................................... We estimate that the proceeds of the offering of the Notes, after
deducting underwriters' discounts and commissions and offering expenses,
will aggregate approximately $147 million. We intend to use all of the
proceeds of this offering to redeem our outstanding general term notes.
The outstanding general term notes being redeemed with the proceeds of
this offering have various interest rates ranging from 6% to 7.25% and
maturities ranging from February 2005 through April 2009. The average
interest rate for these outstanding general term notes is 6.88% and the
average maturity is 2.2 years.
Optional Redemption.................................. The Notes will be redeemable at our option, in whole or in part, at any
time or from time to 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 Applicable Premium owed, if any, to the redemption date. See
"Description of the Notes -- Optional Redemption."
Change in Control.................................... If a Change in Control (as defined under "Description of the Notes --
Purchase of Notes Upon Change in Control") occurs, Holders will have the
right, at their option, to require us to purchase any or all of their
Notes for cash. The cash price we are required to pay is equal to 101% of
the principal amount of the Notes to be purchased plus accrued and unpaid
interest, if any, to the Change in Control purchase date. See "Description
of the Notes -- Purchase of Notes Upon Change in Control."
Ranking.............................................. The Notes will be unsecured and unsubordinated senior debt securities of
ours ranking equally with our other unsecured and unsubordinated
indebtedness. As of September 30, 2004, we had outstanding approximately
$2.7 billion aggregate principal amount of indebtedness, including
approximately $178 million of subordinated indebtedness relating to our
convertible preferred securities, but excluding approximately $5.1 billion
of indebtedness of our subsidiaries. In August 2004, CMS Energy entered
into the Fifth Amended and Restated Credit Agreement in the amount of
approximately $300 million. This facility is secured and the Notes are
junior to such indebtedness. As of December 31, 2004 there were
approximately $106 million of letters of credit outstanding under the Fifth
Amended and
S-11
Restated Credit Agreement. Except for the amount outstanding under the
Fifth Amended and Restated Credit Agreement, none of our indebtedness is
senior to the Notes. The Notes are structurally subordinated to
approximately $5.1 billion of our subsidiaries' debt.
Certain Covenants.................................... The senior debt indenture will contain covenants that will, 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 The Depository Trust
Company ("DTC") in a minimum denomination of $1,000 and any integral
multiple thereof.
Trustee and Paying Agent............................. J.P. Morgan Trust Company, N.A.
Trading.............................................. The Notes will not be listed on any securities exchange or included in any
automated quotation system. No assurance can be given as to the liquidity
of or trading market for the Notes.
Risk Factors......................................... You should carefully consider each of the factors described in the section
of this prospectus supplement entitled "Risk Factors" starting on page
S-15 before purchasing the Notes.
S-12
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from our audited
consolidated financial statements, which have been audited by Ernst & Young LLP,
independent registered public accounting firm, for the fiscal years ended
December 31, 2003, 2002, 2001 and 2000, except for amounts included from the
financial statements of the MCV Partnership and Jorf Lasfar Energy Company
S.C.A. ("JORF LASFAR"). The MCV Partnership represents an investment accounted
for under the equity method of accounting through December 31, 2003, which was
audited by another independent registered public accounting firm (the other
auditors for 2001 and 2000 have ceased operations), for the fiscal years ended
December 31, 2003, 2002, 2001 and 2000. Jorf Lasfar represents an investment
accounted for under the equity method of accounting, which was audited by
another independent accountant for the fiscal years ended December 31, 2003,
2002, 2001 and 2000. The following selected consolidated financial data for the
nine months ended September 30, 2004 and 2003 have been derived from our
unaudited consolidated financial statements. Please refer to our financial
statements for the fiscal year ended December 31, 2003 and for the quarter ended
September 30, 2004, which are each incorporated by reference herein. The
financial information set forth below should be read in conjunction with our
consolidated financial statements, related notes and other financial information
that are incorporated by reference herein. Operating results for the nine months
ended September 30, 2004 are not necessarily indicative of results that may be
expected for the entire year ended December 31, 2004. See "Where You Can Find
More Information."
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -----------------------------------------
2004 (a) 2003 2003 2002 2001 2000
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Operating revenue ...................................... $ 3,910 $ 4,141 $ 5,513 $ 8,673 $ 8,006 $ 6,623
Earnings from equity method investees .................. 78 125 164 92 172 213
Operating expenses ..................................... 3,537 3,776 5,082 8,690 8,027 6,342
Operating income ....................................... 451 490 595 75 151 494
Income (loss) from continuing operations ............... 68 (8) (43) (394) (327) (85)
-------- -------- -------- -------- -------- --------
Net income (loss) available to common shareholder ...... $ 65 $ (52) $ (44) $ (650) $ (459) $ 5
======== ======== ======== ======== ======== ========
Earnings per average common share:
Income (loss) from continuing operations
Basic and diluted .................................... $ 0.36 $ (0.06) $ (0.30) $ (2.84) $ (2.50) $ (0.76)
CMS Energy Basic and Diluted Net Income (Loss)
attributable to common stock ......................... 0.40 (0.36) (0.30) (4.68) (3.51) 0.04
Dividends declared per average common share:
CMS Energy ........................................... $ - $ - $ - $ 1.09 $ 1.46 $ 1.46
BALANCE SHEET DATA (AT PERIOD END DATE):
Cash and cash equivalents .............................. $ 560 $ 669 $ 532 $ 351 $ 123 $ 143
Restricted cash ........................................ 83 205 201 38 4 --
Net plant and property (a) ............................. 8,600 6,624 6,944 6,103 6,703 6,316
Total assets ........................................... 15,377 13,234 13,838 14,781 17,633 17,801
Long-term debt, excluding current maturities (a) ....... 6,228 6,295 6,020 5,357 5,842 6,052
Long-term debt -- related parties ...................... 684 - 684 - - -
Non-current portion of capital and finance lease
obligations .......................................... 318 116 58 116 71 49
Notes payable .......................................... - 4 - 458 416 403
Other liabilities ...................................... 5,328 4,786 5,113 6,807 8,012 7,705
Minority interest (a) .................................. 750 35 73 38 43 82
Company-obligated mandatorily redeemable trust preferred
securities of subsidiaries (b) ....................... - 173 - 393 694 694
Company obligated trust preferred securities of
Consumers' subsidiaries (b) .......................... - 490 - 490 520 395
Preferred stock ........................................ 261 - 261 - - -
Preferred stock of subsidiary .......................... 44 44 44 44 44 44
Common stockholders' equity ............................ $ 1,764 $ 1,291 $ 1,585 $ 1,078 $ 1,991 $ 2,377
OTHER DATA:
Cash Flow:
Provided by (Used in) operating activities ............. $ 194 $ -- $ (251) $ 614 $ 372 $ 600
Provided by (Used in) investing activities ............. (132) 332 203 829 (1,349) (1,220)
Provided by (Used in) financing activities ............. (208) (16) 230 (1,223) 967 629
Ratio of earnings to fixed charges (c) ................. 1.01 -(d) -(e) -(f) -(g) -(h)
----------
(a) Under revised FASB Interpretation No. 46 "Consolidation of Variable
Interest Entities," we are the primary beneficiary of the MCV Partnership
and the First Midland Limited Partnership (the "FMLP"). As a result, we
have consolidated their assets, liabilities and activities into our
financial statements for the first time as of and for the quarter ended
March 31, 2004. These partnerships had third-party obligations totaling
$581 million at September 30, 2004. Property, plant and equipment serving
as collateral for these obligations had a carrying value of $1.440 billion
at September 30, 2004.
S-13
(b) CMS Energy and Consumers each formed various statutory wholly-owned
business trusts for the sole purpose of issuing preferred securities and
lending the gross proceeds to the parent companies. The sole assets of the
trusts are debentures of the parent company with terms similar to those of
the preferred securities. As a result of the adoption of FASB
Interpretation No. 46 on December 31, 2003, we deconsolidated the trusts
that hold the mandatorily redeemable trust preferred securities.
Therefore, $490 million, previously reported by us as Company-obligated
mandatorily redeemable trust preferred securities of subsidiaries, plus
$16 million owed to the trusts and previously eliminated in consolidation,
is now included in the balance sheet as Long-term debt -- related parties.
Additionally, $173 million, previously reported by us as Company-obligated
trust preferred securities of Consumers' subsidiaries, plus $5 million
owed to the trusts and previously eliminated in consolidation, is now
included in the balance sheet as Long-term debt -- related parties.
(c) For the purpose of computing the ratio, earnings represents the sum of
income from continuing operations before income taxes and income from
equity method investees, net interest charges and preferred dividends of
subsidiary, the estimated interest portion of lease rentals and
distributed income of equity method investees.
(d) For the nine months ended September 30, 2003, fixed charges exceeded
earnings by $36 million. Earnings as defined include $70 million of asset
impairment charges.
(e) For the year ended December 31, 2003, fixed charges exceeded earnings by
$59 million. Earnings as defined include $95 million of asset impairment
charges.
(f) For the year ended December 31, 2002, fixed charges exceeded earnings by
$475 million. Earnings as defined include $602 million of asset impairment
charges.
(g) For the year ended December 31, 2001, fixed charges exceeded earnings by
$393 million. Earnings as defined include $323 million of asset impairment
charges.
(h) For the year ended December 31, 2000, fixed charges exceeded earnings by
$225 million. Earnings as defined include a $329 million pretax impairment
loss on the Loy Yang investment.
S-14
RISK FACTORS
Before purchasing any of our securities offered by this prospectus
supplement and the accompanying prospectus, you should carefully consider the
following risk factors, as well as the other information contained or
incorporated by reference in this prospectus supplement and the accompanying
prospectus.
RISKS RELATING TO CMS ENERGY
WE DEPEND ON DIVIDENDS FROM OUR SUBSIDIARIES TO MEET OUR DEBT SERVICE
OBLIGATIONS. IF WE DO NOT RECEIVE ADEQUATE DIVIDENDS OR DISTRIBUTIONS FROM OUR
SUBSIDIARIES, WE MAY NOT BE ABLE TO MAKE PRINCIPAL OR INTEREST PAYMENTS ON THE
NOTES.
Due to our holding company structure, we depend on dividends from our
subsidiaries to meet our debt obligations, including the payment of any
principal or interest on the Notes. None of these entities are or will be
obligated to pay any amounts due on the Notes. Therefore, the Notes are
effectively subordinated to the payment of interest, principal, declared
dividends and preferred distributions on the debt, preferred securities and
other liabilities of Consumers and Enterprises and each of their subsidiaries.
Restrictions contained in Consumers' preferred stock provisions and other
legal restrictions limit Consumers' ability to pay dividends or acquire its own
stock from us. As of September 30, 2004, the most restrictive provisions in its
financing documents allowed Consumers to pay an aggregate of $300 million in
dividends to us during any year.
For additional information concerning restrictions on Consumers' ability
to pay dividends to us, see "Description of the Notes -- Primary Source of Funds
of CMS Energy; Restrictions on Sources of Dividends."
THE NOTES ARE STRUCTURALLY SUBORDINATED TO THE DEBT AND PREFERRED STOCK OF
OUR SUBSIDIARIES.
Of the approximately $7.8 billion of our consolidated indebtedness as of
September 30, 2004, approximately $5.1 billion was indebtedness of our
subsidiaries. Payments on that indebtedness and preferred stock are prior in
right of payment to dividends paid to us by our subsidiaries. See "Description
of the Notes -- Structural Subordination."
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT OUR FINANCIAL
FLEXIBILITY AND HENCE OUR ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS UNDER THE
NOTES.
As of September 30, 2004, we had outstanding approximately $2.7 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible preferred securities
but excluding approximately $5.1 billion of indebtedness of our subsidiaries. In
August 2004, we entered into the Fifth Amended and Restated Credit Agreement in
the amount of approximately $300 million. As of December 31, 2004, there were
approximately $106 million of letters of credit outstanding under the Fifth
Amended and Restated Credit Agreement. We and our subsidiaries may incur
additional indebtedness in the future.
The level of our present and future indebtedness could have several
important effects on our future operations, including, among others:
- a significant portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness and will not be available for other purposes;
- covenants contained in our existing debt arrangements require us to
meet certain financial tests, which may affect our flexibility in
planning for, and reacting to, changes in our business;
- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate and other
purposes may be limited;
- we may be at a competitive disadvantage to our competitors that are
less leveraged; and
- our vulnerability to adverse economic and industry conditions may
increase.
S-15
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 September 30, 2004, CMS Energy had approximately $427 million of
debt maturities in 2004 and 2005, excluding debt maturities of Consumers. These
maturities included: approximately $176 million of senior notes due in November
2004 that has been extinguished; $180 million of senior notes due in January
2005 that has been extinguished; approximately $7 million of general term notes
that matured at various times in 2004; approximately $24 million of general term
notes that will mature at various times in 2005; approximately $7 million of
Enterprises subsidiary debt that matured in 2004; and approximately $33 million
of Enterprises subsidiary debt that will mature in 2005. In addition, we expect
to incur significant costs for capital expenditures, including future
environmental regulation compliance, especially compliance with clean air laws.
See "We could incur significant capital expenditures to comply with
environmental standards and face difficulty in recovering these costs on a
current basis" below. As of September 30, 2004, we had incurred $500 million in
capital expenditures to comply with these regulations and future capital
expenditures may total approximately $302 million between 2004 and 2011. We
could also be required to make additional cash contributions to our employee
pension and benefit plans and become subject to liquidity demands pursuant to
commercial commitments under guarantees, indemnities and letters of credit.
After giving effect to recent issuances of securities, along with asset sales,
capital markets or bank financing and cash flow from operations, we believe, but
can make no assurance, that we will have sufficient liquidity to meet our debt
maturities through 2005. Management is actively pursuing plans to refinance debt
and to sell assets. There can be no assurances that this business plan will be
successful and failure to achieve its goals could have a material adverse effect
on our liquidity and operations.
We continue to explore financing opportunities to supplement our financial
plan. These potential opportunities include: refinancing our bank credit
facilities; entering into leasing arrangements and/or vendor financing;
refinancing and issuing new capital markets debt, preferred stock and/or common
equity; and negotiating private placement debt. We cannot guarantee the capital
market's acceptance of our securities or predict the impact of factors beyond
our control, such as actions of rating agencies. If we are unable to access bank
financing or the capital markets to incur or refinance indebtedness, there could
be a material adverse effect upon our liquidity and operations.
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 B1 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.
Certain of our securities and those of our affiliates, including
Consumers, are rated by various credit rating agencies. Any reduction or
withdrawal of one or more of our credit ratings could have a material adverse
impact on our ability to access capital on acceptable terms. We cannot assure
you that any of our current ratings or those of our affiliates, including
Consumers, will remain in effect for any given period of time or that a rating
will not be lowered or withdrawn entirely by a rating agency.
S-16
WE MAY BE ADVERSELY AFFECTED BY A REGULATORY INVESTIGATION AND LAWSUITS
REGARDING "ROUND TRIP" TRADING BY ONE OF OUR SUBSIDIARIES AS WELL AS CIVIL
LAWSUITS REGARDING PRICING INFORMATION THAT TWO OF OUR AFFILIATES PROVIDED TO
MARKET PUBLICATIONS.
As a result of round trip trading transactions at CMS MST, we are under
investigation by the United States Department of Justice. We have received
subpoenas from U.S. Attorneys' Offices regarding investigations of those trades.
CMS Energy and Consumers have also been named in numerous class action lawsuits
by individuals who allege that they purchased CMS Energy securities during a
purported class period. These complaints generally seek unspecified damages
based on allegations that the defendants violated United States securities laws
and regulations by making allegedly false and misleading statements about the
company's business and financial condition. The cases have been consolidated
into a single lawsuit and an amended and consolidated complaint was filed on May
1, 2003. The judge issued an opinion and order dated March 31, 2004 in
connection with various pending motions, including the plaintiffs' motion to
amend the complaint and the motions to dismiss the complaint filed by us,
Consumers and other defendants. The judge directed the plaintiffs to file an
amended complaint under seal and ordered an expedited hearing on the motion to
amend, which was held on May 12, 2004. At the hearing, the judge ordered the
plaintiffs to file an amended complaint deleting certain counts related to
purchasers of CMS Energy-related securities, which the judge ordered dismissed
with prejudice. The plaintiffs filed this complaint on May 26, 2004. We,
Consumers and the individual defendants filed new motions to dismiss on June 21,
2004. A hearing on those motions occurred on August 2, 2004 and on January 7,
2005, the judge ruled on the motions to dismiss. The judge agreed to dismiss
Consumers as well as three individual defendants. The judge denied the motion to
dismiss with respect to CMS Energy and the other remaining individual
defendants.
In March 2004, the SEC approved a cease-and-desist order settling an
administrative action against us relating to round-trip trading. The order did
not assess a fine and we neither admitted nor denied the order's findings.
Our Board of Directors has received a demand on behalf of a shareholder of
CMS Energy to commence civil actions (i) to remedy alleged breaches of fiduciary
duties by CMS Energy officers and directors in connection with round trip
trading at CMS MST and (ii) to recover damages sustained by CMS Energy as a
result of alleged insider trades alleged to have been made by certain current
and former officers of CMS Energy and its subsidiaries. In December 2002, two
new directors were appointed to our Board of Directors. A special litigation
committee was formed by the Board of Directors in January 2003 to determine
whether it is in the best interest of CMS Energy to bring the action demanded by
the shareholder. The disinterested members of the Board of Directors appointed
the two new directors to serve on the special litigation committee.
On December 2, 2003, during the continuing review by the special
litigation committee, we were served with a derivative complaint filed by the
shareholder in the Circuit Court of Jackson County, Michigan in furtherance of
his demands. The date for CMS Energy and other defendants to answer or otherwise
respond to the complaint was stayed by the court to February 21, 2005, subject
to such further stays as may be mutually agreed upon by the parties and
authorized by the court.
We have notified appropriate regulatory and governmental agencies that
some employees at CMS MST and CMS Field Services, Inc. (now Cantera Gas Company)
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
Energy is cooperating with an investigation by the United States Department of
Justice regarding this matter. On November 25, 2003, the Commodity Futures
Trading Commission ("CFTC") issued a settlement order regarding this matter. CMS
MST and CMS Field Services, Inc. agreed to pay a fine to the CFTC totaling $16
million. CMS Energy neither admitted nor denied the findings of the CFTC in the
settlement order.
We have also been named as a defendant in several gas industry civil
lawsuits regarding inaccurate gas trade reporting that include claims alleging
manipulation of natural gas prices and violations of the Commodities Exchange
Act and federal and state antitrust laws.
We cannot predict the outcome of the United States Department of Justice
investigation and the lawsuits. It is possible that the outcome in one or more
of the investigation or the lawsuits could adversely affect our financial
condition, liquidity or results of operations.
WE MAY BE NEGATIVELY IMPACTED BY THE RESULTS OF AN EMPLOYEE BENEFIT PLAN
LAWSUIT.
We are a defendant, along with Consumers, CMS MST and certain named and
unnamed officers and directors, in two lawsuits brought as purported class
actions on behalf of participants and beneficiaries of our 401(k) plan. The two
cases, filed in July 2002 in the United States District Court for the Eastern
District of Michigan, were consolidated by the trial judge and an amended and
consolidated complaint has been filed. Plaintiffs allege breaches of fiduciary
duties under the Employee Retirement Income Security
S-17
Act of 1974 ("ERISA") and seek restitution on behalf of the plan with respect to
a decline in value of the shares of our common stock held in the plan. The
plaintiffs also seek other equitable relief and legal fees. The judge issued an
opinion and order dated March 31, 2004 in connection with the motions to dismiss
filed by us, Consumers and the individuals. The judge dismissed certain of the
amended counts in the plaintiffs' complaint and denied our motion to dismiss the
other claims in the complaint. We, Consumers and the individual defendants filed
answers to the amended complaint on May 14, 2004. The judge issued an opinion
and order dated December 27, 2004 conditionally granting plaintiffs' motion for
class certification. A trial date has not been set, but is expected to be no
earlier than late in 2005.
We cannot predict the outcome of the ERISA litigation and it is possible
that an adverse outcome in this lawsuit could adversely affect our financial
condition, liquidity or results of operations.
WE CANNOT PREDICT THE OUTCOME OF CLAIMS REGARDING OUR PARTICIPATION IN THE
DEVELOPMENT OF BAY HARBOR OR OTHER LITIGATION IN WHICH SUBSTANTIAL MONETARY
CLAIMS ARE INVOLVED.
Certain subsidiaries of CMS Energy participated in the development of Bay
Harbor, a residential/commercial real estate project developed on the site of a
discontinued cement plant and quarry operation near Petoskey, Michigan. In the
various agreements to develop Bay Harbor, CMS Land Company, a subsidiary of CMS
Energy ("CMS LAND"), and CMS Energy made certain indemnifications to various
parties for environmental conditions. CMS Energy has since sold its interests in
Bay Harbor, but on September 3, 2004, the Michigan Department of Environmental
Quality (the "MDEQ") issued a Notice of Noncompliance ("NON") directed to
certain CMS Energy subsidiaries and other parties that had participated in Bay
Harbor and had entered into an Administrative Agreement and Covenant Not To Sue
("CNTS") with the State of Michigan in 1994.
In the sale agreement, CMS Land abandoned all interests and rights in Bay
Harbor but retained the responsibilities it and CMS Energy had under the
previous environmental indemnifications and the CNTS. One such responsibility
deals with the construction, operation and maintenance of a pH-lowering
treatment facility at Bay Harbor that collects and treats "seep water" from one
of several pre-existing cement kiln dust ("CKD") piles. The "seep water" has a
high pH level and requires treatment before the water can be discharged into the
City of Petoskey sewer system. While the pH treatment facility was out of
service for a number of months in 2004 to address maintenance issues, and to
resolve issues with the City of Petoskey, the MDEQ found higher than acceptable
levels of pH along the shore of Little Traverse Bay and issued the NON. The
treatment facility resumed operation in September 2004.
In addition, the United States Environmental Protection Agency (the "EPA")
has issued a General Notice of Potential Liability under Section 107(a) of the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
and has requested information pursuant to Section 104 of CERCLA. Follow-up
meetings with the EPA to discuss potential response activities and the potential
entry of an administrative order of consent have been held and are scheduled in
the future. CMS Energy filed a formal response to the Section 107(a) notice on
December 6, 2004. CMS Energy plans to file a formal response to the Section 104
information request on or before January 24, 2005. CMS Energy has also presented
plans to the MDEQ and the EPA to undertake a study concerning separate "seeps"
that are not currently subject to a water collection and treatment facility. In
addition, CMS Energy has submitted a proposed plan to undertake immediate
response activities, which is under discussion at the MDEQ and the EPA.
The regulatory agencies have advised the parties that they have reached an
understanding to split jurisdiction, under which the EPA would regulate
immediate response activities and the MDEQ would regulate a final response. In
the event that a suitable consent order is not negotiated, the EPA could issue a
unilateral order under CERCLA requiring that remedial work (both interim and
final) be performed, or, alternatively, the EPA could elect to perform the work
and seek damages, potentially including treble damages, from the parties. The
MDEQ could also elect to prosecute an enforcement action pursuant to its
statutory authority and the previously issued NON.
Several parties have issued demand letters to CMS Land and CMS Energy
claiming breach of the indemnification provisions, making requests for payment
of their expenses related to the NON and/or claiming damages to property or
personal injury with regard to the matter. CMS Energy responded to the
indemnification claim by stating that it had not breached its indemnity
obligations, it will comply with the indemnities, it has restarted the pH
treatment facility and it has responded to the NON. CMS Energy will defend
vigorously any property damage and personal injury claim.
Based on initial preliminary studies, CMS Energy has identified several
remediation options. The estimated potential capital and near-term expenditures
for these options range from $25 million to $40 million, with continuing yearly
operating and maintenance expenses ranging from $0.8 million to $1.6 million.
Final remediation and resulting claims against third parties for reimbursement
of remediation costs could increase or decrease these amounts. CMS Energy
estimates that it will record a liability for its obligations
S-18
associated with this matter in the amount of $45 million, with a resultant
charge to its income statement of $29 million, net of deferred income taxes, in
the fourth quarter of 2004, reflecting CMS Energy's current best estimate of
both the capital and near-term costs as well as the present value of continuing
future operating costs.
An adverse outcome of this matter could, depending on the size of any
indemnification obligation or liability under environmental laws, have a
potentially significant adverse effect on CMS Energy's financial condition and
liquidity and could negatively impact CMS Energy's financial results. CMS Energy
cannot predict the ultimate cost or outcome of this matter.
In addition to the litigation and proceedings discussed above, CMS Energy
or various of our subsidiaries are parties in other pending litigation in which
substantial monetary damages are sought. These proceedings, certain of which are
described in CMS Energy's Annual Report on Form 10-K/A (Amendment No. 2) for the
year ended December 31, 2003 -- Notes to Consolidated Financial Statements --
Note 4, include arbitration and litigation relating to the Dearborn Industrial
Generation project and claims from various provinces in Argentina for stamp
taxes and associated penalties and interest arising from various gas
transportation transactions. An adverse outcome in one or more of these cases
could, depending on the timing and size of any award and the availability of
insurance or reimbursement from third parties, have an adverse effect on our
financial condition, liquidity or results of operations.
REGULATORY CHANGES AND OTHER DEVELOPMENTS HAVE RESULTED AND WILL CONTINUE
TO RESULT IN INCREASED COMPETITION IN OUR DOMESTIC ENERGY BUSINESS. GENERALLY,
INCREASED COMPETITION THREATENS OUR MARKET SHARE IN CERTAIN SEGMENTS OF OUR
BUSINESS AND CAN REDUCE OUR PROFITABILITY.
Consumers has in the last several years experienced, and expects to
continue to experience, a significant increase in competition for generation
services with the introduction of retail open access in the State of Michigan.
Pursuant to the Customer Choice Act, as of January 1, 2002, all electric
customers have the choice of buying electric generation service from an
alternative electric supplier. We continue to lose industrial and commercial
customers to other electric suppliers. As of December 2004, we had lost 926 MW
or 11 percent of our electric generation business to these alternative electric
suppliers. We expect the loss to be in the range of 1,000 to 1,200 MW by
year-end 2005. We cannot predict the total amount of electric supply load that
we may lose to competitor suppliers in the future.
ELECTRIC INDUSTRY REGULATION COULD ADVERSELY AFFECT OUR BUSINESS,
INCLUDING OUR ABILITY TO RECOVER OUR EXPENSES FROM OUR CUSTOMERS.
Federal and state regulation of electric utilities has changed
dramatically in the last two decades and could continue to change over the next
several years. These changes could adversely affect our business, financial
condition and profitability.
In June 2000, the Michigan Legislature enacted the Customer Choice Act
that became effective June 5, 2000. Pursuant to the Customer Choice Act,
residential rates were reduced by five percent and then capped through at least
December 31, 2005. Ultimately, the rate cap could extend until December 31, 2013
depending upon whether or not Consumers exceeds the market power supply test
established by the legislation (a requirement that Consumers believes itself to
be in compliance with at this time). Under circumstances specified in the
Customer Choice Act, certain costs can be deferred for future recovery after the
expiration of the rate cap period. The rate cap could, however, result in
Consumers being unable to collect customer rates sufficient to recover fully its
cost of conducting business. Some of these costs may be beyond Consumers'
ability to control. In particular, if Consumers needs to purchase power supply
from wholesale suppliers during the period when retail rates are frozen or
capped, the rate restrictions imposed by the Customer Choice Act may make it
impossible for Consumers to recover fully the cost of purchased power and
associated transmission costs through the rates it charges its customers. As a
result, it is not certain that Consumers can maintain its profit margins in its
electric utility business during the period of the rate freeze or rate cap.
Consumers filed an electric rate case with the MPSC in December 2004 for
approximately $320 million in rate increases. We cannot predict the outcome of
the electric rate case.
There are multiple proceedings pending before the Federal Energy
Regulatory Commission ("FERC") involving transmission rates, regional
transmission organizations and standard market design for electric bulk power
markets and transmission. FERC is also reviewing the standards under which
electric utilities are allowed to participate in wholesale power markets without
price restrictions. FERC is currently reviewing information submitted by
Consumers to support its ability to continue to sell power at market-based
rates. We cannot predict the impact of these electric industry-restructuring
proceedings on our financial position, liquidity or results of operations.
S-19
PENDING UTILITY LEGISLATION IN MICHIGAN MAY AFFECT US IN WAYS WE CANNOT
PREDICT.
In July 2004, as a result of legislative hearings, several bills were
introduced into the Michigan Senate that could change Michigan's Customer Choice
Act. The proposals include:
- requiring that rates be based on cost of service;
- establishing a defined Stranded Cost calculation method;
- allowing customers who stay with or switch to alternative electric
suppliers after December 31, 2005 to return to utility services, and
requiring them to pay current market rates upon return;
- establishing reliability standards that all electric suppliers must
follow;
- requiring electric utilities and electric alternative suppliers to
maintain a 15 percent power reserve margin;
- creating a service charge to fund the Low Income and Energy
Efficiency Fund;
- giving kindergarten through twelfth-grade schools a discount of 10
percent to 20 percent on electric rates; and
- authorizing a service charge payable by all customers for meeting
Clean Air Act requirements.
In September 2004, the Chair of the Senate Technology and Energy Committee
formed a workgroup, which analyzed the merits of the proposed legislation.
Workgroup activities have since concluded that the impact of the proposed
legislation is still uncertain. In October 2004, a substitute to one of the
bills was introduced, but has not yet been adopted by the Michigan Senate.
Although we do not believe the terms of the proposed bills, if enacted,
would have a material adverse effect on our business, the final form of any new
utility legislation may differ from the bills proposed in 2004. We cannot
predict whether these or other measures will be enacted into law or their
potential effect on us.
OUR ABILITY TO RECOVER CERTAIN REGULATORY ASSETS UNDER SECTION 10(d)(4) OF
THE CUSTOMER CHOICE ACT MAY AFFECT OUR FINANCIAL RESULTS.
Section 10(d)(4) of the Customer Choice Act allows deferred recovery of an
annual return of and on capital expenditures in excess of depreciation levels
and certain other expenses incurred prior to and throughout the current electric
rate freeze and rate cap periods. See "Electric industry regulation could
adversely affect our business, including our ability to recover our expenses
from our customers." In October 2004, Consumers filed an application with the
MPSC seeking recovery of $628 million in costs from 2000 through 2005 under
Section 10(d)(4). The request includes capital expenditures in excess of
depreciation, Clean Air Act costs and other expenses related to changes in law
or governmental action incurred during the rate freeze-cap period. Of the $628
million, $152 million relates to the cost of money.
As allowed by the Customer Choice Act, in January 2004, Consumers began
accruing and deferring for recovery the 2004 portion of its Section 10(d)(4)
regulatory assets. In November 2004, the MPSC issued an order in the Detroit
Edison Company's general electric rate case which concluded that the Detroit
Edison Company's return of and on Clean Air Act costs incurred from June 2000
through December 2003 are recoverable under Section 10(d)(4). Based on the
precedent set by this order, Consumers accrued and recorded an additional
regulatory asset of $55 million (pre-tax), $36 million net of tax, in November
2004 for its return of and on Clean Air Act expenditures incurred from 2000
through 2003. Additional accruals will continue to be recorded until a decision
on Consumers' request is issued by the MPSC. Certain aspects of the Detroit
Edison Company's electric rate case are different than Consumers' Section
10(d)(4) regulatory asset filing.
We cannot predict the ability of Consumers to recover certain regulatory
assets under Section 10(d)(4) of the Customer Choice Act and failure to recover
these regulatory assets could adversely affect our financial condition.
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PERIODIC REVIEWS OF THE VALUES OF OUR ASSETS COULD RESULT IN ADDITIONAL
ACCOUNTING CHARGES.
We are required by U.S. generally accepted accounting principles to
periodically review the carrying value of our assets, including those that may
be sold. Market conditions, the operational characteristics of our assets and
other factors could result in our recording additional impairment charges for
our assets, which could have an adverse effect on our stockholders' equity and
our access to additional financing. In addition, we may be required to record
impairment charges and foreign currency translation losses at the time we sell
assets depending on the sale prices we are able to secure and other factors.
WE COULD INCUR SIGNIFICANT CAPITAL EXPENDITURES TO COMPLY WITH
ENVIRONMENTAL STANDARDS AND FACE DIFFICULTY IN RECOVERING THESE COSTS ON A
CURRENT BASIS.
We and our subsidiaries are subject to costly and increasingly stringent
environmental regulations. We expect that the cost of future environmental
compliance, especially compliance with clean air and water laws, will be
significant.
In 1998, the EPA issued regulations requiring the State of Michigan to
further limit nitrogen oxide emissions at our coal-fired electric plants. The
EPA and the State of Michigan regulations require us to make significant capital
expenditures estimated to be $802 million. As of September 30, 2004, Consumers
has incurred $500 million in capital expenditures to comply with the EPA
regulations and anticipates that the remaining $302 million of capital
expenditures will be incurred between 2004 and 2011. Additionally, Consumers
currently expects it will supplement its compliance plan with the purchase of
nitrogen oxide emissions credits for the years 2004 through 2009. The cost of
these credits based on the current market is estimated to average $7 million per
year for 2004-2006 and then decrease with Consumers' installation of control
technology; however, the market for nitrogen oxide emissions credits and their
price could change substantially. As new environmental standards become
effective, Consumers will need additional capital expenditures to comply with
the standards.
Based on the Customer Choice Act, beginning January 2004 an annual return
of and on these types of capital expenditures, to the extent they are above
depreciation levels, subject to an MPSC prudency hearing shall be accrued and
deferred for recovery. After notice and hearing, the MPSC shall determine the
amount of reasonable and prudent costs, if any, to be recovered and the recovery
period.
The EPA has proposed a Clean Air Interstate Rule that would require
additional coal-fired electric plant emission controls for nitrogen oxides and
sulfur dioxide. If implemented, this rule could potentially require substantial
additional expenditures. The rule proposes a two-phase program to reduce
emissions of sulfur dioxide by 70 percent and nitrogen oxides by 65 percent by
2015. Additionally, the EPA also proposed two alternative sets of rules to
reduce emissions of mercury and nickel from coal-fired and oil-fired electric
plants. Until the proposed environmental rules are finalized, an accurate cost
of compliance cannot be determined.
The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seek modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants and potentially pay fines.
Additionally, the viability of certain plants remaining in operation could be
called into question.
These and other required environmental expenditures, if not recovered from
customers in Consumers' rates, may require us to seek significant additional
financing to fund such expenditures and could strain our cash resources.
WE RETAIN CONTINGENT LIABILITIES IN CONNECTION WITH OUR ASSET SALES.
The agreements we enter into for the sale of assets customarily include
provisions whereby we are required to:
- retain specified preexisting liabilities such as for taxes and
pensions;
- indemnify the buyers against specified risks, including the
inaccuracy of representations and warranties we make; and
- require payments to the buyers depending on the outcome of
post-closing adjustments, audits or other reviews.
Many of these contingent liabilities can remain open for extended periods
of time after the sales are closed. Depending on the extent to which the buyers
may ultimately seek to enforce their rights under these contractual provisions,
and the resolution of any
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disputes we may have concerning them, these liabilities could have a material
adverse effect on our financial condition, liquidity and results of operations.
We have received a request for indemnification from the purchaser of CMS
Oil and Gas Company, a former subsidiary of CMS. The indemnification claim
relates to the sale by CMS of its oil, gas and methanol projects in Equatorial
Guinea and the claim of the government of Equatorial Guinea that $142 million in
taxes is owed it in connection with that sale. Based on information currently
available, CMS and its tax advisors have concluded that the government's tax
claim is without merit and the purchaser of CMS Oil and Gas Company has
submitted a response to the government rejecting the claim. An adverse outcome
of this claim could have a material adverse effect on our financial condition,
liquidity and results of operations.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO RISKS THAT ARE
BEYOND OUR CONTROL, INCLUDING BUT NOT LIMITED TO FUTURE TERRORIST ATTACKS OR
RELATED ACTS OF WAR.
The cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, may adversely impact our results of
operations, financial condition and cash flows. The occurrence or risk of
occurrence of future terrorist activity and the high cost or potential
unavailability of insurance to cover such terrorist activity may impact our
results of operations and financial condition in unpredictable ways. These
actions could also result in disruptions of power and fuel markets. In addition,
our natural gas distribution system and pipelines could be directly or
indirectly harmed by future terrorist activity.
WE HAVE MADE SUBSTANTIAL INTERNATIONAL INVESTMENTS THAT ARE SUBJECT TO
POSSIBLE NATIONALIZATION, EXPROPRIATION OR INABILITY TO CONVERT CURRENCY.
Our investments in selected international markets in electric generating
facilities, natural gas pipelines and electric distribution systems face a
number of risks inherent in acquiring, developing and owning these types of
international facilities. Although we maintain insurance for various risk
exposures, including political risk from possible nationalization, expropriation
or inability to convert currency, we are exposed to some risks that include
local political and economic factors over which we have no control, such as
changes in foreign governmental and regulatory policies (including changes in
industrial regulation and control and changes in taxation), changing political
conditions and international monetary fluctuations. In some cases an investment
may have to be abandoned or disposed of at a loss. These factors could
significantly adversely affect the financial results of the affected subsidiary
and our financial position and results of operations.
International investments of the type we have made are subject to the risk
that they may be expropriated or that the required agreements, licenses, permits
and other approvals may be changed or terminated in violation of their terms.
These kinds of changes could result in a partial or total loss of our
investment.
The local foreign currency may be devalued, the conversion of the currency
may be restricted or prohibited or other actions, such as increases in taxes,
royalties or import duties, may be taken which adversely affect the value and
the recovery of our investment.
OUR OWNERSHIP OF A NUCLEAR GENERATING FACILITY CREATES RISK RELATING TO
NUCLEAR ENERGY.
Consumers owns the Palisades nuclear power plant and we are, therefore,
subject to the risks of nuclear generation, including the risks associated with
the operation of plant facilities and the storage and disposal of spent fuel and
other radioactive waste. The NRC has broad authority under federal law to impose
licensing and safety-related requirements for the operation of nuclear
generation facilities. In the event of non-compliance, the NRC has the authority
to impose fines or shut down a unit, or both, depending upon its assessment of
the severity of the situation, until compliance is achieved. In addition,
although we have no reason to anticipate a serious nuclear incident at
Consumers' plant, if an incident did occur, it could harm our results of
operations and financial condition. A major incident at a nuclear facility
anywhere in the world could cause the NRC to limit or prohibit the operation or
licensing of any domestic nuclear unit.
CONSUMERS CURRENTLY UNDERRECOVERS IN ITS RATES ITS PAYMENTS TO THE MCV
PARTNERSHIP FOR CAPACITY AND ENERGY, AND IS ALSO EXPOSED TO FUTURE CHANGES IN
THE MCV PARTNERSHIP'S FINANCIAL CONDITION THROUGH ITS EQUITY AND LESSOR
INVESTMENTS.
Consumers' power purchase agreement with the MCV Partnership ("PPA")
expires in 2025. We estimate that Consumers will incur estimated cash
underrecoveries of payments under the PPA aggregating $206 million through 2007.
For availability payments billed by the MCV Partnership after September 15,
2007, and not recovered from customers, Consumers would expect to claim a
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"regulatory out" under the PPA which Consumers believes it has the right to do
after satisfying its obligation to "support and defend" full recovery of PPA
charges from customers. The MCV Partnership has indicated that it may take issue
with our exercise of the regulatory out clause after September 2007. The effect
of exercise of the regulatory out clause would be to reduce cash flow to the MCV
Partnership, which could in turn have an adverse effect on Consumers' equity and
lessor interests in the MCV Partnership's facility (the "MCV FACILITY").
Further, under the PPA, energy payments to the MCV Partnership are based
on the cost of coal burned at Consumers' coal plants and costs associated with
fuel inventory, operations and maintenance, and administrative and general
expenses associated with Consumers' coal plants. However, the MCV Partnership's
costs of producing electricity are tied, in large part, to the cost of natural
gas. Because natural gas prices have increased substantially in recent years,
while energy charge payments to the MCV Partnership have not, the MCV
Partnership's financial performance has been impacted negatively.
In February 2004, Consumers filed an 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 is expected to 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 percent. 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. We cannot predict if or when the MPSC will approve the RCP.
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
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enters into contracts to offset its positions, such as hedging exposure to the
risks of demand, market effects of weather and changes in commodity prices
associated with its gas distribution business. Such positions are taken in
conjunction with the gas cost recovery mechanism, which allows Consumers to
recover prudently incurred costs associated with such positions. However,
neither Consumers nor the MCV Partnership always hedges the entire exposure of
its operations from commodity price volatility. Furthermore, the ability to
hedge exposure to commodity price volatility depends on liquid commodity
markets. As a result, to the extent the commodity markets are illiquid,
Consumers may not be able to execute its risk management strategies, which could
result in greater open positions than we would prefer at a given time. To the
extent that open positions exist, fluctuating commodity prices can improve or
diminish our financial results and financial position.
In addition, Consumers currently has a power supply cost recovery
mechanism to recover the increased cost of fuel used to generate electricity
from its industrial and large commercial customers, but not from its residential
or small commercial customers. Therefore, to the extent that Consumers has not
hedged its fuel costs, it is exposed to changes in fuel prices to the extent
fuel for its electric generating facilities must be purchased on the open market
in order for Consumers to serve its residential and small commercial customers.
RISKS RELATED TO THE NOTES
WE MAY BE UNABLE TO RAISE THE FUNDS NECESSARY TO PURCHASE NOTES UPON A
CHANGE IN CONTROL.
In the event of a Change in Control of CMS Energy, each Holder of Notes
may require us to purchase all or a portion of its Notes at a purchase price
equal to 101% of the principal amount thereof, plus accrued interest. Our
ability to purchase the Notes will be limited by the terms of our other debt
agreements and our ability to finance the purchase. It is expected that we will
issue additional debt with similar change of control provisions in the future.
If this occurs, the financial requirements for any purchases could be increased
significantly. In addition, the terms of any debt securities issued to purchase
debt under these change of control provisions may be unfavorable to us. We
cannot assure Holders of Notes that we will be able to finance these purchase
obligations or obtain consents to do so from Holders of Notes under other debt
agreements restricting these purchases.
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. As we do not intend to apply to list the Notes for
trading on any national securities exchange or to include the Notes in any
automated quotation system, 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.
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USE OF PROCEEDS
We estimate that the proceeds of the offering of the Notes, after
deducting underwriters' discounts and commissions and offering expenses, will
aggregate approximately $147 million. We intend to use all of the proceeds of
this offering to redeem our outstanding general term notes. The outstanding
general term notes being redeemed with the proceeds of this offering have
various interest rates ranging from 6% to 7.25% and maturities ranging from
February 2005 through April 2009. The average interest rate for these
outstanding general term notes is 6.88% and the average maturity is 2.2 years.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the nine months ended September
30, 2004 and each of the years ended December 31, 1999 through 2003 is as
follows:
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------
SEPTEMBER 30, 2004 2003 2002 2001 2000 1999
------------------ ------- ------ ------ ------ -----
Ratio of earnings to fixed charges.... 1.01 -(1) -(2) -(3) -(4) 1.33
----------
(1) For the year ended December 31, 2003, fixed charges exceeded earnings by
$59 million. Earnings as defined include $95 million of asset impairment
charges.
(2) For the year ended December 31, 2002, fixed charges exceeded earnings by
$475 million. Earnings as defined include $602 million of asset impairment
charges.
(3) For the year ended December 31, 2001, fixed charges exceeded earnings by
$393 million. Earnings as defined include $323 million of asset impairment
charges.
(4) For the year ended December 31, 2000, fixed charges exceeded earnings by
$225 million. Earnings as defined include a $329 million pretax impairment
loss on the Loy Yang investment.
For the purpose of computing the ratio, earnings represent income before
income taxes, net interest charges and the estimated interest portion of lease
rentals and distributed income of equity method investees.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2004
on an actual basis and as adjusted to reflect the sale of Notes in this offering
and the application of the net proceeds as described under "Use of Proceeds".
This table should be read in conjunction with our consolidated financial
statements and related notes and other financial information also incorporated
by reference in this prospectus supplement. See "Where You Can Find More
Information."
AT SEPTEMBER 30, 2004
---------------------------
AS ADJUSTED
ACTUAL FOR THIS OFFERING
------ -----------------
(UNAUDITED, DOLLARS
IN MILLIONS)
Current portion of long-term debt, capital and finance leases (a)(b)(c) $ 594 $ 580
====== ======
Non-current portion of capital and finance lease obligations .......... $ 318 $ 318
Long-term debt:
6.30% Senior Notes due 2012 ......................................... - 150
Other long-term debt (excluding current maturities) (b)(c) .......... 6,228 6,092
Long-term debt -- related parties ..................................... 684 684
Preferred stock ....................................................... 261 261
Preferred stock of subsidiary ......................................... 44 44
Common stockholders' equity (a) ....................................... 1,764 1,764
------ ------
Total capitalization ............................................... $9,299 $9,313
====== ======
----------
(a) In October 2004, we issued 32.8 million shares of our common stock. We
realized $288 million in net proceeds from this offering. In December
2004, we paid off $180 million of X-TRAS and incurred extinguishment costs
of $15 million, after-tax. These transactions are not reflected in the
capitalization table.
(b) In November 2004, $176 million principal amount of our senior notes
matured and were paid off. In December 2004, Consumers issued $225 million
principal amount of 5.00% first mortgage bonds and paid off $208 million
principal amount of 7.375% first mortgage bonds. In December 2004, we
issued $288 million principal amount of 2.875% Convertible Senior Notes
due 2024. From September 30, 2004 through January 11, 2005, we paid off $7
million principal amount of general term notes. These transactions are not
reflected in the capitalization table.
(c) Reflects redemption of $150 million principal amount of our general term
notes with the proceeds of this offering. A redemption of $14 million
principal amount of our general term notes is reflected in the line
"Current portion of long-term debt and capital finance leases."
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CMS ENERGY
OVERVIEW
CMS Energy, formed in Michigan in 1987, is an integrated energy holding
company operating through subsidiaries in the United States and in selected
markets around the world. Its two principal subsidiaries are Consumers and
Enterprises. Consumers is a public utility that provides natural gas and/or
electricity to almost 6.5 million of Michigan's 10 million residents and serves
customers in 61 of the 68 counties in Michigan's Lower Peninsula. Enterprises,
through subsidiaries and equity investments, is engaged in several energy
businesses in the United States and in selected international markets.
CONSUMERS
Consumers primarily consists of our electric and gas utility operations.
Consumers was formed in Michigan in 1968 and is the successor to a corporation
organized in Maine in 1910 and which did business in Michigan from 1915 to 1968.
Consumers' consolidated operations account for a majority of our total assets
and income, as well as a substantial portion of our operating revenue.
Industries in Consumers' service areas include automotive, metal, chemical, food
and wood products and a diversified group of other industries.
Electric Utility Operations
Consumers' electric utility operating revenue was $2.590 billion in 2003,
$2.648 billion in 2002 and $2.633 billion in 2001. Based on the average number
of customers, Consumers' electric utility operations, if independent, would be
the thirteenth largest electric utility company in the United States. The
electric operations of Consumers include the generation, purchase, distribution
and sale of electricity. In 2003, total electric sales were 36 billion kWh and
retail open access deliveries were 3 billion kWh. At year-end 2003, it served
customers in 61 of the 68 counties of Michigan's Lower Peninsula. Principal
cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo,
Midland, Muskegon and Saginaw. Consumers' electric utility customer base
includes a mix of residential, commercial and diversified industrial customers,
the largest segment of which is the automotive industry. Consumers' electric
operations are not dependent upon a single customer, or even a few customers,
and the loss of any one or even a few of such customers is not reasonably likely
to have a material adverse effect on its financial condition.
At December 31, 2003, Consumers owned and operated 30 electric generating
plants with an aggregate of 6,435 MW of capacity. Also, in 2003, Consumers
purchased up to 2,353 MW of net capacity from other power producers, which
amounted to 30.5% of Consumers' total system requirements, the largest of which
was the MCV Partnership in which Consumers has a 49% interest through CMS
Midland, Inc. Consumers also owns:
- 347 miles of high voltage distribution radial lines operating at 120
kilovolts and above;
- 4,164 miles of high voltage distribution overhead lines operating at
23 kilovolts and 46 kilovolts;
- 16 subsurface miles of high voltage distribution underground lines
operating at 23 kilovolts and 46 kilovolts;
- 54,922 miles of electric distribution overhead lines;
- 8,526 subsurface miles of underground distribution lines; and
- substations having an aggregate transformer capacity of 20,605,680
kilovoltamperes.
Consumers generates electricity principally from coal and nuclear fuel.
Consumers has four generating plant sites that use coal as a fuel source and
constituted 76% of its baseload capacity in 2003. In 2003, these plants produced
a combined total of 20,091 million kWhs of electricity and burned 10.1 million
tons of coal. Consumers owns Palisades, an operating nuclear power plant located
near South Haven, Michigan. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to the 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.
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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.
In 1999, CMS Gas Transmission acquired Panhandle Eastern Pipe Line Company
("PANHANDLE"), which was primarily engaged in the interstate transmission and
storage of natural gas and also provided liquefied natural gas terminalling and
regasification services. Panhandle operated a large natural gas pipeline
network, which provided customers in the Midwest and Southwest with a
comprehensive array of transportation services. Panhandle's major customers
included 25 utilities located primarily in the United States Midwest market
area, which encompassed large portions of Illinois, Indiana, Michigan, Missouri,
Ohio and Tennessee.
In February 2003, Panhandle sold its one-third equity interest in
Centennial Pipeline, LLC ("CENTENNIAL") for $40 million to Centennial's two
other partners, Marathon Ashland Petroleum, LLC and TE Products Pipeline
Company, Limited Partnership, through its general partner, Texas Eastern
Products Pipeline Company, LLC.
In March 2003, Panhandle transferred $63 million previously committed to
collateralize a letter of credit and its one-third ownership interest in
Guardian Pipeline, LLC ("GUARDIAN") to CMS Gas Transmission. CMS Gas
Transmission sold its interest in Guardian to a subsidiary of WPS Resources
Corporation in June 2003. Proceeds from the sale were $26 million and the $63
million of cash collateral was released.
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In June 2003, CMS Gas Transmission sold Panhandle to Southern Union
Panhandle Corp., a newly formed entity owned by Southern Union Company. Southern
Union Panhandle Corp. purchased all of Panhandle's outstanding capital stock for
approximately $582 million in cash and 3 million shares of Southern Union
Company common stock. Southern Union Panhandle Corp. also assumed approximately
$1.166 billion in debt. In July 2003, Southern Union Company declared a 5%
common stock dividend resulting in an additional 150,000 shares of common stock
for CMS Gas Transmission. In October 2003, CMS Gas Transmission sold its 3.15
million shares to a private investor for $17.77 per share.
In July 2003, CMS Gas Transmission completed the sale of CMS Field
Services, Inc. to Cantera Natural Gas, Inc. for gross cash proceeds of
approximately $113 million, subject to post closing adjustments, and a $50
million face value note of Cantera Natural Gas, Inc. The note is payable to CMS
Energy for up to $50 million subject to the financial performance of the Fort
Union and Bighorn natural gas gathering systems from 2004 through 2008.
In August 2004, we sold our interests in a business located in Australia
comprised of a pipeline, processing facilities and a gas storage facility in
which we held a 100 percent ownership interest ("PARMELIA") and a pipeline
business located in Australia in which we held a 39 percent ownership interest
("GOLDFIELDS") to Australian Pipeline Trust for approximately $204 million
Australian (approximately $147 million in U.S. dollars).
At December 31, 2003, CMS Gas Transmission had nominal processing
capabilities of approximately 0.33 bcf per day of natural gas in Michigan. At
December 31, 2003, CMS Gas Transmission had a total of 288 miles of gas
gathering and transmission pipelines located in the State of Michigan, with a
total capacity of approximately 0.95 bcf per day.
Internationally, at December 31, 2003, CMS Gas Transmission had ownership
interests in 5,517 miles of pipelines (including 988 miles from Goldfields and
Parmelia sold in August 2004) in Argentina, Australia and Chile.
Independent Power Production
CMS Generation, formed in 1986, invests in, acquires, develops, constructs
and operates non-utility power generation plants in the United States and
abroad. In 2003, the independent power production business segment's operating
revenue, which includes revenues from CMS Generation and CMS Operating, S.A., as
well as from Consumers' interests in the MCV Facility and the MCV Partnership,
was $204 million.
Independent Power Production Properties
As of December 31, 2003, we had ownership interests in operating power
plants totaling 8,766 gross MW (including 2,000 gross MW from Loy Yang that was
sold in April 2004) (4,149 net MW). At December 31, 2003, additional plants
totaling approximately 1,784 gross MW (420 net MW) were under construction or in
advanced stages of development. These plants include the Shuweihat power plant,
which was under construction in the United Arab Emirates, and the Saudi
Petrochemical Company power plant, which is under construction and is located in
the Kingdom of Saudi Arabia. We believe that the independent power production
business unit will continue to optimize the operations and management of its
remaining portfolio of assets in order to contribute to CMS Energy's earnings
and to maintain its reputation for solid performance in the construction and
operation of power plants.
The following table details our interests in independent power plants in
the United States as well as abroad as of year-end 2003 (excluding the plants
owned by CMS Operating, S.A. and CMS Electric and Gas Company and the MCV
Facility, discussed further below, as well as Loy Yang that was sold in April
2004 (2,000 gross MW)):
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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
CMS Energy's international energy distribution business involves Sistemo
Electrico del Estado Nueva Esparta, C.A. in Venezuela and Companhia Paulista de
Energia Electrica in Brazil.
Energy Resource Management
In 2003, CMS ERM moved its headquarters from Houston, Texas to Jackson,
Michigan. In February 2004, CMS ERM changed its name from CMS Marketing,
Services and Trading Company to CMS ERM. CMS ERM has reduced its business focus
and in the future will concentrate on the purchase and sale of energy
commodities in support of CMS Energy's generating facilities. CMS ERM previously
provided gas, oil and electric marketing, risk management and energy management
services to industrial, commercial, utility and municipal energy users
throughout the United States. In January 2003, CMS ERM closed the sale of a
major portion of its wholesale natural gas trading book to Sempra Energy Trading
Corp. The cash proceeds were approximately $17 million. In April 2003, CMS ERM
sold its wholesale electric power business to Constellation Power Source, Inc.
Also in April 2003, CMS ERM sold the federal business of CMS Viron, its energy
management service provider, to Pepco Energy Services, Inc. In July 2003, CMS
ERM sold CMS Viron's non-federal business to Chevron Energy Solutions Company, a
division of Chevron U.S.A. Inc. In 2003, CMS ERM marketed approximately 85 bcf
of natural gas and 5,314 gWh of electricity. Its operating revenue was $711
million in 2003, $4.137 billion in 2002 and $3.616 billion in 2001.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued as a series of senior debentures under the senior
debt indenture as supplemented by a supplemental indenture thereto dated as of
January 19, 2005 (the "SUPPLEMENTAL INDENTURE"), and will be initially 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 supplement, provided that such
additional notes must be part of the same issue as the Notes offered hereby for
United States federal income tax purposes. The Notes offered by this prospectus
supplement and any such additional notes will constitute a single series of debt
securities. This means that, in circumstances where the senior debt indenture
provides for the holders of notes to vote or take any action, the Holders of
Notes offered by this prospectus supplement and the holders of any such
additional notes will vote or take that action as a single class. The Notes will
be unsecured and unsubordinated senior debt securities of CMS Energy.
As of September 30, 2004, we had outstanding approximately $2.7 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible trust preferred
securities but excluding approximately $5.1 billion of indebtedness of our
subsidiaries. In August 2004, CMS Energy entered into the Fifth Amended and
Restated Credit Agreement in the amount of approximately $300 million. This
facility is secured and the Notes are junior to such indebtedness. As of
December 31, 2004 there were approximately $106 million of letters of credit
outstanding under the Fifth Amended and Restated Credit Agreement. Except for
the amount outstanding under the Fifth Amended and Restated Credit Agreement,
none of our indebtedness is senior to the Notes. The Notes are structurally
subordinated to approximately $5.1 billion of our subsidiaries' debt.
We may issue debt securities from time to time in one or more series under
the senior debt indenture. There is no limitation on the amount of debt
securities we may issue under the senior debt indenture.
The statements herein concerning the Notes and the senior debt indenture
are a summary and do not purport to be complete and are subject to, and
qualified in their entirety by, all of the provisions of the senior debt
indenture, which is incorporated herein by this reference. They make use of
defined terms and are qualified in their entirety by express reference to the
senior debt indenture, including the Supplemental Indenture, a copy of which
will be available upon request to the Trustee.
STRUCTURAL SUBORDINATION
CMS Energy is a holding company that conducts substantially all of its
operations through its subsidiaries. Its only significant assets are the capital
stock of its subsidiaries, and its subsidiaries generate substantially all of
its operating income and cash flow. As a result, dividends or advances from its
subsidiaries are the principal source of funds necessary to meet its debt
service obligations. Contractual provisions or laws, as well as its
subsidiaries' financial condition and operating requirements, may limit CMS
Energy's ability to obtain cash from its subsidiaries that it may require to pay
its debt service obligations, including payments on the Notes. In addition, the
Notes will be effectively subordinated to all of the liabilities of CMS Energy's
subsidiaries with regard to the assets and earnings of CMS Energy's
subsidiaries. The subsidiaries are separate and distinct legal entities and have
no obligation, contingent or otherwise, to pay any amounts due pursuant to the
Notes or to make any funds available therefor, whether by dividends, loans or
other payments. CMS Energy's rights and the rights of its creditors, including
Holders of Notes, to participate in the distribution of assets of any subsidiary
upon the latter's liquidation or reorganization will be subject to prior claims
of the subsidiaries' creditors, including trade creditors.
Of the approximately $7.8 billion of our consolidated indebtedness as of
September 30, 2004, approximately $5.1 billion was indebtedness of our
subsidiaries. Payments on that indebtedness are prior in right of payment to
dividends paid to us by our subsidiaries.
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.
S-31
Consumers' Restated Articles of Incorporation ("ARTICLES") provide two
restrictions on its payment of dividends on its common stock. First, prior to
the payment of any common stock dividend, Consumers must reserve retained
earnings after giving effect to such dividend payment of at least (i) $7.50 per
share on all then outstanding shares of its preferred stock, (ii) in respect to
its Class A Preferred Stock, 7.5% of the aggregate amount established by its
Board of Directors to be payable on the shares of each series thereof in the
event of involuntary liquidation of Consumers and (iii) $7.50 per share on all
then outstanding shares of all other stock over which its preferred stock and
Class A Preferred Stock do not have preference as to the payment of dividends
and as to assets. Second, dividend payments during the 12 month period ending
with the month the proposed payment is to be paid are limited to: (i) 50% of net
income available for the payment of dividends during the base period, if the
ratio of common stock and surplus to total capitalization and surplus for 12
consecutive calendar months within the 14 calendar months immediately preceding
the proposed dividend payment (the "BASE PERIOD"), adjusted to reflect the
proposed dividend, is less than 20%; and (ii) 75% of net income available for
the payment of dividends during the base period if the ratio of common stock and
surplus to total capitalization and surplus for the base period, adjusted to
reflect the proposed dividend, is at least 20% but less than 25%.
In addition, Consumers' indenture dated as of January 1, 1996, between
Consumers and The Bank of New York, as trustee (the "PREFERRED SECURITIES
INDENTURE"), and certain preferred securities guarantees by Consumers dated
January 23, 1996, September 11, 1997 and October 25, 1999 (collectively, the
"CONSUMERS PREFERRED SECURITIES GUARANTEES"), in connection with which the 8.36%
Trust Originated Preferred Securities of Consumers Power Company Financing I,
the 8.20% Trust Originated Preferred Securities of Consumers Energy Company
Financing II, 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
- the 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.
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.
PAYMENT AND MATURITY
The Notes will mature on February 1, 2012, and will bear interest at the
rate of 6.30% per year. At maturity, CMS Energy will pay the aggregate principal
amount of the Notes then outstanding. At maturity, CMS Energy will pay the
aggregate principal amount of the Notes then outstanding. Each Note will bear
interest from the original date of issue, payable semiannually in arrears on
February 1 and August 1, commencing on August 1, 2005, and at maturity. Interest
will be paid to the person in whose name the Notes are registered at the close
of business fifteen days prior to the interest payment date. Interest payable on
any interest payment date or on
S-32
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 Change in Control) of
any Note shall not be a Business Day (as defined herein) at any place of
payment, then payment of interest or principal (and premium, 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 Change in Control); 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 will be 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 will be registered in the name of the nominee of DTC. Except as described
under "Book-Entry System," owners of beneficial interests in a Global Note will
not be entitled to have Notes registered in their names, will not receive or be
entitled to receive physical delivery of any such Note and will not be
considered the registered holder thereof under the senior debt indenture.
OPTIONAL REDEMPTION
The Notes will be redeemable at CMS Energy's option, in whole or in part,
at any time or from time to time, at a redemption price equal to 100% of the
principal amount of such Notes being redeemed plus the Applicable Premium (as
defined below), if any, thereon at the time of redemption, together with accrued
interest, if any, thereon to the redemption date. In no event will the
redemption price be less than 100% of the principal amount of the Notes plus
accrued interest, if any, thereon to the redemption date.
The following definitions are used to determine the Applicable Premium:
"APPLICABLE PREMIUM" means, with respect to a Note (or portion thereof)
being redeemed at any time, the excess of (A) the present value at such time of
the principal amount of such Note (or portion thereof) being redeemed plus all
interest payments due on such Note (or portion thereof) after the redemption
date, which present value shall be computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (B) the principal amount of such Note
(or portion thereof) being redeemed at such time. For purposes of this
definition, the present values of interest and principal payments will be
determined in accordance with generally accepted principles of financial
analysis.
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) (the
"STATISTICAL RELEASE")) which has become publicly available at least two
Business Days prior to the redemption date or, in case of defeasance, prior to
the date of deposit (or, if such Statistical Release is no longer published, any
publicly available source of similar market data) most nearly equal to the then
remaining average life to stated maturity of the Notes; provided, however, that
if the average life to stated maturity of the Notes is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given.
If the original redemption date is on or after a record date and on or
before the relevant interest payment date, the accrued and unpaid interest, if
any, will be paid to the person or entity in whose name the Note is registered
at the close of business on the record date, and no additional interest will be
payable to Holders whose Notes shall be subject to redemption.
If less than all of the Notes are to be redeemed, the Trustee under the
senior debt indenture shall select, in such manner as it shall deem appropriate
and fair, the particular Notes or portions thereof to be redeemed. Notice of
redemption shall be given by mail not less than 30 nor more than 60 days prior
to the date fixed for redemption to the Holders of Notes to be redeemed (which,
as long as the Notes are held in the book-entry only system, will be DTC (or its
nominee) or a successor depositary); provided, however, that the failure to duly
give such notice by mail, or any defect therein, shall not affect the validity
of any proceedings for the redemption of Notes as to which there shall have been
no such failure or defect. On and after the date fixed for redemption (unless
CMS Energy shall
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default in the payment of the Notes or portions thereof to be redeemed at the
applicable redemption price, together with accrued interest, if any, thereon to
such date), interest on the Notes or the portions thereof so called for
redemption shall cease to accrue.
No sinking fund is provided for the Notes.
PURCHASE OF NOTES UPON CHANGE IN CONTROL
In the event of any Change in Control (as defined below) each Holder of a
Note will have the right, at such Holder's option, subject to the terms and
conditions of the senior debt indenture, to require CMS Energy to repurchase all
or any part of such Holder's Note on a date selected by CMS Energy that is no
earlier than 60 days nor later than 90 days (the "CHANGE IN CONTROL PURCHASE
DATE") after the mailing of written notice by CMS Energy of the occurrence of
such Change in Control, at a repurchase price payable in cash equal to 101% of
the principal amount of such Notes plus accrued interest, if any, thereon to the
Change in Control Purchase Date (the "CHANGE IN CONTROL PURCHASE PRICE").
Within 30 days after the Change in Control Purchase Date, CMS Energy is
obligated to mail to each Holder of a Note a notice regarding the Change in
Control, which notice shall state, among other things:
- that a Change in Control has occurred 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 Change in Control Purchase Price;
- the Change in Control Purchase Price;
- the Change in Control Purchase Date;
- the name and address of the paying agent; and
- the procedures that Holders must follow to cause the Notes to be
repurchased.
To exercise this right, a Holder must deliver a written notice (the
"CHANGE IN CONTROL PURCHASE NOTICE") 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 Change in Control
Purchase Date. The Change in Control 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 change-in-control 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.
Any Change in Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the paying agent not later than three
Business Days prior to the Change in Control Purchase Date. The notice of
withdrawal shall state the principal amount and, if applicable, the certificate
numbers of the Notes as to which the withdrawal notice relates and the principal
amount, if any, which remains subject to a Change in Control Purchase Notice.
If a Note is represented by a Global Note, DTC or its nominee will be the
holder of such Note and therefore will be the only entity that can require CMS
Energy to repurchase Notes upon a Change in Control. To obtain repayment with
respect to such Note upon a Change in Control, the beneficial owner of such Note
must provide to the broker or other entity through which it holds the beneficial
interest in such Note (1) the Change in Control Purchase Notice signed by such
beneficial owner, and such signature must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc. ("NASD") or a commercial bank or trust company having
an office or correspondent in the United States and (2) instructions to such
broker or other entity to notify DTC of such beneficial owner's desire to cause
CMS Energy to repurchase such Notes. Such broker or other entity will provide to
the paying agent (1) a Change in Control Purchase Notice received from such
beneficial owner and (2) a certificate satisfactory to the paying agent from
such broker or other entity that it represents such beneficial owner. Such
broker or other entity will be responsible for disbursing any payments it
receives upon the repurchase of such Notes by CMS Energy.
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Payment of the Change in Control Purchase Price for a Note in registered,
certificated form (a "CERTIFICATED NOTE") for which a Change in Control 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
Change in Control Purchase Date) after the delivery of such Change in Control
Purchase Notice. Payment of the Change in Control Purchase Price for such
Certificated Note will be made promptly following the later of the Change in
Control 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 Change in Control Purchase Price of a
Note on the Business Day following the Change in Control 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 Change in
Control Purchase Price upon delivery of the Note).
Under the senior debt indenture, a "CHANGE IN CONTROL" means an event or
series of events by which:
- CMS Energy ceases to beneficially own, directly or indirectly, at
least 80% of the total voting power of all classes of Capital Stock
then outstanding of Consumers (whether arising from issuance of
securities of CMS Energy or Consumers, any direct or indirect
transfer of securities by CMS Energy or Consumers, any merger,
consolidation, liquidation or dissolution of CMS Energy or Consumers
or otherwise); or any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) becomes the
"beneficial owner" (as such term is used in Rules 13d-3 and 13d-5
under the Exchange Act, except that a person or group shall be
deemed to have "beneficial ownership" of all shares that such person
or group has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or
indirectly, of more than 35% of the Voting Stock of CMS Energy; or
- CMS Energy consolidates with or merges into another corporation or
directly or indirectly conveys, transfers or leases all or
substantially all of its assets to any person, or any corporation
consolidates with or merges into CMS Energy, in either event
pursuant to a transaction in which the outstanding Voting Stock of
CMS Energy is changed into or exchanged for cash, securities or
other property, other than any such transaction where (A) the
outstanding Voting Stock of CMS Energy is changed into or exchanged
for Voting Stock of the surviving corporation and (B) the holders of
the Voting Stock of CMS Energy immediately prior to such transaction
retain, directly or indirectly, substantially proportionate
ownership of the Voting Stock of the surviving corporation
immediately after such transaction.
The senior debt indenture requires CMS Energy to comply with the
provisions of Regulation 14E and any other tender offer rules under the Exchange
Act which may then be applicable in connection with any offer by CMS Energy to
purchase Notes at the option of Holders upon a Change in Control. The Change in
Control 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 Change in Control purchase feature, however, is not
the result of management's knowledge of any specific effort to accumulate shares
of its common stock or to obtain control of CMS Energy 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 Change in Control
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
underwriters. 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.
No Note may be repurchased by CMS Energy as a result of a Change in
Control if there has occurred and is continuing an Event of Default described
under "Events of Default" below (other than a default in the payment of the
Change in Control Purchase Price with respect to the Notes). In addition, CMS
Energy's ability to purchase 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
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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);
- dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividends would have complied
with this covenant; or
- payments pursuant to the Tax Sharing Agreement.
LIMITATION ON CERTAIN LIENS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding, CMS Energy shall not create, incur, assume or suffer to exist
any Lien, provided, that no event of default shall have occurred and be
continuing (or result therefrom) at the time of payment of such dividend upon or
with respect to any of its property of any character, including without
limitation any shares of Capital Stock of Consumers or Enterprises, without
making effective provision whereby the Notes shall be (so long as any such other
creditor shall be so secured) equally and ratably secured. The foregoing
restrictions shall not apply to (a) Liens securing Indebtedness of CMS Energy,
provided that on the date such Liens are created, and after giving effect to
such Indebtedness, the aggregate principal amount at maturity of all the secured
Indebtedness of CMS Energy at such date shall not exceed 5% of Consolidated Net
Tangible Assets or (b) certain liens for taxes, pledges to secure workman's
compensation, other statutory obligations and Support Obligations, certain
materialman's, mechanic's and similar liens and certain purchase money liens.
LIMITATION ON ASSET SALES
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding, CMS Energy may not sell, transfer or otherwise dispose of any
property or assets of CMS Energy, including Capital Stock of any Consolidated
Subsidiary, in one transaction or a series of transactions in an amount which
exceeds $50,000,000 (an "ASSET SALE") unless CMS Energy shall (1) apply an
amount equal to such excess Net Cash Proceeds to permanently repay Indebtedness
of a Consolidated Subsidiary or Indebtedness of CMS Energy which is pari passu
with the Notes, (2) invest an equal amount not so used in clause (1) in property
or assets of a related business within 24 months after the date of the Asset
Sale (the "APPLICATION PERIOD") or (3) apply such excess Net Cash
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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 "Purchase of Notes
Upon Change in Control" with respect to a Change in Control.
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 Change in Control as described
in "Purchase of Notes Upon Change in Control" 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 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;
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- 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 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;
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- 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, provided, however, that for
purposes of this bullet point, any cash, dividends or distributions
of any such Subsidiary to CMS Energy shall be included in
calculating Consolidated Net Income.
"CONSOLIDATED NET TANGIBLE ASSETS" means, for any period, the total amount
of assets (less accumulated depreciation or amortization, allowances for
doubtful receivables, other applicable reserves and other properly deductible
items) as set forth on the most recently available quarterly or annual
consolidated balance sheet of CMS Energy and its Consolidated Subsidiaries,
determined on a consolidated basis in accordance with generally accepted
accounting principles, and after giving effect to purchase accounting and after
deducting therefrom, to the extent otherwise included, the amounts of:
- Consolidated Current Liabilities;
- minority interests in Consolidated Subsidiaries held by Persons
other than CMS Energy or a Restricted Subsidiary;
- excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors as evidenced by
resolutions of the Board of Directors;
- any revaluation or other write-up in value of assets subsequent to
December 31, 1996, as a result of a change in the method of
valuation in accordance with generally accepted accounting
principles;
- unamortized debt discount and expenses and other unamortized
deferred charges, goodwill, patents, trademarks, service marks,
trade names, copyrights, licenses, organization or developmental
expenses and other intangible items;
- treasury stock; and
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- 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 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);
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- 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 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
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 non-cash 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
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liquidation or dissolution of such corporation, over shares of Capital Stock of
any other class of such corporation; provided, that Hybrid Preferred Securities
are not considered Preferred Stock for purposes of this definition.
"REDEEMABLE STOCK" means any Capital Stock that by its terms or otherwise
is required to be redeemed prior to the first anniversary of the stated maturity
of the outstanding Notes or is redeemable at the option of the Holders thereof
at any time prior to the first anniversary of the stated maturity of the
outstanding Notes.
"RESTRICTED SUBSIDIARY" means any Subsidiary (other than Consumers and its
subsidiaries) of CMS Energy which, as of the date of CMS Energy's most recent
quarterly consolidated balance sheet, constituted at least 10% of the total
Consolidated Assets of CMS Energy and its Consolidated Subsidiaries and any
other Subsidiary which from time to time is designated a Restricted Subsidiary
by the Board of Directors, provided that no Subsidiary may be designated a
Restricted Subsidiary if, immediately after giving effect thereto, an Event of
Default or event that, with the lapse of time or giving of notice or both, would
constitute an Event of Default would exist or CMS Energy and its Restricted
Subsidiaries could not incur at least one dollar of additional Indebtedness
pursuant to the first paragraph under "Description of the Notes -- Certain
Restrictive Covenants -- Limitation on Consolidated Indebtedness," and (1) any
such Subsidiary so designated as a Restricted Subsidiary must be organized under
the laws of the United States or any State thereof, (2) more than 80% of the
Voting Stock of such Subsidiary must be owned of record and beneficially by CMS
Energy or a Restricted Subsidiary and (3) such Restricted Subsidiary must be a
Consolidated Subsidiary.
"S&P" shall mean Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., and any successor thereto which is a nationally
recognized statistical rating organization, or, if such entity shall cease to
rate the Notes or shall cease to exist and there shall be no such successor
thereto, any other nationally recognized statistical rating organization
selected by CMS Energy which is acceptable to the Trustee.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of CMS Energy (whether
outstanding on the date of the Supplemental Indenture or thereafter incurred)
which is contractually subordinated or junior in right of payment to the Notes.
"SUBSIDIARY" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by CMS Energy or by one or more
other Subsidiaries, or by CMS Energy and one or more other Subsidiaries. For the
purposes of this definition, "voting stock" means stock which ordinarily has
voting power for the election of directors, whether at all times or only so long
as no senior class of stock has such voting power by reason of any contingency.
"SUPPORT OBLIGATIONS" means, for any person, without duplication, any
financial obligation, contingent or otherwise, of such person guaranteeing or
otherwise supporting any debt or other obligation of any other person in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such person, direct or indirect:
- 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).
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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 redeem Notes after we exercised our
redemption option; or
- a default in our obligation to purchase Notes upon the occurrence of
a Change in Control or exercise by a Holder of its option to require
us to purchase such Holder's Notes.
If an Event of Default on the Notes shall have occurred and be continuing,
either the Trustee or the Holders of not less than 25% in aggregate principal
amount of the Notes then outstanding may declare the principal of all the Notes
and the premium thereon and interest, if any, accrued thereon to be due and
payable immediately.
The senior debt indenture provides that the Trustee will be under no
obligation to exercise any of its rights or powers under the senior debt
indenture at the request, order or direction of the Holders of the Notes, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for indemnity and certain other limitations contained in the
senior debt indenture, the 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
S-43
District of Columbia. Notwithstanding the foregoing provisions, such a
transaction may constitute a Change in Control as described in "Purchase of
Notes Upon Change in Control".
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), may 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 or Change in Control 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 exchange any
debt security, including the Notes, or decreases the exchange rate
of any exchangeable debt security; or
- waive any default in any payment of redemption price or Change in
Control Purchase Price with respect to the Notes.
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 register the transfer of or
exchange 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.
S-44
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.
THE TRUSTEE
J.P. Morgan Trust Company, N.A. is the Trustee and paying agent under the
senior debt indenture for the Notes. CMS Energy and its affiliates maintain
lending depositary and other normal banking relationships 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.
GOVERNING LAW
The senior debt indenture, the Supplemental Indenture and the Notes will
be 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 will be represented by one or more global securities. Each
global security will be deposited with, or on behalf of, DTC and be 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.
S-45
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
underwriters 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 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.
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.
S-46
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.
S-47
UNDERWRITING
Citigroup Global Markets Inc. and Deutsche Bank Securities Inc. are acting
as representatives of the underwriters named below.
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus supplement, each underwriter named below has
agreed to purchase, and we have agreed to sell to that underwriter, the
principal amount of the Notes set forth opposite the underwriter's name.
PRINCIPAL AMOUNT OF
UNDERWRITER NOTES
---------------------------- -------------------
Citigroup Global Markets Inc. .................... $ 90,000,000
Deutsche Bank Securities Inc. .................... 52,500,000
BNP Paribas Securities Corp. ..................... 3,750,000
Wedbush Morgan Securities Inc. ................... 3,750,000
-------------------
Total ....................................... $ 150,000,000
===================
The underwriting agreement provides that the obligations of the
underwriters to purchase the Notes included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all of the Notes if they purchase any of the Notes.
The underwriters propose to offer some of the Notes directly to the public
at the public offering price set forth on the cover page of this prospectus
supplement and some of the Notes to dealers at the public offering price less a
concession not to exceed 0.50% of the principal amount of the Notes. The
underwriters may allow, and dealers may reallow, a concession not to exceed
0.25% of the principal amount of the Notes on sales to other dealers. After the
initial offering of the Notes to the public, the representatives may change the
public offering price and concessions.
The following table shows the underwriting discounts and commissions that
we are to pay to the underwriters in connection with this offering (expressed as
a percentage of the principal amount of the Notes).
PAID BY CMS ENERGY
------------------
Per Note......................................... 1.75%
In connection with the offering, Citigroup Global Markets Inc., on behalf
of the underwriters, may purchase and sell Notes in the open market. These
transactions may include over-allotment, syndicate covering transactions and
stabilizing transactions. Over-allotment involves syndicate sales of Notes in
excess of the principal amount of Notes to be purchased by the underwriters in
the offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of certain bids or purchases of Notes made for
the purpose of preventing or retarding a decline in the market price of the
Notes while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Citigroup Global Markets Inc., in covering syndicate short positions or making
stabilizing purchases, repurchase Notes originally sold by that syndicate
member.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the Notes. They may also cause the price of the
Notes to be higher than the price that otherwise would exist in the open market
in the absence of these transactions. The underwriters may conduct these
transactions in the over-the-counter market or otherwise. If the underwriters
commence any of these transactions, they may discontinue them at any time.
We estimate that our total expenses for this offering will be
approximately $180,000.
The underwriters have performed investment banking and advisory services
for us and our affiliates from time to time for which they have received
customary fees and expenses. Affiliates of the underwriters are lenders to us
and our affiliates under our credit facilities. The underwriters may, from time
to time, engage in transactions with and perform services for us in the ordinary
course of their business.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make because of any of those liabilities.
S-48
LEGAL MATTERS
Robert C. Shrosbree, Assistant General Counsel for CMS Energy, will render
opinions as to the legality of the Notes for CMS Energy.
Pillsbury Winthrop LLP will pass upon certain legal matters with respect
to the Notes for the underwriters.
EXPERTS
The consolidated financial statements and schedule of CMS Energy appearing
in its Annual Report (Form 10-K/A (Amendment No. 2)) for the year ended December
31, 2003 have been audited by Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon included therein and
incorporated herein by reference which are based in part on the report of Price
Waterhouse, independent accountants, for Jorf Lasfar and the reports of
PricewaterhouseCoopers LLP, independent registered public accounting firm, for
2003 and 2002 and Arthur Andersen LLP, independent accountants (who have ceased
operations), for 2001 for the MCV Partnership. Such consolidated financial
statements and schedule are incorporated herein by reference in reliance upon
such reports given on the authority of such firms as experts in accounting and
auditing.
The financial statements of Emirates CMS Power Company PJSC appearing in
CMS Energy's Annual Report (Form 10-K/A (Amendment No. 2)) for the year ended
December 31, 2003 have been audited by Ernst & Young, independent registered
public accounting firm, as set forth in their report thereon included therein
and incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of SCP Investments (No.1) Pty Ltd
for the year ended June 30, 2004 appearing in CMS Energy's Annual Report (Form
10-K/A (Amendment No. 2)) for the year ended December 31, 2003 have been audited
by Ernst & Young, independent registered public accounting firm, as set forth in
their report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of Jorf Lasfar as of December 31, 2003 and 2002
and for each of the three years in the period ended December 31, 2003
incorporated by reference in this prospectus supplement and the accompanying
prospectus have been so included in reliance on the report of Price Waterhouse,
independent accountants for Jorf Lasfar, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of the MCV Partnership as of and for
the years ended December 31, 2003 and 2002 incorporated by reference in this
prospectus supplement and the accompanying prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent registered
public accounting firm, given on the authority of said firm as experts in
auditing and accounting.
The audited consolidated financial statements of the MCV Partnership for
the year ended December 31, 2001, incorporated by reference in this prospectus
supplement and the accompanying prospectus, have been audited by Arthur Andersen
LLP, independent accountants. Arthur Andersen LLP has not consented to the
inclusion of their report on the financial statements of the MCV Partnership for
the year ended December 31, 2001 in this prospectus supplement, and we have
dispensed with the requirement to file their consent in reliance upon Rule 437a
under the Securities Act. Because Arthur Andersen LLP has not consented to the
incorporation by reference of their report in this prospectus supplement, you
will not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Arthur Andersen LLP or any omissions to state a
material fact required to be stated therein.
S-49
CMS ENERGY CORPORATION
CMS ENERGY COMMON STOCK
SENIOR DEBENTURES
SUBORDINATED DEBENTURES
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
GUARANTEES
AND
CMS ENERGY TRUST IV
CMS ENERGY TRUST V
TRUST PREFERRED SECURITIES
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
CMS ENERGY CORPORATION
OFFERING PRICE: $2,000,000,000
---------------
We may offer, from time to time:
- shares of CMS Energy Common Stock,
- unsecured senior or subordinated debt securities consisting of
debentures, convertible debentures, notes and other unsecured
evidence of indebtedness,
- stock purchase contracts to purchase CMS Energy Common Stock,
- stock purchase units, each representing ownership of a stock
purchase contract and unsecured senior or subordinated debt
securities or trust preferred securities or debt obligations of
third parties, including U.S. Treasury Securities, securing the
holder's obligation to purchase the CMS Energy Common Stock under
the stock purchase contract, or any combination of the above, and
- guarantees of CMS Energy with respect to Trust Preferred Securities
of CMS Energy Trusts IV and V.
For each type of security listed above, the amount, price and terms will
be determined at or prior to the time of sale.
CMS Energy Trust IV and CMS Energy Trust V, which are Delaware business
trusts, may offer trust preferred securities. The trust preferred securities
represent preferred undivided beneficial interests in the assets of CMS Energy
Trust IV and CMS Energy Trust V in amounts, at prices and on terms to be
determined at or prior to the time of sale.
We will provide the specific terms of these securities in an accompanying
prospectus supplement or supplements. You should read this prospectus and the
accompanying prospectus supplement or supplements carefully before you invest.
THESE SECURITIES INVOLVE RISK. SEE "RISK FACTORS" ON PAGE 5.
CMS Energy Common Stock is traded on the New York Stock Exchange under the
symbol "CMS." CMS Energy Common Stock sold pursuant to a prospectus supplement
or supplements accompanying this prospectus will also be listed for trading on
the New York Stock Exchange, subject to official notice of issuance.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We intend to sell these securities through underwriters, dealers, agents
or directly to a limited number of purchasers. The names of, and any securities
to be purchased by or through, these parties, the compensation of these parties
and other special terms in connection with the offering and sale of these
securities will be provided in the related prospectus supplement or supplements.
This prospectus may not be used to consummate sales of any of these
securities unless accompanied by a prospectus supplement.
The date of this prospectus is September 21, 2004.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT, AND ANY
INFORMATION OR REPRESENTATION NOT CONTAINED OR INCORPORATED HEREIN MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY CMS ENERGY OR ANY UNDERWRITER, DEALER
OR AGENT. THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH THEY RELATE OR AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED OR
INCORPORATED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
OF SUCH INFORMATION.
TABLE OF CONTENTS
PAGE
Summary.......................................................... 2
Where to Find More Information................................... 2
CMS Energy Corporation........................................... 4
CMS Energy Trusts................................................ 4
Risk Factors..................................................... 5
Use of Proceeds.................................................. 5
Ratio of Earnings to Fixed Changes and Ratio of Earnings to
Combined Fixed Changes and Preference Dividends................ 5
Description of Securities........................................ 6
Effect of Obligations Under the Debt Securities and the
Guarantees..................................................... 20
Plan of Distribution............................................. 24
Legal Opinions................................................... 26
Experts.......................................................... 26
SUMMARY
This prospectus is part of a registration statement on Form S-3 that we
filed with the Securities and Exchange Commission utilizing a "shelf"
registration process. Under this shelf process, we may sell any combination of
securities described in this prospectus in one or more offerings, up to a total
dollar amount of $2,000,000,000. This prospectus provides you with a general
description of the securities we may offer. Each time we sell securities, we
will provide a prospectus supplement containing specific information about the
terms of that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with additional information described
below under the heading "Where To Find More Information."
WHERE TO FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC under
File No. 1-9513. Our SEC filings are also 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 have securities listed on the New York Stock Exchange. You can inspect
and copy reports and other information about us at the NYSE's offices at 20
Broad Street, New York, New York 10005.
2
We have not included separate financial statements of the Trusts. We and
the Trusts do not consider that such financial statements would be material to
holders of Trust Preferred Securities because each Trust is a newly organized
special purpose entity, has no operating history and no independent operations.
The Trusts are not currently involved in and don't anticipate being involved in
any activity other than as described under "CMS Energy Trusts." Further, we
believe that financial statements of the Trusts are not material to the holders
of the Trust Preferred Securities since we will guarantee the Trust Preferred
Securities. Holders of the Trust Preferred Securities, with respect to the
payment of distributions and amounts upon liquidation, dissolution and
winding-up, are at least in the same position vis-a-vis the assets of CMS Energy
Corporation ("CMS Energy") as a preferred stockholder of CMS Energy. We
beneficially own all of the undivided beneficial interests in the assets of the
Trusts (other than the beneficial interests represented by the Trust Preferred
Securities). See "CMS Energy Trusts," "Description of Securities -- Trust
Preferred Securities" and "Effect of Obligations Under the Debt Securities And
the Guarantees -- The Guarantees." In future filings under the Exchange Act,
there will be an audited footnote to our annual financial statements stating
that the Trusts are wholly-owned by CMS Energy, that the sole assets of the
Trusts are the Senior Debentures or the Subordinated Debentures of CMS Energy
having a specified aggregate principal amount, and, considered together, the
back-up undertakings, including the Guarantees, constitute a full and
unconditional guarantee by CMS Energy of the Trusts' obligations under the Trust
Preferred Securities issued by the Trusts.
We are "incorporating by reference" information into this registration
statement. This means that we are disclosing important information to you when
we refer you to another document that we filed separately with the SEC.
Information incorporated by reference is considered to be part of this
prospectus, unless the information is updated by information in this prospectus.
This prospectus incorporates by reference the documents listed below. We
encourage you to read these additional documents because these documents contain
important information about us and our finances.
SEC FILINGS
(FILE NO. 1-9513) PERIOD/DATE
-------------------------------- --------------------------------------
- Annual Report on Form 10-K/A Year ended December 31, 2003
- Quarterly Reports on Form 10-Q Quarters ended March 31, 2004 and
June 30, 2004
- Current Reports on Form 8-K Filed January 22, 2004, March 8, 2004,
April 14, 2004, June 3, 2004,
August 20, 2004, August 31, 2004 and
September 1, 2004
The documents we have filed with the SEC after the date of this prospectus
and prior to the termination of the offering made by this prospectus are also
incorporated by reference into this prospectus. Any statement contained in such
document will be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus or any
other subsequently filed document modifies or supersedes such statement.
This prospectus, which is part of the offering registration statement,
does not contain all of the information found in the offering registration
statement including various exhibits and schedules. We are incorporating by
reference the offering registration statement.
We will provide, upon your oral or written request, a copy of any or all
of the information that has been incorporated by reference into the prospectus
but not delivered with the prospectus.
You may request copies of these filings, including the registration
statement, at no cost, by writing or telephoning CMS Energy at the following
address:
CMS Energy Corporation
Attn: Office of the Secretary
One Energy Plaza
Jackson, Michigan 49201
Telephone: (517) 788-0531
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information that is different from this information.
3
CMS ENERGY CORPORATION
We are an integrated energy company with a business strategy focused
primarily in Michigan. We are the parent holding company of Consumers Energy
Company ("Consumers") and CMS Enterprises Company ("Enterprises"). Consumers is
a combination electric and gas utility company serving Michigan's Lower
Peninsula. Enterprises, through various subsidiaries and equity investments, is
engaged in domestic and international diversified energy businesses including:
independent power production and natural gas transmission, storage and
processing. We manage our businesses by the nature of services each provides and
operate principally in three business segments: electric utility, gas utility,
and enterprises.
CMS ENERGY TRUSTS
CMS Energy Trust IV and CMS Energy Trust V are statutory business trusts
formed under the Delaware Business Trust Act (the "Trust Act") (each, a "Trust"
and collectively, the "Trusts") pursuant to: (i) a trust agreement executed by
CMS Energy, as sponsor, and the trustees of the Trusts (the "CMS Trustees"); and
(ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware. At the time of public issuance of Trust Preferred Securities,
each trust agreement will be amended and restated in its entirety (as so amended
and restated, the "Trust Agreement") and will be qualified as an indenture under
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). CMS
Energy will directly or indirectly acquire common securities of each Trust (the
"Common Securities" and, together with the Trust Preferred Securities, the
"Trust Securities") in an aggregate liquidation amount equal to approximately 3%
for the total capital of the Trust. Each Trust exists for the exclusive purposes
of:
- issuing the Trust Preferred Securities and Common Securities
representing undivided beneficial interests in the assets of the
Trust;
- investing the gross proceeds of the Trust Securities in the Senior
Debentures or Subordinated Debentures; and
- engaging in only those other activities necessary or incidental
thereto. Each Trust has a term of approximately 30 years, but may
terminate earlier as provided in the Trust Agreement.
The undivided common beneficial interests in the Trust will be owned by
CMS Energy. The proceeds from the offering of the Trust Preferred Securities and
the sale of the Common Securities may be contributed by the Trust to purchase
from CMS Energy Senior Debentures or Subordinated Debentures in an aggregate
principal amount equal to the aggregate liquidation preference of the Trust
Securities, bearing interest at an annual rate equal to the annual distribution
rate of such Trust Securities and having certain redemption terms which
correspond to the redemption terms for the Trust Securities. The Senior
Debentures will rank on an equal basis with all other unsecured debt of CMS
Energy except subordinated debt. The Subordinated Debentures will rank
subordinate in right of payment to all of CMS Energy's Senior Indebtedness (as
defined herein). Distributions on the Trust Securities may not be made unless
the Trust receives corresponding interest payments on the Senior Debentures or
the Subordinated Debentures from CMS Energy. CMS Energy will irrevocably
guarantee, on a senior or subordinated basis, as applicable, and to the extent
set forth therein, with respect to each of the Trust Securities, the payment of
distributions, the redemption price, including all accrued or deferred and
unpaid distributions, and payment on liquidation, but only to the extent of
funds on hand. Each Guarantee will be unsecured and will be either equal to or
subordinate to, as applicable, all Senior Indebtedness, of CMS Energy. Upon the
occurrence of certain events (subject to the conditions to be described in an
accompanying prospectus supplement) the Trust may be liquidated and the holders
of the Trust Securities could receive Senior Debentures or Subordinated
Debentures in lieu of any liquidating cash distribution.
Pursuant to the Trust Agreement, the number of CMS Trustees will initially
be three. Two of the CMS Trustees (the "Administrative Trustees") will be
persons who are employees or officers of or who are affiliated with CMS Energy.
The third trustee will be a financial institution that is unaffiliated with CMS
Energy, which trustee will serve as property trustee under the Trust Agreement
and as indenture trustee for the purposes of compliance with the provisions of
the Trust Indenture Act (the "Property Trustee"). Initially, either The Bank of
New York, a New York banking corporation, or J.P. Morgan Trust Company, N.A, a
national banking association, will be the Property Trustee until removed or
replaced by the holder of the Common Securities. For the purpose of compliance
with the provisions of the Trust Indenture Act, The Bank of New York or J.P.
Morgan Trust Company, N.A. will also act as trustee (each a "Guarantee Trustee"
and collectively the "Guarantee Trustees"). The Bank of New York (Delaware) will
act as the Delaware Trustee for the purposes of the Trust Act, until removed or
replaced by the holder of the Common Securities. See "Effect of Obligations
Under the Debt Securities And the Guarantees -- The Guarantees."
Each Property Trustee will hold title to the applicable Debt Securities
for the benefit of the holders of the Trust Securities and each Property Trustee
will have the power to exercise all rights, powers and privileges under the
applicable indentures (as defined herein)
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as the holder of the Debt Securities. In addition, each Property Trustee will
maintain exclusive control of a segregated non-interest bearing bank account
(the "Property Account") to hold all payments made in respect of the Debt
Securities for the benefit of the holders of the Trust Securities. Each Property
Trustee will make payments of distributions and payments on liquidation,
redemption and otherwise to the holders of the Trust Securities out of funds
from the Property Account. The Guarantee Trustees will hold the Guarantees for
the benefit of the holders of the Trust Securities. CMS Energy, as the direct or
indirect holder of all the Common Securities, will have the right to appoint,
remove or replace any CMS Trustee and to increase or decrease the number of CMS
Trustees; provided, that the number of CMS Trustees shall be at least three, a
majority of which shall be Administrative Trustees. CMS Energy will pay all fees
and expenses related to the Trusts and the offering of the Trust Securities.
The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
Trust Agreement, the Trust Act and the Trust Indenture Act.
The trustee in the State of Delaware is The Bank of New York (Delaware),
White Clay Center, Route 273, Newark, Delaware 19711.
The principal place of business of each Trust shall be c/o CMS Energy
Corporation, One Energy Plaza, Jackson, Michigan 49201.
RISK FACTORS
Before acquiring any of the securities that may be offered hereby, you
should carefully consider the risks discussed in the section of our Form 10-Q,
filed August 6, 2004, for the quarter year ended June 30, 2004, entitled
"Forward-Looking Statements and Risk Factors," which is incorporated in this
document by reference. You should also consider the risk factors listed in the
accompanying prospectus supplement or supplements and you should read this
prospectus and the accompanying prospectus supplement or supplements carefully
before you invest.
USE OF PROCEEDS
The proceeds received by each of the Trusts from the sale of its Trust
Preferred Securities or the Common Securities will be invested in the Senior
Debentures or the Subordinated Debentures. As will be more specifically set
forth in the applicable prospectus supplement, we will use such borrowed amounts
and the net proceeds from the sale of CMS Energy Common Stock, Stock Purchase
Contracts, Stock Purchase Units and any Senior Debentures or Subordinated
Debentures offered hereby for our general corporate purposes, including capital
expenditures, investment in subsidiaries, working capital and repayment of debt.
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERENCE DIVIDENDS
The ratio of earnings to fixed charges and the ratio of earnings to
combined fixed charges and preferred stock dividends 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 -- (1) --(2) --(3) --(4) --(5) 1.33
charges.........................
Ratio of earnings to combined
fixed charges and preference -- (1) --(2) --(6) --(7) --(8) 1.28
dividends.......................
----------
(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.
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(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.
(6) For the year ended December 31, 2002, fixed charges exceeded earnings by
$472 million. Earnings as defined include $602 million of asset impairment
charges.
(7) For the year ended December 31, 2001, fixed charges exceeded earnings by
$392 million. Earnings as defined include $323 million of asset impairment
charges.
(8) For the year ended December 31, 2000, fixed charges exceeded earnings by
$224 million. Earnings as defined include a $329 million pretax impairment
loss on the Loy Yang investment.
For the purpose of computing these ratios, earnings represent sum of
income from continuing operations before income taxes, net interest charges and
the estimated interest portion of lease rentals and distributed income of equity
method investees.
DESCRIPTION OF SECURITIES
INTRODUCTION
Specific terms of the shares of Common Stock, par value $.01 per share
("CMS Energy Common Stock"), unsecured senior debt securities (the "Senior
Debentures") and unsecured subordinated debt securities (the "Subordinated
Debentures") (individually a "Debt Security" and collectively the "Debt
Securities") consisting of debentures, convertible debentures, notes and other
unsecured evidence of indebtedness, Stock Purchase Contracts (the "Stock
Purchase Contracts") to purchase CMS Energy Common Stock, Stock Purchase Units
(the "Stock Purchase Units"), each representing ownership of a Stock Purchase
Contract and Debt Securities, or Trust Preferred Securities or debt obligations
of third parties, including U.S. Treasury Securities, securing the holder's
obligation to purchase the CMS Energy Common Stock under the Stock Purchase
Contract, or any combination of the foregoing, irrevocable guarantees
(individually a "Guarantee" and collectively "Guarantees") of CMS Energy, on a
senior or subordinated basis as applicable, and to the extent set forth therein,
with respect to each of the Trust Securities, the payment of distributions, the
redemption price, including all accrued or deferred and unpaid distributions,
and payment on liquidation, but only to the extent of fund on hand, and trust
preferred securities (the "Trust Preferred Securities") representing preferred
undivided beneficial interests in the assets of the Trust, in respect of which
this prospectus is being delivered (collectively, the "Offered Securities"),
will be set forth in an accompanying prospectus supplement or supplements,
together with the terms of the offering of the Offered Securities, the initial
price thereof and the net proceeds from the sale thereof. The prospectus
supplement will set forth with regard to the particular Offered Securities,
without limitation, the following: (i) in the case of Debt Securities, the
designation, aggregate principal amount, denomination, maturity, premium, if
any, any exchange, conversion, redemption or sinking fund provisions, interest
rate (which may be fixed or variable), the time or method of calculating
interest payments, the right of CMS Energy, if any, to defer payment or interest
on the Debt Securities and the maximum length of such deferral, put options, if
any, public offering price, ranking, any listing on a securities exchange and
other specific terms of the offering; (ii) in the case of CMS Energy Common
Stock, the designation, number of shares, public offering price and other
specific terms of the Offering, from the sale thereof; (iii) in the case of
Trust Preferred Securities, the designation, number of shares, liquidation
preference per security, initial public offering price, any listing on a
securities exchange, dividend rate (or method of calculation thereof), dates on
which dividends shall be payable and dates from which dividends shall accrue,
any voting rights, any redemption, exchange, conversion or sinking fund
provisions and any other rights, preferences, privileges, limitations or
restrictions relating to a specific series of the Trust Preferred Securities
including a description of the Guarantee (as defined herein), as the case may
be; and (iv) in the case of Stock Purchase Units, the specific terms of the
Stock Purchase Contracts and any Debt Securities, Trust Preferred Securities, or
debt obligations of third parties securing the holders obligation to purchase
CMS Energy Common Stock under the Stock Purchase Contracts, and the terms of the
offering and sale thereof.
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
6
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; and
- 10 million shares of CMS Energy Preferred Stock, par value $0.01 per
share ("Preferred Stock").
As of August 31, 2004, we had 5,000,000 shares of 4.50% Cumulative
Convertible Preferred Stock and 161,819,124 shares of CMS Energy 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 CMS
Energy 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 CMS
Energy 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 CMS Energy 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 the CMS Energy 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;
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
7
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.
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");
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:
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- $120 million;
- 100% of our consolidated net income from September 30, 1993 to the
end of the most recent fiscal quarter ending at least 45 days prior
to the date of the restricted payment (or, in the case of a deficit,
minus 100% of the deficit); and
- the aggregate net proceeds we have received for any issuance or sale
of, or contribution with respect to, our capital stock subsequent to
September 30, 1993.
The provisions described above do not prohibit (1) dividends or other
distributions in respect of capital stock issued in connection with the
acquisition of any business or assets by us where the payment of such dividends
or distributions are payable solely from the net earnings of such business or
assets, (2) any purchase or redemption of capital stock made by exchange for, or
out of the proceeds of the substantially concurrent sale of, our capital stock
(other than certain redeemable stock or exchangeable stock), (3) dividends paid
within 60 days after the date of declaration thereof if at the date of
declaration such dividends would have complied with the limitations described
above or (4) payments pursuant to the tax sharing agreement among us and our
subsidiaries.
TRUST PREFERRED SECURITIES
In June 1997, a CMS Energy affiliated trust issued $172.5 million of 7
3/4% Convertible Quarterly Income Preferred Securities. The preferred securities
are convertible at the option of the holder into shares of CMS Energy Common
Stock at an initial conversion rate of 1.2255 shares of CMS Energy Common Stock
for each preferred security (equivalent to a purchase price of $40.80 per share
of CMS Energy Common Stock), subject to certain adjustments. We may, at our
option, cause the conversion rights of the holders of the preferred securities
to expire upon certain conditions.
Under the terms of the indenture, dated June 1, 1997, between us and The
Bank of New York, as trustee, as amended and supplemented, and the guarantee
agreement dated June 20, 1997 between us and The Bank of New York relating to
the preferred securities of CMS Energy Trust I pursuant to which the preferred
securities and the related 7 3/4% Convertible Subordinated Debentures due 2027
were issued, we have agreed that we will not, and will not cause any of our
subsidiaries to, declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to, any of our
capital stock, if at such time:
- an event has occurred, of which we have actual knowledge, that with
the giving of notice or the lapse of time, or both, would constitute
an event of default and in respect of which we have not taken
reasonable steps to cure;
- we are in default with respect to the payment of any obligations
under the relevant guarantee agreement; or
- we have given notice of our selection of an extension period as
provided in such indenture with respect to the subordinated
debentures and have not rescinded such notice, or such extension
period (or any extension thereof) is continuing.
DIVIDEND RESTRICTIONS UNDER MICHIGAN LAW
Michigan law prohibits payment of a dividend or a repurchase of capital
stock if, after giving it effect, a corporation would not be able to pay its
debts as they become due in the usual course of business, or its total assets
would be less than the sum of its total liabilities plus, unless the Articles of
Incorporation provide otherwise, the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution (including the rights of
holders of preferred stock, if any).
VOTING RIGHTS
Each holder of CMS Energy Common Stock is entitled to one vote for each
share of CMS Energy 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.
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Under Michigan law, the approval of the holders of a majority of the
outstanding shares of CMS Energy 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 CMS Energy Common Stock,
and to authorize any amendment to the Articles of Incorporation that would
increase or decrease the aggregate number of authorized shares of CMS Energy
Common Stock or alter or change the powers, preferences or special rights of the
shares of CMS Energy 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 CMS Energy 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 CMS
Energy Common Stock, either directly by amendment to the Articles of
Incorporation or indirectly by requiring the holders of the CMS Energy 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 CMS Energy Common Stock to block any such merger or amendment which
would adversely affect the powers or special rights of holders of such shares of
CMS Energy Common Stock.
PREEMPTIVE RIGHTS
The Articles of Incorporation provide that holders of CMS Energy 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 CMS Energy Common Stock will be entitled to receive, on a per share
basis, the assets of CMS Energy remaining for distribution to the holders of CMS
Energy 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 CMS Energy 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 CMS Energy Common Stock.
TRANSFER AGENT AND REGISTRAR
CMS Energy Common Stock is transferable at Consumers Energy Company, One
Energy Plaza, Jackson, Michigan 49201. CMS Energy is the registrar and transfer
agent for CMS Energy Common Stock.
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PREFERRED STOCK
The authorized Preferred Stock may be issued without the approval of the
holders of CMS Energy 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 CMS Energy 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 CMS Energy 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 the CMS Energy 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 CMS Energy 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 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.
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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 CMS Energy 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 the CMS Energy
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
CMS Energy 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 CMS Energy 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 CMS Energy 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 CMS Energy 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 CMS Energy 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 CMS Energy Common Stock. This
represents an initial conversion price of $9.893 per share of CMS Energy 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 Debt Securities, 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.
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DEBT SECURITIES
The Debt Securities offered by this prospectus will be unsecured
obligations of CMS Energy and will be either senior or subordinated debt. Senior
Debentures will be issued under a senior debt indenture and Subordinated
Debentures will be issued under a subordinated debt indenture. The senior debt
indenture and the subordinated debt indenture are sometimes referred to in this
prospectus individually as an "indenture" and collectively as the "indentures."
The following briefly summarizes the material provisions of the indentures
and the Debt Securities. You should read the more detailed provisions of the
applicable indenture, including the defined terms, for provisions that may be
important to you. You should also read the particular terms of a series of Debt
Securities, which will be described in more detail in the applicable prospectus
supplement. Copies of the indentures may be obtained from CMS Energy or the
applicable trustee.
Unless otherwise provided in the applicable prospectus supplement, the
trustee under the senior debt indenture will be J.P. Morgan Trust Company, N.A
and the trustee under the subordinated debt indenture will be The Bank of New
York.
GENERAL
The indentures provide that Debt Securities of CMS Energy may be issued in
one or more series, with different terms, in each case as authorized from time
to time by CMS Energy.
Federal income tax consequences and other special considerations
applicable to any Debt Securities issued by CMS Energy at a discount will be
described in the applicable prospectus supplement.
Because CMS Energy is a holding company, the claims of creditors of CMS
Energy's subsidiaries will have a priority over CMS Energy's equity rights and
the rights of CMS Energy's creditors, including the holders of Debt Securities,
to participate in the assets of the subsidiary upon the subsidiary's
liquidation.
The applicable prospectus supplement relating to any series of Debt
Securities will describe the following terms, where applicable:
- the title of the Debt Securities;
- whether the Debt Securities will be senior or subordinated debt;
- the total principal amount of the Debt Securities;
- the percentage of the principal amount at which the Debt Securities
will be sold and, if applicable, the method of determining the
price;
- the maturity date or dates;
- the interest rate or the method of computing the interest rate;
- the date or dates from which any interest will accrue, or how such
date or dates will be determined, and the interest payment date or
dates and any related record dates;
- the location where payments on the Debt Securities will be made;
- the terms and conditions on which the Debt Securities may be
redeemed at the option of CMS Energy;
- any obligation of CMS Energy to redeem, purchase or repay the Debt
Securities at the option of a holder upon the happening of any event
and the terms and conditions of redemption, purchase or repayment;
- any provisions for the discharge of CMS Energy's obligations
relating to the Debt Securities by deposit of funds or United States
government obligations;
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- whether the Debt Securities are to trade in book-entry form and the
terms and any conditions for exchanging the global security in whole
or in part for paper certificates;
- any material provisions of the applicable indenture described in
this prospectus that do not apply to the Debt Securities;
- any additional amounts with respect to the Debt Securities that CMS
Energy will pay to a non-United States person because of any tax,
assessment or governmental charge withheld or deducted and, if so,
any option of CMS Energy to redeem the Debt Securities rather than
paying these additional amounts; and
- any other specific terms of the Debt Securities.
CONCERNING THE TRUSTEES
Each of J.P. Morgan Trust Company, N.A, the trustee under the senior debt
indenture, and The Bank of New York, the trustee under the subordinated debt
indenture, is one of a number of banks with which CMS Energy and its
subsidiaries maintain ordinary banking relationships, including credit
facilities.
EXCHANGE AND TRANSFER
Debt Securities may be presented for exchange and registered Debt
Securities may be presented for registration of transfer at the offices and
subject to the restrictions set forth therein and in the applicable prospectus
supplement without service charge, but upon payment of any taxes or other
governmental charges due in connection therewith, subject to any limitations
contained in the applicable indenture. Debt Securities in bearer form and the
coupons appertaining thereto, if any, will be transferable by delivery.
PAYMENT
Distributions on the Debt Securities in registered form will be made at
the office or agency of the applicable trustee in the Borough of Manhattan, the
City of New York or its other designated office. However, at the option of CMS
Energy, payment of any interest may be made by check or by wire transfer.
Payment of any interest due on Debt Securities in registered form will be made
to the persons in whose name the Debt Securities are registered at the close of
business on the record date for such interest payments. Payments made in any
other manner will be specified in the prospectus supplement.
EVENTS OF DEFAULT
Each indenture provides that events of default regarding any series of
Debt Securities will be:
- failure to pay required interest on any Debt Security of such series
for 30 days;
- failure to pay principal other than a scheduled installment payment
or premium, if any, on any Debt Security of such series when due;
- failure to make any required scheduled installment payment for 30
days on Debt Securities of such series;
- failure to perform for 90 days after notice any other covenant in
the relevant indenture other than a covenant included in the
relevant indenture solely for the benefit of a series of Debt
Securities other than such series;
- certain events of bankruptcy or insolvency, whether voluntary or
not; or
- entry of final judgments against CMS Energy or Consumers for more
than $25,000,000 which remain undischarged or unbonded for 60 days
or a default resulting in the acceleration of indebtedness of CMS
Energy or Consumers of more than $25,000,000, and the acceleration
has not been rescinded or annulled within 10 days after written
notice of such default as provided in the applicable indenture.
Additional events of default may be prescribed for the benefit of the
holders of a particular series of Debt Securities and will be described in the
prospectus supplement relating to those Debt Securities.
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If an event of default regarding Debt Securities of any series issued
under the indentures should occur and be continuing, either the trustee or the
holders of 25% in the principal amount of outstanding Debt Securities of such
series may declare each Debt Security of that series due and payable.
Holders of a majority in principal amount of the outstanding Debt
Securities of any series will be entitled to control certain actions of the
trustee under the indentures and to waive past defaults regarding such series.
The trustee generally will not be requested, ordered or directed by any of the
holders of Debt Securities, unless one or more of such holders shall have
offered to the trustee reasonable security or indemnity.
Before any holder of any series of Debt Securities may institute action
for any remedy, except payment on such holder's Debt Security when due, the
holders of not less than 25% in principal amount of the Debt Securities of that
series outstanding must request the trustee to take action. Holders must also
offer and give the satisfactory security and indemnity against liabilities
incurred by the trustee for taking such action.
CMS Energy is required to annually furnish the relevant trustee a
statement as to CMS Energy's compliance with all conditions and covenants under
the applicable indenture. Each indenture provides that the relevant trustee may
withhold notice to the holders of the Debt Securities of any series of any
default affecting such series, except payment on holders' Debt Securities when
due, if it considers withholding notice to be in the interests of the holders of
the Debt Securities of such series.
CONSOLIDATION, MERGER OR SALE OF ASSETS
Each 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 Debt Securities and the indentures and is
organized and existing under the laws of the United States of America, any U.S.
state or the District of Columbia.
MODIFICATION OF THE INDENTURE
Each indenture permits CMS Energy and the relevant trustee to enter into
supplemental indentures without the consent of the holders of the Debt
Securities to establish the form and terms of any series of securities under the
indentures.
Each indenture also permits CMS Energy and the relevant trustee, with the
consent of the holders of at least a majority in total principal amount of the
Debt Securities of all series then outstanding and affected (voting as one
class), to change in any manner the provisions of the applicable indenture or
modify in any manner the rights of the holders of the Debt Securities of each
such affected series. CMS Energy and the relevant trustee may not, without the
consent of the holder of each Debt Security affected, enter into any
supplemental indenture to:
- change the time of payment of the principal;
- reduce the principal amount of such Debt Security;
- reduce the rate or change the time of payment of interest on such
Debt Security;
- reduce the amount payable on any securities issued originally at a
discount upon acceleration or provable in bankruptcy; or
- impair the right to institute suit for the enforcement of any
payment on any Debt Security when due.
In addition, no such modification may reduce the percentage in principal
amount of the Debt Securities of the affected series, the consent of whose
holders is required for any such modification or for any waiver provided for in
the applicable indenture.
Prior to the acceleration of the maturity of any Debt Security, the
holders, voting as one class, of a majority in total principal amount of the
Debt Securities 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
Debt Securities 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 applicable indenture or of any Debt Security which cannot be modified or
amended without the consent of the holder of each Debt Security affected.
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DEFEASANCE, COVENANT DEFEASANCE AND DISCHARGE
Each indenture provides that, at the option of CMS Energy:
- CMS Energy will be discharged from all obligations in respect of the
Debt Securities of a particular series then outstanding (except for
certain obligations to register the transfer of or exchange the Debt
Securities of such series, to replace stolen, lost or mutilated Debt
Securities of such series, to maintain paying agencies and to
maintain the trust described below); or
- CMS Energy need not comply with certain restrictive covenants of the
relevant 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 Debt Securities of such
series on the stated maturities of such Debt Securities 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 Debt
Securities of such series 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 applicable 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 Debt Securities of any series as described above,
- the Debt Securities of such series 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,
- the amount of money and securities on deposit with the relevant
trustee would be insufficient to pay amounts due on the Debt
Securities of such series at the time of the acceleration resulting
from such event of default,
CMS Energy would remain liable for such amounts.
GOVERNING LAW
Each indenture and the Debt Securities will be governed by, and construed
in accordance with, the laws of the State of Michigan unless the laws of another
jurisdiction shall mandatorily apply.
SENIOR DEBENTURES
The Senior Debentures will be issued under the senior debt indenture and
will rank on an equal basis with all other unsecured debt of CMS Energy except
subordinated debt.
SUBORDINATED DEBENTURES
The Subordinated Debentures will be issued under the subordinated debt
indenture and will rank subordinated and junior in right of payment, to the
extent set forth in the subordinated debt indenture, to all "Senior
Indebtedness" (as defined below) of CMS Energy.
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If CMS Energy defaults in the payment of any distributions on any Senior
Indebtedness when it becomes due and payable after any applicable grace period,
then, unless and until the default is cured or waived or ceases to exist, CMS
Energy cannot make a payment on account of or redeem or otherwise acquire the
Subordinated Debentures. The subordinated debt indenture provisions described in
this paragraph, however, do not prevent CMS Energy from making sinking fund
payments in Subordinated Debentures acquired prior to the maturity of Senior
Indebtedness or, in the case of default, prior to such default and notice
thereof. If there is any insolvency, bankruptcy, liquidation or other similar
proceeding relating to CMS Energy, its creditors or its property, then all
Senior Indebtedness must be paid in full before any payment may be made to any
holders of Subordinated Debentures. Holders of Subordinated Debentures must
return and deliver any payments received by them, other than in a plan of
reorganization or through a defeasance trust as described above, directly to the
holders of Senior Indebtedness until all Senior Indebtedness is paid in full.
"Senior Indebtedness" means distributions on the following, whether
outstanding on the date of execution of the subordinated debt indenture or
thereafter incurred, created or assumed:
- indebtedness of CMS Energy for money borrowed by CMS Energy or
evidenced by debentures (other than the Subordinated Debentures),
notes, bankers' acceptances or other corporate debt securities or
similar instruments issued by CMS Energy;
- obligations of CMS Energy with respect to letters of credit;
- all indebtedness of others of the type referred to in the two
preceding clauses assumed by or guaranteed in any manner by CMS
Energy or in effect guaranteed by CMS Energy; or
- renewals, extensions or refundings of any of the indebtedness
referred to in the preceding three clauses unless, in the case of
any particular indebtedness, renewal, extension or refunding, under
the express provisions of the instrument creating or evidencing the
same or the assumption or guarantee of the same, or pursuant to
which the same is outstanding, such indebtedness or such renewal,
extension or refunding thereof is not superior in right of payment
to the subordinated debt securities.
The subordinated debt indenture does not limit the total amount of Senior
Indebtedness that may be issued.
CERTAIN COVENANTS
If Debt Securities are issued to a Trust or a trustee of such Trust in
connection with the issuance of Trust Preferred Securities by such Trust, CMS
Energy will covenant that it will not, and it will not cause any of its
subsidiaries to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
CMS Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu (in the case of Subordinated Debentures) with or junior (in the
case of Senior and Subordinated Debentures) to that Debt Security (other than
(a) any dividend, redemption, liquidation, interest, principal or guarantee
payment by CMS Energy where the payment is made by way of securities (including
capital stock) that rank pari passu with or junior to the securities on which
such dividend, redemption, interest, principal or guarantee payment is being
made, (b) payments under the Guarantees, (c) purchases of CMS Energy Common
Stock related to the issuance of CMS Energy Common Stock under any of CMS
Energy's benefit plans for its directors, officers or employees, (d) as a result
of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock and (e) the purchase of fractional
interests in shares of CMS Energy's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged) if at such time (i) there shall have occurred any event of which CMS
Energy has actual knowledge that (a) with the giving of notice or the lapse of
time, or both, would constitute an event of default under the indentures and (b)
in respect of which CMS Energy shall not have taken reasonable steps to cure,
(ii) CMS Energy shall be in default with respect to its payment of any
obligations under the Guarantees or (iii) CMS Energy shall have given notice of
its selection of an Extension Period as provided in the indentures with respect
to the Debt Securities and shall not have rescinded such notice, or such
Extension Period, or any extension thereof, shall be continuing. CMS Energy will
also covenant (i) for so long as Trust Preferred Securities are outstanding, not
to convert the Debt Securities except pursuant to a notice of conversion
delivered to the Conversion Agent (as defined in the indentures) by a holder of
Trust Preferred Securities, (ii) to maintain directly or indirectly 100%
ownership of the Common Securities, provided that certain successor which are
permitted pursuant to the indentures may succeed to CMS Energy's ownership of
the Common Securities, (iii) not to voluntarily terminate, wind-up or liquidate
such Trust, except (a) in connection with a distribution of the Debt Securities
to the holders of the Trust Preferred Securities in liquidation of such Trust or
(b) in connection with certain mergers, consolidations or amalgamations
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permitted by the Trust Agreement, (iv) to maintain the reservation for issuance
of the number of shares of CMS Energy Common Stock that would be required from
time to time upon the conversion of all the Debt Securities then outstanding,
(v) to use its reasonable efforts, consistent with the terms and provisions of
the Trust Agreement, to cause such Trust to remain classified as a grantor trust
and not as an association taxable as a corporation for United States federal
income tax purposes and (vi) to deliver shares of CMS Energy Common Stock upon
an election by the holders of the Trust Preferred Securities to convert such
Trust Preferred Securities into CMS Energy Common Stock.
As part of the Guarantees, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Trust Preferred Securities into or for CMS Energy Common Stock, Senior
Debentures or Subordinated Debentures.
CONVERSION RIGHTS
If the prospectus supplement provides, the Holders of Debt Securities may
convert such Debt Securities into CMS Energy Common Stock, as defined herein
(see "Description of Securities -- Common Stock"), at the option of the Holders
at the principal amount thereof, or of such portion thereof, at any time during
the period specified in the prospectus supplement, at the conversion price or
conversion rate specified in the prospectus supplement; except that, with
respect to any Debt Securities (or portion thereof) called for redemption, such
conversion right shall terminate at the close of business on the fifteenth day
prior to the date fixed for redemption of such Debt Security, unless CMS Energy
shall default in payment of the amount due upon redemption thereof.
The conversion privilege and conversion price or conversion rate will be
adjusted in certain events, including if CMS Energy:
- pays a dividend or makes a distribution in shares of CMS Energy
Common Stock;
- subdivides its outstanding shares of CMS Energy Common Stock into a
greater number of shares;
- combines its outstanding shares of CMS Energy Common Stock into a
smaller number of shares;
- pays a dividend or makes a distribution on its CMS Energy Common
Stock other than in shares of its CMS Energy Common Stock;
- issues by reclassification of its shares of CMS Energy Common Stock
any shares of its capital stock;
- issues any rights or warrants to all holders of shares of its CMS
Energy Common Stock entitling them (for a period expiring within 45
days, or such other period as may be specified in the prospectus
supplement) to purchase shares of CMS Energy Common Stock (or
Convertible Securities as defined in the indentures) at a price per
share less than the Average Market Price (as defined in the
indentures) per share for such CMS Energy Common Stock; or
- distributes to all holders of shares of its CMS Energy Common Stock
any assets or Debt Securities or any rights or warrants to purchase
securities, provided that no adjustment shall be made under the last
two bullet points above if the adjusted conversion price would be
higher than, or the adjusted conversion rate would be less than, the
conversion price or conversion rate, as the case may be, in effect
prior to such adjustment.
CMS Energy may reduce the conversion price or increase the conversion
rate, temporarily or otherwise, by any amount but in no event shall such
adjusted conversion price or conversion rate result in shares of CMS Energy
Common Stock being issuable upon conversion of the Debt Securities if converted
at the time of such adjustment at an effective conversion price per share less
than the par value of the CMS Energy Common Stock at the time such adjustment is
made. No adjustments in the conversion price or conversion rate need be made
unless the adjustment would require an increase or decrease of at least one
percent (1%) in the initial conversion price or conversion rate. Any adjustment
which is not made shall be carried forward and taken into account in any
subsequent adjustment. The foregoing conversion provisions may be modified to
the extent set forth in the prospectus supplement.
TRUST PREFERRED SECURITIES
GENERAL
Each Trust may issue, from time to time, Trust Preferred Securities having
terms described in the applicable prospectus supplement. The Trust Agreement of
each Trust will authorize the establishment of no more than one series of Trust
Preferred
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Securities, having such terms, including distributions, redemption, voting,
liquidation rights and such other preferred, deferred or other special rights or
such rights or restrictions as shall be set forth therein or otherwise
established by the relevant Trust Trustees. Reference is made to the prospectus
supplement relating to the Trust Preferred Securities for specific terms,
including:
- the distinctive designation and the number of Trust Preferred
Securities to be offered which will represent undivided beneficial
interests in the assets of the Trust;
- the annual distribution rate and the dates or date upon which such
distributions will be paid, provided, however distributions on the
Trust Preferred Securities will be paid quarterly in arrears to
holders of Trust Preferred Securities as of a record date on which
the Trust Preferred Securities are outstanding;
- whether holders' can convert the Trust Preferred Securities into
shares of CMS Energy Common Stock;
- whether distributions on Trust Preferred Securities would be
deferred during any deferral of interest payments on the Debt
Securities, provided, however that no such deferral, including
extensions, if any, may exceed 20 consecutive quarters nor extend
beyond the stated maturity date of the Debt Securities, and at the
end of any such deferrals, CMS Energy shall make all interest
payments then accrued or deferred and unpaid (including any
compounded interest);
- the amount of any liquidation preference;
- the obligation, if any, of the Trust to redeem Trust Preferred
Securities through the exercise of CMS Energy of an option on the
corresponding Debt Securities and the price or prices at which, the
period or periods within which and the terms and conditions upon
which Trust Preferred Securities shall be purchased or redeemed, in
whole or in part, pursuant to such obligation;
- the period or periods within which and the terms and conditions, if
any, including the price or prices or the rate or rates of
conversion or exchange and the terms and conditions of any
adjustments thereof, upon which the Trust Preferred Securities shall
be convertible or exchangeable at the option of the holder of the
Trust Preferred Securities or other property or cash;
- the voting rights, if any, of the Trust Preferred Securities in
addition to those required by law and in the Trust Agreement, or set
forth under a Guarantee (as defined below);
- the additional payments, if any, which the Trust will pay as a
distribution as necessary so that the net amounts reserved by the
Trust and distributable to the holders of the Trust Preferred
Securities, after all taxes, duties, assessments or governmental
charges of whatever nature (other than withholding taxes) have been
paid will not be less than the amount that would have been reserved
and distributed by the Trust, and the amount the holders of the
Trust Preferred Securities would have reserved, had no such taxes,
duties, assessments or governmental charges been imposed;
- the terms and conditions, if any, upon which the Debt Securities may
be distributed to holders of Trust Preferred Securities; and
- any other relative rights, powers, preferences, privileges,
limitations or restrictions of the Trust Preferred Securities not
inconsistent with the Trust Agreement or applicable law. All Trust
Preferred Securities offered hereby will be irrevocably guaranteed
by CMS Energy, on a senior or subordinated basis, as applicable, and
to the extent set forth below under "The Guarantees." Any applicable
federal income tax considerations applicable to any offering of the
Trust Preferred Securities will be described in the prospectus
supplement relating thereto. The aggregate number of Trust Preferred
Securities which the Trust shall have authority to issue will be
pursuant to the terms of the Trust Agreement.
EFFECT OF OBLIGATIONS UNDER THE DEBT SECURITIES
AND THE GUARANTEES
As set forth in the Trust Agreement, the sole purpose of the Trust is to
issue the Trust Securities evidencing undivided beneficial interests in the
assets of each of the Trusts, and to invest the proceeds from such issuance and
sale to acquire directly the Debt Securities from CMS Energy.
As long as payments of interest and other payments are made when due on
the Debt Securities, such payments will be sufficient to cover distributions and
payments due on the Trust Securities because of the following factors:
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- the aggregate principal amount of Debt Securities will be equal to
the sums of the aggregate stated liquidation amount of the Trust
Securities;
- the interest rate and the interest and other payment dates on the
Debt Securities will match the distribution rate and distribution
and other payment dates for the Trust Securities;
- CMS Energy shall pay all, and the Trust shall not be obligated to
pay, directly or indirectly, all costs, expenses, debt and
obligations of the Trust (other than with respect to the Trust
Securities); and
- the Trust Agreement further provides that CMS Energy Trustees shall
not take or cause or permit the Trust to, among other things, engage
in any activity that is not consistent with the purposes of the
Trust.
Payments of distributions (to the extent funds therefore are available)
and other payments due on the Trust Preferred Securities (to the extent funds
therefor are available) are guaranteed by CMS Energy as and to the extent set
forth under "The Guarantees" below. If CMS Energy does not make interest
payments on the Debt Securities purchased by the Trust, it is expected that the
Trust will not have sufficient funds to pay distributions on the Trust Preferred
Securities. The Guarantees do not apply to any payment of distributions unless
and until the Trust has sufficient funds for the payment of distributions and
other payments on the Trust Preferred Securities only if and to the extent that
CMS Energy has made a payment of interest or principal on the Debt Securities
held by the Trust as its sole asset. The Guarantees, when taken together with
CMS Energy's obligations under the Debt Securities and the Indenture and its
obligations under the Trust Agreement, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Trust securities), provide a full and unconditional guarantee of amounts on the
Trust Preferred Securities.
If CMS Energy fails to make interest or other payments on the Debt
Securities when due (taking account of any extension period), the Trust
Agreement provides a mechanism whereby the holders of the Trust Preferred
Securities may direct a Property Trustee to enforce its rights under the Debt
Securities. If a Property Trustee fails to enforce its rights under the Debt
Securities, a holder of Trust Preferred Securities may institute a legal
proceeding against CMS Energy to enforce a Property Trustee's rights under the
Debt Securities without first instituting any legal proceeding against a
Property Trustee or any other person or entity. Notwithstanding the foregoing,
if an event of default has occurred and is continuing under the Trust Agreement,
and such event is attributable to the failure of CMS Energy to pay interest or
principal on the Debt Securities on the date such interest or principal is
otherwise payable (or in the case of redemption on the redemption date), then a
holder of Trust Preferred Securities may institute legal proceedings directly
against CMS Energy to obtain payment. If CMS Energy fails to make payments under
the Guarantees, the Guarantees provide a mechanism whereby the holders of the
Trust Preferred Securities may direct a Guarantee Trustee to enforce its rights
thereunder. Any holder of Trust Preferred Securities may institute a legal
proceeding directly against CMS Energy to enforce a Guarantee Trustee's rights
under a Guarantee without first instituting a legal proceeding against the
Trust, the Guarantee Trustee, or any other person or entity.
THE GUARANTEES
Set forth below is a summary of information concerning the Guarantees
which will be executed and delivered by CMS Energy for the benefit of the
holders, from time to time, of the Trust Preferred Securities. Each Guarantee
will be qualified as an indenture under the Trust Indenture Act of 1939. Either
The Bank of New York, or J.P. Morgan Trust Company, N.A, each an independent
trustee, will act as indenture trustee under the Guarantees for the purpose of
compliance with the provisions of the Trust Indenture Act of 1939. This summary
does not purport to be complete and is subject in all respects to the provisions
of, and is qualified in its entirety by reference to, the Guarantees, which is
filed as an exhibit to the Registration Statement of which this prospectus forms
a part.
GENERAL
CMS Energy will irrevocably agree to pay in full, on a senior or
subordinated basis, as applicable, to the extent set forth herein, the Guarantee
Payments (as defined below) to the holders of the Trust Preferred Securities, as
and when due, regardless of any defense, right of set-off or counterclaim that
the Trust may have or assert other than the defense of payment. The following
payments with respect to the Trust Preferred Securities, to the extent not paid
by or on behalf of the Trust (the "Guarantee Payments"), will be subject to a
Guarantee: (i) any accumulated and unpaid distributions required to be paid on
the Trust Preferred Securities, to the extent that the Trust has funds on hand
available therefor at such time; (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption to the extent that the Trust
has funds on hand available therefor at such time; or (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Trust (unless the Debt
Securities are distributed to holders of the Trust Preferred Securities), the
lesser of (a) the liquidation distribution, to the extent that the Trust has
funds on hand available therefor at such time,
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and (b) the amount of assets of the Trust remaining available for distribution
to holders of Trust Preferred Securities. CMS Energy's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts of
CMS Energy to the holders of the Trust Preferred Securities or by causing the
Trust to pay such amount to such holders.
Such Guarantees will be irrevocable guarantees, on a senior or
subordinated basis, as applicable, of the Trust's obligations under the Trust
Preferred Securities, but will apply only to the extent that the Trust has funds
sufficient to make such payments, and are not guarantees of collection. If CMS
Energy does not make interest payments on the Debt Securities held by the Trust,
the Trust will not be able to pay distributions on the Trust Preferred
Securities and will not have funds legally available therefor.
CMS Energy has, through the Guarantees, the Trust Agreements, the Senior
Debentures, the Subordinated Debentures, the indentures and the Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed all
of the Trust's obligations under the Trust Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Trust Preferred
Securities.
CMS Energy has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities to
the same extent as the Guarantees, except that upon the occurrence and during
the continuation of a Trust Agreement Event of Default, holders of Trust
Preferred Securities shall have priority over holders of Common Securities with
respect to distributions and payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF CMS ENERGY
CMS Energy will covenant in each Guarantee that if and so long as (i) the
Trust is the holder of all the Debt Securities, (ii) a Tax Event (as defined in
the Guarantee) in respect of the Trust has occurred and is continuing and (iii)
CMS Energy has elected, and has not revoked such election, to pay Additional
Sums (as defined in the Guarantee) in respect of the Trust Preferred Securities
and Common Securities, CMS Energy will pay to the Trust such Additional Sums.
CMS Energy will also covenant that it will not, and it will not cause any of its
subsidiaries to (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of CMS
Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu (in the case of Subordinated Debentures with or junior in the
case of the Senior and Subordinated Debentures) to the Debt Securities (other
than (a) any dividend, redemption, liquidation, interest, principal or guarantee
payment by CMS Energy where the payment is made by way of securities (including
capital stock) that rank pari passu with or junior to the securities on which
such dividend, redemption, interest, principal or guarantee payment is being
made, (b) payments under the Guarantees, (c) purchases of CMS Energy Common
Stock related to the issuance of CMS Energy Common Stock under any of CMS
Energy's benefit plans for its directors, officers or employees, (d) as a result
of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock and (e) the purchase of fractional
interests in shares of CMS Energy's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged) if at such time (i) there shall have occurred any event of which CMS
Energy has actual knowledge that (a) with the giving of notice or the lapse of
time, or both, would constitute an event of default and (b) in respect of which
CMS Energy shall not have taken reasonable steps to cure, (ii) CMS Energy shall
be in default with respect to its payment of any obligations under the Guarantee
or (iii) CMS Energy shall have given notice of its selection of an Extension
Period as provided in the indentures with respect to the Debt Securities and
shall not have rescinded such notice, or such Extension Period, or any extension
thereof, shall be continuing. CMS Energy also will covenant to (i) for so long
as Trust Preferred Securities are outstanding, not convert Debt Securities
except pursuant to a notice of conversion delivered to the Conversion Agent by a
holder of Trust Preferred Securities, (ii) maintain directly or indirectly 100%
ownership of the Common Securities, provided that certain successors which are
permitted pursuant to the indentures may succeed to CMS Energy's ownership of
the Common Securities, (iii) not voluntarily terminate, wind-up or liquidate the
Trust, except (a) in connection with a distribution of the Debt Securities to
the holders of the Trust Preferred Securities in liquidation of the Trust or (b)
in connection with certain mergers, consolidations or amalgamations permitted by
the Trust Agreement, (iv) maintain the reservation for issuance of the number of
shares of CMS Energy Common Stock that would be required from time to time upon
the conversion of all the Debt Securities then outstanding, (v) use its
reasonable efforts, consistent with the terms and provisions of the Trust
Agreement, to cause the Trust to remain classified as a grantor trust and not as
an association taxable as a corporation for United States federal income tax
purposes and (vi) deliver shares of CMS Energy Common Stock upon an election by
the holders of the Trust Preferred Securities to convert such Trust Preferred
Securities into CMS Energy Common Stock.
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As part of the Guarantees, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Trust Preferred Securities into or for CMS Energy Common Stock, Senior
Debentures or Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely
affect the rights of holders of the Trust Preferred Securities (in which case no
vote will be required), the Guarantees may not be amended without the prior
approval of the holders of not less than a majority in aggregate liquidation
amount of such outstanding Trust Preferred Securities. All guarantees and
agreements contained in the Guarantees shall bind the successors, assigns,
receivers, trustees and representatives of CMS Energy and shall inure to the
benefit of the holders of the Trust Preferred Securities then outstanding.
TERMINATION OF THE GUARANTEES
The Guarantees will terminate and be of no further force and effect upon
full payment of the redemption price of the Trust Preferred Securities, upon
full payment of the amounts payable upon liquidation of the Trust, upon the
distribution, if any, of CMS Energy Common Stock to the holders of Trust
Preferred Securities in respect of the conversion of all such holders' Trust
Preferred Securities into CMS Energy Common Stock or upon distribution of the
Debt Securities to the holders of the Trust Preferred Securities in exchange for
all of the Trust Preferred Securities. The Guarantees will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of Trust Preferred Securities must restore payment of any sums paid under such
Trust Preferred Securities or the Guarantees.
EVENTS OF DEFAULT
An event of default under a Guarantee will occur upon the failure of CMS
Energy to perform any of its payment or other obligations thereunder. The
holders of a majority in aggregate liquidation amount of the Trust Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to a Guarantee Trustee in respect of a
Guarantee or to direct the exercise of any trust or power conferred upon a
Guarantee Trustee under the Guarantees.
If a Guarantee Trustee fails to enforce a Guarantee, any holder of the
Trust Preferred Securities may institute a legal proceeding directly against CMS
Energy to enforce its rights under such Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person or
entity. In addition, any record holder of Trust Preferred Securities shall have
the right, which is absolute and unconditional, to proceed directly against CMS
Energy to obtain Guarantee Payments, without first waiting to determine if
the Guarantee Trustee has enforced a Guarantee or instituting a legal proceeding
against the Trust, the Guarantee Trustee or any other person or entity. CMS
Energy has waived any right or remedy to require that any action be brought just
against the Trust, or any other person or entity before proceeding directly
against CMS Energy.
CMS Energy, as guarantor, is required to file annually with each Guarantee
Trustee a certificate as to whether or not CMS Energy is in compliance with all
the conditions and covenants applicable to it under the Guarantees.
STATUS OF THE GUARANTEES
The Guarantees will constitute unsecured obligations of CMS Energy and
will rank equal to or subordinate and junior in right of payment to all other
liabilities of CMS Energy, as applicable. The Guarantees will rank pari passu
with or senior to, as applicable, any guarantee now or hereafter entered into by
CMS Energy in respect of any preferred or preference stock of any affiliate of
CMS Energy.
The Guarantees will constitute a guarantee of payment and not of
collection which means that the guaranteed party may institute a legal
proceeding directly against the Guarantor to enforce its rights under the
Guarantee without first instituting a legal proceeding against any other person
or entity. The Guarantees will be held for the benefit of the holders of the
Trust Preferred Securities. The Guarantees will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Trust or
upon distribution of the Debt Securities to the holders of the Trust Preferred
Securities. The Guarantees do not place a limitation on the amount of additional
indebtedness that may be incurred by CMS Energy or any of its subsidiaries.
23
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
CMS Energy may issue Stock Purchase Contracts, representing contracts
obligating holders to purchase from CMS Energy, and CMS Energy to sell to the
holders, a specified number of shares of CMS Energy Common Stock at a future
date or dates. The price per share of CMS Energy Common Stock may be fixed at
the time the Stock Purchase Contracts are issued or may be determined by
reference to a specific formula set forth in the Stock Purchase Contracts. The
Stock Purchase Contracts may be issued separately or as part of Stock Purchase
Units consisting of a Stock Purchase Contract and Senior Debentures,
Subordinated Debentures, Trust Preferred Securities or debt obligations of third
parties, including U.S. Treasury securities, securing the holders' obligations
to purchase the Common Stock under the Stock Purchase Contracts. The Stock
Purchase Contracts may require CMS Energy to make periodic payments to the
holders of the Stock Purchase Units or visa versa, and such payments may be
unsecured or refunded on some basis. The Stock Purchase Contracts may require
holders to secure their obligations thereunder in a specified manner.
The applicable prospectus supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units. The description in the prospectus
supplement will not purport to be complete and will be qualified in its entirety
by reference to the Stock Purchase Contracts, and, if applicable, collateral
arrangements and depositary arrangements, relating to such Stock Purchase
Contracts or Stock Purchase Units.
PLAN OF DISTRIBUTION
CMS Energy and/or the Trusts may sell the Offered Securities: (i) through
the solicitation of proposals of underwriters or dealers to purchase the Offered
Securities; (ii) through underwriters or dealers on a negotiated basis; (iii)
directly to a limited number of purchasers or to a single purchaser; or (iv)
through agents. The prospectus supplement with respect to any Offered Securities
will set forth the terms of such offering, including the name or names of any
underwriters, dealers or agents; the purchase price of the Offered Securities
and the proceeds to CMS Energy and/or the Trust from such sale; any underwriting
discounts and commissions and other items constituting underwriters'
compensation; any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers and any securities exchange on which
such Offered Securities may be listed. Any initial public offering price,
discounts or concessions allowed or reallowed or paid to dealers may be changed
from time to time.
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Offered Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Offered Securities will be
named in the prospectus supplement relating to such offering and, if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of such prospectus supplement. Unless otherwise set forth
in the prospectus supplement relating thereto, the obligations of the
underwriters to purchase the Offered Securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all the
Offered Securities if any are purchased.
CMS Energy and/or the Trusts may sell Offered Securities to dealers as
principals. The dealers may then resell such Offered Securities to the public at
varying prices to be determined by such dealers at the time of resale. The names
of the dealers and the terms of the transaction will be set forth in the
prospectus supplement relating thereto.
The Offered Securities may be sold directly by CMS Energy and/or the
Trusts to institutional investors or others, who may be deemed to be
underwriters within the meaning of the Securities Act with respect to any resale
thereof. The terms of any such sales will be described in the prospectus
supplement relating thereto.
The CMS Energy Common Stock may be offered other than through the
facilities of a national securities exchange and other than to or through a
market maker other than on an exchange.
Agents, dealers and underwriters may be entitled under agreements with CMS
Energy and/or the Trusts to indemnification by CMS Energy and/or the Trusts
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments which such agents, dealers or
underwriters may be required to make in respect thereof. Agents, dealers and
underwriters may be customers of, engage in transactions with, or perform
services for CMS Energy and/or the Trusts in the ordinary course of business.
24
The Offered Securities may also be offered and sold, if so indicated in
the applicable prospectus supplement, in connection with a remarketing upon
their purchase, in accordance with a redemption or repayment pursuant to their
terms, or otherwise, by one or more firms ("remarketing firms"), acting as
principals for their own accounts or as agents for CMS Energy and/or the Trusts.
Any remarketing firm will be identified and the terms of its agreement, if any,
with its compensation will be described in the applicable prospectus supplement.
Remarketing firms may be deemed to be underwriters, as such term is defined in
the Securities Act, in connection with the Offered Securities remarketed
thereby. Remarketing firms may be entitled under agreements which may be entered
into with CMS Energy and/or the Trusts to indemnification or contribution by CMS
Energy and/or the Trusts against certain civil liabilities, including
liabilities under the Securities Act, and may be customers of, engage in
transactions or perform services for CMS Energy and its subsidiaries in the
ordinary course of business.
The Offered Securities may or may not be listed on a national securities
exchange. Reference is made to the prospectus supplement with regard to such
matter. No assurance can be given that there will be a market for any of the
Offered Securities.
We may engage J.P. Morgan Securities Inc. ("JPMS") or Brinson Patrick
Securities Corporation ("Brinson") (JPMS and Brinson collectively, the "Agents")
to act as agent or principal for offerings from time to time of shares of CMS
Energy Common Stock in one or more placements pursuant to the terms of a
distribution agreement between us and either JPMS or Brinson. The terms of sales
to or through the Agents pursuant to a distribution agreement will be set out in
more detail in a prospectus supplement to this prospectus. When acting as agent,
the Agents will use commercially reasonable efforts to sell the shares pursuant
to the terms agreed to with us, including the number of shares to be offered in
the placement and any minimum price below which sales may not be made. The
Agents, in their capacity as agent or principal, could arrange for or make sales
in privately negotiated transactions, at the market in the existing trading
market for CMS Energy Common Stock, including sales made to or through a market
maker or through an electronic communications network, or in any other manner
that may be deemed to be an "at-the-market offering" as defined in Rule 415
promulgated under the Securities Act and/or any other method permitted by law.
CMS Energy Common Stock sold through the Agents in any at-the-market
offerings will be sold at prices related to the prevailing market price for such
securities, and therefore exact figures regarding proceeds which will be raised
or commissions to be paid are impossible to determine. We will report at least
quarterly the number of shares of CMS Energy Common Stock sold to or through the
Agents in at-the-market offerings, the net proceeds to us and the compensation
paid by us to the Agents in connection with such sales of CMS Energy Common
Stock. Pursuant to the terms of a distribution agreement with the Agents or any
other distribution agreement we may enter into, we also may agree to sell, and
the relevant underwriters or agents may agree to solicit offers to purchase,
blocks of CMS Energy Common Stock or other securities. The total number of
shares that we may sell in at-the-market offerings will be disclosed in a
prospectus supplement to this prospectus.
In connection with the offering of the securities, certain underwriters
and selling group members and their respective affiliates, may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the applicable securities. These transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M promulgated by
the SEC pursuant to which these persons may bid for or purchase securities for
the purpose of stabilizing their market price.
If indicated in the applicable prospectus supplement, we will authorize
underwriters, dealers or agents to solicit offers by institutional investors to
purchase securities from us pursuant to contracts providing for payment and
delivery at a future date. In all cases, these purchasers must be approved by
us. Unless otherwise set forth in the applicable prospectus supplement, the
obligations of any purchaser under any of these contracts will not be subject to
any conditions, except that the purchase of the securities must not at the time
of delivery be prohibited under the laws of any jurisdiction to which that
purchaser is subject and if securities also are being sold to underwriters, we
must have sold to these underwriters the securities not subject to delayed
delivery. Underwriters and other agents will not have any responsibility in
respect of the validity or performance of these contracts.
Under the securities laws of some states, the securities registered by the
registration statement that includes this prospectus may be sold in those states
only through registered or licensed brokers or dealers. Any person participating
in the distribution of the securities registered under the registration
statement that includes this prospectus will be subject to applicable provisions
of the Securities Exchange Act of 1934, and the applicable rules and regulations
of the SEC, including, among others, Regulation M noted above, which may limit
the timing of purchases and sales of any of the securities by any such person.
Furthermore, Regulation M may restrict the ability of any person engaged in the
distribution of the securities to engage in market-making activities with
respect to the securities. These restrictions may affect the marketability of
the securities and the ability of any person or entity to engage in
market-making activities with respect to the securities.
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We may enter into derivative transactions with third parties, or sell
securities not covered by this prospectus to third parties in privately
negotiated transactions. If the applicable prospectus supplement indicates, in
connection with those derivatives, the third parties may sell securities covered
by this prospectus and the applicable prospectus supplement, including in short
sale transactions. If so, the third parties may use securities pledged by us or
borrowed from us or others to settle those sales or to close out any related
open borrowings of stock, and may use securities received from us in settlement
of those derivatives to close out any related open borrowings of stock. The
third parties in such sale transactions will be underwriters and, if not
identified in this prospectus, will be identified in the applicable prospectus
supplement (or a post-effective amendment).
We or one of our affiliates may loan or pledge securities to a financial
institution or other third party that in turn may sell the securities using this
prospectus. Such financial institution or third party may transfer its short
position to investors in our securities or in connection with a simultaneous
offering of other securities offered by this prospectus or otherwise.
LEGAL OPINIONS
Opinions as to the legality of certain of the Offered Securities will be
rendered for CMS Energy by Robert C. Shrosbree, Esq., Assistant General Counsel
for CMS Energy. Certain matters of Delaware law relating to the validity of the
Trust Preferred Securities will be passed upon on behalf of the Trusts by
Skadden, Arps, Slate, Meagher & Flom LLP, special Delaware counsel to the
Trusts. Certain United States Federal income taxation matters may be passed upon
for CMS Energy and the Trust by either Theodore Vogel, tax counsel for CMS
Energy, or by special tax counsel to CMS Energy and of the Trust, who will be
named in the prospectus supplement. Certain legal matters with respect to
Offered Securities will be passed upon by counsel for any underwriters, dealers
or agents, each of whom will be named in the related prospectus supplement.
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 reports of Price Waterhouse,
independent accountants, for Jorf Lasfar and the reports of
PricewaterhouseCoopers LLP, independent registered public accounting firm, for
2003 and 2002 and Arthur Andersen LLP, (who have ceased operations) for 2001 for
the MCV Partnership. Such consolidated financial statements and schedule are
incorporated herein by reference in reliance upon such reports given on the
authority of such firms as experts in accounting and auditing.
The financial statements of Emirates CMS Power Company PJSC appearing in
CMS'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 by reference in this prospectus and registration statement have
been so included in reliance on the report of Price Waterhouse, independent
accountants for Jorf Lasfar, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of the MCV Partnership as of and for
the years ended December 31, 2003 and 2002 incorporated by reference in this
prospectus and registration statement have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent registered public accounting
firm, given on the authority of said firm as experts in auditing and accounting.
The audited consolidated financial statements of the MCV Partnership for
the year ended December 31, 2001, incorporated by reference in this
prospectus and registration statement, 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 of 1933. 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 of 1933 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.
26
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$150,000,000
CMS ENERGY CORPORATION
6.30% SENIOR NOTES DUE 2012
[CMS ENERGY CORPORATION LOGO]
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PROSPECTUS SUPPLEMENT
JANUARY 13, 2005
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CITIGROUP
DEUTSCHE BANK SECURITIES
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BNP PARIBAS
WEDBUSH MORGAN SECURITIES INC.
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