Rule 424(b)3
Registration Statement No. 333-119256
PROSPECTUS
[CMS ENERGY LOGO]
5,000,000 SHARES
CMS ENERGY CORPORATION
4.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
(liquidation preference $50.00 per share)
We issued 5,000,000 shares of our 4.50% Cumulative Convertible Preferred
Stock (the "OLD PREFERRED STOCK") in a private placement during the fourth
quarter of 2003. In December of 2004 we completed an exchange offer to exchange
shares of Old Preferred Stock for shares of 4.50% Cumulative Convertible
Preferred Stock, Series B (the "PREFERRED STOCK"). Holders of 5,000,000 shares
of Old Preferred Stock tendered their shares for exchange and received 5,000,000
shares of Preferred Stock. Under this prospectus, the selling securityholders
named herein or in any prospectus supplements hereto may offer and sell their
shares of Preferred Stock and the shares of our common stock issuable upon
conversion thereof.
Each share of the Preferred Stock has a liquidation preference of $50.00
and is convertible into cash and 5.0541 shares of our common stock based on a
conversion price of $9.893 per share, subject to specified adjustments. Each
holder of Preferred Stock has the option to convert the Preferred Stock into our
common stock in the following circumstances: (1) the price of our common stock
issuable upon conversion reaches specified thresholds described in this
prospectus; (2) upon the occurrence of specified corporate transactions as
described in this prospectus; or (3) subject to certain exceptions, during the
five Business Day period after any ten consecutive trading-day period in which
the trading price per share of Preferred Stock for each day of the ten
trading-day period was less than 95% of the product of the closing sale price
per share of our common stock and the applicable conversion rate of such share
of Preferred Stock. On or after December 5, 2008, if the closing price of our
common stock exceeds 130% of the applicable conversion price for 20 trading days
during any consecutive 30 trading-day period (including the last trading day of
such period), we may at our option cause the Preferred Stock to be automatically
converted into shares of our common stock at the then applicable conversion
price.
The applicable conversion rate will increase for holders converting in
connection with a corporate transaction that is a fundamental change other than
a fundamental change relating to the composition of our Board of Directors and
which occurs prior to December 5, 2008. Under certain circumstances, in a cash
take-over transaction by a public company we may elect to change the conversion
right so that the holders of the Preferred Stock will be able to convert shares
of Preferred Stock into cash and shares of the public acquirer's common stock.
The Preferred Stock is not redeemable by us at any time.
The annual dividend on each share of Preferred Stock is $2.25 and is
payable quarterly in cash, in arrears, on each March 1, June 1, September 1 and
December 1, commencing March 1, 2005, when, as and if declared by the Board of
Directors.
Our common stock is listed on the New York Stock Exchange under the symbol
"CMS." The last reported price of the common stock on January 28, 2005 was
$10.35 per share.
INVESTING IN THE OLD AND PREFERRED STOCK INVOLVES RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 16.
We will not receive any of the proceeds from the sale by any of the
selling securityholders of the Preferred Stock or the shares of our common
stock. The Preferred Stock and the shares of our common stock may be offered in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices. The timing and amount of any sale are within the
sole discretion of the selling securityholders. In addition, our common stock
may be offered from time to time through ordinary brokerage transactions on the
New York Stock Exchange. See "Plan of Distribution." The selling securityholders
may be deemed to be "underwriters" as defined in the Securities Act of 1933, as
amended (the "SECURITIES ACT"). Any profits realized by the selling
securityholders may be deemed to be underwriting commissions. If the selling
securityholders use any broker-dealers, any commission paid to broker-dealers
and, if broker-dealers purchase any Preferred Stock or shares of common stock as
principals, any profits received by such broker-dealers on the resale of the
Preferred Stock or shares of common stock may be deemed to be underwriting
discounts or commissions under the Securities Act.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is February 3, 2005
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT OR TO MAKE ANY REPRESENTATIONS ABOUT US OR THE
TRANSACTIONS WE DISCUSS IN THIS PROSPECTUS. IF YOU RECEIVE INFORMATION ABOUT
THESE MATTERS THAT IS NOT INCLUDED IN THIS PROSPECTUS, YOU MUST NOT RELY ON THAT
INFORMATION. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF
THIS DOCUMENT.
TABLE OF CONTENTS
PAGE
----
Where You Can Find More Information .................................... 2
Forward-Looking Statements and Information ............................. 3
Summary ................................................................ 5
Risk Factors ........................................................... 16
Use of Proceeds ........................................................ 26
Ratio of Earnings to Combined Fixed Charges and Preference Dividends ... 26
Price Range of Our Common Stock and Dividend Policy .................... 27
CMS Energy ............................................................. 28
Description of the Preferred Stock ..................................... 32
Registration Rights .................................................... 46
Description of our Capital Stock ....................................... 48
Material United States Federal Income Tax Considerations ............... 55
Selling Securityholders ................................................ 60
Plan of Distribution ................................................... 62
Legal Matters .......................................................... 64
Experts ................................................................ 64
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC under
File No. 1-9513. Our SEC filings are available over the Internet at the SEC's
web site at http://www.sec.gov. You may also read and copy any document we file
at the SEC's public reference room at 450 Fifth Street N.W., Room 1024,
Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms and their copy charges. You may also
inspect our SEC reports and other information at the New York Stock Exchange, 20
Broad Street, New York, New York 10005. You can find additional information
about us, including our Annual Report on Form 10-K/A (Amendment No. 2) for the
year ended December 31, 2003 and our Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, on our Web
site at http://www.cmsenergy.com. The information on this Web site is not a part
of this prospectus.
We are "incorporating by reference" information into this prospectus. This
means that we are disclosing important information by referring to another
document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this prospectus, except for any information
superseded by information in this prospectus. This prospectus incorporates by
reference the documents set forth below that we have previously filed with the
SEC. These documents contain important information about us and our finances.
- Annual Report on Form 10-K/A (Amendment No. 2) for the year ended
December 31, 2003 filed on December 16, 2004
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
filed on May 7, 2004, Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004 filed on August 6, 2004 and Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004 filed on November
4, 2004
- Current Reports on Form 8-K filed on January 22, 2004, March 18,
2004, April 14, 2004, June 3, 2004, August 20, 2004, August 31,
2004, September 1, 2004, October 6, 2004, October 12, 2004, October
13, 2004, October 19, 2004, November 9, 2004, December 6, 2004,
December 8, 2004, December 13, 2004, December 22, 2004, January 12,
2005, January 14, 2005, January 20, 2005 and January 27, 2005.
2
The documents filed by us with the SEC pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 (the "EXCHANGE ACT") after
the date of this prospectus and prior to the termination of this offering are
also incorporated by reference into this prospectus. . Any statement contained
in such document will be deemed to be modified or superseded for purposes of
this prospectus to the extent that a statement contained in this prospectus or
any other subsequently filed document modifies or supersedes such statement.
We will provide, upon your oral or written request, a copy of any or all
of the information that has been incorporated by reference in this prospectus
but not delivered with this prospectus. You may request a copy of these filings
at no cost by writing or telephoning us at the following address:
CMS Energy Corporation
One Energy Plaza
Jackson, Michigan 49201
Tel: (517) 788-0550
Attention: Office of the Secretary
FORWARD-LOOKING STATEMENTS AND INFORMATION
This prospectus contains forward-looking statements as defined in Rule 175
under the Securities Act and Rule 3b-6 under the Exchange Act and relevant legal
decisions. Our intention with the use of such words as "may," "could,"
"anticipates," "believes," "estimates," "expects," "intends," "plans" and other
similar words is to identify forward-looking statements that involve risk and
uncertainty. We designed this discussion of potential risks and uncertainties to
highlight important factors that may impact our business and financial outlook.
We have no obligation to update or revise forward-looking statements regardless
of whether new information, future events or any other factors affect the
information contained in the statements. These forward-looking statements are
subject to various factors that could cause our actual results to differ
materially from the results anticipated in these statements. Such factors
include our inability to predict and/or control:
- capital and financial market conditions, including the price of our
common stock and the effect of such market conditions on our pension
plan, interest rates and access to the capital markets, as well as
availability of financing to us, Consumers Energy Company, our
wholly-owned subsidiary ("CONSUMERS"), or any of our affiliates, and
the energy industry;
- market perception of the energy industry, us and Consumers, or any
of our affiliates;
- credit ratings of us, Consumers or any of our affiliates;
- currency fluctuations, transfer restrictions and exchange controls;
- factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs,
environmental incidents or electric transmission or gas pipeline
system constraints;
- international, national, regional and local economic, competitive
and regulatory policies, conditions and developments;
- adverse regulatory or legal decisions, including those related to
environmental laws and regulations;
- the extent of favorable regulatory treatment and regulatory lag
concerning a number of significant questions presently before the
Michigan Public Service Commission ("MPSC") relating to the Customer
Choice Act, including:
- recovery of stranded costs incurred due to customers choosing
alternative energy suppliers;
- recovery of Clean Air Act costs and other environmental and
safety-related expenditures;
- power supply and natural gas supply costs when energy supply
and oil prices are increasing rapidly;
3
- timely recognition in rates of additional equity investments
in Consumers; and
- adequate and timely recovery of additional electric and gas
rate-based expenditures;
- the impact of adverse natural gas prices on the Midland Cogeneration
Venture Limited Partnership (the "MCV PARTNERSHIP") investment and
regulatory decisions that limit our recovery of capacity and fixed
energy payments;
- federal regulation of electric sales and transmission of
electricity, including re-examination by federal regulators of the
market-based sales authorizations by which our subsidiaries
participate in wholesale power markets without price restrictions;
- energy markets, including the timing and extent of changes in
commodity prices for oil, coal, natural gas, natural gas liquids,
electricity and certain related products due to lower or higher
demand, shortages, transportation problems or other developments;
- the generally accepted accounting principles requirement that we
utilize mark-to-market accounting on certain of our energy commodity
contracts, and possibly other types of contracts in the future,
which may have, in any given period, a significant positive or
negative effect on earnings, which could change dramatically or be
eliminated in subsequent periods or could add to earnings
volatility;
- potential disruption, expropriation or interruption of facilities or
operations due to accidents, war, terrorism or changing political
conditions and the ability to obtain or maintain insurance coverage
for such events;
- nuclear power plant performance, decommissioning, policies,
procedures, incidents and regulation, including the availability of
spent nuclear fuel storage;
- technological developments in energy production, delivery and usage;
- achievement of capital expenditure and operating expense goals;
- changes in financial or regulatory accounting principles or
policies;
- outcome, cost and other effects of legal and administrative
proceedings, settlements, investigations and claims, including
particularly claims, damages and fines resulting from round-trip
trading and inaccurate commodity price reporting, including
investigations by the U.S. Department of Justice regarding
round-trip trading and price reporting;
- limitations on our ability to control the development or operation
of projects in which our subsidiaries have a minority interest;
- disruptions in the normal commercial insurance and surety bond
markets that may increase costs or reduce traditional insurance
coverage, particularly terrorism and sabotage insurance and
performance bonds;
- the efficient sale of non-strategic or under-performing domestic or
international assets and discontinuation of certain operations;
- other business or investment considerations that may be disclosed
from time to time in our or Consumers' SEC filings or in other
publicly issued written documents;
- other uncertainties that are difficult to predict, and many of which
are beyond our control; and
- the factors identified under "Risk Factors" beginning on page 16.
These are important factors, but not necessarily all of the important
factors, that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, us or our
subsidiaries.
4
SUMMARY
This summary may not contain all the information that may be important to
you. You should read this prospectus and the documents incorporated by reference
into this prospectus in their entirety before making an investment decision. The
terms "CMS," "CMS ENERGY," "OUR," "US" and "WE" as used in this document refer
to CMS Energy Corporation and its subsidiaries as a combined entity, except
where it is made clear that such term means only CMS Energy Corporation.
In this document, "BCF" means billion cubic feet, "GWH" means
gigawatt-hour, "KWH" means kilowatt-hour and "MW" means megawatts.
CMS ENERGY CORPORATION
CMS Energy, formed in Michigan in 1987, is an integrated energy holding
company operating through subsidiaries in the United States and in selected
markets around the world. Its two principal wholly-owned subsidiaries are
Consumers and CMS Enterprises Company ("ENTERPRISES"). Consumers is a public
utility that provides natural gas and/or electricity to almost 6.5 million of
Michigan's 10 million residents and serves customers in 61 of the 68 counties in
Michigan's Lower Peninsula. Enterprises, through subsidiaries, is engaged in
several energy businesses in the United States and in selected international
markets.
Our assets and services include: electric and natural gas utility
operations; independent power production; natural gas transmission, storage and
processing; and international energy distribution. Our principal businesses are:
- Consumers' electric utility, which owns and operates 30 electric
generating plants with an aggregate of 6,435 MW of capacity and
serves 1.77 million customers in Michigan's Lower Peninsula;
- Consumers' gas utility, which owns and operates over 27,463 miles of
transmission and distribution lines throughout the Lower Peninsula
of Michigan, providing natural gas to 1.67 million customers;
- CMS Generation Co. ("CMS GENERATION"), a wholly-owned subsidiary of
Enterprises that has ownership interests in independent power plants
in operation with 6,766 gross MW (3,157 net MW) throughout the
United States and abroad. The plants are located in the U.S.,
Argentina, Chile, Ghana, India, Jamaica, Morocco and the United Arab
Emirates. CMS Generation also has ownership interests in additional
plants totaling approximately 323 gross MW (69 net MW) that are
under construction or advanced stages of development. These plants
include the Saudi Petrochemical Company power plant, which is under
construction in the Kingdom of Saudi Arabia; and
- CMS Gas Transmission Company ("CMS GAS TRANSMISSION"), a
wholly-owned subsidiary of Enterprises that owns an interest in and
operates natural gas pipelines in various locations in North America
(aggregating 265 miles) and South America (aggregating 4,330 miles).
The pipelines are located in the U.S., Argentina and Chile. It also
owns gathering systems and processing facilities.
In 2003, we had consolidated operating revenue of approximately $5.5
billion.
Our principal executive offices are located at One Energy Plaza, Jackson,
Michigan 49201 and our telephone number is (517) 788-0550.
5
RECENT DEVELOPMENTS
THIRD QUARTER RESULTS OF OPERATIONS
2004 2003 CHANGE
----- ------ --------
(UNAUDITED, DOLLARS IN MILLIONS
THREE MONTHS ENDED SEPTEMBER 30, 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.
6
2004 2003 CHANGE
----- ------ --------
(UNAUDITED, DOLLARS IN MILLIONS
NINE MONTHS ENDED SEPTEMBER 30, 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.
7
STRANDED COST ORDER
On November 23, 2004, the MPSC issued an order authorizing Consumers to
collect its combined 2002 and 2003 "net" stranded costs under the Customer
Choice Act, of approximately $63.2 million. The amount, including interest at an
annual rate of 7%, will be collected through use of a stranded cost recovery
charge of 1.2 mills per kilowatt-hour starting in December 2004 until fully
collected. The order also approved a methodology for the calculation of stranded
costs.
2003 GAS RATE CASE AND 2001 GAS DEPRECIATION CASE
On December 2, 2004, the MPSC issued orders in Consumers' rehearing
requests stemming from MPSC orders issued October 14, 2004 regarding Consumers'
2003 gas rate case and the 2001 gas depreciation case.
Regarding the 2003 gas rate case, the MPSC issued an order clarifying the
method of computing Consumers' rate of return on common equity, for purposes of
whether the rate of return on common equity exceeds the authorized 11.4% rate,
consistent with Consumers' rehearing request. The MPSC held that (i) the actual
current level of equity invested in Consumers should be used and (ii) actual
(not weather-normalized) results should be used for the rate of return
calculation required by the October 14, 2004 order.
Regarding the 2001 gas depreciation case, the MPSC issued an order
approving Consumers' rehearing request that the book depreciation rates be
restored to the levels set forth in the MPSC's December 18, 2003 interim gas
rate relief order, effective and retroactive to October 14, 2004.
ISSUANCE AND SALE OF SECURITIES
On December 13, 2004, CMS Energy issued and sold $287.5 million principal
amount of its 2.875% Convertible Senior Notes due 2024 pursuant to an effective
shelf registration statement and a Prospectus Supplement dated December 8, 2004
to a Prospectus dated September 21, 2004. CMS Energy used the proceeds to redeem
the $180 million principal amount of its outstanding 7% Extendible Tenor
Rate-Adjusted Securities ("X-TRAS"), plus accrued but unpaid interest and any
associated option payment, and for general corporate purposes.
On December 13, 2004, Consumers issued and sold $225 million principal
amount of its 5.00% First Mortgage Bonds due 2015 pursuant to an effective shelf
registration statement and a Prospectus Supplement dated December 8, 2004 to a
Prospectus dated December 1, 2004. Consumers used the proceeds (i) to redeem the
aggregate outstanding balance of $207.7 million of its 7.375% First Mortgage
Bonds due 2023, (ii) to pay the attendant call premium of $6,893,563, (iii) to
pay accrued interest to the redemption date and (iv) for general corporate
purposes.
On January 19, 2005, CMS Energy issued and sold $150 million principal
amount of its 6.30% Senior Notes due 2012 pursuant to an effective shelf
registration statement and a Prospectus Supplement dated January 13, 2005 to a
Prospectus dated September 21, 2004. CMS Energy used the proceeds to redeem its
outstanding general term notes. The outstanding general term notes being
redeemed have various interest rates ranging from 6 percent to 7.25 percent and
maturities ranging from February 2005 through April 2009. The average interest
rate for these outstanding general term notes is 6.88 percent and the average
maturity is 2.2 years.
On January 20, 2005, Consumers issued and sold $250 million principal
amount of its 5.15% First Mortgage Bonds due 2017 pursuant to an effective shelf
registration statement and a Prospectus Supplement dated January 13, 2005 to a
Prospectus dated December 1, 2004. Consumers used the proceeds (i) to redeem the
aggregate outstanding balance of $70 million of its 8.36 percent Trust
Originated Preferred Securities due 2015, (ii) to redeem the aggregate
outstanding balance of $120 million of its 8.20 percent Trust Originated
Preferred Securities due 2027 and (iii) to pay off its $60 million term loan due
November 2006 with a current floating interest rate of 3.79 percent.
CMS ENERGY ASSET IMPAIRMENTS
An affiliate of CMS Energy entered into a sale and purchase agreement on
February 25, 2004 to sell its 33% interest in the GVK facility, a 235 megawatt
power plant located in India, for approximately $25 million. CMS Energy expects
to complete this sale in the first quarter of 2005 and estimates it will record
an impairment resulting from the sale in the amount of approximately $29.5
million, with a resultant charge to its income statement of approximately $19
million, net of deferred income taxes, in the fourth quarter of 2004.
8
CMS Energy expects to sell its interest in the Scudder Latin American
Power Fund in the first quarter of 2005. CMS Energy estimates it will record an
impairment resulting from this sale in the amount of approximately $5 million,
with a resultant charge to its income statement of approximately $3.2 million,
net of deferred income taxes, in the fourth quarter of 2004.
APPROVAL OF RESOURCE CONSERVATION PLAN
Consumers purchases power under a long term contract from a natural
gas-fueled combined-cycle cogeneration facility (the "MCV FACILITY") operated by
the MCV Partnership, in which Consumers has a 49 percent interest. In February
2004, Consumers filed with the MPSC a request for approval of a resource
conservation plan (the "RCP"). On January 25, 2005, the MPSC issued an order
approving the RCP, with modifications. The terms of the order are consistent
with Consumers' expectations in the RCP proceeding. The purpose of the RCP is to
help conserve natural gas and thereby improve Consumers' investment in the MCV
Partnership as discussed below, without raising the costs paid by Consumers'
electric customers. The RCP allows for a change in the operation of the MCV
Facility to dispatch it on the basis of natural gas market prices. This change
will reduce the MCV Facility's production of electricity and consumption of
natural gas by an estimated 30 to 40 bcf. The substantial MCV Facility fuel cost
savings will be used first to offset fully the cost of replacement power to
Consumers' electric customers. Second, $5 million annually will be used to fund
a renewable energy program. Remaining savings will be split between the MCV
Partnership and Consumers. Consumers' direct savings will be shared 50 percent
with its customers in 2005 and 70 percent in 2006 and beyond. In addition, the
RCP subjects a larger portion of the MCV Facility's gas contracts to
mark-to-market accounting. Based upon current market gas prices, this is
expected to result in a gain in Consumers' 2005 earnings. Consumers and the MCV
Partnership's general partners have accepted the terms of the order and are
implementing the RCP.
9
THE PREFERRED STOCK
Issuer.......................... CMS Energy Corporation.
Securities Offered.............. 5,000,000 shares of 4.50% Cumulative
Convertible Preferred Stock, Series B.
Dividends....................... Cumulative annual dividends of $2.25 per share
payable quarterly in cash, in arrears, on each
March 1, June 1, September 1 and December 1,
commencing March 1, 2005, when, as and if
declared by the Board of Directors. Dividends
will be paid in arrears on the basis of a
360-day year consisting of twelve 30-day
months. Dividends on the Preferred Stock will
accumulate and be cumulative from the last
date on which dividends were paid on the Old
Preferred Stock or, if no dividends have been
paid, from the date of issuance of the
Preferred Stock. Accumulated unpaid dividends
accrue and cumulate at the annual rate of
4.50%.
Liquidation Preference.......... $50.00 per share, plus accumulated and unpaid
dividends.
Ranking......................... The Preferred Stock ranks with respect to
dividend rights and rights upon our
liquidation, winding-up or dissolution:
- senior to all of our common stock and to all
of our other capital stock or series of
preferred stock established after the
original issue date of the Preferred Stock
issued in the future unless the terms of
that stock expressly provide that it ranks
on a parity with the Preferred Stock;
- on a parity with any of our capital stock or
series of preferred stock established after
the original issue date of the Preferred
Stock issued in the future the terms of
which expressly provide that it will rank on
a parity with the Preferred Stock;
- junior to all our existing and future
liabilities and obligations, whether or not
for borrowed money; and
- effectively junior to all of our
subsidiaries' existing and future
liabilities and capital stock held by
others.
Redemption...................... Shares of the Preferred Stock are not
redeemable by us.
Conversion Rights............... A person who is a holder of record of
Preferred Stock (a "HOLDER") may convert its
shares of Preferred Stock at any time into
cash and shares of our common stock under any
of the following circumstances:
- during any calendar quarter (and only during
such calendar quarter) if the last reported
sale price of our common stock for at least
20 trading days during the period of 30
consecutive trading days ending on the last
trading day of the previous calendar quarter
is greater than or equal to 120% of the
applicable conversion price of the Preferred
Stock on such last trading day;
- upon the occurrence of specified corporate
transactions described under "Description of
the Preferred Stock -- Conversion Rights --
Conversion Upon Specified Corporate
Transactions"; or
- subject to certain exceptions, during the
five Business Day period immediately
following any ten consecutive trading-day
period in which the trading price per share
of Preferred Stock for each day of that
period was less than 95% of the product of
the closing sale price of our common stock
and the applicable conversion rate of such
share of Preferred Stock; provided, however,
a holder may not convert its shares of
Preferred Stock if the average closing sale
price of our common stock for such ten
consecutive trading-day period was between
the then applicable conversion price of the
Preferred
10
Stock and 120% of the then applicable
conversion price of the Preferred Stock.
Upon the occurrence of any of the
circumstances described above, holders may
convert any outstanding Preferred Stock into
cash and shares of our common stock at an
initial conversion rate of 5.0541 shares of
common stock per share of Preferred Stock
(equivalent to an initial conversion price of
$9.893 per share of common stock). The
conversion rate and the equivalent conversion
price in effect at any given time are referred
to as the "APPLICABLE CONVERSION RATE" and the
"APPLICABLE CONVERSION PRICE," respectively,
and will be subject to adjustment as described
below. Subject to certain exceptions, once
Preferred Stock is tendered for conversion,
the value (the "CONVERSION VALUE") of the cash
and shares of our common stock, if any, to be
received by a holder converting a share of
Preferred Stock will be determined by
multiplying the conversion rate by the ten day
average closing stock price. We will deliver
the conversion value to holders as follows:
(1) an amount in cash (the "PRINCIPAL RETURN")
equal to the lesser of (a) the aggregate
conversion value of the Preferred Stock to be
converted and (b) the aggregate liquidation
preference of $50.00 per share of Preferred
Stock to be converted; (2) if the aggregate
conversion value of the Preferred Stock to be
converted is greater than the principal
return, an amount in whole shares (the "NET
SHARES"), determined as set forth below, equal
to such aggregate conversion value less the
principal return (the "NET SHARE AMOUNT"); and
(3) an amount in cash in lieu of any
fractional shares of common stock. We will pay
the principal return and cash in lieu of
fractional shares and deliver the net shares,
if any, as promptly as practicable after
determination of the net share amount. The
number of net shares to be paid will be
determined by dividing the net share amount by
the ten day average closing stock price. The
"TEN DAY AVERAGE CLOSING STOCK PRICE" will be
the average of the closing per share prices of
our common stock on the New York Stock
Exchange on the ten consecutive trading days
beginning on the second trading day following
the day the Preferred Stock is submitted for
conversion.
As described in this prospectus, the
conversion rate may be adjusted for certain
reasons, but it will not be adjusted for
accumulated and unpaid dividends. Except as
otherwise described in this prospectus,
holders will not receive any payment
representing accumulated and unpaid dividends
if any, upon conversion of a share of
Preferred Stock; however, we will continue to
pay additional dividends, if any, on the
Preferred Stock and the common stock issuable
upon conversion thereof to the holder in
accordance with the registration rights
agreement.
If we declare a cash dividend or cash
distribution to all or substantially all of
the holders of our common stock, the
applicable conversion rate shall be increased
to equal the number determined by multiplying
the applicable conversion rate in effect
immediately prior to the record date for such
dividend or distribution by the following
fraction:
(pre-dividend sale price)
(pre-dividend sale price - dividend adjustment
amount)
provided that if the denominator of the
foregoing fraction is less than $1.00
(including a negative amount), then in lieu of
any adjustment, we shall make adequate
provision so that each holder of Preferred
Stock shall have the right to receive upon
conversion, in addition to the cash and shares
of common stock issuable upon such conversion,
the amount of cash such holder would have
received had such holder converted its
Preferred Stock solely into shares of our
common stock at the then applicable conversion
rate immediately prior to the record date for
such cash dividend or cash distribution.
"PRE-DIVIDEND SALE PRICE" means the average of
the last reported sale price of our common
stock price for the five consecutive trading
days ending on the trading day immediately
preceding the record date for such dividend or
distribution. "DIVIDEND ADJUSTMENT AMOUNT"
means the full amount of the dividend or
distribution
11
to the extent payable in cash applicable to
one share of our common stock.
Mandatory Conversion............ On or after December 5, 2008, we may, at our
option, cause the Preferred Stock to be
automatically converted into cash and shares
of our common stock. We may exercise our
conversion right only if, for 20 trading days
within any period of 30 consecutive trading
days (including the last trading day of such
30-day period), the closing price of our
common stock exceeds 130% of the then
applicable conversion price of the Preferred
Stock.
Fundamental Change.............. If we undergo a Fundamental Change (as defined
under "Description of the Preferred Stock --
Fundamental Change Requires Purchase of
Preferred Stock by Us at the Option of the
Holder"), holders will have the right at their
option, subject to the terms of the
certificate of designation, to require us to
purchase any or all of their Preferred Stock
for cash. The cash price we are required to
pay is equal to 100% of the liquidation
preference of the Preferred Stock to be
purchased plus accumulated and unpaid
dividends, and additional dividends owed, if
any, to the Fundamental Change purchase date.
See "Description of the Preferred Stock --
Fundamental Change Requires Purchase of
Preferred Stock by Us at the Option of the
Holder."
Voting Rights................... Except as required by Michigan law and our
Restated Articles of Incorporation ("ARTICLES
OF INCORPORATION"), which include the
certificate of designation for the Preferred
Stock, the holders of Preferred Stock have no
voting rights unless dividends payable on the
Preferred Stock are in arrears for six or more
quarterly periods (whether or not
consecutive). In that event, the holders of
the 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 Preferred Stock has been paid
in full.
Change of Control Make-Whole
Provision....................... Until December 5, 2008, if you elect to
convert your Preferred Stock in connection
with a corporate transaction as described
under "Description of the Preferred Stock --
Conversion Rights -- Conversion Upon Specified
Corporate Transactions" that constitutes a
Fundamental Change as defined under
"Description of the Preferred Stock --
Fundamental Change Requires Purchase of
Preferred Stock by Us at the Option of the
Holder" (other than a Fundamental Change
relating to the composition of our Board of
Directors) and 10% or more of the fair market
value of the consideration for the shares of
common stock in the corporate transaction
consists of (i) cash, (ii) other property or
(iii) securities that are not traded or
scheduled to be traded immediately following
such transaction on a U.S. national securities
exchange or the NASDAQ National Market, we
will increase the applicable conversion rate
for the Preferred Stock surrendered for
conversion, which will increase the number of
shares of our common stock issuable upon
conversion. The number of additional shares a
holder will receive and the applicable
conversion rate upon such Fundamental Change
is determined by the table found in
"Description of the Preferred Stock --
Conversion Rights -- Adjustment to Conversion
Rate upon the Occurrence of a Cash Take-Over
Transaction."
Cash Take-Over Transaction by a
Public Company.................. A public company change of control is a cash
take-over transaction where we would be
required to increase the conversion rate and
the acquirer has a class of equity securities
traded on a U.S. national securities exchange
or quoted on the NASDAQ National Market. Upon
the occurrence of a cash take-over transaction
that constitutes a public company change of
control, in lieu of increasing the conversion
rate, we may elect to change the conversion
right so that holders of the Preferred Stock
will be entitled to convert their
12
Preferred Stock into the acquirer's common
stock. See "Description of the Preferred Stock
-- Conversion Rights--Conversion After a
Public Acquirer Change of Control."
Form of Preferred Stock......... One or more global securities held in the name
of DTC.
Use of Proceeds................. We will not receive any of the proceeds from
sales of any of the securities covered by this
prospectus by the selling securityholders.
Common Stock.................... Our common stock is listed on the New York
Stock Exchange under the symbol "CMS."
Absence of a Public Market...... The Preferred Stock is not listed on any
securities exchange or included in any
automated quotation system. Our common stock
is listed on the New York Stock Exchange under
the symbol "CMS."
Tax Consequences................ The U.S. federal income tax consequences of
purchasing, owning and disposing of the
Preferred Stock and any of our common stock
received upon its conversion are described in
"Material United States Federal Income Tax
Considerations." Prospective investors are
urged to consult their own tax advisors
regarding the tax consequences of purchasing,
owning and disposing of the Preferred Stock
and any of our common stock received upon
conversion thereof in light of their personal
investment circumstances, including
consequences resulting from the possibility
that actual or constructive distributions on
the Preferred Stock may exceed our current and
accumulated earnings and profits, as
calculated for U.S. federal income tax
purposes, in which case they would not be
treated as dividends for U.S. federal income
tax purposes.
Risk Factors.................... An investment in the Preferred Stock involves
certain risks that a potential investor should
carefully evaluate prior to making an
investment in the Preferred Stock. See "Risk
Factors."
13
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 combined fixed charges and 0
preference dividends(c)................................ 1.01 1.5 --(d) --(e) --(f) --(g)
----------
(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.
14
(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 year ended December 31, 2003, combined fixed charges and
preference dividends exceeded earnings by $59 million. Earnings as defined
include $95 million of asset impairment charges.
(e) For the year ended December 31, 2002, combined fixed charges and
preference dividends exceeded earnings by $472 million. Earnings as
defined include $602 million of asset impairment charges.
(f) For the year ended December 31, 2001, combined fixed charges and
preference dividends exceeded earnings by $392 million. Earnings as
defined include $323 million of asset impairment charges.
(g) For the year ended December 31, 2000, combined fixed charges and
preference dividends exceeded earnings by $224 million. Earnings as
defined include a $329 million pretax impairment loss on the Loy Yang
investment.
15
RISK FACTORS
Before purchasing any of our securities offered by this prospectus, you
should carefully consider the following risk factors, as well as the other
information contained or incorporated by reference in this prospectus.
RISKS RELATING TO CMS ENERGY
WE DEPEND ON DIVIDENDS FROM OUR SUBSIDIARIES TO MEET OUR DEBT SERVICE
OBLIGATIONS. IF WE DO NOT RECEIVE ADEQUATE DIVIDENDS OR DISTRIBUTIONS FROM OUR
SUBSIDIARIES, WE MAY NOT BE ABLE TO PAY DIVIDENDS ON THE PREFERRED STOCK.
Due to our holding company structure, we depend on dividends from our
subsidiaries to meet our debt obligations, including the payment of any
dividends on the Preferred Stock. None of these entities are or will be
obligated to pay any dividends on the Preferred Stock. Therefore, payment of
dividends on the Preferred Stock is effectively subordinated to the payment of
interest, principal, declared dividends and preferred distributions on the debt,
preferred securities and other liabilities of Consumers and Enterprises and each
of their subsidiaries.
Restrictions contained in Consumers' preferred stock provisions and other
legal restrictions limit Consumers' ability to pay dividends or acquire its own
stock from us. As of September 30, 2004, the most restrictive provisions in its
financing documents allowed Consumers to pay an aggregate of $300 million in
dividends to us during any year.
For additional information concerning restrictions on Consumers' ability
to pay dividends to us, see "Description of Our Capital Stock -- Primary Source
of Funds of CMS Energy; Restrictions on Sources of Dividends."
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT OUR FINANCIAL
FLEXIBILITY AND HENCE OUR ABILITY TO PAY DIVIDENDS ON PREFERRED STOCK.
As of September 30, 2004, we had outstanding approximately $2.7 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible preferred securities
but excluding approximately $5.1 billion of indebtedness of our subsidiaries. In
August 2004, we entered into the Fifth Amended and Restated Credit Agreement in
the amount of approximately $300 million. As of December 31, 2004, there were
approximately $106 million of letters of credit outstanding under the Fifth
Amended and Restated Credit Agreement. We and our subsidiaries may incur
additional indebtedness in the future.
The level of our present and future indebtedness could have several
important effects on our future operations, including, among others:
- a significant portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness and will not be available for other purposes;
- covenants contained in our existing debt arrangements require us to
meet certain financial tests, which may affect our flexibility in
planning for, and reacting to, changes in our business;
- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate and other
purposes may be limited;
- we may be at a competitive disadvantage to our competitors that are
less leveraged; and
- our vulnerability to adverse economic and industry conditions may
increase.
Our ability to meet our debt service obligations and to reduce our total
indebtedness will be dependent upon our future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors affecting 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.
16
There can be no assurance that the requirements of our existing debt
arrangements or other indebtedness will be met in the future. Failure to comply
with such covenants may result in a default with respect to the related debt and
could lead to acceleration of such debt or any instruments evidencing
indebtedness that contain cross-acceleration or cross-default provisions.
In such a case, there can be no assurance that we would be able to
refinance or otherwise repay such indebtedness.
WE HAVE FINANCING NEEDS AND WE MAY BE UNABLE TO SUCCESSFULLY ACCESS BANK
FINANCING OR THE CAPITAL MARKETS.
As of September 30, 2004, CMS Energy had approximately $427 million of
debt maturities in 2004 and 2005, excluding debt maturities of Consumers. These
maturities included: approximately $176 million of senior notes due in November
2004 that has been extinguished; $180 million of senior notes due in January
2005 that has been extinguished; approximately $7 million of general term notes
that matured at various times in 2004; approximately $24 million of general term
notes that will mature at various times in 2005; approximately $7 million of
Enterprises subsidiary debt that matured in 2004; and approximately $33 million
of Enterprises subsidiary debt that will mature in 2005. In addition, we expect
to incur significant costs for capital expenditures, including future
environmental regulation compliance, especially compliance with clean air laws.
See "We could incur significant capital expenditures to comply with
environmental standards and face difficulty in recovering these costs on a
current basis" below. As of September 30, 2004, we had incurred $500 million in
capital expenditures to comply with these regulations and future capital
expenditures may total approximately $302 million between 2004 and 2011. We
could also be required to make additional cash contributions to our employee
pension and benefit plans and become subject to liquidity demands pursuant to
commercial commitments under guarantees, indemnities and letters of credit.
After giving effect to recent issuances of securities, along with asset sales,
capital markets or bank financing and cash flow from operations, we believe, but
can make no assurance, that we will have sufficient liquidity to meet our debt
maturities through 2005. Management is actively pursuing plans to refinance debt
and to sell assets. There can be no assurances that this business plan will be
successful and failure to achieve its goals could have a material adverse effect
on our liquidity and operations.
We continue to explore financing opportunities to supplement our financial
plan. These potential opportunities include: refinancing our bank credit
facilities; entering into leasing arrangements and/or vendor financing;
refinancing and issuing new capital markets debt, preferred stock and/or common
equity; and negotiating private placement debt. We cannot guarantee the capital
market's acceptance of our securities or predict the impact of factors beyond
our control, such as actions of rating agencies. If we are unable to access bank
financing or the capital markets to incur or refinance indebtedness, there could
be a material adverse effect upon our liquidity and operations.
Certain of our securities and those of our affiliates, including
Consumers, are rated by various credit rating agencies. Any reduction or
withdrawal of one or more of our credit ratings could have a material adverse
impact on our ability to access capital on acceptable terms. We cannot assure
you that any of our current ratings or those of our affiliates, including
Consumers, will remain in effect for any given period of time or that a rating
will not be lowered or withdrawn entirely by a rating agency.
WE MAY BE ADVERSELY AFFECTED BY A REGULATORY INVESTIGATION AND LAWSUITS
REGARDING "ROUND TRIP" TRADING BY ONE OF OUR SUBSIDIARIES AS WELL AS CIVIL
LAWSUITS REGARDING PRICING INFORMATION THAT TWO OF OUR AFFILIATES PROVIDED TO
MARKET PUBLICATIONS.
As a result of round trip trading transactions at CMS MST, we are under
investigation by the United States Department of Justice. We have received
subpoenas from U.S. Attorneys' Offices regarding investigations of those trades.
CMS Energy and Consumers have also been named in numerous class action lawsuits
by individuals who allege that they purchased CMS Energy securities during a
purported class period. These complaints generally seek unspecified damages
based on allegations that the defendants violated United States securities laws
and regulations by making allegedly false and misleading statements about the
company's business and financial condition. The cases have been consolidated
into a single lawsuit and an amended and consolidated complaint was filed on May
1, 2003. The judge issued an opinion and order dated March 31, 2004 in
connection with various pending motions, including the plaintiffs' motion to
amend the complaint and the motions to dismiss the complaint filed by us,
Consumers and other defendants. The judge directed the plaintiffs to file an
amended complaint under seal and ordered an expedited hearing on the motion to
amend, which was held on May 12, 2004. At the hearing, the judge ordered the
plaintiffs to file an amended complaint deleting certain counts related to
purchasers of CMS Energy-related securities, which the judge ordered dismissed
with prejudice. The plaintiffs filed this complaint on May 26, 2004. We,
Consumers and the individual defendants filed new motions to dismiss on June 21,
2004. A hearing on those 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.
17
Our Board of Directors has received a demand on behalf of a shareholder of
CMS Energy to commence civil actions (i) to remedy alleged breaches of fiduciary
duties by CMS Energy officers and directors in connection with round trip
trading at CMS MST and (ii) to recover damages sustained by CMS Energy as a
result of alleged insider trades alleged to have been made by certain current
and former officers of CMS Energy and its subsidiaries. In December 2002, two
new directors were appointed to our Board of Directors. A special litigation
committee was formed by the Board of Directors in January 2003 to determine
whether it is in the best interest of CMS Energy to bring the action demanded by
the shareholder. The disinterested members of the Board of Directors appointed
the two new directors to serve on the special litigation committee.
On December 2, 2003, during the continuing review by the special
litigation committee, we were served with a derivative complaint filed by the
shareholder in the Circuit Court of Jackson County, Michigan in furtherance of
his demands. The date for CMS Energy and other defendants to answer or otherwise
respond to the complaint was stayed by the court to February 21, 2005, subject
to such further stays as may be mutually agreed upon by the parties and
authorized by the court.
We have notified appropriate regulatory and governmental agencies that
some employees at CMS MST and CMS Field Services, Inc. (now Cantera Gas Company)
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
Energy is cooperating with an investigation by the United States Department of
Justice regarding this matter. On November 25, 2003, the Commodity Futures
Trading Commission ("CFTC") issued a settlement order regarding this matter. CMS
MST and CMS Field Services, Inc. agreed to pay a fine to the CFTC totaling $16
million. CMS Energy neither admitted nor denied the findings of the CFTC in the
settlement order.
We have also been named as a defendant in several gas industry civil
lawsuits regarding inaccurate gas trade reporting that include claims alleging
manipulation of natural gas prices and violations of the Commodities Exchange
Act and federal and state antitrust laws.
We cannot predict the outcome of the United States Department of Justice
investigation and the lawsuits. It is possible that the outcome in one or more
of the investigation or the lawsuits could adversely affect our financial
condition, liquidity or results of operations.
WE MAY BE NEGATIVELY IMPACTED BY THE RESULTS OF AN EMPLOYEE BENEFIT PLAN
LAWSUIT.
We are a defendant, along with Consumers, CMS MST and certain named and
unnamed officers and directors, in two lawsuits brought as purported class
actions on behalf of participants and beneficiaries of our 401(k) plan. The two
cases, filed in July 2002 in the United States District Court for the Eastern
District of Michigan, were consolidated by the trial judge and an amended and
consolidated complaint has been filed. Plaintiffs allege breaches of fiduciary
duties under the Employee Retirement Income Security Act of 1974 ("ERISA") and
seek restitution on behalf of the plan with respect to a decline in value of the
shares of our common stock held in the plan. The plaintiffs also seek other
equitable relief and legal fees. The judge issued an opinion and order dated
March 31, 2004 in connection with the motions to dismiss filed by us, Consumers
and the individuals. The judge dismissed certain of the amended counts in the
plaintiffs' complaint and denied our motion to dismiss the other claims in the
complaint. We, Consumers and the individual defendants filed answers to the
amended complaint on May 14, 2004. The judge issued an opinion and order dated
December 27, 2004 conditionally granting plaintiffs' motion for class
certification. A trial date has not been set, but is expected to be no earlier
than late in 2005.
We cannot predict the outcome of the ERISA litigation and it is possible
that an adverse outcome in this lawsuit could adversely affect our financial
condition, liquidity or results of operations.
WE CANNOT PREDICT THE OUTCOME OF CLAIMS REGARDING OUR PARTICIPATION IN THE
DEVELOPMENT OF BAY HARBOR OR OTHER LITIGATION IN WHICH SUBSTANTIAL MONETARY
CLAIMS ARE INVOLVED.
Certain subsidiaries of CMS Energy participated in the development of Bay
Harbor, a residential/commercial real estate project developed on the site of a
discontinued cement plant and quarry operation near Petoskey, Michigan. In the
various agreements to 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.
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In the sale agreement, CMS Land abandoned all interests and rights in Bay
Harbor but retained the responsibilities it and CMS Energy had under the
previous environmental indemnifications and the CNTS. One such responsibility
deals with the construction, operation and maintenance of a pH-lowering
treatment facility at Bay Harbor that collects and treats "seep water" from one
of several pre-existing cement kiln dust ("CKD") piles. The "seep water" has a
high pH level and requires treatment before the water can be discharged into the
City of Petoskey sewer system. While the pH treatment facility was out of
service for a number of months in 2004 to address maintenance issues, and to
resolve issues with the City of Petoskey, the MDEQ found higher than acceptable
levels of pH along the shore of Little Traverse Bay and issued the NON. The
treatment facility resumed operation in September 2004.
In addition, the United States Environmental Protection Agency (the "EPA")
has issued a General Notice of Potential Liability under Section 107(a) of the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
and has requested information pursuant to Section 104 of CERCLA. Follow-up
meetings with the EPA to discuss potential response activities and the potential
entry of an administrative order of consent have been held and are scheduled in
the future. CMS Energy filed a formal response to the Section 107(a) notice on
December 6, 2004. CMS Energy plans to file a formal response to the Section 104
information request on or before January 24, 2005. CMS Energy has also presented
plans to the MDEQ and the EPA to undertake a study concerning separate "seeps"
that are not currently subject to a water collection and treatment facility. In
addition, CMS Energy has submitted a proposed plan to undertake immediate
response activities, which is under discussion at the MDEQ and the EPA.
The regulatory agencies have advised the parties that they have reached an
understanding to split jurisdiction, under which the EPA would regulate
immediate response activities and the MDEQ would regulate a final response. In
the event that a suitable consent order is not negotiated, the EPA could issue a
unilateral order under CERCLA requiring that remedial work (both interim and
final) be performed, or, alternatively, the EPA could elect to perform the work
and seek damages, potentially including treble damages, from the parties. The
MDEQ could also elect to prosecute an enforcement action pursuant to its
statutory authority and the previously issued NON.
Several parties have issued demand letters to CMS Land and CMS Energy
claiming breach of the indemnification provisions, making requests for payment
of their expenses related to the NON and/or claiming damages to property or
personal injury with regard to the matter. CMS Energy responded to the
indemnification claim by stating that it had not breached its indemnity
obligations, it will comply with the indemnities, it has restarted the pH
treatment facility and it has responded to the NON. CMS Energy will defend
vigorously any property damage and personal injury claim.
Based on initial preliminary studies, CMS Energy has identified several
remediation options. The estimated potential capital and near-term expenditures
for these options range from $25 million to $40 million, with continuing yearly
operating and maintenance expenses ranging from $0.8 million to $1.6 million.
Final remediation and resulting claims against third parties for reimbursement
of remediation costs could increase or decrease these amounts. CMS Energy
estimates that it will record a liability for its obligations associated with
this matter in the amount of $45 million, with a resultant charge to its income
statement of $29 million, net of deferred income taxes, in the fourth quarter of
2004, reflecting CMS Energy's current best estimate of both the capital and
near-term costs as well as the present value of continuing future operating
costs.
An adverse outcome of this matter could, depending on the size of any
indemnification obligation or liability under environmental laws, have a
potentially significant adverse effect on CMS Energy's financial condition and
liquidity and could negatively impact CMS Energy's financial results. CMS Energy
cannot predict the ultimate cost or outcome of this matter.
In addition to the litigation and proceedings discussed above, CMS Energy
or various of our subsidiaries are parties in other pending litigation in which
substantial monetary damages are sought. These proceedings, certain of which are
described in CMS Energy's Annual Report on Form 10-K/A (Amendment No. 2) for the
year ended December 31, 2003--Notes to Consolidated Financial Statements--
Note 4, include arbitration and litigation relating to the Dearborn Industrial
Generation project and claims from various provinces in Argentina for stamp
taxes and associated penalties and interest arising from various gas
transportation transactions. An adverse outcome in one or more of these cases
could, depending on the timing and size of any award and the availability of
insurance or reimbursement from third parties, have an adverse effect on our
financial condition, liquidity or results of operations.
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
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January 1, 2002, all electric customers have the choice of buying electric
generation service from an alternative electric supplier. We continue to lose
industrial and commercial customers to other electric suppliers. As of December
2004, we had lost 926 MW or 11 percent of our electric generation business to
these alternative electric suppliers. We expect the loss to be in the range of
1,000 to 1,200 MW by year-end 2005. We cannot predict the total amount of
electric supply load that we may lose to competitor suppliers in the future.
ELECTRIC INDUSTRY REGULATION COULD ADVERSELY AFFECT OUR BUSINESS,
INCLUDING OUR ABILITY TO RECOVER OUR EXPENSES FROM OUR CUSTOMERS.
Federal and state regulation of electric utilities has changed
dramatically in the last two decades and could continue to change over the next
several years. These changes could adversely affect our business, financial
condition and profitability.
In June 2000, the Michigan Legislature enacted the Customer Choice Act
that became effective June 5, 2000. Pursuant to the Customer Choice Act,
residential rates were reduced by five percent and then capped through at least
December 31, 2005. Ultimately, the rate cap could extend until December 31, 2013
depending upon whether or not Consumers exceeds the market power supply test
established by the legislation (a requirement that Consumers believes itself to
be in compliance with at this time). Under circumstances specified in the
Customer Choice Act, certain costs can be deferred for future recovery after the
expiration of the rate cap period. The rate cap could, however, result in
Consumers being unable to collect customer rates sufficient to recover fully its
cost of conducting business. Some of these costs may be beyond Consumers'
ability to control. In particular, if Consumers needs to purchase power supply
from wholesale suppliers during the period when retail rates are frozen or
capped, the rate restrictions imposed by the Customer Choice Act may make it
impossible for Consumers to recover fully the cost of purchased power and
associated transmission costs through the rates it charges its customers. As a
result, it is not certain that Consumers can maintain its profit margins in its
electric utility business during the period of the rate freeze or rate cap.
Consumers filed an electric rate case with the MPSC in December 2004 for
approximately $320 million in rate increases. We cannot predict the outcome of
the electric rate case.
There are multiple proceedings pending before the Federal Energy
Regulatory Commission ("FERC") involving transmission rates, regional
transmission organizations and standard market design for electric bulk power
markets and transmission. FERC is also reviewing the standards under which
electric utilities are allowed to participate in wholesale power markets without
price restrictions. FERC is currently reviewing information submitted by
Consumers to support its ability to continue to sell power at market-based
rates. We cannot predict the impact of these electric industry-restructuring
proceedings on our financial position, liquidity or results of operations.
PENDING UTILITY LEGISLATION IN MICHIGAN MAY AFFECT US IN WAYS WE CANNOT
PREDICT.
In July 2004, as a result of legislative hearings, several bills were
introduced into the Michigan Senate that could change Michigan's Customer Choice
Act. The proposals include:
- requiring that rates be based on cost of service;
- establishing a defined Stranded Cost calculation method;
- allowing customers who stay with or switch to alternative electric
suppliers after December 31, 2005 to return to utility services, and
requiring them to pay current market rates upon return;
- establishing reliability standards that all electric suppliers must
follow;
- requiring electric utilities and electric alternative suppliers to
maintain a 15 percent power reserve margin;
- creating a service charge to fund the Low Income and Energy
Efficiency Fund;
- 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.
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In September 2004, the Chair of the Senate Technology and Energy Committee
formed a workgroup, which analyzed the merits of the proposed legislation.
Workgroup activities have since concluded that the impact of the proposed
legislation is still uncertain. In October 2004, a substitute to one of the
bills was introduced, but has not yet been adopted by the Michigan Senate.
Although we do not believe the terms of the proposed bills, if enacted,
would have a material adverse effect on our business, the final form of any new
utility legislation may differ from the bills proposed in 2004. We cannot
predict whether these or other measures will be enacted into law or their
potential effect on us.
OUR ABILITY TO RECOVER CERTAIN REGULATORY ASSETS UNDER SECTION 10(d)(4) OF
THE CUSTOMER CHOICE ACT MAY AFFECT OUR FINANCIAL RESULTS.
Section 10(d)(4) of the Customer Choice Act allows deferred recovery of an
annual return of and on capital expenditures in excess of depreciation levels
and certain other expenses incurred prior to and throughout the current electric
rate freeze and rate cap periods. See "Electric industry regulation could
adversely affect our business, including our ability to recover our expenses
from our customers." In October 2004, Consumers filed an application with the
MPSC seeking recovery of $628 million in costs from 2000 through 2005 under
Section 10(d)(4). The request includes capital expenditures in excess of
depreciation, Clean Air Act costs and other expenses related to changes in law
or governmental action incurred during the rate freeze-cap period. Of the $628
million, $152 million relates to the cost of money.
As allowed by the Customer Choice Act, in January 2004, Consumers began
accruing and deferring for recovery the 2004 portion of its Section 10(d)(4)
regulatory assets. In November 2004, the MPSC issued an order in the Detroit
Edison Company's general electric rate case which concluded that the Detroit
Edison Company's return of and on Clean Air Act costs incurred from June 2000
through December 2003 are recoverable under Section 10(d)(4). Based on the
precedent set by this order, Consumers accrued and recorded an additional
regulatory asset of $55 million (pre-tax), $36 million net of tax, in November
2004 for its return of and on Clean Air Act expenditures incurred from 2000
through 2003. Additional accruals will continue to be recorded until a decision
on Consumers' request is issued by the MPSC. Certain aspects of the Detroit
Edison Company's electric rate case are different than Consumers' Section
10(d)(4) regulatory asset filing.
We cannot predict the ability of Consumers to recover certain regulatory
assets under Section 10(d)(4) of the Customer Choice Act and failure to recover
these regulatory assets could adversely affect our financial condition.
PERIODIC REVIEWS OF THE VALUES OF OUR ASSETS COULD RESULT IN ADDITIONAL
ACCOUNTING CHARGES.
We are required by U.S. generally accepted accounting principles to
periodically review the carrying value of our assets, including those that may
be sold. Market conditions, the operational characteristics of our assets and
other factors could result in our recording additional impairment charges for
our assets, which could have an adverse effect on our stockholders' equity and
our access to additional financing. In addition, we may be required to record
impairment charges and foreign currency translation losses at the time we sell
assets depending on the sale prices we are able to secure and other factors.
WE COULD INCUR SIGNIFICANT CAPITAL EXPENDITURES TO COMPLY WITH
ENVIRONMENTAL STANDARDS AND FACE DIFFICULTY IN RECOVERING THESE COSTS ON A
CURRENT BASIS.
We and our subsidiaries are subject to costly and increasingly stringent
environmental regulations. We expect that the cost of future environmental
compliance, especially compliance with clean air and water laws, will be
significant.
In 1998, the EPA issued regulations requiring the State of Michigan to
further limit nitrogen oxide emissions at our coal-fired electric plants. The
EPA and the State of Michigan regulations require us to make significant capital
expenditures estimated to be $802 million. As of September 30, 2004, Consumers
has incurred $500 million in capital expenditures to comply with the EPA
regulations and anticipates that the remaining $302 million of capital
expenditures will be incurred between 2004 and 2011. Additionally, Consumers
currently expects it will supplement its compliance plan with the purchase of
nitrogen oxide emissions credits for the years 2004 through 2009. The cost of
these credits based on the current market is estimated to average $7 million per
year for 2004-2006 and then decrease with Consumers' installation of control
technology; however, the market for nitrogen oxide 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
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notice and hearing, the MPSC shall determine the amount of reasonable and
prudent costs, if any, to be recovered and the recovery period.
The EPA has proposed a Clean Air Interstate Rule that would require
additional coal-fired electric plant emission controls for nitrogen oxides and
sulfur dioxide. If implemented, this rule could potentially require substantial
additional expenditures. The rule proposes a two-phase program to reduce
emissions of sulfur dioxide by 70 percent and nitrogen oxides by 65 percent by
2015. Additionally, the EPA also proposed two alternative sets of rules to
reduce emissions of mercury and nickel from coal-fired and oil-fired electric
plants. Until the proposed environmental rules are finalized, an accurate cost
of compliance cannot be determined.
The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seek modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants and potentially pay fines.
Additionally, the viability of certain plants remaining in operation could be
called into question.
These and other required environmental expenditures, if not recovered from
customers in Consumers' rates, may require us to seek significant additional
financing to fund such expenditures and could strain our cash resources.
WE RETAIN CONTINGENT LIABILITIES IN CONNECTION WITH OUR ASSET SALES.
The agreements we enter into for the sale of assets customarily include
provisions whereby we are required to:
- retain specified preexisting liabilities such as for taxes and
pensions;
- indemnify the buyers against specified risks, including the
inaccuracy of representations and warranties we make; and
- require payments to the buyers depending on the outcome of
post-closing adjustments, audits or other reviews.
Many of these contingent liabilities can remain open for extended periods
of time after the sales are closed. Depending on the extent to which the buyers
may ultimately seek to enforce their rights under these contractual provisions,
and the resolution of any disputes we may have concerning them, these
liabilities could have a material adverse effect on our financial condition,
liquidity and results of operations.
We have received a request for indemnification from the purchaser of CMS
Oil and Gas Company, a former subsidiary of CMS. The indemnification claim
relates to the sale by CMS of its oil, gas and methanol projects in Equatorial
Guinea and the claim of the government of Equatorial Guinea that $142 million in
taxes is owed it in connection with that sale. Based on information currently
available, CMS and its tax advisors have concluded that the government's tax
claim is without merit and the purchaser of CMS Oil and Gas Company has
submitted a response to the government rejecting the claim. An adverse outcome
of this claim could have a material adverse effect on our financial condition,
liquidity and results of operations.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO RISKS THAT ARE
BEYOND OUR CONTROL, INCLUDING BUT NOT LIMITED TO FUTURE TERRORIST ATTACKS OR
RELATED ACTS OF WAR.
The cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, may adversely impact our results of
operations, financial condition and cash flows. The occurrence or risk of
occurrence of future terrorist activity and the high cost or potential
unavailability of insurance to cover such terrorist activity may impact our
results of operations and financial condition in unpredictable ways. These
actions could also result in disruptions of power and fuel markets. In addition,
our natural gas distribution system and pipelines could be directly or
indirectly harmed by future terrorist activity.
WE HAVE MADE SUBSTANTIAL INTERNATIONAL INVESTMENTS THAT ARE SUBJECT TO
POSSIBLE NATIONALIZATION, EXPROPRIATION OR INABILITY TO CONVERT CURRENCY.
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
22
as changes in foreign governmental and regulatory policies (including changes in
industrial regulation and control and changes in taxation), changing political
conditions and international monetary fluctuations. In some cases an investment
may have to be abandoned or disposed of at a loss. These factors could
significantly adversely affect the financial results of the affected subsidiary
and our financial position and results of operations.
International investments of the type we have made are subject to the risk
that they may be expropriated or that the required agreements, licenses, permits
and other approvals may be changed or terminated in violation of their terms.
These kinds of changes could result in a partial or total loss of our
investment.
The local foreign currency may be devalued, the conversion of the currency
may be restricted or prohibited or other actions, such as increases in taxes,
royalties or import duties, may be taken which adversely affect the value and
the recovery of our investment.
OUR OWNERSHIP OF A NUCLEAR GENERATING FACILITY CREATES RISK RELATING TO
NUCLEAR ENERGY.
Consumers owns the Palisades nuclear power plant and we are, therefore,
subject to the risks of nuclear generation, including the risks associated with
the operation of plant facilities and the storage and disposal of spent fuel and
other radioactive waste. The Nuclear Regulatory Commission ("NRC") has broad
authority under federal law to impose licensing and safety-related requirements
for the operation of nuclear generation facilities. In the event of
non-compliance, the NRC has the authority to impose fines or shut down a unit,
or both, depending upon its assessment of the severity of the situation, until
compliance is achieved. In addition, although we have no reason to anticipate a
serious nuclear incident at Consumers' plant, if an incident did occur, it could
harm our results of operations and financial condition. A major incident at a
nuclear facility anywhere in the world could cause the NRC to limit or prohibit
the operation or licensing of any domestic nuclear unit.
CONSUMERS CURRENTLY UNDERRECOVERS IN ITS RATES ITS PAYMENTS TO THE MCV
PARTNERSHIP FOR CAPACITY AND ENERGY, AND IS ALSO EXPOSED TO FUTURE CHANGES IN
THE MCV PARTNERSHIP'S FINANCIAL CONDITION THROUGH ITS EQUITY AND LESSOR
INVESTMENTS.
Consumers' power purchase agreement with the MCV Partnership ("PPA")
expires in 2025. We estimate that Consumers will incur estimated cash
underrecoveries of payments under the PPA aggregating $206 million through 2007.
For availability payments billed by the MCV Partnership after September 15,
2007, and not recovered from customers, Consumers would expect to claim a
"regulatory out" under the PPA which Consumers believes it has the right to do
after satisfying its obligation to "support and defend" full recovery of PPA
charges from customers. The MCV Partnership has indicated that it may take issue
with our exercise of the regulatory out clause after September 2007. The effect
of exercise of the regulatory out clause would be to reduce cash flow to the MCV
Partnership, which could in turn have an adverse effect on Consumers' equity and
lessor interests in the MCV Facility.
Further, under the PPA, energy payments to the MCV Partnership are based
on the cost of coal burned at Consumers' coal plants and costs associated with
fuel inventory, operations and maintenance, and administrative and general
expenses associated with Consumers' coal plants. However, the MCV Partnership's
costs of producing electricity are tied, in large part, to the cost of natural
gas. Because natural gas prices have increased substantially in recent years,
while energy charge payments to the MCV Partnership have not, the MCV
Partnership's financial performance has been impacted negatively.
We cannot estimate, at this time, the impact of these issues on Consumers'
future earnings or cash flow from its interest in the MCV Partnership. The
forward price of natural gas for the next 20 years and the MPSC decision in 2007
or later related to Consumers' recovery of capacity payments are the two most
significant variables in the analysis of the MCV Partnership's future financial
performance. Natural gas prices have historically been volatile and presently
there is no consensus in the marketplace on the price or range of prices of
natural gas beyond the next five years. Further, it is not presently possible
for us to predict the actions of the MPSC in 2007 or later. Even with the
implementation of the RCP, if gas prices continue at present levels or increase,
the economics of operating the MCV Facility may be adverse enough to require
Consumers to recognize an impairment of its investment in the MCV Partnership.
For these reasons, at this time we cannot predict the impact of these issues on
Consumers' future earnings or cash flows or on the value of its equity interest
in the MCV Partnership.
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
23
these risks, including swaps, options, futures and forward contracts. We cannot
assure you that these strategies will be successful in managing Consumers'
pricing risk, or that they will not result in net liabilities to Consumers as a
result of future volatility in these markets.
Natural gas prices in particular have historically been volatile. To
manage market risks associated with the volatility of natural gas prices, the
MCV Partnership maintains a gas hedging program. The MCV Partnership enters into
natural gas futures contracts, option contracts and over-the-counter swap
transactions in order to hedge against unfavorable changes in the market price
of natural gas in future months when gas is expected to be needed. These
financial instruments are being used principally to secure anticipated natural
gas requirements necessary for projected electric and steam sales, and to lock
in sales prices of natural gas previously obtained in order to optimize the MCV
Partnership's existing gas supply, storage and transportation arrangements.
Consumers also routinely enters into contracts to offset its positions, such as
hedging exposure to the risks of demand, market effects of weather and changes
in commodity prices associated with its gas distribution business. Such
positions are taken in conjunction with the gas cost recovery mechanism, which
allows Consumers to recover prudently incurred costs associated with such
positions. However, neither Consumers nor the MCV Partnership always hedges the
entire exposure of its operations from commodity price volatility. Furthermore,
the ability to hedge exposure to commodity price volatility depends on liquid
commodity markets. As a result, to the extent the commodity markets are
illiquid, Consumers may not be able to execute its risk management strategies,
which could result in greater open positions than we would prefer at a given
time. To the extent that open positions exist, fluctuating commodity prices can
improve or diminish our financial results and financial position.
In addition, Consumers currently has a power supply cost recovery
mechanism to recover the increased cost of fuel used to generate electricity
from its industrial and large commercial customers, but not from its residential
or small commercial customers. Therefore, to the extent that Consumers has not
hedged its fuel costs, it is exposed to changes in fuel prices to the extent
fuel for its electric generating facilities must be purchased on the open market
in order for Consumers to serve its residential and small commercial customers.
RISKS RELATED TO THE PREFERRED STOCK
WE MAY ISSUE ADDITIONAL SERIES OF PREFERRED STOCK THAT RANK EQUALLY TO THE
PREFERRED STOCK AS TO DIVIDEND PAYMENTS AND LIQUIDATION PREFERENCE.
Our Articles of Incorporation and the certificate of designation do not
limit our ability to issue additional series of preferred stock that would rank
equally to the Preferred Stock as to dividend payments and liquidation
preference. This could have the effect of reducing the amounts available to the
Preferred Stock in the event of our liquidation. It may also reduce dividend
payments on the Preferred Stock if we do not have sufficient funds to pay
dividends on all Preferred Stock outstanding and outstanding parity preferred
stock.
WE WILL ONLY PAY DIVIDENDS ON THE PREFERRED STOCK WHEN, AS AND IF DECLARED
BY OUR BOARD OF DIRECTORS OUT OF LEGALLY AVAILABLE FUNDS.
Dividends on the Preferred Stock will only be paid when, as and if
declared by the Board of Directors out of funds legally available therefor. The
Board of Directors may elect not to declare dividends on the Preferred Stock,
and CMS Energy may not have enough funds to legally declare dividends on the
Preferred Stock. Dividends on the capital stock of CMS Energy, including the
Preferred Stock, are limited by Michigan law to legally available assets of CMS
Energy.
CMS ENERGY MAY NOT HAVE SUFFICIENT EARNINGS AND PROFITS IN ORDER FOR
DISTRIBUTIONS ON THE PREFERRED STOCK TO BE TREATED AS DIVIDENDS.
The dividends paid by CMS Energy may exceed its current and accumulated
earnings and profits, as calculated for U.S. federal income tax purposes. This
will result in the amount of the dividends that exceeds such earnings and
profits being treated first as a return of capital to the extent of the holder's
adjusted tax basis in the Preferred Stock, and the excess as capital gain. Such
treatment will generally be unfavorable for corporate holders and may also be
unfavorable to certain other holders. See "Certain United States Federal Income
Tax Considerations -- Consequences to U.S. Holders of Preferred Stock or Common
Stock."
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RESTRICTIVE COVENANTS IN FUTURE DEBT ISSUANCES COULD RESTRICT OUR ABILITY
TO PAY DIVIDENDS ON THE PREFERRED STOCK.
From time to time, we may enter into financing arrangements that contain
restrictive covenants that may limit our ability to declare and pay dividends on
the Preferred Stock.
THE MARKET PRICE OF THE PREFERRED STOCK COULD BE SIGNIFICANTLY AFFECTED BY
THE MARKET PRICE OF OUR COMMON STOCK.
We expect that the market price of the Preferred Stock could be
significantly affected by the market price of our common stock. This may result
in greater volatility in the market price of the Preferred Stock than would be
expected for nonconvertible Preferred Stock. The market price of our common
stock will likely continue to fluctuate in response to factors such as the
following, many of which are beyond our control:
- fluctuations in our operating and financial results;
- changes in financial estimates and recommendations by financial
analysts;
- changes in the ratings of the Preferred Stock or other securities of
ours or Consumers;
- developments related to litigation or regulatory proceedings
involving us;
- our asset sales and financings; and
- market perception of the energy industry and of us.
In addition, the stock markets in general, including the New York Stock
Exchange, recently have experienced significant price and trading fluctuations.
These fluctuations have resulted in volatility in the market prices of
securities that often has been unrelated or disproportionate to changes in
operating performance. These broad market fluctuations may affect adversely the
market prices of the Preferred Stock and our common stock.
WE MAY ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK OR SECURITIES
CONVERTIBLE OR EXCHANGEABLE FOR OUR COMMON STOCK AND THEREBY MATERIALLY AND
ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
We are not restricted from issuing additional shares of our common stock
or securities convertible into or exchangeable for our common stock during the
life of the Preferred Stock and have no obligation to consider the interests of
holders for any reason. If we issue additional shares of our common stock or
securities convertible into or exchangeable for our common stock, it may
materially and adversely affect the market price of our common stock and, in
turn, the market price of the Preferred Stock.
A HOLDER OF PREFERRED STOCK WILL NOT BE ENTITLED TO ANY RIGHTS WITH
RESPECT TO OUR COMMON STOCK, BUT WILL BE SUBJECT TO ALL CHANGES MADE WITH
RESPECT TO OUR COMMON STOCK.
A holder of Preferred Stock will not be entitled to any rights with
respect to our common stock (including, without limitation, voting rights and
rights to receive any dividends or other distributions on our common stock), but
will be subject to all changes affecting our common stock. Holders will only be
entitled to rights on our common stock if and when we deliver shares of common
stock to holders upon conversion of Preferred Stock and in limited cases under
the conversion rate adjustments of the Preferred Stock. For example, in the
event that an amendment is proposed to our Articles of Incorporation or Bylaws
requiring stockholder approval and the record date for determining the
stockholders of record entitled to vote on the amendment occurs prior to such
delivery of our common stock, holders will not be entitled to vote on the
amendment, although holders will nevertheless be subject to any changes in the
powers, preferences or special rights of our common stock.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO PAY THE CASH
COMPONENT UPON A CONVERSION OF THE PREFERRED STOCK OR PURCHASE THE PREFERRED
STOCK UPON A FUNDAMENTAL CHANGE.
Holders of the New Preferred Stock upon conversion will be entitled to
receive a cash component equal to the liquidation preference. We cannot assure
you that we would have sufficient financial resources or would be able to
arrange financing, to pay the liquidation preference to a holder upon
conversion. See "Description of Preferred Stock -- Conversion." Holders of the
Preferred Stock may require us to purchase their shares of Preferred Stock upon
a Fundamental Change as described under "Description of the Preferred Stock --
Fundamental Change Requires Purchase of Preferred Stock by Us at the Option of
the Holder." We cannot assure
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you that we would have sufficient financial resources, or would be able to
arrange financing, to pay the liquidation preference for the Preferred Stock
tendered by holders upon a Fundamental Change. Further, the terms of any debt
agreements of CMS in effect at the time could prohibit or limit repurchase of
the Preferred Stock. Michigan law restricting distributions could also limit our
ability to repurchase the Preferred Stock.
THE PREFERRED STOCK RANKS JUNIOR TO ALL OF OUR AND OUR SUBSIDIARIES'
LIABILITIES.
In the event of our bankruptcy, liquidation or winding-up, our assets will
be available to pay obligations on our Preferred Stock only after all our
indebtedness and other liabilities have been paid. In addition, the Preferred
Stock will effectively rank junior to all existing and future liabilities of our
subsidiaries. The rights of holders of the Preferred Stock to participate in the
distribution of assets of our subsidiaries will rank junior to the prior claims
of that subsidiary's creditors and any senior equity holders. If we are forced
to liquidate our assets to pay our creditors, we may not have sufficient assets
remaining to pay amounts due on any of the Preferred Stock then outstanding. We
and our subsidiaries may incur substantial amounts of additional debt and other
obligations that will rank senior to the Preferred Stock.
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE
PREFERRED STOCK.
The Preferred Stock is not listed on any national securities exchange or
the Nasdaq National Market. Accordingly, there may not be development of or
liquidity in any market for the Preferred Stock. If a market for the Preferred
Stock were to develop, the Preferred Stock could trade at prices that depend
upon many factors, including prevailing interest rates, our operating results
and the markets for similar securities. In addition, such market-making activity
will be subject to limits imposed by the Securities Act and the Exchange Act and
may be limited during the pendency of the effectiveness of the shelf
registration statement. If an active trading market does not develop, the market
price and liquidity of the Preferred Stock may be adversely affected.
USE OF PROCEEDS
We will not receive any of the proceeds from sales of any of the
securities covered by this prospectus by the selling securityholders.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERENCE DIVIDENDS
The ratio of earnings to combined fixed charges and preference dividends
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
combined fixed charges
and preference dividends... 1.01 --(1) --(2) --(3) --(4) 1.28
(1) For the year ended December 31, 2003, combined fixed charges and
preference dividends exceeded earnings by $59 million. Earnings as defined
include $95 million of asset impairment charges.
(2) For the year ended December 31, 2002, combined fixed charges and
preference dividends exceeded earnings by $472 million. Earnings as
defined include $602 million of asset revaluations and other charges.
(3) For the year ended December 31, 2001, combined fixed charges and
preference dividends exceeded earnings by $392 million. Earnings as
defined include $323 million of asset revaluations and other charges.
(4) For the year ended December 31, 2000, combined fixed charges and
preference dividends 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 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.
26
PRICE RANGE OF OUR COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the New York Stock Exchange. The following
table sets forth for the periods indicated the range of high and low intraday
sales prices per share of our common stock as reported on the New York Stock
Exchange and the cash dividends declared on the common stock for the periods
indicated.
HIGH LOW DIVIDENDS
------ ------ ---------
Year Ended December 31, 2002
First Quarter .......................... $24.80 $20.97 $0.365
Second Quarter ......................... 22.50 7.75 0.365
Third Quarter .......................... 11.55 6.89 0.180
Fourth Quarter ......................... 10.48 5.45 0.180
Year Ended December 31, 2003
First Quarter .......................... 10.74 3.41 --
Second Quarter ......................... 8.95 4.58 --
Third Quarter .......................... 8.04 6.03 --
Fourth Quarter ......................... 8.67 7.40 --
Year Ending December 31, 2004
First Quarter .......................... 9.59 8.25 --
Second Quarter ......................... 9.43 7.81 --
Third Quarter .......................... 9.88 8.58 --
Fourth Quarter ......................... 10.65 8.80 --
Year Ending December 31, 2005
First Quarter (through January 28, 2005) 9.70 10.57 --
On January 28, 2005, the last sale price of our common stock as reported
on the New York Stock Exchange was $10.35 per share. On January 28, 2005 there
were approximately 58,455 holders of record of our common stock.
In January 2003, we suspended the payment of dividends on our common
stock.
27
CMS ENERGY
OVERVIEW
CMS Energy, formed in Michigan in 1987, is an integrated energy holding
company operating through subsidiaries in the United States and in selected
markets around the world. Its two principal subsidiaries are Consumers and
Enterprises. Consumers is a public utility that provides natural gas and/or
electricity to almost 6.5 million of Michigan's 10 million residents and serves
customers in 61 of the 68 counties in Michigan's Lower Peninsula. Enterprises,
through subsidiaries and equity investments, is engaged in several energy
businesses in the United States and in selected international markets.
CONSUMERS
Consumers primarily consists of our electric and gas utility operations.
Consumers was formed in Michigan in 1968 and is the successor to a corporation
organized in Maine in 1910 and which did business in Michigan from 1915 to 1968.
Consumers' consolidated operations account for a majority of our total assets
and income, as well as a substantial portion of our operating revenue.
Industries in Consumers' service areas include automotive, metal, chemical, food
and wood products and a diversified group of other industries.
Electric Utility Operations
Consumers' electric utility operating revenue was $2.590 billion in 2003,
$2.648 billion in 2002 and $2.633 billion in 2001. Based on the average number
of customers, Consumers' electric utility operations, if independent, would be
the thirteenth largest electric utility company in the United States. The
electric operations of Consumers include the generation, purchase, distribution
and sale of electricity. In 2003, total electric sales were 36 billion kWh and
retail open access deliveries were 3 billion kWh. At year-end 2003, it served
customers in 61 of the 68 counties of Michigan's Lower Peninsula. Principal
cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo,
Midland, Muskegon and Saginaw. Consumers' electric utility customer base
includes a mix of residential, commercial and diversified industrial customers,
the largest segment of which is the automotive industry. Consumers' electric
operations are not dependent upon a single customer, or even a few customers,
and the loss of any one or even a few of such customers is not reasonably likely
to have a material adverse effect on its financial condition.
At December 31, 2003, Consumers owned and operated 30 electric generating
plants with an aggregate of 6,435 MW of capacity. Also, in 2003, Consumers
purchased up to 2,353 MW of net capacity from other power producers, which
amounted to 30.5% of Consumers' total system requirements, the largest of which
was the MCV Partnership in which Consumers has a 49% interest through CMS
Midland, Inc. Consumers also owns:
- 347 miles of high voltage distribution radial lines operating at 120
kilovolts and above;
- 4,164 miles of high voltage distribution overhead lines operating at
23 kilovolts and 46 kilovolts;
- 16 subsurface miles of high voltage distribution underground lines
operating at 23 kilovolts and 46 kilovolts;
- 54,922 miles of electric distribution overhead lines;
- 8,526 subsurface miles of underground distribution lines; and
- substations having an aggregate transformer capacity of 20,605,680
kilovoltamperes.
Consumers generates electricity principally from coal and nuclear fuel.
Consumers has four generating plant sites that use coal as a fuel source and
constituted 76% of its baseload capacity in 2003. In 2003, these plants produced
a combined total of 20,091 million kWhs of electricity and burned 10.1 million
tons of coal. Consumers owns Palisades, an operating nuclear power plant located
near South Haven, Michigan. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to the Nuclear Management Company
("NMC"). The Palisades nuclear fuel supply responsibilities are under the
control of NMC acting as agent for Consumers. During 2003, Palisades' net
generation was 6,151 million kWhs, constituting 23.3% of Consumers' baseload
supply.
Gas Utility Operations
28
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.
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
29
$582 million in cash and 3 million shares of Southern Union Company common
stock. Southern Union Panhandle Corp. also assumed approximately $1.166 billion
in debt. In July 2003, Southern Union Company declared a 5% common stock
dividend resulting in an additional 150,000 shares of common stock for CMS Gas
Transmission. In October 2003, CMS Gas Transmission sold its 3.15 million shares
to a private investor for $17.77 per share.
In July 2003, CMS Gas Transmission completed the sale of CMS Field
Services, Inc. to Cantera Natural Gas, Inc. for gross cash proceeds of
approximately $113 million, subject to post closing adjustments, and a $50
million face value note of Cantera Natural Gas, Inc. The note is payable to CMS
Energy for up to $50 million subject to the financial performance of the Fort
Union and Bighorn natural gas gathering systems from 2004 through 2008.
In August 2004, we sold our interests in a business located in Australia
comprised of a pipeline, processing facilities and a gas storage facility in
which we held a 100 percent ownership interest ("PARMELIA") and a pipeline
business located in Australia in which we held a 39 percent ownership interest
("GOLDFIELDS") to Australian Pipeline Trust for approximately $204 million
Australian (approximately $147 million in U.S. dollars).
At December 31, 2003, CMS Gas Transmission had nominal processing
capabilities of approximately 0.33 bcf per day of natural gas in Michigan. At
December 31, 2003, CMS Gas Transmission had a total of 288 miles of gas
gathering and transmission pipelines located in the State of Michigan, with a
total capacity of approximately 0.95 bcf per day.
Internationally, at December 31, 2003, CMS Gas Transmission had ownership
interests in 5,517 miles of pipelines (including 988 miles from Goldfields and
Parmelia sold in August 2004) in Argentina, Australia and Chile.
Independent Power Production
CMS Generation, formed in 1986, invests in, acquires, develops, constructs
and operates non-utility power generation plants in the United States and
abroad. In 2003, the independent power production business segment's operating
revenue, which includes revenues from CMS Generation and CMS Operating, S.A., as
well as from Consumers' interests in the MCV Facility and the MCV Partnership,
was $204 million.
Independent Power Production Properties
As of December 31, 2003, we had ownership interests in operating power
plants totaling 8,766 gross MW (including 2,000 gross MW from Loy Yang that was
sold in April 2004) (4,149 net MW). At December 31, 2003, additional plants
totaling approximately 1,784 gross MW (420 net MW) were under construction or in
advanced stages of development. These plants include the Shuweihat power plant,
which is under construction in the United Arab Emirates, and the Saudi
Petrochemical Company power plant, which is under construction and is located in
the Kingdom of Saudi Arabia. We believe that the independent power production
business unit will continue to optimize the operations and management of its
remaining portfolio of assets in order to contribute to CMS Energy's earnings
and to maintain its reputation for solid performance in the construction and
operation of power plants.
The following table details our interests in independent power plants in
the United States as well as abroad as of year-end 2003 (excluding the plants
owned by CMS Operating, S.A. and CMS Electric and Gas Company and the MCV
Facility, discussed further below, as well as Loy Yang that was sold in April
2004 (2,000 gross MW)):
PERCENTAGE OF
GROSS CAPACITY
OWNERSHIP GROSS UNDER LONG-TERM
INTEREST CAPACITY CONTRACT
LOCATION FUEL TYPE (%) (MW) (%)
-------- ------------ --------- -------- ---------------
California.................................................. Wood 37.8 36 100
Connecticut................................................. Scrap tire 100 31 100
Michigan.................................................... Coal 50 70 100
Michigan.................................................... Natural gas 100 710 85
Michigan.................................................... Natural gas 100 224 0
Michigan.................................................... Wood 50 40 100
Michigan.................................................... Wood 50 38 100
New York.................................................... Hydro 0.3 14 100
North Carolina.............................................. Wood 50 50 100
Oklahoma.................................................... Natural gas 8.8 124 100
-----
DOMESTIC TOTAL............................................ 1,337
30
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.
31
DESCRIPTION OF THE PREFERRED STOCK
GENERAL
Under our Articles of Incorporation, our Board of Directors is authorized,
without further stockholder action, to issue up to 10,000,000 shares of
preferred stock, par value $0.01 per share, in one or more series, with such
voting powers or without voting powers, and with such designations, preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions, as shall be set forth in the
resolutions or certificate of designation providing therefor. Please read
"Description of our Capital Stock." We currently have outstanding 5,000,000
shares of Preferred Stock. Terms defined in this section "Description of the
Preferred Stock" will only apply to this section.
The Preferred Stock and any of our common stock issued upon the conversion
of the Preferred Stock is fully paid and nonassessable. Holders of Preferred
Stock have no preemptive or preferential right to purchase or subscribe to
stock, obligations, warrants or other securities of CMS Energy of any class. The
transfer agent, registrar, conversion and dividend disbursing agent for shares
of both the Preferred Stock and our common stock is CMS Energy.
The Preferred Stock is subject to mandatory conversion, as described below
in "Mandatory Conversion," but is not redeemable by us.
The statements herein concerning the Preferred Stock are a summary of
certain provisions of the certificate of designation. They make use of defined
terms that are defined in the certificate of designation. A copy of the
certificate of designation and the form of Preferred Stock share certificate are
available upon request from us at the address set forth under "Where You Can
Find More Information." The following summary of the terms of Preferred Stock
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the certificate of designation, which is
incorporated herein by this reference.
REGISTRATION, TRANSFER AND EXCHANGE
The Preferred Stock was issued in the form of one or more global
securities as described under "Book-Entry System." The global Preferred Stock
certificate will be registered in the name of the nominee of DTC. Except as
described under "Book-Entry System," owners of beneficial interests in the
global Preferred Stock certificates are not be entitled to have shares of
Preferred Stock registered in their names, will not receive nor be entitled to
receive physical delivery of any such shares of Preferred Stock and are not
considered the registered holder thereof.
RANKING
The Preferred Stock, with respect to dividend rights or rights upon our
liquidation, winding-up or dissolution, ranks:
- senior to all classes of our common stock and each other class of
capital stock or series of preferred stock established after the
original issue date of the Preferred Stock (which we will refer to
as the "ISSUE DATE"), the terms of which do not expressly provide
that such class or series ranks senior to or on a parity with the
Preferred Stock as to dividend rights or rights upon our
liquidation, winding-up or dissolution (which we will refer to
collectively as "JUNIOR STOCK");
- on a parity, in all respects, with any class of capital stock or
series of preferred stock established after the Issue Date, the
terms of which expressly provide that such class or series will rank
on a parity with the Preferred Stock as to dividend rights or rights
upon our liquidation, winding-up or dissolution (which we will refer
to collectively as "PARITY STOCK");
- junior to all our existing and future liabilities and obligations,
whether or not for borrowed money; and
- effectively junior to all of our subsidiaries' (i) existing and
future liabilities and (ii) capital stock held by others.
While any shares of Preferred Stock are outstanding, we may not authorize
or issue any class or series of capital stock or series of preferred stock
established after the Issue Date, the terms of which expressly provide that such
class or series will rank senior to the Preferred Stock as to dividend rights or
rights upon our liquidation, winding up or dissolution (which we will shall
refer to collectively as "SENIOR STOCK") (or any security convertible into
Senior Stock) without the affirmative vote or consent of the holders of all of
the outstanding shares of Preferred Stock. Without the consent of any holder of
Preferred Stock, however, we may authorize, increase the authorized amount of,
or issue any class or series of, Parity Stock or Junior Stock. See "Voting
Rights" below.
32
LIQUIDATION PREFERENCE
In the event of our voluntary or involuntary liquidation, winding-up or
dissolution, each holder of Preferred Stock will be entitled to receive and to
be paid out of our assets available for distribution to our stockholders, before
any payment or distribution is made to holders of Junior Stock (including common
stock), a liquidation preference in the amount of $50.00 per share of 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 Preferred Stock and all Parity Stock are not paid
in full, the holders of the 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. After payment of the full amount of the liquidation preference and
accumulated and unpaid dividends to which they are entitled, the holders of the
Preferred Stock will have no right or claim to any of our remaining assets.
Neither the sale of all or substantially all our assets or business (other than
in connection with our liquidation, winding-up or dissolution), nor our merger
or consolidation into or with any other person, will be deemed to be a voluntary
or involuntary liquidation, winding-up or dissolution.
The certificate of designation does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Preferred
Stock even though it is substantially in excess of the par value thereof.
DIVIDENDS
Holders of shares of Preferred Stock are 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 of Preferred Stock
(equivalent to $2.25 per annum per share). Dividends on the Preferred Stock are
payable quarterly on March 1, June 1, September 1 and December 1 of each year
(each, a "DIVIDEND PAYMENT DATE"), commencing March 1, 2005, at such annual
rate, and shall accumulate from the most recent date as to which dividends shall
have been paid on the Old Preferred Stock or, if no dividends have been paid,
from the Issue Date of the Preferred Stock, whether or not in any dividend
period or periods there have been funds legally available for the payment of
such dividends. Dividends will be payable to holders of record as they appear on
our stock register on the immediately preceding February 15, May 15, August 15
and November 15 (each, a "RECORD DATE"). Accumulated unpaid dividends accrue and
cumulate at the annual rate of 4.50% and are payable in the manner provided
herein. Dividends payable on the Preferred Stock including for any period less
than a full dividend period (based upon the number of days elapsed during the
period) are computed on the basis of a 360-day year consisting of twelve 30-day
months.
No dividend will be declared or paid upon, or any sum set apart for the
payment of dividends upon, any outstanding share of Preferred Stock with respect
to any dividend period unless all dividends for all preceding dividend periods
have been declared and paid, or declared and a sufficient sum has been set apart
for the payment of such dividend, upon all outstanding shares of Preferred
Stock.
No dividends or other distributions (other than a dividend or distribution
payable solely in shares of Parity Stock or Junior Stock (in the case of Parity
Stock) or Junior Stock (in the case of Junior Stock) and cash in lieu of
fractional shares) may be declared, made or paid on, or set apart for payment
upon, any Parity Stock or Junior Stock, nor may any Parity Stock or Junior Stock
be redeemed, purchased or otherwise acquired for any consideration (or any money
paid to or made available for a sinking fund for the redemption of any Parity
Stock or Junior Stock) by us or on our behalf (except by conversion into or
exchange for shares of Parity Stock or Junior Stock (in the case of Parity
Stock) or Junior Stock (in the case of Junior Stock)) unless all accumulated and
unpaid dividends have been or contemporaneously are declared and paid, or are
declared and a sum sufficient for the payment thereof is set apart for such
payment, on the Preferred Stock and any Parity Stock for all dividend payment
periods terminating on or prior to the date of such declaration, payment,
redemption, purchase or acquisition. Notwithstanding the preceding, if full
dividends have not been paid on the Preferred Stock and any Parity Stock,
dividends may be declared and paid on the Preferred Stock and such Parity Stock
so long as the dividends are declared and paid pro rata so that the amounts of
dividends declared per share on the Preferred Stock and such Parity Stock will
in all cases bear to each other the same ratio that accumulated and unpaid
dividends per share on the shares of the Preferred Stock and such Parity Stock
bear to each other. Holders of shares of the Preferred Stock will not be
entitled to any dividend, whether payable in cash, property or stock, in excess
of full cumulative dividends.
Our ability to declare and pay dividends may be limited by applicable
Michigan law.
In any case where any dividend payment date or conversion date (including
upon the occurrence of a Fundamental Change) of any Preferred Stock shall not be
a Business Day at any place of payment, then payment of dividends (and
additional dividends, 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
33
and effect as if made on the dividend payment date or conversion date (including
upon the occurrence of a Fundamental Change); and no dividends shall accumulate
on the amount so payable for the period from and after such dividend payment
date or conversion date, as the case may be, to such Business Day. "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.
VOTING RIGHTS
The holders of the Preferred Stock have no voting rights except as set
forth below or as otherwise required by our Articles of Incorporation, which
will include the certificate of designation, or by Michigan law from time to
time.
If dividends on the Preferred Stock are in arrears and unpaid for six or
more quarterly periods (whether or not consecutive), the holders of the
Preferred Stock, voting as a single class with any other preferred stock or
preference securities having similar voting rights that are exercisable, will be
entitled at our next regular or special meeting of stockholders to elect two
additional directors to our board of directors unless it is comprised of fewer
than six directors at such time, in which case such holders will be entitled to
elect one additional director. Upon the election of any additional directors,
the number of directors that comprise our board shall be increased by such
number of additional directors. Such voting rights and the terms of the
directors so elected will continue until such time as the dividend arrearage on
the Preferred Stock has been paid in full.
In addition, the affirmative vote or consent of holders of all of the
outstanding Preferred Stock will be required for the authorization or issuance
of any class or series of Senior Stock (or any security convertible into Senior
Stock) and for amendments to our Articles of Incorporation that would affect
adversely the rights of holders of the Preferred Stock. The certificate of
designation will provide that the authorization of, the increase in the
authorized amount of, or the issuance of any shares of any class or series of
Parity Stock or Junior Stock will not require the consent of the holders of the
Preferred Stock, and will not be deemed to affect adversely the rights of the
holders of the Preferred Stock.
In all cases in which the holders of Preferred Stock shall be entitled to
vote, each share of Preferred Stock shall be entitled to one vote.
CONVERSION RIGHTS
Subject to the conditions and during the periods and under the
circumstances described below, holders may convert each share of their Preferred
Stock into cash and shares of our common stock initially at a conversion rate of
5.0541 shares of common stock per share of Preferred Stock (equivalent to an
initial conversion price of $9.893 per share of common stock). The conversion
rate and the equivalent conversion price in effect at any given time are
referred to as the "APPLICABLE CONVERSION RATE" and the "APPLICABLE CONVERSION
PRICE," respectively, and will be subject to adjustment as described below. A
holder may convert fewer than all of such holder's Preferred Stock so long as
the Preferred Stock converted is an integral multiple of the $50.00 liquidation
preference.
GENERAL. Subject to certain exceptions described below under "Conversion
Upon Satisfaction of Trading Price Condition" and "Conversion Upon Specified
Corporate Transactions", once the Preferred Stock is tendered for conversion,
holders tendering the Preferred Stock will be entitled to receive, per $50.00
liquidation preference of the Preferred Stock, cash and shares of our common
stock, the aggregate value of which (the "CONVERSION VALUE") will be equal to
the product of:
(1) the applicable conversion rate then in effect; and
(2) the average of the common stock prices for the ten consecutive
trading days (appropriately adjusted to take into account the
occurrence during such period of stock splits, stock dividends
and similar events) beginning on the second trading day
immediately following the day the Preferred Stock is tendered
for conversion (the "TEN DAY AVERAGE CLOSING STOCK PRICE").
Subject to certain exceptions described below and under "Conversion Upon
Satisfaction of Trading Price Condition" and "Conversion Upon Specified
Corporate Transactions," we will deliver the conversion value of the Preferred
Stock surrendered for conversion to converting holders as follows:
(1) an amount in cash (the "PRINCIPAL RETURN") equal to the lesser
of (a) the aggregate conversion value of the Preferred Stock
to be converted and (b) the aggregate liquidation preference
of $50.00 per share of Preferred Stock to be converted;
34
(2) if the aggregate conversion value of the Preferred Stock to be
converted is greater than the principal return, an amount in
whole shares (the "NET SHARES"), determined as set forth
below, equal to such aggregate conversion value less the
principal return (the "NET SHARE AMOUNT"); and
(3) an amount in cash in lieu of any fractional shares of common
stock.
The number of net shares to be paid will be determined by dividing the net
share amount by the ten day average closing stock price. The cash payment for
fractional shares also will be based on the ten day average closing stock price.
The conversion value, principal return, net share amount and the number of
net shares will be determined by us at the end of the ten consecutive trading
day period beginning on the second trading day immediately following the day the
Preferred Stock is tendered for conversion (the "DETERMINATION DATE").
We will pay the principal return and cash in lieu of fractional shares and
deliver the net shares, if any, as promptly as practicable after the
determination date, but in no event later than five Business Days thereafter.
Except as otherwise described below, holders will not receive any payment
(in cash or check, referred to as a "CASH PAYMENT") representing accumulated and
unpaid dividends upon conversion of a share of Preferred Stock and we will not
adjust the applicable conversion rate to account for accumulated and unpaid
dividends. Delivery of the principal return, net shares and cash in lieu of
fractional shares will be deemed to satisfy our obligation to pay the
liquidation preference of $50.00 per share of Preferred Stock, including
accumulated and unpaid dividends, if any. Accumulated and unpaid dividends will
be deemed canceled, extinguished or forfeited rather than paid in full. CMS
Energy will act as the conversion agent. Notwithstanding conversion of any
Preferred Stock, the holders of the Preferred Stock and any common stock
issuable upon conversion thereof will continue to be entitled to receive
additional dividends in accordance with the registration rights agreement.
If a holder converts Preferred Stock, we will pay any documentary, stamp
or similar issue or transfer tax due on the issue of shares of our common stock
upon the conversion, unless the tax is due because the holder requests the
shares to be issued or delivered to a person other than the holder, in which
case the holder will pay that tax.
If a holder wishes to exercise its conversion right, such holder must
deliver a conversion notice, together, if the Preferred Stock is in certificated
form, with the certificated security, to the conversion agent along with
appropriate endorsements and transfer documents, if required, and pay any
transfer or similar tax, if required. The conversion agent will, on the holder's
behalf, convert the shares of Preferred Stock into cash and shares of our common
stock. Holders may obtain copies of the required form of the conversion notice
from the conversion agent. The conversion value will be paid in cash and a
certificate for the number of full shares representing net shares, if any,
together with any cash payment for fractional shares. Such conversion value will
be delivered through the conversion agent as soon as practicable, but no later
than the fifth Business Day, following the conversion date.
If a holder has already delivered a purchase notice as described under
"Fundamental Change Requires Purchase of the Preferred Stock by Us at the Option
of the Holder" with respect to Preferred Stock, however, the holder may not
surrender those shares of Preferred Stock for conversion until the holder has
withdrawn the purchase notice in accordance with the certificate of designation.
Holders of the Preferred Stock at the close of business on a record date
will receive dividends, payable on the corresponding dividend payment date
notwithstanding the conversion of such Preferred Stock at any time after the
close of business on such record date. Preferred Stock surrendered for
conversion by a holder during the period from the close of business on any
record date to the opening of business on the immediately following dividend
payment date must be accompanied by payment of an amount equal to the dividends
that the holder is to receive on the Preferred Stock; provided, however, that no
such payment need be made if:
- we have specified a Mandatory Conversion Date that is after a record
date and on or prior to the immediately following dividend payment
date;
- we have specified a purchase date following a Fundamental Change
that is during such period; or
- any accumulated and unpaid dividend exists at the time of conversion
with respect to such Preferred Stock to the extent of such
accumulated and unpaid dividend.
Holders may surrender their shares of Preferred Stock for conversion into
cash and shares of our common stock only in the circumstances described below.
For a discussion of the federal income tax consequences of a conversion of the
Preferred Stock into
35
cash and our common stock, see "Material United States Federal Income Tax
Considerations."
CONVERSION UPON SATISFACTION OF SALE PRICE CONDITION. A holder may
surrender any of its shares of Preferred Stock for conversion into cash and
shares of our common stock in any calendar quarter (and only during such
calendar quarter) if the last reported sale price of our common stock for at
least 20 trading days during the period of 30 consecutive trading days ending on
the last trading day of the previous calendar quarter is greater than or equal
to 120% of the applicable conversion price of the Preferred Stock on such last
trading day.
CONVERSION UPON SPECIFIED CORPORATE TRANSACTIONS. If we elect to:
- distribute to all holders of our common stock certain rights
entitling them to purchase, for a period expiring within 60 days
after the date of the distribution, shares of our common stock at
less than the last reported sale price of a share of our common
stock on the trading day immediately preceding the declaration date
of the distribution; or
- distribute to all holders of our common stock our assets, debt
securities or certain rights to purchase our securities, which
distribution has a per share value as determined by our Board of
Directors exceeding 15% of the last reported sale price of a share
of our common stock on the trading day immediately preceding the
declaration date for such distribution, we must notify the holders
of the Preferred Stock at least 20 Business Days prior to the
ex-dividend date (as defined herein) for such distribution. Once we
have given such notice, holders may surrender their Preferred Stock
for conversion at any time until the earlier of the close of
business on the Business Day immediately prior to the ex-dividend
date or our announcement that such distribution will not take place,
even if the Preferred Stock is not otherwise convertible at such
time; provided, however, that a holder may not exercise this right
to convert if the holder may participate in the distribution without
conversion. The "EX-DIVIDEND DATE" is the first date upon which a
sale of the common stock does not automatically transfer the right
to receive the relevant distribution from the seller of the common
stock to its buyer.
In addition, if we are party to a consolidation, merger or binding share
exchange pursuant to which our common stock would be converted into cash or
property other than securities, a holder may surrender Preferred Stock for
conversion at any time from and after the date which is 15 days prior to the
anticipated effective date of the transaction until 15 days after the actual
effective date of such transaction. If we engage in certain reclassifications of
our common stock or are a party to a consolidation, merger, binding share
exchange or transfer of all or substantially all of our assets pursuant to which
our common stock is converted into cash, securities or other property, then, at
the effective time of the transaction, the right to convert Preferred Stock into
cash and shares of our common stock will be changed into a right to convert
Preferred Stock into the kind and amount of cash, securities or other property
which the holder would have received if the holder had converted its Preferred
Stock immediately prior to the transaction. If the transaction also constitutes
a Fundamental Change, a holder can require us to purchase all or a portion of
its Preferred Stock as described below under "Fundamental Change Requires
Purchase of Preferred Stock by Us at the Option of the Holder."
CONVERSION UPON SATISFACTION OF TRADING PRICE CONDITION. A holder may
convert its Preferred Stock into cash and shares of our common stock during the
five Business Days immediately following any 10 consecutive trading-day period
in which the trading price per share of Preferred Stock (as determined following
a request by a holder of Preferred Stock in accordance with the procedures
described below) for each day of that period was less than 95% of the product of
the closing sale price of our common stock and the then applicable conversion
rate of Preferred Stock; provided, however, a holder may not convert its
Preferred Stock if the average closing sale price of our common stock for such
10 consecutive trading-day period was between the then applicable conversion
price of the Preferred Stock and 120% of the then applicable conversion price of
the Preferred Stock.
The "TRADING PRICE" of the Preferred Stock on any date of determination
means the average of the secondary market bid quotations per share of Preferred
Stock obtained by the conversion agent for $5,000,000 liquidation preference of
the Preferred Stock at approximately 3:30 p.m., New York City time, on such
determination date from three independent nationally recognized securities
dealers we select, provided that if three such bids cannot reasonably be
obtained by the conversion agent, but two such bids are obtained, then the
average of the two bids shall be used, and if only one such bid can reasonably
be obtained by the conversion agent, this one bid shall be used. If the
conversion agent cannot reasonably obtain at least one bid for $5,000,000
liquidation preference of the Preferred Stock from a nationally recognized
securities dealer, then the trading price per share of the Preferred Stock will
be deemed to be less than 95% of the product of the sale price of our common
stock and the then applicable conversion rate.
In connection with any conversion upon satisfaction of the above trading
price condition, the conversion agent shall have no obligation to determine the
trading price of the Preferred Stock unless we have requested such
determination; and we shall have no obligation to make such request unless a
holder provides us with reasonable evidence that the trading price per share of
the Preferred Stock would be less than 95% of the product of the sale price of
our common stock and the then applicable conversion rate, at which
36
time, we shall instruct the conversion agent to determine the trading price of
the Preferred Stock beginning on the next trading day and on each successive
trading day until the trading price is greater than or equal to 95% of the
product of the sale price of our common stock and the then applicable conversion
rate.
CONVERSION RATE ADJUSTMENTS. The applicable conversion rate will be
subject to adjustment, without duplication, upon the occurrence of any of the
following events:
(1) the payment of dividends and other distributions on our common
stock payable exclusively in shares of our common stock or our other
capital stock;
(2) the issuance to all holders of our common stock of rights or
warrants that allow the holders to purchase shares of our common stock for
a period expiring within 60 days from the date of issuance of the rights
or warrants at less than the market-trading price on the record date for
the determination of shareholders entitled to receive the rights or
warrants;
(3) subdivisions, combinations or certain reclassifications of our
common stock;
(4) distributions to all holders of our common stock of our assets,
debt securities or rights or warrants to purchase our securities
(excluding (A) any dividend, distribution or issuance covered by clause
(1) or (2) above and (B) any dividend or distribution paid exclusively in
cash). In cases where (a) the fair market value per share of common stock
of the assets, debt securities or rights or warrants to purchase our
securities distributed to shareholders equals or exceeds the market price
of our common stock on the record date for the determination of
shareholders entitled to receive such distribution, or (b) the market
price of our common stock on the record date for determining the
shareholders entitled to receive the distribution exceeds the fair market
value per share of common stock of the assets, debt securities or rights
or warrants so distributed by less than $1.00, rather than being entitled
to an adjustment in the conversion rate, the holder will be entitled to
receive upon conversion, in addition to the shares of our common stock,
the kind and amount of assets, debt securities or rights or warrants
comprising the distribution that the holder would have received if the
holder had converted the holder's Preferred Stock immediately prior to the
record date for determining the shareholders entitled to receive the
distribution;
(5) we declare a cash dividend or cash distribution to all or
substantially all of the holders of our common stock. If we declare such a
cash dividend or cash distribution, the applicable conversion rate shall
be increased to equal the number determined by multiplying the applicable
conversion rate in effect immediately prior to the record date for such
dividend or distribution by the following fraction:
(pre-dividend sale price)
(pre-dividend sale price - dividend adjustment amount)
provided that if the denominator of the foregoing fraction is less than
$1.00 (including a negative amount), then in lieu of any adjustment under
this clause (5), we shall make adequate provision so that each holder of
Preferred Stock shall have the right to receive upon conversion, in
addition to the cash and shares of common stock issuable upon such
conversion, the amount of cash such holder would have received had such
holder converted its Preferred Stock solely into shares of our common
stock at the then applicable conversion rate immediately prior to the
record date for such cash dividend or cash distribution. "PRE-DIVIDEND
SALE PRICE" means the average of the last reported sale price of our
common stock price for the five consecutive trading days ending on the
trading day immediately preceding the record date for such dividend or
distribution. "DIVIDEND ADJUSTMENT AMOUNT" means the full amount of the
dividend or distribution to the extent payable in cash applicable to one
share of our common stock; and
(6) (A) other all-cash distributions other than dividends and
distributions covered by clause (5) above made during such quarterly
fiscal period and (B) any cash and the fair market value, as of the
expiration of the tender or exchange offer (other than consideration
payable in respect of any odd-lot tender offer) by us or any of our
subsidiaries for shares of our common stock concluded during such
quarterly fiscal period. The applicable conversion rate in such a case
will be increased in accordance with the provision of clause (5) above.
With respect to clause (4) above, in the event that we make a distribution
to all holders of our common stock consisting of capital stock of, or similar
equity interests in, a subsidiary or other business unit of ours, the conversion
rate will be adjusted based on the market value of the securities so distributed
relative to the market value of our common stock, in each case based on the
average closing sale prices of those securities for the 10 trading days
commencing on and including the fifth trading day after the date on which
"ex-dividend trading" commences for such dividend or distribution on the New
York Stock Exchange or such other national or regional exchange or market on
which the securities are then listed or quoted.
37
Notwithstanding the foregoing, in no event will the conversion rate exceed
6.5703 shares of common stock, which we refer to as the "MAXIMUM CONVERSION
RATE," as a result of an adjustment pursuant to clauses (4) and (5) above.
In addition to these adjustments, we may increase the applicable
conversion rate as our Board of Directors considers advisable to avoid or
diminish any income tax to holders of our common stock or rights to purchase our
common stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes. We may
also, from time to time, to the extent permitted by applicable law, increase the
applicable conversion rate by any amount, temporarily or otherwise, for any
period of at least 20 days if our Board of Directors has determined that such
increase would be in our best interests. If our Board of Directors makes such a
determination, it will be conclusive. We will give holders of Preferred Stock at
least 15 days' notice of such an increase in the applicable conversion rate.
As used in this prospectus, "MARKET PRICE" means the average of the last
reported sale price per share of our common stock for the 20 trading day period
ending on the applicable date of determination (if the applicable date of
determination is a trading day or, if not, then on the last trading day prior to
the applicable date of determination), appropriately adjusted to take into
account the occurrence, during the period commencing on the first of the trading
days during the 20 trading day period and ending on the applicable date of
determination, of any event that would result in an adjustment of the applicable
conversion rate under the certificate of designation.
No adjustment to the applicable conversion rate or the ability of a holder
of Preferred Stock to convert will be made if the holder will otherwise
participate in the distribution without conversion or in certain other cases.
The applicable conversion rate will not be adjusted:
- upon the issuance of any shares of our common stock pursuant to any
present or future plan providing for the reinvestment of dividends
or interest payable on our securities and the investment of
additional optional amounts in shares of our common stock under any
plan;
- upon the issuance of any shares of our common stock or options or
rights to purchase those shares pursuant to any present or future
employee, director or consultant benefit plan or program of or
assumed by us or any of our subsidiaries;
- upon the issuance of any shares of our common stock pursuant to any
option, warrant, right or exercisable, exchangeable or convertible
security not described in the preceding bullet and outstanding as of
the date the Preferred Stock was first issued;
- for a change in the par value of the common stock; or
- for accumulated and unpaid dividends on the Preferred Stock,
including additional dividends, if any.
Holders will receive, upon conversion of the Preferred Stock, in addition
to cash and common stock, rights under any rights plan we may adopt, whether or
not the rights have separated from the common stock at the time of conversion
unless, prior to conversion, the rights have expired, terminated or been
redeemed or exchanged.
No adjustment in the applicable conversion price will be required unless
the adjustment would require an increase or decrease of at least 1% of the
applicable conversion price. If the adjustment is not made because the
adjustment does not change the applicable conversion price by more than 1%, then
the adjustment that is not made will be carried forward and taken into account
in any future adjustment.
No adjustment in the conversion price or conversion rate need be made for
a merger or consolidation if holders are to participate in the transaction on a
basis and with notice that the Board of Directors determines to be fair and
appropriate in light of the basis and notice on which holders of our common
stock participate in the transaction; provided, that the basis on which the
holders are to participate in the transaction shall not be deemed to be fair if
it would require the conversion of Preferred Stock at any time prior to the
expiration of the conversion period specified for such Preferred Stock.
ADJUSTMENT TO CONVERSION RATE UPON THE OCCURRENCE OF A CASH TAKE-OVER
TRANSACTION
Until December 5, 2008, if you elect to convert Preferred Stock in
connection with a corporate transaction as described under " -- Conversion Upon
Specified Corporate Transactions" that constitutes a Fundamental Change as
defined under " -- Fundamental Change
38
Requires Purchase of Preferred Stock by Us at the Option of the Holder" (other
than a Fundamental Change relating to the composition of our Board of Directors)
and 10% or more of the fair market value of the consideration for the shares of
our common stock in the corporate transaction consists of (i) cash, (ii) other
property or (iii) securities that are not traded or scheduled to be traded
immediately following such transaction on a U.S. national securities exchange or
the Nasdaq National Market, we will increase the applicable conversion rate for
the Preferred Stock surrendered for conversion, which will increase the number
of shares of our common stock issuable upon conversion (the "ADDITIONAL SHARES")
as described below.
The number of additional shares will be determined by reference to the
table below, based on the date on which the corporate transaction becomes
effective (the "EFFECTIVE DATE") and the share price (the "SHARE PRICE") paid
per share of our common stock in the corporate transaction. If holders of shares
of our common stock receive only cash in the corporate transaction, the share
price shall be the cash amount paid per share. Otherwise, the share price shall
be the average of the closing sale prices of our common stock on the five
trading days prior to but not including the effective date of the corporate
transaction.
The share prices set forth in the first row of the table below (i.e.,
column headers) will be adjusted as of any date on which the applicable
conversion rate of the Preferred Stock is adjusted, as described above under "
-- Conversion Rate Adjustments." The adjusted share prices will equal the share
prices applicable immediately prior to such adjustment, multiplied by a
fraction, the numerator of which is the conversion rate immediately prior to
such adjustment giving rise to the share price adjustment and the denominator of
which is the conversion rate so adjusted. The number of additional shares will
be adjusted in the same manner as the applicable conversion rate as set forth
above under " -- Conversion Rate Adjustments."
The following table sets forth the hypothetical share price and number of
additional shares to be received per liquidation preference of $50.00 per share
of Preferred Stock:
SHARE PRICE
=================================================================================================================
EFFECTIVE DATE $7.61 $8.00 $9.00 $10.00 $11.00 $12.00 $13.00 $14.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $50.00
---------------- ----- ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
November 9, 2004 1.52 1.52 1.42 1.20 1.02 0.88 0.79 0.70 0.63 0.39 0.27 0.20 0.15 0.12 0.00
December 5, 2005 1.52 1.52 1.33 1.11 0.93 0.79 0.71 0.61 0.55 0.33 0.23 0.17 0.13 0.10 0.00
December 5, 2006 1.52 1.52 1.23 1.00 0.82 0.69 0.62 0.52 0.47 0.27 0.18 0.13 0.10 0.08 0.00
December 5, 2007 1.52 1.43 1.12 0.89 0.70 0.57 0.50 0.41 0.34 0.19 0.12 0.09 0.07 0.05 0.00
December 5, 2008 1.52 1.36 1.03 0.77 0.57 0.43 0.37 0.27 0.20 0.10 0.06 0.05 0.04 0.03 0.00
The share prices and additional share amounts set forth above are based
upon an initial conversion rate per share of 5.0541 per liquidation preference
of $50.00 per share of Preferred Stock.
The exact share prices and effective dates may not be set forth in the
table above, in which case:
- If the share price is between two share price amounts in the table
or the effective date is between two effective dates in the table,
the number of additional shares will be determined by a
straight-line interpolation between the number of additional shares
set forth for the higher and lower share price amounts and the two
dates, as applicable, based on a 365-day year.
- If the share price is equal to or in excess of $50.00 per share
(subject to adjustment), no additional shares will be issued upon
conversion.
- If the share price is less than $7.61 per share (subject to
adjustment), no additional shares will be issued upon conversion.
Notwithstanding the foregoing, any adjustment to the applicable conversion
rate relating to the issuance of additional shares as described in this section
will not exceed the maximum conversion rate.
CONVERSION AFTER A PUBLIC ACQUIRER CHANGE OF CONTROL
Notwithstanding the foregoing, in the case of a public acquirer change of
control (as defined below), we may, in lieu of increasing the applicable
conversion rate by additional shares of our common stock as described above in "
-- Adjustment to Conversion Rate upon the Occurrence of a Cash Take-Over
Transaction," elect to adjust the applicable conversion rate and related
conversion obligation such that upon conversion we will deliver cash and a
number of shares of the public acquirer's common stock (as defined below). Such
adjustment will be permanent although your right to convert the Preferred Stock
will still be subject to the satisfaction of the conditions to conversion
described under " -- Conversion Rights" above.
39
The applicable conversion rate will be adjusted by a fraction calculated
by dividing the average price of our common stock by the average price of the
public acquirer's common stock.
The average price of our common stock will be calculated based on the
closing sale price for the five consecutive trading days prior to but excluding
the effective date of such public acquirer change of control. The public
acquirer's common stock will be calculated based on the five consecutive trading
days commencing on the trading day next succeeding the effective date of such
public acquirer change of control.
A "PUBLIC ACQUIRER CHANGE OF CONTROL" means any event constituting a cash
take-over transaction that would otherwise obligate us to increase the
conversion rate as described above under " -- Adjustment to Conversion Rate upon
the Occurrence of a Cash Take-Over Transaction" and the acquirer has a class of
common stock traded on a U.S. national securities exchange or quoted on the
NASDAQ National Market or which will be so traded or quoted when issued or
exchanged in connection with such cash take-over transaction (the "PUBLIC
ACQUIRER COMMON STOCK"). If an acquirer does not itself have a class of common
stock satisfying the foregoing requirement, it will be deemed to have "public
acquirer common stock" if a parent corporation that directly or indirectly
wholly owns the acquirer, has a class of common stock satisfying the foregoing
requirement and that parent corporation provides a guarantee to the Preferred
Stock; in such case, all reference to "public acquirer common stock "shall refer
to such class of common stock.
We are required to notify holders of Preferred Stock of our election in
our notice of such transaction which notice shall be made five Business Days
prior to the effective date of such public acquirer change of control. As
described under " -- Conversion Upon Specified Corporate Transactions" above,
you may convert your Preferred Stock into cash and our common stock if we are a
party to a consolidation, merger or binding share exchange pursuant to which our
common stock would be converted into cash or property other than securities
during the period specified therein. In addition, a holder of Preferred Stock
can also, subject to certain conditions, require us to repurchase all or a
portion of their Preferred Stock as described under " -- Fundamental Change
Requires Purchase of Preferred Stock by Us at the Option of the Holder."
MANDATORY CONVERSION
At any time on or after December 5, 2008, we may, at our option, cause the
Preferred Stock to be automatically converted into cash and shares of our common
stock. The conversion value a holder will receive upon mandatory conversion will
be calculated in the manner set forth above under "Conversion Rights --
General." We may exercise this right only if the closing price of our common
stock equals or exceeds 130% of the then applicable conversion price of the
Preferred Stock for at least 20 trading days in any consecutive 30-day trading
period, including the last trading day of such 30-day period, ending on the
trading day prior to our issuance of a press release announcing the mandatory
conversion as described below.
To exercise the mandatory conversion right described above, we must issue
a press release for publication on the Dow Jones News Service prior to the
opening of business on the first trading day following any date on which the
conditions described in the preceding paragraph are met, announcing such a
mandatory conversion. We will also give notice by mail or by publication (with
subsequent prompt notice by mail) to holders of Preferred Stock (not more than
four Business Days after the date of the press release) of the mandatory
conversion announcing our intention to convert the Preferred Stock. The
conversion date will be a date selected by us (which we will refer to as the
"MANDATORY CONVERSION DATE") and will be no more than five days after the date
on which we issue such press release.
In addition to any information required by applicable law or regulation,
the press release and notice of mandatory conversion shall state, as
appropriate:
- the Mandatory Conversion Date;
- the conversion value including the number of shares of net shares of
common stock to be issued upon conversion of each share of Preferred
Stock;
- the number of shares of Preferred Stock to be converted; and
- that dividends on the Preferred Stock to be converted will cease to
accumulate on the Mandatory Conversion Date.
On and after the Mandatory Conversion Date, dividends will cease to
accumulate on the Preferred Stock called for a mandatory
40
conversion and all rights of holders of such Preferred Stock will terminate
except for the right to receive the cash and shares of common stock issuable
upon conversion thereof. The dividend payment with respect to a share of
Preferred Stock called for a mandatory conversion on a date during the period
between the close of business on any record date for the payment of dividends to
the close of business on the corresponding dividend payment date will be payable
on such dividend payment date to the record holder of such share on such record
date if such share has been converted after such record date and prior to such
dividend payment date. Except as provided in the immediately preceding sentence
with respect to a mandatory conversion, no payment or adjustment will be made
upon conversion of Preferred Stock for accumulated and unpaid dividends or for
dividends with respect to our common stock issued upon such conversion.
We may not authorize, issue a press release or give notice of any
mandatory conversion unless, prior to giving the conversion notice, all
accumulated and unpaid dividends on the Preferred Stock for periods ended prior
to the date of such conversion notice shall have been paid in cash.
In addition to the mandatory conversion provision described above, if
there are less than 250,000 shares of Preferred Stock outstanding, we may, at
any time on or after December 5, 2008, at our option, cause the Preferred Stock
to be automatically converted into cash and our common stock in accordance with
the provisions of "Conversion Rights -- General," above.
FUNDAMENTAL CHANGE REQUIRES PURCHASE OF PREFERRED STOCK BY US AT THE OPTION OF
THE HOLDER
Holders will have the right, at their option, subject to the terms of the
certificate of designation, to require us to purchase any or all of their
Preferred Stock for cash on a date selected by CMS Energy that is no earlier
than 60 days nor later than 90 days (the "FUNDAMENTAL CHANGE PURCHASE DATE")
after the mailing of written notice by CMS Energy of the occurrence of such
Fundamental Change. The cash price we are required to pay is equal to 100% of
the liquidation preference of the Preferred Stock to be purchased plus
accumulated and unpaid dividends, including additional dividends, if any, to the
Fundamental Change purchase date (the "FUNDAMENTAL CHANGE PURCHASE PRICE"). For
a discussion of the United States federal income tax treatment of a holder
receiving cash, see "Material United States Federal Income Tax Considerations."
A "FUNDAMENTAL CHANGE" will be deemed to have occurred at the time after
the Preferred Stock is originally issued that any of the following occurs:
(1) our common stock or other capital stock into which the Preferred
Stock is convertible is neither listed for trading on a United States
national securities exchange nor approved for trading on the Nasdaq
National Market or another established automated over-the-counter trading
market in the United States;
(2) a "person" or "group" within the meaning of Section 13(d) of the
Exchange Act, other than us, our subsidiaries or our or their employee
benefit plans, files a Schedule TO or any schedule, form or report under
the Exchange Act disclosing that such person or group has become the
direct or indirect ultimate "beneficial owner," as defined in Rule 13d-3
under the Exchange Act, of our common equity representing more than 50% of
the voting power of our common equity entitled to vote generally in the
election of directors;
(3) consummation of any share exchange, consolidation or merger of
us pursuant to which our common stock will be converted into cash,
securities or other property or any sale, lease or other transfer in one
transaction or a series of transactions of all or substantially all of the
consolidated assets of us and our subsidiaries, taken as a whole, to any
person other than us or one or more of our subsidiaries; provided,
however, that a transaction where the holders of our common equity
immediately prior to such transaction have, directly or indirectly, more
than 50% of the aggregate voting power of all classes of common equity of
the continuing or surviving corporation or transferee entitled to vote
generally in the election of directors immediately after such event shall
not be a Fundamental Change; or
(4) continuing directors (as defined herein) cease to constitute at
least a majority of our Board of Directors.
A Fundamental Change will not be deemed to have occurred in respect of any
of the foregoing, however, if either:
(1) the last reported sale price of our common stock for any five
trading days within the 10 consecutive trading days ending immediately
before the later of the Fundamental Change or the public announcement
thereof equals or exceeds 105% of the applicable conversion price of the
Preferred Stock in effect immediately before the Fundamental Change or the
public announcement thereof; or
41
(2) at least 90% of the consideration, excluding cash payments for
fractional shares, in the transaction or transactions constituting the
Fundamental Change consists of shares of capital stock traded on a
national securities exchange or quoted on the Nasdaq National Market or
which will be so traded or quoted when issued or exchanged in connection
with a Fundamental Change (these securities being referred to as "PUBLICLY
TRADED SECURITIES") and as a result of this transaction or transactions
the Preferred Stock becomes convertible into such publicly traded
securities, excluding cash payments for fractional shares.
For purposes of the above paragraph, the term capital stock of any person
means any and all shares (including ordinary shares or American Depositary
Shares), interests, participations or other equivalents however designated of
corporate stock or other equity participations, including partnership interests,
whether general or limited, of such person and any rights (other than debt
securities convertible or exchangeable into an equity interest), warrants or
options to acquire an equity interest in such person.
"CONTINUING DIRECTOR" means a director who either was a member of our
Board of Directors on November 9, 2004 or who becomes a member of our Board of
Directors subsequent to that date and whose appointment, election or nomination
for election by our stockholders is duly approved by a majority of the
continuing directors on our Board of Directors at the time of such approval,
either by a specific vote or by approval of the proxy statement issued by us on
behalf of the Board of Directors in which such individual is named as nominee
for director.
Within 30 days after the occurrence of the Fundamental Change, CMS Energy
is obligated to mail to each holder of shares of Preferred Stock a notice
regarding the Fundamental Change, which notice shall state, among other things:
- that a Fundamental Change has occurred, the date of such occurrence
and that each such holder has the right to require CMS Energy to
repurchase all or any part of such holder's Preferred Stock at the
Fundamental Change purchase price;
- the Fundamental Change purchase price;
- the Fundamental Change purchase date;
- the name and address of the paying agent and the conversion agent;
- the procedures that holders must follow to cause the Preferred Stock
to be repurchased;
- the last date on which a holder may exercise its purchase right;
- that the Preferred Stock with respect to which a Fundamental Change
purchase notice (as defined herein) has been given by the holder may
be converted only if the holder withdraws the Fundamental Change
purchase notice in accordance with the terms of the certificate of
designation; and
- the applicable conversion rate and any adjustments to the applicable
conversion rate.
To exercise this right, a holder must deliver a written notice (the
"FUNDAMENTAL CHANGE PURCHASE NOTICE"), along with the Preferred Stock to be
purchased, duly endorsed for transfer, to the paying agent at its office in
Jackson, Michigan, or any other office of the paying agent maintained for such
purposes, not later than 30 days prior to the Fundamental Change purchase date.
The Fundamental Change purchase notice shall state:
- the Preferred Stock to be repurchased, which must be $50.00 or an
integral multiple thereof;
- that such Preferred Stock is to be repurchased by CMS Energy
pursuant to the applicable Fundamental Change provisions of the
certificate of designation; and
- unless the Preferred Stock is represented by one or more global
securities, the certificate numbers of the Preferred Stock to be
repurchased.
If the Preferred Stock is not in certificated form, the Fundamental Change
purchase notice must comply with appropriate DTC procedures.
Holders may withdraw any Fundamental Change purchase notice (in whole or
in part) by a written notice of withdrawal delivered to the paying agent prior
to the close of business on the Business Day prior to the Fundamental Change
purchase date. The notice of
42
withdrawal shall state:
- the number of shares of the withdrawn Preferred Stock;
- if certificated Preferred Stock has been issued, the certificate
numbers of the withdrawn shares of Preferred Stock; and
- the number of shares of Preferred Stock, if any, which remain
subject to the purchase notice.
If the Preferred Stock is not in certificated form, the notice of
withdrawal must comply with appropriate DTC procedures.
Payment of the Fundamental Change purchase price for shares of Preferred
Stock in registered, certificated form ("CERTIFICATED PREFERRED STOCK") for
which a Fundamental Change purchase notice has been delivered and not withdrawn
is conditioned upon delivery of such Certificated Preferred Stock (together with
necessary endorsements) to the paying agent at its office in Jackson, Michigan,
or any other office of the paying agent maintained for such purpose, at any time
(whether prior to, on or after the Fundamental Change purchase date) after the
delivery of such Fundamental Change purchase notice. Payment of the Fundamental
Change purchase price for such Certificated Preferred Stock will be made
promptly following the later of the Fundamental Change purchase date or the time
of delivery of such Certificated Preferred Stock.
If the paying agent holds, in accordance with the terms of the certificate
of designation, money sufficient to pay the Fundamental Change purchase price of
shares of Preferred Stock on the Business Day following the Fundamental Change
purchase date for such Preferred Stock, then, on and after such date, dividends
on such Preferred Stock (including additional dividends, if any,) will cease to
accumulate, whether or not such Preferred Stock is delivered to the paying
agent, and all other rights of the holder shall terminate (other than the right
to receive the Fundamental Change purchase price upon delivery of such Preferred
Stock).
The definition of Fundamental Change includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our consolidated assets. There is no precise, established definition of the
phrase "substantially all" under applicable law. Accordingly, the ability of a
holder of Preferred Stock to require us to purchase its shares of Preferred
Stock as a result of the conveyance, transfer, sale, lease or other disposition
of less than all of our assets may be uncertain.
If a Fundamental Change were to occur, we may not have enough funds to pay
the Fundamental Change purchase price. See "Risk Factors" under the caption
"Risks Related to the Preferred Stock -- We may not have the ability to raise
the funds necessary to pay the cash component upon a conversion of the Preferred
Stock or purchase the Preferred Stock upon a Fundamental Change."
The certificate of designation 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 Preferred Stock at the option of the holder upon a Fundamental Change.
The Fundamental Change purchase feature of the Preferred Stock may in
certain circumstances make more difficult or discourage a takeover of CMS Energy
and, thus, the removal of incumbent management. The Fundamental Change purchase
feature, however, is not the result of management's knowledge of any specific
effort to accumulate shares of our common stock or to obtain control of us by
means of a merger, tender offer, solicitation or otherwise, or part of a plan by
management to adopt a series of anti-takeover provisions. Instead, the
Fundamental Change purchase feature is a term contained in many similar
preferred stock offerings and the terms of such feature result from negotiations
between CMS Energy and the initial purchasers. Management has no present
intention to propose any anti-takeover measures although it is possible that CMS
Energy could decide to do so in the future.
The definition of Fundamental Change is limited to specified transactions
and may not include other events that might adversely affect our financial
condition. In addition, the requirement that we offer to purchase the Preferred
Stock upon a Fundamental Change may not protect holders in the event of a highly
leveraged transaction, reorganization, merger or similar transaction involving
us.
In addition, CMS Energy's ability to repurchase Preferred Stock may be
limited by its financial resources.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
The certificate of designation provides that we may, without the consent
of the holders of any of the outstanding Preferred Stock, consolidate with or
merge into any other person or convey, transfer or lease all or substantially
all our assets to any person or may permit any person to consolidate with or
merge into, or transfer or lease all or substantially all its properties to, us;
provided, however, that: (a) the successor, transferee or lessee is organized
under the laws of the United States or any political subdivision thereof; (b)
the shares of Preferred Stock will become shares of such successor, transferee
or lessee, having in respect of such successor, transferee or lessee the same
powers, preferences and relative participating, optional or other special rights
and the qualification, limitations or restrictions thereon, as the Preferred
Stock had immediately prior to such transaction; and (c) certain procedural
conditions are met.
Under any consolidation by us with, or merger by us into, any other person
or any conveyance, transfer or lease of all or substantially all our assets as
described in the preceding paragraph, the successor resulting from such
consolidation or into which we are merged or the transferee or lessee to which
such conveyance, transfer or lease is made will succeed to, and be substituted
for, and may exercise every right and power of, ours under the shares of
Preferred Stock, and, thereafter, except in the case of a lease, the predecessor
(if still in existence) will be released from its obligations and covenants with
respect to the Preferred Stock. Notwithstanding the foregoing provisions, such a
transaction may constitute a Fundamental Change as described in "Fundamental
Change Requires Purchase of Preferred Stock by Us at the Option of the Holder."
THE CONVERSION AND PAYING AGENT
CMS Energy is the paying agent and conversion agent under the certificate
of designation for the Preferred Stock.
CALCULATIONS IN RESPECT OF THE PREFERRED STOCK
We will be responsible for making all calculations called for under the
Preferred Stock. These calculations include, but are not limited to,
determinations of the market prices of our common stock, accumulated dividends
payable on the Preferred Stock the conversion rate and the conversion price of
the Preferred Stock. We will make all these calculations in good faith and,
absent manifest error, our calculations will be final and binding on holders of
Preferred Stock. We will provide a schedule of our calculations to the
conversion agent, and the conversion agent is entitled to rely upon the accuracy
of our calculations without independent verification. We will forward our
calculations to any holder of Preferred Stock upon the request of that holder.
GOVERNING LAW
The certificate of designation and the Preferred Stock 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 Preferred Stock is represented by one or more global securities. Each
global security is deposited with, or on behalf of, DTC and registered in the
name of a nominee of DTC. Except under circumstances described below, the
Preferred Stock will not be issued in definitive form.
The following is based upon information furnished by DTC:
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("PARTICIPANTS") deposit with DTC. DTC
also facilitates the settlement among participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
("DIRECT PARTICIPANTS") include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its direct participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the SEC.
Investors who purchase Preferred Stock in offshore transactions in
reliance on Regulation S under the Securities Act may hold
44
their interest in a global security directly through Euroclear Bank S.A./N.V.,
as operator of the Euroclear System ("EUROCLEAR"), and Clearstream Banking,
societe anonyme ("CLEARSTREAM"), if they are participants in such systems, or
indirectly through organizations that are participants in such systems.
Euroclear and Clearstream will hold interests in the global securities on behalf
of their participants through their respective depositaries, which in turn will
hold such interests in the global securities in customers' securities accounts
in the depositaries' names on the books of DTC.
Upon the issuance of a global security, DTC will credit on its book-entry
registration and transfer system the accounts of persons with the respective
number of shares of Preferred Stock 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 Preferred Stock represented by that global security for
all purposes. Except as provided below, owners of beneficial interests in a
global security will not be entitled to have Preferred Stock represented by that
global security registered in their names, will not receive or be entitled to
receive physical delivery of Preferred Stock in definitive form and will not be
considered the owners or holders thereof. Dividend and any other payments, if
any, on Preferred Stock 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, any paying agent or the security registrar
for the Preferred Stock 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
dividends, will credit immediately participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the number of
shares of the relevant global security as shown on the records of DTC or its
nominee. We also expect that payments by participants to owners of beneficial
interests in a global security held through these participants will be governed
by standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of the participants.
Beneficial owners of interests in global securities who desire to convert
their interests into common stock should contact their brokers or other
participants or indirect participants through whom they hold such beneficial
interests to obtain information on procedures, including proper forms and
cut-off times, for submitting requests for conversion.
Unless and until they are exchanged in whole or in part for Preferred
Stock 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.
45
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 Preferred Stock in definitive form in exchange for the global
securities relating to the Preferred Stock. In addition, we may at any time and
in our sole discretion determine not to have the Preferred Stock or portions of
the Preferred Stock represented by one or more global securities and, in that
event, will issue individual shares of Preferred Stock in exchange for the
global security or securities representing the Preferred Stock. Further, if we
so specify with respect to any Preferred Stock, an owner of a beneficial
interest in a global security representing the Preferred Stock may, on terms
acceptable to us and the depositary for the global security, receive individual
shares of Preferred Stock 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 shares of Preferred Stock
represented by the global security equal in number of shares to the beneficial
interest, and to have the shares of Preferred Stock registered in its name.
Preferred Stock so issued in definitive form will be issued as registered
Preferred Stock in denominations of $50.00 and integral multiples thereof,
unless otherwise specified by us.
REGISTRATION RIGHTS
The following description of the material provisions of a registration
rights agreement that was entered into in connection with the issuance of the
Old Preferred Stock is a summary only. Because this section is a summary, it
does not describe every aspect of the registration rights agreement. This
summary is subject to and qualified in its entirety by reference to all the
provisions of the registration rights agreement, a copy of which will be made
available to holders of the Preferred Stock upon request to us.
We have granted holders of the Preferred Stock the registration rights
given to holders of Old Preferred Stock provided in the registration rights
agreement. Under this registration rights agreement, we agreed to, at our cost,
use our reasonable best efforts to:
- as soon as practicable after the time that we become eligible to
file registration statements on Form S-3 under the Exchange Act but
in any event within 11 months after the original issuance of the Old
Preferred Stock (the "SHELF REGISTRATION FILING DATE"), file a shelf
registration statement with the SEC covering resales of the Old
Preferred Stock and the common stock issuable upon conversion
thereof;
- cause the shelf registration statement to be declared effective
under the Securities Act no later than 120 days after the Shelf
Registration Filing Date; and
- keep the shelf registration statement effective after its effective
date until the earliest to occur of the following:
- all securities covered by the registration statement have been
sold pursuant to an effective registration statement;
- the date on which all registrable securities have been sold
pursuant to Rule 144 under the Securities Act;
- such time as there are no longer any registrable securities
outstanding; and
- the second anniversary of the last date of original issuance
of the Old Preferred Stock.
A shelf registration statement on Form S-3 under the Exchange Act
regarding the Old Preferred Stock was filed with the SEC on September 24, 2004
which satisfied our obligation under the registration rights agreement to file a
shelf registration statement with the SEC. Pursuant to the exchange offer
whereby all of the outstanding shares of Old Preferred Stock were exchanged for
shares of Preferred Stock we agreed to, at our cost, use our reasonable best
efforts to:
- amend the shelf registration statement to cover resales of Preferred
Stock and any Old Preferred Stock that was not exchanged (or at our
option file a new registration statement relating to either Old or
Preferred Stock) and cause the shelf registration statement to be
declared effective under the Securities Act no later than 120 days
after the Shelf Registration Filing Date; and
- keep the shelf registration statement effective after its effective
date until the earliest to occur of the following:
- all securities covered by the registration statement have been
sold pursuant to an effective registration statement;
46
- the date on which all registrable securities have been sold
pursuant to Rule 144 under the Securities Act;
- such time as there are no longer any registrable securities
outstanding; and
- the second anniversary of the last date of original issuance
of the Old Preferred Stock.
The shelf registration statement was declared effective on February 3,
2005 which satisfies our obligation to cause the shelf registration statement to
be declared effective. We refer to the Preferred Stock and the common stock
issuable upon conversion thereof as registrable securities. We will be permitted
to suspend the effectiveness of the shelf registration statement or the use of
the prospectus that is part of the shelf registration statement during specified
periods (not to exceed 45 consecutive days or an aggregate of 90 days in any
consecutive 12-month period) in specified circumstances, without being required
to pay additional dividends. We need not specify the nature of the event giving
rise to a suspension in any notice to the holders of the Preferred Stock of the
existence of a suspension.
If:
- after the effectiveness of the shelf registration statement, we fail
to file a post-effective amendment, prospectus supplement or report
with the SEC if required by applicable law within five business days
after a holder provides us with the questionnaire referred to below,
if such filing is necessary to enable the holder to deliver the
prospectus to purchasers of such holder's registrable securities;
- the registration statement ceases to be effective or fails to be
usable without being succeeded within 30 days by a post-effective
amendment, prospectus supplement or report filed with the SEC (other
than as permitted in the preceding paragraph) pursuant to the
Exchange Act that cures the failure of the registration statement to
be effective or usable; or
- the aggregate duration of any suspension periods in any period
exceeds the limits described above,
then, in each case, additional dividends will accumulate on the Preferred Stock,
from and including the date on which any such registration default shall occur
to, but excluding, the date on which the registration default has been cured, at
the rate of 0.25% per year for the first 90 days following such date and at a
rate of 0.50% per year thereafter. With respect to shares of common stock
issued, if any, upon conversion of the Preferred Stock, additional dividends
will accumulate on the then applicable conversion price from and including the
date on which any such registration default shall occur to, but excluding, the
date on which the registration default has been cured, at the rate of 0.25% per
year for the first 90 days following such date and at a rate of 0.50% per year
thereafter. Except as mentioned above, we will have no other liabilities for
monetary damages with respect to our registration obligations. The receipt of
additional dividends will be the sole monetary remedy available to a holder if
we fail to meet these obligations.
A holder who elects to sell any securities pursuant to the shelf
registration statement:
- will be required to be named as a selling securityholder;
- will be required to deliver a prospectus to purchasers;
- will be subject to the civil liability provisions under the
Securities Act in connection with any sales; and
- will be bound by the provisions of the registration rights
agreement, which are applicable to the holder, including certain
indemnification obligations.
If we receive from a holder of registrable securities a completed
questionnaire, together with such other information as may be reasonably
requested by us, after the effectiveness of the shelf registration statement, we
will file an amendment to the shelf registration statement (or new registration
statement if required by applicable law) or supplement to the related prospectus
or to any document incorporated by reference therein within five business days
to permit the holder to deliver a prospectus to purchasers of registrable
securities. Questionnaires were originally provided in the offering memorandum
used in connection with the sale of the Old Preferred Stock and may be obtained
from us upon request. If we receive from a holder of registrable securities a
completed questionnaire, together with such other information as may be
reasonably requested by us, after the effectiveness of the shelf registration
statement, we will file an amendment to the shelf registration statement (or new
registration statement if required by applicable law) or supplement to the
related prospectus or to any document incorporated by reference therein within
five business days to permit the holder to deliver a prospectus to purchasers of
registrable securities. Any holder that does not complete and deliver a
47
questionnaire or provide such other information will not be named as a selling
security holder in the prospectus and therefore will not be permitted to sell
any registrable securities under the shelf registration statement. We will agree
in the registration rights agreement to give notice to all holders of the
Preferred Stock of the filing of the amendment to, and the effectiveness of, the
shelf registration statement.
Each share of Preferred Stock will contain a legend to the effect that the
holder of the Preferred Stock, by its acceptance of the Preferred Stock, agrees
to be bound by the provisions of the registration rights agreement. In that
regard, if a holder receives notice from us of:
(1) the issuance by the SEC or any state securities authority of any
stop order suspending the effectiveness of a registration statement
or the qualification of the Preferred Stock or the common stock
issuable upon conversion thereof to be offered or sold by any
participating broker-dealer or the initiation of proceedings for
that purpose; or
(2) the happening of any event or the failure of any event to occur or
the discovery of any facts which makes any statement made in a
registration statement or related prospectus untrue in any material
respect or which causes that registration statement or the related
prospectus to omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which there were made, not misleading,
the holder, or participating broker-dealer, as the case may be, will suspend the
sale of Preferred Stock or the common stock issuable upon conversion thereof
pursuant to that prospectus until we have either:
- amended or supplemented the prospectus to correct the misstatement
or omission and furnished copies of the amended or supplemented
prospectus to the holder, or participating broker-dealer, as the
case may be; or
- given notice that the sale of the Preferred Stock or the common
stock issuable upon conversion thereof may be resumed.
The registration rights agreement is governed by, and construed in
accordance with, the laws of the State of New York.
DESCRIPTION OF OUR CAPITAL STOCK
The following summary of certain rights of the holders of CMS Energy
capital stock does not purport to be complete and is qualified in its entirety
by express reference to the Restated Articles of Incorporation of CMS Energy
(the "ARTICLES OF INCORPORATION") and the By-Laws of CMS Energy, which are
incorporated into this prospectus by reference. See "Where You Can Find More
Information." A copy of the By-Laws has been previously filed with the SEC. The
Articles of Incorporation are available on our website at
http://www.cmsenergy.com.
The authorized capital stock of CMS Energy consists of:
- 350 million shares of CMS Energy Common Stock, par value $0.01 per
share ("COMMON STOCK"); and
- 10 million shares of CMS Energy Preferred Stock, par value $0.01 per
share ("PREFERRED STOCK").
As of January 28, 2005, we had 5,000,000 shares of 4.50% Cumulative
Convertible Preferred Stock, Series B and 195,136,632 shares of common stock
issued and outstanding.
COMMON STOCK
DIVIDEND RIGHTS AND POLICY; RESTRICTIONS ON DIVIDENDS
Dividends on the common stock are paid at the discretion of the Board of
Directors based primarily upon the earnings and financial condition of CMS
Energy. Dividends are payable out of the assets of CMS Energy legally available
therefore.
In January 2003, the Board of Directors suspended the payment of common
stock dividends.
CMS Energy is a holding company and its assets consist primarily of
investments in its subsidiaries. As a holding company with no significant
operations of its own, the principal sources of its funds are dependent
48
primarily upon the earnings of its subsidiaries (in particular, Consumers),
borrowings and sales of equity. CMS Energy's ability to pay dividends on common
stock, is dependent primarily upon the earnings and cash flows of its
subsidiaries and the distribution or other payment of such earnings to CMS
Energy in the form of dividends, loans or advances and repayment of loans and
advances from CMS Energy. Accordingly, the ability of CMS Energy to pay
dividends on its capital stock will depend on the earnings, financial
requirements, contractual restrictions of the subsidiaries of CMS Energy (in
particular, Consumers) and other factors. CMS Energy's subsidiaries are separate
and distinct legal entities and have no obligation, contingent or otherwise, to
pay any amounts on the capital stock of CMS Energy or to make any funds
available therefor, whether by dividends, loans or other payments.
Dividends on capital stock of CMS Energy are limited by Michigan law to
legally available assets of CMS Energy. Distributions on common stock may be
subject to the rights of the holders, if any, of the Preferred Stock, including
the currently issued and outstanding 4.50% Cumulative Convertible Preferred
Stock, Series B. As long as the 4.50% Cumulative Convertible Preferred Stock,
Series B is outstanding, CMS Energy may not pay dividends on its common stock
unless certain conditions are met including, but not limited to, that dividends
on the 4.50% Cumulative Convertible Preferred Stock, Series B have been paid.
See "Preferred Stock -- Dividends".
CMS Energy is subject to the following contractual restrictions on its
ability to pay dividends:
CMS ENERGY'S SENIOR SECURED CREDIT FACILITY
Under the terms of our Fifth Amended and Restated Senior Credit Agreement
we have agreed that we will not, and will not permit certain of our
subsidiaries, directly or indirectly, to:
- declare or pay any dividend, payment or other distribution of
assets, properties, cash, rights, obligations or securities on
account of any shares of any class of CMS Energy Common Stock or the
capital stock or other ownership interests of certain subsidiaries
(other than stock splits and dividends payable solely in our
non-convertible equity securities (other than Redeemable Stock or
Exchangeable Stock (as such terms are defined in the senior debt
indenture on August 3, 2004)) and dividends and distributions made
to us or certain of our subsidiaries); or
- purchase, redeem, retire or otherwise acquire for value any such
capital stock or other ownership interests;
unless other than (i) pursuant to the terms of any class of our capital stock
issued and outstanding (and as in effect on August 3, 2004), any purchase or
redemption of our capital stock made by exchange for, or out of the proceeds of
the substantially concurrent sale of, our capital stock (other than Redeemable
Stock or Exchangeable Stock (as such terms are defined in the senior debt
indenture on August 3, 2004)) and (ii) payments made by us or certain
subsidiaries pursuant to our tax sharing agreement and (iii) after January 1,
2005 payments not to exceed certain amounts for any twelve-month period so long
as a certain amount of liquidity is held by CMS Energy.
SENIOR DEBT INDENTURE
Under the terms of the senior debt indenture we have the following issued
and outstanding securities: 9.875% Senior Notes Due 2007, 7.5% Senior Notes Due
2009, 8.9% Senior Notes Due 2008, 8.5% Senior Notes Due 2011, 3.375% Convertible
Senior Notes Due 2023 Series B, 7.75% Senior Notes Due 2010, 2.875% Convertible
Senior Notes Due 2024 and 6.30% Senior Notes Due 2012. So long as any of such
notes issued thereunder are outstanding and until those notes are rated BBB - or
above (or an equivalent rating) by S&P and one other rating agency, at which
time we will be permanently released from the provisions of this limitation, we
have agreed that we will not, and will not permit any of our restricted
subsidiaries, directly or indirectly, to:
- declare or pay any dividend or make any distribution on our capital
stock to the direct or indirect holders of our capital stock (except
dividends or distributions payable solely in our non-convertible
capital stock (as defined in the senior debt indenture) or in
options, warrants or other rights to purchase such non-convertible
capital stock and except dividends or other distributions payable to
us or one of our subsidiaries);
- purchase, redeem or otherwise acquire or retire for value any of our
capital stock; or
- purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to the schedule maturity or scheduled repayment
thereof, any of our subordinated indebtedness (each, for purposes of
the senior debt indenture, a "RESTRICTED PAYMENT"),
if at the time of any restricted payment described above (1) an event of default
under the senior debt indenture (or event that with the
49
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:
- $120 million;
- 100% of our consolidated net income from September 30, 1993 to the
end of the most recent fiscal quarter ending at least 45 days prior
to the date of the restricted payment (or, in the case of a deficit,
minus 100% of the deficit); and
- the aggregate net proceeds we have received for any issuance or sale
of, or contribution with respect to, our capital stock subsequent to
September 30, 1993.
The provisions described above do not prohibit (1) dividends or other
distributions in respect of capital stock issued in connection with the
acquisition of any business or assets by us where the payment of such dividends
or distributions are payable solely from the net earnings of such business or
assets, (2) any purchase or redemption of capital stock made by exchange for, or
out of the proceeds of the substantially concurrent sale of, our capital stock
(other than certain redeemable stock or exchangeable stock), (3) dividends paid
within 60 days after the date of declaration thereof if at the date of
declaration such dividends would have complied with the limitations described
above or (4) payments pursuant to the tax sharing agreement among us and our
subsidiaries.
TRUST PREFERRED SECURITIES
In June 1997, a CMS Energy affiliated trust issued $172.5 million of 7
3/4% Convertible Quarterly Income Preferred Securities. The preferred securities
are convertible at the option of the holder into shares of common stock at an
initial conversion rate of 1.2255 shares of common stock for each preferred
security (equivalent to a purchase price of $40.80 per share of common stock),
subject to certain adjustments. We may, at our option, cause the conversion
rights of the holders of the preferred securities to expire upon certain
conditions.
Under the terms of the indenture, dated June 1, 1997, between us and The
Bank of New York, as trustee, as amended and supplemented, and the guarantee
agreement dated June 20, 1997 between us and The Bank of New York relating to
the preferred
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securities of CMS Energy Trust I pursuant to which the preferred securities and
the related 7 3/4% Convertible Subordinated Debentures due 2027 were issued, we
have agreed that we will not, and will not cause any of our subsidiaries to,
declare or pay any dividends or distributions on, or redeem, purchase, acquire
or make a liquidation payment with respect to, any of our capital stock, if at
such time:
- an event has occurred, of which we have actual knowledge, that with
the giving of notice or the lapse of time, or both, would constitute
an event of default and in respect of which we have not taken
reasonable steps to cure;
- we are in default with respect to the payment of any obligations
under the relevant guarantee agreement; or
- we have given notice of our selection of an extension period as
provided in such indenture with respect to the subordinated
debentures and have not rescinded such notice, or such extension
period (or any extension thereof) is continuing.
DIVIDEND RESTRICTIONS UNDER MICHIGAN LAW
Michigan law prohibits payment of a dividend or a repurchase of capital
stock if, after giving it effect, a corporation would not be able to pay its
debts as they become due in the usual course of business, or its total assets
would be less than the sum of its total liabilities plus, unless the Articles of
Incorporation provide otherwise, the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution (including the rights of
holders of preferred stock, if any).
VOTING RIGHTS
Each holder of common stock is entitled to one vote for each share of
common stock held by such holder on each matter voted upon by the shareholders.
Such right to vote is not cumulative. A majority of the votes cast by the
holders of shares entitled to vote thereon is sufficient for the adoption of any
question presented, except that certain provisions of the Articles of
Incorporation relating to special shareholder meetings, the removal,
indemnification and liability of the Board of Directors and the requirements for
amending these provisions may not be amended, altered, changed or repealed
unless such amendment, alteration, change or repeal is approved by the
affirmative vote of at least 75% of the outstanding shares entitled to vote
thereon.
Under Michigan law, the approval of the holders of a majority of the
outstanding shares of common stock would be necessary for authorizing, effecting
or validating the merger or consolidation of CMS Energy into or with any other
corporation if such merger or consolidation would adversely affect the powers or
special rights of such common stock, and to authorize any amendment to the
Articles of Incorporation that would increase or decrease the aggregate number
of authorized shares of common stock or alter or change the powers, preferences
or special rights of the shares of common stock so as to affect them adversely.
The Articles of Incorporation also provide that unless the vote or consent of a
greater number of shares shall then be required by law, the vote or consent of
the holders of a majority of the shares of common stock then outstanding will be
necessary for authorizing, effecting or validating the merger or consolidation
of CMS Energy into or with any other entity if such merger or consolidation
would adversely affect the powers or special rights of the common stock, either
directly by amendment to the Articles of Incorporation or indirectly by
requiring the holders of the common stock to accept or retain, in such merger or
consolidation, anything other than (i) shares of such class or (ii) shares of
the surviving or resulting corporation, having, in either case, powers and
special rights identical to those of such commons stock prior to such merger or
consolidation. The effect of these provisions may be to permit the holders of a
majority of the outstanding shares of common stock to block any such merger or
amendment that would adversely affect the powers or special rights of holders of
such shares of common stock.
PREEMPTIVE RIGHTS
The Articles of Incorporation provide that holders of common stock will
have no preemptive rights to subscribe for or purchase any additional shares of
the capital stock of CMS Energy of any class now or hereafter authorized, or
Preferred Stock, bonds, debentures, or other obligations or rights or options
convertible into or exchangeable for or entitling the holder or owner to
subscribe for or purchase any shares of capital stock, or any rights to exchange
shares issued for shares to be issued.
LIQUIDATION RIGHTS
In the event of the dissolution, liquidation or winding up of CMS Energy,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of CMS Energy and after there shall have been paid
or set apart for the holders of Preferred Stock the full preferential amounts
(including any accumulated and unpaid dividends) to which they are entitled, the
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holders of common stock will be entitled to receive, on a per share basis, the
assets of CMS Energy remaining for distribution to the holders of common stock.
Neither the merger or consolidation of CMS Energy into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with CMS Energy nor any sale, transfer or lease of all or any part of the assets
of CMS Energy, shall be deemed to be a dissolution, liquidation or winding up
for the purposes of this provision.
Because CMS Energy has subsidiaries which have debt obligations and other
liabilities of their own, CMS Energy's rights and the rights of its creditors
and its stockholders to participate in the distribution of assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
prior claims of the subsidiary's creditors, except to the extent that CMS Energy
may itself be a creditor with recognized claims against the subsidiary.
SUBDIVISION OR COMBINATION
If CMS Energy subdivides (by stock split, stock dividend or otherwise) or
combines (by reverse stock split or otherwise), the voting and liquidation
rights of shares of common stock will be appropriately adjusted so as to avoid
any dilution in aggregate voting or liquidation rights.
EXCHANGES
The Articles of Incorporation do not provide for either the mandatory or
optional exchange or redemption of common stock.
TRANSFER AGENT AND REGISTRAR
Common stock is transferable at Consumers Energy Company, One Energy
Plaza, Jackson, Michigan 49201. CMS Energy is the registrar and transfer agent
for common stock.
PREFERRED STOCK
The authorized Preferred Stock may be issued without the approval of the
holders of common stock in one or more series, from time to time, with each such
series to have such designation, powers, preferences and relative,
participating, optional or other special rights, voting rights, if any, and
qualifications, limitations or restrictions thereof, as shall be stated in a
resolution providing for the issue of any such series adopted by CMS Energy's
Board of Directors. The Articles of Incorporation provide that holders of
Preferred Stock will not have any preemptive rights to subscribe for or purchase
any additional shares of the capital stock of CMS Energy of any class now or
hereafter authorized, or any Preferred Stock, bonds, debentures or other
obligations or rights or options convertible into or exchangeable for or
entitling the holder or owner to subscribe for or purchase any shares of capital
stock. The future issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of CMS Energy.
4.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
The Articles of Incorporation establish one series of preferred stock
designated as "4.50% Cumulative Convertible Preferred Stock Series B" consisting
of 5,000,000 shares with a liquidation preference of $50.00 per share (the
"CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B "). The Cumulative Convertible
Preferred Stock, Series B ranks prior to any series of our common stock as to
the payment of dividends and distribution of assets upon dissolution,
liquidation or winding up of CMS Energy, and is convertible into shares of
common stock. The holders of the Cumulative Convertible Preferred Stock, Series
B have no preemptive rights.
DIVIDENDS
Holders of shares of Cumulative Convertible Preferred Stock, Series B will
be entitled to receive, when, as and if declared by our board of directors out
of funds legally available for payment, cumulative cash dividends at the rate
per annum of 4.50% per share on the liquidation preference thereof of $50.00 per
share (equivalent to $2.25 per annum per share). Dividends on the Cumulative
Convertible Preferred Stock, Series B will be payable quarterly on March 1, June
1, September 1 and December 1 of each year at such annual rate, and shall
accumulate from the last date on which dividends were paid on the Old Preferred
Stock or, if no dividends have been paid, from the issue date of the Cumulative
Convertible Preferred Stock, Series B, whether or not in any dividend period or
periods there have been funds legally available for the payment of such
dividends. Accumulated unpaid dividends accrue and cumulate dividends at the
annual rate of 4.50%.
As long as any Cumulative Convertible Preferred Stock, Series B is
outstanding, we may not pay dividends or distributions on, or purchase, redeem
or otherwise acquire, subject to certain exceptions, shares of our common stock
unless all accumulated and unpaid
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dividends on the Cumulative Convertible Preferred Stock, Series B have been paid
or set aside for payment.
LIQUIDATION PREFERENCE
In the event of our voluntary or involuntary liquidation, winding-up or
dissolution, holders of Cumulative Convertible Preferred Stock, Series B will be
entitled to receive and to be paid out of our assets available for distribution
to our stockholders, before any payment or distribution is made to holders of
junior stock (including common stock), a liquidation preference in the amount of
$50.00 per share of Cumulative Convertible Preferred Stock, Series B, plus
accumulated and unpaid dividends on the shares to the date fixed for
liquidation, winding-up or dissolution. If, upon our voluntary or involuntary
liquidation, winding-up or dissolution, the amounts payable with respect to the
liquidation preference of the Cumulative Convertible Preferred Stock, Series B
and all parity stock are not paid in full, the holders of the Cumulative
Convertible Preferred Stock, Series B and the parity stock will share equally
and ratably in any distribution of our assets in proportion to the full
liquidation preference and accumulated and unpaid dividends to which they are
entitled.
VOTING RIGHTS
Except as required by Michigan law and our Articles of Incorporation, the
holders of Cumulative Convertible Preferred Stock, Series B have no voting
rights unless dividends payable on the Cumulative Convertible Preferred Stock,
Series B are in arrears for six or more quarterly periods (whether or not
consecutive). In that event, the holders of the Cumulative Convertible Preferred
Stock, Series B, voting as a single class with the shares of any other preferred
stock or preference securities having similar voting rights that are
exercisable, will be entitled at the next regular or special meeting of our
stockholders to elect two additional directors (or one director if fewer than
six directors comprise our board prior to appointment) and the number of
directors that comprise our board will be increased by the number of directors
so elected. These voting rights and the terms of the directors so elected will
continue until such time as the dividend arrearage on the Cumulative Convertible
Preferred Stock, Series B has been paid in full.
REDEMPTION
We cannot redeem shares of the Cumulative Convertible Preferred Stock,
Series B.
MANDATORY CONVERSION
On or after December 5, 2008, we may, at our option, cause the Cumulative
Convertible Preferred Stock, Series B to be automatically converted into cash
and shares of common stock. We may exercise our conversion right only if, for 20
trading days within any period of 30 consecutive trading days (including the
last trading day of such 30-day period), the closing price of our common stock
exceeds 130% of the then prevailing conversion price of the Cumulative
Convertible Preferred Stock, Series B.
CONVERSION RIGHTS
A holder of record of Cumulative Convertible Preferred Stock, Series B may
convert its shares of Cumulative Convertible Preferred Stock, Series B at any
time into cash and shares of our common stock under any of the following
circumstances:
- during any calendar quarter (and only during such calendar quarter)
if the last reported sale price of our common stock for at least 20
trading days during the period of 30 consecutive trading days ending
on the last trading day of the previous calendar quarter is greater
than or equal to 120% of the applicable conversion price of the
Cumulative Convertible Preferred Stock, Series B on such last
trading day;
- upon the occurrence of specified corporate transactions; or
- subject to certain exceptions, during the five Business Day period
immediately following any ten consecutive trading-day period in
which the trading price per share of Cumulative Convertible
Preferred Stock, Series B for each day of that period was less than
95% of the product of the closing sale price of our common stock and
the applicable conversion rate of such share of Cumulative
Convertible Preferred Stock, Series B; provided, however, a holder
may not convert its shares of Cumulative Convertible Preferred
Stock, Series B if the average closing sale price of our common
stock for such ten consecutive trading-day period was between the
then applicable conversion price of the Cumulative Convertible
Preferred Stock, Series B and 120% of the then applicable conversion
price of the Cumulative Convertible Preferred Stock, Series B.
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Upon the occurrence of any of the circumstances described above, holders
may convert any outstanding Cumulative Convertible Preferred Stock, Series B
into cash and shares of our common stock at an initial conversion rate of 5.0541
shares of common stock per share of Cumulative Convertible Preferred Stock,
Series B (equivalent to an initial conversion price of $9.893 per share of
common stock). The conversion rate and the equivalent conversion price in effect
at any given time are referred to as the "APPLICABLE CONVERSION RATE" and the
"APPLICABLE CONVERSION PRICE," respectively, and will be subject to adjustment
as described below. Subject to certain exceptions, once Cumulative Convertible
Preferred Stock, Series B is tendered for conversion, the value (the "CONVERSION
VALUE") of the cash and shares of our common stock, if any, to be received by a
holder converting a share of Cumulative Convertible Preferred Stock, Series B
will be determined by multiplying the conversion rate by the ten day average
closing stock price. We will deliver the conversion value to holders as follows:
(1) an amount in cash (the "PRINCIPAL RETURN") equal to the lesser of (a) the
aggregate conversion value of the Cumulative Convertible Preferred Stock, Series
B to be converted and (b) the aggregate liquidation preference of $50.00 per
share of Cumulative Convertible Preferred Stock, Series B to be converted; (2)
if the aggregate conversion value of the Cumulative Convertible Preferred Stock,
Series B to be converted is greater than the principal return, an amount in
whole shares (the "NET SHARES"), determined as set forth below, equal to such
aggregate conversion value less the principal return (the "NET SHARE AMOUNT");
and (3) an amount in cash in lieu of any fractional shares of common stock. We
will pay the principal return and cash in lieu of fractional shares and deliver
the net shares, if any, as promptly as practicable after determination of the
net share amount. The number of net shares to be paid will be determined by
dividing the net share amount by the ten day average closing stock price. The
"TEN DAY AVERAGE CLOSING STOCK PRICE" will be the average of the closing per
share prices of our common stock on the New York Stock Exchange on the ten
consecutive trading days beginning on the second trading day following the day
the Cumulative Convertible Preferred Stock, Series B is submitted for
conversion.
The conversion rate may be adjusted for certain reasons, but it will not
be adjusted for accumulated and unpaid dividends. Except as otherwise provided,
holders will not receive any payment representing accumulated and unpaid
dividends if any, upon conversion of a share of Cumulative Convertible Preferred
Stock, Series B; however, we will continue to pay additional dividends, if any,
on the Cumulative Convertible Preferred Stock, Series B and the common stock
issuable upon conversion thereof to the holder in accordance with the applicable
registration rights agreement.
If we declare a cash dividend or cash distribution to all or substantially
all of the holders of our common stock, the applicable conversion rate shall be
increased to equal the number determined by multiplying the applicable
conversion rate in effect immediately prior to the record date for such dividend
or distribution by the following fraction:
(pre-dividend sale price)
-------------------------
(pre-dividend sale price - dividend adjustment amount)
provided that if the denominator of the foregoing fraction is less than $1.00
(including a negative amount), then in lieu of any adjustment, we shall make
adequate provision so that each holder of Cumulative Convertible Preferred
Stock, Series B shall have the right to receive upon conversion, in addition to
the cash and shares of common stock issuable upon such conversion, the amount of
cash such holder would have received had such holder converted its Cumulative
Convertible Preferred Stock, Series B solely into shares of our common stock at
the then applicable conversion rate immediately prior to the record date for
such cash dividend or cash distribution. "PRE-DIVIDEND SALE PRICE" means the
average of the last reported sale price of our common stock price for the five
consecutive trading days ending on the trading day immediately preceding the
record date for such dividend or distribution. "DIVIDEND ADJUSTMENT AMOUNT"
means the full amount of the dividend or distribution to the extent payable in
cash applicable to one share of our common stock.
PRIMARY SOURCE OF FUNDS OF CMS ENERGY; RESTRICTIONS ON SOURCES OF DIVIDENDS
The ability of CMS Energy to pay (i) dividends on its capital stock and
(ii) its indebtedness, including the Notes, depends and will depend
substantially upon timely receipt of sufficient dividends or other distributions
from its subsidiaries, in particular Consumers and Enterprises. Each of
Consumers' and Enterprises' ability to pay dividends on its common stock depends
upon its revenues, earnings and other factors. Consumers' revenues and earnings
will depend substantially upon rates authorized by the MPSC.
Consumers' Restated Articles of Incorporation ("ARTICLES") provide two
restrictions on its payment of dividends on its common stock. First, prior to
the payment of any common stock dividend, Consumers must reserve retained
earnings after giving effect to such dividend payment of at least (i) $7.50 per
share on all then outstanding shares of its preferred stock, (ii) in respect to
its Class A Preferred Stock, 7.5% of the aggregate amount established by its
Board of Directors to be payable on the shares of each series thereof in the
event of involuntary liquidation of Consumers and (iii) $7.50 per share on all
then outstanding shares of all other stock over which its preferred stock and
Class A Preferred Stock do not have preference as to the payment of dividends
and as to assets. Second,
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dividend payments during the 12 month period ending with the month the proposed
payment is to be paid are limited to: (i) 50% of net income available for the
payment of dividends during the base period, if the ratio of common stock and
surplus to total capitalization and surplus for 12 consecutive calendar months
within the 14 calendar months immediately preceding the proposed dividend
payment (the "BASE PERIOD"), adjusted to reflect the proposed dividend, is less
than 20%; and (ii) 75% of net income available for the payment of dividends
during the base period if the ratio of common stock and surplus to total
capitalization and surplus for the base period, adjusted to reflect the proposed
dividend, is at least 20% but less than 25%.
In addition, Consumers' indenture dated as of January 1, 1996, between
Consumers and The Bank of New York, as trustee (the "PREFERRED SECURITIES
INDENTURE"), and certain preferred securities guarantees by Consumers dated
January 23, 1996, September 11, 1997 and October 25, 1999 (collectively, the
"CONSUMERS PREFERRED SECURITIES GUARANTEES"), in connection with which the 8.36%
Trust Originated Preferred Securities of Consumers Power Company Financing I,
the 8.20% Trust Originated Preferred Securities of Consumers Energy Company
Financing II, and the 9.00% Trust Preferred Securities of Consumers Energy
Company Financing IV (collectively, the "CONSUMERS TRUST PREFERRED SECURITIES")
were issued, provide that Consumers shall not declare or pay any dividend on,
make any distributions with respect to, or redeem, purchase or make a
liquidation payment with respect to, any of its capital stock if (i) there shall
have occurred any event that would constitute an event of default under the
Preferred Securities Indenture or the trust agreements pursuant to which the
Consumers Trust Preferred Securities were issued, (ii) a default has occurred
with respect to its payment of any obligations under the Consumers Preferred
Securities Guarantees or certain Consumers common stock guarantees or (iii) it
gives notice of its election to extend the interest payment period on the
subordinated notes issued under the Preferred Securities Indenture, at any time
for up to 20 consecutive quarters, provided, however, Consumers may declare and
pay stock dividends where the dividend stock is the same stock as that on which
the dividend is being paid.
Consumers' ability to pay dividends is also restricted by the Amended and
Restated Credit Agreement dated as of August 3, 2004 among Consumers, JPMorgan
Chase Bank, N.A, as agent, and the financial institutions named therein.
Pursuant to this loan agreement, so long as there exists no event of default
under the loan agreement, Consumers may pay dividends in an aggregate amount not
to exceed $300 million during any calendar year.
Consumers' Articles also prohibit the payment of cash dividends on its
common stock if Consumers is in arrears on preferred stock dividend payments.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, Consumers or Enterprises would not be able to pay its debts as they
become due in the usual course of business, or its total assets would be less
than the sum of its total liabilities plus, unless the Articles permit
otherwise, the amount that would be needed, if Consumers or Enterprises were to
be dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
receiving the distribution. Currently, it is Consumers' policy to pay annual
dividends equal to 80% of its annual consolidated net income. Consumers' Board
of Directors reserves the right to change this policy at any time.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal income tax
consequences of the purchase, ownership, and disposition of the Preferred Stock
and any common stock received upon its conversion. This discussion is based upon
the provisions of the Internal Revenue Code of 1986, as amended (the "CODE"),
the final and temporary Treasury Regulations promulgated thereunder, and
administrative rulings and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. This summary does not purport to deal with all aspects of U.S.
federal income taxation that may be relevant to an investor's decision to
purchase shares of Preferred Stock, or with any tax consequences arising under
the laws of any state, locality or foreign jurisdiction. This summary is not
intended to be applicable to all categories of investors (such as dealers in
securities, banks, insurance companies, tax-exempt organizations, persons that
hold the Stock or common stock as part of a straddle, hedge, constructive sale
transaction, conversion transaction, "synthetic security" or other integrated
transaction for U.S. federal income tax purposes, or holders subject to the
alternative minimum tax) that may be subject to special rules. In addition, this
discussion is limited to persons that hold the Preferred Stock or common stock
as a "capital asset" (generally, property held for investment) within the
meaning of Section 1221 of the Code.
As used in this section, a "U.S. HOLDER" is a beneficial owner of
Preferred Stock or common stock that is, for U.S. federal income tax purposes:
- an individual U.S. citizen or resident alien;
- a corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States, any state
55
thereof or the District of Columbia;
- an estate whose world-wide income is subject to U.S. federal income
taxation; or
- a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust, or that has a valid election in
effect under applicable U.S. Treasury Regulations to be treated as a
United States person.
A "NON-U.S. HOLDER" is a beneficial owner of Preferred Stock or common
stock that is not a U.S. holder.
If a partnership holds Preferred Stock or common stock, the tax treatment
of a partner will generally depend upon the status of the partner and upon the
activities of the partnership.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, CONVERSION AND
DISPOSITION OF PREFERRED STOCK AND COMMON STOCK RECEIVED UPON ITS CONVERSION.
CONSEQUENCES TO U.S. HOLDERS OF PREFERRED STOCK OR COMMON STOCK
DISTRIBUTIONS
The amount of any distribution with respect to Preferred Stock or common
stock will be treated as a dividend to the extent of our current or accumulated
earnings and profits as determined under U.S. federal income tax principles. If
the distribution is a dividend, it may be taxable as ordinary income or, if you
are an individual, as "qualified dividend income," which is taxed at
preferential rates. One of the requirements for a dividend to qualify as
"qualified dividend income" is that, in the case of preferred stock, the holder
must have owned the stock for more than 90 days during the 180-day period
beginning on the date before the ex-dividend date and, in the case of common
stock, the holder must have owned the stock for more than 60 days during the
120-day period beginning on the date that is 60 days before the ex-dividend
date. You should consult your own tax advisor as to these and other possible
exceptions to qualified dividend income treatment.
To the extent the amount of any distribution exceeds our current and
accumulated earnings and profits, the excess will be applied against and will
reduce your tax basis (on a dollar-for-dollar basis) in the Preferred Stock or
common stock, as the case may be. Any amount in excess of your tax basis will be
treated as capital gain.
DIVIDENDS TO CORPORATE SHAREHOLDERS
In general, a distribution that is treated as a dividend for U.S. federal
income tax purposes and is made to a corporate shareholder with respect to the
Preferred Stock or common stock will qualify for the 70% dividends received
deduction under Section 243 of the Code. Corporate shareholders should note,
however, that there can be no assurance that the amount of distributions made
with respect to the Preferred Stock or the common stock will not exceed the
amount of our current and accumulated earnings and profits. Accordingly, there
can be no assurance that the dividends received deduction will be available in
respect of distributions on the Preferred Stock or common stock.
In addition, there are many exceptions and restrictions relating to the
availability of the dividends received deduction such as those relating to:
- the holder's holding period for the stock;
- debt-financed portfolio stock;
- dividends treated as "extraordinary dividends" for purposes of
Section 1059 of the Code; and
- holders that pay corporate alternative minimum tax.
Corporate shareholders should consult their own tax advisors regarding the
extent, if any, to which such exceptions and restrictions may apply to their
particular circumstances.
56
SALE OR OTHER DISPOSITION
Upon a sale or other disposition of Preferred Stock or common stock (other
than a conversion of Preferred Stock), you generally will recognize capital gain
or loss equal to the difference between the amount of cash and the fair market
value of any other property you receive on the sale or other disposition and
your adjusted tax basis in the Preferred Stock or common stock. Such capital
gain or loss will be long-term capital gain or loss if your holding period for
the Preferred Stock or common stock, as applicable, is more than one year.
If a Fundamental Change occurs and you exercise your option to require us
to purchase your Preferred Stock for cash, the transaction will generally be
treated as a redemption for U.S. federal income tax purposes. The U.S. federal
income tax treatment of such a redemption to a holder will depend on the
particular facts relating to such holder at the time of the redemption. The
receipt of cash in connection with such redemption will be treated as gain or
loss from the sale or other disposition of the Preferred Stock, taxable as
described in the preceding paragraph, if, taking into account stock that is
actually or constructively owned as determined under Section 318 of the Code:
- your interest in our stock is completely terminated as a result of
such redemption;
- your percentage ownership in our voting stock immediately after such
redemption is less than 80% of your percentage ownership immediately
before such redemption; or
- such redemption is "not essentially equivalent to a dividend"
(within the meaning of Section 302(b)(1) of the Code).
If none of the above tests giving rise to sale treatment is satisfied,
then a payment made in redemption of the Preferred Stock will be treated as a
distribution, taxable as described above under "Distributions," and your
adjusted tax basis in the redeemed Preferred Stock will be transferred to any
remaining ownership interest you hold in our stock. If you do not retain any
stock ownership in us following such redemption, then you may lose your basis
completely.
CONVERSION OF PREFERRED STOCK IN EXCHANGE FOR COMMON STOCK
If a U.S. Holder surrenders Preferred Stock for conversion and we deliver
a combination of shares of common stock and cash, the conversion should be
treated as a recapitalization within the meaning of Section 368(a)(1)(E) of the
Code, and a U.S. Holder should be required to recognize any gain (but not loss)
realized, but only to the extent such gain does not exceed the amount of cash
received (other than any cash received in lieu of a fractional share or
attributable to dividend arrearages, as discussed below). Such gain, depending
upon the circumstances, may be long-term capital gain if the U.S. Holder held
the Preferred Stock for more than one year at the time of the conversion.
Furthermore, a U.S. Holder's basis in the common stock received in the
conversion (excluding any shares of common stock attributable to dividend
arrearages) would be equal to such U.S. Holder's adjusted tax basis in the
Preferred Stock, reduced by any cash received in the conversion (other than any
cash received in lieu of a fractional share or attributable to dividend
arrearages) and increased by the amount of any gain recognized on the conversion
(other than gain with respect to a fractional share).
If, upon conversion of Preferred Stock, cash is received in lieu of a
fractional share, the amount of gain or loss recognized by a U.S. Holder will be
equal to the difference between the amount of cash received in respect of the
fractional share and the portion of the U.S. Holder's adjusted tax basis in the
Preferred Stock allocable to the fractional share.
The amount of any cash and the fair market value of any common stock
received by the U.S. Holder that is attributable to dividend arrearages will be
treated as constructive distributions, taxable as described above under
"Distributions" or "Dividends to Corporate Shareholders". A U.S. Holder's tax
basis in any such shares of common stock will equal the fair market value of
such common stock and the holding period will begin on the day following the
conversion.
The holding period for any common stock received upon conversion
(excluding any common stock received that is attributable to dividend
arrearages) will include the holding period for the Preferred Stock.
ADJUSTMENT OF CONVERSION PRICE
Holders of Preferred Stock may, in certain circumstances, be deemed to
have received constructive distributions of stock if the conversion rate for the
Preferred Stock is adjusted. Adjustments to the conversion price made pursuant
to a bona fide, reasonable adjustment formula that has the effect of preventing
the dilution of the interest of the holders of the Preferred Stock, however,
57
generally will not be considered to result in a constructive distribution of
stock. Certain adjustments provided in the anti- dilution provisions of the
Preferred Stock, including, without limitation, adjustments in respect of stock
dividends or the distribution of rights to subscribe for common stock should
qualify as being pursuant to a bona fide, reasonable adjustment formula and
should not result in a constructive distribution. In contrast, adjustments in
respect of distributions of our indebtedness or assets to our stockholders, for
example, will not qualify as being pursuant to a bona fide, reasonable
adjustment formula. In addition, an adjustment occasioned by a Fundamental
Change may not so qualify. If such adjustments are made, the holders generally
will be deemed to have received constructive distributions in amounts based upon
the value of such holders' increased interests in our equity resulting from such
adjustments. The amount of the distribution will be treated as a distribution to
a holder, taxable as described above under "Distributions." Accordingly, you
could be considered to have received distributions taxable as dividends to the
extent of our current or accumulated earnings and profits even though you did
not receive any cash or property as a result of such adjustments.
INFORMATION REPORTING AND BACKUP WITHHOLDING
You may be subject to information reporting and backup withholding with
respect to dividends paid on, or the proceeds of a sale, exchange or redemption
of Preferred Stock or common stock unless:
- you are a corporation or come within certain other exempt categories
and, when required, demonstrate this fact; or
- within a reasonable period of time, you provide a taxpayer
identification number, certified under penalties of perjury, as well
as certain other information, or otherwise establish an exemption
from the backup withholding rules.
The amount of any backup withholding from a payment to you generally will
be allowed as a credit against your U.S. federal income tax liability and may
entitle you to a refund, provided that the required information is furnished to
the Internal Revenue Service.
CONSEQUENCES TO NON-U.S. HOLDERS OF PREFERRED STOCK OR COMMON STOCK
DIVIDENDS
In general, dividends received by you with respect to our Preferred Stock
or common stock will be subject to withholding of U.S. federal income tax at a
30% rate, unless such rate is reduced by an applicable income tax treaty.
Dividends that are effectively connected with your conduct of a trade or
business in the United States (and, if an income tax treaty applies, are
attributable to a U.S. permanent establishment) are generally subject to U.S.
federal income tax on a net income basis and are exempt from the 30% withholding
tax (assuming compliance with certain certification requirements). Any such
effectively connected dividends received by a non-U.S. holder that is a
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be applicable under
an income tax treaty.
For purposes of obtaining a reduced rate of withholding under an income
tax treaty, you generally will be required to provide a U.S. taxpayer
identification number as well as certain information concerning your country of
residence and entitlement to tax treaty benefits. Generally, this will be
accomplished by providing a properly executed IRS Form W-8BEN. If you instead
claim an exemption from withholding with respect to dividends effectively
connected with the conduct of a trade or business within the United States, you
will be required to provide an appropriate certification to us or our paying
agent (generally by providing a properly completed IRS Form W-8ECI).
SALE OR OTHER DISPOSITION
You generally will not be subject to U.S. federal income tax on any gain
recognized on the sale or other disposition of Preferred Stock or common stock
unless:
- the gain is considered effectively connected with the conduct of a
trade or business by you within the United States and, where an
income tax treaty applies, is attributable to a U.S. permanent
establishment (in which case, if you are a foreign corporation, you
may be subject to an additional "branch profits" tax equal to 30% or
a lower rate as may be specified by an applicable income tax
treaty);
- you are an individual who holds the Preferred Stock or common stock
as a capital asset and are present in the United States for 183 or
more days in the taxable year of the sale or other disposition and
other conditions are met; or
58
- we are or have been a "United States real property holding
corporation" for U.S. federal income tax purposes.
CONVERSION OF PREFERRED STOCK IN EXCHANGE FOR COMMON STOCK
Except as set forth herein, a Non-U.S. Holder will not be subject to U.S.
federal income tax upon the conversion of Preferred Stock. The amount of any
cash and the fair market value of any common stock received by a Non-U.S. Holder
that is attributable to dividend arrearages will be treated as described above
under "Non-U.S. Holders -- Dividends." To the extent a Non-U.S. Holder receives
cash upon conversion of Preferred Stock, such cash may give rise to gain that
would be subject to the rules described under "Non-U.S. Holders -- Sale or Other
Disposition", above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We must report annually to the Internal Revenue Service and to you the
amount of dividends paid to you and the tax withheld with respect to those
dividends, regardless of whether withholding was required. Copies of the
information returns reporting those dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty or other applicable agreements.
Backup withholding is generally imposed on certain payments to persons
that fail to furnish the necessary identifying information to the payor. You
generally will be subject to backup withholding tax with respect to dividends
paid on your Preferred Stock or common stock unless you certify as to your
non-U.S. status, provided we do not have actual knowledge or reason to know that
you are a U.S. Holder.
The payment of proceeds of a sale of Preferred Stock or common stock
effected by or through a U.S. office of a broker is subject to both backup
withholding and information reporting unless you provide the payor with your
name and address and you certify under penalties of perjury as to your non-U.S.
status or you otherwise establish an exemption. In general, backup withholding
and information reporting will not apply to the payment of the proceeds of a
sale of Preferred Stock or common stock by or through a foreign office of a
broker. If, however, such broker is, for U.S. federal income tax purposes, a
United States person, a controlled foreign corporation, a foreign person that
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the United States or a foreign partnership that at any
time during its tax year either is engaged in the conduct of a trade or business
in the United States or has as partners one or more United States persons that,
in the aggregate, hold more than 50% of the income or capital interest in the
partnership, such payments will be subject to information reporting, but not
backup withholding, unless such broker has documentary evidence in its records
that you are a non-U.S. holder and certain other conditions are met or you
otherwise establish an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against your U.S. federal income tax liability,
provided the required information is furnished in a timely manner to the
Internal Revenue Service.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO YOU IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES
AND INCOME TAX SITUATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES THAT WOULD RESULT FROM YOUR PURCHASE, OWNERSHIP AND
DISPOSITION OF THE PREFERRED STOCK AND ANY COMMON STOCK RECEIVED UPON ITS
CONVERSION, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN U.S. FEDERAL OR OTHER TAX
LAWS.
59
SELLING SECURITYHOLDERS
The Old Preferred Stock was originally issued by us and sold by Citigroup
Global Markets Inc., Merrill, Lynch, Pierce, Fenner & Smith Incorporated, J.P.
Morgan Securities, Inc., Deutsche Bank Securities Inc., Wachovia Capital
Markets, LLC, and Banc One Capital Markets, Inc. (the "INITIAL PURCHASERS") in
transactions exempt from the registration requirements of the Securities Act to
persons reasonably believed by the initial purchasers to be "qualified
institutional buyers" as defined by Rule 144A under the Securities Act. The
Preferred Stock was issued in exchange for outstanding shares of Old Preferred
Stock. The selling securityholders may from time to time offer and sell pursuant
to this prospectus any or all of the Preferred Stock listed below and the shares
of common stock issued upon conversion of such Preferred Stock. When we refer to
the "selling securityholders" in this prospectus, we mean those persons listed
in the table below, as well as the assignees, transferees, successors and others
who later hold any of the selling securityholders' interests in restricted
securities.
The table below sets forth the name of each selling securityholder, the
principal amount of Preferred Stock that each selling securityholder may offer
pursuant to this prospectus and the number of shares of common stock into which
such Preferred Stock is convertible. Unless set forth below, to our knowledge,
none of the selling securityholders has, or within the past three years has had,
any material relationship with us or any of our predecessors or affiliates or
beneficially owns in excess of 1% of our outstanding common stock.
The number of shares of the Preferred Stock provided in the table below is
based on information provided to us by the selling securityholders at various
dates through January 31, 2005, and the percentages are based on 5,000,000
shares of Preferred Stock outstanding. The number of shares of our common stock
that may be sold is based on the current conversion rate of 5.0541 shares of our
common stock per share of Preferred Stock surrendered for conversion.
Since the date on which each selling securityholder provided the
information below, such selling securityholder may have sold, transferred or
otherwise disposed of all or a portion of its shares of Preferred Stock in a
transaction exempt from the registration requirements of the Securities Act.
Information concerning the selling securityholders is expected to change from
time to time. If we are informed of any changed information, it will be set
forth in supplements to this prospectus to the extent required. In addition, the
conversion ratio, and therefore the number of shares of our common stock
issuable upon conversion of the shares of Preferred Stock, is subject to
adjustment under the circumstances described in this prospectus. Accordingly,
the number of shares of our common stock issuable upon conversion of the shares
of Preferred Stock may increase or decrease.
The selling securityholders may from time to time offer and sell any or
all of the securities under this prospectus. Because the selling securityholders
are not obligated to sell the shares of Preferred Stock or shares of our common
stock issuable upon conversion thereof, we cannot estimate the number of shares
of Preferred Stock or our common stock that the selling securityholders will
hold upon consummation of any such sales.
NUMBER OF SHARES PERCENTAGE OF NUMBER OF SHARES OF
OF PREFERRED STOCK PREFERRED STOCK COMMON STOCK COVERED
NAME(1) THAT MAY BE SOLD OUTSTANDING BY THIS PROSPECTUS (2)
------- ---------------- ----------- ----------------------
Akela Capital Master Fund, Ltd........................ 325,000 6.5% 273,000
Bank of America Pension Plan.......................... 50,000 1.0% 42,000
Clinton Multistrategy Master Fund, Ltd................ 74,075 1.5% 62,223
Clinton Riverside Convertible Portfolio Ltd........... 20,200 * 16,968
CQS Convertible & Quantatitive Strategies Master Fund
Limited............................................... 919,500 18.4% 772,380
Credit Suisse First Boston Europe LTD................. 2,460 * 2,066
Deep Rock & Co........................................ 50,000 1.0% 42,000
DKR Sound Shore Strategic Holding Fund Ltd............ 20,000 * 16,800
Equity Overlay Fund, LLC.............................. 10,000 * 8,400
Evergreen Investment Management Company............... 40,000 * 33,600
General Motors Welfare Benefit Trust.................. 25,000 * 21,000
GMAM Group Pension Trust.............................. 80,000 1.6% 67,200
60
NUMBER OF SHARES PERCENTAGE OF NUMBER OF SHARES OF
OF PREFERRED STOCK PREFERRED STOCK COMMON STOCK COVERED
NAME(1) THAT MAY BE SOLD OUTSTANDING BY THIS PROSPECTUS (2)
------- ---------------- ----------- ----------------------
Goldman Sachs & Co.................................... 5,000 * 4,200
Grace Brothers, Ltd................................... 30,000 * 25,200
Grace Convertible Arbitrage Fund, Ltd................. 145,000 2.9% 121,800
Guggenheim Portfolio Company VIII(Cayman) Ltd......... 2,500 * 21,000
Kd Convertible Arbitrage L.P.......................... 90,000 1.8% 75,600
Kdc Convertible Arb Master Fund C.V................... 45,000 * 37,800
Lehman Brothers, Inc.................................. 7,000 * 5,880
Lord Abbett America's Value Fund...................... 70,000 1.4% 58,800
Lord Abbett Series Fund-America's Value Portfolio..... 3,000 * 2,520
Lord Abbett Series Fund - Bond Debenture Portfolio.... 10,000 * 8,400
McMahan Securities Co. L.P............................ 20,000 * 16,800
Merrill Lynch Insurance Group Bond Debenture Portfolio 1,000 * 840
Met Investor Series Trust-America's Value............. 5,000 * 4,200
Peoples Benefit Life Insurance Company Teamsters...... 247,500 4.9% 207,900
Phoenix Lord Abbett Bond Debenture Fund............... 1,000 * 840
Primerica Life Insurance Company...................... 2,000 * 1,680
Retail Clerks Pension Trust........................... 50,000 1.0% 42,000
Retail Clerks Pension Trust #2........................ 25,000 * 21,000
S.A.C. Arbitrage Fund, LLC............................ 65,000 11.3% 474,936
Sphinx Convertible Arbitrage (Clinton) Segregated
Portfolio............................................. 36,225 * 30,429
Standard Fire Insurance Company....................... 2,000 * 1,680
The Travelers Insurance Company - Life................ 13,000 * 10,920
Timberpass Trading LLC................................ 21,680 * 18,211
Travelers Casualty Insurance Company of America....... 6,000 * 5,040
Union Pacific Master Retirement Trust................. 25,000 * 21,000
Wachovia Bank National Association.................... 60,000 1.2% 50,400
W S Investments, L.P.................................. 4,520 * 3,796
Yield Strategies Fund I, L.P.......................... 95,000 1.9% 79,800
Yield Strategies Fund II, L.P......................... 130,000 2.6% 109,200
-------------
* Less than 1%
(1) Specific information about these holders will be set forth in
supplements or amendments to this prospectus, if required.
(2) Assumes conversion at the initial contingent conversion price of
$11.87 per share of Common Stock. This results in a settlement of
0.84 shares of common stock per share of Preferred Stock. This
conversion rate is subject to adjustment as described under
"Description of the Preferred Stock - Conversion Rights - Conversion
Rate Adjustments." As a result, the number of shares of our common
stock issuable upon conversion of the Preferred Stock may increase
or decrease in the future.
61
PLAN OF DISTRIBUTION
The selling securityholders are the only persons authorized to offer and
sell the securities covered by this prospectus. We will not receive any of the
proceeds from the offering of the Preferred Stock or the common stock by the
selling securityholders. In connection with the initial offering of the
Preferred Stock, we entered into a registration rights agreement. We granted
certain registration rights to holders of the Preferred Stock pursuant to our
exchange offer. Securities may only be offered or sold under this prospectus
pursuant to the terms of the registration rights agreement. However, selling
securityholders may resell all or a portion of the securities in open market
transactions in reliance upon Rule 144 or 144A under the Securities Act,
provided they meet the criteria and conform to the requirements of one of these
rules. We are registering the Preferred Stock and shares of our common stock
covered by this prospectus to permit holders to conduct public secondary trading
of these securities from time to time after the date of this prospectus. We have
agreed, among other things, to bear all expenses, other than underwriting
discounts, expenses of each holder's counsel, selling commissions and transfer
taxes, in connection with the registration and sale of the Preferred Stock and
shares of common stock covered by this prospectus.
We have been advised by the selling securityholders that the selling
securityholders may sell all or a portion of the securities offered hereby from
time to time:
- directly; or
- through underwriters, broker-dealers or agents, who may
receive compensation in the form of discounts, commissions or
concessions from the selling securityholders or from the
purchasers of the securities for whom they may act as agent.
Shares of the Preferred Stock and our common stock may be sold from time
to time in one or more transactions at:
- fixed prices, which may be changed;
- prevailing market prices at the time of sale;
- varying prices determined at the time of sale; or
- negotiated prices.
These prices will be determined by the holders of the securities or by
agreement between these holders and underwriters or dealers who may receive fees
or commissions in connection with the sale. The aggregate proceeds to the
selling securityholders from the sale of the securities offered by them hereby
will be the purchase price of the securities less discounts and commissions, if
any.
The sales described in the preceding paragraph may be effected in
transactions:
- on any national securities exchange or quotation system on
which the Preferred Stock or shares of our common stock may be
listed or quoted at the time of sale, including the New York
Stock Exchange in the case of our common stock;
- in the over-the-counter market;
- in transactions otherwise than on such exchanges or services
or in the over-the-counter market; or
- through the writing of options or similar securities.
These transactions may include block transactions or crosses. Crosses are
transactions in which the same broker acts as an agent on both sides of the
trade.
In connection with the sales of shares of Preferred Stock and our common
stock or otherwise, the selling securityholders may enter into hedging
transactions with broker-dealers. These broker-dealers may in turn engage in
short sales of the securities in the course of hedging their positions. The
selling securityholders may also sell the securities short and deliver the
securities to close out short positions, or loan or pledge the securities to
broker-dealers that in turn may sell the securities.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of shares of Preferred Stock or our
common stock covered by this prospectus. Selling securityholders may sell none,
some or all of the securities covered by this prospectus. In addition, we cannot
assure you that a selling securityholder will not sell, donate or otherwise
transfer shares of Preferred Stock or common stock by other means not described
in this prospectus.
Our common stock is listed for trading on the New York Stock Exchange.
62
The selling securityholders and any broker-dealers, agents or underwriters
that participate with the selling securityholders in the distribution of shares
of Preferred Stock or our common stock may be deemed to be "underwriters" within
the meaning of the Securities Act. In this case, any commissions received by
these broker-dealers, agents or underwriters and any profit on the resale of
shares of Preferred Stock or our common stock purchased by them may be deemed to
be underwriting commissions or discounts under the Securities Act. In addition,
any profits realized by the selling securityholders may be deemed to be
underwriting commissions under the Securities Act. To the extent the selling
securityholders may be deemed to be underwriters, the selling securityholders
may be subject to statutory liabilities, including, but not limited to,
liabilities under Sections 11, 12 and 17 or the Securities Act and Rule 10b-5
under the Exchange Act.
The selling securityholders will be subject to the prospectus delivery
requirements of the Securities Act. At any time a particular offer of the
securities is made, we will, if reasonably requested, prepare a revised
prospectus or prospectus supplement, if required, which discloses information
required to be disclosed under the registration rights agreement including:
- the name of the selling securityholders and any participating
underwriters, broker-dealers or agents;
- the aggregate amount and type of securities being offered;
- the offering price of the securities and other material terms
of the offering; and
- any discounts, commissions, concessions or other items
constituting compensation from the selling securityholders and
any discounts, commissions or concessions allowed or reallowed
or paid to dealers.
The prospectus supplement or a post-effective amendment will be filed with
the SEC to reflect the disclosure of additional information with respect to the
distribution of the securities.
We have agreed to indemnify the initial purchasers and each selling
securityholder, and each selling securityholder has agreed to indemnify us, our
directors, our officers who sign the shelf registration statement to which this
prospectus relates and each person, if any, who controls CMS Energy within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act, against specified liabilities arising under the Securities Act, the
Exchange Act or other applicable law.
The selling securityholders and any other person participating in such
distribution will be subject to certain provisions of the Exchange Act. The
Exchange Act rules include, without limitation, Regulation M, which may limit
the timing of purchases and sales of any shares of Preferred Stock and our
common stock by the selling securityholders and any such other person. In
addition, Regulation M of the Exchange Act may restrict the ability of any
person engaged in the distribution of shares of Preferred Stock and our common
stock to engage in market-making activities with respect to the particular
shares of Preferred Stock and our common stock being distributed for a period of
up to five business days prior to the commencement of distribution. This may
affect the marketability of the shares of Preferred Stock and our common stock
and the ability of any person or entity to engage in market-making activities
with respect to shares of Preferred Stock and our common stock.
Under the registration rights agreement, we are obligated to use our
reasonable best efforts to keep the shelf registration statement of which this
prospectus forms a part effective until the earliest of:
- the time when all of the shares of Preferred Stock have been
sold pursuant to the shelf registration statement of which
this prospectus forms a part;
- the time when the holders of shares of Preferred Stock are
able to sell all such shares of Preferred Stock pursuant to
Rule 144 under the Securities Act;
- the time when there are no longer any shares of Preferred
Stock outstanding; or
- December 5, 2005.
Our obligation to keep the shelf registration statement effective is
subject to specified, permitted exceptions set forth in the registration rights
agreement. In these cases, we may prohibit offers and sales of shares of
Preferred Stock and our common stock pursuant to the shelf registration
statement.
We may suspend the use of this prospectus upon the occurrence or existence
of certain specified events or conditions that, in our sole judgment, make it
appropriate for us to take such action. Each selling securityholder has agreed
not to trade securities from the time the selling securityholder receives notice
from us of this type of event or condition until the selling securityholder
receives a prospectus supplement or amendment, or is advised that this
prospectus may be used.
63
LEGAL MATTERS
Robert C. Shrosbree, Assistant General Counsel for CMS Energy Corporation,
will render opinions as to the legality of the Preferred Stock for CMS Energy.
Jay M. Silverman, Director of Tax Planning and Assistant Tax Counsel, will
render opinions as to certain tax matters regarding the Preferred Stock for CMS
Energy.
EXPERTS
The consolidated financial statements and schedule of CMS Energy appearing
in its Annual Report (Form 10-K/A (Amendment No. 2)) for the year ended December
31, 2003 have been audited by Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon included therein and
incorporated herein by reference which are based in part on the report of Price
Waterhouse, independent accountants, for Jorf Lasfar and the reports of
PricewaterhouseCoopers LLP, independent registered public accounting firm, for
2003 and 2002 and Arthur Andersen LLP, independent accountants (who have ceased
operations), for 2001 for the MCV Partnership. Such consolidated financial
statements and schedule are incorporated herein by reference in reliance upon
such reports given on the authority of such firms as experts in accounting and
auditing.
The financial statements of Emirates CMS Power Company PJSC appearing in
CMS Energy's Annual Report (Form 10-K/A (Amendment No. 2)) for the year ended
December 31, 2003 have been audited by Ernst & Young, independent registered
public accounting firm, as set forth in their report thereon included therein
and incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of SCP Investments (No.1) Pty Ltd
for the year ended June 30, 2004 appearing in CMS Energy's Annual Report (Form
10-K/A (Amendment No. 2)) for the year ended December 31, 2003 have been audited
by Ernst & Young, independent registered public accounting firm, as set forth in
their report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of Jorf Lasfar as of December 31, 2003 and 2002
and for each of the three years in the period ended December 31, 2003
incorporated by reference in this prospectus supplement and the accompanying
prospectus have been so included in reliance on the report of Price Waterhouse,
independent accountants for Jorf Lasfar, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of the MCV Partnership as of and for
the years ended December 31, 2003 have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report
appearing in CMS Energy's Annual Report (Form 10-K/A (Amendment No. 2) for the
year ended December 31, 2003, which report is incorporated by reference herein.
Such financial statements, to the extent that they have been included in the
financial statements of CMS Energy, have been so included in reliance on the
report of such independent registered public accounting firm given on the
authority of said firm as experts in auditing and accounting.
The audited consolidated financial statements of the MCV Partnership for
the year ended December 31, 2001, incorporated by reference in this prospectus
supplement and the accompanying prospectus, have been audited by Arthur Andersen
LLP, independent accountants. Arthur Andersen LLP has not consented to the
inclusion of their report on the financial statements of the MCV Partnership for
the year ended December 31, 2001 in this prospectus supplement, and we have
dispensed with the requirement to file their consent in reliance upon Rule 437a
under the Securities Act. Because Arthur Andersen LLP has not consented to the
incorporation by reference of their report in this prospectus supplement, you
will not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Arthur Andersen LLP or any omissions to state a
material fact required to be stated therein.
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