THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS
NOT COMPLETE AND MAY BE CHANGED. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS ARE NOT AN OFFER TO SELL THESE SECURITIES AND THEY ARE NOT SOLICITING
AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
RULE 424(B)3
REGISTRATION STATEMENT NO. 333-51932
SUBJECT TO COMPLETION, DATED DECEMBER 8, 2005
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 16, 2005
(CMS ENERGY LOGO)
$125,000,000
CMS ENERGY CORPORATION
% SENIOR NOTES DUE 2015
----------
The Notes will bear interest at the rate of ___% per year. Interest on the
Notes is payable on ___________ and ________ of each year, beginning on
___________ 2006. The Notes will mature on ____________ 2015. We may redeem some
or all of the Notes at any time. The redemption price for the Notes will be 100%
of their principal amount, plus any Applicable Premium thereon at the time of
redemption plus accrued and unpaid interest to the redemption date. See
"Description of the Notes -- Optional Redemption." Under certain circumstances,
Holders of the Notes will have the right to require us to repurchase the Notes.
See "Description of the Notes -- Purchase of Notes Upon Change in Control."
There is no sinking fund for the Notes.
The Notes will be our unsecured obligations and will rank equally with all
of our other unsecured senior indebtedness.
----------
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
S-14.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
----------
PER SENIOR NOTE TOTAL
--------------- -----
Public Offering Price ___% $____
Underwriting Discount ___% $____
Proceeds to CMS Energy (before expenses) ___% $____
Interest on the Notes will accrue from December __, 2005 to date of
delivery.
----------
The underwriters expect to deliver the Notes to purchasers on or about
December __, 2005.
----------
Joint Book-Running Managers
CITIGROUP MERRILL LYNCH & CO.
----------
Co-Managers
BANC OF AMERICA SECURITIES LLC
KEYBANC CAPITAL MARKETS WEDBUSH MORGAN SECURITIES INC.
December __, 2005
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR TO
DOCUMENTS TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT, AND THE UNDERWRITERS ARE
NOT, MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
----------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
About This Prospectus Supplement......................................... S-2
Forward-Looking Statements and Information............................... S-3
Where You Can Find More Information...................................... S-5
Summary.................................................................. S-6
Risk Factors............................................................. S-14
Use of Proceeds.......................................................... S-25
Ratio of Earnings to Fixed Charges....................................... S-25
Capitalization........................................................... S-26
Description of the Notes................................................. S-27
Underwriting............................................................. S-43
Legal Matters............................................................ S-44
Experts.................................................................. S-44
PROSPECTUS
Summary.................................................................. 2
Risk Factors............................................................. 2
Where to Find More Information........................................... 3
CMS Energy Corporation................................................... 4
CMS Energy Trusts........................................................ 4
Use of Proceeds.......................................................... 5
Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined
Fixed Charges and Preference Dividends................................ 6
Description of Securities................................................ 7
Effect of Obligations Under the Debt Securities and the Guarantees....... 21
Plan of Distribution..................................................... 24
Legal Opinions........................................................... 26
Experts.................................................................. 27
ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part is this prospectus
supplement, which describes the terms of this offering of Notes and also adds to
and updates information contained in the accompanying prospectus and the
documents incorporated by reference into the accompanying prospectus. The second
part is the accompanying prospectus, which contains a description of the
securities registered by us. To the extent there is a conflict between the
information contained or incorporated by reference in this prospectus
supplement, on the one hand, and the information contained in the accompanying
prospectus or any document incorporated by reference therein, on the other hand,
the information in this prospectus supplement shall control.
This prospectus supplement and the accompanying prospectus are part of a
registration statement that we filed with the Securities and Exchange Commission
("SEC") using a "shelf" registration process. Under the registration statement,
we may sell securities, including Notes, up to a dollar amount of
$1,500,000,000, of which this offering is a part.
S-2
FORWARD-LOOKING STATEMENTS AND INFORMATION
This prospectus supplement contains forward-looking statements as defined
in Rule 175 under the Securities Act of 1933, as amended (the "SECURITIES ACT")
and Rule 3b-6 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT") and relevant legal decisions. Our intention with the use of such
words as "may," "could," "anticipates," "believes," "estimates," "expects,"
"intends," "plans" and other similar words is to identify forward-looking
statements that involve risk and uncertainty. We designed this discussion of
potential risks and uncertainties to highlight important factors that may impact
our business and financial outlook. We have no obligation to update or revise
forward-looking statements regardless of whether new information, future events
or any other factors affect the information contained in the statements. These
forward-looking statements are subject to various factors that could cause our
actual results to differ materially from the results anticipated in these
statements. Such factors include our inability to predict and/or control:
- capital and financial market conditions, including the price of our
common stock and the effect of such market conditions on our pension
plan, interest rates and access to the capital markets, as well as
availability of financing to us, Consumers Energy Company, our
wholly-owned subsidiary ("CONSUMERS"), or any of our affiliates, and
the energy industry;
- market perception of the energy industry, us and Consumers, or any of
our affiliates;
- credit ratings of us, Consumers or any of our affiliates;
- currency fluctuations, transfer restrictions and exchange controls;
- factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs, environmental
incidents or electric transmission or gas pipeline system constraints;
- international, national, regional and local economic, competitive and
regulatory policies, conditions and developments;
- adverse regulatory or legal decisions, including those related to
environmental laws and regulations, and potential environmental
remediation costs associated with such decisions;
- potentially adverse regulatory treatment and/or regulatory lag
concerning a number of significant questions presently before the
Michigan Public Service Commission ("MPSC"), including:
- recovery of future stranded costs incurred due to customers
choosing alternative energy suppliers;
- recovery of Clean Air Act costs and other environmental and
safety-related expenditures;
- timely recovery of power supply and natural gas supply costs when
oil prices and other fuel prices are rapidly increasing;
- timely recognition in rates of additional equity investments in
Consumers; and
- adequate and timely recovery of additional electric and gas
rate-based investments;
- the impact of adverse natural gas prices on the Midland Cogeneration
Venture Limited Partnership (the "MCV PARTNERSHIP") and the First
Midland Limited Partnership ("FMLP") investments, regulatory decisions
that limit recovery of capacity and fixed energy payments and our
ability to develop a new long-term strategy with respect to the MCV
Partnership's natural gas facility (the "MCV FACILITY") to provide for
its long-term financial viability;
- federal regulation of electric sales and transmission of electricity,
including periodic re-examination by federal regulators of the
market-based sales authorizations 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;
- our ability to collect accounts receivable from our gas customers due
to high natural gas prices;
S-3
- potential adverse impacts of the new Midwest Energy Market upon power
supply and transmission costs;
- potential for the Midwest Energy Market to develop into an active
energy market in the state of Michigan, which may lead us to account
for certain electric energy contracts at CMS Energy Resource
Management Company ("CMS ERM") as derivatives;
- the generally accepted accounting principles requirement that we
utilize mark-to-market accounting on certain energy commodity
contracts and interest rate swaps, 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 and
could add to earnings volatility;
- the effect on Consumers of the direct and indirect impacts of the
continued economic downturn experienced by our automotive and
automotive parts manufacturing customers;
- 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;
- changes in tax laws or new Internal Revenue Service ("IRS")
interpretations of existing tax laws;
- 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 ("DOJ") regarding
round-trip trading and price reporting;
- limitations on our ability to control the development or operation of
projects in which our subsidiaries have a minority interest;
- disruptions in the normal commercial insurance and surety bond markets
that may increase costs or reduce traditional insurance coverage,
particularly terrorism and sabotage insurance and performance bonds;
- the efficient sale of non-strategic or under-performing domestic or
international assets and discontinuation of certain operations;
- other business or investment considerations that may be disclosed from
time to time in our or Consumers' SEC filings or in other publicly
issued written documents;
- other uncertainties that are difficult to predict, and many of which
are beyond our control; and
- the factors identified under "Risk Factors" beginning on page S-14.
These are important factors, but not necessarily all of the important
factors, that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, us or our
subsidiaries.
S-4
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC under
File No. 1-9513. Our SEC filings are available over the Internet at the SEC's
web site at http://www.sec.gov. You may also read and copy any document we file
at the SEC's public reference room at 100 F Street N.E., Room 1580, 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. 1) for the year ended
December 31, 2004 and our Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2005, June 30, 2005 and September 30, 2005, on our web site at
http://www.cmsenergy.com. The information on this web site is not a part of this
prospectus supplement and the accompanying prospectus.
We are "incorporating by reference" information into this prospectus
supplement and the accompanying prospectus. This means that we are disclosing
important information by referring to another document filed separately with the
SEC. The information incorporated by reference is deemed to be part of this
prospectus supplement and the accompanying prospectus, except for any
information superseded by information in this prospectus supplement and the
accompanying prospectus. This prospectus supplement and the accompanying
prospectus incorporate by reference the documents set forth below that we have
previously filed with the SEC. These documents contain important information
about us and our finances.
- Annual Report on Form 10-K/A (Amendment No. 1) for the year ended
December 31, 2004 filed on June 28, 2005
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2005
filed on May 5, 2005, Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005 filed on August 4, 2005 and Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005 filed on November
1, 2005
- Current Reports on Form 8-K or Form 8-K/A filed on January 12, 2005,
January 14, 2005, January 20, 2005, January 27, 2005, February 28,
2005 (2 reports), March 30, 2005, April 4, 2005 (2 reports), April 5,
2005, April 13, 2005, May 17, 2005, July 8, 2005, August 11, 2005,
August 17, 2005, August 29, 2005 and December 5, 2005
The documents filed by us with the SEC pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this prospectus supplement, until
the offering of the Notes pursuant to this prospectus supplement is terminated,
are also incorporated by reference into this prospectus supplement and the
accompanying prospectus. Any statement contained in such document will be deemed
to be modified or superseded for purposes of this prospectus supplement and the
accompanying prospectus to the extent that a statement contained in this
prospectus supplement and the accompanying prospectus or any other subsequently
filed document modifies or supersedes such statement.
We will provide, upon your oral or written request, a copy of any or all of
the information that has been incorporated by reference in this prospectus
supplement and the accompanying prospectus but not delivered with this
prospectus supplement and the accompanying prospectus. You may request a copy of
these filings at no cost by writing or telephoning us at the following address:
CMS Energy Corporation
One Energy Plaza
Jackson, Michigan 49201
Tel: (517) 788-0550
Attention: Office of the Secretary
S-5
SUMMARY
This summary may not contain all the information that may be important to
you. You should read this prospectus supplement and the documents incorporated
by reference into this prospectus supplement in their entirety before making an
investment decision. The terms "CMS," "CMS ENERGY," "OUR," "US" and "WE" as used
in this document refer to CMS Energy Corporation and its subsidiaries as a
combined entity, except where it is made clear that such term means only CMS
Energy Corporation.
In this document, "MCF" means thousand cubic feet, "BCF" means billion
cubic feet and "MW" means megawatts.
CMS ENERGY CORPORATION
CMS Energy, formed in Michigan in 1987, is an energy holding company with a
business strategy focused primarily in Michigan. 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
all 68 counties in Michigan's Lower Peninsula. Enterprises, through various
subsidiaries, affiliates and equity investments, is engaged in domestic and
international diversified energy businesses.
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 6,437 MW of capacity and serves
1.77 million customers in Michigan's Lower Peninsula;
- Consumers' gas utility, which owns and operates over 27,398 miles of
transmission and distribution lines throughout the Lower Peninsula of
Michigan, providing natural gas to 1.69 million customers;
- CMS Generation Co. ("CMS GENERATION"), a wholly-owned subsidiary of
Enterprises that has ownership interests in operating power plants
totaling 8,219 gross MW (3,455 net MW) throughout the United States
and abroad. The plants are located in the U.S., Argentina, Chile,
Ghana, India, Jamaica, Morocco, Saudi Arabia and the United Arab
Emirates; and
- CMS Gas Transmission Company ("CMS GAS TRANSMISSION"), a wholly-owned
subsidiary of Enterprises that owns an interest in and operates 265
miles of natural gas gathering and transmission pipelines in the state
of Michigan and 4,331 miles of natural gas pipelines in South America.
In 2004, we had consolidated operating revenue of approximately $5.47
billion.
Our principal executive offices are located at One Energy Plaza, Jackson,
Michigan 49201 and our telephone number is (517) 788-0550.
S-6
RECENT DEVELOPMENTS
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS OF CMS ENERGY
THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 CHANGE
-------------------------------- ------ ----- ------
(UNAUDITED, DOLLARS IN
MILLIONS EXCEPT PER
SHARE AMOUNTS)
Net Income (Loss) .............................................. $ (263) $ 59 $ (322)
Preferred Dividends ............................................ 2 3 1
------ ----- ------
Net Income (Loss) Available to Common Stockholders ............. $ (265) $ 56 $ (321)
====== ===== ======
Basic Earnings (Loss) Per Share ................................ $(1.21) $0.35 $(1.56)
Diluted Earnings (Loss) Per Share .............................. (1.21) 0.34 (1.55)
Electric Utility ............................................... $ 62 $ 49 $ 13
Gas Utility .................................................... (16) (11) (5)
Enterprises .................................................... (260) 59 (319)
Corporate Interest and Other ................................... (51) (49) (2)
Discontinued Operations ........................................ -- 8 (8)
------ ----- ------
CMS Energy Net Income (Loss) Available to Common Stockholders .. $ (265) $ 56 $ (321)
====== ===== ======
For the three months ended September 30, 2005, our net loss available to
common stockholders was $265 million, compared to $56 million of net income
available to common stockholders for the three months ended September 30, 2004.
The decrease is primarily due to an impairment charge to property, plant and
equipment at the MCV Partnership to reflect the excess of the carrying value of
these assets over their estimated fair values. The decrease also reflects the
absence in 2005 of gains associated with the sale of our interest in the
Goldfields pipeline located in Australia ("GOLDFIELDS") and a reduction in net
income from our gas utility, as higher operating and maintenance costs exceeded
the benefits derived from increased deliveries and the increase in revenue
resulting from the gas rates surcharge authorized by the MPSC in October 2004.
Partially offsetting these losses are higher earnings at our electric utility
primarily due to weather-driven higher than normal residential electric utility
sales and the collection of an electric surcharge related to the recovery of
costs incurred in the transition to customer choice. The reduction was also
partially offset by increases in the fair value of certain long-term gas
contracts and financial hedges at the MCV Partnership and interest rate swaps at
Al Taweelah A2, a power and desalination plant located in the United Arab
Emirates ("TAWEELAH").
Specific changes to net income (loss) available to common stockholders for
the three months ended September 30, 2005 versus the same period in 2004 are:
IN MILLIONS
-----------
- decrease in earnings from our ownership interest in the
MCV Partnership primarily due to a $385 million
impairment charge to property, plant and equipment to
reflect the excess of the carrying value over the
estimated fair values of these assets, offset partially
by an increase of $67 million from operations, primarily
due to an increase in fair value of certain long-term
gas contracts and financial hedges...................... $(318)
- the absence in 2005 of the gain on the sale of our
interest in Goldfields.................................. (29)
- the absence in 2005 of net gains associated with
discontinued operations................................. (8)
- decrease in net income from our gas utility primarily
due to increases in benefit costs and safety,
reliability and customer service expenses offset
partially by increased deliveries and increased revenue
associated with the gas rate surcharge authorized by the
MPSC in October of 2004................................. (5)
- increase in corporate interest and other expenses
primarily due to premiums paid on the early retirement
of a portion of our 9.75 percent senior notes offset by
reduced interest expense................................ (2)
- increase in income at our electric utility primarily due
to weather-driven higher than normal residential
electric utility sales and the collection of electric
surcharges related to the recovery of MPSC approved
costs, offset partially by increased operating expenses
and power supply costs.................................. 13
- increase in the fair value of interest rate swaps
associated with our investment in Taweelah as we
recorded gains in 2005 versus losses in 2004............ 13
- income tax benefit recorded at Enterprises resulting
from the American Jobs Creation Act of 2004............. 10
- increase in income from CMS ERM primarily due to
mark-to-market adjustments.............................. 5
-----
Total Change................................................. $(321)
=====
S-7
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 CHANGE
------------------------------- ------ ----- ------
(UNAUDITED, DOLLARS IN
MILLIONS EXCEPT PER
SHARE AMOUNTS)
Net Income (Loss)............................................... $ (81) $ 72 $ (153)
Preferred Dividends............................................. 7 9 2
------ ----- ------
Net Income (Loss) Available to Common Stockholders.............. $ (88) $ 63 $ (151)
====== ===== ======
Basic Earnings (Loss) Per Share................................. $(0.42) $0.39 $(0.81)
Diluted Earnings (Loss) Per Share............................... (0.42) 0.38 (0.80)
Electric Utility................................................ $ 141 $ 124 $ 17
Gas Utility..................................................... 39 46 (7)
Enterprises..................................................... (126) 36 (162)
Corporate Interest and Other.................................... (142) (147) 5
Discontinued Operations......................................... - 6 (6)
Accounting Changes.............................................. - (2) 2
------ ----- ------
CMS Energy Net Income (Loss) Available to Common Stockholders... $ (88) $ 63 $ (151)
====== ===== ======
For the nine months ended September 30, 2005, our net loss available to
common stockholders was $88 million, compared to $63 million of net income
available to common stockholders for the nine months ended September 30, 2004.
The decrease is primarily due to an asset impairment charge to property, plant
and equipment at the MCV Partnership to reflect the excess of the carrying value
of these assets over their estimated fair values. The decrease also reflects the
absence in 2005 of the gain on the sale of our interest in Goldfields and a
decrease in net income at our gas utility due to higher operating costs and
depreciation expense. Partially offsetting these decreases is an increase in the
fair value of certain long-term gas contracts and financial hedges at the MCV
Partnership and the positive impact at our electric utility due to an increase
in the collection of an electric surcharge related to the recovery of costs
incurred in the transition to customer choice, increased regulatory return on
capital expenditures, and weather-driven higher than normal residential electric
utility sales. The reduction was also partially offset by the absence in 2005 of
a 2004 investment impairment at Loy Yang, an Australian power plant ("LOY YANG")
and tax benefits recorded in 2005 resulting from the American Jobs Creation Act
of 2004.
Specific changes to net income (loss) available to common stockholders for
the nine months ended September 30, 2005 versus the same period in 2004 are:
IN MILLIONS
-----------
- decrease in earnings from our ownership interest in the
MCV Partnership primarily due to a $385 million
impairment charge to property, plant and equipment to
reflect the excess of the carrying value over the
estimated fair values of these assets, offset partially
by an increase of $120 million from operations,
primarily due to an increase in fair value of certain
long-term gas contracts and financial hedges............ $(265)
- the absence in 2005 of the gain on the sale of our
interest in Goldfields.................................. (29)
- the absence in 2005 of the settlement agreement that
Dearborn Industrial Generation ("DIG") and CMS
Marketing, Services and Trading Company ("CMS MST")
entered into with the purchasers of electric power and
steam from DIG.......................................... (8)
- decrease in net income from our gas utility primarily
due to increases in benefit costs and safety,
reliability and customer service expenses offset
partially by increased deliveries and increased revenue
associated with the gas rate surcharge authorized by the
MPSC in October 2004.................................... (7)
- the absence in 2005 of net gains associated with
discontinued operations................................. (6)
- the absence in 2005 of an impairment charge related to
the sale of our Loy Yang investment that was recorded in
2004.................................................... 81
income tax benefit recorded at Enterprises resulting
from the American Jobs Creation Act of 2004............. 33
- increase in other Enterprises income primarily due to an
increase in earnings from our overseas investments,
increased interest income, and the favorable resolution
of a contingent liability at our Leonard Field storage
facility................................................ 21
- increase in income from our electric utility primarily
due to weather-driven higher than normal electric
utility sales, the return on capital expenditures, and
the collection of electric surcharges related to the
recovery of MPSC approved costs, offset by increased
operating expenses and power supply purchase costs, and
customers choosing alternative suppliers................ 17
- increase in income from CMS ERM primarily due to
mark-to-market adjustments.............................. 5
- reduction in corporate interest and other expenses
partially offset by premiums paid on the early
retirement of a portion of our 9.75 percent senior
notes................................................... 5
- the absence in 2005 of a loss recorded in 2004 for the
cumulative effect of a change in accounting principle... 2
-----
Total Change...................................................... $(151)
=====
S-8
GAS RECOVERY PLAN FOR YEAR 2005-2006
In September 2005, Consumers filed a motion with the MPSC seeking to reopen
its gas cost recovery plan ("GCR") for the year 2005-2006. After a settlement
agreement was reached in the GCR plan case with various parties in June 2005,
there were substantial, unanticipated increases in the market price for natural
gas. These increases were so large that the maximum adjustments possible under
the GCR ceiling price adjustment mechanisms included in the settlement agreement
were not adequate. In October 2005, the MPSC issued an order reopening
evidentiary proceedings. On November 30, 2005, the MPSC authorized Consumers to
increase the maximum allowable GCR factor up to $10.10 per mcf. Consumers will
only charge an amount necessary to recover its natural gas supply costs.
Consumers began charging customers a GCR factor on December 1, 2005 at a rate of
$8.92 per mcf.
CONSUMERS DECIDES TO SELL THE PALISADES NUCLEAR POWER PLANT
On December 5, 2005, Consumers announced that it planned to sell the
Palisades nuclear power plant and will establish a competitive bid process
expected to lead to a sale in 2007. The terms of sale will include a long-term
power purchase agreement with the new owner to retain the benefits of the
low-cost nuclear generation for Consumers' electric customers.
S-9
THE OFFERING
Issuer........................ CMS Energy Corporation.
Securities Offered............ $125 million aggregate principal amount of ___%
Senior Notes due 2015 (the "NOTES") to be
issued under the indenture dated as of
September 15, 1992 between us and JPMorgan
Chase Bank, N.A. (successor to NBD Bank,
National Association), as trustee (the
"TRUSTEE"), and as amended and supplemented
from time to time (the "SENIOR DEBT
INDENTURE").
Issue Price................... Each Note will be issued at a price of $1,000
per Note, plus accrued interest, if any, from
December ____, 2005.
Maturity...................... _____________ 2015.
Interest Rate................. The Notes will bear interest at the rate of __%
per year, payable semiannually in arrears on __
and ____, commencing on ____ 2006, and at
maturity.
Use of Proceeds............... We estimate that the proceeds of the offering
of the Notes, after deducting underwriters'
discounts and commissions and offering
expenses, will aggregate approximately $_______
million. We intend to use all of the proceeds
of this offering to extinguish obligations of
approximately $109 million under one of our gas
supply contracts (for which we expect to pay
approximately $118 million), to pay expenses
incurred in paying down the obligations under
such contract and for general corporate
purposes. If the closing of the extinguishment
of the gas supply contract does not occur for
any reason, we intend to use the proceeds of
this offering for general corporate purposes,
which may include retiring debt or making
capital infusions into Consumers. See "Use of
Proceeds."
Optional Redemption........... The Notes will be redeemable at our option, in
whole or in part, at any time or from time to
time, upon not less than 30 nor more than 60
days notice before the redemption date by mail
to the Trustee, the paying agent and each
Holder of the Notes, for a price equal to 100%
of the principal amount of the Notes to be
redeemed plus any accrued and unpaid interest,
and Applicable Premium owed, if any, to the
redemption date. See "Description of the
Notes -- Optional Redemption."
Change in Control............. If a Change in Control (as defined under
"Description of the Notes -- Purchase of Notes
Upon Change in Control") occurs, Holders will
have the right, at their option, to require us
to purchase any or all of their Notes for cash.
The cash price we are required to pay is equal
to 101% of the principal amount of the Notes to
be purchased plus accrued and unpaid interest,
if any, to the Change in Control purchase date.
See "Description of the Notes -- Purchase of
Notes Upon Change in Control."
Ranking....................... The Notes will be unsecured and unsubordinated
senior debt securities of ours ranking equally
with our other unsecured and unsubordinated
indebtedness. As of September 30, 2005, we had
outstanding approximately $2.4 billion
aggregate principal amount of indebtedness,
including approximately $178 million of
subordinated indebtedness relating to our
convertible preferred securities, but excluding
approximately $4.7 billion of indebtedness of
our subsidiaries. In May 2005, CMS Energy
entered into the Sixth Amended and Restated
Credit Agreement in the amount of approximately
$300 million. This facility is secured and the
Notes are junior to such indebtedness as to the
assets pledged. As of September 30, 2005, there
were approximately $98 million of letters of
credit outstanding under the Sixth Amended and
Restated Credit Agreement. Except for the
amount outstanding under the Sixth Amended and
Restated Credit Agreement, none
S-10
of our indebtedness is senior to the Notes as
to our assets. The Notes are structurally
subordinated to approximately $4.7 billion of
our subsidiaries' debt.
Certain Covenants............. The senior debt indenture will contain
covenants that will, among other things, limit
our ability to pay dividends or distributions,
incur additional indebtedness, incur additional
liens, sell, transfer or dispose of certain
assets, enter into certain transactions with
affiliates or enter into certain mergers or
consolidations.
Form of Notes................. One or more global securities held in the name
of The Depository Trust Company ("DTC") in a
minimum denomination of $1,000 and any integral
multiple thereof.
Trustee and Paying Agent...... JPMorgan Chase Bank, N.A.
Trading....................... The Notes will not be listed on any securities
exchange or included in any automated quotation
system. No assurance can be given as to the
liquidity of or trading market for the Notes.
Risk Factors.................. You should carefully consider each of the
factors described in the section of this
prospectus supplement entitled "Risk Factors"
starting on page S-14 before purchasing the
Notes.
S-11
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 five fiscal years ended
December 31, 2004, 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 a 49% owned variable interest entity which was
consolidated in our financial statements in 2004 and accounted for under the
equity method of accounting through December 31, 2003, and which was audited by
another independent registered public accounting firm (the other auditors for
2001 and 2000 have ceased operations), for the five fiscal years ended December
31, 2004. Jorf Lasfar represents an investment accounted for under the equity
method of accounting, which was audited by another independent accountant for
the five fiscal years ended December 31, 2004. The following selected
consolidated financial data for the nine months ended September 30, 2005 and
2004 have been derived from our unaudited consolidated financial statements.
Please refer to our consolidated financial statements for the fiscal year ended
December 31, 2004 and for the quarter ended September 30, 2005, 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, 2005 are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 2005. See "Where You Can Find More Information."
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------------------------------
2005 2004 2004 (A) 2003 2002 2001 2000
------- ------- -------- ------- ------- ------- -------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Operating revenue ............................... $ 4,421 $ 3,910 $ 5,472 $ 5,513 $ 8,673 $ 8,006 $ 6,623
Earnings from equity method investees ........... 92 78 115 164 92 172 213
Operating expenses .............................. 4,771 3,537 4,994 5,082 8,690 8,027 6,342
------- ------- ------- ------- ------- ------- -------
Operating income (loss) ......................... (258) 451 593 595 75 151 494
Income (loss) from continuing operations ........ (81) 68 127 (42) (394) (327) (85)
Net income (loss) available to common
stockholders ................................. $ (88) $ 63 $ 110 $ (44) $ (650) $ (459) $ 5
Earnings (loss) per average common share:
Income (loss) from continuing operations:
Basic ........................................ $ (0.42) $ 0.36 $ 0.68 $ (0.30) $ (2.84) $ (2.50) $ (0.76)
Income (loss) from continuing operations:
Diluted ...................................... (0.42) 0.36 0.67 (0.30) (2.84) (2.50) (0.76)
CMS Energy Net Income (Loss) attributable to
common stock: Basic .......................... (0.42) 0.39 0.65 (0.30) (4.68) (3.51) 0.04
CMS Energy Net Income (Loss) attributable to
common stock: Diluted ........................ (0.42) 0.38 0.64 (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 at cost, which
approximates market .......................... $ 793 $ 560 $ 669 $ 532 $ 351 $ 123 $ 143
Restricted cash ................................. 196 83 56 201 38 4 --
Net plant and property .......................... 7,719 8,684 8,636 6,890 6,103 6,703 6,316
Total assets .................................... 16,115 15,367 15,872 13,838 14,781 17,633 17,801
Long-term debt, excluding current
maturities ................................... 6,521 6,228 6,444 6,020 5,357 5,842 6,052
Long-term debt--related parties, excluding
current maturities ........................... 178 684 504 684 -- -- --
Non-current portion of capital and finance
lease obligations ............................ 299 318 315 58 116 71 49
Notes payable ................................... -- -- -- -- 458 416 403
Other liabilities ............................... 6,105 5,320 5,499 5,113 6,807 8,012 7,705
Minority interests .............................. 396 750 733 73 38 43 82
Company-obligated mandatorily redeemable trust
preferred securities of subsidiaries (b) ..... -- -- -- -- 393 694 694
Company obligated trust preferred securities
of Consumers' subsidiaries (b) ............... -- -- -- -- 490 520 395
Preferred stock ................................. 261 261 261 261 -- -- --
Preferred stock of subsidiary ................... 44 44 44 44 44 44 44
Common stockholders' equity ..................... $ 2,311 $ 1,762 $ 2,072 $ 1,585 $ 1,078 $ 1,991 $ 2,377
OTHER DATA:
Cash Flow:
Provided by (Used in) operating activities ...... $ 604 $ 200 $ 398 $ (250) $ 614 $ 372 $ 600
Provided by (Used in) investing activities ...... (399) (388) (392) 203 829 (1,349) (1,220)
Provided by (Used in) financing activities ...... (82) (219) (43) 229 (1,223) 967 629
Ratio of earnings to fixed charges (c) .......... --(d) 1.01 1.12 --(e) --(f) --(g) --(h)
----------
(a) Under revised FASB Interpretation No. 46 "Consolidation of Variable
Interest Entities," we are the primary beneficiary of the MCV Partnership
and the FMLP. As a result, we have consolidated the assets, liabilities and
activities of these entities into our financial statements for the nine
months ended September 30, 2005 and 2004 and for the fiscal year ended
December 31, 2004.
S-12
(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, was 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, was included in the
balance sheet as Long-term debt -- related parties. Since December 31,
2003, $377 million of Long-term debt -- related parties has been retired
and $129 million of Long-term debt -- related parties has been reclassified
in the balance sheet as Current portion of 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 the estimated interest
portion of lease rentals and distributed income of equity method investees.
(d) For the nine months ended September 30, 2005, fixed charges exceeded
earnings by $601 million. Earnings as defined include $1.184 billion of
asset impairment charges.
(e) For the year ended December 31, 2003, fixed charges exceeded earnings by
$34 million. Earnings as defined include $95 million of asset impairment
charges.
(f) For the year ended December 31, 2002, fixed charges exceeded earnings by
$488 million. Earnings as defined include $602 million of asset impairment
charges.
(g) For the year ended December 31, 2001, fixed charges exceeded earnings by
$395 million. Earnings as defined include $323 million of asset impairment
charges.
(h) For the year ended December 31, 2000, fixed charges exceeded earnings by
$220 million. Earnings as defined include $329 million of asset impairment
charges.
S-13
RISK FACTORS
Before purchasing any of our securities offered by this prospectus
supplement and the accompanying prospectus, you should carefully consider the
following risk factors, as well as the other information contained or
incorporated by reference in this prospectus supplement and the accompanying
prospectus.
RISKS RELATED TO CMS ENERGY
WE DEPEND ON DIVIDENDS FROM OUR SUBSIDIARIES TO MEET OUR DEBT SERVICE
OBLIGATIONS. IF WE DO NOT RECEIVE ADEQUATE DIVIDENDS OR DISTRIBUTIONS FROM OUR
SUBSIDIARIES, WE MAY NOT BE ABLE TO MAKE PRINCIPAL OR INTEREST PAYMENTS ON THE
NOTES.
Due to our holding company structure, we depend on dividends from our
subsidiaries to meet our debt obligations, including the payment of any
principal or interest on the Notes. None of these entities are or will be
obligated to pay any amounts due on the Notes. Therefore, the Notes are
effectively subordinated to the payment of interest, principal, declared
dividends and preferred distributions on the debt, preferred securities and
other liabilities of Consumers and Enterprises and each of their subsidiaries.
Restrictions contained in Consumers' preferred stock provisions and other
legal restrictions limit Consumers' ability to pay dividends or acquire its own
stock from us. As of September 30, 2005, the most restrictive provisions in its
financing documents allowed Consumers to pay an aggregate of $300 million in
dividends to us during any year.
For additional information concerning restrictions on Consumers' ability to
pay dividends to us, see "Description of the Notes -- Primary Source of Funds of
CMS Energy; Restrictions on Sources of Dividends."
THE NOTES ARE STRUCTURALLY SUBORDINATED TO THE DEBT AND PREFERRED STOCK OF
OUR SUBSIDIARIES.
Of the approximately $7.1 billion of our consolidated indebtedness as of
September 30, 2005, approximately $4.7 billion was indebtedness of our
subsidiaries. Payments on that indebtedness and preferred stock are prior in
right of payment to dividends paid to us by our subsidiaries. See "Description
of the Notes -- Structural Subordination."
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT OUR FINANCIAL FLEXIBILITY
AND HENCE OUR ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS UNDER THE NOTES.
As of September 30, 2005, we had outstanding approximately $2.4 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible preferred securities
but excluding approximately $4.7 billion of indebtedness of our subsidiaries. In
May 2005, we entered into the Sixth Amended and Restated Credit Agreement in the
amount of approximately $300 million. As of September 30, 2005, there were
approximately $98 million of letters of credit outstanding under the Sixth
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
S-14
generate sufficient cash flow from operations to service our indebtedness. If we
are unable to generate sufficient cash flows from operations, we may be required
to sell additional assets or obtain additional financings. We cannot assure you
that additional financing will be available on commercially acceptable terms or
at all.
There can be no assurance that the requirements of our existing debt
arrangements or other indebtedness will be met in the future. Failure to comply
with such covenants may result in a default with respect to the related debt and
could lead to acceleration of such debt or any instruments evidencing
indebtedness that contain cross-acceleration or cross-default provisions.
In such a case, there can be no assurance that we would be able to
refinance or otherwise repay such indebtedness.
WE HAVE FINANCING NEEDS AND WE MAY BE UNABLE TO SUCCESSFULLY ACCESS BANK
FINANCING OR THE CAPITAL MARKETS.
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, 2005, we had incurred $589 million in
capital expenditures to comply with these regulations and future capital
expenditures may total approximately $226 million between 2005 and 2011. We
continue to be challenged by the substantial increase in natural gas prices.
Although our natural gas purchases are recoverable from our utility customers,
as gas prices increase, the amount we pay for natural gas stored as inventory
will require additional liquidity due to the timing of the cost recoveries from
our customers. We anticipate that we will need a substantial amount of cash in
the summer of 2006 to purchase storage for natural gas for winter 2006-2007. See
"The combined effects of substantially higher natural gas prices, restrictions
on Consumers' ability to issue first mortgage bonds and possible power purchase
supply cost recovery delays may have a negative effect on Consumers' short-term
liquidity" below. In addition, certain mark-to-market effects resulting from
high gas prices may negatively affect a coverage ratio in our bank financing
facility. 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. Management is actively pursuing plans 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.
On August 2, 2005, the IRS issued Revenue Ruling 2005-53 and regulations to
provide guidance with respect to the use of the "simplified service cost" method
of tax accounting. We use this tax accounting method, generally allowed by the
IRS under section 263A of the Internal Revenue Code, with respect to the
allocation of certain corporate overheads to the tax basis of self-constructed
utility assets. Under the IRS guidance, significant issues with respect to the
application of this method remain unresolved. Accordingly, it is difficult to
predict the impact of this ruling on future earnings, cash flows or our present
net operating loss carryforwards, but it is possible that CMS Energy could pay
about $100 million to the IRS to resolve this issue.
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/or issuing new capital markets debt, preferred stock and/or
common equity; and negotiating private placement debt. We cannot guarantee the
capital market's acceptance of our securities or predict the impact of factors
beyond our control, such as actions of rating agencies. If we are unable to
access bank financing or the capital markets to incur or refinance indebtedness,
there could be a material adverse effect upon our liquidity and operations.
Standard & Poor's Ratings Group, a division of The McGraw Hill Companies,
Inc. ("S&P"), has assigned the Notes a rating of B+, Moody's Investors Service,
Inc. ("MOODY'S") has assigned the Notes a rating of B1 and Fitch, Inc. ("FITCH")
has assigned the Notes a rating of BB-. We cannot assure you that these credit
ratings will remain in effect for any given period of time or that one or more
of these ratings will not be lowered or withdrawn entirely by a rating agency.
We note that these credit ratings are not recommendations to buy, sell or hold
our securities. Each rating should be evaluated independently of any other
rating. Any future reduction or withdrawal of one or more of our credit ratings
could have a material adverse impact on our ability to access capital on
acceptable terms.
Certain of our securities and those of our affiliates, including Consumers,
are rated by various credit rating agencies. On November 1, 2005, we announced
our third quarter results, which included an impairment of our ownership
interest in the MCV Partnership. See "Periodic reviews of the values of our
assets could result in additional accounting charges such as the recent asset
impairment charges we took relating to our interest in the MCV Partnership"
below. As a result, S&P placed CMS' and Consumers' debt credit ratings on
CreditWatch with negative implications. S&P has indicated that it expects
resolution of the CreditWatch before December 31, 2005. Moody's revised its
outlook for Consumers to negative from stable. Moody's ratings and outlook for
CMS remained unchanged. Fitch reaffirmed CMS' ratings. On November 7, 2005,
Fitch raised CMS' ratings on its senior secured debt to BB+ from BB and on its
senior unsecured debt to BB- from B+. Following these rating upgrades, Fitch
revised its outlook on CMS to stable from positive. The recent ratings
activities by the various
S-15
credit rating agencies or potential future credit downgrades could have a
material adverse impact on our ability to access capital on acceptable terms and
maintain commodity lines of credit and could make our cost of borrowing higher.
If we are unable to maintain commodity lines of credit, we may have to post
collateral or make prepayments to certain of our suppliers pursuant to existing
contracts with them. Further, any adverse developments to Consumers, which
provides dividends to us, that result in a lowering of Consumers' credit ratings
could have an adverse effect on our credit ratings. 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.
PERIODIC REVIEWS OF THE VALUES OF OUR ASSETS COULD RESULT IN ADDITIONAL
ACCOUNTING CHARGES SUCH AS THE RECENT ASSET IMPAIRMENT CHARGES WE TOOK RELATING
TO OUR INTEREST IN THE MCV PARTNERSHIP.
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.
In the third quarter of 2005, we recorded asset impairment charges of
$1.184 billion on our consolidated statements of income relating to our interest
in the MCV Partnership. These charges reduced our third quarter net income by
$385 million.
The MCV Partnership's costs of producing electricity are tied to the price
of natural gas, but its revenues do not vary with changes in the price of
natural gas. While the average forward price of natural gas has increased
steadily from 2002 through the second quarter of 2005, it remained at a level
that suggested the MCV Partnership's operating cash flow would be sufficient to
provide for the recovery of its assets. However, unforeseen natural and economic
events in the third quarter of 2005 caused a substantial upward spike in New
York Mercantile Exchange forward natural gas prices for the years 2005 through
2010. Additionally, other independent natural gas long-term forward price
forecasting organizations indicated their intention to raise their forecasts for
the price of natural gas generally over the entire long-term forecast horizon
beyond 2010. Our analysis and assessment of this new information suggests that
forward natural gas prices for the period from 2006 through 2010 will average
approximately $9 per mcf. This compares to the second quarter 2005 New York
Mercantile Exchange-quoted average prices for the same forward period of
approximately $7.50 per mcf. Further, this new information indicates that
natural gas prices will average approximately $6.50 per mcf over the long term
beyond 2010. As a result, the MCV Partnership reevaluated the economics of
operating MCV Facility and determined that an impairment analysis, considering
revised forward natural gas price assumptions, was required. In its impairment
analysis, the MCV Partnership determined the fair value of its fixed assets by
discounting a set of probability-weighted streams of future operating cash flows
at a 4.3 percent risk free interest rate. The carrying value of the MCV
Partnership's fixed assets exceeded the estimated fair value by $1.159 billion.
In the third quarter of 2005, the MCV Partnership recorded an impairment charge
of $1.159 billion to recognize the reduction in fair value of the MCV Facility's
fixed assets. As a result, our net income was reduced by $369 million after
considering tax effects and minority interest. The MCV Partnership's fixed
assets, which are included on our consolidated balance sheets and reported under
the Enterprises business segment, after reflecting the impairment charge, are
valued at $219 million at September 30, 2005.
If natural gas prices remain at present levels or increase, the operations
of the MCV Facility would be adversely affected and could result in a further
impairment or the MCV Partnership failing to meet its financial obligations
under its sale and leaseback transactions and other contracts.
Our 49 percent interest in the MCV Partnership is held through Consumers'
wholly-owned subsidiary, CMS Midland, Inc. ("CMS MIDLAND"). The severe adverse
change in the anticipated economics of the MCV Partnership operations also led
to our decision to impair certain assets carried on the balance sheet of CMS
Midland. These assets represented interest capitalized during the construction
of the MCV Facility, which were being amortized over the life of the MCV
Facility. In the third quarter of 2005, we recorded an impairment charge of $25
million ($16 million, net of tax) to resolve the carrying amount of these assets
to zero.
THE COMBINED EFFECTS OF SUBSTANTIALLY HIGHER NATURAL GAS PRICES,
RESTRICTIONS ON CONSUMERS' ABILITY TO ISSUE FIRST MORTGAGE BONDS AND POSSIBLE
POWER PURCHASE SUPPLY COST RECOVERY DELAYS MAY HAVE A NEGATIVE EFFECT ON
CONSUMERS' SHORT-TERM LIQUIDITY.
Prior to Hurricane Katrina in August 2005, New York Mercantile Exchange
forward natural gas prices through 2010 were approximately $2 per mcf higher
than they were at year-end 2004. The effects of this summer's hurricanes,
combined with tight natural gas supplies, have caused natural gas prices to
increase even further. Although our natural gas purchases are recoverable from
our utility customers, as gas prices increase, the amount we pay for natural gas
stored as inventory will
S-16
require additional liquidity due to the timing of the cost recoveries from our
customers. In addition, due to the high natural gas prices, our ability to
collect accounts receivable from our gas customers may be negatively impacted.
As of October 2005, our gas storage facilities were full and approximately 83
percent of our gas purchase requirements for the 2005-2006 heating season were
under fixed price contracts. However, if natural gas prices increase or stay at
current levels, we will require significant additional liquidity in the summer
of 2006 to fill our gas storage facilities in preparation for the 2006-2007
heating season.
Due to the adverse impact of the MCV Partnership asset impairment charge
recorded in September 2005, Consumers' ability to issue first mortgage bonds as
primary obligations or as collateral for financing is expected to be limited to
$298 million for 12 months, ending September 30, 2006. First mortgage bonds have
been a primary source of financing for Consumers. Beyond 12 months, Consumers'
ability to issue first mortgage bonds in excess of $298 million is based on
achieving a two-times first mortgage bonds interest coverage ratio.
Consumers is entitled to recover its reasonably and prudently incurred
power supply costs pursuant to a power supply cost recovery ("PSCR") process. In
September 2005, Consumers submitted its 2006 PSCR plan filing to the MPSC. In
the absence of MPSC action, Consumers intended to self-implement the filed PSCR
factor commencing January 2006, as it is entitled to do pursuant to statute. On
November 10, 2005, the MPSC established an expedited hearing procedure to
consider whether to issue a temporary order limiting the PSCR factor. The MPSC
staff has filed a proposal in the expedited hearing that, if adopted by the
MPSC, would reduce the PSCR factor billed to customers in January 2006 and
therefore defer recovery of a portion of the anticipated costs to later in 2006
or 2007. We are unable to predict the outcome of this matter.
As of December 5, 2005, Consumers' borrowings under their revolving credit
facility, which expires May 18, 2010, have increased by $175 million since
September 30, 2005. This increase in short-term borrowing is typical this time
of year given the need to purchase storage natural gas for the winter heating
season. CMS currently intends to make a loan to Consumers of $250 million before
December 31, 2005 to pay down these short-term borrowings and bolster Consumers'
short-term liquidity. However, the combined effects of higher natural gas
prices, restrictions on Consumers' ability to issue first mortgage bonds,
possible PSCR recovery delays and any ratings downgrades at Consumers may have a
negative effect on Consumers' short-term liquidity.
WE MAY BE ADVERSELY AFFECTED BY REGULATORY INVESTIGATIONS AND A LAWSUIT
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 DOJ. We have received subpoenas from U.S. Attorneys'
Offices regarding investigations of those trades. CMS Energy and Consumers have
also been named in numerous securities 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 our business and
financial condition. The cases have been consolidated into a single lawsuit. The
consolidated lawsuit generally seeks unspecified damages based on allegations
that the defendants violated United States securities laws and regulations by
making allegedly false and misleading statements about CMS Energy's business and
financial condition, particularly with respect to revenues and expenses recorded
in connection with round trip trading by CMS MST. In January 2005, a motion was
granted dismissing Consumers and three of the individual defendants, but the
court denied the motions to dismiss for CMS Energy and the 13 remaining
individual defendants. Plaintiffs filed a motion for class certification on
April 15, 2005 and an amended motion for class certification on June 20, 2005.
On November 29, 2005, the court denied a further motion to dismiss filed by CMS
Energy and dismissed a motion by the plaintiffs for partial summary judgment.
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.
We have notified appropriate regulatory and governmental agencies that some
employees at CMS MST and CMS Field Services, Inc. (now Cantera Gas Company)
("CMS FIELD SERVICES") 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 ongoing
investigation by the DOJ 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. The CFTC filed a civil injunctive
action against two former CMS Field Services employees in Oklahoma federal
district court on February 1, 2005. The action alleges the two engaged in
reporting false natural gas trade information, and the action seeks to enjoin
such acts, compel compliance with the Commodities Exchange Act and impose
monetary penalties.
S-17
We have also been named as a defendant in a number of gas industry civil
lawsuits regarding inaccurate gas trade reporting that include claims alleging
manipulation of New York Mercantile Exchange natural gas futures and options
prices, price-fixing conspiracies and artificial inflation of natural gas retail
prices in California, Kansas and Tennessee.
We cannot predict the outcome of the DOJ investigations and the lawsuits.
It is possible that the outcome in one or more of the investigations 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. In March 2004, the judge granted in part, but
denied in part, CMS Energy's motion to dismiss the complaint. The judge has
conditionally granted plaintiffs' motion for class certification. A trial date
has not been set, but is expected to be no earlier than mid-2006.
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 ("BAY
HARBOR"). As part of the development of Bay Harbor which went forward under an
agreement with the Michigan Department of Environmental Quality ("MDEQ"), a
third party constructed a golf course over several abandoned cement kiln dust
("CKD") piles, leftover from the former cement plant operation on the Bay Harbor
site. Pursuant to the agreement with the MDEQ, CMS Energy constructed a water
collection system to recover seep water from one of the CKD piles. In 2002, CMS
Energy sold its interest in Bay Harbor, but retained its obligations under
previous environmental indemnifications entered into at the inception of the
project.
In September 2004, the MDEQ issued a notice of noncompliance ("NON"), after
finding high pH-seep water in Lake Michigan adjacent to the property. The MDEQ
also found higher than acceptable levels of heavy metals, including mercury, in
the seep water.
In February 2005, the U.S. Environmental Protection Agency ("EPA") executed
an Administrative Order on Consent ("AOC") to address problems at Bay Harbor,
upon the consent of CMS Land Company, a subsidiary of Enterprises ("CMS LAND"),
and CMS Capital, LLC, a subsidiary of CMS Energy. Under the AOC, CMS Energy is
generally obligated, among other things, to: (i) engage in measures to restrict
access to seep areas, install methods to interrupt the flow of seep water to
Lake Michigan, and take other measures as may be required by the EPA under an
approved "removal action work plan"; (ii) investigate and study the extent of
hazardous substances at the site, evaluate alternatives to address a long-term
remedy, and issue a report of the investigation and study; and (iii) within 120
days after EPA approval of the investigation report, enter into an enforceable
agreement with the MDEQ to address a long-term remedy under certain criteria set
forth in the AOC. The EPA approved a final removal action work plan in September
2005.
The EPA-approved removal action work plan provides for fencing of affected
beach-front areas and the installation of an underground leachate collection
system, among other elements. The EPA's approvals also specify that a backup
"containment and isolation system," involving dams or barriers in the lake,
could be required in certain areas, if the collection system is ineffective.
Several parties have issued demand letters to 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. Several landowners have threatened litigation in the event
their demands are not met and owners of one parcel have filed a lawsuit in Emmet
County Circuit Court against CMS Energy and several of its subsidiaries, as well
as Bay Harbor Company LLC and David Johnson, one of the developers at Bay
Harbor. CMS Energy responded to the indemnification claims by stating that it
had not breached its indemnity obligations, it will comply with the indemnities,
it has restarted the seep water collection facility and it has responded to the
NON. CMS Energy has entered into negotiations with several landowners at Bay
Harbor for access as necessary to implement remediation measures, and will
defend vigorously any property damage and personal injury claims or lawsuits.
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On November 18, 2005, the MDEQ issued a notice of violation and escalated
enforcement action under Part 31 of Michigan's Natural Resources and
Environmental Protection Act, relating to a release of CKD leachate that
accidentally occurred during the construction of a leachate collection system
being installed by CMS Land in order to meet the terms of the AOC. The MDEQ's
enforcement activity could include a civil penalty. CMS Land will vigorously
defend the claimed notice of violation. In addition, there are indications that
CKD may be located on the beach at the west end of the collection system
installation. As a result, construction in the affected area has been halted
pending further investigation.
CMS Energy recorded a liability for its obligations associated with this
matter in the amount of $45 million in the fourth quarter of 2004. Under the
AOC, CMS Land is presently conducting a remedial investigation of the site,
which includes the gathering and analysis of data to be utilized in arriving at
a permanent fix. CMS Energy is in the process of evaluating the effect of recent
construction events and site-related data on its cost projections and reserves
for this matter. An adverse outcome of this matter could, depending on the
amount of any indemnification obligation or liability under the environmental
laws, result in an increase in the recorded liability, have a potentially
significant adverse effect on CMS Energy's financial condition and liquidity and
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. 1) for the
year ended December 31, 2004 -- Notes to Consolidated Financial Statements --
Note 3, include arbitration and litigation relating to DIG. An adverse outcome
in one or more of these cases could, depending on the timing and size of any
award and the availability of insurance or reimbursement from third parties,
have an adverse effect on our financial condition, liquidity or results of
operations.
REGULATORY CHANGES AND OTHER DEVELOPMENTS HAVE RESULTED AND WILL CONTINUE
TO RESULT IN INCREASED COMPETITION IN OUR DOMESTIC ENERGY BUSINESS. GENERALLY,
INCREASED COMPETITION THREATENS OUR MARKET SHARE IN CERTAIN SEGMENTS OF OUR
BUSINESS AND CAN REDUCE OUR PROFITABILITY.
Consumers has in the last several years experienced, and expects to
continue to experience, a significant increase in competition for generation
services with the introduction of retail open access in the State of Michigan.
Pursuant to the Customer Choice Act, as of January 1, 2002, all electric
customers have the choice of buying electric generation service from an
alternative electric supplier. As of October 2005, we had lost 754 MW of our
electric generation business to these alternative electric suppliers. This is,
however, down from 877 MW in October 2004, a decrease of 14 percent. We expect
this trend down to continue through the end of 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 COSTS 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. The primary reasons for the
request are load migration to alternative electric suppliers, increased system
maintenance and improvement costs, Clean Air Act-related expenditures and
employee pension costs. In April 2005, Consumers filed updated debt and equity
information in this case.
In June 2005, the MPSC staff filed its position in this case, recommending
a base rate increase of $98 million. The MPSC staff also recommended an 11.25
percent return on equity to establish rates and recognized all of our projected
equity
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investment (infusions and retained earnings) in 2006. In August 2005, Consumers
revised its request for an annual increase in revenues to approximately $197
million, and the MPSC staff revised its recommendation to $100 million. In
October 2005, the administrative law judge issued a proposal for decision
recommending a base rate increase of $112 million and an 11.25 percent
authorized return on equity. On November 15, 2005, the MPSC staff recommended in
its Replies to Exceptions that no adjustment be made to the case as a result of
the MCV impairment. See "As a result of the impairment of our interest in the
MCV Partnership, the amount of equity investment used for rate making purposes
included in Consumers' electric and gas rate cases could be reduced by the MPSC,
thereby reducing revenues to Consumers which could ultimately affect dividends
to CMS" below. The MPSC staff also stated that an evaluation of the total impact
of the MCV project on the cost of capital and capital could be determined in the
next Consumers rate making proceeding. We expect a final order from the MPSC in
late 2005. If approved as requested, the rate increase would go into effect in
January 2006 and would apply to all retail electric customers. We cannot predict
the amount or timing of the rate increase, if any, which the MPSC will approve.
There are multiple proceedings pending before the Federal Energy Regulatory
Commission ("FERC") involving transmission rates, regional transmission
organizations and 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. We cannot
predict the impact of these electric industry-restructuring proceedings on our
financial position, liquidity or results of operations.
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 Consumers to recover
certain regulatory assets through deferred recovery of annual capital
expenditures in excess of depreciation levels and certain other expenses
incurred prior to and throughout the rate freeze and rate cap periods, including
the cost of money. See "Electric industry regulation could adversely affect our
business, including our ability to recover our costs 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) consisting
of:
- capital expenditures in excess of depreciation;
- Clean Air Act costs;
- other expenses related to changes in law or governmental action
incurred during the rate freeze and rate cap periods; and
- the associated cost of money through the period of collection.
Of the $628 million, $152 million relates to the cost of money.
As allowed by the Customer Choice Act, Consumers accrues and defers for
recovery a portion of its Section 10(d)(4) regulatory assets. In March 2005, the
MPSC staff filed testimony recommending that the MPSC approve recovery of
approximately $323 million in Section 10(d)(4) costs, which includes the cost of
money through the period of collection. In June 2005, the administrative law
judge issued a proposal for decision recommending that the MPSC approve recovery
of the same Section 10(d)(4) costs recommended by the MPSC staff. However,
Consumers may have the opportunity to recover certain costs included in its
application alternatively in other cases pending before the MPSC. We cannot
predict the amount, if any, the MPSC will approve as recoverable, and failure to
recover these regulatory assets could adversely affect our financial condition.
At September 30, 2005, total recorded Section 10(d)(4) regulatory assets were
$201 million.
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 $815 million. As of September 30, 2005, Consumers
has incurred $589 million in capital expenditures to comply with the EPA
regulations and anticipates that the remaining $226 million of capital
expenditures will be incurred between 2005 and 2011. These expenditures include
installing selective catalytic reduction control technology at four of
Consumers' coal-fired electric plants. In addition to modifying the coal-fired
electric plants, Consumers expects to utilize nitrogen oxide emissions
allowances for the years 2006 through 2008, of which 90 percent have been
obtained. The cost of the allowances is estimated to average $5 million per year
for 2006 through 2008. The estimated costs are based on the average cost of the
purchased, allocated and exchanged allowances. The need for allowances will
decrease after 2006 with the installation of selective catalytic reduction
control technology.
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Based on the Customer Choice Act, beginning January 2004 an annual return
of and on these types of capital expenditures, to the extent they are above
depreciation levels, subject to an MPSC prudency hearing, shall be accrued and
deferred for recovery. After notice and hearing, the MPSC shall determine the
amount of reasonable and prudent costs, if any, to be recovered and the recovery
period.
The EPA recently adopted the Clean Air Interstate Rule that requires
additional coal-fired electric plant emission controls for nitrogen oxides and
sulfur dioxide. The rule includes a two-phase program to reduce emissions of
sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015.
In May 2005, the EPA issued the Clean Air Mercury Rule, which requires
initial reductions of mercury emissions from coal-fired electric power plants by
2010 and further reductions by 2018. While the industry has not reached a
consensus on the technical methods for curtailing mercury emissions, Consumers'
capital and operating costs for mercury emissions reductions are expected to be
significantly less than what is required for nitrogen oxide compliance.
In August 2005, the MDEQ filed a motion to intervene in a court challenge
to certain aspects of the EPA's Clean Air Mercury Rule, asserting that the rule
is inadequate. The MDEQ has not indicated the direction that it will pursue to
meet or exceed the EPA requirements through a state rulemaking. We are actively
participating in dialogue with the MDEQ regarding potential paths for
controlling mercury emissions and meeting the EPA requirements. In October 2005,
the EPA announced it would reconsider certain aspects of the Clean Air Mercury
Rule. We cannot predict the outcome of this proceeding.
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.
AS A RESULT OF THE IMPAIRMENT OF OUR INTEREST IN THE MCV PARTNERSHIP, THE
AMOUNT OF EQUITY INVESTMENT USED FOR RATE MAKING PURPOSES INCLUDED IN CONSUMERS'
ELECTRIC AND GAS RATE CASES COULD BE REDUCED BY THE MPSC, THEREBY REDUCING
REVENUES TO CONSUMERS WHICH COULD ULTIMATELY AFFECT DIVIDENDS TO CMS.
The impairment of the MCV Partnership resulted in a charge of $1.159
billion to recognize the reduction of the fair value of the MCV Facility,
thereby reducing the equity of Consumers. See "Periodic reviews of the values of
our assets could result in additional accounting charges such as the recent
asset impairment charges we took relating to our interest in the MCV
Partnership" above. Consumers' equity base is used to establish its rates. As a
result, it is possible that Consumers may have to reduce the amount of equity
investment included in its electric and gas rate cases. This would reduce
revenues to Consumers and would negatively impact its ability to pay us
dividends. On November 15, 2005, the MPSC staff recommended in its Replies to
Exceptions in Consumers' current electric rate case that no adjustment be made
to the case as a result of the MCV impairment. The MPSC staff also stated that
an evaluation of the total impact of the MCV project on the cost of capital and
capital could be determined in the next Consumers rate making proceeding. We
cannot predict the amount, if any, of such reduction.
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.
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OUR REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO RISKS THAT ARE BEYOND
OUR CONTROL, INCLUDING BUT NOT LIMITED TO FUTURE TERRORIST ATTACKS OR RELATED
ACTS OF WAR.
The cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, may adversely impact our results of
operations, financial condition and cash flows. The occurrence or risk of
occurrence of future terrorist activity and the high cost or potential
unavailability of insurance to cover such terrorist activity may impact our
results of operations and financial condition in unpredictable ways. These
actions could also result in disruptions of power and fuel markets. In addition,
our natural gas distribution system and pipelines could be directly or
indirectly harmed by future terrorist activity.
WE HAVE MADE SUBSTANTIAL INTERNATIONAL INVESTMENTS THAT ARE SUBJECT TO
POSSIBLE NATIONALIZATION, EXPROPRIATION OR INABILITY TO CONVERT CURRENCY.
Our investments in selected international markets in electric generating
facilities, natural gas pipelines and electric distribution systems face a
number of risks inherent in acquiring, developing and owning these types of
international facilities. Although we maintain insurance for various risk
exposures, including political risk from possible nationalization, expropriation
or inability to convert currency, we are exposed to some risks that include
local political and economic factors over which we have no control, such as
changes in foreign governmental and regulatory policies (including changes in
industrial regulation and control and changes in taxation), changing political
conditions and international monetary fluctuations. In some cases an investment
may have to be abandoned or disposed of at a loss. These factors could
significantly adversely affect the financial results of the affected subsidiary
and our financial position and results of operations.
International investments of the type we have made are subject to the risk
that they may be expropriated or that the required agreements, licenses, permits
and other approvals may be changed or terminated in violation of their terms.
These kinds of changes could result in a partial or total loss of our
investment.
The local foreign currency may be devalued, the conversion of the currency
may be restricted or prohibited or other actions, such as increases in taxes,
royalties or import duties, may be taken which adversely affect the value and
the recovery of our investment.
OUR OWNERSHIP OF A NUCLEAR GENERATING FACILITY CREATES RISK RELATING TO
NUCLEAR ENERGY.
Consumers owns the Palisades nuclear power plant and we are, therefore,
subject to the risks of nuclear generation, including the risks associated with
the operation of plant facilities and the storage and disposal of spent fuel and
other radioactive waste. The 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 $150 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.
Natural gas prices have increased substantially in recent years and throughout
2005. In the third quarter of 2005, the MCV Partnership reevaluated the
economics of operating the MCV Facility and determined that an impairment was
required. For additional details on the impairment of the MCV Facility, see
"Periodic reviews of the values of our assets could result in additional
accounting charges such as the recent asset impairment charges we took relating
to our
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interest in the MCV Partnership" above. We are currently in discussions with our
partners and certain owner participants to develop a new long-term strategy with
respect to the MCV Facility. If we are not ultimately successful in developing a
new long-term strategy we may have to take a further impairment charge of our
equity or lessor interest in the MCV Facility. We cannot predict the success of
our ability to develop such a strategy and our failure to do so may have an
adverse effect on our financial condition, liquidity and results of operation.
In January 2005, the MPSC issued an order approving the Resource
Conservation Plan (the "RCP"), with modifications. The RCP allows us to recover
the same amount of capacity and fixed energy charges from customers as approved
in prior MPSC orders. However, we are able to dispatch the MCV Facility on the
basis of natural gas market prices, which reduces the MCV Facility's annual
production of electricity and, as a result, reduces the MCV Facility's
consumption of natural gas by an estimated 30 to 40 bcf annually. This decrease
in the quantity of high-priced natural gas consumed by the MCV Facility will
benefit our ownership interest in the MCV Partnership.
The substantial MCV Facility fuel cost savings are first used to offset
fully the cost of replacement power. Second, $5 million annually, funded jointly
by Consumers and the MCV Partnership, are contributed to our Renewable Resources
Program. Remaining savings are split between the MCV Partnership and Consumers.
Consumers' direct savings are shared 50 percent with its customers in 2005 and
70 percent in 2006 and beyond. Consumers' direct savings from the RCP, after
allocating a portion to customers, are used to offset our capacity and fixed
energy underrecoveries expense. Since the MPSC has excluded these
underrecoveries from the rate making process, we anticipate that our savings
from the RCP will not affect our return on equity used in our base rate filings.
In January 2005, Consumers and the MCV Partnership's general partners
accepted the terms of the order and implemented the RCP. The underlying
agreement for the RCP between Consumers and the MCV Partnership extends through
the term of the MCV PPA. However, either party may terminate that agreement
under certain conditions. In February 2005, a group of intervenors in the RCP
case filed for rehearing of the MPSC order. The Attorney General also filed an
appeal with the Michigan Court of Appeals. We cannot predict the outcome of
these matters.
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. Our
ability to develop a new long-term strategy with respect to the MCV Facility,
the future price of natural gas and the MPSC decision in 2007 or later related
to Consumers' recovery of capacity payments are the three most significant
variables in the analysis of the MCV Partnership's future financial performance.
It is not presently possible for us to predict the success of our ability to
develop a new long-term strategy with respect to the MCV Facility, the future
price of natural gas, or the actions of the MPSC in 2007 or later. 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 and our lessor interest in the FMLP.
CONSUMERS' ENERGY RISK MANAGEMENT STRATEGIES MAY NOT BE EFFECTIVE IN
MANAGING FUEL AND ELECTRICITY PRICING RISKS, WHICH COULD RESULT IN UNANTICIPATED
LIABILITIES TO CONSUMERS OR INCREASED VOLATILITY OF ITS EARNINGS.
Consumers is exposed to changes in market prices for natural gas, coal,
electricity and emission credits. Prices for natural gas, coal, electricity and
emission credits may fluctuate substantially over relatively short periods of
time and expose Consumers to commodity price risk. A substantial portion of
Consumers' operating expenses for its plants consists of the costs of obtaining
these commodities. Consumers manages these risks using established policies and
procedures, and it may use various contracts to manage these risks, including
swaps, options, futures and forward contracts. We cannot assure you that these
strategies will be successful in managing Consumers' pricing risk, or that they
will not result in net liabilities to Consumers as a result of future volatility
in these markets.
Natural gas prices in particular have historically been volatile. To manage
market risks associated with the volatility of natural gas prices, the MCV
Partnership maintains a gas hedging program. The MCV Partnership enters into
natural gas futures contracts, option contracts and over-the-counter swap
transactions in order to hedge against unfavorable changes in the market price
of natural gas in future months when gas is expected to be needed. These
financial instruments are being used principally to secure anticipated natural
gas requirements necessary for projected electric and steam sales, and to lock
in sales prices of natural gas previously obtained in order to optimize the MCV
Partnership's existing gas supply, storage and transportation arrangements.
Consumers also routinely enters into contracts to offset its positions, such as
hedging exposure to the risks of demand, market effects of weather and changes
in commodity prices associated with its gas distribution business. Such
positions are taken in conjunction with the gas cost recovery mechanism, which
allows Consumers to recover prudently incurred costs associated with such
positions. However, neither Consumers nor the MCV Partnership always hedges the
entire exposure of its operations from commodity price volatility. Furthermore,
the ability to hedge exposure to commodity price volatility depends on liquid
commodity markets. As a result, to the extent the commodity markets are
illiquid, Consumers may not be able to execute its risk management strategies,
which could result in greater open positions than we would prefer at a
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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 and 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, Consumers is exposed to changes in fuel prices.
RISKS RELATED TO THE NOTES
WE MAY BE UNABLE TO RAISE THE FUNDS NECESSARY TO PURCHASE NOTES UPON A
CHANGE IN CONTROL.
In the event of a Change in Control of CMS Energy, each Holder of Notes may
require us to purchase all or a portion of its Notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued interest. Our ability to
purchase the Notes will be limited by the terms of our other debt agreements and
our ability to finance the purchase. It is expected that we will issue
additional debt with similar change of control provisions in the future. If this
occurs, the financial requirements for any purchases could be increased
significantly. In addition, the terms of any debt securities issued to purchase
debt under these change of control provisions may be unfavorable to us. We
cannot assure Holders of Notes that we will be able to finance these purchase
obligations or obtain consents to do so from Holders of Notes under other debt
agreements restricting these purchases.
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE
NOTES.
The Notes are a new issue of securities for which there currently is no
active trading market. As we do not intend to apply to list the Notes for
trading on any national securities exchange or to include the Notes in any
automated quotation system, we cannot assure you that an active trading market
for the Notes will develop or as to the liquidity or sustainability of any such
market, the ability of the Holders to sell their Notes or the price at which
Holders of the Notes will be able to sell their Notes. Future trading prices of
the Notes will also depend on many other factors, including, among other things,
prevailing interest rates, the market for similar securities, our performance
and other factors. We do not intend to apply for listing of the Notes on any
securities exchange or any automated quotation system.
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USE OF PROCEEDS
We estimate that the proceeds of the offering of the Notes, after deducting
underwriters' discounts and commissions and offering expenses, will aggregate
approximately $ million. We intend to use all of the proceeds of this offering
to extinguish obligations of approximately $109 million under one of our gas
supply contracts (for which we expect to pay approximately $118 million), to pay
expenses incurred in paying down the obligations under such contract and for
general corporate purposes. If the closing of the extinguishment of the gas
supply contract does not occur for any reason, we intend to use the proceeds of
this offering for general corporate purposes, which may include retiring debt or
making capital infusions into Consumers.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the nine months ended September
30, 2005 and each of the years ended December 31, 2000 through 2004 is as
follows:
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED ------------------------------------
SEPTEMBER 30, 2005 2004 2003 2002 2001 2000
------------------ ---- ----- ----- ----- -----
Ratio of earnings to fixed charges.... --(1) 1.12 --(2) --(3) --(4) --(5)
----------
(1) For the nine months ended September 30, 2005, fixed charges exceeded
earnings by $601 million. Earnings as defined include $1.184 billion of
asset impairment charges.
(2) For the year ended December 31, 2003, fixed charges exceeded earnings by
$34 million. Earnings as defined include $95 million of asset impairment
charges.
(3) For the year ended December 31, 2002, fixed charges exceeded earnings by
$488 million. Earnings as defined include $602 million of asset impairment
charges.
(4) For the year ended December 31, 2001, fixed charges exceeded earnings by
$395 million. Earnings as defined include $323 million of asset impairment
charges.
(5) For the year ended December 31, 2000, fixed charges exceeded earnings by
$220 million. Earnings as defined include $329 million of asset impairment
charges.
For the purpose of computing the ratio, earnings represent income before
income taxes, net interest charges and the estimated interest portion of lease
rentals and distributed income of equity method investees.
S-25
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2005
on an actual basis and as adjusted to reflect the sale of Notes in this offering
and the application of the net proceeds as described under "Use of Proceeds"
assuming that such net proceeds are applied to extinguish obligations under one
of our gas supply contracts as described therein. This table should be read in
conjunction with our consolidated financial statements and related notes and
other financial information also incorporated by reference in this prospectus
supplement. See "Where You Can Find More Information."
AT SEPTEMBER 30, 2005
--------------------------
AS ADJUSTED
ACTUAL FOR THIS OFFERING
------ -----------------
(UNAUDITED, DOLLARS
IN MILLIONS)
Current portion of long-term debt, capital and finance leases,
and long-term debt-related parties......................... $ 441 $ 441
====== ======
Non-current portion of capital and finance lease obligations.. $ 299 $ 299
Long-term debt:
% Senior Notes due 2015 (a)................................ -- 125
Other long-term debt (excluding current portion)........... 6,521 6,521
Long-term debt -- related parties............................. 178 178
Preferred stock............................................... 261 261
Preferred stock of subsidiary................................. 44 44
Common stockholders' equity (b)............................... 2,311 2,304
------ ------
Total capitalization....................................... $9,614 $9,732
====== ======
----------
(a) Proceeds from this offering are expected to be used to pay down $114
million, as of September 30, 2005, of current and non-current gas contract
supply obligations under one gas supply contract as described in "Use of
Proceeds." However, during the period between September 30, 2005 and
November 30, 2005, we provided gas pursuant to that gas supply contract. As
a result, the current and non-current gas contract supply obligations as of
November 30, 2005 were $109 million. Any remaining proceeds of the offering
will be used for expenses incurred in paying down that gas supply contract.
If we do not use the proceeds to extinguish that gas supply contract as
discussed in "Use of Proceeds," we will use the proceeds for general
corporate purposes, which may include retiring debt or making capital
infusions into Consumers.
(b) Reflects the estimated net loss of approximately $6.5 million on the buyout
of one of our gas supply contracts.
S-26
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued as a series of senior debentures under the senior
debt indenture as supplemented by a supplemental indenture thereto dated as of
December , 2005 (the "SUPPLEMENTAL INDENTURE"), and will be initially limited in
aggregate principal amount to $125 million. The senior debt indenture permits us
to "re-open" this offering of the Notes without the consent of the Holders of
the Notes. Accordingly, the principal amount of the Notes may be increased in
the future on the same terms and conditions and with the same CUSIP numbers as
the Notes being offered by this prospectus supplement, provided that such
additional notes must be part of the same issue as the Notes offered hereby for
United States federal income tax purposes. The Notes offered by this prospectus
supplement and any such additional notes will constitute a single series of debt
securities. This means that, in circumstances where the senior debt indenture
provides for the holders of notes to vote or take any action, the Holders of
Notes offered by this prospectus supplement and the holders of any such
additional notes will vote or take that action as a single class. The Notes will
be unsecured and unsubordinated senior debt securities of CMS Energy.
As of September 30, 2005, we had outstanding approximately $2.4 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible trust preferred
securities but excluding approximately $4.7 billion of indebtedness of our
subsidiaries. In May 2005, CMS Energy entered into the Sixth Amended and
Restated Credit Agreement in the amount of approximately $300 million. This
facility is secured and the Notes are junior to such indebtedness as to the
assets pledged. As of September 30, 2005 there were approximately $98 million of
letters of credit outstanding under the Sixth Amended and Restated Credit
Agreement. Except for the amount outstanding under the Sixth Amended and
Restated Credit Agreement, none of our indebtedness is senior to the Notes as to
our assets. The Notes are structurally subordinated to approximately $4.7
billion of our subsidiaries' debt.
We may issue debt securities from time to time in one or more series under
the senior debt indenture. There is no limitation on the amount of debt
securities we may issue under the senior debt indenture.
The statements herein concerning the Notes and the senior debt indenture
are a summary and do not purport to be complete and are subject to, and
qualified in their entirety by, all of the provisions of the senior debt
indenture, which is incorporated herein by this reference. They make use of
defined terms and are qualified in their entirety by express reference to the
senior debt indenture, including the Supplemental Indenture, a copy of which
will be available upon request to the Trustee.
STRUCTURAL SUBORDINATION
CMS Energy is a holding company that conducts substantially all of its
operations through its subsidiaries. Its only significant assets are the capital
stock of its subsidiaries, and its subsidiaries generate substantially all of
its operating income and cash flow. As a result, dividends or advances from its
subsidiaries are the principal source of funds necessary to meet its debt
service obligations. Contractual provisions or laws, as well as its
subsidiaries' financial condition and operating requirements, may limit CMS
Energy's ability to obtain cash from its subsidiaries that it may require to pay
its debt service obligations, including payments on the Notes. In addition, the
Notes will be effectively subordinated to all of the liabilities of CMS Energy's
subsidiaries with regard to the assets and earnings of CMS Energy's
subsidiaries. The subsidiaries are separate and distinct legal entities and have
no obligation, contingent or otherwise, to pay any amounts due pursuant to the
Notes or to make any funds available therefor, whether by dividends, loans or
other payments. CMS Energy's rights and the rights of its creditors, including
Holders of Notes, to participate in the distribution of assets of any subsidiary
upon the latter's liquidation or reorganization will be subject to prior claims
of the subsidiaries' creditors, including trade creditors.
Of the approximately $7.1 billion of our consolidated indebtedness as of
September 30, 2005, approximately $4.7 billion was indebtedness of our
subsidiaries. Payments on that indebtedness are prior in right of payment to
dividends paid to us by our subsidiaries.
PRIMARY SOURCE OF FUNDS OF CMS ENERGY; RESTRICTIONS ON SOURCES OF DIVIDENDS
The ability of CMS Energy to pay (i) dividends on its capital stock and
(ii) its indebtedness, including the Notes, depends and will depend
substantially upon timely receipt of sufficient dividends or other distributions
from its subsidiaries, in particular Consumers and Enterprises. Each of
Consumers' and Enterprises' ability to pay dividends on its common stock depends
upon its revenues, earnings and other factors. Consumers' revenues and earnings
will depend substantially upon rates authorized by the MPSC.
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
S-27
respect to its Class A Preferred Stock, 7.5% of the aggregate amount established
by its Board of Directors to be payable on the shares of each series thereof in
the event of involuntary liquidation of Consumers and (iii) $7.50 per share on
all then outstanding shares of all other stock over which its preferred stock
and Class A Preferred Stock do not have preference as to the payment of
dividends and as to assets. Second, dividend payments during the 12 month period
ending with the month the proposed payment is to be paid are limited to: (i) 50%
of net income available for the payment of dividends during the base period, if
the ratio of common stock and surplus to total capitalization and surplus for 12
consecutive calendar months within the 14 calendar months immediately preceding
the proposed dividend payment (the "BASE PERIOD"), adjusted to reflect the
proposed dividend, is less than 20%; and (ii) 75% of net income available for
the payment of dividends during the base period if the ratio of common stock and
surplus to total capitalization and surplus for the base period, adjusted to
reflect the proposed dividend, is at least 20% but less than 25%.
In addition, Consumers' indenture dated as of January 1, 1996, between
Consumers and The Bank of New York, as trustee (the "PREFERRED SECURITIES
INDENTURE"), and a certain preferred securities guarantee by Consumers dated May
31, 2001 (the "CONSUMERS PREFERRED SECURITIES GUARANTEE"), in connection with
which the 9.00% Trust Preferred Securities of Consumers Energy Company Financing
IV (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 Guarantee 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 Third Amended
and Restated Credit Agreement dated as of May 18, 2005 among Consumers, JPMorgan
Chase Bank, N.A., as administrative agent, and the financial institutions named
therein. Pursuant to this loan agreement, so long as there exists no event of
default under this agreement, Consumers may pay dividends in an aggregate amount
not to exceed $300 million during any calendar year.
Consumers is subject to the Federal Power Act and the Natural Gas Act.
These Acts limit Consumers' ability to pay dividends from its retained earnings.
As of September 30, 2005, Consumers' retained earnings were $314 million.
Consumers' Articles also prohibit the payment of cash dividends on its
common stock if Consumers is in arrears on preferred stock dividend payments.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, Consumers or Enterprises would not be able to pay its debts as they
become due in the usual course of business, or its total assets would be less
than the sum of its total liabilities plus, unless the Articles permit
otherwise, the amount that would be needed, if Consumers or Enterprises were to
be dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
receiving the distribution. Currently, it is Consumers' policy to pay annual
dividends equal to 80% of its annual consolidated net income. Consumers' Board
of Directors reserves the right to change this policy at any time.
PAYMENT AND MATURITY
The Notes will mature on __________ 2015, and will bear interest at the
rate of _____% per year. At maturity, CMS Energy will pay the aggregate
principal amount of the Notes then outstanding. Each Note will bear interest
from the original date of issue, payable semiannually in arrears on __________
and __________, commencing on ______ 2006, and at maturity. Interest will be
paid to the person in whose name the Notes are registered at the close of
business fifteen days prior to the interest payment date. Interest payable on
any interest payment date or on the date of maturity will be the amount of
interest accrued from and including the date of original issuance or from and
including the most recent interest payment date on which interest has been paid
or duly made available for payment to but excluding such interest payment date
or the date of maturity, as the case may be. Interest will be computed on the
basis of a 360-day year consisting of twelve 30 day months.
In any case where any interest payment date, redemption date, repurchase
date or maturity date (including upon the occurrence of a Change in Control) of
any Note shall not be a Business Day (as defined herein) at any place of
payment, then payment of interest or principal (and premium, if any) need not be
made on such date, but may be made on the next succeeding Business Day at such
place of payment with the same force and effect as if made on the interest
payment date, redemption date, repurchase date or maturity date (including upon
the occurrence of a Change in Control); and no interest shall accrue on the
amount so payable for the period from and after such interest payment date,
redemption date, repurchase date or maturity date, as the case may be, to such
Business Day.
S-28
REGISTRATION, TRANSFER AND EXCHANGE
The Notes will be initially issued in the form of one or more Notes in
registered, global form, without coupons, in denominations of $1,000 and any
integral multiple thereof as described under "Book-Entry System." The Global
Notes will be registered in the name of the nominee of DTC. Except as described
under "Book-Entry System," owners of beneficial interests in a Global Note will
not be entitled to have Notes registered in their names, will not receive or be
entitled to receive physical delivery of any such Note and will not be
considered the registered holder thereof under the senior debt indenture.
OPTIONAL REDEMPTION
The Notes will be redeemable at CMS Energy's option, in whole or in part,
at any time or from time to time, at a redemption price equal to 100% of the
principal amount of such Notes being redeemed plus the Applicable Premium (as
defined below), if any, thereon at the time of redemption, together with accrued
interest, if any, thereon to the redemption date. In no event will the
redemption price be less than 100% of the principal amount of the Notes plus
accrued interest, if any, thereon to the redemption date.
The following definitions are used to determine the Applicable Premium:
"APPLICABLE PREMIUM" means, with respect to a Note (or portion thereof)
being redeemed at any time, the excess of (A) the present value at such time of
the principal amount of such Note (or portion thereof) being redeemed plus all
interest payments due on such Note (or portion thereof) after the redemption
date, which present value shall be computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (B) the principal amount of such Note
(or portion thereof) being redeemed at such time. For purposes of this
definition, the present values of interest and principal payments will be
determined in accordance with generally accepted principles of financial
analysis.
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) (the
"STATISTICAL RELEASE")) which has become publicly available at least two
Business Days prior to the redemption date or, in case of defeasance, prior to
the date of deposit (or, if such Statistical Release is no longer published, any
publicly available source of similar market data) most nearly equal to the then
remaining average life to stated maturity of the Notes; provided, however, that
if the average life to stated maturity of the Notes is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given.
If the original redemption date is on or after a record date and on or
before the relevant interest payment date, the accrued and unpaid interest, if
any, will be paid to the person or entity in whose name the Note is registered
at the close of business on the record date, and no additional interest will be
payable to Holders whose Notes shall be subject to redemption.
If less than all of the Notes are to be redeemed, the Trustee under the
senior debt indenture shall select, in such manner as it shall deem appropriate
and fair, the particular Notes or portions thereof to be redeemed. Notice of
redemption shall be given by mail not less than 30 nor more than 60 days prior
to the date fixed for redemption to the Holders of Notes to be redeemed (which,
as long as the Notes are held in the book-entry only system, will be DTC (or its
nominee) or a successor depositary); provided, however, that the failure to duly
give such notice by mail, or any defect therein, shall not affect the validity
of any proceedings for the redemption of Notes as to which there shall have been
no such failure or defect. On and after the date fixed for redemption (unless
CMS Energy shall default in the payment of the Notes or portions thereof to be
redeemed at the applicable redemption price, together with accrued interest, if
any, thereon to such date), interest on the Notes or the portions thereof so
called for redemption shall cease to accrue.
No sinking fund is provided for the Notes.
PURCHASE OF NOTES UPON CHANGE IN CONTROL
In the event of any Change in Control (as defined below) each Holder of a
Note will have the right, at such Holder's option, subject to the terms and
conditions of the senior debt indenture, to require CMS Energy to repurchase all
or any part of such Holder's Note on a date selected by CMS Energy that is no
earlier than 60 days nor later than 90 days (the "CHANGE IN CONTROL PURCHASE
DATE") after the mailing of written notice by CMS Energy of the occurrence of
such Change in Control, at a repurchase price payable in cash equal to 101% of
the principal amount of such Notes plus accrued interest, if any, thereon to the
Change in Control Purchase Date (the "CHANGE IN CONTROL PURCHASE PRICE").
S-29
Within 30 days after the Change in Control Purchase Date, CMS Energy is
obligated to mail to each Holder of a Note a notice regarding the Change in
Control, which notice shall state, among other things:
- that a Change in Control has occurred and that each such Holder has
the right to require CMS Energy to repurchase all or any part of such
Holder's Notes at the Change in Control Purchase Price;
- the Change in Control Purchase Price;
- the Change in Control Purchase Date;
- the name and address of the paying agent; and
- the procedures that Holders must follow to cause the Notes to be
repurchased.
To exercise this right, a Holder must deliver a written notice (the "CHANGE
IN CONTROL PURCHASE NOTICE") to the paying agent at its corporate trust office
in Detroit, Michigan, or any other office of the paying agent maintained for
such purposes, not later than 30 days prior to the Change in Control Purchase
Date. The Change in Control Purchase Notice shall state:
- the portion of the principal amount of any Notes to be repurchased,
which must be $1,000 or an integral multiple thereof;
- that such Notes are to be repurchased by CMS Energy pursuant to the
applicable change-in-control provisions of the senior debt indenture;
and
- unless the Notes are represented by one or more Global Notes, the
certificate numbers of the Notes to be repurchased.
Any Change in Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the paying agent not later than three
Business Days prior to the Change in Control Purchase Date. The notice of
withdrawal shall state the principal amount and, if applicable, the certificate
numbers of the Notes as to which the withdrawal notice relates and the principal
amount, if any, which remains subject to a Change in Control Purchase Notice.
If a Note is represented by a Global Note, DTC or its nominee will be the
holder of such Note and therefore will be the only entity that can require CMS
Energy to repurchase Notes upon a Change in Control. To obtain repayment with
respect to such Note upon a Change in Control, the beneficial owner of such Note
must provide to the broker or other entity through which it holds the beneficial
interest in such Note (1) the Change in Control Purchase Notice signed by such
beneficial owner, and such signature must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc. ("NASD") or a commercial bank or trust company having
an office or correspondent in the United States and (2) instructions to such
broker or other entity to notify DTC of such beneficial owner's desire to cause
CMS Energy to repurchase such Notes. Such broker or other entity will provide to
the paying agent (1) a Change in Control Purchase Notice received from such
beneficial owner and (2) a certificate satisfactory to the paying agent from
such broker or other entity that it represents such beneficial owner. Such
broker or other entity will be responsible for disbursing any payments it
receives upon the repurchase of such Notes by CMS Energy.
Payment of the Change in Control Purchase Price for a Note in registered,
certificated form (a "CERTIFICATED NOTE") for which a Change in Control Purchase
Notice has been delivered and not withdrawn is conditioned upon delivery of such
Certificated Note (together with necessary endorsements) to the paying agent at
its office in Detroit, Michigan, or any other office of the paying agent
maintained for such purpose, at any time (whether prior to, on or after the
Change in Control Purchase Date) after the delivery of such Change in Control
Purchase Notice. Payment of the Change in Control Purchase Price for such
Certificated Note will be made promptly following the later of the Change in
Control Purchase Date or the time of delivery of such Certificated Note.
If the paying agent holds, in accordance with the terms of the senior debt
indenture, money sufficient to pay the Change in Control Purchase Price of a
Note on the Business Day following the Change in Control Purchase Date for such
Note, then, on and after such date, interest on such Note will cease to accrue,
whether or not such Note is delivered to the paying agent, and all other rights
of the Holder shall terminate (other than the right to receive the Change in
Control Purchase Price upon delivery of the Note).
S-30
Under the senior debt indenture, a "CHANGE IN CONTROL" means an event or
series of events by which:
- CMS Energy ceases to beneficially own, directly or indirectly, at
least 80% of the total voting power of all classes of Capital Stock
then outstanding of Consumers (whether arising from issuance of
securities of CMS Energy or Consumers, any direct or indirect transfer
of securities by CMS Energy or Consumers, any merger, consolidation,
liquidation or dissolution of CMS Energy or Consumers or otherwise);
or any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) becomes the "beneficial owner" (as such
term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person or group shall be deemed to have "beneficial ownership"
of all shares that such person or group has the right to acquire,
whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 35% of the
Voting Stock of CMS Energy; or
- CMS Energy consolidates with or merges into another corporation or
directly or indirectly conveys, transfers or leases all or
substantially all of its assets to any person, or any corporation
consolidates with or merges into CMS Energy, in either event pursuant
to a transaction in which the outstanding Voting Stock of CMS Energy
is changed into or exchanged for cash, securities or other property,
other than any such transaction where (A) the outstanding Voting Stock
of CMS Energy is changed into or exchanged for Voting Stock of the
surviving corporation and (B) the holders of the Voting Stock of CMS
Energy immediately prior to such transaction retain, directly or
indirectly, substantially proportionate ownership of the Voting Stock
of the surviving corporation immediately after such transaction.
The senior debt indenture requires CMS Energy to comply with the provisions
of Regulation 14E and any other tender offer rules under the Exchange Act which
may then be applicable in connection with any offer by CMS Energy to purchase
Notes at the option of Holders upon a Change in Control. The Change in Control
purchase feature of the Notes may in certain circumstances make more difficult
or discourage a takeover of CMS Energy and, thus, the removal of incumbent
management. The Change in Control purchase feature, however, is not the result
of management's knowledge of any specific effort to accumulate shares of its
common stock or to obtain control of CMS Energy by means of a merger, tender
offer, solicitation or otherwise, or part of a plan by management to adopt a
series of anti-takeover provisions. Instead, the Change in Control purchase
feature is a term contained in many similar debt offerings and the terms of such
feature result from negotiations between CMS Energy and the underwriters.
Management has no present intention to propose any anti-takeover measures
although it is possible that CMS Energy could decide to do so in the future.
No Note may be repurchased by CMS Energy as a result of a Change in Control
if there has occurred and is continuing an Event of Default described under
"Events of Default" below (other than a default in the payment of the Change in
Control Purchase Price with respect to the Notes). In addition, CMS Energy's
ability to purchase Notes may be limited by its financial resources and its
inability to raise the required funds because of restrictions on issuance of
securities contained in other contractual arrangements.
CERTAIN RESTRICTIVE COVENANTS
The senior debt indenture contains the covenants described below. Certain
capitalized terms used below are defined under the heading "Certain Definitions"
below.
LIMITATION ON RESTRICTED PAYMENTS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding and until the Notes are rated BBB- or above (or an equivalent
rating) by S&P and one Other Rating Agency, at which time CMS Energy will be
permanently released from the provisions of this "Limitation on Restricted
Payments," CMS Energy will not, and will not permit any of its Restricted
Subsidiaries, directly or indirectly, to:
- declare or pay any dividend or make any distribution on the Capital
Stock of CMS Energy to the direct or indirect holders of its Capital
Stock (except dividends or distributions payable solely in its
Non-Convertible Capital Stock or in options, warrants or other rights
to purchase such Non-Convertible Capital Stock and except dividends or
distributions payable to CMS Energy or a Subsidiary);
- purchase, redeem or otherwise acquire or retire for value any Capital
Stock of CMS Energy; or
- purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity or scheduled repayment thereof,
any Subordinated Indebtedness (any such dividend, distribution,
purchase, redemption, repurchase, defeasing, other acquisition or
retirement being hereinafter referred to as a "RESTRICTED PAYMENT"),
S-31
if at the time CMS Energy or such Subsidiary makes such Restricted Payment: (1)
an Event of Default, or an event that with the lapse of time or the giving of
notice or both would constitute an Event of Default, shall have occurred and be
continuing (or would result therefrom); or (2) the aggregate amount of such
Restricted Payment and all other Restricted Payments made since May 6, 1997
would exceed the sum of (a) $100,000,000 plus 100% of Consolidated Net Income
from May 6, 1997 to the end of the most recent fiscal quarter ending at least 45
days prior to the date of such Restricted Payment (or, in case such sum shall be
a deficit, minus 100% of the deficit) and (b) the aggregate Net Cash Proceeds
received by CMS Energy from the issue or sale of or contribution with respect to
its Capital Stock after May 6, 1997.
The foregoing provisions will not prohibit:
- dividends or other distributions paid in respect of any class of
Capital Stock issued by CMS Energy in connection with the acquisition
of any business or assets by CMS Energy or a Restricted Subsidiary
where the dividends or other distributions with respect to such
Capital Stock are payable solely from the net earnings of such
business or assets;
- any purchase or redemption of Capital Stock of CMS Energy made by
exchange for, or out of the proceeds of the substantially concurrent
sale of, Capital Stock of CMS Energy (other than Redeemable Stock or
Exchangeable Stock);
- dividends paid within 60 days after the date of declaration thereof if
at such date of declaration such dividends would have complied with
this covenant; or
- payments pursuant to the Tax Sharing Agreement.
LIMITATION ON CERTAIN LIENS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding, CMS Energy shall not create, incur, assume or suffer to exist
any Lien, provided, that no event of default shall have occurred and be
continuing (or result therefrom) at the time of payment of such dividend upon or
with respect to any of its property of any character, including without
limitation any shares of Capital Stock of Consumers or Enterprises, without
making effective provision whereby the Notes shall be (so long as any such other
creditor shall be so secured) equally and ratably secured. The foregoing
restrictions shall not apply to (a) Liens securing Indebtedness of CMS Energy,
provided that on the date such Liens are created, and after giving effect to
such Indebtedness, the aggregate principal amount at maturity of all the secured
Indebtedness of CMS Energy at such date shall not exceed 5% of Consolidated Net
Tangible Assets or (b) certain liens for taxes, pledges to secure workman's
compensation, other statutory obligations and Support Obligations, certain
materialman's, mechanic's and similar liens and certain purchase money liens.
LIMITATION ON ASSET SALES
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding, CMS Energy may not sell, transfer or otherwise dispose of any
property or assets of CMS Energy, including Capital Stock of any Consolidated
Subsidiary, in one transaction or a series of transactions in an amount which
exceeds $50,000,000 (an "ASSET SALE") unless CMS Energy shall (1) apply an
amount equal to such excess Net Cash Proceeds to permanently repay Indebtedness
of a Consolidated Subsidiary or Indebtedness of CMS Energy which is pari passu
with the Notes, (2) invest an equal amount not so used in clause (1) in property
or assets of a related business within 24 months after the date of the Asset
Sale (the "APPLICATION PERIOD") or (3) apply such excess Net Cash Proceeds not
so used in clause (1) or (2) (the "EXCESS PROCEEDS") to make an offer, within 30
days after the end of the Application Period, to purchase from the Holders on a
pro rata basis an aggregate principal amount of Notes on the relevant purchase
date equal to the Excess Proceeds on such date, at a purchase price equal to
100% of the principal amount of the Notes on the relevant purchase date and
unpaid interest, if any, to the purchase date. CMS Energy shall only be required
to make an offer to purchase Notes from Holders pursuant to clause (3) if the
Excess Proceeds equal or exceed $25,000,000 at any given time.
The procedures to be followed by CMS Energy in making an offer to purchase
Notes from the Holders with Excess Proceeds, and the acceptance of such offer by
the Holders, shall be the same as those set forth above in "Purchase of Notes
Upon Change in Control" with respect to a Change in Control.
LIMITATION ON CONSOLIDATION, MERGER, SALE OR CONVEYANCE
In addition to the terms of the senior debt indenture relating to
consolidations or mergers described below under "Consolidation, Merger or Sale
of Assets", so long as any of the Notes are outstanding and until the Notes are
rated BBB- or above (or an equivalent rating) by S&P and one Other Rating
Agency, at which time CMS Energy will be permanently released from the
provisions of this "Limitation on Consolidation, Merger, Sale or Conveyance"
(but not from the provisions
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described below which permit a consolidation or merger provided that the
surviving corporation assumes the obligations of CMS Energy under the Notes and
the senior debt indenture and is organized and existing under the laws of the
United States, any state thereof or the District of Columbia), CMS Energy shall
not consolidate with or merge into any other Person or sell, lease or convey the
property of CMS Energy in the entirety or substantially as an entirety, unless
(1) immediately after giving effect to such transaction the Consolidated Net
Worth of the surviving entity is at least equal to the Consolidated Net Worth of
CMS Energy immediately prior to the transaction and (2) after giving effect to
such transaction, the surviving entity would be entitled to incur at least one
dollar of additional Indebtedness (other than revolving Indebtedness to banks)
pursuant to the first paragraph under "Limitation on Consolidated Indebtedness."
Notwithstanding the foregoing provisions, such a transaction may constitute a
Change in Control as described in "Purchase of Notes Upon Change in Control" and
give rise to the right of a Holder to require CMS Energy to repurchase all or
part of such Holder's Note.
LIMITATION ON CONSOLIDATED INDEBTEDNESS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding and until the Notes are rated BBB- or above (or an equivalent
rating) by S&P and one Other Rating Agency, at which time CMS Energy will be
permanently released from the provisions of this "Limitation on Consolidated
Indebtedness," CMS Energy will not, and will not permit any of its Consolidated
Subsidiaries to, issue, create, assume, guarantee, incur or otherwise become
liable for (collectively, for this purpose, "ISSUE"), directly or indirectly,
any Indebtedness unless the Consolidated Coverage Ratio of CMS Energy and its
Consolidated Subsidiaries for the four consecutive fiscal quarters immediately
preceding the issuance of such Indebtedness (as shown by a pro forma
consolidated income statement of CMS Energy and its Consolidated Subsidiaries
for the four most recent fiscal quarters ending at least 30 days prior to the
issuance of such Indebtedness after giving effect to (1) the issuance of such
Indebtedness and (if applicable) the application of the net proceeds thereof to
refinance other Indebtedness as if such Indebtedness was issued at the beginning
of the period, (2) the issuance and retirement of any other Indebtedness since
the first day of the period as if such Indebtedness was issued or retired at the
beginning of the period and (3) the acquisition of any company or business
acquired by CMS Energy or any Subsidiary since the first day of the period
(including giving effect to the pro forma historical earnings of such company or
business), including any acquisition which will be consummated contemporaneously
with the issuance of such Indebtedness, as if in each case such acquisition
occurred at the beginning of the period) exceeds a ratio of 1.6 to 1.0.
The foregoing limitation is subject to exceptions for:
- Indebtedness of Consumers;
- Indebtedness of CMS Energy to banks not to exceed $1 billion in
aggregate outstanding principal amount at any time;
- Indebtedness outstanding on the date of the Supplemental Indenture and
certain refinancings thereof;
- certain refinancings and Indebtedness of CMS Energy to a Subsidiary or
by a Subsidiary to CMS Energy;
- Indebtedness of a Consolidated Subsidiary issued to acquire, develop,
improve, construct or provide working capital for a gas, oil or
electric generation, exploration, production, distribution, storage or
transmission facility and related assets; provided that such
Indebtedness is without recourse to any assets of CMS Energy,
Consumers, Enterprises, CMS Generation, CMS Electric and Gas, CMS Gas
Transmission, CMS MST or any other Designated Enterprises Subsidiary;
- Indebtedness of a Person existing at the time at which such Person
became a Subsidiary and not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary;
- Indebtedness issued by CMS Energy not to exceed $150 million in
aggregate outstanding principal amount at any time; and
- Indebtedness of a Consolidated Subsidiary in respect of rate reduction
bonds issued to recover electric restructuring transition costs of
Consumers; provided that such Indebtedness is without recourse to the
assets of Consumers.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the senior
debt indenture. Reference is made to the senior debt indenture for a full
definition of all terms as well as any other capitalized terms used herein and
not otherwise defined.
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"BUSINESS DAY" means a day on which banking institutions in New York, New
York or Detroit, Michigan are not authorized or required by law or regulation to
close.
"CAPITAL LEASE OBLIGATION" of a Person means any obligation that is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; the stated maturity thereof shall be the date of the last payment of
rent or any other amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty; and
such obligation shall be deemed secured by a Lien on any property or assets to
which such lease relates.
"CAPITAL STOCK" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) corporate stock, including any Preferred Stock or letter
stock; provided that Hybrid Preferred Securities are not considered Capital
Stock for purposes of this definition.
"CMS ELECTRIC AND GAS" means CMS Electric and Gas Company, a Michigan
corporation and wholly-owned subsidiary of Enterprises.
"CONSOLIDATED ASSETS" means, at any date of determination, the aggregate
assets of CMS Energy and its Consolidated Subsidiaries determined on a
consolidated basis in accordance with generally accepted accounting principles.
"CONSOLIDATED COVERAGE RATIO" with respect to any period means the ratio of
(1) the aggregate amount of Operating Cash Flow for such period to (2) the
aggregate amount of Consolidated Interest Expense for such period.
"CONSOLIDATED CURRENT LIABILITIES" means, for any period, the aggregate
amount of liabilities of CMS Energy and its Consolidated Subsidiaries which may
properly be classified as current liabilities (including taxes accrued as
estimated), after (1) eliminating all inter-company items between CMS Energy and
any Consolidated Subsidiary and (2) deducting all current maturities of
long-term Indebtedness, all as determined in accordance with generally accepted
accounting principles.
"CONSOLIDATED INDEBTEDNESS" means, at any date of determination, the
aggregate Indebtedness of CMS Energy and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that Consolidated Indebtedness shall not include
any subordinated debt owned by any Hybrid Preferred Securities Subsidiary.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total interest
expense in respect of Consolidated Indebtedness of CMS Energy and its
Consolidated Subsidiaries, including, without duplication:
- interest expense attributable to capital leases;
- amortization of debt discount;
- capitalized interest;
- cash and noncash interest payments;
- commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
- net costs under interest rate protection agreements (including
amortization of discount); and
- interest expense in respect of obligations of other Persons deemed to
be Indebtedness of CMS Energy or any Consolidated Subsidiaries under
the fifth or sixth bullet points of the definition of Indebtedness;
provided, however, that Consolidated Interest Expense shall exclude (a) any
costs otherwise included in interest expense recognized on early retirement of
debt and (b) any interest expense in respect of any Indebtedness of any
Subsidiary of Consumers, CMS Generation, CMS Electric and Gas, CMS Gas
Transmission, CMS MST or any other Designated Enterprises Subsidiary, provided
that such Indebtedness is without recourse to any assets of CMS Energy,
Consumers, Enterprises, CMS Generation, CMS Electric and Gas, CMS Gas
Transmission, CMS MST or any other Designated Enterprises Subsidiary.
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"CONSOLIDATED NET INCOME" means, for any period, the net income of CMS
Energy and its Consolidated Subsidiaries determined on a consolidated basis in
accordance with generally accepted accounting principles; provided, however,
that there shall not be included in such Consolidated Net Income:
- any net income of any Person if such Person is not a Subsidiary,
except that (A) CMS Energy's equity in the net income of any such
Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to CMS Energy or a Consolidated Subsidiary
as a dividend or other distribution and (B) CMS Energy's equity in a
net loss of any such Person for such period shall be included in
determining such Consolidated Net Income;
- any net income of any Person acquired by CMS Energy or a Subsidiary in
a pooling of interests transaction for any period prior to the date of
such acquisition;
- any gain or loss realized upon the sale or other disposition of any
property, plant or equipment of CMS Energy or its Consolidated
Subsidiaries which is not sold or otherwise disposed of in the
ordinary course of business and any gain or loss realized upon the
sale or other disposition of any Capital Stock of any Person; and
- any net income of any Subsidiary of Consumers, CMS Generation, CMS
Electric and Gas, CMS Gas Transmission, CMS MST or any other
Designated Enterprises Subsidiary whose interest expense is excluded
from Consolidated Interest Expense, provided, however, that for
purposes of this bullet point, any cash, dividends or distributions of
any such Subsidiary to CMS Energy shall be included in calculating
Consolidated Net Income.
"CONSOLIDATED NET TANGIBLE ASSETS" means, for any period, the total amount
of assets (less accumulated depreciation or amortization, allowances for
doubtful receivables, other applicable reserves and other properly deductible
items) as set forth on the most recently available quarterly or annual
consolidated balance sheet of CMS Energy and its Consolidated Subsidiaries,
determined on a consolidated basis in accordance with generally accepted
accounting principles, and after giving effect to purchase accounting and after
deducting therefrom, to the extent otherwise included, the amounts of:
- Consolidated Current Liabilities;
- minority interests in Consolidated Subsidiaries held by Persons other
than CMS Energy or a Restricted Subsidiary;
- excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors as evidenced by
resolutions of the Board of Directors;
- any revaluation or other write-up in value of assets subsequent to
December 31, 1996, as a result of a change in the method of valuation
in accordance with generally accepted accounting principles;
- unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items;
- treasury stock; and
- any cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of
Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities.
"CONSOLIDATED NET WORTH" of any Person means the total of the amounts shown
on the consolidated balance sheet of such Person and its consolidated
subsidiaries, determined on a consolidated basis in accordance with generally
accepted accounting principles, as of any date selected by such Person not more
than 90 days prior to the taking of any action for the purpose of which the
determination is being made (and adjusted for any material events since such
date), as (1) the par or stated value of all outstanding Capital Stock plus (2)
paid-in capital or capital surplus relating to such Capital Stock plus (3) any
retained earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock and (C) any amounts attributable to
Exchangeable Stock.
"CONSOLIDATED SUBSIDIARY" means any Subsidiary whose accounts are or are
required to be consolidated with the accounts of CMS Energy in accordance with
generally accepted accounting principles.
"DESIGNATED ENTERPRISES SUBSIDIARY" means any wholly-owned subsidiary of
Enterprises formed after the date of the Supplemental Indenture which is
designated a Designated Enterprises Subsidiary by the Board of Directors.
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"EXCHANGEABLE STOCK" means any Capital Stock of a corporation that is
exchangeable or convertible into another security (other than Capital Stock of
such corporation that is neither Exchangeable Stock nor Redeemable Stock).
"HOLDER" means the Person in whose name a Note is registered in the
security register kept by CMS Energy for that purpose.
"HYBRID PREFERRED SECURITIES" means any preferred securities issued by a
Hybrid Preferred Securities Subsidiary, where such preferred securities have the
following characteristics:
- such Hybrid Preferred Securities Subsidiary lends substantially all of
the proceeds from the issuance of such preferred securities to CMS
Energy or Consumers in exchange for subordinated debt issued by CMS
Energy or Consumers, respectively;
- such preferred securities contain terms providing for the deferral of
distributions corresponding to provisions providing for the deferral
of interest payments on such subordinated debt; and
- CMS Energy or Consumers (as the case may be) makes periodic interest
payments on such subordinated debt, which interest payments are in
turn used by the Hybrid Preferred Securities Subsidiary to make
corresponding payments to the holders of the Hybrid Preferred
Securities.
"HYBRID PREFERRED SECURITIES SUBSIDIARY" means any business trust (or
similar entity):
- all of the common equity interest of which is owned (either directly
or indirectly through one or more wholly-owned Subsidiaries of CMS
Energy or Consumers) at all times by CMS Energy or Consumers;
- that has been formed for the purpose of issuing Hybrid Preferred
Securities; and
- substantially all of the assets of which consist at all times solely
of subordinated debt issued by CMS Energy or Consumers (as the case
may be) and payments made from time to time on such subordinated debt.
"INDEBTEDNESS" of any Person means, without duplication:
- the principal of and premium (if any) in respect of (A) indebtedness
of such Person for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment
of which such Person is responsible or liable;
- all Capital Lease Obligations of such Person;
- all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
obligations under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business);
- all obligations of such Person for the reimbursement of any obligor on
any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in the bullet
points above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than
the third Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit);
- all obligations of the type referred to in the bullet points above of
other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable as
obligor, guarantor or otherwise; and
- all obligations of the type referred to in the bullet points above of
other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value
of such property or assets or the amount of the obligation so secured.
"LIEN" means any lien, mortgage, pledge, security interest, conditional
sale, title retention agreement or other charge or encumbrance of any kind.
S-36
"NET CASH PROCEEDS" means (a) with respect to any Asset Sale, the aggregate
proceeds of such Asset Sale including the fair market value (as determined by
the Board of Directors and net of any associated debt and of any consideration
other than Capital Stock received in return) of property other than cash,
received by CMS Energy, net of (1) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale, (2) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of CMS Energy and its Restricted
Subsidiaries, taken as a whole, (3) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (4) appropriate amounts to be provided by CMS
Energy or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with generally accepted
accounting principles and (b) with respect to any issuance or sale or
contribution in respect of Capital Stock, the aggregate proceeds of such
issuance, sale or contribution, including the fair market value (as determined
by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by CMS Energy, net of attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof, provided, however, that if
such fair market value as determined by the Board of Directors of property other
than cash is greater than $25 million, the value thereof shall be based upon an
opinion from an independent nationally recognized firm experienced in the
appraisal or similar review of similar types of transactions.
"NON-CONVERTIBLE CAPITAL STOCK" means, with respect to any corporation, any
non-convertible Capital Stock of such corporation and any Capital Stock of such
corporation convertible solely into non-convertible Capital Stock other than
Preferred Stock of such corporation; provided, however, that Non-Convertible
Capital Stock shall not include any Redeemable Stock or Exchangeable Stock.
"OPERATING CASH FLOW" means, for any period, with respect to CMS Energy and
its Consolidated Subsidiaries, the aggregate amount of Consolidated Net Income
after adding thereto Consolidated Interest Expense (adjusted to include costs
recognized on early retirement of debt), income taxes, depreciation expense,
amortization expense and any non-cash amortization of debt issuance costs, any
nonrecurring, noncash charges to earnings and any negative accretion
recognition.
"OTHER RATING AGENCY" shall mean any one of Fitch, Inc. or Moody's
Investors Service, Inc., and any successor to any of these organizations that is
a nationally recognized statistical rating organization.
"PAYING AGENT" means any person authorized by CMS Energy to pay the
principal of (and premium, if any) or interest on any of the Notes on behalf of
CMS Energy. Initially, the paying agent is the Trustee under the senior debt
indenture.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision of any government.
"PREFERRED STOCK" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation; provided, that
Hybrid Preferred Securities are not considered Preferred Stock for purposes of
this definition.
"REDEEMABLE STOCK" means any Capital Stock that by its terms or otherwise
is required to be redeemed prior to the first anniversary of the stated maturity
of the outstanding Notes or is redeemable at the option of the Holders thereof
at any time prior to the first anniversary of the stated maturity of the
outstanding Notes.
"RESTRICTED SUBSIDIARY" means any Subsidiary (other than Consumers and its
subsidiaries) of CMS Energy which, as of the date of CMS Energy's most recent
quarterly consolidated balance sheet, constituted at least 10% of the total
Consolidated Assets of CMS Energy and its Consolidated Subsidiaries and any
other Subsidiary which from time to time is designated a Restricted Subsidiary
by the Board of Directors, provided that no Subsidiary may be designated a
Restricted Subsidiary if, immediately after giving effect thereto, an Event of
Default or event that, with the lapse of time or giving of notice or both, would
constitute an Event of Default would exist or CMS Energy and its Restricted
Subsidiaries could not incur at least one dollar of additional Indebtedness
pursuant to the first paragraph under "Description of the Notes -- Certain
Restrictive Covenants -- Limitation on Consolidated Indebtedness," and (1) any
such Subsidiary so designated as a Restricted Subsidiary must be organized under
the laws of the United States or any State thereof, (2) more than 80% of the
Voting Stock of such Subsidiary must be owned of record and beneficially by CMS
Energy or a Restricted Subsidiary and (3) such Restricted Subsidiary must be a
Consolidated Subsidiary.
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"S&P" shall mean Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., and any successor thereto which is a nationally
recognized statistical rating organization, or, if such entity shall cease to
rate the Notes or shall cease to exist and there shall be no such successor
thereto, any other nationally recognized statistical rating organization
selected by CMS Energy.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness of CMS Energy (whether
outstanding on the date of the Supplemental Indenture or thereafter incurred)
which is contractually subordinated or junior in right of payment to the Notes.
"SUBSIDIARY" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by CMS Energy or by one or more
other Subsidiaries, or by CMS Energy and one or more other Subsidiaries. For the
purposes of this definition, "voting stock" means stock which ordinarily has
voting power for the election of directors, whether at all times or only so long
as no senior class of stock has such voting power by reason of any contingency.
"SUPPORT OBLIGATIONS" means, for any person, without duplication, any
financial obligation, contingent or otherwise, of such person guaranteeing or
otherwise supporting any debt or other obligation of any other person in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such person, direct or indirect:
- to purchase or pay (or advance or supply funds for the purchase or
payment of) such debt or to purchase (or to advance or supply funds
for the purchase of) any security for the payment of such debt;
- to purchase property, securities or services for the purpose of
assuring the owner of such debt of the payment of such debt;
- to maintain working capital, equity capital, available cash or other
financial statement condition of the primary obligor so as to enable
the primary obligor to pay such debt;
- to provide equity capital under or in respect of equity subscription
arrangements (to the extent that such obligation to provide equity
capital does not otherwise constitute debt); or
- to perform, or arrange for the performance of, any non-monetary
obligations or non-funded debt payment obligations of the primary
obligor.
"TAX SHARING AGREEMENT" means the Amended and Restated Agreement for the
Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as
amended or supplemented from time to time, by and among CMS Energy, each of the
members of the Consolidated Group (as defined therein) and each of the
corporations that become members of the Consolidated Group.
"VOTING STOCK" means securities of any class or classes the holders of
which are ordinarily, in the absence of contingencies, entitled to vote for
corporate directors (or persons performing similar functions).
EVENTS OF DEFAULT
The occurrence of any of the following events with respect to the Notes
will constitute an "EVENT OF DEFAULT" with respect to the Notes:
- default for 30 days in the payment of any interest on any of the
Notes;
- default in the payment when due of any of the principal of or the
premium, if any, on any of the Notes, whether at maturity, upon
redemption, acceleration, purchase by CMS Energy at the option of the
Holders or otherwise;
- default for 60 days by CMS Energy in the observance or performance of
any other covenant or agreement contained in the senior debt indenture
relating to the Notes after written notice thereof as provided in the
senior debt indenture;
- certain events of bankruptcy, insolvency or reorganization relating to
CMS Energy or Consumers;
- entry of final judgments against CMS Energy or Consumers aggregating
in excess of $25,000,000 which remain undischarged or unbonded for 60
days;
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- a default resulting in the acceleration of indebtedness of CMS Energy
or Consumers in excess of $25,000,000, which acceleration has not been
rescinded or annulled within ten days after written notice of such
default as provided in the senior debt indenture;
- a default in our obligation to redeem Notes after we exercised our
redemption option; or
- a default in our obligation to purchase Notes upon the occurrence of a
Change in Control or exercise by a Holder of its option to require us
to purchase such Holder's Notes.
If an Event of Default on the Notes shall have occurred and be continuing,
either the Trustee or the Holders of not less than 25% in aggregate principal
amount of the Notes then outstanding may declare the principal of all the Notes
and the premium thereon and interest, if any, accrued thereon to be due and
payable immediately.
The senior debt indenture provides that the Trustee will be under no
obligation to exercise any of its rights or powers under the senior debt
indenture at the request, order or direction of the Holders of the Notes, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for indemnity and certain other limitations contained in the
senior debt indenture, the Holders of a majority in aggregate principal amount
of the senior debentures of each affected series then outstanding (voting as one
class) will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred on the Trustee, with respect to the senior debentures of such
affected series.
The senior debt indenture provides that no Holders of Notes may institute
any action against CMS Energy under the senior debt indenture (except actions
for payment of overdue principal, premium or interest) unless such Holder
previously shall have given to the Trustee written notice of default and
continuance thereof and unless the Holders of not less than 25% in aggregate
principal amount of senior debentures of the affected series then outstanding
(voting as one class) shall have requested the Trustee to institute such action
and shall have offered the Trustee reasonable indemnity, the Trustee shall not
have instituted such action within 60 days of such request and the Trustee shall
not have received direction inconsistent with such request by the Holders of a
majority in aggregate principal amount of the senior debentures of the affected
series then outstanding (voting as one class).
The senior debt indenture requires CMS Energy to furnish to the Trustee
annually a statement as to CMS Energy's compliance with all conditions and
covenants under the senior debt indenture. The senior debt indenture provides
that the Trustee may withhold notice to the Holders of the Notes of any default
affecting such Notes (except defaults as to payment of principal, premium or
interest on the Notes) if it considers such withholding to be in the interests
of the Holders of the Notes.
CONSOLIDATION, MERGER OR SALE OF ASSETS
The senior debt indenture provides that CMS Energy may consolidate with or
merge into, or sell, lease or convey its property as an entirety or
substantially as an entirety to, any other corporation if the new corporation
assumes the obligations of CMS Energy under the Notes and the Supplemental
Indenture and is organized and existing under the laws of the United States, any
U.S. State or the District of Columbia. Notwithstanding the foregoing
provisions, such a transaction may constitute a Change in Control as described
in "Purchase of Notes Upon Change in Control."
MODIFICATION AND WAIVER
CMS Energy and the relevant trustee may enter into supplemental indentures
without the consent of the Holders of the Notes to establish the form and terms
of any series of securities under the senior debt indenture.
CMS Energy and the relevant trustee, with the consent of the holders of at
least a majority in total principal amount of senior debentures of all series
then outstanding and affected (voting as one class), may change in any manner
the provisions of the senior debt indenture or modify in any manner the rights
of the holders of the senior debentures of each such affected series. CMS Energy
and the relevant trustee may not, without the consent of the holders of each
senior debenture affected, enter into any supplemental indenture to:
- change the time of payment of the principal;
- reduce the principal amount of such senior debenture;
- reduce the rate or change the time of payment of interest on such
senior debenture;
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- reduce the amount payable on any securities issued originally at a
discount upon acceleration or provable in bankruptcy;
- impair the right to institute suit for the enforcement of any payment
on any senior debenture when due;
- reduce the redemption price or Change in Control Purchase Price for
the Notes or change the terms applicable to redemption or purchase in
a manner adverse to the Holder;
- make any change that adversely affects the right to exchange any debt
security, including the Notes, or decreases the exchange rate of any
exchangeable debt security; or
- waive any default in any payment of redemption price or Change in
Control Purchase Price with respect to the Notes.
In addition, no such modification may reduce the percentage in principal
amount of the senior debenture of the affected series, the consent of whose
holders is required for any such modification or for any waiver provided for in
the senior debt indenture.
Prior to the acceleration of the maturity of any senior debenture, the
holders, voting as one class, of a majority in total principal amount of the
senior debentures with respect to which a default or event of default shall have
occurred and be continuing may on behalf of the holders of all such affected
senior debentures waive any past default or event of default and its
consequences, except a default or an event of default in respect of a covenant
or provision of the senior debt indenture or of any senior debenture which
cannot be modified or amended without the consent of the holders of each senior
debenture affected.
DEFEASANCE, COVENANT DEFEASANCE AND DISCHARGE
The senior debt indenture provides that, at the option of CMS Energy:
- CMS Energy will be discharged from all obligations in respect of the
Notes (except for certain obligations to register the transfer of or
exchange the Notes, to replace stolen, lost or mutilated Notes, to
maintain paying agencies and to maintain the trust described below);
or
- CMS Energy need not comply with certain restrictive covenants of the
senior debt indenture (including those described under "Consolidation,
Merger or Sale of Assets"),
if CMS Energy in each case irrevocably deposits in trust with the relevant
trustee money and/or securities backed by the full faith and credit of the
United States which, through the payment of the principal thereof and the
interest thereon in accordance with their terms, will provide money in an amount
sufficient to pay all the principal and interest on the Notes on the stated
maturities of such Notes in accordance with the terms thereof.
To exercise this option, CMS Energy is required to deliver to the relevant
trustee an opinion of independent counsel to the effect that:
- the exercise of such option would not cause the Holders of the Notes
to recognize income, gain or loss for United States federal income tax
purposes as a result of such defeasance, and such Holders will be
subject to United States federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if
such defeasance had not occurred; and
- in the case of a discharge as described above, such opinion is to be
accompanied by a private letter ruling to the same effect received
from the Internal Revenue Service, a revenue ruling to such effect
pertaining to a comparable form of transaction published by the
Internal Revenue Service or appropriate evidence that since the date
of the senior debt indenture there has been a change in the applicable
federal income tax law.
In the event:
- CMS Energy exercises its option to effect a covenant defeasance with
respect to the Notes as described above;
- the Notes are thereafter declared due and payable because of the
occurrence of any event of default other than an event of default
caused by failing to comply with the covenants which are defeased; or
- the amount of money and securities on deposit with the relevant
trustee would be insufficient to pay amounts due on the Notes at the
time of the acceleration resulting from such event of default,
S-40
CMS Energy would remain liable for such amounts.
THE TRUSTEE
JPMorgan Chase Bank, N.A. is the Trustee and paying agent under the senior
debt indenture for the Notes. CMS Energy and its affiliates maintain lending
depositary and other normal banking relationships with JPMorgan Chase Bank, N.A.
JPMorgan Chase Bank, N.A. is also a lender to CMS Energy and its affiliates.
GOVERNING LAW
The senior debt indenture, the Supplemental Indenture and the Notes will be
governed by, and construed in accordance with, the laws of the State of Michigan
unless the laws of another jurisdiction shall mandatorily apply.
BOOK-ENTRY SYSTEM
The Notes will be represented by one or more global securities. Each global
security will be deposited with, or on behalf of, DTC and be registered in the
name of a nominee of DTC. Except under circumstances described below, the Notes
will not be issued in definitive form.
The following is based upon information furnished by DTC:
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("PARTICIPANTS") deposit with DTC. DTC
also facilitates the settlement among participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
("DIRECT PARTICIPANTS") include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its direct participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the SEC.
Investors who purchase Notes in offshore transactions in reliance on
Regulation S under the Securities Act may hold their interest in a global
security directly through Euroclear Bank S.A./N.V., as operator of the Euroclear
System ("EUROCLEAR"), and Clearstream Banking, societe anonyme ("CLEARSTREAM"),
if they are participants in such systems, or indirectly through organizations
that are participants in such systems. Euroclear and Clearstream will hold
interests in the global securities on behalf of their participants through their
respective depositaries, which in turn will hold such interests in the global
securities in customers' securities accounts in the depositaries' names on the
books of DTC.
Upon the issuance of a global security, DTC will credit on its book-entry
registration and transfer system the accounts of persons designated by the
underwriters with the respective principal amounts of the Notes represented by
the global security. Ownership of beneficial interests in a global security will
be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in a global security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of persons
other than participants). The laws of some states require that some purchasers
of securities take physical delivery of the securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a global security.
So long as DTC or its nominee is the registered owner of a global security,
DTC or its nominee, as the case may be, will be considered the sole owner or
Holder of the Notes represented by that global security for all purposes under
the senior debt indenture. Except as provided below, owners of beneficial
interests in a global security will not be entitled to have Notes represented by
that global security registered in their names, will not receive or be entitled
to receive physical delivery of Notes in definitive form and will not be
considered the owners or Holders thereof under the senior debt indenture.
Principal and interest payments, if any, on Notes registered in the name of DTC
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the relevant global security. Neither we, the Trustee, any
paying agent or the security registrar for the Notes will have any
responsibility or liability for any aspect of the records relating to nor
payments made on account of beneficial interests in a global security or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.
S-41
We expect that DTC or its nominee, upon receipt of any payment of principal
or interest, will credit immediately participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the relevant global security as shown on the records of DTC or its
nominee. We also expect that payments by participants to owners of beneficial
interests in a global security held through these participants will be governed
by standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of the participants.
Unless and until they are exchanged in whole or in part for Notes in
definitive form, the global securities may not be transferred except as a whole
by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of
DTC. Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Clearstream will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Cross-market transfers between DTC, on the one hand, and directly or
indirectly through Euroclear or Clearstream participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(Brussels time). Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the global securities in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositaries for
Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in the global securities from a
DTC participant will be credited during the securities settlement processing day
(which must be a business day for Euroclear or Clearstream, as the case may be)
immediately following the DTC settlement date, and such credit of any
transactions interests in the global securities settled during such processing
day will be reported to the relevant Euroclear or Clearstream participant on
such day. Cash received by Euroclear or Clearstream as a result of sales of
interests in the global securities by or through a Euroclear or Clearstream
participant to a DTC participant will be received with value on the DTC
settlement date, but will be available in the relevant Euroclear or Clearstream
cash account only as of the business day following settlement in DTC.
If DTC at any time is unwilling or unable to continue as a depositary,
defaults in the performance of its duties as depositary or ceases to be a
clearing agency registered under the Exchange Act or other applicable statute or
regulation, and a successor depositary is not appointed by us within 90 days, we
will issue Notes in definitive form in exchange for the global securities
relating to the Notes. In addition, we may at any time and in our sole
discretion determine not to have the Notes or portions of the Notes represented
by one or more global securities and, in that event, will issue individual Notes
in exchange for the global security or securities representing the Notes.
Further, if we so specify with respect to any Notes, an owner of a beneficial
interest in a global security representing the Notes may, on terms acceptable to
us and the depositary for the global security, receive individual Notes in
exchange for the beneficial interest. In any such instance, an owner of a
beneficial interest in a global security will be entitled to physical delivery
in definitive form of Notes represented by the global security equal in
principal amount to the beneficial interest, and to have the Notes registered in
its name. Notes so issued in definitive form will be issued as registered Notes
in denominations of $1,000 and integral multiples thereof, unless otherwise
specified by us.
S-42
UNDERWRITING
Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives of the underwriters named below.
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus supplement, each underwriter named below has
agreed to purchase, and we have agreed to sell to that underwriter, the
principal amount of the Notes set forth opposite the underwriter's name.
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
Citigroup Global Markets Inc. ....................................... $
Merrill Lynch, Pierce, Fenner & Smith Incorporated ..................
Banc of America Securities LLC ......................................
KeyBanc Capital Markets, a division of McDonald Investments Inc. ....
Wedbush Morgan Securities Inc. ......................................
------------
Total ............................................................ $125,000,000
============
The underwriting agreement provides that the obligations of the
underwriters to purchase the Notes included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all of the Notes if they purchase any of the Notes.
The underwriters propose to offer some of the Notes directly to the public
at the public offering price set forth on the cover page of this prospectus
supplement and some of the Notes to dealers at the public offering price less a
concession not to exceed ___% of the principal amount of the Notes. The
underwriters may allow, and dealers may reallow, a concession not to exceed ___%
of the principal amount of the Notes on sales to other dealers. After the
initial offering of the Notes to the public, the representatives may change the
public offering price and concessions.
The following table shows the underwriting discounts and commissions that
we are to pay to the underwriters in connection with this offering (expressed as
a percentage of the principal amount of the Notes).
PAID BY CMS ENERGY
------------------
Per Note..... %
In connection with the offering, Citigroup Global Markets Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, on behalf of the underwriters, may
purchase and sell Notes in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of Notes in excess of the principal
amount of Notes to be purchased by the underwriters in the offering, which
creates a syndicate short position. Syndicate covering transactions involve
purchases of the Notes in the open market after the distribution has been
completed in order to cover syndicate short positions. Stabilizing transactions
consist of certain bids or purchases of Notes made for the purpose of preventing
or retarding a decline in the market price of the Notes while the offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, in covering syndicate short positions or making stabilizing
purchases, repurchase Notes originally sold by that syndicate member.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the Notes. They may also cause the price of the
Notes to be higher than the price that otherwise would exist in the open market
in the absence of these transactions. The underwriters may conduct these
transactions in the over-the-counter market or otherwise. If the underwriters
commence any of these transactions, they may discontinue them at any time.
We estimate that our total expenses for this offering will be approximately
$180,000.
The underwriters have performed investment banking and advisory services
for us and our affiliates from time to time for which they have received
customary fees and expenses. Affiliates of the underwriters are lenders to us
and our affiliates under our credit facilities. The underwriters may, from time
to time, engage in transactions with and perform services for us in the ordinary
course of their business.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make because of any of those liabilities.
UnionBanc Investment Services, LLC, a member of the National Association of
Securities Dealers, Inc. and subsidiary of Union Bank of California, N.A., is
being paid a referral fee by Wedbush Morgan Securities Inc.
S-43
LEGAL MATTERS
Robert C. Shrosbree, Assistant General Counsel for CMS Energy, will render
opinions as to the legality of the Notes for CMS Energy.
Pillsbury Winthrop Shaw Pittman LLP will pass upon certain legal matters
with respect to the Notes for the underwriters.
EXPERTS
The consolidated financial statements and schedule of CMS Energy appearing
in CMS Energy's Annual Report (Form 10-K/A (Amendment No. 1)) for the year ended
December 31, 2004 (including a schedule appearing therein), and CMS Energy's
management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2004 included therein, have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set forth in their
reports thereon, included therein, and incorporated herein by reference, which
are based in part on the reports of PricewaterhouseCoopers LLP, independent
registered public accounting firm for the MCV Partnership, and Price Waterhouse,
independent accountants, for Jorf Lasfar. Such consolidated financial statements
and management's assessment 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. 1)) for the year ended
December 31, 2004 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. 1)) for the year ended December 31, 2004 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, 2004 and 2003
and for each of the three years in the period ended December 31, 2004
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 audited financial statements for the years ended December 31, 2004 and
2003 and management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004 (which is included in Management's
Report on Internal Control over Financial Reporting) of the MCV Partnership, not
separately presented in or incorporated by reference in this prospectus
supplement or the accompanying prospectus, have been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
whose report thereon is incorporated by reference herein. Such financial
statements and management's assessment of the effectiveness of internal control
over financial reporting, to the extent they have been included in the financial
statements and management's assessment of the effectiveness of internal control
over financial reporting 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.
S-44
$1,500,000,000
CMS ENERGY CORPORATION
CMS ENERGY COMMON STOCK
SENIOR DEBENTURES
SUBORDINATED DEBENTURES
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
GUARANTEES
AND
CMS ENERGY TRUST IV
CMS ENERGY TRUST V
TRUST PREFERRED SECURITIES
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
CMS ENERGY CORPORATION
----------
We may offer, from time to time:
- shares of CMS Energy Common Stock,
- unsecured senior or subordinated debt securities consisting of
debentures, convertible debentures, notes and other unsecured evidence
of indebtedness,
- stock purchase contracts to purchase CMS Energy Common Stock,
- stock purchase units, each representing ownership of a stock purchase
contract and unsecured senior or subordinated debt securities or trust
preferred securities or debt obligations of third parties, including
U.S. Treasury Securities, securing the holder's obligation to purchase
the CMS Energy Common Stock under the stock purchase contract, or any
combination of the above, and
- guarantees of CMS Energy with respect to trust preferred securities of
CMS Energy Trusts IV and V.
For each type of security listed above, the amount, price and terms will be
determined at or prior to the time of sale.
CMS Energy Trust IV and CMS Energy Trust V, which are Delaware business
trusts, may offer trust preferred securities. The trust preferred securities
represent preferred undivided beneficial interests in the assets of CMS Energy
Trust IV and CMS Energy Trust V in amounts, at prices and on terms to be
determined at or prior to the time of sale.
We will provide the specific terms of these securities in an accompanying
prospectus supplement or supplements. You should read this prospectus and the
accompanying prospectus supplement or supplements carefully before you invest.
THESE SECURITIES INVOLVE RISK. SEE "RISK FACTORS" ON PAGE 2.
CMS Energy Common Stock is traded on the New York Stock Exchange under the
symbol "CMS." CMS Energy Common Stock sold pursuant to a prospectus supplement
or supplements accompanying this prospectus will also be listed for trading on
the New York Stock Exchange, subject to official notice of issuance.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We intend to sell these securities through underwriters, dealers, agents or
directly to a limited number of purchasers. The names of, and any securities to
be purchased by or through, these parties, the compensation of these parties and
other special terms in connection with the offering and sale of these securities
will be provided in the related prospectus supplement or supplements.
This prospectus may not be used to consummate sales of any of these
securities unless accompanied by a prospectus supplement.
The date of this prospectus is June 16, 2005.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT, AND ANY INFORMATION
OR REPRESENTATION NOT CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY CMS ENERGY OR ANY UNDERWRITER, DEALER OR AGENT.
THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH THEY RELATE OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT
NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED OR INCORPORATED HEREIN OR THEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
TABLE OF CONTENTS
PAGE
----
Summary.................................................................. 2
Risk Factors............................................................. 2
Where To Find More Information........................................... 3
CMS Energy Corporation................................................... 4
CMS Energy Trusts........................................................ 4
Use of Proceeds.......................................................... 5
Ratio of Earnings to Fixed Changes and Ratio of Earnings to Combined
Fixed Changes and Preference Dividends................................ 6
Description of Securities................................................ 7
Effect of Obligations Under the Debt Securities and the Guarantees....... 21
Plan of Distribution..................................................... 24
Legal Opinions........................................................... 26
Experts.................................................................. 27
SUMMARY
This prospectus is part of a registration statement on Form S-3 that we
filed with the Securities and Exchange Commission (the "SEC") utilizing a
"shelf" registration process. Under this shelf process, we may sell any
combination of securities described in this prospectus in one or more offerings,
up to a total dollar amount of $1,500,000,000. This prospectus provides you with
a general description of the securities we may offer. Each time we sell
securities, we will provide a prospectus supplement containing specific
information about the terms of that offering. The prospectus supplement may also
add, update or change information contained in this prospectus. You should read
both this prospectus and any prospectus supplement together with additional
information described below under the heading "Where To Find More Information."
Our principal executive offices are located at One Energy Plaza, Jackson,
Michigan 49201. The telephone number is 517-788-0550.
RISK FACTORS
Before acquiring any of the securities that may be offered hereby, you
should carefully consider the risks discussed in the section of our Form 10-Q,
filed May 5, 2005, for the quarter year ended March 31, 2005, entitled
"Forward-Looking Statements and Risk Factors," which is incorporated in this
document by reference. You should also consider the risk factors listed in the
accompanying prospectus supplement or supplements and you should read this
prospectus and the accompanying prospectus supplement or supplements carefully
before you invest.
2
WHERE TO FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC under
File No. 1-9513. Our SEC filings are also available over the Internet at the
SEC's Web site at http://www.sec.gov. You may also read and copy any document we
file at the SEC's public reference room at 450 Fifth Street N.W., Room 1024,
Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the SEC's public reference room and its copy charges. Since we
have securities listed on the New York Stock Exchange, 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 for the year ended December 31, 2004
and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, on
our Web site at http://www.cmsenergy.com. The information on this Web site is
not a part of this prospectus.
We have not included separate financial statements of the Trusts. We and
the Trusts do not consider that such financial statements would be material to
holders of Trust Preferred Securities because each Trust is a special purpose
entity, has no operating history and no independent operations. The Trusts are
not currently involved in and don't anticipate being involved in any activity
other than as described under "CMS Energy Trusts." Further, we believe that
financial statements of the Trusts are not material to the holders of the Trust
Preferred Securities since we will guarantee the Trust Preferred Securities.
Holders of the Trust Preferred Securities, with respect to the payment of
distributions and amounts upon liquidation, dissolution and winding-up, are at
least in the same position vis-a-vis the assets of CMS Energy Corporation ("CMS
ENERGY") as a preferred stockholder of CMS Energy. We beneficially own all of
the undivided beneficial interests in the assets of the Trusts (other than the
beneficial interests represented by the Trust Preferred Securities). See "CMS
Energy Trusts," "Description of Securities -- Trust Preferred Securities" and
"Effect of Obligations Under the Debt Securities And the Guarantees -- The
Guarantees." In future filings under the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), there will be an audited footnote to our annual
financial statements stating that the Trusts are wholly-owned by CMS Energy,
that the sole assets of the Trusts are the Senior Debentures or the Subordinated
Debentures of CMS Energy having a specified aggregate principal amount, and,
considered together, the back-up undertakings, including the Guarantees,
constitute a full and unconditional guarantee by CMS Energy of the Trusts'
obligations under the Trust Preferred Securities issued by the Trusts.
We are "incorporating by reference" information into this prospectus. This
means that we are disclosing important information to you when we refer you to
another document that we filed separately with the SEC. Information incorporated
by reference is considered to be part of this prospectus, unless the information
is updated by information in this prospectus. This prospectus incorporates by
reference the documents listed below. We encourage you to read these additional
documents because these documents contain important information about us and our
finances.
SEC FILINGS
(FILE NO. 1-9513) PERIOD/DATE
---------------------------------------- -------------------------------------
- Annual Report on Form 10-K Year ended December 31, 2004
- Quarterly Report on Form 10-Q Quarter ended March 31, 2005
- Current Reports on Form 8-K Filed January 12, 2005, January 14,
2005, January 20, 2005, January 27,
2005, February 28, 2005 (Current
Report on Form 8-K/A only), March 30,
2005, April 4, 2005 (2 reports),
April 5, 2005, April 13, 2005 and May
17, 2005
- The description of CMS Energy Common Filed November 22, 1996
Stock contained in our Registration
Statement on Form 8-B/A
The documents we file with the SEC between the date of the initial filing
of the registration statement of which this prospectus is a part and the
effectiveness of the registration statement, as well as after the date of this
prospectus and prior to the termination of the offering made by this prospectus
are also incorporated by reference into this prospectus. Any statement contained
in such document will be deemed to be modified or superseded for purposes of
this prospectus to the extent that a statement contained in this prospectus or
any other subsequently filed document modifies or supersedes such statement.
This prospectus, which is part of the offering registration statement, does
not contain all of the information found in the offering registration statement
including various exhibits and schedules. We are incorporating by reference the
offering registration statement.
3
We will provide, upon your oral or written request, a copy of any or all of
the information that has been incorporated by reference into the prospectus but
not delivered with this prospectus.
You may request copies of these filings, including the registration
statement, at no cost, by writing or telephoning CMS Energy at the following
address:
CMS Energy Corporation
Attn: Office of the Secretary
One Energy Plaza
Jackson, Michigan 49201
Telephone: (517) 788-0550
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information that is different from this information.
CMS ENERGY CORPORATION
We are an integrated energy company with a business strategy focused
primarily in Michigan. We are the parent holding company of Consumers Energy
Company ("CONSUMERS") and CMS Enterprises Company ("ENTERPRISES"). Consumers is
a combination electric and gas utility company serving Michigan's Lower
Peninsula. Enterprises, through various subsidiaries and equity investments, is
engaged in domestic and international diversified energy businesses. We manage
our businesses by the nature of services each provides and operate principally
in three business segments: electric utility, gas utility, and enterprises.
CMS ENERGY TRUSTS
CMS Energy Trust IV and CMS Energy Trust V are statutory business trusts
formed under the Delaware Business Trust Act (the "TRUST ACT") (each, a "TRUST"
and collectively, the "TRUSTS") pursuant to: (i) a trust agreement executed by
CMS Energy, as sponsor, and the trustees of the Trusts (the "CMS TRUSTEES"); and
(ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware. At the time of public issuance of Trust Preferred Securities,
each trust agreement will be amended and restated in its entirety (as so amended
and restated, the "TRUST AGREEMENT") and will be qualified as an indenture under
the Trust Indenture Act of 1939, as amended (the "TRUST INDENTURE ACT"). CMS
Energy will directly or indirectly acquire common securities of each Trust (the
"COMMON SECURITIES" and, together with the Trust Preferred Securities, the
"TRUST SECURITIES") in an aggregate liquidation amount equal to approximately 3%
for the total capital of the Trust. Each Trust exists for the exclusive purposes
of:
- issuing the Trust Preferred Securities and Common Securities
representing undivided beneficial interests in the assets of the
Trust;
- investing the gross proceeds of the Trust Securities in the Senior
Debentures or Subordinated Debentures; and
- engaging in only those other activities necessary or incidental
thereto.
Each Trust has a term of approximately 30 years, but may terminate earlier as
provided in the Trust Agreement.
The undivided common beneficial interests in the Trust will be owned by CMS
Energy. The proceeds from the offering of the Trust Preferred Securities and the
sale of the Common Securities may be contributed by the Trust to purchase from
CMS Energy Senior Debentures or Subordinated Debentures in an aggregate
principal amount equal to the aggregate liquidation preference of the Trust
Securities, bearing interest at an annual rate equal to the annual distribution
rate of such Trust Securities and having certain redemption terms which
correspond to the redemption terms for the Trust Securities. The Senior
Debentures will rank on an equal basis with all other unsecured debt of CMS
Energy except subordinated debt. The Subordinated Debentures will rank
subordinate in right of payment to all of CMS Energy's Senior Indebtedness (as
defined herein). Distributions on the Trust Securities may not be made unless
the Trust receives corresponding interest payments on the Senior Debentures or
the Subordinated Debentures from CMS Energy. CMS Energy will irrevocably
guarantee, on a senior or subordinated basis, as applicable, and to the extent
set forth therein, with respect to each of the Trust Securities, the payment of
distributions, the redemption price, including all accrued or deferred and
unpaid distributions, and payment on liquidation, but only to the extent of
funds on hand. Each Guarantee will be unsecured and will be either equal to or
subordinate to, as applicable, all Senior Indebtedness, of CMS Energy. Upon the
occurrence of certain events (subject to the conditions to be described in an
4
accompanying prospectus supplement) the Trust may be liquidated and the holders
of the Trust Securities could receive Senior Debentures or Subordinated
Debentures in lieu of any liquidating cash distribution.
Pursuant to the Trust Agreement, the number of CMS Trustees will initially
be three. Two of the CMS Trustees will be persons who are employees or officers
of or who are affiliated with CMS Energy (the "ADMINISTRATIVE TRUSTEES"). The
third trustee will be a financial institution that is unaffiliated with CMS
Energy, which trustee will serve as property trustee under the Trust Agreement
and as indenture trustee for the purposes of compliance with the provisions of
the Trust Indenture Act (the "PROPERTY TRUSTEE"). Initially, either The Bank of
New York, a New York banking corporation, or J.P. Morgan Trust Company, N.A., a
national banking association, will be the Property Trustee until removed or
replaced by the holder of the Common Securities. For the purpose of compliance
with the provisions of the Trust Indenture Act, The Bank of New York or J.P.
Morgan Trust Company, N.A. will also act as trustee (each a "GUARANTEE TRUSTEE"
and collectively the "GUARANTEE TRUSTEES"). The Bank of New York (Delaware) will
act as the "DELAWARE TRUSTEE" for the purposes of the Trust Act, until removed
or replaced by the holder of the Common Securities. See "Effect of Obligations
Under the Debt Securities And the Guarantees -- The Guarantees."
Each Property Trustee will hold title to the applicable Debt Securities for
the benefit of the holders of the Trust Securities and each Property Trustee
will have the power to exercise all rights, powers and privileges under the
applicable indentures (as defined herein) as the holder of the Debt Securities.
In addition, each Property Trustee will maintain exclusive control of a
segregated non-interest bearing bank account (the "PROPERTY ACCOUNT") to hold
all payments made in respect of the Debt Securities for the benefit of the
holders of the Trust Securities. Each Property Trustee will make payments of
distributions and payments on liquidation, redemption and otherwise to the
holders of the Trust Securities out of funds from the Property Account. The
Guarantee Trustees will hold the Guarantees for the benefit of the holders of
the Trust Securities. CMS Energy, as the direct or indirect holder of all the
Common Securities, will have the right to appoint, remove or replace any CMS
Trustee and to increase or decrease the number of CMS Trustees; provided, that
the number of CMS Trustees shall be at least three, a majority of which shall be
Administrative Trustees. CMS Energy will pay all fees and expenses related to
the Trusts and the offering of the Trust Securities.
The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
Trust Agreement, the Trust Act and the Trust Indenture Act.
The trustee in the State of Delaware is The Bank of New York (Delaware),
White Clay Center, Route 273, Newark, Delaware 19711.
The principal place of business of each Trust shall be c/o CMS Energy
Corporation, One Energy Plaza, Jackson, Michigan 49201.
USE OF PROCEEDS
The proceeds received by each of the Trusts from the sale of its Trust
Preferred Securities or the Common Securities will be invested in the Senior
Debentures or the Subordinated Debentures. As will be more specifically set
forth in the applicable prospectus supplement, we will use such borrowed amounts
and the net proceeds from the sale of CMS Energy Common Stock, Stock Purchase
Contracts, Stock Purchase Units and any Senior Debentures or Subordinated
Debentures offered hereby for our general corporate purposes, including capital
expenditures, investment in subsidiaries, working capital and repayment of debt.
5
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERENCE DIVIDENDS
The ratio of earnings to fixed charges and the ratio of earnings to
combined fixed charges and preference dividends for the three months ended March
31, 2005 and each of the years ended December 31, 2000 through 2004 is as
follows:
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED ----------------------------------
MARCH 31, 2005 2004 2003 2002 2001 2000
------------------ ---- ---- ---- ---- ----
Ratio of earnings to fixed charges... 3.43 1.12(1) --(2) --(3) --(4) --(5)
Ratio of earnings to combined fixed
charges and preference dividends.. 3.38 1.12(1) --(2) --(3) --(4) --(5)
----------
(1) Fixed charges, adjusted as defined, includes $25 million of interest cost
that was capitalized prior to 2004 and subsequently expensed in 2004.
(2) For the year ended December 31, 2003, fixed charges exceeded earnings by
$34 million. Earnings as defined include $95 million of asset impairment
charges.
(3) For the year ended December 31, 2002, fixed charges exceeded earnings by
$488 million. Earnings as defined include $602 million of asset impairment
charges.
(4) For the year ended December 31, 2001, fixed charges exceeded earnings by
$395 million. Earnings as defined include $323 million of asset impairment
charges.
(5) For the year ended December 31, 2000, fixed charges exceeded earnings by
$220 million. Earnings as defined include $329 million of asset impairment
charges.
For the purpose of computing these ratios, earnings represent the sum of
income from continuing operations before income taxes, net interest charges and
the estimated interest portion of lease rentals and distributed income of equity
method investees.
6
DESCRIPTION OF SECURITIES
INTRODUCTION
Specific terms of the shares of Common Stock, par value $.01 per share
("CMS ENERGY COMMON STOCK"), unsecured senior debt securities (the "SENIOR
DEBENTURES") and unsecured subordinated debt securities (the "SUBORDINATED
DEBENTURES") (individually a "DEBT SECURITY" and collectively the "DEBT
SECURITIES") consisting of debentures, convertible debentures, notes and other
unsecured evidence of indebtedness, Stock Purchase Contracts (the "STOCK
PURCHASE CONTRACTS") to purchase CMS Energy Common Stock, Stock Purchase Units
(the "STOCK PURCHASE UNITS"), each representing ownership of a Stock Purchase
Contract and Debt Securities, or Trust Preferred Securities or debt obligations
of third parties, including U.S. Treasury Securities, securing the holder's
obligation to purchase the CMS Energy Common Stock under the Stock Purchase
Contract, or any combination of the foregoing, irrevocable guarantees
(individually a "GUARANTEE" and collectively "GUARANTEES") of CMS Energy, on a
senior or subordinated basis as applicable, and to the extent set forth therein,
with respect to each of the Trust Securities, the payment of distributions, the
redemption price, including all accrued or deferred and unpaid distributions,
and payment on liquidation, but only to the extent of funds on hand, and trust
preferred securities (the "TRUST PREFERRED SECURITIES") representing preferred
undivided beneficial interests in the assets of the Trust, in respect of which
this prospectus is being delivered (collectively, the "OFFERED SECURITIES"),
will be set forth in an accompanying prospectus supplement or supplements,
together with the terms of the offering of the Offered Securities, the initial
price thereof and the net proceeds from the sale thereof. The prospectus
supplement will set forth with regard to the particular Offered Securities,
without limitation, the following: (i) in the case of Debt Securities, the
designation, aggregate principal amount, denomination, maturity, premium, if
any, any exchange, conversion, redemption or sinking fund provisions, interest
rate (which may be fixed or variable), the time or method of calculating
interest payments, the right of CMS Energy, if any, to defer payment or interest
on the Debt Securities and the maximum length of such deferral, put options, if
any, public offering price, ranking, any listing on a securities exchange and
other specific terms of the offering; (ii) in the case of CMS Energy Common
Stock, the designation, number of shares, public offering price and other
specific terms of the offering, from the sale thereof; (iii) in the case of
Trust Preferred Securities, the designation, number of shares, liquidation
preference per security, initial public offering price, any listing on a
securities exchange, dividend rate (or method of calculation thereof), dates on
which dividends shall be payable and dates from which dividends shall accrue,
any voting rights, any redemption, exchange, conversion or sinking fund
provisions and any other rights, preferences, privileges, limitations or
restrictions relating to a specific series of the Trust Preferred Securities
including a description of the Guarantee, as the case may be; and (iv) in the
case of Stock Purchase Units, the specific terms of the Stock Purchase Contracts
and any Debt Securities, Trust Preferred Securities, or debt obligations of
third parties securing the holders obligation to purchase CMS Energy Common
Stock under the Stock Purchase Contracts, and the terms of the offering and sale
thereof.
CAPITAL STOCK
The following summary of certain rights of the holders of CMS Energy
capital stock does not purport to be complete and is qualified in its entirety
by express reference to the Restated Articles of Incorporation of CMS Energy
(the "ARTICLES OF INCORPORATION") and the By-Laws of CMS Energy, which are
incorporated into this prospectus by reference. See "Where You Can Find More
Information." A copy of the By-laws has been previously filed with the SEC. The
Articles of Incorporation are available on our website at
http://www.cmsenergy.com.
The authorized capital stock of CMS Energy consists of:
- 350 million shares of CMS Energy Common Stock; and
- 10 million shares of CMS Energy Preferred Stock, par value $0.01 per
share ("PREFERRED STOCK").
As of May 31, 2005, we had 5,000,000 shares of 4.50% Cumulative Convertible
Preferred Stock and 221,294,189 shares of CMS Energy Common Stock issued and
outstanding.
7
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
therefor.
In January 2003, the Board of Directors suspended the payment of CMS Energy
Common Stock dividends.
CMS Energy is a holding company and its assets consist primarily of
investments in its subsidiaries. As a holding company with no significant
operations of its own, the principal sources of its funds are dependent
primarily upon the earnings of its subsidiaries (in particular, Consumers),
borrowings and sales of equity. CMS Energy's ability to pay dividends on CMS
Energy Common Stock is dependent primarily upon the earnings and cash flows of
its subsidiaries and the distribution or other payment of such earnings to CMS
Energy in the form of dividends, tax sharing payments, loans or advances and
repayment of loans and advances from CMS Energy. Accordingly, the ability of CMS
Energy to pay dividends on its capital stock will depend on the earnings,
financial requirements, contractual restrictions of the subsidiaries of CMS
Energy (in particular, Consumers) and other factors. CMS Energy's subsidiaries
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts on the capital stock of CMS Energy or to make any
funds available therefor, whether by dividends, loans or other payments.
Dividends on capital stock of CMS Energy are limited by Michigan law to
legally available assets of CMS Energy. Distributions on CMS Energy Common Stock
may be subject to the rights of the holders, if any, of the Preferred Stock,
including the currently issued and outstanding 4.50% Cumulative Convertible
Preferred Stock. As long as the 4.50% Cumulative Convertible Preferred Stock is
outstanding, CMS Energy may not pay dividends on the CMS Energy Common Stock
unless certain conditions are met including, but not limited to, that dividends
on the 4.50% Cumulative Convertible Preferred Stock have been paid. See
"Preferred Stock -- Dividends".
CMS Energy is subject to the following contractual restrictions on its
ability to pay dividends:
CMS ENERGY'S SENIOR SECURED CREDIT FACILITY
Under the terms of our Sixth Amended and Restated Credit Agreement, dated
as of May 18, 2005, 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 May 18, 2005)) 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;
other than (i) pursuant to the terms of any class of our capital stock issued
and outstanding (and as in effect on May 18, 2005), 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
May 18, 2005)), (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, 8.9% Senior Notes Due
2008, 7.5% Senior Notes Due 2009, 7.75% Senior Notes Due 2010, 8.5% Senior Notes
Due 2011, 6.30% Senior Notes Due 2012, 3.375% Convertible Senior Notes Due 2023,
and 2.875% Convertible Senior Notes Due 2024. 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:
8
- 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 scheduled maturity or scheduled repayment
thereof, any of our subordinated indebtedness (each, for purposes of
the senior debt indenture, a "RESTRICTED PAYMENT"),
if at the time of any restricted payment described above (1) an event of default
under the senior debt indenture (or event that with the lapse of time or giving
of notice would constitute an event of default) has occurred and is continuing,
or would occur as a result of the restricted payment, or (2) after giving effect
to any restricted payment described above, the aggregate amount of all
restricted payments made since May 6, 1997 would exceed the sum of:
- $100 million;
- 100% of our consolidated net income from May 6, 1997 to the end of the
most recent fiscal quarter ending at least 45 days prior to the date
of the restricted payment (or, in the case of a deficit, minus 100% of
the deficit); and
- the aggregate net proceeds we have received for any issuance or sale
of, or contribution with respect to, our capital stock subsequent to
May 6, 1997.
TRUST PREFERRED SECURITIES
In June 1997, a CMS Energy affiliated trust issued $172.5 million of 7 3/4%
Convertible Quarterly Income Preferred Securities. The preferred securities are
convertible at the option of the holder into shares of CMS Energy Common Stock
at an initial conversion rate of 1.2255 shares of CMS Energy Common Stock for
each preferred security (equivalent to a purchase price of $40.80 per share of
CMS Energy Common Stock), subject to certain adjustments. We may, at our option,
cause the conversion rights of the holders of the preferred securities to expire
upon certain conditions.
Under the terms of the indenture, dated June 1, 1997, between us and The
Bank of New York, as trustee, as amended and supplemented, and the guarantee
agreement dated June 20, 1997 between us and The Bank of New York relating to
the preferred securities of CMS Energy Trust I pursuant to which the preferred
securities and the related 7 3/4% Convertible Subordinated Debentures due 2027
were issued, we have agreed that we will not, and will not cause any of our
subsidiaries to, declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to, any of our
capital stock, if at such time:
- an event has occurred, of which we have actual knowledge, that with
the giving of notice or the lapse of time, or both, would constitute
an event of default and in respect of which we have not taken
reasonable steps to cure;
- we are in default with respect to the payment of any obligations under
the relevant guarantee agreement; or
- we have given notice of our selection of an extension period as
provided in such indenture with respect to the subordinated debentures
and have not rescinded such notice, or such extension period (or any
extension thereof) is continuing.
DIVIDEND RESTRICTIONS UNDER MICHIGAN LAW
Michigan law prohibits payment of a dividend or a repurchase of capital
stock if, after giving it effect, a corporation would not be able to pay its
debts as they become due in the usual course of business, or its total assets
would be less than the sum of its total liabilities plus, unless the Articles of
Incorporation provide otherwise, the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution (including the rights of
holders of preferred stock, if any).
VOTING RIGHTS
9
Each holder of CMS Energy Common Stock is entitled to one vote for each
share of CMS Energy Common Stock held by such holder on each matter voted upon
by the shareholders. Such right to vote is not cumulative. A majority of the
votes cast by the holders of shares entitled to vote thereon is sufficient for
the adoption of any question presented, except that certain provisions of the
Articles of Incorporation relating to special shareholder meetings, the removal,
indemnification and liability of the Board of Directors and the requirements for
amending these provisions may not be amended, altered, changed or repealed
unless such amendment, alteration, change or repeal is approved by the
affirmative vote of at least 75% of the outstanding shares entitled to vote
thereon.
Under Michigan law, the approval of the holders of a majority of the
outstanding shares of CMS Energy Common Stock would be necessary for
authorizing, effecting or validating the merger or consolidation of CMS Energy
into or with any other corporation if such merger or consolidation would
adversely affect the powers or special rights of such CMS Energy Common Stock,
and to authorize any amendment to the Articles of Incorporation that would
increase or decrease the aggregate number of authorized shares of CMS Energy
Common Stock or alter or change the powers, preferences or special rights of the
shares of CMS Energy Common Stock so as to affect them adversely. The Articles
of Incorporation also provide that unless the vote or consent of a greater
number of shares shall then be required by law, the vote or consent of the
holders of a majority of the shares of CMS Energy Common Stock then outstanding
will be necessary for authorizing, effecting or validating the merger or
consolidation of CMS Energy into or with any other entity if such merger or
consolidation would adversely affect the powers or special rights of the CMS
Energy Common Stock, either directly by amendment to the Articles of
Incorporation or indirectly by requiring the holders of the CMS Energy Common
Stock to accept or retain, in such merger or consolidation, anything other than
(i) shares of such class or (ii) shares of the surviving or resulting
corporation, having, in either case, powers and special rights identical to
those of such common stock prior to such merger or consolidation. The effect of
these provisions may be to permit the holders of a majority of the outstanding
shares of CMS Energy Common Stock to block any such merger or amendment that
would adversely affect the powers or special rights of holders of such shares of
CMS Energy Common Stock.
PREEMPTIVE RIGHTS
The Articles of Incorporation provide that holders of CMS Energy Common
Stock will have no preemptive rights to subscribe for or purchase any additional
shares of the capital stock of CMS Energy of any class now or hereafter
authorized, or Preferred Stock, bonds, debentures, or other obligations or
rights or options convertible into or exchangeable for or entitling the holder
or owner to subscribe for or purchase any shares of capital stock, or any rights
to exchange shares issued for shares to be issued.
LIQUIDATION RIGHTS
In the event of the dissolution, liquidation or winding up of CMS Energy,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of CMS Energy and after there shall have been paid
or set apart for the holders of Preferred Stock the full preferential amounts
(including any accumulated and unpaid dividends) to which they are entitled, the
holders of CMS Energy Common Stock will be entitled to receive, on a per share
basis, the assets of CMS Energy remaining for distribution to the holders of CMS
Energy Common Stock. Neither the merger or consolidation of CMS Energy into or
with any other corporation, nor the merger or consolidation of any other
corporation into or with CMS Energy nor any sale, transfer or lease of all or
any part of the assets of CMS Energy, shall be deemed to be a dissolution,
liquidation or winding up for the purposes of this provision.
Because CMS Energy has subsidiaries that have debt obligations and other
liabilities of their own, CMS Energy's rights and the rights of its creditors
and its stockholders to participate in the distribution of assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
prior claims of the subsidiary's creditors, except to the extent that CMS Energy
may itself be a creditor with recognized claims against the subsidiary.
SUBDIVISION OR COMBINATION
If CMS Energy subdivides (by stock split, stock dividend or otherwise) or
combines (by reverse stock split or otherwise), the voting and liquidation
rights of shares of CMS Energy Common Stock will be appropriately adjusted so as
to avoid any dilution in aggregate voting or liquidation rights.
EXCHANGES
10
The Articles of Incorporation do not provide for either the mandatory or
optional exchange or redemption of CMS Energy Common Stock.
TRANSFER AGENT AND REGISTRAR
CMS Energy Common Stock is transferable at Consumers Energy Company, One
Energy Plaza, Jackson, Michigan 49201. CMS Energy is the registrar and transfer
agent for CMS Energy Common Stock.
PREFERRED STOCK
The authorized Preferred Stock may be issued without the approval of the
holders of CMS Energy Common Stock in one or more series, from time to time,
with each such series to have such designation, powers, preferences and
relative, participating, optional or other special rights, voting rights, if
any, and qualifications, limitations or restrictions thereof, as shall be stated
in a resolution providing for the issue of any such series adopted by CMS
Energy's Board of Directors. The Articles of Incorporation provide that holders
of Preferred Stock will not have any preemptive rights to subscribe for or
purchase any additional shares of the capital stock of CMS Energy of any class
now or hereafter authorized, or any Preferred Stock, bonds, debentures or other
obligations or rights or options convertible into or exchangeable for or
entitling the holder or owner to subscribe for or purchase any shares of capital
stock. The future issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of CMS Energy.
4.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Articles of Incorporation establish one series of preferred stock
designated as "4.50% Cumulative Convertible Preferred Stock" consisting of
5,000,000 shares with a liquidation preference of $50.00 per share (the
"CUMULATIVE CONVERTIBLE PREFERRED STOCK"). The Cumulative Convertible Preferred
Stock ranks prior to any series of our CMS Energy Common Stock as to the payment
of dividends and distribution of assets upon dissolution, liquidation or winding
up of CMS Energy, and is convertible into shares of CMS Energy Common Stock. The
holders of the Cumulative Convertible Preferred Stock have no preemptive rights.
DIVIDENDS
Holders of shares of Cumulative Convertible Preferred Stock will be
entitled to receive, when, as and if declared by our board of directors out of
funds legally available for payment, cumulative cash dividends at the rate per
annum of 4.50% per share on the liquidation preference thereof of $50.00 per
share (equivalent to $2.25 per annum per share). Dividends on the Cumulative
Convertible Preferred Stock will be payable quarterly on March 1, June 1,
September 1 and December 1 of each year at such annual rate, and shall
accumulate from the most recent date as to which dividends shall have been paid
or, if no dividends have been paid, from the issue date of the Cumulative
Convertible Preferred Stock, whether or not in any dividend period or periods
there have been funds legally available for the payment of such dividends.
Accumulated unpaid dividends accrue and cumulate dividends at the annual rate of
4.50%.
As long as any Cumulative Convertible Preferred Stock is outstanding, we
may not pay dividends or distributions on, or purchase, redeem or otherwise
acquire, subject to certain exceptions, shares of the CMS Energy Common Stock
unless all accumulated and unpaid dividends on the Cumulative Convertible
Preferred Stock have been paid or set aside for payment.
LIQUIDATION PREFERENCE
In the event of our voluntary or involuntary liquidation, winding-up or
dissolution, holders of Cumulative Convertible Preferred Stock will be entitled
to receive and to be paid out of our assets available for distribution to our
stockholders, before any payment or distribution is made to holders of junior
stock (including CMS Energy Common Stock), a liquidation preference in the
amount of $50.00 per share of Cumulative Convertible Preferred Stock, plus
accumulated and unpaid dividends on the shares to the date fixed for
liquidation, winding-up or dissolution. If, upon our voluntary or involuntary
liquidation, winding-up or dissolution, the amounts payable with respect to the
liquidation preference of the Cumulative Convertible Preferred Stock and all
parity stock are not paid in full, the holders of the Cumulative Convertible
Preferred Stock and the parity stock will share equally and ratably in any
distribution of our assets in proportion to the full liquidation preference and
accumulated and unpaid dividends to which they are entitled.
VOTING RIGHTS
11
Except as required by Michigan law and our Articles of Incorporation, the
holders of Cumulative Convertible Preferred Stock have no voting rights unless
dividends payable on the Cumulative Convertible Preferred Stock are in arrears
for six or more quarterly periods (whether or not consecutive). In that event,
the holders of the Cumulative Convertible Preferred Stock, voting as a single
class with the shares of any other preferred stock or preference securities
having similar voting rights that are exercisable, will be entitled at the next
regular or special meeting of our stockholders to elect two additional directors
(or one director if fewer than six directors comprise our board prior to
appointment) and the number of directors that comprise our board will be
increased by the number of directors so elected. These voting rights and the
terms of the directors so elected will continue until such time as the dividend
arrearage on the Cumulative Convertible Preferred Stock has been paid in full.
REDEMPTION
We cannot redeem shares of the Cumulative Convertible Preferred Stock.
MANDATORY CONVERSION
On or after December 5, 2008, we may, at our option, cause the Cumulative
Convertible Preferred Stock to be automatically converted into that number of
shares of CMS Energy Common Stock for each share of Cumulative Convertible
Preferred Stock equal to $50.00 (the liquidation preference) divided by the
applicable conversion rate. We may exercise our conversion right only if, for 20
trading days within any period of 30 consecutive trading days (including the
last trading day of such 30-day period), the closing price of the CMS Energy
Common Stock exceeds 130% of the then prevailing conversion price of the
Cumulative Convertible Preferred Stock.
CONVERSION RIGHTS
A holder of record of Cumulative Convertible Preferred Stock may convert
its shares of Cumulative Convertible Preferred Stock at any time into shares of
CMS Energy Common Stock under any of the following circumstances:
- during any calendar quarter (and only during such calendar quarter) if
the last reported sale price of CMS Energy Common Stock for at least
20 trading days during the period of 30 consecutive trading days
ending on the last trading day of the previous calendar quarter is
greater than or equal to 120% of the conversion price per share of CMS
Energy Common Stock on such last trading day;
- upon the occurrence of specified corporate transactions; and
- subject to certain exceptions, during the five business day period
immediately following any ten consecutive trading-day period in which
the trading price per share of Cumulative Convertible Preferred Stock
for each day of that period was less than 95% of the product of the
closing sale price of CMS Energy Common Stock and the applicable
conversion rate of such share of Cumulative Convertible Preferred
Stock; provided, however, a holder may not convert its shares of
Cumulative Convertible Preferred Stock if the average closing sale
price of CMS Energy Common Stock for such ten consecutive trading-day
period was between the then current conversion price on the Cumulative
Convertible Preferred Stock and 120% of the then applicable conversion
price on the Cumulative Convertible Preferred Stock.
For each share of Cumulative Convertible Preferred Stock surrendered for
conversion, holders will receive 5.0541 shares of CMS Energy Common Stock. This
represents an initial conversion price of $9.893 per share of CMS Energy Common
Stock. The conversion rate may be adjusted for certain reasons, but it will not
be adjusted for accumulated and unpaid dividends on the Preferred Stock.
PRIMARY SOURCE OF FUNDS OF CMS ENERGY; RESTRICTIONS ON SOURCES OF DIVIDENDS
The ability of CMS Energy to pay (i) dividends on its capital stock and
(ii) its indebtedness, including the Debt Securities, depends and will depend
substantially upon timely receipt of sufficient dividends or other distributions
from its subsidiaries, in particular Consumers and Enterprises. Each of
Consumers' and Enterprises' ability to pay dividends on its common stock depends
upon its revenues, earnings and other factors. Consumers' revenues and earnings
will depend substantially upon rates authorized by the Michigan Public Service
Commission (the "MPSC").
12
CMS Energy has pledged the common stock of its principal subsidiaries,
including Consumers, as security for bank credit facilities.
Consumers' Restated Articles of Incorporation ("ARTICLES") provide two
restrictions on its payment of dividends on its common stock. First, prior to
the payment of any common stock dividend, Consumers must reserve retained
earnings after giving effect to such dividend payment of at least (i) $7.50 per
share on all then outstanding shares of its preferred stock, (ii) in respect to
its Class A Preferred Stock, 7.5% of the aggregate amount established by its
Board of Directors to be payable on the shares of each series thereof in the
event of involuntary liquidation of Consumers and (iii) $7.50 per share on all
then outstanding shares of all other stock over which its preferred stock and
Class A Preferred Stock do not have preference as to the payment of dividends
and as to assets. Second, dividend payments during the 12 month period ending
with the month the proposed payment is to be paid are limited to: (i) 50% of net
income available for the payment of dividends during the base period, if the
ratio of common stock and surplus to total capitalization and surplus for 12
consecutive calendar months within the 14 calendar months immediately preceding
the proposed dividend payment (the "BASE PERIOD"), adjusted to reflect the
proposed dividend, is less than 20%; and (ii) 75% of net income available for
the payment of dividends during the base period if the ratio of common stock and
surplus to total capitalization and surplus for the base period, adjusted to
reflect the proposed dividend, is at least 20% but less than 25%.
In addition, Consumers' indenture dated as of January 1, 1996, between
Consumers and The Bank of New York, as trustee (the "PREFERRED SECURITIES
INDENTURE"), and a certain preferred securities guarantee by Consumers dated May
31, 2001 (the "CONSUMERS PREFERRED SECURITIES GUARANTEE"), in connection with
which the 9.00% Trust Preferred Securities of Consumers Energy Company Financing
IV (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 Third Amended
and Restated Credit Agreement dated as of May 18, 2005 among Consumers, JPMorgan
Chase Bank, N.A., as administrative agent, and the financial institutions named
therein. Pursuant to this loan agreement, so long as there exists no event of
default under the 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 respective
debts as they become due in the usual course of business, or its respective
total assets would be less than the sum of its respective total liabilities
plus, unless the respective Articles of Incorporation 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.
DEBT SECURITIES
The Debt Securities offered by this prospectus will be unsecured
obligations of CMS Energy and will be either senior or subordinated debt. Senior
Debentures will be issued under a senior debt indenture and Subordinated
Debentures will be issued under a subordinated debt indenture. The senior debt
indenture and the subordinated debt indenture are sometimes referred to in this
prospectus individually as an "INDENTURE" and collectively as the "INDENTURES."
The following briefly summarizes the material provisions of the indentures
and the Debt Securities. You should read the more detailed provisions of the
applicable indenture, including the defined terms, for provisions that may be
important to you. You should also read the particular terms of a series of Debt
Securities, which will be described in more detail in the applicable prospectus
supplement. Copies of the indentures may be obtained from CMS Energy or the
applicable trustee.
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Unless otherwise provided in the applicable prospectus supplement, the
trustee under the senior debt indenture will be J.P. Morgan Trust Company, N.A.
and the trustee under the subordinated debt indenture will be The Bank of New
York.
GENERAL
The indentures provide that Debt Securities of CMS Energy may be issued in
one or more series, with different terms, in each case as authorized from time
to time by CMS Energy.
Federal income tax consequences and other special considerations applicable
to any Debt Securities issued by CMS Energy at a discount will be described in
the applicable prospectus supplement.
Because CMS Energy is a holding company, the claims of creditors of CMS
Energy's subsidiaries will have a priority over CMS Energy's equity rights and
the rights of CMS Energy's creditors, including the holders of Debt Securities,
to participate in the assets of the subsidiary upon the subsidiary's
liquidation.
The applicable prospectus supplement relating to any series of Debt
Securities will describe the following terms, where applicable:
- the title of the Debt Securities;
- whether the Debt Securities will be senior or subordinated debt;
- the total principal amount of the Debt Securities;
- the percentage of the principal amount at which the Debt Securities
will be sold and, if applicable, the method of determining the price;
- the maturity date or dates;
- the interest rate or the method of computing the interest rate;
- the date or dates from which any interest will accrue, or how such
date or dates will be determined, and the interest payment date or
dates and any related record dates;
- the location where payments on the Debt Securities will be made;
- the terms and conditions on which the Debt Securities may be redeemed
at the option of CMS Energy;
- any obligation of CMS Energy to redeem, purchase or repay the Debt
Securities at the option of a holder upon the happening of any event
and the terms and conditions of redemption, purchase or repayment;
- any provisions for the discharge of CMS Energy's obligations relating
to the Debt Securities by deposit of funds or United States government
obligations;
- whether the Debt Securities are to trade in book-entry form and the
terms and any conditions for exchanging the global security in whole
or in part for paper certificates;
- any material provisions of the applicable indenture described in this
prospectus that do not apply to the Debt Securities;
- any additional amounts with respect to the Debt Securities that CMS
Energy will pay to a non-United States person because of any tax,
assessment or governmental charge withheld or deducted and, if so, any
option of CMS Energy to redeem the Debt Securities rather than paying
these additional amounts; and
- any other specific terms of the Debt Securities.
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CONCERNING THE TRUSTEES
Each of J.P. Morgan Trust Company, N.A., the trustee under the senior debt
indenture, and The Bank of New York, the trustee under the subordinated debt
indenture, is one of a number of banks with which CMS Energy and its
subsidiaries maintain ordinary banking relationships, including credit
facilities.
EXCHANGE AND TRANSFER
Debt Securities may be presented for exchange and registered Debt
Securities may be presented for registration of transfer at the offices and
subject to the restrictions set forth therein and in the applicable prospectus
supplement without service charge, but upon payment of any taxes or other
governmental charges due in connection therewith, subject to any limitations
contained in the applicable indenture. Debt Securities in bearer form and the
coupons appertaining thereto, if any, will be transferable by delivery.
PAYMENT
Distributions on the Debt Securities in registered form will be made at the
office or agency of the applicable trustee in the Borough of Manhattan, The City
of New York or its other designated office. However, at the option of CMS
Energy, payment of any interest may be made by check or by wire transfer.
Payment of any interest due on Debt Securities in registered form will be made
to the persons in whose name the Debt Securities are registered at the close of
business on the record date for such interest payments. Payments made in any
other manner will be specified in the prospectus supplement.
EVENTS OF DEFAULT
Each indenture provides that events of default regarding any series of Debt
Securities will be:
- failure to pay required interest on any Debt Security of such series
for 30 days;
- failure to pay principal other than a scheduled installment payment or
premium, if any, on any Debt Security of such series when due;
- failure to make any required scheduled installment payment for 30 days
on Debt Securities of such series;
- failure to perform for 90 days after notice any other covenant in the
relevant indenture other than a covenant included in the relevant
indenture solely for the benefit of a series of Debt Securities other
than such series;
- certain events of bankruptcy or insolvency, whether voluntary or not;
or
- entry of final judgments against CMS Energy or Consumers for more than
$25,000,000 which remain undischarged or unbonded for 60 days or a
default resulting in the acceleration of indebtedness of CMS Energy or
Consumers of more than $25,000,000, and the acceleration has not been
rescinded or annulled within 10 days after written notice of such
default as provided in the applicable indenture.
Additional events of default may be prescribed for the benefit of the
holders of a particular series of Debt Securities and will be described in the
prospectus supplement relating to those Debt Securities.
If an event of default regarding Debt Securities of any series issued under
the indentures should occur and be continuing, either the trustee or the holders
of 25% in the principal amount of outstanding Debt Securities of such series may
declare each Debt Security of that series due and payable.
Holders of a majority in principal amount of the outstanding Debt
Securities of any series will be entitled to control certain actions of the
trustee under the indentures and to waive past defaults regarding such series.
The trustee generally will not be requested, ordered or directed by any of the
holders of Debt Securities, unless one or more of such holders shall have
offered to the trustee reasonable security or indemnity.
Before any holder of any series of Debt Securities may institute action for
any remedy, except payment on such holder's Debt Security when due, the holders
of not less than 25% in principal amount of the Debt Securities of that series
outstanding must request
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the trustee to take action. Holders must also offer and give the satisfactory
security and indemnity against liabilities incurred by the trustee for taking
such action.
CMS Energy is required to annually furnish the relevant trustee a statement
as to CMS Energy's compliance with all conditions and covenants under the
applicable indenture. Each indenture provides that the relevant trustee may
withhold notice to the holders of the Debt Securities of any series of any
default affecting such series, except payment on holders' Debt Securities when
due, if it considers withholding notice to be in the interests of the holders of
the Debt Securities of such series.
CONSOLIDATION, MERGER OR SALE OF ASSETS
Each indenture provides that CMS Energy may consolidate with or merge into,
or sell, lease or convey its property as an entirety or substantially as an
entirety to, any other corporation if the new corporation assumes the
obligations of CMS Energy under the Debt Securities and the indentures and is
organized and existing under the laws of the United States of America, any U.S.
state or the District of Columbia.
MODIFICATION OF THE INDENTURE
Each indenture permits CMS Energy and the relevant trustee to enter into
supplemental indentures without the consent of the holders of the Debt
Securities to establish the form and terms of any series of securities under
that indenture.
Each indenture also permits CMS Energy and the relevant trustee, with the
consent of the holders of a majority in total principal amount of the Debt
Securities of all series then outstanding and affected (voting as one class), to
change in any manner the provisions of the applicable indenture or modify in any
manner the rights of the holders of the Debt Securities of each such affected
series. CMS Energy and the relevant trustee may not, without the consent of the
holder of each Debt Security affected, enter into any supplemental indenture to:
- change the time of payment of the principal;
- reduce the principal amount of such Debt Security;
- reduce the rate or change the time of payment of interest on such Debt
Security;
- reduce the amount payable on any securities issued originally at a
discount upon acceleration or provable in bankruptcy; or
- impair the right to institute suit for the enforcement of any payment
on any Debt Security when due.
In addition, no such modification may reduce the percentage in principal
amount of the Debt Securities of the affected series, the consent of whose
holders is required for any such modification or for any waiver provided for in
the applicable indenture.
Prior to the acceleration of the maturity of any Debt Security, the
holders, voting as one class, of a majority in total principal amount of the
Debt Securities with respect to which a default or event of default shall have
occurred and be continuing may on behalf of the holders of all such affected
Debt Securities waive any past default or event of default and its consequences,
except a default or an event of default in respect of a covenant or provision of
the applicable indenture or of any Debt Security which cannot be modified or
amended without the consent of the holder of each Debt Security affected.
DEFEASANCE, COVENANT DEFEASANCE AND DISCHARGE
Each indenture provides that, at the option of CMS Energy:
- CMS Energy will be discharged from all obligations in respect of the
Debt Securities of a particular series then outstanding (except for
certain obligations to register the transfer of or exchange the Debt
Securities of such series, to replace stolen, lost or mutilated Debt
Securities of such series, to maintain paying agencies and to maintain
the trust described below); or
- CMS Energy need not comply with certain restrictive covenants of the
relevant indenture (including those described under "CONSOLIDATION,
MERGER OR SALE OF ASSETS"),
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if CMS Energy in each case irrevocably deposits in trust with the relevant
trustee money and/or securities backed by the full faith and credit of the
United States which, through the payment of the principal thereof and the
interest thereon in accordance with their terms, will provide money in an amount
sufficient to pay all the principal and interest on the Debt Securities of such
series on the stated maturities of such Debt Securities in accordance with the
terms thereof.
To exercise this option, CMS Energy is required to deliver to the relevant
trustee an opinion of independent counsel to the effect that:
- the exercise of such option would not cause the holders of the Debt
Securities of such series to recognize income, gain or loss for United
States federal income tax purposes as a result of such defeasance, and
such holders will be subject to United States federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such defeasance had not occurred; and
- in the case of a discharge as described above, such opinion is to be
accompanied by a private letter ruling to the same effect received
from the Internal Revenue Service, a revenue ruling to such effect
pertaining to a comparable form of transaction published by the
Internal Revenue Service or appropriate evidence that since the date
of the applicable indenture there has been a change in the applicable
federal income tax law.
In the event:
- CMS Energy exercises its option to effect a covenant defeasance with
respect to the Debt Securities of any series as described above,
- the Debt Securities of such series are thereafter declared due and
payable because of the occurrence of any event of default other than
an event of default caused by failing to comply with the covenants
which are defeased, or
- the amount of money and securities on deposit with the relevant
trustee would be insufficient to pay amounts due on the Debt
Securities of such series at the time of the acceleration resulting
from such event of default,
CMS Energy would remain liable for such amounts.
GOVERNING LAW
Each indenture and the Debt Securities will be governed by, and construed
in accordance with, the laws of the State of Michigan unless the laws of another
jurisdiction shall mandatorily apply.
SENIOR DEBENTURES
The Senior Debentures will be issued under the senior debt indenture and
will rank on an equal basis with all other unsecured debt of CMS Energy except
subordinated debt.
SUBORDINATED DEBENTURES
The Subordinated Debentures will be issued under the subordinated debt
indenture and will rank subordinated and junior in right of payment, to the
extent set forth in the subordinated debt indenture, to all Senior Indebtedness
(as defined below) of CMS Energy.
If CMS Energy defaults in the payment of any distributions on any Senior
Indebtedness when it becomes due and payable after any applicable grace period,
then, unless and until the default is cured or waived or ceases to exist, CMS
Energy cannot make a payment on account of or redeem or otherwise acquire the
Subordinated Debentures. The subordinated debt indenture provisions described in
this paragraph, however, do not prevent CMS Energy from making sinking fund
payments in Subordinated Debentures acquired prior to the maturity of Senior
Indebtedness or, in the case of default, prior to such default and notice
thereof. If there is any insolvency, bankruptcy, liquidation or other similar
proceeding relating to CMS Energy, its creditors or its property, then all
Senior Indebtedness must be paid in full before any payment may be made to any
holders of Subordinated Debentures. Holders of
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Subordinated Debentures must return and deliver any payments received by them,
other than in a plan of reorganization or through a defeasance trust as
described above, directly to the holders of Senior Indebtedness until all Senior
Indebtedness is paid in full.
"SENIOR INDEBTEDNESS" means distributions on the following, whether
outstanding on the date of execution of the subordinated debt indenture or
thereafter incurred, created or assumed:
- indebtedness of CMS Energy for money borrowed by CMS Energy or
evidenced by debentures (other than the Subordinated Debentures),
notes, bankers' acceptances or other corporate debt securities or
similar instruments issued by CMS Energy;
- obligations of CMS Energy with respect to letters of credit;
- all indebtedness of others of the type referred to in the two
preceding clauses assumed by or guaranteed in any manner by CMS Energy
or in effect guaranteed by CMS Energy; or
- renewals, extensions or refundings of any of the indebtedness referred
to in the preceding three clauses unless, in the case of any
particular indebtedness, renewal, extension or refunding, under the
express provisions of the instrument creating or evidencing the same
or the assumption or guarantee of the same, or pursuant to which the
same is outstanding, such indebtedness or such renewal, extension or
refunding thereof is not superior in right of payment to the
subordinated debt securities.
The subordinated debt indenture does not limit the total amount of Senior
Indebtedness that may be issued.
CERTAIN COVENANTS
If Debt Securities are issued to a Trust or a trustee of such Trust in
connection with the issuance of Trust Preferred Securities by such Trust, CMS
Energy will covenant that it will not, and it will not cause any of its
subsidiaries to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
CMS Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu (in the case of Subordinated Debentures) with or junior (in the
case of Senior and Subordinated Debentures) to that Debt Security (other than
(a) any dividend, redemption, liquidation, interest, principal or guarantee
payment by CMS Energy where the payment is made by way of securities (including
capital stock) that rank pari passu with or junior to the securities on which
such dividend, redemption, liquidation, interest, principal or guarantee payment
is being made, (b) payments under the Guarantees, (c) purchases of CMS Energy
Common Stock related to the issuance of CMS Energy Common Stock under any of CMS
Energy's benefit plans for its directors, officers or employees, (d) as a result
of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock and (e) the purchase of fractional
interests in shares of CMS Energy's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged) if at such time (i) there shall have occurred any event of which CMS
Energy has actual knowledge that (a) with the giving of notice or the lapse of
time, or both, would constitute an event of default under the indentures and (b)
in respect of which CMS Energy shall not have taken reasonable steps to cure,
(ii) CMS Energy shall be in default with respect to its payment of any
obligations under the Guarantees or (iii) CMS Energy shall have given notice of
its selection of an extension period as provided in the indentures with respect
to the Debt Securities and shall not have rescinded such notice, or such
extension period, or any extension thereof, shall be continuing. CMS Energy will
also covenant (i) for so long as Trust Preferred Securities are outstanding, not
to convert the Debt Securities except pursuant to a notice of conversion
delivered to the Conversion Agent (as defined in the indentures) by a holder of
Trust Preferred Securities, (ii) to maintain directly or indirectly 100%
ownership of the Common Securities, provided that certain successors which are
permitted pursuant to the indentures may succeed to CMS Energy's ownership of
the Common Securities, (iii) not to voluntarily terminate, wind-up or liquidate
such Trust, except (a) in connection with a distribution of the Debt Securities
to the holders of the Trust Preferred Securities in liquidation of such Trust or
(b) in connection with certain mergers, consolidations or amalgamations
permitted by the Trust Agreement, (iv) to maintain the reservation for issuance
of the number of shares of CMS Energy Common Stock that would be required from
time to time upon the conversion of all the Debt Securities then outstanding,
(v) to use its reasonable efforts, consistent with the terms and provisions of
the Trust Agreement, to cause such Trust to remain classified as a grantor trust
and not as an association taxable as a corporation for United States federal
income tax purposes and (vi) to deliver shares of CMS Energy Common Stock upon
an election by the holders of the Trust Preferred Securities to convert such
Trust Preferred Securities into CMS Energy Common Stock.
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As part of the Guarantees, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Trust Preferred Securities into or for CMS Energy Common Stock, Senior
Debentures or Subordinated Debentures.
CONVERSION RIGHTS
If the prospectus supplement provides, the holders of Debt Securities may
convert such Debt Securities into CMS Energy Common Stock, as defined herein
(see "Description of Securities -- Common Stock"), at the option of the holders
at the principal amount thereof, or of such portion thereof, at any time during
the period specified in the prospectus supplement, at the conversion price or
conversion rate specified in the prospectus supplement; except that, with
respect to any Debt Securities (or portion thereof) called for redemption, such
conversion right shall terminate at the close of business on the fifteenth day
prior to the date fixed for redemption of such Debt Security, unless CMS Energy
shall default in payment of the amount due upon redemption thereof.
The conversion privilege and conversion price or conversion rate will be
adjusted in certain events, including if CMS Energy:
- pays a dividend or makes a distribution in shares of CMS Energy Common
Stock;
- subdivides its outstanding shares of CMS Energy Common Stock into a
greater number of shares;
- combines its outstanding shares of CMS Energy Common Stock into a
smaller number of shares;
- pays a dividend or makes a distribution on its CMS Energy Common Stock
other than in shares of its CMS Energy Common Stock;
- issues by reclassification of its shares of CMS Energy Common Stock
any shares of its capital stock;
- issues any rights or warrants to all holders of shares of its CMS
Energy Common Stock entitling them (for a period expiring within 45
days, or such other period as may be specified in the prospectus
supplement) to purchase shares of CMS Energy Common Stock (or
Convertible Securities as defined in the indentures) at a price per
share less than the Average Market Price (as defined in the
indentures) per share for such CMS Energy Common Stock; or
- distributes to all holders of shares of its CMS Energy Common Stock
any assets or Debt Securities or any rights or warrants to purchase
securities, provided that no adjustment shall be made under the last
two bullet points above if the adjusted conversion price would be
higher than, or the adjusted conversion rate would be less than, the
conversion price or conversion rate, as the case may be, in effect
prior to such adjustment.
CMS Energy may reduce the conversion price or increase the conversion rate,
temporarily or otherwise, by any amount but in no event shall such adjusted
conversion price or conversion rate result in shares of CMS Energy Common Stock
being issuable upon conversion of the Debt Securities if converted at the time
of such adjustment at an effective conversion price per share less than the par
value of the CMS Energy Common Stock at the time such adjustment is made. No
adjustments in the conversion price or conversion rate need be made unless the
adjustment would require an increase or decrease of at least one percent (1%) in
the initial conversion price or conversion rate. Any adjustment that is not made
shall be carried forward and taken into account in any subsequent adjustment.
The foregoing conversion provisions may be modified to the extent set forth in
the prospectus supplement.
TRUST PREFERRED SECURITIES
GENERAL
Each Trust may issue, from time to time, Trust Preferred Securities having
terms described in the applicable prospectus supplement. The Trust Agreement of
each Trust will authorize the establishment of no more than one series of Trust
Preferred Securities, having such terms, including distributions, redemption,
voting, liquidation rights and such other preferred, deferred or other special
rights or such rights or restrictions as shall be set forth therein or otherwise
established by the relevant Trust's trustees. Reference is made to the
prospectus supplement relating to the Trust Preferred Securities for specific
terms, including:
- the distinctive designation and the number of Trust Preferred
Securities to be offered which will represent undivided beneficial
interests in the assets of the Trust;
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- the annual distribution rate and the dates or date upon which such
distributions will be paid, provided, however, distributions on the
Trust Preferred Securities will be paid quarterly in arrears to
holders of Trust Preferred Securities as of a record date on which the
Trust Preferred Securities are outstanding;
- whether holders can convert the Trust Preferred Securities into shares
of CMS Energy Common Stock;
- whether distributions on Trust Preferred Securities would be deferred
during any deferral of interest payments on the Debt Securities,
provided, however, that no such deferral, including extensions, if
any, may exceed 20 consecutive quarters nor extend beyond the stated
maturity date of the Debt Securities, and at the end of any such
deferrals, CMS Energy shall make all interest payments then accrued or
deferred and unpaid (including any compounded interest);
- the amount of any liquidation preference;
- the obligation, if any, of the Trust to redeem Trust Preferred
Securities through the exercise by CMS Energy of an option on the
corresponding Debt Securities and the price or prices at which, the
period or periods within which and the terms and conditions upon which
Trust Preferred Securities shall be purchased or redeemed, in whole or
in part, pursuant to such obligation;
- the period or periods within which and the terms and conditions, if
any, including the price or prices or the rate or rates of conversion
or exchange and the terms and conditions of any adjustments thereof,
upon which the Trust Preferred Securities shall be convertible or
exchangeable at the option of the holder of the Trust Preferred
Securities or other property or cash;
- the voting rights, if any, of the Trust Preferred Securities in
addition to those required by law and in the Trust Agreement, or set
forth under a Guarantee (as defined below);
- the additional payments, if any, which the Trust will pay as a
distribution as necessary so that the net amounts reserved by the
Trust and distributable to the holders of the Trust Preferred
Securities, after all taxes, duties, assessments or governmental
charges of whatever nature (other than withholding taxes) have been
paid will not be less than the amount that would have been reserved
and distributed by the Trust, and the amount the holders of the Trust
Preferred Securities would have reserved, had no such taxes, duties,
assessments or governmental charges been imposed;
- the terms and conditions, if any, upon which the Debt Securities may
be distributed to holders of Trust Preferred Securities; and
- any other relative rights, powers, preferences, privileges,
limitations or restrictions of the Trust Preferred Securities not
inconsistent with the Trust Agreement or applicable law. All Trust
Preferred Securities offered hereby will be irrevocably guaranteed by
CMS Energy, on a senior or subordinated basis, as applicable, and to
the extent set forth below under "Effect of Obligations Under the Debt
Securities and the Guarantees -- The Guarantees." Any applicable
federal income tax considerations applicable to any offering of the
Trust Preferred Securities will be described in the prospectus
supplement relating thereto. The aggregate number of Trust Preferred
Securities which the Trust shall have authority to issue will be
pursuant to the terms of the Trust Agreement.
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EFFECT OF OBLIGATIONS UNDER THE DEBT SECURITIES
AND THE GUARANTEES
As set forth in the Trust Agreement, the sole purpose of each Trust is to
issue the Trust Securities evidencing undivided beneficial interests in the
assets of each Trust, and to invest the proceeds from such issuance and sale to
acquire directly the Debt Securities from CMS Energy.
As long as payments of interest and other payments are made when due on the
Debt Securities, such payments will be sufficient to cover distributions and
payments due on the Trust Securities because of the following factors:
- the aggregate principal amount of Debt Securities will be equal to the
sums of the aggregate stated liquidation amount of the Trust
Securities;
- the interest rate and the interest and other payment dates on the Debt
Securities will match the distribution rate and distribution and other
payment dates for the Trust Securities;
- CMS Energy shall pay, and the Trust shall not be obligated to pay,
directly or indirectly, all costs, expenses, debt and obligations of
the Trust (other than with respect to the Trust Securities); and
- the Trust Agreement further provides that the trustees shall not take
or cause or permit the Trust to, among other things, engage in any
activity that is not consistent with the purposes of the Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Trust Preferred Securities (to the extent funds
therefor are available) are guaranteed by CMS Energy as and to the extent set
forth under "The Guarantees" below. If CMS Energy does not make interest
payments on the Debt Securities purchased by the Trust, it is expected that the
Trust will not have sufficient funds to pay distributions on the Trust Preferred
Securities. The Guarantees do not apply to any payment of distributions unless
and until the Trust has sufficient funds for the payment of distributions and
other payments on the Trust Preferred Securities only if and to the extent that
CMS Energy has made a payment of interest or principal on the Debt Securities
held by the Trust as its sole asset. The Guarantees, when taken together with
CMS Energy's obligations under the Debt Securities and the indenture and its
obligations under the Trust Agreement, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Trust's securities), provide a full and unconditional guarantee of amounts on
the Trust Preferred Securities.
If CMS Energy fails to make interest or other payments on the Debt
Securities when due (taking account of any extension period), the Trust
Agreement provides a mechanism whereby the holders of the Trust Preferred
Securities may direct a Property Trustee to enforce its rights under the Debt
Securities. If a Property Trustee fails to enforce its rights under the Debt
Securities, a holder of Trust Preferred Securities may institute a legal
proceeding against CMS Energy to enforce a Property Trustee's rights under the
Debt Securities without first instituting any legal proceeding against a
Property Trustee or any other person or entity. Notwithstanding the foregoing,
if an event of default has occurred and is continuing under the Trust Agreement,
and such event is attributable to the failure of CMS Energy to pay interest or
principal on the Debt Securities on the date such interest or principal is
otherwise payable (or in the case of redemption on the redemption date), then a
holder of Trust Preferred Securities may institute legal proceedings directly
against CMS Energy to obtain payment. If CMS Energy fails to make payments under
the Guarantees, the Guarantees provide a mechanism whereby the holders of the
Trust Preferred Securities may direct a Guarantee Trustee to enforce its rights
thereunder. Any holder of Trust Preferred Securities may institute a legal
proceeding directly against CMS Energy to enforce a Guarantee Trustee's rights
under a Guarantee without first instituting a legal proceeding against the
Trust, the Guarantee Trustee, or any other person or entity.
THE GUARANTEES
Set forth below is a summary of information concerning the Guarantees that
will be executed and delivered by CMS Energy for the benefit of the holders,
from time to time, of the Trust Preferred Securities. Each Guarantee will be
qualified as an indenture under the Trust Indenture Act of 1939. Either The Bank
of New York, or J.P. Morgan Trust Company, N.A., each an independent trustee,
will act as indenture trustee under the Guarantees for the purpose of compliance
with the provisions of the Trust Indenture Act of 1939. This summary does not
purport to be complete and is subject in all respects to the provisions of, and
is qualified in its entirety by reference to, the Guarantees, which are filed as
exhibits to the Registration Statement of which this prospectus forms a part.
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GENERAL
CMS Energy will irrevocably agree to pay in full, on a senior or
subordinated basis, as applicable, to the extent set forth herein, the Guarantee
Payments (as defined below) to the holders of the Trust Preferred Securities, as
and when due, regardless of any defense, right of set-off or counterclaim that
the Trust may have or assert other than the defense of payment. The following
payments with respect to the Trust Preferred Securities, to the extent not paid
by or on behalf of the Trust (the "GUARANTEE PAYMENTS"), will be subject to a
Guarantee: (i) any accumulated and unpaid distributions required to be paid on
the Trust Preferred Securities, to the extent that the Trust has funds on hand
available therefor at such time; (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption to the extent that the Trust
has funds on hand available therefor at such time; or (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Trust (unless the Debt
Securities are distributed to holders of the Trust Preferred Securities), the
lesser of (a) the liquidation distribution, to the extent that the Trust has
funds on hand available therefor at such time, and (b) the amount of assets of
the Trust remaining available for distribution to holders of Trust Preferred
Securities. CMS Energy's obligation to make a Guarantee Payment may be satisfied
by direct payment of the required amounts of CMS Energy to the holders of the
Trust Preferred Securities or by causing the Trust to pay such amount to such
holders.
Such Guarantees will be irrevocable guarantees, on a senior or subordinated
basis, as applicable, of the Trust's obligations under the Trust Preferred
Securities, but will apply only to the extent that the Trust has funds
sufficient to make such payments, and are not guarantees of collection. If CMS
Energy does not make interest payments on the Debt Securities held by the Trust,
the Trust will not be able to pay distributions on the Trust Preferred
Securities and will not have funds legally available therefor.
CMS Energy has, through the Guarantees, the Trust Agreements, the Senior
Debentures, the Subordinated Debentures, the indentures and the related Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed all
of the Trust's obligations under the Trust Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such Guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Trust Preferred
Securities.
CMS Energy has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities to
the same extent as the Guarantees, except that upon the occurrence and during
the continuation of a Trust Agreement event of default, holders of Trust
Preferred Securities shall have priority over holders of Common Securities with
respect to distributions and payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF CMS ENERGY
CMS Energy will covenant in each Guarantee that if and so long as (i) the
Trust is the holder of all the Debt Securities, (ii) a Tax Event (as defined in
the Guarantee) in respect of the Trust has occurred and is continuing and (iii)
CMS Energy has elected, and has not revoked such election, to pay Additional
Sums (as defined in the Guarantee) in respect of the Trust Preferred Securities
and Common Securities, CMS Energy will pay to the Trust such Additional Sums.
CMS Energy will also covenant that it will not, and it will not cause any of its
subsidiaries to: (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
CMS Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu (in the case of Subordinated Debentures with or junior in the
case of the Senior and Subordinated Debentures) to the Debt Securities (other
than (a) any dividend, redemption, liquidation, interest, principal or guarantee
payment by CMS Energy where the payment is made by way of securities (including
capital stock) that rank pari passu with or junior to the securities on which
such dividend, redemption, liquidation, interest, principal or guarantee payment
is being made, (b) payments under the Guarantees, (c) purchases of CMS Energy
Common Stock related to the issuance of CMS Energy Common Stock under any of CMS
Energy's benefit plans for its directors, officers or employees, (d) as a result
of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock and (e) the purchase of fractional
interests in shares of CMS Energy's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged) if at such time (i) there shall have occurred any event of which CMS
Energy has actual knowledge that (a) with the giving of notice or the lapse of
time, or both, would constitute an event of default and (b) in respect of which
CMS Energy shall not have taken reasonable steps to cure, (ii) CMS Energy shall
be in default with respect to its payment of any obligations under the Guarantee
or (iii) CMS Energy shall have given notice of its selection of an extension
period as provided in the indentures with respect to the Debt Securities and
shall not have rescinded such notice, or such extension period, or any extension
thereof, shall be continuing. CMS Energy also will covenant to (i) for so long
as Trust Preferred Securities are outstanding, not convert Debt Securities
except pursuant to a notice of conversion delivered to the Conversion Agent by a
holder of Trust Preferred Securities, (ii) maintain directly or indirectly 100%
ownership of the Common Securities, provided that
22
certain successors which are permitted pursuant to the indentures may succeed to
CMS Energy's ownership of the Common Securities, (iii) not voluntarily
terminate, wind-up or liquidate the Trust, except (a) in connection with a
distribution of the Debt Securities to the holders of the Trust Preferred
Securities in liquidation of the Trust or (b) in connection with certain
mergers, consolidations or amalgamations permitted by the Trust Agreement, (iv)
maintain the reservation for issuance of the number of shares of CMS Energy
Common Stock that would be required from time to time upon the conversion of all
the Debt Securities then outstanding, (v) use its reasonable efforts, consistent
with the terms and provisions of the Trust Agreement, to cause the Trust to
remain classified as a grantor trust and not as an association taxable as a
corporation for United States federal income tax purposes and (vi) deliver
shares of CMS Energy Common Stock upon an election by the holders of the Trust
Preferred Securities to convert such Trust Preferred Securities into CMS Energy
Common Stock.
As part of the Guarantees, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Trust Preferred Securities into or for CMS Energy Common Stock, Senior
Debentures or Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the Trust Preferred Securities (in which case no vote
will be required), the Guarantees may not be amended without the prior approval
of the holders of a majority in aggregate liquidation amount of such outstanding
Trust Preferred Securities. All guarantees and agreements contained in the
Guarantees shall bind the successors, assigns, receivers, trustees and
representatives of CMS Energy and shall inure to the benefit of the holders of
the Trust Preferred Securities then outstanding.
TERMINATION OF THE GUARANTEES
The Guarantees will terminate and be of no further force and effect upon
full payment of the redemption price of the Trust Preferred Securities, upon
full payment of the amounts payable upon liquidation of the Trust, upon the
distribution, if any, of CMS Energy Common Stock to the holders of Trust
Preferred Securities in respect of the conversion of all such holders' Trust
Preferred Securities into CMS Energy Common Stock or upon distribution of the
Debt Securities to the holders of the Trust Preferred Securities in exchange for
all of the Trust Preferred Securities. The Guarantees will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of Trust Preferred Securities must restore payment of any sums paid under such
Trust Preferred Securities or the Guarantees.
EVENTS OF DEFAULT
An event of default under a Guarantee will occur upon the failure of CMS
Energy to perform any of its payment or other obligations thereunder. The
holders of a majority in aggregate liquidation amount of the Trust Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to a Guarantee Trustee in respect of a
Guarantee or to direct the exercise of any trust or power conferred upon a
Guarantee Trustee under the Guarantees.
If a Guarantee Trustee fails to enforce a Guarantee, any holder of the
Trust Preferred Securities may institute a legal proceeding directly against CMS
Energy to enforce its rights under such Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person or
entity. In addition, any record holder of Trust Preferred Securities shall have
the right, which is absolute and unconditional, to proceed directly against CMS
Energy to obtain Guarantee Payments, without first waiting to determine if the
Guarantee Trustee has enforced a Guarantee or instituting a legal proceeding
against the Trust, the Guarantee Trustee or any other person or entity. CMS
Energy has waived any right or remedy to require that any action be brought just
against the Trust, or any other person or entity before proceeding directly
against CMS Energy.
CMS Energy, as guarantor, is required to file annually with each Guarantee
Trustee a certificate as to whether or not CMS Energy is in compliance with all
the conditions and covenants applicable to it under the Guarantees.
STATUS OF THE GUARANTEES
The Guarantees will constitute unsecured obligations of CMS Energy and will
rank equal to or subordinate and junior in right of payment to all other
liabilities of CMS Energy, as applicable. The Guarantees will rank pari passu
with or senior to, as applicable, any guarantee now or hereafter entered into by
CMS Energy in respect of any preferred or preference stock of any affiliate of
CMS Energy.
23
The Guarantees will constitute a guarantee of payment and not of collection
which means that the guaranteed party may institute a legal proceeding directly
against the guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity. The
Guarantees will be held for the benefit of the holders of the Trust Preferred
Securities. The Guarantees will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust or upon
distribution of the Debt Securities to the holders of the Trust Preferred
Securities. The Guarantees do not place a limitation on the amount of additional
indebtedness that may be incurred by CMS Energy or any of its subsidiaries.
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
CMS Energy may issue Stock Purchase Contracts, representing contracts
obligating holders to purchase from CMS Energy, and CMS Energy to sell to the
holders, a specified number of shares of CMS Energy Common Stock at a future
date or dates. The price per share of CMS Energy Common Stock may be fixed at
the time the Stock Purchase Contracts are issued or may be determined by
reference to a specific formula set forth in the Stock Purchase Contracts. The
Stock Purchase Contracts may be issued separately or as part of Stock Purchase
Units consisting of a Stock Purchase Contract and Senior Debentures,
Subordinated Debentures, Trust Preferred Securities or debt obligations of third
parties, including U.S. Treasury securities, securing the holders' obligations
to purchase the Common Stock under the Stock Purchase Contracts. The Stock
Purchase Contracts may require CMS Energy to make periodic payments to the
holders of the Stock Purchase Units or vice versa, and such payments may be
unsecured or refunded on some basis. The Stock Purchase Contracts may require
holders to secure their obligations thereunder in a specified manner.
The applicable prospectus supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units. The description in the prospectus
supplement will not purport to be complete and will be qualified in its entirety
by reference to the Stock Purchase Contracts, and, if applicable, collateral
arrangements and depositary arrangements, relating to such Stock Purchase
Contracts or Stock Purchase Units.
PLAN OF DISTRIBUTION
CMS Energy and/or the Trusts may sell the Offered Securities: (i) through
the solicitation of proposals of underwriters or dealers to purchase the Offered
Securities; (ii) through underwriters or dealers on a negotiated basis; (iii)
directly to a limited number of purchasers or to a single purchaser; or (iv)
through agents. The prospectus supplement with respect to any Offered Securities
will set forth the terms of such offering, including: the name or names of any
underwriters, dealers or agents; the purchase price of the Offered Securities
and the proceeds to CMS Energy and/or the Trust from such sale; any underwriting
discounts and commissions and other items constituting underwriters'
compensation; any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers and any securities exchange on which
such Offered Securities may be listed. Any initial public offering price,
discounts or concessions allowed or reallowed or paid to dealers may be changed
from time to time.
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Offered Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Offered Securities will be
named in the prospectus supplement relating to such offering and, if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of such prospectus supplement. Unless otherwise set forth
in the prospectus supplement relating thereto, the obligations of the
underwriters to purchase the Offered Securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all the
Offered Securities if any are purchased.
CMS Energy and/or the Trusts may sell Offered Securities to dealers as
principals. The dealers may then resell such Offered Securities to the public at
varying prices to be determined by such dealers at the time of resale. The names
of the dealers and the terms of the transaction will be set forth in the
prospectus supplement relating thereto.
The Offered Securities may be sold directly by CMS Energy and/or the Trusts
to institutional investors or others, who may be deemed to be underwriters
within the meaning of the Securities Act of 1933, as amended (the "SECURITIES
ACT"), with respect to any resale thereof. The terms of any such sales will be
described in the prospectus supplement relating thereto.
The CMS Energy Common Stock may be offered other than through the
facilities of a national securities exchange and other than to or through a
market maker other than on an exchange.
24
Agents, dealers and underwriters may be entitled under agreements with CMS
Energy and/or the Trusts to indemnification by CMS Energy and/or the Trusts
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments which such agents, dealers or
underwriters may be required to make in respect thereof. Agents, dealers and
underwriters may be customers of, engage in transactions with, or perform
services for, CMS Energy and/or the Trusts in the ordinary course of business.
The Offered Securities may also be offered and sold, if so indicated in the
applicable prospectus supplement, in connection with a remarketing upon their
purchase, in accordance with a redemption or repayment pursuant to their terms,
or otherwise, by one or more firms ("REMARKETING FIRMS"), acting as principals
for their own accounts or as agents for CMS Energy and/or the Trusts. Any
remarketing firm will be identified and the terms of its agreement, if any, with
its compensation will be described in the applicable prospectus supplement.
Remarketing firms may be deemed to be underwriters, as such term is defined in
the Securities Act, in connection with the Offered Securities remarketed
thereby. Remarketing firms may be entitled under agreements which may be entered
into with CMS Energy and/or the Trusts to indemnification or contribution by CMS
Energy and/or the Trusts against certain civil liabilities, including
liabilities under the Securities Act, and may be customers of, engage in
transactions with, or perform services for, CMS Energy and its subsidiaries in
the ordinary course of business.
The Offered Securities may or may not be listed on a national securities
exchange. Reference is made to the prospectus supplement with regard to such
matter. No assurance can be given that there will be a market for any of the
Offered Securities.
We may engage J.P. Morgan Securities Inc. ("JPMS") or Brinson Patrick
Securities Corporation ("BRINSON") (JPMS and Brinson collectively, the "AGENTS")
to act as agent or principal for offerings from time to time of shares of CMS
Energy Common Stock in one or more placements pursuant to the terms of a
distribution agreement between us and either JPMS or Brinson. The terms of sales
to or through the Agents pursuant to a distribution agreement will be set out in
more detail in a prospectus supplement to this prospectus. When acting as agent,
the Agents will use commercially reasonable efforts to sell the shares pursuant
to the terms agreed to with us, including the number of shares to be offered in
the placement and any minimum price below which sales may not be made. The
Agents, in their capacity as agent or principal, could arrange for or make sales
in privately negotiated transactions, at the market in the existing trading
market for CMS Energy Common Stock, including sales made to or through a market
maker or through an electronic communications network, or in any other manner
that may be deemed to be an "at-the-market offering" as defined in Rule 415
promulgated under the Securities Act and/or any other method permitted by law.
CMS Energy Common Stock sold through the Agents in any at-the-market
offerings will be sold at prices related to the prevailing market price for such
securities, and therefore exact figures regarding proceeds that will be raised
or commissions to be paid are impossible to determine. We will report at least
quarterly the number of shares of CMS Energy Common Stock sold to or through the
Agents in at-the-market offerings, the net proceeds to us and the compensation
paid by us to the Agents in connection with such sales of CMS Energy Common
Stock. Pursuant to the terms of a distribution agreement with the Agents or any
other distribution agreement we may enter into, we also may agree to sell, and
the relevant underwriters or agents may agree to solicit offers to purchase,
blocks of CMS Energy Common Stock or other securities. The total number of
shares that we may sell in at-the-market offerings will be disclosed in a
prospectus supplement to this prospectus.
In connection with the offering of the securities, certain underwriters and
selling group members and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the applicable
securities. These transactions may include stabilization transactions effected
in accordance with Rule 104 of Regulation M promulgated by the SEC pursuant to
which these persons may bid for or purchase securities for the purpose of
stabilizing their market price.
If indicated in the applicable prospectus supplement, we will authorize
underwriters, dealers or agents to solicit offers by institutional investors to
purchase securities from us pursuant to contracts providing for payment and
delivery at a future date. In all cases, these purchasers must be approved by
us. Unless otherwise set forth in the applicable prospectus supplement, the
obligations of any purchaser under any of these contracts will not be subject to
any conditions, except that the purchase of the securities must not at the time
of delivery be prohibited under the laws of any jurisdiction to which that
purchaser is subject and if securities also are being sold to underwriters, we
must have sold to these underwriters the securities not subject to delayed
delivery. Underwriters and other agents will not have any responsibility in
respect of the validity or performance of these contracts.
Under the securities laws of some states, the securities registered by the
registration statement that includes this prospectus may be sold in those states
only through registered or licensed brokers or dealers. Any person participating
in the distribution of the securities registered under the registration
statement that includes this prospectus will be subject to applicable provisions
of the Exchange Act, and the applicable rules and regulations of the SEC,
including, among others, Regulation M noted above, which may limit the timing
25
of purchases and sales of any of the securities by any such person. Furthermore,
Regulation M may restrict the ability of any person engaged in the distribution
of the securities to engage in market-making activities with respect to the
securities. These restrictions may affect the marketability of the securities
and the ability of any person or entity to engage in market-making activities
with respect to the securities.
We may enter into derivative transactions with third parties, or sell
securities not covered by this prospectus to third parties in privately
negotiated transactions. If the applicable prospectus supplement indicates, in
connection with those derivatives, the third parties may sell securities covered
by this prospectus and the applicable prospectus supplement, including in short
sale transactions. If so, the third parties may use securities pledged by us or
borrowed from us or others to settle those sales or to close out any related
open borrowings of stock, and may use securities received from us in settlement
of those derivatives to close out any related open borrowings of stock. The
third parties in such sale transactions will be underwriters and, if not
identified in this prospectus, will be identified in the applicable prospectus
supplement (or a post-effective amendment).
We or one of our affiliates may loan or pledge securities to a financial
institution or other third party that in turn may sell the securities using this
prospectus. Such financial institution or third party may transfer its short
position to investors in our securities or in connection with a simultaneous
offering of other securities offered by this prospectus or otherwise.
LEGAL OPINIONS
Opinions as to the legality of certain of the Offered Securities will be
rendered for CMS Energy by Robert C. Shrosbree, Esq., Assistant General Counsel
for CMS Energy. Certain matters of Delaware law relating to the validity of the
Trust Preferred Securities will be passed upon on behalf of the Trusts by
Skadden, Arps, Slate, Meagher & Flom LLP, special Delaware counsel to the
Trusts. Certain United States Federal income taxation matters may be passed upon
for CMS Energy and the Trust by either Theodore Vogel, tax counsel for CMS
Energy, or by special tax counsel to CMS Energy and of the Trust, who will be
named in the prospectus supplement. Certain legal matters with respect to
Offered Securities will be passed upon by counsel for any underwriters, dealers
or agents, each of whom will be named in the related prospectus supplement.
26
EXPERTS
The consolidated financial statements of CMS Energy appearing in CMS
Energy's Annual Report (Form 10-K) for the year ended December 31, 2004
(including a schedule appearing therein), and CMS Energy's management's
assessment of the effectiveness of internal control over financial reporting as
of December 31, 2004 included therein, have been audited by Ernst & Young LLP,
independent registered public accounting firm, as set forth in their reports
thereon, included therein, and incorporated herein by reference, which are based
in part on the reports of PricewaterhouseCoopers LLP, independent registered
public accounting firm for the Midland Cogeneration Venture Limited Partnership,
and Price Waterhouse, independent accountants for Jorf Lasfar Energy Company
S.C.A. Such consolidated financial statements and management's assessment 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 Jorf Lasfar Energy Company S.C.A. as of
December 31, 2004 and 2003 and for each of the three years in the period ended
December 31, 2004 incorporated herein by reference have been so included in
reliance on the report of Price Waterhouse, independent accountants for Jorf
Lasfar Energy Company S.C.A., given on the authority of said firm as experts in
auditing and accounting.
The audited financial statements and management's assessment of the
effectiveness of internal control over financial reporting (which is included in
Management's Report on Internal Control over Financial Reporting) of the Midland
Cogeneration Venture Limited Partnership for the years ended December 31, 2004
and 2003, not separately presented or incorporated by reference into this
prospectus, have been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, whose report thereon appears herein. Such
financial statements and management's assessment of the effectiveness of
internal control over financial reporting, to the extent they have been included
in the financial statements and management's assessment of the effectiveness of
internal control over financial reporting 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.
27
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$125,000,000
CMS ENERGY CORPORATION
% SENIOR NOTES DUE 2015
(CMS ENERGY LOGO)
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PROSPECTUS SUPPLEMENT
DECEMBER __, 2005
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CITIGROUP
MERRILL LYNCH & CO.
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BANC OF AMERICA SECURITIES LLC
KEYBANC CAPITAL MARKETS
WEDBUSH MORGAN SECURITIES INC.
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