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Rule 424(b)5
Registration Statement No. 333-63969
PROSPECTUS
DATED OCTOBER 14, 1998
OFFER TO EXCHANGE
SENIOR NOTES, 6.20% RESET PUT SECURITIES (REPS)(SM), SERIES(SM),
DUE 2008* FOR ANY AND ALL OUTSTANDING SENIOR NOTES, 6.20% RESET PUT
SECURITIES (REPS)(SM), SERIES A, DUE 2008* OF
[CONSUMERS ENERGY LOGO]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON NOVEMBER 13, 1998, UNLESS
EXTENDED.
Consumers Energy Company, a Michigan corporation ("Consumers"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal, to exchange
up to an aggregate principal amount of $250 million of its Senior Notes, 6.20%
Reset Put Securities(SM), Series B, Due 2008 (the "Exchange Notes") for an equal
principal amount of its Senior Notes, 6.20% Reset Put Securities(SM), Series A,
Due 2008 (the "Notes"). The Exchange Notes will be substantially identical
(including principal amount, interest rate, maturity and redemption rights) to
the Notes for which they may be exchanged pursuant to the Exchange Offer, except
for certain transfer restrictions, registration rights and interest rate step-up
provisions applicable only to the Notes. The Notes have been, and the Exchange
Notes will be, issued under the Indenture (as defined herein). The Exchange
Notes will bear interest from November 1, 1998. Interest on the Exchange Notes
will be payable semiannually on May 1 and November 1, commencing May 1, 1999.
The Exchange Notes will be required to be put by the existing holders on May 1,
2003, through either (i) the exercise of the applicable Call Option (as defined
herein) by the Callholder (as defined below) or (ii) in the event the Callholder
does not purchase the Exchange Notes pursuant to its Call Option, the automatic
exercise of the Mandatory Put (as defined herein) by The Chase Manhattan Bank,
as Trustee (the "Trustee"), on behalf of the holders. The "Callholder" will be
Morgan Stanley & Co. International Limited. If the Callholder, or any successor
or assign thereto, purchases the Exchange Notes pursuant to the Call Option, the
Exchange Notes will be purchased by the Callholder from the holders thereof on
May 1, 2003 ("Coupon Reset Date") at 100% of the entire principal amount thereof
and the interest rate on the Exchange Notes will be reset (the "Coupon Reset
Rate") by the Calculation Agent (as defined herein) effective on the Coupon
Reset Date pursuant to the Coupon Reset Process (as defined herein). If the
Callholder for any reason fails to purchase the Exchange Notes on the Coupon
Reset Date, the Trustee will exercise the Mandatory Put on behalf of the holders
of the Exchange Notes and Consumers will be required to repurchase the principal
amount of the Exchange Notes from the holders thereof on the Coupon Reset Date
at 100% of the principal amount thereof. See "Description of Exchange Notes --
Call Option; Mandatory Put."
Until the Release Date (as defined herein), the Exchange Notes will be
secured by First Mortgage Bonds (as defined herein) issued and delivered by
Consumers to the Trustee. See "Description of Exchange Notes -- Security;
Release Date." On the Release Date, the Exchange Notes will cease to be secured,
will become unsecured general obligations (Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 14, 1998.
(continued from front cover page)
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of Consumers and will rank on a parity with other unsecured indebtedness of
Consumers (unless otherwise secured under the limited circumstances described
under the caption "Description of Exchange Notes -- Limitation on Liens").
The Notes were sold by Consumers on May 1, 1998 to the Initial Purchasers
(as defined herein) who offered a portion of the Notes in the United States to
qualified institutional buyers in reliance on Rule 144A of the Securities Act of
1933, as amended (the "Securities Act"), and the remainder of the Notes were
offered by the Initial Purchasers outside the United States in reliance on
Regulation S under the Securities Act. See "The Exchange Offer." Accordingly,
the Notes may not be reoffered, resold or otherwise transferred in the United
States unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of Consumers contained in the Registration Rights Agreement dated
May 1, 1998 (the "Registration Rights Agreement") by and among Consumers and
Morgan Stanley & Co. Incorporated, Chase Securities Inc., First Chicago Capital
markets, Inc. and Salomon Brothers Inc (the last four named entities
collectively referred to herein as the "Initial Purchasers"), with respect to
the initial sale of the Notes.
Consumers will not receive any proceeds from the Exchange Offer. Consumers
will pay all the expenses incident to the Exchange Offer. Tenders of Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date (as defined) for the Exchange Offer. See "The Exchange Offer."
The Exchange Offer is being made in reliance on certain no-action positions
that have been published by the staff of the Securities and Exchange Commission
(the "Commission") which require each tendering note holder to represent that it
is acquiring the Exchange Notes in the ordinary course of its business and that
such holder does not intend to participate and has no arrangement or
understanding with any person to participate in a distribution of the Exchange
Notes. Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of the Exchange Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Notes where such Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities.
There has not previously been any public market for the Exchange Notes.
Consumers does not intend to list the Exchange Notes on any securities exchange
or to seek approval for quotation through any automated quotation system. There
can be no assurance that an active market for the Exchange Notes will develop.
To the extent that an active market for the Exchange Notes does develop, the
market value of the Exchange Notes will depend on market conditions, Consumers's
financial conditions and other factors. Such conditions might cause the Exchange
Notes, to the extent they are actively traded, to trade at a significant
discount from face value.
The Exchange Offer will expire at 5:00 p.m., New York City time, on November
13, 1998, or such later date and time to which it may be extended by Consumers,
which in no event shall be later than November 27, 1998. The Exchange Offer is
not conditioned upon any minimum principal amount of Notes being tendered for
exchange pursuant to the Exchange Offer.
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*REPS is a service mark of Morgan Stanley Dean Witter & Co.
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AVAILABLE INFORMATION
Consumers is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Consumers has filed with the Commission a Registration Statement on
Form S-4 under the Securities Act for the registration of the Exchange Notes
offered hereby (the "Exchange Offer Registration Statement"). This Prospectus,
which constitutes a part of the Exchange Offer Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
items of which are contained in exhibits and schedules to the Exchange Offer
Registration Statement as permitted by the rules and regulations of the
Commission. For further information about Consumers and the Exchange Notes
offered hereby, reference is made to the Exchange Offer Registration Statement,
including the exhibits thereto, which may, along with reports, proxy statements
and other information filed by Consumers with the Commission pursuant to the
informational requirements of the Exchange Act, be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the Commission's regional
offices located at Seven World Trade Center, 13th Floor, New York, New York
10048; and Citicorp Center, 5000 West Madison Street (Suite 1400), Chicago,
Illinois 60601. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates, or through the World Wide Web (http://www.sec.gov).
Such reports, proxy statements and other information concerning consumers may
also be inspected and copied at the offices of the New York Stock Exchange, Inc.
20 Broad Street, New York, New York 10005, the securities exchange on which
certain of Consumers' securities are listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Consumers (File No.
1-5611) are incorporated by reference in this Prospectus:
(a) Consumers' Annual Report on Form 10-K for the year ended December 31,
1997;
(b) Consumers' Quarterly Reports on Form 10-Q for the quarters ended March
31, and June 30, 1998; and
(c) Consumers' Current Report on From 8-K dated October 2, 1998.
All documents and reports subsequently filed by Consumers with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
prior to the termination of the offering of the Exchange Notes shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the date of filing of such documents (such documents, and the documents
enumerated above, being hereinafter referred to as "Incorporated Documents").
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN. CONSUMERS WILL PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE
WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR ALL OF THE
FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN, OTHER THAN CERTAIN
EXHIBITS TO SUCH DOCUMENTS. REQUESTS SHOULD BE DIRECTED TO CONSUMERS ENERGY
COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES LOCATED AT 212 WEST MICHIGAN AVENUE,
JACKSON, MICHIGAN 49201, ATTENTION: CHIEF FINANCIAL OFFICER, TELEPHONE: (517)
788-0550. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS
SHOULD BE MADE BY NOVEMBER 6, 1998.
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent any
statement contained herein or in any subsequently filed document, which is also
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
Certain information contained in this Prospectus summarizes, is based upon
or refers to information and financial statements contained in one or more
Incorporated Documents; accordingly, such information contained herein is
qualified in its entirety by reference to such documents and should be read in
conjunction therewith.
PROSPECTUS SUMMARY
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The following is a summary of certain information contained elsewhere or
incorporated by reference in this Prospectus and is qualified in its entirety by
such more detailed information and consolidated financial statements, including
the notes thereto, incorporated by reference in this Prospectus.
THE NOTE OFFERING
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THE NOTES ........................................... The Notes were sold by Consumers on May 1, 1998 and were
subsequently offered to qualified institutional buyers
pursuant to Rule 144A and to institutional investors that
are accredited investors in a manner exempt from
registration under the Securities Act as well as to
purchasers pursuant to Regulation S under the Securities
Act.
REGISTRATION RIGHTS AGREEMENT........................ In connection with the offering of the Notes, Consumers
entered into the Registration Rights Agreement, which
granted holders of the Notes certain exchange and
registration rights. The Exchange Offer is intended to
satisfy the obligations of Consumers with respect to such
exchange and registration rights which, except for limited
instances involving the Initial Purchasers (as defined in
the Registration Rights Agreement) or Holders (as defined
in the Registration Rights Agreement) who are not eligible
to participate in the Exchange Offer, terminate upon the
consummation of the Exchange Offer. See "The Exchange
Offer."
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THE EXCHANGE OFFER
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SECURITIES OFFERED................................... $250 million aggregate principal amount of Senior Notes,
6.20% Reset Put Securities(SM), Series B, Due 2008.
THE EXCHANGE OFFER................................... The Exchange Notes are being offered in exchange for an
equal principal amount of Notes. As of the date hereof,
$250 million aggregate principal amount of Notes are
outstanding. The Notes may be tendered only in integral
multiples of $1,000.
RESALE OF EXCHANGE NOTES............................. Based on interpretations by the Staff of the Commission as
set forth in no action letters issued to third parties,
Consumers believes that the Exchange Notes issued pursuant
to the Exchange Offer may be offered for resale, resold or
otherwise transferred by any holder thereof (other than
any such holder that is a broker-dealer or an "affiliate"
of Consumers within the meaning of Rule 405 under the
Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act,
provided that (i) such Exchange Notes are acquired in the
ordinary course of business, (ii) at the time of the
commencement of the Exchange Offer, such holder has no
arrangement with any person to participate in a
distribution of the Exchange Notes and (iii) such holder
is not engaged in, and does not intend to engage in, a
distribution of the Exchange Notes. By tendering the Notes
in exchange for the Exchange Notes, each holder will
represent to Consumers that: (i) it is not such an
affiliate
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of Consumers, (ii) any Exchange Notes to be received by it
will be acquired in the ordinary course of business and
(iii) at the time of the commencement of the Exchange
Offer it is not engaged in, and does not intend to engage
in, and has no arrangement or understanding with any
person to participate in, a distribution of the Exchange
Notes. If a holder of Notes is unable to make the
foregoing representations, such holder may not rely on the
applicable interpretations of the Staff of the Commission
and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection
with any secondary resale transaction.
Each broker-dealer that receives Exchange Notes for its
own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The
Letter of Transmittal states that, by so acknowledging and
by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may
be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of the
Exchange Notes received in exchange for the Notes where
such Exchange Notes were acquired by such broker-dealer as
a result of market-making activities or other trading
activities. Consumers has agreed that, starting on the
Expiration Date and ending on the close of business on the
first anniversary of the Expiration Date, it will make
this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of
Distribution."
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale or
to register the Exchange Notes prior to offering or
selling such Exchange Notes. Consumers has agreed,
pursuant to the Registration Rights Agreement and subject
to certain specified limitations therein, to cooperate
with selling Holders or underwriters in connection with
the registration and qualification of the Exchange Notes
for offer or sale under the securities or "blue sky" laws
of such jurisdictions as may be necessary to permit the
holders of Exchange Notes to trade the Exchange Notes
without any restrictions or limitations under the
securities laws of the several states of the United
States.
CONSEQUENCES OF FAILURE TO
EXCHANGE NOTES....................................... Upon consummation of the Exchange Offer, subject to
certain limited exceptions, holders of Notes who do not
exchange their Notes for Exchange Notes in the Exchange
Offer will no longer be entitled to registration rights
and will not be able to offer or sell their Notes, unless
such Notes are subsequently registered under the
Securities Act (which, subject to certain limited
exceptions, Consumers will have no obligation to do),
except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state
securities
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laws. See "The Exchange Offer-- Consequences of Failure to
Exchange."
EXPIRATION DATE ..................................... 5:00 p.m., New York City time, on November 13, 1998,
unless the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
CONDITIONS TO THE EXCHANGE OFFER..................... The Exchange Offer is not conditioned upon any minimum
principal amount of Notes being tendered for exchange.
However, the Exchange Offer is subject to certain
customary conditions, which may be waived by Consumers.
See "The Exchange Offer- Conditions." Except for the
requirements of applicable United States federal and state
securities laws, there are no United States federal or
state regulatory requirements to be complied with or
obtained by Consumers in connection with the Exchange
Offer.
PROCEDURES FOR TENDERING
NOTES................................................ Each holder of Notes wishing to accept the Exchange Offer
must complete, sign and date the Letter of Transmittal, or
a facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such facsimile,
together with any other required documentation to the
Exchange Agent at the address set forth herein and effect
a tender of Notes pursuant to the procedures for
book-entry transfer as provided for herein. See "The
Exchange Offer - Procedures for Tendering" and "Book-Entry
Transfer."
GUARANTEED DELIVERY PROCEDURES....................... Holders of Notes who wish to tender their Notes and who
cannot deliver their Notes and a properly completed Letter
of Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Notes according to the
guaranteed delivery procedures set forth under "The
Exchange Offer - Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS.................................... Tenders of Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Notes, a written or facsimile
transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth under "The
Exchange Offer-Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date.
ACCEPTANCE OF NOTES
AND DELIVERY OF EXCHANGE NOTES....................... Subject to certain conditions, any and all Notes that are
properly tendered in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date will be
accepted for exchange. The Exchange Notes issued pursuant
to the
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Exchange Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer - Acceptance of
Notes for Exchange; Delivery of Exchange Notes."
CERTAIN UNITED STATES TAX CONSEQUENCES .............. The exchange of Notes for Exchange Notes will not
constitute a taxable exchange for United States federal
income tax purposes. See "Certain United States Federal
Income Tax Consequences."
EXCHANGE AGENT....................................... The Chase Manhattan Bank is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange Offer.
FEES AND EXPENSES.................................... All expenses incident to Consumers's consummation of the
Exchange Offer and compliance with the Registration Rights
Agreement will be borne by Consumers. See "The Exchange
Offer- Fees and Expenses."
USE OF PROCEEDS...................................... There will be no cash proceeds payable to Consumers from
the issuance of the Exchange Notes pursuant to the
Exchange Offer. The proceeds from the Notes together with
the proceeds from a new long-term bank loan were used to
refinance the outstanding balance on a then existing
Consumers $400 million unsecured long-term bank loan.
Residual proceeds were used for refunding or repurchasing
various Consumers' First Mortgage Bonds and for general
corporate purposes. See "Use of Proceeds."
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THE EXCHANGE NOTES
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SECURITIES OFFERED................................... $250 million aggregate principal amount of Senior Notes,
6.20% Reset Put Securities(SM), Series B, Due 2008.
MATURITY............................................. May 1, 2008, subject to the Call Option and Mandatory Put.
INTEREST RATE........................................ The Exchange Notes will bear interest at the rate of 6.20%
per annum until the Coupon Reset Date. If the Callholder
has elected to exercise the Call Option, the interest rate
on the Exchange Notes will be reset by the Calculation
Agent (as defined herein) effective on the Coupon Reset
Date pursuant to the Coupon Reset Process. See
"Description of Exchange Notes - Principal, Maturity and
Interest."
CALL OPTION.......................................... The Callholder has the right to purchase the Exchange
Notes, in whole but not in part, on May 1, 2003, at a
price equal to 100% of the principal amount thereof. See
"Description of Exchange Notes - Call Option; Mandatory
Put."
MANDATORY PUT........................................ If the Callholder fails for any reason to purchase the
Exchange Notes on May 1, 2003, the Trustee will be
obligated to exercise, on behalf of the holders, the right
to require Consumers to purchase the Exchange Notes in
whole, but not in part, at a price equal to 100% of the
principal amount thereof. See "Description of Exchange
Notes - Call Option; Mandatory Put."
RANKING.............................................. Until the Release Date (as defined herein), all of the
Senior Notes (as defined herein) outstanding will be
secured by one or more series of First Mortgage Bonds
issued and delivered by Consumers to the Trustee. On the
Release Date, the Senior Notes will cease to be secured by
First Mortgage Bonds, will become unsecured general
obligations of Consumers and will rank on a parity with
other senior unsecured indebtedness of Consumers. See
"Description of Exchange Notes - General."
CERTAIN COVENANTS.................................... The Exchange Notes will be issued under an Indenture which
contains covenants that, among other things, limit the
ability of Consumers to incur certain additional liens or
engage in certain sale-leaseback transactions following
the Release Date. See "Description of Exchange Notes -
Certain Covenants of Consumers."
FORM AND DENOMINATION................................ The Exchange Notes will be fully registered under the
Securities Act and will be issued in the form of one or
more Global Exchange Notes in fully registered form,
deposited with a custodian for and registered in the name
of a nominee of the Depositary. Beneficial interests in
the Global Exchange Notes will be shown on, and transfers
thereof will be effected
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through, records maintained by the Depositary and its
Participants. See "Description of Exchange Notes -
Registration, Transfer and Exchange."
EXCHANGE OFFER, REGISTRATION RIGHTS.................. Pursuant to a Registration Rights Agreement among
Consumers and the Initial Purchasers, Consumers agreed,
among other things, (i) to file a registration statement
(the "Exchange Offer Registration Statement") on or prior
to 150 days after the closing of the offering (the
"Closing") with respect to an offer to exchange the Notes
for a new issue of debt securities of Consumers (the
"Exchange Notes") registered under the Securities Act,
with terms substantially identical to those of the Notes
(the "Exchange Offer") and (ii) to use its best efforts to
cause the Exchange Offer Registration Statement to be
declared effective by the Commission on or prior to 180
days after Closing. In certain circumstances, Consumers
will be required to provide a shelf registration statement
(the "Shelf Registration Statement") to cover resales of
the Notes by the Holders thereof. If Consumers fails to
satisfy its registration obligation under the Registration
Rights Agreement, Consumers will be required to pay
liquidated damages ("Liquidated Damages") to the Holders
of Notes under certain circumstances. See "The Exchange
Offer - Registration Rights; Liquidated Damages."
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CONSUMERS ENERGY COMPANY
Consumers, incorporated in Michigan in 1968, is the successor to a
corporation organized in Maine in 1910 that did business in Michigan from 1915
to 1968. Consumers was named Consumers Power Company from 1910 to the first
quarter of 1997, when Consumers changed its name to Consumers Energy Company.
Consumers is the principal subsidiary of CMS Energy Corporation, a Michigan
corporation ("CMS Energy"). CMS Energy, through other subsidiaries, is also
engaged in several domestic and international energy-related businesses
including: oil and gas exploration and production; acquisition, development and
operation of independent power production facilities; storage, transmission and
processing of natural gas; energy marketing, services and trading; and
international energy distribution.
Consumers is a public utility serving gas or electricity to almost six
million of Michigan's nine and a half million residents in all 68 counties in
Michigan's Lower Peninsula. Consumers' service areas include automotive, metal,
chemical, food and wood products and a diversified group of other industries.
Consumers' electric operations include the generation, purchase, transmission
and distribution of electricity in 61 of the 68 counties in the Lower Peninsula
of Michigan. Consumers' gas operations include the purchase, transportation,
storage and distribution of gas serving 54 of the 68 counties in the Lower
Peninsula of Michigan. At December 31, 1997, Consumers provided service to 1.6
million electric customers and 1.5 million gas customers.
Consumers' 1997 consolidated operating revenue of $3,769 million was derived
67% ($2,515 million) from its electric utility business, 32% ($1,204 million)
from its gas utility business and 1% ($50 million) from its non-utility
business.
Consumers' electric generating system consists of five fossil-fueled plants,
one nuclear plant, one pumped storage hydroelectric facility, seven gas
combustion turbine plants and thirteen hydroelectric plants. Consumers-owned
system generating capacity (including the pumped storage hydroelectric facility,
of which Consumers has a 51% ownership) was 6,255 megawatts ("MW") as of
December 31, 1997. In 1997, Consumers purchased 1,648 MW of net capacity from
independent power producers. Consumers' peak power demand for 1997 was 7,315 MW
in July 1997.
Consumers' gas distribution and transmission system consists of 22,825 miles
of distribution mains and 1,057 miles of transmission lines throughout the Lower
Peninsula of Michigan. Consumers owns and operates six compressor stations with
a total of 133,560 installed horsepower.
Consumers is subject to regulation by various federal, state and local
agencies including the Michigan Public Service Commission ("MPSC"), the Federal
Energy Regulatory Commission ("FERC") and the Nuclear Regulatory Commission
("NRC"). The MPSC regulates public utilities in Michigan with respect to retail
utility rates, accounting, services, certain facilities and various other
matters. The FERC has jurisdiction over certain aspects of Consumers' gas
business relating, among other things, to the acquisition, operation and
disposal of assets and facilities and to service provided and rates charged by
Michigan Gas Storage Company, a subsidiary of Consumers. Under certain
circumstances, the FERC also has the power to modify gas tariffs of interstate
pipeline companies. Certain aspects of Consumers' gas business also are subject
to regulation by the FERC including a blanket transportation tariff pursuant to
which Consumers can transport gas in interstate commerce. Certain aspects of
Consumers' electric operations also are subject to regulation by the FERC,
including compliance with the FERC's accounting rules and other regulations
applicable to "public utilities" and "licensees," the transmission of electric
energy in interstate commerce and the rates and charges for the sale of electric
energy at wholesale, the consummation of certain mergers, the sale of certain
facilities, the construction, operation and maintenance of hydroelectric
projects and the issuance of securities, as provided by the Federal Power Act.
Consumers is subject to NRC jurisdiction with respect to the design,
construction, operation and decommissioning of its nuclear power plants.
The foregoing information concerning Consumers does not purport to be
comprehensive. For additional information concerning Consumers' business and
affairs, including its capital requirements and external financing plans,
pending legal and regulatory proceedings and descriptions of certain laws and
regulations to which it is subject, prospective
10
<PAGE> 11
purchasers should refer to the Incorporated Documents. See "Incorporation of
Certain Documents by Reference."
RECENT DEVELOPMENTS
On October 2, 1998, Consumers initiated a process for the solicitation of
bids to acquire Consumers' rights to 1240 MW of contract capacity and associated
energy ("PPA Rights") under its Power Purchase Agreement ("PPA") with Midland
Cogeneration Venture Limited Partnership ("MCV"). The term of the PPA is for 35
years, which commenced on the date of commercial operations of the MCV's
generating facilities in March 1990. The PPA Rights are being offered in one
1240 MW block or in two 620 MW pieces, for the period from the effective date in
1999 through either September 2007 or March 2025.
Morgan Stanley Dean Witter has been retained to act as financial advisor in
the solicitation of bids, and is contemporaneously distributing a summary
information brochure to potentially interested parties. Parties who sign a
confidentiality agreement will receive additional confidential information,
after which they will submit indicative bids. Consumers anticipates that those
parties who are invited into more detailed investigation will be asked to submit
binding bids in mid January 1999.
Consumers has reserved the right at any time, in its sole discretion, to
terminate the bidding process or to reject any or all bids. Consumers will not
consummate a transaction unless important customer benefits flow from that
transaction. Any such transaction would be subject to the approval of Consumers'
Board of Directors and obtaining satisfactory ratemaking and accounting
treatment from the MPSC and the FERC with respect to the definitive agreement.
11
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SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of certain financial information of Consumers and
its consolidated subsidiaries and is qualified in its entirety by, and should be
read in conjunction with, the detailed information and Consumers consolidated
financial statements and notes thereto included in the Incorporated Documents.
See "Incorporation of Certain Documents by Reference."
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<CAPTION>
TWELVE MONTHS
ENDED/AT YEAR ENDED/AT DECEMBER 31,
--------------------------
JUNE 30,
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(UNAUDITED) (IN MILLIONS)
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Operating revenue............................... $3,696 $3,769 $3,770 $3,511 $3,356 $3,243
Net income...................................... 342 321 296 255 226 198
Net income available to common stockholder...... 305 284 260 227 202 187
Total assets.................................... 7,076 6,949 7,025 6,954 6,809 6,551
Long-term debt, excluding current maturities.... 2,159 1,369 1,900 1,922 1,953 1,839
Non-current portion of capital leases........... 77 74 100 104 108 106
Total preferred stock........................... 238 238 356 356 356 163
Total trust preferred securities................ 220 220 100 --- --- ---
</TABLE>
USE OF PROCEEDS
There will be no cash proceeds payable to Consumers from the issuance of the
Exchange Notes pursuant to the Exchange Offer. Net proceeds from the sale of the
Notes in the amount of $125 million, together with the proceeds from a new $225
million long-term bank loan, were used to refinance $350 million of the then
outstanding balance on Consumers' then outstanding $400 million unsecured
long-term bank loan which was to mature on November 3, 1999. Such long-term bank
loan had a weighted average interest rate at March 31, 1998 of 6.34%. Remaining
proceeds of $36 million were applied to the payment upon early redemption of $36
million aggregate principal amount of Consumers's 7 3/8% First Mortgage Bonds
due September 15, 2023. The remaining net proceeds of $89 million were used for
general corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES
The ratios of earnings to fixed charges for the twelve months ended June 30,
1998 and for each of the years ended December 31, 1993 through 1997 are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
Twelve Months
Ended June 30, 1998 1997 1996 1995 1994 1993
-------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges......... 3.26 3.31 3.27 2.82 2.81 2.46
</TABLE>
For the purpose of computing such ratio, earnings represent net income before
income taxes, net interest charges and estimated interest portion of lease
rentals.
12
<PAGE> 13
DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued under the Indenture, dated as of February
1, 1998, as supplemented (collectively, the "Indenture") between Consumers and
The Chase Manhattan Bank (the "Trustee"). The following summaries of certain
provisions of the Indenture do not purport to be complete, make use of defined
terms (some but not all of which are defined herein) and are subject to, and
qualified in their entirety by, all of the provisions of the Indenture, which is
incorporated herein by this reference and which is available upon request to the
Trustee. Unless otherwise indicated, references to Section numbers under this
caption are references to the Section numbers of the Indenture.
Until the Release Date (as defined below), all of the senior notes
outstanding under the Indenture (the "Senior Notes") will be secured by one or
more series of Consumers' First Mortgage Bonds (as defined below) issued and
delivered by Consumers to the Trustee. See "Security; Release Date." ON THE
RELEASE DATE, THE SENIOR NOTES (INCLUDING THE EXCHANGE NOTES) WILL CEASE TO BE
SECURED BY FIRST MORTGAGE BONDS, WILL BECOME UNSECURED GENERAL OBLIGATIONS OF
CONSUMERS AND WILL RANK ON A PARITY WITH OTHER UNSECURED INDEBTEDNESS OF
CONSUMERS. The Indenture provides that, in addition to the Exchange Notes
offered hereby, additional Senior Notes may be issued thereunder, without
limitation as to aggregate principal amount, provided that, prior to the Release
Date, the principal amount of Senior Notes that may be issued and outstanding
cannot exceed the principal amount of Senior Note Mortgage Bonds (as defined
herein) then held by the Trustee. See "Description of First Mortgage Bonds --
Issuance of Additional First Mortgage Bonds."
There is no requirement under the Indenture that future issues of debt
securities of Consumers be issued exclusively under the Indenture, and Consumers
will be free to employ other indentures (including, prior to the Release Date,
the Mortgage (as defined below)) or documentation, containing provisions
different from those included in the Indenture or applicable to one or more
issues of Senior Notes (including the Exchange Notes), in connection with future
issues of such other debt securities.
There are no provisions in the Indenture or the Exchange Notes that require
Consumers to redeem, or permit the holders to cause a redemption of, the
Exchange Notes or that otherwise protect the holders in the event that Consumers
incurs substantial additional indebtedness, whether or not in connection with a
change in control of Consumers.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes are limited in aggregate principal amount to $250 million
and will bear interest at 6.20% per annum from and including November 1, 1998 to
but excluding May 1, 2003 (the "Coupon Reset Date"). Interest on the Exchange
Notes will be payable semi-annually on May 1 and November 1, beginning May 1,
1999. Subject to certain exceptions, the Indenture provides for the payment of
interest on the interest payment date only to persons in whose names the
Exchange Notes are registered on the Regular Record Date, which will be the
April 15 or October 15 (whether or not a "Business Day", as defined in the
Exchange Notes), as the case may be, immediately preceding the applicable
Interest Payment Date. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. As used herein, the term "interest" on the
Exchange Notes or Senior Note Mortgage Bonds shall be deemed to include
additional interest, if any, which may be payable following a Registration
Default as described under "Registration Rights."
If Morgan Stanley & Co. International Limited (the "Callholder") elects to
purchase the Exchange Notes pursuant to the Call Option (as defined below), the
Calculation Agent (as defined below) will reset the interest rate effective on
the Coupon Reset Date, pursuant to the Coupon Reset Process described below. In
such circumstance, (i) the Exchange Notes will be purchased from the holders by
the Callholder, in whole but not in part, at 100% of the principal amount
thereof on the Coupon Reset Date, on the terms and subject to the conditions
described herein (interest accrued to but excluding the Coupon Reset Date will
be paid by Consumers on such date to holders on the immediately preceding
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<PAGE> 14
Record Date), and (ii) on and after the Coupon Reset Date, the Exchange Notes
will bear interest at the rate determined by the Calculation Agent in accordance
with the procedures set forth under "Coupon Reset Process if Exchange Notes are
Called" below.
FINAL MATURITY DATES
The Exchange Notes will mature on May 1, 2008 (the "Final Maturity Date").
On May 1, 2003, however, holders of the Exchange Notes will be required to sell
their Exchange Notes at a price equal to 100% of the principal amount thereof
(i) to the Callholder if it purchases the Exchange Notes pursuant to the Call
Option or (ii) in the event the Callholder does not exercise the Call Option or
fails for any reason to pay the Call Price (as defined below) to the Trustee
when required, to Consumers following the exercise by the Trustee for and on
behalf of the holders of the Exchange Notes of the Mandatory Put. The Trustee is
required to exercise the Mandatory Put without the consent of, or notice to, the
holders of the Exchange Notes. See "Call Option; Mandatory Put."
CALL OPTION; MANDATORY PUT
Call Option
The "Callholder" with respect to the Exchange Notes will be Morgan Stanley &
Co. International Limited. Pursuant to the terms of the Exchange Notes, the
Callholder has the right to purchase the Exchange Notes, in whole but not in
part, on the Coupon Reset Date (the "Call Option"), at a price equal to 100% of
the principal amount thereof (the "Call Price"), by giving notice to the Trustee
(the "Call Notice"). If the Callholder exercises the Call Option, the Trustee
will send a copy of the Call Notice to the holders as required by the terms of
the Exchange Notes. The Callholder will be required to give the Call Notice to
the Trustee, in writing, prior to 4:00 p.m., New York City time, no later than
ninety calendar days prior to the Coupon Reset Date. The Call Notice may be
revoked by the Callholder at any time prior to 2:00 p.m. New York City time, on
the Business Day prior to the Coupon Reset Date. If the Callholder exercises the
Call Option, (a) not later than 2:00 p.m., New York City time, on the Business
Day prior to the Coupon Reset Date, the Callholder shall pay the amount of the
Call Price in immediately available funds to the Trustee for payment of the Call
Price to the holders of the Exchange Notes on the Coupon Reset Date and (b) the
holders of the Exchange Notes will be required to deliver the Exchange Notes
against payment therefor on the Coupon Reset Date through the facilities of DTC.
The Callholder is not required to exercise the Call Option, and no holder of the
Exchange Notes or any interest therein shall have any right or claim against the
Callholder as a result of the Callholder not purchasing the Exchange Notes.
The Call Option provides for certain circumstances under which such Call
Option may be terminated. If the Call Option terminates or if the Callholder
fails to pay the Call Price to the Trustee at or prior to the required time, the
Trustee shall exercise the Mandatory Put described below. The Trustee shall
notify the holders that it is exercising the Put Option as required by the
Exchange Notes.
Mandatory Put
If the Callholder fails for any reason to purchase the Exchange Notes on the
Coupon Reset Date, the Trustee will be obligated to exercise on behalf of the
holders of the Exchange Notes the right to require Consumers to purchase the
Exchange Notes, in whole but not in part (the "Mandatory Put"), on the Coupon
Reset Date at a price equal to 100% of the principal amount thereof (the "Put
Price"). By its purchase of an Exchange Note, each holder irrevocably agrees
that the Trustee shall exercise the Mandatory Put for, or on behalf of, the
holder of the Exchange Notes as provided herein. If the Trustee exercises the
Mandatory Put, then Consumers shall deliver the Put Price in immediately
available funds to the Trustee by no later than 12:00 noon, New York City time,
on the Coupon Reset Date and the holders of the Exchange Notes will be required
to deliver such Exchange Notes to Consumers against payment therefor on the
Coupon Reset Date through the facilities of DTC. No holder of the Exchange Notes
or any interest therein has the right to consent or object to the exercise of
the Trustee's duties under the Mandatory Put.
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<PAGE> 15
Notice to Holders
In anticipation of the exercise of the Call Option or Mandatory Put on the
Coupon Reset Date, notice of delivery of all Exchange Notes on the Coupon Reset
Date against payment of the Call Price or Put Price (the "Delivery Notice")
shall be given by mail not less than 30 nor more than 60 days prior to the
Coupon Reset Date (which, as long as the Exchange Notes are held in the
book-entry only system, will be DTC (or its nominee) or a successor depositary
(the "Depositary")); provided, however, that the failure to duly give such
Delivery Notice by mail, or any defect therein, shall not affect the validity of
any proceedings for the delivery of any Exchange Notes. The Trustee will notify
the holders of Exchange Notes once it is determined whether the Call Price or
the Put Price will be delivered on the Coupon Reset Date. Interest on the
Exchange Notes accrues to, but excludes, the Coupon Reset Date.
The Exchange Notes have no sinking fund or other redemption provisions.
COUPON RESET PROCESS IF EXCHANGE NOTES ARE CALLED
Pursuant to the terms of a Calculation Agency Agreement, Morgan Stanley &
Co. Incorporated has been appointed the calculation agent for the Exchange Notes
(in its capacity as calculation agent, the "Calculation Agent"). If the
Callholder exercises the Call Option, as set forth above, then the following
steps (the "Coupon Reset Process") will be taken in order to determine the
interest rate to be paid on the Exchange Notes, from and including the Coupon
Reset Date, to but excluding the Final Maturity Date (the "Coupon Reset Rate").
Consumers and the Calculation Agent will use reasonable efforts to cause the
actions contemplated below to be completed in as timely a manner as possible.
(a) Consumers will provide the Calculation Agent with (i) a list (the
"Dealer List"), no later than five Business Days prior to the Coupon Reset Date,
containing the names and addresses of three dealers, one of which shall be
Morgan Stanley & Co. Incorporated, from which Consumers desires the Calculation
Agent to obtain Bids (as defined below) for the purchase of the Exchange Notes
and (ii) a copy of any other material reasonably requested by the Calculation
Agent to facilitate a successful Coupon Reset Process.
(b) Within one Business Day following receipt by the Calculation Agent of
the Dealer List, the Calculation Agent will provide to each dealer ("Dealer") on
the Dealer List (i) a copy of this Prospectus, (ii) a copy of the form of
Exchange Note and (iii) a written request that each Dealer submit a Bid to the
Calculation Agent by 12:00 noon, New York City time, on the third Business Day
prior to the Coupon Reset Date (the "Bid Date"). "Bid" means an irrevocable
written offer given by a Dealer for the purchase of all of the Exchange Notes
settling on the Coupon Reset Date, and shall be quoted by such Dealer as a
stated yield to maturity on the Exchange Notes ("Yield to Maturity"). Each
Dealer shall also be provided with (A) Consumers' name, (B) the Purchase Price
(which shall be stated as a U.S. dollar amount and be calculated by the
Calculation Agent in accordance with clause (c) below), (C) the principal amount
and Final Maturity Date of the Exchange Notes and (D) the method by which
interest will be calculated on the Exchange Notes.
(c) The purchase price to be paid by any Dealer for the Exchange Notes (the
"Purchase Price") shall be equal to (i) the total principal amount of the
Exchange Notes, plus (ii) a premium (the "Exchange Notes Premium") which shall
be equal to the excess, if any, on the Coupon Reset Date of (A) the discounted
present value to the Coupon Reset Date of a bond with a maturity of May 1, 2008,
which has an interest rate of 5.75%, semi-annual interest payments on each May 1
and November 1, commencing November 1, 2003, and a principal amount of
$250,000,000, and assuming a discount rate equal to the Treasury Rate over (B)
$250,000,000. "Treasury Rate" for the Exchange Notes means the per annum rate
equal to the offer side yield to maturity of the current on-the-run five-year
United States Treasury security per Telerate page 500 (or any successor page or
substitute page as may replace such page on such service), at 11:00 a.m., New
York City time, on the 90th calendar day prior to the Coupon Reset Date (or such
other time or date that may be agreed upon by Consumers and the Calculation
Agent) or, if such rate does not appear on Telerate page 500 (or any successor
page or substitute page as may replace such page on such service) at such time,
the rate on GovPX End-of-Day Pricing at 3:00 p.m., New York City time, on such
date (or such other time or date that may be agreed upon by Consumers and the
Calculation Agent).
15
<PAGE> 16
(d) The Calculation Agent will provide written notice to Consumers by 12:30
p.m., New York City time, on the Bid Date, setting forth (i) the names of each
of the Dealers from whom the Calculation Agent received Bids on the Bid Date,
(ii) the Bid submitted by each such Dealer and (iii) the Purchase Price as
determined pursuant to paragraph (c) above. Unless the Call Option has
terminated, the Calculation Agent will thereafter select from the Bids received
the Bid with the lowest Yield to Maturity (the "Selected Bid") and set the
Coupon Reset Rate equal to the interest rate which would amortize the Exchange
Notes Premium fully over the term of the Exchange Notes at the Yield to Maturity
indicated by the Selected Bid; provided, however, that if the Calculation Agent
has not received a timely Bid from a Dealer on the Bid Date, the Selected Bid
shall be the lowest of all Bids received by such time, and provided further,
that if any two or more of the lowest Bids submitted are equivalent, Consumers
shall in its sole discretion select any of such equivalent Bids (and such
selected Bid shall be the Selected Bid). In all cases, Morgan Stanley & Co.
Incorporated, in its capacity as a dealer, has the right to match the Bid with
the lowest Yield to Maturity, whereby Morgan Stanley & Co. Incorporated's Bid
becomes the Selected Bid.
(e) Immediately after calculating the Coupon Reset Rate, the Calculation
Agent will provide written notice to Consumers and the Trustee, setting forth
the Coupon Reset Rate. At the request of the holders of any Exchange Notes, the
Calculation Agent will provide to the holders the Coupon Reset Rate. The Coupon
Reset Rate for the Exchange Notes will be effective from and including the
Coupon Reset Date.
(f) The Callholder will sell the Exchange Notes to the Dealer that made the
Selected Bid at the Purchase Price, such sale is to be settled on the Coupon
Reset Date in immediately available funds.
If the Calculation Agent determines (i) at any time prior to the sale of the
Exchange Notes on the Bid Date that an Event of Default has occurred and is
continuing under Sections 8.01(a)(1), (2), (3) or (4) (other than, with respect
to clause (4), any Event of Default resulting from a default under Section
11.01(d) or (e) of the Mortgage, as described below) of the Indenture (which
Events of Default are described in clauses (a) - (d) under "Events of Default"
herein) (in such event, termination is at the Callholder's option) or under
Sections 8.01(a)(4) (to the extent that such Event of Default results from a
default under Sections 11.01(d) or (e) of the Mortgage, as described in clause
(d) under "Description of First Mortgage Bonds -- Defaults" herein), (5) or (6)
of the Indenture (which defaults are described in clause (e) under "Events of
Default" herein) (in such event, termination is automatic), (ii) following the
Call Notice, the Callholder fails to pay the Call Price by 2:00 p.m., New York
City time, on the Business Day prior to the Coupon Reset Date due to the
occurrence of a Market Disruption Event (as defined below) or (iii) following
the Call Notice, fewer than two Dealers have submitted Bids in a timely manner
substantially as provided above, the Call Option will be automatically revoked
and terminated, and the Trustee will exercise the Mandatory Put on behalf of the
holders. "Market Disruption Event" shall mean any of the following: (A) a
suspension or material limitation in trading in securities generally on the New
York Stock Exchange or the establishment of minimum prices on such exchange; (B)
a general moratorium on commercial banking activities declared by either federal
or New York State authorities; (C) any material adverse change in the existing
financial, political or economic conditions in the United States of America; (D)
an outbreak or escalation of major hostilities involving the United States of
America or the declaration of a national emergency or war by the United States
of America; or (E) any material disruption of the U.S. treasury securities
market, U.S. corporate bond market or U.S. federal wire system; provided, in
each case, that in the judgment of the Calculation Agent the effect of the
foregoing makes it impracticable to conduct the Coupon Reset Process.
The Calculation Agency Agreement provides that the Calculation Agent may
resign at any time as Calculation Agent, such resignation to be effective ten
Business Days after the delivery to Consumers and the Trustee of notice of such
resignation. In such case, Consumers may appoint a successor Calculation Agent.
The Calculation Agent, in its individual capacity, may buy, sell, hold and
deal in the Exchange Notes and may exercise any vote or join in any action which
any holder of the Exchange Notes may be entitled to exercise or take as if it
were not the Calculation Agent. The Calculation Agent, in its individual
capacity, may also engage in or have an interest in any transaction with
Consumers or its affiliates as if it were not the Calculation Agent.
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<PAGE> 17
REGISTRATION, TRANSFER AND EXCHANGE
The Exchange Notes will initially be issued in the form of one or more
Global Exchange Notes, in registered form, without coupons, in denominations of
$1,000 or an integral multiple thereof as described under "Book-Entry; Delivery;
Form and Transfer." The Global Exchange Notes will be registered in the name of
a nominee of DTC. Each Global Exchange Note (and any Global Exchange Note issued
in exchange therefor) will be subject to certain restrictions on transfer set
forth therein as described under "Book-Entry; Delivery; Form and Transfer --
Transfers of Interests in Global Exchange Notes for Certificated Exchange
Notes." Except as set forth herein under "Book-Entry; Delivery; Form and
Transfer -- Transfers of Interests in Global Exchange Notes for Certificated
Exchange Notes," owners of beneficial interests in a Global Exchange Note will
not be entitled to have Exchange Notes registered in their names, will not
receive or be entitled to receive physical delivery of any such Exchange Note
and will not be considered the registered holder thereof under the Indenture.
Senior Notes of any series will be exchangeable for other Senior Notes of
the same series of any authorized denominations and of a like aggregate
principal amount and tenor. (Section 2.06)
Senior Notes may be presented for exchange or registration of transfer (duly
endorsed or accompanied by a duly executed written instrument of transfer), at
the office of the Trustee maintained in the Borough of Manhattan, The City of
New York, for such purpose with respect to any series of Senior Notes, without
service charge but upon payment of any taxes and other governmental charges as
described in the Indenture. Such transfer or exchange will be effected upon
Consumers and the Trustee being satisfied with the documents of title and
indemnity of the person making the request. (Sections 2.06, 2.07 and 6.02)
PAYMENT AND PAYING AGENTS
Payments of principal of and interest and premium, if any, on Exchange
Notes issued in the form of Global Exchange Notes shall be made by wire transfer
of immediately available funds to the account specified by the registered holder
of such Global Exchange Note, which shall initially be a nominee of DTC.
Interest on Exchange Notes (other than interest at maturity) that are in the
form of certificated notes ("Certificated Exchange Notes") will be paid by check
mailed to the person entitled thereto at such person's address as it appears in
the register for the Exchange Notes maintained by the Trustee; however, a holder
of Senior Notes of one or more series under the Indenture in the aggregate
principal amount of $10 million or more having the same interest payment dates
will be entitled to receive payments of interest on such series by wire transfer
of immediately available funds to a bank within the continental United States if
appropriate wire transfer instructions have been received by the Trustee on or
prior to the applicable Regular Record Date. The principal of, and interest at
maturity and premium, if any, on Exchange Notes in the form of Certificated
Exchange Notes will be payable in immediately available funds at the office of
the Trustee or at the authorized office of any paying agent.
(Section 2.12)
If and to the extent that Consumers fails to make timely payment of interest
on any Exchange Note, that interest shall cease to be payable to the persons who
were the holders of such Exchange Notes at the applicable Regular Record Date,
and shall instead become payable to the holder of such Exchange Note at the
close of business on a special record date established by the Trustee, which
special record date shall be not more than 15 or fewer than 10 days prior to the
date of the proposed payment. (Section 2.11)
All monies paid by Consumers to the Trustee for the payment of principal of,
interest or premium, if any, on any Exchange Note which remain unclaimed at the
end of two years after such principal, interest or premium shall have become due
and payable will be repaid to Consumers, subject to applicable abandoned
property laws, and the holder of such Exchange Note will thereafter look only to
Consumers for payment thereof. (Section 5.04)
In any case where the date of maturity of the principal of or any premium or
interest on any Exchange Note or the date fixed for redemption of any Exchange
Note is not a Business Day, then payment of such principal or any premium
17
<PAGE> 18
or interest need not be made on such date but may be made on the next succeeding
Business Day with the same force and effect as if made on the date of maturity
or the date fixed for redemption, and, in the case of timely payment thereof, no
interest shall accrue for the period from and after such interest payment date
or the date on which the principal or premium of the Exchange Note is stated to
be payable to such next succeeding Business Day. (Section 15.06) "Business Day"
means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on
which banks or trust companies in the Borough of Manhattan, The City of New
York, or in any other city where the corporate trust office of the Trustee may
be located, are obligated or authorized by law or executive order to close.
SECURITY; RELEASE DATE
Until the Release Date, the Senior Notes (including the Exchange Notes) will
be secured by one or more series of Consumers' First Mortgage Bonds ("Senior
Note Mortgage Bonds") issued and delivered by Consumers to the Trustee (see
"Description of First Mortgage Bonds"). Upon the issuance of a series of Senior
Notes (including the Exchange Notes) prior to the Release Date, Consumers will
simultaneously issue and deliver to the Trustee, as security for all Senior
Notes, a series of Senior Note Mortgage Bonds that will have the same stated
maturity date and corresponding redemption provisions, and will be in the same
aggregate principal amount as the series of the Senior Notes (including the
Exchange Notes) being issued. Any series of Senior Note Mortgage Bonds may, but
need not, bear interest. The series of Senior Note Mortgage Bonds to be issued
to the Trustee concurrently with the issuance of the Exchange Notes will bear
interest at the same rate as is borne by the Exchange Notes. Any payment by
Consumers to the Trustee of principal of, premium, if any, and interest on, a
series of Senior Note Mortgage Bonds will be applied by the Trustee to satisfy
Consumers' obligations with respect to principal of, premium, if any, and
interest on, the Senior Notes. (Sections 2.12(c), 4.10 and 4.11)
THE RELEASE DATE WILL BE THE DATE THAT ALL FIRST MORTGAGE BONDS ("FIRST
MORTGAGE BONDS") OF CONSUMERS ISSUED AND OUTSTANDING UNDER THE MORTGAGE, OTHER
THAN SENIOR NOTE MORTGAGE BONDS, HAVE BEEN RETIRED (AT, BEFORE OR AFTER THE
MATURITY THEREOF) THROUGH PAYMENT, REDEMPTION OR OTHERWISE. ON THE RELEASE DATE,
THE TRUSTEE WILL DELIVER TO CONSUMERS FOR CANCELLATION ALL SENIOR NOTE MORTGAGE
BONDS AND NOT LATER THAN 30 DAYS THEREAFTER, WILL PROVIDE NOTICE TO ALL HOLDERS
OF SENIOR NOTES (INCLUDING THE EXCHANGE NOTES) OF THE OCCURRENCE OF THE RELEASE
DATE. AS A RESULT, ON THE RELEASE DATE, THE SENIOR NOTE MORTGAGE BONDS SHALL
CEASE TO SECURE THE SENIOR NOTES (INCLUDING THE EXCHANGE NOTES), AND THE SENIOR
NOTES (INCLUDING THE EXCHANGE NOTES) WILL BECOME UNSECURED GENERAL OBLIGATIONS
OF CONSUMERS. (Section 4.11) Each series of Senior Note Mortgage Bonds will be a
series of First Mortgage Bonds of Consumers, all of which are secured by a lien
on certain property owned by Consumers. See "Description of First Mortgage Bonds
- -- Priority and Security." Upon the payment or cancellation of any outstanding
Senior Notes, the Trustee shall surrender to Consumers for cancellation an equal
principal amount of the related series of Senior Note Mortgage Bonds. Consumers
shall not permit, at any time prior to the Release Date, the aggregate principal
amount of Senior Note Mortgage Bonds held by the Trustee to be less than the
aggregate principal amount of Senior Notes outstanding. (Section 4.08) Following
the Release Date, Consumers will cause the Mortgage to be discharged and will
not issue any additional First Mortgage Bonds under the Mortgage. (Section 4.11)
While Consumers will be precluded after the Release Date from issuing additional
First Mortgage Bonds, it will not be precluded under the Indenture or Exchange
Notes from issuing or assuming other secured debt, or incurring liens on its
property, except to the extent indicated below under "Certain Covenants of
Consumers -- Limitation on Liens."
EVENTS OF DEFAULT
The following constitute events of default under the Indenture: (a) default
in the payment of principal of and premium, if any, on any Senior Note when due
and payable; (b) default in the payment of interest on any Senior Note when due
which continues for 60 days; (c) default in the performance or breach of any
other covenant or agreement of Consumers in the Senior Notes or in the Indenture
and the continuation thereof for 90 days after written notice thereof to
Consumers by the Trustee or the holders of at least 33% in aggregate principal
amount of the outstanding Senior Notes; (d) prior to the Release Date, the
occurrence of a default as defined in the Mortgage; provided, however, that the
waiver or cure of such default and the rescission and annulment of the
consequences thereof under the Mortgage shall
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<PAGE> 19
constitute a waiver of the corresponding event of default under the Indenture
and a rescission and annulment of the consequences thereof under the Indenture;
(e) certain events of bankruptcy, insolvency, reorganization, assignment or
receivership of Consumers; and (f) default in the payment of the Put Price with
respect to the Exchange Notes. (Section 8.01)
If an event of default occurs and is continuing, either the Trustee or the
holders of a majority in aggregate principal amount of the outstanding Senior
Notes may declare the principal amount of all Senior Notes to be due and payable
immediately. Upon such acceleration of the Senior Notes, the Senior Note
Mortgage Bonds shall be immediately redeemed upon demand of the Trustee (and
surrender thereof to the Mortgage Trustee) at a redemption price of 100% of the
principal amount thereof, together with interest to the redemption date. See
"Description of First Mortgage Bonds -- Redemption Provisions." At any time
after an acceleration of the Senior Notes has been declared but before a
judgment or decree for the payment of the principal amount of the Senior Notes
has been obtained (and provided the acceleration of all First Mortgage Bonds has
not occurred), if Consumers pays or deposits with the Trustee a sum sufficient
to pay all matured installments of interest and the principal and any premium
which has become due otherwise than by acceleration and all defaults shall have
been cured or waived, then such payment or deposit will cause an automatic
rescission and annulment of the acceleration of the Senior Notes. (Section 8.01)
The Indenture provides that the Trustee generally will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of Senior Notes unless such holders
have offered to the Trustee reasonable security or indemnity. (Section 9.02)
Subject to such provisions for indemnity and certain other limitations contained
in the Indenture, the holders of a majority in principal amount of the
outstanding Senior Notes generally will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or of exercising any trust or power conferred on the Trustee. The
holders of a majority in principal amount of the outstanding Senior Notes
generally will have the right to waive any past default or event of default
(other than a payment default) on behalf of all holders of Senior Notes.
(Section 8.07) The Indenture provides that no holder of Senior Notes may
institute any action against Consumers under the Indenture 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 a majority in
aggregate principal amount of Senior Notes then outstanding affected by such
event of default shall have requested the Trustee to institute such action and
shall have offered the Trustee reasonable indemnity, and the Trustee shall not
have instituted such action within 60 days of such request. Furthermore, no
holder of Senior Notes will be entitled to institute any such action if and to
the extent that such action would disturb or prejudice the rights of other
holders of Senior Notes. Notwithstanding that the right of a holder of Senior
Notes to institute a proceeding with respect to the Indenture is subject to
certain conditions precedent, each holder of a Senior Note has the right, which
is absolute and unconditional, to receive payment of the principal of and
premium, if any, and interest, if any, on such Senior Note when due and to
institute suit for the enforcement of any such payment, and such rights may not
be impaired without the consent of such holder of Senior Notes. (Section 8.04)
The Indenture provides that the Trustee, within 90 days after the occurrence of
a default with respect to the Senior Notes, is required to give the holders of
the Senior Notes notice of any such default known to the Trustee, unless cured
or waived, but, except in the case of default in the payment of principal of, or
premium, if any, or interest on, any Senior Notes, the Trustee may withhold such
notice if it determines in good faith that it is in the interest of such holders
to do so. (Section 8.08) Consumers is required to deliver to the Trustee each
year a certificate as to whether or not, to the knowledge of the officers
signing such certificate, Consumers is in compliance with the conditions and
covenants under the Indenture. (Section 6.06)
MODIFICATION
Modification and amendment of the Indenture may be effected by Consumers and
the Trustee with the consent of the holders of a majority in principal amount of
the outstanding Senior Notes affected thereby, provided that no such
modification or amendment may, without the consent of the holder of each
outstanding Senior Note affected thereby, (a) change the maturity date of any
Senior Note; (b) reduce the rate (or change the method of calculation thereof)
or extend the time of payment of interest on any Senior Note; (c) reduce the
principal amount of, or premium payable on, any Senior Note; (d) change the coin
or currency of any payment of principal of, or any premium or interest on, any
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Senior Note; (e) change the date on which any Senior Note may be redeemed or
repaid at the option of the holder thereof or adversely affect the rights of a
holder to institute suit for the enforcement of any payment on or with respect
to any Senior Note; (f) impair the interest of the Trustee in the Senior Note
Mortgage Bonds held by it or, prior to the Release Date, reduce the principal
amount of any series of Senior Note Mortgage Bonds securing the Senior Notes to
an amount less than the principal amount of the related series of Senior Notes
or alter the payment provisions of such Senior Note Mortgage Bonds in a manner
adverse to the holders of the Senior Notes; or (g) modify the foregoing
requirements or reduce the percentage of outstanding Senior Notes necessary to
modify or amend the Indenture or to waive any past default to less than a
majority. (Section 13.02) Modification and amendment of the Indenture may be
effected by Consumers and the Trustee without the consent of the holders in
certain cases, including (a) to add to the covenants of Consumers for the
benefit of the holders or to surrender a right conferred on Consumers in the
Indenture; (b) to add further security for the Senior Notes; (c) to add
provisions enabling Consumers to be released with respect to one or more series
of outstanding Senior Notes from its obligations under the covenants described
under "Certain Covenants of Consumers Limitation on Liens" and "-- Limitation on
Sale and Lease-Back Transactions" and "Consolidation, Merger and Sale or
Disposition of Assets" below, upon satisfaction of conditions with respect to
such series of Senior Notes which are the same as those described below under
"Defeasance and Discharge" (except that the opinion of tax counsel referred to
therein need not be based upon an External Tax Pronouncement (as defined in the
Indenture)); (d) to supply omissions, cure ambiguities or correct defects which
actions, in each case, are not prejudicial to the interests of the holders in
any material respect; or (e) to make any other change that is not prejudicial to
the holders of Senior Notes in any material respect. (Section 13.01)
Notwithstanding the provisions of Sections 13.01 and 13.02 of the Indenture,
Consumers has agreed that it shall not enter into any modification or amendment
of the Indenture, the Mortgage, the Exchange Notes or the Senior Note Mortgage
Bonds which would have a material adverse effect on the Callholder, without the
consent of such Callholder.
A supplemental indenture which changes or eliminates any covenant or other
provision of the Indenture (or any supplemental indenture) which has expressly
been included solely for the benefit of one or more series of Senior Notes, or
which modifies the rights of the holders of Senior Notes of such series with
respect to such covenant or provision, will be deemed not to affect the rights
under the Indenture of the holders of Senior Notes of any other series. (Section
13.02)
DEFEASANCE AND DISCHARGE
The Indenture provides that Consumers will be discharged from any and all
obligations in respect to the Senior Notes and the Indenture (except for certain
obligations such as obligations to register the transfer or exchange of Senior
Notes, replace stolen, lost or mutilated Senior Notes and maintain paying
agencies) if, among other things, Consumers irrevocably deposits with the
Trustee, in trust for the benefit of holders of Senior Notes, money or certain
United States government obligations, or any combination thereof, which through
the payment of interest thereon and principal thereof in accordance with their
terms will provide money in an amount sufficient, without reinvestment, to make
all payments of principal of, and any premium and interest on, the Senior Notes
on the dates such payments are due in accordance with the terms of the Indenture
and the Senior Notes; provided that, unless all of the Senior Notes are to be
due within 90 days of such deposit by redemption or otherwise, Consumers shall
also have delivered to the Trustee an opinion of counsel to the effect that the
holders of the Senior Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance or discharge of the
Indenture. Thereafter, the holders of Senior Notes must look only to such
deposit for payment of the principal of, and interest and any premium on, the
Senior Notes. (Section 5.01) Consumers has agreed not to cause the discharge of
the Exchange Notes as contemplated above prior to the Final Maturity Date
without the prior consent of the Callholder (which consent shall not be
unreasonably withheld).
CONSOLIDATION, MERGER AND SALE OR DISPOSITION OF ASSETS
Consumers will not consolidate with or merge into any other corporation or
sell or otherwise dispose of its properties as or substantially as an entirety
unless (i) the successor or transferee corporation shall be a corporation
organized and existing under the laws of the United States of America, any State
thereof, or the District of Columbia, (ii) the successor
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or transferee corporation assumes by supplemental indenture the due and punctual
payment of the principal of and premium and interest on all the Senior Notes and
the performance of every covenant of the Indenture to be performed or observed
by Consumers and (iii) if prior to the Release Date, the successor or transferee
corporation assumes Consumers' obligations under the Mortgage with respect to
the Senior Note Mortgage Bonds. (Section 12.01) Upon any such consolidation,
merger, sale, transfer or other disposition of the properties of Consumers
substantially as an entirety, the successor corporation formed by such
consolidation or into which Consumers is merged or to which such transfer is
made shall succeed to, and be substituted for, and may exercise every right and
power of, Consumers under the Indenture with the same effect as if such
successor corporation had been named as Consumers therein and Consumers will be
released from all obligations under the Indenture. (Section 12.02) For purposes
of the Indenture, the conveyance or other transfer by Consumers of (a) all or
any portion of its facilities for the generation of electric energy, (b) all of
its facilities for the transmission of electric energy or (c) all of its
facilities for the distribution of natural gas, in each case considered alone or
in any combination with properties described in any other clause, shall in no
event be deemed to constitute a conveyance or other transfer of all the
properties of Consumers, as or substantially as an entirety. (Section 12.01)
CERTAIN COVENANTS OF CONSUMERS
Limitation on Liens
The Indenture provides that, so long as any such Senior Notes are
outstanding, Consumers may not issue, assume, guarantee or permit to exist after
the Release Date any Debt that is secured by any mortgage, security interest,
pledge or lien ("Lien") of or upon any Operating Property of Consumers, whether
owned at the date of the Indenture or thereafter acquired, without in any such
case effectively securing the Senior Notes (together with, if Consumers shall so
determine, any other indebtedness of Consumers ranking equally with the Senior
Notes) equally and ratably with such Debt (but only so long as such Debt is so
secured).
The foregoing restriction will not apply to: (1) Liens on any Operating
Property existing at the time of its acquisition (which Liens may also extend to
subsequent repairs, alterations and improvements to such Operating Property);
(2) Liens on Operating Property of a corporation existing at the time such
corporation is merged into or consolidated with, or such corporation disposes of
its properties (or those of a division) as or substantially as an entirety to,
Consumers; (3) Liens on Operating Property to secure the cost of acquisition,
construction, development or substantial repair, alteration or improvement of
property or to secure indebtedness incurred to provide funds for any such
purpose or for reimbursement of funds previously expended for any such purpose,
provided such Liens are created or assumed contemporaneously with, or within 18
months after, such acquisition or the completion of substantial repair or
alteration, construction, development or substantial improvement; (4) Liens in
favor of any State or any department, agency or instrumentality or political
subdivision of any State, or for the benefit of holders of securities issued by
any such entity (or providers of credit enhancement with respect to such
securities), to secure any Debt (including, without limitation, obligations of
Consumers with respect to industrial development, pollution control or similar
revenue bonds) incurred for the purpose of financing all or any part of the
purchase price or the cost of substantially repairing or altering, constructing,
developing or substantially improving Operating Property of Consumers; or (5)
any extension, renewal or replacement (or successive extensions, renewals or
replacements), in whole or in part, of any Lien referred to in clauses (1)
through (4), provided, however, that the principal amount of Debt secured
thereby and not otherwise authorized by said clauses (1) to (4), inclusive,
shall not exceed the principal amount of Debt, plus any premium or fee payable
in connection with any such extension, renewal or replacement, so secured at the
time of such extension, renewal or replacement. However, the foregoing
restriction will not apply to the issuance, assumption or guarantee by Consumers
of Debt secured by a Lien which would otherwise be subject to the foregoing
restriction up to an aggregate amount which, together with all other secured
Debt of Consumers (not including secured Debt permitted under any of the
foregoing exceptions) and the Value (as defined below) of Sale and Lease-Back
Transactions (as defined below) existing at such time (other than Sale and
Lease-Back Transactions the proceeds of which have been applied to the
retirement of certain indebtedness, Sale and Lease-Back Transactions in which
the property involved would have been permitted to be subjected to a Lien under
any of the foregoing exceptions in clauses (1) to (5) and Sale and Lease-Back
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Transactions that are permitted by the first sentence of "Limitations on Sale
and Lease-Back Transactions" below), does not exceed the greater of 15% of Net
Tangible Assets or 15% of Capitalization. (Section 6.07).
Limitation on Sale and Lease-Back Transactions
The Indenture provides that so long as such Senior Notes are outstanding,
Consumers may not enter into or permit to exist after the Release Date any Sale
and Lease-Back Transaction with respect to any Operating Property (except for
transactions involving leases for a term, including renewals, of not more than
48 months), if the purchaser's commitment is obtained more than 18 months after
the later of the completion of the acquisition, construction or development of
such Operating Property or the placing in operation of such Operating Property
or of such Operating Property as constructed or developed or substantially
repaired, altered or improved. This restriction will not apply if (a) Consumers
would be entitled pursuant to any of the provisions described in clauses (1) to
(5) of the first sentence of the second paragraph under "Limitation on Liens"
above to issue, assume, guarantee or permit to exist Debt secured by a Lien on
such Operating Property without equally and ratably securing the Senior Notes,
(b) after giving effect to such Sale and Lease-Back Transaction, Consumers could
incur pursuant to the provisions described in the second sentence of the second
paragraph under "Limitation on Liens," at least $1.00 of additional Debt secured
by Liens (other than Liens permitted by clause (a)), or (c) Consumers applies
within 180 days an amount equal to, in the case of a sale or transfer for cash,
the net proceeds (not exceeding the net book value), and, otherwise, an amount
equal to the fair value (as determined by its Board of Directors) of the
Operating Property so leased to the retirement of Senior Notes or other Debt of
Consumers ranking equally with, the Senior Notes, subject to reduction for
Senior Notes and such Debt retired during such 180-day period otherwise than
pursuant to mandatory sinking fund or prepayment provisions and payments at
stated maturity. (Section 6.08).
Certain Definitions
"Capitalization" means the total of all the following items appearing on, or
included in, the consolidated balance sheet of Consumers: (i) liabilities for
indebtedness maturing more than twelve (12) months from the date of
determination; and (ii) common stock, preferred stock, Hybrid Preferred
Securities (as defined in the Indenture), premium on capital stock, capital
surplus, capital in excess of par value, and retained earnings (however the
foregoing may be designated), less, to the extent not otherwise deducted, the
cost of shares of capital stock of Consumers held in its treasury.
"Debt" means any outstanding debt for money borrowed evidenced by notes,
debentures, bonds or other securities, or guarantees of any thereof.
"Net Tangible Assets" means the amount shown as total assets on the
consolidated balance sheet of Consumers, less the following: (i) intangible
assets including, but without limitation, such items as goodwill, trademarks,
trade names, patents, and unamortized debt discount and expense and (ii)
appropriate adjustments, if any, on account of minority interests. Net Tangible
Assets shall be determined in accordance with generally accepted accounting
principles and practices applicable to the type of business in which Consumers
is engaged and that are approved by the independent accountants regularly
retained by Consumers, and may be determined as of a date not more than sixty
(60) days prior to the happening of the event for which such determination is
being made.
"Operating Property" means (i) any interest in real property owned by
Consumers and (ii) any asset owned by Consumers that is depreciable in
accordance with GAAP, excluding, in either case, any interest of Consumers as
lessee under any lease (except for a lease that results from a Sale and
Lease-Back Transaction) which has been or would be capitalized on the books of
the lessee in accordance with GAAP.
"Sale and Lease-Back Transaction" means any arrangement with any person
providing for the leasing to Consumers of any Operating Property (except for
leases for a term, including any renewals thereof, of not more than 48 months),
which Operating Property has been or is to be sold or transferred by Consumers
to such person; provided, however, Sale
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and Lease-back Transaction does not include any arrangement first entered into
prior to the date of the Indenture.
"Value" means, with respect to a Sale and Lease-Back Transaction, as of any
particular time, the amount equal to the greater of (i) the net proceeds to
Consumers from the sale or transfer of the property leased pursuant to such Sale
and Lease-Back Transaction or (ii) the net book value of such property, as
determined in accordance with generally accepted accounting principles by
Consumers at the time of entering into such Sale and Lease-Back Transaction, in
either case multiplied by a fraction, the numerator of which shall be equal to
the number of full years of the term of the lease that is part of such Sale and
Lease-Back Transaction remaining at the time of determination and the
denominator of which shall be equal to the number of full years of such term,
without regard, in any case, to any renewal or extension options contained in
such lease.
VOTING OF SENIOR NOTE MORTGAGE BONDS HELD BY TRUSTEE
The Trustee, as the holder of Senior Note Mortgage Bonds, will attend any
meeting of bondholders under the Mortgage, or, at its option, will deliver its
proxy in connection therewith as it relates to matters with respect to which it
is entitled to vote or consent. So long as no Event of Default as defined in the
Indenture has occurred and is continuing, the Trustee will vote or consent:
(a) in favor of amendments or modifications of the Mortgage of substantially
the same tenor and effect as follows:
(i) to eliminate the maintenance and replacement fund and to recover
amounts of net property additions previously applied in satisfaction thereof so
that the same would become available as a basis for the issuance of First
Mortgage Bonds;
(ii) to eliminate sinking funds or improvement funds ("S&I Funds") and
to recover amounts of net property additions previously applied in satisfaction
thereof so that the same would become available as a basis for the issuance of
First Mortgage Bonds;
(iii) to eliminate the restriction on the payment of dividends on common
stock and to eliminate the requirements in connection with the periodic
examination of the mortgaged and pledged property by an independent engineer;
(iv) to permit First Mortgage Bonds to be issued under the Mortgage in a
principal amount equal to 70% of unfunded net property additions instead of 60%,
to permit S&I Fund requirements (to the extent not otherwise eliminated) under
the Mortgage to be satisfied by the application of net property additions in an
amount equal to 70% of such additions instead of 60%, and to permit the
acquisition of property subject to certain liens prior to the lien of the
Mortgage if the principal amount of indebtedness secured by such liens does not
exceed 70% of the cost of such property instead of 60%;
(v) to eliminate requirements that Consumers deliver a net earnings
certificate for any purpose under the Mortgage;
(vi) to raise the minimum dollar amount of insurance proceeds on account
of loss or damage that must be payable to the Trustee from $50,000 to an amount
equal to the greater of (A) $5,000,000 and (B) three per centum (3%) of the
aggregate principal amount of First Mortgage Bonds outstanding;
(vii) to increase the amount of the fair value of property which may be
sold or disposed of free from the lien of the Mortgage, without any release or
consent by the Trustee, from not more than $25,000 in any calendar year to not
more than an amount equal to the greater of (A) $5,000,000 and (B) three per
centum (3%) of the aggregate principal amount of First Mortgage Bonds then
outstanding; and
(viii) to permit certain mortgaged and pledged property to be released
from the lien of the Mortgage if, in addition to certain other conditions, the
Trustee receives purchase money obligations of not more than 70% of the fair
value of
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such property instead of 60% and to eliminate the further requirement for the
release of such property that the aggregate principal amount of purchase money
obligations held by the Trustee not exceed 20% of the principal amount of First
Mortgage Bonds outstanding; and
(ix) to eliminate the restriction prohibiting the Mortgage Trustee from
applying cash held by it pursuant to the Mortgage to the purchase of bonds not
otherwise redeemable at a price exceeding 110% of the principal of such bonds,
plus accrued interest; and
(b) with respect to any other amendments or modifications of the Mortgage,
as follows: the Trustee shall vote all Senior Note Mortgage Bonds then held by
it, or consent with respect thereto, proportionately with the vote or consent of
the holders of all other first mortgage bonds outstanding under the Mortgage,
the holders of which are eligible to vote or consent; provided, however, that
the Trustee shall not so vote in favor of, or so consent to, any amendment or
modification of the Mortgage which, if it were an amendment or modification of
the Indenture, would require the consent of Holders of Senior Notes as described
under "Modification," without the prior consent of Holders of Senior Notes which
would be required for such an amendment or modification of the Indenture.
(Section 4.03)
RESIGNATION OR REMOVAL OF TRUSTEE
The Trustee may resign at any time upon written notice to Consumers
specifying the day upon which the resignation is to take effect and such
resignation will take effect immediately upon the later of the appointment of a
successor Trustee and such specified day. (Section 9.10)
The Trustee may be removed at any time by an instrument or concurrent
instruments in writing filed with the Trustee and signed by the holders, or
their attorneys-in-fact, of at least a majority in principal amount of the then
outstanding Senior Notes. In addition, so long as no Event of Default or event
which, with the giving of notice or lapse of time or both, would become an Event
of Default has occurred and is continuing, Consumers may remove the Trustee upon
notice to the holder of each Senior Note outstanding and the Trustee, and
appointment of a successor Trustee. (Section 9.10)
CONCERNING THE TRUSTEE
The Chase Manhattan Bank is both the Trustee under the Indenture and the
Mortgage Trustee under the Mortgage. Consumers and its affiliates maintain
depository and other normal banking relationships with The Chase Manhattan Bank.
The Chase Manhattan Bank is also a lender to Consumers and its affiliates. The
Indenture provides that Consumers' obligations to compensate the Trustee and
reimburse the Trustee for expenses, disbursements and advances will constitute
indebtedness which will be secured by a lien generally prior to that of the
Senior Notes upon all property and funds held or collected by the Trustee as
such.
GOVERNING LAW
The Indenture and each Senior Note will be governed by Michigan Law.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Exchange Notes will be issued initially in the form of one or more
registered global Exchange Notes without interest coupons (collectively, the
"Global Exchange Notes"). Upon issuance, the Global Exchange Notes will be
deposited with the Trustee, as custodian for DTC, and registered in the name of
DTC or its nominee, in each case for credit to the accounts of DTC's Direct and
Indirect Participants (as defined below).
The Global Exchange Notes may be transferred, in whole and not in part, only
to another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Exchange Notes
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may be exchanged for Exchange Notes in certificated form in certain limited
circumstances. See "--Transfer of Interests in Global Exchange Notes for
Certificated Exchange Notes."
Depositary Procedures
DTC has advised Consumers that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities that clear through or maintain
a direct or indirect, custodial relationship with a Direct Participant
(collectively, the "Indirect Participants"). DTC may hold securities
beneficially owned by other persons only through the Direct Participants or
Indirect Participants, and such other persons' ownership interest and transfer
of ownership interest will be recorded only on the records of the appropriate
Direct Participant and/or Indirect Participant, and not on the records
maintained by DTC.
DTC has also advised Consumers that, pursuant to DTC's procedures, (i) upon
deposit of the Global Exchange Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Exchange Notes allocated by the Initial Purchasers to such
Direct Participants, and (ii) DTC will maintain records of the ownership
interests of such Direct Participants in the Global Exchange Notes and the
transfer of ownership interests by and between Direct Participants. DTC will not
maintain records of the ownership interests of, or the transfer of ownership
interests by and between, Indirect Participants or other owners of beneficial
interests in the Global Exchange Notes. Direct Participants and Indirect
Participants must maintain their own records of the ownership interests of, and
the transfer of ownership interests by and between, Indirect Participants and
other owners of beneficial interests in the Global Exchange Notes.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form, of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Exchange Note
to such persons. Because DTC can act only on behalf of Direct Participants,
which in turn act on behalf of Indirect Participants and others, the ability of
a person having a beneficial interest in a Global Exchange Note to pledge such
interest to persons or entities that are not Direct Participants in DTC, or to
otherwise take actions in respect of such interests, may be affected by the lack
of physical certificates evidencing such interests. For certain other
restrictions on the transferability of the Exchange Notes see "--Transfers of
Interest in Global Exchange Notes for Certificated Exchange Notes."
EXCEPT AS DESCRIBED IN "--TRANSFERS OF INTERESTS IN GLOBAL EXCHANGE NOTES
FOR CERTIFICATED EXCHANGE NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL
EXCHANGE NOTES WILL NOT HAVE EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT
RECEIVE PHYSICAL DELIVERY OF EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE
CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY
PURPOSE.
Under the terms of the Indenture, Consumers and the Trustee will treat the
persons in whose names the Exchange Notes are registered (including Exchange
Notes represented by Global Exchange Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium and interest on Global Exchange
Notes registered in the name of DTC or its nominee will be payable by the
Trustee to DTC or its nominee as the registered holder under the Senior Debt
Indenture. Consequently, neither Consumers, the Trustee nor any agent of
Consumers or the Trustee has or will have any responsibility or liability for
(i) any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Exchange Notes or for maintaining, supervising
or reviewing any of DTC's records or any Direct Participant's or Indirect
Participant's records relating to the beneficial ownership interests in any
Global Exchange Note or (ii) any other matter relating to the actions and
practices of DTC or any of its Direct Participants or Indirect Participants.
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DTC has advised Consumers that its current payment practice (for payments of
principal, interest and the like) with respect to securities such as the
Exchange Notes is to credit the accounts of the relevant Direct Participants
with such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Exchange Notes as
shown on DTC's records. Payments by Direct Participants and Indirect
Participants to the beneficial owners of the Exchange Notes will be governed by
standing instructions and customary practices between them and will not be the
responsibility of DTC, the Trustee or Consumers. Neither Consumers nor the
Trustee will be liable for any delay by DTC or its Direct Participants or
Indirect Participants in identifying the beneficial owners of the Exchange
Notes, and Consumers and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the Exchange Notes for all purposes.
The Global Exchange Notes will trade in DTC's Same-Day Funds Settlement
System and, therefore, transfers between Direct Participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in immediately
available funds. Transfers between Indirect Participants who hold an interest
through a Direct Participant will be effected in accordance with the procedures
of such Direct Participant but generally will settle in immediately available
funds.
DTC has advised Consumers that it will take any action permitted to be taken
by a holder of Exchange Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Exchange Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Exchange Notes as to which such Direct Participant or Direct Participants
has or have given direction. However, if there is an Event of Default with
respect to the Exchange Notes, DTC reserves the right to exchange Global
Exchange Notes (without the direction of one or more of its Direct Participants)
for legended Exchange Notes in certificated form, and to distribute such
certificated forms of Exchange Notes to its Direct Participants. See
"--Transfers of Interests in Global Exchange Notes for Certificated Exchange
Notes."
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Exchange Notes among Direct Participants, it is under
no obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of Consumers or the Trustee
will have any responsibility for the performance by DTC, or its respective
Direct and Indirect Participants of their respective obligations under the rules
and procedures governing any of their operations.
The information in this section concerning DTC and its book-entry systems
has been obtained from sources that Consumers believes to be reliable, but
Consumers takes no responsibility for the accuracy thereof.
Transfers of Interests in Global Exchange Notes for Certificated Exchange Notes
An entire Global Exchange Note may be exchanged for Certificated Exchange
Notes if (i) (x) DTC notifies Consumers that it is unwilling or unable to
continue as Depositary for the Global Exchange Notes or Consumers determines
that DTC is unable to act as such Depositary and Consumers thereupon fails to
appoint a successor depositary within 90 days or (y) DTC has ceased to be a
clearing agency registered under the Exchange Act, (ii) Consumers, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
Certificated Exchange Notes or (iii) there shall have occurred and be continuing
a Default or an Event of Default with respect to the Exchange Notes. In any such
case, Consumers will notify the Trustee in writing that, upon surrender by the
Direct and Indirect Participants of their interest in such Global Exchange Note,
Certificated Exchange Notes will be issued to each person that such Direct and
Indirect Participants and the DTC identify as being the beneficial owner of the
related Exchange Notes.
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Beneficial interests in Global Exchange Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Exchange Notes upon request to
DTC, by such Direct Participant (for itself or on behalf of an Indirect
Participant), to the Trustee in accordance with customary DTC procedures.
Certificated Exchange Notes delivered in exchange for any beneficial interest in
any Global Exchange Note will be registered in the names, and issued in any
approved denominations, requested by DTC on behalf of such Direct or Indirect
Participants (in accordance with DTC's customary procedures).
Neither Consumers nor the Trustee will be liable for any delay by the holder
of the Global Exchange Notes or DTC in identifying the beneficial owners of
Exchange Notes, and Consumers and the Trustee may conclusively rely on, and will
be protected in relying on, instructions from the holder of the Global Exchange
Note or DTC for all purposes.
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DESCRIPTION OF FIRST MORTGAGE BONDS
GENERAL
The Senior Note Mortgage Bonds were issued under an Indenture dated as of
September 1, 1945, between Consumers and The Chase Manhattan Bank, as trustee
(the "Mortgage Trustee"), as amended and supplemented by various supplemental
indentures and as further supplemented by a Supplemental Indenture dated as of
May 1, 1998 providing for the series of Senior Note Mortgage Bonds relating to
the Exchange Notes (the "Mortgage"). In connection with the change of the state
of incorporation from Maine to Michigan in 1968, Consumers succeeded to and was
substituted for the Maine corporation under the Mortgage. At August 31, 1998,
four series of First Mortgage Bonds in an aggregate principal amount of
approximately $674 million were outstanding under the Mortgage, excluding four
series of First Mortgage Bonds in an aggregate principal amount of $925 million
to secure outstanding Senior Notes and one series of First Mortgage Bonds in an
aggregate principal amount of $30 million to secure outstanding pollution
control revenue bonds. The statements herein concerning the Senior Note Mortgage
Bonds and the Mortgage are an outline and do not purport to be complete. They
make use of defined terms and are qualified in their entirety by express
reference to the cited sections and articles of the Mortgage a copy of which
will be available upon request to the Trustee.
The Senior Note Mortgage Bonds relating to the Exchange Notes ("Senior Note
Exchange Mortgage Bonds") were issued as security for Consumers' obligations
under the Indenture and were delivered to and registered in the name of the
Trustee. The Senior Note Exchange Mortgage Bonds were issued as security for the
Notes and will secure the Exchange Notes until the Release Date. For purposes of
the Indenture, the Senior Note Exchange Mortgage Bonds shall be deemed to be the
"related series" of Senior Note Mortgage Bonds in respect of the Exchange Notes.
The Indenture provides that the Trustee shall not transfer any Senior Note
Mortgage Bonds except to a successor trustee, to Consumers (as provided in the
Indenture) or in compliance with a court order in connection with a bankruptcy
or reorganization proceeding of Consumers. The Trustee shall generally vote the
Senior Note Mortgage Bonds proportionately with what it believes to be the vote
of all other First Mortgage Bonds then outstanding except in connection with
certain amendments or modifications of the Mortgage, as described under
"Description of Exchange Notes -- Voting of Senior Note Mortgage Bonds Held by
Trustee."
The Senior Note Exchange Mortgage Bonds will correspond to the Exchange
Notes in respect of principal amount, interest rate, maturity date and
redemption provisions. Upon payment of the principal or premium, if any, or
interest on the Exchange Notes, Senior Note Exchange Mortgage Bonds in a
principal amount equal to the principal amount of such Exchange Notes will, to
the extent of such payment of principal, premium or interest, be deemed fully
paid and the obligation of Consumers to make such payment shall be discharged.
The Mortgage Trustee may conclusively assume that the obligation to make
payments on the Senior Note Exchange Mortgage Bonds has been discharged unless
it has received a written notice from the Trustee stating that timely payment on
the Exchange Notes has not been made.
REDEMPTION PROVISIONS
The Senior Note Exchange Mortgage Bonds will be redeemed on the respective
dates and in the respective principal amounts which correspond to the redemption
dates for, and the principal amounts to be redeemed of, the Exchange Notes. The
Senior Note Exchange Mortgage Bonds are not redeemable by operation of the
improvement fund or the maintenance or replacement provisions of the Mortgage,
or with the proceeds of released property.
In the event of an Event of Default under the Indenture and acceleration of
the Exchange Notes, the Senior Note Exchange Mortgage Bonds will be immediately
redeemable in whole, upon demand of the Trustee, at a redemption price of 100%
of the principal amount thereof, together with accrued interest to the
redemption date. See "Description of Exchange Notes -- Events of Default."
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PRIORITY AND SECURITY
The Senior Note Mortgage Bonds will rank pari passu as to security with
bonds of other series now outstanding or hereafter issued under the Mortgage,
which is a direct first lien on substantially all of Consumers' property and
franchises (other than certain property expressly excluded from the lien thereof
(such as cash, bonds, stock and certain other securities, contracts, accounts
and bills receivables, judgments and other evidences of indebtedness, stock in
trade, materials or supplies manufactured or acquired for the purpose of sale
and/or resale in the usual course of business or consumable in the operation of
any of the properties of Consumers, natural gas, oil and minerals, motor
vehicles and certain real property listed in Schedule A to the Mortgage)), and
subject to excepted encumbrances (and certain other limitations) as defined and
described in the Mortgage and subject to the provisions of MCL 324.20138. MCL
324.20138 provides that under certain circumstances, the State of Michigan's
lien against property on which it has incurred costs related to any response
activity that is subordinate to prior recorded liens can become superior to such
prior liens pursuant to court order. The Mortgage permits, with certain
limitations specified in Section 7.05, the acquisition of property subject to
prior liens and, under certain conditions specified in Section 7.14, permits the
issuance of additional indebtedness under such prior liens to the extent of 60%
of net property additions made by Consumers to the property subject to such
prior liens. (Granting Clauses, Article I.)
IMPROVEMENT FUND REQUIREMENT
The supplemental indentures under which certain series of outstanding bonds
have been issued provide for annual improvement fund payments, in cash and/or
bonds, in the amount of an "improvement fund requirement" (which generally is 1%
of the principal amount of such bonds, less certain bonds retired), which may
also be satisfied with, and cash withdrawn to the extent of, 60% of unfunded net
property additions. The Senior Note Exchange Mortgage Bonds will not have the
benefit of any sinking or improvement fund.
MAINTENANCE AND REPLACEMENT REQUIREMENT
The supplemental indentures under which all series of outstanding bonds
prior to the Sixty-seventh Supplemental Indenture have been issued have
incorporated certain covenants contained in Section 7.07 of the Mortgage. Such
covenants, in addition to a general covenant with respect to maintenance of the
mortgaged property, require Consumers as of the end of each calendar year to
have applied certain amounts for maintenance, renewals and replacements of the
mortgaged and pledged property. The supplemental indenture relating to the
Senior Note Exchange Mortgage Bonds does not incorporate Section 7.07 of the
Mortgage.
ISSUANCE OF ADDITIONAL FIRST MORTGAGE BONDS
Additional bonds may be issued under the Mortgage to the extent of 60% of
unfunded net property additions or against the deposit of an equal amount of
cash, if, for any period of twelve consecutive months within the fifteen
preceding calendar months the net earnings of Consumers (before income or excess
profit taxes) shall have been at least twice the interest requirement for one
year on all bonds outstanding and to be issued and on indebtedness of prior or
equal rank. Additional bonds may also be issued to refund bonds theretofore
outstanding under the Mortgage. Deposited cash may be applied to the retirement
of bonds or be withdrawn in an amount equal to the principal amount of bonds
which may be issued on the basis of unfunded net property additions. (Articles
I, IV, V and VI.) As of June 30, 1998, unfunded net property additions were $2.8
billion, and Consumers could issue $1.7 billion of additional bonds on the basis
of such property additions. In addition, at June 30, 1998, Consumers could issue
$731 million of additional bonds on the basis of bonds previously retired.
The Senior Note Exchange Mortgage Bonds were issued upon the basis of
retired bonds.
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RELEASE AND SUBSTITUTION OF PROPERTY
The Mortgage provides that, subject to various limitations, property may be
released from the lien thereof when sold or exchanged, or contracted to be sold
or exchanged, upon the basis of cash deposited with the Mortgage Trustee, bonds
or purchase money obligations delivered to the Mortgage Trustee, prior lien
bonds delivered to the Mortgage Trustee or reduced or assumed by the purchaser,
property additions acquired in exchange for the property released, or upon a
showing that unfunded net property additions exist. The Mortgage also permits
the withdrawal of cash upon a showing that unfunded net property additions exist
or against the deposit of bonds or the application thereof to the retirement of
bonds. (Articles VI, VII and X.)
LIMITATIONS ON DIVIDENDS
The supplemental indenture relating to the Senior Note Exchange Mortgage
Bonds does not restrict Consumers' ability to pay dividends on its Common Stock.
However, supplemental indentures relating to certain series of outstanding bonds
prohibit the payment of common dividends except out of retained earnings which
have accumulated since September 30, 1945 less the amount, if any, that actual
charges to income or retained earnings since December 31, 1945 for repairs,
maintenance and depreciation of certain of the property subject to the Indenture
are less than the maintenance and replacement requirements applicable pursuant
to Section 7.07 of the Indenture for the equivalent period.
MODIFICATION OF MORTGAGE
The Mortgage, the rights and obligations of Consumers and the rights of the
bondholders may be modified by Consumers with the consent of the holders of 75%
in principal amount of the bonds and of not less than 60% of the principal
amount of each series affected. In general, however, no modification of the
terms of payment of principal or interest and no modification affecting the lien
or reducing the percentage required for modification is effective against any
bondholder without the bondholder's consent. (Article XVII.) Consumers has
reserved the right without any consent or other action by the holders of bonds
of any series created after September 15, 1993 (including the Senior Note
Exchange Mortgage Bonds) or by the holder of any Senior Note or Exchange Note,
to amend the Mortgage in order to substitute a majority in principal amount of
bonds outstanding under the Mortgage for the 75% requirement set forth above
(and then only in respect of such series of outstanding bonds as shall be
affected by the proposed action) and to eliminate the requirement for a
series-by-series consent requirement.
CONCERNING THE MORTGAGE TRUSTEE
As of July 16, 1984, Citibank, N.A. resigned as Trustee under the Mortgage
and was replaced by Manufacturers Hanover Trust Company. As of June 19, 1992
Chemical Bank became successor Mortgage Trustee, and as of July 15, 1996 The
Chase Manhattan Bank became successor Mortgage Trustee.
The Chase Manhattan Bank is also the Trustee under the Indenture. Consumers
and its affiliates maintain depository and other normal banking relationships
with The Chase Manhattan Bank. The Chase Manhattan Bank is also a lender to
Consumers and its affiliates. The Mortgage provides that Consumers' obligations
to compensate the Mortgage Trustee and reimburse the Trustee for expenses,
disbursements and advances will constitute indebtedness which will be secured by
a lien generally prior to that of the Senior Note Mortgage Bonds upon all
property and funds held or collected by the Mortgage Trustee as such.
The Mortgage Trustee or the holders of 20% in aggregate principal amount of
the bonds may declare the principal due on default, but the holders of a
majority in aggregate principal amount may annul such declaration and waive the
default if the default has been cured. (Section 11.05.) Subject to certain
limitations, the holders of a majority in aggregate principal amount may
generally direct the time, method and place of conducting any proceeding for the
enforcement of the Mortgage. (Sections 11.01 and 11.12.) No bondholder has the
right to institute any proceedings for
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the enforcement of the Mortgage unless such holder shall have given the Mortgage
Trustee written notice of a default, the holders of 20% of outstanding bonds
shall have tendered to the Mortgage Trustee reasonable security or indemnity
against costs, expenses and liabilities and requested the Mortgage Trustee to
take action, the Mortgage Trustee shall have declined to take action or failed
to do so within sixty days and no inconsistent directions shall have been given
by the holders of a majority in aggregate principal amount of the bonds.
(Section 11.14.) The Mortgage Trustee is not required to advance or risk its own
funds or otherwise incur personal financial liability in the performance of any
of its duties if there is reasonable ground for believing that repayment is not
reasonably assured to it. (Section 16.03.)
DEFAULTS
By Section 11.01 of the Mortgage, the following are defined as "defaults":
failure to pay principal when due; failure to pay interest for sixty days;
failure to pay any installment of any sinking or other purchase fund for ninety
days; certain events in bankruptcy, insolvency or reorganization; failure to
perform any other covenant for ninety days following written demand by the
Mortgage Trustee for Consumers to cure such failure. Consumers has covenanted to
pay interest on any overdue principal and (to the extent permitted by law) on
overdue installments of interest, if any, on the bonds under the Mortgage at the
rate of 6% per annum. The Mortgage does not contain a provision requiring any
periodic evidence to be furnished as to the absence of default or as to
compliance with the terms thereof. However, Consumers is required by law to
furnish annually to the Trustee a certificate as to compliance with all
conditions and covenants under the Mortgage.
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THE EXCHANGE OFFER
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Notes were sold by Consumers on May 1, 1998 pursuant to the Purchase
Agreement dated April 28, 1998 (the "Purchase Agreement") by and among Consumers
and the Initial Purchasers and were subsequently offered by the Initial
Purchasers to qualified institutional buyers pursuant to Rule 144A that are
accredited investors in a manner exempt from registration under the Securities
Act as well as to purchasers pursuant to Regulation S under the Securities Act.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement which has been filed as an
exhibit to the Exchange Offer Registration Statement and a copy of which is
available as set forth in "Available Information."
Consumers and the Initial Purchasers entered into the Registration Rights
Agreement dated as of May 1, 1998. Pursuant to the Registration Rights
Agreement, Consumers agreed to file with the Commission a registration statement
(the "Exchange Offer Registration Statement") on the appropriate form under the
Securities Act with respect to the offer to exchange the Notes for a new series
of notes of Consumers (the "Senior Notes, 6.20% Reset Put Securities(SM), Series
B, Due 2008" or "Exchange Notes") registered under the Securities Act with terms
substantially identical to those of the Notes (the "Exchange Offer") (except
that the Exchange Notes will not contain terms with respect to transfer
restrictions or for provision of additional interest during the continuation of
a Registration Default (as defined below)). Upon the effectiveness of the
Exchange Offer Registration Statement, Consumers will offer Exchange Notes
pursuant to the Exchange Offer in exchange for Transfer Restricted Securities
(as defined herein) to the Holders of Transfer Restricted Securities who are
able to make certain representations. If (i) Consumers is not required to file
the Exchange Offer Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any Holder of Transfer Restricted Securities notifies
Consumers that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) it may not resell the Exchange Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) it is a
broker-dealer and owns Notes acquired directly from Consumers or an affiliate of
Consumers, Consumers will file with the Commission a shelf registration
statement (the "Shelf Registration Statement") to cover resales of the Notes by
the Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. Consumers will
use its best efforts to cause the applicable registration statement to be
declared effective by the Commission on or prior to 180 days after such filing
obligation arises. For purposes of the foregoing, "Transfer Restricted
Securities" means each Note until (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for an Exchange Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of an Note for an Exchange Note, the date on which such an Exchange Note
is sold to a purchaser who receives from such broker-dealer on or prior to the
date of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement, or (iv) the date on which such Note is eligible to be
distributed to the public pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement will provide that (i) Consumers will file
an Exchange Offer Registration Statement with the Commission on or prior to 150
days after the closing date, (ii) Consumers will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 180 days after the closing date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, Consumers will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
business days after the date on which the Exchange Offer Registration Statement
was declared effective by the Commission, Exchange Notes in exchange for all
Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file
the Shelf Registration Statement, Consumers will file the Shelf Registration
Statement with the Commission on or prior to 150 days after such filing
obligation arises and to use its best efforts to cause the Shelf Registration to
be declared effective by the Commission on or prior to 180 days after the date
on which Consumers becomes obligated to file such Shelf
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Registration Statement. Except as provided in the next paragraph, if (a)
Consumers fails to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) Consumers fails to consummate the Exchange
Offer within 30 business days after the Exchange Offer Registration Statement is
first declared effective or (d) the Shelf Registration Statement or the Exchange
Offer Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above being a "Registration
Default"), then Consumers will pay additional interest to each Holder of Notes
at a rate of .25% per annum until all such Registration Defaults are cured. All
accrued additional interest will be paid by Consumers on each interest payment
date to the Depositary by wire transfer of immediately available funds or by
federal funds check and to Holders of certificated securities by mailing checks
to their registered addresses. Following the cure of all Registration Defaults,
the accrual of additional interest will cease.
Holders of Notes will be required to make certain representations to
Consumers (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
additional interest set forth above.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean November 13, 1998, unless Consumers,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
To extend the Expiration Date, Consumers will notify the Exchange Agent of
any extension by oral or written notice and will notify the holders of the Notes
by means of a press release or other public announcement prior to 9:00 A.M., New
York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that Consumers is extending the
Exchange Offer for a specified period of time.
Consumers reserves the right (i) to delay acceptance of any Notes, to extend
the Exchange Offer or to terminate the Exchange Offer and not permit acceptance
of Notes not previously accepted if any of the conditions set forth herein under
"- Conditions" shall have occurred and shall not have been waived by Consumers,
by giving oral or written notice of such delay, extension or termination to the
Exchange Agent, or (ii) to amend the terms of the Exchange Offer in any manner
deemed by it to be advantageous to the holders of the Notes. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the Exchange Agent. If the
Exchange Offer is amended in a manner determined by Consumers to constitute a
material change, Consumers will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of the Notes of such amendment.
Without limiting the manner in which Consumers may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, Consumers shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will accrue interest at the rate of 6 20% per annum from
November 1, 1998 until the Coupon Reset Date. If the Callholder has elected to
exercise the Call Option, the interest rate on the Exchange Notes will be reset
by the Calculation Agent (as defined herein) effective on the Coupon Reset Date
pursuant to the Coupon Reset
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Process. Interest on the Exchange Notes is payable semiannually on May 1 and
November 1, commencing May 1, 1999.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Notes into the
Exchange Agent's account at The Depositary (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (ii) the holder
must comply with the guaranteed delivery procedures described below. THE METHOD
OF DELIVERY OF LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE
EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS
BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTERS OF TRANSMITTAL OR OTHER REQUIRED DOCUMENTS SHOULD BE SENT TO CONSUMERS.
Delivery of all documents must be made to the Exchange Agent at its address set
forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
The tender by a holder of Notes will constitute an agreement between such
holder and Consumers in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal. Any beneficial owner whose
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should contact such registered
holder promptly and instruct such registered holder to tender on his behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be medallion guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor' institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Notes
tendered pursuant thereto are tendered for the account of an Eligible
Institution.
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations, or
others acting in a fiduciary or representative capacity, such person should so
indicate when signing, and unless waived by Consumers, evidence satisfactory to
Consumers of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Notes will be determined by Consumers,
in its sole discretion, which determination will be final and binding. Consumers
reserves the absolute right to reject any and all Notes not properly tendered or
any Notes which, if accepted, would, in the opinion of counsel for Consumers, be
unlawful. Consumers also reserves the absolute right to waive any irregularities
or conditions of tender as to particular Notes. Consumers' interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Notes must be cured
within such time as Consumers shall determine. Neither Consumers, the Exchange
Agent nor any other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Notes, nor shall any of
them incur any liability for failure to give such notification. Tenders of Notes
will not be deemed to have been made until such irregularities have been cured
or waived. Any Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned without cost to such holder by the Exchange Agent,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, Consumers reserves the right, in its sole discretion, subject
to the provisions of the Senior Debt
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Indenture, to purchase or make offers for any Notes that remain outstanding
subsequent to the Expiration Date or, as set forth under "- Conditions," to
terminate the Exchange Offer in accordance with the terms of the Registration
Agreement, and to the extent permitted by applicable law, purchase Notes in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.
ACCEPTANCE OF NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Notes properly tendered will be accepted promptly after the Expiration Date,
and the Exchange Notes will be issued promptly after acceptance of the Notes.
See "- Conditions." For purposes of the Exchange Offer, Notes shall be deemed to
have been accepted as validly tendered for exchange when, as and if Consumers
has given oral or written notice thereof to the Exchange Agent.
In all cases, issuance of Exchange Notes for Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a Book-Entry Confirmation of such Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility, a properly
completed and duly executed Letter of Transmittal and all other required
documents. If any tendered Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer, such unaccepted or such
nonexchanged Notes will be credited to an account maintained with such
Book-Entry Transfer Facility as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Notes at the Book-Entry Transfer Facility for purposes of the Exchange
Offer within two business days after the date of this Prospectus. Any financial
institution that is a participant in the Book-Entry Transfer Facility's systems
may make book-entry delivery of Notes by causing the Book-Entry Transfer
Facility to transfer such Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for transfer. However, the Letter of Transmittal (or
facsimile) thereof with any required signature guarantees and any other required
documents must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth under "- Exchange Agent" on or prior to
the Expiration Date or the guaranteed delivery procedures described below must
be complied with.
GUARANTEED DELIVERY PROCEDURES
If the procedures for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by Consumers (by facsimile transmission, mail
or hand delivery), setting forth the name and address of the holder of Notes and
the amount of Notes tendered, stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange, Inc. ("NYSE"') trading
days after the date of execution of the Notice of Guaranteed Delivery, a
Book-Entry Confirmation and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, and (iii) a Book-Entry Confirmation and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within three NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date at one of the addresses set forth under "- Exchange Agent." Any
such notice of withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility from
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which the Notes were tendered, identify the principal amount of the Notes to be
withdrawn, and specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Notes and otherwise comply
with the procedures of such Book-Entry Transfer Facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notice
will be determined by Consumers, whose determination shall be final and binding
on all parties. Any Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Notes which have
been tendered for exchange but which are not exchanged for any reason will be
credited to an account maintained with such Book-Entry Transfer Facility for the
Notes as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Notes may be retendered by
following one of the procedures described under "- Procedures for Tendering" and
"- Book-Entry Transfer" at any time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Notes will not be
required to be accepted for exchange, nor will Exchange Notes be issued in
exchange for any Notes, and Consumers may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Notes, if, because of any
change in law, or applicable interpretations thereof by the Commission,
Consumers determines that it is not permitted to effect the Exchange Offer.
Consumers has no obligation to, and will not knowingly, permit acceptance of
tenders of Notes from affiliates of Consumers or from any other holder or
holders who are not eligible to participate in the Exchange Offer under
applicable law or interpretations thereof by the Staff of the Commission, or if
the Exchange Notes to be received by such holder or holders of Notes in the
Exchange Offer, upon receipt, will not be tradable by such holder without
restriction under the Securities Act and the Exchange Act and without material
restrictions under the "blue sky" or securities laws of substantially all of the
states of the United States.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Mail (Certified, Registered, Overnight or First Class) or Hand Delivery:
The Chase Manhattan Bank
55 Water Street. Room 234
North Building
New York, New York 10041
By Facsimile
(For Eligible Institutions Only)
(212)638-7380
Telephone Number
(212) 638-0828
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Consumers. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of Consumers.
Consumers will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange
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Offer. Consumers, however, will pay the Exchange Agent reasonable and customary
fees for its services and will reimburse the Exchange Agent for its reasonable
out-of-pocket expenses in connection therewith.
The expenses to be incurred in connection with the Exchange Offer will be
paid by Consumers, including fees and expenses of the Exchange Agent and the
Trustee, and accounting, legal, printing and related fees and expenses.
Consumers will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, Exchange Notes or Notes
for principal amounts not tendered or accepted for exchange are to be registered
or issued in the name of any person other than the registered holder of the
Notes tendered, or if tendered Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, Consumers believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered
for resale, resold and otherwise transferred by any owner of such Exchange Notes
(other than any such owner which is an "affiliate" of Consumers within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such owner's
business and such owner does not intend to participate, and has no arrangement
or understanding with any person to participate, in the distribution of such
Exchange Notes. Any owner of Notes who tenders in the Exchange Offer with the
intention to participate, or for the purpose of participating, in a distribution
of the Exchange Notes may not rely on the position of the staff of the
Commission enunciated in Exxon Capital Holdings Corporation (available May
13,1988, as interpreted in the Commission's letter to Shearman & Sterling dated
July 2, 1993) and Morgan Stanley & Co., Incorporated (available June 5, 1991),
Warnaco, Inc.(available June 5, 1991), and Epic Properties, Inc. (available
October 21, 1991) or similar no-action letters (collectively the "No-Action
Letters") but rather must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction. In
addition, any such resale transaction should be covered by an effective
registration statement containing the selling security holders information
required by Item 507 of Regulation S-K of the Securities Act. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Notes, where
such Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, may be a statutory underwriter and must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes.
By tendering in the Exchange Offer, each Holder (or DTC participant, in the
case of tenders of interests in the Global Notes held by DTC) will represent to
Consumers (which representation may be contained the Letter of Transmittal) to
the effect that (A) it is not an affiliate of Consumers, (B) it is not engaged
in, and does not intend to engage in, and has no arrangement or understanding
with any person to participate in, a distribution of the Exchange Notes to be
issued in the Exchange Offer and (C) it is acquiring the Exchange Notes in its
ordinary course of business. Each Holder will acknowledge and agree that any
broker-dealer and any such Holder using the Exchange Offer to participate in a
distribution of the Exchange Notes acquired in the Exchange Offer (1) could not
under Commission policy as in effect on the date of the Registration Rights
Agreement rely on the position of the Commission enunciated in the No-Action
Letters, and (2) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K if the
resales are of Exchange Notes obtained by such Holder in exchange for Notes
acquired by such Holder directly from Consumers or an affiliate thereof.
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To comply with the securities laws of certain jurisdictions, it may be
necessary to qualify for sale or to register the Exchange Notes prior to
offering or selling such Exchange Notes. Consumers has agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to cooperate with selling Holders or underwriters in connection with
the registration and qualification of the Exchange Notes for offer or sale under
the securities or "blue sky" laws of such jurisdictions as may be necessary to
permit the holders of Exchange Notes to trade the Exchange Notes without any
restrictions or limitations under the securities laws of the several states of
the United States.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Notes who do not exchange their Notes for Exchange Notes pursuant
to the Exchange Offer will continue to be subject to the restrictions on
transfer of such Notes as set forth in the legend thereon as a consequence of
the issuance of the Notes pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act and applicable
state securities laws. In general, the Notes may not be registered under the
Securities Act, except pursuant a transaction not subject to, the Securities Act
and applicable state securities laws. Consumers does not currently anticipate
that it will register the Notes under the Securities Act. To the extent that
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Notes could be adversely affected.
DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item appears (i) under "Nominees for
Election as Directors" on pages 2 through 5 of CMS Energy Corporation's
definitive Proxy Statement, dated April 20, 1998, relating to its 1998 Annual
Meeting of Shareholders (the "1998 Proxy Statement"); (ii) under "Section 16(a)
Beneficial Ownership Reporting Compliance" on page 6 of the 1998 Proxy
Statement; and (iii) under "CMS Energy and Consumers Executive Officers" on
pages 21 through 23 of CMS Energy and Consumers Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, all of which information is
incorporated by reference.
EXECUTIVE COMPENSATION
The information required by this item appears under (i) "Executive
Compensation" on pages 10 through 12 of the 1998 Proxy Statement; (ii)
"Executive Compensation" on pages 3 and 4 of Consumers Energy Company's
definitive Proxy Statement, dated April 20, 1998, relating to its 1998 Annual
Meeting of Shareholders; and (iii) "Organization and Compensation Committee
Report" on pages 13 through 14 of the 1998 Proxy Statement all of which
information is incorporated by reference.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OF NOTES
FOR EXCHANGE NOTES
The following summary describes the principal United States federal income
tax consequences to holders who exchange Notes for Exchange Notes pursuant to
the Exchange Offer. This summary is intended to address the beneficial owners of
Notes that are citizens or residents of the United States, corporations,
partnerships or other entities created or organized in or under the laws of the
United States or any State or the District of Columbia, or estates or trusts
that are not foreign estates or trusts for United States federal income tax
purposes, in each case, that hold the Notes as capital assets.
The exchange of Notes for Exchange Notes pursuant to the Exchange Offer will
not constitute a taxable exchange for United States federal income tax purposes.
As a result, a holder of a Note whose Note is accepted in the Exchange Offer
will not recognize gain or loss on the exchange. A tendering holder's tax basis
in the Exchange Notes received pursuant to the Exchange Offer will be the same
as such holder's tax basis in the Notes surrendered therefor. A tendering
holder's holding period for the Exchange Notes received pursuant to the Exchange
Offer-will include its holding period for the Notes surrendered therefor.
ALL HOLDERS OF NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE EXCHANGE OF
NOTES FOR EXCHANGE NOTES, AND OF THE OWNERSHIP AND DISPOSITION OF EXCHANGE NOTES
RECEIVED IN THE EXCHANGE OFFER IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE
EXCHANGE NOTES
The following is a summary of the material United States federal income tax
consequences of the acquisition, ownership and disposition of the Notes or the
Exchange Notes by a United States Holder (as defined below). This summary deals
only with the United States Holders that will hold the Notes or the Exchange
Notes as capital assets. The discussion does not cover-all aspects of federal
taxation that may be relevant to, or the actual tax effect that any of the
matters described herein will have on, the acquisition, ownership or disposition
of the Notes or the Exchange Notes by particular investors, and does not address
state, local, foreign or other tax laws. In particular, this summary does not
discuss all of the tax considerations that may be relevant to certain types of
investors subject to special treatment under the federal income tax laws (such
as banks, insurance companies, investors liable for the alternative minimum tax,
individual retirement accounts and other tax-deferred accounts, tax-exempt
organizations, dealers in securities or currencies, investors that will hold the
Notes or the Exchange Notes as part of straddles, hedging transactions or
conversion transactions for federal tax purposes or investors whose functional
currency is not United States Dollars). Furthermore, the discussion below is
based on provisions of the Internal Revenue Code of 1986, as amended, and
regulations, rulings, and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified so as to result in
U.S. federal income tax consequences different from those discussed below.
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP, OR DISPOSITION OF EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME
TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR INTERNATIONAL TAXING
JURISDICTION.
As used herein, the term "United States Holder" means a beneficial owner of
the Notes or the Exchange Notes that is (i) a citizen or resident of the United
States for United States federal income tax purposes, (ii) a corporation created
or organized under the laws of the United States or any State thereof, (iii) a
person or entity that is otherwise subject to United States federal income tax
on a net income basis in respect of income derived from the Notes or the
Exchange Notes, or (iv) a partnership to the extent the interest therein is
owned by a person who is described in clause (i), (ii) or (iii) of this
paragraph.
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INTEREST
Interest paid on an Existing Note or an Exchange Note will be taxable to a
United States Holder as ordinary income at the time it is received or accrued,
depending on the holder's method of accounting for tax purposes.
PURCHASE, SALE, EXCHANGE, RETIREMENT AND REDEMPTION OF THE EXCHANGE NOTES
In general (with certain exceptions described below) a United States
Holder's tax basis in an Exchange Note will equal the price paid for the Notes
for which such Exchange Note was exchanged pursuant to the Exchange Offer. A
United States Holder generally will recognize gain or loss on the sale,
exchange, retirement, redemption or other disposition of an Note or an Exchange
Note (or portion thereof) equal to the difference between the amount realized on
such disposition and the United States Holder's tax basis in the Note or the
Exchange Note (or portion thereof). Except to the extent attributable to accrued
but unpaid interest, gain or loss recognized on such disposition of an Note or a
Exchange Note will be capital gain or loss. Under the "Taxpayer Relief Act of
1997" (the "Taxpayer Act") the maximum rate applicable to long-term capital
gains of individuals has been reduced to 20%. However, the Taxpayer Act also
extends the holding period for long-term capital gains to 18 months for capital
assets disposed of after July 28, 1997. Gain on capital assets held between 12
months and 18 months are subject to tax at a maximum rate of 28%. Any such gain
will generally be United States source gain.
BOND PREMIUM
If a United States Holder acquires an Exchange Note or has acquired a Note,
in each ease, for an amount more than its redemption price, the Holder may elect
to amortize such bond premium on a yield to maturity basis. Once made, such an
election applies to all bonds (other than bonds the interest on which is
excludable from gross income) held by the United States Holder at the beginning
of the first taxable year to which the election applies or thereafter acquired
by the United States Holder, unless the IRS consents to a revocation of the
election. The basis of an Exchange Note will be reduced by any amortizable bond
premium taken as a deduction,
MARKET DISCOUNT
The purchase of an Exchange Note or the purchase of a Note other than at
original issue may be affected by the market discount provisions of the Code.
These rules generally provide that, subject to a statutorily defined de minimis
exception, if a United States Holder purchases an Exchange Note (or purchased a
Note) at a "market discount," as defined below, and thereafter recognizes gain
upon a disposition of the Exchange Note (including dispositions by gift or
redemption), the lesser of such gain (or appreciation, in the case of a gift) or
the portion of the market discount that has accrued ("accrued market discount")
while the Exchange Note (and its predecessor Note, if any) was held by such
United States Holder will be treated as ordinary interest income at the time of
disposition rather than as capital gain. For an Exchange Note or a Note, "market
discount" is the excess of the stated redemption price at maturity over the tax
basis immediately after its acquisition by a United States Holder. Market
discount generally will accrue ratably during the period from the date of
acquisition to the maturity date of the Exchange Note, unless the United States
Holder elects to accrue such discount on the basis of the constant yield method.
Such an election applies only to the Exchange Note with respect to which it is
made and is irrevocable.
In lieu of including the accrued market discount income at the time of
disposition, a United States Holder of an Exchange Note acquired at a market
discount (or acquired in exchange for a Note acquired at a market discount) may
elect to include the accrued market discount in income currently either ratably
or using the constant yield method. Once made, such an election applies to all
other obligations that the United States Holder purchases at a market discount
during the taxable year for which the election is made and in all subsequent
taxable years of the United States Holder, unless the Internal Revenue Service
consents to a revocation of the election. If an election is made to include
accrued market discount in income currently, the basis of a Exchange Note (or,
where applicable, a predecessor Note) in the hands of the United States Holder
will be increased by the accrued market discount thereon as it is includible in
income.
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A United States Holder of a market discount Exchange Note who does not elect to
include market discount in income currently generally will be required to defer
deductions for interest on borrowings allocable to such Exchange Note, if any,
in an amount not exceeding the accrued market discount on such Exchange Note
until the maturity or disposition of such Exchange Note.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of interest and principal on, and the proceeds of sale or other
disposition of the Notes or the Exchange Notes payable to a United States
Holder, may be subject to information reporting requirements and backup
withholding at a rate of 31% will apply to such payments if the United States
Holder fails to provide an accurate taxpayer identification number or to report
all interest and dividends required to be shown on its federal income tax
returns. Certain United States Holders (including, among others, corporations)
are not subject to backup withholding. United States Holders should consult
their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connections with resales of the Exchange Notes received in exchange for the
Notes where such Notes were acquired as a result of market-making activities or
other trading activities. Consumers has agreed that, starting on the Expiration
Date and ending on the close of business on the first anniversary of the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
Consumers will not receive any proceeds from any sale of the Exchange Notes
by broker-dealers. The Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the counter market, in negotiated transaction,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, Consumers will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. Consumers has agreed to pay all expenses incident to the
Exchange Offer and will indemnify the holders of the Exchange Notes against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Opinions as to the legality of the Exchange Notes will be rendered for
Consumers by Michael D. Van Hemert, Assistant General Counsel for CMS Energy,
Consumers' parent. Certain United States Federal income taxation matters will be
passed upon for Consumers by Theodore J. Vogel, tax counsel for CMS Energy.
EXPERTS
The consolidated financial statements and schedules of Consumers as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997 incorporated by reference in this Prospectus, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
With respect to the unaudited interim consolidated financial information for
the periods ended March 31, and June 30, 1998 and 1997, Arthur Andersen LLP has
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate reports thereon state that
they did not audit and they did not express an opinion on that interim
consolidated financial information. Accordingly, the degree of reliance on their
reports on that information should be restricted in light of the limited nature
of the review procedures applied. In addition, the accountants are not subject
to the liability provisions of Section 11 of the Securities Act, for their
reports on the unaudited interim consolidated financial information because
these reports are not "reports" or "part" of the
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registration statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act.
Future consolidated financial statements of Consumers and the reports
thereon of Arthur Andersen LLP also will be incorporated by reference in this
Prospectus in reliance upon the authority of that firm as experts in giving
those reports to the extend that said firm has audited said consolidated
financial statements and consented to the use of their reports thereon.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CONSUMERS,
THE INITIAL PURCHASERS OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE EXCHANGE NOTES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
PAGE
Available Information.............................. 1
Incorporation of Certain Documents by
Reference........................................ 1
Prospectus Summary................................. 2
Consumers Energy Company........................... 10
Selected Consolidated Financial Data............... 12
Use of Proceeds.................................... 12
Ratio of Earnings to Fixed Charges................. 12
Description of Exchange Notes...................... 13
Description of First Mortgage Bonds................ 28
The Exchange Offer................................. 32
Directors and Executive Officers................... 38
Executive Compensation............................. 38
Certain United States Federal Income
Tax Consequences................................. 39
Plan of Distribution............................... 42
Legal Matters...................................... 42
Experts............................................ 42
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OFFER TO EXCHANGE
SENIOR NOTES, 6.20% RESET PUT
SECURITIES(SM), SERIES B DUE 2008
FOR ANY AND ALL OF THE OUTSTANDING
SENIOR NOTES, 6.20% RESET PUT
SECURITIES(SM), SERIES A, DUE 2008
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933,
AS AMENDED
[CONSUMERS ENERGY LOGO]
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