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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive, Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue, Jackson, Michigan 49201
(517)788-0550
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
Name of Each Exchange
Registrant Title of Class on Which Registered
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<S> <C> <C>
CMS ENERGY CORPORATION Common Stock, $.01 par value New York Stock Exchange
Class G Common Stock, no par value New York Stock Exchange
CONSUMERS ENERGY COMPANY
Cumulative Preferred Stock, No par value: $2.08 Series New York Stock Exchange
Preferred Stocks, $100 par value: $4.16 Series, $4.50 Series New York Stock Exchange
CONSUMERS POWER
COMPANY FINANCING I 8.36% Trust Originated Preferred Securities New York Stock Exchange
CONSUMERS ENERGY
COMPANY FINANCING II 8.20% Trust Originated Preferred Securities New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of CMS Energy voting and non-voting common equity
held by non-affiliates was $4,678,908,660 for the 108,371,851 CMS Energy Common
Stock shares and the 8,479,275 Class G Common Stock shares outstanding on
February 28, 1999.
On February 28, 1999, CMS Energy held all voting and non-voting common equity of
Consumers.
Documents incorporated by reference: CMS Energy's proxy statement and Consumers
information statement relating to the 1999 annual meeting of shareholders to be
held May 28, 1999, are incorporated by reference in Part III, except for the
organization and compensation committee report contained therein.
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CMS ENERGY CORPORATION
AND
CONSUMERS ENERGY COMPANY
ANNUAL REPORTS ON FORM 10-K TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1998
This combined Form 10-K is separately filed by CMS Energy Corporation and
Consumers Energy Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Energy Company makes no
representation as to information relating to any other companies affiliated with
CMS Energy Corporation.
TABLE OF CONTENTS
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Page
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PART I
<S> <C> <C>
Item 1. Business................................................................. 6
Item 2. Properties............................................................... 24
Item 3. Legal Proceedings........................................................ 33
Item 4. Submission of Matters to a Vote of Security Holders...................... 35
PART II
Item 5. Market for CMS Energy's and Consumers' Common Equity and
Related Stockholder Matters......................................... 36
Item 6. Selected Financial Data.................................................. 36
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............... 37
Item 8. Financial Statements and Supplementary Data.............................. 37
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................ 140
PART III
Item 10. Directors and Executive Officers of CMS Energy and Consumers............. 140
Item 11. Executive Compensation................................................... 140
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 140
Item 13. Certain Relationships and Related Transactions........................... 140
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 140
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
<TABLE>
<S> <C>
ABATE............................. Association of Businesses Advocating Tariff Equity
ALJ............................... Administrative Law Judge
Ames.............................. Crescent and Ames gas gathering systems and processing plant in
Oklahoma
AMT............................... Alternative minimum tax
Articles.......................... Articles of Incorporation
Attorney General.................. Michigan Attorney General
bcf............................... Billion cubic feet
Big Rock.......................... Big Rock Point nuclear power plant, owned by Consumers
Board of Directors................ Board of Directors of CMS Energy
Btu............................... British thermal unit
Class G Common Stock.............. One of two classes of common stock of CMS Energy, no par
value, which reflects the separate performance of the Consumers
Gas Group
Clean Air Act..................... Federal Clean Air Act, as amended
CMS Electric and Gas.............. CMS Electric and Gas Company, a subsidiary of Enterprises
CMS Energy........................ CMS Energy Corporation
CMS Energy Common Stock........... One of two classes of common stock of CMS Energy, par value
$.01 per share
CMS Gas Transmission.............. CMS Gas Transmission and Storage Company, a subsidiary of
Enterprises
CMS Generation.................... CMS Generation Co., a subsidiary of Enterprises
CMS Holdings...................... CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland....................... CMS Midland Inc., a subsidiary of Consumers
CMS MST........................... CMS Marketing, Services and Trading Company, a subsidiary of
Enterprises
CMS Oil and Gas .................. CMS Oil and Gas Company, a subsidiary of Enterprises
Common Stock...................... CMS Energy Common Stock and Class G Common Stock
Consumers......................... Consumers Energy Company, a subsidiary of CMS Energy
Consumers Gas Group............... The gas distribution, storage and transportation businesses
currently conducted by Consumers and Michigan Gas Storage
Court of Appeals.................. Michigan Court of Appeals
Detroit Edison.................... The Detroit Edison Company
DOE............................... U.S. Department of Energy
Dow............................... The Dow Chemical Company
DSM............................... Demand-side management
Enterprises....................... CMS Enterprises Company, a subsidiary of CMS Energy
EPA............................... Environmental Protection Agency
EPS............................... Earning per share
FASB.............................. Financial Accounting Standards Board
FERC.............................. Federal Energy Regulatory Commission
</TABLE>
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<TABLE>
<S> <C>
FMLP.............................. First Midland Limited Partnership
FTC............................... Federal Trade Commission
GCR............................... Gas cost recovery
Grand Lacs partnership............ Grand Lacs Limited Partnership, a marketing center for natural
gas
GTNs.............................. CMS Energy General Term Notes(R), $250 million Series A, $125
million Series B, $150 million Series C, $200 million Series D
and $400 million Series E
Huron ............................ Huron Hydrocarbons, Inc., a subsidiary of Consumers
IT................................ Information technology
ITC............................... Investment tax credit
Jorf Lasfar....................... A 1,356 MW (660 MW in operation and 696 MW under
construction) coal-fueled power plant in Morocco, jointly owned
by CMS Generation and ABB Energy Venture, Inc.
kWh............................... Kilowatt-hour
Loy Yang.......................... The 2,000 MW brown coal fueled Loy Yang A power plant and
an associated coal mine in Victoria, Australia, in which CMS
Generation holds a 50 percent ownership interest
Ludington......................... Ludington pumped storage plant, jointly owned by Consumers
and Detroit Edison
mcf............................... Thousand cubic feet
MCV Facility...................... A natural gas-fueled, combined-cycle cogeneration facility
operated by the MCV Partnership
MCV Partnership................... Midland Cogeneration Venture Limited Partnership in which
Consumers has a 49 percent interest through CMS Midland
MD&A.............................. Management's Discussion and Analysis
MichCon........................... Michigan Consolidated Gas Company
Michigan Gas Storage.............. Michigan Gas Storage Company, a subsidiary of Consumers
Mbbls............................. Thousand barrels
MMbbls............................ Million barrels
MMBtu............................. Million British thermal unit
MMcf.............................. Million cubic feet
Moss Bluff........................ Moss Bluff Gas Storage Systems, a partnership that owns a gas
storage facility
MPSC.............................. Michigan Public Service Commission
MW................................ Megawatts
Natural Gas Act................... Federal Natural Gas Act
Nitrotec.......................... Nitrotec Corporation, a propriety gas technology company in
which CMS Gas Transmission owns an equity interest
NRC............................... Nuclear Regulatory Commission
NEIL.............................. Nuclear Electric Insurance Limited, an industry mutual insurance
company owned by member utility companies
</TABLE>
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<TABLE>
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OPEB.............................. Postretirement benefit plans other than pensions for retired
employees
Order 888 and Order 889........... FERC final rules issued on April 24, 1996
Outstanding Shares................ Outstanding shares of Class G Common Stock
Palisades......................... Palisades nuclear power plant, owned by Consumers
Panhandle Companies............... Panhandle Eastern Pipe Line Company, Trunkline Gas Company,
Pan Gas Storage Company, Panhandle Storage Company, and
Trunkline LNG Company
PCBs.............................. Poly chlorinated biphenyls
PECO.............................. PECO Energy Company
Pension Plan...................... The trusteed, non-contributory, defined benefit pension plan of
Consumers and CMS Energy
PPA............................... The Power Purchase Agreement between Consumers and the
MCV Partnership with a 35-year term commencing in March
1990
ppm............................... Parts per million
PSCR.............................. Power supply cost recovery
PUHCA............................. Public Utility Holding Company Act of 1935
Retained Interest Shares.......... Authorized but unissued shares of Class G Common Stock not
held by holders of the Outstanding Shares and attributable to the
Retained Interest
SEC............................... Securities and Exchange Commission
SERP.............................. Supplemental Executive Retirement Plan
Senior Credit Facilities.......... $725 million senior credit facilities consisting of a $600 million
three-year revolving credit facility and a five-year $125 million
term loan facility
SFAS.............................. Statement of Financial Accounting Standards
Superfund......................... Comprehensive Environmental Response, Compensation and
Liability Act
TGN............................... Transportadora de Gas del Norte S. A., a natural gas pipeline
located in Argentina
Transition Costs.................. Costs incurred by utilities in order to serve their customers in a
regulated monopoly environment, but which may not be
recoverable in a competitive environment because of customers
leaving their systems and ceasing to pay for their costs. These
costs could include owned and purchased generation, regulatory
assets, and costs incurred in the transition to competition.
Trust Preferred Securities........ Undivided beneficial interest in the assets of statutory business
trusts, these interests have a preference with respect to certain
trust distributions over the interests of either CMS Energy or
Consumers, as applicable, as owner of the common beneficial
interests of the trusts
Union............................. Utility Workers of America, AFL-CIO
UST............................... Underground storage tanks
</TABLE>
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PART I
ITEM 1. BUSINESS.
GENERAL
CMS ENERGY
CMS Energy, incorporated in Michigan in 1987, is a leading diversified energy
company operating in the United States and around the world. Our two principal
subsidiaries are Consumers and Enterprises. Consumers is a public utility that
provides natural gas and electricity to almost six million of the nine and
one-half million residents in Michigan's Lower Peninsula. Enterprises, through
subsidiaries, is engaged in several domestic and international energy businesses
including:
- - Natural gas transmission, storage and processing;
- - Independent power production;
- - Oil and gas exploration and production;
- - International energy distribution; and
- - Energy marketing, services and trading.
Our consolidated operating revenue in 1998 was $5.1 billion. Of our consolidated
operating revenue, 51 percent was derived from electric utility operations, 21
percent from gas utility operations, 18 percent from energy marketing, services
and trading operations, 6 percent from independent power production and other
non-utility operations, 3 percent from transmission, storage and processing of
natural gas, and 1 percent from oil and gas exploration and production
operations.
CONSUMERS
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 to reflect its
increasing focus on providing customers with total energy solutions.
Consumers' consolidated operations account for a majority of CMS Energy's total
assets, revenues and income. Consumers' service areas include automotive, metal,
chemical, food and wood products and a diversified group of other industries. At
year end 1998, Consumers provided service to 1.64 million electric customers and
1.55 million gas customers. Consumers' consolidated operating revenue in 1998
was $3.7 billion. Of Consumers' operating revenue, 70 percent was generated from
its electric utility business, 29 percent from its gas utility business, and 1
percent from its non-utility business. Consumers' rates and certain other
aspects of its business are subject to the jurisdiction of the MPSC and FERC, as
described in CMS ENERGY AND CONSUMERS REGULATION later in this Item.
CMS ENERGY'S AND CONSUMERS' RECENT DEVELOPMENTS
Acquisition of the Panhandle Companies
On November 2, 1998, CMS Energy announced a definitive agreement to acquire all
of the outstanding common stock of the Panhandle Companies from Duke Energy
Corporation for a cash payment of $1.9
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billion and existing Panhandle Companies debt of $300 million. This transaction
was completed in March 1999.
The Panhandle Companies are primarily engaged in the interstate transmission and
storage of natural gas. The Panhandle Companies operate one of the nation's
largest natural gas pipeline networks, providing customers in the Midwest and
Southwest with a comprehensive array of transportation services. This
interconnected 10,400 mile system accesses virtually all major natural gas
regions in the United States. The rates and operations of the Panhandle
Companies are subject to regulation by the Federal Energy Regulatory Commission.
Panhandle Eastern Pipe Line Company's transmission system consists of four
large-diameter parallel pipelines and extends approximately 1,300 miles from
producing areas in the Anadarko Basin of Texas, Oklahoma and Kansas through
Missouri, Illinois, Indiana and Ohio into Michigan. This system connects with
the Trunkline Gas Company system at Tuscola, Illinois.
Trunkline Gas Company's transmission system consists principally of three
large-diameter parallel pipelines extending approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through Arkansas, Mississippi,
Tennessee, Kentucky, Illinois and Indiana to a point on the Indiana-Michigan
border. Trunkline Gas Company also owns and operates two offshore Louisiana
natural gas supply systems consisting of 337 miles of pipeline extending
approximately 81 miles into the Gulf of Mexico.
Panhandle Eastern Pipe Line Company's major customers include approximately 20
utilities located in the Midwest market area that encompasses large portions of
Michigan, Ohio, Indiana, Illinois and Missouri. Trunkline Gas Company's major
customers include six utilities located in portions of Illinois, Indiana,
Michigan, Ohio and Tennessee. Transportation service for Consumers accounted for
approximately 10 percent of the 1998 combined revenue of the Panhandle
Companies.
The Panhandle Companies own and operate five underground gas storage fields
located in Illinois, Michigan, Kansas, Oklahoma and Louisiana with a combined
maximum working storage gas capacity of 70 bcf.
Trunkline LNG Company owns a liquified natural gas ("LNG") regasification plant
and related LNG tanker port, unloading facilities and LNG and gas storage
facilities located at Lake Charles, Louisiana. The LNG plant has the capacity to
deliver 700 mcf per day but has been operated on a limited basis for a number of
years.
Pending Sale of the PPA between Consumers and the MCV Partnership
In October 1998, Consumers initiated a process for the solicitation of bids to
acquire Consumers' rights to 1,240 MW of contract capacity and associated energy
with the MCV Partnership for the period from the effective date in 1999 through
either September 2007 or March 2025. In March 1999, Consumers signed a long-term
power sales agreement to supply PECO with electric generating capacity until
September 2007. After a three-year transition period during which 100 to 150 MW
will be sold to PECO, beginning in 2002 Consumers will sell all 1,240 MW of PPA
capacity and associated energy to PECO. In an order issued in 1998, the MPSC
delayed its consideration of the bidding process until the definitive agreement
with the winning bidder was presented for review, but stated that Consumers'
approach offers a legitimate way to utilize independent market forces to
determine the above-market or stranded portion of Consumers' obligations under
the PPA with the MCV Partnership. Consumers has filed an application with the
MPSC for accounting and rate-making approvals related to the transaction and
the MPSC has issued an order requesting comments by April 12, 1999 on issues
raised by the application.
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BUSINESS SEGMENTS
CMS ENERGY AND CONSUMERS FINANCIAL INFORMATION
For information with respect to operating revenue, net operating income,
identifiable assets and liabilities attributable to all of CMS Energy's business
segments and international and domestic operations, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA - SELECTED FINANCIAL INFORMATION AND CMS
ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
For information with respect to the operating revenue, net operating income,
identifiable assets and liabilities attributable only to Consumers' business
segments, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SELECTED
FINANCIAL INFORMATION AND CONSUMERS' CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
CMS ENERGY AND CONSUMERS PRINCIPAL OPERATIONS
CMS Energy conducts its principal operations through the following six business
segments:
- - Electric utility operations;
- - Gas utility operations;
- - Natural gas transmission, storage and processing;
- - Independent power production;
- - Oil and gas exploration and production; and
- - Energy marketing, services and trading
Consumers conducts CMS Energy's domestic electric and gas utility operations.
CMS Energy and Consumers are subject to certain uncertainties and risks which
are normal for their respective businesses. Certain uncertainties are described
in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTE 3 OF CMS ENERGY'S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and NOTE 2 OF CONSUMERS' NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. Certain risks are described in ITEM 7. CMS
ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS MARKET RISK INFORMATION and ITEM
8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA - NOTE 8 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. CMS Energy and Consumers believe that they
and their subsidiaries are adequately insured for the various risk exposures,
including political risk from possible nationalization or expropriation,
incidental to their respective businesses.
CONSUMERS
Electric Utility Operations
Consumers' electric utility operation would be the twelfth largest electric
company in the United States if independent. It serves 1.64 million customers in
61 of the 68 counties of Michigan's Lower Peninsula. Principal cities served
include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Midland, Muskegon
and Saginaw. Consumers' electric utility customer base includes a mix of
residential,
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commercial and diversified industrial customers, the largest segment of which is
the automotive industry. Consumers' electric operations are not dependent upon a
single customer, or even a few customers, and the loss of any one or even a few
of such customers would not have a material adverse effect on its financial
condition.
Consumers' electric operations are seasonal. The summer months increase demand
for energy, thereby affecting revenues. Total electric sales in 1998 were 40
billion kWh, a 6 percent increase over 1997 levels including a 3 percent
increase in system sales to Consumers' ultimate customers. Consumers' electric
operating revenue in 1998 was $2.6 billion, an increase of 3.6 percent from
1997.
Consumers achieved a peak demand of 7,246 MW in July 1998. Peak demands for 1998
were 5,993 MW in the winter and 7,246 MW in the summer. Based on actual peaks,
Consumers' reserve margin was 21.1 percent in 1998 compared to 10.4 percent in
1997. Based on weather-adjusted peaks, Consumers' reserve margin was 18.2
percent in 1998 compared to 10.4 percent in 1997. Consumers estimates that
during the summer of 1999 it will be able to satisfy its peak demand with a 5
percent reserve margin from a combination of its owned electric generating
plants and existing long-term purchase contracts and a 9 percent reserve margin
when intermediate-term purchase contracts are added. After giving effect to
additional short-term electricity purchase contracts or options as well as other
arrangements, Consumers anticipates a 16 percent to 21 percent summer reserve
margin in 1999.
Consumers' owned and operated 28 electric generating plants in 1998 with an
aggregate of 6,190 MW of capacity. In 1998, Consumers purchased 2,545 MW of net
capacity, which amounted to 34 percent of Consumers' total system requirements,
from other power producers, the largest being the MCV Partnership. For
additional information on Consumers' electric properties, see ITEM 2. PROPERTIES
- - CONSUMERS ELECTRIC UTILITY PROPERTIES.
A transmission system interconnects Consumers' electric generating plants at
many locations with transmission facilities of unaffiliated systems, including
those of other utilities in Michigan and Indiana. The interconnections permit a
sharing of the reserve capacity of the connected systems. This allows mutual
assistance during emergencies and substantially reduces investment in utility
plant facilities.
FUEL: Consumers has five generating plants which use coal as a fuel source and
which constitute 78.5 percent of its baseload capacity. These plants combined to
produce a total of 17,959 million kWhs of electricity in 1998 and required 8.2
million tons of coal. Consumers' current coal supply contracts have expiration
dates that range from 1999 to 2004. Consumers enters into long-term contracts
for approximately 50 to 75 percent of its annual coal requirements. In 1998 coal
purchases totaled $246 million of which $161 million (60 percent of the tonnage
requirement) was under long-term contract. Consumers supplements its long-term
contracts with spot-market purchases. Consumers' coal inventory on December 31,
1998 amounted to approximately 51 days' supply.
Consumers owned two and operated one nuclear power plant during 1998. The Big
Rock nuclear power plant, near Charlevoix, Michigan was closed permanently on
August 26, 1997. During 1998, the net generation of the Palisades nuclear power
plant was 5,364 million kWhs, constituting 23 percent of Consumers' baseload
generation. Consumers currently has two contracts for uranium concentrate
sufficient to cover 40 percent of its requirements. Consumers has purchased the
balance of its 1999 concentrate, conversion and enrichment requirements.
Consumers intends to maximize use of the spot market for its future
requirements. Consumers has contracts for nuclear fuel services and fabrication
of nuclear fuel assemblies. Consumers renegotiated the fabrication contract in
1995 for Palisades. The fabrication contract remains in effect for the next four
Palisades reloads with options to extend for an additional two reloads. These
contracts are with major private industrial suppliers of nuclear fuel and
related services and with uranium producers, converters and enrichers who
participate in the world nuclear fuel marketplace.
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As shown below, Consumers generates electricity principally from coal and
nuclear fuel.
<TABLE>
<CAPTION>
Power Generated Millions of kWhs
- --------------- ----------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Coal 17,959 16,427 16,928 15,956 17,401
Nuclear 5,364 5,970 5,653 5,353 4,904
Oil 520 258 364 318 322
Gas 302 80 74 238 91
Hydro 395 467 473 420 481
Net pumped storage (a) (480) (477) (419) (373) (414)
- ---------------------- ------ ------ ------ ------ -----
Total net generation 24,060 22,725 23,073 21,912 22,785
==================== ====== ====== ====== ====== ======
</TABLE>
(a) Represents Consumers' share of net generation from Ludington. This facility
pumps water into a storage pond using electricity generated during off-peak
hours to generate electricity later during peak demand hours.
The cost of all fuels consumed, shown below, fluctuates with the mix of fuel
burned.
<TABLE>
<CAPTION>
Fuel Consumed Cost per Million Btu
- ------------- --------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Coal $1.45 $1.53 $1.50 $1.51 $1.57
Oil 2.73 2.97 2.67 2.64 2.96
Gas 2.66 3.36 3.60 2.18 2.81
Nuclear .50 57 .50 .49 .46
All Fuels (a) 1.28 1.29 1.27 1.27 1.34
============= ====== ==== ==== ==== ====
</TABLE>
(a) Weighted average fuel costs.
Under the Nuclear Waste Policy Act of 1982, the federal government was to be
responsible for the permanent disposal of spent nuclear fuel and high-level
radioactive waste beginning in 1998. To date, the DOE has been unable to arrange
for storage facilities to meet this obligation and it does not anticipate being
able to accept spent nuclear fuel for storage in 1999. For a discussion of
pending litigation and legislative action relating to the DOE's obligations in
this regard, see ITEM 3. LEGAL PROCEEDINGS and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA - NOTE 2 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS. Consumers' on-site storage pool at Palisades is at capacity and
Consumers' is currently storing spent nuclear fuel in NRC-approved steel and
concrete vaults, known as Adry casks.@ For a discussion relating to the NRC
approval of dry casks and Consumers' use of the casks, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA - NOTE 3 OF CMS ENERGY'S NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
INSURANCE: Consumers maintains $500 million of primary nuclear property damage
insurance from NEIL at Big Rock and Palisades, covering all risks of physical
loss, subject to certain exclusions and deductibles. Consumers also maintains at
Palisades NEIL excess property damage insurance in the amount of $2 billion.
These nuclear property insurance policies cover decontamination, debris removal
and direct property loss. The NEIL excess property damage policy for Palisades
also covers a portion of the cost arising from an accidental premature
decommissioning which is not already funded by the decommissioning trust funds
and part of the remaining book value of the plant. For any loss more than $100
million, stabilization and decontamination expenses must be satisfied before
Consumers receives
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other claims proceeds from NEIL. Under all these policies, Consumers retains the
risk of loss to the extent the loss is within the policy deductibles ($1 million
for Palisades and $250,000 for Big Rock) or policy exclusions, or if the loss
exceeds the combined property damage policy limits ($2.5 billion for Palisades
and $500 million for Big Rock) at either location. Because NEIL is a mutual
insurance company, Consumers could be subject to assessments under the NEIL
primary and excess property damage policies of up to $13 million in any one
policy year if covered losses occurred at its own or any other member's nuclear
facility. Consumers has also procured from NEIL coverage that would partially
cover the cost of replacement power during certain prolonged accidental outages
at Palisades. Insurance would not cover such costs during the first 17 weeks of
any outage, but insurance would cover most of such costs during the next 58
weeks of the outage, followed by a reduced level of coverage for a period up to
two additional years. Consumers could be subject to a maximum assessment under
the replacement power insurance of $2 million in any one policy year if covered
losses occurred at its own or any other member's nuclear facility.
Consumers maintains nuclear liability insurance and other forms of financial
protection (including an agreement of government indemnity under the
Price-Anderson Act, applicable to Big Rock) for injuries and off-site property
damage due to the nuclear hazard at such facilities. Such insurance and
financial protection covers Consumers up to the total limits of liability
established by the Price-Anderson Act, which are presently $544 million for Big
Rock and approximately $9.6 billion for Palisades. Part of such financial
protection consists of a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed if a nuclear incident occurred
at any of such facilities. Consumers could be subject to a maximum assessment of
$88 million per occurrence if a nuclear incident occurred at certain nuclear
facilities, limited to a maximum installment payment of $10 million per
occurrence in any year. Consumers also maintains insurance under a master worker
program that covers tort claims for bodily injury to workers caused by nuclear
hazards. The policy contains a $200 million nuclear industry aggregate limit.
Under a previous insurance program providing coverage for claims brought by
workers, Consumers remains responsible for a maximum assessment of up to $6.3
million.
Consumers has not obtained insurance for flood and earthquake property damage at
its nuclear plants because it believes that the protective systems built into
these plants and the low probability of an event of this type at the locations
of these plants makes such insurance unnecessary.
Insurance policy terms, limits and conditions are subject to change during the
year as policies are renewed.
Gas Utility Operations
Consumers' gas utility operation purchases, transports, stores and distributes
natural gas. It renders gas sales and delivery service to 1.55 million customers
and is authorized to provide service in 54 of the 68 counties in Michigan's
Lower Peninsula. Principal cities served include Bay City, Flint, Jackson,
Kalamazoo, Lansing, Pontiac and Saginaw, as well as the suburban Detroit area.
Consumers owns gas transmission and distribution mains and other gas lines,
compressor stations and facilities, storage rights, wells and gathering
facilities in several storage fields in Michigan. See ITEM 2. PROPERTIES -
CONSUMERS GAS UTILITY PROPERTIES. Consumers and its wholly-owned subsidiary,
Michigan Gas Storage, inject natural gas into storage during the summer months
of the year for use during the winter months when demand is higher. Consumers'
gas operation is not dependent upon a single customer, or even a few customers,
and the loss of any one or even a few of such customers would not have a
material adverse effect on its financial condition.
Consumers' gas operation is seasonal to the extent that peak demand occurs in
winter due to colder temperatures. Total deliveries of natural gas sold by
Consumers and from other sellers over Consumers' pipeline and distribution
network to ultimate customers, including the MCV Partnership, totaled 360 bcf in
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1998. Consumers' gas operating revenue in 1998 was $1.1 billion, a decrease of
12.7 percent from 1997.
GAS SUPPLY: In 1998, Consumers purchased 70 percent of its required gas supply
under long-term contracts. The contract supply included 23 percent from United
States producers outside Michigan, 27 percent from Canadian producers, 20
percent from Michigan producers and 24 percent from the spot market. The
remaining 6 percent was supplied by authorized suppliers in the Gas Customer
Choice program which started in April 1998.
Consumers' firm transportation agreements are with Trunkline Gas Company,
Panhandle Eastern Pipeline Company, ANR Pipeline Company and Great Lakes Gas
Transmission, L.P. Consumers uses these agreements to deliver gas to Michigan
for ultimate deliveries to market. In total, Consumers' firm transportation
arrangements will carry over 90 percent of Consumers' total gas supply
requirements. Consumers' portfolio of firm transportation from pipelines to
Michigan is as follows:
<TABLE>
<CAPTION>
Volume (dekatherms/day) Expiration
----------------------- ----------
<S> <C> <C>
Trunkline Gas Company 336,375 October 2002
Panhandle Eastern Pipeline Company 40,000 March 2000
25,000 March 2000
ANR Pipeline Company 20,000 October 1999
40,000 October 1999
10,000 December 2001
6,000 December 2002
83,790 October 2003
Great Lakes Gas Transmission, L.P. 85,092 March 2004
================================== ====== ===== ====
</TABLE>
Consumers transports the balance of its required gas supply under interruptible
contracts. The amount of interruptible capacity and the use of it primarily
varies with the price for such service and the availability and price of the
spot supplies to be purchased and transported. Consumers' use of interruptible
transportation is generally in off-peak summer months and after Consumers has
fully subscribed its firm capacity.
ENTERPRISES
Natural Gas Transmission, Storage and Processing
CMS Gas Transmission, incorporated in 1988, owns, develops and manages domestic
and international natural gas facilities consisting of a total of 12,996 miles
of pipeline with a daily capacity of approximately 6.3 bcf per day. In addition,
CMS Gas Transmission has processing capabilities of over 760 mcf per day of
natural gas. In our Michigan CO2 removal plants, we process over 330 million mcf
per day, representing more natural gas processed than any other processor in the
State.
CMS Gas Transmission's operating revenue in 1998 was $160 million. For
additional information, see ITEM 7. CMS ENERGY MANAGEMENT'S DISCUSSION AND
ANALYSIS - NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING RESULTS OF
OPERATIONS.
Independent Power Production
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<PAGE> 13
CMS Generation, incorporated in 1986, invests in, acquires, develops, constructs
and operates non-utility power generation plants both in the United States and
internationally. As of December 31, 1998, CMS Generation had ownership interests
in operating power plants totaling 7,304 (gross) MW, (3,319 MW net) throughout
the United States and in Argentina, Australia, India, Jamaica, Morocco and the
Philippines. Our net generating capacity has more than tripled since 1993.
Projects range in size from 3 MW to 2,000 MW and are powered by water, coal,
natural gas, oil, wood, wind and waste material. Additional projects totaling
approximately 6,477 gross MW are under construction or advanced development.
The rapid growth in our generating capacity has been matched by growth in this
business segment's operating revenue. CMS Generation's operating revenue in 1998
was $277 million. For additional information, see ITEM 2. PROPERTIES - CMS
ENERGY OTHER PROPERTIES and ITEM 7. CMS ENERGY MANAGEMENT'S DISCUSSION AND
ANALYSIS - INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS.
Oil and Gas Exploration and Production
CMS Oil and Gas Company (formerly known as CMS NOMECO Oil & Gas Co.),
incorporated in 1967, conducts oil and gas exploration and development
operations throughout the U.S. and eight other countries. Most domestic
operations focus on gas exploration and production in Michigan and Louisiana
while the international operations focus on oil exploration and production and
are distributed across two other continents. In 1998, CMS Oil and Gas achieved
production levels of 7.7 million barrels of oil, condensate and plant products
and 26.5 bcf of gas. CMS Oil and Gas' proven oil and gas reserves total 182.6
million net equivalent barrels reflecting a balanced portfolio of high-quality
reserves, including 49 percent oil and condensate and 51 percent natural gas.
During 1998, CMS Oil and Gas participated with a working interest in drilling
wells as follows:
<TABLE>
<CAPTION>
Number of
Number of Wells Successful Wells Success Ratio
Type of Well Gross Net Gross Net Gross Net
- ------------ ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory 10 4.46 2 1.25 20% 28%
Development 17 7.22 17 7.22 100% 100%
-- ---- -- ----
Total 27 11.68 19 8.47 70.37% 72.5%
===== == ===== == ==== ====== =====
</TABLE>
The preceding table does not include CMS Oil and Gas' participation in Devonian
Shale gas wells in Michigan and Indiana, where CMS Oil and Gas drilled 82 wells
(21.02 net) during 1998 with a 97.6 percent success rate.
CMS Oil and Gas' operating revenue was $127 million in 1998, including sales
between business segments. For additional information, see ITEM 2. PROPERTIES -
CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES and ITEM 7. CMS
ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS - OIL AND GAS EXPLORATION AND
PRODUCTION RESULTS OF OPERATIONS.
International Energy Distribution
CMS Electric and Gas Company, incorporated in 1996, is our international energy
distribution subsidiary. We have ownership interests in electric distribution
companies which provide service in the states of Rio de Janeiro, Sergipe and
Minas Gerais in Brazil, the province of Entre Rios in Argentina, and
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<PAGE> 14
on Margarita Island in Venezuela. These electric distribution companies serve a
total of 992,000 customers with electricity sales of 4,790 Gwh in 1998.
Energy Marketing, Services and Trading
CMS MST, incorporated in 1996, provides gas, oil, coal and electric marketing,
risk management and energy management services to industrial, commercial,
utility and municipal energy users throughout the United States and
internationally. CMS MST has grown dramatically since its inception. At December
31, 1998, CMS MST had more than 7,000 customers, including 30 major gas
distribution companies and is active in 30 states and 3 countries. CMS MST's
operating revenue in 1998 was $939 million. For additional information, see ITEM
7. CMS ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS - MARKETING, SERVICES AND
TRADING RESULTS OF OPERATIONS.
SALES BETWEEN BUSINESS SEGMENTS
CMS Energy's sales between business segments for the years ended December 31
were as follows.
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1998 1997 1996
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Oil and Gas Exploration and Production $64 $75 $23
Natural Gas Transmission, Storage and Processing 9 4 3
Marketing, Services and Trading 68 16 9
=============================== === == =
</TABLE>
CMS ENERGY AND CONSUMERS REGULATION
CMS Energy is exempt from registration under PUHCA, as described in Item 3.
Legal Proceedings. CMS Energy, Consumers and their subsidiaries are subject to
regulation by various federal, state, local and foreign governmental agencies,
including those specifically described below.
MICHIGAN PUBLIC SERVICE COMMISSION
Consumers is subject to the jurisdiction of the MPSC, which regulates public
utilities in Michigan with respect to retail utility rates, accounting,
services, certain facilities and various other matters. The MPSC also has, or
will have, rate jurisdiction over several limited partnerships in which CMS Gas
Transmission has ownership interests. These partnerships own, or will own, and
operate intrastate gas transmission pipelines.
The Attorney General, ABATE and the MPSC staff typically intervene in MPSC
electric and/or gas related proceedings concerning Consumers. Unless otherwise
noted herein, these parties have intervened in such proceedings. For many years,
various parties have appealed almost every significant MPSC order affecting
Consumers. Appeals from such MPSC orders are pending in the Court of Appeals and
the Michigan Supreme Court. Consumers is vigorously pursuing these matters.
Under Michigan civil procedure, parties may file a claim of appeal with the
Court of Appeals that serves as a notice of appeal of an MPSC order. The grounds
on which they are making the appeal are not finally set forth until a later date
when the parties file their briefs.
RATE PROCEEDINGS: In 1996, the MPSC issued orders that established the electric
authorized rate of return on common equity at 12.25 percent; and the gas
authorized rate of return at 11.6 percent.
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<PAGE> 15
MPSC REGULATORY CHANGES: In January 1996, the Governor of the State of Michigan
requested that the MPSC review the existing statutory and regulatory framework
governing Michigan electric utilities in light of increasing competition in the
utility industry. Since that time, as a part of ongoing proceedings relating to
the restructuring of the electric utility industry in Michigan, the MPSC issued
various orders: 1) providing that beginning in 1998 and phasing in until 2002,
Consumers transmit and distribute energy on behalf of competing power suppliers
to serve retail customers; 2) allowing Consumers to recover Transition Costs
(estimated for Consumers at $1.755 billion) through a charge to all customers
purchasing their power from other sources until the end of the transition period
in 2007; 3) allowing, subject to a prudency review, a separate charge to recover
costs of implementing a direct-access program, estimated by Consumers at an
additional $200 million; and 4) suspending the PSCR clause and freezing PSCR
charges. By January 1, 2002, all customers would be free to choose (that is,
have direct-access to) their own power suppliers. A February 1998 MPSC order in
these ongoing proceedings suspended the PSCR as proposed by Consumers,
terminated the 1998 PSCR plan case, and stated that a permanent PSCR/base rate
freeze charge would be established in the 1997 PSCR reconciliation proceeding.
As a result of an informal process involving consultations with MPSC staff and
other interested parties, as directed in the MPSC's February 1998 order,
Consumers submitted to the MPSC in June 1998 its plan for implementing direct
access. The primary issues addressed in the plan are: 1) the implementation of
the three-year phase in of a total of 750 MW of retail customer load to
customers purchasing their power from other sources; 2) the direct-access
service options available to customers and suppliers; 3) the process and
requirements for customers and others to obtain direct-access service; and 4)
the roles and responsibilities for Consumers, customers and suppliers.
Subsequent to year end, Consumers received MPSC electric restructuring orders
which generally support Consumers' implementation plan. Accordingly, Consumers
is now preparing to implement electric customer direct access.
Several MPSC orders related to restructuring are subject to claims of appeal
filed with the Court of Appeals which question whether the MPSC has the
statutory authority to mandate restructuring on an involuntary basis and which
challenge various other aspects of these restructuring orders. For additional
information concerning the electric industry restructuring, see ITEM 7. CMS
ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS - OUTLOOK - ELECTRIC BUSINESS
OUTLOOK and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTE 3 TO CMS
ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
In December 1997, the MPSC approved Consumers' application to implement a
statewide three-year experimental gas transportation program eventually allowing
300,000 residential, commercial and industrial retail gas sales customers to
choose their gas supplier. The program is voluntary and participating natural
gas customers are selected on a first-come, first-served basis, up to a limit of
100,000 per year. As of December 31, 1998, more than 102,000 customers chose
alternative gas suppliers, representing approximately 24.1 bcf of gas load.
Customers choosing to remain as sales customers of Consumers will not see a rate
change in their natural gas rates. This experimental program will allow
competing gas suppliers, including marketers and brokers to market natural gas
to these retail customers in direct competition with Consumers. The Attorney
General, ABATE and other parties filed claims of appeal regarding the program
with the Court of Appeals. For additional information concerning the MPSC order,
see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTE 3 TO CMS ENERGY'S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
RETAIL WHEELING PROCEEDINGS: In April 1994, the MPSC issued an opinion and
interim order that approved the framework for a five-year experimental retail
direct-access program for "wheeling" of electric power purchased by customers
from other suppliers over the transmission systems of Consumers and Detroit
Edison, and remanded the case to the ALJ to decide appropriate rates and
charges. The MPSC stated that the purpose of the experiment is to gather and
evaluate information regarding whether
15
<PAGE> 16
retail wheeling is in the public interest and should occur on a permanent basis.
The experimental program will commence with each utility's next solicitation of
additional supply side resources. In June 1995, the MPSC issued an order that
set rates and charges for retail delivery service under the experiment. After
the MPSC denied Consumers' and ABATE's petitions for a rehearing of that order,
Consumers, ABATE and Dow filed claims of appeal of the MPSC's orders with the
Court of Appeals, joining Detroit Edison and the Attorney General who had
previously appealed. In January 1998, the Court of Appeals found that the MPSC
has authority to authorize an experimental wheeling program. Applications for
leave to appeal were filed with the Michigan Supreme Court by Consumers, Detroit
Edison and the Attorney General. The Supreme Court granted these applications in
October 1998. A decision is expected sometime in mid-1999.
INTRASTATE GAS SUPPLIER CONTRACT PRICING DISPUTE: In October 1995, the MPSC
issued an opinion and order in a proceeding that Consumers had initiated
regarding a gas contract pricing dispute under three gas supply contracts. The
MPSC found that the pricing mechanism at issue, which operates within definite
ceiling and floor prices, is a definite pricing provision within the meaning of
the state statutes and was properly implemented by Consumers to reduce gas
prices without the prior approval of the MPSC. The producers subsequently filed
a claim of appeal of the MPSC order with the Court of Appeals. The Court of
Appeals affirmed the MPSC order. The producers subsequently filed for leave to
appeal with the Michigan Supreme Court and the Michigan Supreme Court denied the
leave to appeal on August 28, 1998. This matter is now closed.
Before the issuance of the MPSC's order, the intrastate gas producers involved
in this MPSC proceeding filed a complaint against Consumers in Kent County
Circuit Court alleging breach of contract. On Consumers' motion, the court
dismissed the lawsuit. The gas suppliers subsequently filed a petition for
rehearing with the court. On December 2, 1998, the gas suppliers withdrew their
motion for rehearing and reconsideration. This matter is now closed.
FEDERAL ENERGY REGULATORY COMMISSION
FERC has limited rate jurisdiction over several independent power projects in
which CMS Generation has an ownership interest. These power projects are
Qualifying Facilities. FERC also has more comprehensive jurisdiction over
Michigan Gas Storage as a natural gas company within the meaning of the Natural
Gas Act. FERC jurisdiction relates, among other things, to the acquisition,
operation and disposal of assets and facilities and to service provided and
rates charged by Michigan Gas Storage. Under certain circumstances, FERC also
has the power to modify gas tariffs of interstate pipeline companies. Some of
Consumers' gas business is also subject to regulation by FERC, including a
blanket transportation tariff pursuant to which Consumers can transport gas in
interstate commerce.
Certain aspects of Consumers' electric operations are also subject to regulation
by FERC, including compliance with 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 and transmission of electrical energy in interstate
commerce, 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.
FERC REGULATORY CHANGES: FERC Orders 888 and 889, as amended on rehearing,
require utilities to file conforming direct-access tariffs and functionally
unbundle transmission and wholesale sales activities. Consumers complied with
several requirements contained in these orders. For additional information on
Orders 888 and 889, see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS - OUTLOOK - ELECTRIC BUSINESS OUTLOOK.
16
<PAGE> 17
NUCLEAR REGULATORY COMMISSION
Under the Atomic Energy Act of 1954, as amended, and the Energy Reorganization
Act of 1974, Consumers is subject to the jurisdiction of the NRC with respect to
the design, construction and operation of its nuclear power plants. Consumers is
also subject to NRC jurisdiction with respect to certain other uses of nuclear
material. These and other matters concerning Consumers' nuclear plants are more
fully discussed in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTES 2
AND 3 TO CMS ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS.
CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE
CMS Energy and Consumers and their subsidiaries are subject to regulation for
environmental quality, including air and water quality, waste management, zoning
and other matters, by various federal, state and local authorities. Management
believes that the responsible administration of CMS Energy's and Consumers'
energy resources includes reasonable programs for the protection and enhancement
of the environment. For additional information concerning environmental matters,
see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTE 3 OF CMS ENERGY'S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Consumers installed modern stack emission control and monitoring systems at its
electric generating plants and converted electric generating units to burn
cleaner fuels. It has worked with others to use bottom ash as final cover for
ash disposal areas in place of topsoil and compacted clay and to use fly ash as
a filler for asphalt in road shoulders and incorporation into concrete products.
It has also worked with local, state and national organizations on waste
minimization and pollution prevention initiatives and enhanced certain of
Consumers' lands for the benefit of wildlife, as well as provided recreational
access to its lands. Finally, it has worked with universities and other
institutions on projects to protect and, in some instances, propagate threatened
or endangered species, and made financial contributions to a variety of
environmental enhancement projects. Capital expenditures by Consumers for
environmental protection additions were $22 million in 1998 and are estimated to
be $45 million in 1999.
Federal and state laws require air permits for certain of Consumers' and CMS
Generation's affiliates' sources of air emissions. These laws require that
certain affected facilities control their sources' air emissions. The
appropriate agency or department for environmental protection in the state in
which each facility is located has issued permits for Consumers' and CMS
Generation's affiliates affected steam electric generating facilities and other
affected sources of air emissions. Consumers and CMS Generation believe that
these facilities are in substantial compliance with all air permits.
Consumers has engaged in an aggressive testing and removal program for USTs.
Since 1985, Consumers and its subsidiaries have reduced the number of regulated
UST systems from 256 to 17. At 118 of the sites from which Consumers or its
subsidiaries removed UST systems, hydrocarbon releases occurred, either from
tank system leaks or from spillage on the surface during transfer of contents to
or from the tanks. Consumers' response activities have resulted in Department of
Natural Resources/Department of Environmental Quality concurrence in closure of
113 of those releases. The remaining releases are at various stages of cleanup
completion.
Like most electric utilities, Consumers has PCB in some of its electrical
equipment. Although it has been unlawful to manufacture or sell PCB or PCB
contaminated equipment since the 1970's, its continued use in preexisting
electrical equipment is lawful. Consumers has engaged in a number of programs to
reduce the risk of exposure to the environment from possible PCB spills. These
include such actions as a contingency program of removing PCB capacitors outside
of substations and replacing them with non-PCB capacitors, draining large
transformers and refilling them with non-PCB mineral oil, removing PCB equipment
that was found to pose a risk to food supplies or animal feed, and other such
17
<PAGE> 18
programs. Consumers still has a few PCB capacitors in substations. It has nearly
500,000 distribution transformers, many of which have not been tested for PCB.
By regulation, unless the PCB level is known, mineral oil transformers built
before July 2, 1979, are presumed to be PCB-contaminated. Other types of
electrical equipment may also contain PCB. Based upon results of sampling in
1981, about 1 percent of the pole-top transformers had more than 500 ppm of PCB,
and about 12 percent had from 50 to 500 ppm. Those percentages should decline
over time with the retirement of older equipment and the replacement with
non-PCB equipment. From time to time accidental releases occur from such
equipment. Consumers typically spends less than $1 million per year for the
clean up and disposal of debris and equipment from PCB releases.
National Pollutant Discharge Elimination System and equivalent State Pollutant
Discharge Elimination System permits, as well as state ground water discharge
permits, authorize the discharge of certain waste waters from Consumers'
facilities and pipeline construction projects and certain CMS Generation
affiliates' facilities pursuant to state water quality standards and federal
effluent limitation guidelines. The appropriate agency or department for
environmental protection issued authorizations for discharges from all of
Consumers' and CMS Generation affiliates' major operating steam electric
generating facilities and for certain discharges from Consumers' other
facilities, including hydroelectric projects and pipeline construction projects.
Consumers and CMS Generation affiliates believe that these facilities are in
substantial compliance with National or State Pollutant Discharge Elimination
System and groundwater discharge/exemption permits.
Consumers' current insurance coverages do not extend to certain environmental
clean-up costs, such as claims for air pollution, some past PCB contamination
and for some long-term storage or disposal of pollutants.
CMS ENERGY AND CONSUMERS COMPETITION
ELECTRIC COMPETITION
Consumers' electric utility business experiences competition and potential
competition from a number of sources, both in the wholesale and retail markets,
and in electric generation, electric delivery, and retail services.
In the wholesale electricity markets, Consumers competes with other wholesale
suppliers, marketers and brokers. Electric competition in the wholesale markets
increased significantly since 1996 due to FERC Order 888. In 1996, Consumers
filed wholesale power agreements with FERC to supply power to six municipal and
two electric cooperatives that had preexisting contracts with Consumers. The new
contracts have a term of five years. Because wholesale transactions by Consumers
generated less than 1.5 percent of Consumers' 1998 revenues from electric
operations, Consumers does not believe future loss of wholesale sales to be
significant, and in most instances the customers will continue to be
transmission customers.
A significant increase in retail electric competition is likely to occur with
the introduction of retail direct access in Michigan. In its January 14, 1998
order, the MPSC ordered retail direct access in Michigan. Some parties,
including Consumers, are challenging the orders in the courts. Legislation, if
passed, could reinforce or modify the MPSC order. The MPSC order, as
supplemented by additional MPSC orders issued subsequent to year end 1998, as
discussed above in ACMS ENERGY AND CONSUMERS REGULATION - Michigan Public
Service Commission - MPSC Regulatory Changes," calls for Consumers to open up
its electric load to competition on a gradual basis from 1999 through 2001. The
MPSC order gives all customers the right to choose their own electric supplier
by 2002. Consumers' financial exposure to competition in a retail direct-access
environment is limited due to: 1) the
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<PAGE> 19
expectation of recovery of related Transition Costs attributable to retail
direct access; 2) customer inertia that will likely aid in retaining a majority
of residential and small business customers; 3) Consumers' opportunity to secure
sales in other service territories; and 4) the fact that Consumers will still be
the deliverer of electricity.
Absent comprehensive deregulation in the retail electric commodity markets,
Consumers has competition or potential competition from the following sources:
1) from the threat of customers relocating outside of Consumers' service
territory; 2) from the threat of municipalization; 3) from customer
co-generation and self-generation; 4) from adjacent municipal utilities who
extend lines to customers along service territory boundaries; and 5) from
marketers and brokers for customers on the previously-implemented Consumers'
direct-access program, which is currently limited to 134 MW. Consumers addressed
this competition primarily through the offering of rate discounts and additional
services. In the event of municipalization, Consumers believes it would be
entitled to recovery of appropriate Transition Costs, thus mitigating the
potential negative financial impact.
Consumers is beginning to offer non-commodity retail services to electric
customers, and faces competition from numerous sources including energy
management services companies, other utilities, contractors, and retail
merchandisers.
CMS Energy's non-regulated electric subsidiaries primarily face competition from
other marketers, brokers, financial management firms, energy management firms,
and other utilities through the marketing services and trading business segment;
and from other generators, marketers, brokers, and price of power on the
wholesale market through the independent power production business segment.
For additional information concerning electric competition, see ITEM 7. CMS
ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS - OUTLOOK - ELECTRIC BUSINESS
OUTLOOK AND CONSUMERS MANAGEMENT'S DISCUSSION AND ANALYSIS - OUTLOOK ELECTRIC
BUSINESS OUTLOOK.
GAS COMPETITION
Competition has existed for several years for Consumers' gas operations and
comes primarily from alternate energy sources such as electricity and alternate
fuel sources. In the industrial market segment, customers have traditionally
used alternate fuels such as coal, oil and propane. In the residential market
segment, some customers use propane, fuel oil or electricity for space heating
and water heating. In Consumers' gas territory, natural gas maintains 97 percent
market share for residential space heating and 88 percent for residential water
heating. The Natural Gas Policy Act of 1978 resulted in the deregulation of
wellhead gas prices, substituting supply and demand effects of the gas
production marketplace for regulation. This effectively eliminated
artificially-induced curtailments of gas supply experienced earlier in the
decade. Gas competition among various wellhead suppliers subsequently increased.
Order 636 effectively unbundled the transportation of natural gas from the sale
of natural gas by interstate pipelines thereby requiring pipelines to become
common carriers. Consequently, pipelines must compete for shippers in search of
low-priced capacity. Consumers offers unbundled services (transportation and
some storage) to its larger end-use customers who choose to acquire gas supplies
from alternate sources. Traditionally, Consumers' earnings for its gas
operations are not dependent on gas purchased and resold to its customer base.
However, in a proactive move by Consumers to prepare for an unbundled market
where gas supply is separated from gas distribution, Consumers filed, and the
MPSC approved on December 19, 1997 Consumers' expanded gas customer choice
program. See the discussion of the MPSC's order authorizing the expanded
experimental gas program above in CMS ENERGY AND CONSUMERS REGULATION - MPSC
REGULATORY CHANGES.
CMS Energy's non-utility gas subsidiaries face significant competition from
other gas pipeline companies, gas producers, gas storage companies, and
brokers/marketers.
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<PAGE> 20
For additional information concerning gas competition, see ITEM 7. CMS ENERGY'S
MANAGEMENT DISCUSSION AND ANALYSIS - OUTLOOK and CONSUMERS MANAGEMENT'S
DISCUSSION AND ANALYSIS - OUTLOOK.
EMPLOYEES
CMS ENERGY
As of December 31, 1998, CMS Energy and its subsidiaries had 9,710 full-time
equivalent employees of which 9,581 are full-time employees and 129 full-time
equivalent employees associated with the part-time work force.
CONSUMERS
As of December 31, 1998, Consumers and its subsidiaries had 8,521 full-time
equivalent employees of which 8,399 are full-time employees and 122 full-time
equivalent employees associated with the part-time work force. Included in the
total are 3,730 full-time operating, maintenance and construction employees of
Consumers who are represented by the Union. Consumers and the Union negotiated a
collective bargaining agreement that became effective as of June 1, 1995. By its
terms, it will continue in full force and effect until June 1, 2000.
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<PAGE> 21
CMS ENERGY AND CONSUMERS EXECUTIVE OFFICERS
As of February 28, 1999
<TABLE>
<CAPTION>
Name Age Position Period
- ---- --- -------- ------
<S> <C> <C> <C>
William T. McCormick, Jr. 54 Chairman of the Board and Chief Executive Officer
of CMS Energy 1987-Present
Chairman of the Board of Consumers 1985-Present
Chairman of the Board of Enterprises 1987-Present
Chairman of the Board and Chief Executive Officer
of Enterprises 1987-1995
Victor J. Fryling 51 President and Chief Operating Officer
of CMS Energy 1996-Present
Vice Chairman of the Board and President
of Consumers 1998-Present
President and Chief Executive Officer
of Enterprises 1995-Present
President of Consumers 1997-1998
President of CMS Energy 1992-1995
President of Enterprises 1993-1995
President and Chief Financial Officer of
Enterprises 1992-1993
Alan M. Wright 53 Senior Vice President and Chief Financial
Officer of CMS Energy 1998-Present
Senior Vice President and Chief Financial
Officer of Consumers 1993-Present
Senior Vice President and Chief Financial
Officer of Enterprises 1998-Present
Senior Vice President, Chief Financial Officer
and Treasurer of Enterprises 1994-1998
Senior Vice President, Chief Financial Officer
and Treasurer of CMS Energy 1994-1998
Senior Vice President and Chief Financial Officer
of CMS Energy 1992-1994
Senior Vice President and Chief Financial Officer
of Enterprises 1993-1994
Senior Vice President, Chief Financial Officer and
Treasurer of Consumers 1992-1993
Rodger A. Kershner 50 Senior Vice President and General Counsel
of CMS Energy 1996-Present
Senior Vice President and General Counsel of
Enterprises 1996-Present
Vice President, General Counsel and Assistant
Secretary of Enterprises 1989-1995
Deputy General Counsel and Assistant Secretary
<CAPTION>
Name Age Position Period
- ---- --- -------- ------
<S> <C> <C> <C>
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C> <C>
of CMS Energy 1994-1995
Assistant General Counsel and Assistant
Secretary of CMS Energy 1989-1994
John W. Clark 54 Senior Vice President of CMS Energy 1987-Present
Senior Vice President of Consumers 1985-Present
James W. Cook 58 Senior Vice President of CMS Energy 1995-Present
Senior Vice President of Enterprises 1994-Present
Executive Vice President of Enterprises 1989-1994
President and Chief Executive Officer
of CMS Generation 1989-1995
Preston D. Hopper 48 Senior Vice President, Controller and Chief
Accounting Officer of CMS Energy 1996-Present
Senior Vice President and Chief Accounting
Officer of Enterprises 1997-Present
Vice President, Controller and Chief Accounting
Officer of CMS Energy 1992-1996
Senior Vice President and Controller of
Enterprises 1996-1997
Vice President and Controller of Enterprises 1992-1996
Rodney E. Boulanger 58 Senior Vice President of Enterprises 1996-Present
President and Chief Executive Officer of CMS
Generation 1995-Present
William J. Haener 57 Senior Vice President of Enterprises 1998-Present
President and Chief Executive Officer of CMS
Gas Transmission 1994-Present
Bradley W. Fischer 49 President and Chief Executive Officer of CMS
Oil and Gas Company 1998-Present
Vice President of CMS Oil and Gas Company 1997-1998
Paul A. Elbert 49 Executive Vice President of Consumers and President
and Chief Executive Officer - Gas Business Unit 1997-Present
Executive Vice President of Consumers and
Chief Operating Officer - Gas Business Unit 1994-1997
Senior Vice President of Consumers 1991-1994
</TABLE>
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<PAGE> 23
<TABLE>
<CAPTION>
Name Age Position Period
- ---- --- -------- ------
<S> <C> <C> <C>
David W. Joos 45 Executive Vice President of Consumers and
President and Chief Executive Officer -
Electric Business Unit 1997-Present
Executive Vice President of Consumers and
Chief Operating Officer - Electric Business Unit 1994-1997
Senior Vice President of Consumers 1994-1994
Vice President of Consumers 1990-1994
David A. Mikelonis 50 Senior Vice President and General Counsel of
Consumers 1988-Present
Robert A. Fenech 51 Senior Vice President of Consumers 1997-Present
Vice President of Consumers 1994-1997
Dennis DaPra* 56 Vice President and Controller of Consumers 1991-Present
</TABLE>
*Mr. DaPra is an executive officer of Consumers but not of CMS Energy. All other
individuals are executive officers of both CMS Energy and Consumers.
The present term of office of each of the executive officers extends to the
first meeting of the Board of Directors after the next annual election of
Directors of each of CMS Energy and Consumers (scheduled to be held on May 28,
1999).
There are no family relationships among executive officers and directors of CMS
Energy and Consumers.
23
<PAGE> 24
ITEM 2. PROPERTIES.
CHARACTER OF OWNERSHIP
The principal properties of CMS Energy, Consumers and their subsidiaries are
owned in fee, except that most electric lines and gas mains are located,
pursuant to easements and other rights, in public roads or on land owned by
others. The statements under this item as to ownership of properties are made
without regard to tax and assessment liens, judgments, easements, rights of way,
contracts, reservations, exceptions, conditions, immaterial liens and
encumbrances, and other outstanding rights. None of these outstanding rights
impairs the usefulness of such properties.
Substantially all of Consumers' properties are subject to the lien of its First
Mortgage Bond Indenture. Substantially all properties of the subsidiaries of CMS
Generation that own interests in operating plants are subject to liens of
creditors of the respective subsidiaries. Properties of certain Consumers, CMS
Gas Transmission and CMS Oil and Gas subsidiaries are also subject to liens of
creditors of the respective subsidiaries.
CONSUMERS ELECTRIC UTILITY PROPERTIES
At December 31, 1998, Consumers' electric generating system consists of five
fossil-fueled plant sites, one nuclear plant, one pumped storage hydroelectric
facility, seven gas combustion turbine plants and 13 hydroelectric plants.
24
<PAGE> 25
<TABLE>
<CAPTION>
1998 Summer Net 1998 Net
Demonstrated Generation
Size and Year Capability (Thousands
Name and Location (Michigan) Entering Service (Kilowatts) of kWhs)
- ----------------------------------------------------------------------------------------------------
COAL GENERATION
<S> <C> <C> <C>
J H Campbell - West Olive 3 Units, 1962-1980 1,346,100(a) 8,716,040
D E Karn - Essexville 2 Units, 1959-1961 515,000 2,956,590
B C Cobb - Muskegon 2 Units, 1956-1957 300,000 2,167,278
J R Whiting - Erie 3 Units, 1952-1953 310,000 1,905,584
J C Weadock - Essexville 2 Units, 1955-1958 310,000 2,213,428
-----------------------------------
Total coal generation 2,781,100 17,958,920
-----------------------------------
OIL/GAS GENERATION
D E Karn - Essexville 2 Units, 1975-1977 1,276,000 760,716
-----------------------------------
LUDINGTON PUMPED STORAGE 6 Units, 1973 954,700(b) (479,583)(c)
-----------------------------------
NUCLEAR GENERATION
Palisades - South Haven 1 Unit, 1971 760,000 5,363,942
-----------------------------------
GAS/OIL COMBUSTION TURBINE
GENERATION 7 Plants, 1966-1971 345,000 60,917
-----------------------------------
HYDRO GENERATION 13 Plants, 1907-1949 73,500 395,250
-----------------------------------
Total owned generation 6,190,300 24,060,162
==========
PURCHASED AND INTERCHANGE POWER CAPACITY 1,821,900(d)
---------
Total 8,012,200
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents Consumers' share of the capacity of the Campbell Plant Unit 3,
net of 6.69 percent (ownership interests of the Michigan Public Power Agency and
Wolverine Power Supply Cooperative, Inc.).
(b) Represents Consumers' share of the capacity of Ludington. Consumers and
Detroit Edison have 51 percent and 49 percent undivided ownership, respectively,
in the plant, and the capacity of the plant is shared accordingly.
(c) Represents Consumers' share of net pumped storage generation. This facility
electrically pumps water during off-peak hours for storage to later generate
electricity during peak-demand hours.
(d) Includes 1,240 MW of purchased contract capacity from the MCV Facility.
25
<PAGE> 26
Consumers owns 8,630 miles of electric transmission lines operating at up to 345
kilovolts, owns 59,471 miles of electric distribution lines and owns substations
having an aggregate transformer capacity of 39,022.14 kilovoltamperes.
CONSUMERS GAS UTILITY PROPERTIES
Consumers' gas distribution and transmission system consists of 23,392 miles of
distribution mains and 1,165 miles of transmission lines throughout the Lower
Peninsula of Michigan. Consumers owns and operates six compressor stations with
a total of 115,400 installed horsepower.
Consumers' gas storage fields, listed below, have an aggregate storage capacity
of 221.3 bcf.
<TABLE>
<CAPTION>
Field Name Location Storage Capacity (bcf)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Overisel Allegan and Ottawa Counties 62.0
Salem Allegan and Ottawa Counties 35.0
Ira St Clair County 6.8
Lenox Macomb County 3.5
Ray Macomb County 64.5
Northville Oakland, Washtenaw and Wayne Counties 12.1
Puttygut St Clair County 14.6
Four Corner St Clair County 3.8
Swan Creek St Clair County .6
Hessen St Clair County 17.0
Lyon - 34 Oakland County 1.4
- --------------------------------------------------------------------------------------------
</TABLE>
Michigan Gas Storage owns and operates two compressor stations with a total of
46,600 installed horsepower. Its transmission system consists of 530 miles of
pipelines within the Lower Peninsula of Michigan.
Michigan Gas Storage's gas storage fields, listed below, have an aggregate
certified storage capacity of 109.5 bcf.
<TABLE>
<CAPTION>
Total Certified
Field Name Location Storage Capacity (bcf)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Winterfield Osceola and Clare Counties 72.3
Cranberry Lake Clare and Missaukee Counties 28.2
Riverside Missaukee County 9.0
- -------------------------------------------------------------------------------------------
</TABLE>
In April 1998, Consumers sold gas properties related to the Marysville Gas
Reforming Plant, located in Marysville, Michigan. In addition, Huron
Hydrocarbons, Inc., which is a wholly-owned subsidiary of Consumers, sold its
ownership in St. Clair Underground Storage. These facilities were sold to an
affiliate of Consumers, CMS Gas Transmission and Storage Company. The effective
date of the sale was January 1, 1998.
26
<PAGE> 27
CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES
Net oil and gas production by CMS Oil and Gas for the years 1996 through 1998 is
shown in the following table.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oil and condensate (Mbbls) (a) 7,307 6,564 4,921
Natural gas (MMcf) (a) 26,495 27,157 29,371
Plant products (Mbbls) (a) 413 321 240
Average daily production (b)
Oil (Mbbls) 23.8 20.5 16.7
Gas (MMcf) 89.3 89.1 97.9
Reserves to annual production ratio
Oil (MMbbls) 11.5 14.3 16.2
Gas (bcf) 21.3 11.9 11.0
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Revenue interest to CMS Oil and Gas
(b) CMS Oil and Gas working interest (includes CMS Oil and Gas' share of
royalties)
27
<PAGE> 28
The following table shows CMS Oil and Gas' undeveloped net acres of oil and gas
leasehold interests.
<TABLE>
<CAPTION>
December 31 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michigan 113,912 138,903
Wyoming 137,098 -
Texas (including offshore acreage) 18,657 9,557
Montana 107,242 -
Indiana 10,293 28,839
Ohio 9,394 9,671
Louisiana (including offshore acreage) 4,155 4,424
North Dakota 575 2,587
Other states 8 55
---------------------------------
Total domestic 401,334 194,036
---------------------------------
Venezuela 339,521 339,521
Colombia 294,157 294,330
Cameroon 187,636 187,636
Equatorial Guinea 117,366 113,806
Cote d'Ivoire 89,868 -
Ecuador 66,430 66,430
Tunisia 64,761 67,193
Congo 17,364 17,364
---------------------------------
Total international 1,177,103 1,086,280
---------------------------------
Total net acres 1,578,437 1,280,316
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
The following table shows CMS Oil and Gas' estimated proved reserves of oil and
gas for the years 1996 through 1998.
<TABLE>
<CAPTION>
Total Worldwide United States International
- -------------------------------------------------------------------------------------------------------------------
Oil Gas Oil Gas Oil Gas
(MMbbls) (bcf) (MMbbls) (bcf) (MMbbls) (bcf)
- -------------------------------------------------------------------------------------------------------------------
PROVED DEVELOPED AND
UNDEVELOPED RESERVES
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 74.4 283.9 1.9 273.2 72.5 10.7
Revisions and other changes 2.7 6.8 1.5 - 1.2 6.8
Extensions and discoveries 4.9 64.6 - 32.6 4.9 32.0
Acquisitions of reserves 0.2 1.0 - 1.0 0.2 -
Sales of reserves (0.6) (3.7) (0.6) (3.7) - -
Production (5.2) (29.4) (1.0) (29.4) (4.2) -
------------------------------------------------------------------
December 31, 1996 76.4 323.2 1.8 273.7 74.6 49.5
Revisions and other changes 10.6 6.4 0.2 (7.2) 10.4 13.6
Extensions and discoveries 9.9 26.3 0.3 14.6 9.6 11.7
Acquisitions of reserves 8.3 - - - 8.3 -
Sales of reserves - (6.5) - (6.5) - -
Production (6.9) (27.2) (0.7) (26.5) (6.2) (0.7)
------------------------------------------------------------------
December 31, 1997 98.3 322.2 1.6 248.1 96.7 74.1
Revisions and other changes (8.2) (27.4) 0.5 (28.8) (8.7) 1.4
Extensions and discoveries 3.3 278.3 - 7.4 3.3 270.9
Acquisitions of reserves 2.9 17.4 - - 2.9 17.4
Sales of reserves - - - - - -
Production (7.7) (26.5) (0.7) (24.6) (7.0) (1.9)
------------------------------------------------------------------
December 31, 1998 88.6 564.0 1.4 202.1 87.2 361.9
- -------------------------------------------------------------------------------------------------------------------
ESTIMATED PROVED DEVELOPED RESERVES (a)
December 31, 1995 37.5 254.2 1.8 254.2 35.7 -
December 31, 1996 39.2 270.0 1.8 270.0 37.4 -
December 31, 1997 45.3 267.8 1.7 238.2 43.6 29.6
December 31, 1998 50.6 448.8 1.4 197.8 49.2 251.0
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EQUITY INTEREST IN ESTIMATED
PROVED RESERVES OF COMECO
PETROLEUM, INC. (YEMEN)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 2.8 - - - 2.8 -
December 31, 1996 3.2 - - - 3.2 -
December 31, 1997 - - - - - -
December 31, 1998 - - - - - -
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The government license in Venezuela is an oil service contract whereby CMS
Oil and Gas is paid a fee per barrel for oil discovered, lifted, and delivered
to Maraven S.A., a subsidiary of Petroleos de Venezuela S.A.. Additionally, CMS
Oil and Gas receives a fee for reimbursement of certain capital expenditures.
The volumes presented represent actual production with respect to which CMS Oil
and Gas is paid a per barrel fee.
CONSUMERS OTHER PROPERTIES
CMS Midland owns a 49 percent interest in the MCV Partnership, which was formed
to construct and operate the MCV Facility. The MCV Facility was sold to five
owner trusts and leased back to the MCV Partnership. CMS Holdings is a limited
partner in the FMLP, which is a beneficiary of one of these trusts. CMS
Holdings' indirect beneficial interest in the MCV Facility is 35 percent.
Consumers owns fee title to 1,140 acres of land in the City and Township of
Midland, Midland County, Michigan, occupied by the MCV Facility. The land is
leased to the owners of the MCV Facility by five separate leases, each leasing
an undivided interest and in the aggregate totaling 100 percent, for an initial
term ending December 31, 2035 with possible renewal terms to June 15, 2090.
Consumers owns or leases three principal general office buildings in Jackson,
Michigan and 53 field offices at various locations in Michigan's Lower
Peninsula. Of these, two general office buildings and 15 field offices are
leased. Also owned are miscellaneous parcels of real estate not now used in
utility operations.
For information on capital expenditures, see ITEM 7. CONSUMERS MANAGEMENT'S
DISCUSSION AND ANALYSIS - OUTLOOK AND ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA - NOTE 10 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
CMS ENERGY OTHER PROPERTIES
CMS Generation has ownership interests in certain facilities such as Loy Yang,
Jorf Lasfar and El Chocon. The Loy Yang assets are owned in fee, but are subject
to the security interests of its creditors. The Jorf Lasfar facility is held
pursuant to a right of possession agreement with the Moroccan state owned Office
National de l'Electricite. The El Chocon facility is held pursuant to a 30-year
possession agreement.
30
<PAGE> 31
CMS Gas Transmission has ownership interests in 367 miles of pipelines in
Michigan. Additionally, CMS Gas Transmission owns a 25 percent general
partnership interest in TGN, which owns and operates 3,115 miles of pipeline
that provides natural gas transmission service to the northern and central parts
of Argentina. CMS Gas Transmission also owns a 260-mile pipeline in western
Australia, which includes 30 bcf of proved natural gas reserves with two gas
production licenses and an associated gas storage facility in pre-operational
testing.
In May 1998, CMS Gas Transmission initiated construction of a 2,500 metric tons
per day methanol plant in Equatorial Guinea in west Africa. The plant will
utilize approximately 115 mmcfd of residue gas from the CMS Oil and Gas
facilities nearby.
In October 1998, CMS Gas Transmission acquired Continental Natural Gas, Inc. and
Heritage Gas Services, L.L.C. Based in Oklahoma, these companies operate
approximately 4,000 miles of gas gathering lines and thirteen processing plants.
In December 1998, CMS Gas Transmission acquired a 45 percent interest in the 860
mile Goldfields Gas Transmission Pipeline, which transports natural gas to the
mining regions of western Australia.
CMS Gas Transmission also has ownership interests in other facilities, including
a proprietary gas processing company which has patents for its helium removal
and nitrogen rejection processes, gas gathering systems and processing plants,
and an enhanced oil recovery project which involves flooding depleted oil
reservoirs with carbon dioxide.
CMS Electric and Gas owns two electric distribution facilities in South America.
Empresa Distribuidora de Electricidad de Entre Rios S.A. serves approximately
223,000 customers in the province of Entre Rios, Argentina. Sistema Electrico
Nueva Esparta C.A. serves more than 90,000 customers on Margarita Island,
Venezuela.
CMS Energy, through certain subsidiaries; owns a 50 percent interest in Bay
Harbor Company, L.L.C., a development in Emmet County, Michigan, owns 6,000
acres of undeveloped land in Benzie and Manistee Counties, Michigan; and owns 53
acres of undeveloped land in Muskegon County, Michigan.
31
<PAGE> 32
The following table shows interests in independent power plants at December 31,
1998.
<TABLE>
<CAPTION>
Location Ownership Interest (%) Gross Capacity (MW)
- ---------------------------------------------------------------------------------------------------------------
CMS GENERATION
<S> <C> <C>
Wood-Fueled
Domestic 50.0 175
Fossil-Fueled
Domestic 8.8 - 80.0 410
International
Andhra Pradesh, India 25.3 235
Mendoza Province, Argentina 92.6 540
Port of Jorf Lasfar, Morocco 50.0 660
State of Victoria, Australia 49.6 2,000
Other 25.3 - 100.0 386
Scrap Tire-Fueled
Domestic 50.0 31
Hydro Generation
Domestic 1.0 - 55.5 98
International
Limay River, Argentina 17.2 1,320
CMS MIDLAND
Fossil-Fueled
Midland, Michigan 49.0(a) 1,370
===============================================================================================================
</TABLE>
(a) See the previous section - CONSUMERS OTHER PROPERTIES - for more
information.
For information on capital expenditures, see ITEM 7. CMS ENERGY MANAGEMENT'S
DISCUSSION AND ANALYSIS - CAPITAL RESOURCES AND LIQUIDITY AND ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA - NOTE 3 OF CMS ENERGY'S NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
32
<PAGE> 33
ITEM 3. LEGAL PROCEEDINGS
CMS Energy, Consumers and some of their subsidiaries and affiliates are parties
to certain routine lawsuits and administrative proceedings incidental to their
businesses involving, for example, claims for personal injury and property
damage, contractual matters, various taxes, and rates and licensing. Reference
is made to the combined ITEM 1. BUSINESS - CMS ENERGY AND CONSUMERS REGULATION,
as well as to each of CMS Energy's and Consumers' ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS included herein for additional
information regarding various pending administrative and judicial proceedings
involving regulatory, operating and environmental matters.
CMS ENERGY
EXEMPTION UNDER PUHCA: CMS Energy is exempt from registration under PUHCA. In
December 1991, the Attorney General and the Michigan Municipal Cooperative Group
filed a request with the SEC for the revocation of CMS Energy's exemption. In
January 1992, CMS Energy responded to the revocation request affirming its
position that it is entitled to the exemption and vigorously contesting the
revocation request and believes it will maintain the exemption. In April 1992,
the MPSC filed a statement with the SEC that recommended that the SEC impose
certain conditions on CMS Energy's exemption. There has been no action taken by
the SEC on this matter.
In January 1999, a bill was introduced in the United States Senate that would
repeal PUHCA. The bill was reported out of the Senate Committee on Banking,
Housing and Urban Affairs on February 11, 1999. A similar bill was introduced in
the House of Representatives in February 1999.
INDEPENDENT POWER PRODUCTION PROJECT LITIGATION: In August 1995, William R.
Williams and two of his corporations, Altresco Philippines, Inc. and WRW
Corporation (formerly Altresco International, Inc.), filed a lawsuit against CMS
Generation in the United States District Court for the District of Colorado, in
connection with a project to be developed in Bantangas, Philippines by Luzon
Power Associates, Inc. in which CMS Generation owned 50 percent. The complaint
alleged breach of a confidentiality agreement, breach of fiduciary duty,
intentional interference with a contract, breach of implied covenant of good
faith and fair dealing, and unfair competition. The claims primarily relate to
CMS Generation's alleged violation of a restrictive covenant in a
confidentiality agreement. The plaintiffs had claimed direct damages of
approximately $85 million and indirect damages in a like amount from loss of
future business, plus punitive damages, interest, and attorney's fees. Altresco
Philippines, Inc. also initiated a related arbitration proceeding under the
auspices of the International Chamber of Commerce ("ICC"), International Court
of Arbitration. The arbitration was completed in June 1998, and a decision was
issued in September 1998. The parties entered into a settlement agreement in
February 1999 resolving all remaining claims relating to the litigation. On
March 3, 1999, the court entered an Order granting a Stipulation and Motion for
Dismissal with Prejudice. The total
33
<PAGE> 34
award of damages in this litigation did not have a material adverse effect on
CMS Energy's financial position, liquidity or results of operation.
FTC CONSENT AGREEMENT: In March 1999, CMS Energy signed a consent agreement with
the FTC to settle the FTC's investigation of CMS Energy's acquisition of the
Panhandle Companies and to terminate the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act. Pursuant to the consent agreement,
CMS Energy agreed that Consumers would receive natural gas tendered for delivery
at all material interconnections with pipelines (other than those of the
Panhandle Companies and other pipelines affiliated with CMS Energy) up to design
capacity of the interconnections, except as the capacity may be reduced for
maintenance or force majeure. If it does not provide service at the agreed
capacity, Consumers agrees to provide gas on Consumers' side of the
interconnection and accept delayed repayment in kind. The FTC accepted the
consent agreement on March 18, 1999, and this permitted the acquisition to close
on March 29, 1999. The requirements in the proposed FTC order are consistent
with Consumers' previous practices, and the MPSC has approved new tariffs to
reflect the proposed order. The FTC has published the proposed order and after a
60 day period for public comments, the order will be entered unless the FTC
should withdraw its acceptance of the consent agreement, in which event the FTC
may take such action as it may consider appropriate.
CONSUMERS
ANTITRUST LITIGATION: In October 1997, Indeck Energy Services, Inc. and Indeck
Saginaw Limited Partnership, independent power producers, filed a lawsuit
against Consumers in the United States District Court for the Eastern District
of Michigan. The suit alleges antitrust violations relating to contracts that
Consumers entered into with some of its customers as well as claims relating to
independent power production projects. The plaintiffs claim damages of $100
million (which can be trebled in antitrust cases as provided by law). The
transactions of which plaintiffs complain have been regulated by and are subject
to the jurisdiction of the MPSC. On November 21, 1997, Consumers filed a motion
for summary judgment and/or dismissal of the complaint. The court has not yet
ruled on Consumers' motion to dismiss. Consumers believes the lawsuit is without
merit and will vigorously defend against it, but cannot predict the outcome of
this matter.
CONSUMERS' JOINT LAWSUIT AGAINST DOE: Under the Nuclear Waste Policy Act of
1982, the DOE was required to begin accepting deliveries of spent nuclear fuel
from commercial operators by January 31, 1998 for disposal, even if a permanent
storage repository was not then operational. In January 1997, in response to the
DOE's declaration in December 1996 that it would not begin to accept spent
nuclear fuel deliveries in 1998, Consumers and other utilities filed suit in the
United States Court of Appeals for the District of Columbia Circuit. In November
1997, the United States Court of Appeals decided that the contract between DOE
and the utilities provided a potentially adequate remedy if the DOE failed to
fulfill its obligations by January 31, 1998. Further litigation brought by
Consumers and others in 1998 is intended to produce specific monetary relief for
DOE's failure to comply with its obligation to take delivery of spent nuclear
fuel. In January 1999, federal legislation was reintroduced in the House of
Representatives to clarify the timing of the DOE's obligation to accept spent
nuclear fuel and to direct the DOE to establish an integrated spent fuel
management system that includes designing and constructing an interim storage
facility in Nevada. Similar legislation is expected to be reintroduced in the
Senate.
34
<PAGE> 35
CMS ENERGY AND CONSUMERS
ENVIRONMENTAL MATTERS: CMS Energy, Consumers and their subsidiaries and
affiliates are subject to various federal, state and local laws and regulations
relating to the environment. Several of these companies have been named parties
to various actions involving environmental issues. Based on their present
knowledge and subject to future legal and factual developments, CMS Energy and
Consumers believe that it is unlikely that these actions, individually or in
total, will have a material adverse effect on their financial condition. See
ITEM 1. BUSINESS - CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE; ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS; and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA - NOTE 3 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
CMS ENERGY
None in the fourth quarter of 1998 for CMS Energy.
CONSUMERS
None in the fourth quarter of 1998 for Consumers.
35
<PAGE> 36
PART II
ITEM 5. MARKET FOR CMS ENERGY'S AND CONSUMERS' COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
CMS ENERGY
Market prices for CMS Energy's Common Stock and related security holder matters
are contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - CMS
ENERGY'S QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION, which is incorporated
by reference herein. At February 28, 1999, the number of registered shareholders
totaled 65,775 for CMS Energy Common Stock and 5,065 for Class G Common Stock.
CONSUMERS
Consumers' common stock is privately held by its parent, CMS Energy, and does
not trade in the public market. In February, May, August and November 1998,
Consumers paid $80 million, $49 million, $44 million and $68 million in cash
dividends, respectively, on its common stock. In May, August, November and
December 1997, Consumers paid $70 million, $43 million, $57 million and $48
million in cash dividends, respectively, on its common stock.
ITEM 6. SELECTED FINANCIAL DATA.
CMS ENERGY
Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA - CMS ENERGY'S SELECTED FINANCIAL INFORMATION which is
incorporated by reference herein.
CONSUMERS
Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA - CONSUMERS' SELECTED FINANCIAL INFORMATION which is
incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CMS ENERGY
Management's discussion and analysis of financial condition and results of
operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -
CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS which is incorporated by
reference herein.
CONSUMERS
Management's discussion and analysis of financial condition and results of
operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -
CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS which is incorporated by
reference herein.
36
<PAGE> 37
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CMS ENERGY
Quantitative and Qualitative Disclosures About Market Risk is contained in ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - CMS ENERGY'S MANAGEMENT'S
DISCUSSION AND ANALYSIS - RESULTS OF OPERATIONS - MARKET RISK INFORMATION which
is incorporated by reference herein.
CONSUMERS ENERGY
Quantitative and Qualitative Disclosures About Market Risk is contained in ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - CONSUMERS ENERGY'S MANAGEMENT'S
DISCUSSION AND ANALYSIS - OTHER MATTERS - MARKET RISK INFORMATION which is
incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
CMS ENERGY Page
Selected Financial Information......................................... 39
Management's Discussion and Analysis................................... 41
Consolidated Statements of Income...................................... 55
Consolidated Statements of Cash Flows.................................. 56
Consolidated Balance Sheets............................................ 57
Consolidated Statements of Preferred Stock............................. 59
Consolidated Statements of Common Stockholders' Equity................. 60
Notes to Consolidated Financial Statements............................. 61
Report of Independent Public Accountants............................... 95
Quarterly Financial and Common Stock Information....................... 96
CONSUMERS Page
Selected Financial Information......................................... 98
Management's Discussion and Analysis................................... 99
Consolidated Statements of Income...................................... 109
Consolidated Statements of Cash Flows.................................. 110
Consolidated Balance Sheets............................................ 111
Consolidated Statements of Long-Term Debt.............................. 113
Consolidated Statements of Preferred Stock............................. 114
Consolidated Statements of Common Stockholder's Equity................. 115
Notes to Consolidated Financial Statements............................. 116
Report of Independent Public Accountants............................... 138
Quarterly Financial Information........................................ 139
37
<PAGE> 38
[CMS ENERGY LOGO]
1998 FINANCIAL STATEMENTS
38
<PAGE> 39
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CMS ENERGY CORPORATION
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue (in millions) ($) 5,141 4,781 4,324 3,890 3,614
Consolidated net income (in millions) ($) 285 244 224 195 177
Average common shares outstanding
(in thousands)
CMS Energy 102,446 96,144 92,462 88,810 85,888
Class G 8,333 8,015 7,727 7,511 -
Earnings per average common share
CMS Energy - Basic ($) 2.65 2.39 2.27 2.16 2.07
- Diluted ($) 2.62 2.37 2.26 2.16 2.06
Class G - Basic and Diluted ($) 1.56 1.84 1.82 .38 -
Cash from operations (in millions) ($) 516 624 647 640 603
Capital expenditures, excludes capital
lease additions and DSM (in millions) ($) 1,295 678 643 508 575
Total assets (in millions) ($) 11,310 9,508 8,363 7,909 7,159
Long-term debt, excluding current
maturities (in millions) ($) 4,726 3,272 2,842 2,906 2,709
Non-current portion of capital
leases (in millions) ($) 105 75 103 106 108
Total preferred stock (in millions) ($) 238 238 356 356 356
Total Trust Preferred Securities (in millions) ($) 393 393 100 - -
Cash dividends declared per common share
CMS Energy ($) 1.26 1.14 1.02 .90 .78
Class G ($) 1.27 1.21 1.15 .56 -
Market price of common stock at year-end
CMS Energy ($) 48-7/16 44-1/16 33-5/8 29-7/8 22-7/8
Class G ($) 25-1/4 27-1/8 18-3/8 18-7/8 -
Book value per common share at year-end
CMS Energy ($) 19.61 16.84 15.24 13.51 11.16
Class G ($) 11.46 10.91 11.38 10.60 -
Return on average common equity (%) 14.2 14.7 15.7 17.1 19.8
Return on assets (%) 5.5 5.6 5.4 5.2 5.0
Number of employees at year-end
(full-time equivalents) 9,710 9,682 9,712 10,105 9,972
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
SELECTED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CMS ENERGY CORPORATION
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ELECTRIC UTILITY STATISTICS
Sales (billions of kWh) 40.0 37.9 37.1 35.5 34.5
Customers (in thousands) 1,640 1,617 1,594 1,570 1,547
Average sales rate per kWh (cents) 6.50 6.57 6.55 6.36 6.29
GAS UTILITY STATISTICS
Sales and transportation deliveries (bcf) 360 420 448 404 409
Customers (in thousands) (a) 1,558 1,533 1,504 1,476 1,448
Average sales rate per mcf ($) 4.56 4.44 4.45 4.42 4.48
INTERNATIONAL ENERGY-RELATED STATISTICS
CMS Energy's share of unconsolidated
independent power production
revenue (in millions) ($) 761 621 493 497 385
Independent power production
sales (millions of kWh) 19,017 13,126 7,823 7,422 6,216
CMS Energy's share of unconsolidated
natural gas transmission, storage and
processing revenue (in millions) ($) 67 51 42 26 7
CMS Energy's share of unconsolidated
marketing, services and trading
revenue ($) 291 202 - - -
Gas managed and marketed for end users (bcf) 366 243 108 101 66
EXPLORATION AND PRODUCTION STATISTICS
Sales (net equiv. MMbbls) 12.1 11.4 10.1 9.0 5.6
Proved reserves (net equiv. MMbbls) 182.6 152.0 133.5 124.5 108.0
Proved reserves added (net equiv. MMbbls) (b) 42.7 29.8 18.7 25.6 29.0
Finding cost per net equiv. barrel (b) ($) 3.35 2.38 2.94 5.06 5.92
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes off-system transportation customers.
(b) Certain prior year amounts were restated for comparative purposes.
40
<PAGE> 41
CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
CMS Energy Corporation (CMS Energy) is the parent holding company of Consumers
Energy Company (Consumers) and CMS Enterprises Company (Enterprises). Consumers
is a combination electric and gas utility company serving the Lower Peninsula of
Michigan and is the principal subsidiary of CMS Energy. Enterprises is engaged
in several domestic and international energy-related businesses including:
acquisition, development and operation of independent power production
facilities; oil and gas exploration and production; transmission, storage and
processing of natural gas; energy marketing, services and trading; and
international energy distribution.
This Annual Report contains forward-looking statements, as defined by the
Private Securities Litigation Reform Act of 1995. Where any such forward-looking
statements include a statement of the assumptions underlying forward-looking
statements, CMS Energy cautions that, while such assumptions are believed to be
reasonable and are made in good faith, assumed results almost always vary from
actual results and differences between assumed and actual results can be
material. The type of assumptions that could materially affect the actual
results are discussed in the Forward-Looking Statements section in this
Management's Discussion and Analysis. More specific risk factors are contained
in various public filings made by CMS Energy with the Securities and Exchange
Commission (SEC). This Annual Report also describes material contingencies in
the Notes to Consolidated Financial Statements and the readers are encouraged to
read such Notes.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
<TABLE>
<CAPTION>
In Millions, Except Per Share Amounts
- -----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998(a) 1997 Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated Net Income $ 285 $ 244 $ 41
Net Income Attributable to Common Stocks:
CMS Energy 272 229 43
Class G 13 15 (2)
Earnings Per Average Common Share:
CMS Energy
Basic 2.65 2.39 .26
Diluted 2.62 2.37 .25
Class G
Basic and Diluted 1.56 1.84 (.28)
=================================================================================================================
</TABLE>
(a) Includes the cumulative effect of an accounting change for property taxes
which increased net income by $43 million or $.40 per share - basic and diluted
- - for one of two classes of common stock of CMS Energy, par value $.01 per share
(CMS Energy Common Stock) and $12 million or $.36 per share - basic and diluted
- - for one of two classes of common stock of CMS Energy, no par value (Class G
Common Stock).
The increase in consolidated net income for 1998 over 1997 resulted from
increased earnings from the electric utility; independent power production;
natural gas transmission, storage and processing; and
41
<PAGE> 42
marketing, services and trading businesses. Partially offsetting these increases
were lower earnings from the gas utility, exploration and production and
international energy distribution businesses, the recognition of a $37 million
loss ($24 million after-tax) for the underrecovery of power costs under the
power purchase agreement between Consumers and the Midland Cogeneration Venture
Limited Partnership (MCV Partnership), and higher interest expense.
The increase in consolidated net income for 1997 over 1996 resulted from
increased income from the electric utility; independent power production; and
natural gas transmission, storage and processing businesses. Partially
offsetting these increases were lower incomes from the gas utility and
exploration and production businesses coupled with higher interest expense.
For further information, see the individual results of operations for each CMS
Energy business segment in this Management's Discussion and Analysis.
CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Change Compared to Prior Year 1998 vs 1997 1997 vs 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deliveries (including special contract discounts) $ 40 $ 5
Lower power supply cost per kWh 20 -
Rate increases and other non-commodity revenue (4) 11
Operation and maintenance (3) 24
General taxes, depreciation and other (10) (19)
---------------------------------
Total increase (decrease) in pretax operating income $ 43 $ 21
================================================================================================================
</TABLE>
ELECTRIC DELIVERIES: Total electric deliveries in 1998 were 40 billion
kilowatt-hours (kWh), an increase of 6 percent over 1997. The increase is
primarily attributable to an increase in sales between utility systems and a 3
percent increase in deliveries to ultimate customers. Total electric deliveries
in 1997 were 38 billion kWh, an increase of 2 percent over 1996 deliveries. The
increase in 1997 was the result of continued economic growth in Michigan and a 1
percent increase in deliveries to ultimate customers, primarily within the
industrial class.
POWER SUPPLY COSTS: Cost increases in both 1998 and 1997 over the prior periods
reflect increased power purchases from outside sources to meet increased sales
demand. In addition, the 1998 cost increase reflects higher internal kWh
generation to meet the increased demand for electricity. The following table
quantifies the changes in electric power costs:
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 Change 1997 1996 Change
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1,175 $1,139 $36 $1,139 $1,087 $52
==============================================================================================================
</TABLE>
Consumers purchased $5 million of energy options to ensure a reliable source of
capacity during the summer months of 1998. As a result of weather conditions and
fluctuations in the price of electricity, some options were sold totaling $11
million during June, July, and August 1998. All of the remaining options
42
<PAGE> 43
have expired. The costs relating to the expired options and income receive from
the sale of options were reflected as purchased power costs.
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties are: i) environmental liabilities arising from
compliance with various federal, state and local environmental laws and
regulations, including potential liability or expenses relating to the Michigan
Natural Resources and Environmental Protection Act and Comprehensive
Environmental Response, Compensation and Liability Act; ii) capital expenditures
for compliance with the federal Clean Air Act, as amended (Clean Air Act); iii)
suits by two independent power producers alleging antitrust violations and
economic losses due to special electric contracts signed by Consumers; iv) cost
recovery relating to the natural gas-fueled, combined-cycle cogeneration
facility (MCV Facility) and nuclear plant investments and an experimental
direct-access program; v) electric industry restructuring; vi) implementation of
a frozen power supply cost recovery and initiatives to be undertaken to reduce
exposure to high energy prices; vii) after-tax cash underrecoveries associated
with power purchases from the MCV Partnership; and viii) Big Rock Point nuclear
power plant decommissioning issues and ongoing issues relating to the storage of
spent fuel and the operating life of Palisades nuclear power plant (Palisades).
For detailed information about these trends or uncertainties see Note 3,
"Uncertainties," incorporated by reference herein.
CONSUMERS GAS GROUP RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
43
<PAGE> 44
<TABLE>
<CAPTION>
In Millions
- ---------------------------------------------------------------------------------------------------------------------
Change Compared to Prior Year 1998 vs 1997 1997 vs 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ (36) $ (13)
Reduced gas cost per thousand cubic feet 19 -
Gas wholesale and retail services activities 1 (9)
Operation and maintenance (1) 24
General taxes, depreciation and other (10) (7)
--------------------------------
Total increase (decrease) in pretax operating income $ (27) $ (5)
=====================================================================================================================
</TABLE>
GAS DELIVERIES: System deliveries in 1998, including miscellaneous
transportation, totaled 360 billion cubic feet (bcf), a decrease of 60 bcf or 14
percent compared to 1997. The decreased deliveries for 1998 compared to 1997
reflect warmer temperatures in 1998. System deliveries in 1997, including
miscellaneous transportation, totaled 420 bcf, a decrease of 28 bcf or 6 percent
compared to 1996. The decreased deliveries for 1997 compared to 1996 reflect
warmer temperatures in 1997 and the loss of an extra day for the 1996 leap year.
COST OF GAS SOLD: The cost decrease for 1998 was the result of decreased sales
and decreased gas prices. The cost decrease for 1997 also was the result of
decreased sales and lower gas prices.
<TABLE>
<CAPTION>
In Millions
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 Change 1997 1996 Change
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$564 $694 $(130) $694 $750 $(56)
=====================================================================================================================
</TABLE>
UNCERTAINTIES: CMS Energy's financial position may be affected by a number of
trends or uncertainties that have, or CMS Energy reasonably expects could have,
a material impact on net sales or revenues or income from continuing gas
operations. Such uncertainties are: i) potential environmental costs at a number
of sites, including sites formerly housing manufactured gas plant facilities;
ii) a statewide experimental gas transportation program; and iii) implementation
of a frozen gas cost recovery and initiatives undertaken to protect against gas
price increases. For detailed information about these uncertainties see Note 3,
"Uncertainties," incorporated by reference herein.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for 1998 increased $48 million
(50 percent) from the comparable period in 1997. This increase primarily
reflects increased operating income from international plant earnings and fees,
a $26 million gain on the sale of two biomass project power purchase agreements,
and a $9 million gain on the sale of two biomass plants, partially offset by
higher net operating expenses and a scheduled reduction in the industry
expertise service fee income earned in connection with the 2,000 megawatt (MW)
brown coal-fueled Loy Yang A power plant and an associated coal mine in
Victoria, Australia (Loy Yang). Pretax operating income for 1997 increased $28
million (41 percent) from 1996, primarily reflecting increased international
earnings, higher electricity sales by the MCV Facility, and the industry
expertise service fee income earned in connection with Loy Yang in 1997. These
increases were partially offset by the absence of certain 1996 nonrecurring
gains, including the gain on the sale of a power purchase agreement.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
44
<PAGE> 45
PRETAX OPERATING INCOME: Pretax operating income for 1998 decreased $20 million
(77 percent) from the comparable period in 1997. This decrease is the result of
lower oil prices and a gain in the prior period from the sale of CMS Oil and Gas
Company's (CMS Oil and Gas) (formerly CMS NOMECO Oil & Gas Co.) entire interest
in oil and gas properties in Yemen, partially offset by increased oil
production, decreased exploration expenses, and decreased depreciation,
depletion and amortization expenses. Pretax operating income for 1997 decreased
$7 million (21 percent) from 1996 as a result of lower oil and gas prices,
decreased gas production and higher operating expenses. The decrease is
partially offset by a gain on the sale of the entire interest in oil and gas
properties in Yemen and 33 percent higher oil production.
CMS Oil and Gas changed its method of accounting, effective January 1, 1998, for
oil and gas operations from the full cost method to the successful efforts
method. CMS Oil and Gas believes that the successful efforts method will
minimize asset write-offs caused by periodic price swings, which may not be
representative of overall or long-term markets, and will allow its results of
operations to be more easily compared to other oil and gas companies. Nitrotec
Corporation (Nitrotec), in which CMS Gas Transmission and Storage Company (CMS
Gas Transmission) has an equity investment, also elected to convert effective
January 1, 1998 from the full cost method of accounting to the successful
efforts method of accounting. All prior period financial statements presented
have been restated to conform with successful efforts accounting. The effect,
after tax, of the change in accounting method as of December 31, 1997, was a
reduction to retained earnings of $175 million for CMS Oil and Gas and $15
million for CMS Gas Transmission, primarily attributable to a decrease in CMS
Oil and Gas' net plant and property and deferred tax liability of $270 million
and $95 million, respectively, and a $15 million decrease in CMS Gas
Transmission's equity investment in Nitrotec.
NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for 1998 increased $6 million
(22 percent) from the comparable period in 1997. The increase primarily reflects
a gain on the sale of Petal Gas Storage Company, a gain on the sale of
Australian gas reserves, and lower operating expenses, partially offset by a
decrease in earnings from international operations. Pretax operating income for
1997 increased $10 million (59 percent) from 1996. The increase primarily
reflects income attributable to an Australian pipeline acquired in 1997, higher
income from domestic and international operations, a larger restated loss from
Nitrotec in 1996 subsequent to converting to the successful efforts method of
accounting, and a gain on the sale of a portion of the Crescent and Ames gas
gathering systems and processing plant in Oklahoma. These increases were
partially offset by the 1996 gain resulting from the dissolution of the Moss
Bluff Gas Storage Systems and Grand Lacs Limited Partnerships.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for 1998 increased $9 million
from the comparable period in 1997. This increase is the result of improved
margins on electricity and gas sales combined with increased electric and gas
sales volumes, partially offset by additional operating costs relating to growth
objectives. Pretax operating income for 1997 decreased $7 million from the 1996
period. The decrease is a result of substantially higher than expected natural
gas prices that severely restricted CMS Marketing, Services and Trading
Company's ability to achieve positive margins on fixed price sales, and higher
than expected start-up costs. Electric marketing volumes reached 6.9 million MW
for the year ended December 31, 1998 compared to 900,000 MW for the comparable
period in 1997. Gas managed and marketed for end users totaled 366 bcf, 243 bcf
and 108 bcf for the years ended December 31, 1998, 1997 and 1996, respectively.
45
<PAGE> 46
MARKET RISK INFORMATION
CMS Energy is exposed to market risk including, but not limited to, changes in
interest rates, currency exchange rates, and certain commodity and equity
prices. Derivative instruments including, but not limited to, futures contracts,
swaps, options and forward contracts may be used to manage these exposures.
Derivatives are principally used to hedge market risks.
Management uses commodity futures contracts, options and swaps (which require a
net cash payment for the difference between a fixed and variable price) and oil
swaps to manage commodity price risk. They also use forward exchange contracts
to hedge certain receivables, payables and long-term debt relating to foreign
investments. Management also uses equity investments in which CMS Energy or its
subsidiaries hold less than a 20 percent interest. These commodity, financial
and equity instruments do not expose CMS Energy to material market risk.
During 1998, derivative trading activities were immaterial. Management believes
that any losses incurred on derivative instruments used as a hedge would be
offset by the opposite movement of the underlying hedged item.
INTEREST RATE RISK: Management uses a combination of fixed-rate and
variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital. The carrying amount of long-term debt was $4.7 billion at
December 31, 1998 with a fair value of $4.7 billion. The fair value of CMS
Energy's financial derivative instruments at December 31, 1998, with a notional
amount of $579 million, was $15 million, representing the amount that CMS Energy
would have paid to terminate these agreements on December 31, 1998.
SENSITIVITY ANALYSIS: In accordance with SEC disclosure requirements, CMS Energy
performed a sensitivity analysis. The analysis assesses the potential loss in
fair value, cash flows and earnings based upon hypothetical increases and
decreases in market interest rates. A hypothetical 10 percent adverse shift in
market rates in the near term would not have a material impact on CMS Energy's
consolidated financial position, results of operations or cash flows as of
December 31, 1998. Management does not believe that a sensitivity analysis alone
provides an accurate or reliable method for monitoring and controlling risk.
Therefore, CMS Energy and its subsidiaries rely on the experience and judgment
of senior management and traders to revise strategies and adjust positions as
they deem necessary. Losses in excess of the amounts determined in the
sensitivity analysis could occur if market rates or prices exceed the 10 percent
shift used for the analysis. The analysis assumes that the maximum exposure
associated with purchased options is limited to premiums paid. The analysis
assumes that the CMS Energy Trust Preferred Securities are not converted into
CMS Energy Common Stock. If the conversion occurred, the $173 million of CMS
Energy Trust Preferred Securities would be discharged through the issuance of
4.2 million shares of CMS Energy Common Stock. The analysis also does not
quantify short-term exposure to hypothetically adverse price fluctuations in
inventories.
For a discussion of accounting policies related to derivative transactions, see
Note 8.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
46
<PAGE> 47
CMS Energy's primary ongoing source of operating cash is dividends and
distributions from subsidiaries. In 1998, Consumers paid $241 million in common
dividends. In December 1998, CMS Energy contributed $100 million of paid-in
capital to Consumers. During 1998, Enterprises paid common dividends and other
distributions of $122 million to CMS Energy. CMS Energy's consolidated operating
cash requirements are met by its operating and financing activities.
OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by operating
activities is derived mainly from the processing, storage, transportation and
sale of natural gas; the generation, transmission and sale of electricity; and
the sale of oil. Consolidated cash from operations totaled $516 million and $624
million for 1998 and 1997, respectively. The $108 million decrease resulted from
cash outflows related to increases in accounts receivable from and advances to
affiliates, partially offset by an increase in consolidated net income. CMS
Energy uses its operating cash primarily to expand its international businesses,
to maintain and expand electric and gas systems of Consumers, to pay interest on
and retire portions of its long-term debt, and to pay dividends.
INVESTING ACTIVITIES: CMS Energy's consolidated net cash used in investing
activities totaled $1.634 billion and $1.551 billion for 1998 and 1997,
respectively. The increase of $83 million primarily reflects increased capital
expenditures for acquisitions, partially offset by decreased investments in
partnerships and unconsolidated subsidiaries (1997 included an approximately
$500 million investment in Loy Yang). CMS Energy's 1998 expenditures for its
utility and international businesses were $429 million and $1.271 billion,
respectively, compared to $371 million and $1.148 billion, respectively, during
1997.
FINANCING ACTIVITIES: CMS Energy's net cash provided by financing activities
totaled $1.150 billion and $938 million for 1998 and 1997, respectively. The
increase of $212 million in net cash provided by financing activities resulted
from an increase of $848 million in the issuance of new securities (see table
below), partially offset by increases in the retirement of bonds and other
long-term debt ($140 million) and the repayment of bank loans ($545 million).
47
<PAGE> 48
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------------------------------------------------------
Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CMS ENERGY
GTNs
Series D (1) (1) 6.8%(1) $ 122 General corporate purposes
Series E (1) (1) 6.9%(1) 34 General corporate purposes
Extendible Tenor Rate
Adjusted Securities (2) January 2005 7.0% 180 Pay down borrowings
Common Stock November N/A 4.5 shares 208 General corporate purposes
-------
544
CONSUMERS
Senior Notes (3) February 2008 6.375% 250 Pay down First Mortgage
Bonds and general corporate
purposes
Senior Notes (3) March 2018 6.875% 225 Pay down First Mortgage
Bonds and borrowings
under credit facilities
Senior Notes (3) May 2008 6.2%(4) 250 Pay down First Mortgage
Bonds, long-term bank
debt and general corporate
purposes
Senior Notes (3) June 2018 6.5%(5) 200 Pay down First Mortgage
Bonds and general corporate
purposes
Long-Term Bank Debt May 2001-2003 6.05%(6) 225 Pay down long-term bank
debt
Senior Notes (3) October 2028 6.5% 150 Pay down long-term bank
debt and general corporate
purposes
-------
Total $ 1,844
====================================================================================================================
</TABLE>
(1) CMS Energy General Term Notes(R) (GTNs) are issued from time
to time with varying maturity dates. The rate shown herein is
a weighted average interest rate.
(2) May be extended for an additional seven years.
(3) The Senior Notes are secured by Consumers' First Mortgage
Bonds issued contemporaneously in a similar amount.
48
<PAGE> 49
(4) The interest rate may be reset in May 2003.
(5) The interest rate will be reset in June 2005.
(6) The interest rate is variable; weighted average interest rate
upon original issuance was 6.05 percent.
In 1998, CMS Energy paid $129 million in cash dividends to holders
of CMS Energy Common Stock and $11 million in cash dividends to
holders of Class G Common Stock. In January 1999, the Board of
Directors of CMS Energy declared a quarterly dividend of $.33 per
share on CMS Energy Common Stock and $.325 per share on Class G
Common Stock, payable in February 1999.
In August 1998, CMS Energy filed a shelf registration statement for
the issuance of $400 million of GTNs Series E.
In December 1998, CMS Energy filed two shelf registration statements for the
issuance of $1.5 billion of CMS Energy Common Stock and $400 million of senior
and subordinated debt securities.
In January 1999, CMS Energy received net proceeds of approximately $473 million
from the sale of $480 million of senior notes. In February 1999, CMS Energy
received net proceeds of approximately $296 million from the sale of $300
million of senior notes. Proceeds from these offerings were used to repay debt
and for general corporate purposes.
OTHER INVESTING AND FINANCING MATTERS: At December 31, 1998, the book value per
share of CMS Energy Common Stock and Class G Common Stock was $19.61 and $11.46,
respectively.
In January 1998, a Delaware statutory business trust established by CMS Energy
sold $180 million of certificates due January 15, 2005 in a public offering. In
exchange for those proceeds, CMS Energy sold to the trust $180 million aggregate
principal amount of 7 percent Extendible Tenor Rate Adjusted Securities due
January 15, 2005, which may be extended for an additional seven years. Net
proceeds to CMS Energy from the sale totaled $176 million.
As of December 31, 1998, CMS Energy had an aggregate $2.3 billion in securities
registered for future issuance, including securities to be issued to permanently
finance the acquisition, as described below, of Panhandle Eastern Pipe Line
Company, Trunkline Gas Company, Pan Gas Storage Company, Panhandle Storage
Company and Trunkline LNG Company (Panhandle Companies). CMS Energy also has
$725 million senior credit facilities (Senior Credit Facilities), unsecured
lines of credit and letters of credit as sources of funds needed to fulfill, in
whole or in part, material commitments for capital expenditures. For detailed
information, see "Short-Term Financings" and "Capitalization" in Notes 4 and 6,
respectively, incorporated by reference herein.
CMS Energy's Senior Credit Facilities consist of a $600 million three-year
revolving credit facility and a five-year $125 million term loan facility.
Additionally, CMS Energy has unsecured lines of credit and letters of credit in
an aggregate amount of $216 million. These credit facilities are available to
finance working capital requirements and to pay for capital expenditures between
long-term financings. At December 31, 1998, the total amount utilized under the
Senior Credit Facilities was $725 million, including $57 million of contingent
obligations, and under the unsecured lines of credit and letters of credit was
$147 million.
Consumers has Federal Energy Regulatory Commission (FERC) authorization to issue
securities and guarantees. Consumers has a credit facility, lines of credit and
a trade receivable sale program in place as anticipated sources of funds needed
to fulfill, in whole or in part, material commitments for capital
49
<PAGE> 50
expenditures as of December 31, 1998. For detailed information, see "Short-Term
Financings" and "Capitalization" in Notes 4 and 6, respectively, incorporated by
reference herein.
CMS Energy and its subsidiaries must redeem or retire $762 million of long-term
debt over the three-year period ending December 2001. In addition, at December
31, 1998, Consumers had a recorded liability to the U.S. Department of Energy
(DOE) of $117 million, which Consumers must pay upon the first delivery of spent
nuclear fuel to the DOE. Current federal law originally scheduled delivery of
the fuel to occur in 1998; for additional information, see "Nuclear Fuel Cost"
in Note 2.
On November 2, 1998, CMS Energy announced an agreement to acquire the Panhandle
Companies from Duke Energy Corporation for a cash payment of $1.9 billion and
existing Panhandle Companies debt of $300 million. The transaction was completed
in March 1999, and will be accounted for under the purchase method of
accounting.
The acquisition of the Panhandle Companies initially was financed in part with
bridge loan facilities negotiated with domestic banks and in part with
approximately $800 million of debt securities issued by the Panhandle Companies.
CMS Energy expects to permanently finance the acquisition with existing
arrangements as well as the sale of approximately $600 million of CMS Energy
Common Stock and other CMS Energy securities.
CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease commitments
and investments in partnerships and unconsolidated subsidiaries, will total $6.8
billion over the next three years. These estimates are prepared for planning
purposes and are subject to revision. This total includes approximately $2.2
billion for the acquisition of the Panhandle Companies as described above. A
substantial portion of the remaining capital expenditures is expected to be
satisfied by cash from operations. Nevertheless, CMS Energy will continue to
evaluate capital markets in 1999 as a potential source of financing its
subsidiaries' investing activities. CMS Energy estimates capital expenditures by
business segment over the next three years as follows:
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumers electric operations (a) (b) $ 380 $ 385 $ 385
Consumers gas operations (a) 123 125 120
Independent power production 724 435 224
Oil and gas exploration and production 135 165 165
Natural gas transmission and storage 2,412(c) 225 143
International energy distribution 359 100 126
Marketing, services and trading 5 15 12
Other 10 - -
-------------------------------------------
$4,148 $1,450 $1,175
===================================================================================================================
</TABLE>
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
50
<PAGE> 51
(b) These amounts do not include preliminary estimates for capital expenditures
possibly required to comply with recently revised national air quality standards
under the Clean Air Act. For further information see Note 3.
(c) Includes approximately $2.2 billion for the acquisition of the Panhandle
Companies.
CMS Energy currently plans investments from 1999 to 2001: i) for oil and gas
exploration and production operations, primarily in North and South America,
offshore West Africa and North Africa; ii) for independent power production
operations to pursue acquisitions and development of electric generating plants
in the United States, Latin America, Asia, Australia, the Pacific Rim region,
North Africa and the Middle East; iii) to continue development of nonutility
natural gas storage, gathering and pipeline operations of CMS Gas Transmission,
both domestic and international; iv) to acquire, develop and expand
international energy distribution businesses; and v) to provide gas, electric,
oil and coal marketing, risk management and energy management services
throughout the United States and eventually worldwide.
OUTLOOK
As the deregulation and privatization of the energy industry takes place in the
United States and internationally, CMS Energy has positioned itself to be a
leading international diversified energy company acquiring, developing and
operating energy facilities and providing energy services in major world growth
markets. CMS Energy provides a complete range of international energy expertise
from energy production to consumption.
INTERNATIONAL OPERATIONS OUTLOOK
CMS Energy will continue to grow internationally by investing in multiple
projects in several countries as well as by developing synergistic projects
across its lines of business. CMS Energy believes these integrated projects will
create more opportunities and greater value than individual investments. Also,
CMS Energy will achieve this growth through strategic partnering where
appropriate.
CMS Energy seeks to minimize operational and financial risks when operating
internationally by working with local partners, utilizing multilateral financing
institutions, procuring political risk insurance and hedging foreign currency
exposure where appropriate.
CONSUMERS' ELECTRIC UTILITY OUTLOOK
GROWTH: Consumers expects average annual growth of 2.4 percent per year in
electric system deliveries over the next five years, absent the impact of
restructuring on the industry and its regulation in Michigan. Abnormal weather,
changing economic conditions, or the developing competitive market for
electricity may affect actual electric sales in future periods.
RESTRUCTURING: Consumers' retail electric business is affected by competition.
To meet its challenges, Consumers entered into multi-year contracts with some of
its largest industrial customers to serve certain facilities. The Michigan
Public Service Commission (MPSC) has approved these contracts as part of its
phased introduction to competition. Certain customers have the option of
terminating their contracts early.
FERC final rules issued on April 24, 1996 (Orders 888 and 889), as amended,
require utilities to provide direct access to the interstate transmission grid
for wholesale transactions. Consumers and The Detroit Edison Company (Detroit
Edison) disagree on the effect of the orders on the Michigan Electric Power
51
<PAGE> 52
Coordination Center pool. Consumers proposes to maintain the benefits of the
pool through at least December 2000, while Detroit Edison contends that the pool
agreement should be terminated immediately. Among Consumers' alternatives in the
event of the pool being terminated would be joining an independent system
operator. FERC has indicated this preference for structuring the operations of
the electric transmission grid.
For material changes relating to the restructuring of the electric utility
industry, see "Consumers' Electric Utility Rate Matters - Electric
Restructuring" in Note 3, incorporated by reference herein.
ELECTRIC APPLICATION OF SFAS 71: Consumers applies utility accounting standard,
Statement of Financial Accounting Standards (SFAS) 71. At December 31, 1998,
Consumers believed that the generation segment of its business was still subject
to cost-based rate regulation due to legislative and regulatory uncertainty
about the status of Consumers' continuing obligation to provide generation
service to customers. Subsequent to year-end, Consumers received MPSC electric
restructuring orders which among other things identified the terms and timing
for implementing electric restructuring in Michigan. Consumers anticipates that
it will discontinue application of SFAS 71 for the generation segment of its
business in the first quarter of 1999 as Consumers is now preparing to implement
electric customer direct access. According to current accounting standards,
Consumers can continue to carry its generation-related regulatory assets or
liabilities for the part of the business being deregulated if deregulatory
legislation or an MPSC rate order allows the collection of cash flows from its
regulated transmission and distribution customers to recover these specific
costs or settle obligations. A February 1998 MPSC order allows Consumers to
fully recover its costs incurred by utilities in order to serve their customers
in a regulated monopoly environment (Transition Costs). At December 31, 1998,
Consumers had $259 million of generation-related net regulatory assets recorded
on its balance sheet, and a net investment in generation facilities of $1.3
billion included in electric plant and property.
CONSUMERS GAS GROUP OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries (excluding transportation to the MCV Facility and off-system
deliveries), to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, and the level of
natural gas consumption. Consumers also offers a variety of energy-related
services to its customers focused upon appliance maintenance, home safety,
commodity choice and assistance to customers purchasing heating, ventilation and
air conditioning equipment.
RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information, regarding
restructuring of the gas distribution, storage and transportation businesses
currently conducted by Consumers and Michigan Gas Storage Company (Consumers Gas
Group) see "Uncertainties - Consumers Gas Group Matters - Gas Restructuring" in
Note 3, incorporated by reference herein.
OTHER: Effective January 1, 1999, Consumers was allowed to solicit Michigan
Consolidated Gas Company (MichCon) and SEMCO Energy Gas Company customers due to
a three-year experimental program ordered by the MPSC allowing customers a
choice of gas suppliers. As of February 8, 1999, Consumers has signed up 650 of
MichCon's customers and 300 of SEMCO Energy Gas Company's customers.
52
<PAGE> 53
OTHER MATTERS
NEW ACCOUNTING RULES
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities. These statements will be effective in 1999. CMS
Energy does not expect the application of these standards to materially affect
its financial position, liquidity, or results of operations. Also in 1998, the
Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which will be effective in 2000, and the
Emerging Issues Task Force published Issue 98-10, Accounting for Energy Trading
and Risk Management Activities which will be effective in 1999. CMS Energy is
currently studying these new standards and has not yet quantified the impacts of
adopting SFAS 133 or Issue 98-10 on its financial statements and has not
determined the timing of or method of adoption. However, SFAS 133 and Issue
98-10 will increase volatility in earnings and other comprehensive income.
YEAR 2000 COMPUTER MODIFICATIONS
CMS Energy uses software and related technologies throughout its domestic and
international businesses that the year 2000 date change could affect and, if
uncorrected, could cause CMS Energy to, among other things, delay issuance of
bills or reports, issue inaccurate bills, report inaccurate data, incur
generating plant outages, or create energy delivery uncertainties. In 1995, CMS
Energy established a Year 2000 Program to ensure the continued operation of its
businesses at the turn of the century. CMS Energy's efforts included dividing
the programs requiring modification between critical and noncritical programs. A
formal methodology was established to identify critical business functions and
risk scenarios, to correct problems identified, to develop test plans and
expected results, and to test the corrections made. CMS Energy's Year 2000
Program involves an aggressive, comprehensive four-phase approach, including
impact analysis, remediation, compliance review, and monitoring/contingency
planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediated technology. A mainframe test environment was established in 1997 and
a test environment for network servers and stand-alone personal computers was
established in mid-1998. All essential corporate business systems have been, or
will be, tested in these test environments. The compliance review phase includes
the assembling of compliance documentation for each technology component as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure that year 2000 problems are not
reintroduced into remediated technology, as well as the development of
contingency plans to address reasonably likely risk scenarios.
STATE OF READINESS: CMS Energy is managing traditional information technology
(IT), which consists of essential business systems such as payroll, billing and
purchasing; and infrastructure, including mainframe, wide area network, local
area networks, personal computers, radios and telephone systems. CMS Energy is
also managing process control computers and embedded systems contained in
buildings, equipment and energy supply and delivery systems.
Essential goods and services for CMS Energy are electric fuel supply, gas fuel
supply, independent electric power supplies, facilities, electronic commerce,
telecommunications network carriers, financial institutions, purchasing vendors,
and software and hardware technology vendors. CMS Energy is addressing the
preparedness of these businesses and their risk through readiness assessment
questionnaires.
53
<PAGE> 54
The status of CMS Energy's Year 2000 Program by phase, with target dates for
completion and current percentage complete based upon software and hardware
inventory counts as of December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Monitoring/
Impact Compliance Contingency
Analysis Remediation Review Planning
- ------------------------------------------------------------------------------------------------------------
(a) (b) (a) (b) (a) (b) (a) (b)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Electric utility 3/98 100% 6/99 78% 6/99 66% 6/99 50%
Gas utility 3/98 100% 6/99 73% 6/99 38% 6/99 10%
Independent power production 1/99 66% 9/99 44% 9/99 30% 9/99 10%
Oil and gas 1/99 97% 9/99 80% 9/99 20% 9/99 20%
Natural gas transmission 1/99 50% 9/99 75% 9/99 25% 9/99 5%
Marketing, services and trading 1/99 77% 9/99 50% 9/99 50% 9/99 10%
Essential goods and services 6/99 56% N/A N/A (c)
============================================================================================================
</TABLE>
(a) Target date for completion.
(b) Current percentage complete.
(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each segment presented.
COST OF REMEDIATION: CMS Energy expenses spending for software modifications as
incurred, and capitalizes and amortizes the cost for new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is
approximately $30 million. Costs incurred through December 31, 1998 were
approximately $16 million. CMS Energy's annual Year 2000 Program costs have
represented approximately 2 percent to 10 percent of CMS Energy's annual IT
budget through 1998 and are expected to represent approximately 25 percent of
CMS Energy's annual IT budget in 1999. Year 2000 compliance work is being funded
primarily from operations. To date, the commitment of CMS Energy resources to
the year 2000 issue has not deferred any material IT projects which could have a
material adverse affect on CMS Energy's financial position, liquidity or results
of operations.
RISK ASSESSMENT: CMS Energy considers the most reasonably likely worst-case
scenarios to be: i) a lack of communications to dispatch crews to electric or
gas emergencies; ii) a lack of communications to generating units to balance
electrical load; iii) power shortages due to the lack of stability of the
electric grid; and iv) a failure of fuel suppliers to deliver fuel to generating
facilities. These scenarios could result in CMS Energy not being able to
generate or distribute enough energy to meet customer demand for a period of
time, which could result in lost sales and profits, as well as legal liability.
Year 2000 remediation and testing efforts are concentrating on these risk areas
and will continue through the end of 1999. Contingency plans will be revised and
executed to further mitigate the risks associated with these scenarios.
CONTINGENCY PLANS: Contingency planning efforts are currently underway for all
business systems and providers of essential goods and services. Extensive
contingency plans are already in place in many locations and are currently being
revised for reasonably likely worst-case scenarios related to year 2000 issues.
In many cases, Consumers already has arrangements with multiple vendors of
similar goods and services so that in the event that one cannot meet its
commitments, others may be able to. Current contingency plans provide for manual
dispatching of crews and manual coordination of electrical load balancing and
are being revised to provide for radio or satellite communications. Coordinated
contingency planning efforts are in progress with third parties to minimize risk
to electric generation, transmission and distribution systems.
54
<PAGE> 55
EXPECTATIONS: CMS Energy does not expect that the cost of these modifications
will materially affect its financial position, liquidity, or results of
operations. There can be no guarantee, however, that these costs, plans or time
estimates will be achieved, and actual results could differ materially.
Because of the integrated nature of CMS Energy's business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, CMS Energy may be
indirectly affected by year 2000 compliance complications. At this time, CMS
Energy is unable to anticipate the magnitude of the operational or financial
impact of year 2000 issues on CMS Energy.
FOREIGN CURRENCY TRANSLATION
CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. The adjustment is primarily due to the exchange rate fluctuations
between the U.S. dollar and each of the Australian dollar and Brazilian real.
From January 1, 1998 through December 31, 1998, the change in the foreign
currency translation adjustment totaled $40 million, net of after-tax hedging
proceeds. Although management currently believes that the currency exchange rate
fluctuations over the long term will not materially adversely affect CMS
Energy's financial position, liquidity or results of operations, CMS Energy has
hedged its exposure to the Australian dollar and the Brazilian real. CMS Energy
uses forward exchange contracts and collared options to hedge certain
receivables, payables, long-term debt and equity value relating to foreign
investments. The notional amount of the outstanding foreign exchange contracts
was $736 million at December 31, 1998, which includes $450 million and $250
million for Australian and Brazilian foreign exchange contracts, respectively.
Subsequent to December 31, 1998, the fair value of the Brazilian foreign
exchange contracts increased significantly, as the Brazilian real weakened
against the U.S. dollar.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," as well as variations of such
words and similar expressions, are intended to identify forward- looking
statements that involve risk and uncertainty. These statements are necessarily
based upon various assumptions involving judgements with respect to the future
including, among others, the ability to achieve operating synergies and revenue
enhancements; international, national, regional and local economic, competitive
and regulatory conditions and developments; capital and financial market
conditions, including currency exchange controls and interest rates; weather
conditions; adverse regulatory or legal decisions, including environmental laws
and regulations; the pace of deregulation of the natural gas and electric
industries; energy markets, including the timing and extent of changes in
commodity prices for oil, coal, natural gas, natural gas liquids, electricity
and certain related products; the timing and success of business development
efforts; potential disruption, expropriation or interruption of facilities or
operations due to accidents or political events; nuclear power and other
technological developments; and other uncertainties, all of which are difficult
to predict and many of which are beyond the control of CMS Energy. Accordingly,
while CMS Energy believes that the assumed results are reasonable, there can be
no assurance that they will approximate actual results. CMS Energy disclaims any
obligation to update or revise forward-looking statements, whether as a result
of new information, future events or otherwise. Certain risk factors are
detailed from time to time in various public filings made by CMS Energy with the
SEC.
55
<PAGE> 56
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
CMS ENERGY CORPORATION
In Millions, Except Per Share Amounts
Years Ended December 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE Electric utility $2,606 $2,515 $2,446
Gas utility 1,051 1,204 1,282
Independent power production 277 168 140
Natural gas transmission, storage and processing 160 96 53
Oil and gas exploration and production 63 93 130
Marketing, services and trading 939 692 258
Other 45 13 15
---------------------------------
5,141 4,781 4,324
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES Operation
Fuel for electric generation 359 319 312
Purchased power - related parties 573 599 589
Purchased and interchange power 584 265 202
Cost of gas sold 1,212 1,311 997
Other 763 719 742
---------------------------------
3,491 3,213 2,842
Maintenance 176 174 178
Depreciation, depletion and amortization 484 467 427
General taxes 215 211 201
---------------------------------
4,366 4,065 3,648
- ---------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING Electric utility 475 432 411
INCOME (LOSS) Gas utility 126 153 158
Independent power production 144 96 68
Natural gas transmission, storage and processing 33 27 17
Oil and gas exploration and production 6 26 33
Marketing, services and trading 4 (5) 2
Other (13) (13) (13)
---------------------------------
775 716 676
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME Loss on MCV power purchases (37) - -
(DEDUCTIONS) Accretion income 6 8 10
Accretion expense (16) (17) (22)
Other, net 1 (3) 1
---------------------------------
(46) (12) (11)
- ---------------------------------------------------------------------------------------------------------------------
FIXED CHARGES Interest on long-term debt 318 273 230
Other interest 47 49 43
Capitalized interest (29) (13) (5)
Preferred dividends 19 25 28
Trust Preferred Securities distributions 32 18 8
---------------------------------
387 352 304
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 342 352 361
INCOME TAXES 100 108 137
---------------------------------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 242 244 224
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PROPERTY TAXES, NET OF $23 TAX 43 - -
---------------------------------
CONSOLIDATED NET INCOME $ 285 $ 244 $ 224
=====================================================================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCKS CMS ENERGY $ 272 $ 229 $ 210
CLASS G $ 13 $ 15 $ 14
=====================================================================================================================
BASIC EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ 2.65 $ 2.39 $ 2.27
CLASS G $ 1.56 $ 1.84 $ 1.82
=====================================================================================================================
DILUTED EARNINGS PER AVERAGE COMMON SHARE CMS ENERGY $ 2.62 $ 2.37 $ 2.26
CLASS G $ 1.56 $ 1.84 $ 1.82
=====================================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE CMS ENERGY $ 1.26 $ 1.14 $ 1.02
CLASS G $ 1.27 $ 1.21 $ 1.15
=====================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
56
<PAGE> 57
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CMS ENERGY CORPORATION
In Millions
Years Ended December 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM Consolidated net income $ 285 $ 244 $ 224
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $51, $50 and $49, respectively) 484 467 427
Deferred income taxes and investment tax credit 54 24 45
Capital lease and debt discount amortization 51 44 41
Loss on MCV power purchases 37 - -
Accretion expense 16 17 22
Accretion income - abandoned Midland project (6) (8) (10)
Undistributed earnings of related parties (95) (58) (55)
Cumulative effect of accounting change for property taxes (66) - -
MCV power purchases (64) (62) (63)
Other 6 (9) 27
Changes in other assets and liabilities (186) (35) (11)
--------------------------------
Net cash provided by operating activities 516 624 647
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Capital expenditures (excludes capital lease additions of
INVESTING ACTIVITIES $60, $11 and $31, respectively and DSM) (1,295) (678) (643)
Investments in partnerships and unconsolidated subsidiaries (345) (830) (163)
Cost to retire property, net (83) (46) (31)
Other 32 (46) (47)
Acquisition of companies, net of cash acquired - - (20)
Proceeds from sale of property 57 49 79
--------------------------------
Net cash used in investing activities (1,634) (1,551) (825)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Proceeds from bank loans, notes and bonds 2,348 1,214 433
FINANCING ACTIVITIES Issuance of Common Stock 269 224 95
Proceeds from Trust Preferred Securities - 286 97
Retirement of bonds and other long-term debt (661) (521) (37)
Repayment of bank loans (574) (29) (256)
Payment of Common Stock dividends (140) (119) (103)
Increase (decrease) in notes payable, net (53) 49 (8)
Payment of capital lease obligations (36) (44) (40)
Retirement of Common Stock (3) (2) (1)
Retirement of preferred stock - (120) -
--------------------------------
Net cash provided by financing activities 1,150 938 180
-------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 32 11 2
Cash and temporary cash investments
Beginning of year 69 58 56
--------------------------------
End of year $ 101 $ 69 $ 58
==========================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
57
<PAGE> 58
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
CMS ENERGY CORPORATION
ASSETS In Millions
December 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PLANT AND PROPERTY Electric $ 6,720 $ 6,491
(AT COST) Gas 2,701 2,528
Oil and gas properties (successful efforts method) 670 545
Independent power production 518 122
Other 373 46
-------------------------------
10,982 9,732
Less accumulated depreciation, depletion
and amortization 5,213 4,849
------------------------------
5,769 4,883
Construction work-in-progress 271 261
-------------------------------
6,040 5,144
- ------------------------------------------------------------------------------------------------------------------
INVESTMENTS Independent power production 888 792
Natural gas transmission, storage and processing 494 241
International energy distribution 209 255
First Midland Limited Partnership 240 242
Midland Cogeneration Venture Limited Partnership 209 171
Other 33 45
--------------------------------
2,073 1,746
- ------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS Cash and temporary cash investments at cost, which
approximates market 101 69
Accounts receivable and accrued revenue, less allowances
of $13 in 1998 and $7 in 1997 720 495
Inventories at average cost
Gas in underground storage 219 197
Materials and supplies 99 87
Generating plant fuel stock 43 35
Deferred income taxes - 38
Prepayments and other 225 235
-------------------------------
1,407 1,156
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS Nuclear decommissioning trust funds 557 486
Postretirement benefits 373 404
Abandoned Midland project 71 93
Other 789 479
-------------------------------
1,790 1,462
------------------------------
TOTAL ASSETS $11,310 $ 9,508
==================================================================================================================
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
CMS ENERGY CORPORATION
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITALIZATION Common stockholders' equity $ 2,216 $ 1,787
Preferred stock of subsidiary 238 238
Company-obligated mandatorily redeemable
Trust Preferred Securities of:
Consumers Power Company Financing I (a) 100 100
Consumers Energy Company Financing II (a) 120 120
Company-obligated convertible Trust Preferred Securities of
CMS Energy Trust I (b) 173 173
Long-term debt 4,726 3,272
Non-current portion of capital leases 105 75
-------------------------------
7,678 5,765
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES Current portion of long-term debt and capital leases 293 643
Notes payable 328 382
Accounts payable 501 398
Accrued taxes 272 272
Accounts payable - related parties 79 80
Accrued interest 65 51
Power purchases 47 47
Accrued refunds 11 12
Other 214 190
-------------------------------
1,810 2,075
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES Deferred income taxes 649 648
Postretirement benefits 489 514
Deferred investment tax credit 135 151
Power purchases 121 133
Regulatory liabilities for income taxes, net 87 54
Other 341 168
-------------------------------
1,822 1,668
------------------------------
Commitments and Contingencies (Notes 2, 3 and 13)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $11,310 $ 9,508
==================================================================================================================
</TABLE>
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36 percent subordinated deferrable interest notes due 2015
from Consumers. The primary asset of Consumers Energy Company Financing II is
$124 million principal amount of 8.20 percent subordinated deferrable interest
notes due 2027 from Consumers. For further discussion, see Note 6 to the
Consolidated Financial Statements.
(b) As described in Note 6, the primary asset of CMS Energy Trust I is $178
million principal amount of 7.75 percent convertible subordinated debentures due
2027 from CMS Energy.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
59
<PAGE> 60
CONSOLIDATED STATEMENTS OF PREFERRED STOCK CMS ENERGY CORPORATION
<TABLE>
<CAPTION>
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
CONSUMERS' PREFERRED STOCK
<S> <C> <C> <C> <C> <C> <C>
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
CONSUMERS' CLASS A PREFERRED STOCK
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption 2.08 25.00 (a) 8,000,000 8,000,000 194 194
-------------
TOTAL PREFERRED STOCK $238 $238
==================================================================================================================
</TABLE>
(a) Redeemable beginning April 1, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
60
<PAGE> 61
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY CMS ENERGY CORPORATION
<TABLE>
<CAPTION>
Number of Shares, In Thousands In Millions
Years Ended December 31 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCK
<S><C>
At beginning and end of period $ 1 $ 1 $ 1
- -----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL - CMS ENERGY
At beginning of period 100,792 94,813 91,594 2,131 1,916 1,827
Common Stock reacquired (72) (54) (32) (3) (2) (1)
Common Stock issued 7,383 6,031 3,248 324 217 90
Common Stock reissued 1 2 3 - - -
---------------------------------------------------------------------------
At end of period 108,104 100,792 94,813 2,452 2,131 1,916
- -----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL - CLASS G
At beginning of period 8,219 7,877 7,619 136 129 124
Common Stock reacquired (1) (1) - - - -
Common Stock issued 235 343 258 6 7 5
--------------------------------------------------------------------------
At end of period 8,453 8,219 7,877 142 136 129
- -----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period (6) (6) (8)
Change in unrealized investment-
gain (loss) (a) (3) - 2
----------------------------------
At end of period (9) (6) (6)
- -----------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (96) - -
Change in foreign currency translation (a) (40) (96)
----------------------------------
At end of period (136) (96) -
- -----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (379) (504) (625)
Consolidated net income (a) 285 244 224
Common Stock dividends declared:
CMS Energy (129) (109) (94)
Class G (11) (10) (9)
----------------------------------
At end of period (234) (379) (504)
----------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $2,216 $1,787 $1,536
=================================================================================================================
(a) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment-gain (loss),
net of tax of $2, $0 and
$0, respectively $ (3) $ - $ 2
Foreign currency translation (40) (96) -
Consolidated net income 285 244 224
----------------------------------
Total Consolidated Comprehensive Income $ 242 $ 148 $ 226
==================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
61
<PAGE> 62
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1: CORPORATE STRUCTURE
CMS Energy Corporation (CMS Energy) is the parent holding company of Consumers
Energy Company (Consumers) and CMS Enterprises Company (Enterprises). Consumers,
a combination electric and gas utility company serving the Lower Peninsula of
Michigan, is the principal subsidiary of CMS Energy. Enterprises is engaged in
several domestic and international energy-related businesses including:
acquisition, development and operation of independent power production
facilities; oil and gas exploration and production; transmission, storage, and
processing of natural gas; energy marketing, services and trading; and
international energy distribution.
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
BASIS OF PRESENTATION: The consolidated financial statements include CMS Energy,
Consumers and Enterprises and their majority owned subsidiaries. The financial
statements are prepared in conformity with generally accepted accounting
principles and use management's estimates where appropriate. Affiliated
companies (more than 20 percent but less than a majority ownership interest) are
accounted for by the equity method.
CHANGE IN METHOD OF ACCOUNTING FOR INVESTMENTS IN OIL AND GAS PROPERTIES: CMS
Oil and Gas Company (CMS Oil and Gas ) (formerly CMS NOMECO Oil & Gas Co.)
elected to convert, effective January 1, 1998, from the full cost method to the
successful efforts method of accounting for its investments in oil and gas
properties. CMS Oil and Gas believes this accounting change will more accurately
present the results of its exploration and development activities and minimize
asset write-offs caused by periodic price swings, which may not be
representative of overall or long-term markets. In addition, the Financial
Accounting Standards Board has stated a preference for the use of successful
efforts accounting. Nitrotec Corporation (Nitrotec), in which CMS Gas
Transmission and Storage Company (CMS Gas Transmission) has an equity
investment, also elected to convert, effective January 1, 1998, from the full
cost method of accounting to the successful efforts method of accounting.
Accordingly, all prior period financial statements presented have been restated
to conform with successful efforts accounting. The effect, after tax, of the
change in accounting method as of December 31, 1997, was a reduction to retained
earnings of $175 million for CMS Oil and Gas and $15 million for CMS Gas
Transmission, primarily attributable to a decrease in CMS Oil and Gas' net plant
and property and deferred tax liability of $270 million and $95 million,
respectively, and a $15 million decrease in CMS Gas Transmission's equity
investment in Nitrotec.
CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES: During the first quarter of
1998, Consumers implemented a change in the method of accounting for property
taxes so that such taxes are recognized during the fiscal period of the taxing
authority for which the taxes are levied. This change better matches property
tax expense with the services provided by the taxing authorities, and is
considered the most acceptable basis of recording property taxes. Prior to 1998,
Consumers recorded property taxes monthly
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during the year following the assessment date (December 31). The cumulative
effect of this one-time change in accounting increased other income by $66
million, and earnings, net of tax, by $43 million or $.40 per share. The pro
forma effect on prior years' consolidated net income of retroactively recording
property taxes as if the new method of accounting had been in effect for all
periods presented is not material.
ACCRETION INCOME AND EXPENSE: In 1991, the Michigan Public Service Commission
(MPSC) allowed Consumers to recover a portion of its abandoned Midland
investment over a 10-year period, but did not allow Consumers to earn a return
on that amount. Consumers reduced the recoverable investment to the present
value of the future recoveries. During the recovery period, Consumers adjusts
the unrecovered asset to its present value. It reflects this adjustment as
accretion income. Conversely, Consumers recorded a loss in 1992 for the present
value of its estimated future underrecoveries of power costs resulting from
purchases from the Midland Cogeneration Venture Limited Partnership (MCV
Partnership) (see Note 3). It now recognizes accretion expense annually to
reflect the time value of money on the recorded loss.
GAS INVENTORY: Consumers uses the weighted average cost method for valuing
working gas inventory. It records cushion gas, which is gas stored to maintain
reservoir pressure for recovery of working gas, in the appropriate gas utility
plant account. Consumers stores gas inventory in its underground storage
facilities.
MAINTENANCE, DEPRECIATION AND DEPLETION: Consumers charges property repairs and
minor property replacements to maintenance expense. Depreciable property retired
or sold, plus cost of removal (net of salvage credits), is charged to
accumulated depreciation. Consumers bases depreciation provisions for utility
plant on straight-line and units-of-production rates approved by the MPSC. The
composite depreciation rate for electric utility property was 3.5 percent for
1998, 3.6 percent for 1997 and 3.5 percent for 1996. The composite rate for gas
utility plant was 4.2 percent for 1998, 4.1 percent for 1997 and 4.2 percent for
1996. The composite rate for other plant and property was 7.4 percent for 1998,
8.2 percent for 1997 and 5.5 percent for 1996.
CMS Oil and Gas follows the successful efforts method of accounting for its
investments in oil and gas properties. CMS Oil and Gas capitalizes the costs of
property acquisitions, successful exploratory wells, all development costs, and
support equipment and facilities when incurred. It expenses unsuccessful
exploratory wells when they are determined to be non-productive. CMS Oil and Gas
also charges to expense production costs, overhead, and all exploration costs
other than exploratory drilling as incurred. Depreciation, depletion and
amortization of proved oil and gas properties is determined on a field-by-field
basis using the units-of-production method over the life of the remaining proved
reserves.
Other nonutility depreciable property is amortized over its estimated useful
life; gains and losses are recognized at the time of sale.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense based
on the quantity of heat produced for electric generation. Interest on leased
nuclear fuel is expensed as incurred. Under current federal law, as confirmed by
court decision, the U.S. Department of Energy (DOE) was to begin accepting
deliveries of spent nuclear fuel by January 31, 1998 for disposal. For fuel used
after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense,
recovers them through electric rates and remits to the DOE quarterly. Consumers
elected to defer payment for disposal of spent nuclear fuel burned before April
7, 1983. At December 31, 1998, Consumers had a recorded liability to the DOE of
$117 million,
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including interest, which is payable upon the first delivery of spent nuclear
fuel to the DOE. Consumers recovered through electric rates the amount of this
liability, excluding a portion of interest. In January 1997, in response to the
DOE's declaration that it would not begin to accept spent nuclear fuel
deliveries in 1998, Consumers and other utilities filed suit in federal court. A
decision was issued by the court in late 1997 affirming the DOE's duty to take
delivery of spent fuel, but was not specific as to the relief available for
failure of the DOE to comply. Further litigation brought by Consumers and others
in 1998 is intended to produce specific monetary relief for the DOE's failure to
comply. In January 1999, federal legislation was reintroduced in the House of
Representatives to clarify the timing of the DOE's obligation to accept spent
nuclear fuel and to direct the DOE to establish an integrated spent fuel
management system that includes designing and constructing an interim storage
facility in Nevada. Similar legislation is expected to be reintroduced in the
Senate.
NUCLEAR PLANT DECOMMISSIONING: Consumers collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. In 1996, Consumers
received a decommissioning order from the MPSC that estimated decommissioning
costs for Big Rock Point nuclear power plant (Big Rock) and Palisades nuclear
power plant (Palisades) to be $344 million and $599 million (in 1998 dollars),
respectively. Consumers filed with the MPSC in March 1998 site-specific
decommissioning cost estimates for Big Rock and Palisades, assuming that each
plant site will eventually be restored to conform with the adjacent landscape,
and that all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. The revised estimated decommissioning costs for Big
Rock and Palisades are $304 million and $541 million (in 1998 dollars),
respectively. The decreases in cost from previous estimates are principally due
to the Big Rock immediate dismantlement and reductions in decommissioning costs.
Consumers has determined that the current decommissioning surcharge will be
sufficient to provide for decommissioning of its nuclear plants and anticipates
a new MPSC order in early 1999. After retirement of Palisades, Consumers plans
to maintain the facility in protective storage if radioactive waste disposal
facilities are not available. Consumers will incur most of the Palisades
decommissioning costs after the plant's Nuclear Regulatory Commission (NRC)
operating license expires. When the Palisades' NRC license expires in 2007, the
trust funds are currently estimated to have accumulated $719 million. Consumers
estimates that at the time Palisades is fully decommissioned in the year 2046,
the trust funds will have provided $1.9 billion, including trust earnings, over
this decommissioning period. At December 31, 1998, Consumers had an investment
in nuclear decommissioning trust funds of $376 million for Palisades and $181
million for Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally scheduled to close on May 31, 2000, at the end of the
plant's operating license. The MPSC has allowed Consumers to continue collecting
decommissioning surcharges through December 31, 2000. Plant decommissioning
began in 1997 and may take five to ten years to return the site to its original
condition. Consumers has spent $75 million for the decommissioning and withdrew
$68 million from the Big Rock nuclear decommissioning trust fund.
RECLASSIFICATIONS: CMS Energy has reclassified certain prior year amounts for
comparative purposes. These reclassifications did not affect consolidated net
income for the years presented.
RELATED-PARTY TRANSACTIONS: In 1998, 1997 and 1996, Consumers purchased $51
million, $51 million and $50 million, respectively, of electric generating
capacity and energy from affiliates of Enterprises. Affiliates of CMS Energy
sold, stored and transported natural gas and provided other services to the MCV
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Partnership totaling $21 million, $21 million and $17 million for 1998, 1997 and
1996. For additional discussion of related-party transactions with the MCV
Partnership and the First Midland Limited Partnership (FMLP), see Notes 3 and
18. Other related-party transactions are immaterial.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on a
regulated utility accounting standard Statement of Financial Accounting
Standards (SFAS) 71. As a result, the actions of regulators affect when
revenues, expenses, assets and liabilities are recognized. SFAS 121 imposes
stricter criteria for retention of regulatory-created assets by requiring that
such assets be probable of future recovery at each balance sheet date.
Management believes these assets will be recovered.
The following regulatory assets (liabilities), which include both current and
non-current amounts, are reflected in the Consolidated Balance Sheets. These
costs are being recovered through rates over periods of up to 14 years.
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits (Note 12) $ 397 $ 429
Income taxes (Note 9) 148 172
Abandoned Midland project 71 93
Manufactured gas plant sites (Note 3) 48 47
DSM - deferred costs 32 46
Uranium enrichment facility 20 22
Other 38 28
---------------------------
Total regulatory assets $ 754 $ 837
================================================================================================================
Income taxes (Note 9) $(235) $(226)
DSM - deferred revenue (24) (24)
Total regulatory liabilities $(259) $(250)
================================================================================================================
</TABLE>
Consumers anticipates that it will discontinue application of SFAS 71 for the
generation segment of its business in the first quarter of 1999 as Consumers is
now preparing to implement electric customer direct access.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: In 1998 CMS Energy implemented SFAS
130, Reporting Comprehensive Income, SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, and SFAS 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components. Equity
adjustments related to unrealized investment gains and losses (net of tax) and
foreign currency translation, along with consolidated net income, comprise
comprehensive income. SFAS 131 and 132 require expanded disclosure concerning
segments of an enterprise and pension and other postretirement benefits.
FOREIGN CURRENCY TRANSLATION: Foreign currency translation adjustments relating
to the operation of CMS Energy's long-term investments in foreign countries are
included in common stockholders' equity.
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For the year ended December 31, 1998, the change in the foreign currency
translation adjustment totaled $40 million, net of after-tax hedging proceeds.
OTHER: For significant accounting policies regarding cash equivalents, see Note
16; for income taxes, see Note 9; for executive incentive compensation, see Note
11; and for pensions and other postretirement benefits, see Note 12.
3: UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The federal Clean Air Act, as amended, (Clean
Air Act) limits emissions of sulfur dioxide and nitrogen oxides and requires
emissions and air quality monitoring. Consumers currently operates within these
limits and meets current emission requirements. The Clean Air Act requires the
Environmental Protection Agency (EPA) to periodically review the effectiveness
of the national air quality standards in preventing adverse health effects, and
in 1997 the EPA revised these standards. It is probable that the 1997 standards
will result in further limitations on small particulate- related emissions.
In September 1998, based upon the 1997 standards, the EPA Administrator signed
final regulations requiring the State of Michigan to further limit nitrogen
oxide emissions. Fossil-fueled emitters, such as Consumers' generating units,
can anticipate a reduction in nitrogen oxide emissions by 2003 to only 32
percent of levels allowed for the year 2000. The State of Michigan has one year
to submit an implementation plan. The State of Michigan has filed a lawsuit
objecting to the extent of the required emission reductions. It is unlikely that
the State of Michigan will establish Consumers' nitrogen oxide emissions
reduction target until mid-to-late 1999. Until this target is established, the
estimated cost of compliance discussed below is subject to revision. If a court
were to order the EPA to adopt the State of Michigan's position, compliance
costs could be less than the preliminary estimated amounts.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions for Consumers' fossil-fueled generating units is
approximately $290 million, plus $10 million per year for operation and
maintenance costs. Consumers anticipates that these capital expenditures will be
incurred between 1999 and 2003. Consumers may need an equivalent amount of
capital expenditures and operation and maintenance costs to comply with the new
small particulate standards.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at the remaining coal-fueled units to meet year 2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
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Under the Michigan Natural Resources and Environmental Protection Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites. Nevertheless, it believes that these costs are properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated
sites administered under the Comprehensive Environmental Response, Compensation
and Liability Act (Superfund). Superfund liability is joint and several; along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $3 million and $9 million. At December
31, 1998, Consumers has accrued the minimum amount of the range for its
estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and polychlorinated biphenyls. Consumers
does not believe that any facility in the United States currently accepts the
radioactive portion of that waste. The cost of removal and disposal is currently
unknown. These costs will constitute part of the cost to decommission the plant,
and will be paid from the decommissioning fund. Consumers is studying the extent
of the contamination and reviewing options.
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleges antitrust violations relating to contracts which
Consumers entered into with some of its customers and claims relating to power
facilities. The plaintiffs claim damages of $100 million (which a court can
treble in antitrust cases as provided by law). Consumers has filed a motion to
dismiss and is awaiting a court ruling on this motion. Consumers believes the
lawsuit is without merit and will vigorously defend against it, but cannot
predict the outcome of this matter.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs associated with the purchase of the additional 325
megawatts (MW) of the natural gas-fueled, combined-cycle cogeneration facility
(MCV Facility) capacity (see "Power Purchases from the MCV Partnership" in this
Note) and to recover its nuclear plant investment by increasing prospective
annual nuclear plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense. It also
established an experimental direct-access program. Customers having a maximum
demand of 2 MW or greater are eligible to purchase generation services directly
from any eligible third-party power supplier and Consumers will transmit the
power for a fee. The direct-access program is limited to 134 MW of load. In
accordance with the MPSC order, Consumers held a lottery in April 1997 to select
the customers to participate in the direct-access program. Subsequently, direct
access for a portion of this 134 MW began in late 1997. The program was
substantially filled by mid-January 1999 and Consumers expects the remaining
amount to begin by the end of the first quarter of 1999.
In January 1998, the Michigan Court of Appeals (Court of Appeals) affirmed an
MPSC conclusion that the MPSC has statutory authority to authorize an
experimental electric retail wheeling program. No retail wheeling has yet
occurred pursuant to that program. In October 1998, the Michigan Supreme Court
issued an order granting Consumers' application for leave to appeal. A decision
by the Michigan Supreme Court in this matter may be issued in mid-1999.
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ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997 issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to retail
customers. Further restructuring orders issued in late 1997 and early 1998
provide for: i) recovery of costs incurred by utilities in order to serve their
customers in a regulated monopoly environment of $1.755 billion through a charge
to all customers purchasing their power from other sources until the end of the
transition period in 2007, subject to an adjustment through a true-up mechanism;
ii) commencement of the phase-in of direct access in 1998; iii) suspension of
the power supply cost recovery (PSCR) clause as discussed below; and iv) all
customers to choose their power suppliers on January 1, 2002. The recovery of
costs of implementing a direct-access program, preliminarily estimated at an
additional $200 million, would be reviewed for prudence and recovered via a
charge approved by the MPSC. Nuclear decommissioning costs will also continue to
be collected through a separate surcharge to all customers.
In June 1998, Consumers submitted its plan for implementing direct access to the
MPSC. The primary issues addressed in the plan are: i) the implementation
schedule; ii) the direct-access service options available to customers and
suppliers; iii) the process and requirements for customers and others to obtain
direct-access service; and iv) the roles and responsibilities for Consumers,
customers and suppliers. In the plan, Consumers proposed to phase in 750 MW of
retail customer load to customers purchasing their power from other sources over
the 1998-2001 period. Subsequent to year-end, Consumers received MPSC electric
restructuring orders which generally supported Consumers' implementation plan.
Accordingly, Consumers is now preparing to implement electric customer direct
access.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers. Consumers believes
that the MPSC lacks statutory authority to mandate industry restructuring, and
its appeal is limited to this jurisdictional issue. CMS Energy cannot predict
the outcome of electric restructuring on CMS Energy's financial position,
liquidity, or results of operations.
In October 1998, Consumers initiated a process for the solicitation of bids to
acquire Consumers' rights to 1,240 MW of contract capacity and associated energy
being purchased from the MCV Partnership. Subsequent to year-end, Consumers
signed a tentative long-term power sales agreement with PECO Energy Company.
This transaction is subject to obtaining satisfactory rate-making and accounting
treatment and regulatory rulings. In an order issued in 1998, the MPSC delayed
its consideration of the bidding process until a definitive agreement was signed
(subject to review by the MPSC), but stated that Consumers' approach offers a
legitimate way to utilize independent market forces to determine the
above-market or stranded portion of Consumers' obligations under the Power
Purchase Agreement (PPA) with the MCV Partnership. Consumers anticipates that
its regulatory filing will be made with the MPSC for consideration by the end of
the first quarter of 1999.
As a result of a 1998 MPSC order in connection with the electric restructuring
program, Consumers' ability to recover certain costs pursuant to the PSCR
process was suspended. Under this program, customers buying electricity from
Consumers as traditional customers will not have their rates adjusted to reflect
the actual costs of fuel and purchased and interchanged power during the
1998-2001 period. In prior years, any change in power supply costs was passed
through to Consumers' customers. In order to reduce the risk of high energy
prices during peak demand periods, Consumers is purchasing energy options and
contracting to buy electricity during the months of June through September 1999.
Consumers is planning to have sufficient generation and purchased capacity for a
16 percent to 21 percent reserve margin in order to provide reliable service to
its electric service customers and to protect itself against unscheduled
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plant outages. Under certain circumstances, the cost of purchasing capacity and
energy on the spot market could be substantial.
OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to The Dow Chemical
Company. Consumers, through two wholly owned subsidiaries, holds the following
assets related to the MCV Partnership and MCV Facility: i) CMS Midland Inc., a
subsidiary of Consumers, owns a 49 percent general partnership interest in the
MCV Partnership; and ii) CMS Midland Holdings Company, a subsidiary of
Consumers, holds, through FMLP, a 35 percent lessor interest in the MCV
Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings (unaudited)
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------------------------------------------
December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax operating income $ 49 $ 46 $ 40
Income taxes and other 15 14 11
- ------------------------------------------------------------------------------------------------------------------
Net income $ 34 $ 32 $ 29
==================================================================================================================
</TABLE>
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay a levelized
average capacity charge, based on the MCV Facility's availability, of 3.77 cents
per kilowatt-hour (kWh), a fixed energy charge, and a variable energy charge
based primarily on Consumers' average cost of coal consumed. Since January 1,
1993, Consumers has been permitted by the MPSC to recover capacity charges
averaging 3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed
and variable energy charges. Since January 1, 1996, Consumers also has been
permitted to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. Because
the MPSC has already approved recovery of this capacity, Consumers expects to
recover these increases through an adjustment to the currently frozen PSCR
level. This adjustment is currently under consideration by the MPSC. After
September 2007, under the terms of the PPA, Consumers will only be required to
pay the MCV Partnership capacity and energy charges that the MPSC has authorized
for recovery from electric customers.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At December 31, 1998 and December 31, 1997, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $110 million and $117 million, respectively. At December 31, 1998,
the undiscounted after-tax amount associated with this liability totaled $164
million. These after-tax cash underrecoveries are based on the assumption that
the MCV Facility would be available to generate electricity 91.5 percent of the
time over its expected life. Historically the MCV Facility has operated above
the 91.5 percent level.
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Accordingly, in 1998, Consumers increased its PPA liability by $37 million.
Because the MCV Facility was available 99.4 percent of the time in 1998,
Consumers has an accumulated unrecovered after-tax shortfall of $10 million as
of December 31, 1998. If the MCV Facility was to be available to generate
electricity at the expected 91.5 percent level during the next five years,
Consumers' after-tax cash underrecoveries associated with the PPA would be as
follows.
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Estimated cash underrecoveries, net of tax $22 $21 $20 $19 $18
==================================================================================================================
</TABLE>
If the MCV Facility operates at availability levels above management's estimate
over the remainder of the PPA, Consumers will need to recognize additional
losses for future underrecoveries. For further discussion on the impact of the
frozen PSCR, see "Electric Restructuring" in this Note. Management will continue
to evaluate the adequacy of the contract loss liability considering actual MCV
Facility operations and the potential sale of the PPA.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. The MCV Partnership is seeking to
prohibit the MPSC from implementing portions of the order.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended the assessment process for all licensees in 1998.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults,
commonly known as "dry casks," for temporary on-site storage. As of December 31,
1998 Consumers had loaded 13 dry storage casks with spent nuclear fuel at
Palisades and plans to load five additional casks in 1999 pending approval by
the NRC. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
Consumers maintains insurance coverage against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
generating facilities. Consumers also maintains coverage for replacement power
costs during prolonged accidental outages at Palisades. Insurance would not
cover such costs during the first 17 weeks of any outage, but would cover most
of such costs during the next 58 weeks of the outage, followed by reduced
coverage to 80 percent for two additional years. If certain covered losses occur
at its own or other nuclear plants similarly insured, Consumers could be
required to pay maximum assessments of $15 million in any one year to Nuclear
Electric Insurance Limited; $88 million per occurrence, limited to a maximum
installment payment of $10 million per occurrence in any year; and $6 million if
nuclear workers claim bodily injury from radiation exposure. Consumers considers
the possibility of these assessments to be remote.
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The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management designed
to minimize embrittlement, it can operate Palisades to the end of its license
life in the year 2007 without annealing the reactor vessel. Nevertheless,
Consumers will continue to monitor the matter.
COMMITMENTS FOR COAL SUPPLIES: Consumers has entered into coal supply contracts
with various suppliers for its coal-fired generating stations. Under the terms
of these agreements, Consumers is obligated to take physical delivery of the
coal and make payment based upon the contract terms. Consumers' current
contracts have expiration dates that range from 1999 to 2004. Consumers enters
into long-term contracts for approximately 50 - 75 percent of its annual coal
requirements. In 1998 coal purchases totaled $246 million of which $161 million
(60 percent of the tonnage requirement) was under long-term contract.
Consumers supplements its long-term contracts with spot-market purchases.
CONSUMERS GAS GROUP CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. On sites where
Consumers has received site-wide study plan approvals, it will continue to
implement these plans. It will also work toward closure of environmental issues
at sites as studies are completed. Consumers estimates its costs related to
investigation and remedial action for all 23 sites between $48 million and $98
million, of which Consumers accrued a liability for $48 million. These estimates
are undiscounted 1998 costs. As of December 31, 1998, Consumers has an accrued
liability of $48 million and a regulatory asset for approximately the same
amount. Any significant change in assumptions, such as remediation techniques,
nature and extent of contamination, and legal and regulatory requirements, could
affect the estimate of remedial action costs for the sites. Consumers defers and
amortizes over a period of ten years, environmental clean-up costs above the
amount currently being recovered in rates. Rate recognition of amortization
expense will not begin until after a prudence review in a general rate case.
Consumers is allowed current recovery of $1 million annually. Consumers has
initiated lawsuits against certain insurance companies regarding coverage for
some or all of the costs that it may incur for these sites.
CONSUMERS GAS GROUP MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program, which will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier in direct
competition with Consumers. The program is voluntary and participating natural
gas customers are selected on a first-come, first-served basis, up to a limit of
100,000 per year. As of December 31, 1998, more than 102,000 customers chose
alternative gas suppliers, representing approximately 24.1 billion cubic feet
(bcf) of gas load. Customers choosing to remain as sales customers of Consumers
will not see a rate change in their natural gas rates. This three-year program:
i) suspends Consumers' gas cost recovery clause, effective April 1, 1998,
establishing a gas commodity cost at a fixed rate of $2.84 per thousand
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cubic feet (mcf); ii) establishes an earnings sharing mechanism with customers
if Consumers' earnings exceed certain pre-determined levels; and iii)
establishes a gas transportation code of conduct that addresses the relationship
between Consumers and marketers, including its affiliated marketers. In January
1998, the Michigan Attorney General, Association of Businesses Advocating Tariff
Equity and other parties filed claims of appeal regarding the program with the
Court of Appeals.
Consumers uses gas purchase contracts to limit its risk associated with gas
price increases. It is management's intent to take physical delivery of the
commodity and failure could result in a significant penalty for nonperformance.
At December 31, 1998, Consumers had an exposure to gas price increases if the
ultimate cost of gas was to exceed $2.84 per mcf for the following volumes: 15
percent of its 1999 requirements; 45 percent of its 2000 requirements; and 45
percent of its first quarter 2001 requirements. Additional contract coverage is
currently under review. The gas purchase contracts currently in place were
consummated at prices less than $2.84 per mcf. The gas purchase contracts are
being used to protect against gas price increases in a three-year experimental
gas program where Consumers is recovering from its customers $2.84 per mcf for
gas.
COMMITMENTS FOR GAS SUPPLIES: Consumers entered into gas supply contracts and
transportation contracts with various suppliers for its natural gas business.
These contracts have expiration dates that range from 1999 to 2003. Consumers'
1998 gas requirements totaled 210 bcf at a cost of $565 million, 70 percent of
which was under long-term contracts for one year or more. As of the end of 1998,
Consumers had 85 percent of its 1999 gas requirements under such long-term
contracts, and will supplement them with additional long-term contracts and
spot-market purchases.
OTHER UNCERTAINTIES
CMS GENERATION ENVIRONMENTAL MATTERS: CMS Generation Co. (CMS Generation) does
not currently expect to incur significant capital costs, if any, at its power
facilities to comply with current environmental regulatory standards.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $4.148
billion for 1999, which includes approximately $2.2 billion for the acquisition
of the Panhandle Eastern Pipe Line Company, Trunkline Gas Company, Pan Gas
Storage Company, Panhandle Storage Company and Trunkline LNG Company (Panhandle
Companies), $1.450 billion for 2000, and $1.175 billion for 2001. For further
information, see Capital Resources and Liquidity-Capital Expenditures in the
Management's Discussion and Analysis.
OTHER: As of December 31, 1998, CMS Energy and Enterprises have guaranteed up to
$433 million in contingent obligations of unconsolidated affiliates and related
parties.
In addition to the matters disclosed in this note, Consumers and certain other
subsidiaries of CMS Energy are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies arising from the
ordinary course of business. These lawsuits and proceedings may involve personal
injury, property damage, contractual matters, environmental issues, federal and
state taxes, rates, licensing and other matters.
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<PAGE> 73
CMS Energy has accrued estimated losses for certain contingencies discussed in
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on CMS Energy's financial position, liquidity, or results of
operations.
4: SHORT-TERM FINANCINGS
At December 31, 1998, CMS Energy and a subsidiary had bridge loan facilities
negotiated with domestic banks in an aggregate amount of $1.9 billion. These
facilities were specifically available to finance CMS Energy's acquisition of
the Panhandle Companies, and had a term of six months from the date of
acquisition. These facilities had aggregate average commitment and usage fees of
approximately 53 basis points on amounts committed and/or used.
At February 1, 1999, Consumers had Federal Energy Regulatory Commission (FERC)
authorization to issue or guarantee through June 2000, up to $900 million of
short-term securities outstanding at any one time and to guarantee, through
1999, up to $25 million in loans made by others to residents of Michigan for
making energy-related home improvements. Consumers also had remaining FERC
authorization to issue through June 2000, up to $475 million and $425 million of
long-term securities with maturities up to 30 years for refinancing purposes and
for general corporate purposes respectively.
Consumers has an unsecured $425 million credit facility and unsecured lines of
credit aggregating $130 million. These facilities are available to finance
seasonal working capital requirements and to pay for capital expenditures
between long-term financings. At December 31, 1998, a total of $215 million was
outstanding at a weighted average interest rate of 5.8 percent, compared with
$377 million outstanding at December 31, 1997, at a weighted average interest
rate of 6.5 percent. In January 1999, Consumers renegotiated a variable-to-fixed
interest rate swap totaling $175 million in order to reduce the impact of
interest rate fluctuations.
Consumers also has in place a $500 million trade receivables sale program. At
December 31, 1998 and 1997, receivables sold under the program totaled $306
million and $335 million, respectively. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect receivables
sold.
5: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------
December 31 Maturing/Expiring Interest Rate 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Mortgage Bonds 1998 to 2023 6.4% to 8.9% $ 628 $ 1,255
Long-Term Bank Debt 2003 5.8%(a) 175 400
Senior Notes:
CMS Energy 2000 to 2004 7.8%(a) 830 830
</TABLE>
73
<PAGE> 74
<TABLE>
<S> <C> <C> <C> <C>
Consumers 2008 to 2028 6.5%(a) 1,075 -
Extendible Tenor Rate
Adjusted Securities (b) 2005 7.0%(a) 180 -
Senior Credit Facilities 2002 6.6%(a) 669 305
General Term Notes(R)
Series A to E 1999 to 2008 7.5%(a) 625 509
Pollution Control Revenue Bonds 2000 to 2018 5.2%(a) 131 131
Term Loan Agreement-
CMS Generation 1998 7.4%(a) - 91
Revolving Line of Credit 2003 5.9%(a) 168 124
Nuclear Fuel Disposal (c) 5.1%(a) 117 111
Bank Loans and Other 1999 to 2014 7.7%(a) 410 134
-----------------------
Principal Amount Outstanding 5,008 3,890
Current Amounts (258) (609)
Net Unamortized Discount (24) (9)
------------------------
Total Long-Term Debt $ 4,726 $ 3,272
==========================================================================================================
</TABLE>
(a) Represents the weighted average interest rate at December 31, 1998.
(b) May be extended for an additional seven years.
(c) Maturity date uncertain (see Note 2).
The scheduled maturities of long-term debt and improvement fund obligations are
as follows: $258 million in 1999, $408 million in 2000, $96 million in 2001,
$1.306 billion in 2002 and $592 million in 2003.
CMS ENERGY
CMS Energy has $725 million of senior credit facilities consisting of a $600
million three-year revolving credit facility and a five-year $125 million term
loan facility (Senior Credit Facilities). Additionally, CMS Energy has unsecured
lines of credit and letters of credit in an aggregate amount of $216 million. At
December 31, 1998, the total amount utilized under the Senior Credit Facilities
was $725 million, including $57 million of contingent obligations, and under the
unsecured lines of credit and letters of credit was $147 million.
In January 1998, a Delaware statutory business trust established by CMS Energy
sold $180 million of certificates due January 15, 2005 in a public offering. In
exchange for those proceeds, CMS Energy sold to the trust $180 million aggregate
principal amount of 7 percent Extendible Tenor Rate Adjusted Securities due
January 15, 2005, which may be extended for an additional seven years. Net
proceeds to CMS Energy from the sale totaled $176 million.
In August 1998, CMS Energy filed a shelf registration statement for the issuance
of $400 million of General Term Notes (R) Series E.
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<PAGE> 75
In January 1999, CMS Energy received net proceeds of approximately $473 million
from the sale of $480 million of senior notes. In February 1999, CMS Energy
received net proceeds of approximately $296 million from the sale of $300
million of senior notes. Proceeds from these offerings were used to repay debt
and for general corporate purposes.
CONSUMERS
Consumers issued a total of $1.075 billion of senior notes throughout 1998 at
varying interest rates between 6.2 percent and 6.875 percent, principal amounts
between $150 million and $250 million, and maturities from 2008 to 2028. The
senior notes are secured by Consumers First Mortgage Bonds issued
contemporaneously in similar amounts and one series of senior notes also is
secured by an insurance policy. Consumers also issued long-term bank debt of
$225 million in May 1998, maturing in 2001 to 2003, at an initial interest rate
of 6.05 percent. Proceeds from these issuances were used primarily to pay down
$627 million of First Mortgage Bonds and $450 million of long-term bank debt, as
well as for general corporate purposes.
Consumers secures its First Mortgage Bonds by a mortgage and lien on
substantially all of its property. Consumers' ability to issue and sell
securities is restricted by certain provisions in its First Mortgage Bond
Indenture, its Articles of Incorporation and the need for regulatory approvals
to meet appropriate federal law.
Consumers' long-term pollution control revenue bonds are secured by irrevocable
letters of credit or First Mortgage Bonds, and an insurance policy.
CMS OIL AND GAS
CMS Oil and Gas has a $225 million revolving credit facility that converts to
term loans maturing from March 1999 through March 2003.
6: CAPITALIZATION
CMS ENERGY
The authorized capital stock of CMS Energy consists of 250 million shares of CMS
Energy Common Stock, one of two classes of par value $.01 per share (CMS Energy
Common Stock), 60 million shares of Class G Common Stock, one of two classes of
no par value (Class G Common Stock), and 10 million shares of CMS Energy
Preferred Stock, $.01 par value.
In November 1998, CMS Energy sold 4.5 million new shares of CMS Energy Common
Stock in a block trade. The net proceeds of approximately $208 million were used
for general corporate purposes.
In December 1998, CMS Energy filed a shelf registration statement for the
issuance of $1.5 billion of CMS Energy Common Stock, trust preferred securities
and other securities which could be converted into CMS Energy Common Stock.
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<PAGE> 76
CMS Energy, through CMS Energy Trust I, a wholly owned business trust, sold 3.45
million units of 7.75 percent tax deductible Trust Preferred Securities. The
primary asset of CMS Energy Trust I is $178 million principal amount of 7.75
percent subordinated debentures issued by CMS Energy, which mature in 2027.
These tax deductible Trust Preferred Securities are convertible into 4.2 million
shares of CMS Energy Common Stock at a rate equivalent to a conversion price of
$40.80 per share of CMS Energy Common Stock.
OTHER: Under its most restrictive borrowing arrangement at December 31, 1998,
none of CMS Energy's consolidated net income was restricted for payment of
common dividends. CMS Energy could pay $800 million in common dividends under
its most restrictive debt covenant.
CONSUMERS
Consumers has 4 million shares of 8.36 percent Trust Preferred Securities which
were sold through Consumers Power Company Financing I, a wholly owned business
trust consolidated with Consumers. Net proceeds from the sale totaled $97
million. Consumers has 4.8 million shares of 8.2 percent Trust Preferred
Securities which were sold through Consumers Energy Company Financing II, a
wholly owned business trust consolidated with Consumers. Net proceeds from the
sale totaled $116 million. Consumers formed both trusts for the sole purpose of
issuing the Trust Preferred Securities. Consumers' obligations with respect to
the Trust Preferred Securities under the related tax-deductible notes, under the
indenture through which Consumers issued the notes, under Consumers' guarantee
of the Trust Preferred Securities, and under the declaration by the trusts,
taken together, constitute a full and unconditional guarantee by Consumers of
the trusts' obligations under the Trust Preferred Securities.
Under the provisions of its Articles of Incorporation, Consumers had $300
million of unrestricted retained earnings available to pay common dividends at
December 31, 1998. In January 1999, Consumers declared and paid a $97 million
common dividend.
7: EARNINGS PER SHARE AND DIVIDENDS
CMS Energy currently has two classes of common stock: CMS Energy Common Stock
and Class G Common Stock (Common Stock). Earnings per share attributable to
Common Stock for the years ended December 31, 1998, 1997 and 1996 include
earnings of the gas distribution, storage and transportation businesses
currently conducted by Consumers and Michigan Gas Storage Company (Consumers Gas
Group). The allocation of earnings attributable to each class of common stock
and the related amounts per share are computed by considering the weighted
average number of shares outstanding.
Earnings attributable to the outstanding shares of Class G Common Stock
(Outstanding Shares) are equal to Consumers Gas Group net income multiplied by a
fraction; the numerator is the weighted average number of Outstanding Shares
during the period and the denominator is the weighted average number of
Outstanding Shares and authorized but unissued shares of Class G Common Stock
not held by holders of the Outstanding Shares during the period. The earnings
attributable to Class G Common Stock on a per share basis for 1998, 1997 and
1996 are based on 25.5 percent, 24.5 percent, and 23.8 percent respectively, of
the income of Consumers Gas Group.
76
<PAGE> 77
COMPUTATION OF EARNINGS PER SHARE:
<TABLE>
<CAPTION>
In Millions, Except Per Share Amounts
- -----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME APPLICABLE TO BASIC AND DILUTED EARNINGS
PER SHARE
Consolidated Net Income $ 285 $ 244 $ 224
Net Income Attributable to Common Stocks: ==========================================
CMS Energy - Basic Income $272 $ 229 $ 210
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 9 5 -
------------------------------------------
CMS Energy - Diluted Income $ 281 $ 234 $ 210
Class G:
Basic and Diluted Income $ 13 $ 15 $ 14
==========================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EARNINGS PER SHARE
CMS Energy:
Average Shares - Basic 102.4 96.1 92.5
Add conversion of 7.75% Trust
Preferred Securities 4.3 2.3 -
Options-Treasury Shares 0.5 0.3 0.2
-------------------------------------------
Average Shares - Diluted 107.2 98.7 92.7
Class G:
Average Shares
Basic and Diluted 8.3 8.0 7.7
==========================================
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic $ 2.65 $2.39 $ 2.27
Diluted $ 2.62 $2.37 $ 2.26
Class G:
Basic and Diluted $ 1.56 $1.84 $ 1.82
=================================================================================================================
</TABLE>
Holders of Class G Common Stock have no direct rights in the equity or assets of
Consumers Gas Group, but rather have rights in the equity and assets of CMS
Energy as a whole. In the sole discretion of the CMS Energy Board of Directors
(Board of Directors), CMS Energy may pay dividends exclusively to the holders of
Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or
to the holders of both classes in equal or unequal amounts. The Board of
Directors has stated its intention to declare and pay dividends on the CMS
Energy Common Stock based primarily on the earnings and financial condition of
CMS Energy. Dividends on Class G Common Stock are paid at the discretion of the
77
<PAGE> 78
Board of Directors based primarily upon the earnings and financial condition of
Consumers Gas Group, and to a lesser extent, CMS Energy as a whole.
In February and May 1998, CMS Energy paid dividends of $.30 per share on CMS
Energy Common Stock and $.31 per share on Class G Common Stock. In August and
November 1998, CMS Energy paid dividends of $.33 per share on CMS Energy Common
Stock and $.325 per share on Class G Common Stock. In January 1999, the Board of
Directors declared a quarterly dividend of $.33 per share on CMS Energy Common
Stock and $.325 per share on Class G Common Stock, which were paid in February
1999.
8: RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS
CMS Energy and its subsidiaries use a variety of derivative instruments
(derivatives), including futures contracts, swaps, options and forward
contracts, to manage exposure to fluctuations in commodity prices, interest
rates and foreign exchange rates. To qualify for hedge accounting, derivatives
must meet the following criteria: i) the item to be hedged exposes the
enterprise to price, interest or exchange rate risk; and ii) the derivative
reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counter parties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
reviews using, among other things, publicly available credit ratings of such
counter parties. Nonperformance by counter parties is not expected to have a
material adverse impact on CMS Energy's financial position, liquidity, or
results of operations.
COMMODITY PRICE HEDGES: CMS Energy accounts for its commodity price derivatives
as hedges, as defined above, and as such, defers any changes in market value and
gains and losses resulting from settlements until the hedged transaction is
complete. If there was a loss of correlation between the changes in i) the
market value of the commodity price contracts and ii) the market price
ultimately received for the hedged item, and the impact was material, the open
commodity price contracts would be marked to market and gains and losses would
be recognized in the income statement currently.
Consumers has entered into and will enter into electric option contracts to
ensure a reliable source of capacity to meet its customers' electric
requirements and to limit its risk associated with electricity price increases.
It is management's intent to take physical delivery of the commodity. Consumers
continuously evaluates its daily capacity needs and sells the option contracts,
if marketable, when it has excess daily capacity. Consumers' maximum exposure
associated with these options is limited to premiums paid.
CMS Oil and Gas has one arrangement which is used to fix the prices that CMS Oil
and Gas will pay for gas supplied to the MCV Facility for the years 2001 through
2006 by purchasing the economic equivalent of 10,000 million British thermal
units (MMBtu) per day at a fixed price, escalating at 8 percent per year
thereafter, starting at $2.82 per MMBtu in 2001. The settlement periods are each
a one-year period ending December 31, 2001 through 2006 on 3.65 million MMBtu.
If the floating price, essentially the then-current Gulf Coast spot price, for a
period is higher than the fixed price, the seller pays CMS Oil and Gas the
difference, and vice versa. If a party's exposure at any time exceeds $5
million, that party is required to obtain a letter of credit in favor of the
other party for the excess over $5 million and up to $10 million.
78
<PAGE> 79
At December 31, 1998, no letter of credit was posted by either party to the
agreement. As of December 31, 1998, the fair value of this contract reflected
payment due from CMS Oil and Gas of $14.5 million.
A subsidiary of CMS Gas Transmission uses natural gas future contracts and CMS
Marketing, Services and Trading Company uses natural gas and oil futures
contracts, options and swaps (which require a net cash payment for the
difference between a fixed and variable price).
INTEREST RATE HEDGES: CMS Energy and some of its subsidiaries enter into
interest rate swap agreements to exchange variable rate interest payment
obligations to fixed rate obligations without exchanging the underlying notional
amounts. These agreements convert variable rate debt to fixed rate debt to
reduce the impact of interest rate fluctuations. The notional amounts parallel
the underlying debt levels and are used to measure interest to be paid or
received and do not represent the exposure to credit loss. The notional amount
of CMS Energy's and its subsidiaries' interest rate swaps was $579 million at
December 31, 1998. The difference between the amounts paid and received under
the swaps is accrued and recorded as an adjustment to interest expense over the
life of the hedged agreement.
FOREIGN EXCHANGE HEDGES: CMS Energy uses forward exchange contracts and collared
options to hedge certain receivables, payables, long-term debt and equity value
relating to foreign investments. The purpose of CMS Energy's foreign currency
hedging activities is to protect the company from the risk that U.S. dollar net
cash flows resulting from sales to foreign customers and purchases from foreign
suppliers and the repayment of non-U.S. dollar borrowings as well as equity
reported on the company's balance sheet, may be adversely affected by changes in
exchange rates. These contracts do not subject CMS Energy to risk from exchange
rate movements because gains and losses on such contracts offset losses and
gains, respectively, on assets and liabilities being hedged. The notional amount
of the outstanding foreign exchange contracts was $736 million at December 31,
1998, which includes $450 million and $250 million for Australian and Brazilian
foreign exchange contracts, respectively. Subsequent to December 31, 1998, the
fair value of the Brazilian foreign exchange contracts increased significantly,
as the Brazilian real weakened against the U.S. dollar.
9: INCOME TAXES
CMS Energy and its subsidiaries file a consolidated federal income tax return.
Income taxes are generally allocated based on each company's separate taxable
income. CMS Energy and Consumers practice full deferred tax accounting for
temporary differences, but federal income taxes have not been recorded on the
undistributed earnings of international subsidiaries where CMS Energy intends to
permanently reinvest those earnings. Upon distribution, those earnings may be
subject to both U.S. income taxes (adjusted for foreign tax credits or
deductions) and withholding taxes payable to various foreign countries. It is
not practical to estimate the amount of unrecognized deferred income taxes or
withholding taxes on undistributed earnings.
CMS Energy used investment tax credit (ITC) to reduce current income taxes
payable, and amortizes ITC over the life of the related property. Any
alternative minimum tax (AMT) paid generally becomes a tax credit that CMS
Energy can carry forward indefinitely to reduce regular tax liabilities in
future periods when regular taxes paid exceed the tax calculated for AMT. The
significant components of income tax expense (benefit) consisted of:
79
<PAGE> 80
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes
Federal and other $ 61 $ 76 $ 86
State and local 5 3 4
Foreign 3 5 3
----------------------------------------
69 84 93
Deferred income taxes
Federal 77(a) 41 54
Foreign (7) (7) -
----------------------------------------
70 34 54
Deferred ITC, net (16) (10) (10)
----------------------------------------
$123 $108 $137
==============================================================================================================
</TABLE>
(a) Includes $23 million for 1998 change in property tax accounting.
The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------
December 31 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property $ (574) $ (558)
Unconsolidated investments (285) (263)
Postretirement benefits (139) (150)
Abandoned Midland project (25) (33)
Employee benefit obligations (includes postretirement benefits
of $141 and $155 182 195
AMT carryforward 134 147
Power purchases 59 66
Other (1) (14)
-------------------------------
$ (649) $ (610)
=============================================================================================================
Gross deferred tax liabilities $ (1,786) $ (1,758)
Gross deferred tax assets 1,137 1,148
-------------------------------
$ (649) $ (610)
=============================================================================================================
</TABLE>
80
<PAGE> 81
The actual income tax expense differs from the amount computed by applying the
statutory federal tax rate of 35% to income before income taxes as follows:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated net income before
preferred dividends
Domestic $ 247 $ 222 $ 230
Foreign 57 47 22
------------------------------------------------
304 269 252
Income tax expense 123(a) 108 137
------------------------------------------------
427 377 389
Statutory federal income tax rate x 35% x 35% x 35%
----------------------------------------------
Expected income tax expense 149 132 136
Increase (decrease) in taxes from:
Capitalized overheads previously flowed through 5 5 5
Differences in book and tax depreciation
not previously deferred 14 14 13
Impact of foreign taxes, tax rates and credits (5) 1 8
Undistributed earnings of international subsidiaries (13) (10) (2)
ITC amortization/adjustments (16) (10) (10)
Section 29 Fuel Tax Credits (13) (13) (13)
Other, net 2 (11) -
------------------------------------------------
$ 123 $ 108 $ 137
================================================================================================================
Effective tax rate 28.8% 28.6% 35.4%
=================================================================================================================
</TABLE>
(a) Includes $23 million for 1998 change in property tax accounting.
10: FINANCIAL INSTRUMENTS
The carrying amounts of cash, short-term investments and current liabilities
approximate their fair values due to their short-term nature. The estimated fair
values of long-term investments are based on quoted market prices or, in the
absence of specific market prices, on quoted market prices of similar
investments or other valuation techniques. The carrying amounts of all long-term
investments in financial instruments approximate fair value.
The carrying amount and fair values of long-term debt were $4.7 billion at
December 31, 1998 and $3.3 billion at December 31, 1997. Although the current
fair value of the long-term debt may differ from the current carrying amount,
settlement of the reported debt is generally not expected until maturity. The
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<PAGE> 82
carrying amount of preferred stock and Trust Preferred Securities was $631
million at December 31, 1998 and $631 million at December 31, 1997, and the fair
value was $631 million and $632 million, respectively.
The fair values of CMS Energy's off balance-sheet financial instruments are
based on the amounts estimated to terminate or settle the instruments. At
December 31, 1998, the fair value of CMS Energy's interest rate swap agreements,
with a notional amount of $579 million, was $15 million, representing the amount
that CMS Energy would have to pay to terminate the agreements. The settlement of
the interest rate swap agreements in 1998 did not materially affect interest
expense. At December 31, 1997, CMS Energy would have paid $13 million to
terminate the agreements. Also refer to Note 8 for a discussion of CMS Oil and
Gas' price hedging arrangements and their fair values. Guarantees were $433
million and $543 million at December 31, 1998 and 1997, respectively.
The amortized cost of Consumers' nuclear decommissioning investments, which are
considered available- for-sale securities in accordance with SFAS 115,
Accounting For Certain Investments in Debt and Equity Securities, was $425
million and $405 million as of December 31, 1998 and 1997, respectively. The
unrealized gain, which is classified in accumulated depreciation, was $132
million and $81 million as of December 31, 1998 and 1997, respectively.
11: EXECUTIVE INCENTIVE COMPENSATION
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of Common
Stock as well as stock options and stock appreciation rights relating to Common
Stock may be granted to key employees based on their contributions to the
successful management of CMS Energy and its subsidiaries. Awards under the plan
may consist of any class of Common Stock. Certain plan awards are subject to
performance-based business criteria. The plan reserves for award not more than
three percent of Common Stock outstanding on January 1 each year, less (i) the
number of shares of restricted Common Stock awarded and (ii) Common Stock
subject to options granted under the plan during the immediately preceding four
calendar years. Any forfeitures of shares previously awarded will increase the
number of shares available to be awarded under the plan. At December 31, 1998,
awards of up to 681,603 shares of CMS Energy Common Stock and 138,780 shares of
Class G Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting and
dividend rights. These awards vest over five years at the rate of 25 percent per
year after two years. The restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. If performance objectives are exceeded,
the plan provides additional awards. Restricted shares vest fully if control of
CMS Energy changes, as defined by the plan. At December 31, 1998, 658,494 of the
861,744 shares of restricted CMS Energy Common Stock outstanding are subject to
performance objectives. At December 31, 1998 all of the 30,490 restricted shares
of Class G Common Stock outstanding are subject to performance objectives.
Under the plan, stock options and stock appreciation rights relating to Common
Stock are granted with an exercise price equal to the closing market price on
each grant date. Options are exercisable upon grant and expire up to ten years
and one month from date of grant. The status of the restricted stock granted to
CMS Energy's key employees under the Performance Incentive Stock Plan and
options granted under the plan follows.
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<PAGE> 83
<TABLE>
<CAPTION>
Restricted
Stock Options
---------------------------------------------------------
Number Number Weighted-Average
of Shares of Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CMS Energy Common Stock:
Outstanding at January 1, 1996 517,447 1,592,000 $ 24.50
Granted 222,000 368,176 $ 30.55
Exercised or Issued (92,533) (231,550) $ 20.79
Forfeited (46,076) - -
Expired - (12,000) $ 32.88
-------------------------------------------------------
Outstanding at December 31, 1996 600,838 1,716,626 $ 26.24
Granted 366,360 431,500 $ 35.91
Exercised or Issued (159,405) (479,422) $ 26.54
Forfeited (59,582) - -
Expired - (2,987) $ 30.13
-------------------------------------------------------
Outstanding at December 31, 1997 748,211 1,665,717 $ 28.65
Granted 304,750 376,000 $ 43.38
Exercised or Issued (185,217) (331,925) $ 27.69
Forfeited (6,000) - -
-------------------------------------------------------
Outstanding at December 31, 1998 861,744 1,709,792 $ 32.07
===========================================================================================================
- -----------------------------------------------------------------------------------------------------------
Class G Common Stock:
Outstanding at January 1, 1996 6,924 10,000 $ 17.88
Granted 9,423 11,000 $ 17.88
-------------------------------------------------------
Outstanding at December 31, 1996 16,347 21,000 $ 17.88
Granted 8,784 12,000 $ 20.24
Exercised or Issued (1,385) (5,000) $ 17.88
Forfeited (3,955) - -
-------------------------------------------------------
Outstanding at December 31, 1997 19,791 28,000 $ 18.89
Granted 14,720 45,900 $ 24.50
Exercised or Issued (4,021) - -
-------------------------------------------------------
Outstanding at December 31, 1998 30,490 73,900 $ 22.37
===========================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
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<PAGE> 84
<TABLE>
<CAPTION>
Number Weighted- Weighted-
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CMS Energy Common Stock
$17.13 -- $26.25 576,000 4.45 years $ 22.92
$27.25 -- $35.94 755,292 6.11 years $ 33.40
$38.00 -- $44.06 378,500 9.64 years $ 43.34
- -----------------------------------------------------------------------------------------------------------
$17.13 -- $44.06 1,709,792 6.33 years $ 32.07
===========================================================================================================
Class G Common Stock
Number Weighted- Weighted-
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
- -----------------------------------------------------------------------------------------------------------
$17.88 -- $19.44 25,500 7.62 years $ 18.46
$23.31 -- $24.50 48,400 9.60 years $ 24.44
- -----------------------------------------------------------------------------------------------------------
$17.88 -- $24.50 73,900 8.92 years $ 22.37
===========================================================================================================
</TABLE>
The weighted average fair value of options granted for CMS Energy Common Stock
was $6.43 in 1998, $6.38 in 1997, and $6.94 in 1996. The weighted average fair
value of options granted for Class G Common Stock was $3.03 in 1998, $1.87 in
1997 and $1.59 in 1996. Fair value is estimated using the Black-Scholes model, a
mathematical formula used to value options traded on securities exchanges, with
the following assumptions:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CMS ENERGY COMMON STOCK OPTIONS
Risk-free interest rate 5.45% 6.06% 6.63%
Expected stock-price volatility 15.93% 17.43% 24.08%
Expected dividend rate $.33 $.30 $.27
Expected option life (years) 4 5 5
CLASS G COMMON STOCK OPTIONS
Risk-free interest rate 5.44% 6.06% 6.63%
Expected stock-price volatility 20.02% 18.05% 16.19%
Expected dividend rate $.325 $.31 $.295
Expected option life (years) 5 5 5
===========================================================================================================
</TABLE>
CMS Energy applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for the Performance Incentive Stock Plan. Since
stock options are granted at market price, no compensation cost has been
recognized for stock options granted under the plan. The compensation cost
charged against
84
<PAGE> 85
income for restricted stock was $9 million in 1998, $6 million in 1997, and $2
million in 1996. If compensation cost for stock options had been determined in
accordance with SFAS 123, Accounting for Stock-Based Compensation, CMS Energy's
consolidated net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
In Millions, Except Per Share Amounts
- ----------------------------------------------------------------------------------------------------------------
Pro Forma As Reported
Years Ended December 31 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated Net Income $ 283 $ 242 $ 285 $ 244
Net Income Attributable to Common Stocks
CMS Energy 270 228 272 229
Class G 13 14 13 15
Earnings Per Average Common Share
CMS Energy
Basic 2.64 2.37 2.65 2.39
Diluted 2.61 2.35 2.62 2.37
Class G
Basic and Diluted 1.54 1.81 1.56 1.84
================================================================================================================
</TABLE>
85
<PAGE> 86
12: RETIREMENT BENEFITS
CMS Energy and its subsidiaries provide retirement benefits under a number of
different plans, including certain health care and life insurance benefits under
its postretirement benefit plans other than pensions for retired employees
(OPEB), benefits to certain management employees under its Supplemental
Executive Retirement Plan (SERP), and benefits to substantially all its
employees under a trusteed, non-contributory, defined benefit pension plan of
Consumers and CMS Energy (Pension Plan), and a defined contribution 401(k) plan.
Amounts presented below for the Pension Plan include amounts for employees of
CMS Energy and nonutility affiliates which were not distinguishable from the
plan's total assets.
<TABLE>
<CAPTION>
Weighted-Average Assumptions:
Pension & SERP OPEB
----------------------------- ------------------------------
Years Ended December 31 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.00% 7.50% 7.75% 7.00% 7.50% 7.75%
Expected long-term rate
of return on plan assets 9.25% 9.25% 9.25% 7.00% 7.00% 7.00%
Rate of compensation increase:
Pension - to age 45 5.25% 5.25% 5.50%
- age 45 to assumed retirement 3.75% 3.75% 4.00%
SERP 5.50% 5.50% 5.50%
==============================================================================================================
</TABLE>
Retiree health care costs at December 31, 1998 are based on the assumption that
costs would increase 6.5 percent in 1999, then decrease gradually to 5.5 percent
in 2005 and thereafter.
Net Pension Plan, SERP and OPEB costs consist of:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Pension & SERP OPEB
---------------------- ---------------------
Years Ended December 31 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 27 $ 26 $ 26 $ 11 $ 10 $ 13
Interest expense 64 61 58 43 41 42
Expected return on plan assets (73) (70) (69) (18) (13) (6)
Amortization of unrecognized transition (asset) (5) (5) (5) -
Amortization of prior service cost 4 4 5 - - -
-------------------------------------------------------
Net periodic pension and
postretirement benefit cost $ 17 $ 16 $ 15 $ 36 $ 38 $ 49
================================================================================================================
</TABLE>
The health care cost trend rate assumption significantly affects the amounts
reported. A one percentage point change in the assumed health care cost trend
assumption would have the following effects:
86
<PAGE> 87
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
One Percentage One Percentage
Point Increase Point Decrease
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total service and interest cost components $ 9 $ (8)
Effect on postretirement benefit obligation $92 $ (76)
===================================================================================================================
</TABLE>
The funded status of CMS Energy's Pension Plan, SERP and OPEB plans is
reconciled with the liability recorded at December 31 as follows:
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
Pension Plan SERP OPEB
1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation, January 1 $ 792 $ 734 $ 41 $ 37 $ 582 $ 585
Service cost 25 24 2 2 11 10
Interest cost 60 59 3 3 43 41
Plan amendments - - - - - (7)
Actuarial loss (gain) 76 36 5 - 47 (21)
Benefits paid (79) (61) (1) (1) (28) (26)
-------------------------------------------------------------
Benefit obligation, December 31 874 792 50 41 655 582
-------------------------------------------------------------
Plan assets at fair value, January 1 882 779 - - 224 138
Actual return on plan assets 167 164 - - 54 37
Company contribution - - 1 1 49 49
Actual benefits paid (79) (61) (1) (1) - -
-------------------------------------------------------------
Plan assets at fair
value, December 31 970(a) 882(a) - - 327 224
-------------------------------------------------------------
Benefit obligation less than
(in excess of) plan assets 96 90 (50) (41) (328) (358)
Unrecognized net (gain) loss from
experience different than assumed (176) (157) 10 5 (72) (83)
Unrecognized prior service cost 31 35 1 2 - -
Unrecognized net transition (asset) obligation (16) (22) - - - -
-------------------------------------------------------------
Recorded liability $ (65) $ (54) $ (39) $ (34) $ (400) $ (441)
===================================================================================================================
</TABLE>
(a) Primarily stocks and bonds, including $168 million in 1998 and $153 million
in 1997 of CMS Energy Common Stock.
SERP benefits are paid from a trust established in 1988. SERP is not a qualified
plan under the Internal Revenue Code, and as such, earnings of the trust are
taxable and trust assets are included in consolidated assets. At December 31,
1998 and 1997, trust assets were $53 million and $44 million, respectively, and
were classified as other noncurrent assets. The accumulated benefit obligation
for SERP was $31 million in 1998 and $25 million in 1997.
Contributions to the 40l(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan were $18 million in 1998, $20 million
in 1997, and $18 million in 1996.
87
<PAGE> 88
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized on a
straight-line basis over the average remaining service period of active
employees.
CMS Energy and its subsidiaries adopted SFAS 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, effective as of the beginning of
1992 and Consumers recorded a liability of $466 million for the accumulated
transition obligation and a corresponding regulatory asset for anticipated
recovery in utility rates (see Note 2, Utility Regulation). The MPSC authorized
recovery of the electric utility portion of these costs in 1994 over 18 years
and the gas utility portion in 1996 over 16 years. At December 31, 1998,
Consumers had recorded a FERC regulatory asset and liability of $6 million. The
FERC has authorized recovery of these costs.
13: LEASES
CMS Energy, Consumers, and Enterprises lease various assets, including vehicles,
rail cars, aircraft, construction equipment, computer equipment, nuclear fuel
and buildings. Consumers' nuclear fuel capital leasing arrangement expires in
November 2000, yet provides for additional one-year extensions upon mutual
agreement by the parties. Upon termination of the lease, the lessor would be
entitled to a cash payment equal to its remaining investment, which was $72
million as of December 31, 1998. Consumers is responsible for payment of taxes,
maintenance, operating costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at December
31, 1998 were:
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------------------------
Capital Operating
Leases Leases
- --------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 46 $ 20
2000 71 19
2001 18 16
2002 17 15
2003 12 12
2004 and thereafter 9 89
-----------------------
Total minimum lease payments 173 $171
====
Less imputed interest 33
---
Present value of net minimum lease payments 140
Less current portion 35
---
Noncurrent portion $105
======================================================================================
</TABLE>
Consumers recovers lease charges from customers and accordingly charges payments
for its capital and operating leases to operating expense. Operating lease
charges, including charges to clearing and other accounts for the years ended
December 31, 1998, 1997 and 1996, were $19 million, $10 million and $8 million,
respectively.
88
<PAGE> 89
Capital lease expenses for the years ended December 31, 1998, 1997 and 1996 were
$42 million, $43 million and $46 million, respectively. Included in these
amounts for the years ended 1998, 1997 and 1996 are nuclear fuel lease expenses
of $23 million, $31 million and $25 million, respectively.
14: JOINTLY OWNED UTILITY FACILITIES
Consumers is responsible for providing its share of financing for the jointly
owned utility facilities. The direct expenses of the joint plants are included
in Consumers' operating expenses. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------------------------------------------
Net Investment Accumulated Depreciation
December 31 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Campbell Unit 3 - 93.3 percent $ 299 $ 314 $ 279 $ 265
Ludington pumped storage plant -
51 percent 106 112 94 88
Transmission lines - various 33 34 15 14
==================================================================================================================
</TABLE>
15: REPORTABLE SEGMENTS
CMS Energy operates principally in the following six reportable segments:
electric utility; gas utility; independent power production; oil and gas
exploration and production; natural gas transmission, storage and processing;
and energy marketing, services and trading.
The electric utility segment consists of regulated activities associated with
the generation, transmission and distribution of electricity in the State of
Michigan. The gas utility segment consists of regulated activities associated
with the production, transportation, storage and distribution of natural gas in
the State of Michigan. The other reportable segments consist of the development
and management of electric, gas and other energy-related projects in the United
States and internationally, including energy trading and marketing. CMS Energy's
reportable segments are strategic business units organized and managed by the
nature of the products and services each provides. The accounting policies of
each reportable segment are the same as those described in the summary of
significant accounting policies. CMS Energy's management evaluates performance
based on pretax operating income. Intersegment sales and transfers are accounted
for at current market prices and are eliminated in consolidated pretax operating
income by segment.
The Consolidated Statements of Income show operating revenue and pretax
operating income by reportable segment. Revenues from an international energy
distribution business and a land development business fall below the
quantitative thresholds for reporting. Neither of these segments has ever met
any of the quantitative thresholds for determining reportable segments. Other
financial data for reportable segments and geographic area are as follows:
89
<PAGE> 90
Reportable Segments
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation, Depletion and Amortization
Electric utility $ 304 $ 296 $ 282
Gas utility 97 93 87
Independent power production 22 13 8
Oil and gas exploration and production 38 48 42
Natural gas transmission, storage and processing 14 14 7
Marketing, services and trading 2 1 -
Other 7 2 1
---------------------------------------------------------------------
$ 484 $ 467 $ 427
==================================================================================================================
Identifiable Assets
Electric utility (a) $ 4,640 $ 4,472 $ 4,505
Gas utility (a) 1,726 1,644 1,709
Independent power production 2,252 1,710 1,053
Oil and gas exploration and production 547 456 476
Natural gas transmission, storage and processing 971 508 388
Marketing, services and trading 152 191 52
Other 1,022 527 180
------------------------------------------------------------
$ 11,310 $ 9,508 $ 8,363
==================================================================================================================
Capital Expenditures (b)
Electric utility $ 331 $ 255 $ 310
Gas utility 114 116 137
Independent power production 462 704 142
Oil and gas exploration and production 143 99 72
Natural gas transmission, storage and processing 573 115 136
Marketing, services and trading 1 28 -
Other 76 202 66
------------------------------------------------------------
$ 1,700 $ 1,519 $ 863
==================================================================================================================
Investments in Equity Method Investees
Independent power production $ 1,337 $ 1,205 $ 683
Natural gas transmission, storage and processing 494 241 225
Marketing, services and trading 25 26 -
Other 217 274 85
--------------------------------------------------------------------
$ 2,073 $ 1,746 $ 993
==================================================================================================================
Earnings from Equity Method Investees (c)
Independent power production $ 158 $ 89 $ 91
</TABLE>
90
<PAGE> 91
<TABLE>
<S> <C> <C> <C>
Natural gas transmission, storage and processing 9 4 3
Marketing, services and trading 2 2 -
Other 2 8 8
---------------------------------------------------------------------
$ 171 $ 103 $ 102
==================================================================================================================
</TABLE>
Geographic Areas (d)
<TABLE>
<CAPTION>
Pretax
Operating Operating Identifiable
Revenue Income Assets
---------------------------------------------------------------------
<S> <C> <C> <C>
1998
United States $4,867 $ 702 $8,842
International 274 73 2,468
1997
United States $4,576 $ 665 $7,872
International 205 51 1,636
1996
United States $4,211 $ 651 $7,668
International 113 25 695
================================================================================================================
</TABLE>
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
(b) Includes electric restructuring implementation plan, capital leases for
nuclear fuel and other assets and electric demand-side management costs
(DSM) (see Consolidated Statements of Cash Flows). Amounts also include an
attributed portion of Consumers' capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
(c) These amounts are included in operating revenue in the Consolidated
Statements of Income.
(d) Revenues are attributed to countries based on location of customers.
16: SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the Consolidated Statements of Cash Flows, all highly liquid
investments with an original maturity of three months or less are considered
cash equivalents. Other cash flow activities and noncash investing and financing
activities were:
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $313 $293 $240
Income taxes paid (net of refunds) 64 67 82
</TABLE>
91
<PAGE> 92
<TABLE>
<S> <C> <C> <C>
NONCASH TRANSACTIONS
Nuclear fuel placed under capital leases $ 46 $ 4 $ 28
Other assets placed under capital leases 14 7 3
Common stock issued to acquire companies 61 - -
Assumption of debt 88 - -
==================================================================================================================
</TABLE>
Changes in other assets and liabilities as shown on the Consolidated Statements
of Cash Flows are described below:
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sale of receivables, net $ (29) $ 17 $ 23
Accounts receivable (183) (160) (28)
Accrued revenue (5) 64 (82)
Inventories (42) (15) -
Accounts payable 104 67 55
Accrued refunds (1) 4 (14)
Other current assets and liabilities, net 126 (6) 25
Noncurrent deferred amounts, net (156) (6) 10
------------------------------------------------
$ (186) $ (35) $ (11)
==================================================================================================================
</TABLE>
17: EQUITY METHOD INVESTMENTS
Certain of CMS Energy's investments in companies, partnerships and joint
ventures, where CMS Energy's ownership in its affiliates is more than 20 percent
but less than a majority, are accounted for by the equity method. Consolidated
net income includes undistributed equity earnings of $95 million in 1998, $58
million in 1997, and $55 million in 1996 from these investments. The more
significant of these investments are CMS Energy's 50 percent interest in Loy
Yang, a 2,000 MW brown coal-fueled power plant and coal mine in Australia, and
CMS Energy's 50 percent interest in Jorf Lasfar, a 1,356 MW coal-fueled power
plant in Africa. Summarized combined financial information of CMS Energy's
equity method investees follows, except for the MCV Partnership, which is
disclosed separately in Note 18.
INCOME STATEMENT DATA (UNAUDITED)
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue $2,255 $1,603 $ 769
Operating expenses 1,503 1,154 532
---------------------------------------
Operating income 752 449 237
Other expense, net 409 271 91
---------------------------------------
Net income $ 343 $ 178 $ 146
===================================================================================================================
</TABLE>
BALANCE SHEET DATA (UNAUDITED)
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
</TABLE>
92
<PAGE> 93
<TABLE>
<CAPTION>
December 31 1998 1997
- -------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets $ 646 $ 642
Property, plant and equipment, net 6,783 6,304
Other assets 2,694 2,052
--------------------------------
$ 10,123 $ 8,998
===================================================================================================================
LIABILITIES AND EQUITY
Current liabilities $ 804 $ 688
Long-term debt and other noncurrent liabilities 6,341 5,678
Equity 2,978 2,632
--------------------------------
$ 10,123 $ 8,998
===================================================================================================================
</TABLE>
18: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT
RELATED ENERGY SUPPLIER
Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1998
obligation to purchase electric capacity from the MCV Partnership was 15.5
percent of Consumers' owned and contracted capacity. Summarized financial
information of the MCV Partnership follows:
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue (a) $ 627 $ 652 $ 645
Operating expenses 405 435 417
---------------------------------------
Operating income 222 217 228
Other expense, net 142 154 162
---------------------------------------
Net income before cumulative effect of accounting change 80 63 66
Cumulative effect of change in method of accounting for property tax - 15 -
---------------------------------------
Net income $ 80 $ 78 $ 66
===================================================================================================================
</TABLE>
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
December 31 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
ASSETS LIABILITIES AND EQUITY
<S> <C> <C> <C> <C> <C>
Current assets (b) $ 341 $ 362 Current liabilities $ 204 $ 285
</TABLE>
93
<PAGE> 94
<TABLE>
<S> <C> <C> <C> <C> <C>
Plant, net 1,773 1,820 Noncurrent liabilities (c) 1,725 1,789
Other assets 173 169 Partners' equity (d) 358 277
--------------------- -----------------------
$2,287 $2,351 $2,287 $2,351
===================================================================================================================
</TABLE>
(a) Revenue from Consumers totaled $584 million, $609 million and $598 million
for 1998, 1997, and 1996, respectively.
(b) Receivables from Consumers totaled $49 million and $54 million, at December
31, 1998 and 1997, respectively.
(c) FMLP is the sole beneficiary of an owner-trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership. CMS Holdings
holds a 46.4 percent ownership interest in FMLP. At December 31, 1998 and 1997,
lease obligations of $1.41 billion and $1.52 billion, respectively, were owed to
the owner trust. CMS Holdings' share of the interest and principal portion for
the 1998 lease payments was $59 million and $49 million, respectively, and for
the 1997 lease payments was $62 million and $28 million, respectively. The lease
payments service $907 million and $1,016 million in nonrecourse debt outstanding
as of December 31, 1998 and 1997, respectively, of the owner-trust. FMLP's debt
is secured by the MCV Partnership's lease obligations, assets, and operating
revenues. For 1998 and 1997, the owner-trust made debt payments (including
interest) of $233 million and $192 million, respectively. FMLP's earnings for
1998, 1997, and 1996 were $23 million, $20 million, and $17 million,
respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of its
investment in the MCV Partnership. Covenants contained in financing agreements
prohibit the MCV Partnership from paying distributions until certain financial
test requirements are met. Consumers does not anticipate receiving a cash
distribution in the near future.
19: SUBSEQUENT EVENT
In 1999, CMS Energy completed the acquisition of the Panhandle Companies from
Duke Energy Corporation for a cash payment of $1.9 billion and existing
Panhandle Companies debt of $300 million. The Panhandle Companies are primarily
engaged in the interstate transportation and storage of natural gas. The
transaction will be accounted for under the purchase method of accounting.
The acquisition of the Panhandle Companies initially was financed in part with
bridge loan facilities negotiated with domestic banks and in part with
approximately $800 million of debt securities issued by the Panhandle Companies.
CMS Energy expects to permanently finance the acquisition with existing
arrangements as well as the sale of approximately $600 million of CMS Energy
Common Stock and other CMS Energy securities.
The following unaudited pro forma combined selected financial information
assumes: i) various restructuring, realignment, and elimination of activities
between the Panhandle Companies and Duke Energy Corporation prior to closing;
ii) adjustments resulting from the acquisition; and iii) Panhandle Companies and
CMS Energy financing transactions (except bridge financing fees) completed to
facilitate the acquisition, as if the acquisition had occurred on January 1,
1998. Unaudited pro forma amounts for
94
<PAGE> 95
operating revenue, consolidated net income, basic earnings per share and total
assets were $5.6 billion, $319 million, $2.66 and $13.8 billion, respectively.
95
<PAGE> 96
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and consolidated
statements of preferred stock of CMS ENERGY CORPORATION (a Michigan corporation)
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, common stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CMS Energy Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective January 1, 1998,
Consumers Energy Company, a wholly owned subsidary of CMS Energy Corporation,
changed its method of accounting for property taxes.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1999 (except with respect to the matters disclosed in Note 3,
"Consumers' Electric Utility Rate Matters", and Note 19, as to which the
date is March 29, 1999).
96
<PAGE> 97
QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION CMS ENERGY CORPORATION
<TABLE>
<CAPTION>
In Millions, Except Per Share Amounts
1998 (Unaudited) 1997 (Unaudited)
<S><C>
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------------------------
Operating revenue (a) $1,374 $1,132 $1,286 $1,349 $1,295 $1,022 $1,030 $1,434
Pretax operating income (a) $197 $188 $222 $168 $204 $158 $178 $176
Consolidated net income (a) $88 $65 $81 $51 $78 $47 $60 $59
Basic earnings (loss) per
average common
share (b):
CMS Energy (a) $.79 $.63 $.81 $.44 $.73 $.48 $.64 $.54
Class G $1.09 $.12 $(.16) $.52 $1.18 $.16 $(.21) $.70
Diluted earnings (loss) per
average common
share (b):
CMS Energy (a) $.77 $.62 $.80 $.44 $.72 $.48 $.63 $.54
Class G $1.09 $.12 $(.16) $.52 $1.18 $.16 $(.21) $.70
Dividends declared per
common share:
CMS Energy $.30 $.30 $.33 $.33 $.27 $.27 $.30 $.30
Class G $.31 $.31 $.325 $.325 $.295 $.295 $.31 $.31
Common stock prices (c)
CMS Energy:
High $47-5/16 $47-3/16 $44-3/4 $50-1/8 $34-1/2 $35-5/8 $38-1/16 $44-1/16
Low $41-7/8 $40-11/16 $38-3/4 $43-3/16 $31-1/2 $31-1/8 $34-7/8 $35-11/16
Class G:
High $26-5/8 $26-7/8 $25-1/4 $26-1/2 $19-7/8 $19-7/8 $22 $27-1/8
Low $22-1/4 $23-1/4 $21-3/8 $23-1/8 $17-7/8 $17-5/8 $19 $20-5/8
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts in the first quarter of 1998 and 1997 were restated for comparative
purposes.
(b) The sum of the quarters may not equal the annual earnings per
share due to changes in shares outstanding.
(c) Based on New York Stock Exchange - Composite transactions.
97
<PAGE> 98
[CONSUMERS ENERGY LOGO]
1998 FINANCIAL STATEMENTS
98
<PAGE> 99
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION CONSUMERS ENERGY COMPANY
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue (in millions) ($) 3,709 3,769 3,770 3,511 3,356
Net income (in millions) (Note 1) ($) 349 321 296 255 226
Net income available to common
stockholder (in millions) ($) 312 284 260 227 202
Cash from operations (in millions) ($) 625 761 672 642 598
Capital expenditures, excluding capital
lease additions and DSM (in millions) ($) 369 360 410 414 447
Total assets (in millions) ($) 7,163 6,949 7,025 6,954 6,809
Long-term debt, excluding current
maturities (in millions) ($) 2,007 1,369 1,900 1,922 1,953
Non-current portion of capital
leases (in millions) ($) 100 74 100 104 108
Total preferred stock (in millions) ($) 238 238 356 356 356
Total preferred securities (in millions) ($) 220 220 100 -- --
Number of preferred shareholders at year-end 5,649 6,178 9,540 10,084 10,599
Book value per common share at year-end ($) 21.94 20.38 19.96 19.00 16.96
Return on average common equity (%) 17.5 16.8 15.9 15.0 14.9
Return on average assets (%) 6.6 6.2 5.7 5.3 4.9
Number of full-time equivalent
employees at year-end
Consumers 8,456 8,640 8,938 9,262 9,409
Michigan Gas Storage 65 66 67 70 73
Electric statistics
Sales (billions of kWh) 40.0 37.9 37.1 35.5 34.5
Customers (in thousands) 1,640 1,617 1,594 1,570 1,547
Average sales rate per kWh (cent) 6.50 6.57 6.55 6.36 6.29
Gas statistics
Sales and transportation deliveries (bcf) 360 420 448 404 409
Customers (in thousands) (a) 1,558 1,533 1,504 1,476 1,448
Average sales rate per mcf ($) 4.56 4.44 4.45 4.42 4.48
</TABLE>
(a) Excludes off-system transportation customers.
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<PAGE> 100
CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers is a combination electric and gas utility company serving the Lower
Peninsula of Michigan and is the principal subsidiary of CMS Energy, a holding
company. Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the automotive
industry.
This Annual Report contains forward-looking statements, as defined by the
Private Securities Litigation Reform Act of 1995. Where any such forward-looking
statements include a statement of the assumptions underlying forward-looking
statements, Consumers cautions that, while such assumptions are believed to be
reasonable and are made in good faith, assumed results almost always vary from
actual results and the difference between assumed and actual results can be
material. The type of assumptions that could materially affect the actual
results are discussed in the Forward-Looking Statements section in this
Management's Discussion and Analysis. More specific risk factors are contained
in various public filings made by Consumers with the SEC. This Annual Report
also describes material contingencies in the Notes to Consolidated Financial
Statements and the readers are encouraged to read such Notes.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
In Millions
Years Ended December 31 1998 1997 Change 1997 1996 Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income available to common stockholder $312 $284 $28 $284 $260 $24
================================================================================================================
</TABLE>
Consumers experienced earnings growth for the sixth consecutive year. This
continued growth includes the reflection of changes in regulation which allowed
Consumers the opportunity to benefit from lower electric power costs and reduced
gas costs. Net income available to the common stockholder, after the cumulative
effect of a change in accounting for property taxes (as described in Note 1),
was $312 million for 1998 compared with $284 million for 1997. The increase in
earnings for 1998 also reflects revised accounting to recognize property tax
expense on a fiscal year basis of the taxing units instead of on a calendar year
basis, resulting in a benefit of $66 million ($43 million after-tax). Net income
for 1998 also reflects increased electric sales, improved earnings from the MCV
Partnership, and an adjustment of prior years' income taxes associated with the
investment tax credit of $6 million. Although other operating and maintenance
expenses were higher than 1997, continued focus on cost control benefited net
income by nearly offsetting the amount spent on performing significant
restoration work on the electric distribution system which suffered damages
caused by several storms. Partially offsetting these increases were the
recognition of a $37 million loss ($24 million after-tax) for the underrecovery
of power costs under the PPA, and decreased gas deliveries due to the extreme
mild temperatures during the 1998 heating season. The improvement of $24 million
in net income for 1997 over 1996 reflects the favorable impact for all of 1997
of an electric rate increase received in February 1996, increased electric
sales, the one-time recognition of interest income for $7 million from a
related-party property sale, increased revenues from the transmission of
electricity for others, improved earnings from the MCV Partnership and an
adjustment of prior years' income taxes associated with non-taxable earnings on
nuclear decommissioning trust funds of $9 million. For further information, see
the Electric and Gas Utility Results of Operations sections of this MD&A and the
Notes To Consolidated Financial Statements.
100
<PAGE> 101
ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 Change 1997 1996 Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$475 $432 $43 $432 $411 $21
================================================================================================================
</TABLE>
Electric pretax operating income for 1998 increased $43 million from the
comparable period in 1997. The increase reflects increased electric deliveries,
continued cost control, and changes in regulation related to the electric
industry restructuring initiatives. The changes provided Consumers the
opportunity to benefit from reduced power supply costs. In the past these cost
reductions would have had no impact on net income because power cost savings
were passed on to Consumers' electric customers. Partially offsetting these
increases were higher general taxes and depreciation associated with additional
plant investment. Electric pretax operating income in 1997 benefited from
increased electric sales, the full effect of a February 1996 electric rate
increase and extensive control of operation and maintenance costs. Partially
offsetting these benefits were lower revenue due to increases in special
contract discounts negotiated with large commercial and industrial customers and
higher depreciation and general taxes expenses. The following table quantifies
these impacts on pretax operating income:
<TABLE>
<CAPTION>
In Millions
- ---------------------------------------------------------------------------------------------------------------
Change Compared to Prior Year 1998 vs 1997 1997 vs 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deliveries (including special contract discounts) $40 $ 5
Lower power supply cost per kWh 20 -
Rate increases and other non-commodity revenue (4) 11
Operation and maintenance (3) 24
General taxes, depreciation and other (10) (19)
--------------------------
Total increase(decrease) in pretax operating income $43 $21
===============================================================================================================
</TABLE>
ELECTRIC DELIVERIES: Total electric deliveries in 1998 were 40 billion kWh, an
increase of 6 percent over 1997. The increase is primarily attributable to an
increase in sales between utility systems and a 3 percent increase in deliveries
to ultimate customers. Total electric deliveries in 1997 were 38 billion kWh, an
increase of 2 percent over 1996 deliveries. The increase in 1997 was the result
of continued economic growth in Michigan and a 1 percent increase in deliveries
to ultimate customers, primarily within the industrial class.
POWER SUPPLY COSTS: Cost increases in both 1998 and 1997 over the prior periods
reflect increased power purchases from outside sources to meet increased sales
demand. In addition, the 1998 cost increase reflects higher internal kWh
generation to meet the increased demand for electricity. The following table
quantifies the changes in electric power costs:
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 Change 1997 1996 Change
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1,175 $1,139 $36 $1,139 $1,087 $52
==============================================================================================================
</TABLE>
101
<PAGE> 102
Consumers purchased $5 million of energy options to ensure a reliable source of
capacity during the summer months of 1998. As a result of weather conditions and
fluctuations in the price of electricity, some options were sold totaling $11
million during June, July, and August 1998. All of the remaining options have
expired. The costs relating to the expired options and income received from the
sale of options were reflected as purchased power costs.
UNCERTAINTIES: Consumers' financial position may be affected by a number of
trends or uncertainties that have, or Consumers reasonably expects could have, a
material impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties are: 1) environmental liabilities arising from
compliance with various federal, state and local environmental laws and
regulations, including potential liability or expenses relating to the Michigan
Natural Resources and Environmental Protection Act and Superfund; 2) capital
expenditures for compliance with the Clean Air Act; 3) suits by two independent
power producers alleging antitrust violations and economic losses due to special
electric contracts signed by Consumers; 4) cost recovery relating to the MCV
Facility and nuclear plant investments and an experimental direct-access
program; 5) electric industry restructuring; 6) implementation of a frozen PSCR
and initiatives to be undertaken to reduce exposure to high energy prices; 7)
after-tax cash underrecoveries associated with power purchases from the MCV
Partnership; and 8) Big Rock decommissioning issues and ongoing issues relating
to the storage of spent fuel and the operating life of Palisades. For detailed
information about these trends or uncertainties, see Note 2, Uncertainties,
incorporated by reference herein.
GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
In Millions
Years Ended December 31 1998 1997 Change 1997 1996 Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$126 $153 $(27) $153 $158 $(5)
===============================================================================================================
</TABLE>
Gas pretax operating income decreased by $27 million in 1998 from the comparable
period in 1997. The decrease is primarily the result of reduced gas deliveries
due to significantly milder temperatures during the 1998 heating season which
was the warmest on record in the company's service territory. After adjusting
for the weather impacts, pretax operating income would have increased by $20
million and $4 million for 1998 and 1997 respectively. The impact of the mild
temperatures on sales was partially tempered by the suspension of Consumers GCR
clause in 1998. Changes in regulation related to the gas industry restructuring
initiatives provided Consumers the opportunity to benefit from low gas prices.
In the past these cost reductions would have had no impact on pretax operating
income because any gas cost savings were passed on to Consumers' gas customers,
see Note 2, Uncertainties, "Gas Rate Matters - Gas Restructuring", for more
detailed information on this matter. Pretax operating income decreased in 1998
as a result of increased depreciation and general taxes associated with
additional plant investments to serve new customers. Gas pretax operating income
decreased in 1997 compared to 1996 by $5 million. The decrease results from
reduced gas deliveries due to warmer winter month temperatures in 1997 and the
loss of an extra day for the 1996 leap year. Revenues were also down in 1997 due
to the elimination of surcharges related to past conservation programs in the
first quarter of 1997 and reduced gas loaning activities. In addition,
depreciation costs and general taxes were higher in 1997 from increased
investments to serve new customers. Offsetting these decreases to pretax
operating income were lower operations and maintenance expenses that resulted
from extensive cost controls. The following table quantifies these impacts on
pretax operating income.
102
<PAGE> 103
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Change Compared to Prior Year 1998 vs 1997 1997 vs 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ (36) $ (13)
Reduced gas cost per mcf 19 -
Gas wholesale and retail services activities 1 (9)
Operation and maintenance (1) 24
General taxes, depreciation and other (10) (7)
----------------------------
Total increase(decrease) in pretax operating income $ (27) $ (5)
===============================================================================================================
</TABLE>
GAS DELIVERIES: System deliveries in 1998, including miscellaneous
transportation, totaled 360 bcf, a decrease of 60 bcf or 14 percent compared to
1997. The decreased deliveries for 1998 compared to 1997 reflect warmer heating
season temperatures in 1998. System deliveries in 1997, including miscellaneous
transportation, totaled 420 bcf, a decrease of 28 bcf or 6 percent compared to
1996. The decreased deliveries for 1997 compared to 1996 reflect warmer
temperatures in 1997 and the loss of an extra day for the 1996 leap year.
COST OF GAS SOLD: The cost decrease for 1998 was the result of decreased sales
and decreased gas prices. The cost decrease for 1997 also was the result of
decreased sales and lower gas prices.
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 Change 1997 1996 Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$564 $694 $(130) $694 $750 $(56)
================================================================================================================
</TABLE>
UNCERTAINTIES: Consumers' financial position may be affected by a number of
trends or uncertainties that have, or Consumers reasonably expects could have, a
material impact on net sales or revenues or income from continuing gas
operations. Such uncertainties are: 1) potential environmental costs at a number
of sites, including sites formerly housing manufactured gas plant facilities, 2)
a statewide experimental gas transportation program, and 3) implementation of a
frozen GCR and initiatives undertaken to protect against gas price increases.
For detailed information about these uncertainties see Note 2, Uncertainties,
incorporated by reference herein.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers derives cash from operations from the sale and
transportation of natural gas and the generation, transmission and sale of
electricity. Cash from operations totaled $625 million and $761 million for 1998
and 1997, respectively. The $136 million decrease resulted primarily from a $46
million decrease in the sale of accounts receivable, a $24 million increase in
gas inventories, and from the timing of cash payments related to normal
operations; for additional information see note 12, Supplemental Cash Flow
Information. Other items included in income but which had no effect on cash flow
were a one-time change in accounting for property taxes resulting in a $66
million ($43 million after-tax) gain and the recognition of a $37 million loss
($24 million after-tax) for the underrecovery of power costs under the
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<PAGE> 104
PPA. Consumers uses operating cash primarily to maintain and expand electric and
gas systems, to retire portions of long-term debt, and to pay dividends.
INVESTING ACTIVITIES: Cash used in investing activities totaled $(374) million
and $(395) million for 1998 and 1997, respectively. The change of $21 million
was primarily the result of receiving $27 million from the sale of two
non-utility partnerships, $12 million distribution from FMLP and a $36 million
increase in nuclear decommissioning trust funds previously collected from
electric customers for decommissioning Big Rock. Offsetting this increase is a
$37 million increase in the cost of plant retired and a $14 million increase in
Electric Restructuring Implementation Plan expenditures.
FINANCING ACTIVITIES: Cash used in financing activities totaled $(233) and
$(363) million for 1998 and 1997, respectively. The change of $130 million is
primarily the result of a $100 million contribution from Consumers' common
stockholder, a net increase in cash of $36 million due to refinancing and
issuance of Consumers' debt, $9 million decrease in capital lease payments and
$10 million decrease in preferred stock dividends. Offsetting this increase was
a $23 million increase in the payment of common stock dividends, reflecting
increased earnings.
OTHER INVESTING AND FINANCING MATTERS: Consumers is authorized by FERC to issue
securities and guarantees. Consumers has a credit facility, lines of credit and
a trade receivable sale program in place as anticipated sources of funds needed
to fulfill, in whole or in part, material commitments for capital expenditures.
For detailed information about these source of funds, see Note 1, "Nuclear Fuel
Cost" and Note 3, "Authorization", "Short-Term Financings" and "Preferred
Securities".
At December 31, 1998, Consumers' capital structure consisted of 39 percent
common equity, 9 percent preferred equity (including preferred stock and
preferred securities), and 52 percent long- and short-term debt (including
capital leases and notes payable).
OUTLOOK
CAPITAL EXPENDITURES OUTLOOK
Consumers estimates the following capital expenditures, including new lease
commitments, by company and by business segment over the next three years. These
estimates are prepared for planning purposes and are subject to revision.
104
<PAGE> 105
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
In Millions
Years Ended December 31 1999 2000 2001
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Construction $476 $493 $473
Nuclear fuel lease 11 - 16
Capital leases other than nuclear fuel 16 17 16
- ----------------------------------------------------------------------------------------------------------------
$503 $510 $505
================================================================================================================
Electric utility operations (a)(b) $380 $385 $385
Gas utility operations (a) 123 125 120
- ----------------------------------------------------------------------------------------------------------------
$503 $510 $505
================================================================================================================
</TABLE>
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and gas
utility businesses.
(b) These amounts do not include preliminary estimates for capital expenditures
possibly required to comply with recently revised national air quality standards
under the Clean Air Act. For further information see Note 2, Uncertainties.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Consumers expects average annual growth of 2.4 percent per year in
electric system deliveries over the next five years, absent the impact of
restructuring on the industry and its regulation in Michigan. Abnormal weather,
changing economic conditions, or the developing competitive market for
electricity may affect actual electric sales in future periods.
RESTRUCTURING: Consumers' retail electric business is affected by competition.
To meet its challenges, Consumers entered into multi-year contracts with some of
its largest industrial customers to serve certain facilities. The MPSC has
approved these contracts as part of its phased introduction to competition.
Certain customers have the option of terminating their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide direct access
to the interstate transmission grid for wholesale transactions. Consumers and
Detroit Edison disagree on the effect of the orders on the Michigan Electric
Power Coordination Center pool. Consumers proposes to maintain the benefits of
the pool through at least December 2000, while Detroit Edison contends that the
pool agreement should be terminated immediately. Among Consumers' alternatives
in the event of the pool being terminated would be joining an independent system
operator. FERC has indicated this preference for structuring the operations of
the electric transmission grid.
For material changes relating to the restructuring of the electric utility
industry, see Note 2, Uncertainties,"Electric Rate Matters - Electric
Restructuring", incorporated by reference herein.
ELECTRIC APPLICATION OF SFAS 71: Consumers applies utility accounting standard,
SFAS 71. At December 31, 1998, Consumers believed that the generation segment of
its business was still subject to cost-based rate regulation due to legislative
and regulatory uncertainty about the status of Consumers' continuing obligation
to provide generation service to customers. Subsequent to year-end, Consumers
received MPSC electric restructuring orders which among other things identified
the terms and timing for implementing electric restructuring in Michigan.
Consumers anticipates that it will discontinue application of SFAS 71
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<PAGE> 106
for the generation segment of its business in the first quarter of 1999 as
Consumers is now preparing to implement electric customer direct access.
According to current accounting standards, Consumers can continue to carry its
generation-related regulatory assets or liabilities for the part of the business
being deregulated if deregulatory legislation or an MPSC rate order allows the
collection of cash flows from its regulated transmission and distribution
customers to recover these specific costs or settle obligations. A February 1998
MPSC order allows Consumers to fully recover its Transition Costs. At December
31, 1998, Consumers had $259 million of generation-related net regulatory assets
recorded on its balance sheet, and a net investment in generation facilities of
$1.3 billion included in electric plant and property.
GAS BUSINESS OUTLOOK
GROWTH: Consumers currently anticipates gas deliveries, including gas customer
choice deliveries (excluding transportation to the MCV Facility and off-system
deliveries), to grow at an average annual rate of between one and two percent
over the next five years based primarily on a steadily growing customer base.
Actual gas deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions, and the level of
natural gas consumption. Consumers also offers a variety of energy-related
services to its customers focused upon appliance maintenance, home safety,
commodity choice and assistance to customers purchasing heating, ventilation and
air conditioning equipment.
RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement a statewide three-year experimental gas transportation program,
eventually allowing 300,000 residential, commercial and industrial retail gas
sales customers to choose their gas supplier. For further information, regarding
restructuring of Gas Business see Note 2, Uncertainties, "Gas Restructuring"
incorporated by reference herein.
OTHER: Effective January 1, 1999, Consumers was allowed to solicit MichCon and
SEMCO Energy Gas Company customers due to a three-year experimental program
ordered by the MPSC allowing customers a choice of gas suppliers. As of February
8, 1999, Consumers has signed up 650 of MichCon's customers and 300 of SEMCO
Energy Gas Company's customers.
OTHER MATTERS
NEW ACCOUNTING STANDARDS
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities. Also in 1998, the FASB issued SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, and the Emerging Issues Task
Force published Issue 98-10, Accounting for Energy Trading and Risk Management
Activities. These statements, with the exception of SFAS 133, will be effective
in 1999. SFAS 133 will be effective in 2000. Consumers does not expect the
application of these standards to materially affect its financial position,
liquidity or results of operations.
YEAR 2000 COMPUTER MODIFICATIONS
Consumers uses software and related technologies throughout its businesses that
the year 2000 date change could affect and, if uncorrected, could cause
Consumers to, among other things, delay issuance of bills or
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<PAGE> 107
reports, issue inaccurate bills, report inaccurate data, incur generating plant
outages, or create energy delivery uncertainties. In 1995, Consumers established
a Year 2000 Program to ensure the continued operation of its business at the
turn of the century. Consumers' efforts included dividing the programs requiring
modification between critical and noncritical programs. A formal methodology was
established to identify critical business functions and risk scenarios, to
correct problems identified, to develop test plans and expected results, and to
test the corrections made. Consumers' Year 2000 Program involves an aggressive,
comprehensive four-phase approach, including impact analysis, remediation,
compliance review, and monitoring/contingency planning.
The impact analysis phase includes the analysis, inventory, prioritization and
remediation plan development for all technology essential to core business
processes. The remediation phase involves testing and implementation of
remediated technology. A mainframe test environment was established in 1997 and
a test environment for network servers and stand-alone personal computers was
established in mid-1998. All essential corporate business systems have been, or
will be, tested in these test environments. The compliance review phase includes
the assembling of compliance documentation for each technology component as
remediation efforts are completed, and additional verification testing of
essential technology where necessary. The monitoring/contingency planning phase
includes compliance monitoring to ensure that year 2000 problems are not
reintroduced into remediated technology, as well as the development of
contingency plans to address reasonably likely risk scenarios.
STATE OF READINESS: Consumers is managing traditional IT, which consists of
essential business systems (such as payroll, billing and purchasing) and
infrastructure (including mainframe, wide area network, local area networks,
personal computers, radios and telephone systems). Process control computers and
embedded systems contained in buildings, equipment and energy supply and
delivery systems are also being managed.
Essential goods and services for Consumers are electric fuel supply, gas fuel
supply, independent electric power supplies, facilities, electronic commerce,
telecommunications network carriers, financial institutions, purchasing vendors,
and software and hardware technology vendors. Consumers is addressing the
preparedness of these businesses and their risk through readiness assessment
questionnaires.
The status of Consumers' Year 2000 Program by phase, with target dates for
completion and current percentage complete based upon software and hardware
inventory counts as of December 31, 1998, is as follows:
<TABLE>
<CAPTION>
MONITORING/
IMPACT COMPLIANCE CONTINGENCY
ANALYSIS REMEDIATION REVIEW PLANNING
----------- ----------- ------------- -----------
SYSTEMS (a) (b) (a) (b) (a) (b) (a) (b)
- -------
<S><C>
Electric 3/98 100% 6/99 78% 6/99 66% 6/99 50%
Gas 3/98 100% 6/99 73% 6/99 38% 6/99 10%
Corporate 3/98 100% 6/99 75% 6/99 18% 6/99 10%
Operating Services 3/98 100% 6/99 81% 6/99 47% 6/99 10%
Information Technology 3/98 100% 6/99 55% 6/99 55% 6/99 10%
Essential Goods
& Services 6/99 47% N/A N/A (c)
</TABLE>
(a) Target date for completion.
(b) Current percentage complete.
107
<PAGE> 108
(c) Contingency planning for essential goods and services is incorporated into
contingency planning for each major system presented.
COST OF REMEDIATION: Consumers expenses spending for software modifications as
incurred, and capitalizes and amortizes the cost for new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is $22
million. Costs incurred through December 31, 1998 were $15 million. Consumers'
annual Year 2000 Program costs represent approximately 1% to 10% of a typical
Consumers' annual information technology budget. Year 2000 compliance work is
being funded primarily from operations. To date, the commitment of Consumers
resources to the year 2000 issue has not deferred any information technology
projects which could have a material adverse affect on Consumers' financial
position, liquidity or results of operations.
RISK ASSESSMENT: Consumers considers the most reasonably likely worst-case
scenarios to be: (1) a lack of communications to dispatch crews to electric or
gas emergencies; (2) a lack of communications to generating units to balance
electrical load; and (3) power shortages due to the lack of stability of the
regional or national electric grid. These scenarios could result in Consumers
not being able to generate or distribute enough energy to meet customer demand
for a period of time, which could result in lost sales and profits, as well as
legal liability. Year 2000 remediation and testing efforts are concentrating on
these risk areas and will continue through the end of 1999. Contingency plans
will be revised and executed to further mitigate the risks associated with these
scenarios.
CONTINGENCY PLANS: Contingency planning efforts are currently underway for all
systems and providers of essential goods and services. Extensive contingency
plans are already in place in many locations and are currently being revised for
reasonably likely worst-case scenarios related to year 2000 issues. In many
cases, Consumers already has arrangements with multiple vendors of similar goods
and services so that in the event that one cannot meet its commitments, others
may be able to. Current contingency plans provide for manual dispatching of
crews and manual coordination of electrical load balancing and are being revised
to provide for radio or satellite communications. Coordinated contingency
planning efforts are in progress with the North American Electric Reliability
Council and its Regional Reliability Councils to minimize risk to electric
generation, transmission and distribution systems.
EXPECTATIONS: Consumers does not expect that the cost of these modifications
will materially affect its financial position, liquidity, or results of
operations. There can be no guarantee, however, that these costs, plans or time
estimates will be achieved, and actual results could differ materially.
Because of the integrated nature of Consumers' business with other energy
companies, utilities, jointly owned facilities operated by other entities, and
business conducted with suppliers and large customers, Consumers may be
indirectly affected by year 2000 compliance complications. At this time,
Consumers is unable to anticipate the magnitude of the operational or financial
impact of year 2000 issues.
DERIVATIVES AND HEDGES
MARKET RISK INFORMATION: Consumers' exposure to market risk sensitive
instruments and positions include, but are not limited to, changes in interest
rates, debt prices and equity prices in which Consumers holds less than a 20
percent interest. For purposes of disclosure requirements, Consumers performed a
10 percent sensitivity analysis on its derivative and non-derivative financial
instruments. The model measures the change in the net present values based on a
hypothetical 10 percent adverse change in the market rates to determine the
potential loss in fair values, cash flows and earnings. Losses in excess of the
amounts determined could occur if market rates or prices exceed the 10 percent
shift used for the analysis. Management does not believe that a sensitivity
analysis alone provides an accurate or reliable
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<PAGE> 109
method for monitoring and controlling risk. Therefore, Consumers relies on the
experience and judgment of senior management to revise strategies and adjust
positions as they deem necessary.
For purposes of the analysis below, Consumers has not quantified short-term
exposures to hypothetically adverse changes in the price or nominal amounts
associated with inventories, and trade receivables and payables. Furthermore,
all derivative financial instruments are entered into for purposes other than
trading. In the case of hedges, management believes that any losses incurred on
derivative instruments used as a hedge would be offset by the opposite movement
of the underlying hedged item.
EQUITY SECURITY PRICE RISK: Consumers has an equity investment in which it holds
less than a 20 percent interest in the entity. A hypothetical 10 percent adverse
shift in market price would result in a $17 million change in its investment and
equity since this equity instrument is currently marked-to-market through
equity. Consumers believes that such an adverse change would not have a material
effect on its consolidated financial position, results of operation or cash
flows.
DEBT PRICE AND INTEREST RATE RISK: Management uses a combination of fixed-rate
and variable-rate debt to reduce interest rate exposure. Interest rate swaps and
rate locks may be used to adjust exposure when deemed appropriate, based upon
market conditions. These strategies attempt to provide and maintain the lowest
cost of capital.
As of December 31, 1998, Consumers had outstanding $935 million of variable-rate
debt. In order to minimize adverse interest-rate shifts, Consumers entered into
fixed interest-rate swaps for a notional amount of $190 million. Assuming a
hypothetical 10 percent adverse shift in market interest rates, Consumers'
exposure to earnings is limited to $4 million. As of December 31, 1998,
Consumers has outstanding fixed-rate debt including fixed-rate swaps of $2.143
billion with a fair value of $2.165 billion. Assuming a hypothetical 10 percent
adverse shift in market rates, Consumers would have an exposure of $125 million
to its fair value. Consumers believes that any adverse change in debt price and
interest rates would not have a material effect on its consolidated financial
position, results of operation or cash flows.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans," as well as variation on such
words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These statements are based upon
various assumptions involving judgements with respect to the future including,
among others, the ability to achieve revenue enhancements; national, regional,
and local economic competitive and regulatory conditions and developments;
capital and financial market conditions including interest rates; weather
conditions; adverse regulatory or legal decisions, including environmental laws
and regulations; the pace of deregulation of the natural gas and electric
industries; energy markets, including the timing and extent of changes in
commodity prices for oil, coal, natural gas, natural gas liquids, electricity
and certain related products; the timing and success of business development
efforts; potential disruption or interruption of facilities or operations due to
accidents or political events; nuclear power and other technological
developments; and other uncertainties, all of which are difficult to predict and
many of which are beyond the control of Consumers. Accordingly, while Consumers
believes that the assumed results are reasonable, there can be no assurance that
they will approximate actual results. Consumers disclaims any obligation to
update or revise forward-looking statements, whether as a result of new
information, future events or otherwise. Certain risk factors are detailed from
time to time in various public filings made by Consumers with the SEC.
109
<PAGE> 110
CONSOLIDATED STATEMENTS OF INCOME CONSUMERS ENERGY COMPANY
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE Electric $2,606 $2,515 $2,446
Gas 1,051 1,204 1,282
Other 52 50 42
---------------------------------
3,709 3,769 3,770
- -----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES Operation
Fuel for electric generation 317 297 296
Purchased power - related parties 573 599 589
Purchased and interchange power 285 243 202
Cost of gas sold 564 694 750
Other 544 542 586
---------------------------------
2,283 2,375 2,423
Maintenance 173 170 174
Depreciation, depletion and amortization 403 391 371
General taxes 201 200 191
---------------------------------
3,060 3,136 3,159
- -----------------------------------------------------------------------------------------------------------------
PRETAX OPERATING Electric 475 432 411
INCOME Gas 126 153 158
Other 48 48 42
---------------------------------
649 633 611
- -----------------------------------------------------------------------------------------------------------------
OTHER INCOME Loss on MCV power purchases (37) - -
(DEDUCTIONS) Dividends and interest from affiliates 14 24 17
Accretion income (Note 1) 6 8 10
Accretion expense (Note 1) (16) (17) (22)
Other, net - (2) (4)
----------------------------------
(33) 13 1
- -----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES Interest on long-term debt 138 138 139
Other interest 38 36 29
Capitalized interest (1) (1) (2)
----------------------------------
175 173 166
- -----------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES 441 473 446
INCOME TAXES 135 152 150
----------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 306 321 296
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PROPERTY TAXES,
NET OF $23 TAX (NOTE 1) 43 -- --
----------------------------------
NET INCOME 349 321 296
PREFERRED STOCK DIVIDENDS 19 25 28
PREFERRED SECURITIES DISTRIBUTIONS 18 12 8
----------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 312 $ 284 $ 260
=================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
110
<PAGE> 111
CONSOLIDATED STATEMENTS OF CASH FLOWS CONSUMERS ENERGY COMPANY
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM Net income $ 349 $ 321 $ 296
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $51, $50 and $49,
respectively) 403 391 371
Loss on MCV power purchases 37 - -
Capital lease and other amortization 36 44 40
Deferred income taxes and investment tax credit 21 13 48
Accretion expense 16 17 22
Accretion income - abandoned Midland project (6) (8) (10)
Undistributed earnings of related parties (50) (47) (40)
Power purchases (64) (62) (63)
Cumulative effect of accounting change (66) - -
Changes in other assets and liabilities (51) 92 8
----------------------------
Net cash provided by operating activities 625 761 672
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Capital expenditures (excludes assets placed under
INVESTING ACTIVITIES capital lease) (369) (360) (410)
Cost to retire property, net (83) (46) (31)
Investments in nuclear decommissioning trust funds (51) (50) (49)
Investment in Electric Restructuring Implementation Plan (17) (3) -
Proceeds from nuclear decommissioning trust funds 53 17 -
Associated company preferred stock redemption 50 50 -
Proceeds from the sale of two non-utility partnerships 27 - -
Proceeds from FMLP 12 - -
Other 4 (3) (4)
----------------------------
Net cash used in investing activities (374) (395) (494)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Proceeds from senior notes & bank loans 1,046 - 23
FINANCING ACTIVITIES Contribution from (return of equity to) stockholder 50 (50) 13
Retirement of bonds and other long-term debt (854) (50) (37)
Payment of common stock dividends (241) (218) (200)
Increase (decrease) in notes payable, net (162) 44 (8)
Payment of capital lease obligations (35) (44) (40)
Payment of preferred stock dividends (19) (29) (28)
Preferred securities distributions (18) (12) (8)
Retirement of preferred stock - (120) -
Proceeds from preferred securities - 116 97
----------------------------
Net cash used in financing activities (233) (363) (188)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENT 18 3 (10)
Cash and temporary cash investments - Beginning of year 7 4 14
----------------------------
End of year $ 25 $ 7 $ 4
================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 161 $ 166 $ 143
Income taxes paid (net of refunds) 153 116 119
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 46 $ 4 $ 28
Other assets placed under capital leases 14 7 3
================================================================================================================
</TABLE>
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
111
<PAGE> 112
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS CONSUMERS ENERGY COMPANY
ASSETS IN MILLIONS
DECEMBER 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PLANT (AT ORIGINAL COST) Electric $6,720 $6,491
Gas 2,360 2,322
Other 25 24
----------------------------
9,105 8,837
Less accumulated depreciation, depletion
and amortization 4,862 4,603
----------------------------
4,243 4,234
Construction work-in-progress 165 145
----------------------------
4,408 4,379
- ------------------------------------------------------------------------------------------------------------------
INVESTMENTS Stock of affiliates 241 278
First Midland Limited Partnership 240 242
Midland Cogeneration Venture Limited Partnership 209 171
Other - 7
----------------------------
690 698
- ------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS Cash and temporary cash investments at cost, which
approximates market 25 7
Accounts receivable and accrued revenue, less allowances
of $5 in 1998 and $6 in 1997 114 82
Accounts receivable - related parties 63 62
Inventories at average cost
Gas in underground storage 219 197
Materials and supplies 67 63
Generating plant fuel stock 43 35
Postretirement benefits 25 25
Deferred income taxes - 22
Prepaid property taxes and other 162 161
----------------------------
718 654
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS Nuclear decommissioning trust funds 557 486
Postretirement benefits 372 404
Abandoned Midland project 71 93
Other 347 235
----------------------------
1,347 1,218
----------------------------
TOTAL ASSETS $7,163 $6,949
==================================================================================================================
</TABLE>
112
<PAGE> 113
<TABLE>
<CAPTION>
Consumers Energy Company
STOCKHOLDERS' INVESTMENT AND LIABILITIES IN MILLIONS
DECEMBER 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CAPITALIZATION (NOTE 3) Common stockholder's equity
Common stock $ 841 $ 841
Paid-in capital 502 452
Revaluation capital 68 58
Retained earnings since December 31, 1992 434 363
--------------------------------
1,845 1,714
Preferred stock 238 238
Company-obligated mandatorily redeemable
preferred securities of:
Consumers Power Company Financing I (a) 100 100
Consumers Energy Company Financing II (a) 120 120
Long-term debt 2,007 1,369
Non-current portion of capital leases 100 74
--------------------------------
4,410 3,615
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES Current portion of long-term debt and capital leases 152 579
Notes payable 215 377
Accrued taxes 238 244
Accounts payable 190 171
Accounts payable - related parties 79 79
Power purchases 47 47
Accrued interest 36 32
Deferred income taxes 9 -
Accrued refunds 11 12
Other 138 136
--------------------------------
1,115 1,677
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES Deferred income taxes 666 688
Postretirement benefits 456 489
Deferred investment tax credit 134 149
Power purchases 121 133
Regulatory liabilities for income taxes, net 87 54
Other 174 144
--------------------------------
1,638 1,657
--------------------------------
Commitments and Contingencies (Notes 1, 2, 8 and 11)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,163 $6,949
==================================================================================================================
</TABLE>
(a) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36% subordinated deferrable interest notes due 2015 from
Consumers. The primary asset of Consumers Energy Company Financing II is $124
million principal amount of 8.20% subordinated deferrable interest notes due
2027 from Consumers. For further discussion, see Note 3.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
113
<PAGE> 114
CONSOLIDATED STATEMENTS OF LONG-TERM DEBT CONSUMERS ENERGY COMPANY
<TABLE>
<CAPTION>
In Millions
December 31 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST MORTGAGE BONDS SERIES (%) DUE
8-3/4 1998 $ - $ 248
6-5/8 1998 - 45
6-7/8 1998 - 43
8-7/8 1999 64 200
7-1/2 2001 - 57
7-1/2 2002 - 62
6-3/8 2003 300 300
7-3/8 2023 264 300
-----------------
628 1,255
SENIOR NOTES 6-3/8 2008 250 -
6-7/8 2018 225 -
6-1/5 2008 250 -
6-1/2 2018 200 -
6-1/2 2028 150 -
-----------------
1,703 1,255
LONG-TERM BANK DEBT 175 400
POLLUTION CONTROL REVENUE BONDS 131 131
NUCLEAR FUEL DISPOSAL (A) 117 111
OTHER 22 25
-----------------
PRINCIPAL AMOUNT OUTSTANDING 2,148 1,922
CURRENT AMOUNTS (119) (545)
NET UNAMORTIZED DISCOUNT (2) (8)
-----------------
TOTAL LONG-TERM DEBT $2,007 $1,369
===============================================================================
</TABLE>
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS In Millions
<TABLE>
<CAPTION>
First Mortgage Improvement Long-Term
Bonds Fund Bank Debt Other Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 $ 64 $1 $50 $ 4 $119
2000 - - - 10 10
2001 - - - 4 4
2002 - - 41 4 45
2003 300 - 84 4 388
===============================================================================
</TABLE>
(a) Due date uncertain (see Note 1)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
114
<PAGE> 115
CONSOLIDATED STATEMENTS OF PREFERRED STOCK CONSUMERS ENERGY COMPANY
<TABLE>
<CAPTION>
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
CLASS A PREFERRED STOCK
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption 2.08 25.00 (a) 8,000,000 8,000,000 194 194
-------------
TOTAL PREFERRED STOCK $238 $238
=============================================================================================================
</TABLE>
(a) Redeemable beginning April 1, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
115
<PAGE> 116
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
CONSUMERS ENERGY COMPANY
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK At beginning and end of period (a) $ 841 $ 841 $ 841
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL At beginning of period 452 504 491
Preferred stock reacquired - (2) -
Stockholder's contribution 100 - 13
Return of stockholder's contribution (50) (50) -
--------------------------------
At end of period 502 452 504
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL At beginning of period 58 37 29
Change in unrealized investment - gain (b) 10 21 8
--------------------------------
At end of period 68 58 37
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS At beginning of period 363 297 237
Net income (b) 349 321 296
Cash dividends declared - Common Stock (241) (218) (200)
Cash dividends declared - Preferred Stock (19) (25) (28)
Preferred securities distributions (18) (12) (8)
--------------------------------
At end of period 434 363 297
--------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,845 $1,714 $1,679
================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods
presented.
(b) Disclosure of Comprehensive Income:
Revaluation capital
Unrealized investment - gain, net of tax of $6, $11 and $4, respectively $ 10 $ 21 $ 8
Net income 349 321 296
--------------------------------
Total Comprehensive Income $ 359 $ 342 $ 304
================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
116
<PAGE> 117
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers is a combination electric and gas utility company
serving the Lower Peninsula of Michigan and is the principal subsidiary of CMS
Energy, a holding company. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
BASIS OF PRESENTATION: The consolidated financial statements include Consumers
and its wholly owned subsidiaries. The financial statements are prepared in
conformity with generally accepted accounting principles and include the use of
management's estimates. Consumers uses the equity method of accounting for
investments in its companies and partnerships where it has more than a 20
percent but less than a majority ownership interest and includes these results
in operating income.
ACCRETION INCOME AND EXPENSE: In 1991, the MPSC allowed Consumers to recover a
portion of its abandoned Midland investment over a 10-year period, but did not
allow Consumers to earn a return on that amount. Consumers reduced the
recoverable investment to the present value of the future recoveries. During the
recovery period, Consumers adjusts the unrecovered asset to its present value.
It reflects this adjustment as accretion income. Conversely, Consumers recorded
a loss in 1992 for the present value of its estimated future underrecoveries of
power costs resulting from purchases from the MCV Partnership (see Note 2). It
now recognizes accretion expense annually to reflect the time value of money on
the recorded loss.
GAS INVENTORY: Consumers uses the weighted average cost method for valuing
working gas inventory. It records cushion gas, which is gas stored to maintain
reservoir pressure for recovery of working gas, in the appropriate gas utility
plant account. Consumers stores gas inventory in its underground storage
facilities.
MAINTENANCE, DEPRECIATION AND DEPLETION: Consumers charges property repairs and
minor property replacements to maintenance expense. Depreciable property retired
or sold, plus cost of removal (net of salvage credits), is charged to
accumulated depreciation. Consumers bases depreciation provisions for utility
plant on straight-line and units-of-production rates approved by the MPSC. The
composite depreciation rate for electric utility property was 3.5 percent for
1998, 3.6 percent for 1997 and 3.5 percent for 1996. The composite rate for gas
utility plant was 4.2 percent for 1998, 4.1 percent for 1997 and 4.2 percent for
1996. The composite rate for other plant and property was 7.4 percent for 1998,
8.2 percent for 1997 and 5.5 percent for 1996.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense based
on the quantity of heat produced for electric generation. Interest on leased
nuclear fuel is expensed as incurred. Under current federal law, as confirmed by
court decision, the DOE was to begin accepting deliveries of spent nuclear fuel
by January 31, 1998 for disposal. For fuel used after April 6, 1983, Consumers
charges disposal costs to nuclear fuel expense, recovers them through electric
rates and remits to the DOE quarterly. Consumers elected to defer payment for
disposal of spent nuclear fuel burned before April 7, 1983. At December 31,
1998, Consumers had a recorded liability to the DOE of $117 million, including
interest, which is payable upon the first delivery of spent nuclear fuel to the
DOE. Consumers recovered through electric rates the
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<PAGE> 118
amount of this liability, excluding a portion of interest. In January 1997, in
response to the DOE's declaration that it would not begin to accept spent
nuclear fuel deliveries in 1998, Consumers and other utilities filed suit
in federal court. A decision was issued by the court in late 1997 affirming the
DOE's duty to take delivery of spent fuel, but was not specific as to the relief
available for failure of the DOE to comply. Further litigation brought by
Consumers and others in 1998 is intended to produce specific monetary relief for
the DOE's failure to comply. In January 1999, federal legislation was
reintroduced in the House of Representatives to clarify the timing of the DOE's
obligation to accept spent nuclear fuel and to direct the DOE to establish an
integrated spent fuel management system that includes designing and constructing
an interim storage facility in Nevada. Similar legislation is expected to be
reintroduced in the Senate.
NUCLEAR PLANT DECOMMISSIONING: Consumers collected $51 million in 1998 from its
electric customers for decommissioning of its two nuclear plants. Amounts
collected from electric retail customers and deposited in trusts (including
trust earnings) are credited to accumulated depreciation. In 1996, Consumers
received a decommissioning order from the MPSC that estimated decommissioning
costs for Big Rock and Palisades to be $344 million and $599 million (in 1998
dollars), respectively. Consumers filed with the MPSC in March 1998
site-specific decommissioning cost estimates for Big Rock and Palisades,
assuming that each plant site will eventually be restored to conform with the
adjacent landscape, and that all contaminated equipment will be disassembled and
disposed of in a licensed burial facility. The revised estimated decommissioning
costs for Big Rock and Palisades are $304 million and $541 million (in 1998
dollars), respectively. The decreases in cost from previous estimates are
principally due to the Big Rock immediate dismantlement and reductions in
decommissioning costs. Consumers has determined that the current decommissioning
surcharge will be sufficient to provide for decommissioning of its nuclear
plants and anticipates a new MPSC order in early 1999. After retirement of
Palisades, Consumers plans to maintain the facility in protective storage if
radioactive waste disposal facilities are not available. Consumers will incur
most of the Palisades decommissioning costs after the plant's NRC operating
license expires. When the Palisades' NRC license expires in 2007, the trust
funds are currently estimated to have accumulated $719 million. Consumers
estimates that at the time Palisades is fully decommissioned in the year 2046,
the trust funds will have provided $1.9 billion, including trust earnings, over
this decommissioning period. At December 31, 1998, Consumers had an investment
in nuclear decommissioning trust funds of $376 million for Palisades and $181
million for Big Rock.
Big Rock was closed permanently in 1997 because management determined that it
would be uneconomical to operate in an increasingly competitive environment. The
plant was originally scheduled to close on May 31, 2000, at the end of the
plant's operating license. The MPSC has allowed Consumers to continue collecting
decommissioning surcharges through December 31, 2000. Plant decommissioning
began in 1997 and may take five to ten years to return the site to its original
condition. Consumers has spent $75 million for the decommissioning and withdrew
$68 million from the Big Rock nuclear decommissioning trust fund.
RECLASSIFICATIONS: Consumers has reclassified certain prior year amounts for
comparative purposes. These reclassifications did not affect consolidated net
income for the years presented.
RELATED-PARTY TRANSACTIONS: Consumers' investment in Enterprises' preferred
stock was $150 million at December 31, 1998 and $200 million at December 31,
1997. Beginning in 1997, Enterprises commenced a five-year redemption program of
$50 million per year. In addition, Consumers has an investment in three million
shares of CMS Energy Common Stock with a fair value totaling $142 million at
December 31, 1998 (see Note 5). From these two investments, Consumers received
dividends on affiliates' common and preferred stock totaling $14 million, $17
million, and $17 million in 1998, 1997 and 1996 respectively. In addition,
Consumers recovered $7 million of interest income in 1997 related to the sale of
land to an affiliate.
118
<PAGE> 119
Consumers purchases a portion of its gas from CMS Oil and Gas. The purchases for
the years ended 1998, 1997 and 1996 were $24 million, $25 million and $24
million, respectively. In 1998, 1997 and 1996, Consumers purchased $51 million,
$51 million and $50 million, respectively, of electric generating capacity
and energy from affiliates of Enterprises. Consumers and its subsidiaries sold,
stored and transported natural gas and provided other services to the MCV
Partnership totaling $13 million, each year, for 1998, 1997 and 1996. For
additional discussion of related-party transactions with the MCV Partnership and
the FMLP, see Notes 2 and 11. Other related-party transactions are immaterial.
UTILITY REGULATION: Consumers accounts for the effects of regulation based on a
regulated utility accounting standard (SFAS 71). As a result, the actions of
regulators affect when revenues, expenses, assets and liabilities are
recognized. SFAS 121 imposes stricter criteria for retention of
regulatory-created assets by requiring that such assets be probable of future
recovery at each balance sheet date. Management believes these assets will be
recovered.
The following regulatory assets (liabilities), which include both current and
non-current amounts, are reflected in the Consolidated Balance Sheets. These
costs are being recovered through rates over periods of up to 14 years.
<TABLE>
<CAPTION>
In Millions
- ---------------------------------------------------------------------------------------
December 31 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits (Note 7) $ 397 $ 429
Income taxes (Note 4) 148 172
Abandoned Midland project 71 93
Manufactured gas plant sites (Note 2) 48 47
DSM - deferred costs 32 46
Uranium enrichment facility 20 22
Other 38 28
------------------------
Total regulatory assets $ 754 $ 837
=======================================================================================
Income taxes (Note 4) $(235) $(226)
DSM - deferred revenue (24) (24)
------------------------
Total regulatory liabilities $(259) $(250)
=======================================================================================
</TABLE>
Consumers anticipates that it will discontinue application of SFAS 71 for the
generation segment of its business in the first quarter of 1999 as Consumers is
now preparing to implement electric customer direct access.
RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS: Consumers and its
subsidiaries use derivative instrument including swaps and options, to manage
exposure to fluctuations in interest rates and commodity prices, respectively.
To qualify for hedge accounting, derivatives must meet the following criteria:
1) the item to be hedged exposes the enterprise to price and interest rate risk;
and 2) the derivative reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counter parties, including
financial institutions and energy marketers, fail to perform under the
agreements. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such counter
parties. The risk
119
<PAGE> 120
of nonperformance by the counter parties is considered remote.
Consumers enters into interest rate swap agreements to exchange variable rate
interest payment obligations for fixed rate obligations without exchanging the
underlying notional amounts. These agreements convert variable rate debt to
fixed rate debt in order to reduce the impact of interest rate fluctuations. The
notional amounts parallel the underlying debt levels and are used to measure
interest to be paid or received and do not represent the exposure to credit
loss.
Consumers has entered into and will enter into electric option contracts to
ensure a reliable source of capacity to meet its customers' electric
requirements and to limit its risk associated with electricity price increases.
It is management's intent to take physical delivery of the commodity. Consumers
continuously evaluates its daily capacity needs and sells the option contracts,
if marketable, when it has excess daily capacity. Consumers' maximum exposure
associated with these options is limited to premiums paid.
OTHER: For significant accounting policies regarding income taxes, see Note 4;
for executive incentive compensation, see Note 6; and for pensions and other
postretirement benefits, see Note 7.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: In 1998 Consumers implemented SFAS
130, Reporting Comprehensive Income, SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, and SFAS 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components. Equity
adjustments related to unrealized investment gains and losses (net of tax),
along with consolidated net income, comprise comprehensive income. SFAS 131 and
132 require expanded disclosure concerning segments of an enterprise and pension
and other postretirement benefits, see Notes 7 and 10.
CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES: During the first quarter of
1998, Consumers implemented a change in the method of accounting for property
taxes so that such taxes are recognized during the fiscal period of the taxing
authority for which the taxes are levied. This change better matches property
tax expense with the services provided by the taxing authorities, and is
considered the most acceptable basis of recording property taxes. Prior to 1998,
Consumers recorded property taxes monthly during the year following the
assessment date (December 31). The cumulative effect of this one-time change in
accounting increased other income by $66 million, and earnings, net of tax, by
$43 million. The pro forma effect on prior years' consolidated net income of
retroactively recording property taxes as if the new method of accounting had
been in effect for all periods presented is not material.
2: UNCERTAINTIES
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: The Clean Air Act limits emissions of sulfur
dioxide and nitrogen oxides and requires emissions and air quality monitoring.
Consumers currently operates within these limits and meets current emission
requirements. The Clean Air Act requires the EPA to periodically review the
effectiveness of the national air quality standards in preventing adverse health
effects, and in 1997 the EPA revised these standards. It is probable that the
1997 standards will result in further limitations on small particulate- related
emissions.
In September 1998, based upon the 1997 standards, the EPA Administrator signed
final regulations requiring the State of Michigan to further limit nitrogen
oxide emissions. Fossil-fueled emitters, such as
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<PAGE> 121
Consumers' generating units, can anticipate a reduction in nitrogen oxide
emissions by 2003 to only 32 percent of levels allowed for the year 2000. The
State of Michigan has one year to submit an implementation plan. The State of
Michigan has filed a lawsuit objecting to the extent of the required emission
reductions. It is unlikely that the State of Michigan will establish Consumers'
nitrogen oxide emissions reduction target until mid-to-late 1999. Until this
target is established, the estimated cost of compliance discussed below is
subject to revision. If a court were to order the EPA to adopt the State of
Michigan's position, compliance costs could be less than the preliminary
estimated amounts.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions for Consumers' fossil-fueled generating units is
approximately $290 million, plus $10 million per year for operation and
maintenance costs. Consumers anticipates that these capital expenditures will be
incurred between 1999 and 2003. Consumers may need an equivalent amount of
capital expenditures and operation and maintenance costs to comply with the new
small particulate standards.
Consumers' coal-fueled electric generating units burn low-sulfur coal and are
currently operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. During the past few years, in order to comply with
the Clean Air Act, Consumers incurred capital expenditures totaling $55 million
to install equipment at certain generating units. Consumers estimates an
additional $16 million of capital expenditures for ongoing and proposed
modifications at the remaining coal-fueled units to meet year 2000 requirements.
Management believes that these expenditures will not materially affect
Consumers' annual operating costs.
Under the Michigan Natural Resources and Environmental Protection Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites. Nevertheless, it believes that these costs are properly
recoverable in rates under current ratemaking policies.
Consumers is a so-called potentially responsible party at several contaminated
sites administered under Superfund. Superfund liability is joint and several;
along with Consumers, many other creditworthy, potentially responsible parties
with substantial assets cooperate with respect to the individual sites. Based
upon past negotiations, Consumers estimates that its share of the total
liability for the known Superfund sites will be between $3 million and $9
million. At December 31, 1998, Consumers has accrued the minimum amount of the
range for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of the plant
have coatings that contain both metals and PCBs. Consumers does not believe that
any facility in the United States currently accepts the radioactive portion of
that waste. The cost of removal and disposal is currently unknown. These costs
will constitute part of the cost to decommission the plant, and will be paid
from the decommissioning fund. Consumers is studying the extent of the
contamination and reviewing options.
ANTITRUST: In October 1997, two independent power producers sued Consumers in a
federal court. The suit alleges antitrust violations relating to contracts which
Consumers entered into with some of its customers and claims relating to power
facilities. The plaintiffs claim damages of $100 million (which a court can
treble in antitrust cases as provided by law). Consumers has filed a motion to
dismiss and is awaiting a court ruling on this motion. Consumers believes the
lawsuit is without merit and will vigorously defend against it, but cannot
predict the outcome of this matter.
ELECTRIC RATE MATTERS
ELECTRIC PROCEEDINGS: In 1996, the MPSC issued a final order that authorized
Consumers to recover costs
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<PAGE> 122
associated with the purchase of the additional 325 MW of MCV Facility capacity
(see "Power Purchases from the MCV Partnership" in this Note) and to recover its
nuclear plant investment by increasing prospective annual nuclear plant
depreciation expense by $18 million, with a corresponding decrease in
fossil-fueled generating plant depreciation expense. It also established an
experimental direct-access program. Customers having a maximum demand of 2 MW or
greater are eligible to purchase generation services directly from any eligible
third-party power supplier and Consumers will transmit the power for a fee. The
direct-access program is limited to 134 MW of load. In accordance with the MPSC
order, Consumers held a lottery in April 1997 to select the customers to
participate in the direct-access program. Subsequently, direct access for a
portion of this 134 MW began in late 1997. The program was substantially filled
by mid-January 1999 and Consumers expects the remaining amount to begin by the
end of the first quarter of 1999.
In January 1998, the Court of Appeals affirmed an MPSC conclusion that the MPSC
has statutory authority to authorize an experimental electric retail wheeling
program. No retail wheeling has yet occurred pursuant to that program. In
October 1998, the Michigan Supreme Court issued an order granting Consumers'
application for leave to appeal. A decision by the Michigan Supreme Court in
this matter may be issued in mid-1999.
ELECTRIC RESTRUCTURING: As part of ongoing proceedings relating to the
restructuring of the electric utility industry in Michigan, the MPSC in June
1997 issued an order proposing that beginning January 1, 1998 Consumers transmit
and distribute energy on behalf of competing power suppliers to retail
customers. Further restructuring orders issued in late 1997 and early 1998
provide for: 1) recovery of estimated Transition Costs of $1.755 billion through
a charge to all customers purchasing their power from other sources until the
end of the transition period in 2007, subject to an adjustment through a true-up
mechanism; 2) commencement of the phase-in of direct-access in 1998; 3)
suspension of the PSCR clause as discussed below; and 4) all customers to choose
their power suppliers on January 1, 2002. The recovery of costs of implementing
a direct-access program, preliminarily estimated at an additional $200 million,
would be reviewed for prudence and recovered via a charge approved by the MPSC.
Nuclear decommissioning costs will also continue to be collected through a
separate surcharge to all customers.
In June 1998, Consumers submitted its plan for implementing direct access to the
MPSC. The primary issues addressed in the plan are: 1) the implementation
schedule; 2) the direct-access service options available to customers and
suppliers; 3) the process and requirements for customers and others to obtain
direct-access service; and 4) the roles and responsibilities for Consumers,
customers and suppliers. In the plan, Consumers proposed to phase in 750 MW of
retail customer load to customers purchasing their power from other sources over
the 1998-2001 period. Subsequent to year-end, Consumers received MPSC electric
restructuring orders which generally supported Consumers' implementation plan.
Accordingly, Consumers is now preparing to implement electric customer direct
access.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders, including appeals by Consumers. Consumers believes
that the MPSC lacks statutory authority to mandate industry restructuring, and
its appeal is limited to this jurisdictional issue. Consumers cannot predict the
outcome of electric restructuring on Consumers' financial position, liquidity,
or results of operations.
In October 1998, Consumers initiated a process for the solicitation of bids to
acquire Consumers' rights to 1,240 MW of contract capacity and associated energy
being purchased from the MCV Partnership. Subsequent to year-end, Consumers
signed a tentative long-term power sales agreement with PECO Energy Company
(PECO). This transaction is subject to obtaining satisfactory rate-making and
accounting treatment and regulatory rulings. In an order issued in 1998, the
MPSC delayed its consideration of the bidding process until a definitive
agreement was signed (subject to review by the MPSC), but stated that
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<PAGE> 123
Consumers' approach offers a legitimate way to utilize independent market forces
to determine the above-market or stranded portion of Consumers' obligations
under the PPA with the MCV Partnership. Consumers anticipates that its
regulatory filings will be made with the MPSC for consideration by the end of
the first quarter of 1999.
As a result of a 1998 MPSC order in connection with the electric restructuring
program, Consumers' ability to recover certain costs pursuant to the PSCR
process was suspended. Under this program, customers buying electricity from
Consumers as traditional customers will not have their rates adjusted to reflect
the actual costs of fuel and purchased and interchanged power during the
1998-2001 period. In prior years, any change in power supply costs was passed
through to Consumers' customers. In order to reduce the risk of high energy
prices during peak demand periods, Consumers is purchasing energy options and
contracting to buy electricity during the months of June through September 1999.
Consumers is planning to have sufficient generation and purchased capacity for a
16 percent to 21 percent reserve margin in order to provide reliable service to
its electric service customers and to protect itself against unscheduled plant
outages. Under certain circumstances, the cost of purchasing capacity and energy
on the spot market could be substantial.
OTHER ELECTRIC UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings (unaudited)
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax operating income $49 $46 $40
Income taxes and other 15 14 11
----------------------------------------------------------------
Net income $34 $32 $29
==================================================================================================================
</TABLE>
Power Purchases from the MCV Partnership- Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA provides that Consumers is to pay a levelized
average capacity charge, based on the MCV Facility's availability, of 3.77 cents
per kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed. Since January 1, 1993, Consumers has
been permitted by the MPSC to recover capacity charges averaging 3.62 cents per
kWh for 915 MW, plus a substantial portion of the fixed and variable energy
charges. Since January 1, 1996, Consumers also has been permitted to recover
capacity charges for the remaining 325 MW of contract capacity with an initial
average charge of 2.86 cents per kWh increasing periodically to an eventual 3.62
cents per kWh by 2004 and thereafter. Because the MPSC has already approved
recovery of this capacity, Consumers expects to recover these increases through
an adjustment to the currently frozen PSCR level. This adjustment is currently
under consideration by the MPSC. After September 2007, under the terms of the
PPA, Consumers will only be required to pay
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<PAGE> 124
the MCV Partnership capacity and energy charges that the MPSC has authorized
for recovery from electric customers.
Consumers recognized a loss in 1992 for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC recovery
orders. At December 31, 1998 and December 31, 1997, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $110 million and $117 million, respectively. At December 31, 1998,
the undiscounted after-tax amount associated with this liability totaled $164
million. These after-tax cash underrecoveries are based on the assumption that
the MCV Facility would be available to generate electricity 91.5 percent of the
time over its expected life. Historically the MCV Facility has operated above
the 91.5 percent level. Accordingly, in 1998, Consumers increased its PPA
liability by $37 million. Because the MCV Facility was available 99.4 percent of
the time in 1998, Consumers has an accumulated unrecovered after-tax shortfall
of $10 million as of December 31, 1998. If the MCV Facility was to be available
to generate electricity at the expected 91.5 percent level during the next five
years, Consumers' after-tax cash underrecoveries associated with the PPA would
be as follows.
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Estimated cash underrecoveries, net of tax $22 $21 $20 $19 $18
==================================================================================================================
</TABLE>
If the MCV Facility operates at availability levels above management's estimate
over the remainder of the PPA, Consumers will need to recognize additional
losses for future underrecoveries. For further discussion on the impact of the
frozen PSCR, see "Electric Restructuring" in this Note. Management will continue
to evaluate the adequacy of the contract loss liability considering actual MCV
Facility operations and the potential sale of the PPA.
In February 1998, the MCV Partnership filed a claim of appeal from the January
1998 and February 1998 MPSC orders in the electric utility industry
restructuring. At the same time, the MCV Partnership filed suit in the U.S.
District Court seeking a declaration that the MPSC's failure to provide
Consumers and the MCV Partnership a certain source of recovery of capacity
payments after 2007 deprived the MCV Partnership of its rights under the Public
Utilities Regulatory Policies Act of 1978. The MCV Partnership is seeking to
prohibit the MPSC from implementing portions of the order.
NUCLEAR MATTERS: In January 1997, the NRC issued its Systematic Assessment of
Licensee Performance report for Palisades. The report rated all areas as good.
The NRC suspended the assessment process for all licensees in 1998.
Palisades' temporary on-site storage pool for spent nuclear fuel is at capacity.
Consequently, Consumers is using NRC-approved steel and concrete vaults,
commonly known as "dry casks", for temporary on-site storage. As of December 31,
1998 Consumers had loaded 13 dry storage casks with spent nuclear fuel at
Palisades and plans to load five additional casks in 1999 pending approval by
the NRC. In June 1997, the NRC approved Consumers' process for unloading spent
fuel from a cask previously discovered to have minor weld flaws. Consumers
intends to transfer the spent fuel to a new transportable cask when one is
available.
Consumers maintains insurance coverage against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
generating facilities. Consumers also maintains coverage for replacement power
costs during prolonged accidental outages at Palisades. Insurance would not
cover such costs during the first 17 weeks of any outage, but would cover most
of such costs during the next 58 weeks
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<PAGE> 125
of the outage, followed by reduced coverage to 80 percent for two additional
years. If certain covered losses occur at its own or other nuclear plants
similarly insured, Consumers could be required to pay maximum assessments of $15
million in any one year to NEIL; $88 million per occurrence, limited to a
maximum installment payment of $10 million per occurrence in any year; and $6
million if nuclear workers claim bodily injury from radiation exposure.
Consumers considers the possibility of these assessments to be remote.
The NRC requires Consumers to make certain calculations and report on the
continuing ability of the Palisades reactor vessel to withstand postulated
pressurized thermal shock events during its remaining license life, considering
the embrittlement of reactor materials. In December 1996, Consumers received an
interim Safety Evaluation Report from the NRC indicating that the reactor vessel
can be safely operated through 2003 before reaching the NRC's screening criteria
for reactor embrittlement. Consumers believes that with fuel management designed
to minimize embrittlement, it can operate Palisades to the end of its license
life in the year 2007 without annealing the reactor vessel. Nevertheless,
Consumers will continue to monitor the matter.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments, of $380 million for 1999, $385 million for
2000, and $385 million for 2001. For further information, see the Capital
Expenditures Outlook section in the MD&A.
COMMITMENTS FOR COAL SUPPLIES: Consumers has entered into coal supply contracts
with various suppliers for its coal-fired generating stations. Under the terms
of these agreements, Consumers is obligated to take physical delivery of the
coal and make payment based upon the contract terms. Consumers' current
contracts have expiration dates that range from 1999 to 2004. Consumers enters
into long-term contracts for approximately 50 - 75 percent of its annual coal
requirements. In 1998 coal purchases totaled $246 million of which $161 million
(60 percent of the tonnage requirement) was under long-term contract. Consumers
supplements its long-term contracts with spot-market purchases.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including some 23
sites that formerly housed manufactured gas plant facilities, even those in
which it has a partial or no current ownership interest. On sites where
Consumers has received site-wide study plan approvals, it will continue to
implement these plans. It will also work toward closure of environmental issues
at sites as studies are completed. Consumers estimates its costs related to
investigation and remedial action for all 23 sites between $48 million and $98
million, of which Consumers accrued a liability for $48 million. These estimates
are based on undiscounted 1998 costs. As of December 31, 1998, Consumers has an
accrued liability of $48 million and a regulatory asset for approximately the
same amount. Any significant change in assumptions, such as remediation
techniques, nature and extent of contamination, and legal and regulatory
requirements, could affect the estimate of remedial action costs for the sites.
Consumers defers and amortizes over a period of ten years, environmental
clean-up costs above the amount currently being recovered in rates. Rate
recognition of amortization expense will not begin until after a prudence review
in a general rate case. Consumers is allowed current recovery of $1 million
annually. Consumers has initiated lawsuits against certain insurance companies
regarding coverage for some or all of the costs that it may incur for these
sites.
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<PAGE> 126
GAS RATE MATTERS
GAS RESTRUCTURING: In December 1997, the MPSC approved Consumers' application to
implement an experimental gas transportation program, which will extend over a
three-year period, eventually allowing 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier in direct
competition with Consumers. The program is voluntary and participating natural
gas customers are selected on a first-come, first-served basis, up to a limit of
100,000 per year. As of December 31, 1998, more than 102,000 customers chose
alternative gas suppliers, representing approximately 24.1 bcf of gas load.
Customers choosing to remain as sales customers of Consumers will not see a rate
change in their natural gas rates. This three-year program: 1) suspends
Consumers' gas cost recovery clause, effective April 1, 1998, establishing a gas
commodity cost at a fixed rate of $2.84 per mcf; 2) establishes an earnings
sharing mechanism with customers if Consumers' earnings exceed certain
pre-determined levels; and 3) establishes a gas transportation code of conduct
that addresses the relationship between Consumers and marketers, including its
affiliated marketers. In January 1998, the Attorney General, ABATE and other
parties filed claims of appeal regarding the program with the Court of Appeals.
Consumers uses gas purchase contracts to limit its risk associated with gas
price increases. It is management's intent to take physical delivery of the
commodity and failure could result in a significant penalty for nonperformance.
At December 31, 1998, Consumers had an exposure to gas price increases if the
ultimate cost of gas was to exceed $2.84 per mcf for the following volumes: 15
percent of its 1999 requirements; 45 percent of its 2000 requirements; and 45
percent of its first quarter 2001 requirements. Additional contract coverage is
currently under review. The gas purchase contracts currently in place were
consummated at prices less than $2.84 per mcf. The gas purchase contracts are
being used to protect against gas price increases in a three-year experimental
gas program where Consumers is recovering from its customers $2.84 per mcf for
gas.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures, including
new lease commitments, of $123 million for 1999, $125 million for 2000, and $120
million for 2001. For further information, see the Capital Expenditures Outlook
section in the MD&A.
In addition to the matters disclosed in this note, Consumers and certain of its
subsidiaries are parties to certain lawsuits and administrative proceedings
before various courts and governmental agencies arising from the ordinary course
of business. These lawsuits and proceedings may involve personal injury,
property damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Consumers has accrued estimated losses for certain contingencies discussed in
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on Consumers' financial position, liquidity, or results of
operations.
COMMITMENTS FOR GAS SUPPLIES: Consumers entered into gas supply contracts and
transportation contracts with various suppliers for its natural gas business.
These contracts have expiration dates that range from 1999 to 2003. Consumers'
1998 gas requirements totaled 210 bcf at a cost of $565 million, 70 percent of
which was under long-term contracts for one year or more. As of the end of 1998,
Consumers had 85 percent of its 1999 gas requirements under such long-term
contracts, and will supplement them with additional long-term contracts and
spot-market purchases.
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<PAGE> 127
3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: At February 1, 1999, Consumers had FERC authorization to issue or
guarantee through June 2000, up to $900 million of short-term securities
outstanding at any one time and to guarantee, through 1999, up to $25 million in
loans made by others to residents of Michigan for making energy-related home
improvements. Consumers also had remaining FERC authorization to issue through
June 2000, up to $475 million and $425 million of long-term securities with
maturities up to 30 years for refinancing purposes and for general corporate
purposes respectively.
SHORT-TERM FINANCINGS: Consumers has an unsecured $425 million credit facility
and unsecured lines of credit aggregating $130 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At December 31, 1998, a total
of $215 million was outstanding at a weighted average interest rate of 5.8
percent, compared with $377 million outstanding at December 31, 1997, at a
weighted average interest rate of 6.5 percent. In January 1999, Consumers
renegotiated a variable-to-fixed interest rate swap totaling $175 million in
order to reduce the impact of interest rate fluctuations.
Consumers also has in place a $500 million trade receivables sale program. At
December 31, 1998 and 1997, receivables sold under the program totaled $306
million and $335 million, respectively. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect receivables
sold.
LONG-TERM FINANCINGS: Consumers issued a total of $1.075 billion of senior notes
throughout 1998 at varying interest rates between 6.2 percent and 6.875 percent,
principal amounts between $150 million and $250 million, and maturities from
2008 to 2028. The senior notes are secured by Consumers First Mortgage Bonds
issued contemporaneously in similar amounts and one series of senior notes also
is secured by an insurance policy. Consumers also issued long-term bank debt of
$225 million in May 1998, maturing in 2001 to 2003, at an initial interest rate
of 6.05 percent. Proceeds from these issuances were used primarily to pay down
$627 million of First Mortgage Bonds and $450 million of long-term bank debt, as
well as for general corporate purposes. For detailed information about long-term
financing, see the Consolidated Statements of Long-Term Debt.
In 1996, Michigan Gas Storage entered into a $23 million secured, variable rate,
seven-year term loan. At December 31, 1998 and 1997 the loan had a weighted
average interest rate of 5.8 percent and 6.3 percent, respectively. In October
1997, Michigan Gas Storage entered into a $15 million variable-to-fixed interest
rate swap at 6.2 percent in order to reduce the impact of interest rate
fluctuations. The swap agreement terminates on September 30, 2003. After taking
into account the effect of the swap, the weighted average interest rate on the
long-term loan for the year ended December 31, 1998 was 6.7 percent.
FIRST MORTGAGE BONDS: Consumers secures its First Mortgage Bonds by a mortgage
and lien on substantially all of its property. Consumers' ability to issue and
sell securities is restricted by certain provisions in its First Mortgage Bond
Indenture, its Articles of Incorporation and the need for regulatory approvals
to meet appropriate federal law.
PREFERRED SECURITIES: Consumers has 4 million shares of 8.36 percent Trust
Preferred Securities which were sold through Consumers Power Company Financing
I, a wholly owned business trust consolidated with Consumers. Net proceeds from
the sale totaled $97 million. Consumers has 4.8 million shares of 8.2 percent
Trust Preferred Securities which were sold through Consumers Energy Company
Financing
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<PAGE> 128
II, a wholly owned business trust consolidated with Consumers. Net proceeds from
the sale totaled $116 million. Consumers formed both trusts for the sole purpose
of issuing the Trust Preferred Securities. Consumers' obligations with respect
to the Trust Preferred Securities under the related tax-deductible notes, under
the indenture through which Consumers issued the notes, under Consumers'
guarantee of the Trust Preferred Securities, and under the declaration by the
trusts, taken together, constitute a full and unconditional guarantee by
Consumers of the trusts' obligations under the Trust Preferred Securities.
OTHER: Consumers has a total of $131 million of long-term pollution control
revenue bonds outstanding, secured by irrevocable letters of credit, first
mortgage bonds, and an insurance policy. These bonds had a weighted average
interest rate of 5.2 percent at December 31, 1998.
Under the provisions of its Articles of Incorporation, Consumers had $300
million of unrestricted retained earnings available to pay common dividends at
December 31, 1998. In January 1999, Consumers declared and paid a $97 million
common dividend.
4: INCOME TAXES
Consumers and its subsidiaries file a consolidated federal income tax return
with CMS Energy. Income taxes are generally allocated based on each company's
separate taxable income. Consumers practices full deferred tax accounting for
temporary differences as authorized by the MPSC.
Consumers used ITC to reduce current income taxes payable, and defers and
amortizes ITC over the life of the related property. Any AMT paid generally
becomes a tax credit that Consumers can carry forward indefinitely to reduce
regular tax liabilities in future periods when regular taxes paid exceed the tax
calculated for AMT. The significant components of income tax expense (benefit)
consisted of:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current federal income taxes $138 $139 $102
Deferred income taxes, includes $23 for 1998 change
in accounting (Note 1) 36 23 58
Deferred ITC, net (16) (10) (10)
-------------------------------------------
$158 $152 $150
================================================================================================================
</TABLE>
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<PAGE> 129
The principal components of Consumers' deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property $ (563) $ (569)
Unconsolidated investments (248) (246)
Postretirement benefits (Note 7) (139) (150)
Abandoned Midland project (25) (33)
Employee benefit obligations, includes postretirement benefits
of $139 and $153 (Note 7) 172 184
Power purchases (Note 2) 59 66
AMT carryforward 64 74
Other 5 8
-----------------------------
$ (675) $ (666)
================================================================================================================
Gross deferred tax liabilities $(1,377) $(1,372)
Gross deferred tax assets 702 706
----------------------------
$ (675) $ (666)
================================================================================================================
</TABLE>
The actual income tax expense differs from the amount computed by applying the
statutory federal tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 349 $ 321 $ 296
Income tax expense, includes $23 for 1998 change
in accounting (Note 1) 158 152 150
Preferred securities distributions (18) (12) (8)
----------------------------------------------
Pretax income 489 461 438
Statutory federal income tax rate x 35% x 35% x 35%
----------------------------------------------
Expected income tax expense 171 161 153
Increase (decrease) in taxes from
Capitalized overheads previously flowed through 5 5 5
Differences in book and tax depreciation
not previously deferred 14 14 13
ITC amortization/adjustments (16) (10) (10)
Affiliated companies' dividends (5) (6) (6)
Other, net (11) (12) (5)
-----------------------------------------------
Actual income tax expense $ 158 $ 152 $ 150
================================================================================================================
Effective tax rate 32.3% 32.9% 34.2%
================================================================================================================
</TABLE>
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<PAGE> 130
5: FINANCIAL INSTRUMENTS
The carrying amounts of cash, short-term investments and current liabilities
approximate their fair values due to their short-term nature. The estimated fair
values of long-term investments are based on quoted market prices or, in the
absence of specific market prices, on quoted market prices of similar
investments or other valuation techniques. The carrying amounts of all long-term
investments, except as shown below, approximate fair value.
<TABLE>
<CAPTION>
In Millions
- ---------------------------------------------------------------------------------------------------------------
December 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
Available-for-sale securities Cost Value Gain Cost Value Gain
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock of CMS Energy $ 43 $ 142 $ 99 $ 43 $ 129 $ 86
SERP 18 25 7 21 24 3
Nuclear decommissioning
investments (a) 425 557 132 405 486 81
===============================================================================================================
</TABLE>
(a) Consumers classifies its unrealized gains and losses on nuclear
decommissioning investments in accumulated depreciation.
The carrying amount of long-term debt was $2.0 billion at December 31, 1998 and
$1.4 billion at December 31, 1997, and the fair values were $2.0 billion and
$1.4 billion, respectively. For held-to-maturity securities and related-party
financial instruments, see Note 1.
6: EXECUTIVE INCENTIVE COMPENSATION
Consumers participates in CMS Energy's Performance Incentive Stock Plan. Under
the plan, restricted shares of Common Stock of CMS Energy, stock options and
stock appreciation rights related to common stock may be granted to key
employees based on their contributions to the successful management of CMS
Energy and its subsidiaries. Awards under the plan may consist of any class of
Common Stock of CMS Energy. Certain plan awards are subject to performance-based
business criteria. The plan reserves for award not more than three percent of
CMS Energy's Common Stock outstanding on January 1 each year, less (1) the
number of shares of restricted Common Stock awarded and (2) Common Stock subject
to options granted under the plan during the immediately preceding four calendar
years. Any forfeitures of shares previously awarded will increase the number of
shares available to be awarded under the plan. At December 31, 1998, awards of
up to 681,603 shares of CMS Energy Common Stock and 138,780 shares of Class G
Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting and
dividend rights. These awards vest over five years at the rate of 25 percent per
year after two years. The restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. If performance objectives are exceeded,
the plan provides additional awards. Restricted shares vest fully if control of
CMS Energy changes, as defined by the plan. At December 31, 1998, 226,601 of the
328,351 shares of restricted CMS Energy Common Stock outstanding are subject to
performance objectives. At December 31, 1998 all of the 30,490 restricted shares
of Class G Common Stock outstanding are subject to performance objectives.
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<PAGE> 131
Under the plan, stock options and stock appreciation rights relating to Common
Stock are granted with an exercise price equal to the closing market price on
each grant date. Options are exercisable upon grant and expire up to ten years
and one month from date of grant. The status of the restricted stock and options
granted to Consumers' key employees under the Performance Incentive Stock Plan
follows.
<TABLE>
<CAPTION>
Restricted
Stock Options
- ----------------------------------------------------------------------------------------------------------------
Number Number Weighted Average
CMS ENERGY COMMON STOCK of Shares of Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 269,053 805,750 $ 24.93
Granted 84,760 138,520 $ 30.63
Exercised or Issued (50,925) (169,525) $ 21.72
Forfeited (25,522) -
Expired - (12,000) $ 32.88
---------------------------------------------------------------
Outstanding at December 31, 1996 277,366 762,745 $ 26.55
Granted 165,942 152,352 $ 35.97
Exercised or Issued (73,375) (377,317) $ 27.21
Forfeited (59,582) -
----------------------------------------------------------
Outstanding at December 31, 1997 310,351 537,780 $ 28.84
Granted 92,319 116,164 $ 43.38
Exercised or Issued (74,319) (123,288) $ 28.05
---------------------------------------------------------
Outstanding at December 31, 1998 328,351 530,656 $ 32.21
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Restricted
Stock Options
- --------------------------------------------------------------------------------------------------------------
Number Number Weighted Average
CLASS G COMMON STOCK of Shares of Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 6,924 10,000 $ 17.88
Granted 9,423 11,000 $ 17.88
--------------------------------------------------------
Outstanding at December 31, 1996 16,347 21,000 $ 17.88
Granted 8,784 12,000 $ 20.24
Exercised or Issued (1,385) (5,000) $ 17.88
Forfeited (3,955) -
--------------------------------------------------------
Outstanding at December 31, 1997 19,791 28,000 $ 18.89
Granted 14,720 45,900 $ 24.50
Exercised or Issued (4,021) -
--------------------------------------------------------
Outstanding at December 31, 1998 30,490 73,900 $ 22.37
==============================================================================================================
</TABLE>
131
<PAGE> 132
The following table summarizes information about CMS Energy Common Stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Number Weighted Weighted
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
- ----------------------------------------------------------------------------------------------------------------
CMS Energy Common Stock
<S> <C> <C> <C>
$17.13 - $24.75 135,433 4.93 years $21.87
$26.25 - $33.88 176,659 4.10 years $30.60
$35.94 - $43.38 218,564 9.10 years $39.91
- ----------------------------------------------------------------------------------------------------------------
$17.13 - $43.38 530,656 6.37 years $32.21
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Number Weighted Weighted
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
- ----------------------------------------------------------------------------------------------------------------
Class G Common Stock
<S> <C> <C> <C>
$17.88 - $19.44 25,500 7.62 years $18.46
$23.31 - $24.50 48,400 9.60 years $24.44
------------------------------------------------------------------------------------------------------------
$17.88 - $24.50 73,900 8.92 years $22.37
================================================================================================================
</TABLE>
The weighted average fair value of options granted for CMS Energy Common Stock
was $6.43 in 1998, $6.38 in 1997, and $6.94 in 1996. The weighted average fair
value of options granted for Class G Common Stock was $3.03 in 1998, $1.87 in
1997 and $1.59 in 1996. Fair value is estimated using the Black-Scholes model, a
mathematical formula used to value options traded on securities exchanges, with
the following assumptions:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
CMS ENERGY COMMON STOCK OPTIONS
<S> <C> <C> <C>
Risk-free interest rate 5.45% 6.06% 6.63%
Expected stock price volatility 15.93% 17.43% 24.08%
Expected dividend rate $ .33 $ .30 $ .27
Expected option life 4 years 5 years 5 years
CLASS G COMMON STOCK OPTIONS
Risk-free interest rate 5.44% 6.06% 6.63%
Expected stock price volatility 20.02% 18.05% 16.19%
Expected dividend rate $ .325 $ .31 $ .295
Expected option life 5 years 5 years 5 years
================================================================================================================
</TABLE>
Consumers applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for the Performance Incentive Stock Plan. Since
stock options are granted at market price, no compensation cost has been
recognized for stock options granted under the plan. If compensation cost for
stock options
132
<PAGE> 133
had been determined in accordance with SFAS 123, Accounting for Stock-Based
Compensation, Consumers' net income would have decreased by less than $1 million
for 1998, 1997 and 1996. The compensation cost charged against income for
restricted stock was $4 million in 1998, $2 million in 1997, and $1 million in
1996.
7: RETIREMENT BENEFITS
Consumers provides retirement benefits under a number of different plans,
including certain health care and life insurance benefits under OPEB, benefits
to certain management employees under SERP, and benefits to substantially all
its employees under a trusteed, non-contributory, defined benefit Pension Plan,
and a defined contribution 401(k) plan.
Amounts presented below for the Pension Plan include amounts for employees of
CMS Energy and non-utility affiliates which were not distinguishable from the
plan's total assets.
Weighted-Average Assumptions
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Pension & SERP OPEB
Years Ended December 31 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.00% 7.50% 7.75% 7.00% 7.50% 7.75%
Expected long-term rate
of return on plan assets 9.25% 9.25% 9.25% 7.00% 7.00% 7.00%
Rate of compensation increase:
Pension - to age 45 5.25% 5.25% 5.50%
- age 45 to
assumed retirement 3.75% 3.75% 4.00%
SERP 5.50% 5.50% 5.50%
==============================================================================================================
</TABLE>
Retiree health care costs at December 31, 1998 are based on the assumption that
costs would increase 6.5 percent in 1999, then decrease gradually to 5.5 percent
in 2005 and thereafter.
CMS Energy's Net Pension Plan, Consumers' SERP and OPEB benefit costs consist
of:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Pension & SERP OPEB
Years Ended December 31 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 26 $ 25 $ 25 $10 $ 9 $ 12
Interest expense 61 60 57 42 40 41
Expected return on plan assets (73) (70) (68) (17) (12) (6)
Amortization of unrecognized transition (asset) (5) (5) (5) - - -
Amortization of prior service cost 4 4 4 (1) - -
----------------------------------------------------
Net periodic pension and
postretirement benefit cost $13 $14 $13 $34 $37 $47
================================================================================================================
</TABLE>
The health care cost trend rate assumption significantly affects the amounts
reported. A one percentage point change in the assumed health care cost trend
assumption would have the following effects:
133
<PAGE> 134
<TABLE>
<CAPTION>
In Millions
One Percentage One Percentage
Point Increase Point Decrease
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total service and interest cost components $ 9 $ (7)
Effect on postretirement benefit obligation $90 $(75)
===============================================================================================================
</TABLE>
The funded status of the CMS Energy Pension Plan, Consumers' SERP and OPEB is
reconciled with the liability recorded at December 31 as follows:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Pension Plan SERP OPEB
1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation January 1 $ 792 $ 734 $ 18 $ 21 $ 570 $ 575
Service cost 25 24 1 1 10 9
Interest cost 60 59 1 1 42 40
Plan amendments - - - - - (7)
Actuarial loss (gain) 76 36 2 (4) 49 (21)
Benefits paid (79) (61) (1) (1) (28) (26)
---------------------------------------------------------
Benefit obligation December 31 874 792 21 18 643 570
---------------------------------------------------------
Plan assets at fair value at January 1 882 779 - - 219 134
Actual return on plan assets 167 164 - - 54 37
Company contribution - - - - 48 48
Actual benefits paid (79) (61) - - - -
---------------------------------------------------------
Plan assets at fair
value at December 31 970(a) 882(a) - - 321 219
---------------------------------------------------------
Benefit obligation less than
(in excess of) plan assets 96 90 (21) (18) (322) (351)
Unrecognized net (gain) loss from
experience different than assumed (176) (157) 4 3 (71) (84)
Unrecognized prior service cost 31 35 1 1 (1) (1)
Unrecognized net transition (asset) obligation (16) (22) - - - -
---------------------------------------------------------
Recorded liability $ (65) $ (54) $(16) $(14) $(394) $(436)
================================================================================================================
</TABLE>
(a) Primarily stocks and bonds, including $168 million in 1998 and $153 million
in 1997 of CMS Energy Common Stock.
SERP benefits are paid from a trust established in 1988. SERP is not a qualified
plan under the Internal Revenue Code, and as such, earnings of the trust are
taxable and trust assets are included in consolidated assets. At December 31,
1998 and 1997, trust assets were $25 million and $24 million, respectively, and
were classified as other non-current assets. The accumulated benefit obligation
for SERP was $14 million in 1998 and $12 million in 1997.
Contributions to the 40l(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan were $15 million in 1998, $18 million
in 1997, and $17 million in 1996.
134
<PAGE> 135
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized on a
straight-line basis over the average remaining service period of active
employees.
Consumers adopted the required accounting for postretirement benefits effective
in 1992 and recorded a liability of $466 million for the accumulated transition
obligation and a corresponding regulatory asset for anticipated recovery in
utility rates (see Note 1, Utility Regulation). The MPSC authorized recovery of
the electric utility portion of these costs in 1994 over 18 years and the gas
utility portion in 1996 over 16 years. At December 31, 1998, Consumers had a
recorded FERC regulatory asset and liability of $6 million. The FERC has
authorized recovery of these costs.
8: LEASES
Consumers leases various assets, including vehicles, rail cars, aircraft,
construction equipment, computer equipment, nuclear fuel and buildings.
Consumers' nuclear fuel capital leasing arrangement expires in November 2000,
yet provides for additional one-year extensions upon mutual agreement by the
parties. Upon termination of the lease, the lessor would be entitled to a cash
payment equal to its remaining investment, which was $72 million as of December
31, 1998. Consumers generally is responsible for payment of taxes, maintenance,
operating costs, and insurance.
Minimum rental commitments under Consumers' non-cancelable leases at December
31, 1998, were:
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------------------------------
Capital Leases Operating Leases
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 44 $ 12
2000 69 11
2001 16 10
2002 15 9
2003 12 9
2004 and thereafter 9 86
-------------------------------------
Total minimum lease payments 165 $ 137
=====
Less imputed interest 32
-----
Present value of net minimum lease payments 133
Less current portion 33
-----
Non-current portion $ 100
======================================================================================================
</TABLE>
Consumers recovers lease charges from customers and accordingly charges payments
for its capital and operating leases to operating expense. Operating lease
charges, including charges to clearing and other accounts for the years ended
December 31, 1998, 1997 and 1996, were $11 million, $3 million and $3 million,
respectively.
Capital lease expenses for the years ended December 31, 1998, 1997 and 1996 were
$41 million, $49 million and $45 million, respectively. Included in these
amounts for the years ended 1998, 1997 and 1996, are nuclear fuel lease expenses
of $23 million, $31 million and $25 million, respectively.
135
<PAGE> 136
9: JOINTLY OWNED UTILITY FACILITIES
Consumers is responsible for providing its share of financing for the jointly
owned utility facilities. The direct expenses of the joint plants are included
in Consumers' operating expenses. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------------------------------------------
Net Investment Accumulated Depreciation
December 31 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Campbell Unit 3 - 93.3 percent $299 $314 $279 $265
Ludington - 51 percent 106 112 94 88
Transmission lines - various 33 34 15 14
==================================================================================================================
</TABLE>
10: REPORTABLE SEGMENTS
Consumers has two reportable segments: electric and gas. The electric segment
consists of regulated activities associated with the generation, transmission
and distribution of electricity. The gas segment consists of regulated
activities associated with the production, transportation, storage and
distribution of natural gas. Consumers' reportable segments are domestic
strategic business units organized and managed by the nature of the product and
service each provides. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. Consumers'
management evaluates performance based on pretax operating income. The
Consolidated Statements of Income show operating revenue and pretax operating
income by reportable segment. These amounts include earnings from investments
accounted for by the equity method of $50 million, $49 million and $42 million
for 1998, 1997 and 1996, respectively. Investment in equity method investees is
$449 million, $420 million and $374 million for 1998, 1997 and 1996,
respectively. Intersegment sales and transfers are accounted for at current
market prices and are eliminated in consolidated pretax operating income by
segment. Other segment information follows:
136
<PAGE> 137
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation, depletion and amortization
Electric $ 304 $ 296 $ 282
Gas 97 93 87
Other 2 2 2
-------------------------------------------------
$ 403 $ 391 $ 371
==================================================================================================================
Total assets
Electric (a) $ 4,640 $ 4,472 $ 4,505
Gas (a) 1,726 1,644 1,709
Other 797 833 811
-------------------------------------------------
$ 7,163 $ 6,949 $ 7,025
==================================================================================================================
Capital expenditures (b)
Electric $ 331 $ 255 $ 310
Gas 114 116 137
-------------------------------------------------
$ 445 $ 371 $ 447
==================================================================================================================
</TABLE>
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
(b) Includes electric restructuring implementation plan, capital leases for
nuclear fuel and other assets and electric DSM costs (see Consolidated
Statements of Cash Flows). Amounts also include an attributed portion of
Consumers' capital expenditures for plant and equipment common to both the
electric and gas utility businesses.
11: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY
SUPPLIER
Under the PPA with the MCV Partnership discussed in Note 2, Consumers' 1998
obligation to purchase electric capacity from the MCV Partnership was 15.5
percent of Consumers' owned and contracted capacity. Summarized financial
information of the MCV Partnership follows:
137
<PAGE> 138
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue (a) $ 627 $ 652 $ 645
Operating expenses 405 435 417
--------------------------------------
Operating income 222 217 228
Other expense, net 142 154 162
--------------------------------------
Net income before cumulative effect of accounting change 80 63 66
Cumulative effect of change in method of accounting for property tax - 15 -
--------------------------------------
Net income $ 80 $ 78 $ 66
===================================================================================================================
</TABLE>
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
December 31 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
ASSETS LIABILITIES AND EQUITY
<S> <C> <C> <C> <C> <C>
Current assets (b) $ 341 $ 362 Current liabilities $ 204 $ 285
Plant, net 1,773 1,820 Noncurrent liabilities (c) 1,725 1,789
Other assets 173 169 Partners' equity (d) 358 277
------------------- --------------------
$2,287 $2,351 $2,287 $2,351
===================================================================================================================
</TABLE>
(a) Revenue from Consumers totaled $584 million, $609 million and $598 million
for 1998, 1997, and 1996, respectively.
(b) Receivables from Consumers totaled $49 million and $54 million, at December
31, 1998 and 1997, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership. CMS Holdings
holds a 46.4 percent ownership interest in FMLP. At December 31, 1998 and 1997,
lease obligations of $1.41 billion and $1.52 billion, respectively, were owed to
the owner trust. CMS Holdings' share of the interest and principal portion for
the 1998 lease payments was $59 million and $49 million, respectively, and for
the 1997 lease payments was $62 million and $28 million, respectively. The lease
payments service $907 million and $1,016 million in non-recourse debt
outstanding as of December 31, 1998 and 1997, respectively, of the owner-trust.
FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and
operating revenues. For 1998 and 1997, the owner-trust made debt payments
(including interest) of $233 million and $192 million, respectively. FMLP's
earnings for 1998, 1997, and 1996 were $23 million, $20 million, and $17
million, respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of its
investment in the MCV Partnership. Covenants contained in financing agreements
prohibit the MCV Partnership from paying distributions until certain financial
test requirements are met. Consumers does not anticipate receiving a cash
distribution in the near future.
138
<PAGE> 139
12: SUPPLEMENTAL CASH FLOW INFORMATION
Changes in other assets and liabilities as shown on the Consolidated Statements
of Cash Flows are described below:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sale of receivables, net $ (29) $ 17 $ 23
Accounts receivable 7 31 12
Accrued revenue (12) 20 (49)
Inventories (34) (10) 8
Accounts payable 19 (30) 17
Accrued refunds (1) 4 (14)
Other current assets and liabilities, net (3) 22 (9)
Non-current deferred amounts, net 2 38 20
---------------------------------------
$ (51) $ 92 $ 8
================================================================================================================
</TABLE>
139
<PAGE> 140
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Energy Company:
We have audited the accompanying consolidated balance sheets and consolidated
statements of long-term debt and preferred stock of CONSUMERS ENERGY COMPANY (a
Michigan corporation and wholly owned subsidiary of CMS Energy Corporation) and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, common stockholder's equity, and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Consumers Energy Company and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective January 1, 1998,
Consumers Energy Company changed its method of accounting for property taxes.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1999 (except with respect to the matter disclosed in Note 2,
"Electric Rate Matters", as to which the date is March 29, 1999).
140
<PAGE> 141
QUARTERLY FINANCIAL INFORMATION CONSUMERS ENERGY COMPANY
In Millions
<TABLE>
<CAPTION>
1998 (Unaudited) 1997 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $1,052 $832 $860 $965 $1,127 $829 $799 $1,014
Pretax operating income $ 183 $141 $171 $154 $ 193 $137 $149 $ 154
Net income before cumulative
effect of change in accounting
principle $ 69 $ 69 $ 86 $ 82 $ 97 $ 63 $ 80 $ 81
Cumulative effect of change
in accounting for property
taxes, net of $23 tax $ 43 - - - - - - -
Net income $ 112 $ 69 $ 86 $ 82 $ 97 $ 63 $ 80 $ 81
Preferred stock dividends $ 5 $ 5 $ 5 $ 4 $ 7 $ 7 $ 6 $ 5
Preferred securities
distributions $ 5 $ 4 $ 4 $ 5 $ 2 $ 2 $ 3 $ 5
Net income available to
common stockholder $ 102 $ 60 $ 77 $ 73 $ 88 $ 54 $ 71 $ 71
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
141
<PAGE> 142
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
CMS ENERGY
None for CMS Energy.
CONSUMERS
None for Consumers.
PART III
(ITEMS 10., 11., 12. AND 13.)
CMS ENERGY
CMS Energy's definitive proxy statement, except for the organization and
compensation committee report contained therein, is incorporated by reference
herein. See also ITEM 1. BUSINESS for information pursuant to ITEM 10.
CONSUMERS
Consumers' definitive information statement, except for the organization and
compensation committee report contained therein, is incorporated by reference
herein. See also ITEM 1. BUSINESS for information pursuant to ITEM 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public Accountants for
CMS Energy and Consumers are listed in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA and are incorporated by reference herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public
Accountants for CMS Energy and Consumers are listed after the Exhibits
in the Index to Financial Statement Schedules, and are incorporated by
reference herein.
(a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c) below
and are incorporated by reference herein.
(b) Reports on Form 8-K for CMS Energy and Consumers.
CMS ENERGY
Current Reports dated October 2, November 2, and December 30, 1998
covering matters reported pursuant to Item 5. Other Events.
CONSUMERS
None.
(c) Exhibits, including those incorporated by reference (see also Exhibit
volume).
142
<PAGE> 143
CMS ENERGY AND CONSUMERS EXHIBITS
<TABLE>
<CAPTION>
Previously Filed
--------------------
With File As Exhibit
Exhibits Number Number Description
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(3)(a) 33-60007 (3)(i) - Restated Articles of Incorporation of CMS Energy.
(3)(b) 1-9513 (3)(b) - By-Laws of CMS Energy. (1994 Form 10-K)
(3)(c) 1-5611 (3)(c) - Certificate of Amendment to the Articles of Incorporation dated
March 10, 1997 and Restated Articles of Incorporation dated
March 25, 1994. (1996 Form 10-K)
(3)(d) 1-5611 (3)(d) - By-Laws of Consumers. (1996 Form 10-K)
(4)(a) 2-65973 (b)(1)-4 - Indenture dated as of September 1, 1945, between Consumers
and Chemical Bank (successor to Manufacturers Hanover Trust
Company), as Trustee, including therein indentures
supplemental thereto through the Forty-third Supplemental
Indenture dated as of May 1, 1979.
Indentures Supplemental thereto:
33-31866 (4)(d) - 67th 11/15/89
33-41126 (4)(c) - 68th 06/15/93
1-5611 (4) - 69th 09/15/93 (Form 8-K dated Sep. 21, 1993)
1-5611 (4)(a) - 70th 02/01/98 (1997 Form 10-K)
1-5611 (4)(a) - 71st 03/06/98 (1997 Form 10-K)
1-5611 (4)(b) - 72nd 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(d) - 73rd 06/15/98
1-5611 (4)(b) - 74th 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(b) 1-5611 (4)(b) - Indenture dated as of January 1, 1996 between Consumers and
The Bank of New York, as Trustee. (1995 Form 10-K).
- Indentures Supplemental thereto:
1-5611 (4)(b) - 1st 01/18/96 (1995 Form 10-K)
1-5611 (4)(a) - 2nd 09/04/97 (3rd qtr 1997 Form 10-Q)
(4)(c) 1-5611 (4)(c) - Indenture dated as of February 1, 1998 between Consumers and
The Chase Manhattan Bank, as Trustee. (1997 Form 10-K)
1.5611 (4)(a) - 1st 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(b) - 2nd 06/15/98
1-5611 (4)(a) - 3rd 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(d) 33-47629 (4)(a) - Indenture dated as of September 15, 1992 between
CMS Energy and NBD Bank, as Trustee.
- Indentures Supplemental thereto:
1-9513 (4) - 3rd 05/06/97 (1st qtr 1997 Form 10-Q)
333-37241 (4)(a) - 4th 09/26/97
1-9513 (4)(b) - 5th 11/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(d) - 6th 01/13/98 (1997 Form 10-K)
(4)(d)(i) - 7th 01/25/99
(4)(d)(ii) - 8th 02/03/99
(4)(e) 1-9513 (4a) - Indenture between CMS Energy and The Chase Manhattan
Bank, as Trustee, dated as of January 15, 1994. (Form 8-K
dated March 29, 1994)
- Indentures Supplemental thereto:
</TABLE>
143
<PAGE> 144
<TABLE>
<CAPTION>
Previously Filed
--------------------
With File As Exhibit
Exhibits Number Number Description
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1-9513 (4b) - 1st 01/20/94 (Form 8-K dated March 29, 1994)
1-9513 (4) - 2nd 03/19/96 (1st qtr 1996 Form 10-Q)
1-9513 (4)(a)(iv) - 3rd 03/17/97 (Form 8-K dated May 1, 1997)
333-36115 (4)(d) - 4th 09/17/97
333-63229 (4)(c) - 5th 08/26/98
(4)(f) 1-9513 (4a) - Indenture dated as of June 1, 1997, between CMS Energy and
The Bank of New York, as trustee. (Form 8-K dated July 1,
1997)
Indentures Supplemental thereto:
1-9513 (4b) - 1st 06/20/97 (Form 8-K dated July 1, 1997)
(10)(a) Underwriting Agreement dated January 20, 1999.
(10)(b) 1-9513 (4) - Credit Agreement dated as of July 2, 1997, among CMS
Energy, the Administrative Agent, Collateral Agent,
Documentation Agent, Syndication Agent, Co-Agents
and Lead Manager, all as defined therein, and the
Exhibits and Schedules thereto. (2nd qtr 1997 Form
10-Q)
333-637229 (4)(f) - 1st Amendment dated 01/30/98
10(b)(i) 2nd Amendment dated 11/02/98
(10)(c) 1-5611 (10) - Credit Agreement dated as of July 14, 1995 among Consumers,
the Banks named therein and the First National Bank of
Chicago, as Administrative Agent.
(10)(d) 1-9513 (10)(c) - Employment Agreement dated as of August 1, 1990 among
Consumers, CMS Energy and William T. McCormick, Jr.
(1990 Form 10-K)
(10)(e) 1-5611 (10)(i) - Employment Agreement effective as of June 15, 1988 among
Consumers, CMS Energy and Victor J. Fryling, (1988
Form 10-K)
(10)(f) 1-5611 (10)(f) - Employment Agreement dated May 26, 1989 between
Consumers and Michael G. Morris. (1990 Form 10-K)
(10)(g) 1-5611 (10)(h) - Employment Agreement dated May 26, 1989 between
Consumers and David A. Mikelonis. (1991 10-K)
(10)(h) 1-9513 (10)(f) - Employment Agreement dated May 26, 1989 among
Consumers, CMS Energy and John W. Clark, (1990
Form 10-K)
(10)(i) 1-5611 (10)(j) - Employment Agreement dated March 25, 1992 between
Consumers, CMS Energy and Alan M. Wright. (1992
Form 10-K)
(10)(j) 1-5611 (10)(k) - Employment Agreement dated March 25, 1992 between
Consumers and Paul A. Elbert. (1992 10-K)
(10)(k) 1-9513 (10) - Employment Agreement dated January 12, 1996 between
CMS Energy and Rodger A. Kershner. (1995 Form 10-K)
(10)(l) 1-9513 (10)(m) - Employment Agreement dated April 2, 1996 between
CMS Energy and William J. Haener. (1996 Form 10-K)
(10)(m) 1-9513 (10)(n) - Employment Agreement dated April 4, 1996 between
CMS Energy, CMS Enterprises and James W. Cook. (1996
Form 10-K)
</TABLE>
144
<PAGE> 145
<TABLE>
<CAPTION>
Previously Filed
-------------------------
With File As Exhibit
Exhibits Number Number Description
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(10)(n) 1-5611 (10)(o) - Employment Agreement dated March 19, 1996 between
Consumers and David W. Joos. (1996 Form 10-K)
(10)(o) 1-5611 ((10)(n) - Employment Agreement dated December 4, 1997 between
Consumers and Robert A. Fenech. (1997 Form 10-K)
(10)(p) 1-5611 (10)(g) - Consumers' Executive Stock Option and Stock Appreciation
Rights Plan effective December 1, 1989. (1990 Form 10-K)
(10)(q) 33-61595 (4)(d) - CMS Energy's Performance Incentive Stock Plan effective as
of December 1, 1989.
(10)(r) 1-9513 (10)(m) - CMS Deferred Salary Savings Plan effective January 1, 1994.
(1993 Form 10-K)
(10)(s) 1-5611 (10)(n) - CMS Energy and Consumers Annual Executive Incentive
Compensation Plan effective January 1, 1986, as amended
January 1995. (1995 Form 10-K)
(10)(t) 1-5611 (10)(o) - Consumers' Supplemental Executive Retirement Plan effective
November 1, 1990. (1993 Form 10-K)
(10)(u) 33-37977 4.1 - Senior Trust Indenture, Leasehold Mortgage and Security
Agreement dated as of June 1, 1990 between The Connecticut
National Bank and United States Trust Company of New York.
(MCV Partnership)
Indenture Supplemental thereto:
33-37977 4.2 - Supplement No. 1 dated as of June 1, 1990. (MCV
Partnership)
(10)(v) 1-9513 (28)(b) - Collateral Trust Indenture dated as of June 1, 1990 among
Midland Funding Corporation I, MCV Partnership and United
States Trust Company of New York, Trustee. (3rd qtr 1990
Form 10-Q)
Indenture Supplemental thereto:
33-37977 4.4 - Supplement No. 1 dated as of June 1, 1990. (MCV
Partnership)
(10)(w) 1-9513 (10)(v) - Amended and Restated Investor Partner Tax Indemnification
Agreement dated as of June 1, 1990 among Investor Partners,
CMS Midland as Indemnitor and CMS Energy as Guarantor,
(1990 Form 10-K)
(10)(x) 1-9513 (19)(d)** - Environmental Agreement dated as of June 1, 1990 made by
CMS Energy to The Connecticut National Bank and Others.
(1990 Form 10-K)
(10)(y) 1-9513 (10)(z)** - Indemnity Agreement dated as of June 1, 1990 made by
CMS Energy to Midland Cogeneration Venture Limited
Partnership. (1990 Form 10-K)
(10)(z) 1-9513 (10)(aa)** - Environmental Agreement dated as of June 1, 1990 made by CMS
Energy to United States Trust Company of New York,
Meridian Trust Company, each Subordinated Collateral Trust
Trustee and Holders from time to time of Senior Bonds and
Subordinated Bonds and Participants from time to time in
Senior Bonds and Subordinated Bonds. (1990 Form 10-K)
</TABLE>
145
<PAGE> 146
<TABLE>
<CAPTION>
Previously Filed
-------------------------
With File As Exhibit
Exhibits Number Number Description
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(10)(aa) 33-37977 10.4 - Amended and Restated Participation Agreement dated as of
June 1, 1990 among MCV Partnership, Owner Participant, The
Connecticut National Bank, United States Trust Company
Meridian Trust Company, Midland Funding Corporation I,
Midland Funding Corporation II, MEC Development
Corporation and Institutional Senior Bond Purchasers. (MCV
Partnership)
1-5611 (10)(w) - Amendment No. 1 dated as of July 1, 1991. (1991 Form 10-K)
(10)(bb) 33-37977 10.4 - Power Purchase Agreement dated as of July 17, 1986 between
MCV Partnership and Consumers. (MCV Partnership)
33-37977 10.5 - Amendments thereto: Amendment No. 1 dated September 10, 1987.
(MCV Partnership)
33-37977 10.6 - Amendment No. 2 dated March 18, 1988. (MCV Partnership)
33-37977 10.7 - Amendment No. 3 dated August 28, 1989. (MCV Partnership)
33-37977 10.8 - Amendment No. 4A dated May 25, 1989. (MCV Partnership)
(10)(cc) 1-5611 (10)(y) - Unwind Agreement dated as of December 10, 1991 by and
among CMS Energy, Midland Group, Ltd., Consumers,
CMS Midland, Inc., MEC Development Corp. and
CMS Midland Holdings Company. (1991 Form 10-K)
(10)(dd) 1-5611 (10)(z) - Stipulated AGE Release Amount Payment Agreement dated as
of June 1, 1990, among CMS Energy, Consumers and The
Dow Chemical Company. (1991 Form 10-K)
(10)(ee) 1-5611 (10)(aa)** - Parent Guaranty dated as of June 14, 1990 from CMS Energy
to MCV, each of the Owner Trustees, the Indenture Trustees,
the Owner Participants and the Initial Purchasers of Senior
Bonds in the MCV Sale Leaseback transaction, and MEC
Development. (1991 Form 10-K)
(12) - Statements regarding computation of CMS Energy's Ratio of
Earnings to Fixed Charges
(21)(a) - Subsidiaries of CMS Energy.
(21)(b) - Subsidiaries of Consumers.
(23) - Consents of experts for CMS Energy.
(24)(a) - Power of Attorney for CMS Energy.
(24)(b) - Power of Attorney for Consumers.
(27)(a) - Financial Data Schedule UT for CMS Energy.
(27)(b) - Financial Data Schedule UT for Consumers.
(99) - CMS Energy; Consumers Gas Group Financials.
</TABLE>
- ---------------
** Obligations of only CMS Holdings and CMS Midland, second tier
subsidiaries of Consumers, and of CMS Energy but not of Consumers.
146
<PAGE> 147
Previously Filed
-------------------------
With File As Exhibit
Exhibits Number Number Description
- --------------------------------------------------------------------------------
Exhibits listed above which have heretofore been filed with the Securities and
Exchange Commission pursuant to various acts administered by the Commission, and
which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.
147
<PAGE> 148
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
Schedule II Valuation and Qualifying Accounts and Reserves 1998,
1997 and 1996:
CMS Energy Corporation............................................................. 149
Consumers Power Company............................................................ 149
Report of Independent Public Accountants
CMS Energy Corporation............................................................. 150
Consumers Power Company............................................................ 150
</TABLE>
Schedules other than those listed above are omitted because they are either not
required, not applicable or the required information is shown in the financial
statements or notes thereto.
Columns omitted from schedules filed have been omitted because the information
is not applicable.
148
<PAGE> 149
CMS ENERGY CORPORATION
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1998, 1997 and 1996
(In Millions)
<TABLE>
<CAPTION>
Balance at Charged Charged to Balance
Beginning to other at End
Description of Period Expense Accounts Deductions of Period
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulated provision for uncollectible
accounts (substantially all
Consumers Energy Company):
1998 $7 $12 $5 $11(a) $13
1997 $10 $8 $1 $12(a) $7
1996 $4 $21 - $15(a) $10
==================================================================================================================
</TABLE>
(a) Accounts receivable written off including net uncollectible amounts of $10
in 1998, $11 in 1997 and $13 in 1996 charged directly to operating expense
and credited to accounts receivable.
CONSUMERS ENERGY COMPANY
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1998, 1997 and 1996
(In Millions)
<TABLE>
<CAPTION>
Balance at Charged Charged to Balance
Beginning to other at End
Description of Period Expense Accounts Deductions of Period
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulated provision for
uncollectible accounts:
1998 $6 $10 - $11(a) $5
1997 $10 $8 - $12(a) $6
1996 $3 $21 - $14(a) $10
==================================================================================================================
</TABLE>
(a) Accounts receivable written off including net uncollectible amounts of $10
in 1998, $11 in 1997 and $13 in 1996 charged directly to operating expense
and credited to accounts receivable.
149
<PAGE> 150
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited in accordance with generally accepted auditing standards, CMS
Energy Corporation's consolidated financial statements included in this Form
10-K, and have issued our report thereon dated January 26, 1999 (except with
respect to the matters disclosed in Note 3, "Consumers' Electric Utility Rate
Matters", and Note 19, as to which the date is March 29, 1999). Our audit was
made for the purpose of forming an opinion on those basic consolidated financial
statements taken as a whole. The schedule listed in Item 14(a) is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1999.
Report of Independent Public Accountants
To Consumers Energy Company:
We have audited in accordance with generally accepted auditing standards,
Consumers Energy Company's consolidated financial statements included in this
Form 10-K, and have issued our report thereon dated January 26, 1999 (except
with respect to the matter disclosed in Note 2, "Electric Rate Matters", as to
which the date is March 29, 1999). Our audit was made for the purpose of forming
an opinion on those basic consolidated financial statements taken as a whole.
The schedule listed in Item 14(a) is the responsibility of the Company's
management and is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1999.
150
<PAGE> 151
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 29th
day of March 1999.
CMS ENERGY CORPORATION
By /s/ William T. McCormick, Jr.
-----------------------------------
WILLIAM T. MCCORMICK, JR.
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of CMS Energy
Corporation and in the capacities and on the 29th day of March 1999.
<TABLE>
<CAPTION>
Signature Title
- ---------------------------------------------------------- -----------------------------------------
<S> <C>
(i) Principal executive officer:
Chairman of the Board,
Chief Executive Officer
/s/ William T. McCormick, Jr. and Director
- ----------------------------------------------------------
WILLIAM T. MCCORMICK, JR.
(ii) Principal financial officer:
Senior Vice President,
and Chief Financial Officer
/s/ A. M. Wright
- ----------------------------------------------------------
ALAN M. WRIGHT
(iii) Controller or principal accounting officer:
Senior Vice President, Controller
/s/ P. D. Hopper and Chief Accounting Officer
- ----------------------------------------------------------
PRESTON D. HOPPER
(iv) A majority of the Directors including those named above:
/s/ John M Deutch* Director
- ----------------------------------------------------------
JOHN M. DEUTCH
</TABLE>
151
<PAGE> 152
<TABLE>
<CAPTION>
Signature Title
- ---------------------------------------------------------- -----------------------------------------
<S> <C>
/s/ James J. Duderstadt* Director
- ------------------------------------------------------
JAMES J. DUDERSTADT
/s/ K R Flaherty* Director
- ------------------------------------------------------
KATHLEEN R. FLAHERTY
/s/ Victor J. Fryling* Director
- ------------------------------------------------------
VICTOR J. FRYLING
/s/ Earl D. Holton* Director
- ------------------------------------------------------
EARL D. HOLTON
/s/ W. U. Parfet* Director
- ------------------------------------------------------
WILLIAM U. PARFET
/s/ Percy A. Pierre* Director
- ------------------------------------------------------
PERCY A. PIERRE
/s/ K. Whipple* Director
- ------------------------------------------------------
KENNETH WHIPPLE
/s/ John B. Yasinsky* Director
- ------------------------------------------------------
JOHN B. YASINSKY
* By /s/ Thomas A. McNish
-------------------------------------------------
THOMAS A. MCNISH, ATTORNEY-IN-FACT
</TABLE>
152
<PAGE> 153
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Consumers Energy Company has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 29th
day of March 1999.
CONSUMERS ENERGY COMPANY
By /s/ William T. McCormick Jr.
-----------------------------------------
WILLIAM T. MCCORMICK, JR.
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of Consumers
Energy Company and in the capacities and on the 29th day of March 1999.
<TABLE>
<CAPTION>
Signature Title
- ---------------------------------------------------------- -----------------------------------------
<S> <C>
(i) Principal executive officer:
Vice Chairman of the Board,
President and Director
/s/ Victor J. Fryling
- ----------------------------------------------------------
VICTOR J.FRYLING
(ii) Principal financial officer:
Senior Vice President and
/s/ A. M. Wright Chief Financial Officer
- ----------------------------------------------------------
ALAN M. WRIGHT
(iii) Controller or principal accounting officer:
Vice President and
/s/ Dennis DaPra Controller
- ----------------------------------------------------------
DENNIS DAPRA
(iv) A majority of the Directors including those named above:
/s/ John M Deutch* Director
- ----------------------------------------------------------
JOHN M. DEUTCH
</TABLE>
153
<PAGE> 154
<TABLE>
<CAPTION>
Signature Title
- ---------------------------------------------------------- -----------------------------------------
<S> <C>
/s/ James J. Duderstadt* Director
- ----------------------------------------------------------
JAMES J. DUDERSTADT
/s/ K R Flaherty* Director
- ----------------------------------------------------------
KATHLEEN R. FLAHERTY
/s/ Earl D. Holton* Director
- ----------------------------------------------------------
EARL D. HOLTON
/s/ William T. McCormick, Jr.* Director
- ----------------------------------------------------------
WILLIAM T. MCCORMICK, JR.
/s/ W. U. Parfet* Director
- ----------------------------------------------------------
WILLIAM U. PARFET
/s/ Percy A. Pierre* Director
- ----------------------------------------------------------
PERCY A. PIERRE
/s/ K. Whipple* Director
- ----------------------------------------------------------
KENNETH WHIPPLE
/s/ John B. Yasinsky* Director
- ----------------------------------------------------------
JOHN B. YASINSKY
*By /s/ Thomas A. McNish
- ----------------------------------------------------------
THOMAS A. MCNISH, ATTORNEY-IN-FACT
</TABLE>
154
<PAGE> 155
CMS ENERGY AND CONSUMERS EXHIBIT INDEX
<TABLE>
<CAPTION>
Previously Filed
-------------------------
With File As Exhibit
Exhibits Number Number Description
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(3)(a) 33-60007 (3)(i) - Restated Articles of Incorporation of CMS Energy.
(3)(b) 1-9513 (3)(b) - By-Laws of CMS Energy. (1994 Form 10-K)
(3)(c) 1-5611 (3)(c) - Certificate of Amendment to the Articles of Incorporation dated
March 10, 1997 and Restated Articles of Incorporation dated March
25, 1994 of Consumers. (1996 Form 10-K)
(3)(d) 1-5611 (3)(d) - By-Laws of Consumers. (1996 Form 10-K)
(4)(a) 2-65973 (b)(1)-4 - Indenture dated as of September 1, 1945, between Consumers and
Chemical Bank (successor to Manufacturers Hanover Trust Company),
as Trustee, including therein indentures supplemental thereto
through the Forty-third Supplemental Indenture dated as of May 1,
1979.
- Indentures Supplemental thereto:
33-31866 (4)(d) - 67th 11/15/89
33-41126 (4)(c) - 68th 06/15/93
1-5611 (4) - 69th 09/15/93 (Form 8-K dated Sep. 21, 1993)
1-5611 (4)(a) - 70th 02/01/98 (1997 Form 10-K)
1-5611 (4)(a) - 71st 03/06/98 (1997 Form 10-K)
1-5611 (4)(b) - 72nd 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(d) - 73rd 06/15/98
1-5611 (4)(b) - 74th 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(b) 1-5611 (4)(b) - Indenture dated as of January 1, 1996 between Consumers and The
Bank of New York, as Trustee. (1995 Form 10-K)
- Indentures Supplemental thereto:
1-5611 (4)(b) - 1st 01/18/96 (1995 Form 10-K)
1-5611 (4)(a) - 2nd 09/04/97 (3rd qtr 1997 Form 10-Q)
(4)(c) 1-5611 (4)(c) - Indenture dated as of February 1, 1998 between Consumers and The
Chase Manhattan Bank, as Trustee. (1997 Form 10-K)
1-5611 (4)(a) - 1st 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(b) - 2nd 06/15/98
1-5611 (4)(a) - 3rd 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(d) 33-47629 (4)(a) - Indenture dated as of September 15, 1992 between CMS Energy and NBD
Bank, as Trustee.
- Indentures Supplemental thereto:
1-9513 (4) - 3rd 05/06/97 (1st qtr 1997 Form 10-Q)
333-37241 (4)(a) - 4th 09/26/97
1-9513 (4)(b) - 5th 11/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(d) - 6th 01/13/98 (1997 Form 10-K)
(4)(d)(i) - 7th 01/25/99
(4)(d)(ii) - 8th 02/03/99
(4)(e) 1-9513 (4a) - Indenture between CMS Energy and The Chase Manhattan Bank, as
Trustee, dated as of January 15, 1994. (Form 8-K dated March 29,
1994)
- Indentures Supplemental thereto:
1-9513 (4b) - 1st 01/20/94 (Form 8-K dated March 29, 1994)
1-9513 (4) - 2nd 03/19/96 (1st qtr 1996 Form 10-Q)
1-9513 (4)(a)(iv) - 3rd 03/17/97 (Form 8-K dated May 1, 1997)
</TABLE>
155
<PAGE> 156
<TABLE>
<CAPTION>
Previously Filed
-------------------------
With File As Exhibit
Exhibits Number Number Description
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
333-36115 (4)(d) - 4th 09/17/97
333-63229 (4)(c) - 5th 08/26/98
(4)(f) 1-9513 (4a) - Indenture dated as of June 1, 1997, between CMS Energy and The Bank
of New York, as trustee. (Form 8-K dated July 1, 1997)
- Indentures Supplemental thereto:
1-9513 (4b) - 1st 06/20/97 (Form 8-K dated July 1, 1997)
(10)(a) - Underwriting Agreement dated January 20, 1999.
(10)(b) 1-9513 (4) - Credit Agreement dated as of July 2, 1997, among CMS Energy, the
Administrative Agent, Collateral Agent, Documentation Agent,
Syndication Agent, Co-Agents and Lead Manager, all as defined
therein, and the Exhibits and Schedules thereto. (2nd qtr 1997 Form
10-Q)
333-63229 (4)(f) - 1st Amendment dated 01/30/98
(10)(b)(i) - 2nd Amendment dated 11/02/98
(10)(c) 1-5611 (10) - Credit Agreement dated as of July 14, 1995 among Consumers, the
Banks named therein and the First National Bank of Chicago, as
Administrative Agent.
(10)(d) 1-9513 (10)(c) - Employment Agreement dated as of August 1, 1990 among Consumers,
CMS Energy and William T. McCormick, Jr. (1990 Form 10-K)
(10)(e) 1-5611 (10)(i) - Employment Agreement effective as of June 15, 1988 among Consumers,
CMS Energy and Victor J. Fryling. (1988 Form 10-K)
(10)(f) 1-5611 (10)(f) - Employment Agreement dated May 26, 1989 between Consumers and
Michael G. Morris. (1990 Form 10-K)
(10)(g) 1-5611 (10)(h) - Employment Agreement dated May 26, 1989 between Consumers and
David A. Mikelonis. (1991 10-K)
(10)(h) 1-9513 (10)(f) - Employment Agreement dated May 26, 1989 among Consumers, CMS Energy
and John W. Clark. (1990 Form 10-K)
(10)(i) 1-5611 (10)(j) - Employment Agreement dated March 25, 1992 between Consumers,
CMS Energy and Alan M. Wright. (1992 Form 10-K)
(10)(j) 1-5611 (10)(k) - Employment Agreement dated March 25, 1992 between Consumers and
Paul A. Elbert. (1992 10-K)
(10)(k) 1-9513 (10) - Employment Agreement dated January 12, 1996 between CMS Energy and
Rodger A. Kershner. (1995 Form 10-K)
(10)(l) 1-9513 (10)(m) - Employment Agreement dated April 2, 1996 between CMS Energy and
William J. Haener. (1996 Form 10-K)
(10)(m) 1-9513 (10)(n) - Employment Agreement dated April 4, 1996 between CMS Energy,
CMS Enterprises and James W. Cook. (1996 Form 10-K)
(10)(n) 1-5611 (10)(o) - Employment Agreement dated March 19, 1996 between Consumer and
David W. Joos. (1996 Form 10-K)
(10)(o) 1-5611 (10)(n) - Employment Agreement dated December 4, 1997 between Consumers and
Robert A. Fenech. (1997 Form 10-K)
(10)(p) 1-5611 (10)(g) - Consumers' Executive Stock Option and Stock Appreciation Rights
Plan effective December 1, 1989. (1990 Form 10-K)
</TABLE>
156
<PAGE> 157
<TABLE>
<CAPTION>
Previously Filed
-------------------------
With File As Exhibit
Exhibits Number Number Description
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(10)(q) 33-61595 (4)(d) - CMS Energy's Performance Incentive Stock Plan effective as of
December 1, 1989.
(10)(r) 1-9513 (10)(m) - CMS Deferred Salary Savings Plan effective January 1, 1994. (1993
Form 10-K)
(10)(s) 1-5611 (10)(n) - CMS Energy and Consumers Annual Executive Incentive Compensation
Plan effective January 1, 1986, as amended January 1995. (1995 Form
10-K)
(10)(t) 1-5611 (10)(o) - Consumers' Supplemental Executive Retirement Plan effective
November 1, 1990. (1993 Form 10-K)
(10)(u) 33-37977 4.1 - Senior Trust Indenture, Leasehold Mortgage and Security Agreement
dated as of June 1, 1990 between The Connecticut National Bank and
United States Trust Company of New York. (MCV Partnership)
Indenture Supplemental thereto:
33-37977 4.2 - Supplement No. 1 dated as of June 1, 1990. (MCV Partnership)
(10)(v) 1-9513 (28)(b) - Collateral Trust Indenture dated as of June 1, 1990 among Midland
Funding Corporation I, MCV Partnership and United States Trust
Company of New York, Trustee. (3rd qtr 1990 Form 10-Q)
Indenture Supplemental thereto:
33-37977 4.4 - Supplement No. 1 dated as of June 1, 1990. (MCV Partnership)
(10)(w) 1-9513 (10)(v) - Amended and Restated Investor Partner Tax Indemnification Agreement
dated as of June 1, 1990 among Investor Partners, CMS Midland as
Indemnitor and CMS Energy as Guarantor. (1990 Form 10-K)
(10)(x) 1-9513 (19)(d)** - Environmental Agreement dated as of June 1, 1990 made by CMS Energy
to The Connecticut National Bank and Others. (1990 Form 10-K)
(10)(y) 1-9513 (10)(z)** - Indemnity Agreement dated as of June 1, 1990 made by CMS Energy to
Midland Cogeneration Venture Limited Partnership. (1990 Form 10-K)
(10)(z) 1-9513 (10)(aa)** - Environmental Agreement dated as of June 1, 1990 made by CMS Energy
to United States Trust Company of New York, Meridian Trust Company,
each Subordinated Collateral Trust Trustee and Holders from time to
time of Senior Bonds and Subordinated Bonds and Participants from
time to time in Senior Bonds and Subordinated Bonds. (1990 Form
10-K)
(10)(aa) 33-37977 10.4 - Amended and Restated Participation Agreement dated as of June 1,
1990 among MCV Partnership, Owner Participant, The Connecticut
National Bank, United States Trust Company, Meridian Trust Company,
Midland Funding Corporation I, Midland Funding Corporation II, MEC
Development Corporation and Institutional Senior Bond Purchasers.
(MCV Partnership)
1-5611 (10)(w) - Amendment No. 1 dated as of July 1, 1991. (1991 Form 10-K)
(10)(bb) 33-37977 10.4 - Power Purchase Agreement dated as of July 17, 1986 between MCV
Partnership and Consumers. (MCV Partnership)
Amendments thereto:
</TABLE>
157
<PAGE> 158
<TABLE>
<CAPTION>
Previously Filed
-------------------------
With File As Exhibit
Exhibits Number Number Description
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
33-37977 10.5 - Amendment No. 1 dated September 10, 1987. (MCV Partnership)
33-37977 10.6 - Amendment No. 2 dated March 18, 1988. (MCV Partnership)
33-37977 10.7 - Amendment No. 3 dated August 28, 1989. (MCV Partnership)
33-37977 10.8 - Amendment No. 4A dated May 25, 1989. (MCV Partnership)
(10)(cc) 1-5611 (10)(y) - Unwind Agreement dated as of December 10, 1991 by and among
CMS Energy, Midland Group, Ltd., Consumers, CMS Midland, Inc., MEC
Development Corp. and CMS Midland Holdings Company (1991 Form
10-K)
(10)(dd) 1-5611 (10)(z) - Stipulated AGE Release Amount Payment Agreement dated as of June 1,
1990, among CMS Energy, Consumers and The Dow Chemical Company.
(1991 Form 10-K)
(10)(ee) 1-5611 (10)(aa)** - Parent Guaranty dated as of June 14, 1990 from CMS Energy to MCV,
each of the Owner Trustees, the Indenture Trustees, the Owner
Participants and the Initial Purchasers of Senior Bonds in the MCV
Sale Leasebak transaction, and MEC Development. (1991 Form 10-K)
(12) - Statements regarding computation of CMS Energy's Ratio of Earnings
to Fixed Charges
(21)(a) - Subsidiaries of CMS Energy.
(21)(b) - Subsidiaries of Consumers.
(23) - Consents of experts for CMS Energy.
(24)(a) - Power of Attorney for CMS Energy.
(24)(b) - Power of Attorney for Consumers.
(27)(a) - Financial Data Schedule UT for CMS Energy.
(27)(b) - Restated Financial Data Schedule UT for CMS Energy.
(27)(c) - Financial Data Schedule UT for Consumers.
(99) - CMS Energy: Consumers Gas Group Financials.
</TABLE>
** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of
Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities and
Exchange Commission pursuant to various acts administered by the Commission, and
which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.
158
<PAGE> 1
Exhibit 4(d)(i)
SEVENTH SUPPLEMENTAL INDENTURE
DATED AS OF JANUARY 25, 1999
--------------------
This Seventh Supplemental Indenture, dated as of the 25th day of
January, 1999 between CMS Energy Corporation, a corporation duly organized and
existing under the laws of the State of Michigan (hereinafter called the
"Issuer") and having its principal office at Fairlane Plaza South, Suite 1100,
330 Town Center Drive, Dearborn, Michigan 48126, and NBD Bank, a Michigan
banking corporation (hereinafter called the "Trustee") and having its principal
Corporate Trust Office at 611 Woodward Avenue, Detroit, Michigan 48226.
WITNESSETH:
WHEREAS, the Issuer and the Trustee (formerly known as NBD Bank,
National Association) entered into an Indenture, dated as of September 15, 1992
(the "Original Indenture"), pursuant to which one or more series of debt
securities of the Issuer (the "Securities") may be issued from time to time; and
WHEREAS, Section 2.3 of the Original Indenture permits the terms
of any series of Securities to be established in an indenture supplemental to
the Original Indenture; and
WHEREAS, Section 8.1(e) of the Original Indenture provides that a
supplemental indenture may be entered into by the Issuer and the Trustee without
the consent of any Holders of the Securities to establish the form and terms of
the Securities of any series; and
<PAGE> 2
WHEREAS, the Issuer has requested the Trustee to join with it in
the execution and delivery of this Seventh Supplemental Indenture in order to
supplement and amend the Original Indenture by, among other things, establishing
the form and terms of a series of Securities to be known as the Issuer's " 7.5%
Senior Notes Due 2009" (the "2009 Notes"), providing for the issuance of the
2009 Notes and amending and adding certain provisions thereof for the benefit of
the Holders of the 2009 Notes; and
WHEREAS, the Issuer and the Trustee desire to enter into this
Seventh Supplemental Indenture for the purposes set forth in Sections 2.3 and
8.1(e) of the Original Indenture as referred to above; and
WHEREAS, the Issuer has furnished the Trustee with a copy of the
resolutions of its Board of Directors certified by its Secretary or Assistant
Secretary authorizing the execution of this Seventh Supplemental Indenture; and
WHEREAS, all things necessary to make this Seventh Supplemental
Indenture a valid agreement of the Issuer and the Trustee and a valid supplement
to the Original Indenture have been done,
NOW, THEREFORE, THIS SEVENTH SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
2009 Notes to be issued hereunder by holders thereof, the Issuer and the Trustee
mutually covenant and agree, for the equal and proportionate benefit of the
respective holders from time to time of the 2009 Notes, as follows:
ARTICLE I
STANDARD PROVISIONS; DEFINITIONS
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SECTION 1.01. Standard Provisions. The Original Indenture together
with this Seventh Supplemental Indenture and all previous indentures
supplemental thereto entered into pursuant to the applicable terms thereof are
hereinafter sometimes collectively referred to as the "Indenture." All
capitalized terms which are used herein and not otherwise defined herein are
defined in the Indenture and are used herein with the same meanings as in the
Indenture.
SECTION 1.02. Definitions. Section 1.1 of the Original Indenture
is amended to insert the new definitions applicable to the 2009 Notes, in the
appropriate alphabetical sequence, as follows:
"Amortization Expense" means, for any period, amounts recognized
during such period as amortization of capital leases, depletion, nuclear fuel,
goodwill and assets classified as intangible assets in accordance with generally
accepted accounting principles.
"Applicable Premium" means, with respect to a 2009 Note (or
portion thereof) being redeemed at any time, the excess of (A) the present value
at such time of the principal amount of such 2009 Note (or portion thereof)
being redeemed plus all interest payments due on such 2009 Note (or portion
thereof), which present value shall be computed using a discount rate equal to
the Treasury Rate plus 50 basis points, over (B) the principal amount of such
2009 Note (or portion thereof) being redeemed at such time. For purposes of this
definition, the present values of interest and principal payments will be
determined in accordance with generally accepted principles of financial
analysis.
"Average Life" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum of
the products of (x) the number of years from the date of determination to the
dates of each successive scheduled
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principal payment of such Indebtedness and (y) the amount of such principal
payment by (ii) the sum of all such principal payments.
"Capital Lease Obligation" of a Person means any obligation that
is required to be classified and accounted for as a capital lease on the face of
a balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; the stated maturity thereof shall be the date of the last payment of
rent or any other amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty; and
such obligation shall be deemed secured by a Lien on any property or assets to
which such lease relates.
"Capital Stock" means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock, including any Preferred Stock or Letter
Stock; provided that Hybrid Preferred Securities shall not be considered Capital
Stock for purposes of this definition.
"Change in Control" means an event or series of events by which
(i) the Issuer ceases to own beneficially, directly or indirectly, at least 80%
of the total voting power of all classes of Capital Stock then outstanding of
Consumers (whether arising from issuance of securities of the Issuer or
Consumers, any direct or indirect transfer of securities by the Issuer or
Consumers, any merger, consolidation, liquidation or dissolution of the Issuer
or Consumers or otherwise); (ii) any "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner"
(as such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person or group shall be deemed to have "beneficial ownership" of all
shares that such person or group has the right to acquire, whether such right is
exercisable
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immediately or only after the passage of time), directly or indirectly, of more
than 35% of the Voting Stock of the Issuer; or (iii) the Issuer consolidates
with or merges into another corporation or directly or indirectly conveys,
transfers or leases all or substantially all of its assets to any Person, or any
corporation consolidates with or merges into the Issuer, in either event
pursuant to a transaction in which the outstanding Voting Stock of the Issuer is
changed into or exchanged for cash, securities, or other property, other than
any such transaction in which (A) the outstanding Voting Stock of the Issuer is
changed into or exchanged for Voting Stock of the surviving corporation and (B)
the holders of the Voting Stock of the Issuer immediately prior to such
transaction retain, directly or indirectly, substantially proportionate
ownership of the Voting Stock of the surviving corporation immediately after
such transaction.
"CMS Electric and Gas" means CMS Electric and Gas Company, a
Michigan corporation and wholly-owned subsidiary of Enterprises.
"CMS Gas Transmission and Storage" means CMS Gas Transmission and
Storage Company, a Michigan corporation and wholly-owned subsidiary of
Enterprises.
"CMS Generation" means CMS Generation Co., a Michigan corporation
and wholly-owned subsidiary of Enterprises.
"CMS MST" means CMS Marketing, Services and Trading Company, a
Michigan corporation and wholly-owned subsidiary of Enterprises.
"CMS Oil & Gas" means CMS Oil & Gas Co. (formerly known as CMS
NOMECO Oil & Gas Co.), a Michigan corporation and wholly-owned subsidiary of
Enterprises.
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"Consolidated Assets" means, at any date of determination, the
aggregate assets of the Issuer and its Consolidated Subsidiaries determined on a
consolidated basis in accordance with generally accepted accounting principles.
"Consolidated Coverage Ratio" with respect to any period means the
ratio of (i) the aggregate amount of Operating Cash Flow for such period to (ii)
the aggregate amount of Consolidated Interest Expense for such period.
"Consolidated Current Liabilities" means, for any period, the
aggregate amount of liabilities of the Issuer and its Consolidated Subsidiaries
which may properly be classified as current liabilities (including taxes accrued
as estimated), after (i) eliminating all inter-company items between the Issuer
and any Consolidated Subsidiary and (ii) deducting all current maturities of
long-term Indebtedness, all as determined in accordance with generally accepted
accounting principles.
"Consolidated Indebtedness" means, at any date of determination,
the aggregate Indebtedness of the Issuer and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that Consolidated Indebtedness shall not include
any subordinated debt owned by any Hybrid Preferred Securities Subsidiary.
"Consolidated Interest Expense" means, for any period, the total
interest expense in respect of Consolidated Indebtedness of the Issuer and its
Consolidated Subsidiaries, including, without duplication, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount, (iii)
capitalized interest, (iv) cash and noncash interest payments, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs under Interest Rate Protection
Agreements (including amortization of discount) and (vii) interest expense in
respect of obligations of other Persons deemed to be Indebtedness of
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the Issuer or any Consolidated Subsidiaries under clause (v) or (vi) of the
definition of Indebtedness, provided, however, that Consolidated Interest
Expense shall exclude (a) any costs otherwise included in interest expense
recognized on early retirement of debt and (b) any interest expense in respect
of any Indebtedness of any Subsidiary of Consumers, CMS Generation, CMS Oil &
Gas, CMS Electric and Gas, CMS Gas Transmission and Storage, CMS MST or any
other Designated Enterprises Subsidiary, provided that such Indebtedness is
without recourse to any assets of the Issuer, Consumers, Enterprises, CMS
Generation, CMS Oil & Gas, CMS Electric and Gas, CMS Gas Transmission and
Storage, CMS MST or any other Designated Enterprises Subsidiary.
"Consolidated Net Income" means, for any period, the net income of
the Issuer and its Consolidated Subsidiaries determined on a consolidated basis
in accordance with generally accepted accounting principles; provided, however,
that there shall not be included in such Consolidated Net Income:
(i) any net income of any Person if such Person is not a
Subsidiary, except that (A) the Issuer's equity in the net income of
any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by
such Person during such period to the Issuer or a Consolidated
Subsidiary as a dividend or other distribution and (B) the Issuer's
equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income;
(ii) any net income of any Person acquired by the Issuer or a
Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(iii) any gain or loss realized upon the sale or other disposition
of any property, plant or equipment of the Issuer or its Consolidated
Subsidiaries which
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is not sold or otherwise disposed of in the ordinary course of business
and any gain or loss realized upon the sale or other disposition of any
Capital Stock of any Person; and
(iv) any net income of any Subsidiary of Consumers, CMS
Generation, CMS Oil & Gas, CMS Electric and Gas, CMS Gas Transmission
and Storage, CMS MST or any other Designated Enterprises Subsidiary
whose interest expense is excluded from Consolidated Interest Expense,
provided, however, that for purposes of this subsection (iv), any cash,
dividends or distributions of any such Subsidiary to the Issuer shall
be included in calculating Consolidated Net Income.
"Consolidated Net Tangible Assets" means, for any period, the
total amount of assets (less accumulated depreciation or amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) as set forth on the most recently available quarterly
or annual consolidated balance sheet of the Issuer and its Consolidated
Subsidiaries, determined on a consolidated basis in accordance with generally
accepted accounting principles, and after giving effect to purchase accounting
and after deducting therefrom, to the extent otherwise included, the amounts of:
(i) Consolidated Current Liabilities; (ii) minority interests in Consolidated
Subsidiaries held by Persons other than the Issuer or a Restricted Subsidiary;
(iii) excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors as evidenced by Board
resolutions; (iv) any revaluation or other write-up in value of assets
subsequent to December 31, 1996, as a result of a change in the method of
valuation in accordance with generally accepted accounting principles; (v)
unamortized debt discount and expenses and other unamortized deferred charges,
goodwill, patents, trademarks, service marks, trade names, copyrights, licenses
organization or developmental expenses and other intangible items; (vi) treasury
stock; and (vii) any cash set apart and held in a sinking or other analogous
fund established
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for the purpose of redemption or other retirement of Capital Stock to the extent
such obligation is not reflected in Consolidated Current Liabilities.
"Consolidated Net Worth" of any Person means the total of the
amounts shown on the consolidated balance sheet of such Person and its
consolidated subsidiaries, determined on a consolidated basis in accordance with
generally accepted accounting principles, as of any date selected by such Person
not more than 90 days prior to the taking of any action for the purpose of which
the determination is being made (and adjusted for any material events since such
date), as (i) the par or stated value of all outstanding Capital Stock plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock and (C) any amounts attributable to
Exchangeable Stock.
"Consolidated Subsidiary" means, any Subsidiary whose accounts are
or are required to be consolidated with the accounts of the Issuer in accordance
with generally accepted accounting principles.
"Consumers" means Consumers Energy Company, a Michigan
corporation, all of whose common stock is on the date hereof owned by the
Issuer.
"Designated Enterprises Subsidiary" means any wholly-owned
subsidiary of Enterprises formed after the date of this Seventh Supplemental
Indenture which is designated a Designated Enterprises Subsidiary by the Board
of Directors.
"Enterprises" means CMS Enterprises Company, a Michigan
corporation and wholly-owned subsidiary of the Issuer.
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"Event of Default" with respect to the 2009 Notes has the meaning
specified in Article V of this Seventh Supplemental Indenture.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchangeable Stock" means any Capital Stock of a corporation that
is exchangeable or convertible into another security (other than Capital Stock
of such corporation that is neither Exchangeable Stock or Redeemable Stock).
"Hybrid Preferred Securities" means any preferred securities
issued by a Hybrid Preferred Securities Subsidiary, where such preferred
securities have the following characteristics:
(i) such Hybrid Preferred Securities Subsidiary lends substantially
all of the proceeds from the issuance of such preferred securities
to the Company or Consumers in exchange for subordinated debt
issued by the Company or Consumers respectively;
(ii) such preferred securities contain terms providing for the deferral
of distributions corresponding to provisions providing for the
deferral of interest payments on such subordinated debt; and
(iii) the Company or Consumers (as the case may be) makes periodic
interest payments on such subordinated debt, which interest
payments are in turn used by the Hybrid Preferred Securities
Subsidiary to make corresponding payments to the holders of the
Hybrid Preferred Securities.
"Hybrid Preferred Securities Subsidiary" means any business trust
(or similar entity) (i) all of the common equity interest of which is owned
(either directly or indirectly through one or more wholly-owned Subsidiaries of
the Company or Consumers) at all times by the Company or Consumers, (ii) that
has been formed for the purpose of issuing Hybrid Preferred Securities and (iii)
substantially all of the assets of which
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consist at all times solely of subordinated debt issued by the Company or
Consumers (as the case may be) and payments made from time to time on such
subordinated debt.
"Indebtedness" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations
and all obligations under any title retention agreement (but excluding
trade accounts payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (i)
through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or,
if and to the extent drawn upon, such drawing is reimbursed no later
than the third Business Day following receipt by such Person of a
demand for reimbursement following payment on the letter of credit);
(v) all obligations of the type referred to in clauses (i)
through (iv) of other Persons and all dividends of other Persons for
the payment of which, in
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either case, such Person is responsible or liable as obligor, guarantor
or otherwise; and
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so
secured.
"Interest Payment Date" means July 15, 1999 and each January 15
and July 15 in each year thereafter.
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect the Issuer or any Subsidiary against
fluctuations in interest rates.
"Letter Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is intended to reflect the separate performance of certain of the
businesses or operations conducted by such corporation or any of its
subsidiaries.
"Lien" means any lien, mortgage, pledge, security interest,
conditional sale, title retention agreement or other charge or encumbrance of
any kind.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale ,
the aggregate proceeds of such Asset Sale including the fair market value (as
determined by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by the Issuer, net of (i) brokerage commissions and other
fees and expenses (including fees and expenses
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of counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes (whether or not such taxes will actually be paid or are payable)
as a result of such Asset Sale without regard to the consolidated results of
operations of the Issuer and its Restricted Subsidiaries, taken as a whole,
(iii) payments made to repay Indebtedness or any other obligation outstanding at
the time of such Asset Sale that either (A) is secured by a Lien on the property
or assets sold or (B) is required to be paid as a result of such sale and (iv)
appropriate amounts to be provided by the Issuer or any Restricted Subsidiary of
the Issuer as a reserve against any liabilities associated with such Asset Sale
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
determined in conformity with generally accepted accounting principles and (b)
with respect to any issuance or sale or contribution in respect of Capital
Stock, the aggregate proceeds of such issuance, sale or contribution, including
the fair market value (as determined by the Board of Directors and net of any
associated debt and of any consideration other than Capital Stock received in
return) of property other than cash, received by the Issuer, net of attorneys'
fees, accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection with
such issuance or sale and net of taxes paid or payable as a result thereof,
provided, however, that if such fair market value as determined by the Board of
Directors of property other than cash is greater than $25 million, the value
thereof shall be based upon an opinion from an independent nationally recognized
firm experienced in the appraisal or similar review of similar types of
transactions.
"Non-Convertible Capital Stock" means, with respect to any
corporation, any non-convertible Capital Stock of such corporation and any
Capital Stock of such corporation convertible solely into non-convertible
Capital Stock other than Preferred Stock of such corporation; provided, however,
that Non-Convertible Capital Stock shall not include any Redeemable Stock or
Exchangeable Stock.
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"Operating Cash Flow" means, for any period, with respect to the
Issuer and its Consolidated Subsidiaries, the aggregate amount of Consolidated
Net Income after adding thereto Consolidated Interest Expense (adjusted to
include costs recognized on early retirement of debt), income taxes,
depreciation expense, Amortization Expense and any noncash amortization of debt
issuance costs, any nonrecurring, noncash charges to earnings and any negative
accretion recognition.
"Other Rating Agency" shall mean any one of Duff & Phelps Credit
Rating Co., Fitch Investors Service, L.P. or Moody's Investors Service, Inc.,
and any successor to any of these organizations which is a nationally recognized
statistical rating organization.
"Paying Agent" means any person authorized by the Issuer to pay
the principal of (and premium, if any) or interest on any of the 2009 Notes on
behalf of the Issuer. Initially, the Paying Agent shall be the Trustee.
"Predecessor 2009 Note" of any particular 2009 Note means every
previous 2009 Note evidencing all or a portion of the same debt as that
evidenced by such particular 2009 Note; and, for the purposes of the definition,
any 2009 Note authenticated and delivered under Section 2.9 of the Indenture in
exchange for or in lieu of a mutilated, destroyed, lost or stolen 2009 Note
shall be deemed to evidence the same debt as the mutilated, destroyed, lost or
stolen 2009 Note.
"Preferred Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
that is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation; provided that Hybrid Preferred Securities shall not be considered
Preferred Stock for purposes of this definition.
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"Redeemable Stock" means any Capital Stock that by its terms or
otherwise is required to be redeemed prior to the first anniversary of the
Stated Maturity of the outstanding 2009 Notes or is redeemable at the option of
the holder thereof at any time prior to the first anniversary of the Stated
Maturity of the outstanding 2009 Notes.
"Restricted Subsidiary" means any Subsidiary (other than Consumers
and its subsidiaries) of the Issuer which, as of the date of the Issuer's most
recent quarterly consolidated balance sheet, constituted at least 10% of the
total Consolidated Assets of the Issuer and its Consolidated Subsidiaries and
any other Subsidiary which from time to time is designated a Restricted
Subsidiary by the Board of Directors provided that no Subsidiary may be
designated a Restricted Subsidiary if, immediately after giving effect thereto,
an Event of Default or event that, with the lapse of time or giving of notice or
both, would constitute an Event of Default would exist or the Issuer and its
Restricted Subsidiaries could not incur at least one dollar of additional
Indebtedness under Section 4.04, and (i) any such Subsidiary so designated as a
Restricted Subsidiary must be organized under the laws of the United States or
any State thereof, (ii) more than 80% of the Voting Stock of such Subsidiary
must be owned of record and beneficially by the Issuer or a Restricted
Subsidiary and (iii) such Restricted Subsidiary must be a Consolidated
Subsidiary.
"Standard & Poor's" shall mean Standard & Poor's Ratings Group, a
division of McGraw Hill Inc., and any successor thereto which is a nationally
recognized statistical rating organization, or if such entity shall cease to
rate the 2009 Notes or shall cease to exist and there shall be no such successor
thereto, any other nationally recognized statistical rating organization
selected by the Issuer which is acceptable to the Trustee.
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"Subordinated Indebtedness" means any Indebtedness of the Issuer
(whether outstanding on the date of this Seventh Supplemental Indenture or
thereafter incurred) which is contractually subordinated or junior in right of
payment to the 2009 Notes.
"Support Obligations" means, for any person, without duplication,
any financial obligation, contingent or otherwise, of such person guaranteeing
or otherwise supporting any debt or other obligation of any other person in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such person, direct or indirect, (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such debt or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such debt, (ii) to purchase property, securities or services for the purpose
of assuring the owner of such debt of the payment of such debt, (iii) to
maintain working capital, equity capital, available cash or other financial
statement condition of the primary obligor so as to enable the primary obligor
to pay such debt, (iv) to provide equity capital under or in respect of equity
subscription arrangements (to the extent that such obligation to provide equity
capital does not otherwise constitute debt), or (v) to perform, or arrange for
the performance of, any non-monetary obligations or non-funded debt payment
obligations of the primary obligor.
"Tax-Sharing Agreement" means the Amended and Restated Agreement
for the Allocation of Income Tax Liabilities and Benefits, dated January 1,
1994, as amended or supplemented from time to time, by and among Issuer, each of
the members of the Consolidated Group (as defined therein), and each of the
corporations that become members of the Consolidated Group.
"Treasury Rate" means the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15(519) which has become publicly available at least two Business Days prior
to the redemption date or, in the case of
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defeasance, prior to the date of deposit (or, if such Statistical Release is no
longer published, any publicly available source of similar market data)) most
nearly equal to the then remaining average life to stated maturity of the 2009
Notes; provided, however, that if the average life to stated maturity of the
2009 Notes is not equal to the constant maturity of a United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-twelfth of a
year) from the weekly average yields of United States Treasury securities for
which such yields are given.
"Voting Stock" means securities of any class or classes the
holders of which are ordinarily, in the absence of contingencies, entitled to
vote for corporate directors (or persons performing similar functions).
Certain terms, used principally in Articles Three, Four and Seven
of this Seventh Supplemental Indenture, are defined in those Articles.
ARTICLE II
DESIGNATION AND TERMS OF THE 2009 NOTES; FORMS
SECTION 2.01. Establishment of Series. (a) There is hereby created
a series of Securities to be known and designated as the "7.5% Senior Notes Due
2009" and limited in aggregate principal amount (except as contemplated in
Section 2.3(f)(2) of the Indenture) to $480,000,000. The Stated Maturity of the
2009 Notes is January 15, 2009.
(b) The 2009 Notes will bear interest from the Original Issue
Date, or from the most recent date to which interest has been paid or duly
provided for, at the rate of 7.5% per annum stated therein until the principal
thereof is paid or made available
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for payment. Interest will be payable semiannually on each Interest Payment Date
and at Maturity, as provided in the form of the 2009 Note in Section 2.03
hereof.
(c) The Record Date referred to in Section 2.3(f)(4) of the
Indenture for the payment of the interest on any 2009 Note payable on any
Interest Payment Date (other than at Maturity) shall be the 15th day (whether or
not a Business Day) of the calendar month preceding the month in which such
Interest Payment Date occurs and, in the case of interest payable at Maturity,
the Record Date shall be the date of Maturity.
(d) The payment of the principal of, premium (if any) and interest
on the 2009 Notes shall not be secured by a security interest in any property.
(e) The 2009 Notes shall be redeemable at the option of the
Issuer, in whole or in part, at any time and from time to time, upon not less
than 30 days' notice to the Holders of the Notes at a redemption price equal to
100% of the principal amount of such 2009 Notes being redeemed plus the
Applicable Premium, if any, thereon at the time of redemption, together with
accrued interest, if any, thereon to the redemption date. In no event will the
redemption price ever be less than 100% of the principal amount of the 2009
Notes plus accrued interest to the redemption date. The 2009 Notes shall be
purchased by the Issuer at the option of the Holders thereof as provided in
Sections 3.01 and 4.06 hereof.
(f) The 2009 Notes shall not be convertible.
(g) The 2009 Notes will not be subordinated to the payment of
Senior Debt.
(h) The Issuer will not pay any additional amounts on the 2009
Notes held by a Person who is not a U.S. Person in respect of any tax,
assessment or government charge withheld or deducted.
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(i) The events specified in Events of Default with respect to the
2009 Notes shall include the events specified in Article Five of this Seventh
Supplemental Indenture. In addition to the covenants set forth in Article Three
of the Original Indenture, the Holders of the 2009 Notes shall have the benefit
of the covenants of the Issuer set forth in Article Four hereto.
SECTION 2.02. Forms Generally. The 2009 Notes and Trustee's
certificates of authentication shall be in substantially the form set forth in
this Article, with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by the Indenture, and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such 2009 Notes, as evidenced by their execution thereof.
The definitive 2009 Notes shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers executing such 2009 Notes, as evidenced by their
execution thereof.
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SECTION 2.03. Form of Face of 2009 Note.
CMS ENERGY CORPORATION
7.5% SENIOR NOTES DUE 2009
No. $
CMS Energy Corporation, a corporation duly organized and existing
under the laws of the State of Michigan (herein called the "Issuer", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to , or registered
assigns, the principal sum of Dollars on January 15, 2009
("Maturity") and to pay interest thereon from January 15, 1999 (the "Original
Issue Date") or from the most recent Interest Payment Date to which interest has
been paid or duly provided for, semi-annually on January 15 and July 15 in each
year, commencing July 15, 1999 and at Maturity at the rate of 7.5% per annum,
until the principal hereof is paid or made available for payment. The amount of
interest payable on any Interest Payment Date shall be computed on the basis of
a 360-day year of twelve 30-day months. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in
such Indenture, be paid to the Person in whose name this 2009 Note (or one or
more Predecessor 2009 Notes) is registered at the close of business on the
Record Date for such interest, which shall be the 15th day of the calendar month
preceding the month in which such Interest Payment Date occurs (whether or not a
Business Day) except that the Record Date for interest payable at Maturity shall
be the date of Maturity. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder on such Record
Date and may either be paid to the Person in whose name this 2009 Note (or one
or more Predecessor 2009 Notes) is registered at the close of business on a
subsequent Record Date (which shall be not less than five Business Days prior to
the date of payment of such defaulted interest) for the payment of such
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defaulted interest to be fixed by the Trustee, notice whereof shall be given to
Holders of 2009 Notes not less than 15 days preceding such subsequent Record
Date.
Payment of the principal of (and premium, if any) and interest, if
any, on this 2009 Note will be made at the office or agency of the Issuer
maintained for that purpose in New York, New York (the "Place of Payment"), in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts; provided, however, that
at the option of the Issuer payment of interest (other than interest payable at
Maturity) may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register or by wire
transfer to an account designated by such Person not later than ten days prior
to the date of such payment.
Reference is hereby made to the further provisions of this 2009
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed
by the Trustee referred to on the reverse hereof by manual signature, this 2009
Note shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Issuer has caused this instrument to be
duly executed under its corporate seal.
Dated:
CMS ENERGY CORPORATION
By
Its:
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By
Its:
Attest:
SECTION 2.04. Form of Reverse of 2009 Note.
This 7.5% Senior Note Due 2009 is one of a duly authorized issue
of securities of the Issuer (herein called the "2009 Notes"), issued and to be
issued under an Indenture, dated as of September 15, 1992, as supplemented by
certain supplemental indentures, including the Seventh Supplemental Indenture,
dated as of January 25, 1999 (herein collectively referred to as the
"Indenture"), between the Issuer and NBD Bank, a Michigan banking corporation
(formerly known as NBD Bank, National Association), as Trustee (herein called
the "Trustee", which term includes any successor trustee under the Indenture),
to which Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Issuer, the Trustee, and the Holders of the 2009
Notes and of the terms upon which the 2009 Notes are, and are to be,
authenticated and delivered. This 2009 Note is one of the series designated on
the face hereof, limited in aggregate principal amount to $480,000,000.
The 2009 Notes are subject to redemption at the option of the
Issuer, in whole or in part, upon not more than 60 nor less than 30 days' notice
as provided in the Indenture at any time and from time to time, at a redemption
price equal to 100% of the principal amount of such 2009 Notes being redeemed
plus the Applicable Premium, if any, thereon at the time of redemption, together
with accrued interest, if any, thereon to the redemption date, but interest
installments whose Stated Maturity is on or prior to such redemption date will
be payable to the Holder of record at the close of business on the relevant
Record Date referred to on the face hereof, all as provided in the Indenture.
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In no event will the redemption price ever be less than 100% of the principal
amount of the 2009 Notes plus accrued interest to the redemption date.
The following definitions are used to determine the Applicable
Premium:
"Applicable Premium" means, with respect to a 2009 Note (or
portion thereof) being redeemed at any time, the excess of (A) the present value
at such time of the principal amount of such 2009 Note (or portion thereof)
being redeemed plus all interest payments due on such 2009 Note (or portion
thereof), which present value shall be computed using a discount rate equal to
the Treasury Rate plus 50 basis points, over (B) the principal amount of such
2009 Note (or portion thereof) being redeemed at such time. For purposes of this
definition, the present values of the interest and principal payments will be
determined in accordance with generally accepted principles of financial
analysis.
"Treasury Rate" means the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15(519) which has become publicly available at least two business days prior
to the redemption date or, in the case of defeasance, prior to the date of
deposit (or, if such Statistical Release is no longer published, any publicly
available source of similar market data)) most nearly equal to the then
remaining average life to stated maturity of the 2009 Notes; provided, however,
that if the average life to stated maturity of the 2009 Notes is not equal to
the constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given.
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In the event of redemption of this 2009 Note in part only, a new
2009 Note for the unredeemed portion hereof will be issued in the name of the
Holder hereof upon the cancellation hereof.
If a Change in Control occurs, the Issuer shall notify the Holder
of this 2009 Note of such occurrence and such Holder shall have the right to
require the Issuer to make a Required Repurchase of all or any part of this 2009
Note at a Change in Control Purchase Price equal to 101% of the principal amount
of this 2009 Note to be so purchased as more fully provided in the Indenture and
subject to the terms and conditions set forth therein. In the event of a
Required Repurchase of only a portion of this 2009 Note, a new 2009 Note or
Notes for the unrepurchased portion hereof will be issued in the name of the
Holder hereof upon the cancellation hereof.
If an Event of Default with respect to this 2009 Note shall occur
and be continuing, the principal of this 2009 Note may be declared due and
payable in the manner and with the effect provided in the Indenture.
In any case where any Interest Payment Date, repurchase date,
Stated Maturity or Maturity of any 2009 Note shall not be a Business Day at any
Place of Payment, then (notwithstanding any other provision of the Indenture or
this 2009 Note), payment of interest or principal (and premium, if any) need not
be made at such Place of Payment on such date, but may be made on the next
succeeding Business Day at such Place of Payment with the same force and effect
as if made on the Interest Payment Date, repurchase date or at the Stated
Maturity or Maturity; provided that no interest shall accrue on the amount so
payable for the period from and after such Interest Payment Date, redemption
date, repurchase date, Stated Maturity or Maturity, as the case may be, to such
Business Day.
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The Indenture contains provisions for defeasance at any time of
(i) the entire indebtedness of this 2009 Note or (ii) certain restrictive
covenants and Events of Default with respect to this 2009 Note, in each case
upon compliance with certain conditions set forth therein.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of all outstanding 2009
Notes under the Indenture at any time by the Issuer and the Trustee with the
consent of the Holders of not less than a majority in principal amount of
Securities of all series then outstanding and affected (voting as one class).
The Indenture permits the Holders of not less than a majority in
principal amount of Securities of all series at the time outstanding with
respect to which a default shall have occurred and be continuing (voting as one
class) to waive on behalf of the Holders of all outstanding Securities of such
series any past default by the Issuer, provided that no such waiver may be made
with respect to a default in the payment of the principal of or the interest on
any Security of such series or the default by the Issuer in respect of certain
covenants or provisions of the Indenture, the modification or amendment of which
must be consented to by the Holder of each outstanding Security of each series
affected.
As set forth in, and subject to, the provisions of the Indenture,
no Holder of any 2009 Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default, the Holders of not less than 25% in principal amount of the outstanding
Securities of each affected series (voting as one class) shall have made written
request, and offered reasonable indemnity, to the Trustee to institute such
proceeding as trustee, and the Trustee shall not have received
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from the Holders of a majority in principal amount of the outstanding Securities
of each affected series (voting as one class) a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days;
provided, however, that such limitations do not apply to a suit instituted by
the Holder hereof for the enforcement of payment of the principal of (and
premium, if any) or any interest on this 2009 Note on or after the respective
due dates expressed herein.
No reference herein to the Indenture and no provision of this 2009
Note or of the Indenture shall alter or impair the obligation of the Issuer,
which is absolute and unconditional, to pay the principal of and any premium and
interest on this 2009 Note at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this 2009 Note is registerable in the
Security Register, upon surrender of this 2009 Note for registration of transfer
at the office or agency of the Issuer in any place where the principal of and
any premium and interest on this 2009 Note are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Issuer and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new 2009 Notes of
this series and of like tenor, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.
The 2009 Notes are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
2009 Notes are exchangeable for a like aggregate principal amount of 2009 Notes
and of like tenor of a different authorized denomination, as requested by the
Holder surrendering the same.
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No service charge shall be made for any such registration of
transfer or exchange, but the Issuer may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
The Issuer shall not be required to (a) issue, exchange or
register the transfer of this 2009 Note for a period of 15 days next preceding
the mailing of the notice of redemption of 2009 Notes or (b) exchange or
register the transfer of any 2009 Note or any portion thereof selected, called
or being called for redemption, except in the case of any 2009 Note to be
redeemed in part, the portion thereof not so to be redeemed.
Prior to due presentment of this 2009 Note for registration of
transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may
treat the Person in whose name this 2009 Note is registered as the owner hereof
for all purposes, whether or not this 2009 Note be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
All terms used in this 2009 Note without definition which are
defined in the Indenture shall have the meanings assigned to them in the
Indenture.
SECTION 2.05. Form of Trustee's Certificate of Authentication. The
Trustee's certificates of authentication shall be in substantially the following
form:
This is one of the Securities of the series designated herein
referred to in the within-mentioned Indenture.
----------------------------------------,
as Trustee
By
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Authorized Officer
ARTICLE III
CHANGE OF CONTROL
SECTION 3.01. Change of Control. Upon the occurrence of a Change
in Control (the effective date of such Change in Control being the "Change in
Control Date"), each Holder of a 2009 Note shall have the right to require that
the Issuer repurchase (a "Required Repurchase") all or any part of such Holder's
2009 Note at a repurchase price payable in cash equal to 101% of the principal
amount of such 2009 Note plus accrued interest to the Purchase Date (the "Change
in Control Purchase Price").
(a) Within 30 days following the Change in Control Date, the
Issuer shall mail a notice (the "Required Repurchase Notice") to each
Holder with a copy to the Trustee stating:
(i) that a Change in Control has occurred and that such
Holder has the right to require the Issuer to repurchase all or
any part of such Holder's 2009 Notes at the Change of Control
Purchase Price;
(ii) the Change of Control Purchase Price;
(iii) the date on which any Required Repurchase shall be made
(which shall be no earlier than 60 days nor later than 90 days
from the date such notice is mailed) (the "Purchase Date");
(iv) the name and address of the Paying Agent; and
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(v) the procedures that Holders must follow to cause the 2009
Notes to be repurchased, which shall be consistent with this
Section and the Indenture.
(b) Holders electing to have a 2009 Note repurchased must deliver
a written notice (the "Change in Control Purchase Notice") to the Paying Agent
(initially the Trustee) at its corporate trust office in Detroit, Michigan, or
any other office of the Paying Agent maintained for such purposes, not later
than 30 days prior to the Purchase Date. The Change in Control Purchase Notice
shall state: (i) the portion of the principal amount of any 2009 Notes to be
repurchased, which portion must be $1,000 or an integral multiple thereof; (ii)
that such 2009 Notes are to be repurchased by the Issuer pursuant to the change
in control provisions of the Indenture; and (iii) unless the 2009 Notes are
represented by one or more Global Notes, the certificate numbers of the 2009
Notes to be delivered by the Holder thereof for repurchase by the Issuer. Any
Change in Control Purchase Notice may be withdrawn by the Holder by a written
notice of withdrawal delivered to the Paying Agent not later than three Business
Days prior to the Purchase Date. The notice of withdrawal shall state the
principal amount and, if applicable, the certificate numbers of the 2009 Notes
as to which the withdrawal notice relates and the principal amount of such 2009
Notes, if any, which remains subject to a Change in Control Purchase Notice.
If a 2009 Note is represented by a Global Note (as described in
Article VI below), the Depositary or its nominee will be the Holder of such 2009
Note and therefore will be the only entity that can elect a Required Repurchase
of such 2009 Note. To obtain repayment pursuant to this Section 3.01 with
respect to such 2009 Note, the beneficial owner of such 2009 Note must provide
to the broker or other entity through which it holds the beneficial interest in
such 2009 Note (i) the Change in Control Purchase Notice signed by such
beneficial owner, and such
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signature must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States, and (ii) instructions to such broker or other entity to notify
the Depositary of such beneficial owner's desire to obtain repayment pursuant to
this Section 3.01. Such broker or other entity will provide to the Paying Agent
(i) the Change of Control Purchase Notice received from such beneficial owner
and (ii) a certificate satisfactory to the Paying Agent from such broker or
other entity stating that it represents such beneficial owner. Such broker or
other entity will be responsible for disbursing any payments it receives
pursuant to this Section 3.01 to such beneficial owner.
(c) Payment of the Change of Control Purchase Price for a 2009
Note for which a Change in Control Purchase Notice has been delivered and not
withdrawn is conditioned (except in the case of a 2009 Note represented by one
or more Global Notes) upon delivery of such 2009 Note (together with necessary
endorsements) to the Paying Agent at its office in Detroit, Michigan, or any
other office of the Paying Agent maintained for such purpose, at any time
(whether prior to, on or after the Purchase Date) after the delivery of such
Change in Control Purchase Notice. Payment of the Change of Control Purchase
Price for such 2009 Note will be made promptly following the later of the
Purchase Date or the time of delivery of such 2009 Note. If the Paying Agent
holds, in accordance with the terms of the Indenture, money sufficient to pay
the Change in Control Purchase Price of such 2009 Note on the Business Day
following the Purchase Date, then, on and after such date, interest will cease
accruing, and all other rights of the Holder shall terminate (other than the
right to receive the Change of Control Purchase Price upon delivery of the 2009
Note).
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(d) The Issuer shall comply with the provisions of Regulation 14E
and any other tender offer rules under the Exchange Act, which may then be
applicable in connection with any offer by the Issuer to repurchase 2009 Notes
at the option of Holders upon a Change in Control.
(e) No 2009 Note may be repurchased by the Issuer as a result of a
Change in Control if there has occurred and is continuing an Event of Default
(other than a default in the Payment of the Change in Control Purchase Price
with respect to the 2009 Notes).
ARTICLE IV
ADDITIONAL COVENANTS OF THE ISSUER
WITH RESPECT TO THE 2009 NOTES
SECTION 4.01. Existence. So long as any of the 2009 Notes are
outstanding, subject to Article 9 of the Original Indenture, the Issuer will do
or cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence.
SECTION 4.02. Limitation on Certain Liens. So long as any of the
2009 Notes are outstanding, the Issuer shall not create, incur, assume or suffer
to exist any lien, mortgage, pledge, security interest, conditional sale, title
retention agreement or other charge or encumbrance of any kind, or any other
type of arrangement intended or having the effect of conferring upon a creditor
of the Issuer or any Subsidiary a preferential interest (hereinafter in this
Section referred to as a "Lien") upon or with respect to any of its property of
any character, including without limitation any shares of Capital Stock of
Consumers or Enterprises, without making effective provision whereby the 2009
Notes shall (so long as any such other creditor shall be so secured) be equally
and ratably secured (along with any other creditor similarly entitled to be
secured) by
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a direct Lien on all property subject to such Lien, provided, however, that the
foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies
to the extent not past due;
(ii) pledges or deposits to secure (a) obligations under workmen's
compensation laws or similar legislation, (b) statutory obligations of the
Issuer or (c) Support Obligations;
(iii) Liens imposed by law, such as materialmen's, mechanics',
carriers', workmen's and repairmen's Liens and other similar Liens arising in
the ordinary course of business securing obligations which are not overdue or
which have been fully bonded and are being contested in good faith;
(iv) purchase money Liens upon or in property acquired and held by
the Issuer in the ordinary course of business to secure the purchase price of
such property or to secure Indebtedness incurred solely for the purpose of
financing the acquisition of any such property to be subject to such Liens, or
Liens existing on any such property at the time of acquisition, or extensions,
renewals or replacements of any of the foregoing for the same or a lesser
amount, provided that no such Lien shall extend to or cover any property other
than the property being acquired and no such extension, renewal or replacement
shall extend to or cover property not theretofore subject to the Lien being
extended, renewed or replaced, and provided, further, that the aggregate
principal amount of the Indebtedness at any one time outstanding secured by
Liens permitted by this clause (iv) shall not exceed $10,000,000; and
(v) Liens not otherwise permitted by clauses (i) through (iv) of
this Section securing Indebtedness of the Issuer; provided that on the date such
Liens are created,
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and after giving effect to such Indebtedness, the aggregate
principal amount at maturity of all of the secured Indebtedness of the Issuer at
such date shall not exceed 5% of Consolidated Net Tangible Assets at such date.
SECTION 4.03. Limitation on Consolidation, Merger, Sale or
Conveyance. So long as any of the 2009 Notes are outstanding and until the 2009
Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and
one Other Rating Agency (or, if Standard & Poor's shall change its rating
system, an equivalent of such rating then employed by such organization), at
which time the Issuer will be permanently released from the provisions of this
Section 4.03, and subject also to Article Nine of the Indenture, the Issuer
shall not consolidate with or merge into any other Person or sell, lease or
convey the property of the Issuer in the entirety or substantially as an
entirety, unless (i) immediately after giving effect to such transaction the
Consolidated Net Worth of the surviving entity is at least equal to the
Consolidated Net Worth of the Issuer immediately prior to the transaction, and
(ii) after giving effect to such transaction, the surviving entity would be
entitled to incur at least one dollar of additional Indebtedness (other than
revolving Indebtedness to banks) without violation of the limitations in Section
4.04 hereof.
SECTION 4.04. Limitation on Consolidated Indebtedness. So long as
any of the 2009 Notes are outstanding and until the 2009 Notes are rated BBB- or
above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency
(or, if Standard & Poor's shall change its rating system, an equivalent of such
rating then employed by such organization), at which time the Issuer will be
permanently released from the provisions of this Section 4.04, the Issuer shall
not, and shall not permit any Consolidated Subsidiary of the Issuer to, issue,
create, assume, guarantee, incur or otherwise become liable for (collectively,
"issue"), directly or indirectly, any Indebtedness unless the Consolidated
Coverage Ratio of the Issuer and its Consolidated Subsidiaries for the four
consecutive fiscal quarters immediately preceding the issuance
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of such Indebtedness (as shown by a pro forma consolidated income statement of
the Issuer and its Consolidated Subsidiaries for the four most recent fiscal
quarters ending at least 30 days prior to the issuance of such Indebtedness
after giving effect to (i) the issuance of such Indebtedness and (if applicable)
the application of the net proceeds thereof to refinance other Indebtedness as
if such Indebtedness was issued at the beginning of the period, (ii) the
issuance and retirement of any other Indebtedness since the first day of the
period as if such Indebtedness was issued or retired at the beginning of the
period and (iii) the acquisition of any company or business acquired by the
Issuer or any Subsidiary since the first day of the period (including giving
effect to the pro forma historical earnings of such company or business),
including any acquisition which will be consummated contemporaneously with the
issuance of such Indebtedness, as if in each case such acquisition occurred at
the beginning of the period) exceeds a ratio of 1.7 to 1.0.
(b) Notwithstanding the foregoing paragraph, the Issuer or any
Restricted Subsidiary may issue, directly or indirectly, the following
Indebtedness:
(1) Indebtedness of the Issuer to banks not to exceed
$1,000,000,000 in aggregate outstanding principal amount at any time;
(2) Indebtedness (other than Indebtedness described in clause (1)
of this Subsection) outstanding on the date of this Seventh
Supplemental Indenture, as set forth on Schedule 4.04(b)(2) attached
hereto and made a part hereof, and Indebtedness issued in exchange for,
or the proceeds of which are used to refund or refinance, any
Indebtedness permitted by this clause (2); provided, however, that (i)
the principal amount (or accreted value in the case of Indebtedness
issued at a discount) of the Indebtedness so issued shall not exceed
the principal amount (or accreted value in the case of Indebtedness
issued at a discount) of, premium, if any, and accrued but unpaid
interest on, the Indebtedness so exchanged, refunded
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or refinanced and (ii) the Indebtedness so issued (A) shall not
mature prior to the stated maturity of the Indebtedness so exchanged,
refunded or refinanced, (B) shall have an Average Life equal to or
greater than the remaining Average Life of the Indebtedness so
exchanged, refunded or refinanced and (C) if the Indebtedness to be
exchanged, refunded or refinanced is subordinated to the 2009 Notes,
the Indebtedness is subordinated to the 2009 Notes in right of payment;
(3) Indebtedness of the Issuer owed to and held by a Subsidiary
and Indebtedness of a Subsidiary owed to and held by the Issuer;
provided, however, that, in the case of Indebtedness of the Issuer owed
to and held by a Subsidiary, (i) any subsequent issuance or transfer of
any Capital Stock that results in any such Subsidiary ceasing to be a
Subsidiary or (ii) any transfer of such Indebtedness (except to the
Issuer or a Subsidiary) shall be deemed for the purposes of this
Subsection to constitute the issuance of such Indebtedness by the
Issuer;
(4) Indebtedness of the Issuer issued in exchange for, or the
proceeds of which are used to refund or refinance, Indebtedness of the
Issuer issued in accordance with Subsection (a) of this Section,
provided that (i) the principal amount (or accreted value in the case
of Indebtedness issued at a discount) of the Indebtedness so issued
shall not exceed the principal amount (or accreted value in the case of
Indebtedness issued at a discount) of, premium, if any, and accrued but
unpaid interest on, the Indebtedness so exchanged, refunded or
refinanced and (ii) the Indebtedness so issued (A) shall not mature
prior to the stated maturity of the Indebtedness so exchanged, refunded
or refinanced, (B) shall have an Average Life equal to or greater than
the remaining Average Life of the Indebtedness so exchanged, refunded
or refinanced and (C) if the Indebtedness to be exchanged, refunded or
refinanced is subordinated to the 2009 Notes, the Indebtedness so
issued is subordinated to the 2009 Notes in right of payment;
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(5) Indebtedness of a Restricted Subsidiary issued in exchange
for, or the proceeds of which are used to refund or refinance,
Indebtedness of a Restricted Subsidiary issued in accordance with
Subsection (a) of this Section, provided that (i) the principal amount
(or accreted value in the case of Indebtedness issued at a discount) of
the Indebtedness so issued shall not exceed the principal amount (or
accreted value in the case of Indebtedness issued at a discount) of,
premium, if any, and accrued but unpaid interest on, the Indebtedness
so exchanged, refunded or refinanced and (ii) the Indebtedness so
issued (A) shall not mature prior to the stated maturity of the
Indebtedness so exchanged, refunded or refinanced and (B) shall have an
Average Life equal to or greater than the remaining Average Life of the
Indebtedness so exchanged, refunded or refinanced.
(6) Indebtedness of a Consolidated Subsidiary issued to acquire,
develop, improve, construct or to provide working capital for a gas,
oil or electric generation, exploration, production, distribution,
storage or transmission facility and related assets, provided that such
Indebtedness is without recourse to any assets of the Issuer,
Consumers, Enterprises, CMS Generation, CMS Oil & Gas, CMS Electric and
Gas, CMS Gas Transmission and Storage, CMS MST or any other Designated
Enterprises Subsidiary;
(7) Indebtedness issued by the Issuer not to exceed $150,000,000
in aggregate principal amount at any time; and
(8) Indebtedness of a Person existing at the time at which such
person became a Subsidiary and not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary. Such Indebtedness
shall be deemed to be incurred on the date the acquired Person becomes
a Consolidated Subsidiary;
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(9) Indebtedness of a Consolidated Subsidiary in respect of rate
reduction bonds issued to recover electric restructuring transition
costs of Consumers provided that such Indebtedness is without recourse
to the assets of Consumers.
SECTION 4.05. Limitation on Restricted Payments. So long as the
2009 Notes are outstanding and until the 2009 Notes are rated BBB- or above (or
an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if
Standard & Poor's shall change its rating system, an equivalent of such rating
then employed by such organization), at which time the Issuer will be
permanently released from the provisions of this Section 4.05, the Issuer shall
not, and shall not permit any Restricted Subsidiary of the Issuer, directly or
indirectly, to (i) declare or pay any dividend or make any distribution on the
Capital Stock of the Issuer to the direct or indirect holders of its Capital
Stock (except dividends or distributions payable solely in its Non-Convertible
Capital Stock or in options, warrants or other rights to purchase such
Non-Convertible Capital Stock and except dividends or distributions payable to
the Issuer or a Subsidiary), (ii) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the Issuer, or (iii) purchase, repurchase,
redeem, defease or otherwise acquire or retire for value, prior to scheduled
maturity or scheduled repayment thereof, any Subordinated Indebtedness (any such
dividend, distribution, purchase, redemption, repurchase, defeasing, other
acquisition or retirement being hereinafter referred to as a "Restricted
Payment") if at the time the Issuer or such Subsidiary makes such Restricted
Payment:
(1) an Event of Default, or an event that with the lapse of
time or the giving of notice or both would constitute an Event of
Default, shall have occurred and be continuing (or would result
therefrom); or
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(2) the aggregate amount of such Restricted Payment and all
other Restricted Payments made since May 6, 1997 would exceed the sum
of:
(A) $100,000,000;
(B) 100% of Consolidated Net Income, accrued during the
period (treated as one accounting period) from May 6, 1997 to the
end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment (or, in case such sum
shall be a deficit, minus 100% of the deficit); and
(C) the aggregate Net Cash Proceeds received by the Issuer
from the issue or sale of or contribution with respect to its
Capital Stock subsequent to May 6, 1997.
For the purpose of determining the amount of any Restricted Payment not in the
form of cash, the amount shall be the fair value of such Restricted Payment as
determined in good faith by the Board of Directors, provided that if the value
of the non-cash portion of such Restricted Payment as determined by the Board of
Directors is in excess of $25 million, such value shall be based on the opinion
from a nationally recognized firm experienced in the appraisal of similar types
of transactions.
(b) The provisions of Section 4.05(a) shall not prohibit:
(i) any purchase or redemption of Capital Stock of the Issuer
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Issuer (other than
Redeemable Stock or Exchangeable Stock); provided, however, that
such purchase or redemption shall be excluded from the calculation
of the amount of Restricted Payments;
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<PAGE> 39
(ii) dividends or other distributions paid in respect of any
class of the Issuer's Capital Stock issued in respect of the
acquisition of any business or assets by the Issuer or a
Restricted Subsidiary if the dividends or other distributions with
respect to such Capital Stock are payable solely from the net
earnings of such business or assets;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend
would have complied with this Section; provided, however, that at
the time of payment of such dividend, no Event of Default shall
have occurred and be continuing (or result therefrom), and
provided further, however, that such dividends shall be included
(without duplication) in the calculation of the amount of
Restricted Payments; or
(iv) payments pursuant to the Tax-Sharing Agreement.
SECTION 4.06. Limitation on Asset Sales. So long as any of the
2009 Notes are outstanding, the Issuer may not sell, transfer or otherwise
dispose of any property or assets of the Issuer, including Capital Stock of any
Consolidated Subsidiary, in one transaction or a series of transactions in an
amount which exceeds $50,000,000 (an "Asset Sale") unless the Issuer shall (i)
apply an amount equal to such excess Net Cash Proceeds to permanently repay
Indebtedness of a Consolidated Subsidiary or Indebtedness of the Issuer which is
pari passu with the 2009 Notes or (ii) invest an equal amount not so used in
clause (i) in property or assets of related business within 24 months after the
date of the Asset Sale (the "Application Period") or (iii) apply such excess Net
Cash Proceeds not so used in (i) or (ii) (the "Excess Proceeds") to make an
offer, within 30 days after the end of the Application Period, to purchase from
the Holders on a pro rata basis an aggregate principal amount of 2009 Notes on
the relevant purchase date equal to the Excess Proceeds on such date, at a
purchase price equal to 100% of the principal
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<PAGE> 40
amount of the 2009 Notes on the relevant purchase date and unpaid interest, if
any, to the purchase date. The Issuer shall only be required to make an offer to
purchase 2009 Notes from Holders pursuant to subsection (iii) if the Excess
Proceeds equal or exceed $25,000,000 at any given time.
The procedures to be followed by the Issuer in making an offer to
purchase 2009 Notes from the Holders with Excess Proceeds, and for the
acceptance of such offer by the Holders, shall be the same as those set forth in
Section 3.01 herein with respect to a Change in Control.
ARTICLE V
ADDITIONAL EVENTS OF DEFAULT
WITH RESPECT TO THE 2009 NOTES
SECTION 5.01. Definition. All of the events specified in clauses
(a) through (h) of Section 5.1 of the Original Indenture shall be "Events of
Default" with respect to the 2009 Notes.
SECTION 5.02. Amendments to Section 5.1 of the Original Indenture.
Solely for the purpose of determining Events of Default with respect to the 2009
Notes, paragraphs (e), (f) and (h) of Section 5.1 of the Original Indenture
shall be amended such that each and every reference therein to the Issuer shall
be deemed to mean either the Issuer or Consumers.
ARTICLE VI
GLOBAL NOTES
The 2009 Notes will be issued initially in the form of Global
Notes. "Global Note" means a registered 2009 Note evidencing one or more 2009
Notes issued to a depositary (the "Depositary") or its nominee, in accordance
with this Article and
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<PAGE> 41
bearing the legend prescribed in this Article. One or more Global Notes will
represent all 2009 Notes. The Issuer shall execute and the Trustee shall, in
accordance with this Article and the Issuer Order with respect to the 2009
Notes, authenticate and deliver one or more Global Notes in temporary or
permanent form that (i) shall represent and shall be denominated in an aggregate
amount equal to the aggregate principal amount of the 2009 Notes to be
represented by such Global Note or Notes, (ii) shall be registered in the name
of the Depositary for such Global Note or Notes or the nominee of such
Depositary, (iii) shall be delivered by the Trustee to such Depositary or
pursuant to such Depositary's instructions and (iv) shall bear a legend
substantially to the following effect: "Unless the Global 2009 Note is presented
by an authorized representative of the Depository to the Issuer or its agent for
registration of transfer, exchange or payment, and any 2009 Note issued is
registered in the name of a nominee of the Depository, or in such other name as
is requested by an authorized representative of the Depository (and any payment
is made to the nominee of the Depository, or to such other entity as is
requested by an authorized representative of the Depository), any transfer,
pledge or other use hereof for value or otherwise by or to any Person is
wrongful inasmuch as the registered owner hereof has an interest herein."
Notwithstanding Section 2.8 of the Indenture, unless and until it
is exchanged in whole or in part for 2009 Notes in definitive form, a Global
Note representing one or more 2009 Notes may not be transferred except as a
whole by the Depositary, to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by such
Depositary or any such nominee to a successor Depositary for 2009 Notes or a
nominee of such successor Depositary.
If at any time the Depositary for the 2009 Notes is unwilling or
unable to continue as Depositary for the 2009 Notes, the Issuer shall appoint a
successor Depositary with respect to the 2009 Notes. If a successor Depositary
for the 2009 Notes is not appointed by the Issuer by the earlier of (i) 90 days
from the date the Issuer receives
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<PAGE> 42
notice to the effect that the Depositary is unwilling or unable to act, or the
Issuer determines that the Depositary is unable to act or (ii) the effectiveness
of the Depositary's resignation or failure to fulfill its duties as Depositary,
the Issuer will execute, and the Trustee, upon receipt of a Issuer Order for the
authentication and delivery of definitive 2009 Notes, will authenticate and
deliver 2009 Notes in definitive form in an aggregate principal amount equal to
the principal amount of the Global Note or Notes representing such 2009 Notes in
exchange for such Global Note or Notes.
The Issuer may at any time and in its sole discretion determine
that the 2009 Notes issued in the form of one or more Global Notes shall no
longer be represented by such Global Note or Notes. In such event the Issuer
will execute, and the Trustee, upon receipt of a Issuer Order for the
authentication and delivery of definitive 2009 Notes, will authenticate and
deliver 2009 Notes in definitive form in an aggregate principal amount equal to
the principal amount of the Global Note or Notes representing such 2009 Notes in
exchange for such Global Note or Notes.
The Depositary for such 2009 Notes may surrender a Global Note or
Notes for such 2009 Notes in exchange in whole or in part for 2009 Notes in
definitive form on such terms as are acceptable to the Issuer and such
Depositary. Thereupon, the Issuer shall execute, and the Trustee shall
authenticate and deliver, without service charge:
(i) to each Person specified by such Depositary a new 2009
Note or Notes, of any authorized denomination as requested by such
Person in aggregate principal amount equal to and in exchange for
such Person's beneficial interest in the Global Note; and
(ii) to such Depositary a new Global Note in a denomination
equal to the difference, if any, between the principal amount of
the surrendered Global
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<PAGE> 43
Note and the aggregate principal amount of 2009 Notes in
definitive form delivered to Holders thereof.
In any exchange provided for in this Article, the Issuer will
execute and the Trustee will authenticate and deliver 2009 Notes in definitive
registered form in authorized denominations.
Upon the exchange of a Global Note for 2009 Notes in definitive
form, such Global Note shall be cancelled by the Trustee. 2009 Notes in
definitive form issued in exchange for a Global Note pursuant to this Article
shall be registered in such names and in such authorized denominations as the
Depositary for such Global Note, pursuant to instructions from its direct or
indirect participants or otherwise, shall instruct the Trustee or Security
Registrar. The Trustee shall deliver such 2009 Notes to the persons in whose
names such 2009 Notes are so registered.
ARTICLE VII
DEFEASANCE
All of the provisions of Article Ten of the Original Indenture
shall be applicable to the 2009 Notes. Upon satisfaction by the Issuer of the
requirements of Section 10.1(c) of the Indenture, in connection with any
covenant defeasance (as provided in Section 10.1(c) of the Indenture), the
Issuer shall be released from its obligations under Article Nine of the Original
Indenture and under Articles III and IV of this Seventh Supplemental Indenture
with respect to the 2009 Notes.
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<PAGE> 44
ARTICLE VIII
SUPPLEMENTAL INDENTURES
This Seventh Supplemental Indenture is a supplement to the
Original Indenture. As supplemented by this Seventh Supplemental Indenture, the
Original Indenture is in all respects ratified, approved and confirmed, and the
Original Indenture and this Seventh Supplemental Indenture shall together
constitute one and the same instrument.
TESTIMONIUM
This Seventh Supplemental Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
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<PAGE> 45
IN WITNESS WHEREOF, the parties hereto have caused this Seventh
Supplemental Indenture to be duly executed and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first written
above.
CMS ENERGY CORPORATION
/s/ A.M. Wright
Alan M. Wright
Senior Vice President and
Chief Financial Officer
Attest:
NBD BANK,
as Trustee
/s/ Ernest J. Peck
Ernest J. Peck
Vice President
Attest:
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<PAGE> 1
Exhibit 4(d)(ii)
EIGHTH SUPPLEMENTAL INDENTURE
DATED AS OF FEBRUARY 3, 1999
--------------------
This Eighth Supplemental Indenture, dated as of the 3rd day of
February, 1999 between CMS Energy Corporation, a corporation duly organized and
existing under the laws of the State of Michigan (hereinafter called the
"Issuer") and having its principal office at Fairlane Plaza South, Suite 1100,
330 Town Center Drive, Dearborn, Michigan 48126, and NBD Bank, a Michigan
banking corporation (hereinafter called the "Trustee") and having its principal
Corporate Trust Office at 611 Woodward Avenue, Detroit, Michigan 48226.
WITNESSETH:
WHEREAS, the Issuer and the Trustee (formerly known as NBD Bank,
National Association) entered into an Indenture, dated as of September 15, 1992
(the "Original Indenture"), pursuant to which one or more series of debt
securities of the Issuer (the "Securities") may be issued from time to time; and
WHEREAS, Section 2.3 of the Original Indenture permits the terms
of any series of Securities to be established in an indenture supplemental to
the Original Indenture; and
WHEREAS, Section 8.1(e) of the Original Indenture provides that a
supplemental indenture may be entered into by the Issuer and the Trustee without
the consent of any Holders of the Securities to establish the form and terms of
the Securities of any series; and
<PAGE> 2
WHEREAS, the Issuer has requested the Trustee to join with it in
the execution and delivery of this Eighth Supplemental Indenture in order to
supplement and amend the Original Indenture by, among other things, establishing
the form and terms of a series of Securities to be known as the Issuer's "6.75%
Senior Notes Due 2004, Series A" (the "Series A Notes"), providing for the
issuance of the Series A Notes and amending and adding certain provisions
thereof for the benefit of the Holders of the Series A Notes; and
WHEREAS, the Issuer and certain purchasers of the Series A Notes
are entering into a Registration Rights Agreement dated as of February 3, 1999
which requires the Issuer to use its best efforts to make an Exchange Offer
which would enable Holders of Series A Notes to exchange such Series A Notes for
Securities not subject to certain restrictions under the Securities Act or to
cause a Shelf Registration Statement to become effective with respect to the
Series A Notes (in each case as defined in such Registration Rights Agreement);
and
WHEREAS, the Issuer wishes to establish the forms and terms of a
series of Securities to be issued in exchange for Series A Notes as so
contemplated, such Securities to be known as the Issuer's "6.75% Senior Notes
Due 2004, Series B" (the "Series B Notes"), provide for the issuance of such
Notes and amend and add certain provisions to the Original Indenture for the
benefit of the Holders of the Series B Notes; and
WHEREAS, the Issuer and the Trustee desire to enter into this
Eighth Supplemental Indenture for the purposes set forth in Sections 2.3 and
8.1(e) of the Original Indenture as referred to above; and
WHEREAS, the Issuer has furnished the Trustee with a copy of the
resolutions of its Board of Directors certified by its Secretary or Assistant
Secretary authorizing the execution of this Eighth Supplemental Indenture; and
2--
<PAGE> 3
WHEREAS, all things necessary to make this Eighth Supplemental
Indenture a valid agreement of the Issuer and the Trustee and a valid supplement
to the Original Indenture have been done,
NOW, THEREFORE, THIS EIGHTH SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Series A Notes and the Series B Notes (such Series A Notes and Series B Notes
being sometimes referred to herein as the "2004 Notes") to be issued hereunder
by holders thereof, the Issuer and the Trustee mutually covenant and agree, for
the equal and proportionate benefit of the respective holders from time to time
of such 2004 Notes, as follows:
ARTICLE I
STANDARD PROVISIONS; DEFINITIONS
SECTION 1.01. Standard Provisions. The Original Indenture
together with this Eighth Supplemental Indenture and all previous indentures
supplemental thereto entered into pursuant to the applicable terms thereof are
hereinafter sometimes collectively referred to as the "Indenture." All
capitalized terms which are used herein and not otherwise defined herein are
defined in the Indenture and are used herein with the same meanings as in the
Indenture.
SECTION 1.02. Definitions. Section 1.1 of the Original Indenture
is amended to insert the new definitions applicable to the 2004 Notes, in the
appropriate alphabetical sequence, as follows:
"Amortization Expense" means, for any period, amounts recognized
during such period as amortization of capital leases, depletion, nuclear fuel,
goodwill and assets
3--
<PAGE> 4
classified as intangible assets in accordance with generally accepted accounting
principles.
"Applicable Premium" means, with respect to a 2004 Note (or
portion thereof) being redeemed at any time, the excess of (A) the present value
at such time of the principal amount of such 2004 Note (or portion thereof)
being redeemed plus all interest payments due on such 2004 Note (or portion
thereof), which present value shall be computed using a discount rate equal to
the Treasury Rate plus 50 basis points, over (B) the principal amount of such
2004 Note (or portion thereof) being redeemed at such time. For purposes of this
definition, the present values of interest and principal payments will be
determined in accordance with generally accepted principles of financial
analysis.
"Average Life" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum of
the products of (x) the number of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness and
(y) the amount of such principal payment by (ii) the sum of all such principal
payments.
"Capital Lease Obligation" of a Person means any obligation that
is required to be classified and accounted for as a capital lease on the face of
a balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; the stated maturity thereof shall be the date of the last payment of
rent or any other amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty; and
such obligation shall be deemed secured by a Lien on any property or assets to
which such lease relates.
4--
<PAGE> 5
"Capital Stock" means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock, including any Preferred Stock or Letter
Stock; provided that Hybrid Preferred Securities shall not be considered Capital
Stock for purposes of this definition.
"Change in Control" means an event or series of events by which
(i) the Issuer ceases to own beneficially, directly or indirectly, at least 80%
of the total voting power of all classes of Capital Stock then outstanding of
Consumers (whether arising from issuance of securities of the Issuer or
Consumers, any direct or indirect transfer of securities by the Issuer or
Consumers, any merger, consolidation, liquidation or dissolution of the Issuer
or Consumers or otherwise); (ii) any "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner"
(as such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person or group shall be deemed to have "beneficial ownership" of all
shares that such person or group has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the Voting Stock of the Issuer; or (iii) the
Issuer consolidates with or merges into another corporation or directly or
indirectly conveys, transfers or leases all or substantially all of its assets
to any Person, or any corporation consolidates with or merges into the Issuer,
in either event pursuant to a transaction in which the outstanding Voting Stock
of the Issuer is changed into or exchanged for cash, securities, or other
property, other than any such transaction in which (A) the outstanding Voting
Stock of the Issuer is changed into or exchanged for Voting Stock of the
surviving corporation and (B) the holders of the Voting Stock of the Issuer
immediately prior to such transaction retain, directly or indirectly,
substantially proportionate ownership of the Voting Stock of the surviving
corporation immediately after such transaction.
5--
<PAGE> 6
"CMS Electric and Gas" means CMS Electric and Gas Company, a
Michigan corporation and wholly-owned subsidiary of Enterprises.
"CMS Gas Transmission and Storage" means CMS Gas Transmission and
Storage Company, a Michigan corporation and wholly-owned subsidiary of
Enterprises.
"CMS Generation" means CMS Generation Co., a Michigan corporation
and wholly-owned subsidiary of Enterprises.
"CMS MST" means CMS Marketing, Services and Trading Company, a
Michigan corporation and wholly-owned subsidiary of Enterprises.
"CMS Oil & Gas" means, CMS Oil & Gas Co., a Michigan corporation
and wholly-owned subsidiary of Enterprises.
"Consolidated Assets" means, at any date of determination, the
aggregate assets of the Issuer and its Consolidated Subsidiaries determined on a
consolidated basis in accordance with generally accepted accounting principles.
"Consolidated Coverage Ratio" with respect to any period means the
ratio of (i) the aggregate amount of Operating Cash Flow for such period to (ii)
the aggregate amount of Consolidated Interest Expense for such period.
"Consolidated Current Liabilities" means, for any period, the
aggregate amount of liabilities of the Issuer and its Consolidated Subsidiaries
which may properly be classified as current liabilities (including taxes accrued
as estimated), after (i) eliminating all inter-company items between the Issuer
and any Consolidated Subsidiary and (ii) deducting all current maturities of
long-term Indebtedness, all as determined in accordance with generally accepted
accounting principles.
6--
<PAGE> 7
"Consolidated Indebtedness" means, at any date of determination,
the aggregate Indebtedness of the Issuer and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that Consolidated Indebtedness shall not include
any subordinated debt owned by any Hybrid Preferred Securities Subsidiary.
"Consolidated Interest Expense" means, for any period, the total
interest expense in respect of Consolidated Indebtedness of the Issuer and its
Consolidated Subsidiaries, including, without duplication, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount, (iii)
capitalized interest, (iv) cash and noncash interest payments, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs under Interest Rate Protection
Agreements (including amortization of discount) and (vii) interest expense in
respect of obligations of other Persons deemed to be Indebtedness of the Issuer
or any Consolidated Subsidiaries under clause (v) or (vi) of the definition of
Indebtedness, provided, however, that Consolidated Interest Expense shall
exclude (a) any costs otherwise included in interest expense recognized on early
retirement of debt and (b) any interest expense in respect of any Indebtedness
of any Subsidiary of Consumers, CMS Generation, CMS Oil & Gas, CMS Electric and
Gas, CMS Gas Transmission and Storage, CMS MST or any other Designated
Enterprises Subsidiary, provided that such Indebtedness is without recourse to
any assets of the Issuer, Consumers, Enterprises, CMS Generation, CMS Oil & Gas,
CMS Electric and Gas, CMS Gas Transmission and Storage, CMS MST or any other
Designated Enterprises Subsidiary.
"Consolidated Net Income" means, for any period, the net income of
the Issuer and its Consolidated Subsidiaries determined on a consolidated basis
in accordance with generally accepted accounting principles; provided, however,
that there shall not be included in such Consolidated Net Income:
7--
<PAGE> 8
(i) any net income of any Person if such Person is not a
Subsidiary, except that (A) the Issuer's equity in the net income of
any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by
such Person during such period to the Issuer or a Consolidated
Subsidiary as a dividend or other distribution and (B) the Issuer's
equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income;
(ii) any net income of any Person acquired by the Issuer or a
Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(iii) any gain or loss realized upon the sale or other disposition
of any property, plant or equipment of the Issuer or its Consolidated
Subsidiaries which is not sold or otherwise disposed of in the ordinary
course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person; and
(iv) any net income of any Subsidiary of Consumers, CMS
Generation, CMS Oil & Gas, CMS Electric and Gas, CMS Gas Transmission
and Storage, CMS MST or any other Designated Enterprises Subsidiary
whose interest expense is excluded from Consolidated Interest Expense,
provided, however, that for purposes of this subsection (iv), any cash,
dividends or distributions of any such Subsidiary to the Issuer shall
be included in calculating Consolidated Net Income.
"Consolidated Net Tangible Assets" means, for any period, the
total amount of assets (less accumulated depreciation or amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) as set forth on the most recently available quarterly
or annual consolidated balance sheet of the
8--
<PAGE> 9
Issuer and its Consolidated Subsidiaries, determined on a consolidated basis in
accordance with generally accepted accounting principles, and after giving
effect to purchase accounting and after deducting therefrom, to the extent
otherwise included, the amounts of: (i) Consolidated Current Liabilities; (ii)
minority interests in Consolidated Subsidiaries held by Persons other than the
Issuer or a Restricted Subsidiary; (iii) excess of cost over fair value of
assets of businesses acquired, as determined in good faith by the Board of
Directors as evidenced by Board resolutions; (iv) any revaluation or other
write-up in value of assets subsequent to December 31, 1996, as a result of a
change in the method of valuation in accordance with generally accepted
accounting principles; (v) unamortized debt discount and expenses and other
unamortized deferred charges, goodwill, patents, trademarks, service marks,
trade names, copyrights, licenses organization or developmental expenses and
other intangible items; (vi) treasury stock; and (vii) the purpose of redemption
or other retirement of Capital Stock to the extent such obligation is not
reflected in Consolidated Current Liabilities.
"Consolidated Net Worth" of any Person means the total of the
amounts shown on the consolidated balance sheet of such Person and its
consolidated subsidiaries, determined on a consolidated basis in accordance with
generally accepted accounting principles, as of any date selected by such Person
not more than 90 days prior to the taking of any action for the purpose of which
the determination is being made (and adjusted for any material events since such
date), as (i) the par or stated value of all outstanding Capital Stock plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock and (C) any amounts attributable to
Exchangeable Stock.
9--
<PAGE> 10
"Consolidated Subsidiary" means, any Subsidiary whose accounts are
or are required to be consolidated with the accounts of the Issuer in accordance
with generally accepted accounting principles.
"Consumers" means Consumers Energy Company, a Michigan
corporation, all of whose common stock is on the date hereof owned by the
Issuer.
"Designated Enterprises Subsidiary" means any wholly-owned
subsidiary of Enterprises formed after the date of this Eighth Supplemental
Indenture which is designated a Designated Enterprises Subsidiary by the Board
of Directors.
"Enterprises" means CMS Enterprises Company, a Michigan
corporation and wholly-owned subsidiary of the Issuer.
"Event of Default" with respect to each series of 2004 Notes has
the meaning specified in Article VI of this Eighth Supplemental Indenture.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchangeable Stock" means any Capital Stock of a corporation that
is exchangeable or convertible into another security (other than Capital Stock
of such corporation that is neither Exchangeable Stock or Redeemable Stock).
"Hybrid Preferred Securities" means any preferred securities
issued by a Hybrid Preferred Securities Subsidiary, where such preferred
securities have the following characteristics:
(i) such Hybrid Preferred Securities Subsidiary lends substantially
all of the proceeds from the issuance of such preferred securities
to the Company or
10--
<PAGE> 11
Consumers in exchange for subordinated debt issued by the Company
or Consumers respectively;
(ii) such preferred securities contain terms providing for the deferral
of distributions corresponding to provisions providing for the
deferral of interest payments on such subordinated debt; and
(iii)the Company or Consumers (as the case may be) makes periodic
interest payments on such subordinated debt, which interest
payments are in turn used by the Hybrid Preferred Securities
Subsidiary to make corresponding payments to the holders of the
Hybrid Preferred Securities.
"Hybrid Preferred Securities Subsidiary" means any business trust
(or similar entity) (i) all of the common equity interest of which is owned
(either directly or indirectly through one or more wholly-owned Subsidiaries of
the Company or Consumers) at all times by the Company or Consumers, (ii) that
has been formed for the purpose of issuing Hybrid Preferred Securities and (iii)
substantially all of the assets of which consist at all times solely of
subordinated debt issued by the Company or Consumers (as the case may be) and
payments made from time to time on such subordinated debt.
"Indebtedness" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations
and all obligations
11--
<PAGE> 12
under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (i)
through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or,
if and to the extent drawn upon, such drawing is reimbursed no later
than the third Business Day following receipt by such Person of a
demand for reimbursement following payment on the letter of credit);
(v) all obligations of the type referred to in clauses (i)
through (iv) of other Persons and all dividends of other Persons for
the payment of which, in either case, such Person is responsible or
liable as obligor, guarantor or otherwise; and
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so
secured.
"Interest Payment Date" means July 15, 1999 and each January 15
and July 15 in each year thereafter.
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect the Issuer or any Subsidiary against
fluctuations in interest rates.
12--
<PAGE> 13
"Letter Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is intended to reflect the separate performance of certain of the
businesses or operations conducted by such corporation or any of its
subsidiaries.
"Lien" means any lien, mortgage, pledge, security interest,
conditional sale, title retention agreement or other charge or encumbrance of
any kind.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
aggregate proceeds of such Asset Sale including the fair market value (as
determined by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by the Issuer, net of (i) brokerage commissions and other
fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Issuer and
its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Issuer or any Restricted Subsidiary of the Issuer as a reserve
against any liabilities associated with such Asset Sale including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with generally accepted accounting principles and (b) with respect to any
issuance or sale or contribution in respect of Capital Stock, the aggregate
proceeds of such issuance, sale or contribution, including the fair market value
(as determined by the Board of Directors and net of any associated debt and of
any consideration other than Capital Stock received in return) of property other
than cash, received by the Issuer, net of attorneys' fees, accountants'
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<PAGE> 14
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes paid or payable as a result thereof, provided, however,
that if such fair market value as determined by the Board of Directors of
property other than cash is greater than $25 million, the value thereof shall be
based upon an opinion from an independent nationally recognized firm experienced
in the appraisal or similar review of similar types of transactions.
"Non-Convertible Capital Stock" means, with respect to any
corporation, any non-convertible Capital Stock of such corporation and any
Capital Stock of such corporation convertible solely into non-convertible
Capital Stock other than Preferred Stock of such corporation; provided, however,
that Non-Convertible Capital Stock shall not include any Redeemable Stock or
Exchangeable Stock.
"Operating Cash Flow" means, for any period, with respect to the
Issuer and its Consolidated Subsidiaries, the aggregate amount of Consolidated
Net Income after adding thereto Consolidated Interest Expense (adjusted to
include costs recognized on early retirement of debt), income taxes,
depreciation expense, Amortization Expense and any noncash amortization of debt
issuance costs, any nonrecurring, noncash charges to earnings and any negative
accretion recognition.
"Other Rating Agency" shall mean any one of Duff & Phelps Credit
Rating Co., Fitch Investors Service, L.P. or Moody's Investors Service, Inc.,
and any successor to any of these organizations which is a nationally recognized
statistical rating organization.
"Paying Agent" means any person authorized by the Issuer to pay
the principal of (and premium, if any) or interest on any of the 2004 Notes on
behalf of the Issuer. Initially, the Paying Agent for each series of 2004 Notes
shall be the Trustee.
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<PAGE> 15
"Predecessor Note" with respect to any particular 2004 Note means
every previous 2004 Note evidencing all or a portion of the same debt as that
evidenced by such particular 2004 Note; and, for the purposes of this
definition, any 2004 Note authenticated and delivered under Section 2.9 of the
Indenture in exchange for or in lieu of a mutilated, destroyed, lost or stolen
2004 Note of the same series shall be deemed to evidence the same debt as such
mutilated, destroyed, lost or stolen 2004 Note.
"Preferred Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
that is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation; provided that Hybrid Preferred Securities shall not be considered
Preferred Stock for purposes of this definition.
"Redeemable Stock" means any Capital Stock that by its terms or
otherwise is required to be redeemed prior to the first anniversary of the
Stated Maturity of the outstanding 2004 Notes or is redeemable at the option of
the holder thereof at any time prior to the first anniversary of the Stated
Maturity of the outstanding 2004 Notes.
"Restricted Subsidiary" means any Subsidiary (other than Consumers
and its subsidiaries) of the Issuer which, as of the date of the Issuer's most
recent quarterly consolidated balance sheet, constituted at least 10% of the
total Consolidated Assets of the Issuer and its Consolidated Subsidiaries and
any other Subsidiary which from time to time is designated a Restricted
Subsidiary by the Board of Directors provided that no Subsidiary may be
designated a Restricted Subsidiary if, immediately after giving effect thereto,
an Event of Default or event that, with the lapse of time or giving of notice or
both, would constitute an Event of Default would exist or the Issuer and its
Restricted Subsidiaries could not incur at least one dollar of additional
Indebtedness under Section 5.04, and (i) any such Subsidiary so designated as a
Restricted Subsidiary must be
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<PAGE> 16
organized under the laws of the United States or any State thereof, (ii) more
than 80% of the Voting Stock of such Subsidiary must be owned of record and
beneficially by the Issuer or a Restricted Subsidiary and (iii) such Restricted
Subsidiary must be a Consolidated Subsidiary.
"Standard & Poor's" shall mean Standard & Poor's Ratings Group, a
division of McGraw Hill Inc., and any successor thereto which is a nationally
recognized statistical rating organization, or if such entity shall cease to
rate the outstanding 2004 Notes or shall cease to exist and there shall be no
such successor thereto, any other nationally recognized statistical rating
organization selected by the Issuer which is acceptable to the Trustee.
"Subordinated Indebtedness" means any Indebtedness of the Issuer
(whether outstanding on the date of this Eighth Supplemental Indenture or
thereafter incurred) which is contractually subordinated or junior in right of
payment to the 2004 Notes.
"Support Obligations" means, for any person, without duplication,
any financial obligation, contingent or otherwise, of such person guaranteeing
or otherwise supporting any debt or other obligation of any other person in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such person, direct or indirect, (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such debt or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such debt, (ii) to purchase property, securities or services for the purpose
of assuring the owner of such debt of the payment of such debt, (iii) to
maintain working capital, equity capital, available cash or other financial
statement condition of the primary obligor so as to enable the primary obligor
to pay such debt, (iv) to provide equity capital under or in respect of equity
subscription arrangements (to the extent that such obligation to provide equity
capital does not
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<PAGE> 17
otherwise constitute debt), or (v) to perform, or arrange for the performance
of, any non-monetary obligations or non-funded debt payment obligations of the
primary obligor.
"Tax-Sharing Agreement" means the Amended and Restated Agreement
for the Allocation of Income Tax Liabilities and Benefits, dated January 1,
1994, as amended or supplemented from time to time, by and among Issuer, each of
the members of the Consolidated Group (as defined therein), and each of the
corporations that become members of the Consolidated Group.
"Treasury Rate" means the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15(519) which has become publicly available at least two Business Days prior
to the redemption date or, in the case of defeasance, prior to the date of
deposit (or, if such Statistical Release is no longer published, any publicly
available source of similar market data)) most nearly equal to the then
remaining average life to stated maturity of the 2004 Notes; provided, however,
that if the average life to stated maturity of the 2004 Notes is not equal to
the constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given.
"Voting Stock" means securities of any class or classes the
holders of which are ordinarily, in the absence of contingencies, entitled to
vote for corporate directors (or persons performing similar functions).
Certain terms, used principally in Articles Three, Four and Seven
of this Eighth Supplemental Indenture, are defined in those Articles.
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<PAGE> 18
ARTICLE II
DESIGNATION AND TERMS OF THE SERIES A NOTES; FORMS
SECTION 2.01. Establishment of Series. (a) There is hereby created
a series of Securities to be known and designated as the "6.75% Senior Notes Due
2004, Series A" and limited in aggregate principal amount (except as
contemplated in Section 2.3(f)(2) of the Indenture) to $300,000,000. The Stated
Maturity of the Series A Notes is January 15, 2004.
(b) The Series A Notes will bear interest from the Original
Issue Date, or from the most recent date to which interest has been paid or duly
provided for, at the rate of 6.75% per annum stated therein until the principal
thereof is paid or made available for payment. Interest will be payable
semiannually on each Interest Payment Date and at Maturity, as provided in the
form of the Series A Note in Section 2.03 hereof.
(c) The Record Date referred to in Section 2.3(f)(4) of the
Indenture for the payment of the interest on any Series A Note payable on any
Interest Payment Date (other than at Maturity) shall be the 1st day (whether or
not a Business Day) of the calendar month in which such Interest Payment Date
occurs and, in the case of interest payable at Maturity, the Record Date shall
be the date of Maturity.
(d) The payment of the principal of, premium (if any) and
interest on the Series A Notes shall not be secured by a security interest in
any property.
(e) The Series A Notes shall be redeemable at the option of the
Issuer, in whole or in part, at any time and from time to time, upon not less
than 30 days' notice to the Holders of the Notes at a redemption price equal to
100% of the principal amount of such Series A Notes being redeemed plus the
Applicable Premium, if any, thereon at the time of redemption, together with
accrued interest, if any, thereon to the redemption
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<PAGE> 19
date. In no event will the redemption price ever be less than 100% of the
principal amount of the Series A Notes plus accrued interest to the redemption
date. The Series A Notes shall be purchased by the Issuer at the option of the
Holders thereof as provided in Sections 4.01 and 5.06 hereof.
(f) The Series A Notes shall not be convertible.
(g) The Series A Notes will not be subordinated to the payment
of Senior Debt.
(h) The Issuer will not pay any additional amounts on the Series
A Notes held by a Person who is not a U.S. Person in respect of any tax,
assessment or government charge withheld or deducted.
(i) The events specified in Events of Default with respect to
the Series A Notes shall include the events specified in Article Six of this
Eighth Supplemental Indenture. In addition to the covenants set forth in Article
Three of the Original Indenture, the Holders of the Series A Notes shall have
the benefit of the covenants of the Issuer set forth in Article Five hereto.
SECTION 2.02. Forms Generally. The Series A Notes and Trustee's
certificates of authentication shall be in substantially the form set forth in
this Article, with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by the Indenture, and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such Series A Notes, as evidenced by their execution thereof.
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<PAGE> 20
The definitive Series A Notes shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers executing such Series A Notes, as evidenced by
their execution thereof.
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<PAGE> 21
SECTION 2.03. Form of Face of Series A Note.
THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO,
OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE
SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST
HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), (B) IT IS
ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S
UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(A) (1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES
ACT (AN "IAI"), (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS
NOTE EXCEPT (A) TO THE ISSUER OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM
THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C)
IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE
SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER
THE SECURITIES ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE
TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS
RELATING TO THE TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM
THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL
AMOUNT OF NOTES LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE
ISSUER THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN
ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER)
OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN
ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION", "U.S. PERSONS" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM
BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A
PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE
IN VIOLATION OF THE FOREGOING.
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<PAGE> 22
CMS ENERGY CORPORATION
6.75% SENIOR NOTE DUE 2004, SERIES A
No. $
-------- ----------
CMS Energy Corporation, a corporation duly organized and existing
under the laws of the State of Michigan (herein called the "Issuer", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to ,
or registered assigns, the principal sum of Dollars
on January 15, 2004 ("Maturity") and to pay interest thereon from February 3,
1999 (the "Original Issue Date") or from the most recent Interest Payment Date
to which interest has been paid or duly provided for, semi-annually on May 15
and November 15 in each year, commencing July 15, 1999 and at Maturity at the
rate of 6.75% per annum, until the principal hereof is paid or made available
for payment. The amount of interest payable on any Interest Payment Date shall
be computed on the basis of a 360-day year of twelve 30-day months. The interest
so payable, and punctually paid or duly provided for, on any Interest Payment
Date will, as provided in such Indenture, be paid to the Person in whose name
this Series A Note (or one or more Predecessor Notes) is registered at the close
of business on the Record Date for such interest, which shall be the 1st day of
the calendar month in which such Interest Payment Date occurs (whether or not a
Business Day) except that the Record Date for interest payable at Maturity shall
be the date of Maturity. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder on such Record
Date and may either be paid to the Person in whose name this Series A Note (or
one or more Predecessor Series A Notes) is registered at the close of business
on a subsequent Record Date (which shall be not less than five Business Days
prior to the date of payment of such defaulted interest) for the payment of such
defaulted interest to be fixed by the Trustee, notice whereof shall be given to
Holders of Series A Notes not less than 15 days preceding such subsequent Record
Date.
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<PAGE> 23
Payment of the principal of (and premium, if any) and interest, if
any, on this Series A Note will be made at the office or agency of the Issuer
maintained for that purpose in New York, New York (the "Place of Payment"), in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts; provided, however, that
at the option of the Issuer payment of interest (other than interest payable at
Maturity) may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register or by wire
transfer to an account designated by such Person not later than ten days prior
to the date of such payment; and provided, further, that if this Series A Note
is a Global Note within the meaning of the Indenture, then each payment
hereunder shall be made by wire transfer to an account or accounts designated by
the Person entitled thereto not later than ten days prior to the date of such
payment.
Reference is hereby made to the further provisions of this Series
A Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed
by the Trustee referred to on the reverse hereof by manual signature, this
Series A Note shall not be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Issuer has caused this instrument to be
duly executed under its corporate seal.
Dated:
CMS ENERGY CORPORATION
By
----------------------------
Its:
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<PAGE> 24
By
----------------------------
Its:
Attest:
SECTION 2.04. Form of Reverse of Series A Note.
This 6.75% Senior Note Due 2004, Series A is one of a duly
authorized issue of securities of the Issuer (herein called the "Series A
Notes"), issued and to be issued under an Indenture, dated as of September 15,
1992, as supplemented by certain supplemental indentures, including the Eighth
Supplemental Indenture, dated as of November 4, 1997 (herein collectively
referred to as the "Indenture"), between the Issuer and NBD Bank, a Michigan
banking corporation (formerly known as NBD Bank, National Association), as
Trustee (herein called the "Trustee", which term includes any successor trustee
under the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Issuer, the Trustee, and the
Holders of the Series A Notes and of the terms upon which the Series A Notes
are, and are to be, authenticated and delivered. This Series A Note is one of
the series designated on the face hereof, limited in aggregate principal amount
to $300,000,000.
The Series A Notes are subject to redemption at the option of the
Issuer, in whole or in part, upon not more than 60 nor less than 30 days' notice
as provided in the Indenture at any time and from time to time, at a redemption
price equal to 100% of the principal amount of such Series A Notes being
redeemed plus the Applicable Premium, if any, thereon at the time of redemption,
together with accrued interest, if any, thereon to the redemption date, but
interest installments whose Stated Maturity is on or prior to such redemption
date will be payable to the Holder of record at the close of business on the
relevant Record Date referred to on the face hereof, all as provided in the
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<PAGE> 25
Indenture. In no event will the redemption price ever be less than 100% of the
principal amount of the Series A Notes plus accrued interest to the redemption
date.
The following definitions are used to determine the Applicable
Premium:
"Applicable Premium" means, with respect to a Series A Note (or
portion thereof) being redeemed at any time, the excess of (A) the present value
at such time of the principal amount of such Series A Note (or portion thereof)
being redeemed plus all interest payments due on such Series A Note (or portion
thereof), which present value shall be computed using a discount rate equal to
the Treasury Rate plus 50 basis points, over (B) the principal amount of such
Series A Note (or portion thereof) being redeemed at such time. For purposes of
this definition, the present values of the interest and principal payments will
be determined in accordance with generally accepted principles of financial
analysis.
"Treasury Rate" means the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15(519) which has become publicly available at least two business days prior
to the redemption date or, in the case of defeasance, prior to the date of
deposit (or, if such Statistical Release is no longer published, any publicly
available source of similar market data)) most nearly equal to the then
remaining average life to stated maturity of the Series A Notes; provided,
however, that if the average life to stated maturity of the Series A Notes is
not equal to the constant maturity of a United States Treasury security for
which a weekly average yield is given, the Treasury Rate shall be obtained by
linear interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such yields
are given.
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<PAGE> 26
In the event of redemption of this Series A Note in part only, a
new Series A Note for the unredeemed portion hereof will be issued in the name
of the Holder hereof upon the cancellation hereof.
If a Change in Control occurs, the Issuer shall notify the Holder
of this Series A Note of such occurrence and such Holder shall have the right to
require the Issuer to make a Required Repurchase of all or any part of this
Series A Note at a Change in Control Purchase Price equal to 101% of the
principal amount of this Series A Note to be so purchased as more fully provided
in the Indenture and subject to the terms and conditions set forth therein. In
the event of a Required Repurchase of only a portion of this Series A Note, a
new Series A Note or Notes for the unrepurchased portion hereof will be issued
in the name of the Holder hereof upon the cancellation hereof.
If an Event of Default with respect to this Series A Note shall
occur and be continuing, the principal of this Series A Note may be declared due
and payable in the manner and with the effect provided in the Indenture.
In any case where any Interest Payment Date, repurchase date,
Stated Maturity or Maturity of any Series A Note shall not be a Business Day at
any Place of Payment, then (notwithstanding any other provision of the Indenture
or this Series A Note), payment of interest or principal (and premium, if any)
need not be made at such Place of Payment on such date, but may be made on the
next succeeding Business Day at such Place of Payment with the same force and
effect as if made on the Interest Payment Date, repurchase date or at the Stated
Maturity or Maturity; provided that no interest shall accrue on the amount so
payable for the period from and after such Interest Payment Date, redemption
date, repurchase date, Stated Maturity or Maturity, as the case may be, to such
Business Day.
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<PAGE> 27
The Indenture contains provisions for defeasance at any time of
(i) the entire indebtedness of this Series A Note or (ii) certain restrictive
covenants and Events of Default with respect to this Series A Note, in each case
upon compliance with certain conditions set forth therein.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of all outstanding
Series A Notes under the Indenture at any time by the Issuer and the Trustee
with the consent of the Holders of not less than a majority in principal amount
of Securities of all series then outstanding and affected (voting as one class).
The Indenture permits the Holders of not less than a majority in
principal amount of Securities of all series at the time outstanding with
respect to which a default shall have occurred and be continuing (voting as one
class) to waive on behalf of the Holders of all outstanding Securities of such
series any past default by the Issuer, provided that no such waiver may be made
with respect to a default in the payment of the principal of or the interest on
any Security of such series or the default by the Issuer in respect of certain
covenants or provisions of the Indenture, the modification or amendment of which
must be consented to by the Holder of each outstanding Security of each series
affected.
As set forth in, and subject to, the provisions of the
Indenture, no Holder of any Series A Note will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such Holder shall have previously given to the Trustee written notice of a
continuing Event of Default, the Holders of not less than 25% in principal
amount of the outstanding Securities of each affected series (voting as one
class) shall have made written request, and offered reasonable indemnity, to the
Trustee to institute such proceeding as trustee, and the Trustee shall not have
received
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<PAGE> 28
from the Holders of a majority in principal amount of the outstanding Securities
of each affected series (voting as one class) a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days;
provided, however, that such limitations do not apply to a suit instituted by
the Holder hereof for the enforcement of payment of the principal of (and
premium, if any) or any interest on this Series A Note on or after the
respective due dates expressed herein.
No reference herein to the Indenture and no provision of this
Series A Note or of the Indenture shall alter or impair the obligation of the
Issuer, which is absolute and unconditional, to pay the principal of and any
premium and interest on this Series A Note at the times, place and rate, and in
the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein and herein set forth, the transfer of this Series A Note is registerable
in the Security Register, upon surrender of this Series A Note for registration
of transfer at the office or agency of the Issuer in any place where the
principal of and any premium and interest on this Series A Note are payable,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Issuer and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Series A Notes of this series and of like tenor, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Series A Notes are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Series A Notes are exchangeable for a like aggregate principal amount of Series
A Notes and of like tenor of a different authorized denomination, as requested
by the Holder surrendering the same.
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<PAGE> 29
No service charge shall be made for any such registration of
transfer or exchange, but the Issuer may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
The Issuer shall not be required to (a) issue, exchange or
register the transfer of this Series A Note for a period of 15 days next
preceding the mailing of the notice of redemption of Series A Notes or (b)
exchange or register the transfer of any Series A Note or any portion thereof
selected, called or being called for redemption, except in the case of any
Series A Note to be redeemed in part, the portion thereof not so to be redeemed.
Prior to due presentment of this Series A Note for registration of
transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may
treat the Person in whose name this Series A Note is registered as the owner
hereof for all purposes, whether or not this Series A Note be overdue, and
neither the Issuer, the Trustee nor any such agent shall be affected by notice
to the contrary.
All terms used in this Series A Note without definition which are
defined in the Indenture shall have the meanings assigned to them in the
Indenture.
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<PAGE> 30
CERTIFICATE OF TRANSFER
6.75% SENIOR NOTE DUE 2004, SERIES A
FOR VALUE RECEIVED, THE UNDERSIGNED HEREBY SELL(S), ASSIGN(S) AND
TRANSFER(S) UNTO PLEASE INSERT SOCIAL SECURITY NUMBER
OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------
- ----------------------------
------------------------------------------------
- --------------------
- -------------------------------------------------------------------------
(Please print or typewrite name and address including postal zip code, of
assignee)
- -------------------------------------------------------------------------
the within Note and all rights thereunder, and hereby
irrevocably constitutes and appoints
----------------------------------
- -------------------------------------------------------------------------
to transfer said Note on the books of the Issuer, with full power of
substitution in the premises.
The undersigned certifies that said Note is being resold, pledged or otherwise
transferred as follows: (check one)
[_] to the Issuer;
[_] to a Person whom the undersigned reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act") purchasing
for its own account or for the account of a qualified institutional
buyer to whom notice is given that the resale, pledge or other transfer
is being made in reliance on Rule 144A;
[_] in an offshore transaction in accordance with Rule 903 or 904 of
Regulation S under the Securities Act;
[_] to an institution that is an "accredited investor" as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act that is acquiring
this Note for investment purposes and not for distribution; (attach a
copy of an Investment Letter For Institutional Accredited Investors in
the form annexed signed by an authorized officer of the transferee)
[_] as otherwise permitted by the non-registration legend appearing on this
Note; or
[_] as otherwise agreed by the Issuer, confirmed in writing to the Trustee,
as follows: (describe)
----------------------------------------------------------------
----------------------------------------------------------------
Dated:
------------------- -------------------------
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<PAGE> 31
FORM OF INVESTMENT LETTER FOR INSTITUTIONAL ACCREDITED INVESTORS
[Transferor, Trustee and Issuer Names and Addresses]
Ladies and Gentlemen:
In connection with our proposed purchase of 6.75% Senior Notes due 2004,
Series A (the "Notes") issued by CMS Energy Corporation ("Issuer"), we confirm
that:
1. We have received a copy of the Offering Memorandum (the
"Offering Memorandum") relating to the Notes and such other information
as we deem necessary in order to make our investment decision. We
acknowledge that we have read and agree to the matters stated under the
caption NOTICE TO INVESTORS in such Offering Memorandum, and the
restrictions on duplication or circulation of, or disclosure relating
to, such Offering Memorandum.
2. We understand that any subsequent transfer of the Notes is
subject to certain restrictions and conditions set forth in the
Indenture relating to Notes (the "Indenture") and that any subsequent
transfer of the Notes is subject to certain restrictions and conditions
set forth under NOTICE TO INVESTORS in the Offering Memorandum and the
undersigned agrees to be bound by, and not to resell, pledge or
otherwise transfer the Notes except in compliance with such
restrictions and conditions and the Securities Act of 1933, as amended
("Securities Act").
3. We understand that the offer and sale of the Notes have not
been registered under the Securities Act, and that the Notes may not be
offered or sold except as permitted in the following sentence. We
agree, on our own behalf and on behalf of any accounts for which we are
acting as hereinafter stated, that if we sell any Senior Notes, we will
do so only (A) to the Issuer, (B) in accordance with Rule 144A under
the Securities Act to a "qualified institutional buyer" (as defined
therein), (C) to an institutional "accredited investor" (as defined
below) that, prior to such transfer, furnishes to the Trustee (as
defined in the Indenture) a signed letter containing certain
representations and agreements relating to the restrictions on transfer
of the Notes (substantially in the form of this letter) and, if such
transfer is in respect of an aggregate principal amount of Notes at the
time of transfer of less than $250,000, an opinion of counsel
acceptable to the Issuer that such transfer is in compliance with the
Securities Act, (D) outside the United States in accordance with Rule
903 or 904 of Regulation S under the Securities Act, (E) pursuant to
the exemption from registration provided by Rule 144 under the
Securities Act (if available), or (F) pursuant to an effective
registration statement under the Securities Act, and we further agree
to provide to any person purchasing any of the Notes from us a notice
advising such purchaser that resales of the Notes are restricted as
stated herein.
4. We understand that, on any proposed resale of any Notes, we
will be required to furnish to the Trustee and Issuer such
certifications, legal opinions and other information as the Trustee and
Issuer may reasonably require to confirm that the proposed sale
complies with the foregoing restrictions. We further understand that
the Notes purchased by us will bear a legend to the foregoing effect.
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<PAGE> 32
5. We are an institutional "accredited investor" (as defined in
Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities
Act) and have such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of our
investment in the Notes, and we and any accounts for which we are
acting are each able to bear the economic risk of our or its
investment.
6. We are acquiring the Notes purchased by us for our own
account or for one or more accounts (each of which is an institutional
"accredited investor") as to each of which we exercise sole investment
discretion.
You, the Issuer and the Trustee are entitled to rely upon this letter
and are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby.
Very truly yours,
By:
--------------------
Name:
Title:
[END OF FORM]
SECTION 2.05. Form of Trustee's Certificate of Authentication. The
Trustee's certificates of authentication shall be in substantially the following
form:
This is one of the Securities of the series designated herein
referred to in the within-mentioned Indenture.
----------------------------------------,
as Trustee
By
--------------------------------------
Authorized Officer
SECTION 2.06. The Series A Notes will be initially issued as
Global Notes registered in the name of Cede & Co. (as nominee for the Depository
Trust Company ("DTC"), New York, New York). The Series A Notes shall contain
restrictions on transfer, substantially as described in the form set forth in
Section 2.03. Each Series A Note, whether in the form of a Global Note or in
certificated form, shall bear a non-registration legend and a Certificate of
Transfer, in each case in substantially the form set forth in such form.
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<PAGE> 33
It is contemplated that beneficial interests in Series A Notes
owned by qualified institutional buyers (as defined in Rule 144A under the
Securities Act)("QIBs") or sold to QIBs in reliance upon Rule 144A under the
Securities Act will be represented by one or more global certificates registered
in the name of Cede & Co., as registered owner and as nominee for DTC;
beneficial interests in Series A Notes acquired by foreign purchasers pursuant
to Regulation S under the Securities Act will be evidenced by one or more
separate global certificates (each the "Regulation S Global Certificate"), also
registered in the name of Cede & Co., as registered owner and as nominee for DTC
for the accounts of Euroclear and Cedel Bank; prior to the 40th day after the
date of initial issuance of the Series A Notes, beneficial interests in the
Regulation S Global Certificate may be held only through Euroclear or Cedel
Bank; Series A Notes acquired by Institutional Accredited Investors (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) ("IAIs") and other
eligible transferees, who are not QIBs and who are not foreign purchasers
pursuant to Regulation S under the Securities Act, will be in certificated form.
The Trustee and the Issuer will have no responsibility under the Indenture for
transfers of beneficial interests in the Series A Notes. The Trustee shall
authenticate and issue new Series A Notes upon a registration of transfer only
upon receipt of a Transfer Certificate in the form set forth in Section 2.04.
The Trustee shall refuse to register any transfer of a Series A Note in
violation of the legend set forth on such Series A Note and without appropriate
completion of the Transfer Certificate on such Series A Note.
ARTICLE III
DESIGNATION AND TERMS OF THE SERIES B NOTES; FORMS
SECTION 3.01. Establishment of Series. (a) There is hereby created
a series of Securities to be known and designated as the "6.75% Senior Notes Due
2004, Series B" and limited in aggregate principal amount (except as
contemplated in Section
33--
<PAGE> 34
2.3(f)(2) of the Indenture) to $300,000,000 (the "Series B Notes"). The Stated
Maturity of the Series B Notes is January 15, 2004.
(b) The Series B Notes will bear interest from the Original
Issue Date, or from the most recent date to which interest has been paid or duly
provided for, at the rate of 6.75% per annum stated therein until the principal
thereof is paid or made available for payment. Interest will be payable
semiannually on each Interest Payment Date and at Maturity, as provided in the
form of the Series B Note in Section 3.03 hereof.
(c) The Record Date referred to in Section 2.3(f)(4) of the
Indenture for the payment of the interest on any Series B Note payable on any
Interest Payment Date (other than at Maturity) shall be the 1st day (whether or
not a Business Day) of the calendar month in which such Interest Payment Date
occurs and, in the case of interest payable at Maturity, the Record Date shall
be the date of Maturity.
(d) The payment of the principal of, premium (if any) and
interest on the Series B Notes shall not be secured by a security interest in
any property.
(e) The Series B Notes shall be redeemable at the option of the
Issuer, in whole or in part, at any time and from time to time, at a redemption
price equal to 100% of the principal amount of such Series B Notes being
redeemed plus the Applicable Premium, if any, thereon at the time of redemption,
together with accrued interest, if any, thereon to the redemption date. In no
event will the redemption price ever be less than 100% of the principal amount
of the Series B Notes plus accrued interest to the redemption date. The Series B
Notes shall be purchased by the Issuer at the option of the Holders thereof as
provided in Sections 4.01 and 5.06 hereof.
(f) The Series B Notes shall not be convertible.
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<PAGE> 35
(g) The Series B Notes will not be subordinated to the payment
of Senior Debt.
(h) The Issuer will not pay any additional amounts on the Series
B Notes held by a Person who is not a U.S. Person in respect of any tax,
assessment or government charge withheld or deducted.
(i) The events specified in Events of Default with respect to
the Series B Notes shall include the events specified in Article Six of this
Eighth Supplemental Indenture. In addition to the covenants set forth in Article
Three of the Original Indenture, the Holders of the Series B Notes shall have
the benefit of the covenants of the Issuer set forth in Article Five hereto.
SECTION 3.02. Forms Generally. The Series B Notes and Trustee's
certificates of authentication shall be in substantially the form set forth in
this Article, with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by the Indenture, and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such Series B Notes, as evidenced by their execution thereof.
The definitive Series B Notes shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers executing such Series B Notes, as evidenced by
their execution thereof.
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<PAGE> 36
SECTION 3.03. Form of Face of Series B Note.
CMS ENERGY CORPORATION
6.75% SENIOR NOTE DUE 2004, SERIES B
No. $
-------- ----------
CMS Energy Corporation, a corporation duly organized and existing
under the laws of the State of Michigan (herein called the "Issuer", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to , or
registered assigns, the principal sum of Dollars on January
15, 2004 ("Maturity") and to pay interest thereon from February 3, 1999 (the
"Original Issue Date") or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, semi-annually on January 15 and
July 15 in each year, commencing July 15, 1999 and at Maturity at the rate of
6.75% per annum, until the principal hereof is paid or made available for
payment. The amount of interest payable on any Interest Payment Date shall be
computed on the basis of a 360-day year of twelve 30-day months. The interest so
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in such Indenture, be paid to the Person in whose name this
Series B Note (or one or more Predecessor Series B Notes) is registered at the
close of business on the Record Date for such interest, which shall be the 1st
day of the calendar month in which such Interest Payment Date occurs (whether or
not a Business Day) except that the Record Date for interest payable at Maturity
shall be the date of Maturity. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder on such Record
Date and may either be paid to the Person in whose name this Series B Note (or
one or more Predecessor Series B Notes) is registered at the close of business
on a subsequent Record Date (which shall be not less than five Business Days
prior to the date of payment of such defaulted interest) for the payment of such
defaulted interest to be fixed by the Trustee,
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<PAGE> 37
notice whereof shall be given to Holders of Series B Notes not less than 15 days
preceding such subsequent Record Date.
Payment of the principal of (and premium, if any) and interest, if
any, on this Series B Note will be made at the office or agency of the Issuer
maintained for that purpose in New York, New York (the "Place of Payment"), in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts; provided, however, that
at the option of the Issuer payment of interest (other than interest payable at
Maturity) may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register or by wire
transfer to an account designated by such Person not later than ten days prior
to the date of such payment; and provided, further, that if this Series B Note
is a Global Note within the meaning of the Indenture, then each payment
hereunder shall be made by wire transfer to an account or accounts designated by
the Person entitled thereto not later than ten days prior to the date of such
payment.
Reference is hereby made to the further provisions of this Series
B Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed
by the Trustee referred to on the reverse hereof by manual signature, this
Series B Note shall not be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose.
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<PAGE> 38
IN WITNESS WHEREOF, the Issuer has caused this instrument to be
duly executed under its corporate seal.
Dated:
CMS ENERGY CORPORATION
By
----------------------------
Its:
By
----------------------------
Its:
Attest:
SECTION 3.04. Form of Reverse of Series B Note.
This 6.75% Senior Note Due 2004, Series B is one of a duly
authorized issue of securities of the Issuer (herein called the "Series B
Notes"), issued and to be issued under an Indenture, dated as of September 15,
1992, as supplemented by certain supplemental indentures, including the Eighth
Supplemental Indenture, dated as of November 4, 1997 (herein collectively
referred to as the "Indenture"), between the Issuer and NBD Bank, a Michigan
banking corporation (formerly known as NBD Bank, National Association), as
Trustee (herein called the "Trustee", which term includes any successor trustee
under the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Issuer, the Trustee, and the
Holders of the Series B Notes and of the terms upon which the Series B Notes
are, and are to be, authenticated and delivered. This Series B Note is one of
the series designated on the face hereof, limited in aggregate principal amount
to $300,000,000.
The Series B Notes are subject to redemption at the option of the
Issuer, in whole or in part, upon not more than 60 nor less than 30 days' notice
as provided in the Indenture at any time and from time to time, at a redemption
price equal to 100% of
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<PAGE> 39
the principal amount of such Series B Notes being redeemed plus the Applicable
Premium, if any, thereon at the time of redemption, together with accrued
interest, if any, thereon to the redemption date, but interest installments
whose Stated Maturity is on or prior to such redemption date will be payable to
the Holder of record at the close of business on the relevant Record Date
referred to on the face hereof, all as provided in the Indenture. In no event
will the redemption price ever be less than 100% of the principal amount of the
Series B Notes plus accrued interest to the redemption date.
The following definitions are used to determine the Applicable
Premium:
"Applicable Premium" means, with respect to a Series B Note (or
portion thereof) being redeemed at any time, the excess of (A) the present value
at such time of the principal amount of such Series B Note (or portion thereof)
being redeemed plus all interest payments due on such Series B Note (or portion
thereof), which present value shall be computed using a discount rate equal to
the Treasury Rate plus 50 basis points, over (B) the principal amount of such
Series B Note (or portion thereof) being redeemed at such time. For purposes of
this definition, the present values of the interest and principal payments will
be determined in accordance with generally accepted principles of financial
analysis.
"Treasury Rate" means the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15(519) which has become publicly available at least two business days prior
to the redemption date or, in the case of defeasance, prior to the date of
deposit (or, if such Statistical Release is no longer published, any publicly
available source of similar market data)) most nearly equal to the then
remaining average life to stated maturity of the Series B Notes; provided,
however, that if the average life to stated maturity of the Series B Notes is
not equal to the constant maturity of a United States Treasury security for
which a weekly average
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<PAGE> 40
yield is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given.
In the event of redemption of this Series B Note in part only, a
new Series B Note for the unredeemed portion hereof will be issued in the name
of the Holder hereof upon the cancellation hereof.
If a Change in Control occurs, the Issuer shall notify the Holder
of this Series B Note of such occurrence and such Holder shall have the right to
require the Issuer to make a Required Repurchase of all or any part of this
Series B Note at a Change in Control Purchase Price equal to 101% of the
principal amount of this Series B Note to be so purchased as more fully provided
in the Indenture and subject to the terms and conditions set forth therein. In
the event of a Required Repurchase of only a portion of this Series B Note, a
new Series B Note or Notes for the unrepurchased portion hereof will be issued
in the name of the Holder hereof upon the cancellation hereof.
If an Event of Default with respect to this Series B Note shall
occur and be continuing, the principal of this Series B Note may be declared due
and payable in the manner and with the effect provided in the Indenture.
In any case where any Interest Payment Date, repurchase date,
Stated Maturity or Maturity of any Series B Note shall not be a Business Day at
any Place of Payment, then (notwithstanding any other provision of the Indenture
or this Series B Note), payment of interest or principal (and premium, if any)
need not be made at such Place of Payment on such date, but may be made on the
next succeeding Business Day at such Place of Payment with the same force and
effect as if made on the Interest Payment Date, repurchase date or at the Stated
Maturity or Maturity; provided that no interest shall accrue on the amount so
payable for the period from and after such Interest Payment Date,
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<PAGE> 41
redemption date, repurchase date, Stated Maturity or Maturity, as the case may
be, to such Business Day.
The Indenture contains provisions for defeasance at any time of
(i) the entire indebtedness of this Series B Note or (ii) certain restrictive
covenants and Events of Default with respect to this Series B Note, in each case
upon compliance with certain conditions set forth therein.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of all outstanding
Series B Notes under the Indenture at any time by the Issuer and the Trustee
with the consent of the Holders of not less than a majority in principal amount
of Securities of all series then outstanding and affected (voting as one class).
The Indenture permits the Holders of not less than a majority in
principal amount of Securities of all series at the time outstanding with
respect to which a default shall have occurred and be continuing (voting as one
class) to waive on behalf of the Holders of all outstanding Securities of such
series any past default by the Issuer, provided that no such waiver may be made
with respect to a default in the payment of the principal of or the interest on
any Security of such series or the default by the Issuer in respect of certain
covenants or provisions of the Indenture, the modification or amendment of which
must be consented to by the Holder of each outstanding Security of each series
affected.
As set forth in, and subject to, the provisions of the Indenture,
no Holder of any Series B Note will have any right to institute any proceeding
with respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing Event
of Default, the Holders of not less
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<PAGE> 42
than 25% in principal amount of the outstanding Securities of each affected
series (voting as one class) shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the Holders of a majority in
principal amount of the outstanding Securities of each affected series (voting
as one class) a direction inconsistent with such request and shall have failed
to institute such proceeding within 60 days; provided, however, that such
limitations do not apply to a suit instituted by the Holder hereof for the
enforcement of payment of the principal of (and premium, if any) or any interest
on this Series B Note on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this
Series B Note or of the Indenture shall alter or impair the obligation of the
Issuer, which is absolute and unconditional, to pay the principal of and any
premium and interest on this Series B Note at the times, place and rate, and in
the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein and herein set forth, the transfer of this Series B Note is registerable
in the Security Register, upon surrender of this Series B Note for registration
of transfer at the office or agency of the Issuer in any place where the
principal of and any premium and interest on this Series B Note are payable,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Issuer and the Security Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Series B Notes of this series and of like tenor, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Series B Notes are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Series B Notes are exchangeable for
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<PAGE> 43
a like aggregate principal amount of Series B Notes and of like tenor of a
different authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any such registration of
transfer or exchange, but the Issuer may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
The Issuer shall not be required to (a) issue, exchange or
register the transfer of this Series B Note for a period of 15 days next
preceding the mailing of the notice of redemption of Series B Notes or (b)
exchange or register the transfer of any Series B Note or any portion thereof
selected, called or being called for redemption, except in the case of any
Series B Note to be redeemed in part, the portion thereof not so to be redeemed.
Prior to due presentment of this Series B Note for registration of
transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may
treat the Person in whose name this Series B Note is registered as the owner
hereof for all purposes, whether or not this Series B Note be overdue, and
neither the Issuer, the Trustee nor any such agent shall be affected by notice
to the contrary.
All terms used in this Series B Note without definition which are
defined in the Indenture shall have the meanings assigned to them in the
Indenture.
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<PAGE> 44
FOR VALUE RECEIVED, THE UNDERSIGNED HEREBY SELL(S), ASSIGN(S) AND
TRANSFER(S) UNTO PLEASE INSERT SOCIAL SECURITY NUMBER
OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------
- ----------------------------
------------------------------------------------
- --------------------
- -------------------------------------------------------------------------
(Please print or typewrite name and address including postal zip code, of
assignee)
- -------------------------------------------------------------------------
the within Note and all rights thereunder, and hereby
irrevocably constitutes and appoints
----------------------------------
- -------------------------------------------------------------------------
to transfer said Note on the books of the Issuer, with full power of
substitution in the premises.
Dated:
------------------- -------------------------
[END OF FORM]
SECTION 3.05. Form of Trustee's Certificate of Authentication. The
Trustee's certificates of authentication shall be in substantially the following
form:
This is one of the Securities of the series designated herein
referred to in the within-mentioned Indenture.
----------------------------------------,
as Trustee
By
--------------------------------------
Authorized Officer
44--
<PAGE> 45
ARTICLE IV
CHANGE IN CONTROL
SECTION 4.01. Change in Control. Upon the occurrence of a Change
in Control (the effective date of such Change in Control being the "Change in
Control Date"), each Holder of a 2004 Note shall have the right to require that
the Issuer repurchase (a "Required Repurchase") all or any part of such Holder's
2004 Note at a repurchase price payable in cash equal to 101% of the principal
amount of such 2004 Note plus accrued interest to the Purchase Date (the "Change
in Control Purchase Price").
(a) Within 30 days following the Change in Control Date, the
Issuer shall mail a notice (the "Required Repurchase Notice") to each
Holder with a copy to the Trustee stating:
(i) that a Change in Control has occurred and that such
Holder has the right to require the Issuer to repurchase all or
any part of such Holder's 2004 Notes at the Change in Control
Purchase Price;
(ii) the Change in Control Purchase Price;
(iii) the date on which any Required Repurchase shall be made
(which shall be no earlier than 60 days nor later than 90 days
from the date such notice is mailed) (the "Purchase Date");
(iv) the name and address of the Paying Agent; and
(v) the procedures that Holders must follow to cause the
2004 Notes to be repurchased, which shall be consistent with this
Section and the Indenture.
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<PAGE> 46
(b) Holders electing to have a 2004 Note repurchased must deliver
a written notice (the "Change in Control Purchase Notice") to the
Paying Agent (initially the Trustee) at its corporate trust office in
Detroit, Michigan, or any other office of the Paying Agent maintained
for such purposes, not later than 30 days prior to the Purchase Date.
The Change in Control Purchase Notice shall state: (i) the portion of
the principal amount of any 2004 Notes to be repurchased, which portion
must be $1,000 or an integral multiple thereof; (ii) that such 2004
Notes are to be repurchased by the Issuer pursuant to the change in
control provisions of the Indenture; and (iii) unless the 2004 Notes
are represented by one or more Global Notes, the certificate numbers of
the 2004 Notes to be delivered by the Holder thereof for repurchase by
the Issuer. Any Change in Control Purchase Notice may be withdrawn by
the Holder by a written notice of withdrawal delivered to the Paying
Agent not later than three Business Days prior to the Purchase Date.
The notice of withdrawal shall state the principal amount and, if
applicable, the certificate numbers of the 2004 Notes as to which the
withdrawal notice relates and the principal amount of such 2004 Notes,
if any, which remains subject to a Change in Control Purchase Notice.
If a 2004 Note is represented by a Global Note (as described in
Article VII below), the Depositary or its nominee will be the Holder of
such 2004 Note and therefore will be the only entity that can elect a
Required Repurchase of such 2004 Note. To obtain repayment pursuant to
this Section 4.01 with respect to such 2004 Note, the beneficial owner
of such 2004 Note must provide to the broker or other entity through
which it holds the beneficial interest in such 2004 Note (i) the Change
in Control Purchase Notice signed by such beneficial owner, and such
signature must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office or
correspondent in the United States, and (ii) instructions to such
broker or other entity to notify the Depositary of such
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<PAGE> 47
beneficial owner's desire to obtain repayment pursuant to this Section
4.01. Such broker or other entity will provide to the Paying Agent (i)
the Change in Control Purchase Notice received from such beneficial
owner and (ii) a certificate satisfactory to the Paying Agent from such
broker or other entity stating that it represents such beneficial
owner. Such broker or other entity will be responsible for disbursing
any payments it receives pursuant to this Section 4.01 to such
beneficial owner.
(c) Payment of the Change in Control Purchase Price for a 2004
Note for which a Change in Control Purchase Notice has been delivered
and not withdrawn is conditioned (except in the case of a 2004 Note
represented by one or more Global Notes) upon delivery of such 2004
Note (together with necessary endorsements) to the Paying Agent at its
office in Detroit, Michigan, or any other office of the Paying Agent
maintained for such purpose, at any time (whether prior to, on or after
the Purchase Date) after the delivery of such Change in Control
Purchase Notice. Payment of the Change in Control Purchase Price for
such 2004 Note will be made promptly following the later of the
Purchase Date or the time of delivery of such 2004 Note. If the Paying
Agent holds, in accordance with the terms of the Indenture, money
sufficient to pay the Change in Control Purchase Price of such 2004
Note on the Business Day following the Purchase Date, then, on and
after such date, interest will cease accruing, and all other rights of
the Holder shall terminate (other than the right to receive the Change
in Control Purchase Price upon delivery of the 2004 Note).
(d) The Issuer shall comply with the provisions of Regulation 14E
and any other tender offer rules under the Exchange Act, which may then
be applicable in connection with any offer by the Issuer to repurchase
2004 Notes at the option of Holders upon a Change in Control.
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<PAGE> 48
(e) No 2004 Note may be repurchased by the Issuer as a result of
a Change in Control if there has occurred and is continuing an Event of
Default (other than a default in the Payment of the Change in Control
Purchase Price with respect to the 2004 Notes).
ARTICLE V
ADDITIONAL COVENANTS OF THE ISSUER
WITH RESPECT TO THE 2004 NOTES
SECTION 5.01. Existence. So long as any of the 2004 Notes are
outstanding, subject to Article Nine of the Original Indenture, the Issuer will
do or cause to be done all things necessary to preserve and keep in full force
and effect its corporate existence.
SECTION 5.02. Limitation on Certain Liens. (a) So long as any of
the 2004 Notes are outstanding, the Issuer shall not create, incur, assume or
suffer to exist any lien, mortgage, pledge, security interest, conditional sale,
title retention agreement or other charge or encumbrance of any kind, or any
other type of arrangement intended or having the effect of conferring upon a
creditor of the Issuer or any Subsidiary a preferential interest (hereinafter in
this Section referred to as a "Lien") upon or with respect to any of its
property of any character, including without limitation any shares of Capital
Stock of Consumers or Enterprises, without making effective provision whereby
the 2004 Notes shall (so long as any such other creditor shall be so secured) be
equally and ratably secured (along with any other creditor similarly entitled to
be secured) by a direct Lien on all property subject to such Lien, provided,
however, that the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or
levies to the extent not past due;
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(ii) pledges or deposits to secure (a) obligations under workmen's
compensation laws or similar legislation, (b) statutory obligations of the
Issuer or (c) Support Obligations;
(iii) Liens imposed by law, such as materialmen's, mechanics',
carriers', workmen's and repairmen's Liens and other similar Liens arising in
the ordinary course of business securing obligations which are not overdue or
which have been fully bonded and are being contested in good faith;
(iv) purchase money Liens upon or in property acquired and held by the
Issuer in the ordinary course of business to secure the purchase price of such
property or to secure Indebtedness incurred solely for the purpose of financing
the acquisition of any such property to be subject to such Liens, or Liens
existing on any such property at the time of acquisition, or extensions,
renewals or replacements of any of the foregoing for the same or a lesser
amount, provided that no such Lien shall extend to or cover any property other
than the property being acquired and no such extension, renewal or replacement
shall extend to or cover property not theretofore subject to the Lien being
extended, renewed or replaced, and provided, further, that the aggregate
principal amount of the Indebtedness at any one time outstanding secured by
Liens permitted by this clause (iv) shall not exceed $10,000,000; and
(v) Liens not otherwise permitted by clauses (i) through (iv) of this
Section securing Indebtedness of the Issuer; provided that on the date such
Liens are created, and after giving effect to such Indebtedness, the aggregate
principal amount at maturity of all of the secured Indebtedness of the Issuer at
such date shall not exceed 5% of Consolidated Net Tangible Assets at such date.
SECTION 5.03. Limitation on Consolidation, Merger, Sale or
Conveyance. So long as any of the 2004 Notes are outstanding and until the 2004
Notes are rated BBB- or
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above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency
(or, if Standard & Poor's shall change its rating system, an equivalent of such
rating then employed by such organization), at which time the Issuer will be
permanently released from the provisions of this Section 5.03, and subject also
to Article Nine of the Indenture, the Issuer shall not consolidate with or merge
into any other Person or sell, lease or convey the property of the Issuer in the
entirety or substantially as an entirety, unless (i) immediately after giving
effect to such transaction the Consolidated Net Worth of the surviving entity is
at least equal to the Consolidated Net Worth of the Issuer immediately prior to
the transaction, and (ii) after giving effect to such transaction, the surviving
entity would be entitled to incur at least one dollar of additional Indebtedness
(other than revolving Indebtedness to banks) without violation of the
limitations in Section 5.04 hereof.
SECTION 5.04. Limitation on Consolidated Indebtedness. (a) So long
as any of the 2004 Notes are outstanding and until the 2004 Notes are rated BBB-
or above (or an equivalent rating) by Standard & Poor's and one Other Rating
Agency (or, if Standard & Poor's shall change its rating system, an equivalent
of such rating then employed by such organization), at which time the Issuer
will be permanently released from the provisions of this Section 5.04, the
Issuer shall not, and shall not permit any Consolidated Subsidiary of the Issuer
to, issue, create, assume, guarantee, incur or otherwise become liable for
(collectively, "issue"), directly or indirectly, any Indebtedness unless the
Consolidated Coverage Ratio of the Issuer and its Consolidated Subsidiaries for
the four consecutive fiscal quarters immediately preceding the issuance of such
Indebtedness (as shown by a pro forma consolidated income statement of the
Issuer and its Consolidated Subsidiaries for the four most recent fiscal
quarters ending at least 30 days prior to the issuance of such Indebtedness
after giving effect to (i) the issuance of such Indebtedness and (if applicable)
the application of the net proceeds thereof to refinance other Indebtedness as
if such Indebtedness was issued at the beginning of the period, (ii) the
issuance and retirement of any other Indebtedness since the first day of the
period as if such Indebtedness was issued or retired at the beginning of the
period and (iii) the acquisition of any company or business acquired by the
Issuer or any Subsidiary since the first day
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of the period (including giving effect to the pro forma historical earnings of
such company or business), including any acquisition which will be consummated
contemporaneously with the issuance of such Indebtedness, as if in each case
such acquisition occurred at the beginning of the period) exceeds a ratio of 1.7
to 1.0.
(b) Notwithstanding the foregoing paragraph, the Issuer or any
Restricted Subsidiary may issue, directly or indirectly, the following
Indebtedness:
(1) Indebtedness of the Issuer to banks not to exceed
$1,000,000,000 in aggregate outstanding principal amount at any time;
(2) Indebtedness (other than Indebtedness described in clause (1)
of this Subsection) outstanding on the date of this Eighth Supplemental
Indenture, as set forth on Schedule 5.04(b)(2) attached hereto and made
a part hereof, and Indebtedness issued in exchange for, or the proceeds
of which are used to refund or refinance, any Indebtedness permitted by
this clause (2); provided, however, that (i) the principal amount (or
accreted value in the case of Indebtedness issued at a discount) of the
Indebtedness so issued shall not exceed the principal amount (or
accreted value in the case of Indebtedness issued at a discount) of,
premium, if any, and accrued but unpaid interest on, the Indebtedness
so exchanged, refunded or refinanced and (ii) the Indebtedness so
issued (A) shall not mature prior to the stated maturity of the
Indebtedness so exchanged, refunded or refinanced, (B) shall have an
Average Life equal to or greater than the remaining Average Life of the
Indebtedness so exchanged, refunded or refinanced and (C) if the
Indebtedness to be exchanged, refunded or refinanced is subordinated to
the 2004 Notes, the Indebtedness is subordinated to the 2004 Notes in
right of payment;
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(3) Indebtedness of the Issuer owed to and held by a
Subsidiary and Indebtedness of a Subsidiary owed to and held by the
Issuer; provided, however, that, in the case of Indebtedness of the
Issuer owed to and held by a Subsidiary, (i) any subsequent issuance or
transfer of any Capital Stock that results in any such Subsidiary
ceasing to be a Subsidiary or (ii) any transfer of such Indebtedness
(except to the Issuer or a Subsidiary) shall be deemed for the purposes
of this Subsection to constitute the issuance of such Indebtedness by
the Issuer;
(4) Indebtedness of the Issuer issued in exchange for, or
the proceeds of which are used to refund or refinance, Indebtedness of
the Issuer issued in accordance with Subsection (a) of this Section,
provided that (i) the principal amount (or accreted value in the case
of Indebtedness issued at a discount) of the Indebtedness so issued
shall not exceed the principal amount (or accreted value in the case of
Indebtedness issued at a discount) of, premium, if any, and accrued but
unpaid interest on, the Indebtedness so exchanged, refunded or
refinanced and (ii) the Indebtedness so issued (A) shall not mature
prior to the stated maturity of the Indebtedness so exchanged, refunded
or refinanced, (B) shall have an Average Life equal to or greater than
the remaining Average Life of the Indebtedness so exchanged, refunded
or refinanced and (C) if the Indebtedness to be exchanged, refunded or
refinanced is subordinated to the 2004 Notes, the Indebtedness so
issued is subordinated to the 2004 Notes in right of payment;
(5) Indebtedness of a Restricted Subsidiary issued in
exchange for, or the proceeds of which are used to refund or refinance,
Indebtedness of a Restricted Subsidiary issued in accordance with
Subsection (a) of this Section, provided that (i) the principal amount
(or accreted value in the case of Indebtedness issued at a discount) of
the Indebtedness so issued shall not exceed the principal amount (or
accreted value in the case of Indebtedness issued at a discount) of,
premium, if
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any, and accrued but unpaid interest on, the Indebtedness so exchanged,
refunded or refinanced and (ii) the Indebtedness so issued (A) shall
not mature prior to the stated maturity of the Indebtedness so
exchanged, refunded or refinanced and (B) shall have an Average Life
equal to or greater than the remaining Average Life of the Indebtedness
so exchanged, refunded or refinanced.
(6) Indebtedness of a Consolidated Subsidiary issued to
acquire, develop, improve, construct or to provide working capital for
a gas, oil or electric generation, exploration, production,
distribution, storage or transmission facility and related assets,
provided that such Indebtedness is without recourse to any assets of
the Issuer, Consumers, Enterprises, CMS Generation, CMS Oil & Gas, CMS
Electric and Gas, CMS Gas Transmission and Storage, CMS MST or any
other Designated Enterprises Subsidiary;
(7) Indebtedness of a Person existing at the time at which
such person became a Subsidiary and not incurred in connection with, or
in contemplation
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of, such Person becoming a Subsidiary. Such Indebtedness shall be
deemed to be incurred on the date the acquired Person becomes a
Consolidated Subsidiary;
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(8) Indebtedness issued by the Issuer not to exceed
$150,000,000 in aggregate principal amount at any time; and
(9) Indebtedness of a Consolidated Subsidiary in respect of
rate reduction bonds issued to recover electric restructuring
transition costs of Consumers provided that such Indebtedness is
without recourse to the assets of Consumers.
SECTION 5.05. Limitation on Restricted Payments. (a) So long
as any of the 2004 Notes are outstanding and until the 2004 Notes are rated BBB-
or above (or an equivalent rating) by Standard & Poor's and one Other Rating
Agency (or, if Standard & Poor's shall change its rating system, an equivalent
of such rating then employed by such organization), at which time the Issuer
will be permanently released from the provisions of this Section 5.05, the
Issuer shall not, and shall not permit any Restricted Subsidiary of the Issuer,
directly or indirectly, to (i) declare or pay any dividend or make any
distribution on the Capital Stock of the Issuer to the direct or indirect
holders of its Capital Stock (except dividends or distributions payable solely
in its Non-Convertible Capital Stock or in options, warrants or other rights to
purchase such NonConvertible Capital Stock and except dividends or distributions
payable to the Issuer or a Subsidiary), (ii) purchase, redeem or otherwise
acquire or retire for value any Capital Stock of the Issuer, or (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity or scheduled repayment thereof, any Subordinated Indebtedness
(any such dividend, distribution, purchase, redemption, repurchase, defeasing,
other acquisition or retirement being hereinafter referred to as a "Restricted
Payment") if at the time the Issuer or such Subsidiary makes such Restricted
Payment:
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(1) an Event of Default, or an event that with the lapse of
time or the giving of notice or both would constitute an Event of
Default, shall have occurred and be continuing (or would result
therefrom); or
(2) the aggregate amount of such Restricted Payment and all
other Restricted Payments made since May 6, 1997 would exceed the sum
of:
(A) $100,000,000;
(B) 100% of Consolidated Net Income, accrued during the
period (treated as one accounting period) from May 6, 1997 to the end
of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment (or, in case such sum shall be a
deficit, minus 100% of the deficit); and
(C) the aggregate Net Cash Proceeds received by the Issuer
from the issue or sale of or contribution with respect to its Capital
Stock subsequent to May 6, 1997.
For the purpose of determining the amount of any Restricted Payment not in the
form of cash, the amount shall be the fair value of such Restricted Payment as
determined in good faith by the Board of Directors, provided that if the value
of the non-cash portion of such Restricted Payment as determined by the Board of
Directors is in excess of $25 million, such value shall be based on the opinion
from a nationally recognized firm experienced in the appraisal of similar types
of transactions.
(b) The provisions of Section 5.05(a) shall not prohibit:
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(i) any purchase or redemption of Capital Stock of the Issuer
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Issuer (other than Redeemable
Stock or Exchangeable Stock); provided, however, that such purchase or
redemption shall be excluded from the calculation of the amount of
Restricted Payments;
(ii) dividends or other distributions paid in respect of any class
of the Issuer's Capital Stock issued in respect of the acquisition of
any business or assets by the Issuer or a Restricted Subsidiary if the
dividends or other distributions with respect to such Capital Stock are
payable solely from the net earnings of such business or assets;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have
complied with this Section; provided, however, that at the time of
payment of such dividend, no Event of Default shall have occurred and
be continuing (or result therefrom), and provided further, however,
that such dividends shall be included (without duplication) in the
calculation of the amount of Restricted Payments; or
(iv) payments pursuant to the Tax-Sharing Agreement.
SECTION 5.06. Limitation on Asset Sales. So long as any of the 2004
Notes are outstanding, the Issuer may not sell, transfer or otherwise dispose of
any property or assets of the Issuer, including Capital Stock of any
Consolidated Subsidiary, in one transaction or a series of transactions in an
amount which exceeds $50,000,000 (an "Asset Sale") unless the Issuer shall (i)
apply an amount equal to such excess Net Cash Proceeds to permanently repay
Indebtedness of a Consolidated Subsidiary or Indebtedness of the Issuer which is
pari passu with the 2004 Notes or (ii) invest an equal amount not
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so used in clause (i) in property or assets of related business within 24 months
after the date of the Asset Sale (the "Application Period") or (iii) apply such
excess Net Cash Proceeds not so used in (i) or (ii) (the "Excess Proceeds") to
make an offer, within 30 days after the end of the Application Period, to
purchase from the Holders on a pro rata basis an aggregate principal amount of
2004 Notes on the relevant purchase date equal to the Excess Proceeds on such
date, at a purchase price equal to 100% of the principal amount of the 2004
Notes on the relevant purchase date and unpaid interest, if any, to the purchase
date. The Issuer shall only be required to make an offer to purchase 2004 Notes
from Holders pursuant to subsection (iii) if the Excess Proceeds equal or exceed
$25,000,000 at any given time.
The procedures to be followed by the Issuer in making an offer to
purchase 2004 Notes from the Holders with Excess Proceeds, and for the
acceptance of such offer by the Holders, shall be the same as those set forth in
Section 4.01 herein with respect to a Change in Control.
ARTICLE VI
ADDITIONAL EVENTS OF DEFAULT
WITH RESPECT TO THE 2004 NOTES
SECTION 6.01. Definition. All of the events specified in clauses
(a) through (h) of Section 5.1 of the Original Indenture shall be "Events of
Default" with respect to each of the 2004 Notes.
SECTION 6.02. Amendments to Section 5.1 of the Original Indenture.
(a) Solely for the purpose of determining Events of Default with
respect to the 2004 Notes, paragraphs (e), (f) and (h) of Section 5.1 of the
Original Indenture shall be amended such that each and every reference therein
to the Issuer shall be deemed to mean either the Issuer or Consumers.
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(b) The following event shall be an "Event of Default" with
respect to the 2004 Notes: default in the payment of any Liquidated Damages
pursuant to the Registration Rights Agreement with respect to any such 2004
Note, when due and continuance of such default for a period of 30 days.
ARTICLE VII
GLOBAL NOTES
Each series of 2004 Notes will be issued initially in the form of
Global Notes. "Global Note" means a registered 2004 Note evidencing one or more
2004 Notes issued to a depositary (the "Depositary") or its nominee, in
accordance with this Article and bearing the legend prescribed in this Article.
One or more Global Notes will represent all 2004 Notes of a series, except as
provided in Section 2.06. The Issuer shall execute and the Trustee shall, in
accordance with this Article and the Issuer Order with respect to each series of
2004 Notes, authenticate and deliver one or more Global Notes in temporary or
permanent form that (i) shall represent and shall be denominated in an aggregate
amount equal to the aggregate principal amount of the 2004 Notes of such series
to be represented by such Global Note or Notes, (ii) shall be registered in the
name of the Depositary for such Global Note or Notes or the nominee of such
Depositary, (iii) shall be delivered by the Trustee to such Depositary or
pursuant to such Depositary's instructions and (iv) shall bear a legend
substantially to the following effect: "Unless the Global 2004 Note is presented
by an authorized representative of the Depository to the Issuer or its agent for
registration of transfer, exchange or payment, and any 2004 Note issued is
registered in the name of a nominee of the Depository, or in such other name as
is requested by an authorized representative of the Depository (and any payment
is made to the nominee of the Depository, or to such other entity as is
requested by an authorized representative of the Depository), any transfer,
pledge or other use hereof for value or otherwise by or to any Person is
wrongful inasmuch as the registered owner hereof has an interest herein."
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Notwithstanding Section 2.8 of the Indenture, unless and until it
is exchanged in whole or in part for 2004 Notes in definitive form, a Global
Note representing one or more 2004 Notes may not be transferred except as a
whole by the Depositary, to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by such
Depositary or any such nominee to a successor Depositary for 2004 Notes or a
nominee of such successor Depositary.
If at any time the Depositary for the 2004 Notes is unwilling or
unable to continue as Depositary for the 2004 Notes of such series, the Issuer
shall appoint a successor Depositary with respect to the 2004 Notes of such
series. If (A) a successor Depositary for such 2004 Notes is not appointed by
the Issuer by the earlier of (i) 90 days from the date the Issuer receives
notice to the effect that the Depositary is unwilling or unable to act, or the
Issuer determines that the Depositary is unable to act or (ii) the effectiveness
of the Depositary's resignation or failure to fulfill its duties as Depositary,
or (B) a Default or Event of Default has occurred with respect to any 2004
Notes, the Issuer will execute, and the Trustee, upon receipt of a Issuer Order
for the authentication and delivery of definitive 2004 Notes of such series,
will authenticate and deliver 2004 Notes of such series in definitive form in an
aggregate principal amount equal to the principal amount of the Global Note or
Notes representing such 2004 Notes in exchange for such Global Note or Notes.
The Issuer may at any time and in its sole discretion determine
that 2004 Notes of either series issued in the form of one or more Global Notes
shall no longer be represented by such Global Note or Notes. In such event the
Issuer will execute, and the Trustee, upon receipt of a Issuer Order for the
authentication and delivery of definitive 2004 Notes of such series, will
authenticate and deliver 2004 Notes of such series in definitive form in an
aggregate principal amount equal to the principal amount of the Global Note or
Notes representing such 2004 Notes in exchange for such Global Note or Notes.
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The Depositary for 2004 Notes of either series may surrender a
Global Note or Notes for 2004 Notes of such series in exchange in whole or in
part for 2004 Notes of such series in definitive form on such terms as are
acceptable to the Issuer and such Depositary. Thereupon, the Issuer shall
execute, and the Trustee shall authenticate and deliver, without service charge:
(i) to each Person specified by such Depositary a new 2004
Note or Notes of such series, of any authorized denomination as
requested by such Person in aggregate principal amount equal to
and in exchange for such Person's beneficial interest in the
Global Note; and
(ii) to such Depositary a new Global Note in a denomination
equal to the difference, if any, between the principal amount of
the surrendered Global Note and the aggregate principal amount of
2004 Notes of such series in definitive form delivered to Holders
thereof.
In any exchange provided for in this Article, the Issuer will
execute and the Trustee will authenticate and deliver 2004 Notes in definitive
registered form in authorized denominations.
Upon the exchange of a Global Note for 2004 Notes in definitive
form, such Global Note shall be canceled by the Trustee. 2004 Notes in
definitive form issued in exchange for a Global Note pursuant to this Article
shall be registered in such names and in such authorized denominations as the
Depositary for such Global Note, pursuant to instructions from its direct or
indirect participants or otherwise, shall instruct the Trustee or Security
Registrar. The Trustee shall deliver such 2004 Notes to the persons in whose
names such 2004 Notes are so registered.
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ARTICLE VIII
DEFEASANCE
All of the provisions of Article Ten of the Original Indenture
shall be applicable to each series of 2004 Notes. Upon satisfaction by the
Issuer of the requirements of Section 10.1(c) of the Original Indenture, in
connection with any covenant defeasance (as provided in Section 10.1(c) of the
Indenture), the Issuer shall be released from its obligations under Article Nine
of the Original Indenture and under Articles IV and V of this Eighth
Supplemental Indenture with respect to the 2004 Notes.
ARTICLE IX
SUPPLEMENTAL INDENTURES
This Eighth Supplemental Indenture is a supplement to the Original
Indenture. As supplemented by this Eighth Supplemental Indenture, the Original
Indenture is in all respects ratified, approved and confirmed, and the Original
Indenture and this Eighth Supplemental Indenture shall together constitute one
and the same instrument.
TESTIMONIUM
This Eighth Supplemental Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Eighth
Supplemental Indenture to be duly executed and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first written
above.
CMS ENERGY CORPORATION
By: /s/ Alan M. Wright
-------------------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and
Treasurer
Attest:
(Corporate Seal)
NBD BANK
as Trustee
By: /s/ Ernest J. Peck
-------------------------------------
Ernest J. Peck
Vice President
Attest: /s/ D.O. Lis
-------------------------
Senior Vice President and
Secretary
(Corporate Seal)
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Schedule 5.04(b)(2)
Indebtedness of CMS Energy Corporation outstanding on October 31, 1997
[CMS Energy to provide]
64
<PAGE> 1
Exhibit (10)(a)
$ 480,000,000
CMS ENERGY CORPORATION
7.5% Senior Notes due 2009
-------------------------------------
Underwriting Agreement
January 20, 1999
To the Representative named
in Schedule I hereto of the
Underwriters named in
Schedule II hereto
Dear Sirs:
CMS Energy Corporation, a Michigan corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the several Underwriters (as defined in Section 14 hereof) certain debt
securities, to be in the aggregate principal amount, to mature in the year and
to have the interest rate specified in Schedule III hereto (the "Securities"),
and hereby confirms its agreement with the Underwriters as set forth herein. The
Securities shall be issued pursuant to the Indenture dated as of September 15,
1992, between the Company and NBD Bank, as Trustee (the "Trustee"), as amended
and supplemented and to be supplemented by various supplemental indentures,
including the Seventh Supplemental Indenture dated as of the Time of Purchase
(as defined herein) relating to the Securities (such Indenture as so amended and
supplemented and to be supplemented, the "Indenture"). The Underwriters have
designated the Representative to execute this Agreement on their behalf and to
act for them in the manner provided in this Agreement.
<PAGE> 2
The Company has prepared and filed with the Securities and
Exchange Commis sion (the "Commission"), in accordance with the provisions of
the Securities Act of 1933, as amended (the "Act"), a registration statement on
Form S-3 (Registration No. 333-68933), including a prospectus relating to the
Securities and such registration statement has become effective under the Act.
The registration statement at the time such registration statement became
effective and as it may have been thereafter amended to the date of this
Agreement (including the documents then incorporated by reference therein) is
hereinafter referred to as the "Registration Statement." The prospectus forming
a part of the Registration Statement at the time the Registra tion Statement
became effective (including the documents then incorporated by reference
therein) is hereinafter referred to as the "Basic Prospectus," provided that in
the event that the Basic Prospectus shall have been amended, revised or
supplemented prior to the date of this Agreement, or if the Company shall have
supplemented the Basic Prospectus by filing any documents pursuant to Section 13
or 14 or 15 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), after the time the Registration Statement became effective and prior to
the date of this Agreement, which documents are deemed to be incorporated in the
Basic Prospectus, the term "Basic Prospectus" shall also mean such prospectus as
so amended, revised or supplemented. The Basic Prospectus, as it shall be
revised or supplemented to reflect the final terms of the offering and sale of
the Securities by a prospectus supplement relating to the Securities, and in the
form to be filed with, or transmitted for filing to, the Commission pursuant to
Rule 424 under the Act, is hereinafter referred to as the "Prospectus." Any
reference herein to the terms "amend," "amend ment" or "supplement" with respect
to the Registration Statement or the Prospectus shall be deemed to include only
amendments or supplements to the Registration Statement or Prospectus, as the
case may be, and documents incorporated by reference therein after the date of
this Agreement and prior to the termination of the offering of the Securities by
the Underwriters.
1. Purchase and Sale: Upon the basis of the representations and
warranties and on the terms and subject to the conditions herein set forth, the
Company agrees to sell to the respective Underwriters, severally and not
jointly, and the respective Underwriters, severally and not jointly, agree to
purchase from the Company, at the purchase price specified in Schedule III
hereto, the respective principal amounts of Securities set opposite their names
in Schedule II hereto.
The Company is advised by the Representative that the Underwriters
propose to make a public offering of their respective portions of the Securities
as soon as practicable, in their judgment, after this Agreement has become
effective.
2. Payment and Delivery: Payment for the Securities shall be made to
the Company or its order in Federal or other immediately available funds in New
York City (or such other
2
<PAGE> 3
place or places of payment as shall be agreed upon by the Company and the
Representative in writing), upon the delivery of the Securities at the offices
of Skadden, Arps, Slate, Meagher and Flom LLP ("Skadden, Arps"), at 919 Third
Avenue, New York, New York 10022 (or such other place or places of delivery as
shall be agreed upon by the Company and the Representative) to the
Representative for the respective accounts of the Underwriters against receipt
therefor signed by the Representative on behalf of themselves and as agent for
the other Underwriters. Such payment and delivery shall be made at 10:00 A.M.,
New York time on January 25, 1999 (or on such later business day as shall be
agreed upon by the Company and the Representative in writing), unless postponed
in accordance with the provisions of Section 10 hereof. The day and time at
which payment and delivery for the Securities are to be made is herein called
the "Time of Purchase."
Delivery of the Securities shall be made in definitive, fully
registered form in authorized denominations registered in such names as the
Representative may request in writing to the Company not later than two full
business days prior to the Time of Purchase, or if no such request is received,
in the names of the respective Underwriters for the respective principal amounts
of Securities set forth opposite the name of each Underwriter in Schedule II, in
denominations selected by the Company.
The Company agrees to make the Securities available for inspection
by the Underwriters at the offices of Skadden, Arps, at least 24 hours prior to
the Time of Purchase, in definitive, fully registered form, and as requested
pursuant to the preceding paragraph.
3. Conditions of Underwriters' Obligations: The several obligations
of the Under writers hereunder are subject to the accuracy of the warranties and
representations on the part of the Company and to the following other
conditions:
(a) That all legal proceedings to be taken in connection with the
issue and sale of the Securities shall be reasonably satisfactory
in form and substance to Skadden, Arps, counsel to the
Underwriters.
(b) That, at the Time of Purchase, the Representative shall be
furnished with the following opinions, dated the day of the Time
of Purchase:
(i) Opinion of Michael D. VanHemert, Esq., counsel to the
Company, sub stantially to the effect set forth in Exhibit A
to this Agreement; and
(ii) Opinion of Skadden, Arps, counsel to the Underwriters,
substantially to the effect set forth in Exhibit B to this
Agreement.
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<PAGE> 4
(c) That on the date hereof and on the date of the Time of Purchase,
the Representative shall have received a letter from Arthur
Andersen LLP ("Arthur Andersen") in form and substance
satisfactory to the Representa tive, dated as of such date, (i)
confirming that they are independent public accountants within the
meaning of the Act and the applicable published rules and
regulations of the Commission thereunder, (ii) stating that in
their opinion the financial statements examined by them and
included or incor porated by reference in the Registration
Statement complied as to form in all material respects with the
applicable accounting requirements of the Commission, including
applicable published rules and regulations of the Commission, and
(iii) covering, as of a date not more than five business days
prior to the date of such letter, such other matters as the
Representa tive reasonably request.
(d) That, between the date of the execution of this Agreement and the
Time of Purchase, no material and adverse change shall have
occurred in the business, properties or financial condition of the
Company which, in the judgment of the Representative, after
reasonable inquiries on the part of the Representative, impairs
the marketability of the Securities (other than changes referred
to in or contemplated by the Registration Statement or
Prospectus).
(e) That, prior to the Time of Purchase, no stop order suspending the
effec tiveness of the Registration Statement shall have been
issued under the Act by the Commission or proceedings therefor
initiated or threatened.
(f) That, at the Time of Purchase, the Company shall have delivered to
the Representative a certificate of an executive officer of the
Company to the effect that, to the best of his knowledge,
information and belief there shall have been no material adverse
change in the business, properties or finan cial condition of the
Company from that set forth in the Registration Statement or
Prospectus (other than changes referred to in or contemplated by
the Registration Statement or Prospectus).
(g) That the Company shall have performed such of its obligations
under this Agreement as are to be performed at or before the Time
of Purchase by the terms hereof.
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<PAGE> 5
(h) That any additional documents or agreements reasonably requested
by the Representative or their counsel to permit the Underwriters
to perform their obligations or permit their counsel to deliver
opinions hereunder shall have been provided to them.
(i) That between the date of the execution of this Agreement and the
day of the Time of Purchase there has been no downgrading of the
investment ratings of any of the Company's securities by Standard
& Poor's Corpora tion, Moody's Investors Service, Inc. or Duff &
Phelps Credit Rating Co., and the Company shall not have been
placed on "credit watch" or "credit review" with negative
implications by any of such statistical rating organi zations if
any of such occurrences shall, in the reasonable judgment of the
Representative, after reasonable inquiries on the part of the
Representative, impair the marketability of the Securities.
(j) That any filing of the Prospectus and any supplements thereto
required pursuant to Rule 424 under the Act have been made in
compliance with Rule 424 in the time periods provided by Rule 424.
4. Conditions of the Company's Obligations: The obligations of the
Company hereunder are subject to the satisfaction of the condition set forth in
Section 3(e).
5. Certain Covenants of the Company: In further consideration of the
agreements of the Underwriters herein contained, the Company covenants as
follows:
(a) To use its best efforts to cause any post-effective amendments to
the Registration Statement to become effective as promptly as
possible. During the time when a Prospectus is required to be
delivered under the Act, the Company will comply so far as it is
able with all requirements imposed upon it by the Act and the
rules and regulations of the Commis sion to the extent necessary
to permit the continuance of sales of or deal ings in the
Securities in accordance with the provisions hereof and of the
Prospectus.
(b) To deliver to the Representative a conformed copy of the
Registration Statement and any amendments thereto (including all
exhibits thereto) and full and complete sets of all comments of
the Commission or its staff and all responses thereto with respect
to the Registration Statement and any amendments thereto, and to
furnish to the Representative, for each of the
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<PAGE> 6
Underwriters, conformed copies of the Registration Statement and
any amendments thereto, without exhibits.
(c) As soon as the Company is advised thereof, the Company will advise
the Representative and confirm the advice in writing of: (i) the
effectiveness of any amendment to the Registration Statement, (ii)
any request made by the Commission for amendments to the
Registration Statement or Prospectus or for additional information
with respect thereto, (iii) the suspension of qualification of the
Securities for sale under Blue Sky or state securities laws, and
(iv) the entry of a stop order suspending the effectiveness of the
Registration Statement or of the initiation or threat or any
proceedings for that purpose and, if such a stop order should be
entered by the Commis sion, to make every reasonable effort to
obtain the lifting or removal thereof.
(d) To deliver to the Underwriters, without charge, as soon as
practicable, and from time to time during such period of time
after the date of the Prospec tus as they are required by law to
deliver a prospectus, as many copies of the Prospectus (as
supplemented or amended if the Company shall have made any
supplements or amendments thereto) as the Representative may
reasonably request; and in case any Underwriter is required to
deliver a prospectus after the expiration of nine months after the
date of the Pro spectus, to furnish to the Representative, upon
request, at the expense of such Underwriter, a reasonable quantity
of a supplemental prospectus or of supplements to the Prospectus
complying with Section 10(a)(3) of the Act.
(e) For such period of time after the date of the Prospectus as the
Underwrit ers are required by law to deliver a prospectus in
respect of the Securities, if any event shall have occurred as a
result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in light of
the circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if it becomes necessary to amend or supple ment
the Prospectus to comply with law, to forthwith prepare and file
with the Commission an appropriate amendment or supplement to the
Prospec tus and deliver to the Underwriters, without charge, such
number of copies thereof as may be reasonably requested.
(f) To use its best efforts to qualify the Securities for offer and
sale under the securities or Blue Sky laws of such jurisdictions
as the Representative may
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<PAGE> 7
designate and to pay (or cause to be paid), or reimburse (or cause
to be reimbursed) the Underwriters and their counsel for,
reasonable filing fees and expenses in connection therewith
(including the reasonable fees and disbursements of counsel to the
Underwriters and filing fees and expenses paid and incurred prior
to the date hereof), provided, however, that the Company shall not
be required to qualify to do business as a foreign corporation or
as a securities dealer or to file a general consent to service of
process or to file annual reports or to comply with any other
require ments deemed by the Company to be unduly burdensome.
(g) To pay all expenses, fees and taxes (other than transfer taxes on
sales by the respective Underwriters) in connection with the
issuance and delivery of the Securities, except that the Company
shall be required to pay the fees and disbursements (other than
disbursements referred to in paragraph (f) of this Section 5) of
Skadden, Arps, counsel to the Underwriters, only in the events
provided in paragraph (h) of this Section 5, the Underwriters
hereby agreeing to pay such fees and disbursements in any other
event, and that except as provided in Section (h), the Company
shall not be responsible for any out-of-pocket expenses of the
Underwriters in connection with their services hereunder.
(h) If the Underwriters shall not take up and pay for the Securities
due to the failure of the Company to comply with any of the
conditions specified in Section 3 hereof, or, if this Agreement
shall be terminated in accordance with the provisions of Section
11 hereof prior to the Time of Purchase, to pay the reasonable
fees and disbursements of Skadden, Arps, counsel to the
Underwriters, and, if the Underwriters shall not take up and pay
for the Securities due to the failure of the Company to comply
with any of the conditions specified in Section 3 hereof, to
reimburse the Underwriters for their reasonable out-of-pocket
expenses, in an aggregate amount not exceeding a total of $3,000,
incurred in connection with the financing contemplated by this
Agreement.
(i) Prior to the termination of the offering of the Securities, to not
file any amendment to the Registration Statement or supplement to
the Prospectus (including the Basic Prospectus) unless the Company
has furnished the Representative and counsel to the Underwriters
with a copy for their review and comment a reasonable time prior
to filing and has reasonably considered any comments of the
Representative, or any such amendment
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<PAGE> 8
or supplement to which such counsel shall reasonably object on
legal grounds in writing, after consultation with the
Representative.
(j) To furnish the Representative with copies of all documents
required to be filed with the Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act subsequent to the time the
Registration Statement becomes effective and prior to the
termination of the offering of the Securities.
(k) So long as may be required by law for the distribution of the
Securities by the Underwriters or by any dealers that participate
in the distribution thereof, the Company will comply with all
requirements under the Ex change Act relating to the timely filing
with the Commission of its reports pursuant to Section 13 of the
Exchange Act and of its proxy statements pursuant to Section 14 of
the Exchange Act.
(l) To make generally available to the Company's security holders, as
soon as practicable, an "earning statement" (which need not be
audited by inde pendent public accountants) covering a
twelve-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months
thereafter, which shall comply in all material respects with and
satisfy the provisions of Section 11(a) of the Act and Rule 158
under the Act.
6. Representations and Warranties of the Company: The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) The Registration Statement has become effective under the Act; a
true and correct copy of the Registration Statement in the form in
which it became effective has been delivered to each of the
Representative and to the Representative for each of the
Underwriters (except that copies delivered for the Underwriters
excluded exhibits to such Registration Statement); any filing of
the Prospectus and any supplements thereto required pursuant to
Rule 424(b) has been or will be made in the manner required by
Rule 424(b) and within the time period required by Section 3(j)
hereof; no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such
purposes are pending before or, to the knowledge of the Company,
threatened by the Commission. On the effective date of the
Registration Statement, the Registration Statement and the Basic
Prospectus complied, or were deemed to have complied, and
8
<PAGE> 9
on its respective issue date, each preliminary prospectus filed
pursuant to Rule 424(b) complied, and the Basic Prospectus
complied, and on its issue date, the Prospectus will comply, or
will be deemed to comply, in all material respects with the
applicable provisions of the Act, the Trust Indenture Act of 1939,
as amended (the "Trust Indenture Act") and the published rules and
regulations of the Commission, none of the Registra tion Statement
on its effective date, the Basic Prospectus on its issue date, or
any other preliminary prospectus, on its issue date, contained any
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not mislead ing, and the Prospectus, as of its
issue date and, as amended or supple mented, if applicable, as of
the Time of Purchase, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under
which they were made, not misleading, except that the Company
makes no warranty or representation to any Underwriter with
respect to any state ments or omissions made therein in reliance
upon and in conformity with information furnished in writing to
the Company by, or through the Repre sentative on behalf of, any
Underwriter expressly for use therein, or to any statements in or
omissions from that part of the Registration Statement that shall
constitute the Statement of Eligibility and Qualification under
the Trust Indenture Act of the Trustee under the Indenture.
(b) The documents incorporated by reference in the Registration
Statement, any preliminary prospectus, the Basic Prospectus and
the Prospectus, when they were filed (or, if an amendment with
respect to any such document was filed, when such amendment was
filed) with the Commission, con formed in all material respects to
the requirements of the Exchange Act and the rules and regulations
of the Commission promulgated thereunder, and any further
documents so filed and incorporated by reference will, when they
are filed with the Commission, conform in all material respects to
the requirements of the Exchange Act and the rules and regulations
of the Commission promulgated thereunder; none of such documents,
when it was filed (or, if an amendment with respect to any such
document was filed, when such amendment was filed), contained an
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; and no such further docu ment, when it
is filed, will contain an untrue
9
<PAGE> 10
statement of a material fact or will omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made,
not misleading.
(c) The Company has been duly organized and is validly existing as a
corpora tion in good standing under the laws of the State of
Michigan and has all requisite authority to own or lease its
properties and conduct its business as described in the Prospectus
and to consummate the transactions contem plated hereby, and is
duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business as de
scribed in the Prospectus or its ownership or leasing of property
requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a
material adverse effect on the Company.
(d) The Securities are in the form contemplated by the Indenture and
have been duly authorized by the Company. At the Time of Purchase,
the Securities will have been duly executed and delivered by the
Company and, when authenticated by the Trustee in the manner
provided for in the Indenture and delivered against payment
therefor as provided in this Agreement, will constitute valid and
binding obligations of the Company, enforceable against the
Company in accordance with their terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insol vency,
reorganization, moratorium or other similar laws affecting
creditors' rights generally or by general principles of equity
(regardless of whether enforcement is considered in a proceeding
at law or in equity). The Securi ties conform in all material
respects to the descriptions thereof in the Prospectus. Each
significant subsidiary (as defined in Rule 405 under the Act, and
hereinafter called a "Significant Subsidiary") of the Company has
been duly organized and is validly existing as a corporation in
good stand ing under the laws of the jurisdiction of its
incorporation, has all requisite authority to own or lease its
properties and conduct its business as de scribed in the
Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business as described in the Prospectus or its ownership or
leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
Subsidiaries, taken as a whole.
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<PAGE> 11
(e) This Agreement has been duly authorized, executed and delivered by
the Company, and the Company has full corporate power and
authority to enter into this Agreement.
(f) The Indenture has been duly authorized by the Company. At the Time
of Purchase, the Indenture will have been duly executed and
delivered by the Company and will constitute a valid and binding
obligation of the Com pany, enforceable against the Company in
accordance with its terms, except to the extent that enforcement
thereof may be limited by bank ruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights
generally or by general principles of equity (regardless of
whether enforcement is considered in a proceeding at law or in
equity); the Indenture conforms in all material respects to the
description thereof in the Prospectus; and the Indenture conforms
to the requirements of the Trust Indenture Act.
(g) Except for the outstanding shares of preferred stock of Consumers
Energy Company, the 8.36% Trust Originated Preferred Securities of
Consumers Power Company Financing I and the 8.20% Trust Originated
Preferred Securities of Consumers Energy Financing II, all of the
outstanding capital stock of each of Consumers Energy Company and
CMS Enterprises Company is owned directly or indirectly by the
Company, free and clear of any security interest, claim, lien, or
other encumbrance or preemptive rights, and (ii) there are no
outstanding rights (including, without limita tion, preemptive
rights), warrants or options to acquire, or instruments
convertible into or exchangeable for, any shares of capital stock
or other equity interest in any of Consumers Energy Company and
CMS Enterprises Company or any contract, commitment, agreement,
understanding or arrangement of any kind relating to the issuance
of any such capital stock, any such convertible or exchangeable
securities or any such rights, war rants or options.
(h) The Company has all necessary consents, authorizations, approvals,
orders, certificates and permits of and from, and has made all
declarations and filings with, all federal, state, local and other
governmental authorities, all self-regulatory organizations and
all courts and other tribunals, to own, lease, license and use its
properties and assets and to conduct its business in the manner
described in the Prospectus, except to the extent
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<PAGE> 12
that the failure to obtain or file would not have a material
adverse effect on the Company.
(i) An appropriate order has been entered by the Federal Energy
Regulatory Commission under the Federal Power Act authorizing the
issuance and sale of the Securities, and such order is in full
force and effect. No other order, license, consent, authorization
or approval of, or exemption by, or the giving of notice to, or
the registration with any federal, state, municipal or other
governmental department, commission, board, bureau, agency or
instrumentality, and no filing, recording, publication or
registration in any public office or any other place, was or is
now required to be obtained by the Company to authorize its
execution or delivery of, or the performance of its obligations
under, this Agreement or the Securities, except such as have been
obtained or may be required under state securities or Blue Sky
laws or as referred to in the Basic Prospectus.
(j) None of the issuance and sale of the Securities, or the execution
or delivery by the Company of, or the performance by the Company
of its obligations under, this Agreement did or will conflict
with, result in a breach of any of the terms or provisions of, or
constitute a default or require the consent of any party under the
Company's Articles of Incorporation or by-laws, any material
agreement or instrument to which it is a party, any existing appli
cable law, rule or regulation or any judgment, order or decree of
any government, governmental instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any of its
properties or assets, or did or will result in the creation or
imposition of any lien on the Company's properties or assets.
(k) Except as disclosed in the Basic Prospectus, there is no action,
suit, pro ceeding, inquiry or investigation (at law or in equity
or otherwise) pending or, to the knowledge of the Company,
threatened against the Company, by any governmental authority that
(i) questions the validity, enforceability or performance of this
Agreement or the Securities or (ii) if determined adversely, is
likely to have a material adverse effect on the business or
financial condition of the Company, or materially adversely affect
the ability of the Company to perform its obligations hereunder or
the consum mation of the transactions contemplated by this
Agreement.
(l) There has not been any material and adverse change in the
business, properties or financial condition of the Company from
that set forth in the
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<PAGE> 13
Registration Statement (other than changes referred to in or
contemplated by the Registration Statement or the Basic
Prospectus).
(m) Except as set forth in the Basic Prospectus, no event or condition
exists that constitutes, or with the giving of notice or lapse of
time or both would constitute, a default or any breach or failure
to perform by the Company in any material respect under any
indenture, mortgage, loan agreement, lease or other material
agreement or instrument to which the Company is a party or by
which it or any of its properties may be bound.
7. Representation and Warranties of Underwriters: Each Underwriter
warrants and represents that the information, if any, furnished in writing to
the Company through the Represen tative expressly for use in the Registration
Statement and Prospectus is correct in all material respects as to such
Underwriter. Each Underwriter, in addition to other information furnished to the
Company for use in the Registration Statement and Prospectus, herewith furnishes
to the Company for use in the Registration Statement and Prospectus, the
information stated herein with regard to the public offering, if any, by such
Underwriter and represents and warrants that such information is correct in all
material respects as to such Underwriter.
8. Indemnification:
(a) The Company agrees, to the extent permitted by law, to indemnify
and hold harmless each of the Underwriters and each person, if
any, who controls any such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against
any and all losses, claims, damages or liabilities, joint or
several, to which they or any of them may become subject under the
Act or otherwise, and to reimburse the Underwriters and such
controlling person or persons, if any, for any legal or other
expenses incurred by them in connection with defending any action,
suit or proceed ing (including governmental investigations) as
provided in Section 8(c) hereof, insofar as such losses, claims,
damages, liabilities or actions, suits or proceedings (including
governmental investigations) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary
prospectus as of its issue date (if used prior to the date of the
Basic Prospectus), the Basic Prospectus (if used prior to the date
of the Prospectus), the Prospec tus, or, if the Prospectus shall
be amended or supplemented, in the Pro spectus as so amended or
supplemented (if such Prospectus or such Prospectus as amended or
supplemented is used after the period of time
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<PAGE> 14
referred to in Section 5(e) hereof, it shall contain or be used
with such amendments or supplements as the Company deems necessary
to comply with Section 10(a) of the Act), or arise out of or are
based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or actions arise out of or
are based upon any such untrue statement or alleged untrue
statement or omission or alleged omission which was made in such
prelimi nary prospectus, Basic Prospectus, Registration Statement
or Prospectus, or in the Prospectus as so amended or supplemented,
in reliance upon and in conformity with information furnished in
writing to the Company by, or through the Representative on behalf
of, any Underwriter expressly for use therein or with any
statements in or omissions from that part of the Regis tration
Statement that shall constitute the Statement of Eligibility and
Qualification under the Trust Indenture Act of the Trustee under
the Indenture, and except that this indemnity shall not inure to
the benefit of any Underwriter (or any person controlling such
Underwriter) on account of any losses, claims, damages,
liabilities or actions, suits or proceedings arising from the sale
of the Securities to any person if a copy of the Pro spectus, as
the same may then be supplemented or amended (excluding, however,
any document then incorporated or deemed incorporated therein by
reference), was not sent or given by or on behalf of such
Underwriter to such person (i) with or prior to the written
confirmation of sale involved or (ii) as soon as available after
such written confirmation, relating to an event occurring prior to
the payment for and delivery to such person of the Securities
involved in such sale, and the omission or alleged omission or
untrue statement or alleged untrue statement was corrected in the
Prospec tus as supplemented or amended at such time.
The Company's indemnity agreement contained in this Section 8(a),
and the covenants, representations and warranties of the Company
contained in this Agreement, shall remain in full force and effect
regardless of any investigation made by or on behalf of any
person, and shall survive the delivery of and payment for the
Securities hereunder, and the indemnity agreement contained in
this Section 8 shall survive any termination of this Agreement.
The liabilities of the Company in this Section 8(a) are in
addition to any other liabilities of the Company under this
Agreement or otherwise.
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<PAGE> 15
(b) Each Underwriter agrees, severally and not jointly, to the extent
permitted by law, to indemnify, hold harmless and reimburse the
Company, its directors and such of its officers as shall have
signed the Registration Statement, each other Underwriter and each
person, if any, who controls the Company or any such other
Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, to the same extent and upon the same terms
as the indemnity agreement of the Company set forth in Section
8(a) hereof, but only with respect to alleged untrue statements or
omissions made in the Registration Statement, the Basic Prospectus
or in the Prospectus, as amended or supplemented, (if applicable)
in reliance upon and in conformity with information furnished in
writing to the Com pany by such Underwriter expressly for use
therein.
The indemnity agreement on the part of each Underwriter contained
in this Section 8(b) and the representations and warranties of such Underwriter
contained in this Agreement shall remain in full force and effect regardless of
any investigation made by or on behalf of the Company or any other person, and
shall survive the delivery of and payment for the Securities hereunder, and the
indemnity agreement contained in this Section 8(b) shall survive any termina
tion of this Agreement. The liabilities of each Underwriter in Section 8(b) are
in addition to any other liabilities of such Underwriter under this Agreement or
otherwise.
(c) If a claim is made or an action, suit or proceeding (including
governmental investigations) is commenced or threatened against
any person as to which indemnity may be sought under Section 8(a)
or 8(b), such person (the "Indemnified Person") shall notify the
person against whom such indemnity may be sought (the
"Indemnifying Person") promptly after any assertion of such claim
threatening to institute an action, suit or proceeding or if such
an action, suit or proceeding is commenced against such
Indemnified Person, promptly after such Indemnified Person shall
have been served with a summons or other first legal process,
giving information as to the nature and basis of the claim.
Failure to so notify the Indemnifying Person shall not, however,
relieve the Indemnifying Person from any liability which it may
have on account of the indemnity under Section 8(a) or 8(b) if the
Indemnifying Person has not been prejudiced in any material
respect by such failure. Subject to the immediately succeeding
sentence, the Indemni fying Person shall assume the defense of any
such litigation or proceeding, including the employment of counsel
and the payment of all expenses, with such counsel being
designated, subject to the immediately succeeding sentence, in
writing by the Representative in
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<PAGE> 16
the case of parties indemnified pursuant to Section 8(b) and by
the Company in the case of parties indem nified pursuant to
Section 8(a). Any Indemnified Person shall have the right to
participate in such litigation or proceeding and to retain its own
counsel, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Person unless (i) the Indemnifying
Person and the Indemnified Person shall have mutually agreed to
the retention of such counsel or (ii) the named parties to any
such proceeding (including any impleaded parties) include (x) the
Indemnifying Person and (y) the Indem nified Person and, in the
written opinion of counsel to such Indemnified Person,
representation of both parties by the same counsel would be
inappropriate due to actual or likely conflicts of interest
between them, in either of which cases the reasonable fees and
expenses of counsel (includ ing disbursements) for such
Indemnified Person shall be reimbursed by the Indemnifying Person
to the Indemnified Person. If there is a conflict as described in
clause (ii) above, and the Indemnified Persons have partici pated
in the litigation or proceeding utilizing separate counsel whose
fees and expenses have been reimbursed by the Indemnifying Person
and the Indemnified Persons, or any of them, are found to be
solely liable, such Indemnified Persons shall repay to the
Indemnifying Person such fees and expenses of such separate
counsel as the Indemnifying Person shall have reimbursed. It is
understood that the Indemnifying Person shall not, in connection
with any litigation or proceeding or related litigation or pro
ceedings in the same jurisdiction as to which the Indemnified
Persons are entitled to such separate representation, be liable
under this Agreement for the reasonable fees and out-of-pocket
expenses of more than one separate firm (together with not more
than one appropriate local counsel) for all such Indemnified
Persons. Subject to the next paragraph, all such fees and expenses
shall be reimbursed by payment to the Indemnified Persons of such
reasonable fees and expenses of counsel promptly after payment
thereof by the Indemnified Persons.
In furtherance of the requirement above that fees and expenses of
any separate counsel for the Indemnified Persons shall be
reasonable, the Representative and the Company agree that the
Indemnifying Person's obligations to pay such fees and expenses
shall be conditioned upon the following:
(1) in case separate counsel is proposed to be retained by the
Indemnified Persons pursuant to clause (ii) of the preceding
paragraph, the Indemnified
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<PAGE> 17
Persons shall in good faith fully consult with the
Indemnifying Person in advance as to the selection of such
counsel;
(2) reimbursable fees and expenses of such separate counsel shall
be detailed and supported in a manner reasonably acceptable
to the Indemnifying Person (but nothing herein shall be
deemed to require the furnishing to the Indemnifying Person
of any information, including without limitation, computer
print-outs of lawyers' daily time entries, to the extent
that, in the judgment of such counsel, furnishing such
information might reasonably be expected to result in a
waiver of any attorney-client privilege); and
(3) the Company and the Representative shall cooperate in
monitoring and controlling the fees and expenses of separate
counsel for Indemnified Persons for which the Indemnifying
Person is liable hereunder, and the Indemnified Person shall
use every reasonable effort to cause such separate counsel to
minimize the duplication of activities as between themselves
and counsel to the Indemnifying Person.
The Indemnifying Person shall not be liable for any settlement of
any litigation or proceeding effected without the written consent of the
Indemnifying Person, but if settled with such consent or if there be a final
judgment for the plaintiff, the Indemnifying Person agrees, subject to the
provisions of this Section 8, to indemnify the Indemnified Person from and
against any loss, damage, liability or expenses by reason of such settlement or
judgment. The Indemnify ing Person shall not, without the prior written consent
of the Indemnified Persons, effect any settlement of any pending or threatened
litigation, proceeding or claim in respect of which indemnity has been properly
sought by the Indemnified Persons hereunder, unless such settlement includes an
unconditional release by the claimant of all Indemnified Persons from all
liability with respect to claims which are the subject matter of such
litigation, proceeding or claim.
9. Contribution: If the indemnification provided for in Section 8
above is unavailable to or insufficient to hold harmless an Indemnified Person
under such Section in respect of any losses, claims, damages or liabilities (or
actions, suits or proceedings (including governmental investigations) in respect
thereof) referred to therein, then each Indemnifying Person under Section 8
shall contribute to the amount paid or payable by such Indemnified Person as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Indemnifying Person on the one hand and the Indemnified Person
on the other from the offering of the Securities. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law,
17
<PAGE> 18
then each Indemnifying Person shall contribute to such amount paid or payable by
such Indemnified Person in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of each Indemnifying Person,
if any, on the one hand and the Indemnified Person on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions, suits or proceedings (including governmental
investigations) in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the total underwriting discounts and commission received by
the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus, bear to the aggregate public offering price of the Securities.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 9. The amount paid or payable by an Indemnified Person as a result
of the losses, claims, damages or liabilities (or actions, suits or proceedings
(including governmental proceedings) in respect thereof) referred to above in
this Section 9 shall be deemed to include any legal or other expenses reasonably
incurred by such Indemnified Person in connection with investigating or
defending any such action, suits or proceedings (including governmental
proceedings) or claim, provided that the provisions of Section 8 have been
complied with (in all material respects) in respect of any separate counsel for
such Indemnified Person. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount greater than the excess
of (i) the total price at which the Securities underwritten by it and
distributed to the public were offered to the public over (ii) the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepre sentation. The Underwriters' obligations in
this Section 9 to contribute are several in proportion to their respective
underwriting obligations and not joint.
The agreement with respect to contribution contained in Section 9
hereof shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any Underwriter, and shall survive
delivery of and payment for the Securities hereunder and any termination of this
Agreement.
18
<PAGE> 19
10. Substitution of Underwriters: If any Underwriter under this
agreement shall fail or refuse (otherwise than for some reason sufficient to
justify in accordance with the terms hereof, the termination of its obligations
hereunder) to purchase the Securities which it had agreed to purchase on the
Time of Purchase, the Representative shall immediately notify the Company and
the Representative and the other Underwriters may, within 36 hours of the giving
of such notice, determine to purchase, or to procure one or more other members
of the National Association of Securities Dealers, Inc. ("NASD") (or, if not
members of the NASD, who are foreign banks, dealers or institutions not
registered under the Exchange Act and who agree in making sales to comply with
the NASD's Rules of Fair Practice), satisfactory to the Company, to purchase,
upon the terms herein set forth, the principal amount of Securities which the
defaulting Underwriter had agreed to purchase. If any non-defaulting Underwriter
or Underwriters shall determine to exercise such right, the Representative shall
give written notice to the Company of such determi nation within 36 hours after
the Company shall have received notice of any such default, and thereupon the
Time of Purchase shall be postponed for such period, not exceeding three
business days, as the Company shall determine. If in the event of such a
default, the Representative shall fail to give such notice, or shall within such
36-hour period give written notice to the Company that no other Underwriter or
Underwriters, or others, will exercise such right, then this Agree ment may be
terminated by the Company, upon like notice given to the Representative within a
further period of 36 hours. If in such case the Company shall not elect to
terminate this Agree ment, it shall have the right, irrespective of such
default:
(a) to require such non-defaulting Underwriters to purchase and pay
for the respective principal amounts of Securities which they had
severally agreed to purchase hereunder, as herein above provided,
and, in addition, the principal amount of Securities which the
defaulting Underwriter shall have so failed to purchase up to a
principal amount thereof equal to one-ninth (1/9) of the
respective principal amounts of Securities which such non-
defaulting Underwriters have otherwise agreed to purchase
hereunder; and/or
(b) to procure one or more other members of the NASD (or, if not
members of the NASD, who are foreign banks, dealers or
institutions not registered under the Exchange Act and who agree
in making sales to comply with the NASD's Rules of Fair Practice),
to purchase, upon the terms herein set forth, the principal amount
of Securities which such defaulting Underwriter had agreed to
purchase, or that portion thereof which the remaining Underwriters
shall not be obligated to purchase pursuant to the foregoing
clause (a).
19
<PAGE> 20
In the event the Company shall exercise its rights under clause
(a) and/or (b) above, the Company shall give written notice thereof to the
Representative within such further period of 36 hours, and thereupon the Time of
Purchase shall be postponed for such period, not exceeding five business days,
as the Company shall determine. In the event the Company shall be entitled to
but shall not elect to exercise its rights under clause (a) and/or (b), the
Company shall be deemed to have elected to terminate this Agreement.
Any action taken by the Company under this Section 10 shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement. Termination by the Company under this
Section 10 shall be without any liability on the part of the Company or any
non-defaulting Underwriter.
In the computation of any period of 36 hours referred to in this
Section 10, there shall be excluded a period of 24 hours in respect of each
Saturday, Sunday or legal holiday which would otherwise be included in such
period of time.
11. Termination of Agreement: This Agreement may be terminated at any
time prior to the Time of Purchase by the Representative, if, prior to such time
(i) trading generally in securities on the New York Stock Exchange shall have
been suspended by the Commission or the New York Stock Exchange, (ii) trading of
any securities of the Company shall have been suspended on any exchange or
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by federal or New York State
authorities or (iv) there shall have occurred any outbreak or material
escalation of hostilities or any material adverse disruption in financial
markets or any other calamity or crisis, the effect of which on the financial
markets of the United States is such as to impair, in the Representative's
reasonable judgment, after having made due inquiry, the marketability of the
Securities.
If the Representative elect to terminate this Agreement, as
provided in this Section 11, the Representative will promptly notify the Company
and each other Underwriter by telephone or telecopy, confirmed by letter. If
this Agreement shall not be carried out by any Underwriter for any reason
permitted hereunder, or if the sale of the Securities to the Underwrit ers as
herein contemplated shall not be carried out because the Company is not able to
comply with the terms hereof, the Company shall not be under any obligation
under this Agreement and shall not be liable to any Underwriter or to any member
of any selling group for the loss of anticipated profits from the transactions
contemplated by this Agreement and the Underwriters shall be under no liability
to the Company nor be under any liability under this Agreement to one another.
20
<PAGE> 21
Notwithstanding the foregoing, the provisions of Sections 5(f),
5(h), 8 and 9 shall survive any termination of this Agreement.
12. Notices: All notices hereunder shall, unless otherwise expressly
provided, be in writing and be delivered at or mailed to the following addresses
or be sent by telecopy as follows: if to the Underwriters or the Representative,
to the Representative at the address or number, as appropriate, designated in
Schedule I hereto, and, if to the Company, to CMS Energy Corpora tion, Fairlane
Plaza South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan 48126,
attention: Alan M. Wright, Senior Vice President and Chief Financial Officer.
13. Parties in Interest: The Agreement herein set forth has been and
is made solely for the benefit of the Underwriters, the Company (including the
directors thereof and such of the officers thereof as shall have signed the
Registration Statement), and the controlling persons, if any, referred to in
Section 8 hereof, and their respective successors, assigns, executors and
administrators, and, except as expressly otherwise provided in Section 10
hereof, no other person shall acquire or have any right under or by virtue of
this Agreement.
14. Definition of Certain Terms: The term "Underwriters," as used
herein, shall be deemed to mean the several persons, firms or corporations,
named in Schedule II hereto (includ ing the Representative herein mentioned, if
so named), and the term "Representative," as used herein, shall be deemed to
mean the representative or Representative designated by, or in the manner
authorized by, the Underwriters in Schedule I hereto. All obligations of the
Underwriters hereunder are several and not joint. If there shall be only one
person, firm or corporation named in Schedule I and Schedule II hereto, the term
"Underwriters" and the term "Representative," as used herein, shall mean such
person, firm or corporation. If the firm or firms listed in Schedule I hereto
are the same as the firm or firms listed in Schedule II hereto, then the terms
"Underwriters" and "Representative," as used herein, shall each be deemed to
refer to such firm or firms. The term "successors" as used in this Agreement
shall not include any purchaser, as such purchaser, of any of the Securities
from any of the respective Underwriters.
15. Governing Law: This Agreement shall be governed by, and construed
in accor dance with, the laws of the State of New York.
16. Counterparts: This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such respective counterparts shall together
constitute one and the same instrument.
21
<PAGE> 22
If the foregoing is in accordance with your understanding, please
sign and return to us counterparts hereof, and upon the acceptance hereof by
you, this letter and such acceptance hereof shall constitute a binding agreement
between each of the Underwriters and the Company.
Very truly yours,
CMS ENERGY CORPORATION
By: /s/ Alan M. Wright
-------------------------------------
Name: Alan M. Wright
Title: Senior Vice President and
Chief Financial Officer
Confirmed and accepted as
of the date first written above:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Gavin H. Wolfe
------------------------------------
Name: Gavin H. Wolfe
Title: Vice President
22
<PAGE> 23
Schedule I: Representative
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
277 Park Avenue
New York, New York 10172
Attention: George Fan
Telecopy: (212) 892-2689
23
<PAGE> 24
Schedule II: Underwriters
<TABLE>
<CAPTION>
Principal Amount
of Securities
Underwriters to be Purchased
------------ ---------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............. $ 240,000,000
Chase Securities Inc............................................ $ 84,000,000
NationsBanc Montgomery Securities LLC........................... $ 84,000,000
Barclays Capital Inc............................................ $ 72,000,000
--------------
Total........................ $ 480,000,000
==============
</TABLE>
24
<PAGE> 25
Schedule III
Information Regarding the Securities
1. Aggregate Principal Amount: $480,000,000
2. Maturity Date: January 15, 2009
3. Interest Rate: 7.5%
4. Price to be paid to the Company: 1.625% of the principal amount
25
<PAGE> 1
Exhibit (10)(b)(i)
AMENDMENT NO. 2 TO
CREDIT AGREEMENT
This AMENDMENT NO. 2, dated as of November 5, 1998, is made by and
among CMS ENERGY CORPORATION, a Michigan corporation (the "BORROWER"), the
lenders parties to the Credit Agreement referred to below (the "LENDERS"), THE
CHASE MANHATTAN BANK, as administrative agent (the "ADMINISTRATIVE AGENT"),
documentation agent (the "DOCUMENTATION AGENT"), collateral agent (the
"COLLATERAL AGENT") and syndication agent (the "SYNDICATION AGENT") for the
Lenders, and the Co-Agents (the "CO-AGENTS") and Lead Managers (the "LEAD
MANAGERS") named therein.
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders, the Administrative Agent, the
Documentation Agent, the Collateral Agent, the Syndication Agent, the Co-Agents
and the Lead Managers have entered into a Credit Agreement, dated as of July 2,
1997, as amended by Amendment No. 1, dated as of January 30, 1998 (as so
amended, the "CREDIT Agreement"). Unless otherwise defined herein, the terms
defined in the Credit Agreement shall be used herein as therein defined.
(2) The Borrower has executed a definitive stock purchase agreement
(the "ACQUISITION AGREEMENT") to acquire Panhandle Eastern Pipe Line Company,
Panhandle Storage Company, and Trunkline LNG Company from PanEnergy Corp. and
Texas Eastern Corporation (the "SELLERS") (such acquisition is referred to
herein as the "PANHANDLE ACQUISITION"). The Borrower will be incurring
additional Debt in order to finance the Panhandle Acquisition. The Borrower has
requested amendments to the consolidated leverage ratio and the cash dividend
coverage ratio set forth in Section 8.01(i) and Section 8.01(j), respectively,
of the Credit Agreement that would take into account the impact of such
additional Debt on the Borrower's financial condition. The Lenders have agreed
to the Borrower's request, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is,
effective as of the date hereof (subject to the satisfaction of the conditions
precedent set forth in Section 2(a) hereof and the conditions set forth in
Section 2(b) hereof), hereby amended as follows:
<PAGE> 2
2
(a) Section 8.01(i) of the Credit Agreement is amended in full to read
as follows:
(i) Consolidated Leverage Ratio. The Borrower shall maintain at
all times a ratio of Consolidated Debt to Consolidated Capital of not
more than the amount set forth below during each corresponding period
set forth below:
PERIOD AMOUNT
------ ------
Closing Date through 0.68:1.0
June 30, 1998
July 1, 1998 through 0.67:1.0
November 30, 1998
December 1, 1998 0.745:1.0
through June 30, 1999
July 1, 1999 through 0.65:1.0
June 30, 2000
July 1, 2000 through 0.63:1.0
June 30, 2001
Thereafter 0.60.1.0
(b) Section 8.01(j) of the Credit Agreement is amended in full to read
as follows:
(j) Cash Dividend Coverage Ratio. The Borrower shall maintain, as
of the last day of each fiscal quarter (in each case, the "MEASUREMENT
QUARTER"), a ratio of (i) the sum of (A) Cash Dividend Income for the
immediately preceding four-fiscal-quarter period ending on the last day
of the fiscal quarter immediately preceding such Measurement Quarter,
plus (B) 25% of the amount of Equity Distributions received by the
Borrower during such period but in no event in excess of $10,000,000,
plus (C) all amounts received by the Borrower from its Subsidiaries and
Affiliates during such period constituting reimbursement of interest
expense (including commitment, guaranty and letter of credit fees) paid
by the Borrower on behalf of any such Subsidiary or Affiliate to (ii)
interest expense (including commitment, guaranty and letter of credit
fees) accrued by the Borrower in respect of all Debt during such period
of (1) not less than 2.1 to 1.0 for each such period from the Closing
Date until (and including) the
<PAGE> 3
3
fiscal quarter ending June 30, 1999, and (3) not less than 2.0 to 1.0
thereafter; provided, that the Borrower shall be deemed not to be in
breach of the foregoing covenant if, during the Measurement Quarter, it
has (I) permanently reduced the Commitments and the principal amount
outstanding under this Agreement and the Promissory Notes such that the
amount determined pursuant to clause (ii) above, when recalculated on a
pro forma basis assuming that the amount of such reduced Commitments
and principal amount outstanding under this Agreement and the
Promissory Notes were in effect at all times during such
four-fiscal-quarter period, would result in the Borrower being in
compliance with such ratio, and/or (II) increased Cash Dividend Income
during such Measurement Quarter such that the ratio of (x) Cash
Dividend Income for the four-fiscal-quarter period ending on the last
day of the Measurement Quarter to (y) the amount determined pursuant to
clause (ii) above (as recalculated pursuant to clause (I) above),
equals or exceeds (1) 2.1 to 1.0 for each such period from the Closing
Date until (and including) the fiscal quarter ending December 31, 1998,
(2) 1.9 to 1 for each such period from January 1, 1999 until (and
including) the fiscal quarter ending June 30, 1999, and (3) 2.0 to 1.0
thereafter; and provided further, that until the Borrower so reduces
such Commitments and principal amount outstanding under this Agreement
and the Promissory Notes and/or increases Cash Dividend Income during
such Measurement Quarter, the Borrower may not request any additional
Extensions of Credit (other than Conversions).
SECTION 2. CONDITIONS OF EFFECTIVENESS. (a) The amendments to the
Credit Agreement contained in Section 1 hereof shall become effective when, and
only when, the Administrative Agent shall have received (i) counterparts of this
Amendment executed by the Borrower and the Required Lenders and (ii) evidence,
in form and substance satisfactory to the Administrative Agent, that the Letter
of Credit and Reimbursement Agreement, dated as of September 11, 1997, among the
Borrower, Bank of America National Trust and Savings Association, as
Administrative Agent and Letter of Credit Issuing Bank, and the other financial
institutions party thereto, has been amended in a manner substantially similar
to the amendments contained in Section 1 hereof.
(b) This Amendment No. 2 shall automatically terminate and be null and
void, and the amendments to the Credit Agreement set forth in Section 1 hereof
shall be of no further force or effect, in the event that (i) the Borrower
determines, or the Borrower and the Sellers agree, not to consummate the
Panhandle Acquisition, (ii) the Acquisition Agreement is otherwise terminated
for any reason, or (iii) the Panhandle Acquisition is not consummated on or
before June 30, 1999. Accordingly, upon the occurrence of any of the foregoing
events, each of Sections 8.01(i) and 8.01(j) of the Credit Agreement shall
continue in full force and effect in the form thereof that existed immediately
prior to the effectiveness of this Amendment No. 2.
<PAGE> 4
4
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants as follows:
(a) The execution, delivery and performance by the Borrower of this
Amendment, and the performance by the Borrower of the Credit Agreement, as
amended by this Amendment, (i) are within the Borrower's corporate powers, (ii)
have been duly authorized by all necessary corporate action and (iii) do not and
will not (A) require any consent or approval of the stockholders of the
Borrower, (B) violate any provision of the charter or by-laws of the Borrower or
of law, (C) violate any legal restriction binding on or affecting the Borrower,
(D) result in a breach of, or constitute a default under, any indenture or loan
or credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected,
or (E) result in or require the creation of any Lien (other than pursuant to the
Loan Documents) upon or with respect to any of its properties.
(b) No Governmental Approval is required for the due execution,
delivery and performance by the Borrower of this Amendment.
(c) This Amendment and the Credit Agreement, as amended by this
Amendment, are the legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their respective terms;
subject to the qualification, however, that the enforcement of the rights and
remedies herein and therein is subject to bankruptcy and other similar laws of
general application affecting rights and remedies of creditors and the
application of general principles of equity (regardless of whether considered in
a proceeding in equity or at law). This Amendment has been duly executed and
delivered on behalf of the Borrower.
(d) The representations and warranties of the Borrower set forth in
Section 7.01 of the Credit Agreement are true and correct on and as of the date
hereof, as though made on and as of such date.
(e) No event has occurred and is continuing that constitutes a Default
or an Event of Default.
SECTION 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the
effectiveness of this Amendment, on and after the date hereof each reference in
the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like
import referring to the Credit Agreement, and each reference in the other Loan
Documents to "the Credit Agreement", "thereunder", "thereof" or words of like
import referring to the Credit Agreement, shall mean and be a reference to the
Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement and all
other Loan Documents are and shall continue to be in full force and effect and
are hereby in all respects ratified and confirmed.
<PAGE> 5
5
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Agents under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 5. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same agreement. Delivery of an executed counterpart of a signature page of this
Amendment by facsimile transmission shall be as effective as delivery of a
manually executed counterpart of this Amendment.
SECTION 6. GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York.
<PAGE> 6
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CMS ENERGY CORPORATION
By /s/ Alan M. Wright
------------------------------
Name: Alan M. Wright
Title: Senior Vice President and
Chief Financial Officer
THE CHASE MANHATTAN BANK, as
Administrative Agent, Collateral Agent,
Documentation Agent and Syndication Agent
By /s/ Thomas L. Casey
------------------------------
Name: Thomas L. Casey
Title: Vice President
LENDERS
THE CHASE MANHATTAN BANK
By /s/ Thomas L. Casey
--------------------------------
Name: Thomas L. Casey
Title: Vice President
<PAGE> 7
7
ABN AMRO BANK N.V.
By /s/ Mark Lasek
--------------------------------
Name: Mark Lasek
Title: Group Vice President
By /s/ Robert E. Lee IV
--------------------------------
Name: Robert E. Lee IV
Title: Assistant Vice President
BANK OF AMERICA ILLINOIS
By /s/ Gretchen P. Burud
--------------------------------
Name: Gretchen P. Burud
Title: Vice President
BANKBOSTON, N.A.
By /s/ Rita M. Cahill
--------------------------------
Name: Rita M . Cahill
Title: Director
BARCLAYS BANK PLC
By /s/ Sydney G. Dennis
--------------------------------
Name: Sydney G. Dennis
Title: Director
<PAGE> 8
8
DRESDNER BANK AG, NEW YORK
AND GRAND CAYMAN BRANCHES
By /s/ Andrew Schroeder By /s/ Henry J. Karsch, Jr.
-------------------------------- --------------------------------
Name: Andrew Schroeder Name: Henry J. Karsch, Jr.
Title: Vice President Title: Assistant Treasurer
NATIONAL AUSTRALIA BANK
LIMITED ACN004044937
By /s/ Frank J. Campiglia
--------------------------------
Name: Frank J. Campiglia
Title: Vice President
THE SUMITOMO BANK, LIMITED,
CHICAGO BRANCH
By /s/ John H. Kemper
--------------------------------
Name: John H. Kemper
Title: Senior Vice President
BANK OF MONTREAL
By /s/ Howard H. Turner
--------------------------------
Name: Howard H. Turner
Title: Director
<PAGE> 9
9
THE BANK OF NEW YORK
By /s/ John Watt
--------------------------------
Name: John Watt
Title: Vice President
BANK OF SCOTLAND
By /s/ Annie Chin Tat
--------------------------------
Name: Annie Chin Tat
Title: Senior Vice President
BANQUE PARIBAS
By /s/ Glenn Tobas
--------------------------------
Name: Glenn Tobas
Title: Managing Director
COMERICA BANK
By /s/ David C. Bird
--------------------------------
Name: David C. Bird
Title: Vice President
<PAGE> 10
10
CREDIT LYONNAIS CHICAGO
BRANCH
By /s/ Mary Ann Klemm
--------------------------------
Name: Mary Ann Klemm
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By /s/ Walter R. Wolff
--------------------------------
Name: Walter R. Wolff
Title: Joint General Manager
MICHIGAN NATIONAL BANK
By /s/ Mark S. Aben
--------------------------------
Name: Mark S. Aben
Title: Senior Relationship Manager
THE MITSUBISHI TRUST AND
BANKING CORPORATION, LOS
ANGELES AGENCY
By /s/ Yasushi Satomi
--------------------------------
Name: Yasushi Satomi
Title: Senior Vice President
<PAGE> 11
11
SOCIETE GENERALE, CHICAGO
BRANCH
By /s/ Eric E.O. Siebert, Jr.
--------------------------------
Name: Eric E.O. Siebert, Jr.
Title: Director
TORONTO DOMINION (TEXAS), INC.
By /s/ Alva J. Jones
--------------------------------
Name: Alva J. Jones
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By /s/ Jason P. DiNapoli
--------------------------------
Name: Jason P. DiNapoli
Title: Vice President
AUSTRALIA AND NEW ZEALAND
BANKING GROUP LIMITED
By /s/ Geoffrey Pach
--------------------------------
Name: Geoffrey Pach
Title: Senior Vice President
<PAGE> 12
12
THE BANK OF NOVA SCOTIA
By /s/ F.C.H. Ashby
--------------------------------
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
BANQUE NATIONALE DE PARIS
By /s/ Arnaud Collin du Bocage
--------------------------------
Name: Mr. Arnaud Collin du Bocage
Title: EVP and General Manager
BHF-BANK AKTIENGESELLSCHAFT
By /s/ John Sykes By /s/ Thomas Scifo
-------------------------------- --------------------------------
Name: John Sykes Name: Thomas Scifo
Title: Vice President Title: Assistant Vice President
CHANG HWA COMMERCIAL BANK,
LTD., NEW YORK BRANCH
By /s/ Wan-Tu Yeh
--------------------------------
Name: Wan-Tu Yeh
Title: Vice President and General Manager
<PAGE> 13
13
CIBC INC.
By /s/ Christine Harrigan
--------------------------------
Name: Christine Harrigan
Title: Executive Director
CIBC Oppenheimer Corp., As Agent
CITIBANK, N.A.
By /s/ J. Nicholas McKee
--------------------------------
Name: J. Nicholas McKee
Title: Vice President
Attorney in Fact
THE FIRST NATIONAL BANK OF
CHICAGO
By /s/ Jane Bek
--------------------------------
Name: Jane Bek
Title: Vice President
MELLON BANK, N.A.
By /s/ Richard A. Matthews
--------------------------------
Name: Richard A. Matthews
Title: Vice President
<PAGE> 14
14
NATIONAL WESTMINSTER BANK PLC
By /s/ Anne Marie Torre
--------------------------------
Name: Anne Marie Torre
Title: Vice President
THE ROYAL BANK OF SCOTLAND
PLC
By /s/ Grant F. Stoddart
--------------------------------
Name: Grant F. Stoddart
Title: Senior Vice President and Manager
THE SAKURA BANK, LIMITED
By /s/ Masayu Ki Kobayashi
--------------------------------
Name: Masayu Ki Kobayashi
Title: Joint General Manager
THE SANWA BANK, LIMITED,
CHICAGO BRANCH
By /s/ Richard H. Ault
--------------------------------
Name: Richard H. Ault
Title: Vice President
<PAGE> 15
15
THE SUMITOMO TRUST & BANKING
CO., LTD., NEW YORK BRANCH
By /s/ Stephen A. Stratico
--------------------------------
Name: Stephen A. Stratico
Title: Vice President
UBS AG, NEW YORK BRANCH (as successor to
Union Bank of Switzerland, New York Branch)
By /s/ Leo L. Baltz
--------------------------------
Name: Leo L. Baltz
Title: Director
By /s/ Paula Mueller
--------------------------------
Name: Paula Mueller
Title: Director
FIRST COMMERCIAL BANK
(INCORPORATED IN TAIWAN,
R.O.C.), LOS ANGELES BRANCH
By /s/ June Shiong Lu
--------------------------------
Name: June Shiong Lu
Title: Senior Vice President and General Manager
THE FUJI BANK, LIMITED
By /s/ Peter L. Chinnici
--------------------------------
Name: Peter L. Chinnici
Title: Joint General Manager
<PAGE> 16
16
ARAB AMERICAN BANK
By /s/ William G. Reynolds
--------------------------------
Name: William G. Reynolds
Title: Vice President
By
--------------------------------
Name: Carmelo Li Feti
Title: Vice President
<PAGE> 17
17
NATIONSBANK, N.A.
By /s/ Gretchen P. Burud
--------------------------------
Name: Gretchen P. Burud
Title: Vice President
<PAGE> 1
EXHIBIT (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges and Preferred Securities Dividends
and Distributions
(Millions of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996 1995 1994
-----------------------------------------------
(b)
<S> <C> <C> <C> <C> <C>
Earnings as defined (a)
Consolidated net income $ 242 $ 244 $ 224 $ 195 $ 177
Income taxes 100 108 137 113 91
Exclude equity basis subsidiaries (92) (80) (85) (57) (18)
Fixed charges as defined, adjusted to
exclude capitalized interest of $28, $13,
$5, $4 and $2 million for the years ended
December 31, 1998, 1997, 1996, 1995
and 1994, respectively 395 360 313 299 253
-------------------------------------------------
Earnings as defined $ 645 $ 632 $ 589 $ 550 $ 503
================================================
Fixed charges as defined (a)
Interest on long-term debt $ 319 $ 273 $ 230 $ 224 $ 193
Estimated interest portion of lease rental 8 8 10 9 9
Other interest charges 48 49 43 42 30
Preferred securities dividends and
distributions 77 67 54 42 36
-------------------------------------------------
Fixed charges as defined $ 452 $ 397 $ 337 $ 317 $ 268
================================================
Ratio of earnings to fixed charges and
preferred securities dividends and distributions 1.43 1.59 1.75 1.74 1.88
================================================
</TABLE>
NOTES:
(a) Earnings and fixed charges as defined in instructions for Item 503 of
Regulation S-K.
(b) Excludes a cumulative effect of change in accounting after-tax gain of $43
million.
<PAGE> 1
EXHIBIT (21)(a)
SUBSIDIARIES OF CMS ENERGY CORPORATION
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
Percent Voting
Stock Owned by
CMS Energy Incorporated
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumers Energy Company ("Consumers") 100 Michigan
Michigan Gas Storage Company 0 Michigan
(100% Owned by Consumers)*
CMS Enterprises Company ("ACMS Enterprises") 100 Michigan
CMS Generation Co. 0 Michigan
(100% Owned by CMS Enterprises)
</TABLE>
*Subject to regulation by FERC
<PAGE> 1
EXHIBIT (21)(b)
SUBSIDIARIES OF CONSUMERS ENERGY COMPANY
AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
Percent Voting
Stock Owned by
Consumers Energy Company Incorporated
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michigan Gas Storage Company* 100 Michigan
</TABLE>
*Subject to regulation by FERC
<PAGE> 1
EXHIBIT 23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by reference in this Form
10-K, into CMS Energy Corporation's previously filed Registration Statements No.
33-29681, No. 33-47629, No. 33-60007, No. 33-61595, No. 33-62573, No. 333-32229,
No. 333-34087, No. 333-60795, No. 333-63229 and No. 333-68937.
Arthur Andersen LLP
Detroit, Michigan,
March 30, 1999.
<PAGE> 1
EXHIBIT 24a
February 26, 1999
Mr. Alan M. Wright and
Mr. Thomas A. McNish
CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, MI 48126
CMS Energy Corporation is required to file an Annual Report on Form 10-K for the
year ended December 31, 1998 with the Securities and Exchange Commission within
90 days after the end of the year.
We hereby make, constitute and appoint each of you our true and lawful attorney
for each of us and in each of our names, places and steads to sign and cause to
be filed with the Securities and Exchange Commission said Annual Report with any
necessary exhibits, and any amendments thereto that may be required.
Very truly yours,
/s/ William T. McCormick, Jr. /s/ Earl D. Holton
- ---------------------------------------- ----------------------------
William T. McCormick, Jr. Earl D. Holton
/s/ John Deutch /s/ W. U. Parfet
- ---------------------------------------- ----------------------------
John M. Deutch William U. Parfet
/s/ James J. Duderstadt /s/ Percy A. Pierre
- ---------------------------------------- ----------------------------
James J. Duderstadt Percy A. Pierre
/s/ K. R. Flaherty /s/ K. L. Way
- ---------------------------------------- ----------------------------
Kathleen R. Flaherty Kenneth L. Way
/s/ V. J. Fryling /s/ K. Whipple
- ---------------------------------------- ----------------------------
Victor J. Fryling Kenneth Whipple
/s/ John B. Yasinsky
-------------------------------
John B. Yasinsky
<PAGE> 1
EXHIBIT 24b
February 26, 1999
Mr. Alan M. Wright and
Mr. Thomas A. McNish
Consumers Energy Company
212 West Michigan Avenue
Jackson, MI 49201
Consumers Energy Company is required to file an Annual Report on Form 10-K for
the year ended December 31, 1998 with the Securities and Exchange Commission
within 90 days after the end of the year.
We hereby make, constitute and appoint each of you our true and lawful attorney
for each of us and in each of our names, places and steads to sign and cause to
be filed with the Securities and Exchange Commission said Annual Report with any
necessary exhibits, and any amendments thereto that may be required.
Very truly yours,
/s/ William T. McCormick, Jr. /s/ Earl D. Holton
- ------------------------------------------ -----------------------------
William T. McCormick, Jr. Earl D. Holton
/s/ John Deutch /s/ W. U. Parfet
- ------------------------------------------ -----------------------------
John M. Deutch William U. Parfet
/s/ James J. Duderstadt /s/ Percy A. Pierre
- ------------------------------------------ -----------------------------
James J. Duderstadt Percy A. Pierre
/s/ K. R. Flaherty /s/ K. L. Way
- ------------------------------------------ -----------------------------
Kathleen R. Flaherty Kenneth L. Way
/s/ V. J. Fryling /s/ Whipple
- ------------------------------------------ -----------------------------
Victor J. Fryling Kenneth Whipple
/s/ John B. Yasinsky
---------------------------------
John B. Yasinsky
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF
COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000811156
<NAME> CMS ENERGY CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,387
<OTHER-PROPERTY-AND-INVEST> 3,726
<TOTAL-CURRENT-ASSETS> 1,407
<TOTAL-DEFERRED-CHARGES> 1,790
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 11,310
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,594
<RETAINED-EARNINGS> (234)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,216
393
238
<LONG-TERM-DEBT-NET> 1,730
<SHORT-TERM-NOTES> 328
<LONG-TERM-NOTES-PAYABLE> 2,996
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 258
0
<CAPITAL-LEASE-OBLIGATIONS> 105
<LEASES-CURRENT> 35
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,866
<TOT-CAPITALIZATION-AND-LIAB> 11,310
<GROSS-OPERATING-REVENUE> 5,141
<INCOME-TAX-EXPENSE> 123
<OTHER-OPERATING-EXPENSES> 4,366
<TOTAL-OPERATING-EXPENSES> 4,489
<OPERATING-INCOME-LOSS> 652
<OTHER-INCOME-NET> 20
<INCOME-BEFORE-INTEREST-EXPEN> 672
<TOTAL-INTEREST-EXPENSE> 336
<NET-INCOME> 336
51
<EARNINGS-AVAILABLE-FOR-COMM> 285
<COMMON-STOCK-DIVIDENDS> 140
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 516
<EPS-PRIMARY> 2.65<F1>
<EPS-DILUTED> 2.62
<FN>
<F1>EPS FOR CMS ENERGY COMMON STOCK $2.65
EPS FOR CLASS G COMMON STOCK $1.56
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF
COMMON STOCKHOLDER'S EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000201533
<NAME> CONSUMERS ENERGY COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,387
<OTHER-PROPERTY-AND-INVEST> 711
<TOTAL-CURRENT-ASSETS> 718
<TOTAL-DEFERRED-CHARGES> 1,347
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,163
<COMMON> 841
<CAPITAL-SURPLUS-PAID-IN> 502
<RETAINED-EARNINGS> 434
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,845
220
238
<LONG-TERM-DEBT-NET> 805
<SHORT-TERM-NOTES> 215
<LONG-TERM-NOTES-PAYABLE> 1,202
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 119
0
<CAPITAL-LEASE-OBLIGATIONS> 100
<LEASES-CURRENT> 33
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,454
<TOT-CAPITALIZATION-AND-LIAB> 7,163
<GROSS-OPERATING-REVENUE> 3,709
<INCOME-TAX-EXPENSE> 158
<OTHER-OPERATING-EXPENSES> 3,060
<TOTAL-OPERATING-EXPENSES> 3,218
<OPERATING-INCOME-LOSS> 491
<OTHER-INCOME-NET> 33
<INCOME-BEFORE-INTEREST-EXPEN> 524
<TOTAL-INTEREST-EXPENSE> 175
<NET-INCOME> 349
37
<EARNINGS-AVAILABLE-FOR-COMM> 312
<COMMON-STOCK-DIVIDENDS> 241
<TOTAL-INTEREST-ON-BONDS> 84
<CASH-FLOW-OPERATIONS> 625
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
CONSUMERS GAS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS
In 1995, CMS Energy Corporation (CMS Energy) issued a total of 7.62 million
shares of Class G Common Stock. This class of common stock reflects the separate
performance of the gas distribution, storage and transportation businesses
conducted by Consumers Energy Company (Consumers) and Michigan Gas Storage
Company, a subsidiary of Consumers (collectively, Consumers Gas Group).
Accordingly, this Management's Discussion and Analysis (MD&A) should be read
along with the MD&A in the 1998 Annual Report of CMS Energy included and
incorporated by reference herein.
CMS Energy is the parent holding company of Consumers and CMS Enterprises
Company. Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For
further information regarding the businesses of CMS Energy, including the nature
and issuance of Class G Common Stock, see the MD&A of CMS Energy.
RESULTS OF OPERATIONS
Net income for Consumers Gas Group for 1998 totaled $52 million compared with
$60 million for 1997. The decrease in 1998 net income reflects decreased gas
deliveries due to warmer 1998 temperatures. Partially offsetting the decrease
was the benefit resulting from an accounting change for property taxes. The
recognition of property tax expense was changed from expensing on a calendar
year basis to a fiscal year basis which resulted in a benefit of $18 million
($12 million after-tax). Net income for 1997 totaled $60 million compared with
$59 million for 1996. The increase in 1997 net income reflects reduced operation
and maintenance expenses offset by decreased gas deliveries due to warmer winter
month temperatures in 1997 and an extra day for the 1996 leap year, and
increased depreciation and general tax expenses. Other items benefiting 1997
were the recognition of interest income from a related-party property sale and
reduced other income deductions in 1997 reflecting the absence of an unusual
material write-off which occurred during 1996. For a further discussion, see
Consumers Gas Group Results of Operations in CMS Energy's MD&A.
GAS UNCERTAINTIES
For a discussion of gas uncertainties, see Consumers Gas Group Results of
Operations - Uncertainties in CMS Energy's MD&A.
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers Gas Group's cash requirements are met by its
operating and financing activities. Consumers Gas Group's cash from operations
is derived mainly from Consumers' sale and transportation of natural gas. Cash
from operations for 1998 and 1997 totaled $110 million and $223 million,
respectively. The $113 million decrease primarily reflects a decrease in the
sale of accounts receivable, an increase in gas inventories, the noncash effect
of the property tax accounting change, and changes in the timing of cash
receipts and payments related to normal operations. Consumers Gas Group
2
<PAGE> 2
uses its operating cash primarily to maintain and expand its gas utility
transmission and distribution systems, to retire portions of its long-term debt,
and to pay dividends.
INVESTING ACTIVITIES: Cash used in investing activities for 1998 and 1997
totaled $114 million and $122 million, respectively. The $8 million decrease in
cash used primarily reflects an increase in the proceeds received from the sale
of assets.
FINANCING ACTIVITIES: Cash provided by financing activities during 1998 totaled
$4 million while cash used in financing activities during 1997 totaled $114
million. The $118 million increase in cash provided primarily reflects an
increase in the proceeds from senior notes, partially offset by an increase in
the retirement of bonds and other long-term debt.
OTHER INVESTING AND FINANCING MATTERS: Consumers has an agreement permitting the
sale of certain accounts receivable for up to $500 million. At December 31,
1998, receivables sold totaled $306 million. Consumers Gas Group's attributed
portion of these receivables sold totaled $107 million. Accounts receivable and
accrued revenue in the Balance Sheets have been reduced to reflect receivables
sold. For further information, see "Short-Term Financings" in CMS Energy's Note
4.
CAPITAL EXPENDITURES
CMS Energy estimates the following capital expenditures for Consumers Gas Group,
including new lease commitments, over the next three years. These estimates are
prepared for planning purposes and are subject to revision.
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------------------
Years Ended December 31 1999 2000 2001
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gas utility (a) $120 $122 $118
Michigan Gas Storage 3 3 2
---------------------------------------
$123 $125 $120
================================================================================
</TABLE>
(a) Includes a portion of anticipated capital expenditures common to Consumers'
gas and electric utility businesses.
Consumers Gas Group expects that cash from operations and the ability to access
debt markets will provide necessary working capital and liquidity to fund future
capital expenditures, required debt payments, and other cash needs in the
foreseeable future. For further information regarding forward-looking
information, see the Consumers Gas Group Outlook discussion in CMS Energy's
MD&A.
YEAR 2000 COMPUTER MODIFICATIONS
For a discussion of Consumers Gas Group's year 2000 computer modification
efforts, see Year 2000 Computer Modifications in CMS Energy's MD&A.
3
<PAGE> 3
FORWARD-LOOKING STATEMENTS
For cautionary statements relating to Consumers Gas Group's forward-looking
information, see Forward-Looking Statements in CMS Energy's MD&A.
4
<PAGE> 4
STATEMENTS OF INCOME CONSUMERS GAS GROUP
<TABLE>
<CAPTION>
In Millions, Except Per Share Amounts
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUE $1,051 $1,204 $1,282
- --------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES Operation
Cost of gas sold 564 694 750
Other 177 175 193
-------------------------------------------
741 869 943
Maintenance 32 34 40
Depreciation, depletion and amortization 97 93 87
General taxes 55 55 54
-------------------------------------------
925 1,051 1,124
- --------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME 126 153 158
- --------------------------------------------------------------------------------------------------------------------------
OTHER DEDUCTIONS (4) (2) (6)
- --------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES Interest on long-term debt 28 28 30
Other interest 15 13 12
Capitalized interest - - (1)
Preferred dividends 4 5 6
-------------------------------------------
47 46 47
- --------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 75 105 105
INCOME TAXES 35 45 46
-------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 40 60 59
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PROPERTY TAXES, NET OF $6 TAX
12 - -
NET INCOME $ 52 $ 60 $ 59
==========================================================================================================================
NET INCOME ATTRIBUTABLE TO CMS ENERGY SHAREHOLDERS
THROUGH RETAINED INTEREST $ 39 $ 45 $ 45
==========================================================================================================================
NET INCOME ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ 13 $ 15 $ 14
==========================================================================================================================
AVERAGE CLASS G COMMON SHARES OUTSTANDING 8 8 8
==========================================================================================================================
BASIC AND DILUTED EARNINGS PER AVERAGE CLASS G COMMON SHARE
BEFORE CHANGE IN ACCOUNTING PRINCIPLE $ 1.20 $ 1.84 $ 1.82
==========================================================================================================================
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX,
PER AVERAGE CLASS G COMMON SHARE $ .36 $ - $ -
==========================================================================================================================
BASIC AND DILUTED EARNINGS PER AVERAGE CLASS G COMMON SHARE $ 1.56 $ 1.84 $ 1.82
==========================================================================================================================
DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ 1.27 $ 1.21 $ 1.15
==========================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 5
STATEMENTS OF CASH FLOWS
CONSUMERS GAS GROUP
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM Net income $ 52 $ 60 $ 59
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 97 93 87
Deferred income taxes and investment tax credit 16 5 13
Capital lease and other amortization 2 4 4
Other - (1) 2
Cumulative effect of accounting change for property taxes (18) - -
Changes in other assets and liabilities (39) 62 (24)
-------------------------------------
Net cash provided by operating activities 110 223 141
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Capital expenditures (excludes capital
INVESTING ACTIVITIES lease additions) (111) (113) (137)
Cost to retire property, net (9) (9) (99)
Proceeds from the sale of property 4 - -
Other 2 - 1
-------------------------------------
Net cash used in investing activities (114) (122) (145)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Proceeds from senior notes 212 - -
FINANCING ACTIVITIES Increase (decrease) in notes payable, net (1) 5 9
Contribution from CMS Energy stockholders 37 - 3
Issuance of common stock 6 7 5
Retirement of bonds and other long-term debt (169) (40) (8)
Payment of common stock dividends (42) (40) (37)
Return of CMS Energy stockholders' contribution (32) (39) -
Payment of capital lease obligations (6) (4) (4)
Proceeds from long-term note - 25 22
Proceeds from bank loans - - 23
Retirement of preferred stock - (26) -
Repayment of long-term note (1) (2) -
-------------------------------------
Net cash provided by (used in) financing activities 4 (114) 13
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS - (13) 9
Cash and temporary cash investments
Beginning of year 2 15 6
-------------------------------------
End of year $ 2 $ 2 $ 15
==============================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
<PAGE> 6
BALANCE SHEETS
CONSUMERS GAS GROUP
<TABLE>
<CAPTION>
ASSETS In Millions
December 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PLANT AND PROPERTY Plant and property $2,360 $2,322
(AT COST) Less accumulated depreciation, depletion
and amortization 1,252 1,231
-----------------------------
1,108 1,091
Construction work-in-progress 31 28
-------------------------------
1,139 1,119
- ------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS Cash and temporary cash investments at cost,
which approximates market 2 2
Accounts receivable and accrued revenue, less allowances
of $3 in 1998 and $3 in 1997 75 53
Inventories at average cost
Gas in underground storage 219 197
Materials and supplies 6 7
Deferred income taxes - 6
Prepayments and other 51 51
-------------------------------
353 316
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS Postretirement benefits 131 142
Deferred income taxes 16 6
Other 87 61
-------------------------------
234 209
------------------------------
TOTAL ASSETS $1,726 $1,644
==================================================================================================================
</TABLE>
7
<PAGE> 7
CONSUMERS GAS GROUP
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITALIZATION Common stockholders' equity
Common stock $ 184 $ 184
Paid-in capital 113 102
Retained earnings since December 31, 1992 82 72
-------------------------------
379 358
Preferred stock 52 52
Long-term debt 454 333
Non-current portion of capital leases 14 16
-------------------------------
899 759
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES Current portion of long-term debt and capital leases 37 118
Notes payable 118 119
Accounts payable 92 94
Accrued taxes 61 65
Accrued refunds 9 10
Accrued interest 8 4
Deferred income taxes 4 -
Other 47 44
-------------------------------
376 454
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT Postretirement benefits 159 168
LIABILITIES Regulatory liabilities for income taxes, net 189 173
Deferred investment tax credit 25 25
Other 78 65
-------------------------------
451 431
------------------------------
Commitments and Contingencies (Notes 2, 3, 5 and 10)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,726 $1,644
==================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
<PAGE> 8
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
CONSUMERS GAS GROUP
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK At beginning and end of period (a) $ 184 $ 184 $ 184
- ----------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL At beginning of period 102 134 126
Common stock issued 6 7 5
CMS Energy stockholders' contribution 37 - 3
Return of CMS Energy stockholders' contribution (32) (39) -
------------------------------
At end of period 113 102 134
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS At beginning of period 72 52 30
Net income 52 60 59
Common stock dividends declared (42) (40) (37)
------------------------------
At end of period 82 72 52
------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 379 $ 358 $ 370
================================================================================================================
</TABLE>
(a) Number of shares of Consumers' common stock outstanding was 84,108,789 for
all periods presented. Common stock allocated to the Consumers Gas Group
is consistent with the allocation method discussed in Note 4.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
<PAGE> 9
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS
1: CORPORATE STRUCTURE
CMS Energy Corporation (CMS Energy) is the parent holding company of Consumers
Energy Company (Consumers) and CMS Enterprises Company (Enterprises). Consumers,
a combination electric and gas utility company serving the Lower Peninsula of
Michigan, is the principal subsidiary of CMS Energy. For further information
regarding the businesses of CMS Energy, see the Notes to Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein.
CMS Energy has issued shares of Class G Common Stock. This class of common stock
reflects the separate performance of the gas distribution, storage and
transportation businesses conducted by Consumers and Michigan Gas Storage
Company, a subsidiary of Consumers (collectively, Consumers Gas Group). For
further information regarding the nature and issuance of the Class G Common
Stock, see Note 6 to the Consolidated Financial Statements of CMS Energy
included and incorporated by reference herein.
These Financial Statements and their related Notes should be read along with the
Financial Statements and Notes contained in the 1998 Annual Report of CMS Energy
that includes the Report of Independent Public Accountants, included and
incorporated by reference herein.
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
BASIS OF PRESENTATION: Consumers is a regulated utility. Accordingly, the
majority of the accounting allocation policies described within these notes have
a long-standing basis and have historically been used in proceedings conducted
before the Michigan Public Service Commission (MPSC). The financial statements
for Consumers Gas Group have been prepared based upon consistent methods that
management believes are reasonable and appropriate to reflect its financial
position, results of operations and cash flows. Where appropriate, the financial
statements reflect the assets, liabilities, revenues and expenses directly
related to Consumers Gas Group. However, in instances where common accounts
(containing both electric and gas activities) were not readily attributable to a
single business segment, management allocated to Consumers Gas Group's financial
statements based on certain measures of business activities, such as gas
revenues, salaries, other operation and maintenance expenditures, number of gas
customers in relationship to total utility customers and/or functional use
surveys. Management believes the attributions are reasonable.
Although the financial statements of Consumers Gas Group separately report the
assets, liabilities and stockholders' equity, legal title to such assets and the
responsibility for such liabilities are not separately identifiable to a
specific class of common stock. Therefore, the creditors of CMS Energy are
unaffected by the implementation of Consumers Gas Group, because all assets of
the corporation remain available to satisfy all liabilities. The holders of CMS
Energy Common Stock and the Class G Common Stock will be subject to all risks
associated with investments in CMS Energy. Holders of Class G Common Stock have
no direct rights in the equity or assets of Consumers Gas Group, but rather have
rights in the equity and assets of CMS Energy.
10
<PAGE> 10
The financial statements of Consumers Gas Group incorporate Consumers' natural
gas utility business and the related business of Michigan Gas Storage Company.
The Consumers Gas Group and the remaining business segments of CMS Energy
comprise all of the accounts included in the Consolidated Financial Statements
of CMS Energy.
The financial statements of Consumers Gas Group were prepared in accordance with
generally accepted accounting principles on a consistent basis and include the
use of management's estimates. Any future changes in accounting policy not
mandated by appropriate authorities must be, in management's opinion, preferable
to the policy in place and must be disclosed in accordance with generally
accepted accounting principles. For presentation purposes, all material
transactions between companies within Consumers Gas Group have been eliminated.
CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES: During the first quarter of
1998, Consumers Gas Group implemented a change in the method of accounting for
property taxes so that taxes are recognized during the fiscal period of the
taxing authority for which the taxes are levied. This change provides a better
matching of property tax expenses with the services provided by the taxing
authorities, and is considered the most acceptable basis of recording property
taxes. Prior to 1998, Consumers Gas Group recorded property taxes monthly during
the year following the assessment date (December 31). The cumulative effect of
this one-time change in accounting increased other income by $18 million, and
earnings net of tax, by $12 million. The pro forma effect on prior years'
consolidated net income of retroactively recording property taxes as if the new
method of accounting had been in effect for all periods presented is not
material.
EARNINGS PER SHARE AND DIVIDENDS: Basic and diluted earnings per share for the
years ended December 31, 1998, 1997 and 1996, reflect the performance of
Consumers Gas Group. The earnings attributable to Class G Common Stock and the
related amounts per share are computed by considering the weighted average
number of shares of Class G Common Stock outstanding.
Earnings attributable to outstanding Class G Common Stock are equal to Consumers
Gas Group's net income multiplied by a fraction; the numerator is the weighted
average number of Outstanding Shares during the period (Outstanding Shares), and
the denominator is the weighted average number of Outstanding Shares and
Retained Interest Shares, shares not held by the holders of the Outstanding
Shares, during the period. The earnings attributable to Class G Common Stock on
a per share basis, for the years ended December 31, 1998, 1997 and 1996, are
based on 25.5 percent, 24.5 percent and 23.8 percent of the income of Consumers
Gas Group since the initial issuance, respectively.
Holders of Class G Common Stock have no direct rights in the equity or assets of
Consumers Gas Group, but rather have rights in the equity and assets of CMS
Energy as a whole. In the sole discretion of the Board of Directors of CMS
Energy (Board of Directors), dividends may be paid exclusively to the holders of
Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or
to the holders of both classes in equal or unequal amounts. Dividends on Class G
Common Stock are paid at the discretion of the Board of Directors based
primarily upon the earnings and financial condition of Consumers Gas Group, and
to a lesser extent, CMS Energy as a whole. It is the Board of Directors' current
intention that the declaration or payment of dividends with respect to the Class
G Common Stock will not be reduced, suspended or eliminated as a result of
factors arising out of or relating to the electric utility business or the
nonutility businesses of CMS Energy unless such factors also require, in the
Board of Directors' sole discretion, the omission of the declaration or
reduction in payment of dividends on both the CMS Energy Common Stock and the
Class G Common Stock.
11
<PAGE> 11
In February and May 1998, CMS Energy paid dividends of $.31 per share on Class G
Common Stock. In August and November of 1998, and February 1999, CMS Energy paid
dividends of $.325 per share on Class G Common Stock.
RELATED PARTY TRANSACTIONS: Consumers Gas Group sold, stored and transported
natural gas and provided other services to the Midland Cogeneration Venture
Limited Partnership totaling $13 million, each year, for 1998, 1997 and 1996.
Consumers Gas Group purchases a portion of its gas from CMS Oil and Gas Co., a
wholly owned subsidiary of Enterprises. The amounts of purchases for the years
ended December 31, 1998, 1997 and 1996 totaled $24 million, $25 million and $24
million, respectively.
OTHER: For significant accounting policies refer to the following Notes to
Consolidated Financial Statements of CMS Energy: for Consumers Gas Group's gas
inventory, maintenance, depreciation and depletion, and utility regulation, see
Note 2; for cash equivalents, see Note 16; for income taxes, see Note 9; for
executive incentive compensation, see Note 11; and for pensions and other
postretirement benefits, see Note 12 included and incorporated by reference
herein.
3: RATE MATTERS
For information regarding rate matters directly affecting Consumers Gas Group,
see Note 3 in the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
4: SHORT-TERM FINANCINGS AND CAPITALIZATION
SHORT-TERM FINANCINGS: Consumers' short-term financings are discussed in
Consolidated Financial Statements of CMS Energy Note 4 included and incorporated
by reference herein.
Consumers generally manages its short-term financings on a centralized
consolidated basis. The portion of receivables sold attributable to Consumers
Gas Group at December 31, 1998 and 1997, is estimated by management to be $107
million and $138 million, respectively. Accounts receivable and accrued revenue
in the balance sheets have been reduced to reflect receivables sold. The
portions of short-term debt and receivables sold attributable to Consumers Gas
Group reflect the high utilization of short-term borrowing to finance the
purchase of gas for storage in the summer and fall periods. The allocation of
short-term financings and related interest charges to Consumers Gas Group
generally follows the ratio of gas utility assets to total Consumers' assets.
Additionally, the carrying costs for Consumers' sales of certain of its accounts
receivable under its trade receivable purchase and sale agreement generally are
allocated to Consumers Gas Group based on the ratio of customer revenues
contributed by Consumers' gas customers to total Consumers' revenue. As a result
of the centralized management of short-term financing, the amounts allocated to
Consumers Gas Group are further adjusted in both the seasonal gas inventory
build-up period (second and third quarters) and the high seasonal gas sales
period (first and fourth quarters) to more closely reflect the higher short-term
financing requirements of the inventory build-up period and conversely the lower
financing requirements during the higher sales periods. Management believes
these allocations to be reasonable.
CAPITAL STOCK AND LONG-TERM DEBT: Consumers Gas Group's capital stock and
long-term debt, including debt resulting from the sale of Trust Preferred
Securities, have been allocated based on the ratio of gas utility assets
(including common assets attributed to the gas utility segment) to total
Consumers' assets. Management believes these measurements are reasonable. For
information regarding the long-term debt
12
<PAGE> 12
and capital stock of CMS Energy and Consumers, see Notes 5 and Note 6,
respectively, to the Consolidated Financial Statements of CMS Energy included
and incorporated by reference herein.
5: COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Consumers Gas Group estimates capital expenditures,
including new lease commitments, of $123 million for 1999, $125 million for
2000, and $120 million for 2001. These estimates include an attributed portion
of Consumers' anticipated capital expenditures for common plant and equipment.
For further information regarding commitments and contingencies directly
affecting Consumers Gas Group (including those involving former manufactured gas
plant sites), see the Gas Environmental Matters and Other discussions in CMS
Energy's Note 3 included and incorporated by reference herein.
6: INCOME TAXES
Consumers Gas Group is included in the consolidated federal income tax return
filed by CMS Energy (see Note 9 to the Consolidated Financial Statements of CMS
Energy). The financial statement provision and actual cash tax payments have
been reflected in Consumers Gas Group's financial statements in accordance with
CMS Energy's tax allocation policy. The financial statement amounts reflect
management's estimate of the separate taxable income of the segment, the effect
of deferred tax accounting for temporary differences that arise and the
amortization of investment tax credits (ITC) over the life of the related
property included within the Consumers Gas Group. Tax settlements at Consumers
Gas Group are consistent with settlements of CMS Energy's consolidated tax
returns and are generally settled in the year, or in the year following the year
in which such amounts are accrued. The significant components of income tax
expense (benefit) for Consumers Gas Group consisted of:
<TABLE>
<CAPTION>
In Millions
- -----------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current federal income $25 $40 $33
Deferred income taxes 16 7 14
Deferred ITC, net - (2) (1)
-------------------------------
$41 $45 $46
===============================
Operating $37 $46 $50
Other 4 (1) (4)
-------------------------------
$41 $45 $46
============================================================================
</TABLE>
13
<PAGE> 13
The principal components of deferred tax assets (liabilities) recognized in the
balance sheet for Consumers Gas Group are as follows:
<TABLE>
<CAPTION>
In Millions
- ----------------------------------------------------------------------------------------------------------
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property $ (62) $ (66)
Postretirement benefits (Note 9) (50) (53)
Employee benefit obligations (includes postretirement
benefits of $49 and $53) (Note 9) 61 66
Regulatory liability for income taxes 66 60
Other (3) 5
-------------------------
$ 12 $ 12
=========================
Gross deferred tax liabilities $ (222) $ (217)
Gross deferred tax assets 234 229
-------------------------
$ 12 $ 12
==========================================================================================================
</TABLE>
The actual income tax expense for Consumers Gas Group differs from the amount
computed by applying the statutory federal tax rate to income before income
taxes as follows:
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net income before preferred dividends $ 56 $ 65 $ 65
Income tax expense 41 45 46
-----------------------
97 110 111
Statutory federal income tax rate x 35% x 35% x 35%
-----------------------
Expected income tax expense 34 39 39
Increase (decrease) in taxes from:
Differences in book and tax depreciation
not previously deferred 8 8 9
ITC amortization (1) (2) (2)
-----------------------
Actual income tax expense $ 41 $ 45 $ 46
====================================================================
</TABLE>
7: FINANCIAL INSTRUMENTS
The carrying amount of Consumers Gas Group's long-term debt was $454 million and
$333 million and the fair value was $457 million and $335 million as of December
31, 1998 and 1997, respectively. For additional information regarding financial
instruments, see Note 10 to the Consolidated Financial Statements of CMS Energy
included and incorporated by reference herein.
8: EXECUTIVE INCENTIVE COMPENSATION
For information regarding CMS Energy's Performance Incentive Stock Plan,
restricted shares of Common Stock, stock options and stock appreciation rights,
see Note 11 to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein. This plan allows for awards of Class G Common
Stock and has established criteria for certain plan awards.
14
<PAGE> 14
9: RETIREMENT BENEFITS
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS: Consumers Gas Group's
attributed portion of CMS Energy's net periodic cost for health and life
insurance benefits totaled $11 million, $12 million and $15 million in 1998,
1997 and 1996, respectively. These allocations were based on the ratio of
salaries and wages related to Consumers' gas operations to Consumers' total
salaries and wages. Management believes these allocations are reasonable.
Consumers Gas Group's attributed portion of CMS Energy's total recorded
liability for postretirement benefit plans is estimated to be $141 million and
$153 million at December 31, 1998 and 1997, respectively. These amounts were
allocated based on policies Consumers has historically used in proceedings
conducted before the Michigan Public Service Commission. For further information
regarding CMS Energy's postretirement benefit plans other than pensions, see
Note 12 to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN: The attributed Supplemental Executive
Retirement Plan (SERP) trust assets of Consumers Gas Group were $8 million at
December 31, 1998 and $8 million at December 31, 1997 and were classified as
other noncurrent assets. Consumers Gas Group's estimated portion of CMS Energy's
recorded liability for the SERP totaled $5 million at December 31, 1998 and $4
million at December 31, 1997. These allocations were based on a ratio of
salaries and wages related to Consumers' gas operations to Consumers' total
salaries and wages. Management believes these allocations are reasonable. For
further information, see Note 12 to the Consolidated Financial Statements of CMS
Energy included and incorporated by reference herein.
DEFINED BENEFIT PENSION PLAN: A trusteed, noncontributory, defined benefit
pension plan (Pension Plan) covers substantially all employees. Consumers Gas
Group's attributed portion of CMS Energy's net periodic pension cost totaled $3
million in 1998 and $4 million in 1997 and 1996. These allocations were based on
the ratio of salaries and wages related to Consumers' gas operations to
Consumers' total salaries and wages. Management believes these allocations are
reasonable.
Consumers Gas Group's attributed portion of CMS Energy's total recorded
liability for the Pension Plan totaled $20 million at December 31, 1998 and $17
million at December 31, 1997 and was allocated to Consumers Gas Group based on
the ratio of salaries and wages related to Consumers' gas operations to
Consumers' total salaries and wages. Management believes these allocations are
reasonable. For further information, see Note 12 to the Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein.
DEFINED CONTRIBUTION PLAN: Consumers provides a defined contribution 401(k) plan
to all U.S. employees of CMS Energy and its subsidiaries which are at least 80
percent owned and have adopted the plan. Consumers' contributions to the plan
are invested in CMS Energy Common Stock. For further information, see Note 12 to
the Consolidated Financial Statements of CMS Energy included and incorporated by
reference herein.
10: LEASES
15
<PAGE> 15
CMS Energy and its subsidiaries lease various assets, including vehicles,
aircraft, construction equipment, computer equipment and buildings. Consumers
Gas Group's attributed portion of CMS Energy's minimum rental commitments under
noncancelable leases at December 31, 1998, were:
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------------------
Capital Leases
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 7
2000 6
2001 6
2002 5
2003 4
2004 and thereafter 3
---
Total minimum lease payments 31
Less imputed interest 13
---
Present value of net minimum lease payments 18
Less current portion 4
---
Noncurrent portion $14
============================================================================
</TABLE>
Consumers recovers lease charges from customers and accordingly charges payments
for its capital and operating leases to operating expense. Operating lease
charges for Consumers Gas Group in 1998 were $1 million, and there were no
operating lease charges in 1997 and 1996. Capital lease expenses for Consumers
Gas Group for the years ended December 31, 1998, 1997 and 1996 were $7 million,
$6 million and $6 million, respectively.
Consumers Gas Group's minimum rental commitments and lease expenses are
generally allocated based on the specific use of the leased item. Common leases
are allocated to Consumers Gas Group through functional use surveys, which
management believes to be reasonable.
16
<PAGE> 16
11: EFFECTS OF THE RATEMAKING PROCESS
The following regulatory assets (liabilities), which include both current and
noncurrent amounts, are reflected in Consumers Gas Group's Balance Sheets. These
assets represent probable future revenue to Consumers associated with certain
incurred costs as these costs are recovered through the ratemaking process.
Virtually all of these costs are being recovered through current rates.
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------
December 31 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits (Note 9) $ 140 $ 150
Manufactured gas plant sites 48 47
Other 5 3
------------------------
Total regulatory assets $ 193 $ 200
===============================================================================
Regulatory liabilities for income taxes $(189) $(173)
===============================================================================
</TABLE>
12: SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the Statement of Cash Flows, all highly liquid investments with
an original maturity of three months or less are considered cash equivalents.
Consumers Gas Group's other cash flow activities and noncash investing and
financing activities were:
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $38 $42 $39
Income taxes paid (net of refunds) 38 40 33
NONCASH TRANSACTIONS
Assets placed under capital lease $ 5 $ 3 $ 1
================================================================================
</TABLE>
17
<PAGE> 17
Changes in other assets and liabilities as shown on the Statements of Cash Flows
at December 31 are described below:
<TABLE>
<CAPTION>
In Millions
- ------------------------------------------------------------------------------
Years Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Sale of receivables, net $ (31) $ 1 $ -
Accounts receivable 17 18 7
Accrued revenue (9) 25 (5)
Inventories (21) (10) -
Accounts payable (1) 9 6
Accrued refunds (1) 3 (13)
Other current assets and liabilities, net 22 (9) (5)
Noncurrent deferred amounts, net (15) 25 (14)
------------------------------
$ (39) $ 62 $(24)
==============================================================================
</TABLE>
18
<PAGE> 18
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Energy Company ("Consumers") and its
wholly-owned subsidiary, Michigan Gas Storage Company) as of December 31, 1998
and 1997, and the related statements of income, common stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the management of CMS
Energy Corporation, the parent of Consumers. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Consumers Gas Group as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective January 1, 1998,
Consumers Energy Company changed its method of accounting for property taxes.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1999.
19
<PAGE> 19
QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION CONSUMERS GAS GROUP
<TABLE>
<CAPTION>
In Millions, Except Per Share Amounts
1998 (Unaudited) 1997 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 429 $ 170 $ 117 $ 335 $ 498 $ 220 $ 110 $ 376
Pretax operating income
(loss) $ 54 $ 21 $ 6 $ 45 $ 78 $ 23 $ (1) $ 53
Net income (loss) $ 36 $ 4 $ (5) $ 17 $ 39 $ 5 $ (7) $ 23
Basic and diluted earnings
(loss) per average
common share (a) $1.09 $ .12 $(.16) $ .52 $1.18 $ .16 $(.21) $ .70
Dividends declared per
common share $ .31 $ .31 $.325 $.325 $.295 $.295 $ .31 $ .31
Common stock prices (b)
High $26-5/8 $26-7/8 $25-1/4 $26-1/2 $19-7/8 $19-7/8 $22 $27-1/8
Low $22-1/4 $23-1/4 $21-3/8 $23-1/8 $17-7/8 $17-5/8 $19 $20-5/8
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) The sum of the quarters may not equal the annual earnings per share due to
changes in shares outstanding.
(b) Based on New York Stock Exchange - Composite transactions.
20
