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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1995
REGISTRATION NOS. 33-57719
33-57719-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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<S> <C>
CMS ENERGY CORPORATION CMS ENERGY MICHIGAN LIMITED PARTNERSHIP
(Exact name of registrant as specified in its (Exact name of co-registrant as specified in its
charter) charter)
MICHIGAN MICHIGAN
(State or other jurisdiction of incorporation or (State or other jurisdiction of incorporation or
organization) organization)
38-2726431 38-3220537
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
</TABLE>
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313) 436-9261
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Alan M. Wright
Senior Vice President and Chief Financial Officer
Fairlane Plaza South, Suite 900
330 Town Center Drive
Dearborn, Michigan 48126
313-436-9560
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------
It is respectfully requested that the Commission send copies of all notices,
orders and communications to:
David J. Boyd, Esq. Thomas J. Igoe, Jr., Esq.
Sidley & Austin Reid & Priest LLP
One First National Plaza 40 West 57th Street
Chicago, Illinois 60603 New York, New York 10019
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement as determined by
market and other conditions.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: /X/
THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(C) OF THE SECURITIES ACT OF 1933 OR ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(C), MAY
DETERMINE.
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EXPLANATORY NOTE
This Registration Statement contains the following prospectuses: (i) "base"
prospectus (the "Base Prospectus") to be used in connection with the offer and
sale of debt securities, common stock and/or preferred stock of CMS Energy
Corporation ("CMS Energy") and preferred securities of CMS Energy Michigan
Limited Partnership ("CMS Energy Michigan"), a limited partnership in which CMS
Energy is the general partner; and (ii) a prospectus to be used in connection
with any offer and sale of a class of common stock of CMS Energy which will be
designated as Class G Common Stock (the "Class G Prospectus").
The Base Prospectus will be used for the offer and sale of all securities,
other than the Class G Common Stock, registered pursuant to this Registration
Statement, in addition to a prospectus supplement relating to the specific
security or securities to be offered and sold. Only the Class G Prospectus will
be used with respect to the offer and sale of the Class G Common Stock. CMS
Energy plans to consummate, from time to time, transactions involving the sale
of securities registered pursuant to this Registration Statement, provided that
the proceeds therefrom will not exceed an aggregate of $200,000,000. No
decisions have been made as to which securities will be issued or the timing or
size of any offering of such securities. Such determinations will be made from
time to time in the light of market and other conditions.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
PROSPECTUS (Subject to Completion)
Issued June 16, 1995
$200,000,000
CMS ENERGY CORPORATION
DEBT SECURITIES
COMMON STOCK
PREFERRED STOCK
AND
CMS ENERGY MICHIGAN PREFERRED SECURITIES
-------------------------
CMS Energy Corporation, a Michigan corporation ("CMS Energy"), may offer,
from time to time, its (i) unsecured senior debt securities (the "Senior Debt
Securities") consisting of debentures, notes or other unsecured evidence of
indebtedness, (ii) unsecured subordinated debt securities (the "Subordinated
Debt Securities," and together with Senior Debt Securities, the "Debt
Securities") consisting of debentures, notes and other unsecured evidence of
indebtedness, (iii) shares of Common Stock, par value $.01 per share (the "CMS
Energy Common Stock"), (iv) Preferred Stock, par value $.01 per share ("CMS
Energy Preferred Stock"), or any combination of the foregoing, in each case in
amounts, at prices and on terms to be determined at or prior to the time of
sale. See "Description of Securities."
As of May 31, 1995, CMS Energy had outstanding approximately $688,000,000
aggregate principal amount of indebtedness, none of which was secured.
None of such indebtedness would be senior to any Senior Debt Securities which
may be issued. All of such indebtedness would be senior to any Subordinated
Debt Securities which may be issued. The indenture, as supplemented, pursuant
to which the Senior Debt Securities may be issued, contains certain limitations
on the issuance of additional debt by CMS Energy, but indebtedness issued
within such limitations could be secured and therefore senior to unsecured
Senior Debt Securities. The indenture pursuant to which the Subordinated Debt
Securities may be issued contains no limitation on the issuance of indebtedness
ranking senior to the Subordinated Debt Securities.
CMS Energy Michigan Limited Partnership ("CMS Energy Michigan"), a Michigan
special purpose limited partnership in which CMS Energy is the general partner,
may also offer, from time to time, its preferred securities ("CMS Energy
Michigan Preferred Securities"), representing limited partner interests in one
or more series, in amounts, at prices and on terms to be determined at or prior
to the time of sale. CMS Energy Michigan exists for the sole purpose of issuing
its partnership interests and lending the proceeds thereof to CMS Energy. CMS
Energy Michigan will lend the proceeds of the sale of the CMS Energy Michigan
Preferred Securities to CMS Energy in return for Subordinated Debt Securities
in aggregate principal amount equal to the aggregate liquidation preference of
such Preferred Securities, bearing interest at an annual rate equal to the
annual dividend rate of such Preferred Securities and having certain redemption
terms which correspond to the redemption terms for such Preferred Securities.
CMS Energy may have the right to extend the interest payment period for such
Subordinated Debt Securities for a period not expected to exceed 60 months. The
Subordinated Debt Securities will rank subordinate in right of payment to all
Senior Indebtedness (as defined herein) of CMS Energy. The payment of periodic
cash distributions ("dividends") and payments on liquidation or redemption with
respect to the CMS Energy Michigan Preferred Securities, to the extent of funds
held by CMS Energy Michigan and legally available therefor, are guaranteed
under a Payment and Guarantee Agreement (the "Guarantee") of CMS Energy. CMS
Energy's obligations under the Guarantee are subordinate and junior in right of
payment to all other liabilities of CMS Energy and pari passu with the most
senior preferred stock issued by CMS Energy. The Subordinated Debt Securities
subsequently may be distributed pro rata to holders of CMS Energy Michigan
Preferred Securities in connection with the dissolution of CMS Energy Michigan
upon the occurrence of certain events as may be described in an accompanying
Prospectus Supplement (a "Prospectus Supplement").
Specific terms of the particular Debt Securities, Common Stock, CMS Energy
Preferred Stock and CMS Energy Michigan Preferred Securities in respect of which
this Prospectus is being delivered (the "Offered Securities") will be set forth
in an accompanying Prospectus Supplement or Supplements, together with the terms
of the offering of the Offered Securities, the initial price thereof and the net
proceeds from the sale thereof. The Prospectus Supplement will set forth with
regard to the particular Offered Securities, without limitation, the following:
(i) in the case of Debt Securities, the designation, aggregate principal amount,
denomination, maturity, any exchange, conversion, redemption or sinking fund
provisions, provisions for redemption at the option of the holder, interest rate
(which may be fixed or variable), the time and method of calculating interest
payments, the right of CMS Energy, if any, to defer payment of interest on the
Debt Securities and the maximum length of such deferral period, any listing on a
securities exchange and other specific terms of the offering; (ii) in the case
of CMS Energy Common Stock, the number of shares, public offering price and
other specific terms of the offering; and (iii) in the case of CMS Energy
Preferred Stock and CMS Energy Michigan Preferred Securities, the designation,
number of shares, liquidation preference per security, initial public offering
price, any listing on a securities exchange, dividend rate (or method of
calculation thereof), dates on which dividends shall be payable and dates from
which dividends shall accrue, any voting rights, any redemption, exchange,
conversion or sinking fund provisions and any other rights, preferences,
privileges, limitations or restrictions relating to the CMS Energy Preferred
Stock or the CMS Energy Michigan Preferred Securities, as the case may be, of a
specific series and, in the case of CMS Energy Michigan Preferred Securities,
the terms upon which the proceeds of the sale of the CMS Energy Michigan
Preferred Securities will be loaned to CMS Energy. The offering price to the
public of the Offered Securities will be limited to $200,000,000 in the
aggregate.
The outstanding CMS Energy Common Stock is traded on the New York Stock
Exchange, Inc. ("NYSE"). See "Description of Securities -- Capital Stock --
Dividend and Price Range of CMS Energy Common Stock." The CMS Energy Common
Stock sold pursuant to a Prospectus Supplement accompanying this Prospectus will
also be listed for trading on the NYSE, subject to official notice of issuance.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
CMS Energy intends to sell the Offered Securities through underwriters,
dealers, agents or directly to a limited number of purchasers. The names of, and
the Offered Securities to be purchased by or through underwriters, dealers or
agents, if any, the compensation of such persons and other special terms in
connection with the offering and sale of such Offered Securities will be set
forth in the related Prospectus Supplement. See "Plan of Distribution" herein.
This Prospectus may not be used to consummate sales of Offered Securities
unless accompanied by a Prospectus Supplement.
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The date of this Prospectus is , 1995.
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NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT, AND ANY INFORMATION
OR REPRESENTATION NOT CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY CMS ENERGY OR ANY UNDERWRITER, DEALER OR AGENT.
THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH THEY RELATE OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT
NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED OR INCORPORATED HEREIN OR THEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
AVAILABLE INFORMATION
CMS Energy is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Information, as of particular dates, concerning
CMS Energy's directors and officers, their remuneration, the principal holders
of CMS Energy's securities and any material interest of such persons in
transactions with CMS Energy is disclosed in proxy statements distributed to
shareholders of CMS Energy and filed with the Commission. Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at 500 West Madison Street, Chicago, Illinois 60661 and at Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The outstanding
shares of Common Stock of CMS Energy are listed on the NYSE and reports, proxy
statements and other information concerning CMS Energy may also be inspected and
copied at the offices of such exchange at 20 Broad Street, New York, New York
10005.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by CMS Energy with the Commission (File No.
1-9513) pursuant to the Exchange Act are hereby incorporated by reference in
this Prospectus and shall be deemed to be a part hereof: (i) CMS Energy's Annual
Report on Form 10-K for the year ended December 31, 1994; (ii) CMS Energy's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995; and
(iii) CMS Energy's Current Reports on Form 8-K dated January 10 and February 2,
1995.
All documents subsequently filed by CMS Energy pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act and prior to the termination of the
offering made by this Prospectus (the "Offering") shall be deemed to be
incorporated by reference herein and shall be deemed to be a part hereof from
the date of filing of such documents (such documents, and the documents
enumerated above, being hereinafter referred to as "Incorporated Documents").
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed Incorporated
Document modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
CMS Energy undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon the written or oral request of
any such person, a copy of any or all of the documents referred to above which
have been or may be incorporated in this Prospectus by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Requests for such copies should be directed
to CMS Energy Corporation at its principal executive offices located at Fairlane
Plaza South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan 48126,
Attention: Office of the Secretary, telephone: (313) 436-9200.
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Certain information contained in this Prospectus summarizes, is based upon,
or refers to information and financial statements contained in one or more
Incorporated Documents; accordingly, such information contained herein is
qualified in its entirety by reference to such documents and should be read in
conjunction therewith.
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CMS ENERGY
CMS Energy, incorporated in 1987, is the parent holding company of
Consumers Power Company ("Consumers") and CMS Enterprises Company
("Enterprises"). Consumers, a combination electric and gas utility company
serving most of Michigan's Lower Peninsula, is CMS Energy's largest subsidiary.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest of which is the automotive
industry. Enterprises is engaged in several non-utility energy-related
businesses including: (i) oil and gas exploration and production, (ii)
development and operation of independent power production facilities, (iii) gas
marketing services to utility, commercial and industrial customers and (iv)
transmission and storage of natural gas.
CMS Energy conducts its principal operations through the following five
business segments: (i) electric utility operations; (ii) natural gas utility
operations; (iii) gas transmission and marketing; (iv) oil and gas exploration
and production operations; and (v) independent power production. Consumers or
Consumers' subsidiaries are engaged in two segments: electric operations and gas
operations. Consumers' electric and gas businesses are principally regulated
utility operations.
CMS Energy's 1994 consolidated operating revenue was $3,619 million. This
consolidated operating revenue was derived from Consumers' sales of electric
energy (approximately 61% or $2,189 million), Consumers' gas operations
(approximately 32% or $1,151 million), gas transmission and marketing
(approximately 4% or $145 million), oil and gas exploration and production
activities (approximately 2% or $85 million) and independent power production
activities (approximately 1% or $45 million). Consumers' consolidated operations
in the electric and gas utility businesses account for the major share of CMS
Energy's total assets, revenue and income. CMS Energy's share of 1994
unconsolidated non-utility independent power production revenue was $385
million.
Consumers is a public utility serving almost six million of Michigan's nine
million residents in all of the 68 counties in Michigan's Lower Peninsula.
Industries in Consumers' service area include automotive, metal, chemical, food
and wood products and a diversified group of other industries. Consumers' 1994
consolidated operating revenue of $3,356 million was derived approximately 65%
($2,189 million) from its electric utility business and approximately 35%
($1,151 million) from its gas utility business. Consumers' rates and certain
other aspects of its business are subject to the jurisdiction of the Michigan
Public Service Commission (the "MPSC") and the Federal Energy Regulatory
Commission.
CMS ENERGY MICHIGAN LIMITED PARTNERSHIP
CMS Energy Michigan is a limited partnership formed under the laws of the
State of Michigan. CMS Energy Michigan exists for the sole purpose of issuing
its limited partnership interests and investing the net proceeds thereof in the
Subordinated Debt Securities. CMS Energy is the sole general partner in CMS
Energy Michigan (the "General Partner"). CMS Energy Finance Corporation, a
Michigan corporation and wholly-owned subsidiary of CMS Energy ("CMS Finance"),
is, as of the date hereof, the sole limited partner in CMS Energy Michigan. Upon
the issuance of CMS Energy Michigan Preferred Securities, which securities
represent limited partner interests in CMS Energy Michigan, holders of the CMS
Energy Michigan Preferred Securities will be limited partners in CMS Energy
Michigan and CMS Finance will withdraw as a limited partner. CMS Energy will
make capital contributions from time to time to the extent required so that the
total contributions made by the General Partner, as general partner, shall at
all times be at least equal to 1% of the total contributions made by all
partners. CMS Energy Michigan is managed by the General Partner and exists for
the sole purpose of issuing its partnership interests and lending the proceeds
thereof to CMS Energy, such
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loans to be evidenced by Subordinated Debt Securities of CMS Energy. The rights
and obligations of CMS Energy, as General Partner, and the limited partners of
CMS Energy Michigan will be governed by the Michigan Revised Uniform Limited
Partnership Act and by an Amended and Restated Limited Partnership Agreement of
CMS Energy Michigan (the "Limited Partnership Agreement") substantially in the
form filed as an exhibit to the Registration Statement of which this Prospectus
is a part. CMS Energy Michigan has a term of approximately 99 years, unless
earlier dissolved. CMS Energy Michigan's registered office in the State of
Michigan is Fairlane Plaza South, Suite 1100, 330 Town Center Drive, Dearborn,
Michigan 48126, telephone number: (313) 436-9200. All of CMS Energy Michigan's
business and affairs will be conducted by CMS Energy, as the sole general
partner. The principal place of business of CMS Energy Michigan is c/o CMS
Energy Corporation, Fairlane Plaza South, Suite 1100, 330 Town Center Drive,
Dearborn, Michigan 48126, telephone number: (313) 436-9200.
USE OF PROCEEDS
CMS Energy Michigan will loan to CMS Energy all proceeds received by CMS
Energy Michigan from the sale of its CMS Energy Michigan Preferred Securities.
As will be more specifically set forth in the applicable Prospectus Supplement,
CMS Energy will use such borrowed amounts and the net proceeds from the sale of
the Debt Securities, CMS Energy Common Stock and the CMS Energy Preferred Stock
offered hereby to invest in the businesses of CMS Energy and for its general
corporate purposes. Initially, the net proceeds may be used to repay a portion
of CMS Energy's indebtedness outstanding under a Credit Agreement dated as of
July 29, 1994 (the "Credit Facility") among CMS Energy, Citibank, N.A. and
Union Bank, as co-agents, and certain banks named therein, under which
short-term borrowings are incurred for working capital purposes, and which at
May 31, 1995 had $192 million principal amount outstanding, with an annual
interest rate of 7.6%.
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RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The ratios of earnings to fixed charges and the ratios of earnings to fixed
charges and preferred stock dividends for the three months ended March 31, 1995
and for each of the years ended December 31, 1990 through 1994 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ----------------------------------------------
MARCH 31, 1995 1994 1993 1992 1991 1990
-------------- ---- ---- ---- ------ ----
(1) (2)(3) (4)
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Ratio of earnings to fixed charges..... 3.00 2.12 1.92 -- -- --
Ratio of earnings to fixed charges and
preferred stock dividends............ 2.67 1.91 1.83 -- -- --
</TABLE>
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(1) For the year ended December 31, 1992, fixed charges exceeded earnings by
$441 million. Earnings as defined include a $520 million pretax loss on the
settlement of MCV power purchases, $(15) million for potential customer
refunds and other reserves related to 1992 but recorded in 1991, and $6
million relating to CMS Generation Company's reduction in its investment in
The Oxford Energy Company. The ratio of earnings to fixed charges and the
ratio of earnings to fixed charges and preferred stock dividends would have
been 1.34 and 1.30, respectively, excluding these amounts.
(2) Excludes an extraordinary after-tax loss of $14 million.
(3) For the year ended December 31, 1991, fixed charges exceeded earnings by
$356 million. Earnings as defined include pretax losses of $398 million for
write-downs and reserve amounts related to Consumers' abandonment of the
construction of a nuclear generating station in Midland, Michigan ("Midland
Construction"), $76 million for potential customer refunds and other
reserves, and $51 million relating to CMS Generation Company's reduction in
its investment in The Oxford Energy Company. The ratio of earnings to fixed
charges and the ratio of earnings to fixed charges and preferred stock
dividends would have been 1.48 and 1.45, respectively, excluding these
amounts.
(4) For the year ended December 31, 1990, fixed charges exceeded earnings by
$500 million. Earnings as defined include pretax losses of $847 million for
write-downs and reserve amounts related to the abandonment of the Midland
Construction. The ratio of earnings to fixed charges and the ratio of
earnings to fixed charges and preferred stock dividends would have been 2.01
and 1.96, respectively, excluding these amounts.
For the purpose of computing such ratios, earnings represent net income
before income taxes, net interest charges and the estimated interest portion of
lease rentals.
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DESCRIPTION OF SECURITIES
DEBT SECURITIES
The Senior Debt Securities will be issued under an Indenture dated as of
September 15, 1992, as amended and supplemented (the "Senior Debt Indenture"),
between CMS Energy and NBD Bank, N.A., as Trustee (the "Senior Debt Trustee"),
and the Subordinated Debt Securities will be issued under an Indenture (the
"Subordinated Debt Indenture"), between CMS Energy and The Chase Manhattan Bank,
N.A., as Trustee (the "Subordinated Debt Trustee"). The descriptions of the
provisions of the Debt Securities, the Senior Debt Indenture and the
Subordinated Debt Indenture contained herein are brief summaries of such
provisions and do not purport to be complete. The forms of the Senior Debt
Indenture and the Subordinated Debt Indenture are filed as exhibits to the
Registration Statement of which this Prospectus is a part, and reference is made
thereto for the respective definitive provisions of such Indentures. The
descriptions herein are qualified in their entirety by such reference. Certain
capitalized terms used herein shall have the meanings respectively set forth in
the respective Indentures.
GENERAL
CMS Energy will offer under this Prospectus unsecured Debt Securities, any
of which may be issued as: (a) Senior Debt Securities or (b) Subordinated Debt
Securities. The terms of any Debt Securities may or may not restrict the
issuance by CMS Energy or its subsidiaries of additional indebtedness which is
secured, unsecured, senior, pari passu or subordinated to such Debt Securities.
CMS Energy is a holding company and its assets consist primarily of
investments in its subsidiaries. The Debt Securities will be obligations
exclusively of CMS Energy. CMS Energy's ability to service its indebtedness,
including the Debt Securities, is dependent primarily upon the earnings of its
subsidiaries and the distribution or other payment of such earnings to CMS
Energy in the form of dividends, loans or advances, and repayment of loans and
advances from CMS Energy. The subsidiaries are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay any amounts due
pursuant to the Debt Securities or to make any funds available therefor, whether
by dividends, loans or other payments. See "Primary Source of Funds of CMS
Energy; Restrictions on Sources of Dividends" below.
A substantial portion of the consolidated liabilities of CMS Energy have
been incurred by its subsidiaries. Therefore, CMS Energy's rights and the rights
of its creditors, including holders of Debt Securities, to participate in the
distribution of assets of any subsidiary upon the latter's liquidation or
reorganization will be subject to prior claims of the subsidiary's creditors,
including trade creditors, except to the extent that CMS Energy may itself be a
creditor with recognized claims against the subsidiary (in which case the claims
of CMS Energy would still be subject to the prior claims of any secured creditor
of such subsidiary and of any holder of indebtedness of such subsidiary that is
senior to that held by CMS Energy). As of March 31, 1995, CMS Energy's
subsidiaries had total indebtedness for borrowed money (excluding intercompany
indebtedness) of approximately $2.2 billion.
The applicable Prospectus Supplement will set forth the following terms
relating to the Debt Securities offered thereby (the "Offered Debt Securities"):
(1) the specific designation of the Offered Debt Securities and whether such
Offered Debt Securities are Senior Debt Securities or Subordinated Debt
Securities; (2) any limit on the aggregate principal amount of the Offered Debt
Securities; (3) the date or dates, if any (and whether fixed or extendible), on
which the Offered Debt Securities will mature; (4) the rate or rates per annum
(which may be fixed or variable) at which the Offered Debt Securities will bear
interest, if any, the date or dates on which any such interest will be payable
and the regular record dates for any interest payable on the Offered Debt
Securities; (5) the place or places where the principal of and any interest on
the Offered Debt Securities shall be payable and where such Offered Debt
Securities may be surrendered for registration of transfer or exchange; (6) any
provisions relating to the issuance of the Offered Debt Securities at an
original issue discount; (7) the option, if any, of CMS Energy to redeem the
Offered Debt Securities and the periods within which or the dates on which, the
prices at which and the terms and conditions upon which, such Offered Debt
Securities may be redeemed, in whole or in part, upon the exercise of such
option; (8) the obligation, if any, of CMS Energy to redeem such Offered Debt
Securities pursuant to any sinking fund or
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other mandatory redemption provisions or at the option of the holder and the
periods within which or the dates on which, the prices at which and the terms
and conditions upon which such Offered Debt Securities will be redeemed, in
whole or in part, pursuant to such obligation; (9) the obligation, if any, of
CMS Energy to permit the conversion of the Offered Debt Securities into CMS
Energy Common Stock, and the terms and conditions upon which such conversion
shall be effected; (10) the denominations in which such Offered Debt Securities
will be issued and whether the Offered Debt Securities will be issuable in
registered form or bearer form or both, and, if issuable in bearer form, the
restrictions as to the offer, sale and delivery of the Offered Debt Securities
in bearer form and as to exchanges between registered and bearer form; (11)
whether the Offered Debt Securities will be issuable in the form of one or more
temporary or permanent global securities and, if so, the identity of the
depository for such global securities; (12) whether and under what circumstances
CMS Energy will pay additional amounts with respect to the Offered Debt
Securities to a non-United States Person (as defined in such Prospectus
Supplement) on account of any tax, assessment or governmental charge withheld or
deducted and, if so, whether CMS Energy will have the option to redeem such
Offered Debt Securities rather than pay such additional amounts; (13) any
provisions which could afford holders of the Offered Debt Securities protection
in the event of a highly leveraged transaction involving CMS Energy; and (14)
any other terms of the Offered Debt Securities not inconsistent with the related
Indenture, including covenants and events of default relating solely to the
Offered Debt Securities. Debt Securities may be issued at a substantial discount
from the stated principal amount thereof ("Original Issue Discount Securities").
United States federal income tax consequences and other special considerations
applicable thereto or to other Offered Debt Securities offered and sold at par
which are treated as having been issued at a discount for United States federal
income tax purposes will be described in the Prospectus Supplement relating
thereto.
CONCERNING THE TRUSTEES
Each of NBD Bank, N.A., the Trustee under the Senior Debt Indenture, and
The Chase Manhattan Bank, N.A., the Trustee under the Subordinated Debt
Indenture, is one of a number of banks with which CMS Energy and its
subsidiaries maintain ordinary banking relationships, including credit
facilities. The Chase Manhattan Bank, N.A., is the trustee under the GTN
Indenture (as defined herein).
SENIOR DEBT SECURITIES
General. The Senior Debt Securities will be issuable under the Senior Debt
Indenture. The Senior Debt Indenture does not limit the aggregate principal
amount of Senior Debt Securities which may be issued thereunder. Senior Debt
Securities may be issued under the Senior Debt Indenture from time to time in
one or more series. Each series of Senior Debt Securities shall mature on a date
not less than 9 months nor more than 40 years after the date of issuance.
Capitalized terms used in this section "Senior Debt Securities" and not
otherwise specifically defined in this Prospectus shall have the meanings
respectively set forth in the Senior Debt Indenture.
Exchange and Transfer. Senior Debt Securities may be presented for exchange
and registered Senior Debt Securities may be presented for registration of
transfer at the offices and subject to the restrictions set forth therein and in
the applicable Prospectus Supplement without service charge, but upon payment of
any taxes or other governmental charges due in connection therewith, subject to
any applicable limitations contained in the Senior Debt Indenture. Senior Debt
Securities in bearer form and the coupons appertaining thereto, if any, will be
transferable by delivery.
Payment. Unless otherwise indicated in the applicable Prospectus
Supplement, payment of the principal of and the premium and interest, if any, on
all Senior Debt Securities in registered form will be made at the office or
agency of the Senior Debt Trustee in the Borough of Manhattan, the City of New
York, except that, at the option of CMS Energy, payment of any interest may be
made (i) by check mailed to the address of the Person entitled thereto as such
address shall appear in the Security Register or (ii) by wire transfer to an
account maintained by the Person entitled thereto as specified in the Security
Register. Unless otherwise indicated in the applicable Prospectus Supplement,
payment of any interest due on Senior Debt Securities in registered form will be
made to the Persons in whose name such Senior Debt Securities are registered at
the close of business on the Record Date for such interest payments.
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Events of Default. The occurrence of any of the following events with
respect to the Senior Debt Securities of any series will constitute an "Event of
Default" with respect to the Senior Debt Securities of such series: (a) default
for 30 days in the payment of any interest on any of the Senior Debt Securities
of such series; (b) default in the payment when due of any of the principal of
or the premium, if any, on any of the Senior Debt Securities of such series,
whether at maturity, upon redemption, acceleration or otherwise; (c) default in
the deposit or payment of any sinking fund or analogous payment in respect of
any Senior Debt Securities of such series; (d) default for 60 days by CMS Energy
in the observance or performance of any other covenant or agreement contained in
the Senior Debt Indenture relating to the Senior Debt Securities of such series
after written notice thereof as provided in the Senior Debt Indenture; (e)
certain events of bankruptcy, insolvency or reorganization relating to CMS
Energy; (f) entry of final judgments against CMS Energy or Consumers aggregating
in excess of $25,000,000 which remain undischarged or unbonded for 60 days; or
(g) a default resulting in the acceleration of indebtedness in excess of
$25,000,000, which acceleration has not been rescinded or annulled within 10
days after notice of such default. Additional Events of Default may be
prescribed for the benefit of the Holders of a particular series of Senior Debt
Securities and will be described in the Prospectus Supplement relating to such
Senior Debt Securities.
If an Event of Default on any series of Senior Debt Securities shall have
occurred and be continuing, either the Senior Debt Trustee or the Holders of not
less than 25% in aggregate principal amount of the Senior Debt Securities of
such series then Outstanding may declare the principal of all Senior Debt
Securities of such series and the interest, if any, accrued thereon to be due
and payable immediately.
Upon certain conditions, any such declarations may be rescinded and
annulled if all Events of Default, other than the nonpayment of accelerated
principal, with respect to the Senior Debt Securities of all such affected
series then Outstanding shall have been cured or waived as provided in the
Senior Debt Indenture by the Holders of a majority in aggregate principal amount
of the Senior Debt Securities of the affected series then Outstanding.
Reference is made to the Prospectus Supplement relating to any series of
Original Issue Discount Securities for the particular provisions relating to the
acceleration of a portion of the principal amount thereof upon the occurrence
and continuance of an Event of Default with respect thereto.
The Senior Debt Indenture provides that, subject to the duty of the Senior
Debt Trustee to act with the requisite standard of care in case a default with
respect to a series of Senior Debt Securities shall have occurred and be
continuing, the Senior Debt Trustee will be under no obligation to exercise any
of its rights or powers under the Senior Debt Indenture at the request, order or
direction of the Holders of the Senior Debt Securities, unless such Holders
shall have offered to the Senior Debt Trustee reasonable indemnity. Subject to
such provisions for indemnity and certain other limitations contained in the
Senior Debt Indenture, the Holders of a majority in aggregate principal amount
of the Senior Debt Securities of each affected series then Outstanding (voting
as one class) will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Senior Debt Trustee,
or exercising any trust or power conferred on the Senior Debt Trustee, with
respect to the Senior Debt Securities of such affected series.
The Senior Debt Indenture provides that no Holder of Senior Debt Securities
may institute any action against CMS Energy under the Senior Debt Indenture
(except actions for payment of overdue principal, premium or interest) unless
such Holder previously shall have given to the Senior Debt Trustee written
notice of default and continuance thereof and unless the Holders of not less
than 25% in aggregate principal amount of the Senior Debt Securities of the
affected series then Outstanding (voting as one class) shall have requested the
Senior Debt Trustee to institute such action and shall have offered the Senior
Debt Trustee reasonable indemnity, the Senior Debt Trustee shall not have
instituted such action within 60 days of such request and the Senior Debt
Trustee shall not have received direction inconsistent with such request by the
Holders of a majority in aggregate principal amount of the Senior Debt
Securities of the affected series then Outstanding (voting as one class).
The Senior Debt Indenture requires CMS Energy to furnish to the Senior Debt
Trustee annually a statement as to CMS Energy's compliance with all conditions
and covenants under the Senior Debt Indenture. The Senior Debt Indenture
provides that the Senior Debt Trustee may withhold notice to the Holders of the
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Senior Debt Securities of any series of any default affecting such series
(except defaults as to payment of principal, premium or interest on the Senior
Debt Securities of such series) if it considers such withholding to be in the
interests of the Holders of the Senior Debt Securities of such series.
Consolidation, Merger or Sale of Assets. The Senior Debt Indenture provides
that CMS Energy may consolidate with or merge into, or sell, lease or convey its
property as an entirety or substantially as an entirety to, any other
corporation if such corporation assumes the obligations of CMS Energy under the
Senior Debt Securities and the Senior Debt Indenture and is organized and
existing under the laws of the United States of America, any state thereof or
the District of Columbia.
Modification of the Senior Debt Indenture. The Senior Debt Indenture
permits CMS Energy and the Senior Debt Trustee to enter into supplemental
indentures thereto without the consent of the Holders of the Senior Debt
Securities to: (a) secure the Senior Debt Securities of one or more series, (b)
evidence the assumption by a successor corporation of the obligations of CMS
Energy under the Senior Debt Indenture and the Senior Debt Securities then
Outstanding, (c) add covenants for the protection of the Holders of the Senior
Debt Securities, (d) cure any ambiguity or correct any inconsistency in the
Senior Debt Indenture, (e) establish the form and terms of any series of
securities under the Senior Debt Indenture and (f) evidence the acceptance of
appointment by a successor Senior Debt Trustee.
The Senior Debt Indenture also permits CMS Energy and the Senior Debt
Trustee, with the consent of the Holders of not less than a majority in
aggregate principal amount of the Senior Debt Securities of all series then
Outstanding and affected (voting as one class), to add any provisions to, or
change in any manner or eliminate any of the provisions of, the Senior Debt
Indenture or modify in any manner the rights of the Holders of the Senior Debt
Securities of each such affected series; provided, however, that CMS Energy and
the Senior Debt Trustee may not, without the consent of the Holder of each
Senior Debt Security then outstanding and affected thereby: (a) change the time
of payment of the principal (or any installment) of any Senior Debt Security, or
reduce the principal amount thereof, or reduce the rate or extend the time of
payment of interest thereon, or reduce the amount payable on any Original Issue
Discount Securities upon acceleration or provable in bankruptcy, or impair the
right to institute suit for the enforcement of any payment on any Senior Debt
Security when due; or (b) reduce the percentage in principal amount of the
Senior Debt Securities of the affected series, the consent of whose Holders is
required for any such modification or for any waiver provided for in the Senior
Debt Indenture.
Prior to the acceleration of the maturity of any Senior Debt Security, the
Holders of a majority in aggregate principal amount of the Senior Debt
Securities of all series at the time Outstanding with respect to which a default
or an Event of Default shall have occurred and be continuing (voting as one
class) may on behalf of the Holders of all such affected Senior Debt Securities
waive any past default or Event of Default and its consequences, except a
default or an Event of Default in respect of a covenant or provision of the
Senior Debt Indenture or of any Senior Debt Security which cannot be modified or
amended without the consent of the Holder of each Senior Debt Security affected.
Defeasance and Discharge. The Senior Debt Indenture provides that, at the
option of CMS Energy: (a) CMS Energy will be discharged from any and all
obligations in respect of the Senior Debt Securities of a particular series then
Outstanding (except for certain obligations to register the transfer of or
exchange the Senior Debt Securities of such series, to replace stolen, lost or
mutilated Senior Debt Securities of such series, to maintain paying agencies and
to maintain the trust described below), or (b) CMS Energy need not comply with
certain restrictive covenants of the Senior Debt Indenture (including those
described under "Consolidation, Merger or Sale of Assets"), in each case if CMS
Energy irrevocably deposits in trust with the Senior Debt Trustee money, and/or
securities backed by the full faith and credit of the United States which,
through the payment of the principal thereof and the interest thereon in
accordance with their terms, will provide money in an amount sufficient to pay
all the principal of and premium, if any, and interest on the Senior Debt
Securities of such series on the stated maturity of such Senior Debt Securities
(which may include one or more redemption dates designated by CMS Energy) in
accordance with the terms thereof. To exercise such option, CMS Energy is
required, among other things, to deliver to the Senior Debt Trustee an opinion
of independent counsel to the effect that the exercise of such option would not
cause the Holders of the Senior
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Debt Securities of such series to recognize income, gain or loss for United
States Federal income tax purposes as a result of such defeasance, and such
Holders will be subject to United States Federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred, and, in the case of a discharge as described in
clause (a) of the preceding sentence, such opinion is to be accompanied by a
private letter ruling to the same effect received from the Internal Revenue
Service, a revenue ruling to such effect pertaining to a comparable form of
transaction published by the Internal Revenue Service or appropriate evidence
that since the date of the Senior Debt Indenture there has been a change in the
applicable Federal income tax law.
In the event CMS Energy exercises its option to terminate its obligations
with respect to the Senior Debt Securities of any series as described in the
preceding paragraph and the Senior Debt Securities of such series are thereafter
declared due and payable because of the occurrence of any Event of Default other
than an Event of Default caused by failing to comply with the covenants which
are defeased, and the amount of money and securities on deposit with the Senior
Debt Trustee would be insufficient to pay amounts due on the Senior Debt
Securities of such series at the time of their accelerated maturity, CMS Energy
would remain liable for such amounts.
CMS Energy may also obtain a discharge of the Senior Debt Indenture with
respect to all Senior Debt Securities then Outstanding (except for certain
obligations to register the transfer of or exchange such Senior Debt Securities,
to replace stolen, lost or mutilated Senior Debt Securities, to maintain paying
agencies and to maintain the trust described below) by irrevocably depositing in
trust with the Senior Debt Trustee money, and/or securities backed by the full
faith and credit of the United States which, through the payment of the
principal thereof and the interest thereon in accordance with their terms, will
provide money in an amount sufficient to pay all the principal of and premium,
if any, and interest on the Senior Debt Securities on the stated maturities
thereof (including one or more redemption dates), provided that such Senior Debt
Securities are by their terms due and payable, or are to be called for
redemption, within one year.
It is possible that for federal income tax purposes any deposit
contemplated in the preceding paragraph could be treated as a taxable exchange
of the related Senior Debt Securities for an issue of obligations of the trust
or a direct interest in the cash and securities held in the trust. In that case,
Holders of such Senior Debt Securities would recognize gain or loss as if the
trust obligations or the cash or securities deposited, as the case may be, had
actually been received by them in exchange for their Senior Debt Securities.
Such gain or loss may be capital in nature to Holders for whom the Senior Debt
Securities are held as capital assets subject to the possible application of the
market discount rules and other limitations. After such a taxable exchange,
Holders would be required to include in income a share of the income, gain or
loss of the trust or the income from the securities held in trust, as the case
may be. The amount so required to be included in income could be different from
the amount that would be includible in the absence of such deposit. Prospective
investors are urged to consult their own tax advisors as to the specific
consequences to them of such deposit.
SUBORDINATED DEBT SECURITIES
General. The Subordinated Debt Securities will be issuable under the
Subordinated Debt Indenture. The Subordinated Debt Indenture does not limit the
aggregate principal amount of Subordinated Debt Securities which may be issued
thereunder. Subordinated Debt Securities may be issued under the Subordinated
Debt Indenture from time to time in one or more series. Capitalized terms used
in this section "Subordinated Debt Securities" and not otherwise specifically
defined in this Prospectus shall have the meanings respectively set forth in the
Subordinated Debt Indenture.
Exchange and Transfer. Subordinated Debt Securities may be presented for
exchange and registered Subordinated Debt Securities may be presented for
registration of transfer at the offices and subject to the restrictions set
forth therein and in the applicable Prospectus Supplement without service
charge, but upon payment of any taxes or other governmental charges due in
connection therewith, subject to any applicable limitations contained in the
Subordinated Debt Indenture. Subordinated Debt Securities in bearer form and the
coupons appertaining thereto, if any, will be transferable by delivery.
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Payment. Unless otherwise indicated in the applicable Prospectus
Supplement, payment of the principal of and the premium and interest, if any, on
all Subordinated Debt Securities (other than a Registered Global Security) in
registered form will be made at the office or agency of the Subordinated Debt
Trustee in the Borough of Manhattan, the City of New York, except that, at the
option of CMS Energy, payment of any interest may be made (i) by check mailed to
the address of the Person entitled thereto as such address shall appear in the
Security Register or (ii) by wire transfer to an account maintained by the
Person entitled thereto as specified in the Security Register. Unless otherwise
indicated in the applicable Prospectus Supplement, payment of any interest due
on Subordinated Debt Securities in registered form will be made to the Persons
in whose name such Subordinated Debt Securities are registered at the close of
business on the Record Date for such interest payments.
Events of Default. The occurrence of any of the following events with
respect to the Subordinated Debt Securities of any series will constitute an
"Event of Default" with respect to the Subordinated Debt Securities of such
series: (a) default for 30 days in the payment of any interest on any of the
Subordinated Debt Securities of such series; however, if CMS Energy is permitted
by the terms of the Subordinated Debt Securities of the applicable series to
defer the payment in question, the date on which such payment is due and payable
shall be the date on which CMS Energy is required to make payment following such
deferral, if such deferral has been elected pursuant to the terms of the
Subordinated Debt Securities; (b) default in the payment when due of any of the
principal of or the premium, if any, on any of the Subordinated Debt Securities
of such series, whether at maturity, upon redemption, acceleration or otherwise;
however, if CMS Energy is permitted by the terms of the Subordinated Debt
Securities of the applicable series to defer the payment in question, the date
on which such payment is due and payable shall be the date on which CMS Energy
is required to make payment following such deferral, if such deferral has been
elected pursuant to the terms of the Subordinated Debt Securities; (c) default
in the deposit or payment of any sinking fund or analogous payment in respect of
any Subordinated Debt Securities of such series; (d) default for 60 days by CMS
Energy in the observance or performance of any other covenant or agreement
contained in the Subordinated Debt Indenture relating to the Subordinated Debt
Securities of such series after written notice thereof as provided in the
Subordinated Debt Indenture; (e) certain events of bankruptcy, insolvency or
reorganization relating to CMS Energy; (f) entry of final judgments against CMS
Energy or Consumers aggregating in excess of $25,000,000 which remain
undischarged or unbonded for 60 days; or (g) a default resulting in the
acceleration of indebtedness in excess of $25,000,000, which acceleration has
not been rescinded or annulled within 10 days after notice of such default.
Additional Events of Default may be prescribed for the benefit of the Holders of
a particular series of Subordinated Debt Securities and will be described in the
Prospectus Supplement relating to such Subordinated Debt Securities.
If an Event of Default on any series of Subordinated Debt Securities shall
have occurred and be continuing, either the Subordinated Debt Trustee or the
Holders of not less than 25% in aggregate principal amount of the Subordinated
Debt Securities of such series then Outstanding may declare the principal of all
Subordinated Debt Securities of such series and the interest, if any, accrued
thereon to be due and payable immediately.
Upon certain conditions, any such declarations may be rescinded and
annulled if all Events of Default, other than the nonpayment of accelerated
principal, with respect to the Subordinated Debt Securities of all such affected
series then Outstanding shall have been cured or waived as provided in the
Subordinated Debt Indenture by the Holders of a majority in aggregate principal
amount of the Subordinated Debt Securities of the affected series then
Outstanding.
Reference is made to the Prospectus Supplement relating to any series of
Original Issue Discount Securities for the particular provisions relating to the
acceleration of a portion of the principal amount thereof upon the occurrence
and continuance of an Event of Default with respect thereto.
The Subordinated Debt Indenture provides that, subject to the duty of the
Subordinated Debt Trustee to act with the requisite standard of care in case a
default with respect to a series of Subordinated Debt Securities shall have
occurred and be continuing, the Subordinated Debt Trustee will be under no
obligation to exercise any of its rights or powers under the Subordinated Debt
Indenture at the request, order or direction of the
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Holders of the Subordinated Debt Securities, unless such Holders shall have
offered to the Subordinated Debt Trustee reasonable indemnity. Subject to such
provisions for indemnity and certain other limitations contained in the
Subordinated Debt Indenture, the Holders of a majority in aggregate principal
amount of the Subordinated Debt Securities of each affected series then
Outstanding (voting as one class) will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Subordinated Debt Trustee, or exercising any trust or power conferred on the
Subordinated Debt Trustee, with respect to the Subordinated Debt Securities of
such affected series.
The Subordinated Debt Indenture provides that no Holder of Subordinated
Debt Securities may institute any action against CMS Energy under the
Subordinated Debt Indenture (except actions for payment of overdue principal,
premium or interest) unless such Holder previously shall have given to the
Subordinated Debt Trustee written notice of default and continuance thereof and
unless the Holders of not less than 25% in aggregate principal amount of the
Subordinated Debt Securities of the affected series then Outstanding (voting as
one class) shall have requested the Subordinated Debt Trustee to institute such
action and shall have offered the Subordinated Debt Trustee reasonable
indemnity, the Subordinated Debt Trustee shall not have instituted such action
within 60 days of such request and the Subordinated Debt Trustee shall not have
received direction inconsistent with such request by the Holders of a majority
in aggregate principal amount of the Subordinated Debt Securities of the
affected series then Outstanding (voting as one class).
The Subordinated Debt Indenture requires CMS Energy to furnish to the
Subordinated Debt Trustee annually a statement as to CMS Energy's compliance
with all conditions and covenants under the Subordinated Debt Indenture. The
Subordinated Debt Indenture provides that the Subordinated Debt Trustee may
withhold notice to the Holders of the Subordinated Debt Securities of any series
of any default affecting such series (except defaults as to payment of
principal, premium or interest on the Subordinated Debt Securities of such
series) if it considers such withholding to be in the interests of the Holders
of the Subordinated Debt Securities of such series.
Subordination. The Subordinated Debt Indenture provides (and each Holder of
Subordinated Debt Securities by acceptance thereof agrees) that the Subordinated
Debt Securities will be subordinated in right of payment to the prior payment in
full of all Senior Indebtedness of CMS Energy. No payment on account of
principal of, premium, if any, or interest on the Subordinated Debt Securities
and no acquisition of, or payment on account of any sinking fund for, the
Subordinated Debt Securities may be made unless full payment of amounts then due
for principal, premium, if any, and interest then due on all Senior Indebtedness
by reason of the maturity thereof (by lapse of time, acceleration or otherwise)
has been made or duly provided for in cash or in a manner satisfactory to the
Holders of such Senior Indebtedness. In addition, the Subordinated Debt
Indenture provides that upon the happening and during the continuation of any
default in payment of the principal of, premium, if any, or interest on any
Senior Indebtedness when the same becomes due and payable or in the event any
judicial proceeding shall be pending with respect to any such default, then,
unless and until such default shall have been cured or waived or shall have
ceased to exist, no payment shall be made by CMS Energy with respect to the
principal of, premium, if any, or interest on Subordinated Debt Securities or to
acquire any Subordinated Debt Securities or on account of any sinking fund
provisions applicable to Subordinated Debt Securities. CMS Energy shall give
prompt written notice to the Subordinated Debt Trustee of any default under any
Senior Indebtedness or under any agreement pursuant to which Senior Indebtedness
may have been issued. The Subordinated Debt Indenture provisions described in
this paragraph, however, do not prevent CMS Energy from making a sinking fund
payment with Subordinated Debt Securities acquired prior to the maturity of
Senior Indebtedness or, in the case of default, prior to such default and notice
thereof. Upon any distribution of its assets in connection with any dissolution,
winding up, liquidation or reorganization of CMS Energy, whether voluntary or
involuntary, in bankruptcy, insolvency or receivership proceedings or upon an
assignment for the benefit of creditors or otherwise, all Senior Indebtedness
must be paid in full before the Holders of the Subordinated Debt Securities are
entitled to any payments whatsoever. Any payment or distribution, whether in
cash, securities or other property, which would otherwise (but for the
subordination provisions) be payable or deliverable in respect of the
Subordinated Debt Securities shall be paid or delivered directly to the Holders
of such Senior Indebtedness (or their representative or trustee) in accordance
with the priorities then existing among such Holders until all Senior
Indebtedness shall have been paid in full before any payment or distribution is
made to the Holders of Subordinated Debt Securities. In the
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event that notwithstanding such subordination provisions, any payment or
distribution of assets of any kind or character is made on the Subordinated Debt
Securities before all Senior Indebtedness is paid in full, the Subordinated Debt
Trustee or the Holders of Subordinated Debt Securities receiving such payment
will be required to pay over such payment or distribution to the Holders of such
Senior Indebtedness. The rights of the Holders of the Subordinated Debt
Securities will be subrogated to the rights of the Holders of Senior
Indebtedness to receive payments or distributions applicable to Senior
Indebtedness until all amounts owing on the Subordinated Debt Securities are
paid in full. As a result of these subordination provisions, in the event of CMS
Energy's insolvency, Holders of the Subordinated Debt Securities may recover
ratably less than senior creditors of CMS Energy.
"Senior Indebtedness" means the principal of and premium, if any, and
interest on the following, whether outstanding on the date of execution of the
Subordinated Debt Indenture or thereafter incurred, created or assumed: (i)
indebtedness of CMS Energy for money borrowed by CMS Energy (including purchase
money obligations) or evidenced by debentures (other than the Subordinated Debt
Securities), notes, bankers' acceptances or other corporate debt securities or
similar instruments issued by CMS Energy; (ii) obligations with respect to
letters of credit; (iii) all indebtedness of others of the type referred to in
the preceding clauses (i) and (ii) assumed by or guaranteed in any manner by CMS
Energy or in effect guaranteed by CMS Energy; or (iv) renewals, extensions or
refundings of any of the indebtedness referred to in the preceding clauses (i),
(ii) and (iii) unless, in the case of any particular indebtedness, renewal,
extension or refunding, under the express provisions of the instrument creating
or evidencing the same or the assumption or guarantee of the same, or pursuant
to which the same is outstanding, such indebtedness or such renewal, extension
or refunding thereof is not superior in right of payment to the Subordinated
Debt Securities.
The Subordinated Debt Indenture does not limit the aggregate amount of
Senior Indebtedness that may be issued. As of March 31, 1995, Senior
Indebtedness of CMS Energy aggregated approximately $816 million.
Consolidation, Merger or Sale of Assets. The Subordinated Debt Indenture
provides that CMS Energy may consolidate with or merge into, or sell, lease or
convey its property as an entirety or substantially as an entirety to, any other
corporation if such corporation assumes the obligations of CMS Energy under the
Subordinated Debt Securities and the Subordinated Debt Indenture and is
organized and existing under the laws of the United States of America, any state
thereof or the District of Columbia.
Modification of the Subordinated Debt Indenture. The Subordinated Debt
Indenture permits CMS Energy and the Subordinated Debt Trustee to enter into
supplemental indentures thereto without the consent of the Holders of the
Subordinated Debt Securities to: (a) secure the Subordinated Debt Securities of
one or more series, (b) evidence the assumption by a successor corporation of
the obligations of CMS Energy under the Subordinated Debt Indenture and the
Subordinated Debt Securities then Outstanding, (c) add covenants for the
protection of the Holders of the Subordinated Debt Securities, (d) cure any
ambiguity or correct any inconsistency in the Subordinated Debt Indenture, (e)
establish the form and terms of any series of securities under the Subordinated
Debt Indenture and (f) evidence the acceptance of appointment by a successor
Subordinated Debt Trustee.
The Subordinated Debt Indenture also permits CMS Energy and the
Subordinated Debt Trustee, with the consent of the Holders of not less than a
majority in aggregate principal amount of the Subordinated Debt Securities of
all series then Outstanding and affected (voting as one class), to add any
provisions to, or change in any manner or eliminate any of the provisions of,
the Subordinated Debt Indenture or modify in any manner the rights of the
Holders of the Subordinated Debt Securities of each such affected series;
provided, however, that CMS Energy and the Subordinated Debt Trustee may not,
without the consent of the Holder of each Subordinated Debt Security then
outstanding and affected thereby: (a) change the time of payment of the
principal (or any installment) of any Subordinated Debt Security, or reduce the
principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon, or reduce the amount payable on any Original Issue Discount
Securities upon acceleration or provable in bankruptcy, or impair the right to
institute suit for the enforcement of any payment on any Subordinated Debt
Security when due; or (b) reduce the percentage in principal amount of the
Subordinated Debt Securities of the affected series, the consent of
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whose Holders is required for any such modification or for any waiver provided
for in the Subordinated Debt Indenture.
Prior to the acceleration of the maturity of any Subordinated Debt
Security, the Holders of a majority in aggregate principal amount of the
Subordinated Debt Securities of all series at the time Outstanding with respect
to which a default or an Event of Default shall have occurred and be continuing
(voting as one class) may on behalf of the Holders of all such affected
Subordinated Debt Securities waive any past default or Event of Default and its
consequences, except a default or an Event of Default in respect of a covenant
or provision of the Subordinated Debt Indenture or of any Subordinated Debt
Security which cannot be modified or amended without the consent of the Holder
of each Subordinated Debt Security affected.
Defeasance and Discharge. The Subordinated Debt Indenture provides that, at
the option of CMS Energy: (a) CMS Energy will be discharged from any and all
obligations in respect of the Subordinated Debt Securities of a particular
series then Outstanding (except for certain obligations to register the transfer
of or exchange the Subordinated Debt Securities of such series, to replace
stolen, lost or mutilated Subordinated Debt Securities of such series, to
maintain paying agencies and to maintain the trust described below), or (b) CMS
Energy need not comply with certain restrictive covenants of the Subordinated
Debt Indenture (including those described under "Consolidation, Merger or Sale
of Assets"), in each case if CMS Energy irrevocably deposits in trust with the
Subordinated Debt Trustee money, and/or securities backed by the full faith and
credit of the United States which, through the payment of the principal thereof
and the interest thereon in accordance with their terms, will provide money in
an amount sufficient to pay all the principal of and premium, if any, and
interest on the Subordinated Debt Securities of such series on the stated
maturity of such Subordinated Debt Securities (which may include one or more
redemption dates designated by CMS Energy) in accordance with the terms thereof.
To exercise such option, CMS Energy is required, among other things, to deliver
to the Subordinated Debt Trustee an opinion of independent counsel to the effect
that the exercise of such option would not cause the Holders of the Subordinated
Debt Securities of such series to recognize income, gain or loss for United
States Federal income tax purposes as a result of such defeasance, and such
Holders will be subject to United States Federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred, and, in the case of a discharge as described in
clause (a) of the preceding sentence, such opinion is to be accompanied by a
private letter ruling to the same effect received from the Internal Revenue
Service, a revenue ruling to such effect pertaining to a comparable form of
transaction published by the Internal Revenue Service or appropriate evidence
that since the date of the Subordinated Debt Indenture there has been a change
in the applicable Federal income tax law.
In the event CMS Energy exercises its option to terminate its obligations
with respect to the Subordinated Debt Securities of any series as described in
the preceding paragraph and the Subordinated Debt Securities of such series are
thereafter declared due and payable because of the occurrence of any Event of
Default other than an Event of Default caused by failing to comply with the
covenants which are defeased, and the amount of money and securities on deposit
with the Subordinated Debt Trustee would be insufficient to pay amounts due on
the Subordinated Debt Securities of such series at the time of their accelerated
maturity, CMS Energy would remain liable for such amounts.
CMS Energy may also obtain a discharge of the Subordinated Debt Indenture
with respect to all Subordinated Debt Securities then Outstanding (except for
certain obligations to register the transfer of or exchange such Subordinated
Debt Securities to replace stolen, lost or mutilated Subordinated Debt
Securities, to maintain paying agencies and to maintain the trust described
below) by irrevocably depositing in trust with the Subordinated Debt Trustee
money, and/or securities backed by the full faith and credit of the United
States which, through the payment of the principal thereof and the interest
thereon in accordance with their terms, will provide money in an amount
sufficient to pay all the principal of and premium, if any and interest on the
Subordinated Debt Securities on the stated maturities thereof (including one or
more redemption dates), provided that such Subordinated Debt Securities are by
their terms due and payable, or are to be called for redemption, within one
year.
14
<PAGE> 17
It is possible that for federal income tax purposes any deposit
contemplated in the preceding paragraph could be treated as a taxable exchange
of the related Subordinated Debt Securities for an issue of obligations of the
trust or a direct interest in the cash and securities held in the trust. In that
case, Holders of such Subordinated Debt Securities would recognize gain or loss
as if the trust obligations or the cash or securities deposited, as the case may
be, had actually been received by them in exchange for their Subordinated Debt
Securities. Such gain or loss may be capital in nature to Holders for whom the
Subordinated Debt Securities are held as capital assets subject to the possible
application of the market discount rules and other limitations. After such a
taxable exchange, Holders would be required to include in income a share of the
income, gain or loss of the trust or the income from the securities held in
trust, as the case may be. The amount so required to be included in income could
be different from the amount that would be includible in the absence of such
deposit. Prospective investors are urged to consult their own tax advisors as to
the specific consequences to them of such deposit.
CAPITAL STOCK
The following outline of certain rights of the holders of CMS Energy
capital stock does not purport to be complete and is qualified in its entirety
by express reference to Article III of the Restated Articles of Incorporation of
CMS Energy (the "Restated Articles of Incorporation" or "Articles of
Incorporation," unless the context requires otherwise), the Senior Debt
Indenture, the Credit Facility and CMS Energy's Indenture dated as of January
15, 1994 (the "GTN Indenture") to The Chase Manhattan Bank, N.A., as Trustee,
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus is a part.
GENERAL
The Restated Articles of Incorporation currently authorize 320 million
shares of capital stock, of which 250 million are shares of CMS Energy Common
Stock, par value $.01 per share, 60 million are shares of CMS Energy Class G
Common Stock, no par value ("Class G Common Stock"), and 10 million are shares
of CMS Energy Preferred Stock, par value $.01 per share. At June 14, 1995, there
were outstanding 88,103,885 shares of CMS Energy Common Stock; no shares of
Class G Common Stock and CMS Energy Preferred Stock are issued or outstanding.
The outstanding shares of the CMS Energy Common Stock are fully paid and
nonassessable and the CMS Energy Common Stock offered hereby, when issued and
paid for, will be fully paid and nonassessable.
On March 21, 1995, CMS Energy's shareholders approved an amendment (the
"Charter Amendment") to its previous Articles of Incorporation which (1)
authorized 60 million shares of a new class of Common Stock of CMS Energy
designated Class G Common Stock and (2) increased the authorized number of
shares of CMS Energy Preferred Stock to 10 million. The CMS Energy Common Stock
and the Class G Common Stock are together referred to herein as the "Common
Stock." Class G Common Stock is intended to reflect the separate performance of
the gas distribution, storage and transportation businesses conducted by
Consumers and Michigan Gas Storage, a subsidiary of Consumers (such businesses,
collectively, will be attributed to the "Consumers Gas Group"). Effective
January 1, 1995, the management and operations of the Consumers Gas Group were
reorganized as a business unit separate from the electric utility operations of
the Consumers. The reorganization is intended to sharpen management focus,
improve efficiency and accountability in both business segments and better
position Consumers for growth in the gas market and to meet increased
competition in the electric power market. The Charter Amendment became effective
when CMS Energy filed the Restated Articles of Incorporation with the Michigan
Department of Commerce. The existing CMS Energy Common Stock will continue to be
outstanding and, if and after any shares of Class G Common Stock were issued by
CMS Energy, will reflect the performance of all of the businesses of CMS Energy
and its subsidiaries, including the business of the Consumers Gas Group, except
for the interest in the Consumers Gas Group attributable to the outstanding
shares of Class G Common Stock. After the Registration Statement of which this
Prospectus is a part has become effective, CMS Energy may, subject to prevailing
market and other conditions, offer shares of Class G Common Stock for sale for
cash in an initial public offering. The net proceeds of such offering would be
invested in the businesses of CMS Energy and used for its general corporate
purposes. Initially, such proceeds will be used to repay a portion of the debt
of CMS Energy
15
<PAGE> 18
(none of which is attributable to the Consumers Gas Group). The timing and size
of such public offering and the price at which such shares would be sold would
be determined by the Board of Directors of CMS Energy (the "Board of
Directors").
CMS ENERGY COMMON STOCK
The following outline of certain rights of the holders of CMS Energy Common
Stock describes such rights before the filing of the Restated Articles of
Incorporation and the issuance and sale of Class G Common Stock. A summary
description and comparison of certain rights and limitations of CMS Energy
Common Stock after such filing and issuance and sale is set forth below under
"Comparison of Rights and Limitations of CMS Energy Common Stock and Class G
Common Stock."
The shares of CMS Energy Common Stock may be issued from time to time as
the Board of Directors shall determine for such consideration as shall be fixed
by the Board of Directors. Except as otherwise set forth in this Prospectus or
the accompanying Prospectus Supplement, each share of CMS Energy Common Stock
shall be equal to every other share of said stock in every respect.
Dividend Rights. The holders of the CMS Energy Common Stock are entitled to
receive dividends when and as declared by the Board of Directors out of funds
legally available therefor, subject to the terms of any CMS Energy Preferred
Stock which may in the future be issued and at the time be outstanding.
Voting Rights. Each holder of CMS Energy Common Stock is entitled to one
vote for each share of CMS Energy Common Stock held by such holder on each
matter voted upon by the shareholders. Such right to vote is not cumulative. A
majority of the votes cast by the holders of shares entitled to vote thereon is
sufficient for the adoption of any question presented, except that certain
provisions of the Articles of Incorporation relating to special shareholder
meetings, the removal, indemnification and liability of the Board of Directors
and the requirements for amending these provisions may not be amended, altered,
changed or repealed unless such amendment, alteration, change or repeal is
approved by the affirmative vote of at least 75% of the outstanding shares
entitled to vote thereon.
Preemptive Rights. Holders of CMS Energy Common Stock have no preemptive
rights to subscribe for or purchase any additional shares of the capital stock
of CMS Energy of any class now or hereafter authorized, or any CMS Energy
Preferred Stock or other securities or other right or option convertible into or
exchangeable for or entitling the holder or owner to subscribe for or purchase
any shares of capital stock.
Liquidation Rights. The Board of Directors shall determine the rights, if
any, of the holders of CMS Energy Common Stock upon the voluntary or involuntary
liquidation, merger, consolidation, distribution or sale of assets, dissolution
or winding up of CMS Energy.
Because CMS Energy has subsidiaries which have debt obligations and other
liabilities of their own, CMS Energy's rights and the rights of its creditors
and its stockholders to participate in the assets of any subsidiary upon the
latter's liquidation or recapitalization will be subject to prior claims of the
subsidiary's creditors, except to the extent that CMS Energy may itself be a
creditor with recognized claims against the subsidiary.
Transfer Agent and Registrar. CMS Energy Common Stock is transferable at
Consumers Power Company, 212 W. Michigan Avenue, Jackson, MI 49201. Consumers is
the registrar and transfer agent for CMS Energy Common Stock.
COMPARISON OF RIGHTS AND LIMITATIONS OF CMS ENERGY COMMON STOCK AND CLASS G
COMMON STOCK
The following is a summary description and a comparison of the rights and
limitations appertaining to the CMS Energy Common Stock and the Class G Common
Stock before the issuance and sale in an initial public offering of the Class G
Common Stock and after such issuance. The Class G Common Stock is intended to
reflect the separate performance of the Consumers Gas Group and, after the
initial public offering of the Class G Common Stock, the CMS Energy Common Stock
is intended to reflect the performance of all businesses of CMS Energy and its
subsidiaries, including the businesses of the Consumers Gas Group, except
16
<PAGE> 19
for the interest in the Consumers Gas Group attributable to the outstanding
shares of Class G Common Stock.
<TABLE>
<CAPTION>
BEFORE ISSUANCE OF
CLASS G COMMON STOCK AFTER ISSUANCE OF CLASS G COMMON STOCK
---------------------------- -----------------------------------------------------------
CMS ENERGY COMMON STOCK CMS ENERGY COMMON STOCK CLASS G COMMON STOCK
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Voting Rights: One vote per share. The holders of CMS Energy The holders of Class G
Common Stock will vote with Common Stock will vote with
the holders of Class G the holders of CMS Energy
Common Stock as a single Common Stock as a single
class, except on matters class, except on matters
which would be required by which would be required by
law or the Articles of law or the Articles of
Incorporation to be voted on Incorporation to be voted on
by class. The CMS Energy by class. The Class G Common
Common Stock will have one Stock will have one vote per
vote per share. share.
Dividends: On each of February 22, 1995 On each of February 22, 1995 Dividends on the Class G
and May 22, 1995, CMS Energy and May 22, 1995, CMS Energy Common Stock will be paid at
paid a dividend of $.21 per paid a dividend of $.21 per the discretion of the Board
share on the CMS Energy share on the CMS Energy of Directors based primarily
Common Stock (an annualized Common Stock (an annualized upon the earnings and
rate of $.84 per share). On rate of $.84 per share). On financial condition of the
May 26, 1995, CMS Energy May 26, 1995, CMS Energy Consumers Gas Group, and, to
raised its dividend to an raised its dividend to an a lesser extent, CMS Energy
annualized rate of $.96 per annualized rate of $.96 per as a whole. Dividends will
share ($.24 per quarter). share ($.24 per quarter). be payable out of the lesser
The increase will be The increase will be of (i) the assets of CMS
effective with the next effective with the next Energy legally available
scheduled quarterly dividend scheduled quarterly dividend therefor and (ii) the
payment in August 1995. payment in August 1995. Available Class G Dividend
Dividends paid on CMS Dividends paid on CMS Amount (as defined in the
Energy's Common Stock in Energy's Common Stock in Charter Amendment).
1994 were $.78 per share. 1994 were $.78 per share.
Dividends are payable out of The issuance of the Class G Dividends with respect to
the assets of CMS Energy Common Stock is not expected the Class G Common Stock are
legally available therefor. to change the rate at which expected to be paid
dividends will be paid on commensurate with dividend
See also "-- Capital Stock the CMS Energy Common Stock. practices of comparable
-- Restrictions on Payment Future dividends on the CMS publicly-held local natural
of Dividends by CMS Energy" Energy Common Stock will be gas distribution companies
and "-- Primary Source of paid at the discretion of generally. Management
Funds of CMS Energy; the Board of Directors based believes that such practices
Restrictions on Sources of primarily upon the earnings currently are to pay out
Dividends." and financial condition of from 70% to 85% of annual
CMS Energy, including the earnings available for
Consumers Gas Group, except dividends on common stock.
for the interest in the Consistent with this policy,
Consumers Gas Group CMS Energy currently intends
attributable to the to pay an initial quarterly
outstanding shares of the dividend on the Class G
Class G Common Stock, and Common Stock of $.28 per
other factors. Dividends share, or an aggregate of
will be payable out of the $1.9 million, assuming an
assets of CMS Energy legally initial offering of 8
available therefor. million shares.
CMS Energy, in the sole CMS Energy, in the sole
discretion of its Board of discretion of its Board of
Directors could pay Directors, could pay
dividends exclusively to the dividends exclusively to the
holders of CMS Energy Common holders of CMS Energy Common
Stock, exclusively to the Stock, exclusively to the
holders of Class G Common holders of Class G Common
Stock, or to the holders of Stock, or to the holders of
both of such classes in both of such classes in
equal or unequal amounts. It equal or unequal amounts. It
is the Board of Directors' is the Board of Directors'
current intention that the current intention that the
declaration or payment of declaration or payment of
dividends with respect to dividends with respect to
the Class G Common Stock the Class G Common Stock
shall not be reduced, shall not be reduced,
suspended or suspended or eliminated as a
result of factors
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
BEFORE ISSUANCE OF
CLASS G COMMON STOCK AFTER ISSUANCE OF CLASS G COMMON STOCK
---------------------------- -----------------------------------------------------------
CMS ENERGY COMMON STOCK CMS ENERGY COMMON STOCK CLASS G COMMON STOCK
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
eliminated as a result of arising out of or relating
factors arising out of or to the electric utility
relating to the electric business or the non-utility
utility business or the businesses of CMS Energy
non-utility businesses of unless such factors also
CMS Energy unless such require, in the Board of
factors also require, in the Directors' sole discretion,
Board of Directors' sole the omission of the
discretion, the omission of declaration or reduction in
the declaration or reduction payment of dividends on both
in payment of dividends on the CMS Energy Common Stock
both the CMS Energy Common and the Class G Common
Stock and the Class G Common Stock. While the Board of
Stock. While the Board of Directors does not currently
Directors does not currently intend to change this
intend to change this dividend policy, it reserves
dividend policy, it reserves the right to do so at any
the right to do so at any time and from time to time.
time and from time to time. Under the Articles of
Under the Articles of Incorporation and Michigan
Incorporation and Michigan law, the Board of Directors
law, the Board of Directors is not required to declare,
is not required to declare, and CMS Energy is not
and CMS Energy is not required to pay, dividends
required to pay, dividends in accordance with the
in accordance with the foregoing dividend policy.
foregoing dividend policy.
Dividends on the Class G
See also "-- Capital Stock Common Stock are limited by
-- Restrictions on Payment Michigan law, certain
of Dividends by CMS Energy" agreements to which CMS
and "-- Primary Source of Energy is a party and the
Funds of CMS Energy; Articles of Incorporation
Restriction on Sources of and will be payable when, as
Dividends." and if declared by the Board
of Directors out of the
lesser of (i) the assets of
CMS Energy legally available
therefor and (ii) the
Available Class G Dividend
Amount. As of March 31,
1995, assuming an offering
of 8 million shares of Class
G Common Stock had been
completed at that time, the
Available Class G Dividend
Amount would have been
approximately $91.5 million.
See also "-- Capital Stock
-- Restrictions on Payment
of Dividends by CMS Energy"
and "-- Primary Source of
Funds of CMS Energy;
Restrictions on Sources of
Dividends."
Exchanges: None. None. CMS Energy may exchange the
Class G Common Stock for a
proportionate number of
shares of a subsidiary that
holds all the assets and
liabilities attributed to
the Consumers Gas Group, and
no other assets and
liabilities.
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
BEFORE ISSUANCE OF
CLASS G COMMON STOCK AFTER ISSUANCE OF CLASS G COMMON STOCK
---------------------------- -----------------------------------------------------------
CMS ENERGY COMMON STOCK CMS ENERGY COMMON STOCK CLASS G COMMON STOCK
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
If CMS Energy transfers all
or substantially all of the
properties and assets
attributed to the Consumers
Gas Group, CMS Energy is
required, subject to certain
exceptions and conditions,
to exchange each outstanding
share of Class G Common
Stock for a number of shares
of CMS Energy Common Stock
having a Fair Market Value
(defined in the Charter
Amendment) equal to 110% of
the Fair Market Value of one
share of Class G Common
Stock.
CMS Energy may, in the sole
discretion of the Board of
Directors, at any time,
exchange each outstanding
share of Class G Common
Stock for a number of shares
of CMS Energy Common Stock
having a Fair Market Value
equal to 115% of the Fair
Market Value of one share of
Class G Common Stock.
Liquidation: In the event of the In the event of the In the event of the
liquidation of CMS Energy, liquidation of CMS Energy, liquidation of CMS Energy,
the holders of CMS Energy each outstanding share of each outstanding share of
Common Stock will receive CMS Energy Common Stock will Class G Common Stock will be
the assets, if any, be entitled to a portion of entitled to a portion of the
remaining for distribution the assets remaining for assets remaining for
to common stockholders. distribution to holders of distribution to holders of
Common Stock equal to the Common Stock equal to the
amount of such assets amount of such assets
divided by the total number divided by the total number
of shares of CMS Energy of shares of CMS Energy
Common Stock and Class G Common Stock and Class G
Common Stock then Common Stock then
outstanding. outstanding.
</TABLE>
Under Michigan law, the approval of the holders of a majority of the
outstanding shares of a class of Common Stock, voting as a separate class, would
be necessary for authorizing, effecting or validating the merger or
consolidation of CMS Energy into or with any other corporation if such merger or
consolidation would adversely affect the powers or special rights of such class
of stock, and to authorize any amendment to the Articles of Incorporation that
would increase or decrease the aggregate number of authorized shares of such
class or alter or change the powers, preferences or special rights of the shares
of such class so as to affect them adversely. The Articles of Incorporation also
provide that unless the vote or consent of a greater number of shares shall then
be required by law, the approval of the holders of a majority of the outstanding
shares of either class of Common Stock, voting as a separate class, will be
necessary for authorizing, effecting or validating the merger or consolidation
of CMS Energy into or with any other corporation if such merger or consolidation
would adversely affect the powers or special rights of such class of Common
Stock, either directly by amendment to the Articles of Incorporation or
indirectly by requiring the holders of such class to accept or retain, in such
merger or consolidation, anything other than (i) shares of such class or (ii)
shares of the surviving or resulting corporation, having, in either case, powers
and special rights identical to those of such class prior to such merger or
consolidation. In the event that there is more than one class of Common Stock,
the effect of these provisions may be to permit the holders of a majority of the
outstanding shares of
19
<PAGE> 22
either class of Common Stock to block any such merger or amendment which would
adversely affect the powers or special rights of holders of such class of Common
Stock.
CMS ENERGY PREFERRED STOCK
The shares of CMS Energy Preferred Stock may be issued from time to time in
one or more series with such relative rights and preferences of the shares of
any such series as may be determined by the Board of Directors. The Board of
Directors is authorized to fix by resolution or resolutions adopted prior to the
issuance of any shares of each particular series of CMS Energy Preferred Stock,
the designation, powers, preferences and relative, participating, optional and
other rights, and the qualifications, limitations and restrictions thereof, if
any, of such series, including, but without limiting the generality of the
foregoing, the following:
(a) The rate of dividend, if any;
(b) The price at and the terms and conditions upon which shares may be
redeemed;
(c) The rights, if any, of the holders of shares of the series upon
voluntary or involuntary liquidation, merger, consolidation, distribution
or sale of assets, dissolution or winding up of CMS Energy;
(d) Sinking fund or redemption or purchase provisions, if any, to be
provided for shares of the series;
(e) The terms and conditions upon which shares may be converted into
shares of other series or other capital stock, if issued with the privilege
of conversion; and
(f) The voting rights in the event of default in the payment of
dividends or under such other circumstances and upon such conditions as the
Board of Directors may determine.
The specific terms of CMS Energy Preferred Stock will be described in the
Prospectus Supplement relating thereto.
Unless otherwise provided in a Prospectus Supplement, no holder of any
shares of any series of CMS Energy Preferred Stock shall be entitled to vote in
the election of directors or in respect of any other matter except as may be
required by the Michigan Business Corporation Act, as amended.
Unless otherwise provided in a Prospectus Supplement, holders of CMS Energy
Preferred Stock will not have any preemptive rights to subscribe for or purchase
any additional shares of the capital stock of CMS Energy of any class now or
hereafter authorized, or any CMS Energy Preferred Stock or other securities or
other right or option convertible into or exchangeable for or entitling the
holder or owner to subscribe for or purchase any shares of capital stock. The
future issuance of CMS Energy Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of CMS Energy.
RESTRICTIONS ON PAYMENT OF DIVIDENDS BY CMS ENERGY
CMS Energy is a legal entity separate and distinct from its various
subsidiaries. As a holding company with no significant operations of its own,
the principal sources of its funds are dividends or other distributions from its
operating subsidiaries, in particular, Consumers, borrowings and sales of
equity. The ability of Consumers and other subsidiaries of CMS Energy to pay
dividends or make distributions to CMS Energy, and, accordingly, the ability of
CMS Energy to pay dividends on its capital stock will depend on the earnings,
financial requirements, contractual restrictions of the subsidiaries of CMS
Energy, in particular, Consumers, and other factors. See "Primary Source of
Funds of CMS Energy; Restrictions on Sources of Dividends" below.
Dividends on capital stock of CMS Energy are limited by Michigan law to
legally available assets of CMS Energy. Distributions on Common Stock may be
subject to the rights of the holders, if any, of the CMS Energy Preferred Stock.
There are restrictions on CMS Energy's ability to pay dividends contained
in its Credit Facility, the Senior Debt Indenture and the GTN Indenture.
The Credit Facility provides that CMS Energy will not, and will not permit
certain of its subsidiaries, directly or indirectly, to (i) declare or pay any
cash dividend or distribution on the capital stock of CMS Energy or such
subsidiaries, or (ii) purchase, redeem, retire or otherwise acquire for value
any such capital stock (a "Restricted Payment"), unless: (1) no event of default
under the Credit Facility, or event that with
20
<PAGE> 23
the lapse of time or giving of notice would constitute such an event of default,
has occurred and is continuing, and (2) after giving effect to any such
Restricted Payment, the aggregate amount of all such Restricted Payments since
September 30, 1993 shall not have exceeded the sum of: (a) $120,000,000, (b)
100% of CMS Energy's consolidated net income (as defined in the Senior Debt
Indenture) since September 30, 1993 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) any net
proceeds (as defined in the Senior Debt Indenture) received by CMS Energy for
the issuance or sale of its capital stock subsequent to September 30, 1993. At
March 31, 1995, CMS Energy could pay cash dividends of $492 million pursuant to
this restriction.
The First and Second Supplemental Indentures to the Senior Debt Indenture,
pursuant to which CMS Energy's Series A Senior Deferred Coupon Notes due October
1, 1997 and Series B Senior Deferred Coupon Notes due October 1, 1999 were
issued, provide that so long as any of such Notes are outstanding, CMS Energy
will not, and will not permit certain of its subsidiaries, directly or
indirectly, to make a Restricted Payment, unless: (1) no event of default under
the Senior Debt Indenture, or event that with the lapse of time or giving of
notice would constitute such an event of default, has occurred and is
continuing, and (2) after giving effect to any such Restricted Payment, the
aggregate amount of all such Restricted Payments since September 30, 1992 shall
not have exceeded the sum of: (a) $40,000,000, (b) 100% of CMS Energy's
consolidated net income (as defined in the Senior Debt Indenture) since
September 30, 1992 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) any net proceeds (as defined
in the Senior Debt Indenture) received by CMS Energy for the issuance or sale of
its capital stock subsequent to September 15, 1992. At March 31, 1995, CMS
Energy could pay cash dividends of $499 million pursuant to this restriction.
The GTN Indenture provides that, so long as any of the General Term Notes,
Series A ("GTNs") issued thereunder are outstanding and are rated below BBB- by
Standard & Poor's or by Duff & Phelps, CMS Energy will not, and will not permit
certain of its subsidiaries, directly or indirectly, to make any Restricted
Payments, if at any time CMS Energy or such subsidiary makes such Restricted
Payment: (1) an Event of Default (as defined in the GTN Indenture), or an event
that with the lapse of time or the giving of notice or both would constitute
such an Event of Default, has occurred and is continuing (or would result
therefrom), or (2) the aggregate amount of such Restricted Payment and all other
Restricted Payments made since September 30, 1993, would exceed the sum of: (a)
$120,000,000 plus 100% of consolidated net income from September 30, 1993 to the
end of the most recent fiscal quarter ending at least 45 days prior to the date
of such Restricted Payment (or, in case such sum shall be a deficit, minus 100%
of the deficit) and (b) the aggregate net proceeds received by CMS Energy from
the issue or sale of or contribution with respect to its capital stock after
September 30, 1993. At March 31, 1995, CMS Energy could pay cash dividends of
$492 million pursuant to this restriction.
The foregoing provisions do not prohibit: (i) dividends or other
distributions paid by CMS Energy in respect of the capital stock issued in
connection with the acquisition of any business or assets by CMS Energy where
such payments are payable solely from the net earnings of such business or
assets; (ii) any purchase or redemption of capital stock made by exchange for,
or out of the proceeds of the substantially concurrent sale of, capital stock;
(iii) dividends paid within 60 days after the date of declaration thereof if at
such date of declaration such dividends would have complied with the
aforementioned limitations; or (iv) payments pursuant to the tax sharing
agreement among CMS Energy and its subsidiaries.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, CMS Energy would not be able to pay its debts as they become due in
the usual course of business, or its total assets would be less than the sum of
its total liabilities plus, unless the articles permit otherwise, the amount
that would be needed, if CMS Energy were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. CMS Energy's net assets available for payment of dividends under
the Michigan Business Corporation Act at March 31, 1995 were $1,207 million.
21
<PAGE> 24
DIVIDENDS AND PRICE RANGE OF CMS ENERGY COMMON STOCK
CMS Energy has paid dividends on its outstanding CMS Energy Common Stock
each year since its inception except 1987 and 1988. At June 14, 1995, there were
approximately 61,815 CMS Energy Common Stock shareholders of record. Future
dividends will depend upon CMS Energy's earnings, financial condition and other
factors. Reference is made to "Capital Stock -- Restrictions on Payment of
Dividends by CMS Energy" and "Primary Source of Funds of CMS Energy;
Restrictions on Sources of Dividends" regarding limitations upon payment of
dividends on the capital stock of CMS Energy.
The following table indicates the high and low sales prices of the CMS
Energy Common Stock for the calendar quarters indicated as reported in The Wall
Street Journal under "New York Stock Exchange Composite Transactions," and the
quarterly cash dividends declared per share of CMS Energy Common Stock, for the
calendar quarters indicated.
<TABLE>
<CAPTION>
PRICE RANGE
--------------
YEAR HIGH LOW DIVIDEND
- ---- ----- ----- --------
<S> <C> <C> <C> <C>
1991: First Quarter.................................................. $ 33 $26 1/2 $.12
Second Quarter................................................. 30 3/4 23 3/4 .12
Third Quarter.................................................. 25 7/8 18 .12
Fourth Quarter................................................. 19 3/4 16 5/8 .12
1992: First Quarter.................................................. 22 3/4 17 7/8 .12
Second Quarter................................................. 21 7/8 14 7/8 .12
Third Quarter.................................................. 17 1/2 15 1/4 .12
Fourth Quarter................................................. 18 3/8 16 3/4 .12
1993: First Quarter.................................................. 20 7/8 17 7/8 .12
Second Quarter................................................. 25 1/2 19 1/2 .12
Third Quarter.................................................. 27 1/2 24 7/8 .18
Fourth Quarter................................................. 27 1/8 23 .18
1994: First Quarter.................................................. 25 21 1/8 .18
Second Quarter................................................. 22 7/8 19 5/8 .18
Third Quarter.................................................. 23 3/8 20 5/8 .21
Fourth Quarter................................................. 23 1/4 20 7/8 .21
1995: First Quarter.................................................. 24 3/4 22 5/8 .21
Second Quarter (through June 14, 1995)......................... 25 3/8 22 1/2 .21
</TABLE>
The last reported sale price of the CMS Energy Common Stock on June 14,
1995 on the NYSE was $24 1/2.
PRIMARY SOURCE OF FUNDS OF CMS ENERGY; RESTRICTIONS ON SOURCES OF DIVIDENDS
The ability of CMS Energy to pay (i) dividends on its capital stock and
(ii) its indebtedness, including the Debt Securities, depends and will depend
substantially upon timely receipt of sufficient dividends or other distributions
from its subsidiaries, in particular Consumers. Consumers' ability to pay
dividends on its common stock depends upon its revenues, earnings and other
factors. Consumers' revenues and earnings will depend substantially upon rates
authorized by the MPSC.
Consumers' ability to pay dividends is restricted by its First Mortgage
Bond Indenture (the "Mortgage Indenture") and its Articles of Incorporation (the
"Articles"). The Mortgage Indenture provides that Consumers can only pay
dividends on its common stock out of retained earnings accumulated subsequent to
September 30, 1945, provided that upon such payment, there shall remain of such
retained earnings an amount equivalent to any deficiency in maintenance and
replacement expenditures as compared with maintenance and replacement
requirements since December 31, 1945. Because of restrictions in its Articles
and Mortgage Indenture, Consumers was prohibited from paying dividends on its
common stock from June 1991 to December 31, 1992. However, as of December 31,
1992, Consumers effected a quasi-reorganization in which Consumers' accumulated
deficit of $574 million was eliminated against other paid-in capital. With the
22
<PAGE> 25
accumulated deficit eliminated, Consumers satisfied the requirements under its
Mortgage Indenture and resumed paying dividends on its common stock in May 1993.
Consumers' Articles also provide two restrictions on its payment of
dividends on its common stock. First, prior to the payment of any common stock
dividend, Consumers must reserve retained earnings after giving effect to such
dividend payment of at least (i) $7.50 per share on all then outstanding shares
of its preferred stock, (ii) in respect to its Class A Preferred Stock, 7.5% of
the aggregate amount established by its Board of Directors to be payable on the
shares of each series thereof in the event of involuntary liquidation of
Consumers, and (iii) $7.50 per share on all then outstanding shares of all other
stock over which its preferred stock and Class A Preferred Stock do not have
preference as to the payment of dividends and as to assets. Second, dividend
payments during the 12 month period ending with the month the proposed payment
is to be paid are limited to: (i) 50% of net income available for the payment of
dividends during the base period (hereinafter defined) if the ratio of common
stock and surplus to total capitalization and surplus for 12 consecutive
calendar months within the 14 calendar months immediately preceding the proposed
dividend payment (the "base period"), adjusted to reflect the proposed dividend,
is less than 20%; and (ii) 75% of net income available for the payment of
dividends during the base period if the ratio of common stock and surplus to
total capitalization and surplus for the base period, adjusted to reflect the
proposed dividend, is at least 20% but less than 25%.
Consumers' Articles also prohibit the payment of cash dividends on its
common stock if Consumers is in arrears on preferred stock dividend payments.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, Consumers would not be able to pay its debts as they become due in
the usual course of business, or its total assets would be less than the sum of
its total liabilities plus, unless the articles permit otherwise, the amount
that would be needed, if Consumers were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. Consumers' net assets available for payment of dividends under the
Michigan Business Corporation Act at March 31, 1995 were $1,513 million.
Currently it is Consumers' policy to pay annual dividends equal to 80% of its
annual consolidated net income. Under the most restrictive of these conditions,
and Consumers current dividend policy, at March 31, 1995, $69.9 million of
Consumers' retained earnings were available to pay cash dividends on its common
stock. Consumers' Board of Directors reserves the right to change this policy at
any time.
Consumers paid dividends on its common stock of $16.0 million on February
22, 1994, of $65.6 million on May 20, 1994, $31.0 million on August 19, 1994,
$36.0 million on November 4, 1994, $27.4 million on December 20, 1994 and $69.9
million on May 19, 1995.
CMS ENERGY MICHIGAN PREFERRED SECURITIES
GENERAL
CMS Energy Michigan may issue, from time to time, CMS Energy Michigan
Preferred Securities, in one or more series, having terms described in the
Prospectus Supplement relating thereto. The Limited Partnership Agreement will
authorize the establishment of one or more series of CMS Energy Michigan
Preferred Securities, having such terms, including dividends, redemption,
voting, liquidation rights and such other preferred, deferred or other special
rights or such restrictions as shall be set forth therein or otherwise
established by the General Partner pursuant thereto. Reference is made to the
Prospectus Supplement relating to the CMS Energy Michigan Preferred Securities
of a particular series for specific terms, including (i) the distinctive
designation of such series which shall distinguish it from other series; (ii)
the number of CMS Energy Michigan Preferred Securities included in such series,
which number may be increased or decreased from time to time unless otherwise
provided by the General Partner in creating the series; (iii) the annual
dividend rate (or method of determining such rate) for CMS Energy Michigan
Preferred Securities of such series and the date or dates upon which such
dividends shall be payable, provided, however, dividends on any series of CMS
Energy Michigan Preferred Securities shall be payable on a monthly basis to
holders of such series of CMS Energy Michigan Preferred Securities as of a
record date in each month during which such series of CMS Energy Michigan
Preferred Securities are outstanding; (iv) whether dividends on CMS Energy
23
<PAGE> 26
Michigan Preferred Securities of such series shall be cumulative, and, in the
case of CMS Energy Michigan Preferred Securities of any series having cumulative
dividend rights, the date or dates or method of determining the date or dates
from which dividends on CMS Energy Michigan Preferred Securities of such series
shall be cumulative; (v) the amount or amounts which shall be paid out of the
assets of CMS Energy Michigan to the holders of CMS Energy Michigan Preferred
Securities of such series upon voluntary or involuntary dissolution, winding-up
or termination of CMS Energy Michigan; (vi) the price or prices at which, the
period or periods within which and the terms and conditions upon which CMS
Energy Michigan Preferred Securities of such series may be redeemed or
purchased, in whole or in part, at the option of CMS Energy Michigan or the
General Partner; (vii) the obligation, if any, of CMS Energy Michigan to
purchase or redeem CMS Energy Michigan Preferred Securities of such series
pursuant to a sinking fund or otherwise and the price or prices at which, the
period or periods within which and the terms and conditions upon which CMS
Energy Michigan Preferred Securities of such series shall be purchased or
redeemed, in whole or in part, pursuant to such obligation; (viii) the period or
periods within which and the terms and conditions, if any, including the price
or prices or the rate or rates of conversion or exchange and the terms and
conditions of any adjustments thereof, upon which the CMS Energy Michigan
Preferred Securities of such series shall be convertible or exchangeable at the
option of the holder of the CMS Energy Michigan Preferred Securities, or CMS
Energy Michigan, into any other securities or other property or cash or into any
other series of CMS Energy Michigan Preferred Securities; (ix) the voting
rights, if any, of CMS Energy Michigan Preferred Securities of such series in
addition to those required by law or set forth in the Limited Partnership
Agreement, and any requirement for the approval by the holders of CMS Energy
Michigan Preferred Securities, or of CMS Energy Michigan Preferred Securities of
one or more series, or of both, as a condition to specified action or amendments
to the Limited Partnership Agreement; (x) the additional amounts, if any, which
CMS Energy Michigan will pay as a distribution as necessary in order that the
net amounts received by holders of CMS Energy Michigan Preferred Securities of
such series after withholding or deduction of certain taxes, duties, assessments
or governmental charges will equal the amount which would have been receivable
in respect of such CMS Energy Michigan Preferred Securities in the absence of
such withholding or deduction; and (xi) any other relative rights, powers,
preferences, privileges, limitations or restrictions of CMS Energy Michigan
Preferred Securities of the series not inconsistent with the Limited Partnership
Agreement or with applicable law. All CMS Energy Michigan Preferred Securities
offered hereby will be guaranteed by CMS Energy to the extent set forth below
under "Description of the Guarantee." Any applicable federal income tax
considerations applicable to any offering of CMS Energy Michigan Preferred
Securities will be described in the Prospectus Supplement relating thereto.
Unless otherwise provided in a Prospectus Supplement, the aggregate number of
CMS Energy Michigan Preferred Securities which CMS Energy Michigan shall have
authority to issue is unlimited.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CMS ENERGY MICHIGAN PREFERRED
SECURITIES;
EFFECT OF OBLIGATIONS UNDER THE SUBORDINATED DEBT SECURITIES AND THE GUARANTEE
As discussed herein, CMS Energy Michigan will lend the proceeds of any sale
of CMS Energy Michigan Preferred Securities to CMS Energy in return for
Subordinated Debt Securities of CMS Energy in aggregate principal amount equal
to the aggregate liquidation preference of such Preferred Securities, bearing
interest at an annual rate equal to the annual dividend rate of such Preferred
Securities and having certain redemption terms which correspond to the
redemption terms for such Preferred Securities.
As long as payments of interest and other payments are made when due on the
Subordinated Debt Securities, such payments will be sufficient to cover
dividends and payments due on the CMS Energy Michigan Preferred Securities
primarily because (i) the aggregate principal amount of Subordinated Debt
Securities will be at least equal to the sum of the aggregate stated liquidation
preference of the CMS Energy Michigan Preferred Securities; (ii) the interest
rate and interest and other payment dates on the Subordinated Debt Securities
will match the dividend rate and dividend and other payment dates for the CMS
Energy Michigan Preferred Securities; (iii) the Limited Partnership Agreement
provides that CMS Energy, as General Partner, shall pay for all, and CMS Energy
Michigan shall not be obligated to pay, directly or indirectly, for any, costs
and expenses of CMS Energy Michigan; and (iv) the Limited Partnership Agreement
further provides that
24
<PAGE> 27
the General Partner shall not cause or permit CMS Energy Michigan to, among
other things, engage in any activity that is not consistent with the limited
purpose of CMS Energy Michigan.
If (i) CMS Energy Michigan fails to pay dividends in full on any series of
CMS Energy Michigan Preferred Securities for 18 consecutive monthly dividend
periods; (ii) an Event of Default (as defined in the Subordinated Debt
Indenture) occurs and is continuing on the related series of Subordinated Debt
Securities; or (iii) CMS Energy is in default on any of its payment or other
obligations under the Guarantee described below, under the terms of such series
of CMS Energy Michigan Preferred Securities, the holders of outstanding CMS
Energy Michigan Preferred Securities of such series will have the right to
appoint a Special Representative, which Special Representative shall, if an
Event of Default occurs under the Subordinated Debt Indenture, be authorized to
exercise CMS Energy Michigan's right to accelerate the principal amount of the
Subordinated Debt Securities and to enforce CMS Energy Michigan's other creditor
rights under the Subordinated Debt Securities and the rights of the holders of
outstanding CMS Energy Michigan Preferred Securities under the Guarantee. In
addition, if the General Partner or the Special Representative fails to enforce
the Guarantee, a holder of a CMS Energy Michigan Preferred Security may
institute a legal proceeding directly against CMS Energy to enforce its rights
under the Guarantee without first instituting a legal proceeding against CMS
Energy Michigan or any other person or entity.
Notwithstanding the appointment of any such Special Representative, CMS
Energy shall continue as General Partner and shall retain all rights under the
Subordinated Debt Indenture, including any rights it may have to defer interest
payments from time to time as may be provided with respect to the Subordinated
Debt Securities relating to a particular series of CMS Energy Michigan Preferred
Securities, and any such deferral would not constitute a default under the
Subordinated Debt Indenture or enable a holder of CMS Energy Michigan Preferred
Securities to require payment of a dividend that had not theretofore been
declared.
CMS Energy and CMS Energy Michigan believe that the above mechanisms and
obligations, taken together, constitute a full and unconditional guarantee by
CMS Energy of payments due on the CMS Energy Michigan Preferred Securities.
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee which
will be executed and delivered by CMS Energy for the benefit of the holders,
from time to time, of each series of CMS Energy Michigan Preferred Securities.
The summary does not purport to be complete and is subject in all respects to
the provisions of, and is qualified in its entirety by reference to, the
Guarantee, which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
CMS Energy will irrevocably and unconditionally agree, to the extent set
forth herein, to pay in full, to the holders of the CMS Energy Michigan
Preferred Securities of each series, the Guarantee Payments (as defined below),
as and when due, regardless of any defense, right of set-off or counterclaim
which CMS Energy may have or assert against CMS Energy Michigan. The following
payments with respect to any series of CMS Energy Michigan Preferred Securities
to the extent not paid by CMS Energy Michigan (the "Guarantee Payments") will be
subject to the Guarantee (without duplication): (i) any accrued and unpaid
dividends which are required to be paid on the CMS Energy Michigan Preferred
Securities of such series, to the extent CMS Energy Michigan shall have funds on
hand sufficient to make such payment and funds legally available therefor, as
determined by the General Partner, (ii) the redemption price, including all
accrued and unpaid dividends (the "Redemption Price"), payable out of funds
legally available therefor, as determined by the General Partner with respect to
any CMS Energy Michigan Preferred Securities called for redemption by CMS Energy
Michigan and (iii) upon a liquidation of CMS Energy Michigan, the lesser of (a)
the aggregate of the liquidation preference and all accrued and unpaid dividends
on the CMS Energy Michigan Preferred Securities of such series to the date of
payment and (b) the amount of assets of CMS Energy Michigan remaining available
for distribution to holders of CMS Energy Michigan Preferred Securities of such
series in liquidation of CMS Energy Michigan. CMS Energy's obligation to make a
Guarantee Payment may be
25
<PAGE> 28
satisfied by direct payment of the required amounts by CMS Energy to the holders
of CMS Energy Michigan Preferred Securities or by causing CMS Energy Michigan to
pay such amounts to such holders.
CERTAIN COVENANTS OF CMS ENERGY
In the Guarantee, CMS Energy will covenant that, so long as any CMS Energy
Michigan Preferred Securities remain outstanding, CMS Energy will not declare or
pay any dividend on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of its capital stock if at such time CMS Energy is in
default with respect to its payment or other obligations under the Guarantee or
there shall have occurred any event that, with the giving of notice or lapse of
time or both, would constitute an Event of Default under the Subordinated Debt
Indenture.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not adversely affect the rights
of holders of CMS Energy Michigan Preferred Securities (in which case no vote
will be required), the Guarantee may be changed only with the prior approval of
the holders of not less than 66 2/3% in liquidation preference of the
outstanding CMS Energy Michigan Preferred Securities. All guarantees and
agreements contained in the Guarantee shall bind the successors, assignees,
receivers, trustees and representatives of CMS Energy and shall inure to the
benefit of the holders of the CMS Energy Michigan Preferred Securities then
outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect as to
the CMS Energy Michigan Preferred Securities of any series upon full payment of
the Redemption Price of all CMS Energy Michigan Preferred Securities of such
series and will terminate completely upon full payment of the amounts payable
upon liquidation of CMS Energy Michigan. The Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of CMS Energy Michigan Preferred Securities of any series must restore payment
of any sums paid under such series of CMS Energy Michigan Preferred Securities
or the Guarantee.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of CMS Energy and
will rank (i) subordinate and junior in right of payment to all other
liabilities of CMS Energy (including the Subordinated Debt Securities), except
those made pari passu by their terms, (ii) pari passu with the most senior
preferred or preference stock now or hereafter issued by CMS Energy and with any
guarantee now or hereafter entered into by CMS Energy in respect of any
preferred or preference stock of any affiliate of CMS Energy and (iii) senior to
Common Stock of CMS Energy. The Limited Partnership Agreement provides that each
holder of CMS Energy Michigan Preferred Securities by acceptance thereof agrees
to the subordination provisions and other terms of the Guarantee.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the guarantor to enforce its rights under the guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be deposited with the General Partner to be held for the benefit
of the holders of each series of CMS Energy Michigan Preferred Securities. In
the event of the appointment of a Special Representative to, among other things,
enforce the Guarantee, the Special Representative may take possession of the
Guarantee for such purpose. If no Special Representative has been appointed to
enforce the Guarantee, the General Partner has the right to enforce the
Guarantee on behalf of the holders of each series of CMS Energy Michigan
Preferred Securities. The holders of not less than 10% in aggregate liquidation
preference of the CMS Energy Michigan Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available in respect of the Guarantee, including the giving of directions to the
General Partner or the Special Representative, as the case may be. If the
General Partner or the Special Representative fails to enforce the Guarantee as
provided above, any holder of CMS Energy Michigan Preferred Securities may
institute a legal
26
<PAGE> 29
proceeding directly against the guarantor to enforce its rights under the
Guarantee, without first instituting a legal proceeding against CMS Energy
Michigan or any other person or entity. The Guarantee will not be discharged
except by payment of the Guarantee Payments in full and by complete performance
of all obligations under the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Michigan.
LEGAL OPINIONS
Opinions as to the legality of the securities offered hereby will be
rendered for CMS Energy and CMS Energy Michigan by Denise M. Sturdy, Esq.,
Assistant General Counsel for CMS Energy. Certain legal matters with respect to
Offered Securities will be passed upon by Sidley & Austin, Chicago, Illinois,
counsel to CMS Energy and CMS Energy Michigan, and by Reid & Priest LLP, New
York, New York, counsel for any underwriters, dealers or agents who will be
named in the related Prospectus Supplement.
EXPERTS
The consolidated financial statements and schedule of CMS Energy as of
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994 incorporated by reference in this Prospectus, have been
audited by Arthur Andersen LLP (formerly Arthur Andersen & Co.), independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
With respect to the unaudited interim consolidated financial information
for the periods ended March 31, 1994 and 1995, Arthur Andersen LLP has applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report thereon states that they did
not audit and they did not express an opinion on that interim consolidated
financial information. Accordingly, the degree of reliance on their report on
that information should be restricted in light of the limited nature of the
review procedures applied. In addition, the accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933, as amended
("Securities Act"), for their report on the unaudited interim consolidated
financial information because that report is not a "report" or "part" of the
registration statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act.
Future consolidated financial statements of CMS Energy and the reports
thereon of Arthur Andersen LLP also will be incorporated by reference in this
Prospectus in reliance upon the authority of that firm as experts in giving
those reports to the extent that said firm has audited said consolidated
financial statements and consented to the use of their reports thereon.
PLAN OF DISTRIBUTION
CMS Energy and/or CMS Energy Michigan may sell the Offered Securities (i)
through the solicitation of proposals of underwriters or dealers to purchase the
Offered Securities; (ii) through underwriters or dealers on a negotiated basis,
(iii) directly to a limited number of purchasers or to a single purchaser; or
(iv) through agents. The Prospectus Supplement with respect to any Offered
Securities will set forth the terms of such offering, including the name or
names of any underwriters, dealers or agents; the purchase price of the Offered
Securities and the proceeds to CMS Energy and/or CMS Energy Michigan from such
sale; any underwriting discounts and commissions and other items constituting
underwriters' compensation; any initial public offering price and any discounts
or concessions allowed or reallowed or paid to dealers and any securities
exchange on which such Offered Securities may be listed. Any initial public
offering price, discounts or concessions allowed or reallowed or paid to dealers
may be changed from time to time.
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated
27
<PAGE> 30
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The Offered Securities may be offered to the public either
through underwriting syndicates represented by one or more managing underwriters
or directly by one or more firms acting as underwriters. The underwriter or
underwriters with respect to a particular underwritten offering of Offered
Securities will be named in the Prospectus Supplement relating to such offering
and, if an underwriting syndicate is used, the managing underwriter or
underwriters will be set forth on the cover of such Prospectus Supplement.
Unless otherwise set forth in the Prospectus Supplement relating thereto, the
obligations of the underwriters to purchase the Offered Securities will be
subject to certain conditions precedent, and the underwriters will be obligated
to purchase all the Offered Securities if any are purchased.
If dealers are utilized in the sale of Offered Securities, CMS Energy
and/or CMS Energy Michigan will sell such Offered Securities to the dealers as
principals. The dealers may then resell such Offered Securities to the public at
varying prices to be determined by such dealers at the time of resale. The names
of the dealers and the terms of the transaction will be set forth in the
Prospectus Supplement relating thereto.
The Offered Securities may be sold directly by CMS Energy and/or CMS Energy
Michigan or through agents designated by CMS Energy and/or CMS Energy Michigan
from time to time. Any agent involved in the offer or sale of the Offered
Securities in respect to which this Prospectus is delivered will be named, and
any commissions payable by CMS Energy and/or CMS Energy Michigan to such agent
will be set forth, in the Prospectus Supplement relating thereto. Unless
otherwise indicated in the Prospectus Supplement, any such agent will be acting
on a best efforts basis for the period of its appointment.
The Offered Securities may be sold directly by CMS Energy and/or CMS Energy
Michigan to institutional investors or others, who may be deemed to be
underwriters within the meaning of the Securities Act with respect to any resale
thereof. The terms of any such sales will be described in the Prospectus
Supplement relating thereto.
Agents, dealers and underwriters may be entitled under agreements with CMS
Energy and/or CMS Energy Michigan to indemnification by CMS Energy and/or CMS
Energy Michigan against certain civil liabilities, including liabilities under
the Securities Act, or to contribution with respect to payments which such
agents, dealers or underwriters may be required to make in respect thereof.
Agents, dealers and underwriters may be customers of, engage in transactions
with, or perform services for CMS Energy and/or CMS Energy Michigan in the
ordinary course of business.
The Offered Securities may or may not be listed on a national securities
exchange. Reference is made to the Prospectus Supplement with regard to such
matter. No assurance can be given that there will be a market for any of the
Offered Securities.
28
<PAGE> 31
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
PROSPECTUS (Subject to Completion)
Issued June 16, 1995
SHARES
CMS ENERGY CORPORATION
CLASS G COMMON STOCK
------------------------
All of the shares of CMS Energy Corporation Class G Common Stock ("Class G
Common Stock") offered hereby are being sold by CMS Energy Corporation ("CMS
Energy"). Prior to this offering, there has been no public market for the
Class G Common Stock. It is currently estimated that the initial public
offering price per share will be between $ and $ . See
"Underwriters" for a discussion of the factors to be considered in
determining the initial public offering price.
The Class G Common Stock is Common Stock of CMS Energy and is intended to
reflect the separate performance of the natural gas distribution, storage and
transportation businesses conducted by Consumers Power Company ("Consumers") and
Michigan Gas Storage Company ("MGS") (such businesses, collectively, will be
attributed to the "Consumers Gas Group"). Consumers is a direct subsidiary of
CMS Energy and MGS is a wholly-owned direct subsidiary of Consumers. The Class G
Common Stock is one of two classes of the Common Stock of CMS Energy, the other
being CMS Energy Corporation Common Stock ("CMS Energy Common Stock").
Dividends on the Class G Common Stock will be paid at the discretion of the
Board of Directors of CMS Energy ("Board of Directors") based primarily upon the
earnings and financial condition of the Consumers Gas Group, and, to a lesser
extent, CMS Energy as a whole. Dividends will be payable out of the lesser of
(i) the assets of CMS Energy legally available therefor and (ii) the Available
Class G Dividend Amount. Dividends with respect to the Class G Common Stock are
expected to be paid commensurate with dividend practices of comparable
publicly-held local natural gas distribution companies generally. Management
believes that such practices currently are to pay out from 70% to 85% of annual
earnings available for dividends on common stock. Consistent with this policy,
CMS Energy currently intends to pay an initial quarterly dividend on the Class G
Common Stock of $.28 per share. Since there has been no public market for the
Class G Common Stock, there can be no assurance as to the degree to which the
market price of the Class G Common Stock will accurately reflect the performance
of the Consumers Gas Group or the dividend policy established by the Board of
Directors. In addition, holders of Class G Common Stock, as shareholders of CMS
Energy, will be subject to all the risks associated with an investment in CMS
Energy and all of its businesses, assets and liabilities.
In the event of a disposition by CMS Energy of all or substantially all of
the properties and assets attributed to the Consumers Gas Group, CMS Energy is
required to exchange for each outstanding share of Class G Common Stock a number
of shares of CMS Energy Common Stock having a Fair Market Value equal to 110% of
the Fair Market Value of one share of Class G Common Stock. CMS Energy may, in
the sole discretion of the Board of Directors, at any time exchange for each
outstanding share of Class G Common Stock a number of shares of CMS Energy
Common Stock having a Fair Market Value equal to 115% of the Fair Market Value
of one share of Class G Common Stock. See "Description of Capital Stock -- Class
G Common Stock."
------------------------
Application will be made to list the Class G Common Stock on the New York
Stock Exchange, Inc. under the symbol "CPG."
------------------------
SEE "RISK FACTORS" AT PAGES 16-23 FOR INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) CMS ENERGY(2)
-------- -------------- -------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total(3)....................................... $ $ $
</TABLE>
- ------------
(1) CMS Energy has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by CMS Energy estimated at $1,294,966.
(3) CMS Energy has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of
additional shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to CMS Energy will be
$ , $ and $ , respectively. See "Underwriters."
------------------------
The shares of Class G Common Stock are offered, subject to prior sale, when,
as and if accepted by the Underwriters named herein and subject to approval of
certain legal matters by Reid & Priest LLP, counsel for the Underwriters. It is
expected that the delivery of the shares will be made on or about ,
1995, at the office of Morgan Stanley & Co. Incorporated, New York, N.Y.,
against payment therefor in New York funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
A.G. EDWARDS & SONS, INC.
MERRILL LYNCH & CO.
FIRST OF MICHIGAN
Corporation
, 1995
<PAGE> 32
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY CMS ENERGY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference...................................... 2
Prospectus Summary............................... 3
Risk Factors..................................... 16
Use of Proceeds.................................. 23
Capitalization................................... 24
Dividend Policy.................................. 24
Primary Source of Dividends for the Common Stock
of CMS Energy; Restrictions on Sources of
Dividends...................................... 26
Certain Management and Accounting Policies....... 27
Business of the Consumers Gas Group.............. 30
Consumers Gas Group -- Selected Financial and
Operating Data................................. 42
Consumers Gas Group -- Unaudited Pro Forma
Condensed Statements of Income................. 43
Consumers Gas Group -- Management's Discussion
and Analysis of Financial Condition and Results
of Operations.................................. 44
<CAPTION>
PAGE
----
<S> <C>
CMS Energy -- Selected Consolidated Financial
Information.................................... 50
CMS Energy -- Unaudited Pro Forma Condensed
Consolidated Financial Statements.............. 51
CMS Energy -- Management's Discussion and
Analysis of Financial Condition and Results of
Operations..................................... 53
Description of Capital Stock..................... 65
Certain Federal Income Tax Effects of Offering... 74
Underwriters..................................... 75
Legal Opinions................................... 77
Experts.......................................... 77
Available Information............................ 77
Appendix I -- Glossary........................... I-1
Appendix II -- Class G Common Stock Retained
Interest Illustrations......................... II-1
Index to Financial Statements.................... F-1
</TABLE>
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by CMS Energy with the Securities and
Exchange Commission (the "Commission") (File No. 1-9513) pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), are hereby
incorporated by reference in this Prospectus and shall be deemed to be a part
hereof: (i) CMS Energy's Annual Report on Form 10-K for the year ended December
31, 1994; (ii) CMS Energy's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1995; and (iii) CMS Energy's Current Reports on Form 8-K
dated January 10 and February 2, 1995.
All documents subsequently filed by CMS Energy pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act and prior to the termination of the
offering of the Class G Common Stock contemplated hereby (the "Offering") shall
be deemed to be incorporated by reference herein and shall be deemed to be a
part hereof from the date of filing of such documents (such documents, and the
documents enumerated above, being hereinafter referred to as "Incorporated
Documents"). Any statement contained in an Incorporated Document shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed Incorporated
Document modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
CMS Energy undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon the written or oral request of
any such person, a copy of any or all of the documents referred to above which
have been or may be incorporated in this Prospectus by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Requests for such copies should be directed
to CMS Energy Corporation at its principal executive offices located at Fairlane
Plaza South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan 48126,
Attention: Office of the Secretary, telephone: (313) 436-9200.
Certain information contained in this Prospectus summarizes, is based upon,
or refers to information and financial statements contained in one or more
Incorporated Documents; accordingly, such information contained herein is
qualified in its entirety by reference to such documents and should be read in
conjunction therewith.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE CLASS G COMMON
STOCK OR CMS ENERGY COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR CERTAIN OTHER EXCHANGES OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 33
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus and in the Incorporated Documents. As
used herein, "CMS Energy" means CMS Energy Corporation and its consolidated
subsidiaries, including the Consumers Gas Group. The description of the terms of
the Class G Common Stock in this Prospectus reflects the Restated Articles of
Incorporation of CMS Energy authorizing the Class G Common Stock which has been
filed with the Michigan Department of Commerce ("Restated Articles of
Incorporation"). References in this Prospectus to the "Articles of
Incorporation" refer to the Restated Articles of Incorporation, unless the
context requires otherwise. Unless indicated otherwise, the information
contained in this Prospectus assumes that the Underwriters do not exercise their
over-allotment option. Unless otherwise defined herein, capitalized terms used
in this Prospectus Summary have the respective meanings ascribed to them
elsewhere in this Prospectus. See "Glossary" in Appendix I.
CONSUMERS GAS GROUP
GENERAL
The businesses attributed to the Consumers Gas Group consist of the natural
gas distribution, storage and transportation businesses (collectively, the "Gas
Distribution Business") conducted by Consumers and its subsidiary, MGS.
Consumers is a subsidiary of CMS Energy. For the year ended December 31, 1994,
the Gas Distribution Business conducted by the Consumers Gas Group was the
largest local natural gas distribution company in Michigan and the fifth largest
in the United States based on volumes of natural gas distributed (excluding gas
sold for resale). The Consumers Gas Group supplies natural gas for heating and
various other energy applications to approximately 1.5 million residential,
commercial and industrial customers in 45 of the 68 counties in Michigan's Lower
Peninsula through a distribution and transmission system consisting of 21,197
miles of distribution mains and 1,076 miles of transmission lines. The Consumers
Gas Group also operates 14 gas storage fields and related facilities. The
related facilities have a total certified storage capacity of approximately
359.2 billion cubic feet ("Bcf"), of which 130.0 Bcf is working gas. The Gas
Distribution Business is regulated as a public utility by the Michigan Public
Service Commission ("MPSC") and the Federal Energy Regulatory Commission
("FERC").
The operating revenues attributable to the Consumers Gas Group for the
three months ended March 31, 1995 and the year ended December 31, 1994 were $482
million and $1,151 million, respectively, representing 43% and 32%,
respectively, of the total consolidated operating revenues of CMS Energy for
such periods. The pretax operating income attributable to the Consumers Gas
Group for the three months ended March 31, 1995 and the year ended December 31,
1994 was $91 million and $135 million, respectively, representing 44% and 27%,
respectively, of the total consolidated pretax operating income of CMS Energy
for such periods. The total assets attributable to the Consumers Gas Group as of
March 31, 1995 were $1,596 million, representing 22% of the consolidated total
assets of CMS Energy at that date. See "Business of the Consumers Gas Group" for
a more complete description of the Gas Distribution Business.
COMPETITIVE ADVANTAGES
The Consumers Gas Group is well-positioned to capitalize on the
opportunities and meet the challenges of the deregulated gas market. The
Consumers Gas Group's principal competitive advantages include:
- Consistent growth. The Consumers Gas Group's gas sales for the three
months ended March 31, 1995 and the year ended December 31, 1994 were 109
Bcf and 241 Bcf, respectively, with a total throughput of 134 Bcf and 314
Bcf for those periods (excluding sales to a related partnership, Midland
Cogeneration Venture ("MCV") Limited Partnership ("MCV Partnership")).
Such sales have grown at an average annual growth rate since 1990 of
approximately 3.3% (1.3% weather-adjusted). The weather-adjusted growth
is primarily attributable to an increase in the number of customers
served. Since 1990, the Consumers Gas Group has experienced an average
annual customer growth rate of
3
<PAGE> 34
1.5% (approximately 20,000 customers) per year. See "Business of the
Consumers Gas Group -- Customers."
- Diversity and stability of customers served. The Consumers Gas Group's
sales are derived from a diversity of customers with no substantial
dependence on a particular customer. The Consumers Gas Group's
approximately 1.5 million customers include approximately 1.4 million
residential customers, 98,000 commercial customers and 8,500 industrial
customers. In 1994, residential customers, the primary component of the
Consumers Gas Group's load, represented slightly more than half of
throughput, while the industrial and commercial classes each represented
about one-fourth (excluding, in each case, sales to the MCV Partnership).
For the three months ended March 31, 1995 and the year ended December 31,
1994, approximately 70.0% and 69.0%, respectively, of the Consumers Gas
Group's revenues were derived from this relatively stable residential
customer base. The customer base of the Consumers Gas Group also includes
several of the largest manufacturing businesses in the United States,
such as Chrysler Corporation, Dow Chemical Company, Ford Motor Company,
General Motors Corporation and Upjohn Company.
- Low cost natural gas provider. The Consumers Gas Group's residential
customers enjoy rates which are believed to be consistently among the
lowest 15% of all U.S. local natural gas distribution companies. For the
three months ended March 31, 1995 and the year ended December 31, 1994,
the Consumers Gas Group's average rate for residential service was
$4.34/Mcf and $4.62/Mcf ("Mcf" being a thousand cubic feet),
respectively. See "Business of the Consumers Gas Group -- Business."
- Substantial natural gas storage capacity. The 14 gas storage fields
operated by the Consumers Gas Group have 130.0 Bcf of working gas
storage. This storage capacity enabled Consumers Gas Group to provide
approximately 51.0% of its sale requirements throughout the 1994-1995
winter heating season (November 1 through March 31) and 75.0% of its
February 1995 peak-day requirement from storage. These storage facilities
allow the Consumers Gas Group to lower its peak-day entitlement from its
pipeline suppliers, thereby reducing interstate pipeline costs. See
"Business of the Consumers Gas Group -- Gas Storage."
- Strategic location near interstate pipelines. The Consumers Gas Group is
strategically located to receive gas deliveries from several interstate
pipelines connected to the major producing regions of the United States
and Canada. ANR Pipeline Company ("ANR"), Panhandle Eastern Pipeline
Company ("Panhandle") and Trunkline Gas Company ("Trunkline") deliver gas
from the U.S. Gulf Coast and the Mid-Continent areas. Gas produced in
Western Canada is delivered to the Consumers Gas Group through several
pipelines that ultimately deliver gas to Great Lakes Gas Transmission
Company, which is connected directly to the Consumers Gas Group. See
"Business of the Consumers Gas Group -- Gas Supply."
GROWTH STRATEGIES
The Consumers Gas Group believes that if the Consumers Gas Group's
residential customer base grows at a rate of approximately 1.5% annually and gas
prices adjusted for inflation remain relatively unchanged, its annual gas
deliveries will grow to approximately 329.0 Bcf between 1994 and 1999
representing total growth over the period of 5.5%. However, there can be no
assurance that such growth will be achieved.
The Consumers Gas Group has identified the following strategies to further
grow its residential, commercial and industrial customer base:
- Increased usage by existing customers. The Consumers Gas Group believes
that there are opportunities to increase revenues from its existing
customer base. Studies conducted by the Consumers Gas Group show that
many of its existing residential and commercial customers utilize non-gas
furnaces, electric water heaters and wood burning fireplaces for space
and water heating. The Consumers Gas Group intends to conduct marketing
programs to switch these customers to natural gas for these purposes.
4
<PAGE> 35
- Attracting additional customers. The Consumers Gas Group plans to attract
additional customers by expanding within its existing franchises. The
Consumers Gas Group maintains franchises in each of the ten most populous
counties in Michigan and the population of each of these counties has
been growing. Through effective planning, the Consumers Gas Group intends
to position its system expansion to secure future growth in these areas.
The Consumers Gas Group intends to invest $37.7 million over the
three-year period ending December 31, 1997 to construct additional gas
mains. This program is designed to increase gas usage in the Consumers
Gas Group's existing service area and to enable it to successfully
compete with other local natural gas distribution companies for new
customers. Finally, there are still significant numbers of potential gas
customers who have a gas main in front of their home or establishment and
do not have installed gas service. The conversion of these customers to
gas service is an additional potential source of growth.
- Co-generation. The Consumers Gas Group believes that there is a
significant potential for development in its service area of gas powered
cogeneration projects capable of generating from 1,000 to 50,000 kilowatt
("KW") of electricity. For projects of this type the Consumers Gas Group
would have the ability to provide, in addition to gas supply, project
engineering, equipment financing, operating and maintenance service and
gas storage services.
- Industrial conversions. Conversion of industrial processes to natural gas
is also an area of expected sales growth for the Consumers Gas Group. For
example, it is expected that laws mandating improvements in air quality
will provide opportunities for converting industrial boiler load to
clean-burning natural gas, and for additional utilization of natural gas
for electric generation. The Consumers Gas Group believes that conversion
projects also provide opportunities for project engineering, construction
services, equipment financing, gas storage and other services which it is
in a position to provide competitively.
- New technologies. The Consumers Gas Group also expects additional growth
from the development and use of Natural Gas Vehicles ("NGVs"). Pursuant
to the Energy Policy Act of 1992, increasing percentages of the federal
government's automotive fleet must consist of NGVs beginning in 1996; the
federal government will be required to either convert gasoline-fueled
vehicles into NGVs or purchase NGVs. The Consumers Gas Group believes
that other automotive fleets, as well as indoor equipment such as
forklifts and sweepers, will convert to NGVs, and thereafter certain
portions of the general population may acquire or convert their existing
vehicles to NGVs. The Consumers Gas Group estimates that each NGV
represents 125 Mcf of natural gas consumption annually, equal to the
natural gas consumption of an average single family home.
- Revenue diversification. Historically, approximately 85% of Consumers Gas
Group's gas throughput was weather related and weather can cause
significant fluctuations in revenue. See "Business of the Consumers Gas
Group -- Customers" below. Opportunities exist to diversify revenues by
(i) growing off-peak load and (ii) creating and increasing new revenue
from the sale of gas-related services and products, such as maintenance
agreements related to gas equipment (e.g. furnaces), appliance repair
and installation, sales of other equipment (e.g. carbon monoxide
detectors, water heaters) and energy optimization services.
In total, the Consumers Gas Group expects these and related additional
efforts to add approximately 38.0 Bcf of throughput by 1999 which is equivalent
to approximately $17.2 million of additional gross margin annually (excluding
recovery of the cost of gas supplied to customers). However, actual levels of
growth in total throughput and in the earnings of the Consumers Gas Group will
depend on general economic conditions, the availability of gas supply, gas
prices, alternate energy prices, the level of natural gas consumption, the
effects of regulation and other factors, and there can be no assurance that the
Consumers Gas Group will achieve increased sales or earnings.
5
<PAGE> 36
CMS ENERGY
CMS Energy, incorporated in 1987, is the parent holding company of
Consumers and CMS Enterprises Company ("Enterprises"). Consumers, a combination
electric and gas utility company serving most of Michigan's Lower Peninsula, is
CMS Energy's largest subsidiary. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest of
which is the automotive industry. Enterprises is engaged in several non-utility
energy-related businesses including: (i) oil and gas exploration and production,
(ii) development and operation of independent power production facilities, (iii)
gas marketing services to utility, commercial and industrial customers and (iv)
transmission and storage of natural gas.
CMS Energy conducts its principal operations through the following five
business segments: (i) electric utility operations; (ii) natural gas utility
operations; (iii) gas transmission and marketing; (iv) oil and gas exploration
and production operations; and (v) independent power production. Consumers or
Consumers' subsidiaries are engaged in two segments: electric operations and gas
utility operations. Consumers' electric and gas businesses are principally
regulated utility operations.
CMS Energy's 1994 consolidated operating revenue was $3,619 million. This
consolidated operating revenue was derived from Consumers' sales of electric
energy (approximately 61% or $2,189 million), Consumers' gas operations
(approximately 32% or $1,151 million), gas transmission and marketing
(approximately 4% or $145 million), oil and gas exploration and production
activities (approximately 2% or $85 million) and independent power production
activities (approximately 1% or $45 million). Consumers' consolidated operations
in the electric and gas utility businesses account for the major share of CMS
Energy's total assets, revenue and income. CMS Energy's share of 1994
unconsolidated non-utility independent power production revenue was $385
million.
Consumers is a public utility serving almost six million of Michigan's nine
million residents in all of the 68 counties in Michigan's Lower Peninsula.
Industries in Consumers' service area include automotive, metal, chemical, food
and wood products and a diversified group of other industries. Consumers' 1994
consolidated operating revenue of $3,356 million was derived approximately 65%
($2,189 million) from its electric utility business and approximately 35%
($1,151 million) from its gas utility business. Consumers' rates and certain
other aspects of its business are subject to the jurisdiction of the MPSC and
the FERC.
THE OFFERING
<TABLE>
<S> <C>
Class G Common Stock offered by CMS
Energy........................... shares
Percentage of Consumers Gas Group
equity represented by the offered
shares........................... CMS Energy is offering shares of Class G Common Stock
representing % of the common stockholders' equity
value attributed to the Consumers Gas Group.
Use of proceeds.................... All of the proceeds will be invested in the businesses
and used for general corporate purposes of CMS Energy.
Initially, such proceeds will be used to repay a portion
of CMS Energy's indebtedness under a Credit Agreement
dated as of July 29, 1994 (the "Credit Facility") among
CMS Energy, Citibank, N.A. and Union Bank, as co-agents,
and certain banks named therein, in which short-term
borrowings are incurred for working capital purposes,
and which at May 31, 1995 had $192 million principal
amount outstanding with an annual interest rate of
7.6%, none of which is attributable to the Consumers
Gas Group.
NYSE............................... Application will be made to list the Class G Common
Stock on the New York Stock Exchange, Inc. ("NYSE")
under the symbol "CPG."
</TABLE>
RISK FACTORS
Prospective investors should carefully consider certain risks associated
with: (i) the Consumers Gas Group (including those related to the effects of
competition, regulation, decline in customer usage, weather and environmental
compliance); (ii) the other businesses of CMS Energy (including those related
to underrecovery of purchased power costs, nuclear operations and the potential
loss of exempt holding company status); and (iii) the new capital structure of
CMS Energy and the terms of the Class G Common Stock. See "Risk Factors."
6
<PAGE> 37
CONSUMERS GAS GROUP
SUMMARY FINANCIAL AND OPERATING DATA
The summary historical and pro forma financial data presented below have
been derived from the Consumers Gas Group Financial Statements and the
"Consumers Gas Group -- Unaudited Pro Forma Condensed Statements of Income"
contained elsewhere herein. The following summary data reflect the results of
operations and certain financial and operating data of the businesses attributed
to the Consumers Gas Group and should be read in conjunction with the Consumers
Gas Group Financial Statements, "Consumers Gas Group -- Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business of the
Consumers Gas Group," CMS Energy's Consolidated Financial Statements and "CMS
Energy -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere herein. The summary pro forma income
statement data presented below gives effect to the issuance and sale of the
shares of the Class G Common Stock offered hereby as if it had occurred on
January 1, 1994. The net proceeds of the Offering will initially be used to
repay a portion of the debt outstanding under the Credit Facility, none of which
is attributable to the Consumers Gas Group. Accordingly, other than with respect
to net income and net income per share available to outstanding Class G Common
Stock shareholders, no pro forma adjustments were necessary to the Consumers Gas
Group's historical financial statements to give effect to the transactions
described above. See "Use of Proceeds" and "Consumers Gas Group -- Unaudited Pro
Forma Condensed Statements of Income."
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND
AS NOTED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue......................................... $ 482 $ 528 $1,151 $1,160 $1,126
Operating expenses........................................ 391 444 1,016 1,014 1,017
Pretax operating income................................... 91 84 135 146 109
Net operating income...................................... 60 55 94 107 74
Net income................................................ $ 50 $ 46 $ 53 $ 66 $ 40
Net income available to CMS Energy shareholders through
Retained Interest -- Pro Forma(a)....................... $ 37 $ 40
Net income attributable to outstanding Class G Common
Stock -- Pro Forma(a)................................... $ 13 $ 13
Net income per share attributable to outstanding Class G
Common Stock shareholders -- Pro Forma(a)............... $ 1.56 $ 1.66
OTHER FINANCIAL DATA:
Cash flows from operations................................ $ 116 $ 122 $ 155 $ 83 $ 108
Capital expenditures...................................... 21 20 129 153 107
OPERATING DATA:
Sales and transportation deliveries (Bcf)(b).............. 148 168 391 389 364
Customers (in thousands).................................. 1,457 1,430 1,448 1,423 1,402
Average sales rate ($/Mcf)................................ $4.25 $4.16 $4.48 $4.46 $4.55
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1995
---------------------
(IN MILLIONS)
<S> <C>
BALANCE SHEET DATA:
Property, plant and equipment net.......................... $ 983
Total assets............................................... 1,596
Long-term debt (excluding current maturities).............. 425
Notes payable.............................................. 10
Other liabilities.......................................... 717
Preferred stockholders' equity............................. 78
Common stockholders' equity................................ $ 366
</TABLE>
- -------------------------
(a) Reflects the issuance and sale of 8 million shares of Class G Common Stock
representing 25% of the equity attributable to the Consumers Gas Group.
(b) Excludes off-system transportation services.
7
<PAGE> 38
CMS ENERGY
SUMMARY FINANCIAL AND OPERATING DATA
The summary historical and pro forma financial data presented below have
been derived from the CMS Energy Consolidated Financial Statements and the "CMS
Energy -- Unaudited Pro Forma Condensed Consolidated Financial Statements"
contained elsewhere herein. The following summary data reflect the historical
results of operations, and certain financial and operating data of CMS Energy
and its consolidated subsidiaries and should be read in conjunction with CMS
Energy's Consolidated Financial Statements and "CMS Energy -- Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere herein. The summary pro forma income statement data
presented below gives effect to the sale of the shares of the Class G Common
Stock offered hereby and the application of the proceeds therefrom as if they
had occurred on January 1, 1994. The summary as adjusted balance sheet data give
effect to the sale of the shares of the Class G Common Stock offered hereby and
the application of the proceeds therefrom as if they had occurred on March 31,
1995. See "Use of Proceeds" and "CMS Energy -- Unaudited Pro Forma Condensed
Consolidated Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS
NOTED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue.............................. $1,119 $1,142 $3,619 $3,482 $3,146
Pretax operating income........................ 206 175 504 439 231
Net income (loss).............................. 86 78 179 155 (297)
Earnings (loss) per average common share....... $.99 $.92 $2.09 $1.90 $(3.72)
Average common shares outstanding (in
thousands)................................... 86,918 85,302 85,888 81,251 79,877
Cash dividends declared per common share....... $.21 $.18 $.78 $.60 $.48
Net income -- Pro Forma(a)..................... $88 $186
Net income available to CMS Energy shareholders
-- Pro Forma(a).............................. $75 $173
Net income attributable to outstanding Class G
shareholders -- Pro Forma(a)................. $13 $13
Earnings per average common share
CMS Energy -- Pro Forma(a)................... $.86 $2.01
Class G -- Pro Forma(a)...................... $1.56 $1.66
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1995
-------------------------
ACTUAL AS ADJUSTED(B)
------ --------------
(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Net plant and property.......................... $4,826 $4,826
Total assets.................................... 7,344 7,344
Long-term debt, excluding current maturities.... 2,787 2,647
Notes payable................................... 135 135
Other liabilities............................... 2,857 2,857
Preferred stock of subsidiary................... 356 356
Common stockholders' equity..................... $1,209 $1,349
</TABLE>
- -------------------------
(a) See footnotes to "CMS Energy -- Unaudited Pro Forma Condensed Consolidated
Financial Statements -- Unaudited Pro Forma Condensed Consolidated
Statements of Income."
(b) See footnotes to "CMS Energy -- Unaudited Pro Forma Condensed Consolidated
Financial Statements -- Unaudited Pro Forma Condensed Consolidated Balance
Sheet."
8
<PAGE> 39
CLASS G COMMON STOCK
GENERAL
The Class G Common Stock is one of two classes of Common Stock (the "Common
Stock") of CMS Energy, the other being the CMS Energy Common Stock. The Class G
Common Stock is intended to reflect the separate performance of the businesses
attributed to the Consumers Gas Group and to provide holders with financial
returns based on the performance of the businesses attributed to the Consumers
Gas Group. The CMS Energy Common Stock is intended to reflect the performance of
all businesses conducted by CMS Energy and its subsidiaries except for the
interest in the Consumers Gas Group attributable to the outstanding shares of
Class G Common Stock, and to provide holders with financial returns based on
such performance.
RISK FACTORS
RISKS RELATED TO NEW CAPITAL STRUCTURE AND THE CLASS G COMMON STOCK
Shareholders of One Company; Financial Effects of CMS Energy Could
Adversely Affect the Consumers Gas Group. Notwithstanding the attribution of
assets and liabilities (including contingent liabilities), common stockholders'
equity and items of income and expense of CMS Energy to the Consumers Gas Group
for the purpose of preparing the financial statements of the Consumers Gas
Group, the change in the capital structure of CMS Energy will not affect CMS
Energy's title to its assets or CMS Energy's responsibility for its liabilities.
Holders of Class G Common Stock and CMS Energy Common Stock will be common
shareholders of CMS Energy and, as such, will be subject to all of the risks
associated with an investment in CMS Energy and all of its businesses, assets
and liabilities.
Financial results arising from the businesses of CMS Energy, other than the
business of the Consumers Gas Group, that affect CMS Energy's consolidated
results of operations or financial condition could affect the financial position
of the Consumers Gas Group or the market price of the Class G Common Stock. If
certain of CMS Energy's financial covenants in its debt instruments are
breached, no dividends may be paid on the Class G Common Stock. See "Dividend
Policy." Further, a similar breach by Consumers in its debt instruments would
restrict its ability to pay dividends to CMS Energy. The ability of CMS Energy
to pay dividends on its Common Stock depends substantially upon timely receipt
of sufficient dividends or other distributions from Consumers. See "Primary
Source of Dividends for the Common Stock of CMS Energy; Restrictions on Sources
of Dividends." In addition, any net losses of CMS Energy and dividends or
distributions on, or repurchases of, either class of Common Stock will reduce
the assets of CMS Energy legally available for payment of dividends on the Class
G Common Stock. Accordingly, CMS Energy's consolidated financial information
should be read in conjunction with the Consumers Gas Group's financial
information.
Determinations of the Board of Directors Could Have Disparate Effects on
Each Class of Common Stock. Although CMS Energy is aware of no precedent
concerning the manner in which Michigan law would be applied to a board of
directors' duties in the context of multiple classes of common stock with
divergent interests, CMS Energy believes that a Michigan court would hold that a
board of directors owes an equal duty
to all shareholders regardless of class and does not have separate or additional
fiduciary duties to the holders of separate classes of stock. CMS Energy
believes that, under Michigan law, a good faith determination by a disinterested
and adequately informed board, or a committee thereof, which discharges such
duty, and which the directors honestly believe is in the best interests of CMS
Energy, would be a defense to any challenge by or on behalf of the holders of
either class of Common Stock to the Board of Directors' determination that could
have a disparate effect on each class of Common Stock. Disproportionate
ownership interests of members of the Board of Directors in one or both classes
of Common Stock of CMS Energy or disparate values of the classes of Common Stock
of CMS Energy could create or appear to create potential conflicts of interest
when directors are faced with decisions that could have different implications
for different classes.
Potential Conflicts of Interest; Risks that Interests of the Holders of
Each Class of Common Stock Could Diverge. The existence of separate classes of
Common Stock could give rise to occasions when the interests of
9
<PAGE> 40
the holders of Class G Common Stock and holders of CMS Energy Common Stock may
diverge or appear to diverge. Examples of potential conflicts of interest are
discussed below.
No Assurance of Payment of Dividends. As summarized above, the ability
of Consumers and other subsidiaries of CMS Energy to pay dividends or make
distributions to CMS Energy and, accordingly, the ability of CMS Energy to
pay dividends on either class of its Common Stock will depend on the
earnings, financial requirements and contractual restrictions of the
subsidiaries of CMS Energy, in particular Consumers, and other factors.
Consumers' ability to pay dividends is restricted by Michigan law, its
First Mortgage Bond Indenture ("Mortgage Indenture") and its Articles of
Incorporation ("Articles"). See "Primary Source of Dividends for the Common
Stock of CMS Energy; Restrictions on Sources of Dividends" for information
concerning these restrictions. Dividends on the Common Stock will be
limited by Michigan law, certain agreements to which CMS Energy is a party
and the Articles of Incorporation and will be payable when, as and if
declared by the Board of Directors out of legally available assets of CMS
Energy.
Subject to the restrictions on the assets out of which dividends on
the Common Stock may be paid, as described under "Dividend Policy," and to
the express terms of any Preferred Stock, CMS Energy would be able, in the
sole discretion of its Board of Directors, to declare and pay dividends
exclusively on either the Class G Common Stock or the CMS Energy Common
Stock, or on both, in equal or unequal amounts, notwithstanding the
respective amounts of assets available for dividends on each class, the
amounts of prior dividends declared on each class or any other factor.
Payment of dividends on either class of Common Stock will decrease the
amount of funds available under the limitations described above for the
payment of dividends on both classes of Common Stock.
Risks Associated with Attribution of Proceeds Upon Issuance of
Securities of CMS Energy. CMS Energy intends to use net proceeds of the
Offering to repay a portion of the debt outstanding under the Credit
Facility, none of which is attributable to the Consumers Gas Group. In any
future offerings of securities of CMS Energy, the Board of Directors would,
in its sole discretion, determine the attribution of the net proceeds of
such sale among CMS Energy and the Consumers Gas Group. See "Description of
Capital Stock -- Retained Interest of CMS Energy in Consumers Gas Group;
Gas Group Fraction."
Risks Associated with Attribution of Proceeds of Mergers or
Consolidations. The Articles of Incorporation do not contain any provisions
governing how consideration to be received by holders of Common Stock in
connection with a merger or consolidation involving CMS Energy is to be
allocated among holders of different classes of Common Stock. In any such
merger or consolidation, the percentage of the consideration to be
allocated to holders of any class of Common Stock under the method of
allocation chosen by the Board of Directors may be materially more or less
than that which might have been allocated to such holders had the Board of
Directors chosen a different method of allocation.
Risks Associated with Exchange of Class G Common Stock. CMS Energy
could, in the sole discretion of its Board of Directors, at any time
determine to exchange, at a premium, shares of CMS Energy Common Stock for
each outstanding share of Class G Common Stock. In addition, CMS Energy
could, in the sole discretion of its Board of Directors, at any time
dispose of substantially all of the properties or assets attributed to the
Consumers Gas Group, whereupon CMS Energy must exchange, at a premium,
shares of CMS Energy Common Stock for each outstanding share of Class G
Common Stock. See "Description of Capital Stock -- Class G Common Stock --
Exchange or Redemption" and "-- CMS Energy Common Stock -- Exchange or
Redemption."
Risks Associated with Dispositions of Consumers Gas Group Assets. If
the assets attributed to the Consumers Gas Group continue to represent less
than substantially all of the properties and assets of CMS Energy, CMS
Energy could, in the sole discretion of its Board of Directors and without
shareholder approval, approve sales and other dispositions of any amount of
the properties and assets of the Consumers Gas Group.
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<PAGE> 41
Risks Associated with Operational and Financial Decisions. The Board
of Directors could, in its sole discretion, from time to time, make
operational and financial decisions that affect disproportionately the
Consumers Gas Group and the various other businesses of CMS Energy and
its subsidiaries, such as the attribution of funds to and from the
Consumers Gas Group, with appropriate adjustments to the Retained Interest.
No Established Market for Class G Common Stock; Risk That Market Price Will
Not Reflect Reported Financial Performance. The Class G Common Stock is intended
to reflect the performance of the businesses attributed to the Consumers Gas
Group. Since there has been no public market for the Class G Common Stock, there
can be no assurance as to the degree to which the market price of the Class G
Common Stock will accurately reflect the performance of the businesses
attributed to the Consumers Gas Group reflected in its financial statements or
the dividend policy established by the Board of Directors. In addition, CMS
Energy cannot predict the impact on such market price of certain terms of the
Class G Common Stock, such as the ability of CMS Energy to exchange for each
outstanding share of Class G Common Stock shares of CMS Energy Common Stock.
Limited Additional Shareholders Rights. Holders of Class G Common Stock
will have only the rights of common shareholders of CMS Energy, and will not be
provided any rights specifically related to the Consumers Gas Group, other than
(i) the dividend provisions described under "Description of Capital Stock --
Class G Common Stock -- Dividends," (ii) the redemption and exchange provisions
described under "Description of Capital Stock -- Class G Common Stock --
Exchange or Redemption" and (iii) certain limited class voting rights provided
in the Restated Articles of Incorporation and under Michigan law. See
"Description of Capital Stock -- Class G Common Stock -- Voting."
Limited Separate Shareholders Voting Rights; Lack of Effective Voting Power
of Class G Common Stock. Subject to certain limited exceptions, holders of
shares of Class G Common Stock and holders of shares of CMS Energy Common Stock
would vote together as a single class on all matters as to which common
shareholders generally are entitled to vote. Holders of each class of Common
Stock will have no rights to vote on matters as a separate class (except in
certain limited circumstances as described below under "Description of Capital
Stock -- Class G Common Stock -- Voting").
When a vote is taken on any matter as to which all Common Stock is voting
together as one class, the class of Common Stock that is entitled to more than
the number of votes required to approve such matter would be in a position to
control the outcome of the vote on such matter. Upon the completion of the
Offering, shares of outstanding CMS Energy Common Stock will be entitled to a
substantial majority of the total votes to which the then outstanding Common
Stock is entitled. See "Description of Capital Stock -- Class G Common Stock --
Voting" and "-- CMS Energy Common Stock -- Voting."
Risk of Limited Approval Rights of Future Issuances of Stock; Dilution. The
approval of the holders of Class G Common Stock would not be solicited by CMS
Energy for the issuance from the authorized but unissued shares of Common Stock
of any additional shares of Class G Common Stock or CMS Energy Common Stock
(unless such approval is deemed advisable by the Board of Directors or is
required by stock exchange regulations). Any issuance of shares of Class G
Common Stock or CMS Energy Common Stock would dilute the relative voting power
of shareholders of shares of Class G Common Stock outstanding prior to such
issuance.
Risks Associated with Attribution of Funds. After completion of the
Offering, any securities issued by CMS Energy and its subsidiaries would be
specifically attributed to and reflected in the financial statements of the
Consumers Gas Group to the extent that the Board of Directors determines that
such securities are issued for the benefit of the Consumers Gas Group. After
completion of the Offering, any cash of CMS Energy attributed to the Consumers
Gas Group would be accounted for as short-term loans to the Consumers Gas Group
unless the Board of Directors made a specific determination that a given
attribution (or type of attribution) should be accounted for as a long-term loan
or an attribution of cash of CMS Energy to the Consumers Gas Group as an equity
contribution, which would increase the Retained Interest Shares. Such
determinations could affect the amount of interest expense and income of the
Consumers Gas Group, the amount of stockholders' equity attributable thereto and
the Retained Interest of CMS Energy.
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<PAGE> 42
Risks Associated with Changes in Management and Accounting Policies. The
Board of Directors
has
adopted certain management and accounting policies and agreements described
herein with respect to dividends, the allocation of corporate expenses, assets
and liabilities (including contingent liabilities) and intercompany
transactions, any and all of which could be modified or rescinded in the sole
discretion of the Board of Directors without approval of the shareholders. See
"Dividend Policy" and "Certain Management and Accounting Policies." The Board of
Directors may also adopt additional policies depending upon the circumstances.
Any determination of the Board of Directors to modify or rescind such policies,
or to adopt additional policies, including any such decision that would have
disparate impacts upon holders of Class G Common Stock and holders of CMS Energy
Common Stock, would be made by the Board of Directors in good faith and in the
honest belief that such decision is in the best interests of CMS Energy. In
addition, generally accepted accounting principles require that certain changes
in accounting policy be preferable (in accordance with such principles) to the
policy previously established.
COMMENT 9
------------------------
For further discussion of the foregoing and certain other considerations,
see "Risk Factors."
DIVIDENDS AND DIVIDEND POLICY
The Class G Common Stock is intended to reflect the separate performance of
the Consumers Gas Group. Dividends on the Class G Common Stock will be paid at
the discretion of the Board of Directors based primarily upon the earnings and
financial condition of the Consumers Gas Group, and, to a lesser extent, CMS
Energy as a whole. Subject to the restrictions described below, if the earnings
and financial condition of the Consumers Gas Group permit, dividends with
respect to the Class G Common Stock are expected to be paid commensurate with
dividend practices of comparable publicly-held local natural gas distribution
companies generally. Management believes that such practices currently are to
pay out from 70% to 85% of annual earnings available for common stock.
Consistent with this policy, CMS Energy currently intends to pay an initial
quarterly dividend on the Class G Common Stock of $.28 per share. 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 non-utility 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. While the Board of Directors
does not currently intend to change this dividend policy, it reserves the right
to do so at any time and from time to time. Under the Articles of Incorporation
and Michigan law, the Board of Directors is not required to declare, and CMS
Energy is not required to pay, dividends in accordance with the foregoing
dividend policy.
Dividends on the Class G Common Stock are limited by Michigan law, certain
agreements to which CMS Energy is a party and the Articles of Incorporation and
will be payable when, as and if declared by the Board of Directors out of the
lesser of (i) the assets of CMS Energy legally available therefor and (ii) the
Available Class G Dividend Amount. There can be no assurance that there will be
an Available Class G Dividend Amount. See "Dividend Policy."
The ability of CMS Energy to pay dividends on its Class G Common Stock and
CMS Energy Common Stock also depends, and will depend, substantially upon timely
receipt of sufficient dividends or other distributions from its subsidiaries, in
particular Consumers. Consumers' ability to pay dividends on its Common Stock
depends on its revenues, earnings and other factors. As a regulated entity,
Consumers' rates are set by the MPSC. See "Primary Source of Dividends for the
Common Stock of CMS Energy; Restrictions on Sources of Dividends."
As of March 31, 1995, assuming the Offering had been completed at that
time, the Available Class G Dividend Amount would have been approximately $91.5
million (assuming a Gas Group Fraction of 25%), or approximately $ million
(based on a Gas Group Fraction of %), assuming that the Underwriters'
over-allotment option is exercised in full.
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<PAGE> 43
AUTHORIZED SHARES OF CLASS G COMMON STOCK
The Board of Directors has determined that 32 million of the 60 million
authorized shares of Class G Common Stock represents 100% of the common
stockholders' equity of CMS Energy attributed to the Consumers Gas Group, and
such number will represent the initial Retained Interest Shares. The authorized
but unissued shares of Class G Common Stock in excess of (i) the Retained
Interest Shares and (ii) any outstanding shares of the Class G Common Stock, are
referred to herein as the "Additional Shares."
Assuming that 32 million Retained Interest Shares will represent 100% of
the equity attributable to the Consumers Gas Group, the following diagrams
illustrate the numbers of Retained Interest Shares and Additional Shares before
the Offering, and after an Offering of 8 million shares of Class G Common Stock
from the Retained Interest Shares:
<TABLE>
<CAPTION>
Before Offering After Offering
<S> <C>
----------------------------------- -----------------------------------
28 million Additional Shares 28 million Additional Shares
----------------------------------- -----------------------------------
32 million Retained Interest
Shares 24 million Retained Interest Shares
----------------------------------- -----------------------------------
8 million Outstanding Shares
-----------------------------------
</TABLE>
Any issuance of Retained Interest Shares would reduce the percentage
interest of CMS Energy in the Consumers Gas Group.
Any issuance of Additional Shares would reduce the Retained Interest of CMS
Energy in the Consumers Gas Group and, if issued after the Offering, would also
reduce the percentage interest of the holders of outstanding shares of Class G
Common Stock in the Consumers Gas Group, unless such Additional Shares were
issued as a dividend on such outstanding shares of Class G Common Stock.
RETAINED INTEREST; GAS GROUP FRACTION
The Retained Interest represents the portion of the common stockholders'
equity of CMS Energy attributable to the Consumers Gas Group retained by CMS
Energy and not attributable to the outstanding shares of Class G Common Stock.
The Retained Interest is represented by the Retained Interest Shares. If, as
assumed in the example set forth under "Authorized Shares of Class G Common
Stock" above, 8 million shares of Class G Common Stock are sold in the Offering,
the Retained Interest would be deemed to be 24 million Retained Interest Shares
of Class G Common Stock representing 75% of the equity of the Consumers Gas
Group. The Retained Interest Shares are not deemed to be outstanding shares of
Class G Common Stock and have no voting rights.
The "Gas Group Fraction" is the fractional interest in the common
stockholders' equity attributed to the Consumers Gas Group represented by the
outstanding shares of Class G Common Stock; the balance of the equity interest
(the "Retained Interest Fraction") will be attributed to the Retained Interest.
Following the completion of the Offering, the Gas Group Fraction as a percentage
initially will be 25%. If the Underwriters' over-allotment option is exercised
in full, the Gas Group Fraction as a percentage initially will be %.
CMS Energy intends to invest the net proceeds of the Offering in the
businesses and for general corporate purposes of CMS Energy. Initially, such net
proceeds will be used to repay a portion of the debt outstanding under the
Credit Facility, none of which is attributable to the Consumers Gas Group. See
"Use of Proceeds." After completion of the Offering, any securities issued by
CMS Energy and its subsidiaries would be specifically attributed to and
reflected in the financial statements of the Consumers Gas Group to the extent
that the Board of Directors determines that such securities are issued for the
benefit of the Consumers Gas Group. After completion of the Offering, any cash
of CMS Energy attributed to the Consumers Gas Group would be accounted for as
short-term loans unless the Board of Directors made a specific determination
that a given attribution (or type of attribution) should be accounted for as a
long-term loan or an attribution of cash of CMS Energy to the Consumers Gas
Group as an equity contribution, which would increase the Retained Interest
Shares. If the net proceeds of an offering of Class G Common Stock were
attributed to CMS Energy's
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<PAGE> 44
Retained Interest in the Consumers Gas Group, the Retained Interest Shares of
CMS Energy would be reduced.
The Board of Directors could, in its sole discretion, determine from time
to time to cause cash or other property attributed to the Consumers Gas Group to
cease to be attributed to the Consumers Gas Group, which would decrease the
Retained Interest Shares and the Retained Interest as a percentage of the common
stockholders' equity attributed to the Consumers Gas Group, and would increase
the Gas Group Fraction. The Board of Directors could, in its sole discretion,
determine from time to time to attribute additional cash or other property to
the Consumers Gas Group, which would increase the Retained Interest Shares and
the Retained Interest as a percentage of the common stockholders' equity
attributed to the Consumers Gas Group, and decrease the Gas Group Fraction. The
Board of Directors could determine, in its sole discretion, to make such
attributions after consideration of a number of factors, including, among
others, the relative levels of internally generated cash flows of each business
of CMS Energy, the long-term business prospects for each business of CMS Energy,
including the Consumers Gas Group, the capital expenditure plans of and the
investment opportunities available to each business of CMS Energy and the
availability, cost and time associated with alternative financing sources. See
"Certain Management and Accounting Policies -- Accounting Matters."
In the event of any dividend or other distribution on outstanding shares of
Class G Common Stock while CMS Energy has a Retained Interest, the Consumers Gas
Group's financial statements would be charged in respect of the Retained
Interest with an amount equal to the product of (i) the aggregate amount paid in
respect of such dividend or other distribution, and (ii) a fraction, the
numerator of which is the Retained Interest Shares and the denominator of which
is the total number of shares of Class G Common Stock then issued and
outstanding.
In the event that CMS Energy repurchases shares of Class G Common Stock for
consideration that is not attributed to the Consumers Gas Group, the Retained
Interest Shares and the Retained Interest as a percentage of the common
stockholders' equity attributed to the Consumers Gas Group would increase, and
the Gas Group Fraction would decrease accordingly. In the event that CMS Energy
repurchases shares of Class G Common Stock for consideration that is attributed
to the Consumers Gas Group, the Retained Interest Shares would not change, but
the Retained Interest as a percentage of the common stockholders' equity
attributed to the Consumers Gas Group would increase, and the Gas Group Fraction
would decrease accordingly. The Board of Directors could, in its sole
discretion, determine whether repurchases of Class G Common Stock should be made
with consideration attributed to the Consumers Gas Group by considering a number
of factors, including, among others, the relative levels of internally generated
cash flows of each business of CMS Energy, the long-term business prospects for
each business of CMS Energy, the capital expenditure plans of and the investment
opportunities available to each business of CMS Energy and the availability,
cost and time associated with alternative financing sources. See "Certain
Management and Accounting Policies -- Accounting Matters."
For further discussion of, and illustrations of the calculation of the
Retained Interest Fraction, the Gas Group Fraction and the Retained Interest
Shares and the effects thereon of issuances and repurchases of, and dividends
on, shares of the Class G Common Stock, and attribution of net assets to and
from the Consumers Gas Group, see "Description of Capital Stock -- Retained
Interest of CMS Energy in Consumers Gas Group; Gas Group Fraction" and Appendix
II to this Prospectus.
VOTING RIGHTS
The holders of Class G Common Stock and CMS Energy Common Stock will vote
together as a single class on all matters as to which all common shareholders
are entitled to vote. On all such matters, each share of Class G Common Stock
entitles its holder to one vote, and each share of CMS Energy Common Stock will
entitle its holder to one vote.
The Articles of Incorporation also provide that unless the vote or consent
of the holders of a greater number of shares shall be required by law, the
approval of the holders of a majority of the outstanding shares of each class of
Common Stock, voting as a separate class, will be necessary for authorizing,
effecting or validating the merger or consolidation of CMS Energy into or with
any other corporation if such merger or
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<PAGE> 45
consolidation would adversely affect the powers or special rights of such class
of stock, either directly or indirectly. See "Description of Capital Stock --
Class G Common Stock -- Voting" and "-- CMS Energy Common Stock -- Voting." If
CMS Energy in any manner subdivides (by stock split, stock dividend or
otherwise) or combines (by reverse stock split or otherwise) the outstanding
shares of either Class G Common Stock or CMS Energy Common Stock, the voting
rights of CMS Energy Common Stock relative to Class G Common Stock will be
appropriately adjusted so as to avoid any dilution in the aggregate voting power
of either class of Common Stock.
LIQUIDATION, SUBDIVISION AND COMBINATION
In the event of liquidation, dissolution or winding up of CMS Energy, each
outstanding share of CMS Energy Common Stock and Class G Common Stock will
entitle its holder to a share of the assets of CMS Energy remaining for
distribution to holders of Common Stock equal to the amount determined by
dividing the total amount remaining for distribution by the total number of
shares of CMS Energy Common Stock and Class G Common Stock then outstanding.
If CMS Energy in any manner subdivides (by stock split, stock dividend or
otherwise) or combines (by reverse stock split or otherwise) the outstanding
shares of either Class G Common Stock or CMS Energy Common Stock, the
liquidation rights of the holder of each share of CMS Energy Common Stock
relative to the holder of each share of Class G Common Stock will be
appropriately adjusted so as to avoid any dilution in the aggregate liquidation
rights of the holders of either class of Common Stock.
EXCHANGE
At any time after CMS Energy has transferred all of the assets and
liabilities attributed to the Consumers Gas Group to a subsidiary of CMS Energy
which has no other assets or liabilities, CMS Energy, in the sole discretion of
the Board of Directors, may exchange for all outstanding shares of Class G
Common Stock a number of shares of common stock of such subsidiary equal to the
Gas Group Fraction multiplied by the number of outstanding shares of common
stock of such subsidiary. CMS Energy will retain the balance of the outstanding
shares of common stock of such subsidiary, which balance will be attributed to
CMS Energy on account of its Retained Interest.
In the event of a Disposition of all or substantially all of the properties
and assets attributed to the Consumers Gas Group to any person (other than to
the holders of all outstanding shares of Class G Common Stock or to a person in
which CMS Energy, directly or indirectly, owns at least a majority equity
interest), CMS Energy is required, subject to certain exceptions and conditions,
to exchange for each outstanding share of Class G Common Stock a number of
shares of CMS Energy Common Stock having a Fair Market Value equal to 110% of
the Fair Market Value of one share of Class G Common Stock as of the date of the
first public announcement by CMS Energy of such Disposition.
CMS Energy also may, in the sole discretion of the Board of Directors, at
any time, exchange for each outstanding share of Class G Common Stock a number
of shares of CMS Energy Common Stock having a Fair Market Value equal to 115% of
the Fair Market Value of one share of Class G Common Stock as of the date of the
first public announcement by CMS Energy of such exchange.
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<PAGE> 46
RISK FACTORS
NO ASSURANCE OF PAYMENT OF DIVIDENDS
Risks Related to Holding Company Structure. CMS Energy is a legal entity
separate and distinct from its various subsidiaries. As a holding company with
no significant operations of its own, the principal sources of its funds are
dividends or other distributions from its operating subsidiaries (principally
Consumers), borrowings and sales of equity. The ability of Consumers and other
subsidiaries of CMS Energy to pay dividends or make distributions to CMS Energy,
and, accordingly, the ability of CMS Energy to pay dividends on either class of
its Common Stock will depend on its earnings, financial requirements and
contractual restrictions of subsidiaries of CMS Energy, in particular,
Consumers, and other factors. As a regulated entity, Consumers' rates are set by
the MPSC. Consumers' ability to pay dividends is restricted by its Mortgage
Indenture and its Articles. See "Primary Source of Dividends for the Common
Stock of CMS Energy; Restrictions on Sources of Dividends" for information
concerning these restrictions.
Legal and Contractual Dividend Constraints. Dividends on the Class G Common
Stock are limited by Michigan law, certain agreements to which CMS Energy is a
party and the Articles of Incorporation and will be payable when, as and if
declared by the Board of Directors out of the lesser of (i) the assets of CMS
Energy legally available therefor and (ii) the Available Class G Dividend
Amount. If an Offering had been completed at March 31, 1995, the Available Class
G Dividend Amount as of such date would have been approximately $91.5 million,
assuming a Gas Group Fraction of 25% (or approximately $ million, assuming a
Gas Group Fraction of %, if the Underwriters' over-allotment option is
exercised in full). See "Dividend Policy."
Potential Adverse Impact of Net Losses of CMS Energy; Dividends on Either
Class of Common Stock Discretionary. Net losses of CMS Energy or the Consumers
Gas Group and distributions on either class of Common Stock will reduce the
assets legally available for payment of dividends on both classes of Common
Stock. Subject to the restrictions on the assets out of which dividends on the
Common Stock may be paid, as described below and under "Description of Capital
Stock," CMS Energy, in the sole discretion of its Board of Directors, would be
able to pay dividends exclusively on either the Class G Common Stock or the CMS
Energy Common Stock, or on both, in equal or unequal amounts, notwithstanding
the respective amounts of assets or earnings available for dividends on each
class, the amounts of prior dividends declared on each class or any other
factor. Payment of dividends on either class of Common Stock will decrease the
amount of funds available under the limitations described above for the payment
of dividends on both classes of Common Stock.
RISK OF ADVERSE DEVELOPMENTS IN THE BUSINESS OF THE CONSUMERS GAS GROUP
Risks Related to Gas Competition. Competition with respect to the Gas
Distribution Business comes primarily from alternate energy sources such as
electricity. Approximately 30% of the retail gas customers served by the
Consumers Gas Group are also served or capable of being served by electricity
provided by Consumers' electric utility business. Competition also exists with
respect to propane, and to a lesser degree, oil and wood. The principal
factors that determine competitive advantage are price, quality of service,
accessibility of supply and transportation arrangements, and the ability to
supply alternative forms of energy.
The Consumers Gas Group also competes in the natural gas market in its
service territory with parties (principally interstate pipeline companies)
desiring to sell or transport gas directly to the Consumers Gas Group's
industrial and commercial customers. These competitors propose to "by-pass" the
facilities of the Consumers Gas Group by offering to transport and supply
natural gas to industrial customers which are willing to build the necessary
interconnection from the customer to the competing interstate pipeline. See
"Business of the Consumers Gas Group -- Competition."
Regulatory Risks. The Gas Distribution Business 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.
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<PAGE> 47
The MPSC establishes the rates the Consumers Gas Group can charge its
customers. As a regulated company under MPSC jurisdiction, the Consumers Gas
Group may apply to the MPSC for rate increases if increased costs or other
factors warrant. Such rates typically go into effect following a contested
case proceeding before the MPSC. In December 1994, Consumers requested an
increase in its gas rates of $21 million annually. The request incorporates
cost increases, including costs for postretirement benefits and costs related
to Consumers' former manufactured gas plant sites. Consumers requested that
the MPSC authorize a 13% return on equity, instead of the currently authorized
rate of 13.25%. In June 1995, the MPSC staff filed its position in this case,
recommending an $11 million rate decrease. The MPSC staff's recommendation
included a lower rate base, a lower return on common equity, a revised capital
structure and a different sales forecast than Consumers had projected. A final
order is expected in early 1996. No assurance can be given as to the level of
rates which will be authorized by the MPSC. See "Business of the Consumers Gas
Group -- Regulation and Rates."
Risks Related to a Decline in Customer Usage. Although the Consumers Gas
Group residential customer base continues to experience growth, the
residential customers' natural gas usage has declined on a per customer basis
due to a combination of increased efficiencies of natural gas appliances and
conservation measures. See "Business of Consumers Gas Group -- Customers."
Financial Results Are Seasonal and Weather Impacted. A major determinant of
gas usage for any period is the weather, particularly with respect to
residential and commercial customers who use natural gas for space heating and,
to a lesser extent, industrial customers. Approximately 93% of the customers of
the Consumers Gas Group are residential customers, of which 98% use natural gas
for space heating. Accordingly, the Consumers Gas Group's business is seasonal
with approximately 74% of its revenues generated in the first and fourth
quarters of each year. Generally, consumption for heating purposes increases as
heating degree days increase with a corresponding improvement in results of
operations of the Consumers Gas Group. If during the heating season, the weather
in the Consumers Gas Group's service area is warmer than normal, its results of
operations will be adversely affected. See "Business of the Consumers Gas Group
- -- Customers."
Risks Associated with Environmental Compliance. The Gas Distribution
Business is subject to regulation with respect to environmental quality,
including air and water quality, zoning and other matters by various federal,
state and local authorities. The Consumers Gas Group expects that it will
ultimately incur investigation and remedial action costs at a number of sites,
including some of the 23 sites that formerly housed manufactured gas plant
facilities. See "Business of the Consumers Gas Group -- Environmental Matters."
Data available to Consumers and its continued internal analysis have resulted in
estimated remedial costs for all 23 sites of between $48 million and $112
million. As of March 31, 1995, the Consumers Gas Group had accrued a liability
of $48 million, representing the minimum amount in the range, which is reflected
on the financial statements of the Consumers Gas Group included herein. The
outcome of these matters may affect the results of operations of the Consumers
Gas Group. See "Business of the Consumers Gas Group -- Environmental Matters."
RISKS RELATED TO OTHER BUSINESSES OF CMS ENERGY
No Assurance of Recovery of Purchased Power Costs. As noted herein, the
availability and amount of dividends payable with respect to the Class G Common
Stock could be adversely affected by any losses incurred in other businesses
conducted by CMS Energy, particularly the Consumers electric utility business
and the foreign oil and gas business conducted by subsidiaries of Enterprises.
For example, issues pertaining to Consumers' Power Purchase Agreement ("PPA")
with MCV Partnership could have a material adverse effect on the earnings or
financial condition of Consumers. Consumers is obligated to purchase 1,240
megawatts ("MW") in 1995 and each year thereafter through approximately 2025 of
contract electric generation capacity from the MCV Partnership under the PPA.
Since 1990, the ability of Consumers to recover from its electric rate
payers capacity and fixed-energy costs for power purchased by Consumers from the
MCV Partnership has been a significant issue. Effective January 1, 1993, a
Settlement Order (the "Settlement Order") issued by the MPSC allowed Consumers
to recover from its electric retail customers substantially all of the payments
for Consumers' ongoing purchase of 915 MW of contract capacity from the MCV
Partnership, significantly reducing the amount of future
17
<PAGE> 48
underrecoveries for these power costs. The Settlement Order has been
appealed to the courts, and there is no assurance that Consumers will be able
to recover from its customers the costs associated with its capacity and energy
purchases from the MCV Partnership above the 915 MW MPSC authorized level. As a
result of the Settlement Order, Consumers recognized a substantial loss in
1992, including an estimate of future losses, and could incur substantial
additional losses in the future. See Note 3 of CMS Energy Corporation Notes to
Consolidated Financial Statements included herein (hereinafter called the "CMS
Energy Notes") for information with respect to the cash underrecoveries
associated with the Settlement Order and the magnitude of previously recorded
and potential future losses.
Nuclear Operations Risks. While CMS Energy believes that all of its nuclear
operations are conducted in accordance with industry and regulatory standards
and that its insurance coverages are adequate and prudent, a major failure at
its larger nuclear electric generating station or a material increase in the
current levels of decommissioning costs being funded by Consumers could have a
material adverse effect on its earnings and financial condition. In addition,
the Nuclear Regulatory Commission ("NRC") has broad authority under federal law
to impose licensing and safety-related requirements upon owners and operators of
nuclear generating facilities, and in the event of non-compliance, has the
authority to impose fines or shut down a unit, or both, depending upon its
assessment of the severity of the situation, until compliance is achieved.
Revised safety requirements promulgated by the NRC have, in the past,
necessitated substantial capital expenditures at Consumers' nuclear plants and
additional such expenditures could be required in the future. See Note 13 of CMS
Energy Notes.
Risk of Loss of Holding Company Exemption. CMS Energy is a public utility
holding company which is exempt from registration under the Public Utility
Holding Company Act of 1935 ("PUHCA"). However, in December 1991, the Attorney
General of the State of Michigan (the "Attorney General") and Michigan Municipal
Cooperative Group (the "MMCG") asked the Commission to revoke CMS Energy's
status as an exempt holding company and to require it to register under PUHCA.
CMS Energy is opposing this request. If CMS Energy were to lose its current
exemption, it would become more heavily regulated by the Commission; Consumers
could ultimately be forced to divest either the Gas Distribution Business of the
Consumers Gas Group or Consumers' electric utility business; and CMS Energy
could be restricted from conducting businesses that are not functionally related
to the conduct of the utility business as determined by the Commission. See
"Business of the Consumers Gas Group -- Legal Proceedings." In the event CMS
Energy is required to divest the Gas Distribution Business, such divestment in
all likelihood would constitute a Disposition of "substantially all of the
properties and assets attributed to the Consumers Gas Group" under the Articles
of Incorporation and would require CMS Energy to exchange for each outstanding
share of Class G Common Stock a number of shares of CMS Energy Common Stock
having a Fair Market Value equal to 110% of the Fair Market Value of one share
of Class G Common Stock as of the date of the first public announcement by CMS
Energy of such Disposition. See "Description of Capital Stock -- Class G Common
Stock -- Exchange or Redemption."
The Incorporated Documents discuss the various regulatory, environmental,
litigation and other matters which could adversely affect Consumers' electric
business, and describe Consumers' electric business generally. The Incorporated
Documents should be reviewed by investors in connection with this Offering.
RISKS RELATED TO NEW CAPITAL STRUCTURE AND THE CLASS G COMMON STOCK
Shareholders of One Company; Financial Effects of CMS Energy Could
Adversely Affect the Consumers Gas Group. Notwithstanding the attribution of
assets and liabilities (including contingent liabilities), common stockholders'
equity and items of income and expense of CMS Energy to the Consumers Gas Group
for the purpose of preparing the financial statements of the Consumers Gas
Group, the change in the capital structure of CMS Energy will not affect CMS
Energy's title to its assets or CMS Energy's responsibility for its liabilities.
CMS Energy and its subsidiaries will each continue to be responsible for their
respective liabilities. Holders of Class G Common Stock and CMS Energy Common
Stock will be common shareholders of CMS Energy and, as such, will be subject to
all of the risks associated with an investment in CMS Energy and all of its
businesses, assets and liabilities.
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<PAGE> 49
Financial results arising from the businesses of CMS Energy, other than
the business of the Consumers Gas Group, that affect CMS Energy's consolidated
results of operations or financial condition could affect the financial
position of the Consumers Gas Group or the market price of the Class G Common
Stock. If certain of CMS Energy's financial covenants in its debt instruments
are breached, no dividends may be paid on the Class G Common Stock. See
"Dividend Policy." Further, a similar breach by Consumers in its debt
instruments would restrict its ability to pay dividends to CMS Energy. The
ability of CMS Energy to pay dividends on its Common Stock depends
substantially upon timely receipt of sufficient dividends or other
distributions from Consumers. See "Primary Source of Dividends for the Common
Stock of CMS Energy; Restrictions on Sources of Dividends." In addition, any
net losses of CMS Energy and dividends or distributions on, or repurchases of,
either class of Common Stock will reduce the assets of CMS Energy legally
available for payment of dividends on the Class G Common Stock. Accordingly,
CMS Energy's consolidated financial information should be read in conjunction
with the Consumers Gas Group's financial information. CMS Energy will provide
to holders of Class G Common Stock separate financial statements, management's
discussion and analysis of financial condition and results of operations,
business descriptions and other information for both the Consumers Gas Group
and CMS Energy and its consolidated subsidiaries, respectively. Such financial
statements would reflect the financial position, results of operations and cash
flows of the businesses reflected therein. However, such financial statements
could also include contingent liabilities that are not separately identified
with particular business operations.
Determinations of the Board of Directors Could Have Disparate Effects
on Each Class of Common Stock. Although CMS Energy is aware of no precedent
concerning the manner in which Michigan law would be applied to a board of
directors' duties in the context of multiple classes of common stock with
divergent interests, CMS Energy believes that a Michigan court would hold that
a board of directors owes an equal duty to all shareholders regardless of class
and does not have separate or additional fiduciary duties to the holders of
separate classes of stock. That duty requires each director to act in good
faith with the care an ordinarily prudent person in a like position would
exercise under similar circumstances, and in a manner such director reasonably
believes to be in the best interests of CMS Energy. CMS Energy believes that,
under Michigan law, a good faith determination by a disinterested and
adequately informed board, or a committee thereof, which discharges such duty,
and which the directors honestly believe is in the best interests of CMS
Energy, would be a defense to any challenge by or on behalf of the holders of
either class of Common Stock to the Board of Directors' determination that
could have a disparate effect on each class of Common Stock.
Disproportionate ownership interests of members of the Board of Directors
in one or both classes of Common Stock of CMS Energy or disparate values of the
classes of Common Stock of CMS Energy could create or appear to create potential
conflicts of interest when directors are faced with decisions that could have
different implications for different classes. Nevertheless, CMS Energy believes
that a director would be able to discharge his or her fiduciary duties even if
his or her interests in shares of the classes of Common Stock were
disproportionate and/or had disparate values. CMS Energy's Performance Incentive
Stock Plan has been amended to permit the issuance of options for, or other
incentive awards consisting of, any class of Common Stock of CMS Energy,
including the Class G Common Stock.
Risk That Interests of the Holders of Each Class of Common Stock Could
Diverge. The existence of separate classes of Common Stock could give rise to
occasions when the interests of the holders of Class G Common Stock and holders
of CMS Energy Common Stock may diverge or appear to diverge. Examples include
determinations by the Board of Directors to (i) pay or omit the payment of
dividends on either class of Common Stock, (ii) attribute the proceeds of
issuances of securities of CMS Energy either to CMS Energy or to the equity of
the Consumers Gas Group, (iii) attribute consideration to be received by common
stockholders in connection with a merger or consolidation including CMS Energy
to either or both classes of Common Stock, (iv) exchange CMS Energy Common Stock
for all outstanding Class G Common Stock at a premium, (v) approve dispositions
of assets of CMS Energy attributable to the Consumers Gas Group and (vi) make
operational and financial decisions with respect to either CMS Energy or the
Consumers Gas Group that could be considered to be detrimental to the other. The
significant considerations with respect to the payment of dividends on either
class of the Common Stock are set forth above under "No Assurance of Payment of
Dividends." Each of the other potential conflicts of interest is discussed
below.
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<PAGE> 50
Risks Associated With Attribution of Proceeds Upon Issuance of
Securities of CMS Energy. CMS Energy intends to invest the net proceeds of
the Offering in the businesses and for general corporate purposes of CMS
Energy, none of which is attributable to the Consumers Gas Group. Such net
proceeds will initially be used to repay a portion of CMS Energy's
indebtedness outstanding under its Credit Facility. None of this debt is
attributable to the Consumers Gas Group. In any future offerings of
securities of CMS Energy, the Board would, in its sole discretion,
determine the attribution of the net proceeds of such sale among CMS
Energy and the Consumers Gas Group. The impact of future offerings
on the Consumers Gas Group would depend upon the type and size of the
offering and the amount attributable to the Consumers Gas Group. See
"Description of Capital Stock -- Retained Interest of CMS Energy in
Consumers Gas Group; Gas Group Fraction."
Risks Associated With Attribution of Proceeds of Mergers or
Consolidations. The Articles of Incorporation do not contain any provisions
governing how consideration to be received by holders of Common Stock in
connection with a merger or consolidation involving CMS Energy is to be
allocated among holders of different classes of Common Stock. In any such
merger or consolidation, the percentage of the consideration to be
allocated to holders of any class of Common Stock under the method of
allocation chosen by the Board of Directors may be materially more or less
than that which might have been allocated to such holders had the Board of
Directors chosen a different method of allocation.
Risks Associated With Exchange of Class G Common Stock. CMS Energy
could, in the sole discretion of its Board of Directors, at any time
determine to exchange for each outstanding share of Class G Common Stock a
number of shares of CMS Energy Common Stock having a Fair Market Value
equal to 115% of the Fair Market Value of one share of Class G Common Stock
as of the date of the first public announcement by CMS Energy of such
exchange (a "15% Premium"). In addition, CMS Energy could, in the sole
discretion of its Board of Directors, at any time dispose of substantially
all of the properties or assets attributed to the Consumers Gas Group,
whereupon CMS Energy must exchange for each share of Class G Common Stock,
shares of CMS Energy Common Stock having a Fair Market Value equal to 110%
of the Fair Market Value of one share of Class G Common Stock as of the
date of the first public announcement by CMS Energy of such disposition (a
"10% Premium"). These determinations could be made at a time when either or
both the CMS Energy Common Stock and the Class G Common Stock may be
considered to be overvalued or undervalued. In addition, any such exchange
at either the 10% Premium or the 15% Premium would preclude holders of both
classes of Common Stock from retaining their investment in a security that
is intended to reflect separately the performance of CMS Energy, on the one
hand, or Consumers Gas Group, on the other. See "Description of Capital
Stock -- Class G Common Stock -- Exchange or Redemption" and " -- CMS
Energy Common Stock -- Exchange or Redemption" below.
Risks Associated With Dispositions of Consumers Gas Group Assets. If
the assets attributed to the Consumers Gas Group continue to represent less
than substantially all of the properties and assets of CMS Energy, CMS
Energy could, in the sole discretion of its Board of Directors and without
shareholder approval, approve sales and other dispositions of any amount of
the properties and assets of the Consumers Gas Group since Michigan law
requires shareholder approval only for a sale or other disposition of all
or substantially all of the properties and assets of CMS Energy not in the
"usual and regular course of its business." See "Description of Capital
Stock -- Class G Common Stock -- Exchange or Redemption."
Risks Associated With Operational and Financial Decisions. The Board
of Directors could, in its sole discretion, from time to time, make
operational and financial decisions that affect disproportionately the
Consumers Gas Group and the various other businesses of CMS Energy and its
subsidiaries, such as the attribution of funds to and from the Consumers
Gas Group, with appropriate adjustments to the Retained Interest.
No Established Market for Class G Common Stock; Risk That Market Price Will
Not Reflect Reported Financial Performance; Risks Associated With Future
Sales. The Class G Common Stock is intended to reflect the performance of the
businesses attributed to the Consumers Gas Group. Since there has been no
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<PAGE> 51
public market for the Class G Common Stock, there can be no assurance as to the
degree to which the
market
price of the Class G Common Stock will accurately reflect the performance of the
businesses attributed to
the
Consumers Gas Group reflected in its financial statements or the dividend policy
established by the Board of Directors. In addition, CMS Energy cannot predict
the impact on such market price of certain terms of the Class G Common Stock,
such as the ability of CMS Energy to exchange for each share of Class G Common
Stock shares of CMS Energy Common Stock.
COMMENT 13
COMMENT 14
& 15(1)
Although the Class G Common Stock will be listed on the NYSE, there can be
no assurance that an active public trading market for the Class G Common Stock
will develop or be sustained after the Offering. The initial public offering
price of the Class G Common Stock will be determined by negotiation among CMS
Energy and the Underwriters, and may not be indicative of the market price of
the Class G Common Stock after the Offering. For a discussion of the factors
considered in determining the initial public offering price of the Class G
Common Stock, see "Underwriters -- Pricing of Offering."
No prediction can be made as to the effect, if any, that future issuances
or sales of shares of Class G Common Stock, or the availability of such shares
for sale, will have on the market price of the Class G Common Stock prevailing
from time to time. Nevertheless, issuances or sales of substantial amounts of
Class G Common Stock, or the perception that such issuances or sales could
occur, could adversely affect prevailing market prices of the Class G Common
Stock. Any such issuances of additional shares of Class G Common Stock may be
authorized by the Board of Directors from the authorized but unissued shares of
Class G Common Stock without shareholder approval. In connection with the
Offering, CMS Energy will agree that, without the prior written consent of the
Representatives, it will not offer, sell or contract to sell or otherwise
dispose of any shares of (a) Class G Common Stock or any securities (other than
CMS Energy Common Stock) convertible into or exercisable or exchangeable for
Class G Common Stock for a period of 180 days after the date of the Underwriting
Agreement or (b) CMS Energy Common Stock or any securities convertible into or
exercisable or exchangeable for CMS Energy Common Stock for a period of 90 days
after the date of the Underwriting Agreement, provided that CMS Energy may,
during such period, (i) in a manner generally consistent with past practices
regarding the numbers of shares issued by CMS Energy from time to time
thereunder, issue shares of CMS Energy Common Stock and Class G Common Stock
under its Dividend Reinvestment and Optional Cash Payment Plan, Performance
Incentive Stock Plan, Employee Stock Ownership Plan and Employee Savings and
Incentive Plan, as any of the same may be supplemented or amended and (ii) issue
up to 3 million shares of CMS Energy Common Stock solely for the purpose of
effecting acquisitions of other businesses or properties. See "Underwriters."
Limited Additional Shareholders Rights. Holders of Class G Common Stock
will have only the rights of common shareholders of CMS Energy, and will not be
provided any rights specifically related to the Consumers Gas Group, other than
(i) the dividend provisions described under "Description of Capital Stock --
Class G Common Stock -- Dividends," (ii) the redemption and exchange provisions
described under "Description of Capital Stock -- Class G Common Stock --
Exchange or Redemption" and (iii) certain limited class voting rights provided
in the Restated Articles of Incorporation and under Michigan law. See
"Description of Capital Stock -- Class G Common Stock -- Voting."
Limited Separate Shareholder Voting Rights; Lack of Effective Voting Power
of Class G Common Stock. Subject to certain limited exceptions, holders of
shares of Class G Common Stock and holders of shares of CMS Energy Common Stock
would vote together as a single class on all matters as to which common
shareholders generally are entitled to vote. Holders of each class of Common
Stock will have no rights to vote on matters as a separate class (except in
certain limited circumstances as described below under "Description of Capital
Stock -- Class G Common Stock -- Voting"). In the absence of a separate class
vote, separate meetings for the holders of each class of Common Stock will not
be held.
Each issued and outstanding share of Class G Common Stock and each issued
and outstanding share of CMS Energy Common Stock will be entitled to one vote on
each matter on which the holders of Common Stock are entitled to vote. However,
certain matters as to which the holders of Common Stock could be entitled to
vote together as a single class could involve a divergence or the appearance of
a divergence of the
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<PAGE> 52
interests of the holders of Class G Common Stock and holders of CMS Energy
Common Stock. When a vote is taken on any matter as to which all Common Stock is
voting together as one class, the class of Common Stock that is entitled to more
than the number of votes required to approve such matter would be in a position
to control the outcome of the vote on such matter. Upon the completion of the
Offering, shares of outstanding CMS Energy Common Stock will be entitled to a
substantial majority of the total votes to which the then outstanding Common
Stock is entitled. See "Description of Capital Stock -- Class G Common Stock --
Voting" and "-- CMS Energy Common Stock -- Voting" below.
Risk of Limited Approval Rights of Future Issuances of Stock; Dilution. The
Articles of Incorporation provide authorization for the issuance of up to 60
million shares of Class G Common Stock. Authorized but unissued shares of Class
G Common Stock and CMS Energy Common Stock would be available for issuance from
time to time by CMS Energy at the sole discretion of the Board of Directors for
any proper corporate purpose, which could include obtaining capital, providing
compensation or benefits to employees, paying stock dividends or acquiring
companies or businesses. The approval of the holders of Class G Common Stock
would not be solicited by CMS Energy for the issuance from the authorized but
unissued shares of Common Stock of any additional shares of Class G Common Stock
or CMS Energy Common Stock (unless such approval is deemed advisable by the
Board of Directors or is required by stock exchange regulations).
Any issuance of shares of Class G Common Stock or CMS Energy Common Stock
would dilute the relative voting power of shareholders of shares of Class G
Common Stock outstanding prior to such issuance.
Risks Associated With Attribution of Funds. After the completion of the
Offering, any securities issued by CMS Energy and its subsidiaries would be
specifically attributed to and reflected in the financial statements of the
Consumers Gas Group to the extent that the Board of Directors determines that
such securities are issued for the benefit of the Consumers Gas Group. After
completion of the Offering, any cash of CMS Energy attributed to the Consumers
Gas Group would be accounted for as short-term loans unless the Board of
Directors made a specific determination that a given attribution (or type of
attribution) should be accounted for as a long-term loan or an attribution of
cash of CMS Energy to the Consumers Gas Group as an equity contribution, which
would increase the Retained Interest Shares. There are no specific criteria to
determine when a cash attribution would be classified as a long-term loan or as
an equity contribution which would change the number of Retained Interest
Shares, rather than a short-term loan. Such determination would be made by the
Board of Directors in the exercise of its business judgment at the time of such
attribution (or the first of such type of attribution) based upon all relevant
circumstances, including the financing needs and objectives of the business
attributed to Consumers Gas Group, the investment objectives of the attribution,
the availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions. Such determination
would affect the amount of interest expense and interest income reflected in the
financial statements of the Consumers Gas Group if such attribution was made as
a short-term loan or long-term loan or as equity, the amount of stockholders'
equity of CMS Energy attributable to the Consumers Gas Group and the Retained
Interest of CMS Energy. See "Certain Management and Accounting Policies --
Accounting Matters" below.
Limitations on Potential Unsolicited Acquisitions of the Consumers Gas
Group. If the Consumers Gas Group were a stand-alone corporation, any person
interested in acquiring such corporation without negotiation with management
could seek control of the outstanding Class G Common Stock by means of a tender
offer or proxy contest. Although the Class G Common Stock is intended to reflect
the performance of the Consumers Gas Group, a person interested in acquiring
only the Consumers Gas Group without negotiation with CMS Energy's management
will still be required to seek control of the voting power represented by all of
the outstanding capital stock of CMS Energy entitled to vote on such
acquisition, including the CMS Energy Common Stock. See "Limited Separate
Shareholder Voting Rights; Effects on Voting Power" above.
Retained Interest Of CMS Energy In The Consumers Gas Group; Gas Group
Fraction. Prior to the sale or distribution of Class G Common Stock, the
Retained Interest of CMS Energy in the Consumers Gas Group would represent 100%
of the CMS Energy common stockholders' equity attributed to the Consumers Gas
Group. The number of shares of Class G Common Stock to be issued and sold in the
Offering will represent approximately 25% (assuming the Underwriters'
over-allotment option is not exercised) of the CMS
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<PAGE> 53
Energy common stockholders' equity attributed to the Consumers Gas Group. The
shares of Class G Common Stock to be sold in such Offering will be allocated to
the Retained Interest of CMS Energy in the Consumers Gas Group, and result in
the reduction of the Retained Interest Shares and the Retained Interest
Fraction. However, (i) any repurchase of outstanding shares of Class G Common
Stock, whether or not for the account of CMS Energy, would increase the Retained
Interest Fraction and would reduce the Gas Group Fraction accordingly and (ii)
any attribution of net assets (whether contributed or deemed to be contributed
by a regulatory agency) to the Consumers Gas Group would increase the Retained
Interest Shares and thereby increase the Retained Interest Fraction and reduce
the Gas Group Fraction accordingly. See "Class G Common Stock Retained Interest
Illustrations" attached as Appendix II hereto.
Risks Associated With Changes in Management and Accounting Policies. The
Board of Directors has adopted certain management and accounting policies and
agreements described herein with respect to dividends, the allocation of
corporate expenses, assets and liabilities (including contingent liabilities)
and intercompany transactions, any and all of which could be modified or
rescinded in the sole discretion of the Board of Directors without approval of
the shareholders. The Board of Directors may also adopt additional policies
depending upon the circumstances, including policies that would have disparate
impacts upon holders of Class G Common Stock and holders of CMS Energy Common
Stock. See "Dividend Policy" and "Certain Management and Accounting Policies."
USE OF PROCEEDS
The estimated proceeds to CMS Energy from the Offering, assuming an
initial public offering price of $17.50 per share, will be $140 million ($161
million if the Underwriters' over-allotment option is exercised in full). All
of the proceeds will be invested in the businesses and used for the general
corporate purposes of CMS Energy, none of which is attributable to the
Consumers Gas Group. Initially, such proceeds will be used to repay a portion
of CMS Energy's indebtedness under the Credit Facility, in which short-term
borrowings are incurred for working capital purposes, and which at May 31, 1995
had $192 million principal amount outstanding with an annual interest rate of
7.6%. None of this debt is attributable to the Consumers Gas Group.
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<PAGE> 54
CAPITALIZATION
The following table sets forth as of March 31, 1995 (i) the capitalization
of the Consumers Gas Group, (ii) the consolidated capitalization of CMS Energy
and (iii) the consolidated capitalization of CMS Energy, as adjusted to give
effect to the Offering at an assumed initial public offering price of $17.50 per
share and the application of the proceeds therefrom to repay a portion of the
debt outstanding under the Credit Facility, none of which is attributable to the
Consumers Gas Group. The proceeds of the Offering will be reflected entirely in
the consolidated financial statements of CMS Energy and will not have a pro
forma effect on the historic capitalization of the Consumers Gas Group. For
information concerning attribution of debt and equity to the Consumers Gas
Group, see "Consumers Gas Group -- Unaudited Pro Forma Condensed Statements of
Income."
<TABLE>
<CAPTION>
MARCH 31, 1995
------------------------------------------------
CONSUMERS GAS GROUP CMS ENERGY CONSOLIDATED
------------------- -----------------------
ACTUAL ACTUAL AS ADJUSTED
------------------- ------ -----------
(IN MILLIONS)
<S> <C> <C> <C>
Short-term debt (includes notes payable and
current portion of long-term debt and capital
leases)......................................... $ 22 $ 315 $ 315
===== ====== =========
Non-current portion of capital leases............. $ 18 $ 103 $ 103
Long-term debt (excluding current maturities)..... 425 2,787 2,647
Stockholders' equity:
Preferred stock................................. 78 356 356
Common stockholders' equity..................... 366 1,209 1,349
----- ------ -----------
Total stockholders' equity................... 444 1,565 1,705
----- ------ -----------
Total capitalization.............................. $ 887 $4,455 $ 4,455
===== ====== =========
</TABLE>
DIVIDEND POLICY
CMS Energy is a legal entity separate and distinct from its various
subsidiaries. As a holding company with no significant operations of its own,
the principal sources of its funds are dividends or other distributions from its
operating subsidiaries, in particular, Consumers, borrowings and sales of
equity. The ability of Consumers and other subsidiaries of CMS Energy to pay
dividends or make distributions to CMS Energy, and, accordingly, the ability to
CMS Energy to pay dividends on its Common Stock will depend on the earnings,
financial requirements and contractual restrictions of the subsidiaries of CMS
Energy, in particular, Consumers, and other factors. See "Primary Source of
Dividends for the Common Stock of CMS Energy; Restrictions on Sources of
Dividends" below.
Dividends on each class of Common Stock are limited by Michigan law to
legally available assets of CMS Energy, which are determined on the basis of the
entire company. Distributions on each class of Common Stock may be subject to
the rights of the holders, if any, of the Preferred Stock of CMS Energy. Net
losses of CMS Energy or the Consumers Gas Group and distributions on either
class of Common Stock will reduce the assets of CMS Energy legally available for
payment of dividends on each class of Common Stock. Under the Articles of
Incorporation, any net losses of CMS Energy and distributions on CMS Energy
Common Stock will not reduce the assets available for declaration and payment of
dividends on the Class G Common Stock unless the legally available assets of CMS
Energy are less than the Available Class G Dividend Amount.
Dividends paid on CMS Energy's Common Stock in 1994 were $.78 per share. On
each of February 22, 1995 and May 22, 1995, CMS Energy paid a quarterly dividend
of $.21 per share (an annualized rate of $.84 per share). On May 26, 1995, CMS
Energy raised its dividend to an annualized rate of $.96 per share ($.24 per
quarter). The increase will be effective with the next scheduled quarterly
dividend payment in August 1995. Future dividends, however, are dependent on the
earnings and financial condition of CMS Energy as well as other factors.
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<PAGE> 55
Dividends on the Class G Common Stock are limited by the Articles of
Incorporation and will be payable when, as and if declared by the Board out of
the lesser of (i) the assets of CMS Energy legally available therefor and (ii)
the Available Class G Dividend Amount. Assuming the Offering had been completed
at March 31, 1995, the Available Class G Dividend Amount as of such date would
have been approximately $91.5 million, assuming a Gas Group Fraction of 25% (or
approximately $ million, assuming a Gas Group Fraction of %, assuming
that the Underwriters' overallotment option is exercised in full). Dividends on
the Class G Common Stock will be paid at the discretion of the Board of
Directors based primarily upon the earnings and financial condition of the
Consumers Gas Group, and, to a lesser extent, CMS Energy as a whole. Subject to
the restrictions described below, if the earnings and financial condition of the
Consumers Gas Group permit, dividends with respect to the Class G Common Stock
are expected to be paid commensurate with dividend practices of comparable
publicly-held local natural gas distribution companies generally. Management
believes that such practices currently are to pay out from 70% to 85% of annual
earnings available for common stock. Consistent with this policy, CMS Energy
currently intends to pay an initial quarterly dividend of $.28 per share on the
Class G Common Stock. While the Board of Directors does not currently intend to
change this dividend policy, it reserves the right to do so at any time and from
time to time. Under the Articles of Incorporation and Michigan law, the Board of
Directors is not required to declare, and CMS Energy is not required to pay,
dividends in accordance with the foregoing dividend policy.
In making its dividend decisions with respect to the Class G Common Stock,
the Board of Directors will rely on the financial statements of the Consumers
Gas Group, as well as, to a lesser extent, the consolidated financial statements
of CMS Energy. The method of calculating earnings per share for the Class G
Common Stock will reflect the intent of the Board of Directors that the
separately reported assets and earnings of the Consumers Gas Group be the basis
for determining dividends to be paid on the Class G Common Stock, although
liquidation rights of the Class G Common Stock and legally available assets of
CMS Energy will be based on different factors.
Subject to the restrictions on the assets out of which dividends on the
Common Stock may be paid, as described below and under "Description of Capital
Stock -- Class G Common Stock" and "-- CMS Energy Common Stock," CMS Energy, in
the sole discretion of its Board of Directors, would be able to pay dividends
exclusively on either the Class G Common Stock or the CMS Energy Common Stock,
or on both, in equal or unequal amounts, notwithstanding the respective amounts
of assets or earnings available for dividends on each class, the amounts of
prior dividends declared on each class or any other factor. 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 non-utility 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. CMS Energy has paid cash dividends on shares
of CMS Energy Common Stock since 1989.
There are restrictions on CMS Energy's ability to pay dividends contained
in its Credit Facility, CMS Energy's Indenture dated as of September 15, 1992,
as supplemented (the "Indenture"), to NBD Bank, N.A., as Trustee, and CMS
Energy's Indenture dated as of January 15, 1994 (the "GTN Indenture") to The
Chase Manhattan Bank, N.A., as Trustee.
The Credit Facility provides that CMS Energy will not, and will not permit
certain of its subsidiaries, directly or indirectly, to (i) declare or pay any
dividend or distribution on the capital stock of CMS Energy, or (ii) purchase,
redeem, retire or otherwise acquire for value any such capital stock (a
"Restricted Payment"), unless: (1) no event of default under the Credit
Facility, or event that with the lapse of time or giving of notice would
constitute such an event of default, has occurred and is continuing, and (2)
after giving effect to any such Restricted Payment, the aggregate amount of all
such Restricted Payments since September 30, 1993 shall not have exceeded the
sum of: (a) $120,000,000, (b) 100% of CMS Energy's consolidated net income (as
defined in the Indenture) since September 30, 1993 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) any net proceeds (as defined in the Indenture) received by CMS Energy
for the issuance or sale of its capital stock subsequent to September 30, 1993.
At March 31, 1995, CMS Energy could pay cash dividends of $492 million pursuant
to this restriction.
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<PAGE> 56
The Indenture provides that CMS Energy will not, and will not permit
certain of its subsidiaries, directly or indirectly, to make a Restricted
Payment, unless: (1) no event of default under the Indenture, or event that with
the lapse of time or giving of notice would constitute such an event of default,
has occurred and is continuing, and (2) after giving effect to any such
Restricted Payment, the aggregate amount of all such Restricted Payments since
September 30, 1992 shall not have exceeded the sum of: (a) $40,000,000, (b) 100%
of CMS Energy's consolidated net income (as defined in the Indenture) since
September 30, 1992 to 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) any net proceeds (as defined in
the Indenture) received by CMS Energy for the issuance or sale of its capital
stock subsequent to September 15, 1992. At March 31, 1995, CMS Energy could pay
cash dividends of $499 million pursuant to this restriction.
The GTN Indenture provides that, so long as any of the General Term Notes,
Series A ("GTNs") issued thereunder are outstanding and are rated below BBB- by
Standard & Poor's or by Duff & Phelps, CMS Energy will not, and will not permit
certain of its subsidiaries, directly or indirectly, to make any Restricted
Payments, if at any time CMS Energy or such subsidiary makes such Restricted
Payment: (1) an Event of Default (as defined in the GTN Indenture), or an event
that with the lapse of time or the giving of notice or both would constitute
such an Event of Default, has occurred and is continuing (or would result
therefrom), or (2) the aggregate amount of such Restricted Payment and all other
Restricted Payments made since September 30, 1993, would exceed the sum of: (a)
$120,000,000 plus 100% of consolidated net income from September 30, 1993 to the
end of the most recent fiscal quarter ending at least 45 days prior to the date
of such Restricted Payment (or, in case such sum shall be a deficit, minus 100%
of the deficit) and (b) the aggregate net proceeds received by CMS Energy from
the issue or sale of or contribution with respect to its capital stock after
September 30, 1993. At March 31, 1995, CMS Energy could pay cash dividends of
$492 million pursuant to this restriction.
The foregoing provisions do not prohibit: (i) dividends or other
distributions paid by CMS Energy in respect of the capital stock issued in
connection with the acquisition of any business or assets by CMS Energy where
such payments are payable solely from the net earnings of such business or
assets; (ii) any purchase or redemption of capital stock made by exchange for,
or out of the proceeds of the substantially concurrent sale of, capital stock;
(iii) dividends paid within 60 days after the date of declaration thereof if at
such date of declaration such dividends would have complied with the
aforementioned limitations; or (iv) payments pursuant to the tax sharing
agreement among CMS Energy and its subsidiaries.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, CMS Energy would not be able to pay its debts as they become due in
the usual course of business, or its total assets would be less than the sum of
its total liabilities plus, unless the articles permit otherwise, the amount
that would be needed, if CMS Energy were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. CMS Energy's net assets available for payment of dividends under
the Michigan Business Corporation Act ("MBCA") at March 31, 1995 were $1,207
million.
PRIMARY SOURCE OF DIVIDENDS FOR THE COMMON STOCK
OF CMS ENERGY; RESTRICTIONS ON SOURCES OF DIVIDENDS
The ability of CMS Energy to pay dividends on its Class G Common Stock and
CMS Energy Common Stock depends and will depend substantially upon timely
receipt of sufficient dividends or other distributions from its subsidiaries, in
particular Consumers. Consumers' ability to pay dividends on its Common Stock
depends on its revenues, earnings and other factors. As a regulated entity,
Consumers' rates are set by the MPSC.
Consumers' ability to pay dividends is restricted by its Mortgage Indenture
and its Articles. The Mortgage Indenture provides that Consumers can only pay
dividends on its common stock out of retained earnings accumulated subsequent to
September 30, 1945, provided that upon such payment, there shall remain of such
retained earnings an amount equivalent to any deficiency in maintenance and
replacement expenditures as compared with maintenance and replacement
requirements since December 31, 1945.
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Because of restrictions in its Articles and Mortgage Indenture, Consumers was
prohibited from paying dividends on its common stock from June 1991 to December
31, 1992. However, as of December 31, 1992, Consumers effected a
quasi-reorganization in which Consumers' accumulated deficit of $574 million was
eliminated against other paid-in capital. With the accumulated deficit
eliminated, Consumers satisfied the requirements under its Mortgage Indenture
and resumed paying dividends on its common stock in May 1993.
Consumers' Articles also provide two restrictions on its payment of
dividends on its common stock. First, prior to the payment of any common stock
dividend, Consumers must reserve retained earnings after giving effect to such
dividend payment of at least (i) $7.50 per share on all then outstanding shares
of its Preferred Stock, (ii) in respect to its Class A Preferred Stock, 7.5% of
the aggregate amount established by its Board of Directors to be payable on the
shares of each series thereof in the event of involuntary liquidation of
Consumers, and (iii) $7.50 per share on all then outstanding shares of all other
stock over which its Preferred Stock and Class A Preferred Stock do not have
preference as to the payment of dividends and as to assets. Second, dividend
payments during the 12-month period ending with the month the proposed payment
is to be paid are limited to: (i) 50% of net income available for the payment of
dividends during the base period (hereinafter defined) if the ratio of common
stock and surplus to total capitalization and surplus for 12 consecutive
calendar months within the 14 calendar months immediately preceding the proposed
dividend payment (the "base period"), adjusted to reflect the proposed dividend,
is less than 20%; and (ii) 75% of net income available for the payment of
dividends during the base period if the ratio of common stock and surplus to
total capitalization and surplus for the base period, adjusted to reflect the
proposed dividend, is at least 20% but less than 25%.
Consumers' Articles also prohibit the payment of cash dividends on its
common stock if Consumers is in arrears on preferred stock dividend payments.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, Consumers would not be able to pay its debts as they become due in
the usual course of business, or its total assets would be less than the sum of
its total liabilities plus, unless the articles permit otherwise, the amount
that would be needed, if Consumers were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. Consumers' net assets available for payment of dividends under the
Michigan Business Corporation Act at March 31, 1995 were $1,513 million.
Currently it is Consumers' policy to pay annual dividends equal to 80% of its
annual consolidated net income.
Under the most restrictive of these conditions, and Consumers' current
dividend policy, at March 31, 1995, $69.9 million of Consumers' retained
earnings were available to pay cash dividends on its common stock. Consumers'
Board of Directors reserves the right to change this policy at any time.
Consumers paid dividends on its Common Stock of $16.0 million on February
22, 1994, $65.6 million on May 20, 1994, $31.0 million on August 19, 1994, $36.0
million on November 4, 1994, $27.4 million on December 20, 1994 and $69.9
million on May 19, 1995.
CERTAIN MANAGEMENT AND ACCOUNTING POLICIES
MANAGEMENT PERSONNEL
The following have been selected to be the senior management team for the
Consumers Gas Group:
Paul A. Elbert, Executive Vice President and Chief Operating Officer,
Consumers Gas Group. Since July 1991, Mr. Elbert had been the senior vice
president for energy distribution for Consumers. From 1988 to June 1991 he
was vice president for marketing, rates and wholesale power transactions.
Paul N. Preketes, Vice President -- Gas Operations, Consumers Gas
Group. Mr. Preketes became Region General Manager of Consumers' Metro
Region in 1991. In that capacity he oversaw natural gas operations for more
than 750,000 customers in parts of Oakland, Wayne, Macomb, Livingston and
Washtenaw counties in Michigan's Lower Peninsula.
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John E. Manczak, Vice President -- Gas Marketing and Pricing,
Consumers Gas Group. Mr. Manczak assumed his current position with the
Consumers Gas Group in November 1994. Prior to joining the Consumers Gas
Group, Mr. Manczak was the President of Michigan Gas Utilities division of
UtiliCorp United.
Edgar L. Doss, Executive Manager -- Gas Supply & Transmission,
Consumers Gas Group. Since July 1991, Mr. Doss had been the General Manager
of the Northwestern region of Consumers, which served the western and
northern lower Peninsula of Michigan consisting of 550,000 electric utility
customers and 30,000 natural gas utility customers. Prior to such time, Mr.
Doss served as the General Manager for the Detroit Metro region.
Jeffrey R. Hinkle, Director -- Gas Business Support, Consumers Gas
Group. Mr. Hinkle has been Consumers' Director of Marketing Services since
October 1990 and served in Consumers' marketing department since 1990.
Prior to that time he held positions in Management and Budget and
Corporation Performance Analysis.
CERTAIN MANAGEMENT POLICIES
CMS Energy has formally adopted certain policies with respect to the
Consumers Gas Group. Such policies include, without limitation, its intention
to: (i) attribute assets, liabilities and expenses between the Consumers Gas
Group and CMS Energy only on an arm's-length basis and (ii) attribute proceeds
generated by sale of shares of Class G Common Stock (other than Retained
Interest Shares) and securities convertible into Class G Common Stock as assets
attributable to the Consumers Gas Group, and apply such proceeds to acquire
assets or reduce liabilities attributable to the Consumers Gas Group. These
policies could be modified or rescinded by action of the Board of Directors, or
the Board of Directors could adopt additional policies, without approval of the
shareholders.
ACCOUNTING MATTERS
CMS Energy will prepare Consumers Gas Group financial statements in
accordance with generally accepted accounting principles. The consolidated
financial statements of CMS Energy will reflect all of its assets, liabilities
and transactions, including those attributable to the Consumers Gas Group. The
financial statements of the Consumers Gas Group will reflect the financial
position, results of operations and cash flows of the businesses attributable to
the Consumers Gas Group, including the effects of dividends and other
distributions on the Class G Common Stock. Consistent with the Articles of
Incorporation and related policies, such financial statements will also include
portions of certain corporate assets and liabilities (including contingent
liabilities) attributed to the Consumers Gas Group. Principal corporate
activities which will be attributed to the Consumers Gas Group and which will be
reflected in such financial statements include financial activities, allocation
of corporate general and administrative costs, common stock transactions and
income taxes. CMS Energy will furnish financial statements of the Consumers Gas
Group prepared in accordance with generally accepted accounting principles
("GAAP") in its quarterly and audited annual filings to the Commission on Forms
10-Q and 10-K, respectively. These statements will be furnished so long as
shares of Class G Common Stock remain outstanding.
Consumers is a regulated utility. Accordingly, the majority of the
accounting allocation policies have a longstanding basis and have historically
been used in proceedings conducted before the MPSC. These accounting allocation
policies for the Consumers Gas Group are based on GAAP for a regulated
enterprise. The financial statements for the Consumers Gas Group have been
prepared based upon consistent methods that management believes are reasonable
and appropriate to reflect the financial position, results of operations and
cash flows of the businesses attributed to the Consumers Gas Group. Where
appropriate, the financial statements reflect the assets, liabilities, revenues
and expenses directly related to the 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 attributed
portions of such accounts to the Consumers Gas Group's financial statements
based on certain measures of business activities, such as gas revenues,
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salaries, operating and maintenance expenditures, number of gas customers in
relationship to total utility customers and/or functional use surveys.
Management believes that the attributions are reasonable.
Notwithstanding the attribution of corporate assets and liabilities to the
Consumers Gas Group for the purpose of preparing financial statements, the
completion of the Offering contemplated hereby will not result in any transfer
of assets or liabilities of CMS Energy. CMS Energy will continue to be
responsible for all of its liabilities (including contingent liabilities) and
will continue to prepare consolidated financial statements.
Cash management and allocation of principal corporate activities are based
upon methods that management of CMS Energy believes to be reasonable and are
reflected in CMS Energy's consolidated financial statements, as follows:
(i) Financings by Consumers, whether through the issuance of First
Mortgage Bonds or Preferred Stock of Consumers or otherwise will be
allocated based upon the relative book values at the time of such
financings of the assets comprising the businesses attributable to the
Consumers Gas Group and the businesses not so attributed. The proportionate
amount of obligations and net proceeds resulting from such financing will
be reflected in the financial statements of the Consumers Gas Group.
(ii) After the completion of the Offering, all financial impacts of
issuances of additional shares of Class G Common Stock, from the Retained
Interest, will be reflected entirely in the financial statements of CMS
Energy and not the Consumers Gas Group. All financial impacts of the
Additional Shares, which will be attributed to Consumers Gas Group, will be
reflected in the financial statements of the Consumers Gas Group. Financial
impacts of dividends or other distributions on, and purchases of, shares of
the Class G Common Stock and CMS Energy Common Stock will be reflected in
the financial statements of the Consumers Gas Group and CMS Energy,
respectively, except that, if a Retained Interest exists at such a time, an
amount that bears the same relation to the aggregate amount of such
dividend or other distribution on outstanding shares of Class G Common
Stock as the Retained Interest Shares bears to the number of shares of
Class G Common Stock then outstanding will be reflected in the Consumers
Gas Group financial statements.
(iii) If funds were to be allocated between the Consumers Gas Group
and CMS Energy, such allocations of funds will generally be accounted for
as short-term loans at an interest rate comparable to the rate that CMS
Energy could obtain in an arm's-length transaction or as an equity
contribution to, or return of capital by, the Consumers Gas Group. In such
latter event, the Retained Interest in the Consumers Gas Group would be
increased or decreased, as applicable, by the amount of such contribution
or return of capital, as a result of which (a) the Retained Interest Shares
would be increased or decreased by an amount equal to the amount of such
contribution or return of capital divided by the Fair Market Value of a
share of Class G Common Stock on the date of contribution or return of
capital and (b) the Retained Interest would be increased or decreased and
the Gas Group Fraction would be decreased or increased accordingly. CMS
Energy could determine, in the sole discretion of its Board of Directors,
to make such contribution or return of capital after consideration of a
number of factors, including, among others, the relative levels of
internally generated cash flows of each of its businesses, the long-term
business prospects for each of its businesses, the capital expenditure
plans of and the investment opportunities available to each of its
businesses, and the availability, cost and time associated with alternative
financing sources.
(iv) The balance sheet of the Consumers Gas Group will reflect any net
short-term loans to or borrowings from CMS Energy. Accordingly, the income
statement of the Consumers Gas Group will reflect interest income or
expense, as the case may be, associated with such loans or borrowings and
the statement of cash flow of the Consumers Gas Group will reflect changes
in the amounts thereof deemed outstanding. The financial statements of CMS
Energy would not be affected by such items because such items would be
eliminated in consolidation.
(v) The Consumers Gas Group financial statements will reflect the
allocation, in the sole discretion of CMS Energy, of certain management,
financial reporting, legal, human resources, treasury, investor relations
and administrative services expenses incurred by CMS Energy in connection
with the business of the Consumers Gas Group.
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(vi) An amount equal to the amount of income taxes that would be
payable or income tax credits that would be receivable by the Consumers Gas
Group on a "stand-alone" basis, after taking into account tax deductions
and credits attributable to the Consumers Gas Group, will be charged
against or credited to the Consumers Gas Group financial statements. The
Consumers Gas Group will continue to be included in CMS Energy's
consolidated income tax returns after the Offering.
The above policies and agreements could be modified or rescinded, in the
sole discretion of the Board of Directors, without approval of shareholders,
although there is no present intention to do so. The Board of Directors could
also adopt additional policies depending upon the circumstances. Any
determination of the Board of Directors to modify or rescind such policies, to
adopt additional policies, including any such decision that could have disparate
effects upon holders of each class of common stock of CMS Energy, would be made
by the Board of Directors in accordance with its fiduciary duties to CMS Energy.
Any such determination would also be made in light of the requirements imposed
by the MPSC that any transactions between Consumers Gas Group and its
affiliates, including CMS Energy, must be on terms comparable to arm's-length
transactions. In addition, generally accepted accounting principles require that
certain changes in accounting policy be preferable (in accordance with such
principles) to the policy previously in place. See Note 2 of Consumers Gas Group
Notes to the Financial Statements included herein (hereinafter called the
"Consumers Gas Group Notes") regarding the method of attribution of the assets
and liabilities of CMS Energy to the Consumers Gas Group.
BUSINESS OF THE CONSUMERS GAS GROUP
BUSINESS
The businesses attributed to the Consumers Gas Group consist of the Gas
Distribution Business conducted by Consumers and MGS. Consumers or its
predecessors has operated the Gas Distribution Business since 1886. For the year
ended December 31, 1994, the Gas Distribution Business conducted by the
Consumers Gas Group was the largest local natural gas distribution company in
Michigan and the fifth largest in the United States based on volumes of natural
gas distributed (excluding gas sold for resale). The Gas Distribution Business
is subject to the jurisdiction of the MPSC and the FERC. See "Regulation and
Rates" below.
The Consumers Gas Group supplies natural gas for heating and various other
energy applications through a distribution and transmission system which
consisted, at December 31, 1994, of 21,197 miles of distribution mains and 1,076
miles of transmission lines including 474 miles of lines greater than 24", 250
miles of 12" line and 100 miles of 4" line. The all-time record 24-hour send-out
of natural gas for the Consumers Gas Group (achieved on January 19, 1994) was
3.1 million Mcf which is currently the peak-day transportation and distribution
capacity of the system. Deliveries of gas by the Consumers Gas Group (including
gas from other sellers), to ultimate customers totaled 154 Bcf for the three
months ended March 31, 1995 and 409 Bcf for the year ended December 31, 1994.
From January 1, 1990 through December 31, 1994, deliveries of natural gas by the
Consumers Gas Group have grown at an average annual rate of 3.3%, non-weather
adjusted, and 1.3%, weather adjusted. The weather-adjusted growth is primarily
attributable to an increase in the number of customers served.
The Consumers Gas Group serves customers located in 45 of the 68 counties
in Michigan's Lower Peninsula including some of the largest metropolitan areas
in the State of Michigan, such as the suburbs of Detroit, including Warren
(population approximately 145,000), Sterling Heights (population approximately
118,000) and Livonia (population approximately 101,000), as well as Flint
(population approximately 141,000), Lansing (population approximately 127,000)
and Kalamazoo (population approximately 80,000). The Consumers Gas Group plans
to install additional gas mains to gain access to customers in the suburbs of
Detroit and Flint, Michigan. See "Growth Strategies" below.
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COMPETITION
The Gas Distribution Business of the Consumers Gas Group has certain
significant competitive advantages, but is also subject to a number of
important competitive risks, in each case as more fully discussed below.
Competitive Advantages: The Consumers Gas Group is well-positioned to
capitalize on the opportunities and meet the challenges of the deregulated gas
market. The Consumers Gas Group's principal competitive advantages include:
- Consistent growth. The Consumers Gas Group's gas sales for the three
months ended March 31, 1995 and the year ended December 31, 1994 were 109
Bcf and 241 Bcf, respectively, with a total throughput of 134 Bcf and 314
Bcf for those periods (excluding, in each case, sales to the MCV
Partnership). Such sales have grown at an average annual growth rate
since 1990 of approximately 3.3% (1.3% weather-adjusted). The
weather-adjusted growth is primarily attributable to an increase in the
number of customers served. Since 1990, the Consumers Gas Group has
experienced an average annual customer growth rate of 1.5% (approximately
20,000 customers) per year. See "-- Customers."
- Diversity and stability of customers served. The Consumers Gas Group's
sales are derived from a diversity of customers with no substantial
dependence on a particular customer. The Consumers Gas Group's
approximately 1.5 million customers include approximately 1.4 million
residential customers, 98,000 commercial customers and 8,500 industrial
customers. In 1994, residential customers, the primary component of the
Consumers Gas Group's load, represented slightly more than half of
throughput, while the industrial and commercial classes each represented
about one-fourth (excluding, in each case, sales to the MCV Partnership).
For the three months ended March 31, 1995 and the year ended December 31,
1994, approximately 70.0% and 69.0%, respectively, of the Consumers Gas
Group's revenues were derived from this relatively stable residential
customer base. The customer base of the Consumers Gas Group also includes
several of the largest manufacturing businesses in the United States,
such as Chrysler Corporation, Dow Chemical Company, Ford Motor Company,
General Motors Corporation and Upjohn Company.
- Low cost natural gas provider. The Consumers Gas Group's residential
customers enjoy rates which are believed to be consistently among the
lowest 15% of all U.S. local natural gas distribution companies. For the
three months ended March 31, 1995 and the year ended December 31, 1994,
the Consumers Gas Group's average rate for residential service was
$4.34/Mcf and $4.62/Mcf, respectively. See "-- Business."
- Substantial natural gas storage capacity. The 14 gas storage fields
operated by the Consumers Gas Group have 130.0 Bcf of working gas
storage. This storage capacity enabled Consumers Gas Group to provide
approximately 51.0% of its sale requirements throughout the 1994-1995
winter heating season (November 1 through March 31) and 75.0% of its
February 1995 peak-day requirement from storage. These facilities allow
the Consumers Gas Group to lower its peak-day entitlement from its
pipeline suppliers, thereby reducing interstate pipeline costs. See "--
Gas Storage."
- Strategic location near interstate pipelines. The Consumers Gas Group is
strategically located to receive gas deliveries from several interstate
pipelines connected to the major producing regions of the United States
and Canada. ANR, Panhandle and Trunkline deliver gas from the U.S. Gulf
Coast and the Mid-Continent areas. Gas produced in Western Canada is
delivered to the Consumers Gas Group through several pipelines that
ultimately deliver gas to Great Lakes Gas Transmission Company, which is
connected directly to the Consumers Gas Group. See "-- Gas Supply."
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Competitive Risks: Competition with respect to the Gas Distribution
Business comes primarily from alternate energy sources such as electricity.
Approximately 30% of the retail gas customers served by the Consumers Gas Group
are also served or capable of being served by electricity provided by
Consumers' electric utility business. Competition also exists with respect to
propane, and to a lesser degree, oil and wood. The principal factors that
determine competitive advantage are price, quality of service, accessibility of
supply and transportation arrangements, and the ability to supply alternative
forms of energy. See "Risk Factors -- Risks of Adverse Developments in the
Business of the Consumers Gas Group." Residential and commercial customers
accounted for approximately 69% and 20%, respectively, of the 1994 revenues of
the Consumers Gas Group. In most of its service territory, the Consumers Gas
Group has little direct competition with respect to its traditional utility
service to residential customers.
- Competition From Pipelines. The Consumers Gas Group also competes in the
natural gas market in its service territory with parties (principally
interstate pipeline companies) desiring to sell or transport gas directly
to the Consumers Gas Group's industrial and commercial customers. These
competitors propose to "by-pass" the facilities of the Consumers Gas
Group by offering to transport and supply natural gas to industrial
customers which are willing to build the necessary interconnection from
the customer to the competing interstate pipeline. The Consumers Gas
Group typically responds to this by-pass competition by offering gas
transportation and storage services to customers that elect to acquire
their gas supplies from some other supplier, by offering lower prices at
the burner tip, by offering personalized services addressing a customers'
particular needs, by offering longer term contracts when natural gas
prices are lower and by supplying alternative forms of energy if the
customer is able to burn various types of energy. Because earnings from
the Gas Distribution Business are not substantially dependent on gas
purchased and resold to customers, but rather on the ownership and
operation of the gas distribution, storage and transportation
facilities, Consumers has not suffered any significant losses as a
result of such competition, nor is it believed that such losses are
likely to be incurred by the Consumers Gas Group.
- Competition From Fuel Oil. The Consumers Gas Group competes with fuel oil
suppliers in making sales to its industrial customers primarily by
offering lower prices at the burner tip and by offering longer term
contracts when natural gas prices are lower.
The Consumers Gas Group will attempt to retain, and if possible expand, the
markets in which it is most vulnerable, such as the large industrial market,
through favorable rate design, business development and related efforts. See
"Growth Strategies." The Consumers Gas Group continues to (i) develop or promote
new sources and uses of natural gas and/or new services, rates and contracts;
(ii) purchase gas from lowest cost suppliers consistent with operating and
long-term gas supply needs; and (iii) emphasize and provide high quality
services to its customers.
GROWTH STRATEGIES
The Consumers Gas Group believes that if the Consumers Gas Group's
residential customer base grows at a rate of approximately 1.5% annually and gas
prices adjusted for inflation remain relatively unchanged, its annual gas
deliveries will grow to approximately 329.0 Bcf between 1994 and 1999
representing total growth over the period of 5.5%. There can be no assurance
that such growth will be achieved. In addition, the Consumers Gas Group has
identified the following strategies to further grow its residential, commercial
and industrial customer base:
- Increased usage by existing customers. The Consumers Gas Group believes
that there are opportunities to increase revenues from its existing
customer base. Studies conducted by the Consumers Gas Group show that
many of its existing residential and commercial customers utilize non-gas
furnaces, electric water heaters and wood burning fireplaces for space
and water heating. The Consumers Gas Group intends to conduct marketing
programs to switch these customers to natural gas for these purposes.
- Attracting additional customers. The Consumers Gas Group plans to attract
additional customers by expanding within its existing franchises. The
Consumers Gas Group maintains franchises in each of the
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ten most populous counties in Michigan and each of these counties has
been growing. Through effective planning, the Consumers Gas Group intends
to position its system expansion to secure future growth in these areas.
The Consumers Gas Group intends to invest $37.7 million over the
three-year period ending December 31, 1997 to construct additional gas
mains. This program is designed to increase gas usage in the Consumers
Gas Group's existing service area and to enable it to successfully
compete with other local natural gas distribution companies for new
customers. Finally, there are still significant numbers of potential gas
customers who have a gas main in front of their home or establishment and
do not have installed gas service. The conversion of these customers to
gas service is an additional potential source of growth.
- Co-generation. The Consumers Gas Group believes that there is a
significant potential for development in its service area of gas powered
cogeneration projects capable of generating from 1,000 to 50,000 KW of
electricity. For projects of this type the Consumers Gas Group would have
the ability to provide, in addition to gas supply, project engineering,
equipment financing, operating and maintenance service and gas storage
services.
- Industrial conversions. Conversion of industrial processes to natural gas
is also an area of expected sales growth for the Consumers Gas Group. For
example, it is expected that laws mandating improvements in air quality
will provide opportunities for converting industrial boiler load to
clean-burning natural gas, and for additional utilization of natural gas
for electric generation. The Consumers Gas Group believes that conversion
projects also provide opportunities for project engineering, construction
services, equipment financing, gas storage and other services which it is
in a position to provide competitively.
- New technologies. The Consumers Gas Group also expects additional growth
from the development and use of NGVs. Pursuant to the Energy Policy Act
of 1992, increasing percentages of the federal government's automotive
fleet must consist of NGVs beginning in 1996; the federal government will
be required to either convert gasoline-fueled vehicles into NGVs or
purchase NGVs. The Consumers Gas Group believes that other automotive
fleets, as well as indoor equipment such as forklifts and sweepers, will
convert to NGVs, and thereafter certain portions of the general
population may acquire or convert their existing vehicles to NGVs. The
Consumers Gas Group estimates that each NGV represents 125 Mcf of natural
gas consumption annually, equal to the natural gas consumption of an
average single family home.
- Revenue diversification. Historically, approximately 85% of Consumers Gas
Group's gas throughput was weather related and weather can cause
significant fluctuations in revenue. See "Customers" below.
Opportunities exist to diversify revenues by (i) growing off-peak load
and (ii) creating and increasing new revenue from the sale of gas-related
services and products, such as maintenance agreements related to gas
equipment (e.g. furnaces), appliance repair and installation, sales of
other equipment (e.g. carbon monoxide detectors, water heaters) and
energy optimization services.
In total, the Consumers Gas Group expects these and related additional
efforts to add approximately 38.0 Bcf of throughput by 1999 which is equivalent
to approximately $17.2 million of additional gross margin annually (excluding
recovery of the cost of gas supplied to customers.) However, actual levels of
growth in total throughput and in the earnings of the Consumers Gas Group will
depend on general economic conditions, the availability of gas supply, gas
prices, alternate energy prices, levels of natural gas consumption, the effects
of regulation and other factors, and there can be no assurance that the
Consumers Gas Group will achieve increased sales or earnings.
CUSTOMERS
At March 31, 1995, the Consumers Gas Group's approximately 1.5 million
customers consisted of approximately 1.4 million residential customers, 98,000
commercial customers and 8,500 industrial customers. Since 1990, the Consumers
Gas Group experienced an average annual customer growth rate of 1.5%
(approximately 20,000 customers per year). The effect on gas sales from
increases in the number of customers has been tempered by a long-term decline of
natural gas consumption per customer (9.6% for residential and
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14.6% for commercial customers since 1983), mainly due to the increased energy
efficiency of gas appliances and equipment, as well as improved usage of
insulation and other energy conservation improvements.
The customer base of the Consumers Gas Group includes several of the
largest manufacturers in the United States, such as Chrysler Corporation, Dow
Chemical Corporation, Ford Motor Company, General Motors Corporation and Upjohn
Company. In 1994, approximately 69% of the Gas Distribution Business' revenues,
and about 42% of its total throughput (including sales to the MCV Partnership),
were derived from its relatively stable residential customer base. Accordingly,
the Consumers Gas Group's operations are not dependent upon a single customer,
or a few customers, the loss of any one or more of which would have a material
adverse effect on the financial condition of the Consumers Gas Group.
The following tables set forth the revenues of, and volumes sold, stored or
transported by, the Consumers Gas Group for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH YEARS ENDED
31, DECEMBER 31,
------------ --------------------------
1995 1994 1994 1993 1992
---- ---- ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Gas Distribution Business Revenues
Residential............................ $334 $365 $ 791 $ 803 $ 781
Commercial............................. 103 114 230 232 226
Industrial............................. 25 27 57 55 55
Transportation......................... 15 17 54 56 48
Other.................................. 5 5 19 14 16
---- ---- ------ ------ ------
Total............................... $482 $528 $1,151 $1,160 $1,126
==== ==== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
31, YEARS ENDED DECEMBER 31,
------------- ------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
(BCF)
<S> <C> <C> <C> <C> <C>
Gas Distribution Business Sales and
Deliveries
Residential............................. 77 86 171 175 167
Commercial.............................. 25 29 55 56 54
Industrial.............................. 7 7 14 14 13
Transportation.......................... 45 54 169 166 150
---- ---- ---- ---- ----
Total................................ 154 176 409 411 384
==== ==== ==== ==== ====
</TABLE>
A major determinant of gas usage for any period is the weather,
particularly with respect to residential and commercial customers who use
natural gas for space heating and, to a lesser extent, industrial customers.
Approximately 93% of the customers of the Consumers Gas Group are residential
customers, of which 98% use natural gas for space heating. Accordingly, the
Consumers Gas Group's business is seasonal with approximately 74% of its
revenues generated in the first and fourth quarters of each year. The heating
degree days for the year ended December 31, 1994 were 7,116, approximately 0.6%
colder than the average heating degree days for the 30-year period ended
December 31, 1994. The average heating degree days for the 30 years, 10 years
and 5 years ended December 31, 1994 were 7,076, 6,902 and 6,832, respectively.
Generally, consumption for heating purposes increases as heating degree days
increase with a corresponding improvement in results of operations of the
Consumers Gas Group. If during the heating season, the weather in the Consumers
Gas Group's service area is warmer than normal, its results of operations will
be adversely affected. The heating degree days for the three months ended March
31, 1995 were 3,332, approximately 13.5% warmer than the three months ended
March 31, 1994. Due to significantly warmer temperatures experienced in the
first quarter of 1995 compared with the corresponding 1994 period, gas sales and
gas transported totaled 154 Bcf in the first quarter of 1995, a 12.6% decrease
from the first quarter of 1994. See "Risk Factors -- Risk of Adverse
Developments in the Business of the Consumers Gas Group."
34
<PAGE> 65
GAS STORAGE
The 14 gas storage fields operated by Consumers Gas Group (listed below)
have an aggregate certified storage capacity of approximately 359.2 Bcf, of
which approximately 130.0 Bcf is working gas:
<TABLE>
<CAPTION>
TOTAL CERTIFIED
FIELD NAME LOCATION STORAGE CAPACITY
- --------------- ---------------------------------------- ----------------
(BCF)
<S> <C> <C>
Overisel Allegan and Ottawa Counties 64.0
Salem Allegan and Ottawa Counties 35.0
Ira St. Clair County 7.5
Lenox Macomb County 3.5
Ray Macomb County 66.0
Northville Oakland, Washtenaw and Wayne Counties 25.8
Puttygut St. Clair County 16.6
Four Corners St. Clair County 3.8
Swan Creek St. Clair County .6
Hessen St. Clair County 18.0
Lyon -34 Oakland County 1.4
Winterfield Osceola and Clare Counties 75.0
Cranberry Lake Clare and Missaukee Counties 30.0
Riverside Missaukee County 12.0
------
Total 359.2
============
</TABLE>
Eleven of these gas storage fields are owned by Consumers, and three are
currently owned by MGS. MGS also conducts certain gas transportation operations.
Consumers and MGS have under consideration the transfer of ownership of MGS'
three storage fields to Consumers. Such transfers would require the approval of
the FERC which may take up to 18 months to obtain.
During the 1994-95 winter heating season (November 1 through March 31), the
maximum one-day withdrawal from the storage facilities listed above was 1.8 Bcf.
This storage and deliverability capacity enabled the Gas Distribution Business
to provide approximately 51.0% of its 1994-95 winter heating season requirements
from storage and 75.0% of its February 1995 peak-day requirement from storage.
This practice allows the Gas Distribution Business to lower its peak-day
entitlement from its pipeline suppliers, thereby reducing interstate pipeline
costs.
GAS SUPPLY
In 1994, the Consumers Gas Group purchased approximately 83% of its
required gas supply for the Gas Distribution Business under long-term contracts.
Trunkline, the Consumers Gas Group's primary gas supplier through November 1994,
supplied 35% of the overall requirement in 1994. The Consumers Gas Group's
supply contract with Trunkline expired November 1, 1994; however, firm
transportation associated with this contract continues until November 1, 2002.
Of the remaining gas supply requirements of the Consumers Gas Group purchased
under long-term contracts in 1994, 14% were derived from Michigan producers and
33% from various other producers and non-affiliated marketing companies in the
United States and Canada. The remaining 17% of the Consumers Gas Group's 1994
gas supply requirements were met by purchases on the spot market.
Through November 1, 1994, Trunkline was obligated to supply 325 thousand
Mcf per day to the Consumers Gas Group. This obligation has been replaced with
three two-year contracts and four one-year contracts with independent producers
at fixed prices for an aggregate of 255 thousand Mcf per day. The Consumers Gas
Group expects to obtain the balance of its gas supply requirements in the spot
market.
35
<PAGE> 66
The Consumers Gas Group's other firm transportation agreements, referred to
in the following table, are used by the Consumers Gas Group to transport its
required gas supplies to market and to replenish its storage fields.
<TABLE>
<CAPTION>
VOLUME
(DEKATHERMS/DAY) EXPIRATION
---------------- --------------
<S> <C> <C>
Trunkline...................................... 41,400 February 1997
336,375 October 2002
Panhandle...................................... 40,000 March 2000
25,000 March 2000
ANR Pipeline Company........................... 40,000 October 1999
10,000 December 2002
6,000 December 2002
24,900 October 2003
58,765 October 2003
Great Lakes Gas Transmission Company........... 84,000 March 2004
</TABLE>
In total, the Consumers Gas Group's firm transportation arrangements
currently amount to almost 90% of total gas supply requirements of the Gas
Distribution Business. The balance of the required gas supply is transported
under interruptible transportation contracts. These contracts are with the same
interstate pipelines mentioned above. The amount of interruptible capacity and
the utilization thereof is primarily a function of the price for such service
and the availability and price of the spot supplies to be purchased and
transported. The Consumers Gas Group generally uses interruptible transportation
in off-peak summer months and after its firm capacity has been fully subscribed.
The Consumers Gas Group expects to ensure the reliability of its gas supply
through long-term supply contracts, with purchases in the short-term spot market
when economically beneficial. Management believes that the Consumers Gas Group's
ability to purchase gas during the off-season and store it in extensive
underground storage facilities helps to reduce costs. See "Gas Storage" above.
REGULATION AND RATES
The Gas Distribution Business 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. For
information concerning pending MPSC matters related to the Gas Distribution
Business, see "Legal Proceedings" below. MGS is regulated by the FERC.
As a regulated company under MPSC jurisdiction, the Consumers Gas Group may
apply to the MPSC for rate increases if increased costs or other factors
warrant. Such rates typically go into effect following a MPSC contested case
proceeding. The MPSC attempts to conclude such proceedings and issue a final
order within 12 months from the initial filing of the general rate case.
In July 1994, the MPSC approved an agreement previously reached between the
MPSC staff and Consumers, to charge $10 million of costs for postretirement
benefits against 1994 earnings. This charge against earnings will partially
offset savings related to state property taxes which were reduced. The agreement
was reached in response to a claim that gas utility business earnings for 1993
were excessive. The agreement also provides for an additional $4 million of
postretirement benefit costs to be charged against 1995 earnings. As part of the
agreement, Consumers filed a gas rate case in December 1994. Consumers requested
an increase in its gas rates of $21 million annually. The request, among other
things, incorporates cost increases, including costs for postretirement benefits
and costs related to Consumers' former manufactured gas plant sites. Consumers
requested that the MPSC authorize a 13% rate of return on equity, instead of the
currently authorized rate of 13.25%. In June 1995, the MPSC staff filed its
position in this case, recommending an $11 million rate decrease. The MPSC
staff's recommendation included a lower rate base, a lower return on common
equity, a revised capital structure and a different sales forecast than
Consumers had projected.
36
<PAGE> 67
Consumers expects an MPSC decision in early 1996. Consumers' most recent rate
filing for its electric utility business resulted in an authorized rate of
return on equity of 11.75%.
In gas rate cases the MPSC determines, among other things, an appropriate
capital structure, including equity, for the Gas Distribution Business and
approves a rate of return on such equity. Because the Gas Distribution Business
is part of Consumers, it does not have its own capital structure. Accordingly,
in the last gas rate case decided by the MPSC relating to the Gas Distribution
Business, the MPSC utilized, for rate making purposes, a capital structure which
was derived from the capital structure of an independent distribution company
which the MPSC regarded as appropriate for the Gas Distribution Business (the
"Proxy Capital Structure"). It is possible that in the current gas rate case and
future gas rate cases, the MPSC may use another methodology to determine equity
used for rate making purposes for the Consumers Gas Group or otherwise select a
methodology different than the Proxy Capital Structure. The capital structure
employed for ratemaking purposes directly affects the overall rate of return of
a rate regulated enterprise. No assurance can be given as to the level of rates
which will be authorized by the MPSC. See "Risk Factors -- Regulatory Risks."
The FERC has jurisdiction over MGS, as a natural gas company, within the
meaning of the Natural Gas Act. The FERC jurisdiction relates, among other
things, to the acquisition, operation and disposal of assets and facilities and
to service provided and rates charged. In July 1993, MGS submitted a notice of
rate change with the FERC to revise its operation and maintenance expenses for
1993 and began collecting the revised rates subject to refund and a hearing in
February 1994. In June 1994, the FERC approved a stipulation and agreement in
full settlement of the rate proceeding which provides MGS with an estimated
increase in annual revenues of $20 million.
The gas costs of the Consumers Gas Group are reviewed by the MPSC in a
two-part gas cost recovery ("GCR") process which provides both advance and
after-the-fact reviews of gas costs and supply arrangements. The MPSC allows
recovery through rates of CMS Energy's cost of gas sold if, and to the extent
that, the MPSC finds such costs reasonable and prudent on a forecasted basis.
Then, in a reconciliation after each GCR year is completed, a review of actual
gas costs and supply arrangements determines whether overcollections or
undercollections have occurred and, depending on the result, a refund or
surcharge, including interest, is ordered.
In 1992, the FERC issued Order 636 ("Order 636") which makes a number of
significant changes to the structure of the services provided by interstate
natural gas pipelines. Order 636 requires interstate pipeline companies to
"unbundle" their sales, transportation and storage services. As a result, the
Consumers Gas Group, like other local natural gas distribution companies, has
been required to incur separate charges for firm transportation service, gas
storage services, and gas sales services provided by the interstate pipelines.
These costs were previously bundled together and charged only to firm sales
service customers. In addition, while local gas distribution companies were
obligated to retain the firm transportation obligations of their former firm
sales contracts, they were permitted to abrogate their firm gas purchase
obligations in favor of purchasing gas from one or more third party gas
suppliers. The Consumers Gas Group assumed a greater direct responsibility to
plan and contract for the quantity, price, reliability and character of the
services it requires in anticipation of Order 636.
In addition, Order 636 authorized local natural gas distribution companies,
such as the Consumers Gas Group, to release their firm transportation capacity
on interstate pipelines on a short-term or long-term basis to third parties,
thereby enabling such local natural gas distribution companies to minimize the
cost of holding firm transportation capacity, during periods of time when such
capacity is under-utilized, by enabling them to release the capacity for use by
third parties.
Order 636 also called for the commencement of individual interstate
pipeline cases leading to implementation of restructuring for the 1993-94 winter
heating season. The Gas Distribution Business is a significant purchaser of gas
from an interstate pipeline, Trunkline, and is a major transportation customer
of a number of pipelines. Through a settlement approved by the FERC and MPSC,
the Consumers Gas Group will be allowed recovery of costs incurred in connection
with the Trunkline restructuring. The effect of the transition costs relating to
Consumers' agreements with ANR and Panhandle on the Consumers Gas Group is
minimal.
37
<PAGE> 68
One of the major effects of Order 636 was the transfer of responsibility
for acquiring gas supply from pipeline companies to local natural gas
distribution companies. The Consumers Gas Group began separately contracting for
its gas supply prior to the implementation of Order 636. The responsibility for
gas acquisition carries with it risks of price fluctuations in the market price
of gas and the obligation to make cost-effective transportation and storage
arrangements. The Gas Distribution Business requires sufficient firm
transportation capacity on interstate pipelines and sufficient storage
arrangements to meet peak day demand. To ensure this deliverability, firm
transportation and storage capacity must be available on a year-round basis and,
it may be necessary to pay for peak capacity even during the summer months when
there is substantially less demand for gas to fill that capacity. The Consumers
Gas Group utilizes its substantial gas storage facilities to reduce such costs.
Prior to Order 636, the FERC determined rates which bundled gas supply
costs in with transportation and storage delivery costs as part of its
regulation of pipeline rates. These federally-approved wholesale rates provided
a partial "safe-harbor" that restricted state commission inquiry into purchasing
practices. With increased local utility responsibility for gas procurements
either as a result of, or in anticipation of, Order 636, the MPSC has reviewed
the gas procurement decisions of the Consumers Gas Group and other gas utilities
in Michigan in annual GCR cases. The MPSC has not found imprudent or disallowed
for any other reason any costs incurred by the Consumers Gas Group for natural
gas purchases, transportation or storage in GCR cases after promulgation of
Order 636.
ENVIRONMENTAL MATTERS
The Gas Distribution Business is subject to regulation with respect to
environmental quality, including air and water quality, zoning and other
matters, by various federal, state and local authorities. The following
discussion relates to environmental matters which affect the Gas Distribution
Business. Therefore, the outcome of these matters may effect the results of
operations of the Consumers Gas Group. Capital expenditures for environmental
projects attributable to the Gas Distribution Business were $5 million in 1994
and are estimated to be $4 million in 1995 and $9 million in 1996.
Under Michigan's Environmental Response Act ("Environmental Response Act"),
the Consumers Gas Group expects that it will ultimately incur investigation and
remedial action costs at a number of sites, including some of the 23 sites that
formerly housed manufactured gas plant facilities, even those in which Consumers
has a partial or no current ownership interest. Parties other than Consumers
with current or former ownership interests may also be considered liable for
site investigations and remedial actions.
The Consumers Gas Group has prepared plans for remedial
investigation/feasibility study for several of these sites to define the nature
and extent of contamination at these sites and to determine which of several
possible remedial action alternatives, including no action, may be required
under the Environmental Response Act. The Michigan Department of Natural
Resources (the "DNR") has approved two of three plans for remedial
investigation/feasibility study submitted by the Consumers Gas Group and is
currently reviewing the third.
The preliminary findings for the first remedial investigation/feasibility
study completed in the first quarter of 1994 indicated that the expenditures for
remedial action at this site are likely to be minimal. However, the Consumers
Gas Group does not believe that a single site was representative of all of the
sites. Data available to the Consumers Gas Group and its continued internal
studies have resulted in an estimate of remedial action for all 23 sites of
between $48 million and $112 million. These estimates are based on undiscounted
1994 costs. At March 31, 1995, the Consumers Gas Group has accrued a liability
of $48 million and has established a regulatory asset for approximately the same
amount. Any significant change in estimating assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements, could
impact the estimate of remedial costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994, discussed below in
"Legal Proceedings." The Consumers Gas Group believes that remedial costs will
be recovered in rates as the MPSC in 1993 addressed the question of recovery of
investigation and remedial costs for another Michigan gas utility as part of a
gas rate case. In that proceeding,
38
<PAGE> 69
the MPSC determined that prudent investigation and remedial costs could be
deferred and amortized over 10-year periods. In order to be recovered in rates,
prudent unamortized costs must be approved by the MPSC in a rate case. Any costs
amortized in years prior to filing a rate case may not be recoverable. The MPSC
stated that the length of the amortization period may be reviewed from time to
time, but any revisions would be prospective. The order further provided that
the prudency review would include a review of the utility's attempts to obtain
reimbursement from others. The MPSC has also approved similar deferred
accounting requests by two other Michigan utilities relative to investigation
and remediation costs. In June 1995, as part of Consumers rate case, the MPSC
staff recommended that the MPSC adopt the same accounting and cost recovery
previously provided to other Michigan utilities. As a result of the foregoing
precedents,
Consumers
believes that ultimate outcome will result in the costs being recovered in
rates, and therefore, it will not have a material impact on the results of
operations.
COMMENT 17
The Consumers Gas Group has initiated discussions with certain insurance
companies with regard to coverage for some or all of the costs which may be
incurred for these sites. If neither insurance coverage nor recovery in rates is
available for some of these costs, Consumers Gas Group would have to recognize a
loss for the amount of its recorded regulatory asset for these investigation and
remedial action costs to the extent that such coverage or rate recovery is not
available.
MGS has determined that it is liable for cleaning up contamination at its
Muskegon River Compressor Station. The estimated cost of this clean-up effort is
$2.7 million. As of March 31, 1995, this amount was accrued and recorded as a
deferred liability. A corresponding regulatory asset was established, as MGS
believes the cost of a clean-up will be collectible through utility rates. In
early 1994, MGS identified an additional compressor site which had some
contamination. The remedial activity at the site has
been
completed and final DNR approval of the clean-up is being sought. Based on
information known by management, MGS believes that it is unlikely that its
liability at any of the known contamination sites will have a material adverse
effect on the financial position or results of operations of the Consumers Gas
Group.
COMMENT 31
CAPITAL EXPENDITURES
The Consumers Gas Group currently estimates capital expenditures, including
new lease commitments, will be $130 million in 1995, $119 million for 1996 and
$111 million for 1997. These estimates include an attributed portion of
Consumers' anticipated capital expenditures for common plant and equipment.
Management believes these estimates are reasonable.
LEGAL PROCEEDINGS
The Gas Distribution Business is subject to regulation by various federal,
state and local authorities and may be the subject of legal action by third
parties. The following discussion relates to certain legal proceedings which
affect the Gas Distribution Business. Therefore, the outcome of these
proceedings may affect the results of operations of the Consumers Gas Group.
MPSC Case No. U-10029 -- Intrastate Gas Supply. In November 1991, the
Consumers Gas Group filed with the MPSC Case No. U-10029 seeking several kinds
of relief with respect to a contract with one of its intrastate gas suppliers,
North Michigan ("North Michigan"), including lowering a contract price. North
Michigan filed an objection with the MPSC and in July 1992 filed a collateral
case in Federal Court seeking an injunction to block the MPSC case. On April 8,
1993, the Federal Court dismissed North Michigan's suit. The U.S. Sixth Circuit
Court of Appeals ("US Court of Appeals") upheld the lower Court's dismissal.
On February 8, 1993, the MPSC issued an order granting the Consumers Gas
Group's request to lower the price to be paid North Michigan under its contract.
In March 1993, North Michigan filed an appeal of the MPSC's February 8, 1993
order with the Michigan Court of Appeals ("Court of Appeals"). In July 1993,
consistent with the MPSC's February 8, 1993 Order, the Consumers Gas Group
notified North Michigan that it planned to terminate the contract in November
1993. In early October 1993, North Michigan sought to have the US Court of
Appeals stay such cancellation of the contract. The US Court of Appeals denied
this request in late October 1993 and Consumers terminated the contract
effective November 1, 1993. In March 1995, management concluded that it is
unlikely that the intrastate producers' pending appeals of the MPSC
39
<PAGE> 70
order would be successful and accordingly reversed $23 million (pretax), which
represented the portion of the loss in excess of the disallowed amount. The
Court of Appeals affirmed the MPSC's decision in June 1995.
1994 Gas Rate Case Filing. In December 1994, Consumers filed a gas rate
case requesting an increase in its gas rates of $21 million annually. The
request, among other things, incorporates cost increases, including costs for
postretirement benefits and costs related to Consumers' former manufactured gas
plant sites. Consumers requested that the MPSC authorize a 13% rate of return
on equity, instead of the currently authorized rate of 13.25%. In June 1995,
the MPSC staff filed its position in this case, recommending an $11 million
rate decrease. The MPSC staff's recommendation included a lower rate base, a
lower return on common equity, a revised capital structure and a different
sales forecast than Consumers had projected. In Consumers last electric rate
case concluded earlier in 1994, the MPSC authorized an 11.75% rate of return on
equity. Under MPSC rate case scheduling policies, a final order in this case is
expected in early 1996. No assurance can be given as to the level of rates
which will be authorized by the MPSC.
Intrastate Gas Supplier Contract Pricing Dispute. On April 18, 1995, an
Administrative Law Judge ("ALJ") issued a proposal for decision in a proceeding
that had been initiated by Consumers regarding a gas supply contract pricing
dispute. In the proposal for decision the ALJ agreed with Consumers that certain
market based pricing provisions should, on a prospective basis, limit the price
paid by Consumers under the three gas purchase agreements at issue. The ALJ also
found that the market based pricing provisions required specific MPSC approval
before Consumers could apply those prices to purchases under the agreements and
found that such approval had not previously been given. Consumers does not agree
with the ALJ's findings and conclusions on this point and filed exceptions and
replies to the proposal for decision on May 23, 1995 for the MPSC's
consideration. The MPSC will issue its decision sometime thereafter. If the MPSC
issues an order adopting the recommendations of the ALJ, the market based
provisions upon which Consumers had paid for gas purchases under these
agreements will not be effective prior to such an MPSC order and Consumers may
be liable for additional payments for gas previously purchased.
Prior to the issuance of the ALJ's proposal for decision, the intrastate
gas producers involved in this MPSC proceeding filed a complaint against
Consumers in a local 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 where the matter is pending. Under the
producers' theories, Consumers' liability for gas previously purchased could be
as much as $44 million (excluding any interest). Consumers believes the
producers' position is without merit and intends to vigorously oppose any claims
they may raise but cannot predict the outcome of this matter.
CMS Energy's Exemption Under the Public Utility Holding Company Act of
1935. CMS Energy is exempt from registration under PUHCA. In December 1991, the
Attorney General and the MMCG filed a request with the Commission for the
revocation of CMS Energy's exemption. In April 1992, the MPSC filed a statement
with the Commission that recommended that the Commission impose certain
conditions on CMS Energy's exemption. CMS Energy has vigorously opposed the
proposed exemption revocation and/or modification, primarily on the grounds that
the matters complained of by the Attorney General and MMCG have all been
addressed and resolved in proceedings before other regulatory and judicial
authorities, primarily at the State level, with the Attorney General and MMCG
participating. The Commission has not taken action on this matter.
Should the Commission revoke CMS Energy's current exemption from
registration under PUHCA, CMS Energy could either become a registered holding
company or be granted a new exemption, possibly subject to conditions similar to
those recommended by the MPSC. Registration under PUHCA could require divestment
by CMS Energy of either the Gas Distribution Business or electric utility
business conducted by Consumers by some future date following registration. As a
registered company, CMS Energy could also be precluded from engaging in
businesses that are not functionally related to its utility operations; in
addition, the Commission approval would be required for the issuance of
securities by CMS Energy and its subsidiaries. If divestiture of the Gas
Distribution Business or Consumers' electric utility business ultimately were
required, the effect on the Consumers Gas Group and CMS Energy would depend on
the method of divestitures and the
40
<PAGE> 71
extent of the proceeds received, which cannot now be predicted. See "Risk
Factors -- Risks Related to Other Businesses of CMS Energy."
There has been no action taken by the Commission on this matter. CMS Energy
believes it will maintain its exemption.
EMPLOYEES
The Consumers Gas Group had approximately 2,975 full time equivalent
employees at April 30, 1995. This total includes approximately 1,331 full-time
equivalent operating, maintenance and construction employees who are represented
by Utility Workers Union of America (AFL-CIO) (the "Union"). On June 1, 1995 a
tentative five-year contract settlement was negotiated between Consumers and the
Union. The Union's ratification vote is expected to be completed by July 15,
1995. All of the terms of the current working agreement remain in effect in the
interim.
41
<PAGE> 72
CONSUMERS GAS GROUP
SELECTED FINANCIAL AND OPERATING DATA
The selected financial data of the Consumers Gas Group presented below have
been derived from the Consumers Gas Group Financial Statements contained
elsewhere herein. The following selected financial and operating data reflect
the results of operations and certain financial and operating data of the
businesses attributed to the Consumers Gas Group and should be read in
conjunction with Consumers Gas Group Financial Statements, "Consumers Gas Group
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business of the Consumers Gas Group," CMS Energy's Consolidated
Financial Statements and "CMS Energy -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
------------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS NOTED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
OPERATING REVENUE................................. $ 482 $ 528 $1,151 $1,160 $1,126
------ ------ ------ ------ ------
OPERATING EXPENSES
Operation
Cost of gas sold.............................. $ 281 $ 334 $ 662 $ 678 $ 673
Other......................................... 46 44 185 171 177
------ ------ ------ ------ ------
Total operation.......................... $ 327 $ 378 $ 847 $ 849 $ 850
Maintenance..................................... 10 11 39 38 37
Depreciation, depletion and amortization........ 33 31 76 73 76
General taxes................................... 21 24 54 54 54
------ ------ ------ ------ ------
Total operating expenses................. $ 391 $ 444 $1,016 $1,014 $1,017
------ ------ ------ ------ ------
PRETAX OPERATING INCOME........................... $ 91 $ 84 $ 135 $ 146 $ 109
INCOME TAXES...................................... 31 29 41 39 35
------ ------ ------ ------ ------
NET OPERATING INCOME.............................. $ 60 $ 55 $ 94 $ 107 $ 74
------ ------ ------ ------ ------
OTHER INCOME (DEDUCTIONS)
Other income taxes, net......................... $ (1) $ -- $ -- $ 1 $ 1
Other, net...................................... 1 -- (2) (3) (4)
------ ------ ------ ------ ------
Total other income (deductions).......... $ -- $ -- $ (2) $ (2) $ (3)
------ ------ ------ ------ ------
FIXED CHARGES
Interest on long-term debt...................... $ 8 $ 7 $ 29 $ 32 $ 28
Other interest.................................. 1 1 5 6 1
Capitalized interest............................ -- -- -- (1) --
Preferred dividends............................. 1 1 5 2 2
------ ------ ------ ------ ------
Net fixed charges........................ $ 10 $ 9 $ 39 $ 39 $ 31
------ ------ ------ ------ ------
NET INCOME........................................ $ 50 $ 46 $ 53 $ 66 $ 40
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Net plant and property............................ $ 983 $ 921 $ 994 $ 931 $ 846
Total assets...................................... 1,596 1,634 1,673 1,628 1,574
Long-term debt, excluding current maturities...... 425 392 426 402 416
Notes payable..................................... 10 -- 99 83 --
Other liabilities................................. 717 839 753 819 853
Preferred stockholders' equity.................... 78 78 78 36 36
Common stockholders' equity....................... 366 325 317 288 269
OTHER FINANCIAL AND OPERATING DATA:
Cash flows from operations........................ $ 116 $ 122 $ 155 $ 83 $ 108
Capital expenditures.............................. 21 20 129 153 107
Sales and transportation deliveries (Bcf)(a)...... 148 168 391 389 364
Customers (in thousands).......................... 1,457 1,430 1,448 1,423 1,402
Average sales rate ($/Mcf)........................ $ 4.25 $ 4.16 $ 4.48 $ 4.46 $ 4.55
</TABLE>
- -------------------------
(a) Excludes off-system transportation services.
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<PAGE> 73
CONSUMERS GAS GROUP
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
The unaudited pro forma condensed statements of income for the three months
ended March 31, 1995 and the year ended December 31, 1994 give effect to the
issuance and sale of 8 million shares of Class G Common Stock (representing 25%
of the equity attributable to the Consumers Gas Group) as if the sale occurred
on January 1, 1994. The proceeds of the Offering will initially be used to repay
a portion of the debt of CMS Energy, none of which is attributable to the
Consumers Gas Group. Accordingly, other than with respect to net income and net
income per share available to outstanding Class G Common Stock shareholders, no
pro forma adjustments were necessary to the Consumers Gas Group's historical
financial statements to give effect to the transactions described above.
The unaudited pro forma condensed statements of income should be read in
conjunction with "Use of Proceeds," Consumers Gas Group Financial Statements,
"Consumers Gas Group -- Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business of the Consumers Gas Group," CMS
Energy's Consolidated Financial Statements and "CMS Energy -- Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere herein. The unaudited pro forma condensed statements of
income are not necessarily indicative of results that would have occurred if the
transactions described above occurred or the capital structure of the Consumers
Gas Group was in effect for the periods indicated, or of the financial condition
or results of the Consumers Gas Group for any future date or period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1995
YEAR ENDED DECEMBER 31, 1994,
----------------------------------- ----------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- --------- ------ ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE............................. $482 -- $ 482 $1,151 -- $ 1,151
------ ----- --------- ------ ----- ---------
OPERATING EXPENSES
Operation
Cost of gas sold.......................... $281 -- $ 281 $ 662 -- $ 662
Other..................................... 46 -- 46 185 -- 185
------ ----- --------- ------ ----- ---------
Total operation......................... $327 -- $ 327 $ 847 -- $ 847
Maintenance................................. 10 -- 10 39 -- 39
Depreciation, depletion and amortization.... 33 -- 33 76 -- 76
General taxes............................... 21 -- 21 54 -- 54
------ ----- --------- ------ ----- ---------
Total operating expenses................ $391 -- $ 391 $1,016 -- $ 1,016
------ ----- --------- ------ ----- ---------
PRETAX OPERATING INCOME....................... $ 91 -- $ 91 $ 135 -- $ 135
INCOME TAXES.................................. 31 -- 31 41 -- 41
------ ----- --------- ------ ----- ---------
NET OPERATING INCOME.......................... $ 60 -- $ 60 $ 94 -- 94
------ ----- --------- ------ ----- ---------
OTHER INCOME (DEDUCTIONS)..................... -- -- -- (2 ) -- (2)
------ ----- --------- ------ ----- ---------
FIXED CHARGES
Interest on long-term debt.................. $ 8 -- $ 8 $ 29 -- $ 29
Other interest.............................. 1 -- 1 5 -- 5
Capitalized interest........................ -- -- -- -- -- --
Preferred dividends......................... 1 -- 1 5 -- 5
------ ----- --------- ------ ----- ---------
Net fixed charges....................... $ 10 -- $ 10 39 -- $ 39
------ ----- --------- ------ ----- ---------
NET INCOME.................................... $ 50 -- $ 50 $ 53 -- $ 53
====== =========== ========= ====== =========== =========
NET INCOME ATTRIBUTABLE TO CMS ENERGY
SHAREHOLDERS
</TABLE>
COMMENT 32
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THROUGH RETAINED INTEREST................... $ 50 $ (13)(a) $ 37(b) $ 53 $ (13)(a) $ 40(b)
====== =========== ========= ====== =========== =========
NET INCOME ATTRIBUTABLE TO OUTSTANDING CLASS G
COMMON STOCK SHAREHOLDERS................... -- $ 13(a)(d) $ 13 -- $ 13(a)(d) $ 13
====== =========== ========= ====== =========== =========
NET INCOME PER SHARE ATTRIBUTABLE TO
OUTSTANDING CLASS G COMMON STOCK
SHAREHOLDERS................................ -- $1.56(a)(c) $1.56 -- $1.66(a)(c) $ 1.66
====== =========== ========= ====== =========== =========
</TABLE>
- -------------------------
(a)Reflects 25% of the earnings of the Consumers Gas Group to be attributed to
the holders of Class G Common Stock as a result of the Offering.
(b)Reflects 75% of the earnings of the Consumers Gas Group to be attributed to
the holders of CMS Energy Common Stock.
(c)Reflects 8 million shares of Class G Common Stock to be outstanding after the
Offering which will represent 25% of the equity attributable to the Consumers
Gas Group.
COMMENT 32(A)
(d) Although the unaudited pro forma statements of income reflect 25% of the
earnings of the Consumers Gas Group to be attributable
to the holders of Class G Common Stock, CMS Energy, in the sole discretion
of its Board of Directors, could pay dividends
exclusively to the holders of Class G Common Stock, exclusively to the
holders of CMS Energy Common Stock or to holders of both
COMMENT 32(B)
classes in equal or unequal amounts. The method of calculating net income
attributable to the outstanding Class G shareholder reflects the intent of
the Board of Directors that the separately reported earnings and financial
condition of the Consumers Gas Group be the primary basis for determining
dividends to be paid on the Class G Common Stock, although liquidation
rights of the Class G Common Stock and legally available assets of CMS
Energy will be based on different factors.
43
<PAGE> 74
CONSUMERS GAS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the Lower
Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers'
customer base includes a mix of residential, commercial and diversified
industrial customers, the largest of which is the automotive industry.
Enterprises is engaged in several non-utility energy-related businesses
including: 1) oil and gas exploration and production, 2) development and
operation of independent power production facilities, 3) gas marketing services
to utility, commercial and industrial customers and 4) storage and transmission
of natural gas.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The restructuring,
while not affecting Consumers' or CMS Energy's consolidated financial statements
or corporate legal form, is designed to sharpen management focus, improve
efficiency and accountability in both business segments and better position
Consumers for growth in the gas market and to meet increased competition in the
electric power market. Management believes that the strategic business unit
structure will allow each unit to focus more on its own profitability and growth
potential, and will, in the long term, allow Consumers to be more competitive.
On March 21, 1995, CMS Energy received shareholders' approval to amend its
Articles of Incorporation and authorize a new class of Common Stock of CMS
Energy. The new class of Common Stock, designated Class G Common Stock, is
intended to reflect the separate performance of the gas distribution, storage
and transportation businesses conducted by Consumers and MGS (such businesses,
collectively, will be attributed to the Consumers Gas Group). The existing CMS
Energy Common Stock will continue to be outstanding and is intended to reflect
the performance of all of the businesses of CMS Energy and its subsidiaries,
including the business of the Consumers Gas Group, except for the interest in
the Consumers Gas Group attributable to the outstanding shares of the Class G
Common Stock.
The net proceeds of the Offering will be invested in the businesses of CMS
Energy and used for its general corporate purposes. Such net proceeds will be
used initially to repay a portion of the debt of CMS Energy (none of which is
attributable to the Consumers Gas Group). Additional authorized shares of Class
G Common Stock could be offered by CMS Energy in the future at the discretion of
the Board of Directors.
Consumers is a regulated utility. Accordingly, the majority of the
accounting allocation policies described in this discussion have a long-standing
basis and have historically been used in proceedings conducted before the 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 the 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 the
Consumers Gas Group's financial statements based on certain measures of business
activities, such as gas revenues, salaries, other operations and maintenance
("O&M") 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 the 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. Accordingly, CMS Energy's
consolidated financial statements and related notes should be read in
conjunction with the Consumers Gas Group Financial Statements included herein.
44
<PAGE> 75
Dividends on the Class G Common Stock will be paid at the discretion of the
Board of Directors based primarily upon the earnings and financial condition of
the Consumers Gas Group, and, to a lesser extent, CMS Energy as a whole.
Dividends will be payable out of the lesser of (i) the assets of CMS Energy
legally available therefor and (ii) the Available Class G Dividend Amount.
Dividends with respect to the Class G Common Stock are expected to be paid
commensurate with dividend practices of comparable publicly-held local natural
gas distribution companies generally. Management believes that such practices
currently are to pay out from 70% to 85% of annual earnings available for
dividends on common stock.
CMS Energy, in the sole discretion of its Board of Directors, could pay
dividends exclusively to the holders of CMS Energy Common Stock, exclusively to
the holders of Class G Common Stock, or to the holders of both of such classes
in equal or unequal amounts. It is the Board of Directors' current intention
that the declaration or payment of dividends with respect to the Class G Common
Stock shall not be reduced, suspended or eliminated as a result of factors
arising out of or relating to the electric utility business or the non-utility
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.
The availability and amount of dividends payable with respect to the Class
G Common Stock could be adversely effected by the other businesses of CMS
Energy. While CMS Energy believes that all of its operations are conducted in
accordance with industry and regulatory standards, it is possible that the
results of operations of these businesses could impact the level of, or
eliminate CMS Energy's ability to pay dividends on, the Class G Common Stock.
For further information regarding the Class G Common Stock, including
additional dividend information, voting, liquidation and potential tax issues,
see Notes 2, 6 and 11 of the Consumers Gas Group Notes.
EARNINGS
Net income for the Consumers Gas Group for the first quarter of 1995
totaled $50 million, compared to $46 million for the first quarter of 1994.
Earnings in 1995 recognize the resolution of a previously recorded gas contract
loss contingency partially offset by a 12.6% decrease in gas deliveries due to
significantly warmer temperatures experienced in the first quarter of 1995
compared with the corresponding 1994 period.
Net income for the Consumers Gas Group in 1994 totaled $53 million,
compared to $66 million in 1993 and $40 million in 1992. Earnings in 1994
reflect slightly lower gas sales and higher depreciation and gas operating
costs, which include $10 million of postretirement benefit costs (see Note 3 of
the Consumers Gas Group Notes), and the favorable resolution of a previously
recorded gas cost contingency. Improved earnings in 1993 reflect weather driven
record-setting gas deliveries and more favorable regulatory recovery of gas
costs.
CASH POSITION, FINANCING AND INVESTING
CMS Energy's primary ongoing source of operating cash is dividends from its
principal subsidiaries. Consumers effected a quasi-reorganization as of December
31, 1992, which allowed it to resume paying common dividends (see Note 6 of the
Consumers Gas Group Notes). Consumers paid $176 million and $133 million in
common dividends in 1994 and 1993, respectively. Consumers Gas Group's
attributed portion of Consumers' total common dividend payments totaled $46
million for 1994 and $47 million for 1993. As a continuation of Consumers'
dividend policy of paying dividends on its common stock equal to approximately
80% of its consolidated income, in May 1995 Consumers paid a $69.9 million
common dividend from its first quarter earnings. With the issuance of Class G
Common Stock, all Consumers Gas Group dividends will be paid to Class G Common
Stock shareholders or attributed to Retained Interest.
Consumers Gas Group's cash requirements are met by cash from operations and
financing activities. In the first quarters of 1995 and 1994, and for the years
1994, 1993 and 1992, Consumers Gas Group's cash inflow from operations was
derived mainly from Consumers' sale and transportation of natural gas.
45
<PAGE> 76
Consumers Gas Group's primary use of cash continues to reflect its gas
utility construction expenditures and improvements in the reliability of its gas
utility transmission and distribution systems. It also has used its cash to
retire portions of long-term securities and to pay common and preferred
dividends.
Financing Activities: Consumers manages its long-term debt on a centralized
consolidated basis. In early 1994, Consumers issued and sold 8 million shares of
Class A Preferred Stock (cumulative, without par value) with an annual dividend
of $2.08. Net proceeds of $193 million from the sale were used for general
corporate purposes, including debt retirement and improvements to Consumers'
distribution systems. Consumers Gas Group's attributed portion of the net
proceeds totaled $42 million. Consumers continued its effort to reduce its
future interest charges by retiring $101 million of high-cost first mortgage
bonds. In November 1994, Consumers entered into a new $400 million unsecured,
variable rate, five-year term loan and subsequently used the proceeds to
refinance its long-term, variable rate credit agreement (see Note 6 of the
Consumers Gas Group Notes) and to reduce short-term borrowings. Additionally,
Consumers received a $100 million equity investment from CMS Energy in 1994, of
which $22 million was attributed to the Consumers Gas Group.
Investing Activities: Capital expenditures for the Consumers Gas Group
(including assets placed under capital lease) totaled $22 million for the first
three months of 1995 compared with $21 million for the first three months of
1994. Capital expenditures totaled $134 million for 1994 as compared to $158
million in 1993 and $116 million in 1992.
Financing and Investing Outlook: CMS Energy estimates that capital
expenditures for the Consumers Gas Group, including new lease commitments, will
total approximately $360 million over the next three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Gas utility (a)......................................... $125 $111 $105
Michigan Gas Storage.................................... 5 8 6
---- ---- ----
$130 $119 $111
==== ==== ====
</TABLE>
- -------------------------
(a) Includes a portion of anticipated capital expenditures common to both
utility businesses.
The 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.
Consumers, which generally manages its short-term financings on a
centralized, consolidated basis, has several available sources of credit
including unsecured, committed lines of credit totaling $185 million and a $470
million working capital facility. Consumers has FERC authorization to issue or
guarantee up to $900 million in short-term debt through December 31, 1996.
Consumers uses short-term borrowings to finance working capital, seasonal fuel
inventory and to pay for capital expenditures between long-term financings.
Consumers also manages its cash position on a centralized, consolidated basis.
However, as a result of the seasonal nature of the gas business, proportionally
higher revenues realized in the first and fourth quarters reduces the need for
short-term borrowings to finance gas inventory build-ups and also reduces the
amount of gas related accounts receivables that are sold as part of the monthly
sale of Consumers' receivables under its trade receivables purchase and sale
agreement. As a result, during these high sales periods, carrying costs
assignable to Consumers Gas Group reflect these reduced borrowings.
Consumers has an agreement permitting the sales of certain accounts
receivable for up to $500 million. At March 31, 1995 and 1994 and December 31,
1994, 1993 and 1992 receivables sold totaled $300 million, $335 million, $275
million, $285 million and $225 million, respectively, and Consumers Gas Group's
attributed portion of such receivables sold totaled $135 million, $163 million,
$111 million, $124 million and $52 million, respectively.
46
<PAGE> 77
RESULTS OF OPERATIONS
The Gas Distribution Business is subject to the regulatory jurisdiction of
the MPSC with respect to utility rates. The earnings of the Consumers Gas Group
depend substantially upon its ability to secure timely and appropriate rate
relief for the Gas Distribution Business. Also, a major factor affecting
Consumers Gas Group's results of operations is gas usage which is impacted by
the weather, particularly with respect to residential and commercial customers
who use natural gas primarily for space heating, and, to a lesser extent,
industrial customers.
Gas Pretax Operating Income: During the first quarter of 1995 gas pretax
operating income increased $7 million from the 1994 level. The increased pretax
operating income reflects the recognition of the resolution of a previously
recorded gas contract loss contingency. Partially offsetting this increase was a
12.6% decrease in gas deliveries due to significantly warmer weather during the
first quarter of 1995 compared with the corresponding 1994 period. The average
temperature for the first quarter of 1995 increased 25% to 27.5 degrees from
21.9 degrees during the first quarter of 1994.
For 1994, gas pretax operating income decreased $11 million compared to
1993, reflecting slightly lower gas sales and higher depreciation and gas
operating costs, which include $10 million of postretirement benefit costs
related to the gas settlement with the MPSC (see Note 3 of the Consumers Gas
Group Notes), partially offset by the favorable resolution of a previously
recorded gas cost contingency. During 1993, gas pretax operating income
increased $37 million from the 1992 level, reflecting higher gas deliveries
(both sales and transportation volumes) and more favorable regulatory recovery
of gas costs related to transportation.
<TABLE>
<CAPTION>
PRETAX OPERATING INCOME
CHANGE COMPARED TO
-------------------------------------------
QUARTERS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------- -----------------------
1995/1994 1994/1993 1993/1992
--------------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Sales..................................... $ -- $ (3) $ 7
Weather................................... (19) -- 10
Regulatory recovery of gas cost........... 26 10 12
O&M, general taxes and depreciation....... -- (18) 8
------ --------- ---
Total change......................... $ 7 $ (11) $37
============ ======== ========
</TABLE>
Gas Deliveries: Gas sales and gas transported during the first quarter of
1995 totaled 154 Bcf, a 12.6% decrease from the corresponding 1994 level. Gas
sales and gas transported in 1994 totaled 409 Bcf, a .4% decrease from 1993. In
1993, gas sales and gas transported totaled 411 Bcf, a 6.9% increase from 1992
deliveries.
Cost of Gas Sold: The cost of gas sold for the first quarter of 1995
decreased $53 million from the 1994 level as a result of reduced deliveries and
the reversal of a gas contract loss contingency.
GAS UTILITY ISSUES
Rates: In December 1994, Consumers filed a request with the MPSC to
increase Consumers' annual gas rates by $21 million. The requested increase in
revenue reflects increased expenditures, including those associated with
postretirement benefits, and proposes a 13% return on equity. In June 1995, the
MPSC staff filed its position in this case, recommending an $11 million rate
decrease. The MPSC staff's recommendation included a lower rate base, a lower
return on common equity, a revised capital structure and a different sales
forecast than Consumers had projected. A final order from the MPSC is expected
in early 1996. Consumers' most recent rate filing for its electric utility
business resulted in an approved rate of return on equity of 11.75%.
In June 1994, the FERC approved a stipulation and agreement in full
settlement of a rate proceeding originally filed by MGS in 1993, which provides
MGS with estimated annual revenues of $20 million. For further information
regarding gas utility rates, see Note 3 of the Consumers Gas Group Notes.
47
<PAGE> 78
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal to
by-pass Consumers' system in favor of a competitive alternative. The contract
provides for discounted gas transportation rates in an effort to induce the
customer to remain on Consumers' system. In February 1995, the MPSC approved the
contract but stated that the revenue shortfall created by the difference between
the contract's discounted rate and the floor price of one of Consumers' MPSC
authorized gas transportation rates must be borne by Consumers' shareholders. In
March 1995, Consumers filed an appeal with the Court of Appeals claiming that
the MPSC decision denies Consumers the opportunity to earn its authorized rate
of return and is therefore unconstitutional.
GCR Issues: In April 1995, an ALJ issued a proposal for decision in a
proceeding that had been initiated by Consumers regarding a gas supply contract
pricing dispute with certain intrastate producers. The ALJ agreed with Consumers
that certain market based pricing provisions should, on a prospective basis,
limit the price paid by Consumers under the three agreements at issue. The ALJ
also found that the market based pricing provision required specific MPSC
approval before Consumers could apply those prices to purchases under the
agreements and found that such approval had not previously been given. Consumers
does not agree with the ALJ's findings and conclusions on this point and filed
exceptions to the proposal for decision for the MPSC's consideration. If the
MPSC issues an order adopting the recommendations of the ALJ, the market based
provisions upon which Consumers had paid for gas purchased under these
agreements will not be effective prior to such an MPSC order. If the producers
pursue a court action for amounts owed for previously purchased gas, Consumers
could be liable for as much as $44 million (excluding any interest) under the
producers' theories. Consumers believes the producers' position is without merit
and intends to vigorously oppose any claims they may raise but cannot predict
the outcome of this matter.
Environmental Matters: Under the Environmental Response Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites, including some of the 23 sites that formerly housed
manufactured gas plant facilities, even those in which it has a partial or no
current ownership interest. Parties other than Consumers with current or former
ownership interests may also be considered liable for site investigations and
remedial actions. There is limited knowledge of manufactured gas plant
contamination at these sites at this time.
Data available to Consumers and its continued internal review have resulted
in an estimate for all costs related to investigation and remedial action for
all 23 sites of between $48 million and $112 million. These estimates are based
on undiscounted 1994 costs. At March 31, 1995, Consumers has accrued a liability
for $48 million and has established a regulatory asset for approximately the
same amount. Any significant change in assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements, could
impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in December 1994. Consumers
believes that remedial action costs are recoverable in rates as the MPSC in 1993
addressed the question of recovery of investigation and remedial action costs
for another Michigan gas utility as part of a gas rate case. In order to be
recovered in rates, prudent costs must be approved in a rate case. The MPSC has
approved similar deferred accounting requests by several other Michigan
utilities relative to investigation and remedial action costs. In June 1995, as
part of Consumers gas rate case, the MPSC staff recommended that the MPSC adopt
the same accounting and cost recovery previously provided to other Michigan
utilities. Consumers has initiated discussions with certain insurance companies
regarding coverage for some or all of the costs which may be incurred for these
sites. For further information, see Note 11 of the Consumers Gas Group Notes.
OUTLOOK
The Consumers Gas Group believes that if the Consumers Gas Group's
residential customer base grows at a rate of approximately 1.5% annually and gas
prices adjusted for inflation remain relatively unchanged, its annual gas
deliveries will grow to approximately 329.0 Bcf between 1994 and 1999
representing total growth over the period of 5.5%. In addition, the Consumers
Gas Group has identified the following strategies to further grow its
residential, commercial and industrial customer base: increased usage by
existing customers,
48
<PAGE> 79
attracting additional customers, co-generation, industrial conversions, new
technologies and revenue diversification. See "Business of the Consumers Gas
Group -- Growth Strategies."
In 1994, Consumers purchased approximately 83% of its required gas supply
under long-term contracts, and the balance on the spot market. Trunkline
supplied approximately 35% of the total requirement. In late 1994, Consumers'
supply contract with Trunkline was replaced by several one- and two-year
contracts with independent producers. Consumers estimates its purchases under
long-term gas contracts will range from 70 - 80% in future years. Consumers also
has transmission contracts totaling approximately 90% of its supply
requirements. These contracts vary in length from one to ten years. Consumers'
ability to purchase gas during the off-season and store it in its extensive
underground storage facilities continues to help provide customers with low,
competitive gas rates.
OTHER
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the MMCG
asked the Commission to revoke CMS Energy's exemption from registration under
PUHCA. In 1992, the MPSC filed a statement with the Commission recommending that
CMS Energy's current exemption be revoked and a new exemption be issued
conditioned upon certain reporting and operating requirements. If CMS Energy
were to lose its current exemption, it would become more heavily regulated by
the Commission; Consumers could ultimately be forced to divest either its
electric or gas utility business; and CMS Energy could be restricted from
conducting businesses that are not functionally related to the conduct of its
utility business as determined by the Commission. CMS Energy is opposing this
request and believes it will maintain its current exemption from registration
under PUHCA. The Commission has not taken action on this matter.
49
<PAGE> 80
CMS ENERGY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information of CMS Energy presented
below has been derived from the CMS Energy Consolidated Financial Statements
contained elsewhere herein. The following selected consolidated financial
information should be read in conjunction with CMS Energy's Consolidated
Financial Statements, "CMS Energy -- Unaudited Pro Forma Condensed Consolidated
Financial Statements" and "CMS Energy -- Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
---------------- --------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS AND AS NOTED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue................................... $1,119 $1,142 $3,619 $3,482 $3,146
Pretax operating income............................. 206 175 504 439 231
Net income (loss)................................... 86 78 179 155 (297)
Earnings (loss) per average common share............ $ .99 $ .92 $ 2.09 $ 1.90 $(3.72)
Average common shares outstanding (in thousands).... 86,918 85,302 85,888 81,251 79,877
Cash dividends declared per common share............ $ .21 $ .18 $ .78 $ .60 $ .48
BALANCE SHEET DATA:
Net plant and property.............................. $4,826 $4,602 $4,814 $4,583 $4,326
Total assets........................................ 7,344 6,825 7,384 6,964 6,848
Long-term debt, excluding current maturities........ 2,787 2,376 2,709 2,405 2,725
Notes payable....................................... 135 -- 339 259 215
Other liabilities................................... 2,857 3,051 2,873 3,171 3,018
Preferred stock of subsidiary....................... 356 356 356 163 163
Common stockholders' equity......................... 1,209 1,042 1,107 966 727
</TABLE>
50
<PAGE> 81
CMS ENERGY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements reflect
adjustments to the capital structure of CMS Energy upon approval of the Class G
Common Stock proposal and the subsequent issuance and sale of 8 million shares
of Class G Common Stock and the use of the proceeds to repay a portion of the
debt of CMS Energy. The pro forma statements of income give effect to such
transactions as if they occurred on January 1, 1994. The pro forma balance sheet
gives effect to such transactions as if they had occurred on March 31, 1995.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with CMS Energy's Consolidated Financial Statements and
"CMS Energy -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere herein. The unaudited pro forma
condensed financial statements are not necessarily indicative of results that
would have occurred if the transactions described above occurred or of the
financial condition or results of CMS Energy for any future date or period.
CMS ENERGY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Plant and property............................................ $8,974 -- $ 8,974
Less accumulated depreciation, depletion and amortization..... 4,405 -- 4,405
------ ----------- ---------
4,569 -- 4,569
Construction work-in-progress................................. 257 -- 257
------ ----------- ---------
Net plant..................................................... 4,826 -- 4,826
Investments................................................... 621 -- 621
Current assets................................................ 598 -- 598
Non-current assets............................................ 1,299 -- 1,299
------ ----------- ---------
Total assets.................................................. $7,344 -- $ 7,344
====== ========= ========
STOCKHOLDERS' INVESTMENT AND LIABILITIES
Common stockholders' equity................................... $1,209 $ 140(a) $ 1,349
Preferred stock of subsidiary................................. 356 -- 356
Long-term debt................................................ 2,787 140(b) 2,647
Non-current portion of capital leases......................... 103 -- 103
------ ----------- ---------
Total capitalization.......................................... 4,455 -- 4,455
Current liabilities........................................... 1,027 -- 1,027
Non-current liabilities....................................... 1,862 -- 1,862
====== ========= ========
Total stockholders' investment and liabilities................ $7,344 -- $ 7,344
====== ========= ========
</TABLE>
- -------------------------
(a) Reflects the issuance and sale of 8 million shares of Class G Common Stock
(assuming an initial public offering price of $17.50).
(b) Reflects the use of the proceeds to repay a portion of the long-term debt of
CMS Energy.
51
<PAGE> 82
CMS ENERGY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1995 YEAR ENDED DECEMBER 31, 1994
------------------------------------- -------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- --------- ------ ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE.................. $1,119 -- $ 1,119 $3,619 -- $ 3,619
OPERATING EXPENSES................. 913 -- 913 3,115 -- 3,115
------ ----------- --------- ------ ----------- ---------
PRETAX OPERATING INCOME (LOSS)
Electric utility................. 87 -- 87 335 -- 335
Gas utility...................... 91 -- 91 135 -- 135
Oil and gas exploration and
production..................... 15 -- 15 8 -- 8
Independent power production..... 13 -- 13 20 -- 20
Natural gas pipeline, storage and
marketing...................... 3 -- 3 9 -- 9
Other............................ (3) -- (3) (3) -- (3)
------ ----------- --------- ------ ----------- ---------
TOTAL PRETAX OPERATING INCOME...... 206 -- 206 504 -- 504
INCOME TAXES....................... 54 1(a) 55 104 4(a) 108
------ ----------- --------- ------ ----------- ---------
NET OPERATING INCOME............... 152 1 151 400 4 396
OTHER INCOME (DEDUCTIONS).......... 1 -- 1 8 8
FIXED CHARGES...................... 67 (3)(b) 64 229 (11)(b) 218
------ ----------- --------- ------ ----------- ---------
NET INCOME......................... $ 86 $ 2 $ 88 $ 179 $ 7 $ 186
====== =========== ========== ====== =========== ==========
NET INCOME ATTRIBUTABLE TO CMS
ENERGY SHAREHOLDERS.............. $ 86 $ (11)(c) $ 75 $ 179 $ (6)(c) $ 173
====== =========== ========== ====== =========== ==========
NET INCOME ATTRIBUTABLE TO
OUTSTANDING CLASS G
SHAREHOLDERS..................... $ -- $ 13(d)(h) $ 13 $ -- $ 13(d)(h) $ 13
====== =========== ========== ====== =========== ==========
AVERAGE COMMON SHARES OUTSTANDING
CMS Energy....................... 87 -- 87 86 -- 86
====== =========== ========== ====== =========== ==========
Class G.......................... -- 8(e) 8 -- 8(e) 8
====== =========== ========== ====== =========== ==========
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy....................... $ .99 $(.13)(f) $ .86 $ 2.09 $ (.08)(f) $ 2.01
====== =========== ========== ====== =========== ==========
Class G.......................... $ -- $1.56(e) $ 1.56 $ -- $ 1.66(e) $ 1.66
====== =========== ========== ====== =========== ==========
DIVIDENDS DECLARED PER COMMON SHARE
CMS ENERGY(G).................... $ .21 -- $ .21 $ .78 -- $ .78
====== =========== ========== ====== =========== ==========
</TABLE>
- -------------------------
(a) Reflects an adjustment in income taxes for the reduction in interest expense
discussed in item (b) below, which was computed based upon the U.S.
statutory tax rate.
(b) Reflects a reduction in interest expense as a result of the reduction in a
portion of CMS Energy debt outstanding with the proceeds from the issuance
and sale of Class G Common Stock, assuming an 8% interest rate on the
outstanding debt.
(c) Reflects the increase in net income from items (a) and (b) above, less the
net income attributable to the outstanding shares of Class G Common Stock.
(d) Reflects the net income attributable to the outstanding shares of Class G
Common Stock.
(e) Reflects the issuance and sale of 8 million shares of Class G Common Stock
on January 1, 1994.
(f) Reflects the per share impact on CMS Energy Common Stock of item (c) above.
(g) CMS Energy Common Stock annual dividend was raised to $.84 per share ($.21
quarterly) to be effective with the third quarter 1994 dividend.
(h) Although the unaudited pro forma statements of income reflect 25%
of the earnings of the Consumers Gas Group to be attributable to the
holders of Class G Common Stock, CMS Energy, in the sole discretion of its
Board of Directors, could pay dividends exclusively to the holders of Class
G Common Stock, exclusively to the holders of CMS Energy Common Stock or to
holders of both classes in equal or unequal amounts. The method of
calculating earnings per share for the Class G Common shareholder reflects
the intent of the Board of Directors that the separately reported earnings
and financial condition of the Consumers Gas Group be the primary basis for
determining dividends to be paid on the Class G Common Stock, although
liquidation rights of the Class G Common Stock and legally available assets
of CMS Energy will be based on different factors.
52
<PAGE> 83
CMS ENERGY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the Lower
Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers'
customer base includes a mix of residential, commercial and diversified
industrial customers, the largest of which is the automotive industry.
Enterprises is engaged in several non-utility energy-related businesses
including: 1) oil and gas exploration and production, 2) development and
operation of independent power production facilities, 3) gas marketing services
to utility, commercial and industrial customers and 4) storage and transmission
of natural gas.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The restructuring,
while not affecting Consumers' or CMS Energy's consolidated financial statements
or corporate legal form, is designed to sharpen management focus, improve
efficiency and accountability in both business segments and better position
Consumers for growth in the gas market and to meet increased competition in the
electric power market. Management believes that the strategic business unit
structure will allow each unit to focus more on its own profitability and growth
potential, and will, in the long term, allow Consumers to be more competitive.
On March 21, 1995, CMS Energy received shareholders' approval to amend its
Articles of Incorporation and authorize a new class of Common Stock of CMS
Energy. This new class of Common Stock, designated Class G Common Stock, is
intended to reflect the separate performance of the gas distribution, storage
and transportation businesses conducted by Consumers and MGS (such businesses,
collectively, will be attributed to the Consumers Gas Group). The existing CMS
Energy Common Stock will continue to be outstanding and is intended to reflect
the performance of all of the businesses of CMS Energy and its subsidiaries,
including the business of the Consumers Gas Group, except for the interest in
the Consumers Gas Group attributable to the outstanding shares of the Class G
Common Stock.
CONSOLIDATED EARNINGS
Consolidated net income totaled $86 million or $.99 per share for the first
quarter of 1995, compared to $78 million or $.92 per share for the first quarter
of 1994. The increase in net income reflects increased electric utility sales
resulting from Michigan's continuing economic growth, increased revenue from the
May 1994 electric rate increase, recognition of the resolution of a previously
recorded gas contract loss contingency, and additional earnings reflecting
improved operating results and growth of the non-utility businesses. Partially
offsetting this increase was a 12.6% decrease in gas utility deliveries due to
significantly warmer temperatures experienced in the first quarter of 1995
compared with the corresponding 1994 period.
Consolidated net income for 1994 totaled $179 million or $2.09 per share,
compared to net income of $155 million or $1.90 per share in 1993 and a net loss
of $297 million or $3.72 per share in 1992. The improved net income in 1994
reflects a significant increase in utility electric sales, the impact from a May
1994 electric rate increase, the recognition of incentive revenue related to
demand-side management ("DSM") programs, and the favorable resolution of a
previously recorded gas cost contingency. The increased 1993 net income reflects
the Settlement Order related to power purchases from the MCV Partnership as well
as increased electric sales and gas deliveries. Earnings in 1994 and 1993 also
reflect growth of non-utility businesses.
CASH POSITION, FINANCING AND INVESTING
CMS Energy's primary ongoing source of operating cash is dividends from its
principal subsidiaries. Consumers effected a quasi-reorganization as of December
31, 1992, which allowed it to resume paying common dividends (see Note 7 of CMS
Energy Notes). As a continuation of Consumers' dividend policy of paying
dividends on its common stock equal to approximately 80% of its consolidated
income, in May 1995 Consumers paid a $69.9 million common dividend from its
first quarter earnings. Consumers paid $176 million in common dividends in 1994.
CMS Energy also received cash dividends of $9 million from its non-utility
subsidiaries. In the first quarter of 1995, CMS Energy paid $18 million in cash
dividends to common
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<PAGE> 84
shareholders. CMS Energy paid $67 million in cash dividends to common
shareholders in 1994 compared to $49 million in 1993. The $18 million increase
reflects an annual increase of $.12 per share, from $.72 per share to $.84 per
share, commencing in the third quarter 1994. On May 26, 1995, CMS Energy raised
its dividend to an annualized rate of $.96 per share ($.24 per quarter). The
increase will be effective with the next scheduled quarterly dividend payment in
August 1995.
CMS Energy's consolidated cash requirements are met by its operating and
financing activities. In the first quarters of 1995 and 1994 and in the years
ended 1994, 1993 and 1992, CMS Energy's consolidated cash from operations was
derived mainly from Consumers' sale and transportation of natural gas and its
generation, sale and transmission of electricity and from CMS NOMECO Oil & Gas
Co.'s ("CMS NOMECO") sale of oil and natural gas. Consolidated cash from
operations for 1994 reflects Consumers' record-setting electric sales and
increased electric rates which were approved by the MPSC in mid-1994. Cash from
operations for 1993 primarily reflected increased electric sales and gas
deliveries from 1992 levels and reduced after-tax cash shortfalls resulting from
Consumers' purchases of power from the MCV Partnership. During 1992, CMS Energy
generated cash primarily from its consolidated operating activities.
CMS Energy's primary use of cash continues to reflect its utility
construction expenditures, improvements in the reliability of its electric and
gas utility transmission and distribution systems and expansion of its
non-utility businesses. It also has used its cash to retire portions of
long-term securities and to pay common and preferred dividends.
Financing Activities: In January 1994, CMS Energy filed a
shelf-registration statement with the SEC permitting the issuance and sale of up
to $250 million of GTNs. As of January 31, 1995, CMS Energy had issued
approximately $99 million of GTNs with interest rates ranging from 6.75 to 8.50%
and reduced the principal amount of Series B Notes outstanding by $114 million,
to a balance of $167 million. Also, in July 1994, CMS Energy refinanced its $220
million Secured Revolving Credit Facility dated November 30, 1992 ("Secured
Credit Facility") with a new $400 million Credit Facility and extended the
termination date to June 30, 1997. Additionally, in each of October 1994 and
June 1995, CMS Energy filed a shelf-registration statement for the offering and
issuance of up to 2 million shares and 3 million shares of CMS Energy Common
Stock, respectively. As described in the Commission filing, the shares may be
offered and issued in connection with acquisitions of energy-related businesses
and assets.
In January 1995, CMS Generation Co. ("CMS Generation") entered into a
one-year $118 million bridge credit facility for the acquisition of HYDRA-CO, an
independent power production subsidiary of Niagara Mohawk Power Company
("HYDRA-CO"). CMS Energy is currently evaluating permanent financing options.
In early 1994, Consumers issued and sold 8 million shares of Class A
Preferred Stock (cumulative, without par value) with an annual dividend of
$2.08. Net proceeds of $193 million from the sale were used for general
corporate purposes, including debt retirement and improvements to Consumers'
distribution systems. Consumers continued its effort to reduce its future
interest charges by retiring $101 million of high-cost first mortgage bonds. In
November 1994, Consumers entered into a new $400 million unsecured, variable
rate, five-year term loan and subsequently used the proceeds to refinance its
long-term, variable rate credit agreement and to reduce short-term borrowings.
In October 1993, CMS Energy issued 4.6 million shares of common stock at a
price of $26-5/8. The net proceeds of $119 million were used to reduce existing
debt and for general corporate purposes. During 1993, Consumers retired $51
million of high-cost outstanding debt and refinanced $573 million of other debt
at lower interest rates. In November 1993, CMS NOMECO amended the terms of its
loan agreement and increased the amount to $110 million. For further information
on financing activities, see Note 7 of CMS Energy Notes.
Investing Activities: Capital expenditures, including assets placed under
capital lease, deferred DSM costs and investments in unconsolidated
subsidiaries, totaled $309 million for the first quarter of 1995 compared with
$140 million for the first quarter of 1994. These amounts primarily represent
CMS Energy's continued expansion of the non-utility business segments, and
capital investments in the electric and gas utility
54
<PAGE> 85
business units. Capital expenditures for 1995 include requirements of $201
million for acquisitions which commenced in 1994 but did not close until 1995.
CMS Energy's expenditures for the first quarter of 1995 for its utility and
non-utility businesses were $86 million and $224 million, respectively. Capital
expenditures totaled $673 million for 1994 as compared to $768 million in 1993
and $594 million in 1992. In 1994, CMS Energy's expenditures for its utility,
independent power production, oil and gas exploration and production, and
natural gas pipeline, storage and marketing business segments were $492 million,
$30 million, $115 million and $31 million, respectively.
Financing and Investing Outlook: CMS Energy estimates that capital
expenditures, including DSM, new lease commitments and investments in
unconsolidated subsidiaries, will total approximately $2.1 billion over the next
three years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Electric utility (a).................................... $318 $255 $269
Gas utility, including MGS (a).......................... 130 119 111
Oil and gas exploration and production (b).............. 129 100 110
Independent power production (b)........................ 255 120 68
Natural gas pipeline, storage and marketing............. 100 29 20
---- ---- ----
$932 $623 $578
==== ==== ====
</TABLE>
- -------------------------
(a) Includes a portion of anticipated capital expenditures common to both
utility businesses.
(b) Capital expenditures for 1995 include requirements of $46 million in the
case of oil and gas exploration and production, and $155 million in the case
of independent power production for acquisitions which commenced in 1994 but
did not close until 1995.
CMS Energy is required to redeem or retire approximately $720 million of
long-term debt during 1995 through 1997. Cash generated by operations is
expected to satisfy a substantial portion of these capital expenditures and debt
retirements. Additionally, CMS Energy will continue to evaluate the capital
markets in 1995 as a source of financing its subsidiaries' investing activities.
Consumers has several available sources of credit including unsecured,
committed lines of credit totaling $185 million and a $470 million working
capital facility. Consumers has FERC authorization to issue or guarantee up to
$900 million in short-term debt through December 31, 1996. Consumers uses
short-term borrowings to finance working capital, seasonal fuel inventory and to
pay for capital expenditures between long-term financings. Consumers has an
agreement permitting the sales of certain accounts receivable for up to $500
million. At March 31, 1995 and 1994 and December 31, 1994, 1993 and 1992
receivables sold totaled $300 million, $335 million, $275 million, $285 million
and $225 million, respectively.
ELECTRIC UTILITY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
PRETAX OPERATING INCOME
CHANGE COMPARED TO
-----------------------------------------
QUARTERS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
-------------- -----------------------
1995/1994 1994/1993 1993/1992
-------------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Sales...................................... $ 1 $ 33 $ 34
Weather.................................... -- -- 11
Resolution of MCV power cost issues........ -- -- 126
Rate increase and other regulatory
issues................................... 11 38 5
O&M, general taxes and depreciation........ (13) (22) (44)
------ ------- -------
Total change............................. $ (1) $ 49 $ 132
====== ======== =======
</TABLE>
55
<PAGE> 86
Electric Sales: Electric sales during the first quarter of 1995 totaled 8.7
billion kWh, a 1.5% increase from 1994 levels. Residential sales decreased 3.1%,
commercial sales increased 3.0%, and industrial sales increased 5.5%, compared
with the corresponding period in 1994.
Total electric sales for 1994 were a record 34.5 billion kilowatt-hours
("kWh"), a 5.2% increase from 1993 levels which includes a 4.2% increase in
system sales to Consumers' ultimate customers. Strong industrial sales accounted
for 58% of the growth. In 1994, residential and commercial sales increased 1.6%
and 3.0%, respectively, while industrial sales increased 6.8%. The significant
increase in electric sales reflects the continued improvement in economic
conditions in Michigan and broad-based growth in sales to industrial customers.
Growth in industrial sales was the strongest in the automotive and chemical
sectors. Total electric sales in 1993 were 32.8 billion kWh, a 3.7% increase
from the 1992 levels. The 32.8 billion kWh includes a 3.8% increase in system
sales.
Power Costs: Power costs for the three month period ending March 31, 1995
totaled $227 million, a $16 million decrease from the corresponding 1994 period.
The decrease primarily reflects increased generation at Consumers' nuclear power
plants and a corresponding reduction in generation at the more costly oil and
coal fired plants.
Power costs for 1994 totaled $950 million, a $42 million increase from the
corresponding 1993 period. This increase reflects increased kWh production at
Consumers' generating plants and greater power purchases from outside sources to
meet increased sales demand. Power costs for 1993 compared to 1992 reflect the
impact of $126 million relating to the resolution of MCV power cost issues. See
Note 3 of CMS Energy Notes.
Operation and Maintenance: Increases in other operation and maintenance
expense for 1994 and 1993 reflected increased expenditures to improve electric
system reliability.
Depreciation: The increased depreciation for the first quarter 1995 and for
1994 and 1993 reflects additional capital investments in property and equipment.
ELECTRIC UTILITY ISSUES
Power Purchases from the MCV Partnership: Consumers' obligation to purchase
contract capacity from the MCV Partnership was 1,132 MW in 1994 and increased to
a maximum amount of 1,240 MW in 1995. In 1993, the MPSC issued the Settlement
Order that permits Consumers to recover substantially all payments for 915 MW of
contract capacity purchased from the MCV Partnership. The market for the
remaining 325 MW of contract capacity was assessed at the end of 1992. This
assessment, along with the Settlement Order, resulted in Consumers recognizing
an after-tax loss of $343 million for the present value of estimated future
underrecoveries of power purchases from the MCV Partnership. This loss included
all fixed energy amounts at issue in the arbitration proceedings discussed
below. Additional losses may occur if actual future experience materially
differs from the 1992 estimates. The Association of Business Advocating Tariff
Equity ("ABATE") and the Attorney General have appealed the Settlement Order to
the Court of Appeals. As anticipated in 1992, Consumers continues to experience
cash underrecoveries associated with the Settlement Order. These after-tax cash
underrecoveries totaled $24 million for the three months ended March 31, 1995
and $61 million for 1994. Estimated future after-tax cash underrecoveries and
possible losses for 1995 and the next four years if none of the additional
capacity is sold are shown in the table below.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(AFTER-TAX, IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Expected cash underrecoveries................................... $60 $56 $55 $ 8 $ 9
Possible additional underrecoveries and losses(a)............... $20 $20 $22 $72 $72
</TABLE>
- -------------------------
(a) If unable to sell any capacity above the MPSC's authorized level.
Consumers and the MCV Partnership engaged in arbitration to determine
whether Consumers was entitled to reduce the fixed energy charges payable to the
MCV Partnership. In January 1995, the arbitrator ruled in favor of Consumers'
interpretation of the PPA and found that Consumers was entitled to the immediate
return of an estimated $22 million, representing the fixed energy amounts for
which Consumers did
56
<PAGE> 87
not receive full cost recovery during the years prior to the Settlement Order
(1990-1992). Consumers had escrowed approximately $16 million of this amount.
The arbitrator postponed the return of payments for 1993 and 1994 because the
Settlement Order is still subject to pending appeals. The amount under dispute
in 1994 is approximately $9 million and increases each year thereafter,
averaging approximately $17 million per year over the life of the contract.
Consumers believes it is premature to recognize any current year earnings
benefit from this award at this time until the remaining amount of MCV capacity
is sold and/or the market for the capacity is confirmed. In a second arbitration
proceeding, the MCV Partnership is seeking additional payments from Consumers
which the MCV Partnership has estimated at $6 million annually for an alleged
breach of the PPA. Consumers cannot predict the outcome of this arbitration.
In 1994, the lessors of the natural gas-fueled, combined cycle cogeneration
facility operated by the MCV Partnership (the "MCV Facility") filed a lawsuit
against CMS Energy, Consumers and CMS Midland Holdings Company ("CMS Holdings"),
alleging breach of contract, breach of fiduciary duty and negligent or
fraudulent misrepresentation relating to the MCV Partnership's failure to object
to the Settlement Order in light of Consumers' interpretation of the Settlement
Order. The action alleged damages in excess of $1 billion and sought injunctive
relief relative to Consumers' payments of the fixed energy charges. In February
1995, after the arbitrator's decision, the lessors voluntarily withdrew the
lawsuit.
In July 1994 and February 1995, Consumers terminated power purchase
agreements with a 65 MW coal-fired cogeneration facility and a 44 MW wood and
chipped tire plant. Consumers plans to seek MPSC approval to substitute 109 MW
of less expensive contract capacity from the MCV Facility which Consumers is
currently not authorized to recover from retail customers. In April 1995, an ALJ
issued a proposal for decision related to the 1995 power supply cost recovery
("PSCR") case that agreed with objections, raised by certain parties, as to the
inclusion of the 65 MW of capacity substitution as part of the five year
forecast included in plan cases. Although recovery of the costs relating to the
substitution is not being requested in this case, the ALJ concluded that
additional capacity should be competitively bid and recommended that the MPSC
state in its order that cost recovery for substituting capacity absent a
competitive bid is unlikely to be approved. For further information, see Note 3
of CMS Energy Notes.
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. The order provides Consumers with
higher revenues associated with increased expenditures primarily related to
capital additions, operation and maintenance, postretirement benefits and the
continuation of certain DSM programs. The MPSC order generally supported
Consumers' rate design proposal and reduced the level of subsidization of
residential customers by commercial and industrial customers. Consumers filed a
request with the MPSC in November 1994, to increase its retail electric rates in
a range from $104 million to $140 million annually. In March 1995, the MPSC
staff recommended a final annual rate increase of $45 million. For further
information regarding Consumers' request and the staff's recommendation, see
Note 4 of CMS Energy Notes. Additionally, in January 1995, Consumers filed a
request with the MPSC, seeking approval to increase its traditional depreciation
expense by $21 million and reallocate certain portions of its utility plant from
production to transmission, resulting in a $28 million decrease. If both aspects
of the request are approved, the net result would be a decrease in electric
depreciation expense of $7 million for ratemaking purposes. In April 1995, the
MPSC staff's filing did not support Consumers' requested increase in
depreciation expense, but instead proposed a decrease of $24 million. In
addition, the MPSC staff also did not support the reallocation of plant
investment as proposed by Consumers but suggested several alternatives which
could partially address this issue. Consumers is studying the MPSC staff's
position.
Special Rates: In January 1995, the MPSC dismissed a filing made by
Consumers, seeking approval of a plan to offer competitive, special rates to
certain large qualifying customers. Consumers had proposed to offer the new
rates to customers using high amounts of electricity that have expressed an
intention to or are capable of terminating purchases of electricity from
Consumers and have the ability to acquire energy from alternative sources.
Consumers subsequently filed a new, simplified proposal with the MPSC which
would allow Consumers a certain level of rate-pricing flexibility, and allow use
of MCV contract capacity above the level currently authorized by the MPSC, to
respond to customers' alternative energy options. In May 1995, the MPSC issued
an order stating that it has legal authority to approve a range of rates under
which Consumers could negotiate prices with customers that have competitive
energy alternatives. However, the MPSC
57
<PAGE> 88
dismissed from consideration, in this proceeding, the issues related to
Consumers' proposed use of the additional 325 MW of MCV contract capacity to
serve these customers.
PSCR Matters: Consumers experienced an extended refueling and maintenance
outage at Consumers' Palisades nuclear plant located near South Haven, Michigan
("Palisades") during 1993. In February 1995, the MPSC issued a final order in
the 1993 PSCR reconciliation, disallowing $4 million of replacement power costs
related to the 1993 outage. Consumers accrued a loss for this issue in 1994.
Electric Conservation Efforts: Over the past few years, Consumers has
participated in several MPSC-authorized DSM programs designed to encourage the
efficient use of energy. During 1994, Consumers recognized $11 million in
incentive revenue, related to Consumers' achievement of certain DSM program
objectives approved by the MPSC in 1992. In April 1995, an ALJ issued a proposal
for decision, recommending that Consumers be allowed to recover the full $11
million incentive. A final order, authorizing Consumers to collect the $11
million incentive, is expected from the MPSC by mid-1995. In 1994, as part of
Consumers' electric rate case, the MPSC authorized Consumers to continue certain
DSM programs. As part of its current electric rate case, Consumers requested
that the MPSC eliminate all DSM expenditures after April 1995. The proposal for
decision discussed above recommended that Consumers continue its current DSM
programs through 1996. For further information, see Note 4 of CMS Energy Notes.
Electric Environmental Matters: The 1990 amendment of the federal Clean Air
Act as amended on November 15, 1990 ("Clean Air Act") significantly increased
the environmental constraints that utilities will operate under in the future.
While the Clean Air Act's provisions require Consumers to make certain capital
expenditures in order to comply with the amendments for nitrogen oxide
reductions, Consumers' generating units are presently operating at or near the
sulfur dioxide emission limits which will be effective in the year 2000.
Therefore, management believes that Consumers' annual operating costs will not
be materially affected.
In 1990, the State of Michigan passed amendments to the Environmental
Response Act, under which Consumers expects that it will ultimately incur costs
at a number of sites, even those in which it has a partial or no current
ownership interest. Parties other than Consumers with current or former
ownership interests may also be considered liable for site investigations and
remedial actions. Consumers believes costs incurred for both investigation and
required remedial actions will be recovered in rates or from others.
Consumers is a so-called "potentially responsible party" at several sites
being administered under the Comprehensive Environmental Response, Compensation
and Liability Act ("Superfund"). Along with Consumers, there are numerous
credit-worthy, potentially responsible parties with substantial assets
cooperating with respect to the individual sites. Based on current information,
management believes it is unlikely that Consumers' liability at any of the known
Superfund sites, individually or in total, will have a material adverse effect
on its financial position or results of operations.
The Environmental Protection Agency ("EPA") has asked a number of utilities
in the Great Lakes area to voluntarily retire certain equipment containing
specific levels of polychlorinated biphenyls. While Consumers believes that it
is largely in compliance with the EPA's request, it has agreed to a 10-year
retirement period for certain equipment included in the EPA's request. Consumers
does not anticipate that any significant additional costs will be incurred as a
result of this agreement. For further information regarding electric
environmental matters, see Note 12 of CMS Energy Notes.
ELECTRIC OUTLOOK
Competition: Consumers currently expects customer demand for electricity
within its service territory will increase by approximately 1.6% per year over
the next five years. Economic growth and an increasing customer base are
expected to lead to consistently higher annual sales.
However, Consumers (along with the electric utility industry) is
experiencing increased competitive pressures which may result in a negative
impact on Consumers' sales growth. The primary sources of this competition
include: the installation of cogeneration or other self-generation facilities by
Consumers' larger industrial customers; the formation of municipal utilities
which would displace retail service by Consumers to an entire community; and
competition from neighboring utilities which offer flexible rate arrangements
58
<PAGE> 89
designed to encourage movement to their respective service areas. Several of
Consumers' industrial customers are studying these options.
Consumers is pursuing several strategies to retain its current "at-risk"
customers. These strategies include a request that the MPSC allow Consumers to
offer special competitive service rates to current industrial customers which
have demonstrated an ability to seek alternate electric supplies and to attract
new customers which are considering locating or expanding facilities in
Michigan. As part of its current electric rate case, Consumers has requested
that the MPSC eliminate the rate subsidization of residential customers. If
approved, commercial and industrial customers' electric costs would decrease by
a total of approximately $80 million, or approximately 6%, per year.
Consumers is committed to holding operation and maintenance costs level and
continuing to improve customer service. Consumers is also working with large
customers to identify ways to improve the efficiency with which energy is used.
In 1994, the MPSC approved a framework for a five-year experimental retail
wheeling program for Consumers and The Detroit Edison Company ("Detroit
Edison"). Under the experiment, up to 60 MW of Consumers' additional load
requirements could be met by retail wheeling. The program becomes effective upon
Consumers' next solicitation for capacity. In February 1995, an ALJ issued a
proposal for decision that addressed the methodology for pricing transmission
rates to be used for the experiment. An MPSC order is expected by mid-1995.
Consumers does not expect this short-term experiment to have a material impact
on its financial position or results of operations.
In March 1995, the FERC issued a notice of proposed rulemaking ("NOPR") and
a supplemental NOPR that propose changes in the wholesale electric industry.
Among the most significant proposals, is a requirement that utilities provide
open access to the domestic interstate transmission grid. Under the FERC's
proposal, all utilities would be required to use these tariffs for their own
wholesale sales and purchases of electric energy; and the utilities would be
allowed the opportunity to recover wholesale stranded costs (including those
applicable to municipalization situations). Consumers is reviewing the FERC
proposal to determine its potential effect, if any, on its financial position
and results of operations.
Nuclear Matters: In late 1993, the NRC completed a review of Consumers'
performance at Palisades that showed a decline in performance. To provide NRC
senior management with a more in-depth assessment of plant performance, the NRC
conducted a diagnostic evaluation inspection at Palisades during 1994 which
found certain performance, operational and management deficiencies at the plant.
Consumers subsequently filed its response to the NRC's diagnostic evaluation
report and included both short- and long-term enhancements planned to improve
Palisades' performance. Acceptable performance at Palisades will require
continuing performance improvements and additional expenditures at the plant,
which have been included in Consumers' total planned level of expenditures.
Consumers' on-site storage pool at Palisades is at capacity, and it is
unlikely that the U.S. Department of Energy ("DOE") will begin accepting any
spent nuclear fuel by the originally scheduled date in 1998. Consumers is using
NRC-approved dry casks, which are steel and concrete vaults, for temporary
on-site storage. Several appeals relating to NRC approval of the casks and
Consumers' use of the casks had been pending. In January 1995, the U.S. Sixth
Circuit Court of Appeals issued a decision, effectively allowing Consumers to
continue using dry cask storage at Palisades. The Attorney General and other
parties have asked the U.S. Supreme Court for leave to appeal this decision.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license life.
Analysis of recent data from testing of similar materials indicates that the
Palisades reactor vessel can be safely operated through late 1999. Consumers is
continuing to analyze alternative means to permit continued operation of
Palisades to the end of its license life in the year 2007. Consumers cannot
predict the outcome of these efforts. For further information regarding
Palisades, see Note 13 of CMS Energy Notes.
The staff of the Commission has questioned certain accounting practices of
the electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for
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nuclear generating stations in the financial statements. In response to these
questions, the Financial Accounting Standards Board ("FASB") has agreed to
review the accounting for removal costs, including decommissioning. If current
electric utility industry accounting practices for such decommissioning are
changed, annual provisions for decommissioning could increase, estimated costs
for decommissioning could be recorded as a liability rather than as accumulated
depreciation, and trust fund income from the external decommissioning trusts
could be reported as investment income rather than as a reduction to
decommissioning expense.
Stray Voltage: Consumers has recently experienced increases in the number
of lawsuits relating to the effect of so-called stray voltage on certain
livestock. At March 31, 1995, Consumers had 73 separate stray voltage lawsuits
pending. CMS Energy believes that the resolution of these lawsuits will not have
a material impact on its financial position or results of operations. For
further information, see Note 12 of CMS Energy Notes.
GAS UTILITY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
PRETAX OPERATING INCOME
CHANGE COMPARED TO
-----------------------------------------
QUARTERS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
-------------- -----------------------
1995/1994 1994/1993 1993/1992
-------------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Sales....................................... $ -- $ (3) $ 7
Weather..................................... (19) -- 10
Regulatory recovery of gas cost............. 26 10 12
O&M, general taxes and depreciation......... -- (19) 9
------ ------- ---
Total change........................... $ 7 $ (12) $38
========= ======= =======
</TABLE>
Gas Deliveries: Gas sales and gas transported during the first quarter of
1995 totaled 154 Bcf, a 12.6% decrease from the corresponding 1994 level. Gas
sales and gas transported in 1994 totaled 409 Bcf, a .4% decrease from 1993. In
1993, gas sales and gas transported totaled 411 Bcf, a 6.9% increase from 1992
deliveries.
Cost of Gas Sold: The utility cost of gas sold for the first quarter of
1995 decreased $53 million from the 1994 level as a result of reduced deliveries
and the reversal of a gas contract loss contingency.
GAS UTILITY ISSUES
Gas Rates: In December 1994, Consumers filed a request with the MPSC to
increase Consumers' annual gas rates by $21 million. The requested increase in
revenue reflects increased expenditures, including those associated with
postretirement benefits, and proposes a 13% return on equity. In June 1995, the
MPSC staff filed its position in this case, recommending an $11 million rate
decrease. The MPSC staff's recommendation included a lower rate base, a lower
return on common equity, a revised capital structure and a different sales
forecast than Consumers had projected. A final order from the MPSC is expected
in early 1996. Consumers' most recent rate filing for its electric utility
business resulted in an approved rate of return on equity of 11.75%. In 1994,
the FERC approved a stipulation and agreement in full settlement of a rate
proceeding originally filed by MGS in 1993, which provides MGS with estimated
annual revenues of $20 million.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal to
by-pass Consumers' system in favor of a competitive alternative. The contract
provides for discounted gas transportation rates in an effort to induce the
customer to remain on Consumers' system. In February 1995, the MPSC approved the
contract but stated that the revenue shortfall created by the difference between
the contract's discounted rate and the floor price of one of Consumers' MPSC
authorized gas transportation rates must be borne by Consumers' shareholders. In
March 1995, Consumers filed an appeal with the Court of Appeals claiming that
the MPSC decision denies
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Consumers the opportunity to earn its authorized rate of return and is therefore
unconstitutional. For further information regarding gas utility rates, see Note
4 of CMS Energy Notes.
GCR Issues: In April 1995, an ALJ issued a proposal for decision in a
proceeding that had been initiated by Consumers regarding a gas supply contract
pricing dispute with certain intrastate producers. The ALJ agreed with Consumers
that certain market based pricing provisions should, on a prospective basis,
limit the price paid by Consumers under the three agreements at issue. The ALJ
also found that the market based pricing provision required specific MPSC
approval before Consumers could apply those prices to purchases under the
agreements and found that such approval had not previously been given. Consumers
does not agree with the ALJ's findings and conclusions on this point and filed
exceptions to the proposal for decision for the MPSC's consideration. If the
MPSC issues an order adopting the recommendations of the ALJ, the market based
provisions upon which Consumers had paid for gas purchased under these
agreements will not be effective prior to such an MPSC order. If the producers
pursue a court action for amounts owed for previously purchased gas, Consumers
could be liable for as much as $44 million (excluding any interest) under the
producers' theories. Consumers believes the producers' position is without merit
and intends to vigorously oppose any claims they may raise but cannot predict
the outcome of this matter.
Gas Environmental Matters: Under the Environmental Response Act, Consumers
expects that it will ultimately incur investigation and remedial action costs at
a number of sites, including some of the 23 sites that formerly housed
manufactured gas plant facilities, even those in which it has a partial or no
current ownership interest. Parties other than Consumers with current or former
ownership interests may also be considered liable for site investigations and
remedial actions. There is limited knowledge of manufactured gas plant
contamination at these sites at this time.
Data available to Consumers and its continued internal review have resulted
in an estimate for all costs related to investigation and remedial action for
all 23 sites of between $48 million and $112 million. These estimates are based
on undiscounted 1994 costs. At March 31, 1995, Consumers has accrued a liability
for $48 million and has established a regulatory asset for approximately the
same amount. Any significant change in assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements, could
impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in December 1994. Consumers
believes that remedial action costs are recoverable in rates as the MPSC in 1993
addressed the question of recovery of investigation and remedial action costs
for another Michigan gas utility as part of a gas rate case. In order to be
recovered in rates, prudent costs must be approved in a rate case. The MPSC has
approved similar deferred accounting requests by several Michigan utilities
relative to investigation and remedial action costs. In June 1995, as part of
Consumers gas rate case, the MPSC staff recommended that the MPSC adopt the same
accounting and cost recovery previously provided to other Michigan utilities.
Consumers has initiated discussions with certain insurance companies regarding
coverage for some or all of the costs which may be incurred for these sites. For
further information, see Note 12 of CMS Energy Notes.
GAS OUTLOOK
The Consumers Gas Group believes that if the Consumers Gas Group's
residential customer base grows at a rate of approximately 1.5% annually and gas
prices adjusted for inflation remain relatively unchanged, its annual gas
deliveries will grow to approximately 329.0 Bcf between 1994 and 1999
representing total growth over the period of 5.5%. In addition, the Consumers
Gas Group has identified the following strategies to further grow its
residential, commercial and industrial customer base: increased usage by
existing customers, attracting additional customers, co-generation, industrial
conversions, new technologies and revenue diversification. See "Business of the
Consumers Gas Group -- Growth Strategies."
In 1994, Consumers purchased approximately 83% of its required gas supply
under long-term contracts, and the balance on the spot market. Trunkline
supplied approximately 35% of the total requirement. In late 1994, Consumers'
supply contract with Trunkline was replaced by several one- and two-year
contracts with independent producers. Consumers estimates its purchases under
long-term gas contracts will range from
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70 - 80% in future years. Consumers also has transmission contracts totaling
approximately 90% of its supply requirements. These contracts vary in length
from one to ten years. Consumers' ability to purchase gas during the off-season
and store it in its extensive underground storage facilities continues to help
provide customers with low, competitive gas rates.
OIL AND GAS EXPLORATION AND PRODUCTION
Pretax Operating Income: Pretax operating income for the three months ended
March 31, 1995 increased $13 million from the same period in 1994, reflecting
the gain from assignment and novation of a gas supply contract as well as higher
sales volumes and average market prices for oil, partially offset by lower
average market prices for gas.
1994 pretax operating income increased $5 million from 1993, reflecting
higher gas sales volumes, lower international write-offs, and the gain from
assignment of a gas supply contract, partially offset by lower average market
prices for oil and gas. 1993 pretax operating income decreased $4 million from
1992, primarily reflecting lower average market prices for oil and $10 million
of international write-offs, partially offset by higher gas and oil sales
volumes and higher average market prices for gas.
Capital Expenditures: In June 1994, CMS NOMECO acquired for $22.5 million a
working interest in the Espinal block in Colombia, South America, which is
operated by LASMO Oil Colombia Limited, from Sun Company, Inc. The other
interest holder is Empresa Colombiana de Petroleos, the Colombian State Oil
Company. The block which includes 250,000 acres is currently producing 8,500
barrels of oil per day. CMS NOMECO estimates the block to contain at least 75
million barrels of proven oil reserves of which CMS NOMECO's share of production
is 14.7%.
In September 1994, a consortium in which CMS NOMECO is a 29% participant
was awarded the right to enter into an agreement with Maraven, S.A., a unit of
the Venezuelan state oil company, to develop the Colon block in the Maracaibo
basin of southwest Venezuela. The agreement commits the consortium to spend at
least $160 million over the next three years in a development program involving
reworking, re-equipping and re-entering wells, and drilling new wells to
optimize production from existing proved reserves. Total production from the
block is expected to approximate 30,000 barrels per day by 1997. The
consortium's operating fee and profit compensation is approximately $4.90 per
barrel of production during the 20-year life of the concession.
The 1994 capital expenditures also reflect pipeline and road construction
and development drilling in Ecuador. Production commenced in May 1994. By year
end all three fields were producing at a pipeline-curtailed rate of 33,000
barrels per day compared to total productive capacity of 43,000 barrels per day.
Further, the Ministry of Energy and Mines in Ecuador has recently informed the
consortium members that the Ministry will seek to renegotiate the Risk Service
Contract and other contracts governing the project. CMS NOMECO cannot predict
the outcome of these negotiations. CMS NOMECO holds a 14% working interest.
In February 1995, CMS NOMECO closed on the acquisition of Walter
International, Inc., a Texas corporation ("Walter"), for approximately $46
million, consisting of approximately $24 million of CMS Energy Common Stock and
$22 million in both cash and assumed debt. Post-closing adjustments may result
in the remittance of approximately $3 million of additional CMS Energy Common
Stock. CMS NOMECO's acquisition of Walter will add net production of 5,500
barrels per day in 1995 and proven reserves of approximately 20 million barrels
of oil.
CMS Energy currently plans to invest $339 million over the next three years
in its oil and gas exploration and production operations. These anticipated
capital expenditures, which reflect the acquisition of Walter, will be
concentrated in North and South America and Africa.
INDEPENDENT POWER PRODUCTION
Pretax Operating Income: Pretax operating income for the three months ended
March 31, 1995 increased $11 million from the same period in 1994, primarily
reflecting higher capacity sales from the MCV
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Partnership, as well as additional equity earnings by CMS Generation
subsidiaries primarily due to additional electric generating capacity.
1994 pretax operating income increased $15 million, primarily reflecting
higher capacity sales from the MCV Partnership, as well as additional equity
earnings by the CMS Generation subsidiaries due to the addition of new electric
generating capacity. Sales and revenues related to CMS Energy's ownership
interest increased 24% and 15%, respectively, over the prior year. 1993 pretax
operating income increased $21 million from 1992, primarily reflecting the
addition of new electric generating capacity and improved equity earnings and
operating efficiencies.
Capital Expenditures: In 1994, Genesee Power Station Limited Partnership
("GPSLP"), an unconsolidated affiliate of CMS Generation, obtained financing and
began construction on the Genesee Power Station. CMS Generation has a 50%
ownership interest in GPSLP, the 35 MW wastewood-fueled power plant near Flint,
Michigan. Completion of the project is scheduled for Spring 1996 with an
estimated cost of $94 million. CMS Generation's share of GPSLP equity committed
upon completion of the project approximates $11 million.
In June 1994, CMS Generation acquired a 41% ownership interest in the
Centrales Termicas Mendoza electric generating plant in western Argentina's
Mendoza Province. CMS Generation is the lead developer and the plant operator.
With major retrofitting and maintenance, this facility has the potential to
produce 382 MW of generating capacity from oil and natural gas. CMS Generation's
operational responsibility for the plant commenced on November 1, 1994.
In July 1994, CMS Generation acquired a 32.5% ownership interest in Toledo
Power Company, which holds two operating power plants totaling 135 MW of
generating capacity located on the island of Cebu in the Philippines.
In January 1995, CMS Generation completed its acquisition of HYDRA-CO. CMS
Generation purchased 100% of HYDRA-CO's stock for $207 million, including
approximately $52 million of current assets. CMS Generation partially financed
the acquisition with a $118 million bridge credit facility supplied by a
consortium of four banks led by Union Bank of California. CMS Energy is
currently evaluating permanent financing options. CMS Generation assumes
ownership in 735 megawatts of gross capacity and 224 megawatts of net ownership.
CMS Generation will manage and operate eight plants previously managed by
HYDRA-CO and will also assume construction management responsibility for a
60-megawatt diesel-fueled plant which has begun in Jamaica. The plant is
scheduled to go into service in the third quarter of 1996.
The Moroccan government has selected a consortium of CMS Generation and
Asea Brown Boveri Energy Ventures to exclusively negotiate a definitive
agreement for the privatization and expansion of a Moroccan power plant. The
privatization of the coal-fired Jorf Lasfar plant, southwest of Casablanca,
includes ownership and operation of two 330 MW generating units which are
nearing completion, and the construction of another two 330 MW units. The output
of the plants will be sold to the Moroccan national utility. The cost of the
facilities will be in excess of $1 billion.
CMS Energy currently plans to invest $443 million relating to its
independent power production operations over the next three years, primarily in
domestic and international subsidiaries and partnerships. These anticipated
capital expenditures include a $155 million requirement for the HYDRA-CO
acquisition. CMS Generation will also pursue acquisitions of operating electric
generating plants in Latin America, southern Asia and the Pacific Rim region.
NATURAL GAS PIPELINE, STORAGE AND MARKETING
Pretax Operating Income: Pretax operating income for the three month period
ending March 31, 1995 was unchanged from the corresponding 1994 period. 1994
pretax operating income increased $2 million over 1993, reflecting earnings
growth from gas pipeline and storage projects and gas marketed to end-users. In
1994, 66 Bcf was marketed compared to 60 Bcf in 1993.
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Capital Expenditures: In January 1994, CMS Gas Transmission acquired a 50%
ownership interest in Moss Bluff Gas Storage Systems, a high deliverability salt
cavern storage facility on the Gulf Coast of Texas, for $18 million.
Effective January 1, 1995, CMS Gas Transmission and Storage Company, a
subsidiary of Enterprises, ("CMS Gas Transmission") increased its ownership of
Antrim Limited Partnership to 100% by acquiring the remaining 40% interest.
Under a new agreement with Michigan Consolidated Gas Company ("MichCon"), CMS
Gas Transmission will provide a gas treating service for up to 260 million cubic
feet per day ("MMcf/d") of Antrim gas. CMS Gas Transmission currently plans to
expand this existing 120 MMcf/d treating complex to accommodate new Antrim
production. This $22 million expansion will treat gas connected to a number of
gathering lines including CMS Gas Transmission's South Chester gathering system
and deliver gas to MichCon's Northern Michigan pipeline network.
In March 1995, CMS Gas Transmission received initial regulatory approval to
construct, at a cost of $3 million, a 3.1 mile pipeline from its natural gas
transmission system to an interconnection with an existing pipeline at the St.
Clair River, south of Port Huron, Michigan. The pipeline, targeted to be in
service by November 1995, will provide significantly increased gas supply
flexibilities in the U.S. and Canada.
CMS Energy currently plans to invest $149 million over the next three years
relating to its non-utility gas operations, continuing to pursue development of
natural gas storage, gas gathering and pipeline operations both domestically and
internationally and work toward the development of a Midwest "market center" for
natural gas through strategic alliances and asset acquisition and development.
OTHER
Other Income: Other income for 1994 decreased $34 million when compared to
the corresponding 1993 period, reflecting the sale of the remaining MCV Senior
Secured lease obligation bonds ("MCV Bonds") in December 1993 which eliminated
the bond interest income. The 1992 loss included a $343 million charge related
to the Settlement Order.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991 the Attorney General and the MMCG
asked the Commission to revoke CMS Energy's exemption from registration under
PUHCA. On April 15, 1992, the MPSC filed a statement with the Commission
recommending that CMS Energy's current exemption be revoked and a new exemption
be issued conditioned upon certain reporting and operating requirements. If CMS
Energy were to lose its current exemption, it would become more heavily
regulated by the Commission, Consumers could ultimately be forced to divest
either its electric or gas utility business; and CMS Energy could be restricted
from conducting businesses that are not functionally related to the conduct of
its utility business as determined by the Commission. CMS Energy is opposing
this request and believes it will maintain its current exemption from
registration under PUHCA. The Commission has not taken action on this matter.
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DESCRIPTION OF CAPITAL STOCK
The following is a description of the Capital Stock of CMS Energy,
reflecting the filing of the Restated Articles of Incorporation authorizing the
Class G Common Stock with the Michigan Department of Commerce. This description
does not purport to be complete and is qualified in its entirety by reference to
the Restated Articles of Incorporation and to the Charter Amendment as approved
by CMS Energy's shareholders on March 21, 1995 ("Charter Amendment"), which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
GENERAL
The authorized capital stock of CMS Energy consists of 320 million shares
of capital stock, of which 10 million are shares of preferred stock, $.01 par
value ("Preferred Stock"), 60 million are shares of common stock, no par value,
designated as Class G Common Stock, and 250 million are shares of common stock,
par value $.01 per share, designated as CMS Energy Common Stock. As of June 14,
1995, there were no shares of Preferred Stock or Class G Common Stock issued or
outstanding, and 88,103,885 shares of CMS Energy Common Stock were issued and
outstanding.
Authorized but unissued shares of Class G Common Stock will be available
for issuance by CMS Energy from time to time, as determined by the Board of
Directors, for any proper corporate purpose, which could include raising capital
for use by CMS Energy (in the case of the sale of any Retained Interest Shares)
or for attribution to the Consumers Gas Group (in the case of any sale of
Additional Shares), payment of dividends, providing compensation or benefits to
employees or acquiring companies or businesses. The issuance of such shares of
Class G Common Stock would not be subject to approval by the shareholders of CMS
Energy unless deemed advisable by the Board of Directors or required by
applicable law, regulation or stock exchange listing requirements. Any net
proceeds from, or other effects of, the issuance by CMS Energy of Class G Common
Stock (other than Retained Interest Shares) would be attributed to the Consumers
Gas Group.
The Class G Common Stock is designed to establish a class of Common Stock
that is intended to reflect the performance of the businesses attributed to the
Consumers Gas Group. See "Business of the Consumers Gas Group."
PREFERRED STOCK
The authorized Preferred Stock may be issued without the approval of the
holders of Common Stock in one or more series, from time to time, with each such
series to have such designation, powers, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, as shall be stated in a resolution providing for the
issue of any such series adopted by the Board of Directors. The future issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of CMS Energy.
CLASS G COMMON STOCK
Dividends: Dividends on the Class G Common Stock will be limited to the
lesser of (i) the assets of CMS Energy legally available for dividends under
Michigan law and (ii) the Available Class G Dividend Amount. Michigan law
prohibits a dividend, if after giving it effect, CMS Energy would not be able to
pay its debts as they become due in the usual course of business, or CMS
Energy's total assets would be less than the sum of its total liabilities plus,
unless the Articles of Incorporation are amended to provide otherwise, the
amount that would be needed, if CMS Energy were to be dissolved at the time of
the dividend, to satisfy the preferential rights upon dissolution of any
shareholders whose preferential rights are superior to those receiving the
assets. Consequently, the amount allowed under clause (i) above will reflect the
amount of any net losses of CMS Energy, including the businesses attributed to
the Consumers Gas Group, and any dividends or distributions on the Class G
Common Stock or the CMS Energy Common Stock. However, such net losses, dividends
or distributions would not reduce assets legally available for distribution on
the Class G Common Stock unless the legally available assets of CMS Energy are
less than the Available Class G Dividend Amount limitations set forth in the
Articles of Incorporation. Subject to the express terms of any outstanding
Preferred
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Stock, the foregoing limitations and the contractual limitations described under
"Dividend Policy," the Board of Directors may, in its sole discretion, declare
and pay dividends exclusively on either class of Common Stock, in equal or
unequal amounts, notwithstanding the respective amounts of assets available for
dividends on each class, the respective voting rights of each class, the amounts
of prior dividends declared on each class or any other factor. It is the Board
of Directors' current intention that the declaration or payment of dividends
with respect to the Class G Common Stock shall not be reduced, suspended or
eliminated as a result of factors arising out of or relating to the electric
utility business or the non-utility 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.
The "Available Class G Dividend Amount," on any date ("calculation date"),
means the excess of:
(i) the product of (a) the Gas Group Fraction as of such calculation
date and (b) an amount equal to the total assets attributed to the
Consumers Gas Group less the total liabilities attributed to the Consumers
Gas Group as of such calculation date determined in accordance with
generally accepted accounting principles as in effect at such time applied
on a basis consistent with that applied in determining Consumers Gas Group
income; over
(ii) the product of (a) the Gas Group Fraction as of such calculation
date and (b) the amount that would be needed to satisfy any preferential
rights to which holders of any outstanding shares of preferred stock
attributed to the Consumers Gas Group are entitled as of such calculation
date;
provided that such excess will be reduced by an amount, if any, sufficient to
ensure that the businesses attributed to the Consumers Gas Group will be able to
pay their debts as they become due in the usual course of business.
The "Gas Group Fraction," as of any calculation date, represents the
fractional interest in the businesses attributed to the Consumers Gas Group that
is held by the holders of the outstanding Class G Common Stock. It is a
fraction, the numerator of which is the number of shares of Class G Common Stock
outstanding on such date and the denominator of which is the sum of the number
of shares of Class G Common Stock outstanding on such date plus the number of
Retained Interest Shares on such date, but such fraction will never be greater
than one.
The "Retained Interest Shares" as of any date represents the interest in
the businesses attributed to the Consumers Gas Group that is not held by the
holders of the outstanding shares of Class G Common Stock, but is retained by
CMS Energy. The Retained Interest Shares are not deemed to be outstanding shares
of Class G Common Stock and have no voting rights. The number of Retained
Interest Shares will initially be the number of shares of Class G Common Stock
that the Board of Directors deems, prior to the Offering, to represent 100% of
the common stockholders' equity of CMS Energy attributable to the Consumers Gas
Group, less the number of shares of Class G Common Stock to be first issued. The
number from time to time will be:
(i) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of Class
G Common Stock and dividends or distributions of shares of Class G Common
Stock to holders thereof and other reclassifications of Class G Common
Stock;
(ii) decreased by (A) the number of Retained Interest Shares issued or
sold by CMS Energy, including any sold pursuant to the Offering, (B) the
number of Retained Interest Shares issued upon conversion or exercise of
Convertible Securities (as defined below) which are not attributed to the
Consumers Gas Group, (C) the number of Retained Interest Shares issued by
CMS Energy as a dividend or distribution or by reclassification or exchange
to holders of CMS Energy Common Stock and (D) the number (rounded, if
necessary, to the nearest whole number) equal to the aggregate fair value
(as determined by the Board of Directors) of assets or properties of CMS
Energy which cease to be attributable to the Consumers Gas Group in
consideration for a decrease in the Retained Interest Shares determined by
dividing such amount by the Fair Market Value of one share of Class G
Common Stock as of the date such assets or properties cease to be
attributable to the Consumers Gas Group; and
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(iii) increased by (A) the number of issued and outstanding shares of
Class G Common Stock repurchased by CMS Energy with assets which are not
attributed to the Consumers Gas Group, and (B) the number (rounded, if
necessary, to the nearest whole number) equal to the aggregate fair value
(as determined by the Board of Directors) of assets or properties of CMS
Energy that are attributed to the Consumers Gas Group in consideration for
an increase in the number of Retained Interest Shares divided by the Fair
Market Value of one share of Class G Common Stock as of the date of such
attribution.
"Convertible Securities" means any securities of CMS Energy that are
convertible into or exercisable for or evidence the right to acquire any shares
of CMS Energy Common Stock or Class G Common Stock, whether at such time or upon
the occurrence of certain events, pursuant to antidilution provisions of such
securities or otherwise.
Voting: Except as set forth below and except as otherwise provided by law,
the holders of both classes of Common Stock vote together as a single class on
all matters as to which all holders of Common Stock are entitled to vote. On all
matters to be voted on by the holders of both classes of Common Stock voting
together as a single class (i) each share of outstanding CMS Energy Common Stock
would have one vote and (ii) each share of outstanding Class G Common Stock
would have one vote. If shares of only one class of Common Stock are
outstanding, each share of that class will have one vote. If any class of Common
Stock of CMS Energy is entitled to vote separately as a class, with respect to
any matter, each share of that class shall be entitled to one vote in the
separate vote on such matter.
CMS Energy will set forth the amount of outstanding shares of the CMS
Energy Common Stock and the Class G Common Stock in its Annual Reports on Form
10-K and Quarterly Reports on Form 10-Q filed pursuant to the Exchange Act and
will disclose in any proxy statement for a shareholders' meeting the number of
outstanding shares of the CMS Energy Common Stock and the Class G Common Stock.
Under Michigan law, the approval of the holders of a majority of the
outstanding shares of a class of Common Stock, voting as a separate class, would
be necessary for authorizing, effecting or validating the merger or
consolidation of CMS Energy into or with any other corporation if such merger or
consolidation would adversely affect the powers or special rights of such class
of stock, and to authorize any amendment to the Articles of Incorporation that
would increase or decrease the aggregate number of authorized shares of such
class or alter or change the powers, preferences or special rights of the shares
of such class so as to affect them adversely. The Articles of Incorporation also
provide that unless the vote or consent of a greater number of shares shall then
be required by law, the approval of the holders of a majority of the outstanding
shares of either class of Common Stock, voting as a separate class, will be
necessary for authorizing, effecting or validating the merger or consolidation
of CMS Energy into or with any other corporation if such merger or consolidation
would adversely affect the powers or special rights of such class of Common
Stock, either directly by amendment to the Articles of Incorporation or
indirectly by requiring the holders of such class to accept or retain, in such
merger or consolidation, anything other than (i) shares of such class or (ii)
shares of the surviving or resulting corporation, having, in either case, powers
and special rights identical to those of such class prior to such merger or
consolidation. The effect of these provisions may be to permit the holders of a
majority of the outstanding shares of either class of Common Stock to block any
such merger or amendment which would adversely affect the powers or special
rights of holders of such class of Common Stock.
Exchange or Redemption: The Class G Common Stock will be subject to
exchange or redemption, as the case may be, upon the terms described below.
At any time after the date on which all of the consolidated assets and
liabilities attributed to the Consumers Gas Group (and no other assets or
liabilities) become the consolidated assets and liabilities of a single
corporation, all of the common stock of which is owned by CMS Energy ("Gas Group
Subsidiary"), the Board of Directors, in its sole discretion, provided that
there are assets of CMS Energy legally available therefor, may declare that all
of the outstanding shares of Class G Common Stock will be exchanged for a number
of outstanding shares of common stock of the Gas Group Subsidiary equal to the
product of the Gas Group Fraction and the number of all of the outstanding
shares of common stock of the Gas Group
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Subsidiary, on a pro rata basis, each of which shall, upon issuance, be fully
paid and nonassessable. CMS Energy would retain the balance of the outstanding
shares of the common stock of the Gas Group Subsidiary.
Upon the Disposition, in one transaction or a series of related
transactions, by CMS Energy of all or substantially all of the properties and
assets attributed to the Consumers Gas Group (other than in connection with the
Disposition by CMS Energy of all of its properties and assets in one transaction
or a series of related transactions which results in the dissolution,
liquidation or winding up of CMS Energy as set forth under "Liquidation,
Subdivision and Combination" below) to any person, entity or group (other than
(a) holders of all outstanding shares of Class G Common Stock on a pro rata
basis or (b) a person, entity or group in which CMS Energy, directly or
indirectly, owns a majority equity interest), CMS Energy is required, on or
prior to the first Business Day (as defined below) following the 90th day
following the consummation of such Disposition, to exchange each outstanding
share of Class G Common Stock for a number of fully paid and nonassessable
shares of CMS Energy Common Stock having a Fair Market Value equal to 110% of
the Fair Market Value of one share of Class G Common Stock as of the date of the
first public announcement by CMS Energy of such Disposition.
If immediately after any event, CMS Energy, directly or indirectly, owns
less than a majority equity interest in any person, entity or group in which CMS
Energy, directly or indirectly, owned a majority equity interest immediately
prior to the occurrence of such event, a Disposition of all of the properties
and assets attributed to the Consumers Gas Group owned by such person, entity or
group shall be deemed to have occurred. In the case of a Disposition of
properties and assets in a series of related transactions, such Disposition
shall not be deemed to have been consummated until the consummation of the last
of such transactions.
"Business Day" means each weekday other than any day on which any relevant
class of Common Stock is not traded on any national securities exchange or the
National Association of Securities Dealers Automated Quotations National Market
or in the over-the-counter market.
"Disposition" means a sale, transfer, assignment or other disposition
(whether by merger, consolidation, sale or contribution of assets, properties or
stock or otherwise), but does not include (1) an attribution of assets or
properties of CMS Energy to the Consumers Gas Group if such attribution
increases the Retained Interest Shares, or (2) assets or properties of CMS
Energy ceasing to be attributed to the Consumers Gas Group if the result is a
decrease in the Retained Interest Shares.
"Fair Market Value" of shares of either class of Common Stock on any date
means the average of the daily closing prices thereof for the period of 20
consecutive Business Days commencing on the 30th Business Day prior to such
date. The closing price of shares of a class of Common Stock for each Business
Day shall be (i) if such shares are listed or admitted to trading on a national
securities exchange, the closing price on the New York Stock Exchange Composite
Tape (or any successor composite tape reporting transactions on national
securities exchanges) or, if such New York Stock Exchange Composite Tape shall
not be in use or shall not report transactions in such shares, the last reported
sales price regular way on the principal national securities exchange on which
such shares are listed or admitted to trading (which shall be the national
securities exchange on which the greatest number of such shares of stock has
been traded during such 20 consecutive Business Days), or, if there is no
transaction on any such Business Day in any such situation, the mean of the bid
and asked prices on such Business Day, or (ii) if such shares are not listed or
admitted to trading on any such exchange, the closing price, if reported, or, if
the closing price is not reported, the average of the closing bid and asked
prices as reported by the National Association of Securities Dealers Automated
Quotations or a similar source selected from time to time by CMS Energy for this
purpose, and (iii) reduced, if such Business Day is prior to any "ex" date or
any similar date occurring during such period for any dividend or distribution
(other than as contemplated in (iv) below) paid or to be paid with respect to
such shares, by the fair market value (as determined by the Board of Directors)
of the per share amount of such dividend or distribution, and (iv) appropriately
adjusted, if such Business Day is prior to (A) the effective date of any
subdivision (by stock split, stock dividend, or otherwise) or combination (by
reverse stock split or otherwise) of such shares, or (B) the "ex" date or any
similar date for any dividend or distribution of shares of such class of Common
Stock on the outstanding shares of such class of Common Stock, occurring during
such period, to
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<PAGE> 99
reflect such subdivision, combination, dividend or distribution. In the event
such closing or bid and asked prices are unavailable, the Fair Market Value of
such shares shall be determined by the Board of Directors.
"Substantially all of the properties and assets attributed to the Consumers
Gas Group" means a portion of such properties and assets (A) that represents at
least 80% of the then-current fair market value (as determined by the Board of
Directors) of the properties and assets attributed to the Consumers Gas Group as
of such date or (B) from which were derived at least 80% of the aggregate
revenues for the immediately preceding twelve fiscal quarterly periods of CMS
Energy (calculated on a pro forma basis to include revenues derived from any of
such properties and assets acquired during such periods) derived from the
properties and assets attributed to the Consumers Gas Group as of such date.
In addition, CMS Energy may, by a majority vote of the Board of Directors
then in office, at any time exchange for each outstanding share of Class G
Common Stock a number of fully paid and nonassessable shares of CMS Energy
Common Stock having a Fair Market Value equal to 115% of the Fair Market Value
of one share of Class G Common Stock as of the date of the first public
announcement by CMS Energy of such exchange.
After the exchange date on which all outstanding Class G Common Stock was
exchanged, any share of Class G Common Stock that is issued on conversion or
exercise of any Convertible Securities will, immediately upon issuance pursuant
to such conversion or exercise and without any notice or any other action on the
part of CMS Energy or the Board of Directors or the holder of such share of
Class G Common Stock: (A) in the event the then-outstanding shares of Class G
Common Stock were exchanged for CMS Energy Common Stock on such exchange date as
set forth in the first or seventh immediately preceding paragraphs, be exchanged
for the kind and amount of shares of capital stock and other securities and
property that a holder of such Convertible Security would have been entitled to
receive pursuant to the terms of such Convertible Security had such terms
provided that the conversion or exercise privilege in effect immediately prior
to any exchange by CMS Energy of any of its capital stock for shares of any
other capital stock of CMS Energy would be adjusted so that the holder of any
such Convertible Security thereafter surrendered for conversion or exercise
would be entitled to receive the number of shares of capital stock of CMS Energy
and other securities and property such holder would have owned immediately
following such action had such Convertible Security been converted or exercised
immediately prior thereto; or (B) in the event the then-outstanding shares of
Class G Common Stock were exchanged for common stock of the Gas Group Subsidiary
as set forth in the eighth immediately preceding paragraph, be redeemed, to the
extent of the assets of CMS Energy legally available therefor, for $.01 in cash.
The provisions of clause (A) above do not apply to the extent that equivalent
adjustments are otherwise made pursuant to the provisions of such Convertible
Securities.
Under Section 303 of the MBCA, upon the prior approval of shareholders, a
board of directors may amend a corporation's articles of incorporation to
increase the number of authorized shares of any class or series of stock to the
number that will be sufficient, when added to the previously authorized but
unissued shares of such class or series, to satisfy the conversion privileges of
any convertible securities of the corporation. The Articles of Incorporation
deem the required exchange at a 10% Premium after the Disposition, in one
transaction or a series of related transactions, of all or substantially all of
the properties and assets attributed to the Consumers Gas Group and the optional
exchange at a 15% Premium of Class G Common Stock by CMS Energy for CMS Energy
Common Stock, each as discussed above, as conversion privileges within the
meaning of Section 303 of the MBCA. Accordingly, in order to give effect to any
such exchange, the Board of Directors would have the authority to amend the
Articles of Incorporation to increase the authorized shares of capital stock
generally and of CMS Energy Common Stock specifically to the number that would
be sufficient, when added to the previously authorized but unissued shares of
capital stock and CMS Energy Common Stock, to give effect to such exchange.
General Exchange Provisions: In the event of any exchange of Class G Common
Stock, CMS Energy will cause to be given to each holder of Class G Common Stock
to be so exchanged a notice stating (A) that shares of Class G Common Stock will
be exchanged, (B) the date of the exchange, (C) the kind and amount of shares of
capital stock or cash and/or securities or other property to be received by such
holder with respect to each share of such Class G Common Stock held by such
holder, including details as to the calculation
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<PAGE> 100
thereof, (D) the place or places where certificates for shares of Class G Common
Stock, properly endorsed or assigned for transfer (unless CMS Energy shall waive
such requirement), are to be surrendered for delivery of certificates for shares
of such capital stock or cash and/or securities or other property and (E) that,
except as provided in the following paragraph, dividends or other distributions
on Class G Common Stock will cease to be paid as of such exchange date. Such
notice shall be sent by first-class mail, postage prepaid, not less than 30 days
nor more than 60 days prior to the exchange date and in any case to each holder
of the Class G Common Stock to be exchanged at such holder's address as the same
appears on the stock transfer books of CMS Energy. Neither the failure to mail
such notice to any particular holder of Class G Common Stock nor any defect
therein shall affect the sufficiency thereof with respect to any other holder of
Class G Common Stock.
No adjustments in respect of dividends or other distributions will be made
upon the exchange of any shares of Class G Common Stock; provided, however, that
if the exchange date with respect to Class G Common Stock shall be subsequent to
the record date for the payment of a dividend or other distribution thereon or
with respect thereto, the holders of shares of Class G Common Stock at the close
of business on such record date shall be entitled to receive the dividend or
other distribution payable on or with respect to such shares on the date set for
payment of such dividend or other distribution, notwithstanding the exchange of
such shares or CMS Energy's default in payment of the dividend or distribution
due on such date.
Before any holder of shares of Class G Common Stock will be entitled to
receive certificates representing shares of any capital stock or cash and/or
securities or other property to be received by such holder with respect to any
exchange, such holder shall surrender at such office as CMS Energy shall specify
certificates for such shares of Class G Common Stock, properly endorsed or
assigned for transfer (unless CMS Energy shall waive such requirement). CMS
Energy will as soon as practicable after such surrender of certificates
representing such shares of Class G Common Stock deliver to the person for whose
account such shares of Class G Common Stock were so surrendered, or to the
nominee or nominees of such person, certificates representing the number of
whole shares of the kind of capital stock or cash and/or securities or other
property to which such person shall be entitled as aforesaid, together with any
fractional payment referred to in the next paragraph.
CMS Energy will not be required to issue or deliver fractional shares of
any class of capital stock or any fractional securities to any holder of Class G
Common Stock upon any exchange, dividend or other distribution. If more than one
share of Class G Common Stock shall be held at the same time by the same holder,
CMS Energy may aggregate the number of shares of any class of capital stock that
shall be issuable or the amount of securities that shall be deliverable to such
holder upon any exchange, dividend or other distribution (including any
fractions of shares or securities). If the number of shares of any class of
capital stock or the amount of securities remaining to be issued or delivered to
any holder of Class G Common Stock is a fraction, CMS Energy will, if such
fraction is not issued or delivered to such holder, pay a cash adjustment in
respect of such fraction in an amount equal to the fair market value of such
fraction on the fifth Business Day prior to the date such payment is to be made.
For purposes of the preceding sentence, "fair market value" of any fraction will
be (i) in the case of any fraction of a share of any class of Common Stock, the
product of such fraction and the Fair Market Value of one share of such Common
Stock and (ii) in the case of any other fractional security, such value as is
determined by the Board of Directors.
From and after any applicable exchange date, all rights of a holder of
shares of Class G Common Stock that were exchanged shall cease except for the
right, upon surrender of the certificates representing such shares of Class G
Common Stock, to receive certificates representing shares of the kind and amount
of capital stock or cash and/or securities or other property for which such
shares were exchanged or redeemed, together with any fractional payment
contemplated by the immediately preceding paragraph and rights to dividends or
other distributions as provided in the third immediately preceding paragraph. No
holder of a certificate that immediately prior to the applicable exchange date
for Class G Common Stock represented shares of Class G Common Stock will be
entitled to receive any dividend or other distribution with respect to shares of
any kind of capital stock into which such Class G Common Stock was exchanged
until surrender of such holder's certificate for a certificate or certificates
representing shares of such capital stock. Upon such surrender, there shall be
paid to the holder the amount of any dividends or other distributions (without
interest) which theretofore became payable with respect to a record date after
the exchange date, but that were not paid by
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<PAGE> 101
reason of the foregoing, with respect to the number of whole shares of the kind
of capital stock represented by the certificate or certificates issued upon such
surrender. From and after an exchange date for Class G Common Stock, CMS Energy
will, however, be entitled to treat the certificates for such Class G Common
Stock that have not yet been surrendered for exchange as evidencing the
ownership of the number of whole shares of the kind or kinds of capital stock
for which the shares of such Class G Common Stock represented by such
certificates shall have been exchanged, notwithstanding the failure to surrender
such certificates.
CMS Energy will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock on exchange of shares of Class G Common Stock. CMS
Energy will not, however, be required to pay any tax that may be payable in
respect of any transfer involved in the issue and delivery of any shares of
capital stock in a name other than that in which the shares of the Class G
Common Stock so exchanged were registered, and no such issue or delivery shall
be made unless and until the person requesting such issue has paid to CMS Energy
the amount of any such tax, or has established to the satisfaction of CMS Energy
that such tax has been paid.
Liquidation, Subdivision and Combination: In the event of a dissolution,
liquidation or winding up of CMS Energy, whether voluntary or involuntary, after
payment or provision for payment of the debts and other liabilities of CMS
Energy and after there shall have been paid or set apart for the holders of
Preferred Stock the full preferential amounts (including any accumulated and
unpaid dividends) to which they are entitled, the holders of Class G Common
Stock and CMS Energy Common Stock will be entitled to receive an amount per
share equal to the amount of assets remaining for distribution to holders of
Common Stock divided by the total number of shares of CMS Energy Common Stock
and Class G Common Stock then outstanding. The liquidation rights of the holders
of the respective classes may not bear any relationship to the relative Fair
Market Values or the relative voting rights of the two classes.
If CMS Energy subdivides (by stock split, stock dividend or otherwise) or
combines (by reverse stock split or otherwise) the outstanding shares of either
Class G Common Stock or CMS Energy Common Stock, the voting and liquidation
rights of shares of CMS Energy Common Stock relative to Class G Common Stock
will be appropriately adjusted so as to avoid any dilution in aggregate voting
or liquidation rights of either class of Common Stock. For example, in case CMS
Energy were to effect a two-for-one split of Class G Common Stock, the per share
liquidation rights of CMS Energy Common Stock would be multiplied by two in
order to avoid dilution in the aggregate liquidation rights of holders of CMS
Energy Common Stock and each post-split share of Class G Common Stock would have
one-half of a vote.
Neither the merger or consolidation of CMS Energy into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with CMS Energy nor any sale, transfer or lease of all or any part of the assets
of CMS Energy, will be deemed to be a dissolution, liquidation or winding up for
purposes of the liquidation provisions set forth above.
Determinations by the Board of Directors: Any determinations made in
compliance with applicable law by the Board of Directors under any of the
provisions in the Articles of Incorporation would be final and binding on all
shareholders of CMS Energy.
Other Rights: The holders of Class G Common Stock would have no preemptive
rights or any other rights to convert their shares into any other securities of
CMS Energy.
Retained Interest of CMS Energy In Consumers Gas Group; Gas Group
Fraction: The "Retained Interest" represents the interest in the common
stockholders' equity of CMS Energy attributed to the Consumers Gas Group that
would be deemed to be retained by CMS Energy after shares of Class G Common
Stock are distributed or sold in the Offering or subsequent public offerings. If
the total number of shares of Class G Common Stock that is distributed or sold
represents all of such interest, there will be no Retained Interest.
The Board of Directors has designated 32 million shares of Class G Common
Stock as the number of such shares which it deems to represent 100% of the CMS
Energy common stockholders' equity attributable to the Consumers Gas Group, such
shares representing the initial Retained Interest Shares. If 8 million shares of
Class G Common Stock are offered and sold in the Offering, the Retained Interest
Shares would be
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<PAGE> 102
decreased to 24 million. The Retained Interest Shares are not, and will not be,
outstanding or held by CMS Energy and cannot be voted, but are used to measure
the Retained Interest.
The Gas Group Fraction is the percentage interest in the common
stockholders' equity attributed to the Consumers Gas Group that would be
represented at any time by the issued and outstanding shares of Class G Common
Stock. If shares of Class G Common Stock other than Retained Interest Shares
were sold, the Retained Interest Shares would not be reduced, but the Retained
Interest as a percentage of the common stockholders' equity attributed to the
Consumers Gas Group would nonetheless be reduced, and the Gas Group Fraction
would be increased accordingly. As shares of Class G Common Stock are offered
and sold from time to time by CMS Energy, it will identify the number of shares
of Class G Common Stock offered and sold which would (i) decrease the Retained
Interest Shares, or (ii) increase the Gas Group Fraction; the sum of the
percentage equal to the Gas Group Fraction and the percentage of the common
stockholders' equity represented by the Retained Interest would always equal
100%. A determination as to whether shares of Class G Common Stock which are
sold are or are not Retained Interest Shares would be made by the Board of
Directors, in its sole discretion, after consideration of a number of factors,
including, among others, the relative levels of internally generated cash flows
of each business of CMS Energy, the capital expenditure plans of and investment
opportunities available to each business of CMS Energy and the availability,
cost and time associated with alternative financing sources.
Any issuance of shares of Class G Common Stock would dilute the relative
voting power of holders of shares of Class G Common Stock outstanding prior to
such issuance.
The Board of Directors could, in its sole discretion, determine from time
to time to cause cash or other property attributed to the Consumers Gas Group to
cease to be attributed to the Consumers Gas Group, which would decrease the
Retained Interest Shares and the Retained Interest as a percentage of the common
stockholders' equity attributed to the Consumers Gas Group, and would increase
the Gas Group Fraction. The Board of Directors could, in its sole discretion,
determine from time to time to attribute additional cash or other property to
the Consumers Gas Group, which would increase the Retained Interest Shares and
the Retained Interest as a percentage of the common stockholders' equity
attributed to the Consumers Gas Group, and decrease the Gas Group Fraction. The
Board of Directors could determine, in its sole discretion, to make such
attributions after consideration of a number of factors, including, among
others, the relative levels of internally generated cash flows of each business
of CMS Energy, the long-term business prospects for each business of CMS Energy,
including the Consumers Gas Group, the capital expenditure plans of and the
investment opportunities available to each business of CMS Energy and the
availability, cost and time associated with alternative financing sources. See
"Certain Management and Accounting Policies -- Accounting Matters."
In the event of any dividend or other distribution on outstanding shares of
Class G Common Stock while CMS Energy has a Retained Interest, the Consumers Gas
Group's financial statements would be charged in respect of the Retained
Interest with an amount equal to the product of (i) the aggregate amount paid in
respect of such dividend or other distribution, times (ii) a fraction, the
numerator of which is the Retained Interest Shares and the denominator of which
is the total number of shares of Class G Common Stock then issued and
outstanding.
In the event that CMS Energy repurchases shares of Class G Common Stock for
consideration that is not attributed to the Consumers Gas Group, the Retained
Interest Shares and the Retained Interest as a percentage of the common
stockholders' equity attributed to the Consumers Gas Group would increase, and
the Gas Group Fraction would decrease accordingly. In the event that CMS Energy
repurchases shares of Class G Common Stock for consideration that is attributed
to the Consumers Gas Group, the Retained Interest Shares would not change, but
the Retained Interest as a percentage of the common stockholders' equity
attributed to the Consumers Gas Group would increase, and the Gas Group Fraction
would decrease accordingly. The Board of Directors could, in its sole
discretion, determine whether repurchases of Class G Common Stock should be made
with consideration attributed to the Consumers Gas Group by considering a number
of factors, including, among others, the relative levels of internally generated
cash flows of each business of CMS Energy, the long-term business prospects for
each business of CMS Energy, the capital
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expenditure plans of and the investment opportunities available to each business
of CMS Energy and the availability, cost and time associated with alternative
financing sources. See "Certain Management and Accounting Policies -- Accounting
Matters."
For further discussion of, and illustrations of the calculation of the
Retained Interest Shares, the Retained Interest as a percentage of the common
stockholders' equity in the Consumers Gas Group and the Gas Group Fraction and
the effects thereon of issuances and repurchases of, and dividends on, shares of
Class G Common Stock, and changes in the Retained Interest Shares, the Retained
Interest and the Gas Group Fraction occasioned by the attribution of cash or
other property, see Appendix II, "Class G Common Stock Retained Interest
Illustrations."
CMS ENERGY COMMON STOCK
Dividends: 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. See "Dividend Policy" above. The results of
operations and financial condition of the businesses attributed to the Consumers
Gas Group will continue to be reflected in the consolidated financial statements
of CMS Energy, and such financial statements will disclose the interest of the
holders of outstanding shares of Class G Common Stock in the Consumers Gas
Group.
For information concerning the policies of CMS Energy with regard to
dividends on Common Stock and certain restrictions on its ability to pay such
dividends, see "Dividend Policy" and "Primary Source of Dividends for the Common
Stock of CMS Energy; Restrictions on Sources of Dividends."
Voting: Except as described herein, the holders of outstanding Class G
Common Stock will vote together with the holders of the outstanding CMS Energy
Common Stock as a single class on all matters as to which all common
shareholders are entitled to vote.
On all matters to be voted on by the holders of Class G Common Stock and
CMS Energy Common Stock together as a single class, subject to the antidilution
provisions set forth under "Class G Common Stock -- Liquidation, Subdivision and
Combination" above, each outstanding share of Class G Common Stock and each
outstanding share of CMS Energy Common Stock will have one vote.
Under Michigan law, the approval of the holders of a majority of the
outstanding shares of a class of Common Stock, voting as a separate class, would
be necessary for authorizing, effecting or validating the merger or
consolidation of CMS Energy into or with any other corporation if such merger or
consolidation would adversely affect the powers or special rights of such class
of stock, and to authorize any amendment to the Articles of Incorporation that
would increase or decrease the aggregate number of authorized shares of such
class (except pursuant to Section 303 of the MBCA as described under "Class G
Common Stock -- Exchange or Redemption") or alter or change the powers,
preferences or special rights of the shares of such class so as to affect them
adversely. The Articles of Incorporation also provide that unless the vote or
consent of a greater number of shares shall then be required by law, the
approval of the holders of a majority of the outstanding shares of either class
of Common Stock, voting as a separate class, will be necessary for authorizing,
effecting or validating the merger or consolidation of CMS Energy into or with
any other corporation if such merger or consolidation would adversely affect the
powers or special rights of such class of Common Stock, either directly by
amendment to the Articles of Incorporation or indirectly by requiring the
holders of such class to accept or retain, in such merger or consolidation,
anything other than (i) shares of such class or (ii) shares of the surviving or
resulting corporation, having, in either case, powers and special rights
identical to those of such class prior to such merger or consolidation. The
effect of these provisions may be to permit the holders of a majority of the
outstanding shares of either class of Common Stock to block any such merger or
amendment which would adversely affect the powers or special rights of holders
of such class of Common Stock.
Neither CMS Energy nor any holders of CMS Energy Common Stock would be
entitled to vote with respect to Retained Interest Shares.
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Liquidation, Subdivision and Combination: The rights, if any, of the
holders of CMS Energy Common Stock upon the voluntary or involuntary
liquidation, merger, subdivision, combination, consolidation, distribution or
sale of assets, dissolution or winding up of CMS Energy are as set forth under
"Class G Common Stock -- Liquidation, Subdivision and Combination" above.
Exchange or Redemption: The CMS Energy Common Stock may be exchanged for
outstanding shares of Class G Common Stock upon the terms described under "Class
G Common Stock -- Exchange or Redemption" above.
STOCK TRANSFER AGENT AND REGISTRAR
The Transfer Agent and the Registrar for the Common Stock is Consumers.
CERTAIN FEDERAL INCOME TAX EFFECTS OF OFFERING
In the opinion of Sidley & Austin, special counsel to CMS Energy, the CMS
Energy Common Stock and the Class G Common Stock each will be treated for
federal income tax purposes as Common Stock of CMS Energy. Accordingly, for
federal income tax purposes, (i) CMS Energy will not recognize any income, gain
or loss as a result of the offering and sale of the Class G Common Stock; (ii) a
holder of Class G Common Stock will not recognize any income, gain or loss upon
the exchange of Class G Common Stock for CMS Energy Common Stock, either
pursuant to CMS Energy's option or upon the Disposition of all or substantially
all of the assets of the Consumers Gas Group, except for cash received in lieu
of fractional shares; and (iii) the tax basis of CMS Energy Common Stock
received in such exchange will be the tax basis of the Class G Common Stock
exchanged therefor, and, assuming that the Class G Common Stock is held as a
capital asset, the holding period of such CMS Energy Common Stock will include
the holding period of such Class G Common Stock.
The Internal Revenue Service (the "Service") announced in 1987 that it was
studying and would not issue advance rulings on the classification of an
instrument that has certain voting and liquidation rights in an issuing
corporation but the dividend rights of which are determined by reference to the
earnings of a segregated portion of the issuing corporation's assets, including
assets held by a subsidiary. In addition, there are no court decisions or other
authorities that bear directly on transactions similar to the Offering. It is
possible, therefore, that the Service could assert that the Class G Common Stock
represents property other than stock of CMS Energy. If the Class G Common Stock
were treated as property other than stock of CMS Energy, CMS Energy or its
subsidiaries (i) would recognize a significant taxable gain on the sale of the
Class G Common Stock in an amount equal to the excess of the fair market value
of such stock sold over its federal income tax basis to CMS Energy or such
subsidiaries and (ii) CMS Energy could lose its ability to file consolidated
federal income tax returns with Consumers (one consequence being that any
dividends paid or deemed to be paid by Consumers to CMS Energy would be taxable
to CMS Energy, subject to any applicable dividends received deduction). As
indicated above, however, it is the opinion of counsel that the Service would
not prevail in any such assertion.
The foregoing discussion is for general information only. It is based on
the U.S. Internal Revenue Code of 1986, as amended to the date hereof, Treasury
Department regulations, published positions of the Service and court decisions
now in effect, all of which are subject to change. In particular, Congress could
enact legislation affecting the treatment of stock with characteristics similar
to the Class G Common Stock or the Treasury Department could change the current
law in future regulations, including regulations issued pursuant to its
authority under Section 337(d) of the U.S. Internal Revenue Code. Any future
legislation or regulations could apply retroactively.
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UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement") the underwriters
(the "Underwriters") named below for whom Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, A.G. Edwards & Sons, Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and First of Michigan
Corporation are acting as representatives (the "Representatives") have severally
agreed to purchase, and CMS Energy has agreed to sell to them, the respective
number of shares of Class G Common Stock set forth opposite the name of such
Underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
------------------------------------------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Donaldson, Lufkin & Jenrette Securities Corporation................
A.G. Edwards & Sons, Inc...........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.................
First of Michigan Corporation......................................
---------
Total
=========
</TABLE>
The Underwriting Agreement provides that the obligation of the several
Underwriters to pay for and accept delivery of the shares of Class G Common
Stock offered hereby is subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are committed to
take and pay for all the shares of Class G Common Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are taken, provided that, under certain circumstances relating to a
default of one or more Underwriters, less than all of such shares may be
purchased. Default by one or more Underwriters would not relieve the
non-defaulting Underwriters from their several obligations, and in the event of
such default, CMS Energy would have the right to require the non-defaulting
Underwriters to purchase the respective number of shares of Class G Common Stock
which they have severally agreed to purchase and, in addition, to purchase
shares of Class G Common Stock which the defaulting Underwriter or Underwriters
shall have so failed to purchase up to a number thereof equal to one-ninth of
the respective numbers of shares of Class G Common Stock which such
non-defaulting Underwriters have otherwise agreed to purchase.
75
<PAGE> 106
The Underwriters initially propose to offer part of the shares of Class G
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price which represents a
concession not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share of Class G Common Stock to other Underwriters or to certain
dealers. After the initial offering, the offering price and other selling terms
may from time to time be varied upon the mutual agreement of the
Representatives.
At the request of CMS Energy, the Underwriters have reserved shares of
Class G Common Stock for sale at the initial public offering price to employees
of CMS Energy. The number of shares available for sale to the public will be
reduced to the extent such individuals purchase such reserved shares. Reserved
shares purchased by such individuals will, except as restricted by applicable
securities laws, be available for resale following the Offering.
Pursuant to the Underwriting Agreement, CMS Energy has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an additional shares of Class G Common
Stock at the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Class G Common Stock as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
offered by the Underwriters hereby.
CMS Energy has agreed that, without the prior written consent of the
Representatives, it will not offer, sell, contract to sell or otherwise dispose
of any shares of (a) Class G Common Stock, or any securities (other than CMS
Energy Common Stock) convertible into or exercisable or exchangeable for Class G
Common Stock, for a period of 180 days after the date of the Underwriting
Agreement or (b) CMS Energy Common Stock or any securities convertible into or
exercisable or exchangeable for CMS Energy Common Stock for a period of 90 days
after the date of the Underwriting Agreement; provided that CMS Energy may,
during such period, (i) in a manner generally consistent with past practices
regarding the numbers of shares issued by CMS Energy from time to time
thereunder, issue shares of CMS Energy Common Stock and Class G Common Stock
under its Dividend Reinvestment and Optional Cash Payment Plan, Performance
Incentive Stock Plan, Employee Stock Ownership Plan and Employee Savings and
Incentive Plan, as any of the same may be supplemented or amended and (ii) issue
up to 3 million shares of CMS Energy Common Stock solely for the purpose of
effecting acquisitions of other businesses or properties.
CMS Energy has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). From time to time certain of the Underwriters have been
retained to provide and continue to provide investment banking services to CMS
Energy or Consumers.
PRICING OF OFFERING
Prior to the Offering, there has been no public market for the shares of
Class G Common Stock. The initial public offering price will be determined by
negotiation among CMS Energy and the Representatives. Among the factors to be
considered in determining the initial public offering price will be the
Consumers Gas Group's results of operations, the Consumers Gas Group's current
financial condition and future prospects, the experience of its management, the
industry in general, the general condition of the equity securities market and
the price-earnings ratios and market prices of securities of companies
considered comparable to the Consumers Gas Group. There can be no assurance that
a regular trading market for the shares of Class G Common Stock will develop
after the offering or, if developed, that a public trading market can be
sustained. There can also be no assurance that the prices at which the Class G
Common Stock will sell in the public market after the Offering will not be lower
than the price at which it is sold by the Underwriters in the offering.
76
<PAGE> 107
LEGAL OPINIONS
Opinions as to the legality of the Class G Common Stock will be rendered
for CMS Energy by Sidley & Austin, Chicago, Illinois, counsel to CMS Energy, and
Denise M. Sturdy, Esq., Assistant General Counsel for CMS Energy. Certain legal
matters with respect to the Class G Common Stock will be passed upon by Reid &
Priest LLP, New York, New York, counsel for the Underwriters.
EXPERTS
The consolidated financial statements and schedule of CMS Energy as of
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994 included or incorporated by reference in this Prospectus, and
the financial statements of the Consumers Gas Group as of December 31, 1994 and
1993, and for each of the three years in the period ended December 31, 1994
included in this Prospectus, have been audited by Arthur Andersen LLP (formerly
Arthur Andersen & Co.), independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
With respect to the unaudited interim consolidated financial information
for the periods ended March 31, 1995 and 1994, Arthur Andersen LLP has applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report thereon states that they did
not audit and they did not express an opinion on that interim consolidated
financial information. Accordingly, the degree of reliance on their report on
that information should be restricted in light of the limited nature of the
review procedures applied. In addition, the accountants are not subject to the
liability provisions of Section 11 of the Securities Act for their report on the
unaudited interim consolidated financial information because that report is not
a "report" or "part" of the registration statement prepared or certified by the
accountants within the meaning of Sections 7 and 11 of the Securities Act.
Future consolidated financial statements of CMS Energy and the reports
thereon of Arthur Andersen LLP also will be incorporated by reference in this
Prospectus in reliance upon the authority of that firm as experts in giving
those reports to the extent that said firm has audited said consolidated
financial statements and consented to the use of their reports thereon.
AVAILABLE INFORMATION
CMS Energy is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Information, as of particular dates, concerning CMS Energy's
directors and officers, their remuneration, the principal holders of CMS
Energy's securities and any material interest of such persons in transactions
with CMS Energy is disclosed in proxy statements distributed to shareholders of
CMS Energy and filed with the Commission. Such reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at 500
West Madison Street, 14th Floor, Chicago, Illinois 60661 and at Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W. Washington, D.C. 20549 at prescribed rates. The outstanding
CMS Energy Common Stock is, and the Class G Common Stock is expected to be,
listed on the NYSE and reports, proxy statements and other information
concerning CMS Energy may also be inspected and copied at the offices of such
exchange at 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act, with respect to,
among other things, the shares of the Class G Common Stock offered hereby. The
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto (certain parts of which have
been omitted in accordance with the rules and regulations of the Commission).
For further information with respect to CMS Energy, the Consumers Gas Group and
the shares of Class G Common Stock offered hereby, reference is
77
<PAGE> 108
made to the Registration Statement and to the financial statements, schedules
and exhibits filed as a part thereof. Statements contained in this Prospectus as
to the contents of any contract, agreement or any other document are not
necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
with the Commission, each such statement being qualified in all respects by
reference to each such document. The Registration Statement including all
exhibits thereto may be inspected without charge at the Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from such office after payment of the fees prescribed by the
Commission.
78
<PAGE> 109
APPENDIX I
GLOSSARY
Unless otherwise indicated, page number references are to pages in the body
of the Prospectus and the financial statements attached thereto.
<TABLE>
<CAPTION>
TERM PAGE WHERE DEFINITION APPEARS
- ------------------------------------------------------------------- -----------------------------
<S> <C>
ABATE.............................................................. Page 56
Additional Shares.................................................. Page 13
ALJ................................................................ Page 40
AMT................................................................ Page F-12
ANR................................................................ Page 4
Articles........................................................... Page 10
Articles of Incorporation.......................................... Page 3
Attorney General................................................... Page 18
Available Class G Dividend Amount.................................. Page 66
base period........................................................ Page 27
Bcf................................................................ Page 3
Big Rock........................................................... Page F-31
Board of Directors................................................. Page 1
Business Day....................................................... Page 68
calculation date................................................... Page 66
Charter Amendment.................................................. Page 65
Class G Common Stock............................................... Page 1
Clean Air Act...................................................... Page 58
CMS Energy......................................................... Page 1
CMS Energy Common Stock............................................ Page 1
CMS Energy Notes................................................... Page 18
CMS Gas Transmission............................................... Page 64
CMS Generation..................................................... Page 54
CMS Holdings....................................................... Page 57
CMS Midland........................................................ Page F-32
CMS NOMECO......................................................... Page 54
Commission......................................................... Page 2
Common Stock....................................................... Page 9
Consumers.......................................................... Page 1
Consumers Gas Group................................................ Page 1
Consumers Gas Group Notes.......................................... Page 30
Convertible Securities............................................. Page 67
Court of Appeals................................................... Page 39
Credit Facility.................................................... Page 6
Detroit Edison..................................................... Page 59
Disposition........................................................ Page 68
DNR................................................................ Page 38
DOE................................................................ Page 59
DSM................................................................ Page 53
Energy Act......................................................... Page F-35
Enterprises........................................................ Page 6
Environmental Response Act......................................... Page 38
EPA................................................................ Page 58
Exchange Act....................................................... Page 2
Fair Market Value.................................................. Page 68
</TABLE>
I-1
<PAGE> 110
<TABLE>
<CAPTION>
TERM PAGE WHERE DEFINITION APPEARS
- ------------------------------------------------------------------- -----------------------------
<S> <C>
FASB............................................................... Page 60
FERC............................................................... Page 3
15% Premium........................................................ Page 20
FMLP............................................................... Page F-31
GAAP............................................................... Page 28
Gas Distribution Business.......................................... Page 3
Gas Group Fraction................................................. Page 13
Gas Group Subsidiary............................................... Page 67
GCR................................................................ Page 37
GPSLP.............................................................. Page 63
GTNs............................................................... Page 26
GTN Indenture...................................................... Page 25
HYDRA-CO........................................................... Page 54
Incorporated Documents............................................. Page 2
Indenture.......................................................... Page 25
ITC................................................................ Page F-12
KW................................................................. Page 5
kWh................................................................ Page 56
Ludington.......................................................... Page F-34
MBCA............................................................... Page 26
Mcf................................................................ Page 4
MCV................................................................ Page 3
MCV Bonds.......................................................... Page 64
MCV Facility....................................................... Page 57
MCV Partnership.................................................... Page 3
MGS................................................................ Page 1
MichCon............................................................ Page 64
MMbtu.............................................................. Page F-47
MMcf/d............................................................. Page 64
MMCG............................................................... Page 18
MOAPA.............................................................. Page F-40
Mortgage Indenture................................................. Page 10
MPSC............................................................... Page 3
MW................................................................. Page 17
NEIL............................................................... Page F-48
NGVs............................................................... Page 5
NML................................................................ Page F-48
NOPR............................................................... Page 59
North Michigan..................................................... Page 39
Notes.............................................................. Page F-39
NRC................................................................ Page 18
NYSE............................................................... Page 6
O&M................................................................ Page 44
Offering........................................................... Page 2
Order 636.......................................................... Page 37
Palisades.......................................................... Page 58
Panhandle.......................................................... Page 4
PCRBs.............................................................. Page F-40
Pension Plan....................................................... Page F-17
PPA................................................................ Page 17
Preferred Stock.................................................... Page 65
Proxy Capital Structure............................................ Page 37
</TABLE>
I-2
<PAGE> 111
<TABLE>
<CAPTION>
TERM PAGE WHERE DEFINITION APPEARS
- ------------------------------------------------------------------- -----------------------------
<S> <C>
PSCR............................................................... Page 57
PUHCA.............................................................. Page 18
Registration Statement............................................. Page 77
Representatives.................................................... Page 75
Restated Articles of Incorporation................................. Page 3
Restricted Payment................................................. Page 25
Retained Interest.................................................. Page 71
Retained Interest Fraction......................................... Page 13
Retained Interest Shares........................................... Page 66
Secured Credit Facility............................................ Page 54
Securities Act..................................................... Page 76
Series A Notes..................................................... Page F-39
Series B Notes..................................................... Page F-39
SERP............................................................... Page F-17
Service............................................................ Page 74
Settlement Order................................................... Page 17
SFAS............................................................... Page F-10
Substantially all of the properties and assets attributed to the
Consumers Gas Group.............................................. Page 69
Superfund.......................................................... Page 58
10% Premium........................................................ Page 20
Trunkline.......................................................... Page 4
Underwriters....................................................... Page 75
Underwriting Agreement............................................. Page 75
Union.............................................................. Page 41
US Court of Appeals................................................ Page 39
Voluntary Employee Beneficiary Associations........................ Page F-16
Walter............................................................. Page 62
</TABLE>
I-3
<PAGE> 112
APPENDIX II
CLASS G COMMON STOCK RETAINED INTEREST ILLUSTRATIONS
The following illustration reflects the calculations of the Retained
Interest based on the assumptions set forth herein and using the 60 million
authorized shares of the Class G Common Stock, of which 32 million shares have
been deemed to represent 100% of the common stockholders' equity of CMS Energy
attributable to the Consumers Gas Group, as diagramed below:
<TABLE>
<CAPTION>
AFTER OFFERING
BEFORE OFFERING (AS DISCUSSED BELOW)
----------------------------------- -----------------------------------
<S> <C>
----------------------------------- -----------------------------------
28 million Additional Shares 28 million Additional Shares
----------------------------------- -----------------------------------
32 million Retained Interest Shares 24 million Retained Interest Shares
----------------------------------- -----------------------------------
8 million Outstanding Shares
-----------------------------------
</TABLE>
OFFERING OF CLASS G COMMON STOCK
- A total of 8 million shares are sold in the Offering. Such shares will be
entitled to vote and, in the aggregate, will represent an interest in the
earnings and equity of CMS Energy attributable to the Consumers Gas Group
equal to the Gas Group Fraction, in this case 25%.
- The Gas Group Fraction, which represents the fractional interest in the
earnings and equity of CMS Energy attributable to the Consumers Gas Group
that is held by the holders of the outstanding shares of Class G Common
Stock, is equal to the following fraction:
Outstanding Shares of Class G Common Stock
----------------------------------------------------------
Outstanding Shares of + Retained Interest Shares
Class G Common Stock
or in the foregoing case,
8 million
-------------------------- = 25%
8 million + 24 million
- The balance of the shares deemed to represent 100% of the CMS Energy
common stockholders' equity value attributed to the Consumers Gas Group
(32 million minus 8 million, or 24 million) will represent the Retained
Interest Shares, which remain attributed to CMS Energy at the conclusion
of the Offering. The Retained Interest Shares will not be issued,
outstanding or entitled to vote. CMS Energy's Retained Interest in the
Consumers Gas Group is equal to one minus the Gas Group Fraction, in this
case 75%.
8 million
1 - ------------------------ = 75%
8 million + 24 million
- After the Offering, CMS Energy will have 52 million authorized and
unissued shares of Class G Common Stock remaining (60 million minus 8
million issued and outstanding). Authorized and unissued shares may be
issued without further action by shareholders and would result in the
reduction of the percentage equity interest of existing holders and may
be issued at prices which could dilute the equity interest of existing
shareholders. Issuance of Retained Interest Shares, however, would not
dilute earnings per share of the Consumers Gas Group because the number
of shares that would be used in the denominator for such calculation
would remain the same after any such issue.
- In addition, with a Gas Group Fraction of 25% (and a Retained Interest of
75%) the financial statements of the Consumers Gas Group are charged in
respect of the Retained Interest, with an
II-1
<PAGE> 113
amount equal to three times (representing the ratio of the 24 million
Retained Interest Shares to the 8 million shares outstanding) the
aggregate amount of any dividend or other distribution paid on the
Class G Common Stock. If, for example, a cash dividend of $.28 per share
is declared and paid on the 8 million shares of Class G Common Stock
outstanding (an aggregate of $2.24 million), the Consumers Gas Group
financial statements are charged, through an adjustment to the cash
balance attributable to the Consumers Gas Group, with $6.72 million in
addition to the $2.24 million dividend (an aggregate of $8.96 million).
Thus, the Consumers Gas Group is treated as having paid a cash dividend
on not only the outstanding shares of Class G Common Stock but also on
each of the Retained Interest Shares.
- Any additional shares sold in the Offering to cover over-allotments by
the Underwriters will be attributed to the Retained Interest and will
increase the Gas Group Fraction and reduce the Retained Interest
accordingly.
ADDITIONAL OFFERING OF CLASS G COMMON STOCK
The following illustrations reflect the sale of 4 million shares of Class G
Common Stock subsequent to the Offering.
A. Additional Offering of Shares other than Retained Interest Shares
All such shares are identified as representing an additional equity
interest in the Consumers Gas Group, with the net proceeds reflected in the
financial statements of the Consumers Gas Group. Such shares may be issued
at prices which dilute the equity interest of the holders of the
outstanding shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding.......................... 8 million
Newly issued shares............................................... 4 million
----------
Total issued and outstanding after the second offering............ 12 million
==========
</TABLE>
- CMS Energy would have 48 million authorized and unissued shares of Class
G Common Stock remaining (60 million minus 12 million issued and
outstanding), 24 million of which would be Retained Interest Shares.
- The total issued and outstanding shares (12 million) would in the
aggregate represent a Gas Group Fraction of 33.3%, calculated as follows:
12 million
------------------------------ = 33.3%
12 million + 24 million
The 24 million Retained Interest Shares would accordingly represent an
interest of 66.7% in such earnings and equity.
- In this case, the financial statements of the Consumers Gas Group would
be charged with an amount equal to two times (representing the ratio of
the 24 million Retained Interest Shares to the 12 million shares
outstanding) the aggregate amount of any dividend or other distribution
paid on the Class G Common Stock. The Consumers Gas Group therefore would
be treated as having paid a dividend or other distribution on not only
the outstanding shares of Class G Common Stock but also on each of the
Retained Interest Shares.
B. Additional Offering From the Retained Interest Shares
All of such shares are identified as Retained Interest Shares, with
none of the net proceeds being reflected in the financial statements of the
Consumers Gas Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding.......................... 8 million
Newly issued shares............................................... 4 million
----------
Total issued and outstanding after the second offering............ 12 million
==========
</TABLE>
II-2
<PAGE> 114
- CMS Energy would have 48 million authorized and unissued shares of Class
G Common Stock remaining (60 million minus 12 million issued and
outstanding), 20 million of which would be Retained Interest Shares.
- The total issued and outstanding shares (12 million) would in the
aggregate represent a Gas Group Fraction of 37.5%, calculated as follows:
12 million
------------------------ = 37.5%
12 million + 20 million
- The remaining 20 million Retained Interest Shares would accordingly
represent an interest of 62.5% in such earnings and equity.
- Even if CMS Energy issues all shares deemed to represent the Retained
Interest Shares at a particular point in time (and the Gas Group Fraction
accordingly would become 100%), CMS Energy could still attribute assets
and property to the Consumers Gas Group which would increase above zero
the Retained Interest Shares and would accordingly reduce the Gas Group
Fraction. See "Attribution of Net Assets between CMS Energy and Consumers
Gas Group -- Attribution of Additional Net Assets from CMS Energy to
Consumers Gas Group."
ATTRIBUTION OF NET ASSETS BETWEEN CMS ENERGY AND CONSUMERS GAS GROUP
The following illustrations reflect equity infusions resulting from the
assumed attribution (whether contributed or deemed to have been contributed by a
regulatory agency and required by such agency to be accounted for as such),
after the assumed initial issuance of 8 million shares of Class G Common Stock
attributable to the Retained Interest, of $100 million of net assets (consisting
of $150 million of assets and $50 million of liabilities related thereto) on a
date on which the Fair Market Value of a share of Class G Common Stock is $25
per share.
A. Attribution of Additional Net Assets from CMS Energy to Consumers Gas
Group
Assume the attribution of net assets by CMS Energy to the Consumers
Gas Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding........................... 8 million
Newly issued shares................................................ 0
----------
Total issued and outstanding after attribution..................... 8 million
=========
</TABLE>
- The Retained Interest Shares would be increased to reflect the
attribution of net assets to the Consumers Gas Group by the number equal
to the value of the net assets allocated ($100 million) divided by the
Fair Market Value of a share of Class G Common Stock at that time ($25),
or 4 million shares.
<TABLE>
<S> <C>
Retained Interest Shares prior to attribution..................... 24 million
Increase to reflect attribution to Consumers Gas Group............ 4 million
----------
Retained Interest Shares after attribution........................ 28 million
==========
</TABLE>
- As a result, the total issued and outstanding shares (8 million) would in
the aggregate represent a Gas Group Fraction of 22.2%, calculated as
follows:
8 million
----------------------- = 22.2%
8 million + 28 million
The Retained Interest as a percentage would accordingly be increased to
77.8%.
- CMS Energy would have 52 million authorized and unissued shares of Class
G Common Stock (60 million minus 8 million issued and outstanding).
II-3
<PAGE> 115
B. Attribution of Net Assets from Consumers Gas Group to CMS Energy
Assume the attribution of net assets attributed to the Consumers Gas
Group to CMS Energy.
<TABLE>
<S> <C>
Shares Previously issued and outstanding........................... 8 million
Newly Issued Shares................................................ 0
---------
Total issued and outstanding after attribution..................... 8 million
=========
</TABLE>
- The Retained Interest Shares would be decreased to reflect the
attribution by CMS Energy of net assets attributed to the Consumers Gas
Group to CMS Energy by the number equal to the value of the net assets
attributed ($100 million) divided by the Fair Market Value of a share of
Class G Common Stock at that time ($25), or 4 million shares.
<TABLE>
<S> <C>
Retained Interest Shares prior to attribution..................... 24 million
Decrease to reflect attribution to CMS Energy..................... -4 million
----------
Retained Interest Shares after attribution........................ 20 million
==========
</TABLE>
- As a result, the total issued and outstanding shares (8 million) would in
the aggregate represent a Gas Group Fraction of 28.6%, calculated as
follows:
8 million
---------------------- = 28.6%
8 million + 20 million
The Retained Interest as a percentage would accordingly decrease to 71.4%.
- CMS Energy would have 52 million authorized and unissued shares of Class
G Common Stock (60 million minus 8 million issued and outstanding).
REPURCHASES OF CLASS G COMMON STOCK
The following illustrations reflect an assumed repurchase of 3 million
shares of Class G Common Stock after the assumed initial issuance of 8 million
shares of Class G Common Stock.
A. Repurchase With Assets Not Attributed to the Consumers Gas Group
All of such shares are identified as repurchased with assets not
attributed to the Consumers Gas Group, with no charge to the financial
statements of the Consumers Gas Group for the consideration paid for such
shares, resulting in an increase in CMS Energy's Retained Interest in the
Consumers Gas Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding.......................... 8 million
Shares repurchased with assets not attributed to
the Consumers Gas Group......................................... -3 million
----------
Total issued and outstanding after repurchase..................... 5 million
==========
</TABLE>
- The Retained Interest Shares would be increased by the number of shares
of Class G Common Stock repurchased as noted above.
<TABLE>
<S> <C>
Retained Interest Shares prior to repurchase...................... 24 million
Number of shares repurchased with assets not attributed to the
Consumers Gas Group............................................. 3 million
----------
Number of Retained Interest Shares after repurchase............... 27 million
==========
</TABLE>
II-4
<PAGE> 116
- As a result, the total issued and outstanding shares (5 million) would in
the aggregate represent a Gas Group Fraction of 15.6%, calculated as
follows:
5 million
---------------------- = 15.6%
5 million + 27 million
The Retained Interest as a percentage would accordingly be increased to
84.4%.
- The shares repurchased would no longer be outstanding or entitled to vote
and thereafter CMS Energy would have 55 million authorized and unissued
shares of Class G Common Stock (60 million minus 5 million issued and
outstanding).
B. Repurchase With Assets Attributed to the Consumers Gas Group
Assume all of such shares are identified as repurchased with assets
attributed to the Consumers Gas Group, with the financial statements of the
Consumers Gas Group being charged entirely with the consideration paid for
such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding.......................... 8 million
Shares repurchased with assets attributed to the Consumers Gas
Group........................................................... -3 million
-----------
Total issued and outstanding after repurchase..................... 5 million
==========
</TABLE>
- The Retained Interest Shares (24 million) would remain unchanged.
- As a result, the total issued and outstanding shares (5 million) would in
the aggregate represent a Gas Group Fraction of 17.2%, calculated as
follows:
5 million
---------------------- = 17.2%
5 million + 24 million
The Retained Interest as a percentage would accordingly be increased to
82.8%.
- The shares repurchased would no longer be outstanding or entitled to vote
and thereafter CMS Energy would have 55 million authorized and unissued
shares of Class G Common Stock (60 million minus 5 million issued and
outstanding).
II-5
<PAGE> 117
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................. F-3
Consumers Gas Group Statements of Income............................................. F-4
Consumers Gas Group Statements of Cash Flows......................................... F-5
Consumers Gas Group Balance Sheets................................................... F-6
Consumers Gas Group Statements of Common Stockholders' Equity........................ F-7
Consumers Gas Group Notes to Financial Statements.................................... F-8
Report of Independent Public Accountants............................................. F-23
CMS Energy Corporation Consolidated Statements of Income............................. F-24
CMS Energy Corporation Consolidated Statements of Cash Flows......................... F-25
CMS Energy Corporation Consolidated Balance Sheets................................... F-26
CMS Energy Corporation Consolidated Statements of Long-Term Debt..................... F-27
CMS Energy Corporation Consolidated Statements of Preferred Stock.................... F-28
CMS Energy Corporation Consolidated Statements of Common Stockholders' Equity........ F-29
CMS Energy Corporation Notes to Consolidated Financial Statements.................... F-30
</TABLE>
------------------------
F-1
<PAGE> 118
EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION
Effective upon completion of the Offering, CMS Energy will have outstanding
two classes of Common Stock: Class G Common Stock, which is intended to reflect
the performance of the Consumers Gas Group; and CMS Energy Common Stock, which
is intended to reflect the performance of CMS Energy (which will also reflect
the performance of the Consumers Gas Group to the extent of the Retained
Interest).
Although the financial statements of the Consumers Gas Group will
separately report the assets, liabilities (including contingent liabilities) and
shareholders' equity of CMS Energy attributed to the Consumers Gas Group, such
attribution will not affect CMS Energy's legal title to such assets or
responsibility for such liabilities. Holders of Class G Common Stock will be,
and holders of CMS Energy Common Stock are, shareholders of CMS Energy, which
continues to be responsible for all of its liabilities. Financial results
arising from the business of CMS Energy (including its Retained Interest in the
Consumers Gas Group) or from the business of the Consumers Gas Group could
affect the market price of both classes of Common Stock. In addition, any net
losses of CMS Energy or the Consumers Gas Group, and dividends or distributions
on, or repurchases of, either class of Common Stock will reduce the assets of
CMS Energy legally available for payment of dividends on both classes of Common
Stock. Accordingly, CMS Energy's consolidated financial information should be
read in conjunction with the Consumers Gas Group's financial information.
F-2
<PAGE> 119
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 Power Company ("Consumers") and its
wholly-owned subsidiary, Michigan Gas Storage Company) as of December 31, 1994
and 1993, and the related statements of income, and cash flows for each of the
three years in the period ended December 31, 1994. 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, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Detroit, Michigan
January 31, 1995
(except with respect to certain matters discussed in
Notes 2, 3 and 6 to the financial statements, as to which the date is April 18,
1995)
F-3
<PAGE> 120
CONSUMERS GAS GROUP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------ ------------------------------
1995 1994 1994 1993 1992
---- ---- ------ ------ ------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE................................. $482 $528 $1,151 $1,160 $1,126
---- ---- ------ ------ ------
OPERATING EXPENSES
Operation
Cost of gas sold............................. 281 334 662 678 673
Other........................................ 46 44 185 171 177
---- ---- ------ ------ ------
Total operation............................ 327 378 847 849 850
Maintenance..................................... 10 11 39 38 37
Depreciation, depletion and amortization........ 33 31 76 73 76
General taxes................................... 21 24 54 54 54
---- ---- ------ ------ ------
Total operating expenses................... 391 444 1,016 1,014 1,017
---- ---- ------ ------ ------
PRETAX OPERATING INCOME........................... 91 84 135 146 109
INCOME TAXES...................................... 31 29 41 39 35
---- ---- ------ ------ ------
NET OPERATING INCOME.............................. 60 55 94 107 74
---- ---- ------ ------ ------
OTHER INCOME (DEDUCTIONS)......................... -- -- (2) (2) (3)
---- ---- ------ ------ ------
FIXED CHARGES
Interest on long-term debt...................... 8 7 29 32 28
Other interest.................................. 1 1 5 6 1
Capitalized interest............................ -- -- -- (1) --
Preferred dividends............................. 1 1 5 2 2
---- ---- ------ ------ ------
Net fixed charges.......................... 10 9 39 39 31
---- ---- ------ ------ ------
NET INCOME........................................ $ 50 $ 46 $ 53 $ 66 $ 40
==== ==== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 121
CONSUMERS GAS GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31 YEARS ENDED DECEMBER 31,
-------------- -----------------------
1995 1994 1994 1993 1992
---- ---- ----- ----- -----
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 50 $ 46 $ 53 $ 66 $ 40
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation, depletion and amortization............. 33 31 76 73 76
Capital lease and other amortization................. 1 1 4 5 8
Deferred income taxes and investment tax credit...... 16 4 4 4 (4)
Changes in other assets and liabilities (Note 12).... 16 40 17 (67) (15)
Other................................................ -- -- 1 2 3
---- ---- ----- ----- -----
Net cash provided by operating activities....... 116 122 155 83 108
---- ---- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital
leases) (Note 12)....................................... (21) (20) (129) (153) (107)
Other..................................................... (3) (1) (7) (6) 3
---- ---- ----- ----- -----
Net cash used in investing activities........... (24) (21) (136) (159) (104)
---- ---- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank loans................................... (1) (23) (106) -- --
Payment of common stock dividends......................... -- (9) (46) (47) --
Retirement of bonds and other long-term debt.............. (2) (13) (31) (125) --
Payment of capital lease obligations...................... (1) (1) (4) (5) (8)
Proceeds from bank loans.................................. -- -- 88 3 33
Proceeds from preferred stock............................. -- 42 42 -- --
Contribution from stockholder............................. -- -- 22 -- --
Increase (decrease) in notes payable, net................. (89) (83) 16 83 (61)
Proceeds from bonds and other long-term debt.............. 1 -- -- 158 37
---- ---- ----- ----- -----
Net cash provided by (used in) financing
activities.................................... (92) (87) (19) 67 1
---- ---- ----- ----- -----
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS............................................. -- 14 -- (9) 5
Cash and temporary cash investments
Beginning of period..................................... 4 4 4 13 8
---- ---- ----- ----- -----
End of period........................................... $ 4 $ 18 $ 4 $ 4 $ 13
==== ==== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 122
CONSUMERS GAS GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------
1995 1994 1993
----------- ------ ------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
PLANT AND PROPERTY (AT COST)
Plant.................................................................. $ 2,078 $2,064 $1,939
Less accumulated depreciation, depletion and amortization.............. 1,145 1,117 1,061
------- ------ ------
933 947 878
Construction work-in-progress.......................................... 50 47 53
------- ------ ------
983 994 931
------- ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates
market............................................................... 4 4 4
Accounts receivable and accrued revenues, less allowances of $2 at
March 31, 1995 and December 31, 1994 and 1993 (Note 5)............... 170 51 79
Inventories at average cost
Gas in underground storage........................................... 80 235 228
Materials and supplies............................................... 10 9 10
Trunkline settlement (Note 3).......................................... 30 30 31
Deferred income taxes (Note 4)......................................... 8 16 9
Prepayments and other.................................................. 35 48 57
------- ------ ------
337 393 418
------- ------ ------
NON-CURRENT ASSETS
Postretirement benefits (Note 9)....................................... 157 158 159
Trunkline settlement (Note 3).......................................... 48 55 86
Deferred income taxes (Note 4)......................................... -- 3 3
Other.................................................................. 71 70 31
------- ------ ------
276 286 279
------- ------ ------
TOTAL ASSETS............................................................. $ 1,596 $1,673 $1,628
======= ====== ======
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (NOTE 6)
Common stockholders' equity............................................ $ 366 $ 317 $ 288
Preferred stock........................................................ 78 78 36
Long-term debt......................................................... 425 426 402
Non-current portion of capital leases.................................. 18 18 18
------- ------ ------
887 839 744
------- ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases................... 12 13 82
Notes payable.......................................................... 10 99 83
Accounts payable....................................................... 59 68 67
Accrued refunds........................................................ 25 20 20
Trunkline settlement (Note 3).......................................... 30 30 30
Accrued taxes.......................................................... 53 55 62
Accrued interest....................................................... 6 8 9
Other.................................................................. 43 68 70
------- ------ ------
238 361 423
------- ------ ------
NON-CURRENT LIABILITIES
Postretirement benefits (Note 9)....................................... 175 172 171
Regulatory liabilities for income taxes, net (Note 4).................. 148 144 131
Trunkline settlement (Note 3).......................................... 48 55 86
Deferred investment tax credits........................................ 29 30 32
Deferred income taxes (Note 4)......................................... 1 -- --
Other.................................................................. 70 72 41
------- ------ ------
471 473 461
------- ------ ------
Commitments and Contingencies (Notes 2, 3, 10 and 11)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES........................... $ 1,596 $1,673 $1,628
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 123
CONSUMERS GAS GROUP
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
OTHER RETAINED
COMMON PAID-IN REVALUATION EARNINGS
STOCK CAPITAL CAPITAL (DEFICIT) TOTAL
------ ------- ----------- --------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993(A).................... $184 $ 85 -- $ --(b) $ 269
Net income..................................... 66 66
Common stock dividends declared................ (47) (47)
---- ----- ----- ----- -----
BALANCE AT DECEMBER 31, 1993(A).................. 184 85 -- 19 288
Net income..................................... 53 53
Common stock dividends declared................ (46) (46)
Stockholder's contribution (Note 6)............ 22 22
---- ----- ----- ----- -----
BALANCE AT DECEMBER 31, 1994(A).................. 184 107 -- 26 317
Net income..................................... 50 50
SFAS 115 -- unrealized loss, net of tax........ (1) (1)
---- ----- ----- ----- -----
BALANCE AT MARCH 31, 1995(A)..................... $184 $ 107 $ (1) $ 76 $ 366
==== ===== ===== ===== =====
</TABLE>
- -------------------------
(a) Number of Consumers' common stock shares outstanding was 84,108,789. Common
stock allocated to the Consumers Gas Group is consistent with the allocation
method discussed in Note 6.
(b) As discussed in Note 6, a quasi-reorganization was effected by Consumers at
December 31, 1992. As a result, Consumers Gas Group stockholders' equity
prior to December 31, 1992 will not provide useful comparative information
to make informed investor decisions.
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 124
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS
1: CORPORATE STRUCTURE
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the Lower
Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers'
customer base includes a mix of residential, commercial and diversified
industrial customers, the largest of which is the automotive industry.
Enterprises is engaged in several non-utility energy-related businesses
including: 1) oil and gas exploration and production, 2) development and
operation of independent power production facilities, 3) gas marketing services
to utility, commercial and industrial customers and 4) storage and transmission
of natural gas.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The restructuring,
while not affecting Consumers' or CMS Energy's consolidated financial statements
or corporate legal form, is designed to sharpen management focus, improve
efficiency and accountability in both business segments and better position
Consumers for growth in the gas market and to meet increased competition in the
electric power market. Management believes that the strategic business unit
structure will allow each unit to focus more on its own profitability and growth
potential, and will, in the long term, allow Consumers to be more competitive.
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation: On March 21, 1995, CMS Energy received shareholders'
approval to amend its previous Articles of Incorporation and authorize a new
class of Common Stock of CMS Energy. This new class of Common Stock, designated
Class G Common Stock, is intended to reflect the separate performance of the gas
distribution, storage and transportation businesses conducted by Consumers and
MGS (such businesses, collectively, will be attributed to the Consumers Gas
Group). The existing CMS Energy Common Stock will continue to be outstanding and
is intended to reflect the performance of all of the businesses of CMS Energy
and its subsidiaries, including the business of the Consumers Gas Group, except
for the interest in the Consumers Gas Group attributable to the outstanding
shares of the Class G Common Stock.
The net proceeds of the Offering will be invested in the businesses of CMS
Energy and used for its general corporate purposes. Such net proceeds will be
used initially to repay a portion of CMS Energy's indebtedness outstanding under
the Credit Facility, none of which is attributable to the Consumers Gas Group.
Additional authorized shares of Class G Common Stock could be offered by CMS
Energy in the future at the discretion of the Board of Directors.
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 MPSC.
The financial statements for the 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 the 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 the
Consumers Gas Group's financial statements based on certain measures of business
activities, such as gas revenues, salaries, other O&M 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 the 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
F-8
<PAGE> 125
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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.
Accordingly, CMS Energy's consolidated financial statements and related notes
should be read in conjunction with these financial statements.
Principles Applied in Financial Statements: The financial statements of the
Consumers Gas Group incorporate Consumers' natural gas utility business and the
related business of MGS. 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. 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 the Consumers Gas Group have been eliminated.
Dividend Policy: Dividends on the Class G Common Stock will be paid at the
discretion of the Board of Directors based primarily upon the earnings and
financial condition of the Consumers Gas Group, and, to a lesser extent, CMS
Energy as a whole. Dividends will be payable out of the lesser of (i) the assets
of CMS Energy legally available therefor and (ii) the Available Class G Dividend
Amount.
Dividends with respect to the Class G Common Stock are expected to be paid
commensurate with dividend practices of comparable publicly-held local natural
gas distribution companies generally. Management believes that such practices
currently are to pay out from 70% to 85% of annual earnings available for
dividends on common stock.
CMS Energy, in the sole discretion of its Board of Directors, could pay
dividends exclusively to the holders of CMS Energy Common Stock, exclusively to
the holders of Class G Common Stock, or to the holders of both of such classes
in equal or unequal amounts. It is the Board of Directors' current intention
that the declaration or payment of dividends with respect to the Class G Common
Stock shall not be reduced, suspended or eliminated as a result of factors
arising out of or relating to the electric utility business or the non-utility
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.
In making its dividend decisions with respect to the Class G Common Stock,
the Board of Directors will rely on the financial statements of the Consumers
Gas Group, as well as, to a lesser extent, the consolidated financial statements
of CMS Energy. The method of calculating earnings per share for the Class G
Common Stock reflects the intent of the Board of Directors that the separately
reported assets and earnings of the Consumers Gas Group are to be the source for
payment of, and the basis for determining, dividends to be paid on the Class G
Common Stock, although liquidation rights of the Class G Common Stock and
legally available assets of CMS Energy are based on different factors.
Earnings Per Share: Earnings available to Class G Common Stock on a per
share basis will be determined based on the separately calculated earnings of
the Consumers Gas Group.
Earnings per share are omitted from the historic statements of earnings
since the Class G Common Stock was not part of the equity structure of CMS
Energy and the Articles of Incorporation had not been amended to allow for the
issuance of the Class G Common Stock for the periods presented.
Gas Inventory: Consumers uses the weighted average cost method for valuing
working gas inventory. Cushion gas, which is gas stored to maintain reservoir
pressure for recovery of working gas, is recorded in the
F-9
<PAGE> 126
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
appropriate gas utility plant account. Consumers Gas Group maintains gas
inventory in its underground storage facilities.
Maintenance, Depreciation and Depletion: Property repairs and minor
property replacements are charged 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 gas
utility plant on straight-line and units-of-production rates approved by the
MPSC. The composite rate for gas plant was 4.2% for 1994, 4.4% for 1993 and 4.3%
for 1992.
New Accounting Standards: In December 1994, the American Institute of
Certified Public Accountants issued Statement of Position 94-6, Disclosure of
Certain Significant Risks and Uncertainties, effective for 1995 year-end
financial statements. Consumers Gas Group does not believe that it will be
significantly affected by the statement, which requires disclosures about the
nature of a company's operations and the use of estimates in financial
statements.
In March 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This statement, which is effective for 1996
financial statements, requires that an asset be reviewed for impairment whenever
events indicate that the carrying amount of an asset may not be recoverable. The
statement also requires that a loss be recognized whenever a regulator excludes
a portion of an asset's cost from a company's rate base. The Consumers Gas Group
is continuing to study SFAS 121, but does not expect the application of this
statement to have a material impact on its financial position or results of
operations. For other recent accounting standards regarding financial
instruments, see Note 7.
Related-Party Transactions: The Consumers Gas Group sold, stored and
transported natural gas and provided other services to the MCV Partnership
totaling approximately $13 million for 1994 and $14 million for 1993 and 1992.
Consumers purchases a portion of its gas from an affiliate, CMS NOMECO. The
amounts of purchases for the years ended 1994, 1993 and 1992 were $1 million, $3
million and $3 million, respectively.
Any future transactions between Consumers Gas Group and the remaining
segments of CMS Energy will continue to be on terms comparable to arm's length
transactions in accordance with GAAP. (See Note 4 for income tax policy). Other
related-party transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for gas used by its
customers but not billed at the end of an accounting period. It also accrues or
reduces revenue for any underrecovery or overrecovery of natural gas costs by
establishing a corresponding asset or liability until it bills these unrecovered
costs or refunds the excess recoveries to customers following reconciliation
hearings conducted before the MPSC.
Unaudited Interim Information: Amounts as of, and for, and pertaining
to the three month periods ended March 31, 1995 and 1994 included herein are
unaudited. In the opinion of management, the unaudited financial information
for the three months ended March 31, 1995 and 1994 reflects all normal and
recurring adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows.
Utility Regulation: Consumers' gas operations and MGS are regulated by the
MPSC and FERC, respectively. Accordingly, Consumers Gas Group accounts for the
effects of gas regulation under SFAS 71, Accounting for the Effects of Certain
Types of Regulation. As a result, the actions of regulators affect when
revenues, expenses, assets and liabilities are recognized. Consumers Gas Group's
regulatory assets and liabilities are described in Note 13.
Other: For significant accounting policies regarding income taxes, see Note
4; for pensions and other postretirement benefits, see Note 9; and for cash
equivalents, see Note 12.
3: RATE MATTERS
Gas Rates: In 1994, the MPSC approved an agreement previously reached
between the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits against 1994 earnings. The agreement was reached in
response to a claim that gas utility business earnings for 1993 were excessive.
This charge
F-10
<PAGE> 127
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
against earnings partially offsets savings related to reduced state property
taxes. The agreement also provides for an additional $4 million of
postretirement benefit costs to be charged against 1995 earnings instead of
being deferred. As part of the agreement, Consumers filed a gas rate case in
December 1994. Consumers requested an increase in its gas rates of $21 million
annually. The request, among other things, incorporates cost increases,
including costs for postretirement benefits and costs related to Consumers'
former manufactured gas plant sites. Consumers requested that the MPSC authorize
a 13% rate of return on equity, instead of the currently authorized rate of
13.25%. In June 1995, the MPSC staff filed its position in this case,
recommending an $11 million rate decrease. The MPSC staff's recommendation
included a lower rate base, a lower return on common equity, a revised capital
structure and a different sales forecast than Consumers had projected. Consumers
expects an MPSC decision in early 1996. Consumers' most recent rate filing for
its electric utility business resulted in an approved rate of return on equity
of 11.75%.
In gas rate cases the MPSC determines, among other things, an appropriate
capital structure, including equity, for the Gas Distribution Business and
approves a rate of return on such equity. Because the Gas Distribution Business
is part of Consumers, it does not have its own capital structure. Accordingly,
in the most recent gas rate case before the MPSC relating to the Gas
Distribution Business, the MPSC utilized a Proxy Capital Structure. It is
possible that in future gas rate cases, the MPSC may use another methodology to
determine the equity used for rate making purposes for the Consumers Gas Group
or otherwise select a methodology different than the Proxy Capital Structure.
The capital structure employed for ratemaking purposes directly affects the
overall rate of return of a rate regulated enterprise.
GCR Issues: In 1993, the MPSC provided that the price payable to certain
intrastate gas producers by Consumers be reduced. As a result, Consumers was not
allowed to recover $13 million of costs. Consumers accrued a loss prior to 1993
in excess of the disallowed amount. In March 1995, management concluded that it
is unlikely that the intrastate producers' pending appeals of the MPSC order
would be successful and accordingly reversed $23 million (pretax), which
represented the portion of the loss in excess of the disallowed amount. The
Court of Appeals affirmed the MPSC's decision in June 1995.
In April 1995, an ALJ issued a proposal for decision in a proceeding that
had been initiated by Consumers regarding a gas supply contract pricing dispute
with certain intrastate producers. The ALJ agreed with Consumers that certain
market based pricing provisions should, on a prospective basis, limit the price
paid by Consumers under the three agreements at issue. The ALJ also found that
the market based pricing provision required specific MPSC approval before
Consumers could apply those prices to purchases under the agreements and found
that such approval had not previously been given. Consumers does not agree with
the ALJ's findings and conclusions on this point and filed exceptions to the
proposal for decision for the MPSC's consideration. If the MPSC issues an order
adopting the recommendations for the ALJ, the market based provisions upon which
Consumers had paid for gas purchased under these agreements will not be
effective prior to such an MPSC order. If the producers pursue a court action
for amounts owed for previously purchased gas, Consumers could be liable for as
much as $44 million (excluding any interest) under the producers' theories.
Consumers believes the producers' position is without merit and intends to
vigorously oppose any claims they may raise but cannot predict the outcome of
this matter.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and
certain other parties, which resolved numerous claims and proceedings concerning
Trunkline liquified natural gas costs. The settlement represents significant gas
cost savings for Consumers and its customers in future years. In 1992, Consumers
recorded a liability and regulatory asset for the principal amount of payments
due Trunkline. In 1993, the MPSC approved a separate settlement agreement
providing full recovery of the liability over a five-year period. At December
31, 1994, the remaining liability and regulatory asset were $85 million.
Estimated losses for certain contingencies discussed in this note have been
accrued. Resolution of these contingencies is not expected to have a material
impact on the financial position or results of operations of the Consumers Gas
Group.
F-11
<PAGE> 128
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4: INCOME TAXES
CMS Energy and its subsidiaries (including Consumers) file a consolidated
federal income tax return. Income taxes are generally allocated based on each
subsidiary's separate taxable income. CMS Energy and Consumers practice full
deferred tax accounting for temporary differences.
CMS Energy uses investment tax credit ("ITC") to reduce current income
taxes payable and defers and amortizes ITC over the life of the related
property. Any alternative minimum tax ("AMT") paid generally becomes a tax
credit that can be carried forward indefinitely to reduce regular tax
liabilities in future periods when regular taxes paid exceed the tax calculated
for AMT.
The Consumers Gas Group is included in the consolidated federal income tax
return filed by CMS Energy. The financial statement provision and actual cash
tax payments have been reflected in the 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, the amortization of ITC over the life of the related property
included within the Consumers Gas Group and any AMT credit carryforwards that
can be carried forward indefinitely to reduce regular tax liabilities in future
periods related to the Consumers Gas Group. Tax settlements at Consumers Gas
Group are consistent with settlements of CMS Energy's consolidated 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 the
Consumers Gas Group consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current federal income taxes.......................... $37 $34 $38
Deferred income taxes................................. 6 6 (2)
Deferred ITC, net..................................... (2) (2) (2)
--- --- ---
$41 $38 $34
=== === ===
Operating............................................. $41 $39 $35
Other................................................. -- (1) (1)
--- --- ---
$41 $38 $34
=== === ===
</TABLE>
The principal components of deferred tax assets (liabilities) recognized in
the balance sheet for the Consumers Gas Group are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993
----- -----
(IN MILLIONS)
<S> <C> <C>
Property.................................................... $ (54) $ (53)
Postretirement benefits (Note 9)............................ (58) (58)
Employee benefit obligations (includes postretirement
benefits of $56 and $58 (Note 9).......................... 68 67
Regulatory liability for income taxes....................... 50 47
Other....................................................... 13 9
----- -----
$ 19 $ 12
===== =====
Gross deferred tax liabilities.............................. $(235) $(232)
Gross deferred tax assets................................... 254 244
----- -----
$ 19 $ 12
===== =====
</TABLE>
F-12
<PAGE> 129
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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>
YEARS ENDED DECEMBER 31,
-----------------------
1994 1993 1992
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Net income before preferred dividends................ $ 58 $ 68 $ 42
Income tax expense................................... 41 38 34
----- ----- -----
99 106 76
Statutory federal income tax rate.................... X 35% X 35% X 34%
----- ----- -----
Expected income tax expense.......................... 35 37 26
Increase (decrease) in taxes from:
Differences in book and tax depreciation not
previously deferred............................. 8 7 7
ITC amortization and utilization................... (2) (2) (2)
Other, net......................................... -- (4) 3
----- ----- -----
$ 41 $ 38 $ 34
===== ===== =====
</TABLE>
5: SHORT-TERM FINANCINGS
In 1994, the FERC granted Consumers' request for authorization to issue or
guarantee up to $900 million of short-term debt through December 31, 1996.
Consumers has an unsecured $470 million facility and unsecured, committed lines
of credit aggregating $185 million that are used to finance seasonal working
capital requirements. At December 31, 1994, $170 million and $166 million were
outstanding under these facilities at weighted average interest rates of 6.3%
and 7.3%, respectively. At March 31, 1995, Consumers had a total of $133 million
outstanding under these facilities. Consumers has an established $500 million
trade receivables purchase and sale program. At March 31, 1995 and December 31,
1994 and 1993, receivables sold under the agreement totaled $300 million, $275
million and $285 million, respectively.
Consumers generally manages its short-term financings on a centralized
consolidated basis. The portion of receivables sold attributable to the
Consumers Gas Group at March 31, 1995 and December 31, 1994 and 1993, is
estimated by management to be $135 million, $111 million and $124 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 attributed 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 the Consumers
Gas Group based on the ratio of customer revenues contributed by Consumers' gas
customers to total Consumers' revenue. However, as a result of the centralized
management of short-term financing, the amounts allocated to the 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 periods
(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. The potential change in CMS
Energy's capital structure (see Notes 2 and 6) will not affect Consumers'
responsibility for its total liabilities.
F-13
<PAGE> 130
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6: CAPITALIZATION
CMS ENERGY
Capital Stock: Prior to the approval of the Charter Amendment on March 21,
1995, CMS Energy was permitted to issue up to 250 million shares of common stock
at $.01 par value and up to 5 million shares of preferred stock at $.01 par
value. The filing of the Restated Articles of Incorporation with the Michigan
Department of Commerce has increased the number of authorized shares of capital
stock from 255 million shares to 320 million shares consisting of 250 million
shares of CMS Energy Common Stock, par value $.01 per share, 60 million shares
of Class G Common Stock, no par value, and 10 million shares of Preferred Stock,
par value $.01 per share. Under the Credit Facility and the Indentures pursuant
to which the GTNs are issued, which currently contain CMS Energy's most
restrictive dividend covenants, CMS Energy is permitted to pay, as dividends on
its common stock, an amount not to exceed the total of its net income, as
defined in the Indentures, and any proceeds received from the issuance or sale
of common stock as defined in the agreements and $120 million, provided there
exists no event of default under the terms of the Credit Facility or GTNs. The
same formula applies to limit repurchase or reacquisition of Common Stock of CMS
Energy.
The holders of any outstanding Class G Common Stock will vote with the
holders of CMS Energy Common Stock as a single class, except on matters which
would be required by law or the Articles of Incorporation to be voted on by
class. The Class G Common Stock will have one vote per share.
CMS Energy may exchange the Class G Common Stock for a proportionate number
of shares of a subsidiary that holds all the assets and liabilities attributed
to the Consumers Gas Group, and no other assets and liabilities.
If CMS Energy transfers all or substantially all of the properties and
assets attributed to the Consumers Gas Group, CMS Energy is required, subject to
certain exceptions and conditions, to exchange each outstanding share of Class G
Common Stock for a number of shares of CMS Energy Common Stock having a Fair
Market Value equal to 110% of the Fair Market Value of one share of Class G
Common Stock.
CMS Energy also could, in the sole discretion of the Board of Directors, at
any time, exchange each outstanding share of Class G Common Stock for a number
of shares of CMS Energy Common Stock having a Fair Market Value equal to 115% of
the Fair Market Value of one share of Class G Common Stock.
In the event of the liquidation of CMS Energy, each outstanding share of
Class G Common Stock will be entitled to a share of the assets remaining for
distribution to holders of Common Stock equal of the amount of such assets
divided by the total number of shares of CMS Energy Common Stock and Class G
Common Stock then outstanding.
CMS Energy as parent holding company, is paid dividends from its principal
subsidiaries, primarily Consumers. The ability of CMS Energy to pay dividends on
its Common Stock will depend substantially upon timely receipt of sufficient
dividends or other distributions from Consumers, its principal subsidiary.
Consumers' ability to pay dividends on its common stock depends upon the
revenues, earnings and other factors. Consumers' revenues and earnings will
depend substantially upon its ability to secure timely and appropriate relief
from the MPSC. There is no fixed relationship, on a per share or aggregate
basis, between the dividends that may be paid by CMS Energy to holders of its
Class G Common Stock and the cash dividends or other amounts that may be paid by
Consumers to CMS Energy.
CONSUMERS
Capital Stock and Other Paid-in-Capital: During 1994, Consumers issued and
sold 8 million shares of Class A Preferred Stock (cumulative, without par value)
with an annual dividend of $2.08. Net proceeds to Consumers were $193 million.
The stock is redeemable at the option of Consumers, on or after April 1, 1999,
at a redemption price of $25 per share plus accrued dividends. Consumers Gas
Group's attributed portion of
F-14
<PAGE> 131
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
the net proceeds totaled $42 million and has been reflected in the financial
statements. Management allocated the preferred stock based on the ratio of gas
utility net assets (including common assets attributed to the gas utility
segment) to total Consumers' assets. At December 31, 1992, Consumers effected a
quasi-reorganization in which Consumers' accumulated deficit of $574 million was
eliminated against other paid-in capital.
The portion of Consumers' common dividends attributed to the Consumers Gas
Group for 1994, 1993 and 1992 has been reflected in the financial statements.
These dividend amounts were allocated based on the ratio of the Consumers Gas
Group's net income to Consumers' consolidated net income after dividends on
preferred stock. This ratio was then applied to Consumers' total dividend
payments for these periods. Management believes these allocations are
reasonable. Following the March 1995 approval of the Class G Common Stock
proposal, subsequent financial statements of Consumers Gas Group will reflect
dividends paid to the Class G Common Stock shareholders and dividends
attributable to the Retained Interest held by CMS Energy.
In 1994, Consumers received a $100 million equity investment from CMS
Energy. The investment was consistent with CMS Energy's plan to improve
Consumers' capital structure and was recognized and included in the
capitalization structure employed by the MPSC as part of Consumers' most recent
electric rate order. Consumers Gas Group's attributed portion of the equity
investment totaled $22 million and has been reflected in the financial
statements. The equity investment was allocated based on the ratio of gas
utility assets (including common assets attributed to the gas utility segment)
to total Consumers' assets. Management believes this allocation is reasonable.
Long-Term Debt: Consumers generally manages its long-term debt on a
centralized consolidated basis. The financial statements of Consumers Gas Group
reflect the attributed debt and related interest charges for the periods
presented. Management allocated these amounts 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. The
change in CMS Energy's capitalization structure will not affect Consumers'
responsibility for its total liabilities.
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 Mortgage Indenture,
Articles and the need for regulatory approvals in compliance with appropriate
state and federal law. In the first quarter of 1994, Consumers redeemed first
mortgage bonds totaling $101 million. These redemptions completed Consumers'
commitment to the MPSC, under a 1993 financing order to refinance certain long-
term debt.
In 1994, subsequent to MPSC authorization, Consumers entered into a new
$400 million unsecured, variable rate, five-year term loan and subsequently used
the proceeds to refinance its then existing long-term, variable rate, credit
agreement and to reduce short-term borrowings. At December 31, 1994, the new
loan carried a weighted average interest rate of 6.5%. In 1993, Consumers
entered into an interest rate swap agreement, exchanging variable-rate interest
for a fixed-rate interest of 5.2% on $250 million of its long-term bank debt.
The swap agreement hedges the variable rate exposure associated with Consumers'
long-term bank debt and had the effect of increasing the weighted average
interest rate to 5.3% from 5.0% for the 12-month period ended December 31, 1994.
The current swap agreement began to decrease in February 1995 and will terminate
by May 1996. In February 1995, Consumers entered into another hedging agreement
for $100 million to reduce its exposure to variable rate interest associated
with its long-term bank debt.
In April 1995, the MPSC issued an order authorizing Consumers to issue and
sell up to $300 million of intermediate and/or long-term debt and $100 million
of preferred stock or subordinate debentures.
F-15
<PAGE> 132
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
7: 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. CMS Energy's
carrying amount of long-term debt was $2.7 billion and $2.4 billion and the fair
value of long-term debt was $2.6 billion and $2.6 billion as of December 31,
1994 and 1993, respectively. The carrying amount of Consumers Gas Group's
long-term debt was $426 million and $402 million and the fair value was $403
million and $412 million as of December 31, 1994 and 1993, respectively.
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 fair values of CMS Energy's off-balance-sheet financial instruments are
based on the amounts estimated to terminate or settle the instruments. The fair
value of interest rate swap agreements was $(5) million and $6 million and
guarantees/letters of credit outstanding were $123 million and $96 million as of
December 31, 1994 and 1993, respectively (see Note 6).
Effective January 1, 1994, CMS Energy adopted SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities, which did not materially
impact Consumers Gas Group's financial position or results of operations.
8: EXECUTIVE INCENTIVE COMPENSATION
CMS Energy's Performance Incentive Stock Plan, restricted shares of common
stock of CMS Energy, stock options and stock appreciation rights are discussed
in Note 9 of CMS Energy Notes. This plan has been amended to provide for awards
of Class G Common Stock.
9: RETIREMENT BENEFITS
Postretirement Benefit Plans Other Than Pensions: 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.
CMS Energy's non-utility subsidiaries expensed their accumulated transition
obligation liability. The amount of such transition obligation is not material
to the presentation of the consolidated financial statements or significant to
CMS Energy's total transition obligation. Both the MPSC and FERC have generally
allowed recovery of SFAS 106 costs. The MPSC's generic order allows utilities
three years to seek recovery of costs. In May 1994, the MPSC authorized recovery
of the electric utility portion of these costs over 18 years. In December 1994,
Consumers requested recovery of the gas utility portion of these costs (see Note
3). CMS Energy funds the benefits using external legal entities established
under guidelines of the U.S. Internal Revenue Code ("Voluntary Employee
Beneficiary Associations"). Funding of the health care benefits coincides with
Consumers' recovery in rates. A portion of the life insurance benefits have
previously been funded.
Retiree health care costs at December 31, 1994, are based on the assumption
that costs would increase 10% in 1995, then decrease gradually to a 6% increase
in 2004 and thereafter. The health care cost trend rate assumption significantly
affects the amounts reported. For example, a 1 percentage point increase in each
year's estimated health care cost assumption would increase the accumulated
postretirement benefit obligation as of December 31, 1994 by $85 million and the
aggregate of the service and interest cost components of net periodic
postretirement benefit costs for 1994 by $10 million.
For the years ended December 31, 1994, 1993 and 1992, the weighted average
discount rate was 8%, 7.25% and 8%, respectively, and the expected long-term
rate of return on plan assets was 7%, 8.5% and 8.5%, respectively. Net periodic
postretirement benefit cost for health care benefits and life insurance benefits
was $54 million in 1994, $51 million in 1993 and $49 million in 1992. The 1994,
1993 and 1992 cost was comprised
F-16
<PAGE> 133
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
of $13 million, $13 million and $10 million for service plus $41 million, $38
million and $39 million for interest, respectively. The Consumers Gas Group's
attributed portion of CMS Energy's service cost totaled $4 million in 1994,
1993 and 1992, and the attributed portion of interest cost totaled $13 million,
$12 million and $12 million for 1994, 1993 and 1992, 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.
The funded status for CMS Energy's centrally managed postretirement benefit
plans is reconciled with the total liability recorded at December 31 as follows:
<TABLE>
<CAPTION>
1993
1994 -
-----
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of estimated benefits
Retirees.................................................... $ 338 $ 282
Eligible for retirement..................................... 44 54
Active (upon retirement).................................... 170 190
----- -----
Accumulated postretirement benefit obligation................. 552 526
Plan assets at fair value..................................... 36 4
----- -----
Projected postretirement benefit obligation in excess of plan
assets...................................................... (516) (522)
Unrecognized prior service cost............................... (39) (39)
Unrecognized net loss......................................... 35 41
----- -----
Recorded liability............................................ $(520) $(520)
----- -----
</TABLE>
Consumers Gas Group's attributed portion of CMS Energy's total recorded
liability is estimated to be $166 million and $167 million at December 31, 1994
and 1993, respectively. This amount was allocated based on policies Consumers
has historically used in proceedings conducted before the MPSC.
CMS Energy's postretirement health care plan is partially funded; the
accumulated postretirement benefit obligation for that plan is $536 million and
$514 million at December 31, 1994 and 1993, respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify under the Supplemental Executive Retirement Plan ("SERP"). SERP
benefits, which are based on an employee's years of service and earnings as
defined in the SERP, are paid from a trust established and funded in 1988.
Because the SERP is not a qualified plan under the U.S. Internal Revenue Code,
earnings of the trust are taxable and trust assets are included in consolidated
assets. At December 31, 1994 and 1993, CMS Energy's trust assets at cost (which
approximates market) were $19 million and $18 million, respectively, and were
classified as other non-current assets. The attributed trust assets of Consumers
Gas Group at cost (which approximates market) were $4 million and $5 million, at
December 31, 1994 and 1993 respectively, and were classified as other non-
current assets. This allocation was 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.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit
pension plan (the "Pension Plan") covers substantially all employees. The
benefits are based on an employee's years of accredited service
F-17
<PAGE> 134
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
and earnings, as defined in the plan, during an employee's five highest years of
earnings. Because the plan is fully funded, no contributions were made for plan
years 1992 through 1994.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Discount rate.......................................... 8.0% 7.25% 8.5%
Rate of compensation increase.......................... 4.5% 4.5% 5.5%
Expected long-term rate of return on assets............ 9.25% 8.75% 8.75%
</TABLE>
CMS Energy's net Pension Plan and SERP costs consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 24 $ 19 $ 19
Interest cost............................................. 51 50 48
Actual return on plan assets.............................. 21 (92) (36)
Net amortization and deferral............................. (85) 34 (20)
---- ---- ----
Net periodic pension cost................................. $ 11 $ 11 $ 11
==== ==== ====
</TABLE>
Consumers Gas Group's attributed portion of CMS Energy's net periodic
pension cost totaled $3 million in 1994, 1993 and 1992. Consumers Gas Group's
attributed portion of CMS Energy's service cost totaled $7 million for 1994 and
$6 million for 1993 and 1992, and its attributed portion of interest cost
totaled $15 million for 1994, 1993 and 1992. 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.
The funded status of CMS Energy's Pension Plan and SERP reconciled to the
pension liability recorded at December 31 was:
<TABLE>
<CAPTION>
PENSION PLAN SERP
------------ ------------
1994 1993 1994 1993
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of estimated benefits
Vested.......................................................... $421 $471 $ 17 $ 16
Non-vested...................................................... 61 56 -- --
---- ---- ---- ----
Accumulated benefit obligation.................................... 482 527 17 16
Provision for future pay increases................................ 154 138 11 8
---- ---- ---- ----
Projected benefit obligation...................................... 636 665 28 24
Plan assets (primarily stocks and bonds, including $79 in 1994 and
$87 in 1993 in common stock of CMS Energy) at fair value........ 637 692 -- --
---- ---- ---- ----
Projected benefit obligation less than (in excess of) plan
assets.......................................................... 1 27 (28) (24)
Unrecognized net (gain) loss from experience different than
assumed......................................................... (35) (56) 5 8
Unrecognized prior service cost................................... 40 45 2 (1)
Unrecognized net transition (asset) obligation.................... (39) (44) 1 1
---- ---- ---- ----
Recorded liability................................................ $(33) $(28) $(20) $(16)
==== ==== ==== ====
</TABLE>
Consumers Gas Group's attributed portion of CMS Energy's total recorded
liability for the Pension Plan totaled $10 million at December 31, 1994 and $8
million at December 31, 1993 and was allocated to the Consumers Gas Group based
on the ratio of salaries and wages related to Consumers' gas operations to
Consumers' total salaries and wages. Consumers Gas Group's estimated portion of
CMS Energy's recorded liability for the SERP totaled $4 million at December 31,
1994 and at December 31, 1993 and was allocated to
F-18
<PAGE> 135
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
the 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.
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.
10: LEASES
CMS Energy and its subsidiaries lease various assets, including vehicles,
aircraft, construction equipment, computer equipment and buildings and is
responsible for payment of taxes, maintenance, operating costs, and insurance.
Consumers Gas Group's attributed portion of CMS Energy's minimum rental
commitments under non-cancelable leases at December 31, 1994, were:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN MILLIONS)
<S> <C> <C>
1995........................................................ $ 6 $ 1
1996........................................................ 5 --
1997........................................................ 5 --
1998........................................................ 4 --
1999........................................................ 3 --
2000 and thereafter......................................... 4 --
----- ---
Total minimum lease payments................................ 27 $ 1
======
Less imputed interest....................................... 5
-----
Present value of net minimum lease payments................. 22
Less current portion........................................ 4
-----
Non-current portion......................................... $18
=====
</TABLE>
Consumers recovers these charges from customers and accordingly charges
payments for its capital and operating leases to operating expense. Operating
lease charges for the Consumers Gas Group, including charges to clearing and
other accounts as of December 31, 1994, 1993 and 1992, were $1 million, $1
million and $1 million, respectively. Capital lease expenses for the Consumers
Gas Group for the years ended December 31, 1994, 1993 and 1992 were $6 million,
$6 million and $11 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.
11: COMMITMENTS, CONTINGENCIES AND OTHER
Environmental Matters: Consumers is a so-called "Potentially Responsible
Party" at several sites being administered under Superfund. Although Superfund
liability is joint and several, along with Consumers, there are numerous
credit-worthy, potentially responsible parties with substantial assets
cooperating with respect to the individual sites. Based upon past negotiations,
Consumers estimates its total liability will average less than 4% of the
estimated total site remediation costs, and such liability is expected to be
less than $9 million. At March 31, 1995, Consumers has accrued a liability for
its estimated losses. Consumers and CMS Energy believe that it is unlikely that
their liability at any of the known Superfund sites, individually or in total,
will have a material adverse effect on their financial positions or results of
operations.
Under the Environmental Response Act, Consumers expects that it will
ultimately incur investigation and remedial action costs at a number of sites,
including some of the 23 sites that formerly housed manufactured gas plant
facilities, even those in which it has a partial or no current ownership
interest. Parties
F-19
<PAGE> 136
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
other than Consumers with current or former ownership interests may also be
considered liable for site investigations and remedial actions. There is limited
knowledge of manufactured gas plant contamination at these sites at this time.
Consumers has prepared plans for remedial investigation/feasibility studies
for several of these former manufactured gas plant sites to define the nature
and extent of contamination at these sites and to determine which of several
possible remedial action alternatives, including no action, may be required
under the Environmental Response Act. The DNR has approved three of four plans
for remedial investigation/feasibility studies submitted by Consumers.
The findings for the first remedial investigation indicate that the
expenditures for remedial action at this site are likely to be minimal. However,
Consumers does not believe that a single site is representative of all of the
sites. Data available to Consumers and its continued internal review have
resulted in an estimate for all costs related to investigation and remedial
action for all 23 sites of between $48 million and $112 million. These estimates
are based on undiscounted 1994 costs. At March 31, 1995, Consumers has accrued a
liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions such as
remediation technique, nature and extent of contamination and regulatory
requirements, could impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994. Consumers and CMS
Energy believe that remedial action costs are recoverable in rates as the MPSC
in 1993 addressed the question of recovery of investigation and remedial action
costs for another Michigan gas utility as part of a gas rate case. In order to
be recoverable in rates, prudent costs must be approved in a rate case. Any
costs amortized in years prior to filing a rate case may not be recoverable. The
MPSC has approved similar deferred accounting requests by several other Michigan
utilities relative to investigation and remedial action costs. In June 1995, as
part of Consumers gas rate case, the MPSC staff recommended that the MPSC adopt
the same accounting and cost recovery previously provided to other Michigan
utilities. Consumers has initiated discussions with certain insurance companies
regarding coverage for some or all of the costs which may be incurred for these
sites.
Capital Expenditures: The Consumers Gas Group estimates capital
expenditures, including new lease commitments, will be $130 million for 1995,
$119 million for 1996 and $111 million for 1997. These estimates include an
attributed portion of Consumers' anticipated capital expenditures for common
plant and equipment of $27 million, $14 million and $17 million for 1995, 1996
and 1997, respectively. Management believes these estimates are reasonable.
Commitments for Gas Supplies: Consumers has entered into gas supply
contracts with various suppliers for its natural gas business. These contracts
have expiration dates that range from 1995 to 2003. Consumers contracts for
approximately 70 - 80% of its annual gas requirements which in 1994 totaled $662
million (83% was under long-term contracts). Consumers supplements its long-term
contracts with spot-market purchases to fulfill its gas needs.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the MMCG
asked the Commission to revoke CMS Energy's exemption from registration under
PUHCA. In 1992, the MPSC filed a statement with the Commission recommending that
CMS Energy's current exemption be revoked and a new exemption be issued
conditioned upon certain reporting and operating requirements. If CMS Energy
were to lose its current exemption, it would become more heavily regulated by
the Commission; Consumers could ultimately be forced to divest either its
electric or gas utility business; and CMS Energy could be restricted from
conducting businesses that are not functionally related to the conduct of its
utility business as determined by the Commission. CMS Energy is opposing this
request and believes it will maintain its current exemption from registration
under PUHCA. The Commission has not taken action on this matter.
F-20
<PAGE> 137
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Other: CMS Energy believes that no taxable gain will result in connection
with the sale of the Class G Common Stock. However, the Service has previously
announced that it was studying the federal tax consequences of transactions
similar to CMS Energy's stock proposal. If the sale of the Class G Common Stock
were treated as property other than stock of CMS Energy, CMS Energy may have a
recognizable gain in an amount equal to the difference between the fair market
value of Class G Common Stock and the federal income tax basis to CMS Energy in
such property.
In addition to the matters disclosed in these notes, 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 involving personal injury and
property damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have been
accrued. The ultimate effect of the proceedings discussed in this note is not
expected to have a material impact on CMS Energy's or Consumers Gas Group's
financial position or results of operations.
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 non-cash
investing and financing activities for the three months ended March 31 and the
years ended December 31 were:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
--------------- --------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CASH TRANSACTIONS
Interest paid (net of amounts capitalized)................ $10 $11 $33 $37 $33
Income taxes paid (net of refunds)........................ -- -- 31 42 25
NON-CASH TRANSACTIONS
Other assets placed under capital leases.................. 1 1 5 5 9
Capital leases refinanced................................. -- -- -- 12 --
</TABLE>
Changes in other assets and liabilities as shown on the Statements of Cash
Flows at December 31 are described below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993 1992
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Sale of receivables, net............................................... $(13) $ 72 $ (42)
Accounts receivable.................................................... 11 (35) 53
Accrued revenue........................................................ 30 (31) 85
Inventories............................................................ (6) (24) 20
Accounts payable....................................................... 1 (7) (4)
Accrued refunds........................................................ -- (10) (141)
Other current assets and liabilities, net.............................. (1) (17) 37
Non-current deferred amounts, net...................................... (5) (15) (23)
---- ---- -----
$ 17 $(67) $ (15)
==== ==== =====
</TABLE>
F-21
<PAGE> 138
CONSUMERS GAS GROUP
NOTES TO FINANCIAL STATEMENTS -- CONCLUDED
13: EFFECTS OF THE RATEMAKING PROCESS
The following regulatory assets (liabilities) which include both current
and non-current 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.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1993
----- -----
(IN MILLIONS)
<S> <C> <C>
Postretirement benefits (Note 9).............................. $ 166 $ 167
Trunkline settlement (Note 3)................................. 85 117
Manufactured gas plant sites (Note 11)........................ 48 --
Other......................................................... 13 21
----- -----
Total regulatory assets....................................... $ 312 $ 305
===== =====
Regulatory liabilities for income taxes....................... $(144) $(131)
===== =====
</TABLE>
At December 31, 1994, $85 million of Consumers Gas Group's regulatory
assets are being recovered through rates being charged to customers over 3
years. Consumers anticipates MPSC approval for recovery of the remaining
amounts.
F-22
<PAGE> 139
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and
consolidated statements of long-term debt and preferred stock of CMS Energy
Corporation (a Michigan Corporation) and subsidiaries as of December 31, 1994
and 1993, 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, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CMS Energy
Corporation and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Detroit, Michigan
January 31, 1995
(except with respect to certain matters discussed in
Notes 3, 4, 7 and 13 of the consolidated financial statements
as to which the date is May 9, 1995)
F-23
<PAGE> 140
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------- --------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
UNAUDITED
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric utility............................................. $ 540 $ 545 $2,189 $2,077 $1,863
Gas utility.................................................. 482 528 1,151 1,160 1,126
Oil and gas exploration and production....................... 34 18 85 77 70
Independent power production................................. 23 8 45 21 (8)
Natural gas pipeline, storage and marketing.................. 38 42 145 142 89
Other........................................................ 2 1 4 5 6
------ ------ ------ ------ ------
Total operating revenue................................ 1,119 1,142 3,619 3,482 3,146
------ ------ ------ ------ ------
OPERATING EXPENSES
Operation
Fuel for electric generation............................... 67 79 306 293 305
Purchased power -- related parties......................... 124 122 482 467 460
Purchased and interchange power............................ 36 42 162 148 112
Cost of gas sold........................................... 308 372 785 801 749
Other...................................................... 162 144 625 571 555
------ ------ ------ ------ ------
Total operation........................................ 697 759 2,360 2,280 2,181
Maintenance.................................................. 46 43 192 206 203
Depreciation, depletion and amortization..................... 114 103 379 364 347
General taxes................................................ 56 62 184 193 184
------ ------ ------ ------ ------
Total operating expenses............................... 913 967 3,115 3,043 2,915
------ ------ ------ ------ ------
PRETAX OPERATING INCOME (LOSS)
Electric utility............................................. 87 88 335 286 154
Gas utility.................................................. 91 84 135 147 109
Oil and gas exploration and production....................... 15 2 8 3 7
Independent power production................................. 13 2 20 5 (16)
Natural gas pipeline, storage and marketing.................. 3 3 9 7 5
Other........................................................ (3) (4) (3) (9) (28)
------ ------ ------ ------ ------
Total pretax operating income.......................... 206 175 504 439 231
------ ------ ------ ------ ------
INCOME TAXES................................................. 54 47 104 92 22
------ ------ ------ ------ ------
NET OPERATING INCOME......................................... 152 128 400 347 209
------ ------ ------ ------ ------
OTHER INCOME (DEDUCTIONS)
Accretion income (Note 4).................................... 3 3 13 14 15
Accretion expense............................................ (8) (9) (35) (36) --
Other income taxes, net...................................... 1 2 12 17 168
MCV Bond income.............................................. -- -- -- 32 34
Loss on MCV power purchases -- settlement (Note 3)........... -- -- -- -- (520)
Other, net................................................... 5 5 18 15 9
------ ------ ------ ------ ------
Total other income (deductions)........................ 1 1 8 42 (294)
------ ------ ------ ------ ------
FIXED CHARGES
Interest on long-term debt................................... 56 46 193 204 169
Other interest............................................... 5 3 18 24 35
Capitalized interest......................................... (1) (1) (6) (5) (3)
Preferred dividends.......................................... 7 3 24 11 11
------ ------ ------ ------ ------
Net fixed charges...................................... 67 51 229 234 212
------ ------ ------ ------ ------
NET INCOME (LOSS)............................................ $ 86 $ 78 $ 179 $ 155 $ (297)
====== ====== ====== ====== ======
AVERAGE COMMON SHARES OUTSTANDING............................ 87 85 86 81 80
====== ====== ====== ====== ======
EARNINGS (LOSS) PER AVERAGE COMMON SHARE..................... $ .99 $ .92 $ 2.09 $ 1.90 $(3.72)
====== ====== ====== ====== ======
DIVIDENDS DECLARED PER COMMON SHARE.......................... $ .21 $ .18 $ .78 $ .60 $ .48
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE> 141
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------- ------------------------
1995 1994 1994 1993 1992
----- ----- ----- ----- -----
UNAUDITED
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $ 86 $ 78 $ 179 $ 155 $(297)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation, depletion and amortization
(includes nuclear decommissioning
depreciation of $13, $12, $49, $46 and $46,
respectively)................................ 114 103 379 364 347
Debt discount amortization...................... 8 9 37 36 12
Capital lease and other amortization............ 10 17 36 31 41
Deferred income taxes and investment tax
credit....................................... 29 17 56 56 (185)
Accretion expense............................... 8 9 35 36 --
Accretion income -- abandoned Midland project... (3) (3) (13) (14) (15)
MCV power purchases -- settlement (Note 3)...... (37) (22) (87) (84) --
Loss on MCV power purchases -- settlement (Note
3)........................................... -- -- -- -- 520
Changes in other assets and liabilities (Note
15).......................................... 103 184 12 (88) 25
Other........................................... (12) (7) (22) (8) 8
----- ----- ----- ----- -----
Net cash provided by operating activities.... 306 385 612 484 456
----- ----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes capital lease additions
of $9, $3, $36, $58 and $69, respectively and DSM)
(Note 15)............................................ (287) (114) (575) (550) (487)
Investments in partnerships and unconsolidated
subsidiaries......................................... (11) (23) (53) (108) (12)
Investments in nuclear decommissioning trust funds..... (13) (12) (49) (46) (46)
Cost to retire property, net........................... (9) (7) (38) (32) (14)
Deferred demand-side management costs.................. (2) -- (9) (52) (26)
Proceeds from sale of property......................... -- -- 20 6 12
Proceeds from MCV Bonds................................ -- -- -- 322 10
Sale of subsidiary..................................... -- -- -- (14) --
Proceeds from Bechtel settlement....................... -- -- -- -- 46
Other.................................................. (4) -- (5) (5) (1)
----- ----- ----- ----- -----
Net cash used in investing activities........ (326) (156) (709) (479) (518)
----- ----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds.............. 208 39 701 673 607
Issuance of preferred stock............................ -- 193 193 -- --
Increase (decrease) in notes payable, net.............. (204) (259) 80 44 (493)
Issuance of common stock............................... 33 13 30 132 --
Repayment of bank loans................................ (9) (54) (473) (192) (1)
Retirement of bonds and other long-term debt........... (11) (109) (279) (645) (12)
Payment of common stock dividends...................... (18) (15) (67) (49) (38)
Payment of capital lease obligations................... (10) (16) (35) (26) (36)
Retirement of common stock............................. -- (1) (2) (3) (1)
----- ----- ----- ----- -----
Net cash provided by (used in) financing
activities................................. (11) (209) 148 (66) 26
----- ----- ----- ----- -----
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS.......................................... (31) 20 51 (61) (36)
Cash and temporary cash investments
Beginning of year.................................... 79 28 28 89 125
----- ----- ----- ----- -----
End of year.......................................... $ 48 $ 48 $ 79 $ 28 $ 89
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 142
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------
1995 1994 1993
---------- ------ ------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
PLANT AND PROPERTY (AT COST)
Electric............................................................................ $ 5,826 $5,771 $5,472
Gas................................................................................. 2,115 2,102 1,964
Oil and gas properties (full-cost method)........................................... 978 934 845
Other............................................................................... 55 61 67
--------- ------ ------
8,974 8,868 8,348
Less accumulated depreciation, depletion and amortization (Note 2).................. 4,405 4,299 4,022
--------- ------ ------
4,569 4,569 4,326
Construction work-in-progress....................................................... 257 245 257
--------- ------ ------
4,826 4,814 4,583
--------- ------ ------
INVESTMENTS
Independent power production........................................................ 262 152 115
First Midland Limited Partnership (Notes 3 and 18).................................. 219 218 213
Midland Cogeneration Venture Limited Partnership (Notes 3 and 18)................... 83 74 67
Other............................................................................... 57 56 26
--------- ------ ------
621 500 421
--------- ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market.............. 48 79 28
Accounts receivable and accrued revenue, less allowances of $4 at March 31, 1995 and
$5 at December 31, 1994 and 1993 (Note 6)......................................... 149 156 149
Inventories at average cost
Gas in underground storage........................................................ 80 235 228
Materials and supplies............................................................ 79 75 74
Generating plant fuel stock....................................................... 27 37 41
Deferred income taxes (Note 5)...................................................... 37 34 17
Trunkline settlement (Note 4)....................................................... 30 30 31
Prepayments and other............................................................... 148 186 195
--------- ------ ------
598 832 763
--------- ------ ------
NON-CURRENT ASSETS
Postretirement benefits (Note 10)................................................... 479 484 491
Nuclear decommissioning trust funds (Note 2)........................................ 236 213 165
Abandoned Midland project (Note 4).................................................. 143 147 162
Trunkline settlement (Note 4)....................................................... 48 55 86
Other............................................................................... 393 339 293
--------- ------ ------
1,299 1,238 1,197
--------- ------ ------
TOTAL ASSETS.......................................................................... $ 7,344 $7,384 $6,964
========= ====== ======
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (NOTE 7)
Common stockholders' equity......................................................... $ 1,209 $1,107 $ 966
Preferred stock of subsidiary....................................................... 356 356 163
Long-term debt...................................................................... 2,787 2,709 2,405
Non-current portion of capital leases............................................... 103 108 115
--------- ------ ------
4,455 4,280 3,649
--------- ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases................................ 180 64 368
Notes payable....................................................................... 135 339 259
Accounts payable.................................................................... 160 194 171
Accounts payable -- related parties................................................. 54 50 46
Accrued taxes....................................................................... 172 216 233
MCV power purchases -- settlement (Note 3).......................................... 95 95 82
Accrued interest.................................................................... 30 40 40
Accrued refunds..................................................................... 35 25 28
Other............................................................................... 166 198 189
--------- ------ ------
1,027 1,221 1,416
--------- ------ ------
NON-CURRENT LIABILITIES
Deferred income taxes (Note 5)...................................................... 604 582 509
Postretirement benefits (Note 10)................................................... 555 550 540
MCV power purchases -- settlement (Note 3).......................................... 295 324 391
Deferred investment tax credits..................................................... 178 181 191
Trunkline settlement (Note 4)....................................................... 48 55 86
Regulatory liabilities for income taxes, net (Notes 5 and 17)....................... 29 16 6
Other............................................................................... 153 175 176
--------- ------ ------
1,862 1,883 1,899
--------- ------ ------
Commitments and Contingencies (Notes 2, 3, 4, 11, 12 and 13)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES........................................ $ 7,344 $7,384 $6,964
========= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 143
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
First Mortgage Bonds Series (% ) Due
5 7/8 1996 $ 36 $ 36
6 1997 50 50
8 3/4 1997 -- 5
8 3/4 1998 248 248
6 5/8 1998 45 45
6 7/8 1998 43 43
9 1/8 1998 -- 5
7 5/8 1999 -- 48
8 7/8 1999 200 200
7 1/2 2001 57 57
7 1/2 2002 62 62
7 1/2 2002 -- 43
6 3/8 2003 300 300
7 3/8 2023 300 300
------ ------
1,341 1,442
Long-Term Bank Debt 400 469
Senior Deferred Coupon Notes 355 466
Unsecured Credit Facility 196 --
Pollution Control Revenue Bonds 131 131
Bank Loans 110 115
Nuclear Fuel Disposal 95 90
General Term Notes 94 --
Senior Serial Notes 36 45
4-5/8% Debentures -- 26
Tax Exempt Bonds -- 22
Other 6 13
------ ------
Principal Amount Outstanding 2,764 2,819
Current Amounts (21) (333)
Net Unamortized Discount (34) (81)
------ ------
Total Long-Term Debt $2,709 $2,405
====== ======
</TABLE>
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS
<TABLE>
<CAPTION>
FIRST SENIOR UNSECURED
MORTGAGE IMPROVEMENT LONG-TERM DEFERRED GENERAL CREDIT
BONDS FUND BANK DEBT COUPON NOTES TERM NOTES FACILITY OTHER TOTAL
-------- ----------- --------- ------------ ---------- --------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995............ $ -- $ 8 $ -- $ -- $ -- $ -- $ 13 $ 21
1996............ 36 8 -- -- -- -- 46 90
1997............ 50 8 -- 172 92 196 115 633
1998............ 336 7 200 -- -- -- 37 580
1999............ 200 3 200 183 2 -- 29 617
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 144
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF PREFERRED STOCK
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
OPTIONAL NUMBER OF SHARES
REDEMPTION --------------------
SERIES PRICE 1994 1993 1994 1993
------ ---------- --------- ------- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSUMERS' 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
7.45 101.00 379,549 379,549 38 38
7.68 101.00 207,565 207,565 21 21
7.72 101.00 289,642 289,642 29 29
7.76 102.21 308,072 308,072 31 31
CONSUMERS' CLASS A PREFERRED STOCK
Cumulative, no par value, authorized
16,000,000 shares, with no mandatory
redemption........................... 2.08 (Note 7) 8,000,000 -- 193 --
---- ----
Total Preferred Stock.............. $356 $163
==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 145
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
OTHER RETAINED
NUMBER COMMON REVALUATION PAID-IN EARNINGS
OF SHARES STOCK CAPITAL CAPITAL (DEFICIT) TOTAL
---------- ------ ----------- ------- --------- ------
(IN MILLIONS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1992............ 79,824,385 $1 $ 1,537 $(478) $1,060
Net loss............................ (297) (297)
Common stock dividends declared..... (38) (38)
Common stock reacquired............. (9,101) (1) (1)
Common stock reissued............... 150,438 3 3
---------- -- ------- ------- ------
BALANCE AT DECEMBER 31, 1992.......... 79,965,722 1 1,539 (813) 727
Net income.......................... 155 155
Common stock dividends declared..... (49) (49)
Common stock reacquired............. (97,442) (3) (3)
Common stock issued................. 5,135,726 132 132
Common stock reissued............... 192,789 4 4
---------- -- ------- ------- ------
BALANCE AT DECEMBER 31, 1993.......... 85,196,795 1 1,672 (707) 966
Net income.......................... 179 179
Common stock dividends declared..... (67) (67)
Common stock reacquired............. (85,174) (2) (2)
Common stock issued................. 1,389,578 30 30
Common stock reissued............... 33,350 1 1
---------- -- ------- ------- ------
BALANCE AT DECEMBER 31, 1994.......... 86,534,549 1 1,701 (595) 1,107
Net income.......................... 86 86
Revaluation capital................. 1 1
Common stock dividends declared..... (18) (18)
Common stock reacquired............. (2,142)
Common stock issued................. 1,435,420 33 33
Common stock reissued............... 5,120
---------- -- -- ------- ------- ------
BALANCE AT MARCH 31, 1995............. 87,972,947 $1 $1 $ 1,734 $(527) $1,209
========== ==== ======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE> 146
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1: CORPORATE STRUCTURE
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the Lower
Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers'
customer base includes a mix of residential, commercial and diversified
industrial customers, the largest of which is the automotive industry.
Enterprises is engaged in several non-utility energy-related businesses
including: 1) oil and gas exploration and production, 2) development and
operation of independent power production facilities, 3) gas marketing services
to utility, commercial and industrial customers and 4) storage and transmission
of natural gas.
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation: The consolidated financial statements include CMS
Energy, Consumers and Enterprises and their wholly owned subsidiaries. CMS
Energy uses the equity method of accounting for investments in its companies and
partnerships where it has more than a 20% but less than a majority ownership
interest and includes these results in operating income. For the three months
ended periods March 31, 1995 and March 31, 1994 equity earnings were $14 million
and $6 million, respectively. For the years ended December 31, 1994, 1993 and
1992, equity earnings (losses) were $34 million, $17 million, and $(6) million,
respectively.
Gas Inventory: Consumers uses the weighted average cost method for valuing
working gas inventory. Cushion gas, which is gas stored to maintain reservoir
pressure for recovery of working gas, is recorded in the appropriate gas utility
plant account. Consumers stores gas inventory in its underground storage
facilities.
Maintenance, Depreciation and Depletion: Property repairs and minor
property replacements are charged 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% for 1994 and
3.4% for 1993 and 1992. The composite rate for gas utility plant was 4.2% for
1994, 4.4% for 1993 and 4.3% for 1992.
CMS NOMECO follows the full-cost method of accounting and, accordingly,
capitalizes its exploration and development costs, including the cost of
non-productive drilling and surrendered acreage, on a country-by-country basis.
The capitalized costs in each cost center are being amortized on an overall
units-of-production method based on total estimated proven oil and gas reserves.
The composite rates for Consumers' common property, CMS NOMECO's other
property, and other property of CMS Energy and its subsidiaries were 4.3% in
1994, 4.5% in 1993 and 4.7% in 1992.
New Accounting Standards: In December 1994, the American Institute of
Certified Public Accountants issued Statement of Position 94-6, Disclosure of
Certain Significant Risks and Uncertainties, effective for 1995 year-end
financial statements. CMS Energy does not believe that it will be significantly
affected by the statement, which requires disclosures about the nature of a
company's operations and the use of estimates in financial statements.
In March 1995, the FASB issued SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement,
which is effective for 1996 financial statements, requires that an asset be
reviewed for impairment whenever events indicate that the carrying amount of an
asset may not be recoverable. The statement also requires that a loss be
recognized whenever a regulator excludes a portion of an asset's cost from a
company's rate base. CMS Energy is continuing to study SFAS 121, but does not
expect the application of this statement to have a material impact on its
financial position or results of operations. For other recent accounting
standards regarding financial instruments, see Note 8.
F-30
<PAGE> 147
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 federal law, the DOE is
responsible for permanent disposal of spent nuclear fuel at costs to be paid by
affected utilities. However, in 1994, the DOE asserted that it does not have a
legal obligation to accept spent nuclear fuel without an operational repository.
The DOE is exploring options to offset the costs incurred by nuclear utilities
to store spent nuclear fuel on site. For fuel burned after April 6, 1983,
Consumers charges disposal costs to nuclear fuel expense, recovers it through
electric rates and remits it to the DOE quarterly. Consumers elected to defer
payment for disposal of spent nuclear fuel burned before April 7, 1983, until
the spent fuel is delivered to the DOE, which was originally scheduled to occur
in 1998. At December 31, 1994, Consumers has recorded a liability to the DOE of
$95 million, including interest. Consumers has been recovering through electric
rates the amount of this liability, excluding a portion of interest.
Nuclear Plant Decommissioning: Consumers collects estimated costs to
decommission its two nuclear plants through a monthly surcharge to electric
customers which currently totals $45 million annually. On March 1, 1995,
Consumers filed updated decommissioning estimates with the MPSC which increased
the estimated decommissioning costs for Big Rock Point nuclear power plant
located near Charlevoix, Michigan ("Big Rock"), to $290 million from $221
million and for Palisades to $502 million from $423 million (in 1994 dollars).
The increase in the estimated decommissioning costs principally reflects the
unavailability of low-and high-level radioactive waste disposal facilities.
Amounts collected from electric retail customers and deposited in trusts
(including trust earnings) are credited to accumulated depreciation. To meet NRC
decommissioning requirements, Consumers prepared 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. Consumers currently plans to maintain the facilities in protective
storage until radioactive waste disposal facilities are available. As a result,
the majority of decommissioning costs will be incurred significantly later than
originally anticipated. Consumers has asked the NRC for an exemption from its
requirement for assurance that the Big Rock decommissioning funds will at least
equal the adjusted "minimum certification" amount of $361 million (in 1994
dollars) since the site specific cost study for Big Rock demonstrates that a
lesser amount will cover the projected decommissioning costs for which the
assurance is required. When Big Rock's and Palisades' NRC licenses expire in
2000 and 2007, respectively, the trust funds are estimated to have accumulated
to $257 million and $686 million, respectively. At the time the plants are fully
decommissioned (in the years 2030 for Big Rock and 2046 for Palisades), the
trust funds are estimated to provide $1 billion for Big Rock and $2.1 billion
for Palisades including trust earnings over this period. Accordingly, Consumers
believes that the current decommissioning surcharge is sufficient. At December
31, 1994, Consumers had an investment in nuclear decommissioning trust funds of
$213 million. For information regarding reactor embrittlement at Palisades, see
Note 13.
Reclassifications: CMS Energy has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect the net income
or net losses for the years presented.
Related-Party Transactions: In 1994, 1993 and 1992, Consumers purchased $48
million, $52 million and $36 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
Partnership totaling approximately $22 million, $27 million and $21 million for
1994, 1993 and 1992, respectively. 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.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers also accrues or reduces revenue for any underrecovery or overrecovery
of electric power supply costs and natural gas costs by establishing a
corresponding asset or
F-31
<PAGE> 148
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
liability until it bills these unrecovered costs or refunds the excess
recoveries to customers following reconciliation hearings conducted before the
MPSC.
Unaudited Interim Information: Amounts as of, and for, and pertaining to
the three month periods ended March 31, 1995 and 1994 included herein are
unaudited. In the opinion of management, the unaudited financial information for
the three months ended March 31, 1995 and 1994 reflects all normal and
recurring adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows.
Utility Regulation: Consumers accounts for the effects of regulation under
SFAS 71, Accounting for the Effects of Certain Types of Regulation. As a result,
the actions of regulators affect when revenues, expenses, assets and liabilities
are recognized. Consumers' regulatory assets and liabilities are described in
Note 17.
Other: For significant accounting policies regarding income taxes, see Note
5; for pensions and other postretirement benefits, see Note 10; and for cash
equivalents, see Note 15.
3: 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. At December 31, 1994,
Consumers, through its subsidiaries, held the following assets related to the
MCV: 1) CMS Midland Inc. ("CMS Midland") owned a 49% general partnership
interest in the MCV Partnership; and 2) CMS Holdings held through the FMLP a 35%
lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' obligation for
purchase of contract capacity from the MCV Partnership under the PPA was 1,132
MW in 1994 and increased to a maximum amount of 1,240 MW in 1995. Prior to 1993,
the MPSC allowed Consumers to recover costs of power purchased from the MCV
Partnership at levels significantly less than Consumers paid. In March 1993, the
MPSC approved, with modifications, a settlement proposal which allowed Consumers
to recover substantially all of the payments for its ongoing purchase of 915 MW
of contract capacity effective January 1993. Capacity and energy purchases from
the MCV Partnership above the 915 MW level can be utilized to satisfy customers'
power needs but the MPSC would determine the levels of recovery from retail
customers at a later date. The Settlement Order also provides Consumers the
right to remarket to third parties the remaining contract capacity. At the
request of the MPSC, the MCV Partnership confirmed that it did not object to the
Settlement Order. ABATE and the Attorney General have appealed the Settlement
Order to the Court of Appeals.
The PPA provides that Consumers is to pay to the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge
and a variable energy charge which is based primarily on Consumers' average cost
of coal consumed. The Settlement Order permits Consumers to recover capacity
charges averaging 3.62 cents per kWh for 915 MW of capacity and the prescribed
energy charges associated with the scheduled deliveries within certain hourly
availability limits, whether or not those deliveries are scheduled on an
economic basis. For all economic energy deliveries above the availability limits
to 915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment in
addition to the variable energy charge.
In 1992, Consumers recognized an after-tax loss of $343 million which was
the present value of an undiscounted after-tax loss of $789 million, based on
Consumers' estimated future underrecoveries of power costs under the PPA as a
result of the Settlement Order. This loss was based, in part, on management's
assessment of the future availability of the MCV Facility, and the effect of the
future power market on the amount, timing and price at which various increments
of the capacity, above the MPSC authorized level, could be resold. Additional
losses may occur if actual future experience materially differs from the 1992
estimates. As anticipated in 1992, Consumers continues to experience cash
underrecoveries associated with the Settlement Order. These after-tax cash
underrecoveries, including fixed energy charges which were being
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
escrowed (in connection with a dispute with the MCV Partnership discussed
below), were $24 million for the three months ended March 31, 1995, $61 million
in 1994 and $59 million in 1993. If Consumers is unable to sell any capacity
above the current MPSC-authorized level, future additional after-tax losses and
after-tax cash underrecoveries would be incurred. Consumers estimates its future
after-tax cash underrecoveries and possible losses for 1995 and for the next
four years if none of the additional capacity is sold are shown in the table
below.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(AFTER-TAX, IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Expected cash underrecoveries.................... $60 $56 $55 $ 8 $ 9
Possible additional underrecoveries and
losses(a)...................................... $20 $20 $22 $72 $72
</TABLE>
- -------------------------
(a) If unable to sell any capacity above the MPSC's authorized level.
At March 31, 1995 and December 31, 1994, the after-tax, present value of
the Settlement Order liability totaled $253 million and $272 million,
respectively. The reduction in the Settlement Order liability during the first
quarter of 1995 reflects after-tax cash underrecoveries of $24 million,
partially offset by after-tax accretion expense of $5 million. The undiscounted
after-tax amount associated with the liability totaled $653 million at March 31,
1995.
In connection with the MPSC's approval of the settlement proposal discussed
above, Consumers and the MCV Partnership engaged in arbitration under the PPA
regarding the payment of certain fixed energy charges. In January 1995, the
arbitrator ruled in favor of Consumers' interpretation of the PPA and found that
Consumers was entitled to the immediate return of an estimated $22 million,
representing the fixed energy amounts for which Consumers did not receive full
cost recovery during the years prior to the Settlement Order (1990 - 1992).
Consumers had escrowed approximately $16 million of this amount. The arbitrator
postponed the return of payments for 1993 and 1994 because the Settlement Order
is still subject to pending appeals. The amount under dispute in 1994 is
approximately $9 million and increases each year thereafter, averaging
approximately $17 million per year over the life of the contract. Consumers
believes it is premature to recognize any current year earnings benefit from
this award until the remaining amount of MCV capacity is sold and/or the market
for the capacity is confirmed.
In May 1994, Consumers was notified by the MCV that it was initiating
further arbitration proceedings under the PPA to determine whether the energy
charge paid to the MCV is being properly calculated. Consumers believes that its
calculation of the energy charge is correct. The amount in dispute, which
relates to the period beginning in 1990 and continuing through the term of the
PPA, has been estimated by the MCV Partnership to total $6 million annually. An
arbitrator has been selected, arbitration hearings have commenced and a ruling
is expected in the third quarter of 1995. Consumers cannot predict the outcome
of this arbitration.
In 1994, the lessors of the MCV Facility filed a lawsuit against CMS
Energy, Consumers and CMS Holdings, alleging breach of contract, breach of
fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV
Partnership's failure to object to the Settlement Order in light of Consumers'
interpretation of the Settlement Order, which is the subject of the arbitration
between the MCV Partnership and Consumers discussed above. The action alleged
damages in excess of $1 billion and sought injunctive relief relative to
Consumers' payments of the fixed energy charges. In February 1995, after the
arbitrator's decision, the lessors voluntarily withdrew this lawsuit.
In July 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility. Additionally, in
February 1995, Consumers agreed to pay $15 million to terminate a power purchase
agreement with a 44 MW wood and chipped tire facility. Consumers plans to seek
MPSC approval to substitute less expensive contract capacity from the MCV
Facility which Consumers is currently not authorized to recover from retail
customers. This proposed substitution of capacity would start in late
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1996, the year the coal-fired cogeneration facility was scheduled to begin
operations. The capacity substitution represents significant savings to
Consumers' customers, compared to the cost approved by the MPSC for similar
facilities. As a result, Consumers has recorded a regulatory asset of $45
million ($30 million in 1994), which it believes will ultimately be recoverable
in rates. In April 1995, an ALJ issued a proposal for decision related to the
1995 PSCR case that agreed with objections, raised by certain parties, as to the
inclusion of the 65 MW of capacity substitution as part of the five year
forecast included in plan cases. Although recovery of the costs relating to the
substitution is not being requested in this case, the ALJ concluded that
additional capacity should be competitively bid and recommended that the MPSC
state in its order that cost recovery for substituting capacity absent a
competitive bid is unlikely to be approved.
MCV-related PSCR Matters: Consistent with the terms of the 1993 Settlement
Order, Consumers withdrew its appeals of various MPSC orders issued in
connection with several PSCR cases. Consumers also agreed not to appeal any
MCV-related issues raised in future orders for these plan cases and related
reconciliations to the extent those issues are resolved by the Settlement Order.
In March 1994, the MPSC issued an order in the PSCR reconciliation case for 1992
confirming Consumers' recovery for the purchase of 840 MW from the MCV in
accordance with the MPSC plan case order and allowing recovery for the purchase
of power above 840 MW based on replacement power costs. The MPSC subsequently
confirmed the recovery of MCV-related costs consistent with the Settlement Order
as part of the 1993 and 1994 plan case orders. ABATE or the Attorney General has
appealed these plan case orders to the Court of Appeals.
4: RATE MATTERS
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. The order provides Consumers with
higher revenues associated with increased expenditures primarily related to
capital additions, operation and maintenance, postretirement benefits, and the
continuation of certain DSM programs. The MPSC order generally supported
Consumers' rate design proposal and reduced the level of subsidization of
residential customers by commercial and industrial customers by allocating $40
million of the rate increase to residential customers.
In November 1994, Consumers filed a request with the MPSC which could
increase its retail electric rates in a range from $104 million to $140 million,
depending upon the ratemaking treatment afforded sales losses to competition and
the treatment of the MCV contract capacity above 915 MW. The request includes a
proposed increase in Consumers' authorized rate of return on equity to 13% from
11.75%, recognition of increased expenditures related to continuing construction
activities and capital additions aimed at maintaining and improving system
reliability and increases in financing costs. Consumers has requested that the
MPSC eliminate the remaining subsidization of residential rates in a two-step
adjustment, eliminate all DSM expenditures after April 1995 and allow recovery
of all jurisdictional costs associated with the proposed settlement of the
proceedings concerning the operation of the Ludington pumped storage plant
("Ludington") (see Note 12). In response to Consumers' requested rate increase,
the MPSC staff initially recommended a final annual increase of $45 million to
Consumers' base rates, as well as suggested several options for cost recovery of
325 MW of MCV capacity. However, on motions filed by ABATE and the Attorney
General, an ALJ struck portions of the MPSC staff's testimony relating to the
cost of this capacity and the MPSC staff subsequently withdrew several other
portions of its testimony. As a result, the MPSC staff's recommendations do not
currently include a rate design. The MPSC staff recommendations remaining in the
case proposed a different sales forecast than Consumers, as well as a 12% return
on common equity and a lower equity ratio than that included in Consumers'
proposed capital structure. In May 1995, the MPSC affirmed the ALJ's decision to
strike the MPSC staff's testimony and stated that the remaining 325 MW of MCV
capacity will be considered only as part of a competitive capacity solicitation,
and not as part of the electric rate case.
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers (see Electric Utility Issues
- -- Special Rates discussion in CMS Energy's Management's Discussion and Analysis
of Financial Condition and Results of Operations).
In January 1995, Consumers filed a request with the MPSC, seeking to adjust
its depreciation rates and to reallocate certain portions of its electric
production plant to transmission accounts, which if approved would result in a
net decrease in depreciation expense of $7 million for ratemaking purposes. In
April 1995, the MPSC staff filed its testimony in the proceeding. For further
information see Electric Rate Case discussion in CMS Energy's Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Abandoned Midland Project: In 1991, the MPSC ordered that Consumers could
collect $35 million pretax annually for the next 10 years for its abandoned
nuclear project. Consumers is amortizing the abandoned assets against current
income over the recovery period using an interest method. Consumers was not
permitted to earn a return on the portion of the abandoned investment for which
the MPSC was allowing recovery. The loss of a return on the amount being
recovered is reflected in earnings as accretion income. An after-tax total of
$27 million remains to be included in accretion income through April 2001. In
December 1994, the Court of Appeals upheld the MPSC orders allowing recovery of
the abandoned investment. Consumers, ABATE and the Attorney General have filed
applications for leave to appeal this decision with the Michigan Supreme Court.
Management cannot predict the outcome of this issue.
Electric DSM: As a result of settlement discussions regarding DSM and an
MPSC order, Consumers agreed to spend $65 million over two years on DSM
programs. Consumers completed the customer participation portion of these DSM
programs in 1993. Based on the criteria set out in the DSM settlement agreement
approved by the MPSC, Consumers has achieved all the agreed-upon objectives.
Consumers believes that the MPSC will ultimately allow collection of $11 million
of incentive revenue. Accordingly, during 1994, Consumers recognized $11 million
in revenue, related to its DSM program. In April 1995, a proposal for decision
issued by the ALJ conducting the proceedings recommended that Consumers be
awarded the full $11 million incentive and that Consumers' current DSM programs
continue through 1996. A final order from the MPSC, authorizing Consumers to
collect the $11 million incentive, is expected by mid-1995.
In 1994, as part of Consumers' electric rate case, the MPSC authorized
Consumers to recover DSM expenditures which exceeded $65 million and to continue
certain programs ($30 million annually) in 1994 through 1996. Consumers is
deferring program costs and amortizing the costs over the period these costs are
being recovered from customers in accordance with an MPSC accounting order. The
unamortized balance of deferred costs totaled $70 million at March 31, 1995 and
$71 million at December 31, 1994 and 1993.
PSCR Issues: In November 1994, an ALJ issued a proposal for decision in the
1993 PSCR reconciliation proceeding that addressed issues related to an extended
refueling and maintenance outage that began at Palisades in June 1993 and ended
in November 1993. Consumers conceded that one day of the 1993 outage was
unnecessary, while the ALJ found that 22 days of the outage were the result of
imprudent actions and recommended a disallowance of $4 million of replacement
power costs. In February 1995, the MPSC issued a final order in the 1993 PSCR
reconciliation proceeding that addressed the extended refueling and maintenance
outage at Palisades in 1993. The order disallowed $4 million of replacement
power costs. Consumers accrued a loss for this issue in 1994.
The Energy Policy Act of 1992 ("Energy Act") imposes an obligation on the
utility industry to decommission DOE uranium enrichment facilities. In 1994, the
MPSC authorized Consumers to recover through electric rates its required
decommissioning payments to the DOE. At December 31, 1994, Consumers' remaining
liability and regulatory asset each totaled $25 million.
Gas Rates: In July 1994, the MPSC approved an agreement previously reached
between the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits against 1994 earnings. The
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
agreement was reached in response to a claim that gas utility business earnings
for 1993 were excessive. This charge against earnings partially offsets savings
related to reduced state property taxes. The agreement also provides for an
additional $4 million of postretirement benefit costs to be charged against 1995
earnings instead of being deferred. As part of the agreement, Consumers filed a
gas rate case in December 1994. Consumers requested an increase in its gas rates
of $21 million annually. The request, among other things, incorporates cost
increases, including costs for postretirement benefits and costs related to
Consumers' former manufactured gas plant sites. Consumers requested that the
MPSC authorize a 13% rate of return on equity, instead of the currently
authorized rate of 13.25%. In June 1995, the MPSC staff filed its position in
this case, recommending an $11 million rate decrease. The MPSC staff's
recommendation included a lower rate base, a lower return on common equity, a
revised capital structure and a different sales forecast than Consumers had
projected. Consumers expects an MPSC decision in early 1996. Consumers' most
recent rate filing for its electric utility business resulted in an approved
rate of return on equity of 11.75%.
GCR Issues: In 1993, the MPSC provided that the price payable to certain
intrastate gas producers by Consumers be reduced. As a result, Consumers was not
allowed to recover $13 million of costs. Consumers accrued a loss prior to 1993
in excess of the disallowed amount. In March 1995, management concluded that it
is unlikely that the intrastate producers' pending appeals of the MPSC order
would be successful and accordingly reversed $23 million (pretax), which
represented the portion of the loss in excess of the disallowed amount. The
Court of Appeals affirmed the MPSC's decision in June 1995.
In April 1995, an ALJ issued a proposal for decision in a proceeding that
had been initiated by Consumers regarding a gas supply contract pricing dispute
with certain intrastate producers. The ALJ agreed with Consumers that certain
market based pricing provisions should, on a prospective basis, limit the price
paid by Consumers under the three agreements at issue. The ALJ also found that
the market based pricing provision required specific MPSC approval before
Consumers could apply those prices to purchases under the agreements and found
that such approval had not previously been given. Consumers does not agree with
the ALJ's findings and conclusions on this point and filed exceptions to the
proposal for decision for the MPSC's consideration. If the MPSC issues an order
adopting the recommendations of the ALJ, the market based provisions upon which
Consumers had paid for gas purchased under these agreements will not be
effective prior to such an MPSC order. If the producers pursue a court action
for amounts owed for previously purchased gas, Consumers could be liable for as
much as $44 million (excluding any interest) under the producers' theories.
Consumers believes the producers' position is without merit and intends to
vigorously oppose any claims they may raise but cannot predict the outcome of
this matter.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and
certain other parties, which resolved numerous claims and proceedings concerning
Trunkline liquified natural gas costs. The settlement represents significant gas
cost savings for Consumers and its customers in future years. In 1992, Consumers
recorded a liability and regulatory asset for the principal amount of payments
due Trunkline. In 1993, the MPSC approved a separate settlement agreement
providing full recovery of the liability over a five-year period. At December
31, 1994, the remaining liability and regulatory asset were $85 million.
Estimated losses for certain contingencies discussed in this note have been
accrued. Resolution of these contingencies is not expected to have a material
impact on the financial statements.
5: INCOME TAXES
CMS Energy and its subsidiaries (including Consumers) file a consolidated
federal income tax return. Income taxes are generally allocated based on each
subsidiary's separate taxable income. CMS Energy and Consumers practice full
deferred tax accounting for temporary differences.
CMS Energy uses 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 can be carried forward
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1993 1992
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Current federal income taxes........................... $ 36 $ 19 $ 39
Deferred income taxes.................................. 66 67 (177)
Deferred income taxes -- tax rate change............... -- (1) --
Deferred ITC, net...................................... (10) (10) (8)
---- ---- -----
$ 92 $ 75 $(146)
==== ==== =====
Operating.............................................. $104 $ 92 $ 22
Other.................................................. (12) (17) (168)
---- ---- -----
$ 92 $ 75 $(146)
==== ==== =====
</TABLE>
The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
------- -------
(IN MILLIONS)
<S> <C> <C>
Property................................................. $ (601) $ (580)
Unconsolidated investments............................... (246) (194)
Postretirement benefits (Note 10)........................ (179) (180)
Abandoned Midland project (Note 4)....................... (51) (57)
Employee benefit obligations (includes postretirement
benefits of $176 and $182 (Note 10).................... 205 204
AMT carryforward......................................... 154 110
MCV power purchases -- settlement (Note 3)............... 146 165
ITC carryforward (expires 2005).......................... 37 48
Other.................................................... (13) (8)
------- -------
$ (548) $ (492)
======= =======
Gross deferred tax liabilities........................... $(1,661) $(1,571)
Gross deferred tax assets................................ 1,113 1,079
------- -------
$ (548) (492)
======= =======
</TABLE>
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The actual income tax expense (benefit) differs from the amount computed by
applying the statutory federal tax rate to income before income taxes as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1994 1993 1992
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Net income (loss) before preferred dividends............ $203 $166 $(286)
Income tax expense (benefit)............................ 92 75 (146)
---- ---- -----
295 241 (432)
Statutory federal income tax rate....................... x 35% x 35% x 34%
---- ---- -----
Expected income tax expense (benefit)................... 103 84 (147)
Increase (decrease) in taxes from:
Capitalized overheads previously flowed through......... 5 5 5
Differences in book and tax depreciation not previously
deferred.............................................. 6 6 9
ITC amortization and utilization........................ (9) (11) (11)
Nonconventional fuel tax credit......................... (8) (6) (4)
Other, net.............................................. (5) (3) 2
---- ---- -----
$ 92 $ 75 $(146)
==== ==== =====
</TABLE>
6: SHORT-TERM FINANCINGS
In 1994, the FERC granted Consumers' request for authorization to issue or
guarantee up to $900 million of short-term debt through December 31, 1996.
Consumers has an unsecured $470 million facility and unsecured, committed lines
of credit aggregating $185 million that are used to finance seasonal working
capital requirements. At December 31, 1994, $170 million and $166 million was
outstanding under the facilities at weighted average interest rates of 6.3% and
7.3%. At March 31, 1995, a total of $133 million was outstanding under these
facilities. Consumers has an established $500 million trade receivables purchase
and sale program. At March 31, 1995, December 31, 1994 and 1993, receivables
sold under the agreement totaled $300 million, $275 million and $285 million,
respectively. Accounts receivable and accrued revenue in the Consolidated
Balance Sheets have been reduced to reflect receivables sold.
7: CAPITALIZATION
CMS ENERGY
Capital Stock: On March 21, 1995, CMS Energy received shareholders'
approval to amend its Articles of Incorporation and authorize a new class of
Common Stock of CMS Energy. This new class of Common Stock, designated Class G
Common Stock, is intended to reflect the separate performance of the gas
distribution, storage and transportation businesses conducted by Consumers and
MGS (such businesses, collectively, will be attributed to the Consumers Gas
Group). The existing CMS Energy Common Stock will continue to be outstanding and
is intended to reflect the performance of all of the businesses of CMS Energy
and its subsidiaries, including the business of the Consumers Gas Group, except
for the interest in the Consumers Gas Group attributable to the outstanding
shares of the Class G Common Stock.
Prior to the approval of the Charter Amendment on March 21, 1995, CMS
Energy was permitted to issue up to 250 million shares of common stock at $.01
par value and up to 5 million shares of preferred stock at $.01 par value. The
filing of the Restated Articles of Incorporation with the Michigan Department of
Commerce has increased the number of authorized shares of capital stock from 255
million shares to 320 million shares consisting of 250 million shares of CMS
Energy Common Stock, par value $.01 per share,
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
60 million shares of Class G Common Stock, no par value, and 10 million shares
of Preferred Stock, par value $.01 per share.
Under the Credit Facility and the Indentures pursuant to which the GTNs are
issued, which currently contain CMS Energy's most restrictive dividend
covenants, CMS Energy is permitted to pay, as dividends on its common stock, an
amount not to exceed the total of its net income, as defined in the Indentures,
and any proceeds received from the issuance or sale of common stock as defined
in the agreements and $120 million, provided there exists no event of default
under the terms of the Credit Facility or GTNs. The same formula applies to
limits available to repurchase or reacquire CMS Energy stock for either the
payment of dividends or repurchase of stock.
In each of October 1994 and June 1995, CMS Energy filed a
shelf-registration statement for the offering and issuance of up to 2 million
shares and 3 million shares of common stock, respectively. As described in the
Commission filing, the shares may be offered and issued in connection with
acquisitions of energy-related business and assets. In October 1993, CMS Energy
issued an additional 4.6 million shares of common stock at a price of $26 5/8.
The net proceeds of $119 million were used to reduce existing debt and for
general corporate purposes.
Long-Term Debt: In October 1992, CMS Energy received proceeds of $130
million and $219 million from the issuance of Series A Senior Deferred Coupon
Notes due October 1, 1997 ("Series A Notes") and Series B Senior Deferred Coupon
Notes due October 1, 1999 ("Series B Notes") (collectively, the "Notes"),
respectively. Interest will accrue and increase the principal to the face value
of the Notes through October 1, 1995. After such date, interest will be paid
semi-annually commencing April 1, 1996, at a rate of 9.5% per annum for the
Series A Notes and 9.875% per annum for the Series B Notes. As of January 31,
1995, $328 million of Notes was outstanding.
In January 1994, CMS Energy filed a shelf-registration statement with the
SEC permitting the issuance and sale of up to $250 million of GTNs. The net
proceeds are being used to reduce the amount of Notes outstanding and for
general corporate purposes. The GTNs may be offered from time to time on terms
to be determined at the time of sale. As of January 31, 1995, $99 million of
GTNs was outstanding at a weighted average interest rate of 7.5% and the
principal amount of Series B Notes outstanding was reduced by $114 million to a
balance of $167 million.
In July 1994, CMS Energy refinanced its Secured Credit Facility with a new
$400 million Credit Facility and extended the termination date to June 30, 1997.
As of December 31, 1994, $196 million was outstanding at a weighted average
interest rate of 6.8% leaving $204 million available at December 31, 1994.
CONSUMERS
Capital Stock: During 1994, Consumers issued and sold 8 million shares of
Class A Preferred Stock (cumulative, without par value) with an annual dividend
of $2.08. Net proceeds to Consumers were $193 million. The stock is redeemable
at the option of Consumers, on or after April 1, 1999, at a redemption price of
$25 per share plus accrued dividends.
At December 31, 1992, Consumers effected a quasi-reorganization in which
Consumers' accumulated deficit of $574 million was eliminated against other
paid-in capital. This action had no effect on CMS Energy's consolidated
financial statements.
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 Mortgage
Indenture, Articles and the need for regulatory approvals in compliance with
appropriate state and federal law. In the first quarter of 1994, Consumers
redeemed first mortgage bonds totaling $101 million.
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
These redemptions completed Consumers' commitment to the MPSC, under a 1993
financing order to refinance certain long-term debt.
Long-Term Bank Debt: In 1994, subsequent to MPSC authorization, Consumers
entered into a new $400 million unsecured, variable rate, five-year term loan
and subsequently used the proceeds to refinance its then existing long-term,
variable rate, credit agreement and to reduce short-term borrowings. At December
31, 1994, the new loan carried a weighted average interest rate of 6.5%. In
1993, Consumers entered into an interest rate swap agreement, exchanging
variable-rate interest for a fixed-rate interest of 5.2% on $250 million of its
long-term bank debt. The swap agreement hedges the variable rate exposure
associated with Consumers' long-term bank debt and had the effect of increasing
the weighted average interest rate to 5.3% from 5.0% for the 12-month period
ended December 31, 1994. The current swap agreement began to decrease in
February 1995 and will terminate by May 1996. In February 1995, Consumers
entered into another hedging agreement for $100 million to reduce its exposure
to variable rate interest associated with its long-term bank debt.
Other: Consumers has a total of $131 million of long-term tax-exempt
pollution control revenue bonds ("PCRBs") outstanding (secured by irrevocable
letters of credit and first mortgage bonds) with a weighted average interest
rate of 4.8% as of December 31, 1994.
In 1994, Consumers received a $100 million equity investment from CMS
Energy. The investment was consistent with CMS Energy's plan to improve
Consumers' capital structure and was recognized and included in the
capitalization structure employed by the MPSC as part of Consumers' most recent
electric rate order.
In April 1995, the MPSC issued an order authorizing Consumers to issue and
sell up to $300 million of intermediate and/or long-term debt and $100 million
of preferred stock or subordinate debentures.
CMS NOMECO
As of March 31, 1995 and December 31, 1994, CMS NOMECO had total debt
outstanding of $113 million and $129 million, respectively. Senior serial notes
amounting to $28 million and $36 million with a weighted average interest rate
of 9.4% were outstanding from a private placement. CMS NOMECO's existing credit
line was increased from $110 million at December 31, 1994 to $130 million at
March 31, 1995. At March 31, 1995 and December 31, 1994, $82 million and $89
million was outstanding at weighted average interest rates of 7.4% and 7.3%,
respectively.
In February 1995, CMS Energy acquired Walter for approximately $46 million
subject to post-closing adjustments. Walter was merged with a wholly-owned
subsidiary of CMS NOMECO. In connection with the acquisition, CMS NOMECO
remitted $24 million of CMS Energy common stock and assumed $12 million of
project financing debt.
CMS GENERATION
In May 1994, MOAPA Energy Limited Partnership ("MOAPA"), a wholly owned
affiliate of CMS Generation, redeemed $22 million of Clark County, Nevada
tax-exempt bonds. The bonds had been included in current maturities on the
balance sheet and the funds held in a trust account had been included as other
current assets. The bonds were issued in 1990 for the purpose of providing
partial funding for the development of a proposed tires-to- energy solid waste
disposal and resource recovery facility which was never constructed.
In January 1995, CMS Generation entered into a one-year $118 million bridge
credit facility, for the acquisition of HYDRA-CO. CMS Energy is currently
evaluating permanent financing options.
F-40
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8: 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 of long-term debt was $2.7 billion and $2.4 billion and the fair value of
long-term debt was $2.6 billion and $2.6 billion as of December 31, 1994 and
1993, respectively. 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 fair values of CMS Energy's off-balance-sheet financial instruments are
based on the amounts estimated to terminate or settle the instruments. The fair
value of interest rate swap agreements was $(5) million and $6 million and
guarantees/letters of credit outstanding were $123 million and $96 million as of
December 31, 1994 and 1993, respectively (see Note 7).
Effective January 1, 1994, CMS Energy adopted SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities, which did not materially
impact CMS Energy's financial position or results of operations.
9: EXECUTIVE INCENTIVE COMPENSATION
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
common stock of CMS Energy, stock options and stock appreciation rights may be
granted to key employees based on their contributions to the successful
management of CMS Energy and its subsidiaries. The plan reserves for award not
more than 2% of CMS Energy's common stock outstanding on January 1 each year,
less the number of shares of restricted common stock awarded and of common stock
subject to options granted under the plan during the immediately preceding four
calendar years. Any forfeitures are subject to award under the plan. At December
31, 1994, awards of up to 402,316 shares of common stock may be issued.
Restricted shares of common stock are outstanding shares with full voting
and dividend rights. Performance criteria were added in 1990 based on CMS
Energy's total return to shareholders. Shares of restricted common stock cannot
be distributed until they are vested and the performance objectives are met.
Further, the restricted stock is subject to forfeiture if employment terminates
before vesting. If key employees exceed performance objectives, the plan will
allow additional awards. Restricted shares vest fully if control of CMS Energy
changes, as defined by the plan. At December 31, 1994, 314,856 shares of the
330,356 restricted shares outstanding are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an
earlier plan approved by shareholders, remains in effect until all authorized
options are granted or September 25, 1995. At December 31, 1994, options for
43,000 shares remained to be granted.
Under both plans, for stock options and stock appreciation rights, the
exercise price on each grant date equaled the closing market price on the grant
date. Options are exercisable upon grant and expire up to
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10 years and one month from date of grant. The status of the restricted stock
granted under the Performance Incentive Stock Plan and options granted under
both plans follows:
<TABLE>
<CAPTION>
RESTRICTED
STOCK OPTIONS
---------- ----------------------------
NUMBER OF NUMBER PRICE
SHARES OF SHARES PER SHARE
---------- --------- ---------------
<S> <C> <C> <C>
Outstanding at January 1, 1992............ 275,063 1,291,091 $ 7.13 - $34.25
Granted................................. 101,000 215,000 $17.13 - $18.00
Exercised or Issued..................... (37,422) (21,000) $13.00 - $16.00
Canceled................................ (15,375) (50,000) $20.50 - $33.88
--------- --------- ---------------
Outstanding at December 31, 1992.......... 323,266 1,435,091 $ 7.13 - $34.25
Granted................................. 132,000 249,000 $25.13 - $26.25
Exercised or Issued..................... (54,938) (152,125) $ 7.13 - $21.13
Canceled................................ (84,141) (33,000) $20.50 - $33.88
--------- --------- ---------------
Outstanding at December 31, 1993.......... 316,187 1,498,966 $ 7.13 - $34.25
Granted................................. 133,500 273,000 $21.25 - $22.38
Exercised or Issued..................... (39,361) (158,300) $ 7.13 - $22.00
Canceled................................ (79,970) (123,000) $26.25 - $33.88
--------- --------- ---------------
Outstanding at December 31, 1994.......... 330,356 1,490,666 $ 7.13 - $34.25
========= ========= ===============
</TABLE>
10: RETIREMENT BENEFITS
Postretirement Benefit Plans Other Than Pensions: 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 18). CMS Energy's non-utility subsidiaries expensed their accumulated
transition obligation liability. The amount of such transition obligation is not
material to the presentation of the consolidated financial statements or
significant to CMS Energy's total transition obligation. Both the MPSC and FERC
have generally allowed recovery of SFAS 106 costs. The MPSC's generic order
allows utilities three years to seek recovery of costs. In May 1994, the MPSC
authorized recovery of the electric utility portion of these costs over 18
years. In December 1994, Consumers requested recovery of the gas utility portion
of these costs (see Note 4). CMS Energy funds the benefits using external
Voluntary Employee Beneficiary Associations. Funding of the health care benefits
coincides with Consumers' recovery in rates. A portion of the life insurance
benefits have previously been funded.
Retiree health care costs at December 31, 1994, are based on the assumption
that costs would increase 10% in 1995, then decrease gradually to 6% in 2004 and
thereafter. The health care cost trend rate assumption significantly affects the
amounts reported. For example, a 1 percentage point increase in each year's
estimated health care cost assumption would increase the accumulated
postretirement benefit obligation as of December 31, 1994 by $85 million and the
aggregate of the service and interest cost components of net periodic
postretirement benefit costs for 1994 by $10 million.
For the years ended December 31, 1994, 1993 and 1992, the weighted average
discount rate was 8%, 7.25% and 8%, respectively, and the expected long-term
rate of return on plan assets was 7%, 8.5% and 8.5%, respectively. Net periodic
postretirement benefit cost for health care benefits and life insurance benefits
was $54 million in 1994, $51 million in 1993 and $49 million in 1992. The 1994,
1993 and 1992 cost was comprised of $13 million, $13 million and $10 million for
service plus $41 million, $38 million and $39 million for interest,
respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The funded status of the postretirement benefit plans is reconciled with
the liability recorded at December 31 as follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of estimated benefits
Retirees................................................... $ 338 $ 282
Eligible for retirement.................................... 44 54
Active (upon retirement)................................... 170 190
----- -----
Accumulated postretirement benefit obligation................ 552 526
Plan assets at fair value.................................... 36 4
----- -----
Projected postretirement benefit obligation in excess of plan
assets..................................................... (516) (522)
Unrecognized prior service cost.............................. (39) (39)
Unrecognized net loss........................................ 35 41
----- -----
Recorded liability........................................... $(520) $(520)
===== =====
</TABLE>
CMS Energy's postretirement health care plan is partially funded; the
accumulated postretirement benefit obligation for that plan is $536 million and
$514 million at December 31, 1994 and 1993, respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify under the SERP. SERP benefits, which are based on an employee's years of
service and earnings as defined in the SERP, are paid from a trust established
and funded in 1988. Because the SERP is not a qualified plan under the Internal
Revenue Code, earnings of the trust are taxable and trust assets are included in
consolidated assets. At December 31, 1994 and 1993, trust assets at cost (which
approximates market) were $19 million and $18 million, respectively, and were
classified as other non-current assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit
Pension Plan covers substantially all employees. The benefits are based on an
employee's years of accredited service and earnings, as defined in the plan,
during an employee's five highest years of earnings. Because the plan is fully
funded, no contributions were made for plan years 1992 through 1994.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Discount rate.......................................... 8.0% 7.25% 8.5%
Rate of compensation increase.......................... 4.5% 4.5% 5.5%
Expected long-term rate of return on assets............ 9.25% 8.75% 8.75%
</TABLE>
Net Pension Plan and SERP costs consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost......................................... $ 24 $ 19 $ 19
Interest cost........................................ 51 50 48
Actual return on plan assets......................... 21 (92) (36)
Net amortization and deferral........................ (85) 34 (20)
---- ---- ----
Net periodic pension cost............................ $ 11 $ 11 $ 11
==== ==== ====
</TABLE>
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The funded status of the Pension Plan and SERP reconciled to the pension
liability recorded at December 31 was:
<TABLE>
<CAPTION>
PENSION PLAN SERP
------------ ------------
1994 1993 1994 1993
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of estimated benefits
Vested.......................................................... $421 $471 $ 17 $ 16
Non-vested...................................................... 61 56 -- --
---- ---- ---- ----
Accumulated benefit obligation.................................... 482 527 17 16
Provision for future pay increases................................ 154 138 11 8
---- ---- ---- ----
Projected benefit obligation...................................... 636 665 28 24
Plan assets (primarily stocks and bonds, including $79 in 1994 and
$87 in 1993 in common stock of CMS Energy) at fair value........ 637 692 -- --
---- ---- ---- ----
Projected benefit obligation less than (in excess of) plan
assets.......................................................... 1 27 (28) (24)
Unrecognized net (gain) loss from experience different than
assumed......................................................... (35) (56) 5 8
Unrecognized prior service cost................................... 40 45 2 (1)
Unrecognized net transition (asset) obligation.................... (39) (44) 1 1
---- ---- ---- ----
Recorded liability................................................ $(33) $(28) $(20) $(16)
==== ==== ==== ====
</TABLE>
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.
11: LEASES
CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, aircraft, construction equipment, computer equipment, nuclear fuel and
buildings. Consumers' nuclear fuel capital leasing arrangement is scheduled to
expire in November 1996. The maximum amount of nuclear fuel that can be leased
increased during 1994 to $80 million. The lease provides for an additional
one-year extension 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 $59 million as of December 31, 1994. 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, 1994, were:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN MILLIONS)
<S> <C> <C>
1995......................................................... $ 50 $10
1996......................................................... 60 6
1997......................................................... 17 5
1998......................................................... 15 5
1999......................................................... 12 4
2000 and thereafter.......................................... 21 20
------ ---
Total minimum lease payments................................. 175 $50
======
Less imputed interest........................................ 24
------
Present value of net minimum lease payments.................. 151
Less current portion......................................... 43
------
Non-current portion.......................................... $ 108
=====
</TABLE>
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consumers recovers these 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 as of December
31, 1994, 1993 and 1992, were $10 million, $10 million and $15 million,
respectively.
Capital lease expenses for the years ended December 31, 1994, 1993 and 1992
were $43 million, $34 million and $47 million, respectively. Included in these
amounts for the years ended 1994, 1993 and 1992, are nuclear fuel lease expenses
of $21 million, $13 million and $17 million, respectively.
12: COMMITMENTS, CONTINGENCIES AND OTHER
Ludington Pumped Storage Plant: In 1994, Consumers, Detroit Edison, the
Attorney General, the DNR and certain other parties signed an agreement in
principle designed to resolve all legal issues associated with fish mortality at
Ludington. The proposed settlement allows for continued operation of the plant
through the end of its FERC license. Upon approval of the settlement agreement,
Consumers will transfer land (with an original cost of $9 million and a fair
market value in excess of $20 million) to the state of Michigan and the Great
Lakes Fishery Trust, make an initial payment of approximately $3 million and
incur approximately $1 million of expenditures related to recreational
improvements. Future annual payments of approximately $1 million are also
anticipated over the next 24 years and are intended to enhance the fishery
resources of the Great Lakes. The definitive settlement documents have been
completed and were filed with the appropriate Michigan courts and state and
federal agencies. The agreement is subject to the MPSC permitting Consumers to
recover all such settlement costs from electric customers, and approval by the
FERC.
The proposed settlement would resolve two lawsuits filed by the Attorney
General in 1986 and 1987 on behalf of the State of Michigan. In one, the state
sought $148 million (including $16 million of interest) for past injuries and
$89,000 per day for future injuries, reduced only upon installation of
"adequate" fish barriers and other changed conditions. Each year, a barrier net
would continue to be installed at Ludington by Consumers and Detroit Edison from
April to October. In the other lawsuit, the Attorney General sought to have
Ludington's bottomlands lease declared void.
Environmental Matters: Consumers is a so-called "Potentially Responsible
Party" at several sites being administered under Superfund. Although Superfund
liability is joint and several, along with Consumers, there are numerous
credit-worthy, potentially responsible parties with substantial assets
cooperating with respect to the individual sites. Based upon past negotiations,
Consumers estimates its total liability will average less than 4% of the
estimated total site remediation costs, and such liability is expected to be
less than $9 million. At March 31, 1995, Consumers has accrued a liability for
its estimated losses. Consumers and CMS Energy believe that it is unlikely that
their liability at any of the known Superfund sites, individually or in total,
will have a material adverse effect on their financial positions or results of
operations.
Under the Environmental Response Act, Consumers expects that it will
ultimately incur investigation and remedial action costs at a number of sites,
including some of the 23 sites that formerly housed manufactured gas plant
facilities, even those in which it has a partial or no current ownership
interest. Parties other than Consumers with current or former ownership
interests may also be considered liable for site investigations and remedial
actions. There is limited knowledge of manufactured gas plant contamination at
these sites at this time.
Consumers has prepared plans for remedial investigation/feasibility studies
for several of these former manufactured gas plant sites to define the nature
and extent of contamination at these sites and to determine which of several
possible remedial action alternatives, including no action, may be required
under the Environmental Response Act. The DNR has approved three of four plans
for remedial investigation/feasibility studies submitted by Consumers.
The findings for the first remedial investigation indicate that the
expenditures for remedial action at this site are likely to be minimal. However,
Consumers does not believe that a single site is representative of all of
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
the sites. Data available to Consumers and its continued internal review have
resulted in an estimate for all costs related to investigation and remedial
action for all 23 sites of between $48 million and $112 million. These estimates
are based on undiscounted 1994 costs. At March 31, 1995, Consumers has accrued a
liability of $48 million and established a regulatory asset for approximately
the same amount. Any significant change in assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements, could
impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994. Consumers and CMS
Energy believe that remedial action costs are recoverable in rates as the MPSC
in 1993 addressed the question of recovery of investigation and remedial action
costs for another Michigan gas utility as part of a gas rate case. In order to
be recoverable in rates, prudent costs must be approved in a rate case. Any
costs amortized in years prior to filing a rate case may not be recoverable. The
MPSC has approved similar deferred accounting requests by several other Michigan
utilities relative to investigation and remedial action costs. In June 1995, as
part of Consumers rate case, the MPSC staff recommended that the MPSC adopt the
same accounting and cost recovery previously provided to other Michigan
utilities. Consumers has initiated discussions with certain insurance companies
regarding coverage for some or all of the costs which may be incurred for these
sites.
The federal Clean Air Act contains provisions that limit emissions of
sulfur dioxide and nitrogen oxides and require enhanced emissions monitoring.
All of Consumers' coal-fueled electric generating units burn low-sulfur coal and
are presently operating at or near the sulfur dioxide emission limits which will
be effective in the year 2000. Beginning in 1995, certain coal-fueled generating
units will receive emissions allowances (all of Consumers' coal units will
receive allowances beginning in the year 2000). Based on projected emissions
from these units, Consumers expects to have excess allowances which may be sold
or saved for future use. The Clean Air Act's provisions required Consumers to
make capital expenditures totaling $25 million to install equipment at certain
generating units. Consumers estimates capital expenditures for in-process and
possible modifications at other coal-fired units to be an additional $50 million
by the year 2000. Final acid rain program nitrogen oxide regulations specifying
the controls to be installed at the other coal-fired units are not expected
earlier than 1996. Management believes that Consumers' annual operating costs
will not be materially affected.
Capital Expenditures: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries, DSM and new lease commitments, of
$932 million for 1995, $623 million for 1996 and $578 million for 1997. Capital
expenditures for 1995 include requirements of $201 million for acquisitions
which commenced in 1994 but did not close until 1995.
Commitments for Coal and Gas Supplies: Consumers has entered into coal
supply contracts with various suppliers for its coal-fired generating stations.
These contracts have expiration dates that range from 1995 to 2004. Consumers
contracts for approximately 60 - 70% of its annual coal requirements which in
1994 totaled $261 million (63% was under long-term contracts). Consumers
supplements its long-term contracts with spot-market purchases to fulfill its
coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that range from
1995 to 2003. Consumers contracts for approximately 70 - 80% of its annual gas
requirements which in 1994 totaled $662 million (83% was under long-term
contracts). Consumers supplements its long-term contracts with spot-market
purchases to fulfill its gas needs.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the MMCG
asked the Commission to revoke CMS Energy's exemption from registration under
PUHCA. In 1992, the MPSC filed a statement with the Commission recommending that
CMS Energy's current exemption be revoked and a new exemption be issued
conditioned upon certain reporting and operating requirements. If CMS Energy
were to lose its current
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
exemption, it would become more heavily regulated by the Commission; Consumers
could ultimately be forced to divest either its electric or gas utility
business; and CMS Energy could be restricted from conducting businesses that are
not functionally related to the conduct of its utility business as determined by
the Commission. CMS Energy is opposing this request and believes it will
maintain its current exemption from registration under PUHCA. The Commission has
not taken action on this matter.
Other: As of December 31, 1994 CMS Energy and Enterprises have guaranteed
up to $117 million in contingent obligations of unconsolidated affiliates of
Enterprises' subsidiaries.
CMS NOMECO has hedging arrangements which are used to reduce the risk of
price fluctuations for its spot sales of oil and gas. These arrangements limit
potential gains/losses from any future decrease/increase in the spot prices.
CMS NOMECO periodically enters into oil and gas price hedging arrangements
to mitigate its exposure to price fluctuations on the sale of crude oil and
natural gas. As of December 31, 1993, CMS NOMECO was party to gas price collar
contracts on 7.3 Bcf of gas for the delivery months of January through December
1994 at prices ranging from $2.05 to $2.30 per million British thermal units
("MMBtu"). Also, CMS NOMECO has contracts on 7.3 Bcf of gas for the delivery
months of January through December 1995 at prices ranging from $2.05 to $2.35
per MMBtu. These hedging arrangements are accounted for as hedges; accordingly,
any gains or losses are deferred and recognized on the settlement dates. As of
December 31, 1993 and December 31, 1994, the fair value of these hedge
arrangements was not materially different than the book value.
CMS NOMECO also has one arrangement which is used to fix the prices that
CMS NOMECO will pay to supply gas for the years 2001 - 2006 by purchasing the
economic equivalent of 10,000 MMBtu per day at a fixed, escalated price 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 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 NOMECO the difference, and vice versa. If
a party's exposure at any time exceeds $2 million, that party is required to
obtain a letter of credit in favor of the other party for the excess over $2
million and up to $10 million. At December 31, 1994 and December 31, 1993, the
seller had arranged a letter of credit in CMS NOMECO's favor for $3 million and
$10 million, respectively.
Consumers has experienced increases in the number of lawsuits filed against
it relating to so-called stray voltage. Claimants contend that stray voltage
results when small electrical currents present in grounded electrical systems
are diverted from their intended path. Consumers maintains a policy of
investigating all customer calls regarding stray voltage and working with
customers to address their concerns including, when necessary, modifying the
grounding of the customer's service. At March 31, 1995, Consumers had 73
separate stray voltage lawsuits pending.
In addition to the matters disclosed in these notes, 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 involving personal injury and
property damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
The ultimate effect of the proceedings discussed in this note is not
expected to have a material impact on CMS Energy's financial position or results
of operations.
13: NUCLEAR MATTERS
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. Subsequently, the Attorney General and
certain other parties attempted to block Consumers' use of the storage casks,
alleging that the NRC had failed to comply adequately with the procedural
requirements
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of the Atomic Energy Act and the National Environmental Policy Act. In January
1995, the U.S. Sixth Circuit Court of Appeals rejected these allegations and
upheld the NRC's rulemaking action. The court found that the NRC's environmental
assessment satisfied National Environmental Policy Act requirements, and that a
site-specific environmental analysis concerning the use and operation of the
storage casks at Palisades was not required. The Attorney General and other
parties have asked the U.S. Supreme Court for leave to appeal this decision. As
of April 30, 1995, Consumers had loaded thirteen dry storage casks with spent
nuclear fuel.
In the latter part of 1995, Consumers plans to unload and replace one of
the loaded casks. In a review of the cask manufacturer's quality assurance
program, Consumers detected indications of minor flaws in welds in the steel
liner of one of the loaded casks. Although testing has not disclosed any
leakage, Consumers has nevertheless decided to remove the spent fuel and insert
it in another cask. Consumers has examined radiographs for all of its casks and
has found all other welds acceptable. In order to address concerns raised
subsequent to the initial cask loading, Consumers and the NRC each analyzed the
effects of seismic and other natural hazards on the support pad on which the
casks are placed, and concluded that the pad location is acceptable to support
the casks.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible for
the disposal of low-level radioactive waste. Currently, a low-level waste site
does not exist in Michigan, and no other states' repositories are available to
Michigan generators of such waste. Consumers stores low-level waste at its
nuclear plant sites and plans to continue to do so following final shutdown of
the plants, if necessary, until a permanent storage site is provided. Consumers
currently estimates that a permanent low-level radioactive waste disposal site
will be available by the year 2027.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for replacement
power costs for the major portion of prolonged accidental outages for 12 months
after a 21 week exclusion with reduced coverage to approximately 80% for two
additional years. If certain loss events occur at its own or other nuclear
plants similarly insured, Consumers could be required to pay maximum assessments
of: $33 million in any one year to the Nuclear Mutual Ltd. ("NML") and the
Nuclear Electric Insurance Ltd. ("NEIL"); $79 million per event under the
nuclear liability secondary financial protection program, limited to $10 million
per event in any one year; and $6 million in the event of nuclear workers
claiming bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
In November 1993, Palisades returned to service following a planned
refueling and maintenance outage that had been extended due to several
unanticipated repairs (see Note 4). The results of an NRC review of Consumers'
performance at Palisades published shortly after the planned outage showed a
decline in performance ratings for the plant. To provide NRC senior management
with a more in-depth assessment of plant performance, the NRC conducted a
diagnostic evaluation inspection at Palisades. The inspection, completed in June
1994, found certain performance, operational and management deficiencies at
Palisades. The NRC acknowledged that the new Palisades senior management team,
in place since early 1994, had recognized and begun to address the deficiencies.
In August 1994, Consumers filed its response to the NRC's diagnostic evaluation
report and included both short- and long-term enhancements planned to improve
Palisades' performance. Acceptable performance at Palisades will require
continuing performance improvements and additional expenditures at the plant,
which have been included in Consumers' total planned levels of expenditures.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor vessel
to withstand postulated "pressurized thermal shock" events during its remaining
license life, in light of the embrittlement of reactor vessel materials over
time due to operation in a radioactive environment. Analysis of recent data from
testing of similar materials indicates that the Palisades reactor vessel can be
safely operated through late 1999. In April 1995, Consumers received
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
a Safety Evaluation Report from the NRC concurring with this evaluation and
requesting submittal in 1996 of an action plan to provide for operation of the
plant beyond 1999. Consumers is continuing to analyze alternative means to
permit continued operation of Palisades to the end of its license life in the
year 2007. It is currently estimated that expenditures for corrective action
related to this issue could total $20 million to $30 million. Consumers cannot
predict the outcome of these efforts.
14: JOINTLY OWNED UTILITY FACILITIES
Consumers is responsible for providing its share of financing for the
jointly owned facilities. The following table indicates the extent of Consumers'
investment in jointly owned utility facilities:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1993
---- ----
(IN MILLIONS)
<S> <C> <C>
Net investment
Ludington -- 51%.............................................. $119 $114
Campbell Unit 3 -- 93.3%...................................... 337 349
Transmission lines -- various................................. 31 32
Accumulated depreciation
Ludington..................................................... $ 76 $ 74
Campbell Unit 3............................................... 224 210
Transmission lines............................................ 11 11
</TABLE>
15: 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. Other cash flow activities and non-cash investing and financing
activities for the three months ended March 31 and the years ended December 31
were:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED
------------ --------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash transactions
Interest paid (net of amounts capitalized)... $60 $52 $162 $193 $203
Income taxes paid (net of refunds)........... -- -- 39 32 19
Non-cash transactions
Nuclear fuel placed under capital lease...... $ 7 $ 2 $ 21 $ 28 $ 30
Other assets placed under capital leases..... 2 1 15 30 39
Capital leases refinanced.................... -- -- -- 42 --
Assumption of debt........................... 12 -- -- -- 15
</TABLE>
F-49
<PAGE> 166
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows at December 31 are described below:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Sale of receivables, net................................. $(10) $ 60 $ 25
Accounts receivable...................................... (17) 22 6
Accrued revenue.......................................... 20 (48) 88
Inventories.............................................. (4) (32) 23
Accounts payable......................................... 27 (31) 20
Accrued refunds.......................................... (3) (49) (143)
Other current assets and liabilities, net................ 5 (4) 46
Non-current deferred amounts, net........................ (6) (6) (40)
---- ---- -----
$ 12 $(88) $ 25
==== ==== =====
</TABLE>
F-50
<PAGE> 167
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
16: REPORTABLE SEGMENTS
CMS Energy operates principally in the following five business segments:
electric utility, gas utility, oil and gas exploration and production,
independent power production, and natural gas pipeline, storage and marketing.
The Consolidated Statements of Income show operating revenue and pretax
operating income by business segment. Other segment information follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation, depletion and amortization
Electric utility................................................ $ 257 $ 241 $ 230
Gas utility..................................................... 76 73 76
Oil and gas exploration and production.......................... 41 45 38
Independent power production.................................... 2 2 2
Natural gas pipeline, storage and marketing..................... 2 1 1
Other........................................................... 1 2 --
------ ------ ------
$ 379 $ 364 $ 347
====== ====== ======
Identifiable assets
Electric utility(a)(b).......................................... $4,364 $4,100 $3,845
Gas utility(b).................................................. 1,673 1,628 1,574
Oil and gas exploration and production.......................... 469 398 364
Independent power production.................................... 536 488 333
Natural gas pipeline, storage and marketing..................... 109 75 60
Other........................................................... 233 275 672
------ ------ ------
$7,384 $6,964 $6,848
====== ====== ======
Capital expenditures(d)(e)
Electric utility(c)............................................. $ 358 $ 403 $ 390
Gas utility(c).................................................. 134 158 116
Oil and gas exploration and production.......................... 115 83 68
Independent power production.................................... 30 110 12
Natural gas pipeline, storage and marketing..................... 31 14 6
Other........................................................... 5 -- 2
------ ------ ------
$ 673 $ 768 $ 594
====== ====== ======
</TABLE>
- -------------------------
(a) Includes abandoned Midland investment of $147 million, $162 million and $175
million for 1994, 1993 and 1992, respectively.
(b) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
(c) Includes capital leases for nuclear fuel and other assets and electric DSM
costs (see Statement 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.
(d) Includes equity investments in unconsolidated partnerships of $53 million
for 1994, $108 million for 1993 and $12 million for 1992.
(e) Certain prior year amounts have been adjusted for comparative purposes.
F-51
<PAGE> 168
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17: EFFECTS OF THE RATEMAKING PROCESS
The following regulatory assets (liabilities) which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets. These
assets represent probable future revenue to Consumers associated with certain
incurred costs as these costs are recovered through the ratemaking process.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Postretirement benefits (Note 10).......................... $ 503 $ 510
Income taxes (Note 5)...................................... 189 189
Abandoned Midland project (Note 4)......................... 147 162
Trunkline settlement (Note 4).............................. 85 117
DSM -- deferred costs (Note 4)............................. 71 71
Manufactured gas plant sites (Note 12)..................... 47 --
Power purchase contract (Note 3)........................... 30 --
Uranium enrichment facility (Note 4)....................... 25 33
Other...................................................... 31 39
------ ------
Total regulatory assets............................... $1,128 $1,121
====== ======
Income taxes (Note 5)...................................... $ (205) $ (195)
DSM -- deferred revenue.................................... (21) (17)
------ ------
Total regulatory liabilities.......................... $ (226) $ (212)
====== ======
</TABLE>
At December 31, 1994, $864 million of Consumers' regulatory assets are
being recovered through rates being charged to customers over periods of up to
18 years. Consumers anticipates MPSC approval for recovery of the remaining
amounts.
Consumers is experiencing increased competition, particularly in its
electric utility business. Municipalization and self-generation, among other
forms of competition, could restrict Consumers' ability to establish rates
sufficient to recover specific costs associated with its regulatory assets.
F-52
<PAGE> 169
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED
18: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER
Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1994
obligation to purchase electric capacity from the MCV Partnership was
approximately 15% of Consumers' owned and contracted capacity. Summarized
financial information of the MCV Partnership follows:
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Operating revenue(a)...................................... $579 $548 $488
Operating expenses........................................ 378 362 315
---- ---- ----
Operating income.......................................... 201 186 173
Other expense, net........................................ 183 189 190
---- ---- ----
Net income (loss)......................................... $ 18 $ (3) $(17)
==== ==== ====
</TABLE>
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets(a)............................................ $ 206 $ 181
Property, plant and equipment, net........................... 2,012 2,073
Other assets................................................. 154 146
------ ------
$2,372 $2,400
====== ======
LIABILITIES AND PARTNERS' EQUITY
Current liabilities.......................................... $ 218 $ 198
Long-term debt and other non-current liabilities(b).......... 2,081 2,147
Partners' equity(c).......................................... 73 55
------ ------
$2,372 $2,400
====== ======
</TABLE>
- -------------------------
(a) Revenue from Consumers totaled $534 million, $505 million and $444 million
for 1994, 1993 and 1992, respectively. At December 31, 1994, 1993 and 1992,
$48 million, $44 million and $38 million, respectively, were receivable
from Consumers.
(b) FMLP is a 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% ownership interest in FMLP (see Note 3). At December 31, 1994 and
1993, lease obligations of $1.7 billion were owed to the owner trust of
which FMLP is the sole beneficiary. CMS Holdings' share of the interest and
principal portion for the 1994 lease payments was $62 million and $20
million, respectively, and for the 1993 lease payments was $63 million and
$16 million, respectively. The lease payments service $1.2 billion in
non-recourse debt outstanding as of December 31, 1994 and 1993 of the
owner-trust whose beneficiary is FMLP. FMLP's debt is secured by the MCV
Partnership's lease obligations, assets, and operating revenues. For 1994
and 1993, the owner-trust whose beneficiary is FMLP made debt payments of
$175 million and $172 million, respectively. The 1993 amounts included $10
million of principal and $25 million of interest on the MCV Bonds held by
Consumers through December 1993.
(c) 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.
F-53
<PAGE> 170
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Filing fee -- Securities and Exchange Commission.................. $ 68,966
Listing on New York Stock Exchange................................ 30,000*
Preparation of Stock Certificates................................. 1,000*
Printing and Engraving............................................ 300,000*
Services of counsel............................................... 550,000*
Services of independent public accountants, Arthur Anderson LLP... 200,000*
Rating Agency Fees................................................ 100,000*
Trustees Fees..................................................... 15,000*
Blue Sky fees and expenses........................................ 10,000*
Miscellaneous..................................................... 20,000*
----------
Total........................................................... $1,294,966
==========
</TABLE>
- -------------------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following resolution was adopted by the Board of Directors of CMS
Energy on May 6, 1987:
RESOLVED: That effective March 1, 1987 the Corporation shall indemnify
to the full extent permitted by law every person (including the estate,
heirs and legal representatives of such person in the event of the decease,
incompetency, insolvency or bankruptcy of such person) who is or was a
director, officer, partner, trustee, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against all
liability, costs, expenses, including attorneys' fees, judgments,
penalties, fines and amounts paid in settlement, incurred by or imposed
upon the person in connection with or resulting from any claim or any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative, investigative or of whatever nature, arising from
the person's service or capacity as, or by reason of the fact that the
person is or was, a director, officer, partner, trustee, employee or agent
of the Corporation or is or was serving at the request of the Corporation
as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. Such
right of indemnification shall not be deemed exclusive of any other rights
to which the person may be entitled under statute, bylaw, agreement, vote
of shareholders or otherwise.
CMS Energy's Bylaws provide:
The Corporation may purchase and maintain liability insurance, to the
full extent permitted by law, on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and incurred
by such person in any such capacity.
Article IX of the Articles of Incorporation reads:
A director shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of duty as a director except
(i) for a breach of the director's duty of loyalty to the Corporation or
its shareholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for a
violation of Section 551(l) of the Michigan Business Corporation Act, and
(iv) any action from which the director derived an improper personal
benefit. No amendment to or repeal of this Article IX, and no modification
to its provisions by law, shall apply to, or have any effect
II-1
<PAGE> 171
upon, the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring
prior to such amendment, repeal or modification.
Article X of the Articles of Incorporation reads:
Each director and each officer of the Corporation shall be indemnified
by the Corporation to the fullest extent permitted by law against expenses
(including attorneys' fees), judgments, penalties, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection
with the defense of any proceeding in which he or she was or is a party or
is threatened to be made a party by reason of being or having been a
director or an officer of the Corporation. Such right of indemnification is
not exclusive of any other rights to which such director or officer may be
entitled under any now or thereafter existing statute, any other provision
of these Articles, bylaw, agreement, vote of shareholders or otherwise. If
the Business Corporation Act of the State of Michigan is amended after
approval by the shareholders of this Article X to authorize corporate
action further eliminating or limiting the personal liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Business Corporation Act of
the State of Michigan, as so amended. Any repeal or modification of this
Article X by the shareholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the
time of such repeal or modification.
Sections 561 through 571 of the Michigan Business Corporation Act provides
as follows:
Sec. 561. A corporation has the power to indemnify a person who was or
is a party or is threatened to be made a party to a threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal, other than
an action by or in the right of the corporation, by reason of the fact that
he or she is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign
or domestic corporation, partnership, joint venture, trust, or other
enterprise, whether for profit or not, against expenses, including
attorneys' fees, judgments, penalties, fines, and amounts paid in
settlement actually and reasonably incurred by him or her in connection
with the action, suit, or proceeding, if the person acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation or its shareholders, and with respect to
a criminal action or proceeding, if the person had no reasonable cause to
believe his or her conduct was unlawful. The termination of an action,
suit, or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he or she reasonably believed to be in or not opposed to the best interests
of the corporation or its shareholders, and, with respect to a criminal
action or proceeding, had reasonable cause to believe that his or her
conduct was unlawful.
Sec. 562. A corporation has the power to indemnify a person who was or
is a party or is threatened to be made a party to a threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a
director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, or other enterprise, whether for profit
or not, against expenses, including attorneys' fees, and amounts paid in
settlement actually and reasonably incurred by the person in connection
with the action or suit, if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best
interests of the corporation or its shareholders. Indemnification shall not
be made for a claim, issue, or matter in which the person has been found
liable to the corporation except to the extent authorized in section 564c.
Sec. 563. To the extent that a director, officer, employee, or agent
of a corporation has been successful on the merits or otherwise in defense
of an action, suit, or proceeding referred to in section 561 or 562, or in
defense of a claim, issue, or matter in the action, suit, or proceeding, he
or she shall be indemnified against actual and reasonable expenses,
including attorneys' fees, incurred by him or her in connection with the
action, suit, or proceeding and an action, suit, or proceeding brought to
enforce the mandatory indemnification provided in this subsection.
II-2
<PAGE> 172
Section 564a. (1) An indemnification under section 561 or 562, unless
ordered by the court, shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the
director, officer, employee, or agent is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
sections 561 and 562 and upon an evaluation of the reasonableness of
expenses and amounts paid in settlement. This determination and evaluation
shall be made in any of the following ways:
(a) By a majority vote of a quorum of the board consisting of
directors who are not parties or threatened to be made parties to the
action, suit, or proceeding.
(b) If a quorum cannot be obtained under subdivision (a), by
majority vote of a committee duly designated by the board and
consisting solely of 2 of more directors not at the time parties or
threatened to be made parties to the action, suit, or proceeding.
(c) By independent legal counsel in a written opinion, which
counsel shall be selected in 1 of the following ways:
(i) By the board or its committee in the manner prescribed in
subdivision (a) or (b).
(ii) If a quorum of the board cannot be obtained under
subdivision (a) and a committee cannot be designated under
subdivision (b), by the board.
(d) By all independent directors who are not parties or
threatened to be made parties to the action, suit, or proceeding.
(e) By the shareholders, but shares held by directors, officers,
employees, or agents who are parties or threatened to be made parties
to the action, suit, or proceeding may not be voted.
(2) In the designation of a committee under subsection (1)(b) or in
the selection of independent legal counsel under subsection (1)(c)(ii), all
directors may participate.
(3) If a person is entitled to indemnification under section 561 or
562 for a portion of expenses, including reasonable attorneys' fees,
judgments, penalties, fines, and amounts paid in settlement, but not for
the total amount, the corporation may indemnify the person for the portion
of the expenses, judgments, penalties, fines, or amounts paid in settlement
for which the person is entitled to be indemnified.
Sec. 564b. (1) A corporation may pay or reimburse the reasonable
expenses incurred by a director, officer, employee, or agent who is a party
or threatened to be made a party to an action, suit, or proceeding in
advance of final disposition of the proceeding if all of the following
apply:
(a) The person furnishes the corporation a written affirmation of
his or her good faith belief that he or she has met the applicable
standard of conduct set forth in sections 561 and 562.
(b) The person furnishes the corporation a written undertaking,
executed personally or on his or her behalf, to repay the advance if
it is ultimately determined that he or she did not meet the standard
of conduct.
(c) A determination is made that the facts then known to those
making the determination would not preclude indemnification under this
act.
(2) The undertaking required by subsection (1)(b) must be an unlimited
general obligation of the person but need not be secured.
(3) Determinations and evaluations under this section shall be made in
the manner specified in section 564a.
Section 564c. A director, officer, employee, or agent of the
corporation who is a party or threatened to be made a party to an action,
suit, or proceeding may apply for indemnification to the court conducting
the proceeding or to another court of competent jurisdiction. On receipt of
an application, the court after giving any notice it considers necessary
may order indemnification if it determines that the person is fairly
II-3
<PAGE> 173
and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not he or she met the applicable standard of
conduct set forth in sections 561 and 562 or was adjudged liable as
described in section 562, but if he or she was adjudged liable, his or her
indemnification is limited to reasonable expenses incurred.
Sec. 565. (1) The indemnification or advancement of expenses provided
under sections 561 to 564c is not exclusive of other rights to which a
person seeking indemnification or advancement of expenses may be entitled
under the articles of incorporation, bylaws, or a contractual agreement.
The total amount of expenses advanced or indemnified from all sources
combined shall not exceed the amount of actual expenses incurred by the
person seeking indemnification or advancement of expenses.
(2) The indemnification provided for in sections 561 to 565 continues
as to a person who ceases to be a director, officer, employee, or agent and
shall inure to the benefit of the heirs, personal representatives, and
administrators of the person.
Sec. 567. A corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, partner, trustee, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity or arising out of his or her status as
such, whether or not the corporation would have power to indemnify him or
her against liability under sections 561 to 565.
Sec. 569. For purposes of sections 561 to 567, "corporation" includes
all constituent corporations absorbed in a consolidation or merger and the
resulting or surviving corporation, so that a person who is or was a
director, officer, employee, or agent of the constituent corporation or is
or was serving at the request of the constituent corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise
whether for profit or not shall stand in the same position under the
provisions of this section with respect to the resulting or surviving
corporation as the person would if he or she had served the resulting or
surviving corporation in the same capacity.
Sec. 571. For the purposes of sections 561 to 567:
(a) "Fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan.
(b) "Other enterprises" shall include employee benefit plans.
(c) "Serving at the request of the corporation" shall include any
service as a director, officer, employee, or agent of the corporation
which imposes duties on, or involves services by, the director, officer,
employee, or agent with respect to an employee benefit plan, its
participants, or its beneficiaries.
(d) A person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be considered to have
acted in a manner "not opposed to the best interests of the corporation
or its shareholders" as referred to in sections 561 and 562.
Officers and directors are covered within specified monetary limits by
insurance against certain losses arising from claims made by reason of
their being directors or officers of CMS Energy or of CMS Energy's
subsidiaries and CMS Energy's officers and directors are indemnified
against such losses by reason of their being or having been directors of
officers or another corporation, partnership, joint venture, trust or other
enterprise at CMS Energy's request. In addition, CMS Energy has indemnified
each of its present directors by contracts that contain affirmative
provisions essentially similar to those in sections 561 through 571 of the
Michigan Business Corporation Act cited above.
II-4
<PAGE> 174
The Limited Partnership Agreement will provide that, to the fullest
extent permitted by applicable law, CMS Energy Michigan shall indemnify the
General Partner, the Special Representative, any affiliate of the General
Partner or Special Representative, any officer, director, shareholder,
partner, member, employee, representative or agent of the General Partner,
the Special Representative, or any affiliate of the General Partner or
Special Representative, and any employee or agent of CMS Energy Michigan or
its affiliates for any loss, damage or claim incurred by such person by
reason of any act or omission performed or omitted by such person in good
faith on behalf of CMS Energy Michigan and in a manner reasonably believed
to be within the scope of authority conferred on such person by the Limited
Partnership Agreement, except that no such person shall be entitled to be
indemnified in respect of any loss, damage or claim incurred by such person
by reason of willful misconduct, gross negligence or fraud with respect to
such acts or omissions. The Limited Partnership Agreement will also require
that expenses (including legal fees) be advanced to any such person to the
fullest extent permitted by applicable law upon receipt by CMS Energy
Michigan of an undertaking from such person to repay such amount if it
shall be determined that the person is not entitled to be indemnified. In
addition, the Limited Partnership Agreement will provide that the
provisions of the Limited Partnership Agreement, to the extent that they
restrict the duties and liabilities of any of the foregoing persons
otherwise existing at law or in equity, are agreed by the parties to the
Limited Partnership Agreement to replace such duties and liabilities.
II-5
<PAGE> 175
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
(1)(a)* Form of Underwriting Agreement with respect to the Offered Securities (other than
the Class G Common Stock).
(1)(b) Revised form of Underwriting Agreement with respect to the Class G Common Stock.
(3)(a)* Restated Articles of Incorporation of CMS Energy. (Designated in CMS Energy's
Form S-4 dated June 6, 1995, File No. 1-9513, as Exhibit (3)(i).)
(3)(b)* Form of Charter Amendment to the Articles of Incorporation of CMS Energy.
(Designated in CMS Energy's Proxy Statement filed under cover of Schedule 14A
Information on February 13, 1995, as Annex III.)
(3)(c)* By-Laws of CMS Energy. (Designated in CMS Energy's Form 10-K for the year ended
December 31, 1994, File No. 1-9513, as Exhibit (3)(b).)
(4)(d)* Indenture dated as of September 15, 1992 between CMS Energy Corporation and NBD
Bank, National Association, as Trustee. (Indenture under which the Senior Debt
Securities will be issued.) (Designated in CMS Energy's Form S-3 Registration
Statement filed May 1, 1992, File No. 33-47629, as Exhibit (4)(a).)
First Supplemental Indenture dated as of October 1, 1992 between CMS Energy
Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS
Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit (4).)
Second Supplemental Indenture dated as of October 1, 1992 between CMS Energy
Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS
Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit 4(a).)
(4)(e)* Indenture dated as of January 15, 1994 between CMS Energy and The Chase Manhattan
Bank, N.A., as Trustee. (Designated in CMS Energy's Form 8-K dated March 29,
1994, File No. 1-9513, as Exhibit (4)(a).)
First Supplemental Indenture dated as of January 20, 1994 between CMS Energy and
The Chase Manhattan Bank, N.A., as Trustee. (Designated in CMS Energy's Form 8-K
dated March 29, 1994, File No. 1-9513, as Exhibit (4)(b).)
(4)(f)* Credit Agreement dated as of July 29, 1994 among CMS Energy, Citibank, N.A. and
Union Bank as co-agents and certain banks named therein, and the Exhibits
thereto. (Designated in CMS Energy's Form 10-Q for the quarter ended June 30,
1994, File No. 1-9513, as Exhibit (4).)
(4)(g)* Form of Subordinated Debt Securities Indenture between CMS Energy and The Chase
Manhattan Bank, N.A., as Trustee.
(4)(h)* Certificate of Limited Partnership of CMS Energy Michigan Limited Partnership.
(4)(i)* Form of Amended and Restated Limited Partnership Agreement of CMS Energy Michigan
Limited Partnership.
(4)(j)* Form of Guarantee Agreement with respect to CMS Energy Michigan Preferred
Securities.
(5)* Opinion of Denise M. Sturdy, Esq., Assistant General Counsel for CMS Energy.
(8)* Opinion re Tax Matters of Sidley & Austin.
(12)* Statement re computation of ratios of earnings to fixed charges and ratios of
earnings to combined fixed charges and preferred stock dividends.
(23)(a)* Consent of Denise M. Sturdy, Esq., Assistant General Counsel for CMS Energy
(included in Exhibit 5 above).
(23)(b)* Consent of Sidley & Austin (included in Exhibit 8 above).
</TABLE>
II-6
<PAGE> 176
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
(23)(c)* Consent of Arthur Andersen LLP.
(24)* Powers of Attorney.
(25)(a)* Statement of Eligibility and Qualification of NBD Bank, National Association
(Trustee under the Senior Debt Indenture).
(25)(b)* Statement of Eligibility and Qualification of The Chase Manhattan Bank, N.A.
(Trustee under the Subordinated Debt Indenture).
</TABLE>
- -------------------------
* Previously filed
Exhibits listed above which have been filed with the Securities and
Exchange Commission are incorporated herein by reference with the same effect as
if filed with this Registration Statement.
ITEM 17. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; (iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement; provided, however, that (i) and (ii) do not apply
if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in this registration statement
shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 15 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that as claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
be governed by the final adjudication of such issue.
II-7
<PAGE> 177
(6) That (1) for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective; and (2) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE> 178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Post-Effective
Amendment No. 2 to Form S-3 Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Dearborn, and State
of Michigan, on the 16th day of June, 1995.
CMS ENERGY CORPORATION
By /s/ A. M. WRIGHT
--------------------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to Form S-3 Registration Statement has been
signed below by the following persons in their respective capacities as officers
and/or directors of CMS Energy Corporation and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------- ---------------------------------- -------------
<S> <C> <C>
(i) Principal executive officer:
/s/ WILLIAM T. MCCORMICK, JR. Chairman of the Board, Chief June 16, 1995
- ------------------------------------- Executive Officer and Director
(William T. McCormick, Jr.)
(ii) Principal financial officer:
/s/ A. M. WRIGHT Senior Vice President, Chief June 16, 1995
- ------------------------------------- Financial Officer and Treasurer
(Alan M. Wright)
(iii) Controller or principal accounting officer:
/s/ P. D. HOPPER Vice President, Controller and June 16, 1995
- ------------------------------------- Chief Accounting Officer
(Preston D. Hopper)
* Director June 16, 1995
- -------------------------------------
(James J. Duderstadt)
* Director June 16, 1995
- -------------------------------------
(Kathleen R. Flaherty)
* Director June 16, 1995
- -------------------------------------
(Victor J. Fryling)
* Director June 16, 1995
- -------------------------------------
(Earl D. Holton)
* Director June 16, 1995
- -------------------------------------
(Lois A. Lund)
</TABLE>
II-9
<PAGE> 179
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------- ---------------------------------- -------------
<S> <C> <C>
Director
- -------------------------------------
(Frank H. Merlotti)
* Director June 16, 1995
- -------------------------------------
(W.U. Parfet)
* Director June 16, 1995
- -------------------------------------
(Percy A. Pierre)
* Director June 16, 1995
- -------------------------------------
(S. Kinnie Smith, Jr.)
* Director June 16, 1995
- -------------------------------------
(Kenneth Whipple)
* Director June 16, 1995
- -------------------------------------
(John B. Yasinsky)
*By /s/ A. M. WRIGHT
- -------------------------------------
(Alan M. Wright)
Attorney-in-fact
</TABLE>
II-10
<PAGE> 180
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
co-registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Post-Effective Amendment No. 2 to Form S-3 Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dearborn, and State of Michigan, on the 16th day of June, 1995.
CMS ENERGY MICHIGAN LIMITED
PARTNERSHIP
By CMS ENERGY CORPORATION, as
General Partner
By /s/ A. M. WRIGHT
----------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to Form S-3 Registration Statement has been
signed below by the following persons in their respective capacities as officers
and/or directors of CMS Energy Corporation, as the corporate general partner of
CMS Energy Michigan Limited Partnership, and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------- ---------------------------------- -------------
<S> <C> <C>
(i) Principal executive officer:
/s/ WILLIAM T. MCCORMICK, JR. Chairman of the Board, Chief June 16, 1995
- ------------------------------------- Executive Officer and Director
(William T. McCormick, Jr.)
(ii) Principal financial officer:
/s/ A. M. WRIGHT Senior Vice President, Chief June 16, 1995
- ------------------------------------- Financial Officer and Treasurer
(Alan M. Wright)
(iii) Controller or principal accounting officer:
/s/ P. D. HOPPER Vice President, Controller and June 16, 1995
- ------------------------------------- Chief Accounting Officer
(Preston D. Hopper)
* Director June 16, 1995
- -------------------------------------
(James J. Duderstadt)
* Director June 16, 1995
- -------------------------------------
(Kathleen R. Flaherty)
* Director June 16, 1995
- -------------------------------------
(Victor J. Fryling)
* Director June 16, 1995
- -------------------------------------
(Earl D. Holton)
</TABLE>
II-11
<PAGE> 181
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------- ---------------------------------- -------------
<S> <C> <C>
* Director June 16, 1995
- -------------------------------------
(Lois A. Lund)
Director
- -------------------------------------
(Frank H. Merlotti)
* Director June 16, 1995
- -------------------------------------
(W. U. Parfet)
* Director June 16, 1995
- -------------------------------------
(Percy A. Pierre)
* Director June 16, 1995
- -------------------------------------
(S. Kinnie Smith, Jr.)
* Director June 16, 1995
- -------------------------------------
(Kenneth Whipple)
* Director June 16, 1995
- -------------------------------------
(John B. Yasinsky)
*By /s/ A. M. Wright
- -------------------------------------
(Alan M. Wright)
Attorney-in-fact
</TABLE>
II-12
<PAGE> 182
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CMS ENERGY CORPORATION
CMS ENERGY MICHIGAN LIMITED PARTNERSHIP
EXHIBITS
===============================================================================
<PAGE> 183
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------------- -----
<S> <C> <C>
(1)(a)* Form of Underwriting Agreement with respect to the Offered Securities
(other than the Class G Common Stock).
(1)(b) Revised form of Underwriting Agreement with respect to the Class G Common
Stock.
(3)(a)* Restated Articles of Incorporation of CMS Energy. (Designated in CMS
Energy's Form S-4 dated June 6, 1995, File No. 1-9513, as Exhibit (3)(i).)
(3)(b)* Form of Charter Amendment to the Articles of Incorporation of CMS Energy.
(Designated in CMS Energy's Proxy Statement filed under cover of Schedule
14A Information on February 13, 1995, as Annex III.)
(3)(c)* By-Laws of CMS Energy. (Designated in CMS Energy's Form 10-K for the year
ended December 31, 1994, File No. 1-9513, as Exhibit (3)(b).)
(4)(d)* Indenture dated as of September 15, 1992 between CMS Energy Corporation and
NBD Bank, National Association, as Trustee. (Indenture under which the
Senior Debt Securities will be issued.) (Designated in CMS Energy's Form
S-3 Registration Statement filed May 1, 1992, File No. 33-47629, as Exhibit
(4)(a).)
First Supplemental Indenture dated as of October 1, 1992 between CMS Energy
Corporation and NBD Bank, National Association, as Trustee. (Designated in
CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit
(4).)
Second Supplemental Indenture dated as of October 1, 1992 between CMS
Energy Corporation and NBD Bank, National Association, as Trustee.
(Designated in CMS Energy's Form 8-K dated October 1, 1992, File No.
1-9513, as Exhibit 4(a).)
(4)(e)* Indenture dated as of January 15, 1994 between CMS Energy and The Chase
Manhattan Bank, N.A., as Trustee. (Designated in CMS Energy's Form 8-K
dated March 29, 1994, File No. 1-9513, as Exhibit (4)(a).)
First Supplemental Indenture dated as of January 20, 1994 between CMS
Energy and The Chase Manhattan Bank, N.A., as Trustee. (Designated in CMS
Energy's Form 8-K dated March 29, 1994, File No. 1-9513, as Exhibit
(4)(b).)
(4)(f)* Credit Agreement dated as of July 29, 1994 among CMS Energy, Citibank, N.A.
and Union Bank as co-agents and certain banks named therein, and the
Exhibits thereto. (Designated in CMS Energy's Form 10-Q for the quarter
ended June 30, 1994, File No. 1-9513, as Exhibit (4).)
(4)(g)* Form of Subordinated Debt Securities Indenture between CMS Energy and The
Chase Manhattan Bank, N.A., as Trustee.
(4)(h)* Certificate of Limited Partnership of CMS Energy Michigan Limited
Partnership.
(4)(i)* Form of Amended and Restated Limited Partnership Agreement of CMS Energy
Michigan Limited Partnership.
(4)(j)* Form of Guarantee Agreement with respect to CMS Energy Michigan Preferred
Securities.
(5)* Opinion of Denise M. Sturdy, Esq., Assistant General Counsel for CMS
Energy.
</TABLE>
<PAGE> 184
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------------- -----
<S> <C> <C>
(8)* Opinion re Tax Matters of Sidley & Austin.
(12)* Statement re computation of ratios of earnings to fixed charges and ratios
of earnings to combined fixed charges and preferred stock dividends.
(23)(a)* Consent of Denise M. Sturdy, Esq., Assistant General Counsel for CMS Energy
(included in Exhibit 5 above).
(23)(b)* Consent of Sidley & Austin (included in Exhibit 8 above).
(23)(c)* Consent of Arthur Andersen LLP.
(24)* Powers of Attorney.
(25)(a)* Statement of Eligibility and Qualification of NBD Bank, National
Association (Trustee under the Senior Debt Indenture).
(25)(b)* Statement of Eligibility and Qualification of The Chase Manhattan Bank,
N.A. (Trustee under the Subordinated Debt Indenture).
</TABLE>
- -------------------------
* Previously filed
<PAGE> 1
8,000,000 SHARES
CMS ENERGY CORPORATION
CLASS G COMMON STOCK (NO PAR VALUE)
---------------------------------
UNDERWRITING AGREEMENT
June , 1995
To the Representatives named in
Schedule I hereto of the Underwriters
named in Schedule II hereto
Dear Sirs:
CMS Energy Corporation, a Michigan corporation (the "Company"), proposes to
issue and sell to the several Underwriters (as defined in Section 14 hereof)
8,000,000 shares of its Class G Common Stock (no par value) (the "Firm
Securities") as indicated in Schedule II. The Company also proposes to issue and
sell to the several Underwriters not more than shares of its Class G
Common Stock (no par value) (the "Additional Securities") if and to the extent
that the Representatives (as defined in Section 14 hereof) shall have determined
to exercise, on behalf of the Underwriters, the right to purchase such shares of
common stock granted to the Underwriters in Section 1 hereof. The Firm
Securities and the Additional Securities are hereinafter collectively referred
to as the "Securities." The Underwriters have designated the Representatives to
execute this Agreement on their behalf and to act for them in the manner
provided in this Agreement.
The Company has prepared and filed with the Securities and Exchange
Commission (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 Nos. 33-57719 and 33-57719-01) including a prospectus relating
to the Securities and certain amendments to such registration statement, and
such registration statement, as so amended, has become effective under the Act.
The registration statement, as amended by a post-effective amendment No. 1
thereto, at the time such registration statement, as so amended, 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 Registration 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 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," " amendment" 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
<PAGE> 2
Company, at the purchase price of $ a share (the "Purchase Price"), the
respective number of shares of Firm Securities set opposite their names in
Schedule II hereto.
In addition, on 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 Underwriters, and the Underwriters shall have a one-time right to
purchase, severally and not jointly, up to shares of Additional
Securities at the Purchase Price. Additional Securities may be purchased as
provided in Section 2 hereof solely for the purpose of covering over-allotments
made in connection with the offering of the Firm Securities. If any Additional
Securities are to be purchased, each Underwriter agrees, severally and not
jointly, to purchase the number of shares of Additional Securities (subject to
such adjustments to eliminate fractional shares as the Representatives may
determine) that bears the same proportion to the total number of shares of
Additional Securities to be purchased as the number of shares of Firm Securities
set forth in Schedule II opposite the name of such Underwriter bears to the
total number of shares of Firm Securities.
The Company hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated, the Company will not offer, sell, contract to sell
or otherwise dispose of any shares of (a) Class G Common Stock of the Company or
any securities (other than Common Stock, par value $.01 per share, of the
Company (the "CMS Energy Common Stock")) convertible into or exercisable or
exchangeable for Class G Common Stock of the Company other than the Securities
for a period of 180 days after the date of this Agreement or (b) CMS Energy
Common Stock or any securities convertible into or exercisable or exchangeable
for CMS Energy Common Stock for a period of 90 days after the date of this
Agreement; provided that the Company may, during such period, (i) in a manner
generally consistent with past practices regarding the numbers of shares issued
by the Company from time to time thereunder, issue shares of CMS Energy Common
Stock and Class G Common Stock under its Dividend Reinvestment and Optional Cash
Payment Plan, Performance Incentive Stock Plan, Employee Stock Ownership Plan
and Employee Savings and Incentive Plan, as any of the same may be supplemented
or amended and (ii) issue up to 3,000,000 shares of CMS Energy Common Stock
solely for the purpose of effecting acquisitions of other businesses or
properties.
The Company is advised by the Representatives that the Underwriters propose
to make a public offering of their respective portions of the Securities as soon
as this Agreement has become effective. The Company is further advised by the
Representatives that the Securities are to be offered to the public initially at
$ a share (the public offering price) and to certain dealers selected
by you at a price that represents a concession not in excess of $ a
share under the public offering price, and that any Underwriter may allow, and
such dealers may allow, a concession, not in excess of $ a share, to
certain other dealers.
2. Payment and Delivery: Payment for the Firm Securities shall be made to
the Company or its order by bank check or checks, as requested by the Company,
payable in New York Clearing House funds, at the offices of Reid & Priest LLP,
40 West 57th Street, New York, New York, 10019 (or such other place or places of
payment as shall be agreed upon by the Company and the Underwriters in writing),
upon the delivery of the Firm Securities at said offices (or such other place or
places of delivery as shall be agreed upon by the Company and the
Representatives in writing) to the Representatives for the respective accounts
of the Underwriters against receipt therefor signed by the Representatives 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 , 1995 (or on
such later business day as shall be agreed upon by the Company and the
Representatives in writing), unless postponed in accordance with the provisions
of Section 10 hereof. The day and time at which payment and delivery for the
Firm Securities are to be made is herein called the "First Time of Purchase".
Payment for any Additional Securities shall also be made to the Company or
its order by bank check or checks, as requested by the Company, payable in New
York Clearing House funds, at the offices of Reid & Priest LLP, 40 West 57th
Street, New York, New York 10019 (or such other place or places of payment as
shall be agreed upon by the Company and the Representatives in writing), upon
the delivery of the Additional Securities at said offices (or such other place
or places of delivery as shall be agreed upon by the Company and the
Representatives in writing) to the Representatives for the respective accounts
of the Underwriters against
2
<PAGE> 3
receipt therefor as aforesaid at 10:00 A.M., New York time, on such date (which
may be the same as the First Time of Purchase but shall in no event be earlier
than the First Time of Purchase nor later than ten business days after the
giving of the notice hereinafter referred to) as shall be designated in a
written notice to the Company from the Representatives of their determination,
on behalf of the Underwriters, to purchase a number, specified in said notice,
of shares of Additional Securities, or on such other date, in any event not
later than , 1995, as shall be designated in writing by them. The
day and time at which payment and delivery for the Additional Securities are to
be made is hereinafter called the "Second Time of Purchase." The notice of the
determination to exercise the option to purchase Additional Securities and of
the Second Time of Purchase may be given at any time within 30 days after the
date of this Agreement.
Delivery of the Securities shall be made in definitive, fully registered
form in authorized denominations registered in such names as the Representatives
may request in writing to the Company not later than two full business days
prior to the First Time of Purchase or Second Time of Purchase, as the case may
be, or if no such request is received, in the names of the respective
Underwriters for the respective number of shares of Firm Securities, set forth
opposite the name of each Underwriter in Schedule II, and in the case of
Additional Securities, for the respective number of shares determined in
accordance with Section 1 hereof, in each case in denominations selected by the
Company.
The Company agrees to make the Securities available for inspection by the
Underwriters at the offices of Morgan Stanley & Co. Incorporated at least 24
hours prior to the First Time of Purchase, or the Second Time of Purchase, as
the case may be, in definitive, fully registered form, and as requested pursuant
to the preceding paragraph.
3. Conditions of Underwriters' Obligations: The several obligations of the
Underwriters 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 Reid & Priest LLP, of New York, New York, counsel to the
Underwriters.
(b) That, at the First Time of Purchase and the Second Time of
Purchase, the Representatives shall be furnished with the following
opinions, dated the day of the First Time of Purchase or Second Time of
Purchase, as the case may be:
(1) Opinions of Denise M. Sturdy, Esq., and Messrs. Sidley &
Austin, of Chicago, Illinois, counsel to the Company, substantially to
the effect set forth in Exhibits A and B to this Agreement; and
(2) Opinion of Reid & Priest LLP, of New York, New York, counsel to
the Underwriters, substantially to the effect set forth in Exhibit C to
this Agreement.
(c) That, on each of the dates hereof, the date of the First Time of
Purchase and the date of the Second Time of Purchase, the Representatives
shall have received a letter from Arthur Andersen LLP in form and substance
satisfactory to the Representatives, on and 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 incorporated by reference in
the Registration Statement, including, without limitation, the pro forma
consolidated condensed balance sheets and statements of income and the
related notes thereto set forth or included in the Registration Statement
and the Prospectus with respect to the Company and the Consumers Gas Group
(as defined in the Prospectus), 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 Representatives reasonably
request.
3
<PAGE> 4
(d) That, between the date of the execution of this Agreement and the
First Time of Purchase or the Second Time of Purchase, as the case may be,
no material and adverse change shall have occurred in the business,
properties or financial condition of (i) the Company and its subsidiaries
(as defined in Rule 405 under the Act, and hereafter called the
"Subsidiaries"), taken as a whole, or (ii) the Consumers Gas Group, which,
in either case, in the judgment of the Representatives, after reasonable
inquiries on the part of the Representatives, 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 First Time of Purchase and Second Time of
Purchase, no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the Act by the Commission or
proceedings therefor initiated or threatened.
(f) That, at the First Time of Purchase and Second Time of Purchase,
the Company shall have delivered to the Representatives 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 financial condition of (i) the
Company and its Subsidiaries, taken as a whole, or (ii) the Consumers Gas
Group, 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 First Time of
Purchase and Second Time of Purchase by the terms hereof.
(h) That any additional documents or agreements reasonably requested
by the Representatives 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 First Time of Purchase or the Second Time of Purchase, as the
case may be, there has been no downgrading of the investment ratings of any
of the Company's securities or of Consumers Power Company's first mortgage
bonds by Standard & Poor's Corporation, Moody's Investors Service, Inc. or
Duff & Phelps Credit Rating Co., and neither the Company nor Consumers
Power Company shall have been placed on "credit watch" or "credit review"
with negative implications by any of such statistical rating organizations
if any of such occurrences shall, in the reasonable judgment of the
Representatives, after reasonable inquiries on the part of the
Representatives, 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, or at such later
time as may be acceptable to the Representatives.
(k) That the Securities, at the First Time of Purchase in the case of
the Firm Securities, and at the Second Time of Purchase in the case of the
Additional Securities, shall have been duly listed, subject to notice of
issuance, on the New York Stock Exchange.
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 Commission
to the extent necessary to permit the continuance of sales of or dealings
in the Securities in accordance with the provisions hereof and of the
Prospectus.
(b) To deliver to each of the Representatives a conformed copy of the
Registration Statement (including all exhibits thereto) and full and
complete sets of all comments of the Commission or its staff
4
<PAGE> 5
and all responses thereto with respect to the Registration Statement and to
furnish to the Representatives, for each of the Underwriters, conformed
copies of the Registration Statement without exhibits.
(c) As soon as the Company is advised thereof, the Company will advise
the Representatives 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
of any proceedings for that purpose and, if such a stop order should be
entered by the Commission, 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 (not
exceeding nine months) after the date of the Prospectus 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 Representatives 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 Prospectus, to furnish to
the Representatives, 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 (not exceeding nine months) after the date
of the Prospectus as the Underwriters 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 supplement the Prospectus to comply with law,
to forthwith prepare and file with the Commission an appropriate amendment
or supplement to the Prospectus and deliver to the Underwriters, without
charge, such number of copies thereof as may be reasonably requested.
(f) To make generally available to the Company's security holders, as
soon as practicable, an "earning statement" (which need not be audited by
independent 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.
(g) 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
Representatives may 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 requirements deemed by the Company to be unduly
burdensome.
(h) 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 (g) of this Section 5) of Reid & Priest LLP, of New York, New
York, counsel to the Underwriters, only in the events provided in paragraph
(i) 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 (i), the Company shall not be responsible for any out-of-pocket
expenses of the Underwriters in connection with their services hereunder.
(i) If the Underwriters shall not take up and pay for the Firm
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
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<PAGE> 6
be terminated in accordance with the provisions of Section 11 hereof prior
to the First Time of Purchase, to pay the reasonable fees and disbursements
of Reid & Priest LLP, counsel to the Underwriters, and, if the Underwriters
shall not take up and pay for the Firm 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.
(j) Prior to the termination of the offering of the Securities, not to
file any amendment to the Registration Statement or supplement to the
Prospectus (including the Basic Prospectus) unless the Company has
furnished the Representatives 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 Representatives, or any such
amendment or supplement to which such counsel shall reasonably object on
legal grounds in writing, after consultation with the Representatives.
(k) To furnish the Representatives 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.
(l) 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 Exchange 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.
(m) To use its best efforts to cause the Securities to be listed on
the New York Stock Exchange, subject only to official notice of issuance
and evidence of satisfactory distribution on or prior to the First Time of
Purchase, in the case of the Firm Securities, and on or prior to the Second
Time of Purchase, in the case of the Additional Securities.
(n) To pay all expenses in connection with any review of the offering
of the Securities by the National Association of Securities Dealers, Inc.
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 Representatives and to
the Representatives 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) have 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 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
and the published rules and regulations of the Commission; none of the
Registration 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 misleading, and the Prospectus, as of its issue date
and, as amended or supplemented, if applicable, as of the First Time of
Purchase and Second 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 statements or
omissions made therein in reliance upon and in conformity with information
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<PAGE> 7
furnished in writing to the Company by, or through the Representatives on
behalf of, any Underwriter expressly for use therein.
(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, conformed 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 document, when it is filed, will contain an untrue 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
corporation 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
contemplated hereby, 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. 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 standing under the laws of the
jurisdiction of its incorporation, has all requisite authority to own or
lease its properties and conduct its business as described 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.
(d) The pro forma consolidated condensed balance sheets and
consolidated and condensed statements of income and the related notes
thereto set forth or included or incorporated by reference in the
Registration Statement and the Prospectus with respect to the Company and
the Consumers Gas Group have been prepared in accordance with the
applicable requirements of Regulation S-X promulgated under the Exchange
Act, have been compiled on the pro forma basis described therein and, in
the opinion of the Company, the assumptions used in the preparations
thereof were reasonable at the time made and the adjustments used therein
are based upon good faith estimates and assumptions believed by the Company
to be reasonable at the time made.
(e) The shares of Common Stock of the Company outstanding prior to the
issuance of the Securities have been duly authorized and are validly
issued, fully paid and non-assessable.
(f) The Company's Articles of Incorporation and all amendments thereto
to date, including, without limitation, the amendments necessary to create
the Class G Common Stock (no par value) of the Company as described in the
Registration Statement, have been duly authorized and all necessary
corporate and shareholder action and all necessary filings pursuant to the
laws of the State of Michigan in connection therewith have been taken,
obtained or made.
(g) The Securities have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and nonassessable, and the issuance of such Securities
will not be subject to any preemptive or similar rights.
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<PAGE> 8
(h) The capital stock of the Company conforms in all material respects
to the description thereof in the Prospectus.
(i) Except for the outstanding shares of preferred stock of Consumers
Power Company, all of the outstanding capital stock of each of Consumers
Power Company, CMS Enterprises Company, CMS NOMECO Oil & Gas Co., and
Michigan Gas Storage 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 limitation, 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 Power Company,
CMS Enterprises Company, CMS NOMECO Oil & Gas Co., and Michigan Gas Storage
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,
warrants or options.
(j) Each of the Company and its Significant Subsidiaries 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
that the failure to obtain or file would not have a material adverse effect
on the Company and its Subsidiaries, taken as a whole.
(k) No 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. Each of the Company and its Significant Subsidiaries 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 Basic Prospectus, except to the
extent that the failure to obtain or file would not have a material adverse
effect on the Company and its Subsidiaries, taken as a whole.
(l) Neither the execution or delivery by the Company of, nor 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 applicable 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.
(m) Except as disclosed in the Basic Prospectus, there is no action,
suit, proceeding, inquiry or investigation (at law or in equity or
otherwise) pending or, to the knowledge of the Company, threatened against
the Company or any Subsidiary 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 and its Subsidiaries, taken as a whole, or of the Consumers Gas
Group or materially adversely affect the ability of the Company to perform
its obligations hereunder or the consummation of the transactions
contemplated by this Agreement.
(n) There has not been any material and adverse change in the
business, properties or financial condition of (i) the Company and its
Subsidiaries, taken as a whole, or (ii) the Consumers Gas Group,
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<PAGE> 9
from that set forth in the Registration Statement (other than changes
referred to in or contemplated by the Registration Statement or the Basic
Prospectus).
(o) 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 or any of its Significant Subsidiaries in any material respect
under any indenture, mortgage, loan agreement, lease or other material
agreement or instrument to which the Company or any of its Significant
Subsidiaries is a party or by which it or any of its Significant
Subsidiaries, or any of their respective 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 Representatives 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 proceeding (including governmental investigations) as provided in
Section 8(b) 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 Prospectus, or, if the Prospectus shall be amended or
supplemented, in the Prospectus as so amended or supplemented (if such
Prospectus or such Prospectus as amended or supplemented is used after the
period of time 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
preliminary 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 Representatives on behalf of, any Underwriter expressly
for use therein, 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 Prospectus, 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 Prospectus 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
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<PAGE> 10
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.
(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 Company
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 termination 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. The Indemnifying Person shall assume
the defense of any such litigation or proceeding, including the employment
of counsel and the payment of all expenses. Such counsel shall be
designated in writing by the Representatives in the case of parties
indemnified pursuant to Section 8(b) and by the Company in the case of
parties indemnified 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 Indemnified 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 (including 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 participated 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 proceedings 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
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<PAGE> 11
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
Representatives 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 Persons shall in good faith fully consult with the Indemnifying
Person in advance as to the selection of such counsel; and
(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 Representatives 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 Indemnifying 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, 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
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<PAGE> 12
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 misrepresentation. 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.
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 First Time of
Purchase or Second Time of Purchase, the Representatives shall immediately
notify the Company and the Representatives 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 Securities 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
number of shares of Securities which the defaulting Underwriter had agreed to
purchase. If any non-defaulting Underwriter or Underwriters shall determine to
exercise such right, the Representatives shall give written notice to the
Company of such determination within 36 hours after the Company shall have
received notice of any such default, and thereupon the First Time of Purchase or
Second Time of Purchase, as the case may be, 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 Representatives 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 Agreement may be terminated by the Company, upon like notice given to the
Representatives within a further period of 36 hours. If in such case the Company
shall not elect to terminate this Agreement, it shall have the right,
irrespective of such default:
(a) to require such non-defaulting Underwriters to purchase and pay
for the respective number of shares which they had severally agreed to
purchase hereunder, as hereinabove provided, and, in addition, the number
of shares of Securities which the defaulting Underwriter shall have so
failed to purchase up to a number of shares thereof equal to one-ninth
(1/9) of the respective number of shares 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 number of shares 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).
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 Representatives
within such further period of 36 hours, and thereupon the First Time of Purchase
or the Second Time of Purchase shall be postponed for such period, not exceeding
five
12
<PAGE> 13
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 First Time of Purchase, and the option referred to in Section 1
hereof, if exercised, may be canceled at any time prior to the Second Time of
Purchase, by the Representatives, 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, or there shall have been established
by the Commission or the New York Stock Exchange or by any federal or state
agency or by the decision of any court any general limitation on prices for such
trading or any general restrictions on the distribution of securities, (ii)
trading of any securities of the Company or Consumers Power 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 calamity or crisis, the effect of which
on the financial markets of the United States is such as to impair, in the
Representatives' reasonable judgment, after having made due inquiry, the
marketability of the Securities.
If the Representatives elect to terminate this Agreement, as provided in
this Section 11, the Representatives 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 Underwriters 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.
Notwithstanding the foregoing, the provisions of Sections 5(g), 5(i), 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
Representatives, to the Representatives at the address or number, as
appropriate, designated in Schedule I hereto, and, if to the Company, to CMS
Energy Corporation, Attention: Senior Vice President -- Finance, Fairlane Plaza
South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan 48126 (Telecopy:
313-436-9548).
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 (including the Representatives herein mentioned, if so
named), and the term "Representatives", as used herein, shall be deemed to mean
the representative or representatives 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
13
<PAGE> 14
only one person, firm or corporation named in Schedule I and Schedule II hereto,
the term "Underwriters" and the term "Representatives", 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 "Representatives", 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
accordance 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.
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:
--------------------------------
Accepted:
---------------, 1995
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
A.G. Edwards & Sons, Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
First of Michigan Corporation
As Representatives
By: Morgan Stanley & Co. Incorporated
By:
---------------------------------------------
14
<PAGE> 15
SCHEDULE I
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
A.G. Edwards & Sons, Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
First of Michigan Corporation
c/o Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
Attention: Office of General Counsel
Telecopy: (212) 703-4305
<PAGE> 16
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ----------------------------------------------------------------------- ---------------------
<S> <C>
Morgan Stanley & Co. Incorporated......................................
---------------------
Donaldson, Lufkin & Jenrette Securities Corporation....................
---------------------
A.G. Edwards & Sons, Inc...............................................
---------------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated.....................
---------------------
First of Michigan Corporation..........................................
---------------------
Total........................................................
=================
</TABLE>
<PAGE> 17
EXHIBIT A
[Form of opinion of Denise M. Sturdy, Esq.]
, 1995
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
A.G. Edwards & Sons, Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
First of Michigan Corporation
as Representatives of the Underwriters
referred to below
c/o Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
Re: CMS Energy Corporation
8,000,000 Shares of Class G Common Stock (no par value)
Ladies and Gentlemen:
I address this opinion to you individually and as Representatives of the
Underwriters (the "Underwriters"), named in Schedule II to the Underwriting
Agreement dated , 1995 (the "Underwriting Agreement"), between
you, as such Representatives, and CMS Energy Corporation, a Michigan corporation
(the "Company"), with respect to the issuance and sale of up to 8,000,000 shares
(the "Securities") of the Company's Class G Common Stock, (no par value) (the
"Securities"). Capitalized terms not defined herein have the meanings specified
in the Underwriting Agreement.
In rendering the opinions expressed below, I or attorneys acting under my
supervision have examined originals, or copies of originals certified to my
satisfaction, of such agreements, documents, certificates and other statements
of governmental officials and corporate officers and such other papers and
evidence as I or we have deemed relevant and necessary as a basis for such
opinions. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of all natural
persons, and the conformity with the original documents of any copies thereof
submitted to us for our examination. We have further assumed, without
investigation, that each document submitted to us for review and relied upon for
this opinion is accurate and complete as of the date given to the date hereof.
We have also relied upon the representations and warranties as to factual
matters contained in and made pursuant to the Underwriting Agreement.
Whenever the opinion herein with respect to the existence or absence of
facts is indicated to be based on my knowledge or current conscious awareness,
it is intended to signify that during the course of my representation of the
Company or that of the attorneys acting under my direct supervision who have had
an active involvement in the transactions contemplated by the Underwriting
Agreement, no information has come to our attention which would give us actual
knowledge of the existence or absence of such facts contrary to such opinion or
statement.
<PAGE> 18
Pursuant to the requirements of Section 3(b)(1) of the Underwriting
Agreement, this will advise you that in the opinion of the undersigned:
1. The Company is a duly organized and validly existing corporation in
good standing under the laws of the State of Michigan.
2. Consumers Power Company is a duly organized and validly existing
corporation in good standing under the laws of the State of Michigan.
3. The Company's Restated Articles of Incorporation establishing the
Class G Common Stock, no par value, as a new class of the Company's common
stock, have been duly filed in the Office of the Michigan Department of
Commerce, all necessary corporate and shareholder actions in connection
therewith have been duly taken, and said Restated Articles of Incorporation
are valid and in full force and effect in accordance with their terms on
the date hereof.
4. The Securities have been duly authorized by all necessary corporate
action on the part of the Company and validly issued and are fully paid and
non-assessable, and the issuance of the Securities will not be subject to
any preemptive or similar rights.
5. The shares of common stock of the Company outstanding prior to the
issuance of the Securities have been duly authorized and are validly
issued, fully paid and non-assessable, and the capital stock of the Company
conforms in all material respects to the description thereof in the
Prospectus.
6. All legally required corporate proceedings in connection with the
authorization, issuance and validity of the Securities and the sale of the
Securities by the Company in accordance with the Underwriting Agreement
have been taken; and no approval, authorization, consent or other order of
any Michigan governmental regulatory body is required with respect to the
issuance and sale of the Securities as contemplated in the Underwriting
Agreement (other than in connection with or in compliance with the
provisions of the Michigan securities or Blue Sky laws, as to which I
express no opinion).
7. I do not know of any legal or governmental proceedings required to
be described in the Prospectus that are not described as required, nor of
any contracts or documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
8. The statements made in the Prospectus under the caption
"Description of Capital Stock" accurately summarize the provisions of the
Company's Articles of Incorporation, as amended, and the Securities conform
as to legal matters in all material respects to the description thereof and
to the statements in regard thereto contained in the Registration Statement
and the Prospectus.
9. The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
The opinions expressed herein are limited to the laws of the State of
Michigan.
I consent to the reliance on this opinion by Sidley & Austin and Reid &
Priest LLP in their opinions to you of even date herewith pursuant to the
Underwriting Agreement. Subject to the foregoing, this opinion is being
delivered solely for the benefit of the Underwriters and it may not be quoted,
filed with any governmental authority or other regulatory agency or otherwise
circulated or utilized for any other purpose without my prior written consent.
Very truly yours,
<PAGE> 19
EXHIBIT B
[Form of Opinion of Sidley & Austin]
, 1995
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
A.G. Edwards & Sons, Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
First of Michigan Corporation
as Representatives of the Underwriters
referred to below
c/o Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
Re: CMS Energy Corporation
8,000,000 Shares of Class G Common Stock (no par value)
Ladies and Gentlemen:
We address this opinion to you individually and as Representatives of the
Underwriters (the "Underwriters") named in Schedule II to the Underwriting
Agreement dated , 1995 (the "Underwriting Agreement") between
you, as such Representatives, and CMS Energy Corporation, a Michigan corporation
(the "Company"), with respect to the issuance and sale of up to 8,000,000 shares
of the Company's Class G Common Stock, no par value (the "Securities").
Capitalized terms not defined herein have the meanings specified in the
Underwriting Agreement.
In rendering the opinions expressed below, we have examined originals, or
copies of originals certified to our satisfaction, of such agreements,
documents, certificates and other statements of governmental officials and
corporate officers, including, without limitation, a certificate of the transfer
agent and registrar as to the execution of the Securities and the cross-receipt
with regard to the delivery thereof and the payment therefor, and such other
papers and evidence as we have deemed relevant and necessary as a basis for such
opinions. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of all natural
persons and the conformity with the original documents of any copies thereof
submitted to us for our examination. We have also relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Underwriting Agreement.
Pursuant to the requirements of Section 3(b)(1) of the Underwriting
Agreement, this will advise you that in the opinion of the undersigned, as
counsel for the Company:
1. The Company is a duly organized and validly existing corporation in
good standing under the laws of the State of Michigan.
2. Consumers Power Company is a duly organized and validly existing
corporation in good standing under the laws of the State of Michigan.
<PAGE> 20
3. The Company's Restated Articles of Incorporation, establishing the
Class G Common Stock, no par value, as a new class of the Company's common
stock, have been duly filed in the Office of the Michigan Department of
Commerce, all necessary corporate and shareholder actions in connection
therewith have been duly taken, and said Restated Articles of Incorporation
are valid and in full force and effect in accordance with their terms on
the date hereof.
4. The Securities have been duly authorized by all necessary corporate
action on the part of the Company and are validly issued, fully paid and
non-assessable, and the issuance of the Securities will not be subject to
any preemptive or similar rights.
5. The shares of common stock of the Company outstanding prior to the
issuance of the Securities have been duly authorized and are validly
issued, fully paid and non-assessable, and the capital stock of the Company
conforms in all material respects to the description thereof in the
Prospectus.
6. All legally required corporate proceedings in connection with the
authorization, issuance and validity of the Securities and the sale of the
Securities by the Company in accordance with the Underwriting Agreement
have been taken; and, except for the order of the Commission which is
required under the Act and has been obtained, no approval, authorization,
consent or other order of any governmental regulatory body is required with
respect to the issuance and sale of the Securities (other than in
connection with or in compliance with the provisions of the securities or
Blue Sky laws of any State, as to which we have not been asked to express
an opinion).
7. We do not know of any legal or governmental proceedings required to
be described in the Prospectus that are not described as required, nor of
any contracts or documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
8. The statements made in the Prospectus under the caption
"Description of Capital Stock" accurately summarize the provisions of the
Company's Articles of Incorporation, as amended, and the Securities conform
as to legal matters in all material respects to the description thereof and
to the statements in regard thereto contained in the Registration Statement
and the Prospectus.
9. The Registration Statement has become effective under the Act and,
to our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act.
10. The Registration Statement, as of its effective date, and the
Prospectus, as of the date thereof (except in each case for (i) the
operating statistics, financial statements and schedules contained or
incorporated by reference therein (including the notes thereto and
auditors' reports thereon), (ii) the other financial or statistical
information contained or incorporated by reference therein and (iii) the
exhibits thereto, as to all of which we express no opinion), complied as to
form in all material respects with the requirements of Form S-3 under the
Act and the applicable rules and regulations of the Commission thereunder,
and each document incorporated therein as originally filed pursuant to the
Exchange Act (except for (i) the operating statistics, financial statements
and schedules contained or incorporated by reference therein (including the
notes thereto and the auditors' reports thereon), (ii) the other financial
or statistical information contained or incorporated by reference therein
and (iii) the exhibits thereto, as to which we express no opinion) complied
as to form when so filed in all material respects with the Exchange Act and
the applicable rules and regulations of the Commission thereunder.
11. Based upon the timely filing by the Company with the Commission of
an exemption statement pursuant to Rule 2 under the Public Utility Holding
Company Act of 1935, as amended (the "1935 Act") which, to the best of our
knowledge is not the subject of any notification provided for in Rule 6
under the 1935 Act, the Company is exempt from the provisions of the 1935
Act except for Section 9(a)(2) thereof relating to the acquisition of
securities of other public utility companies or public utility holding
companies.
<PAGE> 21
12. The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
We have participated in discussions with certain officers and other
representatives of the Company, representatives of the independent public
accountants of the Company, your representatives and counsel for the
Underwriters, at which the contents of the Registration Statement and the
Prospectus and related matters were discussed. Although we are not passing upon
and do not assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement or the Prospectus
(except to the extent stated in paragraph 8 above), we advise you that, on the
basis of the foregoing (relying as to materiality to a large extent upon
statements and other representations of officers and other representatives of
the Company), no facts have come to our attention that lead us to believe that
the Registration Statement (except for the operating statistics, financial
statements and schedules and other financial and statistical data included or
incorporated by reference therein, as to which we do not comment) on its
effective 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 misleading, or that the Prospectus (except for the
operating statistics, financial statements and schedules and other financial and
statistical data contained or incorporated by reference therein, as to which we
do not comment) as of its date contained, or as of the date hereof contains, any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
The opinions expressed herein are limited to the laws of the States of New
York and Michigan and the Federal laws of the United States of America. Insofar
as the foregoing opinions involve the laws of the State of Michigan, we have
relied exclusively, with your consent, upon the opinion of even date of Denise
M. Sturdy, Esq., Assistant General Counsel of the Company, addressed to you
pursuant to Section 3(b)(1) of the Underwriting Agreement. We believe that you
and we are justified in relying on Ms. Sturdy's opinion for such purposes.
Any opinion or statement herein which is expressed to be "to our knowledge"
or is otherwise qualified by words of like import means that the attorneys in
this Firm who have had an active involvement in the transaction contemplated by
the Underwriting Agreement have no current conscious awareness of any facts or
information contrary to such opinion or statement.
We consent to the reliance on paragraph 11 of this opinion by Reid & Priest
LLP, counsel for the Underwriters, in their opinion to you of even date herewith
pursuant to the Underwriting Agreement. Subject to the foregoing, this opinion
is being delivered solely for the benefit of the Underwriters. Accordingly, it
may not be quoted, filed with any governmental authority or other regulatory
agency or otherwise circulated or utilized for any other purpose without our
prior written consent.
Very truly yours,
<PAGE> 22
EXHIBIT C
[Form of Opinion of Reid & Priest LLP]
, 1995
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
A.G. Edwards & Sons, Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
First of Michigan Corporation
as Representatives of the Underwriters
named in Schedule II to the Underwriting Agreement
referred to below
c/o Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
Re: CMS Energy Corporation
8,000,000 Shares of Class G Common Stock (no par value)
Ladies and Gentlemen:
We have acted as your counsel in connection with the purchase by you of
8,000,000 Shares of Class G Common Stock (no par value) (the "Securities") of
CMS Energy Corporation (the "Company"), pursuant to the Underwriting Agreement
dated , 1995 between the Company and you (the "Underwriting
Agreement").
We have examined the Registration Statement, as amended, on Form S-3 (File
Nos. 33-57719 and 33-57719-01) filed by the Company under the Securities Act of
1933, as amended (the "Act"), as it became effective under the Act; the
prospectus of the Company dated , 1995 (the "Prospectus"), filed
pursuant to Rule 424 of the rules and regulations of the Securities and Exchange
Commission (the "Commission") under the Act, which pursuant to Form S-3
incorporates by reference (i) the Annual Report of the Company on Form 10-K for
the fiscal year ended December 31, 1994, (ii) the Quarterly Report of the
Company on Form 10-Q for the quarter ended March 31, 1995 and (iii) the Current
Reports of the Company on Form 8-K dated January 10, 1995, February 2, 1995 [and
, 1995] (the "Exchange Act Documents"), filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); and the Company's
Restated Articles of Incorporation as filed with the Department of Commerce of
the State of Michigan on June 6, 1995 (the "Articles"). In addition, we have
examined, and have relied as to matters of fact upon, the documents delivered to
you by the Company at the closing, including, without limitation, a certificate
of the transfer agent and registrar as to the execution of the Securities, and
the cross-receipt with regard to the delivery thereof and the payment therefor
and we have made such other and further investigations as we deemed necessary to
enable us to express the opinions hereinafter set forth. With respect to such
documents, we have assumed the genuineness of signatures on documents, the legal
capacity of all persons, the authenticity of documents submitted as originals
and the conformity to originals of documents
<PAGE> 23
submitted as copies thereof. We have not examined the certificates for the
Securities except a specimen thereof.
We are of the opinion that:
1. The Company is a duly organized and validly existing corporation
under the laws of the State of Michigan.
2. Consumers Power Company is a duly organized and validly existing
corporation under the laws of the State of Michigan.
3. The Securities have been duly authorized by all necessary corporate
action on the part of the Company and validly issued and are fully paid and
non-assessable.
4. The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
5. The Registration Statement, as of its effective date, and the
Prospectus, as of the date thereof (except in each case for (i) the
operating statistics, financial statements and schedules contained or
incorporated by reference therein (including the notes thereto and the
auditors' reports thereon), (ii) the other financial and statistical
information contained or incorporated by reference therein and (iii) the
exhibits thereto, (as to which we do not express an opinion), complied, or
were deemed to have complied, as to form in all material respects with the
requirements of Form S-3 under the Act and to the applicable rules and
regulations of the Commission thereunder.
6. The statements made in the Prospectus under the caption
"Description of Capital Stock" accurately summarize in all material
respects the provisions of the Articles, and the Securities conform as to
legal matters in all material respects to the description thereof contained
therein and to the statements in regard thereto contained in the
Registration Statement and the Prospectus.
We have participated in discussions with certain officers and other
representatives of the Company, counsel for the Company, representatives of the
independent certified public accountants for the Company and representatives of
the Underwriters, at which the contents of the Registration Statement and the
Prospectus and related matters were discussed. Although we are not passing upon
and do not assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement or the Prospectus
(except to the extent set forth in paragraph 6 above), we advise you that, on
the basis of the foregoing (relying as to materiality to a large extent upon
statements and other representations of officers and other representatives of
the Company), no facts have come to our attention which lead us to believe that
the Registration Statement (except for the operating statistics, financial
statements and schedules and other financial or statistical data included or
incorporated by reference therein, as to which we do not comment) contained, on
its effective date, 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 misleading, or that the Prospectus (except for the
operating statistics, financial statements and schedules and other financial or
statistical data included or incorporated by reference therein, as to which we
do not comment), as of its date contained, or as of the date hereof contains,
any untrue statement of a material fact or omitted or omits to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
We are members of the Bar of the State of New York and we do not express
any opinion herein concerning any law other than the federal law of the United
States and the laws of the States of New York and Michigan. Insofar as the
opinions expressed herein relate to or are dependent upon matters governed by
the laws of the State of Michigan or the exemption of the Company under the
Public Utility Holding Company Act of 1935, we have relied upon the opinions,
dated the date hereof, rendered to you by Denise M. Sturdy, Esq. and Sidley &
Austin, respectively, which opinions are in form satisfactory to us.
<PAGE> 24
This opinion is rendered to you in connection with the above-described
transaction. This opinion may not be relied upon by you for any other purpose,
or relied upon or furnished to any other person, firm or corporation without our
prior written consent.
Very truly yours,
REID & PRIEST LLP
