<PAGE> 1
Rule 424(b)5
Registration Statement No. 333-27849
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 13, 1997
3,450,000 PREFERRED SECURITIES
CMS ENERGY LOGO CMS ENERGY TRUST I
7 3/4% CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES
(CONVERTIBLE QUIPS(SM)*)
(LIQUIDATION PREFERENCE $50 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED AS DESCRIBED HEREIN BY,
AND CONVERTIBLE INTO COMMON STOCK OF,
CMS ENERGY CORPORATION
------------------------
The 7 3/4% convertible quarterly income preferred securities (the "Preferred
Securities") offered hereby represent undivided beneficial interests in the
assets of CMS Energy Trust I, a statutory business trust created under the laws
of the State of Delaware (the "Issuer"). All of the beneficial interests in the
assets of the Issuer represented by common securities of the Issuer (the "Common
Securities" and, together with the Preferred Securities, the "Trust Securities")
are owned by CMS Energy Corporation, a Michigan corporation ("CMS Energy" or the
"Company"). The Issuer exists for the sole purpose of issuing the Preferred
Securities and the Common Securities and investing the proceeds from the
issuance thereof in 7 3/4% Convertible Subordinated Debentures due 2027 having
the terms described herein (the "Debentures") to be issued by CMS Energy. The
Preferred Securities will have a preference under certain circumstances with
respect to cash distributions and amounts payable on liquidation, redemption or
otherwise over the Common Securities. See "Description of the Preferred
Securities -- Subordination of Common Securities".
(continued on next page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-16 OF THIS PROSPECTUS SUPPLEMENT FOR
CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES,
INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH PAYMENTS OF
DISTRIBUTIONS ON THE PREFERRED SECURITIES MAY BE DEFERRED AND THE RELATED UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL.
------------------------
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 SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
PLACEMENT PLACEMENT PROCEEDS TO
PRICE FEE(1) ISSUER(2)(3)
--------- --------- ------------
<S> <C> <C> <C>
Per Preferred Security............................. $50 (2) $50
Total.............................................. $172,500,000 (2) $172,500,000
</TABLE>
- ---------------
(1) The Issuer and CMS Energy have agreed to indemnify the several Agents
referred to herein against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Plan of Distribution".
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Debentures, under the Placement
Agreement, CMS Energy will pay to the Agents, as compensation for their
assistance in connection with investment therein of such proceeds, a
placement fee of $0.75 per Preferred Security (or $2,587,500 in the
aggregate). See "Plan of Distribution".
(3) Expenses of the Offering, which are payable by CMS Energy, are estimated to
be $400,000.
------------------------
The Preferred Securities are being sold exclusively to Franklin Income Fund,
Franklin Utilities Fund, Franklin Valuemark Utility Equity Fund, Franklin
Valuemark Income Securities Fund, Franklin Global Utilities Fund, Franklin
Equity Income Fund, Franklin AGE High Income Fund, Franklin Multi-Income Trust,
Franklin Universal Trust, and Franklin Convertible Securities Fund
(collectively, the "Purchasers"). It is expected that the Preferred Securities
will be ready for delivery in book-entry form only through the facilities of DTC
in New York, New York on or about June 20, 1997, against payment therefor in
immediately available funds.
- ------------------------
* QUIPS is a servicemark of Goldman, Sachs & Co.
------------------------
The date of this Prospectus Supplement is June 18, 1997.
<PAGE> 2
(continued from previous page)
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions from the Issuer at an annual rate of
7 3/4% of the liquidation preference of $50 per Preferred Security accruing from
the date of original issuance and payable quarterly in arrears on January 15,
April 15, July 15 and October 15 of each year, commencing October 15, 1997
("Distributions"). The distribution rate and the distribution and other payment
dates for the Preferred Securities will correspond to the interest rate and
interest and other payment dates for the Debentures, which will be the sole
assets of the Issuer. As a result, if principal or interest is not paid on the
Debentures, no amounts will be paid on the Preferred Securities. CMS Energy has
the right to defer payment of interest on the Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect to
each deferral period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the stated maturity of the Debentures. Upon the
termination of any such Extension Period and the payment of all amounts then due
on any Interest Payment Date (as defined herein), CMS Energy may elect to begin
a new Extension Period subject to the requirements set forth herein. If interest
payments on the Debentures are so deferred, Distributions on the Preferred
Securities will also be deferred and CMS Energy will not be permitted, subject
to certain exceptions set forth herein, to declare or pay any cash distributions
with respect to CMS Energy's capital stock or debt securities that rank pari
passu with or junior to the Debentures. During an Extension Period, interest on
the Debentures will continue to accrue (and the amount of Distributions to which
holders of the Preferred Securities are entitled will accumulate at the stated
rate per annum, compounded quarterly) and holders of Preferred Securities will
be required to accrue interest income for United States federal income tax
purposes. See "Description of the Debentures -- Option to Extend Interest
Payment Period" and "Certain Federal Income Tax Consequences -- Interest Income
and Original Issue Discount."
Each Preferred Security is convertible in the manner described herein at
the option of the holder, at any time prior to the Conversion Expiration Date
(as defined herein), into shares of common stock, $.01 par value per share, of
CMS Energy ("CMS Energy Common Stock" or "Common Stock") at the rate of 1.2255
shares of CMS Energy Common Stock for each Preferred Security (equivalent to a
conversion price of $40.80 per share of CMS Energy Common Stock), subject to
adjustment in certain circumstances. See "Description of the Preferred
Securities -- Conversion Rights" herein and "Description of Securities -- Common
Stock" in the accompanying Prospectus. The last reported sale price of CMS
Energy Common Stock, which is listed under the symbol "CMS" on the New York
Stock Exchange, on June 18, 1997 was $35.00 per share. See "Price Range of CMS
Energy Common Stock and Dividends."
At any time on or after July 16, 2001, CMS Energy may, at its option, cause
the rights of holders of the Preferred Securities to convert the Preferred
Securities into CMS Energy Common Stock to expire. CMS Energy may exercise this
option only if for 20 trading days within any period of 30 consecutive trading
days, including the last trading day of such period, the Current Market Price
(as defined herein) of CMS Energy Common Stock exceeds 115% of the conversion
price of the Preferred Securities, subject to adjustment in certain
circumstances. In order to exercise its option to terminate the conversion
rights of the Preferred Securities, CMS Energy must issue a press release
announcing the date upon which conversion rights will expire prior to the
opening of business on the second trading day after any period in which the
condition in the preceding sentence has been met, but in no event prior to July
16, 2001. The date on which such conversion rights will expire (the "Conversion
Expiration Date") shall be a date not less than 30 and not more than 60 days
following the date of the issuance of the press release described above. See
"Description of the Preferred Securities -- Conversion Rights -- Expiration of
Conversion Rights."
Except as provided below, the Preferred Securities may not be redeemed by
the Issuer prior to July 16, 2001. The Preferred Securities are subject to
redemption, in whole or in part, on or after such date, at redemption prices set
forth herein, upon any permitted redemption by CMS Energy of Debentures, in a
principal amount not to exceed the amount of the proceeds derived by CMS Energy
S-2
<PAGE> 3
or its subsidiaries from the issuance and sale of common stock within three
years preceding the date fixed for redemption. See "Description of the Preferred
Securities -- Optional Redemption." In the event that, at any time after the
Conversion Expiration Date, less than 5% of the Preferred Securities remains
outstanding, such Preferred Securities shall be redeemable at the option of the
Issuer, in whole but not in part, at a redemption price equal to the liquidation
preference for such Preferred Securities and all accrued and unpaid
Distributions. See "Description of the Preferred Securities -- Optional
Redemption." In addition, the Preferred Securities are subject to mandatory
redemption upon the repayment at maturity or as a result of acceleration of the
Debentures. See "Description of the Preferred Securities -- Mandatory
Redemption."
Under certain circumstances following the occurrence of a Special Event (as
herein defined), the Preferred Securities are also subject to (i) exchange, at
the option of the Issuer in the manner described herein, for Debentures (see
"Description of the Preferred Securities -- Special Event Exchange or
Redemption") or (ii) redemption, in whole or in part, on or after July 16, 2001,
if such Special Event constitutes a Tax Event (as defined herein). At any time,
CMS Energy will have the right to terminate the Issuer and cause the Debentures
to be distributed to the holders of the Preferred Securities in liquidation of
the Issuer. See "Description of the Preferred Securities -- Distribution of
Debentures."
CMS Energy has, through the Guarantee, the Trust Agreement, the Debentures
and the Indenture (each, as defined herein), taken together, fully, irrevocably
and unconditionally guaranteed all of the Issuer's obligations under the
Preferred Securities. See "Description of the Guarantee," "CMS Energy Trust I"
and "Description of the Debentures," respectively. The Guarantee of CMS Energy
guarantees the payment of Distributions and payments on liquidation or
redemption of the Preferred Securities, but only in each case to the extent of
funds held by the Issuer, as described herein (the "Guarantee"). See
"Description of the Guarantee." If CMS Energy does not make interest payments on
the Debentures held by the Issuer, the Issuer will have insufficient funds to
pay Distributions on the Preferred Securities. The Guarantee does not cover
payment of Distributions when the Issuer does not have sufficient funds to pay
such Distributions. In such event, a holder of Preferred Securities may
institute a legal proceeding directly against CMS Energy to enforce payment
under the Debentures of such Distributions to such holder. The obligations of
CMS Energy under the Guarantee are subordinate and junior in right of payment to
all other liabilities of CMS Energy and will rank pari passu 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 (as defined in "Description of
the Debentures -- Subordination").
The Debentures are subordinate and junior in right of payment to all Senior
Indebtedness (as defined herein) of CMS Energy. The terms of the Debentures
place no limitation on the amount of Senior Indebtedness that may be incurred by
CMS Energy or the amount of indebtedness that may be incurred by its
subsidiaries. As of May 31, 1997, CMS Energy had indebtedness of $1,612 million,
all of which comprised Senior Indebtedness of CMS Energy. CMS Energy will have
the right from time to time on or after July 16, 2001, to redeem, in whole or in
part, the Debentures at the redemption prices set forth herein, provided that
the principal amount so redeemed may not exceed the amount of proceeds derived
from CMS Energy or its subsidiaries from the issuance and sale of common stock
within three years preceding the date fixed for redemption.
In the event of the termination of the Issuer, after satisfaction of the
creditors of the Issuer as provided by applicable law, the holders of the
Preferred Securities will be entitled to receive a liquidation preference of $50
per Preferred Security plus accumulated and unpaid Distributions thereon to the
date of payment, which may be in the form of a distribution of such amount in
Debentures, subject to certain exceptions. See "Description of the Preferred
Securities -- Liquidation Distribution Upon Termination."
Prior to the Offering, there has been no public market for the Preferred
Securities and the Preferred Securities are being sold by the Issuer exclusively
to the Purchasers. There can be no
S-3
<PAGE> 4
assurance that any market for the Preferred Securities will develop or, if one
does develop, that it will be maintained. If an active market for the Preferred
Securities fails to develop or be maintained, the trading price of the Preferred
Securities could be adversely affected. No assurance can be given as to the
liquidity of the trading market for the Preferred Securities.
Except as provided herein, the Preferred Securities will be evidenced by
one or more certificates in registered, global form (collectively, the "Global
Certificate") which will be deposited with the Property Trustee (as defined
herein) as custodian for The Depository Trust Company ("DTC") and registered in
the name of Cede & Co. ("Cede") as DTC's nominee. Except as set forth herein,
record ownership of the Global Certificate may be transferred, in whole or in
part, only to another nominee of DTC or to a successor of DTC or its nominee.
See "Description of the Preferred Securities -- Form, Transfer, Exchange and
Book-Entry Procedures."
S-4
<PAGE> 5
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus
Supplement, including information under "Risk Factors," and in the accompanying
Prospectus.
CMS ENERGY CORPORATION
CMS Energy, incorporated in 1987, is the parent holding company of
Consumers Energy Company ("Consumers") and CMS Enterprises Company
("Enterprises"). Consumers, a combination electric and gas utility company
serving in all 68 counties of Michigan's Lower Peninsula, is the largest
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 domestic and
international energy-related businesses including: (i) oil and gas exploration
and production; (ii) acquisition, development and operation of independent power
production facilities; (iii) energy marketing, risk management and energy
management to large customers; (iv) transmission, storage and processing of
natural gas; and (v) international energy distribution.
CMS Energy conducts its principal operations through the following seven
business segments: (i) electric utility operations; (ii) gas utility operations;
(iii) oil and gas exploration and production operations; (iv) independent power
production; (v) energy marketing, services and trading; (vi) natural gas
transmission, storage and processing; and (vii) international energy
distribution. 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 and its subsidiaries
routinely evaluate, invest in, acquire and divest energy-related assets and/or
companies both domestically and internationally. Consideration for such
transactions may involve the delivery of cash or securities.
CMS Energy's 1996 consolidated operating revenue was $4,333 million. This
consolidated operating revenue was derived from its electric utility operations
(approximately 57% or $2,446 million), its gas utility operations (approximately
30% or $1,282 million), gas transmission, storage and marketing (approximately
7% or $320 million), oil and gas exploration and production activities
(approximately 3% or $130 million) and independent power production and other
non-utility activities (approximately 3% or $155 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. The
unconsolidated share of non-utility electric generation, gas transmission and
storage and international energy distribution revenue for 1996 was $557 million.
Consumers is a public utility serving gas or electricity to almost six
million of Michigan's nine and a half 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' 1996 consolidated operating revenue of
$3,770 million was derived approximately 65% ($2,446 million) from its electric
utility business and approximately 34% ($1,282 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 ("MPSC") and the
Federal Energy Regulatory Commission.
RECENT DEVELOPMENTS
On June 11, 1997, Consumers announced that one of its two nuclear power
plants, Big Rock Point, will permanently cease operations on August 30, 1997
after 35 years of service. Big Rock Point was capable of producing 67 megawatts
of electricity. The plant closure will have no impact on Consumers' electric
rates. The process to decommission the plant will begin in September 1997, and a
decommissioning fund with a current balance of $170 million, together with
future funds to be
S-5
<PAGE> 6
collected and future fund earnings, is expected to be adequate for plant
decommissioning expenses.
On June 5, 1997, the MPSC issued an order related to the restructuring of
the electric power industry in Michigan largely endorsing, with some
modification, a restructuring plan developed the previous year by the MPSC Staff
reflecting the principles and concepts for restructuring espoused by Michigan
Governor John Engler. The key elements of the plan include (i) recovery of
transition costs (often referred to as stranded costs) through a transmission
surcharge applicable through the year 2007 for all retail customers choosing
alternate generation suppliers; (ii) securitization of a transition cost
recovery surcharge for all retail customers; (iii) the ability of all retail
customers to choose their electric generator beginning in the year 2002; and
(iv) an annual phase-in of 2.5 percent of each utility's load (150 megawatts for
Consumers) for competition beginning later in 1997 through 2001. The Michigan
legislature must take action on certain elements of the plan, with action
expected in the fall of 1997. The MPSC will commence proceedings to confirm the
components of the MPSC Staff plan and their implementation, and to review
proposals for base rates, including a rate freeze, transition cost recovery,
performance based rates and other rates issues. CMS Energy and Consumers are
currently studying this order.
On May 12, 1997, a consortium led by CMS Energy completed its successful
bid in the Australian State of Victoria's privatization of its Loy Yang A power
facility. Loy Yang A is a 2,000-megawatt, brown coal-fueled plant with an
associated coal mine which supplies fuel to Loy Yang A and Loy Yang B. Loy Yang
A is Victoria's largest electric generating plant and Australia's lowest-cost
electric generating facility. The purchase price was approximately $3.67 billion
with 77 percent of the acquisition cost project financed by a group of banks and
the remaining 23 percent comprised of partner equity. Subsidiaries of CMS
Generation Co., a wholly owned subsidiary of Enterprises, hold a 50 percent
ownership interest in the Loy Yang A consortium. CMS Generation made an equity
contribution of approximately $500 million to acquire such ownership interest,
derived in part from proceeds of CMS Energy's $350 million note issuance and in
part from drawings under CMS Energy's revolving Credit Agreement (as defined
herein), each of which are described below. Certain management and operating
services for Loy Yang A will be provided by CMS Generation affiliates.
On May 6, 1997, CMS Energy issued $350 million of senior unsecured notes
due 2002 at an interest rate of 8.125 percent. Proceeds were used in part to pay
down debt, with the remainder, together with drawings under the Credit
Agreement, used to fund a portion of CMS Generation's equity contribution in the
acquisition of the Loy Yang A ownership interest.
The Company is negotiating with a group of banks to replace the Credit
Agreement and the Term Loan (as defined herein) with a credit facility
consisting of a combination of unsecured revolving credit and term loan
tranches. The Company expects that the aggregate borrowing capacity under the
new facility may range from $725 million to $1.125 billion. The Company expects
to enter into such new credit facility in June of 1997.
CMS ENERGY TRUST I
CMS Energy Trust I is a statutory business trust formed under the Delaware
Business Trust Act (the "Trust Act") pursuant to (i) a trust agreement, dated as
of May 22, 1997, executed by CMS Energy, as sponsor (the "Sponsor"), and the
trustees of CMS Energy Trust I (the "CMS Trustees") and (ii) the filing of a
certificate of trust with the Secretary of State of the State of Delaware on May
22, 1997. Such trust agreement will be amended and restated in its entirety (as
so amended and restated, the "Trust Agreement") substantially in the form filed
as an exhibit to the Registration Statement of which this Prospectus Supplement
and the accompanying Prospectus form a part. The Trust Agreement will be
qualified as an indenture under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). CMS Energy will directly or indirectly acquire Common
Securities in an aggregate liquidation amount equal to approximately 3% of the
total
S-6
<PAGE> 7
capital of CMS Energy Trust I. CMS Energy Trust I exists for the exclusive
purposes of (i) issuing the Trust Securities representing undivided beneficial
interests in the assets of CMS Energy Trust I and investing the gross proceeds
of the Trust Securities in the Debentures; (ii) distributing the Trust's income;
and (iii) engaging in only those other activities necessary or incidental
thereto. CMS Energy Trust I has a term of approximately 30 years, but may
terminate earlier as provided in the Trust Agreement.
Pursuant to the Trust Agreement, the number of CMS Trustees will initially
be three. Two of the CMS Trustees (the "Administrative Trustees") will be
persons who are employees or officers of or who are affiliated with CMS Energy.
The third trustee will be a financial institution that is unaffiliated with CMS
Energy, which trustee will serve as institutional trustee under the Trust
Agreement and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act (the "Property Trustee"). Initially, The
Bank of New York, a New York banking corporation, will be the Property Trustee
until removed or replaced by the holder of the Common Securities. For the
purpose of compliance with the provisions of the Trust Indenture Act, The Bank
of New York will also act as trustee (the "Guarantee Trustee") under the
Guarantee and The Bank of New York (Delaware) will act as the Delaware Trustee
for the purposes of the Trust Act, until removed or replaced by the holder of
the Common Securities. See "Description of the Guarantees" and "Description of
the Preferred Securities -- Voting Rights."
The Property Trustee will hold title to the Debentures for the benefit of
the holders of the Trust Securities and the Property Trustee will have the power
to exercise all rights, powers and privileges under the Indenture (as defined
herein) as the holder of the Debentures. In addition, the Property Trustee will
maintain exclusive control of a segregated non-interest bearing bank account
(the "Property Account") to hold all payments made in respect of the Debentures
for the benefit of the holders of the Trust Securities. The Property Trustee
will make payments of distributions and payments on liquidation, redemption and
otherwise to the holders of the Trust Securities out of funds from the Property
Account. The Guarantee Trustee will hold the Guarantee for the benefit of the
holders of the Preferred Securities. CMS Energy, as the direct or indirect
holder of all the Common Securities, will have the right to appoint, remove or
replace any CMS Trustee and to increase or decrease the number of CMS Trustees;
provided, that the number of CMS Trustees shall be at least three, a majority of
which shall be Administrative Trustees. CMS Energy will pay all fees and
expenses related to CMS Energy Trust I and the offering of the Trust Securities.
See "Description of the Debentures -- Miscellaneous."
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the Trust
Agreement, the Trust Act and the Trust Indenture Act. See "Description of the
Preferred Securities."
The trustee in the State of Delaware is The Bank of New York (Delaware),
White Clay Center, Route 273, Newark, Delaware 19711. The principal place of
business of the Issuer shall be c/o CMS Energy Corporation, Fairlane Plaza
South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan 48126-2712.
S-7
<PAGE> 8
SUMMARY FINANCIAL INFORMATION OF CMS ENERGY CORPORATION
The following is a summary of certain financial information of CMS Energy
and its consolidated subsidiaries and is qualified in its entirety by, and
should be read in conjunction with, the detailed information and consolidated
financial statements, including notes thereto, which are incorporated in the
accompanying Prospectus by reference. See "Incorporation of Certain Documents By
Reference" in the accompanying Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
------------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue............ $ 1,313 $ 1,283 $ 4,333 $ 3,890 $ 3,614 $ 3,476 $ 3,142
Pretax operating income...... $ 213 $ 219 $ 691 $ 619 $ 515 $ 447 $ 239
Net income (loss)............ $ 84 $ 88 $ 240 $ 204 $ 179 $ 155 $ (297)
Earnings (loss) per average
common share -- CMS Energy
Common Stock............... $ .79 $ .83 $ 2.45 $ 2.27 $ 2.09 $ 1.90 $ (3.72)
Earnings per average common
share -- Class G Common
Stock...................... $ 1.18 $ 1.50 $ 1.82 $ .38 -- -- --
Average shares of CMS Energy
Common Stock outstanding
(in thousands)............. 94,899 91,644 92,462 88,810 85,888 81,251 79,877
Average shares of Class G
Common Stock outstanding
(in thousands)............. 7,901 7,627 7,727 7,511 -- -- --
Cash dividends declared per
share of CMS Energy Common
Stock...................... $ .27 $ .24 $ 1.02 $ .90 $ .78 $ .60 $ .48
Cash dividends declared per
share of Class G Common
Stock...................... $ .295 $ .28 $ 1.15 $ .56 -- -- --
BALANCE SHEET DATA:
Net plant and property....... $ 5,279 $ 5,052 $ 5,280 $ 5,074 $ 4,814 $ 4,583 $ 4,326
Total assets................. $ 8,403 $ 8,033 $ 8,615 $ 8,143 $ 7,378 $ 6,958 $ 6,842
Long-term debt(1)............ $ 2,728 $ 3,192 $ 2,945 $ 3,012 $ 2,817 $ 2,520 $ 2,823
Notes payable................ $ 88 $ 38 $ 333 $ 341 $ 339 $ 259 $ 215
Other liabilities............ $ 3,356 $ 2,806 $ 3,179 $ 2,965 $ 2,759 $ 3,050 $ 2,914
Company-obligated mandatorily
redeemable preferred
securities of Consumers
Power Company Financing
I.......................... $ 100 $ 100 $ 100 -- -- -- --
Preferred stock of
subsidiary................. $ 356 $ 356 $ 356 $ 356 $ 356 $ 163 $ 163
Common stockholders'
equity..................... $ 1,775 $ 1,541 $ 1,702 $ 1,469 $ 1,107 $ 966 $ 727
</TABLE>
- ---------------
(1) Includes capital leases; excludes current maturities.
S-8
<PAGE> 9
THE OFFERING
Securities Offered............ 3,450,000 of the Issuer's 7 3/4% convertible
quarterly income preferred securities,
liquidation preference of $50 per security (the
"Preferred Securities").
Issuer........................ CMS Energy Trust I, a statutory business trust
created under the laws of the State of
Delaware.
Distributions................. Distributions on the Preferred Securities will
be cumulative from the date of original
issuance of the Preferred Securities and will
be payable at the annual rate of 7 3/4% of the
liquidation preference of $50 per Preferred
Security. Distributions will be made quarterly
in arrears on January 15, April 15, July 15 and
October 15, commencing on October 15, 1997 when
and to the extent that funds of the Issuer are
available therefor. The proceeds from the
Offering will be invested in the Debentures.
Interest payment periods on the Debentures are
quarterly, but may be deferred from time to
time by CMS Energy for periods of up to 20
consecutive quarters, so long as no Debenture
Event of Default (as defined herein) has
occurred and is continuing. In the event of
such a deferral, the Issuer would be unable to
make quarterly Distribution payments on the
Preferred Securities during the period of any
such deferral. During any such deferral period,
interest on the Debentures will continue to
accrue (and the amount of Distributions to
which holders of the Preferred Securities are
entitled will accumulate at the stated rate per
annum set forth herein, compounded quarterly)
and holders of Preferred Securities will be
required to accrue interest income for United
States federal income tax purposes. See
"Description of the Debentures -- Option to
Extend Interest Payment Period" and "Certain
Federal Income Tax Consequences -- Interest
Income and Original Issue Discount."
Distribution Deferral
Provisions.................... CMS Energy has the right to defer payment of
interest on the Debentures at any time or from
time to time for a period not exceeding 20
consecutive quarters with respect to each
deferral period (each, an "Extension Period"),
provided that no Extension Period may extend
beyond the stated maturity of the Debentures.
Upon the termination of any such Extension
Period and the payment of all amounts then due
on any Interest Payment Date, CMS Energy may
elect to begin a new Extension Period subject
to the requirements set forth herein. If
interest payments on the Debentures are so
deferred, Distributions on the Preferred
Securities will also be deferred and CMS Energy
will not be permitted, subject to certain
exceptions set forth herein, to declare or pay
any cash distributions with respect to CMS
Energy capital stock or debt securities
(including guarantees of indebtedness for
borrowed money) that rank pari passu with or
junior to the Debentures.
S-9
<PAGE> 10
Liquidation Preference........ $50 per Preferred Security, and all accrued and
unpaid Distributions.
Conversion into CMS Energy
Common Stock................ Each Preferred Security is convertible in the
manner described below at the option of the
holder, at any time prior to the Conversion
Expiration Date, into shares of CMS Energy
Common Stock at the rate of 1.2255 shares of
CMS Energy Common Stock for each Preferred
Security (equivalent to a conversion price of
$40.80 per share of CMS Energy Common Stock),
subject to adjustment in certain circumstances.
A holder of Preferred Securities wishing to
exercise its conversion right shall surrender
any or all of such Preferred Securities,
together with an irrevocable conversion notice,
to the paying, conversion and exchange agent
acting on behalf of the holders of Preferred
Securities (the "Conversion Agent"), which
shall exchange the Preferred Securities for a
portion (equal to the aggregate liquidation
preference of the Preferred Securities being so
converted) of the Debentures held by the Issuer
and immediately convert such Debentures into
CMS Energy Common Stock. A holder generally
will not recognize taxable gain or loss upon
the exchange through the Conversion Agent of
the Preferred Securities for a proportionate
share of the Debentures, followed immediately
thereafter by the conversion of the Debentures
into CMS Energy Common Stock. See "Certain
Federal Income Tax Consequences -- Conversion
of Preferred Securities into CMS Energy Common
Stock."
Termination of Conversion
Rights........................ At any time on or after July 16, 2001, CMS
Energy may, at its option, cause the conversion
rights of holders of the Preferred Securities
to expire. CMS Energy may exercise this option
only if for 20 trading days within any period
of 30 consecutive trading days, including the
last trading day of such period, the Current
Market Price of CMS Energy Common Stock exceeds
115% of the conversion price of the Preferred
Securities, subject to adjustment in certain
circumstances. In order to exercise its option
to terminate the conversion rights of the
Preferred Securities, CMS Energy must issue a
press release for publication on the Dow Jones
News Service announcing the date upon which
conversion rights will expire prior to the
opening of business on the second trading day
after any period in which the condition in the
preceding sentence has been met, but in no
event prior to July 16, 2001. The date upon
which such conversion rights are to expire (the
"Conversion Expiration Date") shall be a date
not less than 30 and not more than 60 days
following the date of such press release. The
press release shall announce the Conversion
Expiration Date and provide the current
conversion price and Current Market Price of
CMS Energy Common Stock, in each case as of the
close of business on the trading day next
preceding the date of the press release.
Written notice will be mailed by first-class
mail
S-10
<PAGE> 11
by the Property Trustee to each holder of
Preferred Securities not more than four
Business Days after issuance of the press
release. In the event of any redemption of the
Preferred Securities, the conversion rights
with respect to the Preferred Securities will
expire two Business Days prior to the scheduled
date for the mandatory redemption of the
Preferred Securities if CMS Energy has not
exercised its option to terminate the
conversion rights of the Preferred Securities.
See "Description of the Preferred Securities --
Conversion Rights -- Expiration of Conversion
Rights."
Redemption.................... Except as provided below, the Preferred
Securities may not be redeemed by the Issuer
prior to July 16, 2001.
From time to time on or after such date, the
Preferred Securities will be subject to
redemption, in whole or in part, at the
redemption prices set forth herein (together
with all accrued and unpaid Distributions, to
the date fixed for redemption) upon any
permitted redemption by CMS Energy of
Debentures, in a principal amount not to exceed
the amount of proceeds derived by CMS Energy or
its subsidiaries from the issuance and sale of
common stock within three years preceding the
date fixed for redemption. See "Description of
the Preferred Securities -- Optional
Redemption" and "Description of the Debentures
-- Optional Redemption."
If at any time following the Conversion
Expiration Date, less than 5% of the Preferred
Securities remains outstanding, such Preferred
Securities shall be redeemable at the option of
the Issuer, in whole but not in part, at a
redemption price of $50 per Preferred Security
together with accumulated and unpaid
Distributions (whether or not earned or
declared) through the date of redemption. The
Preferred Securities are subject to mandatory
redemption upon the repayment at maturity or as
a result of acceleration of the Debentures. See
"Description of Preferred Securities -- Trust
Agreement Events of Default; Notice" and
"Description of the Preferred Securities --
Mandatory Redemption."
Special Event Exchange or
Redemption.................. Upon the occurrence of a Tax Event (as defined
below) or an Investment Company Event (as
defined below), the CMS Trustees shall direct
the Conversion Agent to exchange all
outstanding Preferred Securities for
Debentures, provided that, in the case of a Tax
Event, the CMS Trustees shall have the right to
direct that less than all of the Preferred
Securities be so exchanged if and for so long
as CMS Energy shall have elected to pay
Additional Sums (as defined below) such that
the amounts received by the holders of
Preferred Securities that remain outstanding
are not reduced thereby and shall not have
revoked any such election or failed to make
such payments. Upon the occurrence of a Tax
Event, the Debentures may be redeemed by CMS
Energy on or after
S-11
<PAGE> 12
July 16, 2001 at 100% of the principal amount
thereof, plus accrued and unpaid interest
thereon. In the event the Debentures are
redeemed by CMS Energy, the Preferred
Securities will be redeemed by the CMS Trustees
at $50 per Preferred Security together with
accrued and unpaid Distributions thereon. See
"Description of the Preferred Securities --
Special Event Exchange or Redemption."
A "Special Event" means a Tax Event or an
Investment Company Event. A "Tax Event" means
the receipt by the Property Trustee, on behalf
of the Issuer, of an opinion of counsel,
rendered by a law firm having a national tax
and securities practice (which opinion shall
not have been rescinded by such law firm), to
the effect that, as a result of any amendment
to, or change (including any announced
prospective change) in, the laws (or any
regulations thereunder) of the United States or
any political subdivision or taxing authority
thereof or therein affecting taxation, or as a
result of any official administrative
pronouncement or judicial decision interpreting
or applying such laws or regulations, which
amendment or change is effective or such
pronouncement or decision is announced on or
after the date of issuance of the Preferred
Securities under the Trust Agreement, there is
more than an insubstantial risk in each case
after the date hereof that (i) the Issuer is,
or will be within 90 days of the date thereof,
subject to United States federal income tax
with respect to income received or accrued on
the Debentures, (ii) interest payable by CMS
Energy on such Debentures is not, or within 90
days of the date thereof will not be,
deductible by CMS Energy, in whole or in part,
for United States federal income tax purposes;
or (iii) the Issuer is, or will be within 90
days of the date thereof, subject to more than
a de minimis amount of other taxes, duties or
other governmental charges. "Investment Company
Event" means the receipt by the Property
Trustee, on behalf of the Issuer, of an opinion
of counsel, rendered by a law firm having a
recognized national tax and securities practice
(which opinion shall not have been rescinded by
such law firm), to the effect that, as a result
of the occurrence of a change in law or
regulation or a change in interpretation or
application of law or regulation by any
legislative body, court, governmental agency or
regulatory authority (a "Change in 1940 Act
Law"), that there is more than an insubstantial
risk that the Issuer is or will be considered
an "investment company" that is required to be
registered under the Investment Company Act of
1940, as amended (the "Investment Company
Act"), which Change in 1940 Act Law becomes
effective on or after the date of original
issuance of the Preferred Securities.
"Additional Sums" means the additional amounts
as may be necessary in order that the amount of
Distributions then due and payable by the
Issuer on the outstanding Preferred Securities
and Common Securities of the Issuer shall not
be
S-12
<PAGE> 13
reduced as a result of any additional taxes,
duties and other governmental charges to which
the Issuer has become subject as a result of a
Tax Event.
Distribution of Debentures.... At any time, CMS Energy will have the right to
terminate the Issuer and, after satisfaction of
the liabilities of creditors of the Issuer as
provided by applicable law, cause the
Debentures to be distributed to the holders of
the Preferred Securities in liquidation of the
Issuer. See "Description of the Preferred
Securities -- Distribution of the Debentures."
Guarantee..................... Pursuant to the Guarantee, CMS Energy will
irrevocably agree, on a subordinated basis, to
guarantee the payment in full of (a) the
Distributions payable by the Issuer on the
Preferred Securities, if and to the extent the
Issuer has funds on hand available therefor,
(b) the redemption price (together with
accumulated and unpaid Distributions) of the
Preferred Securities, to the extent the Issuer
has funds on hand available therefor, and (c)
payments on liquidation with respect to the
Preferred Securities (unless the Debentures are
distributed to the holders of the Preferred
Securities), to the extent that there are
assets of the Issuer available for distribution
to holders of the Preferred Securities. A
holder of Preferred Securities may enforce CMS
Energy's obligations under the Guarantee
directly against CMS Energy, and CMS Energy
waives any right to require that an action be
brought against the Issuer or any other person
before proceeding against CMS Energy. The
Guarantee will constitute an unsecured
obligation of CMS Energy and will rank
subordinate and junior in right of payment to
all liabilities of CMS Energy and pari passu
with any guarantee now or hereinafter entered
into by CMS Energy in respect of any preferred
or preference stock of any affiliate of CMS
Energy. See "Risk Factors -- Ranking of
Subordinated Obligations Under the Guarantee
and the Debentures" and "-- Structural
Subordination" and "Description of the
Guarantee."
Voting Rights................. Holders of Preferred Securities will generally
have limited voting rights relating only to the
modification of the Preferred Securities.
Holders of Preferred Securities will not be
entitled to vote to appoint, remove or replace
the CMS Trustees, which voting rights are
vested exclusively in the holder of the Common
Securities. The CMS Trustees and CMS Energy may
amend the Trust Agreement without the consent
of holders of Preferred Securities to ensure
that the Issuer will be classified for United
States federal income tax purposes as a grantor
trust even if such action adversely affects the
interests of such holders. See "Description of
the Preferred Securities -- Voting Rights;
Amendment of the Trust Agreement."
Debentures.................... The Debentures will have a maturity of 30 years
from the date of original issuance and will
bear interest at the rate of 7 3/4% per annum
payable quarterly in arrears. CMS Energy
S-13
<PAGE> 14
has the right from time to time to select an
interest payment period or periods longer than
one quarter (during which period or periods
interest will compound quarterly), provided
that no such deferral of interest payments will
exceed 20 consecutive quarters and provided
further that no such deferral of interest
payments may extend beyond the stated maturity
of the Debentures. Accordingly, Distribution
payments on the Preferred Securities may not be
deferred beyond the stated maturity of the
Debentures. If CMS Energy defers interest
payments longer than one quarter, subject to
certain exceptions, it will be prohibited from
paying dividends on any of its capital stock
and making certain other restricted payments
until quarterly interest payments are resumed
and all accrued and unpaid interest on the
Debentures is brought current. CMS Energy will
have the right to make partial payments of such
interest during a deferral of interest
payments. The Debentures are convertible into
shares of CMS Energy Common Stock at the option
of the holders thereof at a conversion rate of
1.2255 shares of CMS Energy Common Stock for
each $50 in principal amount of Debentures
(equivalent to a conversion price of $40.80 per
share of CMS Energy Common Stock) subject to
certain adjustments set forth herein. The
Issuer will covenant not to convert Debentures
except pursuant to a notice of conversion
delivered to the Conversion Agent by a holder
of Preferred Securities.
In addition, on and after July 16, 2001, the
Debentures are redeemable at the option of CMS
Energy at any time, in whole or in part, at the
redemption prices set forth herein, together
with accrued and unpaid interest to the date
fixed for redemption. See "Description of the
Debentures -- Optional Redemption." The
Debentures are also redeemable, in whole or in
part, upon the occurrence and continuation of a
Tax Event. See "Description of the Preferred
Securities -- Special Event Exchange or
Redemption."
The payment of the principal and interest on
the Debentures will be subordinated in right of
payment to all Senior Indebtedness of CMS
Energy. As of May 31, 1997, CMS Energy had
approximately $1,612 million of indebtedness,
all of which comprised Senior Indebtedness. See
"Risk Factors -- Ranking of Subordinate
Obligations Under the Guarantee and the
Debentures" and "-- Structural Subordination."
While the Preferred Securities are outstanding,
the Issuer will not have the right to amend the
Indenture or the terms of the Debentures in a
way that materially adversely affects the
holders of the Preferred Securities or to waive
a Debenture Event of Default without the
consent of holders of at least a majority in
aggregate liquidation preference of the
Preferred Securities and, in certain cases, the
Common Securities then outstanding. See
"Description of the Debentures -- Modification
of Indenture."
S-14
<PAGE> 15
Use of Proceeds............... All of the proceeds from the sale of the
Preferred Securities and the Common Securities
will be invested by the Issuer in Debentures of
CMS Energy pursuant to the Indenture described
herein and ultimately will be used by CMS
Energy for general corporate purposes,
including capital expenditures, investment in
subsidiaries, working capital and repayment of
debt.
S-15
<PAGE> 16
RISK FACTORS
Prospective purchasers of Preferred Securities should carefully review the
information contained elsewhere in this Prospectus Supplement and in the
accompanying Prospectus and should particularly consider the following matters:
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE DEBENTURES
The obligations of CMS Energy under the Guarantee issued by CMS Energy for
the benefit of the holders of Preferred Securities are unsecured and rank
subordinate and junior in right of payment to all other liabilities of CMS
Energy and pari passu 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. The obligations of CMS Energy under the Debentures are subordinate and
junior in right of payment to all present and future Senior Indebtedness of CMS
Energy. As of May 31, 1997, CMS Energy had indebtedness of $1,612 million, all
of which comprised Senior Indebtedness of CMS Energy. The ability of the Issuer
to pay amounts due on the Preferred Securities is solely dependent upon CMS
Energy's making payments on the Debentures as and when required. Neither the
Indenture, the Guarantee nor the Trust Agreement places any limitation on the
amount of secured or unsecured debt, including Senior Indebtedness, that may be
incurred by CMS Energy and its subsidiaries. See "Description of the Guarantee
- -- Status of the Guarantee" and "Description of the Debentures --
Subordination."
STRUCTURAL SUBORDINATION
CMS Energy is a holding company and its assets consist primarily of
investments in its subsidiaries. The Debentures will be obligations exclusively
of CMS Energy. CMS Energy's ability to service its indebtedness, including the
Debentures, 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
Debentures or to make any funds available therefor, whether by dividends, loans
or other payments. See "Price Range of CMS Energy Common Stock and Dividends --
Restrictions on Dividends" herein and "Description of Securities -- Primary
Source of Funds of CMS Energy; Restrictions on Sources of Dividends" in the
accompanying Prospectus.
In addition, creditors of CMS Energy's subsidiaries would be entitled to a
claim on the assets of such subsidiaries prior to any claims by CMS Energy.
Consequently, in the event of a liquidation or reorganization of any subsidiary,
creditors of such subsidiary are likely to be paid in full before any
distribution is made to CMS Energy, except to the extent that CMS Energy itself
is recognized as a creditor of such subsidiary, in which case the claims of CMS
Energy would still be subordinate to any security interest in the assets of such
subsidiary and any indebtedness of such subsidiary senior to that held by CMS
Energy. As of May 31, 1997, the aggregate indebtedness (including capital lease
obligations, and excluding intercompany indebtedness) of the consolidated
subsidiaries of CMS Energy was approximately $2,616 million. See "Description of
the Preferred Securities -- Distributions" and "Description of the Debentures --
Option to Extend Interest Payment Period."
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES
CMS Energy has the right under the Indenture to defer the payment of
interest on the Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarters with respect to each Extension Period,
provided that no Extension Period may extend beyond the stated maturity of the
Debentures. Upon the termination of any Extension Period and the payment of all
amounts then due, CMS Energy may select a new Extension Period and terminate the
payments of all amounts then due, subject to the requirements described herein.
As a consequence of any such deferral, quarterly Distributions on the Preferred
Securities by the Issuer will be deferred (and the
S-16
<PAGE> 17
amount of Distributions to which holders of the Preferred Securities are
entitled will accumulate additional Distributions) during any such Extension
Period.
Should an Extension Period occur, a holder of Preferred Securities will
accrue income (in the form of original issue discount ("OID")) in respect of its
pro rata share of the deferred interest allocable to the Debentures held by the
Issuer for United States federal income tax purposes. As a result, a holder of
Preferred Securities will include such income in gross income for United States
federal income tax purposes in advance of the receipt of cash and will not
receive the cash related to such income from the Issuer if the holder disposes
of the Preferred Securities prior to the record date for the payment of
Distributions. See "Certain Federal Income Tax Consequences -- Interest Income
and Original Issue Discount." Moreover, if a holder of Preferred Securities
converts its Preferred Securities into CMS Energy Common Stock during an
Extension Period, the holder will not receive any cash related to the deferred
Distribution. Additionally, during the pendency of any Extension Period, CMS
Energy will not be permitted, subject to certain exceptions set forth herein, to
declare or pay any cash distribution with respect to CMS Energy capital stock or
debt securities (including guarantees of indebtedness for money borrowed) that
rank pari passu with or junior to the Debentures. See "Description of the
Preferred Securities -- Distributions."
CMS Energy has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Debentures.
However, should CMS Energy elect to exercise such right in the future, the
market price of the Preferred Securities is likely to be affected. A holder that
disposes of its Preferred Securities during an Extension Period, therefore,
might not receive the same return on its investment as a holder that continues
to hold its Preferred Securities. In addition, as a result of the existence of
CMS Energy's right to defer interest payments, the market price of the Preferred
Securities (which represent preferred undivided beneficial interests in the
Debentures) may be more volatile than the market prices of other securities that
are not subject to such deferrals.
EXPIRATION OF CONVERSION RIGHTS
On and after July 16, 2001, CMS Energy may, subject to certain conditions,
at its option, cause the conversion rights of holders of the Preferred
Securities to expire, provided that the Current Market Price of CMS Energy
Common Stock exceeds 115% of the conversion price of the Preferred Securities
for a specified period. See "Description of the Preferred Securities --
Conversion Rights -- Expiration of Conversion Rights."
SPECIAL EVENT EXCHANGE OR REDEMPTION
Upon certain circumstances following the occurrence and continuation of a
Special Event, the Preferred Securities are also subject to (i) exchange in
whole or, in the case of a Tax Event, in whole or in part, in the manner
described herein, for the Debentures or (ii) redemption, in whole or in part, on
or after July 16, 2001 in the case of a Tax Event. See "Description of the
Preferred Securities -- Special Event Exchange or Redemption."
There can be no assurance as to the market prices for Preferred Securities
or Debentures that may be distributed in exchange for Preferred Securities if a
liquidation of the Issuer occurs or if the Preferred Securities are exchanged
for Debentures in connection with a Special Event. Accordingly, the Preferred
Securities that an investor may purchase, whether pursuant to the offer made
hereby or in the secondary market, or the Debentures that a holder of Preferred
Securities may receive on liquidation of the Issuer, may trade at a discount to
the price that the investor paid to purchase the Preferred Securities offered
hereby. Because holders of Preferred Securities may receive Debentures on
termination of the Issuer or if the Preferred Securities are exchanged for
Debentures in connection with a Special Event, prospective purchasers of
Preferred Securities are also making an investment decision with regard to the
Debentures and should carefully review all the information
S-17
<PAGE> 18
regarding the Debentures contained herein. See "Description of the Preferred
Securities -- Special Event Exchange or Redemption" and "Description of the
Debentures -- General."
RIGHTS UNDER THE GUARANTEE
The Guarantee guarantees to the holders of the Preferred Securities the
following payments, to the extent not paid by the Issuer: (i) any accumulated
and unpaid Distributions required to be paid on the Preferred Securities, to the
extent that the Issuer has funds on hand available therefor at such time; (ii)
the redemption price with respect to any Preferred Securities called for
redemption, to the extent that the Issuer has funds on hand available therefor
at such time; and (iii) upon a voluntary or involuntary dissolution, winding-up
or liquidation of the Issuer (unless the Debentures are distributed to holders
of the Preferred Securities), the lesser of (a) the aggregate of the liquidation
preference and all accrued and unpaid Distributions to the date of payment to
the extent that the Issuer has funds on hand available therefor at such time and
(b) the amount of assets of the Issuer remaining available for distribution to
holders of the Preferred Securities in liquidation of the Issuer.
As part of the Guarantee, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Preferred Securities into or for CMS Energy Common Stock or Debentures.
The holders of not less than a majority in aggregate liquidation amount of
the Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust power conferred
upon the Guarantee Trustee under the Guarantee. Any holder of Preferred
Securities may institute a proceeding directly against CMS Energy to enforce its
rights under the Guarantee without first instituting a proceeding against the
Issuer, the Guarantee Trustee or any other person or entity. If CMS Energy were
to default on its obligation to pay amounts payable under the Debentures, the
Issuer would lack funds for the payment of Distributions or amounts payable on
redemption of the Preferred Securities or otherwise, and, in such event, holders
of the Preferred Securities would not be able to rely upon the Guarantee for
payment of such amounts. Instead, in the event a Debenture Event of Default
shall have occurred and be continuing, a holder of Preferred Securities would be
required to rely on its enforcement by the Property Trustee of its rights as
registered holder of the Debenture against CMS Energy pursuant to the terms of
the Debenture. If, however, such event is attributable to the failure of CMS
Energy to pay interest on or principal of the Debentures on the payment date on
which such payment is due and payable, then a holder of Preferred Securities may
directly institute a proceeding against CMS Energy for enforcement of payment to
such holder of the interest on or principal of such Debentures having a
principal amount equal to the aggregate liquidation preference of the Preferred
Securities of such holder (a "Direct Action"). In connection with such Direct
Action, CMS Energy will be subrogated to the rights of such holder of Preferred
Securities under the Trust Agreement to the extent of any payment made by CMS
Energy to such holder of Preferred Securities in such Direct Action. Except as
set forth herein, holders of Preferred Securities will not be able to exercise
directly any other remedy available to the holders of Debentures or assert
directly any other rights in respect of the Debentures. See "Description of the
Preferred Securities -- Enforcement of Certain Rights by Holders of Preferred
Securities," "Description of the Guarantee" and "Description of the Debentures
- -- Debenture Events of Default." The Trust Agreement provides that each holder
of Preferred Securities by acceptance thereof agrees to the provisions of the
Guarantee and the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Trust Agreement Event of Default (as defined herein) occurs and is
continuing, then the holders of Preferred Securities would rely on the
enforcement by the Property Trustee of its rights as the holder of the
Debentures against CMS Energy. In addition, the holders of a majority in
aggregate liquidation amount of the Preferred Securities will have the right to
direct the time, method
S-18
<PAGE> 19
and place of conducting any proceeding for any remedy available to the Property
Trustee or to direct the exercise of any trust or power conferred upon the
Property Trustee under the Trust Agreement, including the right to direct the
Property Trustee to exercise the remedies available to it as a holder of the
Debentures. If the Property Trustee fails to enforce its rights as holder of the
Debentures after a request therefor by a holder of Preferred Securities, such
holder may proceed to enforce such rights directly against CMS Energy.
Notwithstanding the foregoing, if a Trust Agreement Event of Default occurs that
results from the failure of CMS Energy to pay principal of or interest on the
Debentures when due (or in the case of a redemption, on the redemption date),
during the continuance of such an event of default a holder of Preferred
Securities may institute a legal proceeding directly against CMS Energy to
obtain payment to such holder of such principal or interest on Debentures having
a principal amount equal to the aggregate liquidation amount of the Preferred
Securities owned of record by such holder. See "Description of the Preferred
Securities -- Trust Agreement Events of Default; Notice" and "-- Voting Rights;
Amendment of the Trust Agreement."
LIMITED VOTING RIGHTS
Holders of Preferred Securities will generally have limited voting rights
primarily in connection with directing the activities of the Property Trustee as
the holder of the Debentures. Holders of Preferred Securities will not be
entitled to vote to appoint, remove or replace the CMS Trustees (as defined),
which voting rights are vested exclusively in the holder of the Common
Securities. The CMS Trustees and CMS Energy may amend the Trust Agreement
without the consent of holders of Preferred Securities to ensure that the Issuer
will be classified for United States federal income tax purposes as a grantor
trust even it such action adversely affects the interests of such holders. See
"Description of the Preferred Securities -- Voting Rights; Amendment of the
Trust Agreement."
PROPOSED TAX LEGISLATION
On February 6, 1997, as part of the fiscal 1998 budget proposal submitted
to Congress, the Clinton Administration proposed certain changes to Federal
income tax law which would, among other things, generally treat as equity, for
Federal income tax purposes, certain debt obligations, such as the Debentures,
that are "issued on or after the date of first Congressional Committee action"
(the "Clinton Proposal"). On June 9, 1997, House Ways and Means Committee
Chairman Bill Archer released the Chairman's Mark Relating to Revenue
Reconciliation Provisions that are proposed to be included in 1997 tax
legislation (the "Chairman's Mark"). The Chairman's Mark constitutes "first
Congressional Committee action" with respect to the provisions contained
therein. The Chairman's Mark does not include the Clinton Proposal that would
require instruments with terms similar to the Debentures to be treated as equity
for Federal income tax purposes.
In light of the Chairman's Mark, it appears that "first Congressional
Committee action" has not yet occurred with respect to the Clinton Proposal.
Furthermore, given the effective date transitional rules relating to certain
capital markets provisions included in the Chairman's Mark (as well as
transitional rules provided for in 1996 proposed legislation similar to the
Clinton Proposal), it is anticipated that the Clinton Proposal, even if acted
upon by Congress in the future, would not apply to the Debentures.
There can be no assurance, however, that the Clinton Proposal or similar
legislation will not ultimately be enacted into law, that the effective date and
transitional rules relating thereto would be enacted as anticipated, or that
other developments will not occur after the date hereof that would adversely
affect the tax treatment of the Debentures and could result in the exchange of
the Debentures for Preferred Securities or, in certain limited circumstances,
the redemption of the Debentures by CMS Energy and the distribution of the
resulting cash in redemption of the Preferred Securities. See "Description of
the Preferred Securities -- Special Event Exchange or Redemption."
S-19
<PAGE> 20
ABSENCE OF PUBLIC MARKET FOR THE PREFERRED SECURITIES
Prior to the Offering, there has been no public market for the Preferred
Securities and the Preferred Securities are being sold by the Issuer exclusively
to the Purchasers. There can be no assurance that any market for the Preferred
Securities will develop or, if one does develop, that it will be maintained. If
an active market for the Preferred Securities fails to develop or be maintained,
the trading price of the Preferred Securities could be adversely affected. No
assurance can be given as to the liquidity of the trading market for the
Preferred Securities.
S-20
<PAGE> 21
PRICE RANGE OF CMS ENERGY COMMON STOCK AND DIVIDENDS
CMS Energy has paid dividends on its outstanding CMS Energy Common Stock
each year since its inception except 1987 and 1988. At June 18, 1997 there were
approximately 89,175 CMS Energy Common Stock shareholders of record. Future
dividends will depend upon CMS Energy's earnings, financial condition and other
factors. In addition to the discussion under "-- Restrictions on Dividends"
below, reference is made to "Description of Securities -- Common Stock --
Dividend Rights and Policy; Restrictions on Dividends" and "-- Primary Source of
Funds of CMS Energy; Restrictions on Sources of Dividends" in the accompanying
Prospectus regarding limitations upon payment of dividends on the capital stock
of CMS Energy.
CMS Energy Common Stock began trading on the NYSE on May 27, 1987. The high
and low sales prices of CMS Energy Common Stock, as reported on the Wall Street
Journal "New York Stock Exchange Composite Transactions", and the dividends
declared on CMS Energy Common Stock during the fiscal years ended December 31,
1992 through 1996, and for the first quarter and second quarter of fiscal 1997
through June 18, 1997, are set out below:
CMS ENERGY COMMON STOCK
<TABLE>
<CAPTION>
PRICE RANGE
----------------------
YEAR HIGH LOW DIVIDEND
- ---- ---- --- --------
<S> <C> <C> <C> <C> <C>
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............................................ 25 3/8 22 1/2 .21
Third Quarter............................................. 26 3/8 23 3/8 .24
Fourth Quarter............................................ 30 26 .24
1996:
First Quarter............................................. 31 7/8 27 13/16 .24
Second Quarter............................................ 31 1/4 28 .24
Third Quarter............................................. 31 5/8 29 .27
Fourth Quarter............................................ 33 3/4 30 1/8 .27
1997:
First Quarter............................................. 34 1/2 31 1/2 .27
Second Quarter (through June 18, 1997).................... 35 1/8 31 1/8 .27
</TABLE>
On May 27, 1997, the CMS Energy Board of Directors approved an increase in
the dividend to an annualized rate of $1.20 per share ($.30 per quarter). The
increase will be effective with the next scheduled quarterly dividend payment in
August 1997. For a recent closing sales price for the CMS
S-21
<PAGE> 22
Energy Common Stock, as reported on the NYSE, see the cover page of this
Prospectus Supplement.
CMS Energy sponsors a dividend reinvestment and stock purchase plan under
which holders of record of CMS Energy Common Stock may purchase a limited amount
of CMS Energy Common Stock without paying brokerage fees and other expenses.
Under this plan, CMS Energy Common Stock may be purchased in the open market at
prevailing prices or purchased from CMS Energy at the average of the closing
sales prices on the NYSE for the five trading days of the month immediately
preceding the regular investment dates (typically the first trading date of the
month).
RESTRICTIONS ON DIVIDENDS
In addition to the restrictions on payment of dividends described under
"Description of Securities -- Common Stock -- Dividend Rights Policy;
Restrictions on Dividends" and -- Primary Source of Funds of CMS Energy;
Restrictions on Sources of Dividends" in the accompanying Prospectus, the
following are additional restrictions.
On November 21, 1995, CMS Energy entered into a $450 million Credit
Agreement (the "Credit Agreement") among CMS Energy, Citibank N.A. and Union
Bank as co-agents and certain banks named therein and a $125 million Term Loan
Agreement ("Term Loan") among CMS Energy, Citibank N.A. and Union Bank as
co-agents, and certain banks named therein. The Credit Agreement and Term Loan
each provide 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
Agreement or the Term Loan, as the case may be, 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 dated as of September 15,
1992 as amended and supplemented (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, 1997, CMS Energy
could pay cash dividends of $1,051 million pursuant to this restriction.
Under the terms of the Senior Debt Indenture, pursuant to which the Series
A Senior Deferred Coupon Notes due October 1, 1997, the Series B Senior Deferred
Coupon Notes due October 1, 1999, and 8.125 percent Unsecured Notes Due 2002
were issued, so long as any of the Notes are Outstanding and until the Notes are
rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other
Rating Agency (as defined therein), at which time the Company will be
permanently released from the provisions of this "Limitation on Restricted
Payments," the Company will not, and will not permit any of its Restricted
Subsidiaries, directly or indirectly, to (i) declare or pay any dividend or make
any distribution on the Capital Stock of the Company to the direct or indirect
holders of its Capital Stock (as defined therein) (except dividends or
distributions payable solely in its Non-Convertible Capital Stock (as defined
therein) or in options, warrants or other rights to purchase such
Non-Convertible Capital Stock and except dividends or distributions payable to
the Company or a Subsidiary), (ii) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the Company, or (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity or scheduled repayment thereof, any Subordinated Indebtedness
(as defined therein) (any such dividend, distribution, purchase, redemption,
repurchase, defeasing, other acquisition or retirement being hereinafter
referred to as a "Senior Debt Indenture Restricted Payment") if at the time the
Company or such Subsidiary makes such Senior Debt Indenture Restricted Payment:
(1) an Event of Default (as defined therein), or an
S-22
<PAGE> 23
event that with the lapse of time or the giving of notice or both would
constitute an Event of Default, shall have occurred and be continuing (or would
result therefrom); or (2) the aggregate amount of such Senior Debt Indenture
Restricted Payment and all other Restricted Payments made since May 6, 1997
would exceed the sum of: (a) $100,000,000 plus 100% of Consolidated Net Income
(as defined therein) from the date of the Supplemental Indenture (as defined
therein) to the end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Senior Debt Indenture Restricted Payment (or, in case
such sum shall be a deficit, minus 100% of the deficit) and (b) the aggregate
Net Cash Proceeds received by the Company from the issue or sale of or
contribution with respect to its Capital Stock after May 6, 1997. Under this
restriction, at March 31, 1997, CMS Energy would have been able to pay cash
dividends of $100 million.
The GTN Indenture provides that, so long as any of the General Term Notes,
Series A, Series B and Series C ("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 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, 1997, CMS Energy could
pay cash dividends of $1,057 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 or 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, 1997 were $1,772 million.
S-23
<PAGE> 24
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED 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, 1997
and for each of the years ended December 31, 1992 through 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ---------------------------------------
MARCH 31, 1997 1996 1995 1994 1993 1992(1)
-------------- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges.......... 2.59 2.01 1.94 2.07 1.88 --
Ratio of earnings to fixed charges and
preferred stock dividends................. 2.28 1.79 1.77 1.87 1.81 --
</TABLE>
- ---------------
(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'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
1.33 and 1.29, 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.
USE OF PROCEEDS
The net proceeds from the sale of the Preferred Securities and the Common
Securities will be invested by the Issuer in Debentures of CMS Energy and
ultimately will be used by CMS Energy for general corporate purposes, including
capital expenditures, investment in subsidiaries, working capital and repayment
of debt.
S-24
<PAGE> 25
CAPITALIZATION
The following table sets forth the unaudited summary capitalization at
March 31, 1997 of the Company and its consolidated subsidiaries on a historical
basis and on a pro forma basis after giving effect to the sale by the Company of
the Preferred Securities offered hereby and the application of the net proceeds
therefrom. See "Use of Proceeds." The table should be read in conjunction with
CMS Energy's consolidated financial statements and notes thereto and other
financial data incorporated by reference herein. See "Incorporation of Certain
Documents by Reference" in the accompanying Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------------
ACTUAL AS ADJUSTED(1)
------ --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Short-Term Debt (includes notes payable and current portion
of long-term debt and capital leases)..................... $ 756 $ 756
====== ======
Long-Term Debt (including capital leases)(2)................ $2,728 $2,728
Preferred Stock of Subsidiary............................... 356 356
Company-obligated mandatorily redeemable preferred
securities of subsidiaries holding solely subordinated
debentures of Company(3).................................. 100 273
Common Stockholders' Equity................................. 1,775 1,775
------ ------
Total Capitalization........................................ $4,959 $5,132
====== ======
</TABLE>
- ---------------
(1) Adjusted for the sale of Preferred Securities, the application of the
estimated net proceeds to the purchase of Debentures of CMS Energy and the
application by CMS Energy of the estimated net proceeds of Debentures for
the purposes set out under "Use of Proceeds."
(2) In May 1997, CMS Energy issued $350 million of senior unsecured notes due
2002 at an interest rate of 8.125 percent. Proceeds were used in part to pay
down debt, with the remainder, together with drawings under the Credit
Agreement, to fund CMS Energy's equity contribution in connection with the
acquisition of a 50 percent interest in the 2,000 MW Loy Yang A electric
generating plant and associated mine facilities in the State of Victoria,
Australia. See "Recent Developments."
(3) The sole assets of the subsidiaries are as follows: CMS Energy Trust I --
7 3/4% subordinated debentures of CMS Energy due 2027 with a principal
amount of approximately $178 million; and Consumer Power Company Financing I
-- 8.36% subordinated notes of Consumers due 2015 with a principal amount of
$103 million. Upon redemption of such debt, the preferred securities of such
subsidiaries will be mandatorily redeemable.
ACCOUNTING TREATMENT
The financial statements of the Issuer will be reflected in CMS Energy's
consolidated financial statements with the $172.5 million of Preferred
Securities shown as CMS Energy-obligated mandatorily redeemable preferred
securities of subsidiaries holding solely subordinated debentures of CMS Energy.
The financial statement footnotes of CMS Energy will reflect that the sole asset
of the Issuer will be approximately $178 million principal amount of 7 3/4%
Debentures due July 15, 2027 of CMS Energy. See "Capitalization."
S-25
<PAGE> 26
DESCRIPTION OF THE PREFERRED SECURITIES
The following description of certain terms of the Preferred Securities
offered hereby supplements, and to the extent inconsistent therewith replaces,
the description of the general terms and provisions of the Preferred Securities
offered hereby set forth in the accompanying Prospectus, to which reference is
hereby made. The summaries of certain provisions of documents described below do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of such documents (including the
definitions therein of certain terms), forms of which are on file with the
Commission. Wherever particular Sections of, or terms defined in, such documents
are referred to herein, such Sections or defined terms are incorporated by
reference herein. Capitalized terms not defined herein have the meanings
assigned to such terms in the accompanying Prospectus.
GENERAL
Pursuant to the terms of the Trust Agreement, the CMS Trustees, on behalf
of the Issuer, will issue the Preferred Securities and the Common Securities.
The Preferred Securities will represent preferred undivided beneficial interests
in the assets of the Issuer and the Common Securities will represent common
undivided beneficial interests in the assets of the Issuer. All of the Common
Securities will be owned by CMS Energy. The Preferred Securities will rank pari
passu, and payments will be made thereon pro rata, with the Common Securities
except as described under "-- Subordination of Common Securities." Legal title
to the Debentures will be held by the Property Trustee in trust for the benefit
of the holders of the Preferred Securities and Common Securities. The Trust
Agreement does not permit the issuance by the Issuer of any securities other
than the Preferred Securities and the Common Securities or the incurrence of any
indebtedness by the Issuer. The payment of Distributions out of money held by
the Issuer, and payments upon redemption of the Preferred Securities or
liquidation of the Issuer, are guaranteed by CMS Energy to the extent described
under "Description of the Guarantee." The Guarantee is held by the Guarantee
Trustee for the benefit of the holders of the Preferred Securities. The
Guarantee does not cover payment of Distributions when the Issuer does not have
sufficient available funds to pay such Distributions. The remedy of a holder of
Preferred Securities in such an event is as described herein in "-- Enforcement
of Certain Rights by Holders of Preferred Securities" and in "-- Voting Rights;
Amendment of the Trust Agreement."
DISTRIBUTIONS
Distributions on each Preferred Security will be payable at the annual rate
of 7 3/4% of the liquidation preference of $50 per Preferred Security.
Distributions will accumulate from the date of original issuance and will be
payable quarterly in arrears on January 15, April 15, July 15 and October 15 of
each year on the applicable record date, commencing October 15, 1997 when, as
and if available for payment by the Property Trustee, except as otherwise
described below. The amount of Distributions payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which Distributions are payable on the Preferred Securities is
not a Business Day (as defined below), then payment of the Distributions payable
on such date will be made on the next succeeding day that is a Business Day and
without any additional Distributions or other payment in respect of any such
delay (each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). A "Business Day" shall mean any day other
than a Saturday or a Sunday, or a day on which banking institutions in the City
of New York are authorized or required by law or executive order to remain
closed or a day on which the corporate trust office of the Property Trustee or
the Debenture Trustee is closed for business.
So long as no Debenture Event of Default has occurred and is continuing,
CMS Energy has the right under the Indenture to defer the payment of interest on
the Debentures at any time or from time to time for a period not exceeding 20
consecutive quarters with respect to each deferral period (each an "Extension
Period"), provided that no Extension Period may extend beyond the stated
S-26
<PAGE> 27
maturity of the Debentures. As a consequence of any such election, quarterly
Distributions on the Preferred Securities will be deferred by the Issuer during
any such Extension Period. Distributions to which holders of the Preferred
Securities are entitled will accumulate additional Distributions thereon at the
rate per annum set forth herein, compounded quarterly from the relevant payment
date for such Distributions. The term "Distributions" as used herein shall
include any such additional Distributions. During any such Extension Period, CMS
Energy may not, and may not cause any of its subsidiaries to, (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of CMS Energy's capital stock, or (ii)
make any payment of principal, interest or premium, if any, on, or repay,
repurchase or redeem any debt securities (including guarantees of indebtedness
for money borrowed) of CMS Energy that rank pari passu with or junior to the
Debentures (other than (a) any dividend, redemption, liquidation, interest,
principal or guarantee payment by CMS Energy where the payment is made by way of
securities (including capital stock) that rank pari passu with or junior to the
securities on which such dividend, redemption, interest, principal or guarantee
payment is being made, (b) payments under the Guarantee, (c) purchases of CMS
Energy Common Stock related to the issuance of CMS Energy Common Stock under any
of CMS Energy's benefit plans for its directors, officers or employees, (d) as a
result of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock, and (e) the purchase of
fractional interests in shares of CMS Energy's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged). Prior to the termination of any such Extension Period,
CMS Energy may further extend the interest payment period, provided that no
Extension Period may exceed 20 consecutive quarters or extend beyond the stated
maturity of the Debentures. Upon the termination of any such Extension Period
and the payment of all amounts then due on any Interest Payment Date, CMS Energy
may elect to begin a new Extension Period. See "Description of the
Debentures -- Option to Extend Interest Payment Period" and "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
CMS Energy has no current intention to exercise its right to defer payments
of interest by extending the interest payment period on the Debentures.
Distributions with respect to the Preferred Securities must be paid on the
dates payable to the extent that the Issuer has funds available for the payment
of such Distributions in the Property Account. The funds of the Issuer available
for distribution to holders of the Preferred Securities will be limited to
payments under the Debentures in which the Issuer will invest the proceeds from
the issuance and sale of the Preferred Securities and the Common Securities. See
"Description of the Debentures." If CMS Energy does not make interest payments
on such Debentures, the Property Trustee will not have funds available to pay
Distributions on the Preferred Securities. The payment of Distributions (if and
to the extent the Issuer has funds on hand available for the payment of such
Distributions and cash sufficient to make such payments) is guaranteed by CMS
Energy on a limited basis as set forth herein under "Description of the
Guarantee."
Distributions on the Preferred Securities will be payable to the holders
thereof as they appear on the register of the Issuer on the relevant record
dates, which shall be the fifteenth day (whether or not a Business Day) next
preceding the relevant distribution date. As long as the Preferred Securities
remain in book-entry form, subject to any applicable laws and regulations and
the provisions of the Trust Agreement, each such payment will be made as
described under "-- Form, Transfer, Exchange and Book-Entry Procedures."
CONVERSION RIGHTS
GENERAL
The Preferred Securities will be convertible at any time prior to the
Conversion Expiration Date (as defined herein), at the option of the holder
thereof and in the manner described below, into
S-27
<PAGE> 28
shares of CMS Energy Common Stock at an initial conversion rate of 1.2255 shares
of CMS Energy Common Stock for each Preferred Security (equivalent to a purchase
price of $40.80 per share of CMS Energy Common Stock), subject to adjustment as
described under "-- Conversion Price Adjustments" below.
A holder of Preferred Securities wishing to exercise its conversion right
shall surrender such Preferred Securities together with an irrevocable
conversion notice to the Property Trustee, as conversion agent or to such other
agent appointed for such purpose (the "Conversion Agent"), which shall, on
behalf of such holder, exchange the Preferred Securities for a portion of the
Debentures and immediately convert such Debentures into CMS Energy Common Stock.
So long as a book-entry system for the Preferred Securities is in effect,
however, the procedures for converting the Preferred Stock that are in the form
of Global Certificates into shares of CMS Energy Common Stock will be as
described under "-- Form, Transfer, Exchange and Book-Entry Procedures." CMS
Energy's delivery upon conversion of the fixed number of shares of CMS Energy
Common Stock into which the Debentures are convertible (together with the cash
payment, if any, in lieu of any fractional share) shall be deemed to satisfy CMS
Energy's obligation to pay the principal amount at maturity of the portion of
the Debentures so converted and any unpaid interest accrued on such Debentures
at the time of such conversion. For a discussion of the taxation of such an
exchange to holders, see "Certain Federal Income Tax Consequences -- Conversion
of Preferred Securities into CMS Energy Common Stock." Holders may obtain copies
of the required form of the conversion notice from the Conversion Agent.
Accrued Distributions will not be paid on Preferred Securities that are
converted, provided however, that holders of Preferred Securities at the close
of business on a Distribution payment record date will be entitled to receive
the Distribution payable on such Preferred Securities on the corresponding
Distribution payment date notwithstanding the conversion of such Preferred
Securities on or subsequent to such Distribution record date but prior to such
Distribution payment date. Except as provided in the immediately preceding
sentence, the Issuer will make no payment or allowance for accumulated and
unpaid Distributions, whether or not in arrears, on converted Preferred
Securities. CMS Energy will make no payment or allowance for dividends on the
shares of CMS Energy Common Stock issued upon such conversion. Each conversion
will be deemed to have been effected immediately prior to the close of business
on the day on which proper notice was received by the Conversion Agent.
Shares of CMS Energy Common Stock issued upon conversion of Preferred
Securities will be validly issued, fully paid and non-assessable. No fractional
shares of CMS Energy Common Stock will be issued as a result of conversion, but
in lieu thereof such fractional interest will be paid in cash.
EXPIRATION OF CONVERSION RIGHTS
On and after July 16, 2001, CMS Energy may, at its option, cause the
conversion rights of holders of the Preferred Securities to expire. CMS Energy
may exercise this option only if for 20 trading days within any period of 30
consecutive trading days, including the last trading day of such period, the
Current Market Price of CMS Energy Common Stock exceeds 115% of the conversion
price of the Preferred Securities, subject to adjustment in certain
circumstances. In order to exercise its option to terminate the conversion
rights of the Preferred Securities, CMS Energy must issue a press release for
publication on the Dow Jones News Service announcing the Conversion Expiration
Date prior to the opening of business on the second trading day after any period
in which the condition in the preceding sentence has been met, but in no event
prior to July 16, 2001. The press release shall announce the Conversion
Expiration Date and provide the current conversion price and Current Market
Price of CMS Energy Common Stock, in each case as of the close of business on
the trading day next preceding the date of the press release. Conversion rights
will terminate at the close of business on the Conversion Expiration Date.
S-28
<PAGE> 29
Notice of the expiration of conversion rights will be given by CMS Energy
by first-class mail to the holders of the Preferred Securities not more than
four Business Days after CMS Energy issues the press release. The Conversion
Expiration Date will be a date selected by CMS Energy not less than 30 nor more
than 60 days after the date on which CMS Energy issues the press release
announcing its intention to terminate the conversion rights of the Preferred
Securities. In the event that CMS Energy does not exercise its option to
terminate the conversion rights of the Preferred Securities, the Conversion
Expiration Date with respect to the Preferred Securities will be two Business
Days preceding the date set for redemption of the Preferred Securities.
The term "Current Market Price" of CMS Energy Common Stock for any day
means the last reported sale price, regular way, on such day, or, if no sale
takes place on such day, the average of the reported closing bid and asked
prices on such day, regular way, in either case as reported on the NYSE
Composite Transactions Tape, or, if the CMS Energy Common Stock is not listed or
admitted to trading on the NYSE on such day, on the principal national
securities exchange on which the CMS Energy Common Stock is listed or admitted
to trading, if the CMS Energy Common Stock is listed on a national securities
exchange, or the Nasdaq National Market, or, if the CMS Energy Common Stock is
not quoted or admitted to trading on such quotation system, on the principal
quotation system on which the CMS Energy Common Stock may be listed or admitted
to trading or quoted, or, if not listed or admitted to trading or quoted on any
national securities exchange or quotation system, the average of the closing bid
and asked prices of the CMS Energy Common Stock in the over-the-counter market
on the day in question as reported by the National Quotation Bureau
Incorporated, or a similar generally accepted reporting service, or, if not so
available in such manner, as furnished by any NYSE member firm selected from
time to time by the Board of Directors of CMS Energy for that purpose or, if not
so available in such manner, as otherwise determined in good faith by the Board
of Directors of CMS Energy.
CONVERSION PRICE ADJUSTMENTS
General. The conversion price will be subject to adjustment in certain
events including, without duplication: (i) the payment of dividends (and other
distributions) payable exclusively in CMS Energy Common Stock on CMS Energy
Common Stock; (ii) the issuance to all holders of CMS Energy Common Stock of
rights or warrants entitling holders of such rights or warrants (for a period
not exceeding 45 days) to subscribe for or purchase CMS Energy Common Stock at
less than the then Current Market Price; (iii) subdivisions and combinations of
CMS Energy Common Stock; (iv) the payment of dividends (and other distributions)
to all holders of CMS Energy Common Stock consisting of evidences of
indebtedness of CMS Energy, securities or capital stock, cash, or assets
(including securities, but excluding those rights or warrants referred to above
in clause (ii) and dividends and distributions paid exclusively in cash); (v)
the payment of dividends (and other distributions) on CMS Energy Common Stock
paid exclusively in cash, excluding (A) cash dividends that do not exceed the
per share amount of the immediately preceding regular cash dividend (as adjusted
to reflect any of the events referred to in clauses (i) through (vi) of this
sentence), and (B) cash dividends if the annualized per share amount thereof
does not exceed 12.5% of the last sale price of CMS Energy Common Stock, as
reported on the NYSE Consolidated Transactions Tape, on the trading day
immediately preceding the date of trust agreement of such dividend (such
adjustment being limited to the amount in excess of 12.5% of such Current Market
Price); and (vi) payment in respect of a tender or exchange offer (other than an
odd-lot offer) by CMS Energy or any subsidiary of CMS Energy for CMS Energy
Common Stock in excess of 110% of the Current Market Price of CMS Energy Common
Stock on the trading day next succeeding the last date tenders or exchanges may
be made pursuant to such tender or exchange offer.
CMS Energy from time to time may reduce the conversion price of the
Debentures (and thus the conversion price of the Preferred Securities) by any
amount selected by CMS Energy for any period of at least 30 days, in which case
CMS Energy shall give at least 15 days' notice of such reduction. CMS Energy
may, at its option, make such reductions in the conversion price, in addition
S-29
<PAGE> 30
to those set forth above, as the Board of Directors of CMS Energy deems
advisable to avoid or diminish any income tax to holders of CMS Energy Common
Stock resulting from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax purposes. See "Certain
Federal Income Tax Consequences -- Adjustment of Conversion Price."
No adjustment of the conversion price will be made upon the issuance of any
shares of CMS Energy Common Stock pursuant to any present or future plan
providing for the reinvestment of dividends or interest payable on securities of
CMS Energy and the investment of additional optional amounts in shares of CMS
Energy Common Stock under any such plan, or the issuance of any shares of CMS
Energy Common Stock or options or rights to purchase such shares pursuant to any
present or future employee benefit plan or program of CMS Energy or pursuant to
any option, warrant, right, or exercisable, exchangeable or convertible security
which does not constitute an issuance to all holders of CMS Energy Common Stock
of rights or warrants entitling holders of such rights or warrants to subscribe
for or purchase CMS Energy Common Stock at less than the Current Market Price.
There shall also be no adjustment of the conversion price in case of the
issuance of any CMS Energy Common Stock (or securities convertible into or
exchangeable for CMS Energy Common Stock), except as specifically described
above. If any action would require adjustment of the conversion price pursuant
to more than one of the anti-dilution provisions, only one adjustment shall be
made and such adjustment shall be the amount of adjustment that has the highest
absolute value to holders of the Preferred Securities. No adjustment in the
conversion price will be required unless such adjustment would require an
increase or decrease of at least 1% of the conversion price, but any adjustment
that would otherwise be required to be made shall be carried forward and taken
into account in any subsequent adjustment.
Merger, Consolidation or Sale of Assets of CMS Energy. In the event that
CMS Energy is a party to any transaction (including, without limitation, a
merger other than a merger that does not result in a reclassification,
conversion, exchange or cancellation of CMS Energy Common Stock), consolidation,
sale of all or substantially all of the assets of CMS Energy, recapitalization
or reclassification of CMS Energy Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination of CMS Energy Common Stock) or any
compulsory share exchange (each of the foregoing being referred to as a
"Transaction"), in each case, as a result of which shares of CMS Energy Common
Stock shall be converted into the right to receive, or shall be exchanged for,
(i) in the case of any Transaction other than a Transaction involving a Common
Stock Fundamental Change (as defined below) (and subject to funds being legally
available for such purpose under applicable law at the time of such conversion),
securities, cash or other property, each Preferred Security shall thereafter be
convertible into the kind and, in the case of a Transaction which does not
involve a Fundamental Change (as defined below), amount of securities, cash and
other property receivable upon the consummation of such Transaction by a holder
of that number of shares of CMS Energy Common Stock into which a Preferred
Security was convertible immediately prior to such Transaction, or (ii) in the
case of a Transaction involving a Common Stock Fundamental Change, common stock,
each Preferred Security shall thereafter be convertible (in the manner described
herein) into common stock of the kind received by holders of CMS Energy Common
Stock (but in each case after giving effect to any adjustment discussed below
relating to a Fundamental Change if such Transaction constitutes a Fundamental
Change). The holders of Preferred Securities will have no voting rights with
respect to any Transaction described in this section.
If any Fundamental Change occurs, then the conversion price in effect will
be adjusted immediately after such Fundamental Change as described below. In
addition, in the event of a Common Stock Fundamental Change, each Preferred
Security shall be convertible solely into common stock of the kind received by
holders of CMS Energy Common Stock as a result of such Common Stock Fundamental
Change.
S-30
<PAGE> 31
The conversion price in the case of any Transaction involving a Fundamental
Change will be adjusted immediately after such Fundamental Change:
(i) in the case of a Non-Stock Fundamental Change (as defined below),
the conversion price of the Preferred Securities will thereupon become the
lower of (A) the conversion price in effect immediately prior to such
Non-Stock Fundamental Change, but after giving effect to any other prior
adjustments effected pursuant to the preceding paragraphs, and (B) the
result obtained by multiplying the greater of the Applicable Price (as
defined below) or the then applicable Reference Market Price (as defined
below) by a fraction, the numerator of which is $50 and the denominator of
which is (x) the amount of the redemption price for Preferred Security if
the redemption date were the date of such Non-Stock Fundamental Change (or,
for the period commencing on the first date of original issuance of the
Preferred Securities and through July 15, 1998, and the twelve-month
periods commencing July 16, 1998, July 16, 1999, and July 16, 2000, the
product of 107.75, 106.975, 106.20 and 105.425, respectively, multiplied by
$50) plus (y) any then-accrued and unpaid distributions on one Preferred
Security; and
(ii) in the case of a Common Stock Fundamental Change, the conversion
price of the Preferred Securities in effect immediately prior to such
Common Stock Fundamental Change, but after giving effect to any other prior
adjustments effected pursuant to the preceding paragraphs, will thereupon
be adjusted by multiplying such conversion price by a fraction of which the
numerator will be the Purchaser Stock Price (as defined below) and the
denominator will be the Applicable Price; provided, however, that in the
event of a Common Stock Fundamental Change in which (A) 100% of the value
of the consideration received by a holder of CMS Energy Common Stock is
common stock of the successor, acquiror, or other third party (and cash, if
any, is paid only with respect to any fractional interests in such common
stock resulting from such Common Stock Fundamental Change) and (B) all CMS
Energy Common Stock will have been exchanged for, converted into, or
acquired for common stock (and cash with respect to fractional interests)
of the successor, acquiror, or other third party, the conversion price of
the Preferred Securities in effect immediately prior to such Common Stock
Fundamental Change will thereupon be adjusted by multiplying such
conversion price by a fraction of which the numerator will be one and the
denominator will be the number of shares of common stock of the successor,
acquiror, or other third party received by a holder of one share of CMS
Energy Common Stock as a result of such Common Stock Fundamental Change.
In the absence of the Fundamental Change provisions, in the case of a
Transaction each Preferred Security would become convertible into the
securities, cash, or property receivable by a holder of the number of shares of
CMS Energy Common Stock into which such Preferred Security was convertible
immediately prior to such Transaction. A failure to apply the Fundamental Change
conversion price adjustments described above could substantially lessen or
eliminate the value of the conversion privilege associated with the Preferred
Securities. For example, if CMS Energy were acquired in a cash merger, each
Preferred Security would become convertible solely into cash and would no longer
be convertible into securities whose value would vary depending on the future
prospects of CMS Energy and other factors.
The foregoing conversion price adjustments are designed, in certain
circumstances, to reduce the conversion price that would be applicable in
"Fundamental Change" Transactions where all or substantially all the CMS Energy
Common Stock is converted into securities, cash, or property and not more than
50% of the value received by the holders of CMS Energy Common Stock consists of
stock listed or admitted for listing subject to notice of issuance on the NYSE
or a national securities exchange or quoted on the Nasdaq National Market (a
Non-Stock Fundamental Change, as defined below). Such reduction would result in
an increase in the amount of the securities, cash, or property into which each
Preferred Security is convertible over that which would have been obtained in
the absence of such conversion price adjustments.
S-31
<PAGE> 32
In a Non-Stock Fundamental Change Transaction where the initial value
received per share of CMS Energy Common Stock (measured as described in the
definition of Applicable Price below) is lower than the then applicable
conversion price of a Preferred Security but greater than or equal to the
"Reference Market Price", the conversion price will be adjusted as described
above with the effect that each Preferred Security will be convertible into
securities, cash or property of the same type received by the holders of CMS
Energy Common Stock in the Transaction but in an amount per Preferred Security
that would at the time of the Transaction have had a value equal to the then
applicable redemption price per Preferred Security set forth below under
"-- Optional Redemption" (or, for periods prior to the date on and after which
CMS Energy may cause the conversion rights of holders of Preferred Securities to
expire, the applicable amount per Preferred Security set forth in clause (i)
above with respect to the conversion prices for Non-Stock Fundamental Changes).
In a Non-Stock Fundamental Change Transaction where the initial value
received per share of CMS Energy Common Stock (measured as described in the
definition of Applicable Price) is lower than both the conversion price of a
Preferred Security in effect prior to any adjustment described above and the
Reference Market Price, the conversion price will be adjusted as described above
but calculated as though such initial value had been the Reference Market Price.
In a Fundamental Change Transaction where all or substantially all the CMS
Energy Common Stock is converted into securities, cash, or property and more
than 50% of the value received by the holders of CMS Energy Common Stock
consists of listed or Nasdaq National Market traded common stock (a Common Stock
Fundamental Change, as defined below), the foregoing adjustments are designed to
provide in effect that (a) where CMS Energy Common Stock is converted partly
into such common stock and partly into other securities, cash, or property, each
Preferred Security will be convertible solely into a number of shares of such
common stock determined so that the initial value of such shares (measured as
described in the definition of "Purchaser Stock Price" below) equals the value
of the shares of CMS Energy Common Stock into which such Preferred Security was
convertible immediately before the Transaction (measured as aforesaid) and (b)
where CMS Energy Common Stock is converted solely into such common stock, each
Preferred Security will be convertible into the same number of shares of such
common stock receivable by a holder of the number of shares of CMS Energy Common
Stock into which such Preferred Security was convertible immediately before such
Transaction.
The term "Applicable Price" means (i) in the case of a Non-Stock
Fundamental Change in which the holders of the CMS Energy Common Stock receive
only cash, the amount of cash received by the holder of one share of CMS Energy
Common Stock and (ii) in the event of any other Non-Stock Fundamental Change or
any Common Stock Fundamental Change, the average of the Closing Prices (as
defined below) for the CMS Energy Common Stock during the ten trading days prior
to the record date for the determination of the holders of CMS Energy Common
Stock entitled to receive such securities, cash, or other property in connection
with such Non-Stock Fundamental Change or Common Stock Fundamental Change or, if
there is no such record date, the date upon which the holders of the CMS Energy
Common Stock shall have the right to receive such securities, cash, or other
property (such record date or distribution date being hereinafter referred to as
the "Entitlement Date"), in each case as adjusted in good faith by CMS Energy to
appropriately reflect any of the events referred to in clauses (i) through (vi)
of the first paragraph under "-- Conversion Price Adjustments -- General."
The term "Closing Price" means on any day the reported last sale price on
such day or in case no sale takes place on such day, the average of the reported
closing bid and asked prices in each case on the NYSE Consolidated Transactions
Tape or, if the stock is not listed or admitted to trading on the NYSE, on the
principal national securities exchange on which such stock is listed or admitted
to trading or, if not listed or admitted to trading on any national securities
exchange, the average of the closing bid and asked prices as furnished by any
NYSE member firm, selected by the Debenture Trustee for that purpose.
S-32
<PAGE> 33
The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% of the value (as determined in good faith by the Board of
Directors of CMS Energy) of the consideration received by holders of CMS Energy
Common Stock consists of common stock that for each of the ten consecutive
trading days prior to the Entitlement Date has been admitted for listing or
admitted for listing subject to notice of issuance on a national securities
exchange or quoted on the Nasdaq National Market; provided, however, that a
Fundamental Change shall not be a Common Stock Fundamental Change unless either
(i) CMS Energy continues to exist after the occurrence of such Fundamental
Change and the outstanding Preferred Securities continue to exist as outstanding
Preferred Securities or (ii) not later than the occurrence of such Fundamental
Change, the outstanding Preferred Securities are converted into or exchanged for
shares of convertible preferred stock of an entity succeeding to the business of
CMS Energy or a subsidiary thereof, which convertible preferred stock has
powers, preferences, and relative, participating, optional, or other rights, and
qualifications, limitations, and restrictions, substantially similar to those of
the Preferred Securities.
The term "Fundamental Change" means the occurrence of any Transaction or
event in connection with a plan pursuant to which all or substantially all of
the CMS Energy Common Stock shall be exchanged for, converted into, acquired
for, or constitute solely the right to receive securities, cash, or other
property (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization, or
otherwise), provided, that in the case of a plan involving more than one such
Transaction or event, for purposes of adjustment of the conversion price, such
Fundamental Change shall be deemed to have occurred when substantially all of
the CMS Energy Common Stock shall be exchanged for, converted into, or acquired
for or constitute solely the right to receive securities, cash, or other
property, but the adjustment shall be based upon the consideration that a holder
of CMS Energy Common Stock received in such Transaction or event as a result of
which more than 50% of the CMS Energy Common Stock shall have been exchanged
for, converted into, or acquired for or constitute solely the right to receive
securities, cash, or other property.
The term "Non-Stock Fundamental Change" means any Fundamental Change other
than a Common Stock Fundamental Change.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the Closing Prices for the common stock
received in such Common Stock Fundamental Change for the ten consecutive trading
days prior to and including the Entitlement Date, as adjusted in good faith by
CMS Energy to appropriately reflect any of the events referred to in clauses (i)
through (vi) of the first paragraph under "-- Conversion Price Adjustments --
General."
The term "Reference Market Price" shall initially mean $23.33 (which is an
amount equal to 66 2/3% of the reported last sales price for CMS Energy Common
Stock on the NYSE Corporate Tape on June 18, 1997) and in the event of any
adjustment of the conversion price other than as a result of a Non-Stock
Fundamental Change, the Reference Market Price shall also be adjusted so that
the ratio of the Reference Market Price to the conversion price after giving
effect to any such adjustment shall always be the same as the ratio of the
initial Reference Market Price to the initial conversion price of the Preferred
Securities.
SPECIAL EVENT EXCHANGE OR REDEMPTION
At any time following the occurrence and the continuation of a Tax Event or
an Investment Company Event, the CMS Trustees shall direct the Conversion Agent
to exchange all outstanding Preferred Securities for Debentures, provided, that
in the case of a Tax Event, CMS Energy shall have the right to (a) direct that
less than all, or none, of the Preferred Securities be so exchanged if and for
so long as CMS Energy shall have elected to pay any Additional Sums such that
the net amounts received by the holders of Preferred Securities not so exchanged
in respect of
S-33
<PAGE> 34
Distributions and other distributions are not reduced as a result of such Tax
Event, and shall not have revoked any such election or failed to make such
payments or (b) redeem the Preferred Securities in the manner set forth below.
If a Tax Event shall occur or be continuing, CMS Energy shall have the
right, upon not less than 30 nor more than 60 days' notice, to redeem the
Debentures, in whole or in part, for cash upon the later of (i) 90 days
following the occurrence of such Tax Event or (ii) July 16, 2001. Promptly
following such redemption, Preferred Securities and Common Securities with an
aggregate liquidation amount equal to the aggregate principal amount of the
Debentures so redeemed will be redeemed by the Issuer at the liquidation amount
thereof plus accrued and unpaid Distributions thereon to the redemption date on
a pro rata basis. The Common Securities will be redeemed on a pro rata basis
with the Preferred Securities, except that if a Trust Agreement Event of Default
has occurred and is continuing, the Preferred Securities will have a priority
over the Common Securities with respect to the Redemption Price.
Holders of Preferred Securities, by purchasing such Preferred Securities,
will be deemed to have agreed to be bound by these exchange provisions in regard
to the exchange of such Preferred Securities for Debentures on the terms
described above.
DISTRIBUTION OF DEBENTURES
At any time, CMS Energy will have the right to terminate the Issuer and,
after satisfaction of the liabilities of creditors of the Issuer as provided by
applicable law, cause the Debentures to be distributed to the holders of the
Preferred Securities in liquidation of the Issuer. Under current United States
federal income tax law and interpretations and assuming, as expected, the Issuer
is treated as a grantor trust, a distribution of the Debentures should not be a
taxable event to the Issuer and holders of the Preferred Securities. Should
there be a change in law, a change in legal interpretation, a Special Event or
other circumstances, however, the distribution could be a taxable event to
holders of the Preferred Securities. See "Certain Federal Income Tax
Consequences -- Redemption of Preferred Securities for Debentures or Cash."
After the liquidation date fixed for any distribution of Debentures for
Preferred Securities (i) such Preferred Securities will no longer be deemed to
be outstanding, (ii) DTC or its nominee, as the record holder of such Preferred
Securities, will receive a registered global certificate or certificates
representing the Debentures to be delivered upon such distribution and (iii) any
certificates representing such Preferred Securities not held by DTC or its
nominee will be deemed to represent the Debentures having a principal amount
equal to the liquidation amount of such Preferred Securities, and bearing
accrued and unpaid interest in an amount equal to the accrued and unpaid
Distributions on such Preferred Securities until such certificates are presented
to the Property Trustee for transfer or reissuance.
S-34
<PAGE> 35
OPTIONAL REDEMPTION
Except as provided under "-- Mandatory Redemption" below, the Preferred
Securities may not be redeemed by the Issuer prior to July 16, 2001.
On and after such date, upon any permitted redemption by CMS Energy of
Debentures, the Preferred Securities are subject to redemption, in whole or in
part, at the following percentages of the liquidation preference thereof plus
accrued and unpaid Distributions, if any, to the date fixed for redemption if
redeemed during the twelve-month period commencing July 16 in each of the
following years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2001............................ 104.650%
2002............................ 103.875
2003............................ 103.100
2004............................ 102.325
</TABLE>
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2005............................ 101.550%
2006............................ 100.775
2007 and thereafter............. 100.000
</TABLE>
The aggregate liquidation preference of the Preferred Securities and Common
Securities so redeemed will equal the aggregate principal amount of Debentures
redeemed by CMS Energy which may not exceed the amount of the proceeds derived,
directly or indirectly, by CMS Energy or its subsidiaries from the issuance and
sale of common stock within three years preceding the date fixed for redemption.
The Issuer may not redeem the Preferred Securities in part unless all accrued
and unpaid Distributions have been paid in full on all outstanding Preferred
Securities. If fewer than all the outstanding Preferred Securities are to be
redeemed, the Preferred Securities to be so redeemed will be selected as
described under "-- Form, Transfer, Exchange and Book-Entry Procedures."
In the event CMS Energy redeems the Debentures in certain circumstances
upon the occurrence of a Tax Event as described under "-- Special Event Exchange
or Redemption," the appropriate amount of the Preferred Securities will be
redeemed at 100% of the principal amount thereof together with accrued and
unpaid Distributions to the redemption date.
If at any time following the Conversion Expiration Date, less than 5% of
the Preferred Securities offered hereby remain outstanding, such Preferred
Securities shall be redeemable at the option of the Issuer, in whole but not in
part, at a redemption price of $50 per Preferred Security, and all accrued and
unpaid Distributions.
MANDATORY REDEMPTION
Upon repayment at maturity or as a result of the acceleration of the
Debentures upon the occurrence of a "Debenture Event of Default" described under
"Description of the Debentures -- Debenture Events of Default," the Debentures
shall be subject to mandatory redemption, in whole but not in part, by CMS
Energy, and the proceeds from such repayment will be applied to redeem Preferred
Securities and Common Securities having an aggregate liquidation amount equal to
the aggregate principal amount of Debentures so repaid or redeemed at a
redemption price equal to the respective liquidation amount of the Preferred
Securities and Common Securities or, in the case of a redemption of the
Debentures, at the redemption price paid with respect to the Debentures, as
described below, together with accrued and unpaid distributions on the Preferred
Securities and Common Securities to the date of redemption. In the case of
acceleration of the Debentures, the Preferred Securities will be redeemed only
when repayment of the Debentures has actually been received by the Issuer. In
addition, as described above under "-- Special Event Exchange or Redemption,"
upon the occurrence of a Special Event, Preferred Securities shall be exchanged
for Debentures unless, in the case of a Tax Event, CMS Energy shall have elected
to (a) pay any Additional Sums such that the net amounts of Distributions
received by the holders of any Preferred Securities not so exchanged are not
reduced as a result of such Tax Event and shall not have
S-35
<PAGE> 36
revoked any such election or failed to make such payments or (b) redeem the
Preferred Securities as further set forth in "-- Special Event Exchange or
Redemption."
REDEMPTION PROCEDURES
Preferred Securities redeemed on the date fixed for redemption shall be
redeemed at the redemption price with the applicable proceeds from the
contemporaneous redemption of the Debentures. Redemptions of the Preferred
Securities shall be made and the redemption price shall be payable on the
redemption date only to the extent that the Issuer has funds on hand available
for the payment of such redemption price. See also "-- Subordination of Common
Securities."
Notice of any redemption (optional or mandatory) of Preferred Securities
(which notice will be irrevocable) will be given by the Property Trustee to each
record holder of Preferred Securities that are being redeemed not fewer than 30
nor more than 60 days prior to the redemption date. If the Property Trustee
gives a notice of redemption in respect of the Preferred Securities, then, by
12:00 noon, New York City time, on the redemption date, to the extent funds are
available, the Property Trustee will deposit irrevocably with DTC or the
Conversion Agent, as the case may be, funds sufficient to pay the applicable
redemption price and will give DTC or the Conversion Agent, as the case may be,
irrevocable instructions and authority to pay the redemption price to the
holders of such Preferred Securities. See "-- Form, Transfer, Exchange and
Book-Entry Procedures." If such Preferred Securities are no longer in book-entry
form, the Property Trustee, to the extent funds are available, will irrevocably
deposit with the Paying Agent funds sufficient to pay the applicable redemption
price and will give the Paying Agent irrevocable instructions and authority to
pay the redemption price to the holders thereof upon surrender of their
certificates evidencing such Preferred Securities. Notwithstanding the
foregoing, Distributions payable on or prior to the redemption date for any
Preferred Securities called for redemption shall be payable to the holders of
such Preferred Securities as of the relevant record dates for the related
distribution dates. If notice of redemption shall have been given and funds
deposited as required, then upon the date of such deposit, all rights of the
holders of such Preferred Securities so called for redemption will cease, except
the right of the holders of such Preferred Securities to receive the redemption
price, but without interest on such redemption price, and such Preferred
Securities will cease to be outstanding. In the event that any date fixed for
redemption of Preferred Securities is not a Business Day, then payment of the
redemption price on such date will be made on the next succeeding day which is a
Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day. In the event
that payment of the redemption price in respect of Preferred Securities called
for redemption is improperly withheld or refused and not paid either by the
Issuer or by CMS Energy pursuant to the Guarantee as described under
"Description of the Guarantee," Distributions on such Preferred Securities will
continue to accrue at the then applicable rate, from the redemption date
originally established by the Issuer to the date such redemption price is
actually paid, in which case the actual payment date will be the date fixed for
redemption for purposes of calculating the redemption price.
Subject to applicable law (including, without limitation, United States
Federal securities law), CMS Energy or its subsidiaries may at any time and from
time to time purchase outstanding Preferred Securities by tender, in the open
market or by private agreement.
Payment of the redemption price on the Preferred Securities and any
distribution or exchange of Debentures to holders of Preferred Securities shall
be made to the applicable record holders thereof as they appear on the register
for such Preferred Securities on the relevant record date, which shall be the
fifteenth day (whether or not a Business Day) prior to the redemption date or
liquidation date, as applicable.
If less than all of the Preferred Securities and Common Securities listed
by the Issuer are to be redeemed on a redemption date, then the aggregate
liquidation amount of such Preferred Securities
S-36
<PAGE> 37
and Common Securities to be redeemed shall be allocated pro rata among the
Preferred Securities and the Common Securities. The particular Preferred
Securities to be redeemed shall be selected not more than 60 days prior to the
redemption date by the Property Trustee from the outstanding Preferred
Securities not previously called for redemption, by lot or by such method as the
Property Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions (equal to $50 or an integral multiple of
$50 in excess thereof) of the liquidation amount of the Preferred Securities.
The Property Trustee shall promptly notify the Conversion Agent in writing of
the Preferred Securities selected for redemption and, in the case of any
Preferred Securities selected for partial redemption, the liquidation amount
thereof to be redeemed; it being understood that, in the case of Preferred
Securities held by DTC (or any successor) or its nominee, the distribution of
the proceeds of such redemption will be made in accordance with the procedures
of DTC or its nominee. For all purposes of the Trust Agreement, unless the
context otherwise requires, all provisions relating to the redemption of
Preferred Securities shall relate, in the case of any Preferred Securities
redeemed or to be redeemed only in part, to the portion of the aggregate
liquidation amount of Preferred Securities which has been or is to be redeemed.
Notice of any redemption of Debentures will be mailed at least 30 days but
not more than 60 days before the redemption date to each holder of Debentures to
be redeemed at its registered address. Unless CMS Energy defaults in payment of
the redemption price, on and after the redemption date interest ceases to accrue
on such Debentures or portions thereof called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the redemption price of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based on
the liquidation amount of such Preferred Securities and Common Securities;
provided, however, that if on any distribution date or redemption date a Trust
Agreement Event of Default shall have occurred and be continuing, no payment of
any Distribution on, or redemption price of, any of the Common Securities, and
no other payment on account of the redemption, liquidation or other acquisition
of such Common Securities, shall be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or in
the case of payment of the redemption price the full amount of such redemption
price on all of the outstanding Preferred Securities then called for redemption,
shall have been made or provided for, and all funds available to the Property
Trustee shall first be applied to the payment in full in cash of all
Distributions on, or redemption price of, the Preferred Securities then due and
payable.
In the case of any Trust Agreement Event of Default, CMS Energy as holder
of the Common Securities will be deemed to have waived any right to act with
respect to any such Trust Agreement Event of Default until all such Trust
Agreement Events of Default with respect to the Preferred Securities have been
cured, waived or otherwise eliminated. Until any such Trust Agreement Events of
Default with respect to the Preferred Securities have been so cured, waived or
otherwise eliminated, the Property Trustee shall act solely on behalf of the
holders of the Preferred Securities and not on behalf of CMS Energy as holder of
the Common Securities, and only the holders of the Preferred Securities will
have the right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
In the event of any voluntary or involuntary liquidation, termination,
dissolution or winding up of the Issuer (each, a "Liquidation"), the holders of
the Preferred Securities at that time will be entitled to receive out of the
assets of the Issuer, after satisfaction of liabilities to creditors,
distributions in an amount equal to the aggregate of the stated liquidation
amount of $50 per Preferred Security plus accrued and unpaid Distributions
thereon to the date of payment (the "Liquidation Distribution"), unless, in
connection with such Liquidation. Debentures in an aggregate principal amount
equal to the aggregate stated liquidation amount of, with an interest rate
identical to the distribution rate of,
S-37
<PAGE> 38
and accrued and unpaid interest equal to accrued and unpaid Distributions on,
the Preferred Securities, have been distributed on a pro rata basis to the
holders of Preferred Securities in exchange for such Preferred Securities. See
"-- Distribution of Debentures."
If such Liquidation Distribution can be paid only in part because the
Issuer has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Issuer on the
Preferred Securities shall be paid on a pro rata basis. The holder(s) of the
Common Securities will be entitled to receive Liquidation Distributions upon any
such liquidation pro rata with the holders of the Preferred Securities, except
that if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a priority over the Common Securities.
Pursuant to the Trust Agreement, the Issuer shall automatically terminate
upon expiration of its term and shall terminate on the first to occur of: (i)
certain events of bankruptcy, dissolution or liquidation of CMS Energy; (ii) the
distribution of Debentures to the holders of the Preferred Securities and Common
Securities, if CMS Energy, as Depositor, has given written direction to the
Property Trustee to terminate the Issuer (which direction is optional and wholly
within the discretion of CMS Energy, as Depositor); (iii) the redemption,
conversion, or exchange of all of the Preferred Securities and Common
Securities; (iv) the entry by a court of competent jurisdiction of an order for
the dissolution of the Issuer; and (v) the occurrence of a Special Event except
in the case of a Tax Event following which CMS Energy has elected to pay any
Additional Sums such that the net amount received by holders of Preferred
Securities in respect of Distributions is not reduced as a result of such Tax
Event and CMS Energy has not revoked any such election or failed to make such
payment.
TRUST AGREEMENT EVENTS OF DEFAULT; NOTICE
An event of default under the Indenture (a "Debenture Event of Default")
constitutes an event of default under the Trust Agreement with respect to the
Preferred Securities and the Common Securities (a "Trust Agreement Event of
Default"), whatever the reason for such Debenture Event of Default and whether
it shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body.
Within ten days after the occurrence of any Trust Agreement Event of
Default actually known to the Property Trustee, the Property Trustee shall
transmit notice of such Trust Agreement Event of Default to the holders of the
Preferred Securities, the Administrative Trustees and CMS Energy, as Depositor,
unless such Trust Agreement Event of Default shall have been cured or waived.
CMS Energy, as Depositor, and the Administrative Trustees, on behalf of the
Issuer, are required to file annually with the Property Trustee a certificate as
to whether or not they are in compliance with all the conditions and covenants
applicable to them under the Trust Agreement.
If a Trust Agreement Event of Default has occurred and is continuing, the
Preferred Securities shall have a preference over the Common Securities upon
termination of the Issuer as described above. See "-- Liquidation Distribution
Upon Termination." The existence of a Trust Agreement Event of Default does not
entitle the holders of Preferred Securities to accelerate the maturity thereof.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Trust Agreement Event of Default has occurred and is continuing, then
the holders of Preferred Securities would rely on the enforcement by the
Property Trustee of its rights as a holder of the Debentures against CMS Energy.
In addition, the holders of a majority in aggregate liquidation amount of the
Preferred Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Property Trustee or to
direct the exercise of any trust or power conferred upon the Property Trustee
under the Trust Agreement, including the right to direct the Property Trustee to
exercise the remedies available to it as a holder of the
S-38
<PAGE> 39
Debentures. If the Property Trustee fails to enforce its rights as holder of the
Debentures after a request therefor by a holder of Preferred Securities, such
holder may proceed to enforce such rights directly against CMS Energy.
Notwithstanding the foregoing, if a Trust Agreement Event of Default has
occurred and is continuing and such event is attributable to the failure of CMS
Energy to pay interest or principal on the Debentures on the date such interest
or principal is otherwise payable (or in the case of redemption, on the
redemption date), then a holder of Preferred Securities may directly institute a
Direct Action against CMS Energy for enforcement of payment to such holder of
the principal of or interest on the Debentures having a principal amount equal
to the aggregate liquidation amount of the Preferred Securities of such holder
on or after the respective due date specified in the Debentures. In connection
with such Direct Action, CMS Energy will be subrogated to the rights of such
holder of Preferred Securities under the Trust Agreement to the extent of any
payment made by CMS Energy to such holder of Preferred Securities in such Direct
Action. The holders of Preferred Securities will not be able to exercise
directly against CMS Energy any other remedy available to the Property Trustee
unless the Property Trustee first fails to do so.
MERGER OR CONSOLIDATION OF CMS TRUSTEES
Any corporation into which the Property Trustee, the Delaware Trustee or
any Administrative Trustee that is not a natural person may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such CMS Trustee shall be
a party, or any corporation succeeding to all or substantially all the corporate
trust business of such CMS Trustee, shall be the successor of such CMS Trustee
under the Trust Agreement, provided such corporation shall be otherwise
qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE ISSUER
The Issuer may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except as
described below. The Issuer may, at the request of CMS Energy, with the consent
of the Administrative Trustees and without the consent of the Property Trustee,
the Delaware Trustee or the holders of the Preferred Securities, merge with or
into, consolidate, amalgamate, be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to a trust organized as such
under the laws of any State; provided that (i) such successor entity either (a)
expressly assumes all of the obligations of the Issuer with respect to the
Preferred Securities or (b) substitutes for the Preferred Securities other
securities having substantially the same terms as the Preferred Securities (the
"Successor Securities") so long as the Successor Securities rank the same as the
Preferred Securities rank in priority with respect to Distributions and payments
upon liquidation, redemption and otherwise, (ii) CMS Energy expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee as the holder of the Debentures, (iii) the Successor Securities
are listed, or any Successor Securities will be listed upon notification of
issuance, on any national securities exchange or other organization on which the
Preferred Securities are then listed, if any, (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Preferred Securities (including any Successor Securities) to be downgraded by
any nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Preferred Securities (including any Successor Securities) in any material
respect, (vi) such successor entity has a purpose identical to that of the
Issuer, (vii) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, CMS Energy has received an opinion from
independent counsel to the Issuer experienced in such matters to the effect that
(a) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Preferred Securities (including any Successor Securities) in any
material respect (other than with respect to any dilution of the holders
interest in the new entity) and (b) following such merger, consolidation,
amalgamation, replacement,
S-39
<PAGE> 40
conveyance, transfer or lease, neither the Issuer nor such successor entity will
be required to register as an investment company under the Investment Company
Act, and (viii) CMS Energy or any permitted successor or assignee owns all of
the Common Securities of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee. Notwithstanding the foregoing, the Issuer shall not,
except with the consent of holders of 100% in aggregate liquidation amount of
the Preferred Securities, consolidate, amalgamate, merge with or into, be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Issuer or the successor entity to be classified as other than a grantor trust
for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of the Guarantee --
Amendments and Assignment" and as otherwise required by law and the Trust
Agreement, the holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by CMS Energy and the
CMS Trustees, without the consent of the holders of the Preferred Securities (i)
to cure any ambiguity, correct or supplement any provisions in the Trust
Agreement that may be inconsistent with any other provision, or to make any
other provisions with respect to matters or questions arising under the Trust
Agreement that shall not be inconsistent with the other provisions of the Trust
Agreement, (ii) to modify, eliminate or add to any provision of the Trust
Agreement to such extent as shall be necessary to ensure that the Issuer will be
classified for United States federal income tax purposes as a grantor trust at
all times that any Preferred Securities and Common Securities are outstanding or
to ensure that the Issuer will not be required to register as an "investment
company" under the Investment Company Act or be classified as other than a
grantor trust for United States federal income tax purposes or (iii) to maintain
the qualification of the Trust Agreement under the Trust Indenture Act;
provided, however, that in the case of clause (i), such action shall not
adversely affect in any material respect the interests of any holder of
Preferred Securities or Common Securities, and any amendments of the Trust
Agreement shall become effective when notice thereof is given to the holders of
Preferred Securities and Common Securities. The Trust Agreement may be amended
by the CMS Trustees and CMS Energy with (i) the consent of holders representing
not less than a majority (based upon liquidation amounts) of the outstanding
Preferred Securities and Common Securities, acting as a single class, and (ii)
receipt by the CMS Trustees of an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the CMS Trustees in accordance
with such amendment will not affect the Issuer's status as a grantor trust for
United States federal income tax purposes or the Issuer's exemption from the
status of an "investment company" under the Investment Company Act; provided
further that (a) without the consent of each holder of Preferred Securities and
Common Securities, the Trust Agreement may not be amended to (i) change the
amount or timing of any Distribution on the Preferred Securities and Common
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Preferred Securities and Common Securities as of a
specified date or (ii) restrict the right of a holder of Preferred Securities
and Common Securities to institute suit for the enforcement of any such payment
on or after such date.
If any proposed amendment of the Trust Agreement provides for, or the CMS
Trustees otherwise propose to effect, the dissolution, winding-up or termination
of the Issuer, other than pursuant to the terms of the Trust Agreement, then the
holders of the then outstanding Preferred Securities, as a class, will be
entitled to vote on such amendment or proposal and such amendment or proposal
shall not be effective except with the approval of the holders of the majority
in aggregate liquidation amount of the Preferred Securities.
S-40
<PAGE> 41
The holders of a majority in aggregate liquidation amount of Preferred
Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Property Trustee or to
direct the exercise of any trust or power conferred upon the Property Trustee
under the Trust Agreement, including the right to direct the Property Trustee to
exercise the remedies available to it as a holder of the Debentures. So long as
any Debentures are held by the Property Trustee, the CMS Trustees shall not (i)
direct the time, method and place of conducting any proceeding for any remedy
available to the Debenture Trustee or executing any trust or power conferred on
the Debenture Trustee with respect to such Debentures, (ii) waive any past
default that is waivable under Section 5.10 of the Indenture, (iii) exercise any
right to rescind or annul a declaration that the principal of all the Debentures
shall be due and payable, or (iv) consent to any amendment, modification or
termination of the Indenture or the Debentures where such consent shall be
required, without in each case, obtaining the prior approval of the holders of a
majority in aggregate liquidation amount of all outstanding Preferred Securities
(except in the case of clause (iv), which consent, in the event that no Trust
Agreement Event of Default shall occur and be continuing, shall be of the
holders of Preferred Securities and Common Securities, voting together as a
single class); provided, however, that where a consent under the Indenture would
require the consent of each holder of Debentures affected thereby, no such
consent shall be given by the Property Trustee without the prior written consent
of each holder of the Preferred Securities. The CMS Trustees shall not revoke
any action previously authorized or approved by a vote of the holders of the
Preferred Securities except by subsequent vote of the holders of the Preferred
Securities. The Property Trustee shall notify each holder of record of the
Preferred Securities of any notice of default with respect to the Debentures.
A waiver of a Debenture Event of Default will constitute a waiver of the
corresponding Trust Agreement Event of Default.
Any required approval or direction of holders of Preferred Securities may
be given at a separate meeting of holders of Preferred Securities convened for
such purpose, at a meeting of all of the holders of the Preferred Securities and
the Common Securities or pursuant to written consent. The Property Trustee will
cause a notice of any meeting at which holders of Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of such
holders is to be taken, to be given to each holder of record of Preferred
Securities in the manner set forth in the Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for the Issuer to redeem and cancel the Preferred Securities in accordance with
the Trust Agreement.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by CMS Energy, the CMS Trustees or any
affiliate of any CMS Trustee shall, for purposes of such vote or consent, be
treated as if such Preferred Securities were not outstanding.
The procedures by which holders of Preferred Securities may exercise their
voting rights are described below. See "-- Form, Transfer, Exchange and
Book-Entry Procedures."
Holders of the Preferred Securities will have no rights to appoint or
remove the CMS Trustees, who may be appointed, removed or replaced solely by CMS
Energy, as the direct or indirect holder of all the Common Securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities shall be made to DTC, which
shall credit the relevant accounts at DTC on the applicable distribution dates
or, if the Preferred Securities are not held by DTC, such payments shall be made
by check mailed to the address of the holder entitled thereto as such address
shall appear on the Securities Register. The paying agent (the "Paying Agent")
shall initially be the Property Trustee and any co-paying agent chosen by the
Property
S-41
<PAGE> 42
Trustee and acceptable to the Administrative Trustees and CMS Energy. The Paying
Agent shall be permitted to resign as Paying Agent upon 30 days' written notice
to the Property Trustee and CMS Energy. In the event that the Property Trustee
shall no longer be the Paying Agent, the Administrative Trustees shall appoint a
successor (which shall be a bank or trust company acceptable to the
Administrative Trustees and CMS Energy) to act as Paying Agent.
FORM, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
Preferred Securities initially will be represented by the Global
Certificate. The Global Certificate will be deposited upon issuance with the
Property Trustee as custodian for DTC, in New York, New York, and registered in
the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant in DTC as described below.
Except as set forth below, the Global Certificate may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in the Global Certificate may not be
exchanged for Preferred Securities in certificated form except in the limited
circumstances described below under "-- Exchanges of Book-Entry Certificates for
Certificated Preferred Securities."
EXCHANGES OF BOOK-ENTRY CERTIFICATES FOR CERTIFICATED PREFERRED SECURITIES
A beneficial interest in a Global Certificate may not be exchanged for a
certificated Preferred Security unless (i) DTC (x) notifies the Issuer and the
Company that it is unwilling or unable to continue as Depositary for the Global
Certificate or (y) has ceased to be a clearing agency registered under the
Exchange Act and in either case the Issuer and the Company thereupon fails to
appoint a successor Depositary, (ii) the Issuer and the Company, at their
option, notifies the Property Trustee in writing that they elect to cause the
issuance of the Preferred Securities in certificated form or (iii) there shall
have occurred and be continuing a Trust Agreement Event of Default or any event
which after notice or lapse of time or both would be a Trust Agreement Event of
Default. In all cases, certificated Preferred Securities delivered in exchange
for any Global Certificate or beneficial interests therein will be registered in
the names, and issued in any approved denominations, requested by or on behalf
of the Depositary (in accordance with its customary procedures).
CERTAIN BOOK-ENTRY PROCEDURES FOR GLOBAL CERTIFICATES
DTC has advised the Issuer and the Company as follows: DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "Clearing Agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participants ("participants") and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system is available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
DTC has advised the Issuer and the Company that its current practice, upon
the issuance of the Global Certificate, is to credit, on its internal system,
the respective principal amount of the individual beneficial interests
represented by such Global Certificates to the accounts with DTC of the
participants through which such interests are to be held. Ownership of
beneficial interests in the Global Certificate will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC or its nominees (with respect to interests of participants) and the
S-42
<PAGE> 43
records of participants and indirect participants (with respect to interests of
persons other than participants).
As long as DTC, or its nominee, is the registered holder of a Global
Certificate, DTC or such nominee, as the case may be, will be considered the
sole owner and holder of the Preferred Securities represented by such Global
Certificate for all purposes under the Trust Agreement and the Preferred
Securities.
Except in the limited circumstances described above owners of beneficial
interests in a Global Certificate will not be entitled to have any portions of
such Global Certificate registered in their names, will not receive or be
entitled to receive physical delivery of Preferred Securities in definitive form
and will not be considered the owners or holders of the Global Certificate (or
any Preferred Securities represented thereby) under the Trust Agreement or the
Preferred Securities.
Investors may hold their interests in the Global Certificate directly
through DTC, if they are participants in such system, or indirectly through
organizations which are participants in such system. All interests in a Global
Certificate will be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Certificate to such persons may be
limited to that extent. Because DTC can act only on behalf of its participants,
which in turn act on behalf of indirect participants and certain banks, the
ability of a person having beneficial interests in a Global Certificate to
pledge such interest to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests.
Payments of Distributions on Global Certificates will be made to DTC or its
nominee as the registered owner thereof. Neither the Issuer, the Company, the
Property Trustee nor any of their respective agents will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Global Certificate or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
The Issuer and the Company expect that DTC or its nominee, upon receipt of
any payment of Distributions in respect of a Global Certificate representing any
Preferred Securities held by it or its nominee, will immediately credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global
Certificate for such Preferred Securities as shown on the records of DTC or its
nominee. The Issuer and the Company also expects that payments by participants
to owners of beneficial interests in such Global Certificate held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in "street name." Such payments will be the responsibility of such participants.
Interests in the Global Certificates will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its participants. Transfers between participants
in DTC will be effected in accordance with DTC's procedures, and will be settled
in same-day funds.
DTC has advised the Issuer and the Company that it will take any action
permitted to be taken by a holder of Certificates (including the presentation of
Preferred Securities for exchange as described below and the conversion of
Preferred Securities) only at the direction of one or more participants to whose
account with DTC interests in the Global Certificates are credited and only in
respect of such portion of the aggregate liquidation amount of the Preferred
Securities as to which such participant or participants has or have given such
direction. However, if there is a Trust Agreement Event of Default, DTC reserves
the right to exchange the Global Certificates for
S-43
<PAGE> 44
legended Preferred Securities in certificated form, and to distribute such
Preferred Securities to its participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the Global Certificate among
participants of DTC, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. None of
the Issuer, the Company, the Property Trustee nor any of their respective agents
will have any responsibility for the performance by DTC, its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations, including maintaining, supervising or
reviewing the records relating to, or payments made on account of, beneficial
ownership interests in Global Certificates.
Redemption notices shall be sent to Cede & Co. as the registered holder of
the Preferred Securities. If less than all of the Preferred Securities are being
redeemed, DTC's current practice is to determine by lot the amount of the
interest of each Direct Participant to be redeemed.
Although voting with respect to the Preferred Securities is limited to the
holders of record of the Preferred Securities, in those instances in which a
vote is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to Preferred Securities. Under its usual procedures, DTC would mail an
omnibus proxy (the "Omnibus Proxy") to the Property Trustee as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Direct Participants to whose accounts such Preferred
Securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
Conveyance of notices and other communications by DTC to participants, by
participants to indirect participants, and by participants and indirect
participants to beneficial owners of the Preferred Securities and the voting
rights of participants, indirect participants and beneficial owners of Preferred
Securities will be governed by arrangements among them, subject to any statutory
or regulatory requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depositary with
respect to the Preferred Securities at any time by giving reasonable notice to
the Property Trustee and CMS Energy. In the event that a successor securities
depositary is not obtained, definitive Preferred Securities certificates
representing such Preferred Securities are required to be printed and delivered.
CMS Energy, at its option, may decide to discontinue use of the system of
book-entry transfers through DTC (or a successor depositary). After a Debenture
Event of Default, the holders of a majority in liquidation amount of Preferred
Securities may determine to discontinue the system of book-entry transfers
through DTC. In any such event, definitive certificates for the Preferred
Securities will be printed and delivered.
TRANSFER AGENT, REGISTRAR AND PAYING, CONVERSION AND EXCHANGE AGENT
The Property Trustee will act as transfer agent, registrar and paying,
conversion and exchange agent for the Preferred Securities.
Registration of transfers or exchanges of Preferred Securities will be
effected without charge by or on behalf of the Issuer, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The Issuer will not be required to register or cause to be
registered the transfer of the Preferred Securities after such Preferred
Securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
CMS Energy and certain of its subsidiaries may maintain deposit accounts
and conduct other banking and corporate securities transactions and
relationships with the Property Trustee in the ordinary course of their
businesses. The Property Trustee, other than during the occurrence and
continuance of a Trust Agreement Event of Default, undertakes to perform only
such duties as are
S-44
<PAGE> 45
specifically set forth in the Trust Agreement and, after such Trust Agreement
Event of Default, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the Property Trustee is under no obligation to exercise any
of the powers vested in it by the Trust Agreement at the request of any holder
of Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Trust
Agreement Event of Default has occurred and is continuing and the Property
Trustee is required to decide between alternative causes of action, construe
ambiguous provisions in the Trust Agreement or is unsure of the application of
any provision of the Trust Agreement, and the matter is not one on which holders
of Preferred Securities are entitled under the Trust Agreement to vote, then the
Property Trustee shall take such action as is directed by CMS Energy and, if not
so directed, shall take such action as it deems advisable and in the best
interests of the holders of the Preferred Securities and the Common Securities
and will have no liability except for its own bad faith, negligence or willful
misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Issuer in such a way that the Issuer will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Debentures will be
treated as indebtedness of CMS Energy for United States federal income tax
purposes. In this connection, CMS Energy and the Administrative Trustees are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust of the Issuer or the Trust Agreement, that CMS Energy and
the Administrative Trustees determine in their discretion to be necessary or
desirable for such purposes, as long as such action does not materially
adversely affect the interests of the holders of the Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
The Issuer may not borrow money or issue debt or mortgage or pledge any of
its assets.
DESCRIPTION OF THE GUARANTEE
The Guarantee will be executed and delivered by CMS Energy concurrently
with the issuance by the Issuer of the Preferred Securities for the benefit of
the holders from time to time of such Preferred Securities. The Bank of New York
will act as trustee ("Guarantee Trustee") under the Guarantee. The following
description of certain terms of the Guarantee supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Guarantee set forth in the accompanying Prospectus, to which
reference is hereby made. This summary of certain provisions of the Guarantee
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, all of the provisions of the Guarantee (a copy of which is
available at the corporate trust offices of the Guarantee Trustee in New York,
New York). Capitalized terms not defined herein have the meanings assigned to
such terms in the accompanying Prospectus. The Guarantee Trustee will hold the
Guarantee for the benefit of the holders of the Preferred Securities.
GENERAL
CMS Energy will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Preferred Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that the Issuer may have or assert other than
the defense of payment. The following payments with respect to the Preferred
Securities, to the extent not paid by or on behalf of the Issuer (the "Guarantee
Payments"), will be subject to the Guarantee: (i) any accumulated and unpaid
Distributions required to be paid on the Preferred Securities, to the extent
that the Issuer has funds on hand available therefor at such time,
S-45
<PAGE> 46
(ii) the redemption price with respect to any Preferred Securities called for
redemption to the extent that the Issuer has funds on hand available therefor at
such time, or (iii) upon a voluntary or involuntary dissolution, winding up or
liquidation of the Issuer (unless the Debentures are distributed to holders of
the Preferred Securities), the lesser of (a) the Liquidation Distribution, to
the extent that the Issuer has funds on hand available therefor at such time,
and (b) the amount of assets of the Issuer remaining available for distribution
to holders of Preferred Securities. CMS Energy's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by CMS Energy
to the holders of the Preferred Securities or by causing the Issuer to pay such
amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Issuer's obligations under the Preferred Securities, but will apply only to
the extent that the Issuer has funds sufficient to make such payments, and is
not a guarantee of collection. If CMS Energy does not make interest payments on
the Debentures held by the Issuer, the Issuer will not be able to pay
Distributions on the Preferred Securities and will not have funds legally
available therefor.
CMS Energy has, through the Guarantee, the Trust Agreement, the Debentures
and the Indenture, taken together, fully, irrevocably and unconditionally
guaranteed all of the Issuers obligations under the Preferred Securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Issuer's obligations under the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Debentures and the Guarantee."
CMS Energy has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Issuer with respect to the Common Securities to
the same extent as the Guarantee, except that upon the occurrence and during the
continuation of a Trust Agreement Event of Default, holders of Preferred
Securities shall have priority over holders of Common Securities with respect to
distributions and payments on liquidation, redemption or otherwise.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of CMS Energy and
will rank subordinate and junior in right of payment to all other liabilities of
CMS Energy and will rank pari passu 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.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., 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 held for the benefit of the holders of the Preferred
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Issuer or upon
distribution of the Debentures to the holders of the Preferred Securities. The
Guarantee does not place a limitation on the amount of additional indebtedness
that may be incurred by CMS Energy or any of its subsidiaries.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority in aggregate liquidation amount of such
outstanding Preferred Securities. The manner of obtaining any such approval will
be as set forth under "Description of the Preferred Securities -- Voting Rights;
Amendment of the Trust Agreement." All guarantees and agreements contained in
the Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of CMS Energy and shall inure to the benefit of the holders of
the Preferred Securities then outstanding.
S-46
<PAGE> 47
CERTAIN COVENANTS OF CMS ENERGY
CMS Energy will covenant in the Guarantee that if and so long as (i) the
Issuer is the holder of all the Debentures, (ii) a Tax Event in respect of the
Issuer has occurred and is continuing and (iii) CMS Energy has elected, and has
not revoked such election, to pay Additional Sums in respect of the Preferred
Securities and Common Securities, CMS Energy will pay to the Issuer such
Additional Sums. CMS Energy will also covenant that it will not, and it will not
cause any of its subsidiaries to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of CMS Energy's capital stock or (ii) make any payment of
principal, interest or premium, if any, on or repay or repurchase or redeem any
debt securities (including guarantees of indebtedness for money borrowed) of CMS
Energy that rank pari passu with or junior to the Debentures (other than (a) any
dividend, redemption, liquidation, interest, principal or guarantee payment by
CMS Energy where the payment is made by way of securities (including capital
stock) that rank pari passu with or junior to the securities on which such
dividend, redemption, interest, principal or guarantee payment is being made,
(b) payments under the Guarantee, (c) purchases of CMS Energy Common Stock
related to the issuance of CMS Energy Common Stock under any of CMS Energy's
benefit plans for its directors, officers or employees, (d) as a result of a
reclassification of CMS Energy's capital stock or the exchange or conversion of
one series or class of CMS Energy's capital stock for another series or class of
CMS Energy's capital stock and (e) the purchase of fractional interests in
shares of CMS Energy's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged)
if at such time (i) there shall have occurred any event of which CMS Energy has
actual knowledge that (a) with the giving of notice or the lapse of time, or
both, would constitute a Debenture Event of Default and (b) in respect of which
CMS Energy shall not have taken reasonable steps to cure, (ii) CMS Energy shall
be in default with respect to its payment of any obligations under the Guarantee
or (iii) CMS Energy shall have given notice of its selection of an Extension
Period as provided in the Indenture with respect to the Debentures and shall not
have rescinded such notice, or such Extension Period, or any extension thereof,
shall be continuing. CMS Energy will also covenant (i) for so long as Preferred
Securities are outstanding, not to convert Debentures except pursuant to a
notice of conversion delivered to the Conversion Agent by a holder of Preferred
Securities, (ii) to maintain directly or indirectly 100% ownership of the Common
Securities, provided that certain successors which are permitted pursuant to the
Indenture may succeed to CMS Energy's ownership of the Common Securities, (iii)
not to voluntarily terminate, wind-up or liquidate the Issuer, except (a) in
connection with a distribution of the Debentures to the holders of the Preferred
Securities in liquidation of the Issuer or (b) in connection with certain
mergers, consolidations or amalgamations permitted by the Trust Agreement, (iv)
to maintain the reservation for issuance of the number of shares of CMS Energy
Common Stock that would be required from time to time upon the conversion of all
the Debentures then outstanding, (v) to use its reasonable efforts, consistent
with the terms and provisions of the Trust Agreement, to cause the Issuer to
remain classified as a grantor trust and not as an association taxable as a
corporation for United States federal income tax purposes and (vi) to deliver
shares of CMS Energy Common Stock upon an election by the holders of the
Preferred Securities to convert such Preferred Securities into CMS Energy Common
Stock.
As part of the Guarantee, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Preferred Securities into or for CMS Energy Common Stock or Debentures.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of CMS
Energy to perform any of its payment or other obligations thereunder. The
holders of a majority in aggregate liquidation amount of the Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of the
Guarantee or to
S-47
<PAGE> 48
direct the exercise of any trust or power conferred upon the Guarantee Trustee
under the Guarantee.
If the Guarantee Trustee fails to enforce the Guarantee, any holder of the
Preferred Securities may institute a legal proceeding directly against CMS
Energy to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Issuer, the Guarantee Trustee or any other person
or entity. In addition, any record holder of Preferred Securities shall have the
right, which is absolute and unconditional, to proceed directly against CMS
Energy to obtain Guarantee Payments, without first waiting to determine if the
Guarantee Trustee has enforced the Guarantee or instituting a legal proceeding
against the Issuer, the Guarantee Trustee or any other person or entity. CMS
Energy has waived any right or remedy to require that any action be brought just
against the Issuer, or any other person or entity before proceeding directly
against CMS Energy.
CMS Energy, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not CMS Energy is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by CMS Energy in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use under the circumstances in the
conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of Preferred Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
full payment of the redemption price of the Preferred Securities, upon full
payment of the amounts payable upon liquidation of the Issuer, upon the
distribution, if any, of CMS Energy Common Stock to the holders of Preferred
Securities in respect of the conversion of all such holders' Preferred
Securities into CMS Energy Common Stock or upon distribution of Debentures to
the holders of the Preferred Securities in exchange for all of the Preferred
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of Preferred Securities must
restore payment of any sums paid under such Preferred Securities or the
Guarantee.
DESCRIPTION OF THE DEBENTURES
The Debentures are to be issued under a Subordinated Debt Indenture, to be
dated as of June 1, 1997 (the "Base Indenture") between CMS Energy and The Bank
of New York as trustee (the "Debenture Trustee"), as supplemented by a First
Supplemental Indenture, to be dated as of June 20, 1997 (the Base Indenture, so
supplemented, is hereinafter referred to as the "Indenture"), copies of which
will be available for inspection at the corporate trust office of the Debenture
Trustee in New York, New York. This summary supplements, and to the extent
inconsistent replaces, the summary of the general terms and provisions of the
Debentures set forth in the accompanying Prospectus, to which reference is
hereby made. This summary of certain terms and provisions of the Debentures and
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Indenture. Whenever particular
defined terms of the Indenture are referred to herein, such defined terms are
incorporated herein or therein by reference.
S-48
<PAGE> 49
GENERAL
The Debentures will be unsecured and will rank junior and be subordinate in
right of payment to all Senior Indebtedness of CMS Energy. The Debentures will
be limited in aggregate principal amount to approximately $178 million, such
amount being the sum of the aggregate stated liquidation amount of the Preferred
Securities and capital contributed by CMS Energy in exchange for the Common
Securities. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of CMS Energy, whether under the Indenture or any
existing or other indenture that CMS Energy may enter into in the future or
otherwise. See "-- Subordination."
Concurrently with the issuance of the Preferred Securities, the Issuer will
invest the proceeds thereof and the consideration paid by CMS Energy for the
Common Securities in the Debentures. The Debentures will be in the principal
amount equal to the aggregate stated liquidation amount of the Preferred
Securities plus CMS Energy's concurrent investment in the Common Securities.
The Debentures are not subject to any sinking fund provision. The entire
principal amount of the Debentures will mature, and become due and payable,
together with any accrued and unpaid interest thereon, on July 15, 2027.
INTEREST
The Debentures will bear interest at the annual rate of 7 3/4% per annum,
payable quarterly in arrears on January 15, April 15, July 15 and October 15 of
each year, commencing on October 15, 1997 (each, an "Interest Payment Date"), to
the person in whose name each Debenture is registered at the close of business
on the Business Day next preceding such Interest Payment Date, subject to
certain exceptions. It is anticipated that, until the liquidation, if any, of
the Issuer, each Debenture will be held in the name of the Property Trustee in
trust for the benefit of the holders of the Preferred Securities and the Common
Securities. The amount of interest payable for any period will be computed on
the basis of a 360-day year of twelve 30-day months. In the event that any date
on which interest is payable on the Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay). Accrued interest that is not paid on the applicable Interest
Payment Date will bear additional interest on the amount thereof (to the extent
permitted by law) at the stated rate per annum, compounded quarterly. The term
"interest" as used herein shall include quarterly interest payments, interest on
quarterly interest payments not paid on the applicable Interest Payment Date and
Additional Sums (as defined below), as applicable.
GLOBAL SECURITIES
If distributed to holders of the Preferred Securities in connection with
the involuntary or voluntary dissolution, winding-up or liquidation of the
Issuer as a result of the occurrence of a Special Event, the Debentures will be
issued in the same form as the Preferred Securities which such Debentures
replace. Any Global Certificate will be replaced by one or more global
certificates (each a "Global Security") registered in the name of the depository
or its nominee. Except under the limited circumstances described below, the
Debentures represented by the Global Security will not be exchangeable for, and
will not otherwise be issuable as, Debentures in definitive form. The Global
Securities described above may not be transferred except by the depository to a
nominee of the depository or by a nominee of the depository to the depository or
another nominee of the depository or to a successor depository or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in such a Global
Security.
S-49
<PAGE> 50
Except as provided below, owners of beneficial interests in such a Global
Security will not be entitled to receive physical delivery of Debentures in
definitive form and will not be considered the holders thereof for any purpose
under the Indenture, and no Global Security representing Debentures shall be
exchangeable, except for another Global Security of like denomination and tenor
to be registered in the name of the depository or its nominee or to a successor
depository or its nominee. Accordingly, each beneficial owner of Preferred
Securities must rely on the procedures of DTC or if such person is not a
participant, on the procedures of the participant through which such person owns
its interest to exercise any rights of a holder under the Indenture.
If Debentures are distributed to holders of Preferred Securities in
liquidation of such holders' interests in the Issuer and a Global Security is
issued, DTC will act as securities depository for the Debentures represented by
such Global Security. For a description of DTC and the specific terms of the
depository arrangements, see "Description of the Preferred Securities -- Form,
Transfer, Exchange and Book-Entry Procedures." As of the date of this Prospectus
Supplement, the description therein of DTC's book-entry system and DTC's
practices as they relate to purchases, transfers, notices and payments with
respect to the Preferred Securities apply in all material respects to any debt
obligations represented by one or more Global Securities held by DTC. CMS Energy
may appoint a successor to DTC or any successor depository in the event DTC or
such depository is unable or unwilling to continue as a depository for the
Global Securities.
None of CMS Energy, the Debenture Trustee, any Paying Agent or the
Securities Registrar will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests of the Global Security representing such Debentures or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
A Global Security shall be exchangeable for Debentures registered in the
names of persons other than DTC or its nominee only if (i) DTC notifies CMS
Energy that it is unwilling or unable to continue as a depository for such
Global Debenture and no successor depositary shall have been appointed by CMS
Energy within 90 days, or if at any time DTC ceases to be a clearing agency
registered under the Exchange Act at a time when DTC is required to be so
registered to act as such depository, (ii) CMS Energy in its sole discretion
determines that such Global Security shall be so exchangeable, or (iii) there
shall have occurred and be continuing an Event of Default with respect to such
Global Security. Any Global Security that is exchangeable pursuant to the
preceding sentence shall be exchangeable for definitive certificates registered
in such names as DTC shall direct. It is expected that such instructions will be
based upon directions received by DTC from its Participants with respect to
ownership of beneficial interests in such Global Security. In the event that
Debentures are issued in definitive form, such Debentures will be in
denominations of $50 and integral multiples thereof and may be transferred or
exchanged at the offices described in "-- Payment and Paying Agents" below.
PAYMENT AND PAYING AGENTS
Payments on Debentures represented by a Global Security will be made to
DTC, as the depositary for the Debentures. In the event Debentures are issued in
definitive form, principal of and premium, if any, and any interest on
Debentures will be payable, the transfer of the Debentures will be registrable,
and the Debentures will be exchangeable for Debentures of other denominations of
a like aggregate principal amount at the corporate office of the Debenture
Trustee in the City of New York or at the office of such Paying Agent or Paying
Agents as CMS Energy may designate, 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 Securities Register
or (ii) by wire transfer to an account maintained by the Person entitled thereto
as specified in the Securities Register, provided that proper transfer
instructions have been received by the Regular Record Date. Payment of any
interest on Debentures will be made to the Person in whose name such Debentures
are registered at the close of business on the Regular Record Date for such
interest, except in the case of Defaulted Interest. The Regular Record Date for
the interest payable
S-50
<PAGE> 51
on any Interest Payment Date shall be the fifteenth day (whether or not a
Business Day) next preceding such Interest Payment Date. CMS Energy may at any
time designate additional Paying Agents or rescind the designation of any Paying
Agent.
Any monies deposited with the Debenture Trustee or any Paying Agent, or
then held by CMS Energy in trust, for the payment of the principal of and
premium, if any, or interest on any Debentures and remaining unclaimed for two
years after such principal and premium, if any, or interest has become due and
payable shall, at the request of CMS Energy, be repaid to CMS Energy and the
holder of such Debentures shall thereafter look, as a general unsecured
creditor, only to CMS Energy for payment thereof.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Event of Default under the Indenture has occurred and is
continuing, CMS Energy has the right under the Indenture to defer the payment of
interest (including any Liquidated Damages) on the Debentures at any time or
from time to time for a period not exceeding 20 consecutive quarters with
respect to each Extension Period, provided that no Extension Period may extend
beyond the stated maturity of the Debentures. At the end of such Extension
Period, CMS Energy must pay all interest then accrued and unpaid (together with
interest thereon at the stated annual rate, compounded quarterly, to the extent
permitted by applicable law). During an Extension Period, interest will continue
to accrue and holders of Debentures (or holders of Preferred Securities while
the Preferred Securities are outstanding) will be required to accrue interest
income for United States federal income tax purposes. See "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
During any such Extension Period, CMS Energy may not, and may not cause any
subsidiary to, (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of CMS
Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu with or junior to the Debentures (other than (a) any dividend,
redemption, liquidation, interest, principal or guarantee payment by CMS Energy
where the payment is made by way of securities (including capital stock) that
rank pari passu with or junior to the securities on which such dividend,
redemption, interest, principal or guarantee payment is being made, (b) payments
under the Guarantee, (c) purchases of CMS Energy Common Stock related to the
issuance of CMS Energy Common Stock under any of CMS Energy's benefit plans for
its directors, officers or employees, (d) as a result of a reclassification of
CMS Energy's capital stock or the exchange or conversion of one series or class
of CMS Energy's capital stock for another series or class of CMS Energy's
capital stock, and (e) the purchase of fractional interests in shares of CMS
Energy's capital stock pursuant to the conversion or exchange provisions of such
capital stock or the security being converted or exchanged). Prior to the
termination of any such Extension Period, CMS Energy may further extend the
interest payment period, provided that no Extension Period may exceed 20
consecutive quarters or extend beyond the stated maturity of the Debentures.
Upon the termination of any such Extension Period and the payment of all amounts
then due on any Interest Payment Date, CMS Energy may elect to begin a new
Extension Period subject to the above requirements. No interest shall be due and
payable during an Extension Period, except at the end thereof. CMS Energy shall
give the Property Trustee, the Administrative Trustees and the Debenture Trustee
notice of its election to begin any Extension Period at least one Business Day
prior to the earlier of (i) the record date for the date Distributions on the
Preferred Securities (or, if no Preferred Securities are outstanding, for the
date interest on the Debentures) would have been payable except for the election
to begin such Extension Period and (ii) the date the Property Trustee is (or, if
no Preferred Securities are outstanding, the Debenture Trustee is) required to
give notice to the NYSE or other applicable self-regulatory organization or to
holders of such Preferred Securities (or, if no Preferred Securities are
outstanding, to the holders of such Debentures) of such record date.
S-51
<PAGE> 52
The Debenture Trustee and the Property Trustee shall give notice of CMS Energy's
election to begin an Extension Period to the holders of the Debentures and the
Preferred Securities, respectively.
MANDATORY REDEMPTION
Upon repayment at maturity or as a result of acceleration upon the
occurrence of a Debenture Event of Default, CMS Energy will redeem the
Debentures, in whole but not in part, at a redemption price equal to 100% of the
principal amount thereof, together with any accrued and unpaid interest thereon.
Any payment pursuant to this provision shall be made prior to 12:00 noon, New
York City time, on the date of such repayment or acceleration or at such other
time on such earlier date as the parties thereto shall agree. The Debentures are
not entitled to the benefit of any sinking fund or, except as set forth above or
as a result of acceleration, any other provision for mandatory prepayment.
OPTIONAL REDEMPTION
On and after July 16, 2001, CMS Energy will have the right, at any time and
from time to time, to redeem the Debentures, in whole or in part, upon notice
given as provided below, during the twelve month periods beginning on July 16 in
each of the following years and at the indicated redemption prices (expressed as
a percentage of the principal amount of the Debentures being redeemed), together
with any accrued but unpaid interest on the portion being redeemed.
<TABLE>
<CAPTION>
REDEMPTION REDEMPTION
YEAR PRICE YEAR PRICE
- ---- ---------- ---- ----------
<S> <C> <C> <C>
2001............................ 104.650% 2005............................ 101.550%
2002............................ 103.875 2006............................ 100.775
2003............................ 103.100 2007 and thereafter............. 100.000
2004............................ 102.325
</TABLE>
The principal amount of Debentures so redeemed may not, however, exceed the
amount of the proceeds derived, directly or indirectly, by CMS Energy or its
Subsidiaries from the issuance and sale of common stock within three years
preceding the date fixed for redemption. For so long as the Issuer is the holder
of all the outstanding Debentures, the proceeds of any such redemption will be
used by the Issuer to redeem Preferred Securities and Common Securities in
accordance with their terms. CMS Energy may not redeem the Debentures in part
unless all accrued and unpaid interest has been paid in full on all outstanding
Debentures. See "Description of the Preferred Securities -- Optional
Redemption."
CMS Energy also shall have the right to redeem the Debentures at any time
after July 16, 2001 upon the occurrence of a Tax Event as described in
"Description of the Preferred Securities -- Special Event Exchange or
Redemption."
If at any time following the Conversion Expiration Date, less than 5% of
the original aggregate principal amount of the Debentures remains outstanding,
such Debentures shall be redeemable at the option of CMS Energy, in whole but
not in part, at a redemption price equal to the principal amount thereof, plus
any accrued and unpaid interest.
REDEMPTION PROCEDURES
Notices of any redemption of the Debentures and the procedures for such
redemption shall be as provided with respect to the Preferred Securities under
"Description of the Preferred Securities -- Redemption Procedures." Notice of
any redemption will be mailed at least 30 days but not more than 60 days before
the redemption date to each holder of Debentures to be redeemed at its
registered address. Unless CMS Energy defaults in payment of the redemption
price, on and after the redemption date interest ceases to accrue on such
Debentures or portions thereof called for redemption.
S-52
<PAGE> 53
DISTRIBUTION OF DEBENTURES
At any time, CMS Energy will have the right to terminate the Issuer and
cause the Debentures to be distributed to the holders of the Preferred
Securities in liquidation of the Issuer after satisfaction of liabilities to
creditors of the Issuer as provided by applicable law. If distributed to holders
of Preferred Securities in liquidation, the Debentures will initially be issued
in the form of one or more global securities and DTC, or any successor
depositary for the Preferred Securities, will act as depositary for the
Debentures. It is anticipated that the depositary arrangements for the
Debentures would be substantially identical to those in effect for the Preferred
Securities. There can be no assurance as to the market price of any Debentures
that may be distributed to the holders of Preferred Securities. For a
description of DTC and the terms of the depositary matters, see "Description of
the Preferred Securities -- Form, Transfer, Exchange and Book-Entry Procedures."
CONVERSION OF THE DEBENTURES
The Debentures will be convertible at the option of the holders of the
Debentures into CMS Energy Common Stock, at any time prior to redemption,
maturity or the Conversion Expiration Date, initially at the rate of 1.2255
shares of CMS Energy Common Stock for each $50 in principal amount of the
Debentures (equivalent to a conversion price of $40.80 per share of CMS Energy
Common Stock), subject to the conversion price adjustments described under
"Description of the Preferred Securities -- Conversion Rights." The Issuer will
covenant for so long as the Preferred Securities are outstanding not to convert
the Debentures except pursuant to a notice of conversion delivered to the
Conversion Agent by a holder of Preferred Securities. Upon surrender of such
Preferred Securities to the Conversion Agent for conversion, the Issuer will
distribute the commensurate principal amount of the Debentures to the Conversion
Agent on behalf of the holder of every Preferred Security so converted,
whereupon the Conversion Agent will convert such Debentures into CMS Energy
Common Stock on behalf of such holder. CMS Energy's delivery to the holders of
the Debentures (through the Conversion Agent) of the fixed number of shares of
CMS Energy Common Stock into which the Debentures are convertible (together with
the cash payment, if any, in lieu of fractional shares) will be deemed to
satisfy CMS Energy's obligation to pay the principal amount of the Debentures,
and the accrued and unpaid interest attributable to the period from the last
date to which interest has been paid or duly provided for.
EXPIRATION OF CONVERSION RIGHTS
The conversion rights of any Debentures held by the Issuer shall expire
upon the expiration of the conversion rights of the Preferred Securities on the
terms described above under "Description of the Preferred Securities --
Expiration of Conversion Rights." In the case of any Debentures that have been
exchanged for Preferred Securities under the conditions described under
"Description of the Preferred Securities -- Special Event Exchange or
Redemption," on and after July 16, 2001, CMS Energy may, at its option, cause
the conversion rights of holders of such Debentures to expire. CMS Energy may
exercise this option only if for 20 trading days within any period of 30
consecutive trading days, including the last trading day of such period, the
Current Market Price of CMS Energy Common Stock exceeds 115% of the conversion
price of the Debentures, subject to adjustment in certain circumstances. In
order to exercise its conversion expiration option, CMS Energy must issue a
press release for publication on the Dow Jones News Service announcing the
Conversion Expiration Date prior to the opening of business on the second
trading day after any period in which the condition in the preceding sentence
has been met, but in no event prior to July 16, 2001. The press release shall
announce the Conversion Expiration Date and provide the current conversion price
and Current Market Price of CMS Energy Common Stock, in each case as of the
close of business on the trading day next preceding the date of the press
release.
Notice of the expiration of conversion rights will be given by first-class
mail to the holders of the Debentures not more than four Business Days after CMS
Energy issues the press release. The
S-53
<PAGE> 54
Conversion Expiration Date will be a date selected by CMS Energy not less than
30 nor more than 60 days after the date on which CMS Energy issues the press
release announcing its intention to terminate the conversion rights of the
Debenture holders. In the event that CMS Energy does not exercise its conversion
expiration option, the Conversion Expiration Date with respect to the Debentures
will be two Business Days preceding the date set for mandatory redemption of the
Debentures.
MODIFICATION OF INDENTURE
The Indenture permits CMS Energy and the Debenture Trustee to enter into
supplemental indentures thereto without the consent of the holders of the
Debentures to: (i) secure the Debentures, (ii) evidence the assumption by a
successor corporation of the obligations of CMS Energy under the Indenture and
the Debentures then outstanding, (iii) add covenants for the protection of the
holders of the Debentures, (iv) cure any ambiguity or correct any defect or
inconsistency in the Indenture or to make such other provisions as CMS Energy
deems necessary or desirable with respect to matters or questions arising under
the Indenture, provided that no such action adversely affects the interests of
any holders of the Debentures, (v) establish the form and terms of any series of
securities under the Indenture and (vi) evidence the acceptance of appointment
by a successor Debenture Trustee.
The Indenture also permits CMS Energy and the Debenture Trustee, with the
consent of the holders of not less than a majority in aggregate principal amount
of the Debentures then outstanding and affected (voting as one class), to enter
into supplemental indentures to add any provisions to, or change in any manner
or eliminate any of the provisions of, the Indenture or modify in any manner the
rights of the holders of the Debentures, provided, however, that CMS Energy and
the Debenture Trustee may not, without the consent of the holder of each of the
Debentures then outstanding and affected thereby, enter into a supplemental
indenture to: (i) change the stated maturity of the Debentures, or reduce the
principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon (other than deferrals of the payments of interest as described
under "-- Option to Extend Interest Payment Period") or impair any right to
institute suit for the enforcement of any such payment, or adversely affect the
subordination provisions of the Indenture or any right to convert any Debentures
or (ii) reduce the percentage of principal amount of the Debentures, the holders
of which are required to consent to any such modification of the Indenture,
provided that, so long as any of the Preferred Securities remain outstanding, no
such modification may be made that adversely affects the holders of such
Preferred Securities in any material respect, and no termination of the
Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture may be effective, without the
prior consent of the holders of at least a majority in aggregate liquidation
amount of the Preferred Securities then outstanding unless and until the
principal of the Debentures and all accrued and unpaid interest thereon has been
paid in full.
Prior to the acceleration of the maturity of any Debentures, the holders of
a majority in aggregate principal amount of the Debentures 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 Debentures waive any past default or Event of Default and its
consequences, except a default or an Event of Default in respect of a covenant
or provision of the Indenture or of any Debentures which cannot be modified or
amended without the consent of the holder of each of the Debentures affected.
DEBENTURE EVENTS OF DEFAULT
The occurrence of any of the following events with respect to the
Debentures will constitute an "Event of Default" with respect to such
Debentures: (i) failure for 30 days to pay any interest on the Debentures, when
due (subject to the deferral of any due date in the case of an Extension
Period); (ii) failure to pay any principal or premium, if any, on the Debentures
when due whether at maturity,
S-54
<PAGE> 55
upon redemption by declaration or otherwise; (iii) failure by CMS Energy to
deliver shares of CMS Energy Common Stock upon an appropriate election by
holders of the Debentures to convert such Debentures; (iv) default for 60 days
by CMS Energy in the observance or performance of any other covenant or
agreement contained in the Indenture relating to the Debentures after written
notice thereof as provided in the Indenture; (v) certain events of bankruptcy,
insolvency or reorganization relating to CMS Energy; (vi) 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 (vii) a default resulting
in the acceleration of indebtedness of CMS Energy in excess of $25,000,000,
which acceleration has not been rescinded or annulled within 10 days after
written notice of such default as provided in the Indenture.
If an Event of Default on the Debentures shall have occurred and be
continuing, either the Debenture Trustee or the holders of not less than 25% in
aggregate principal amount of the Debentures then outstanding may declare the
principal of all Debentures and the interest, if any, accrued thereon to be due
and payable immediately and, should the Debenture Trustee or the holders of the
Debentures fail to make such declaration, the holders of at least 25% in
aggregate liquidation amount of the Preferred Securities then outstanding shall
have such right.
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 Debentures then outstanding shall have been cured
or waived as provided in the Indenture by the holders of a majority in aggregate
principal amount of the Debentures then outstanding and, should the holders of
the Debentures fail to waive such default, the holders of a majority in
aggregate liquidation amount of the Preferred Securities shall have such right.
The Indenture provides that the Debenture Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of the holders of the Debentures, unless such
holders shall have offered to the Debenture Trustee reasonable indemnity.
Subject to such provisions for indemnity and certain other limitations contained
in the Indenture, the holders of a majority in aggregate principal amount of the
Debentures 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 Debenture Trustee, or exercising any trust or power conferred on the
Debenture Trustee, with respect to the Debentures.
The Indenture provides that no holder of the Debentures may institute any
action against CMS Energy under the Indenture (except actions for payment of
overdue principal, premium or interest) unless such holder previously shall have
given to the Debenture Trustee written notice of default and continuance thereof
and unless the holders of not less than 25% in aggregate principal amount of the
Debentures then outstanding (voting as one class) shall have requested the
Debenture Trustee to institute such action and shall have offered the Debenture
Trustee reasonable indemnity, the Debenture Trustee shall not have instituted
such action within 60 days of such request and the Debenture Trustee shall not
have received direction inconsistent with such request by the holders of a
majority in aggregate principal amount of the Debentures then outstanding
(voting as one class).
The Indenture requires CMS Energy to furnish to the Debenture Trustee
annually a statement as to CMS Energy's compliance with all conditions and
covenants under the Indenture. The Indenture provides that the Debenture Trustee
may withhold notice to the holders of the Debentures of any default (except
defaults as to payment of principal, premium or interest on the Debentures) if
it considers such withholding to be in the interest of the holders of the
Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of CMS Energy to pay interest or principal
on the Debentures on the date such interest or principal is otherwise payable, a
holder of Preferred Securities may institute a Direct Action for payment after
the respective due date specified in the Debentures. CMS Energy may not amend
the
S-55
<PAGE> 56
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Preferred Securities.
Notwithstanding any payment made to such holder of Preferred Securities by CMS
Energy in connection with a Direct Action, CMS Energy shall remain obligated to
pay the principal of or interest on the Debentures held by the Issuer or the
Property Trustee and CMS Energy shall be subrogated to the rights of the holder
of such Preferred Securities with respect to payments on the Preferred
Securities to the extent of any payments made by CMS Energy to such holder in
any Direct Action.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that CMS Energy shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into CMS Energy or convey, transfer or lease its properties and assets
substantially or as an entirety to CMS Energy, unless (i) in case CMS Energy
consolidates with or merges into another Person or conveys, transfers or leases
its properties and assets substantially as an entirety to any Person, the
successor Person is organized under the laws of the United States or any state
or the District of Columbia, and such successor Person expressly assumes CMS
Energy's obligations on the Debentures; (ii) immediately after giving effect
thereto, no Debenture Event of Default, and no event which, after notice or
lapse of time or both, would become a Debenture Event of Default, shall have
happened and be continuing; (iii) in the case of the Debentures, such
transaction is permitted under the Trust Agreement and Guarantee and does not
give rise to any breach or violation of the Trust Agreement or Guarantee; and
(iv) certain other conditions as prescribed in the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Debentures protection in the event of a highly leveraged or other transaction
involving CMS Energy that may adversely affect holders of the Debentures.
EXPENSES OF ISSUER
Pursuant to the Indenture, CMS Energy will pay all of the costs, expenses
or liabilities of the Issuer, other than obligations of the Issuer to pay to the
holders of any Preferred Securities or Common Securities the amounts due such
holders pursuant to the terms of the Preferred Securities or Common Securities.
DEFEASANCE, COVENANT DEFEASANCE AND DISCHARGE
The Indenture provides that, at the option of CMS Energy: (i) CMS Energy
will be discharged from any and all obligations in respect of the Debentures
then outstanding (except for certain obligations to register the transfer of or
exchange the Debentures, to replace stolen, lost or mutilated Debentures, to
maintain paying agencies and to maintain the trust described below), or (ii) CMS
Energy need not comply with certain restrictive covenants of the Indenture
(including those described under "Consolidation, Merger, Sale of Assets and
Other Transactions"), in each case if CMS Energy irrevocably deposits in trust
with the Debenture 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 Debentures on the stated maturity of such Debentures (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 Debenture Trustee an opinion of independent
counsel to the effect that the exercise of such option would not cause the
holders of the Debentures 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 (i) of
the
S-56
<PAGE> 57
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
Indenture there has been a change in the applicable Federal income tax law.
In the event CMS Energy exercises its option to effect a covenant
defeasance with respect to the Debentures as described in the preceding
paragraph and the Debentures 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 Debenture Trustee would be insufficient to
pay amounts due on the Debentures at the time of the acceleration resulting from
such Event of Default, CMS Energy would remain liable for such amounts.
CMS Energy may also obtain a discharge of the Indenture with respect to all
Debentures then outstanding (except for certain obligations to register the
transfer of or exchange such Debentures to replace stolen, lost or mutilated
Debentures, to maintain paying agencies and to maintain the trust described
below) by irrevocably depositing in trust with the Debenture 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 Debentures on the
stated maturities thereof (including one or more redemption dates), provided
that such Debentures are by their terms due and payable, or are to be called for
redemption, within one year.
For United States Federal income tax purposes any deposit contemplated in
the preceding paragraph would be treated as an exchange of the Debentures
outstanding for other property. Accordingly, holders of the Debentures
outstanding may be required to recognize a gain or loss for United States
Federal income tax purposes upon such exchange. In addition, such holders
thereafter may be required to recognize income from such property which could be
different from the amount that would be includable 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.
SUBORDINATION
The Indenture provides (and each holder of the Debentures by acceptance
thereof agrees) that the Debentures will be subordinated in right of payment to
the prior payment in full of all Senior Indebtedness (as defined herein) of CMS
Energy. No payment on account of principal of, premium, if any, or interest on
the Debentures and no acquisition of, or payment on account of any sinking fund
for, the Debentures 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 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 the Debentures or to acquire any Debentures or on account of any
sinking fund provisions applicable to the Debentures. CMS Energy shall give
prompt written notice to the Debenture Trustee of any default in payment of
principal of or interest on any Senior Indebtedness. The Indenture provisions
described in this paragraph, however, do not prevent CMS Energy from making
sinking fund payments in the Debentures 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
S-57
<PAGE> 58
benefit of creditors or otherwise: (i) all Senior Indebtedness must be paid in
full before the holders of the Debentures are entitled to any payments
whatsoever; and (ii) any payment or distribution of CMS Energy's assets of any
kind or character, whether in cash, securities or other property, which would
otherwise (but for the subordination provisions) be payable or deliverable in
respect of the Debentures 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 the Debentures. In the event that notwithstanding such subordination
provisions, any payment or distribution of assets of any kind or character is
made on the Debentures before all Senior Indebtedness is paid in full, the
Debenture Trustee or the holders of the Debentures receiving such payment will
be required to pay over such payment or distribution to the holders of such
Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness,
the rights of the holders of the Debentures 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 Debentures are
paid in full. As a result of the subordination provisions, in the event of CMS
Energy's insolvency, the holders of the Debentures may recover ratably less than
senior creditors of CMS Energy.
"Senior Indebtedness" means the principal of and premium, if any, and
interest (including interest accruing on or after the filing of any petition in
bankruptcy relating to CMS Energy whether or not such claim for post-petition
interest is allowed in such proceeding) on the following, whether outstanding on
the date of execution of the Indenture or thereafter incurred, created or
assumed: (i) indebtedness of CMS Energy for money borrowed by CMS Energy
(including purchase money obligations, except indebtedness to trade creditors or
assumed by CMS Energy in the ordinary course of business in connection with the
obtaining of goods, materials or services) or evidenced by debentures (other
than the Debentures), notes, bankers' acceptances or other corporate debentures
or similar instruments issued by CMS Energy; (ii) all capital lease obligations
of CMS Energy; (iii) obligations with respect to letters of credit; (iv) all
indebtedness of others of the type referred to in the preceding clauses (i)
through (iii) assumed by or guaranteed in any manner by CMS Energy or in effect
guaranteed by CMS Energy; or (v) renewals, extensions or refundings of any of
the indebtedness referred to in the preceding clauses (i), (ii), (iii) and (iv)
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 Debentures.
The Indenture does not limit the aggregate amount of Senior Indebtedness
that may be issued. As of May 31, 1997, Senior Indebtedness of CMS Energy
aggregated approximately $1,612 million.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee is under no obligation to exercise any of the powers
vested in it by the Indenture at the request of any holder of the Debentures,
unless offered reasonable indemnity by such holder against the costs, expenses
and liabilities which might be incurred thereby. The Debenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Debenture Trustee reasonably
believes that repayment or adequate indemnity is not reasonably assured to it.
S-58
<PAGE> 59
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE DEBENTURES
AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Issuer has funds available for the payment of such
Distributions) are irrevocably guaranteed by CMS Energy as and to the extent set
forth under "Description of the Guarantee." Taken together, CMS Energy's
obligations under the Debentures, the Indenture, the Trust Agreement and the
Guarantee provide, in the aggregate, a full, irrevocable and unconditional
guarantee of payments of Distributions and other amounts due on the Preferred
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Issuer's obligations under the
Preferred Securities. If and to the extent that CMS Energy does not make
payments on the Debentures, the Issuer will not pay Distributions or other
amounts due on the Preferred Securities. The Guarantee does not cover payment of
Distributions when the Issuer does not have sufficient funds to pay such
Distributions. In such event, a holder of Preferred Securities may institute a
Direct Action directly against CMS Energy to enforce payment of such
Distributions to such holder after the respective due dates. The obligations of
CMS Energy under the Guarantee are subordinate and junior in right of payment to
all other liabilities of CMS Energy; and pari passu 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.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Debentures, such payments will be sufficient to cover Distributions and other
payments due on the Preferred Securities, primarily because (i) the aggregate
principal amount of the Debentures will be equal to the sum of the aggregate
stated liquidation amount of the Preferred Securities and Common Securities;
(ii) the interest rate and interest and other payment dates on the Debentures
will match the Distribution rate and Distribution and other payment dates for
the Preferred Securities; (iii) CMS Energy shall pay for all and any costs,
expenses and liabilities of the Issuer except the Issuer's obligations to
holders of the Preferred Securities under such Preferred Securities; and (iv)
the Trust Agreement further provides that the Issuer will not engage in any
activity that is not consistent with the limited purposes of the Issuer.
Notwithstanding anything to the contrary in the Indenture, CMS Energy has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent CMS Energy has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Securities may institute a legal proceeding
directly against CMS Energy to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Issuer
or any other person or entity.
A default or event of default under any Senior Indebtedness of CMS Energy
will not constitute a default under the Indenture or a Debenture Event of
Default. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness of CMS Energy, the subordination provisions of the Indenture
provide that no payments may be made in respect of the Debentures until such
Senior Indebtedness has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on the Debentures would
constitute a Debenture Event of Default.
S-59
<PAGE> 60
LIMITED PURPOSE OF ISSUER
The Preferred Securities evidence a beneficial interest in the Issuer, and
the Issuer exists for the sole purpose of issuing the Preferred Securities and
Common Securities and investing the proceeds thereof in the Debentures. A
principal difference between the rights of a holder of Preferred Securities and
a holder of Debentures is that a holder of Debentures is entitled to receive
from CMS Energy the principal amount of and interest accrued on Debentures held,
while a holder of Preferred Securities is entitled to receive Distributions from
the Issuer (or from CMS Energy under the applicable Guarantee) if and to the
extent the Issuer has funds available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
the Issuer involving the liquidation of the Debentures, the holders of the
Preferred Securities will be entitled to receive, out of assets held by the
Issuer, the Liquidation Distribution in cash. See "Description of the Preferred
Securities -- Liquidation Distribution Upon Termination." Upon any voluntary or
involuntary liquidation or bankruptcy of CMS Energy, the Property Trustee, as
holder of the Debentures, would be a subordinated creditor of CMS Energy,
subordinated in right of payment to all Senior Indebtedness, but entitled to
receive payment in full of principal and interest before any stockholders of CMS
Energy receive payments or distributions. Since CMS Energy is the guarantor
under the Guarantee and has agreed to pay for all costs, expenses and
liabilities of the Issuer (other than the Issuer's obligations to the holders of
the Preferred Securities), the positions of a holder of such Preferred
Securities and a holder of such Debentures relative to other creditors and to
stockholders of CMS Energy in the event of liquidation or bankruptcy of CMS
Energy would be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special United
States tax counsel to the Issuer and CMS Energy ("Special Tax Counsel"), the
following is a summary of certain of the material United States federal income
tax consequences of the purchase, ownership, disposition and conversion of the
Preferred Securities. Unless otherwise stated, this summary deals only with
Preferred Securities held as capital assets by U.S. Holders who purchase the
Preferred Securities upon original issuance. As used herein, a "U.S. Holder"
means a person who is a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust defined
in section 7701(a)(30) of the Internal Revenue Code of 1986, as amended (the
"Code"). This summary does not deal with special classes of holders such as
banks, thrifts, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt investors,
or persons that will hold the Preferred Securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. Dollar. Further, it
does not include any description of any alternative minimum tax consequences or
the tax laws of any state or local government or of any foreign government that
may be applicable to the Preferred Securities. This summary is based on the
Code, Treasury regulations thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis.
INVESTORS ARE ADVISED TO CONSULT THEIR TAX ADVISORS AS TO THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF PREFERRED
SECURITIES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE EFFECT OF
ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
S-60
<PAGE> 61
CLASSIFICATION OF THE DEBENTURES
CMS Energy has taken the position that the Debentures will be classified
for United States federal income tax purposes as indebtedness of CMS Energy
under current law and, by acceptance of Preferred Securities, each holder
covenants to treat the Debentures as indebtedness and the Preferred Securities
as evidence of an indirect beneficial ownership interest in the Debentures. No
assurance can be given, however, that such position of CMS Energy will not be
challenged by the Internal Revenue Service or, if challenged, that such a
challenge will not be successful. The remainder of this discussion assumes that
the Debentures will be classified as indebtedness of CMS Energy for United
States federal income tax purposes.
CLASSIFICATION OF THE ISSUER
The Issuer will be classified for United States federal income tax purposes
as a grantor trust and not as an association taxable as a corporation.
Accordingly, for United States federal income tax purposes, each holder of
Preferred Securities generally will be considered the owner of an undivided
interest in the Debentures, and each holder will be required to include in its
gross income any interest with respect to its allocable share of those
Debentures.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under applicable Treasury regulations, a debt instrument will be deemed to
be issued with OID if there is more than a remote contingency that periodic
stated interest payments due on the instrument will not be timely paid. Because
the exercise by CMS Energy of its option to defer the payment of stated interest
on the Debentures would, among other things, prevent CMS Energy from declaring
dividends on its capital stock, CMS Energy believes that the likelihood of its
exercising the option is remote within the meaning of such regulations. As a
result, CMS Energy intends to take the position, based upon the advice of
Special Tax Counsel, that the Debentures will not be issued with OID.
Accordingly, based upon this position and except as set forth below, stated
interest on the Debentures generally will be taxable to a holder of Preferred
Securities as ordinary income at the time it is paid or accrued in accordance
with such holder's regular method of tax accounting.
If CMS Energy exercises its right to defer payments of interest on the
Debentures, the Debentures will become OID instruments at that time and,
consequently, a holder of the Preferred Securities will be required to include
such holder's pro rata share of such OID in income on an economic accrual basis
before the receipt of cash attributable to the interest, regardless of such
holder's regular method of tax accounting, and actual distributions of stated
interest will not be separately reported as taxable income. Thereafter, the
Debentures will be taxed as OID instruments for as long as they remain
outstanding. The amount of OID that will accrue in any month will approximately
equal the amount of the interest that accrues on the Debentures in that month at
the stated interest rate. Any amount of OID included in a holder's gross income
(whether or not during an Extension Period) with respect to a Preferred Security
will increase such holder's tax basis in such Preferred Security, and the amount
of actual distributions received by a holder in respect of such accrued OID will
reduce the tax basis of such Preferred Security.
The Treasury regulations described above have not yet been addressed in any
rulings or other interpretations by the Internal Revenue Service (the "IRS"),
and it is possible that the IRS could take a contrary position. If the IRS were
to assert successfully that the stated interest on the Debentures was OID
regardless of whether CMS Energy exercised its option to defer payments of
interest on such debt instruments, a holder of Preferred Securities would be
required to include such OID in income on a daily economic accrual basis as
described above.
Because income on the Debentures will constitute interest, corporate
holders will not be entitled to a dividends-received deduction with respect to
any income recognized with respect to the Debentures.
S-61
<PAGE> 62
REDEMPTION OF PREFERRED SECURITIES FOR DEBENTURES OR CASH UPON LIQUIDATION OF
THE ISSUER
Under certain circumstances, the Debentures may be distributed to holders
in exchange for the Preferred Securities. Under current law, such a distribution
to holders, for United States federal income tax purposes, would be treated as a
nontaxable event to each holder, and each holder would receive an aggregate tax
basis in the Debentures distributed equal to such holder's aggregate tax basis
in its Preferred Securities exchanged therefor. A holder's holding period in the
Debentures so received would include the period during which the Preferred
Securities were held by such holder. If, however, the exchange is caused by a
Tax Event which results in the Issuer being treated as an association taxable as
a corporation, the distribution would likely constitute a taxable event to the
Issuer and holders of the Preferred Securities.
Under certain circumstances described herein (see "Description of the
Preferred Securities -- Special Event Exchange or Redemption"), the Debentures
may be redeemed for cash and the proceeds of such redemption distributed to
holders in redemption of their Preferred Securities. Under current law, such a
redemption would, for United States federal income tax purposes, constitute a
taxable disposition of the redeemed Preferred Securities, and a holder would
recognize gain or loss in the same manner as if it sold such redeemed Preferred
Securities for cash. See "-- Sales of Preferred Securities".
SALES OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between the amount realized on the sale of the Preferred
Securities and the holder's adjusted tax basis in such Preferred Securities.
Assuming that CMS Energy does not defer interest on the Debentures, a holder's
adjusted tax basis in the Preferred Securities generally will be its initial
purchase price. In general, such gain or loss will be a capital gain or loss and
will be a long-term capital gain or loss if the Preferred Securities have been
held for more than one year at the time of sale. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
CONVERSION OF PREFERRED SECURITIES INTO CMS ENERGY COMMON STOCK
A holder of Preferred Securities generally will not recognize income, gain
or loss upon the conversion of the Preferred Securities into CMS Energy Common
Stock through the Conversion Agent. A holder of Preferred Securities will,
however, recognize gain upon the receipt of cash in lieu of a fractional share
of CMS Energy Common Stock equal to the amount of cash received less such
holder's tax basis in such fractional share. Such a holder's tax basis in the
CMS Energy Common Stock received upon conversion should generally be equal to
such holder's tax basis in the Preferred Securities delivered to the Conversion
Agent for exchange less the basis allocated to any fractional share for which
cash is received, and such holder's holding period in the CMS Energy Common
Stock received upon conversion should generally begin on the date such holder
acquired the Preferred Securities delivered to the Conversion Agent for
exchange.
Holders of Preferred Securities should not recognize gain or loss upon
expiration of the conversion rights. Such expiration should not effect a
significant modification of the underlying Debentures within the meaning of
applicable Treasury Regulations, and thus will not be considered a sale or
exchange for purposes of federal income taxation.
ADJUSTMENT OF CONVERSION PRICE
Treasury Regulations promulgated under Section 305 of the Code would treat
holders of Preferred Securities as having received a constructive distribution
from CMS Energy in the event the conversion ratio of the Debentures were
adjusted if (i) as a result of such adjustment, the proportionate interest
(measured by the quantum of CMS Energy Common Stock into or for which the
Debentures are convertible or exchangeable) of the holders of the Preferred
Securities in the
S-62
<PAGE> 63
assets or earnings and profits of CMS Energy were increased and (ii) the
adjustment was not made pursuant to a bona fide, reasonable antidilution
formula. An adjustment in the conversion ratio would not be considered made
pursuant to such a formula if the adjustment was made to compensate for certain
taxable distributions with respect to the CMS Energy Common Stock. Thus, under
certain circumstances, a reduction in the conversion price for the holders may
result in deemed dividend income to holders to the extent of the current or
accumulated earnings and profits of CMS Energy. Holders of the Preferred
Securities would be required to include their allocable share of such deemed
dividend income in gross income but would not receive any cash related thereto.
INFORMATION REPORTING TO HOLDERS
Generally, income on the Preferred Securities will be reported to holders
on Forms 1099, which forms will be mailed to holders of record prior to January
31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, Preferred Securities may
be subject to a "backup" withholding tax of 31% unless the holder complies with
certain identification requirements. Any withheld amounts will generally be
allowed as a credit against the holder's federal income tax, provided the
required information is timely filed with the IRS.
PROPOSED TAX LEGISLATION
On February 6, 1997, as part of the fiscal 1998 budget proposal submitted
to Congress, the Clinton administration proposed certain changes to Federal
income tax law which would, among other things, generally treat as equity, for
Federal income tax purposes, certain debt obligations, such as the Debentures,
that are "issued on or after the date of first Congressional Committee action"
(the "Clinton Proposal"). On June 9, 1997, House Ways and Means Committee
Chairman Bill Archer released the Chairman's Mark Relating to Revenue
Reconciliation Provisions that are proposed to be included in 1997 tax
legislation (the "Chairman's Mark"). The Chairman's Mark constitutes "first
Congressional Committee action" with respect to the provisions contained
therein. The Chairman's Mark does not include the Clinton Proposal that would
require instruments with terms similar to the Debentures to be treated as equity
for Federal income tax purposes.
In light of the Chairman's Mark, it appears that "first Congressional
Committee action" has not yet occurred with respect to the Clinton Proposal.
Furthermore, given the effective date transitional rules relating to certain
capital markets provisions included in the Chairman's Mark (as well as
transitional rules provided for in 1996 proposed legislation similar to the
Clinton Proposal), it is anticipated that the Clinton Proposal, even if acted
upon by Congress in the future, would not apply to the Debentures.
There can be no assurance, however, that the Clinton Proposal or similar
legislation will not ultimately be enacted into law, that the effective date and
transitional rules relating thereto would be enacted as anticipated, or that
other developments will not occur after the date hereof that would adversely
affect the tax treatment of the Debentures and could result in the exchange of
the Debentures for Preferred Securities or, in certain limited circumstances,
the redemption of the Debentures by CMS Energy and the distribution of the
resulting cash in redemption of the Preferred Securities. See "Description of
the Preferred Securities -- Special Event Exchange or Redemption."
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Placement Agreement, CMS Energy
and the Issuer have agreed that the Issuer will sell to Franklin Income Fund,
Franklin Utilities Fund, Franklin Valuemark Utility Equity Fund, Franklin
Valuemark Income Securities Fund, Franklin Global Utilities Fund, Franklin
Equity Income Fund, Franklin AGE High Income Fund, Franklin Multi-Income Trust,
S-63
<PAGE> 64
Franklin Universal Trust, and Franklin Convertible Securities Fund
(collectively, the "Purchasers"), and the Purchasers have, jointly and
severally, agreed to purchase from the Issuer, an aggregate of 3,450,000 of the
Preferred Securities.
Under the terms of the Placement Agreement, the Purchasers are committed to
take and pay for all of the Preferred Securities offered hereby, if any are
taken.
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Morgan Stanley & Co. Incorporated are acting as representatives of the
several placement agents for the Issuer and CMS Energy in connection with the
Offering (the "Agents"). The Agents, who are acting severally and not jointly,
also include BancAmerica Securities, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, First of Michigan Corporation, Oppenheimer & Co., Inc.,
Prudential Securities Incorporated and Roney & Co., LLC.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Debentures issued by CMS Energy, the
Placement Agreement provides that CMS Energy will pay a placement fee to the
Agents for the Agents' arranging the investment therein of such proceeds in an
amount of $0.75 per Preferred Security.
Prior to the Offering, there has been no public market for the Preferred
Securities and the Preferred Securities are being sold by the Issuer exclusively
to the Purchasers. There can be no assurance that any market for the Preferred
Securities will develop or, if one does develop, that it will be maintained. If
an active market for the Preferred Securities fails to develop or be maintained,
the trading price of the Preferred Securities could be adversely affected. No
assurance can be given as to the liquidity of the trading market for the
Preferred Securities.
CMS Energy and the Issuer have agreed that, during the period beginning
from the date of the Placement Agreement and continuing to and including the
earlier of (i) the date on which the distribution of the Preferred Securities
ceases, as determined by the representatives, and (ii) 90 days after the
issuance of the Preferred Securities, they will not offer, sell, contract to
sell or otherwise dispose of (a) any Preferred Securities or any preferred stock
or any other securities of CMS Energy which are substantially similar to the
Preferred Securities, including any guarantee of such securities, or any
securities convertible into or exchangeable for or representing the right to
receive any of the foregoing securities, or (b) any shares of any class of
Common Stock of the Company, other than shares of Common Stock issuable upon
conversion of the Preferred Securities or pursuant to the Company's Stock
Purchase Plan, Performance Incentive Stock Plan, Employee Stock Ownership Plan
and Employee Savings and Incentive Plan.
CMS Energy and the Issuer have agreed to indemnify the several Agents
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Common Stock issuable upon conversion of the Preferred
Securities or the Debentures, the Indenture, the Guarantee, the Debentures and
certain matters relating thereto will be passed upon for the Issuer and CMS
Energy by Michael D. Van Hemert, Esq., Assistant General Counsel of CMS Energy.
Certain matters will be passed upon for the Agents by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York, which has also acted as Special Tax
Counsel to the Issuer and CMS Energy. Certain matters of Delaware law relating
to the validity of the Preferred Securities will be passed upon on behalf of the
Issuer by Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware,
special Delaware counsel to the Issuer. Skadden, Arps, Slate, Meagher & Flom LLP
from time to time renders legal services to CMS Energy. An attorney currently
employed by Skadden, Arps, Slate, Meagher & Flom LLP and formerly employed by
CMS Energy currently owns approximately 62,000 shares of CMS Energy Common
Stock, options to acquire approximately 142,000 shares of CMS Energy Common
Stock and approximately $50,000 aggregate principal amount of certain debt
securities issued by the Company.
S-64
<PAGE> 65
CMS ENERGY CORPORATION
COMMON STOCK
SUBORDINATED DEBENTURES
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
AND
CMS ENERGY TRUST I
CMS ENERGY TRUST II
PREFERRED SECURITIES
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY CMS ENERGY CORPORATION
------------------------
CMS Energy Corporation, a Michigan corporation ("CMS Energy"), may offer,
from time to time, (i) shares of Common Stock, par value $.01 per share ("CMS
Energy Common Stock"), (ii) unsecured subordinated debt securities (the
"Subordinated Debentures") consisting of debentures, convertible debentures,
notes and other unsecured evidence of indebtedness, (iii) Stock Purchase
Contracts ("Stock Purchase Contracts") to purchase CMS Energy Common Stock, and
(iv) Stock Purchase Units ("Stock Purchase Units"), each representing ownership
of a Stock Purchase Contract and Subordinated Debentures or Preferred Securities
or debt obligations of third parties, including U.S. Treasury Securities,
securing the holder's obligation to purchase the CMS Energy Common Stock under
the Stock Purchase Contract, or any combination of the foregoing, 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."
CMS Energy Trust I and CMS Energy Trust II (each, a "Trust" and
collectively, the "Trusts"), statutory business trusts formed under the laws of
the State of Delaware, may also offer, from time to time, preferred securities
("Preferred Securities") representing preferred undivided beneficial interests
in the assets of the Trust in amounts, at prices and on terms to be determined
at or prior to the time of sale. The undivided common beneficial interests in
the Trust will be owned by CMS Energy. The proceeds from the offering of the
Preferred Securities and the sale of the common securities may be contributed by
the Trust to purchase from CMS Energy Subordinated Debentures in an aggregate
principal amount equal to the aggregate liquidation preference of the Preferred
Securities, bearing interest at an annual rate equal to the annual distribution
rate of such Preferred Securities and having certain redemption terms which
correspond to the redemption terms for the Preferred Securities. The
Subordinated Debentures will rank subordinate in right of payment to all of CMS
Energy's Senior Indebtedness (as defined herein). Distributions on the Preferred
Securities may not be made unless the Trust receives corresponding interest
payments on the Subordinated Debentures from CMS Energy. CMS Energy will
irrevocably guarantee, on a subordinated basis and to the extent set forth
therein, with respect to each of the Trust securities, if any, the payment of
distributions, the redemption price, including all accrued or deferred and
unpaid distributions, and payment on liquidation, but only to the extent of
funds on hand. Each of the guarantees will be unsecured and each will be
subordinate to all Senior Indebtedness of CMS Energy. Upon the occurrence of
certain events (subject to the conditions to be described in an accompanying
Prospectus Supplement) the Trust may be liquidated and the holders of the
Preferred Securities could receive Subordinated Debentures in lieu of any
liquidating cash distribution.
Specific terms of the CMS Energy Common Stock, Subordinated Debentures,
Stock Purchase Contracts, Stock Purchase Units, Preferred Securities, and Trust
guarantees, 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 Subordinated
Debentures, the designation, aggregate principal amount, denomination, maturity,
premium, if any, any exchange, conversion, redemption or sinking fund
provisions, interest rate (which may be fixed or variable), the time or method
of calculating interest payments, the right of CMS Energy, if any, to defer
payment or interest on the Subordinated Debentures and the maximum length of
such deferral, put options, if any, public offering price, ranking, any listing
on a securities exchange and other specific terms of the offering; (ii) in the
case of CMS Energy Common Stock, the designation, number of shares, public
offering price and other specific terms of the Offering, from the sale thereof;
(iii) in the case of Preferred Securities, the designation, number of shares,
liquidation preference per security, initial public offering price, any listing
on a securities exchange, dividend rate (or method of calculation thereof),
dates on which dividends shall be payable and dates from which dividends shall
accrue, any voting rights, any redemption, exchange, conversion or sinking fund
provisions and any other rights, preferences, privileges, limitations or
restrictions relating to a specific series or the Preferred Securities, as the
case may be; and (iv) in the case of Stock Purchase Units, the specific terms of
the Stock Purchase Contracts and any Subordinated Debentures, Preferred
Securities, or debt obligations of third parties securing the holders obligation
to purchase CMS Energy Common Stock under the Stock Purchase Contracts, and the
terms of the offering and sale thereof. The offering price to the public of the
Offered Securities will be limited to $300,000,000 in the aggregate.
The outstanding CMS Energy Common Stock is traded on the New York Stock
Exchange, Inc. ("NYSE"). See "Description of Securities -- Dividends and Price
Range of 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.
------------------------
The date of this Prospectus is June 13, 1997.
<PAGE> 66
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 Commission
also maintains a Web site (http://www.sec.gov) that contains reports, proxy
statements and other information regarding CMS Energy. The outstanding shares of
CMS Energy Common Stock 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.
No separate financial statements of the Trusts have been included herein.
CMS Energy and the Trusts do not consider that such financial statements would
be material to holders of Preferred Securities because the Trust are newly
organized special purposes entities, have no operating history and no
independent operations and are not engaged in, and do not propose to engage in,
any activity other than as described under "CMS Energy Trust". Further, CMS
Energy believes that financial statements of the Trusts are not material to the
holders of the Preferred Securities since CMS Energy will guarantee the
Preferred Securities such that the holders of the Preferred Securities, with
respect to the payment of distributions and amounts upon liquidation,
dissolution and winding-up, are at least in the same position vis-a-vis the
assets of CMS Energy as a preferred stockholder of CMS Energy. CMS Energy
beneficially owns directly or indirectly all of the undivided beneficial
interests in the assets of the Trusts (other than the beneficial interests
represented by the Preferred Securities). See "CMS Energy Trusts," "Description
of Securities -- Preferred Securities" and "Description of Securities -- The
Guarantees." In future filings under the Exchange Act , an audited footnote to
CMS Energy's annual financial statements will state that the Trusts are
wholly-owned by CMS Energy, that the sole assets of the Trusts are the
Subordinated Debentures of CMS Energy having a specified aggregate principal
amount, and, considered together, the back-up undertakings, including the
Guarantees, constitute a full and unconditional guarantee by CMS Energy of the
Trusts' obligations under the Preferred Securities issued by the Trusts.
2
<PAGE> 67
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by CMS Energy (File No. 1-9513) with the
Commission 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, 1996; (ii) CMS Energy's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997; (iii) CMS
Energy's Current Reports on Form 8-K dated March 7, April 24, May 1, June 5 and
June 11, 1997; and (iv) CMS Energy's Registration Statement on Form 8-B/A dated
November 21, 1996.
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, including
any beneficial owner, to whom a copy of this Prospectus has been delivered, upon
the written or oral request of any such person, a copy of any and 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 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.
CMS ENERGY CORPORATION
CMS Energy, incorporated in 1987, is the parent holding company of
Consumers Energy Company ("Consumers") and CMS Enterprises Company
("Enterprises"). Consumers, a combination electric and gas utility company
serving in all 68 counties of Michigan's Lower Peninsula, is the largest
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 domestic and
international energy-related businesses including: (i) oil and gas exploration
and production; (ii) acquisition, development and operation of independent power
production facilities; (iii) energy marketing, risk management and energy
management to large customers; (iv) transmission, storage and processing of
natural gas; and (v) international energy distribution.
CMS Energy conducts its principal operations through the following seven
business segments: (i) electric utility operations; (ii) gas utility operations;
(iii) oil and gas exploration and production operations; (iv) independent power
production; (v) energy marketing, services and trading; (vi) natural gas
transmission, storage and processing; and (vii) international energy
distribution. 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 and its subsidiaries
routinely evaluate, invest in, acquire and divest energy-related
3
<PAGE> 68
assets and/or companies both domestically and internationally. Consideration for
such transactions may involve the delivery of cash or securities.
CMS Energy's 1996 consolidated operating revenue was $4,333 million. This
consolidated operating revenue was derived from its electric utility operations
(approximately 57% or $2,446 million), its gas utility operations (approximately
30% or $1,282 million), gas transmission, storage and marketing (approximately
7% or $320 million), oil and gas exploration and production activities
(approximately 3% or $130 million) and independent power production and other
non-utility activities (approximately 3% or $155 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. The
unconsolidated share of non-utility electric generation, gas transmission and
storage and international energy distribution revenue for 1996 was $557 million.
Consumers is a public utility serving gas or electricity to almost six
million of Michigan's nine and a half 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' 1996 consolidated operating revenue of
$3,770 million was derived approximately 65% ($2,446 million) from its electric
utility business and approximately 34% ($1,282 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 TRUSTS
Each of CMS Energy Trust I and CMS Energy Trust II is a statutory business
trust formed under the Delaware Business Trust Act (the "Trust Act") pursuant to
(i) a trust agreement executed by CMS Energy, as sponsor, and the trustees of
CMS Energy Trust I and CMS Energy Trust II (the "CMS Trustees") and (ii) the
filing of a certificate of trust with the Secretary of State of the State of
Delaware. Each trust agreement will be amended and restated in its entirety (as
so amended and restated, the "Trust Agreement") and will be qualified as an
indenture under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). CMS Energy will directly or indirectly acquire common
securities of each Trust in an aggregate liquidation amount equal to
approximately 3% of the total capital of the Trust. Each Trust exists for the
exclusive purposes of (i) issuing the Preferred Securities and common securities
(the "Common Securities" and, together with the Preferred Securities, the "Trust
Securities") representing undivided beneficial interests in the assets of the
Trust, (ii) investing the gross proceeds of the Trust Securities in the
Subordinated Debentures and (iii) engaging in only those other activities
necessary or incidental thereto. Each Trust has a term of approximately 30
years, but may terminate earlier as provided in the Trust Agreement.
Pursuant to the Trust Agreement, the number of CMS Trustees will initially
be three. Two of the CMS Trustees (the "Administrative Trustees") will be
persons who are employees or officers of or who are affiliated with CMS Energy.
The third trustee will be a financial institution that is unaffiliated with CMS
Energy, which trustee will serve as property trustee under the Trust Agreement
and as indenture trustee for the purposes of compliance with the provisions of
the Trust Indenture Act (the "Property Trustee"). Initially, The Bank of New
York, a New York banking corporation, will be the Property Trustee until removed
or replaced by the holder of the Common Securities. For the purpose of
compliance with the provisions of the Trust Indenture Act, The Bank of New York
will also act a trustee (the "Guarantee Trustee") under the Preferred Securities
Guarantee and The Bank of New York (Delaware) will act as the Delaware Trustee
for the purposes of the Trust Act (as defined herein), until removed or replaced
by the holder of the Common Securities. See "Description of Securities -- The
Guarantees."
The Property Trustee will hold title to the Subordinated Debentures for the
benefit of the holders of the Trust Securities and the Property Trustee will
have the power to exercise all rights, powers
4
<PAGE> 69
and privileges under the Subordinated Debt Indenture (as defined herein) as the
holder of the Subordinated Debentures. In addition, the Property Trustee will
maintain exclusive control of a segregated non-interest bearing bank account
(the "Property Account") to hold all payments made in respect of the
Subordinated Debentures for the benefit of the holders of the Trust Securities.
The Property Trustee will make payments of distributions and payments on
liquidation, redemption and otherwise to the holders of the Trust Securities out
of funds from the Property Account. The Guarantee Trustee will hold the
Preferred Securities Guarantee for the benefit of the holders of the Preferred
Securities. CMS Energy, as the direct or indirect holder of all the Common
Securities, will have the right to appoint, remove or replace any CMS Trustee
and to increase or decrease the number of CMS Trustees; provided, that the
number of CMS Trustees shall be at least three, a majority of which shall be
Administrative Trustees. CMS Energy will pay all fees and expenses related to
CMS Energy Trust and the offering of the Trust Securities.
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the Trust
Agreement, the Trust Act and the Trust Indenture Act.
The trustee in the State of Delaware is The Bank of New York (Delaware),
White Clay Center, Route 273, Newark, Delaware 19711. The principal place of
business of each Trust shall be c/o CMS Energy Corporation, Fairlane Plaza
South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan 48126-2712.
USE OF PROCEEDS
The proceeds received by the Trust from the sale of its Preferred
Securities or the common securities will be invested in the Subordinated
Debentures. 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 CMS Energy Common Stock and any Subordinated Debentures offered
hereby for its general corporate purposes, including capital expenditures,
investment in subsidiaries, working capital and repayment of debt.
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 each of the years ended December 31,
1992 through 1996, and for the three months ended March 31, 1997, are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------------------
MARCH 31, 1997 1996 1995 1994 1993 1992(1)
-------------- ---- ---- ---- ---- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges.......... 2.59 2.01 1.94 2.07 1.88 --
Ratio of earnings to fixed charges and
preferred stock dividends................. 2.28 1.79 1.77 1.87 1.81 --
</TABLE>
- ---------------
(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'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
1.33 and 1.29, respectively, excluding these amounts.
5
<PAGE> 70
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.
DESCRIPTION OF SECURITIES
CAPITAL STOCK
The following summary of certain rights of the holders of CMS Energy
capital stock does not purport to be complete and is qualified in its entirety
by express reference to the Restated Articles of Incorporation of CMS Energy
(the "Articles of Incorporation") and the By-Laws of CMS Energy, copies of which
are filed as exhibits to the Registration Statement of which this Prospectus is
a part, and by express reference to the Registration Statement on Form 8-B/A,
which is incorporated into this Prospectus by reference. See "Incorporation of
Certain Documents by Reference" herein.
The authorized capital stock of CMS Energy consists of 250 million shares
of CMS Energy Common Stock, 60 million shares of Class G Common Stock, no par
value ("Class G Common Stock"), and 10 million shares of CMS Energy Preferred
Stock, $.01 par value ("Preferred Stock"). At June 10, 1997, there were
outstanding 95,502,754 shares of CMS Energy Common Stock and 8,000,435 shares of
Class G Common Stock; no shares of Preferred Stock are issued or outstanding.
The CMS Energy Common Stock and the Class G Common Stock are sometimes together
referred to herein as the "Common Stock."
COMMON STOCK
The 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, have been attributed to the "Consumers Gas Group"). 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 for the interest in the Consumers Gas Group attributable to the
outstanding shares of Class G Common Stock.
DIVIDEND RIGHTS AND POLICY; RESTRICTIONS ON DIVIDENDS
Dividends on the CMS Energy Common Stock are paid at the discretion of the
Board of Directors based primarily upon the earnings and financial condition of
CMS Energy, including the Consumers Gas Group, except for the interest in the
Consumers Gas Group attributable to the outstanding shares of the Class G Common
Stock, and other factors. Dividends are payable out of the assets of CMS Energy
legally available therefore, including the Available Class G Dividend Amount (as
defined in the Articles of Incorporation).
Dividends on the Class G Common Stock are 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 are payable out of the lesser of (i) the assets of CMS Energy legally
available therefore and (ii) the Available Class G Dividend Amount. Although the
Available Class G Dividend Amount is intended to reflect the amount available
for dividends to holders of outstanding Class G Common Stock, it is also legally
available for dividends to holders of CMS Energy 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.
CMS Energy is a holding company and its assets consist primarily of
investments in its subsidiaries. As a holding company with no significant
operations of its own, the principal sources of its funds are dependent
primarily upon the earnings of its subsidiaries (in particular, Consumers),
6
<PAGE> 71
borrowings and sales of equity. CMS Energy's ability to pay dividends, including
dividends on CMS Energy Common Stock, 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, 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.
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 certain revolving credit and term loan agreements, the Indenture dated as of
September 15, 1992, as amended and supplemented, between CMS Energy and NBD
Bank, as Trustee, and the Indenture dated as of January 15, 1994, as amended and
supplemented, between CMS Energy and The Chase Manhattan Bank, as Trustee. A
discussion of specific restrictions on CMS Energy's ability to pay dividends
will be set forth in an accompanying Prospectus Supplement pursuant to which
convertible Subordinated Debentures, convertible Preferred Securities or CMS
Energy Common Stock are offered.
VOTING RIGHTS
The holders of CMS Energy Common Stock vote with the holders of Class G
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. Each holder of Common
Stock is entitled to one vote for each share of Common Stock held by such holder
on each matter voted upon by the shareholders. Such right to vote is not
cumulative. A majority of the votes cast by the holders of shares entitled to
vote thereon is sufficient for the adoption of any question presented, except
that certain provisions of the Articles of Incorporation relating to special
shareholder meetings, the removal, indemnification and liability of the Board of
Directors and the requirements for amending these provisions may not be amended,
altered, changed or repealed unless such amendment, alteration, change or repeal
is approved by the affirmative vote of at least 75% of the outstanding shares
entitled to vote thereon.
Under Michigan law, the approval of the holders of a majority of the
outstanding shares of 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 Michigan Business Corporation Act)
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 vote or consent of the holders of a majority of all the
shares of either class of Common Stock then outstanding, 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 entity 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.
7
<PAGE> 72
PREEMPTIVE RIGHTS
The Articles of Incorporation provide that holders of Common Stock will
have no preemptive rights to subscribe for or purchase any additional shares of
the capital stock of CMS Energy of any class now or hereafter authorized, or
Preferred Stock, bonds, debentures, or other obligations or rights or options
convertible into or exchangeable for or entitling the holder or owner to
subscribe for or purchase any shares of capital stock, or any rights to exchange
shares issued for shares to be issued.
LIQUIDATION RIGHTS
In the event of the dissolution, liquidation or winding up of CMS Energy,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of CMS Energy and after there shall have been paid
or set apart for the holders of Preferred Stock the full preferential amounts
(including any accumulated and unpaid dividends) to which they are entitled, the
holders of CMS Energy Common Stock and Class G Common Stock shall be entitled to
receive, on a per share basis, the same portion of all of the assets of CMS
Energy remaining for distribution to the holders of Common Stock, regardless of
whether or not any of such assets were attributed to the Consumers Gas Group.
Neither the merger or consolidation of CMS Energy into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with CMS Energy nor any sale, transfer or lease of all or any part of the assets
of CMS Energy, shall be deemed to be a dissolution, liquidation or winding up
for the purposes of this provision.
Because CMS Energy has subsidiaries which have debt obligations and other
liabilities of their own, CMS Energy's rights and the rights of its creditors
and its stockholders to participate in the distribution of assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
prior claims of the subsidiary's creditors, except to the extent that CMS Energy
may itself be a creditor with recognized claims against the subsidiary.
SUBDIVISION OR COMBINATION
If CMS Energy subdivides (by stock split, stock dividend or otherwise) or
combines (by reverse stock split or otherwise) the 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.
EXCHANGES
The Articles of Incorporation do not provide for either the mandatory or
optional exchange or redemption of CMS Energy Common Stock but do provide that
Class G Common Stock may be exchanged for CMS Energy Common Stock as described
in the Registration Statement on Form 8-B/A incorporated by reference herein.
CMS Energy cannot predict the impact of the potential for such exchanges on the
market prices of the CMS Energy Common Stock.
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 (defined
in the Articles of Incorporation) equal to 110% of the Fair Market Value of one
share of Class G Common Stock.
8
<PAGE> 73
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.
CMS Energy cannot predict the impact of the potential for such exchanges on
the market prices of the CMS Energy Common Stock.
TRANSFER AGENT AND REGISTRAR
CMS Energy Common Stock and Class G Common Stock are transferable at
Consumers Energy Company, 212 W. Michigan Avenue, Jackson, MI 49201. CMS Energy
is the registrar and transfer agent for CMS Energy Common Stock and Class G
Common Stock.
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 10, 1997, there were
approximately 89,292 CMS Energy Common Stock shareholders of record. Future
dividends will depend upon CMS Energy's earnings, financial condition and other
factors.
CMS Energy Common Stock began trading on the NYSE on May 27, 1987. 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.
CMS ENERGY COMMON STOCK
<TABLE>
<CAPTION>
PRICE RANGE
----------------------------------
YEAR DIVIDEND HIGH LOW DIVIDEND
---- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
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.......................................... 25 3/8 22 1/2 .21
Third Quarter........................................... 26 3/8 23 3/8 .24
Fourth Quarter.......................................... 30 26 .24
1996: First Quarter........................................... 31 7/8 27 13/16 .24
Second Quarter.......................................... 31 1/4 28 .24
Third Quarter........................................... 31 5/8 29 .27
Fourth Quarter.......................................... 33 3/4 30 1/8 .27
1997: First Quarter........................................... 34 1/2 31 1/2 .27
Second Quarter (through June 13, 1997).................. 34 7/8 31 1/8 .27
</TABLE>
On May 27, 1997, the CMS Energy Board of Directors approved an increase in
the dividend to an annualized rate of $1.20 per share ($.30 per quarter). The
increase will be effective with the next scheduled quarterly dividend payment in
August 1997. The last reported sale price of the CMS Energy Common Stock on June
13, 1997 on the NYSE was $33.875.
9
<PAGE> 74
PREFERRED STOCK
The authorized Preferred Stock may be issued without the approval of the
holders of Common Stock in one or more series, from time to time, with each such
series to have such designation, powers, preferences and relative,
participating, optional or other special rights, voting rights, if any, and
qualifications, limitations or restrictions thereof, as shall be stated in a
resolution providing for the issue of any such series adopted by CMS Energy's
Board of Directors. The Articles of Incorporation provide that holders of
Preferred Stock will not have any preemptive rights to subscribe for or purchase
any additional shares of the capital stock of CMS Energy of any class now or
hereafter authorized, or any Preferred Stock, bonds, debentures or other
obligations or rights or options convertible into or exchangeable for or
entitling the holder or owner to subscribe for or purchase any shares of capital
stock. The future issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of CMS Energy.
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 Subordinated Debentures, 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
("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
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.
10
<PAGE> 75
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, 1997 were $1,748 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, 1997, $70 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.
In 1996, Consumers paid $200 million in common stock dividends to CMS
Energy. Consumers also paid dividends on its common stock of $70 million on May
22, 1997.
SUBORDINATED DEBENTURES
The Subordinated Debentures will be issued under an Indenture (the
"Subordinated Debt Indenture), between CMS Energy and The Bank of New York as
Trustee (the "Subordinated Debt Trustee"). The descriptions of the provisions of
the Subordinated Debentures and the Subordinated Debt Indenture contained herein
are brief summaries of such provisions and do not purport to be complete. The
form of the Subordinated Debt Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and reference is made
thereto for the respective definitive provisions of such Indenture. 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 Indenture. Section references below are references to sections of the
Subordinated Debt Indenture.
GENERAL
CMS Energy will offer under this Prospectus unsecured Subordinated
Debentures. The Subordinated Debt Indenture does not limit the aggregate
principal amount of Subordinated Debentures which may be issued thereunder.
Subordinated Debentures may be issued under the Subordinated Debt Indenture from
time to time in one or more series. The Subordinated Debentures shall mature on
a date not less than nine months nor more than 40 years after the date of
issuance. (Section 2.3) Capitalized terms used in this section "Subordinated
Debentures" and not otherwise specifically defined in this Prospectus shall have
the meanings respectively set forth in the Subordinated Debt Indenture. The
terms of any Subordinated Debentures 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 Subordinated Debentures.
CMS Energy is a holding company and its assets consist primarily of
investments in its subsidiaries. The Subordinated Debentures will be obligations
exclusively of CMS Energy. CMS Energy's ability to service its indebtedness,
including the Subordinated Debentures, 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 Subordinated Debentures or to make any funds available therefor,
whether by dividends, loans or other payments.
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 Subordinated Debentures, 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
11
<PAGE> 76
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 May 31, 1997, CMS Energy's subsidiaries had total indebtedness
for borrowed money (including capital lease obligations and excluding
intercompany indebtedness) of approximately $2,616 million.
The applicable Prospectus Supplement will set forth the following terms
relating to the Subordinated Debentures: (1) the specific designation of the
Subordinated Debentures; (2) any limit on the aggregate principal amount of the
Subordinated Debentures; (3) the date or dates, if any (and whether fixed or
extendible), on which the Subordinated Debentures will mature; (4) the rate or
rates per annum (which may be fixed or variable) at which the Subordinated
Debentures 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 Subordinated Debentures; (5) the place or places where the principal of
and any interest on the Subordinated Debentures shall be payable and where such
Subordinated Debentures may be surrendered for registration of transfer or
exchange; (6) any provisions relating to the issuance of the Subordinated
Debentures at an original issue discount; (7) the option, if any, of CMS Energy
to redeem the Subordinated Debentures and the periods within which or the dates
on which, the prices at which and the terms and conditions upon which, such
Subordinated Debentures 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
Subordinated Debentures pursuant to any sinking fund or 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 Subordinated Debentures 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 Subordinated Debentures into CMS Energy Common Stock, and
the terms and conditions upon which such conversion shall be effected; (10) the
denominations in which such Subordinated Debentures will be issued and whether
the Subordinated Debentures 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 Subordinated Debentures in bearer form and as to exchanges
between registered and bearer form; (11) whether the Subordinated Debentures
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 Subordinated Debentures 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 Subordinated Debentures rather than
pay such additional amounts; and (13) any other terms of the Subordinated
Debentures not inconsistent with the Subordinated Debt Indenture, including
covenants and events of default relating solely to the Subordinated Debentures.
Subordinated Debentures 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 Subordinated Debentures 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 TRUSTEE
The Bank of New York, the Trustee under the Subordinated Debt Indenture, is
one of a number of banks with which CMS Energy and its subsidiaries maintain
ordinary banking relationships, including credit facilities.
EXCHANGE AND TRANSFER
Subordinated Debentures may be presented for exchange and registered
Subordinated Debentures 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
12
<PAGE> 77
payment of any taxes or other governmental charges due in connection therewith,
subject to any applicable limitations contained in the Subordinated Debt
Indenture. Subordinated Debentures in bearer form and the coupons appertaining
thereto, if any, will be transferable by delivery. (Section 2.8)
PAYMENT
Unless otherwise indicated in the applicable Prospectus Supplement, payment
of the principal of and the premium and interest, if any, on all Subordinated
Debentures in registered form will be made at the office or agency of the
Subordinated Debt Trustee in 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. (Sections 3.1 and
3.2) Unless otherwise indicated in the applicable Prospectus Supplement, payment
of any interest due on Subordinated Debentures in registered form will be made
to the Persons in whose name such Subordinated Debentures are registered at the
close of business on the Record Date for such interest payments. (Section
2.3(f))
EVENTS OF DEFAULT
The occurrence of any of the following events with respect to the
Subordinated Debentures of any series will constitute an "Event of Default" with
respect to the Subordinated Debentures of such series: (a) default for 30 days
in the payment of any interest on any of the Subordinated Debentures of such
series (whether or not payment is prohibited by the subordination provisions of
the Subordinated Debt Indenture); provided, however, that if CMS Energy is
permitted by the terms of the Subordinated Debentures 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 Debentures; (b) default in the payment when due of any of
the principal of or the premium, if any, on any of the Subordinated Debentures
of such series, whether at maturity, upon redemption, acceleration or otherwise
(whether or not payment is prohibited by the subordination provisions of the
Subordinated Debt Indenture); provided, however, that if CMS Energy is permitted
by the terms of the Subordinated Debentures 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 Debentures; (c) failure by CMS Energy to deliver shares of CMS
Energy Common Stock upon an appropriate election by holders of the Subordinated
Debentures to convert such Subordinated Debentures; (d) default in the deposit
or payment of any sinking fund or analogous payment in respect of any
Subordinated Debentures of such series (whether or not payment is prohibited by
the subordination provisions of the Subordinated Debt Indenture); (e) 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 Debentures of such series after written notice thereof as provided
in the Subordinated Debt Indenture; (f) certain events of bankruptcy, insolvency
or reorganization relating to CMS Energy; (g) entry of final judgments against
CMS Energy or Consumers aggregating in excess of $25,000,000 which remain
undischarged or unbonded for 60 days; (h) a default resulting in the
acceleration of indebtedness of CMS Energy in excess of $25,000,000, which
acceleration has not been rescinded or annulled within 10 days after written
notice of such default as provided in the Subordinated Debt Indenture; or (i)
the voluntary or involuntary dissolution, winding-up or termination of a Trust,
except in connection with the distribution of Subordinated Debentures to the
holders of Preferred Securities in liquidation of such Trust, the redemption of
all outstanding Trust Securities of the Trust and certain mergers,
consolidations or amalgamations permitted by the Trust Agreement of such Trust.
Additional Events of Default may be prescribed for the benefit of the
13
<PAGE> 78
Holders of a particular series of Subordinated Debentures and will be described
in the Prospectus Supplement relating to such Subordinated Debentures. (Section
5.1)
If an Event of Default on any series of Subordinated Debentures 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
Debentures of such series then Outstanding may declare the principal of all
Subordinated Debentures of such series and the interest, if any, accrued thereon
to be due and payable immediately and, should the Subordinated Debenture Trustee
or the holders of the Subordinated Debentures fail to make such declaration, the
holders of at least 25% in aggregate liquidation amount of the Preferred
Securities then outstanding shall have such right. (Section 5.1)
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 Debentures 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 Debentures of the affected series then Outstanding
and, should the holders of the Subordinated Debentures fail to waive such
defaults, the holders of a majority in aggregate liquidation amount of the
Preferred Securities shall have such right. (Section 5.1)
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 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 Holders of
the Subordinated Debentures, unless such Holders shall have offered to the
Subordinated Debt Trustee reasonable indemnity. (Sections 6.1 and 6.2(d))
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 Debentures of each affected series then
Outstanding (voting as one class) will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Subordinated Debt Trustee, or exercising any trust or power conferred on the
Subordinated Debt Trustee, with respect to the Subordinated Debentures of such
affected series. (Sections 5.9 and 6.2)
The Subordinated Debt Indenture provides that no Holder of Subordinated
Debentures 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
Debentures 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 Debentures of the affected series
then Outstanding (voting as one class). (Sections 5.6, 5.7 and 5.9)
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.
(Section 4.3(d)) The Subordinated Debt Indenture provides that the Subordinated
Debt Trustee may withhold notice to the Holders of the Subordinated Debentures
of any series of any default affecting such series (except defaults as to
payment of principal, premium or interest on the Subordinated Debentures of such
series) if it considers such
14
<PAGE> 79
withholding to be in the interests of the Holders of the Subordinated Debentures
of such series. (Section 5.11)
SUBORDINATION
The Subordinated Debt Indenture provides (and each Holder of Subordinated
Debentures by acceptance thereof agrees) that the Subordinated Debentures will
be subordinated in right of payment to the prior payment in full of all Senior
Indebtedness (as defined herein) of CMS Energy. (Section 12.1) No payment on
account of principal of, premium, if any, or interest on the Subordinated
Debentures and no acquisition of, or payment on account of any sinking fund for,
the Subordinated Debentures 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 Debentures or to
acquire any Subordinated Debentures or on account of any sinking fund provisions
applicable to Subordinated Debentures. CMS Energy shall give prompt written
notice to the Subordinated Debt Trustee of any default in payment of principal
of or interest on any Senior Indebtedness. (Section 12.2) The Subordinated Debt
Indenture provisions described in this paragraph, however, do not prevent CMS
Energy from making sinking fund payments in Subordinated Debentures acquired
prior to the maturity of Senior Indebtedness or, in the case of default, prior
to such default and notice thereof. 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: (i) all Senior Indebtedness must be paid in full before the Holders
of the Subordinated Debentures are entitled to any payments whatsoever; and (ii)
any payment or distribution of CMS Energy's assets of any kind or character,
whether in cash, securities or other property, which would otherwise (but for
the subordination provisions) be payable or deliverable in respect of the
Subordinated Debentures 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 Debentures. (Section 12.3) In the event that
notwithstanding such subordination provisions, any payment or distribution of
assets of any kind or character is made on the Subordinated Debentures before
all Senior Indebtedness is paid in full, the Subordinated Debt Trustee or the
Holders of Subordinated Debentures receiving such payment will be required to
pay over such payment or distribution to the Holders of such Senior
Indebtedness. (Sections 12.2 and 12.3) Subject to the payment in full of all
Senior Indebtedness, the rights of the Holders of the Subordinated Debentures
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 Debentures are paid in full. As a result of
the subordination provisions, in the event of CMS Energy's insolvency, Holders
of the Subordinated Debentures may recover ratably less than senior creditors of
CMS Energy.
"Senior Indebtedness" means the principal of and premium, if any, and
interest (including interest accruing on or after the filing of any petition in
bankruptcy relating to CMS Energy whether or not such claim for post-petition
interest is allowed in such proceeding) 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, except indebtedness to trade
creditors or assumed by CMS Energy in the ordinary course of business in
connection with the obtaining of goods, materials or
15
<PAGE> 80
services) or evidenced by debentures (other than the Subordinated Debentures),
notes, bankers' acceptances or other corporate Subordinated Debentures or
similar instruments issued by CMS Energy; (ii) all capital lease obligations of
CMS Energy; (iii) obligations with respect to letters of credit; (iv) all
indebtedness of others of the type referred to in the preceding clauses (i) and
(iii) assumed by or guaranteed in any manner by CMS Energy or in effect
guaranteed by CMS Energy; or (v) renewals, extensions or refundings of any of
the indebtedness referred to in the preceding clauses (i), (ii), (iii) and (iv)
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 Debentures.
(Section 12.1)
The Subordinated Debt Indenture does not limit the aggregate amount of
Senior Indebtedness that may be issued. As of May 31, 1997, Senior Indebtedness
of CMS Energy aggregated approximately $1,612 million.
CERTAIN COVENANTS
If Subordinated Debentures are issued to a Trust or a trustee of such Trust
in connection with the issuance of Preferred Securities by such Trust, CMS
Energy will covenant that it will not, and it will not cause any of its
subsidiaries to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
CMS Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu with or junior to the Subordinated Debentures (other than (a)
any dividend, redemption, liquidation, interest, principal or guarantee payment
by CMS Energy where the payment is made by way of securities (including capital
stock) that rank pari passu with or junior to the securities on which such
dividend, redemption, interest, principal or guarantee payment is being made,
(b) payments under the Preferred Securities Guarantee, (c) purchases of CMS
Energy Common Stock related to the issuance of CMS Energy Common Stock under any
of CMS Energy's benefit plans for its directors, officers or employees, (d) as a
result of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock and (e) the purchase of fractional
interests in shares of CMS Energy's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged) if at such time (i) there shall have occurred any event of which CMS
Energy has actual knowledge that (a) with the giving of notice or the lapse of
time, or both, would constitute an Event of Default and (b) in respect of which
CMS Energy shall not have taken reasonable steps to cure, (ii) CMS Energy shall
be in default with respect to its payment of any obligations under the Preferred
Securities Guarantee or (iii) CMS Energy shall have given notice of its
selection of an Extension Period as provided in the Subordinated Debt Indenture
with respect to the Subordinated Debentures and shall not have rescinded such
notice, or such Extension Period, or any extension thereof, shall be continuing.
CMS Energy will also covenant (i) for so long as Preferred Securities are
outstanding, not to convert the Subordinated Debentures except pursuant to a
notice of conversion delivered to the Conversion Agent by a holder of Preferred
Securities, (ii) to maintain directly or indirectly 100% ownership of the Common
Securities, provided that certain successor which are permitted pursuant to the
Subordinated Debt Indenture may succeed to CMS Energy's ownership of the Common
Securities, (iii) not to voluntarily terminate, wind-up or liquidate such Trust,
except (a) in connection with a distribution of the Subordinated Debentures to
the holders of the Preferred Securities in liquidation of such Trust or (b) in
connection with certain mergers, consolidations or amalgamations permitted by
the Trust Agreement, (iv) to maintain the reservation for issuance of the number
of shares of CMS Energy Common Stock that would be required from time to time
upon the conversion of all the Subordinated Debentures then outstanding, (v) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Agreement, to cause such
16
<PAGE> 81
Trust to remain classified as a grantor trust and into as an association taxable
as a corporation for United States federal income tax purposes and (vi) to
deliver shares of CMS Energy Common Stock upon an election by the holders of the
Preferred Securities to convert such Preferred Securities into CMS Energy Common
Stock. (Section 3.5).
As part of the Preferred Securities Guarantee, CMS Energy will agree that
it will honor all obligations described therein relating to the conversion or
exchange of the Preferred Securities into or for CMS Energy Common Stock or
Subordinated Debentures.
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 Debentures 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.
(Section 9.1).
CONVERSION RIGHTS
If the Prospectus Supplement provides, the Holders of Subordinated
Debentures may convert the Subordinated Debentures into CMS Energy Common Stock,
as defined herein (see "Description of Securities -- Common Stock"), at the
option of the Holders at the principal amount thereof, or of such portion
thereof, at any time during the period specified in the Prospectus Supplement,
at the conversion price or conversion rate specified in the Prospectus
Supplement; except that, with respect to any Subordinated Debentures (or portion
thereof) called for redemption, such conversion right shall terminate at the
close of business on the fifteenth day prior to the date fixed for redemption of
such Subordinated Debentures, unless CMS Energy shall default in payment of the
amount due upon redemption thereof (Section 13.2).
The conversion privilege and conversion price or conversion rate will be
adjusted in certain events, including if CMS Energy (i) pays a dividend or makes
a distribution in shares of CMS Energy Common Stock; (ii) subdivides its
outstanding shares of CMS Energy Common Stock into a greater number of shares;
(iii) combines its outstanding shares of CMS Energy Common Stock into a smaller
number of shares; (iv) pays a dividend or makes a distribution on its CMS Energy
Common Stock other than in shares of its CMS Energy Common Stock; (v) issues by
reclassification of its shares of CMS Energy Common Stock any shares of its
capital stock; (vi) issues any rights or warrants to all holders of shares of
its CMS Energy Common Stock entitling them (for a period expiring within 45
days, or such other period as may be specified in the Prospectus Supplement) to
purchase shares of CMS Energy Common Stock (or Convertible Securities) at a
price per share less than the Average Market Price per share for such CMS Energy
Common Stock; and (vii) distributes to all holders of shares of its CMS Energy
Common Stock any assets or Subordinated Debentures or any rights or warrants to
purchase securities, provided that no adjustment shall be made under (vi) or
(vii) above if the adjusted conversion price would be higher than, or the
adjusted conversion rate would be less than, the conversion price or conversion
rate, as the case may be, in effect prior to such adjustment (Sections 13.7,
13.8 and 13.9). CMS Energy may reduce the conversion price or increase the
conversion rate, temporarily or otherwise, by any amount but in no event shall
such adjusted conversion price or conversion rate result in shares of CMS Energy
Common Stock being issuable upon conversion of the Subordinated Debentures if
converted at the time of such adjustment at an effective conversion price per
share less than the par value of the CMS Energy Common Stock at the time such
adjustment is made. (Section 13.10) No adjustments in the conversion price or
conversion rate need be made unless the adjustment would require an increase or
decrease of at least one percent (1%) in the initial conversion price or
conversion rate. Any adjustment which is not made shall be carried forward and
taken into account in any subsequent adjustment (Section 13.13). The foregoing
conversion provisions may be modified to the extent set forth in the Prospectus
Supplement.
17
<PAGE> 82
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 Debentures to: (a) secure the Subordinated
Debentures 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 Debentures then Outstanding, (c) add covenants
for the protection of the Holders of the Subordinated Debentures, (d) cure any
ambiguity or correct any defect or inconsistency in the Subordinated Debt
Indenture or to make such other provisions as CMS Energy deems necessary or
desirable with respect to matters or questions arising under the Subordinated
Debt Indenture, provided that no such action adversely affects the interests of
any Holders of Subordinated Debentures, (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. (Section
8.1)
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 Debentures of all
series then Outstanding and affected (voting as one class), to enter into
supplemental indentures 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 Debentures 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 of the Subordinated
Debentures then outstanding and affected thereby, enter into a supplemental
indenture to: (a) change the time of payment of the principal (or any
installment of principal) of any of the Subordinated Debentures, or reduce the
principal amount thereof, or reduce the rate or change the time of payment of
interest thereon (other than any permitted deferrals of the payments of
interest), 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 of the Subordinated
Debentures when due, or materially adversely affects the subordination
provisions of the Subordinated Debt Indenture; or (b) reduce the percentage in
principal amount of the Subordinated Debentures of the affected series, the
consent of whose Holders is required for any such modification or for any waiver
provided for in the Subordinated Debt Indenture, provided that, so long as any
of the Preferred Securities remain outstanding, no such modification may be made
that adversely affects the holders of such Preferred Securities in any material
respect, and no termination of the Subordinated Debt Indenture may occur, and no
waiver of any Event of Default or compliance with any covenant under the
Subordinated Debt Indenture may be effective, without the prior consent of the
holders of at least a majority in aggregate liquidation amount of the Preferred
Securities then outstanding unless and until the principal of the Subordinated
Debentures and all accrued and unpaid interest thereon has been paid in full.
(Section 8.2)
Prior to the acceleration of the maturity of any Subordinated Debentures,
the Holders of a majority in aggregate principal amount of the Subordinated
Debentures 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 Debentures
waive any past default or Event of Default and its consequences, except a
default or an Event of Default in respect of a covenant or provision of the
Subordinated Debt Indenture or of any Subordinated Debentures which cannot be
modified or amended without the consent of the Holder of each of the
Subordinated Debentures affected. (Section 5.10)
DEFEASANCE, COVENANT 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 Debentures of a particular series then Outstanding (except for
certain obligations to register the transfer of or exchange the Subordinated
Debentures of such series, to replace stolen, lost or mutilated
18
<PAGE> 83
Subordinated Debentures 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") 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
Debentures of such series on the stated maturity of such Subordinated Debentures
(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 Debentures 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.
(Section 10.1)
In the event CMS Energy exercises its option to effect a covenant
defeasance with respect to the Subordinated Debentures of any series as
described in the preceding paragraph and the Subordinated Debentures 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 Debentures of such series at the time of the
acceleration resulting from such Event of Default, 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 Debentures then Outstanding (except for certain
obligations to register the transfer of or exchange such Subordinated Debentures
to replace stolen, lost or mutilated Subordinated Debentures, 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 Debentures on the stated maturities
thereof (including one or more redemption dates), provided that such
Subordinated Debentures are by their terms due and payable, or are to be called
for redemption, within one year. (Section 10.1)
For United States Federal income tax purposes any deposit contemplated in
the preceding paragraph would be treated as an exchange of the Subordinated
Debentures outstanding for other property. Accordingly, holders of Subordinated
Debentures outstanding may be required to recognize a gain or loss for United
States Federal income tax purposes upon such exchange. In addition, such Holders
thereafter may be required to recognize income from such property which could be
different from the amount that would be includable 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.
19
<PAGE> 84
PREFERRED SECURITIES
GENERAL
Each CMS Energy Trust may issue, from time to time, Preferred Securities
having terms described in the Prospectus Supplement relating thereto. The Trust
Agreement of each Trust will authorize the establishment of no more than one
series of Preferred Securities, having such terms, including distributions,
redemption, voting, liquidation rights and such other preferred, deferred or
other special rights or such rights or restrictions as shall be set forth
therein or otherwise established by the Trust Trustees pursuant thereto.
Reference is made to the Prospectus Supplement relating to the Preferred
Securities for specific terms, including (i) the distinctive designation and the
number of Preferred Securities to be offered which will represent undivided
beneficial interests in the assets of the Trust; (ii) the annual distribution
rate and the dates or date upon which such distributions will be paid, provided,
however distributions on the Preferred Securities will be paid quarterly in
arrears to holders of Preferred Securities as of a record date on which the
Preferred Securities are outstanding; (iii) whether holders' can convert the
Preferred Securities into shares of CMS Energy Common Stock; (iv) whether
distributions on Preferred Securities would be deferred during any deferral of
interest payments on the Subordinated Debentures, provided, however that no such
deferral, including extensions, if any, may exceed 20 consecutive quarters nor
extend beyond the stated maturity date of the Subordinated Debentures, and at
the end of any such deferrals, CMS Energy shall make all interest payments then
accrued or deferred and unpaid (including any compounded interest); (v) the
amount of any liquidation preference; (vi) the obligation, if any, of the Trust
to redeem Preferred Securities through the exercise of CMS Energy of an option
on the corresponding Subordinated Debenture and the price or prices at which,
the period or periods within which and the terms and conditions upon which
Preferred Securities shall be purchased or redeemed, in whole or in part,
pursuant to such obligation; (vii) 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 Preferred Securities shall be convertible or
exchangeable at the option of the holder of the Preferred Securities or other
property or cash; (viii) the voting rights, if any, of the Preferred Securities
in addition to those required by law and in the Trust Agreement, or set forth
under the Guarantees (as defined below); (ix) the additional payments, if any,
which the Trust will pay as a distribution as necessary so that the net amounts
reserved by the Trust and distributable to the holders of the Preferred
Securities, after all taxes, duties, assessments or governmental charges of
whatever nature (other than withholding taxes) have been paid will not be less
than the amount that would have been reserved and distributed by the Trust, and
the amount the holders of the Preferred Securities would have reserved, had no
such taxes, duties, assessments or governmental charges been imposed; (x) the
terms and conditions, if any, upon which the Subordinated Debentures may be
distributed to holders of Preferred Securities; and (xi) any other relative
rights, powers, preferences, privileges, limitations or restrictions of the
Preferred Securities not inconsistent with the Trust Agreement or applicable
law. All Preferred Securities offered hereby will be irrevocably guaranteed by
CMS Energy, on a subordinated basis and to the extent set forth below under
"Description of the Guarantees." Any applicable federal income tax
considerations applicable to any offering of the Preferred Securities will be
described in the Prospectus Supplement relating thereto. The aggregate number of
Preferred Securities which the Trust shall have authority to issue will be
pursuant to the terms of the Trust Agreement.
EFFECT OF OBLIGATIONS UNDER THE SUBORDINATED DEBENTURES AND THE GUARANTEE
As set forth in the Trust Agreement, the sole purpose of the Trust is to
issue the Trust securities evidencing undivided beneficial interests in the
assets of each of the Trust, and to invest the proceeds from such issuance and
sale to acquire directly the Subordinated Debentures from CMS Energy.
20
<PAGE> 85
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover distributions
and payments due on the Trust securities because of the following factors: (i)
the aggregate principal amount of Subordinated Debentures will be equal to the
sums of the aggregate stated liquidation amount of the Trust securities; (ii)
the interest rate and the interest and other payment dates on the Subordinated
Debentures will match the distribution rate and distribution and other payment
dates for the Preferred Securities; (iii) CMS Energy shall pay all, and the
Trust shall not be obligated to pay, directly or indirectly, all costs,
expenses, debt and obligations of the Trust (other than with respect to the
Trust securities); and (iv) the Trust Agreement further provides that CMS Energy
Trustees shall not take or cause or permit the Trust to, among other things,
engage in any activity that is not consistent with the purposes of the Trust.
Payments of distributions (to the extent funds therefore are available) and
other payments due on the Preferred Securities (to the extent funds therefor are
available) are guaranteed by CMS Energy as and to the extent set forth under
"The Guarantees" below. If CMS Energy does not make interest payments on the
Subordinated Debenture purchased by the Trust, it is expected that the Trust
will not have sufficient funds to pay distributions on the Preferred Securities.
The Guarantee does not apply to any payment of distributions unless and until
the Trust has sufficient funds for the payment of distributions and other
payments on the Preferred Securities only if and to the extent that CMS Energy
has made a payment of interest or principal on the Subordinated Debenture held
by the Trust as its sole asset. The Guarantee, when taken together with CMS
Energy's obligations under the Subordinated Debenture and the Indenture and its
obligations under the Trust Agreement, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Trust securities), provide a full and unconditional guarantee of amounts on the
Preferred Securities.
If CMS Energy fails to make interest or other payments on the Subordinated
Debentures when due (taking account of any extension period), the Trust
Agreement provides a mechanism whereby the holders of the Preferred Securities
may direct the institutional Trustee to enforce its rights under the
Subordinated Debenture. If the institutional Trustee fails to enforce its rights
under the Subordinated Debentures, a holder of Preferred Securities may
institute a legal proceeding against CMS Energy to enforce the institutional
Trustee's rights under the Subordinated Debentures without first instituting any
legal proceeding against the institutional Trustee or any other person or
entity. Notwithstanding the foregoing, if an event of default has occurred and
is continuing under the Trust Agreement, and such event is attributable to the
failure of CMS Energy to pay interest or principal on the Subordinated
Debentures on the date such interest or principal is otherwise payable (or in
the case of redemption on the redemption date), then a holder of Preferred
Securities may institute legal proceedings directly against CMS Energy to obtain
payment. If CMS Energy fails to make payments under the Guarantee, the Guarantee
provides a mechanism whereby the holders of the Preferred Securities may direct
the Guarantee trustee to enforce its rights thereunder. Any holder of Preferred
Securities may institute a legal proceeding directly against CMS Energy to
enforce the Guarantee trustee's rights under the Guarantee without first
instituting a legal proceeding against the Trust, the Preferred Guarantee
Trustee, or any other person or entity.
THE GUARANTEES
Set forth below is a summary of information concerning the Preferred
Securities Guarantee (each, the "Guarantee") which will be executed and
delivered by CMS Energy for the benefit of the holders, from time to time, of
the Preferred Securities. The Preferred Securities Guarantee will be qualified
as an indenture under the Trust Indenture Act of 1939. The Bank of New York, an
independent trustee, will act as indenture trustee under the Preferred
Securities Guarantee for purpose of compliance with the provisions of the Trust
Indenture Act of 1939. The summary does not purport to be complete and is
subject in all respects to the provisions of, and is qualified in its
21
<PAGE> 86
entirety by reference to, the Guarantee, which are filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
GENERAL
CMS Energy will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Preferred Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that the Trust may have or assert other than
the defense of payment. The following payments with respect to the Preferred
Securities, to the extent not paid by or on behalf of the Trust (the "Guarantee
Payments"), will be subject to the Guarantee: (i) any accumulated and unpaid
distributions required to be paid on the Preferred Securities, to the extent
that the Trust has funds on hand available therefor at such time, (ii) the
redemption price with respect to any Preferred Securities called for redemption
to the extent that the Trust has funds on hand available therefor at such time,
or (iii) upon a voluntary or involuntary dissolution, winding up or liquidation
of the Trust (unless the Subordinated Debentures are distributed to holders of
the Preferred Securities), the lesser of (a) the liquidation distribution, to
the extent that the Trust has funds on hand available therefor at such time, and
(b) the amount of assets of the Trust remaining available for distribution to
holders of Preferred Securities. CMS Energy's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts of CMS Energy
to the holders of the Preferred Securities or by causing the Trust to pay such
amount to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Trust's obligations under the Preferred Securities, but will apply only to
the extent that the Trust has funds sufficient to make such payments, and is not
a guarantee of collection. If CMS Energy does not make interest payments on the
Subordinated Debentures held by the Trust, the Trust will not be able to pay
distributions on the Preferred Securities and will not have funds legally
available therefor.
CMS Energy has, through the Guarantee, the Trust Agreement, the
Subordinated Debentures, the Subordinated Debt Indenture and the Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed all
of the Trust's obligations under the Preferred Securities. No single document
standing alone or operating in conjunction with fewer than all of the other
documents constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and unconditional
guarantee of the Trust's obligations under the Preferred Securities.
CMS Energy has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities to
the same extent as the Guarantee, except that upon the occurrence and during the
continuation of a Trust Agreement Event of Default, holders of Preferred
Securities shall have priority over holders of Common Securities with respect to
distributions and payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF CMS ENERGY
CMS Energy will covenant in the Guarantee that if and so long as (i) the
Trust is the holder of all the Subordinated Debentures, (ii) a Tax Event in
respect of the Trust has occurred and is continuing and (iii) CMS Energy has
elected, and has not revoked such election, to pay Additional Sums in respect of
the Preferred Securities and Common Securities, CMS Energy will pay to the Trust
such Additional Sums. CMS Energy will also covenant that it will not, and it
will not cause any of its subsidiaries to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of CMS Energy's capital stock or (ii) make any payment of
principal, interest or premium, if any, on or repay or repurchase or redeem any
debt securities (including guarantees of indebtedness for money borrowed) of CMS
Energy that rank pari passu with or junior to the Subordinated Debentures (other
than (a) any dividend, redemption, liquidation, interest, principal or guarantee
payment by CMS Energy where the payment
22
<PAGE> 87
is made by way of securities (including capital stock) that rank pari passu with
or junior to the securities on which such dividend, redemption, interest,
principal or guarantee payment is being made, (b) payments under the Guarantee,
(c) purchases of CMS Energy Common Stock related to the issuance of CMS Energy
Common Stock under any of CMS Energy's benefit plans for its directors, officers
or employees, (d) as a result of a reclassification of CMS Energy's capital
stock or the exchange or conversion of one series or class of CMS Energy's
capital stock for another series or class of CMS Energy's capital stock and (e)
the purchase of fractional interests in shares of CMS Energy's capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged) if at such time (i) there shall have
occurred any event of which CMS Energy has actual knowledge that (a) with the
giving of notice or the lapse of time, or both, would constitute a Subordinated
Debenture Event of Default and (b) in respect of which CMS Energy shall not have
taken reasonable steps to cure, (ii) CMS Energy shall be in default with respect
to its payment of any obligations under the Guarantee or (iii) CMS Energy shall
have given notice of its selection of an Extension Period as provided in the
Subordinated Debt Indenture with respect to the Subordinated Debentures and
shall not have rescinded such notice, or such Extension Period, or any extension
thereof, shall be continuing. CMS Energy also covenant (i) for so long as
Preferred Securities are outstanding, not to convert Subordinated Debentures
except pursuant to a notice of conversion delivered to the Conversion Agent by a
holder of Preferred Securities, (ii) to maintain directly or indirectly 100%
ownership of the Common Securities, provided that certain successors which are
permitted pursuant to the Subordinated Debt Indenture may succeed to CMS
Energy's ownership of the Common Securities, (iii) not to voluntarily terminate,
wind-up or liquidate the Trust, except (a) in connection with a distribution of
the Debentures to the holders of the Preferred Securities in liquidation of the
Trust or (b) in connection with certain mergers, consolidations or amalgamations
permitted by the Trust Agreement, (iv) to maintain the reservation for issuance
of the number of shares of CMS Energy Common Stock that would be required from
time to time upon the conversion of all the Subordinated Debentures then
outstanding, (v) to use its reasonable efforts, consistent with the terms and
provisions of the Trust Agreement, to cause the Trust to remain classified as a
grantor trust and not as an association taxable as a corporation for United
States federal income tax purposes and (vi) to deliver shares of CMS Energy
Common Stock upon an election by the holders of the Preferred Securities to
convert such Preferred Securities into CMS Energy Common Stock.
As part of the Guarantee, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Preferred Securities into or for CMS Energy Common Stock or Subordinated
Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority in aggregate liquidation amount of such
outstanding Preferred Securities. All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of CMS Energy and shall inure to the benefit of the holders of
the Preferred Securities then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
full payment of the redemption price of the Preferred Securities, upon full
payment of the amounts payable upon liquidation of the Trust, upon the
distribution, if any, of CMS Energy Common Stock to the holders of Preferred
Securities in respect of the conversion of all such holders' Preferred
Securities into CMS Energy Common Stock or upon distribution of the Subordinated
Debentures to the holders of the Preferred Securities in exchange for all of the
Preferred Securities. The Guarantee will continue to
23
<PAGE> 88
be effective or will be reinstated, as the case may be, if at any time any
holder of Preferred Securities must restore payment of any sums paid under such
Preferred Securities or the Guarantee.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of CMS
Energy to perform any of its payment or other obligations thereunder. The
holders of a majority in aggregate liquidation amount of the Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of the
Guarantee or to direct the exercise of any trust or power conferred upon the
Guarantee Trustee under the Guarantee.
If the Guarantee Trustee fails to enforce the Guarantee, any holder of the
Preferred Securities may institute a legal proceeding directly against CMS
Energy to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person or
entity. In addition, any record holder of Preferred Securities shall have the
right, which is absolute and unconditional, to proceed directly against CMS
Energy to obtain Guarantee Payments, without first waiting to determine if the
Guarantee Trustee has enforced the Guarantee or instituting a legal proceeding
against the Trust, the Guarantee Trustee or any other person or entity. CMS
Energy has waived any right or remedy to require that any action be brought just
against the Trust, or any other person or entity before proceeding directly
against CMS Energy.
CMS Energy, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not CMS Energy is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of CMS Energy and
will rank subordinate and junior in right of payment to all other liabilities of
CMS Energy and will rank pari passu 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.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., 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 held for the benefit of the holders of the Preferred
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust or upon
distribution of the Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee does not place a limitation on the amount of
additional indebtedness that may be incurred by CMS Energy or any of its
subsidiaries.
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
CMS Energy may issue Stock Purchase Contracts, representing contracts
obligating holders to purchase from CMS Energy, and CMS Energy to sell to the
holders, a specified number of shares of CMS Energy Common Stock at a future
date or dates. The price per share of CMS Energy Common Stock may be fixed at
the time the Stock Purchase Contracts are issued or may be determined by
reference to a specific formula set forth in the Stock Purchase Contracts. The
Stock Purchase Contracts may require CMS Energy to make periodic payments to the
holders of the Stock Purchase Units or visa versa, and such payments may be
unsecured or refunded on some basis. The Stock Purchase Contracts may require
holders to secure their obligations thereunder in a specified manner.
The applicable Prospectus Supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units. The description in Prospectus
Supplement will not purport to be complete
24
<PAGE> 89
and will be qualified in its entirety by reference to the Stock Purchase
Contracts, and, if applicable, collateral arrangements and depositary
arrangements, relating to such Stock Purchase Contracts or Stock Purchase Units.
LEGAL OPINIONS
Opinions as to the legality of certain of the Offered Securities will be
rendered for CMS Energy by Michael D. Van Hemert, Esq., Assistant General
Counsel for CMS Energy. Certain matters of Delaware law relating to the validity
of the Preferred Securities will be passed upon on behalf of the Trusts by
special Delaware counsel to the Trusts, who will be named in the Prospectus
Supplement. Certain United States federal income taxation matters may be passed
upon for CMS Energy and the Trust by special tax counsel to CMS Energy and of
the Trust, who will be named in the Prospectus Supplement. Certain legal matters
with respect to Offered Securities will be passed upon by counsel for any
underwriters, dealers or agents, each of whom will be named in the related
Prospectus Supplement.
EXPERTS
The consolidated financial statements and schedule of CMS Energy as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996 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 period ended March 31, 1997 and 1996, Arthur Andersen LLP has applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate reports thereon state that they did
not audit and they did not express an opinion on that interim consolidated
financial information. Accordingly, the degree of reliance on their reports on
that information should be restricted in light of the limited nature of the
review procedures applied. In addition, the accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933, as amended
("Securities Act"), for their reports on the unaudited interim consolidated
financial information because these reports are not "reports" 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 the Trust may sell the Offered Securities (i) through the
solicitation of proposals of underwriters or dealers to purchase the Offered
Securities; (ii) through underwriters or dealers on a negotiated basis, (iii)
directly to a limited number of purchasers or to a single purchaser; or (iv)
through agents. The Prospectus Supplement with respect to any Offered Securities
will set forth the terms of such offering, including the name or names of any
underwriters, dealers or agents; the purchase price of the Offered Securities
and the proceeds to CMS Energy and/or the Trust from such sale; any underwriting
discounts and commissions and other items constituting underwriters'
compensation; any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers and any securities exchange on which
such Offered Securities may be listed. Any initial public offering price,
discounts or concessions allowed or reallowed or paid to dealers may be changed
from time to time.
25
<PAGE> 90
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Offered Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Offered Securities will be
named in the Prospectus Supplement relating to such offering and, if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of such Prospectus Supplement. Unless otherwise set forth
in the Prospectus Supplement relating thereto, the obligations of the
underwriters to purchase the Offered Securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all the
Offered Securities if any are purchased.
If dealers are utilized in the sale of Offered Securities, CMS Energy
and/or the Trust 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 the Trust
or through agents designated by CMS Energy and/or the Trust 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 the Trust 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 the Trust
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 the Trust to indemnification by CMS Energy and/or the Trust
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments which such agents, dealers or
underwriters may be required to make in respect thereof. Agents, dealers and
underwriters may be customers of, engage in transactions with, or perform
services for CMS Energy and/or the Trust 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.
26
<PAGE> 91
==========================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS
SUPPLEMENT 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 SUPPLEMENT OR THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUER OR CMS
ENERGY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CMS Energy Corporation.................... S-5
CMS Energy Trust I........................ S-6
Summary Financial Information of CMS
Energy Corporation...................... S-8
The Offering.............................. S-9
Risk Factors.............................. S-16
Price Range of CMS Energy Common Stock and
Dividends............................... S-21
Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends... S-24
Use of Proceeds........................... S-24
Capitalization............................ S-25
Accounting Treatment...................... S-25
Description of the Preferred Securities... S-26
Description of the Guarantee.............. S-45
Description of the Debentures............. S-48
Relationship Among the Preferred
Securities, the Debentures and the
Guarantee............................... S-59
Certain Federal Income Tax
Consequences............................ S-60
Plan of Distribution...................... S-63
Legal Matters............................. S-64
PROSPECTUS
Available Information..................... 2
Incorporation of Certain Documents By
Reference............................... 3
CMS Energy Corporation.................... 3
CMS Energy Trusts......................... 4
Use of Proceeds........................... 5
Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends............... 5
Description of Securities................. 6
Legal Opinions............................ 25
Experts................................... 25
Plan of Distribution...................... 25
</TABLE>
==========================================================
==========================================================
3,450,000 PREFERRED SECURITIES
CMS ENERGY TRUST I
7 3/4% CONVERTIBLE QUARTERLY INCOME
PREFERRED SECURITIES
(CONVERTIBLE QUIPS(SM))
(LIQUIDATION PREFERENCE $50 PER PREFERRED SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY,
AND CONVERTIBLE INTO COMMON STOCK OF,
CMS ENERGY CORPORATION
---------------
[CMS ENERGY LOGO]
---------------
==========================================================
