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REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CMS ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 6719 38-2726431
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
FAIRLANE PLAZA SOUTH, SUITE 1100
330 TOWN CENTER DRIVE
DEARBORN, MICHIGAN 48126
313-436-9200
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
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ALAN M. WRIGHT
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
CMS ENERGY CORPORATION
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
313-436-9200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
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MICHAEL D. VAN HEMERT, ESQ. GERALD R. SHRADER, ESQ. JACK A. SELMAN, ESQ.
CMS ENERGY CORPORATION CONTINENTAL NATURAL GAS, INC. SELMAN & MUNSON
Fairlane Plaza South, Suite 1100 Boulder Towers, Suite 1250 1000 Franklin Plaza
330 Town Center Drive 1437 South Boulder 111 Congress Avenue
Dearborn, Michigan 48126 Tulsa, Oklahoma 74119 Austin, Texas 78701
(313) 436-9200 (918) 582-4700 (512) 505-5955
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: []
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: []
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []
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CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum Amount of
Title of each class of Amount being offering price aggregate offering registration
securities to be registered registered(1) per unit(1) price(1) fee(1)
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Common Stock, par value $.01 per share 1,600,000 shares $35.715 $57,143,315 $16,857
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(1) The registration fee has been computed pursuant to Rule 457(f) under the
Securities Act based on the aggregate market value on September 9, 1998
of the shares of Continental Natural Gas, Inc. common stock expected to be
canceled in connection with Continental's merger with a wholly-owned
subsidiary of the Registrant. The proposed maximum offering price per
share has been computed by dividing (i) the product of (a) the average of
the high and low prices of Continental common stock as reported on NASDAQ
on September 9, 1998 ($8.938) and (b) 6,393,300, representing the number
of shares of Continental common stock expected to be canceled in
connection with the merger, by (ii) 1,600,000, representing the maximum
number of shares of common stock of the Registrant expected to be issued
in the merger.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROSPECTUS OF THE
INFORMATION REQUIRED BY PART I OF FORM S-4
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ITEM NUMBER AND CAPTION LOCATION IN THE PROSPECTUS
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A. Information About the Transaction
1. Forepart of Registration Statement and
Outside Front Cover Page of the Prospectus................. Front Cover Page of the Registration Statement; Cross
Reference Sheet; Table of Contents; Outside Front Cover
Page of the Prospectus
2. Inside Front and Outside Back Cover Pages of the
Prospectus................................................. Inside Front Cover Page of the Prospectus; Table of
Contents; Available Information; Incorporation of Certain
Documents by Reference
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information...................................... Summary; The Parties; The Merger; CNG Financial
Statements
4. Terms of the Transaction................................... Summary; The Special Meeting; The Merger; Description of
CMS Energy Capital Stock; Comparison of Shareholder
Rights; The Merger Agreement
5. Pro Forma Financial Information............................ *
6. Material Contracts with the Company Being
Acquired................................................... *
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be Underwriters........... *
8. Interests of Named Experts and Counsel..................... Legal Matters; Independent Public Accountants
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities............................. *
B. Information About the Registrant
10. Information with Respect to S-3 Registrants................ Available Information; Incorporation of Certain Documents
by Reference; Summary; The Parties
11. Incorporation of Certain Information by
Reference.................................................. Incorporation of Certain Documents by Reference
12. Information With Respect to S-2 or S-3
Registrants................................................ *
13. Incorporation of Certain Information by
Reference.................................................. *
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14. Information With Respect to Registrants Other
Than S-3 or S-2 Registrants................................ *
C. Information About the Company Being Acquired
15. Information With Respect to S-3 Companies.................. *
16. Information With Respect to S-2 or S-3
Companies.................................................. *
17. Information With Respect to Companies Other than
S-3 or S-2 Companies....................................... Available Information; Summary; The Parties; Additional
Information with Respect to CNG; CNG Financial
Statements
D. Voting and Management Information
18. Information if Proxies, Consents or Authorizations are
to be Solicited............................................ Summary; The Special Meeting; The Merger; Additional
Information With Respect to CNG
19. Information if Proxies, Consents or Authorizations are
not to be Solicited, or in an Exchange Offer............... *
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* Item is omitted because response is negative or item is inapplicable.
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CONTINENTAL NATURAL GAS, INC.
September __, 1998
Dear Shareholders:
A Special Meeting of Shareholders (the "Special Meeting") of Continental
Natural Gas, Inc. ("Continental" or "CNG") will be held at
_____________________________________, Tulsa, Oklahoma on October ___, 1998 at
10:00 a.m. local time. At the Special Meeting, Continental's shareholders will
consider and vote on a proposal to approve and adopt an Agreement and Plan of
Merger dated as of July 31, 1998, as amended September 9, 1998 (the "Merger
Agreement"), pursuant to which it is proposed that Continental merge (the
"Merger") with and into CMS Merging Corporation ("CMS Merging"), a Michigan
corporation and a wholly-owned subsidiary of CMS Energy Corporation ("CMS
Energy").
At the Effective Time of the Merger, each share of CNG Common Stock will be
converted into shares of CMS Energy Common Stock based on a ratio which values
the CNG Common Stock at $10.00 per share and which values the CMS Energy Common
Stock based on the average trading price for such stock over a ten day period
ending five days prior to the Effective Time of the Merger.
Enclosed are a Notice of Special Meeting of Shareholders and a Proxy
Statement/Prospectus which describes the Merger and the background to the
transaction. The Board of Directors has fixed the close of business on September
10, 1998, as the record date for the Special Meeting. Accordingly, only
shareholders of record on that date will be entitled to notice of, and to vote
at, the Special Meeting or any adjournments or postponements thereof. The
affirmative vote of a majority of the outstanding shares of CNG Common Stock
entitled to vote thereon, in person or by proxy, with respect to the Merger is
necessary to approve and adopt the Merger Agreement.
THE CONTINENTAL BOARD OF DIRECTORS BELIEVES THE PROPOSAL IS IN THE BEST
INTERESTS OF CONTINENTAL AND ITS SHAREHOLDERS, HAS APPROVED THE MERGER
AGREEMENT, AND RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
The accompanying Proxy Statement/Prospectus sets forth the voting rights of
holders of CNG Common Stock with respect to these matters, and describes the
matters to be acted upon at the Special Meeting. Shareholders are urged to
review carefully the Proxy Statement/Prospectus, which contains a detailed
description of the Merger, the Merger Agreement, their terms and conditions and
the transactions contemplated thereby.
The Board and I urge you to vote "FOR" the Merger Agreement and each of the
transactions contemplated thereby. Thank you and we look forward to seeing you
at the Special Meeting.
Very truly yours,
Gary C. Adams
President and Chairman of the Board
1437 South Boulder, Suite 1250, Tulsa Oklahoma 74119
Phone: 918-582-4700 Fax: 918-560-4930
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CONTINENTAL NATURAL GAS, INC.
1437 SOUTH BOULDER, SUITE 1250
TULSA, OKLAHOMA 74119
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER __, 1998
TO THE SHAREHOLDERS:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Continental Natural Gas, Inc. ("Continental" or "CNG") to
be held at _________________________, Tulsa, Oklahoma 74119 at 10:00 a.m. local
time on _________, October ___, 1998, for the following purposes:
1. To consider and vote upon a proposal to approve, ratify, confirm and
adopt an Agreement and Plan of Merger, dated as of July 31, 1998, as amended
September 9, 1998 (the "Merger Agreement"), by and among Continental, CMS
Merging Corporation ("CMS Merging"), a Michigan corporation and a direct
wholly-owned subsidiary of CMS Energy Corporation ("CMS Energy"), pursuant to
which Continental will be merged with and into CMS Merging, upon the terms and
subject to the conditions set forth in the Merger Agreement, as more fully
described in the accompanying Proxy Statement/Prospectus. A copy of the Merger
Agreement is attached as Annex A to the accompanying Proxy Statement/Prospectus.
2. To consider and transact such other business as may properly come before
the Special Meeting or any adjournments thereof.
Holders of record of CNG Common Stock at the close of business on September
10, 1998, will be entitled to notice of, and to vote at, the Special Meeting or
any adjournment(s) thereof. In the event there are not sufficient votes for a
quorum or to approve or ratify any of the foregoing proposals at the time of the
Special Meeting, the Special Meeting may be adjourned in order to permit further
solicitation of proxies by Continental.
THE CONTINENTAL BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
By Order of the Board of Directors
Garry D. Smith
Secretary
Tulsa, Oklahoma
September ___, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE
REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
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CONTINENTAL NATURAL GAS, INC. CMS ENERGY CORPORATION
PROXY STATEMENT PROSPECTUS
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is being
furnished to shareholders of Continental Natural Gas, Inc. ("Continental" or
"CNG") in connection with the solicitation of proxies by the Board of Directors
of CNG for use at its Special Meeting of Shareholders (including any
adjournments or postponements thereof) to be held on October__, 1998, and
relates to the proposed merger (the "Merger") of CNG with and into CMS Merging
Corporation, a Michigan corporation ("CMS Merging") and a wholly-owned
subsidiary of CMS Energy Corporation, a Michigan corporation ("CMS Energy "),
pursuant to the Agreement and Plan of Merger, dated as of July 31, 1998, as
amended September 9, 1998 (the "Merger Agreement"), by and among CNG, CMS
Merging, CMS Energy, Adams Affiliates, Inc., an Oklahoma corporation, and
Cottonwood Partnership, an Oklahoma general partnership (the latter two parties
collectively, the "Majority Stockholders"), and all of the transactions
contemplated thereby including the filing of Certificates or Articles of Merger
with the proper state authorities.
This Proxy Statement/Prospectus also constitutes a prospectus of CMS Energy
with respect to up to _________ shares of common stock, $0.01 par value per
share, of CMS Energy ("CMS Energy Common Stock") which may be issuable to
holders of common stock, $0.01 par value per share, of CNG ("CNG Common Stock"),
in the Merger. Subject to certain provisions regarding fractional shares and
appraisal rights, each share of CNG Common Stock issued and outstanding
immediately prior to the Effective Time (as defined herein) of the Merger
(exclusive of shares of CNG Common Stock held in the treasury of CNG or by any
of its wholly-owned subsidiaries or by CMS Energy or any of its wholly-owned
subsidiaries) shall be converted into the number of shares of CMS Energy
Common Stock and represent the right to receive the consideration payable
as set forth below, rounded to the nearest thousandth of a share, equal to the
quotient of (i) $10.00 divided by (ii) the average of the per share daily prices
on the New York Stock Exchange, Inc. (the "NYSE") of CMS Energy Common Stock
(the "Average Price") as reported in the New York Stock Exchange Composite
Transactions (on the Transaction Reporting System operated by the Consolidated
Tape Association) during the ten consecutive trading days ending on the fifth
trading day prior to the Effective Time of the Merger (the "Merger
Consideration"). CNG's financial advisor, CIBC Oppenheimer Corp. ("CIBC
Oppenheimer"), has rendered an opinion to the effect that, as of September 10,
1998, the Merger Consideration is fair from a financial point of view to the
shareholders of CNG.
CMS Energy Common Stock is listed on the NYSE under the symbol "CMS." The
last reported sales price of the CMS Energy Common Stock on the NYSE Composite
Tape on September __, 1998 was $__.__. CNG Common Stock is designated for
quotation on the NASDAQ National Market System under the symbol "CNGL."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS SEPTEMBER __, 1998
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of CNG on or about September __, 1998.
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TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION.................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................ 3
SUMMARY................................................................................ 4
The Parties......................................................................... 4
The Special Meeting................................................................. 4
The Merger.......................................................................... 5
Market Price Information............................................................ 9
CMS Energy Historical Selected Financial Information................................ 11
CNG Historical Selected Financial Information....................................... 13
Comparative Per Share Data.......................................................... 14
THE PARTIES............................................................................ 15
CMS Energy Corporation and CMS Merging Corporation.................................. 15
Continental Natural Gas, Inc. and the Majority Stockholders......................... 15
THE SPECIAL MEETING.................................................................... 17
Matters to be Considered at the Special Meeting..................................... 17
Vote Required....................................................................... 17
Record Date; Shares Entitled to Vote; Quorum........................................ 17
Security Ownership of Certain Beneficial Owners..................................... 17
Voting of Proxies................................................................... 18
Revocability of Proxies............................................................. 18
Solicitation of Proxies............................................................. 18
THE MERGER............................................................................. 18
Form of the Merger.................................................................. 18
Merger Consideration................................................................ 19
Background of the Merger............................................................ 19
CMS Energy Reasons for the Merger................................................... 20
Recommendation of the CNG Board of Directors and CNG
Reasons for the Merger.............................................................. 20
Opinion of CNG's Financial Advisor.................................................. 21
Majority Stockholders Agreements.................................................... 24
Effective Time of Merger............................................................ 24
Conversion of Shares; Procedures for Exchange of Certificates;
Fractional Shares................................................................... 24
No Solicitation..................................................................... 25
Conditions to the Consummation of the Merger; Termination; Termination Fees......... 25
Operations After the Merger......................................................... 25
Interests of Certain Persons in the Merger.......................................... 26
CNG Stock Options................................................................... 26
Anticipated Accounting Treatment.................................................... 27
Certain Federal Income Tax Consequences............................................. 27
Stock Exchange Listing.............................................................. 28
Appraisal Rights.................................................................... 28
Certain Regulatory Considerations................................................... 30
DESCRIPTION OF CMS ENERGY CAPITAL STOCK................................................ 30
Common Stock........................................................................ 31
Preferred Stock..................................................................... 34
Primary Source of Funds of CMS Energy; Restriction on Sources of Dividends.......... 34
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COMPARISON OF SHAREHOLDER RIGHTS....................................................... 35
Classification, Election and Removal of Board of Directors.......................... 35
Special Meetings of Shareholders.................................................... 36
Limitation of Liability of Directors................................................ 36
Action by Written Consent........................................................... 37
Certain Business Combinations....................................................... 37
Amendment of Certificate of Incorporation........................................... 38
Dividends........................................................................... 38
THE MERGER AGREEMENT................................................................... 38
Representations and Warranties...................................................... 38
Conduct of Business Pending the Merger.............................................. 39
Conditions to the Merger............................................................ 40
Termination; Termination Fees....................................................... 42
Expenses............................................................................ 42
Resales by Affiliates............................................................... 42
Amendment and Waiver................................................................ 43
ADDITIONAL INFORMATION WITH RESPECT TO CNG............................................. 43
Business Strategy................................................................... 44
Recent Developments................................................................. 45
Natural Gas, NGL and Electricity Marketing.......................................... 45
Description of the Business......................................................... 46
Sales and Marketing................................................................. 48
Operational Risks and Insurance..................................................... 51
Competition......................................................................... 51
Governmental Regulation............................................................. 51
Environmental Matters............................................................... 53
Employees........................................................................... 54
Properties.......................................................................... 54
Legal Proceedings................................................................... 56
Management of CNG................................................................... 56
Executive Compensation.............................................................. 57
Certain Transactions Among Related Entities......................................... 61
Other Relationships................................................................. 62
Principal Stockholders of CNG....................................................... 62
Management's Discussion and Analysis of Financial Condition and
Results of Operations of CNG........................................................ 63
Results of Operations............................................................... 63
Liquidity and Capital Resources..................................................... 66
Seasonality......................................................................... 68
Year 2000 Statement................................................................. 69
LEGAL MATTERS.......................................................................... 69
INDEPENDENT PUBLIC ACCOUNTANTS......................................................... 70
CNG SHAREHOLDER PROPOSALS.............................................................. 70
CNG FINANCIAL STATEMENTS............................................................... F-1
ANNEX A - AGREEMENT AND PLAN OF MERGER DATED AS OF JULY 31, 1998..................... A-1
ANNEX B - SECTION 1091 OF THE OKLAHOMA GENERAL CORPORATION ACT RELATING
TO APPRAISAL RIGHTS........................................................ B-1
ANNEX C - OPINION OF CIBC OPPENHEIMER CORP........................................... C-1
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NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY CMS ENERGY, CMS MERGING OR CNG. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF CMS ENERGY, CMS MERGING OR CNG SINCE THE DATE HEREOF OR
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO SUCH DATE.
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS RELATING TO CMS
ENERGY AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY CMS ENERGY, AND ALL INFORMATION
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS RELATING TO CNG AND ITS
SUBSIDIARIES AND AFFILIATES, INCLUDING THE MAJORITY STOCKHOLDERS, HAS BEEN
SUPPLIED BY CNG AND ALL INFORMATION WITH RESPECT TO CIBC OPPENHEIMER AND ITS
ANALYSIS AND OPINION HAS BEEN FURNISHED BY CIBC OPPENHEIMER.
AVAILABLE INFORMATION
CMS Energy and CNG are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (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, 14th Floor, Chicago, Illinois 60661 and at 7 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 and CNG. The CMS Energy
Common Stock is listed on the New York Stock Exchange and reports, proxy
statements and other information concerning CMS Energy may also be inspected and
copied at the offices of such exchange at 20 Broad Street, New York, New York
10005. The CNG Common Stock is listed on the NASDAQ National Market System
("NASDAQ") and reports, proxy statements and other information concerning CNG
may also be inspected and copied at the offices of NASDAQ, Reports Section, 1735
K Street N.W., Washington, D.C. 20006.
CMS Energy has filed with the Commission a Registration Statement on Form
S-4 (together with any amendments thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the CMS Energy Common Stock to be issued pursuant to the Merger Agreement. This
Proxy Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. Such additional information may
be inspected and copied as set forth above. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated in this Proxy
Statement/Prospectus by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
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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 Proxy Statement/Prospectus and shall be deemed to be a part hereof:
(1) CMS Energy's Annual Report on Form 10-K for the year ended December 31,
1997;
(2) CMS Energy's Quarterly Reports on Form 10-Q for the quarters ended March
31 and June 30, 1998;
(3) CMS Energy's Current Reports on Form 8-K dated June 23, 1998 and July
30, 1998;
(4) CMS Energy's Registration Statement on Form 8-B/A dated November 21,
1996; and
(5) The portions of CMS Energy's Proxy Statement for the Annual Meeting of
Shareholders held May 22, 1998 that have been incorporated by reference
in CMS Energy's Form 10-K for the year ended December 31, 1997, other
than the organization and compensation committee report on pages 13 and
14 thereof.
All documents subsequently filed by CMS Energy pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting of
Shareholders of CNG shall be deemed to be incorporated by reference in this
Proxy Statement/Prospectus and to be a part hereof from the date of filing of
such documents (such documents, and the documents enumerated above, being
hereinafter referred to as "Incorporated Documents").
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this Proxy Statement/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 Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates important business and
financial information about CMS Energy that is not included in or delivered with
this document. CMS Energy undertakes to provide without charge to each person to
whom a copy of this Proxy Statement/Prospectus has been delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents referred to above which have been or may be incorporated in this Proxy
Statement/Prospectus by reference, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference into such documents).
Requests to CMS Energy for such copies should be directed to CMS Energy
Corporation at its principal executive offices located at Fairlane Plaza South,
330 Town Center Drive, Suite 1100, Dearborn, Michigan 48126, Attention: Office
of the Secretary, telephone: (313) 436-9200.
Certain information contained in this Proxy Statement/Prospectus summarizes,
is based upon, or refers to information and financial statements contained in
one or more Incorporated Documents; accordingly, such information contained
herein is qualified in its entirety by reference to such documents and should be
read in conjunction therewith.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. As this summary is necessarily incomplete,
reference is made to, and this summary is qualified in its entirety by, the more
detailed information contained or incorporated by reference in this Proxy
Statement/Prospectus and the annexes hereto. Shareholders are urged to read this
Proxy Statement/Prospectus and the annexes hereto in their entirety. Certain
capitalized terms which are used but not defined in this summary are defined
elsewhere in this Proxy Statement/Prospectus.
Forward-looking statements are contained in this Proxy Statement/Prospectus
and in documents incorporated by reference herein regarding CMS Energy, CNG and
the combined companies. Actual results may vary materially from these
forward-looking statements for reasons which include the factors set forth in
CMS Energy's Annual Report on Form 10-K for the year ended December 31, 1997,
which is incorporated by reference herein. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
THE PARTIES
CMS Energy Corporation ("CMS Energy"), a Michigan corporation 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, services and
trading; (iv) storage, transmission and processing of natural gas; and (v)
international energy distribution. On June 30, 1998, CMS Energy and its
subsidiaries had consolidated assets of $9.9 billion and common shareholders'
equity of $1.9 billion. CMS Merging is a recently organized Michigan corporation
and a direct wholly-owned subsidiary of CMS Energy. CMS Merging is being used
specifically as a merger vehicle for the acquisition by CMS Energy of CNG and
currently has no assets or operations. The principal executive offices of CMS
Energy are located at Fairlane Plaza South, 330 Town Center Drive, Suite 1100,
Dearborn, Michigan 48126. Its telephone number is (313) 436-9200.
Continental Natural Gas, Inc. ("CNG") is an Oklahoma corporation and an
independent mid-stream energy company engaged in the purchasing, gathering,
treating, processing and marketing of natural gas and natural gas liquids
("NGL(s)"). CNG, through its direct and indirect subsidiaries, owns and operates
approximately 2,000 miles of natural gas gathering pipelines and interests in
six natural gas processing plants located in Texas and Oklahoma. CNG's gathering
lines have a combined throughput capacity of 550 million cubic feet per day
("MMcf/d"), while CNG's processing plants have a combined NGL production
capacity of 1,400 thousand gallons per day ("Mgal/d"). CNG provides essential
services to natural gas producers in the area of its gathering systems and
plants by (i) connecting the producers' wells to CNG's gathering systems, (ii)
treating the producers' natural gas to ensure that it meets pipeline
specifications, (iii) transporting the natural gas from the wellhead to CNG's
processing plants where NGLs are extracted from the natural gas stream and (iv)
providing access for the natural gas and NGLs to various markets in the United
States. CNG markets off-system gas, as well as on-system gas, to utilities,
end-users, other marketers and pipeline affiliates. On June 30, 1998, CNG and
its subsidiaries had consolidated assets of $187 million and common
shareholders' equity of $43 million. The principal shareholders of CNG are Adams
Affiliates, Inc., an Oklahoma corporation, and Cottonwood Partnership, an
Oklahoma general partnership (collectively, the "Majority Stockholders"). The
principal executive offices of CNG are located at 1437 South Boulder, Suite
1250, Tulsa, Oklahoma 74119. Its telephone number is (918) 582-4700.
For additional information concerning CMS Energy, CNG and their affiliates,
see "THE PARTIES."
THE SPECIAL MEETING
Matters to Be Considered. A special meeting of the shareholders of CNG (the
"Special Meeting") will be held at ______________, Tulsa, Oklahoma on October
__, 1998, at 10:00 a.m. local time. At the Special Meeting, holders of CNG
Common Stock will be asked to consider and vote upon a proposal to adopt and
approve the Agreement and Plan of Merger, dated as of July 31, 1998, as amended
September 9, 1998 (the "Merger Agreement"), by and among CNG, CMS Energy, CMS
Merging and the Majority Stockholders and the transactions contemplated thereby
and to transact such other business as may properly come before the Special
Meeting. See "THE SPECIAL MEETING -- Matters to Be Considered at the Special
Meeting."
4
<PAGE> 12
Vote Required. Under Oklahoma law, the affirmative vote of the holders of a
majority of the outstanding shares of CNG Common Stock entitled to vote thereon
is required to approve the Merger Agreement. Under NASDAQ rules, the Merger will
require the affirmative vote of a majority of the shares of CNG Common Stock
voting on such proposal. Accordingly, assuming a quorum is present, a failure to
submit a proxy (or to vote in person at the Special Meeting), an abstention by a
CNG shareholder or a broker non- vote, which is an indication by a broker that
it does not have discretionary authority to vote on a particular matter, will
have the same effect as a vote "AGAINST" the Merger. For shares of CNG Common
Stock held in street name by a broker, the failure of a CNG shareholder to give
such broker voting instructions with regard to any proposal on which such
shareholder is entitled to vote will result in a broker non-vote and will have
the effects described in the preceding sentence. Each of the Majority
Stockholders, who collectively have the power to vote 3,438,004 shares of CNG
Common Stock or 54.44%, has agreed to vote their shares of CNG Common Stock in
favor of approval of the Merger Agreement. See "THE SPECIAL MEETING -- Vote
Required" and "THE MERGER -- Majority Stockholders Agreements." CMS Merging has
10 shares of common stock, no par value, issued and outstanding, all of which
are owned and held by CMS Energy. Subject to the satisfaction or waiver of all
of the conditions to the parties obligations to effect the Merger, CMS Energy,
as the sole shareholder of CMS Merging, will approve the Merger Agreement in the
manner prescribed by Michigan corporate law.
Record Date; Shares Entitled to Vote; Quorum. The record date for the
Special Meeting is September 10, 1998 (the "Record Date"). Only CNG shareholders
of record at the close of business on the Record Date are entitled to notice of,
and to vote at, the Special Meeting. As of the Record Date, there were 6,315,000
shares of CNG Common Stock outstanding, and each such share is entitled to one
vote at the Special Meeting. As of the Record Date, there were _____ holders of
record of CNG Common Stock. Holders of a majority of the outstanding shares of
CNG Common Stock entitled to vote must be represented in person or by proxy at
the Special Meeting in order for a quorum to be present.
Security Ownership. As of the Record Date, directors and executive officers
of CNG and their affiliates may be deemed to be the beneficial owners of 60.80%
of the outstanding shares of CNG Common Stock. As of the Record Date, the
Majority Stockholders owned or controlled an aggregate of 3,438,004 shares of
CNG Common Stock, representing 54.44% of the then outstanding shares of CNG
Common Stock. Each of the Majority Stockholders has agreed in the Merger
Agreement to take all necessary action to cause the Merger to be approved,
including voting their shares of CNG Common Stock in favor of the adoption and
approval of the Merger Agreement. See "THE MERGER -- Majority Stockholder
Agreements." As of the Record Date, no shares of CNG Common Stock were
beneficially owned by CMS Energy, or any of its subsidiaries, directors or
executive officers, or their affiliates.
THE MERGER
Form of the Merger. Pursuant to the Merger Agreement, which is hereby
incorporated by reference and is set forth in Annex A to this Proxy
Statement/Prospectus, at the Effective Time (as defined in "THE MERGER --
Effective Time of Merger") of the Merger, CNG will merge with and into CMS
Merging, with CMS Merging being the surviving corporation (the "Surviving
Corporation") in accordance with the terms of the Merger Agreement. The
Surviving Corporation will have the articles of incorporation of CMS Merging and
will be named "CMS Continental Natural Gas, Inc." See "THE MERGER -- Form of the
Merger."
Merger Consideration. Subject to certain provisions regarding fractional
shares and appraisal rights, each share of CNG Common Stock issued and
outstanding immediately prior to the Effective Time (exclusive of shares of CNG
Common Stock held in the treasury of CNG or by any of its wholly-owned
subsidiaries or by CMS Energy or any of its wholly-owned subsidiaries) shall be
converted into the number of shares of CMS Energy Common Stock and represent the
right to receive the consideration payable as set forth below, rounded to the
nearest thousandth of a share, equal to the quotient of (i) $10.00 divided by
(ii) the average of the per share daily prices on the New York Stock Exchange,
Inc. (the "NYSE") of CMS Energy Common Stock (the "Average Price") as reported
in the New York Stock Exchange Composite Transactions (on the Transaction
Reporting System operated by the Consolidated Tape Association) during the ten
consecutive trading days ending on the fifth trading day prior to the Effective
Time of the Merger (the "Merger Consideration"). In lieu of the issuance of any
fractional share of CMS Energy Common Stock resulting from the Merger
Consideration application, cash payments will be made to CNG shareholders in an
amount equal to the product of (a) the Average Price multiplied by (b) the
fraction of the share of CMS Energy Common Stock to which the CNG shareholder
would otherwise be entitled. See "THE MERGER -- Merger Consideration."
In addition, all existing rights with respect to CNG Common Stock pursuant
to the CNG stock option plans (the "CNG Stock Options") will be converted into
a number of shares of CMS Energy Common Stock equivalent to the fair
value of the CNG Stock Options at the Effective Time, as such fair value is
determined by an independent consultant.
See "THE MERGER -- CNG Stock Options."
5
<PAGE> 13
Background of the Merger and CMS Energy's Reasons for the Merger. The
managements of each of CMS Energy and CNG regularly consider the possibility of
acquisitions and strategic combinations with a variety of energy-related assets
and businesses and their potential strategic fit. CMS Energy believes that
through the Merger, CMS Energy will be able to expand its domestic energy market
reach from its traditional Midwestern base into new regions such as the
mid-continent United States where management believes there are long-term
opportunities. See "THE MERGER -- Background of the Merger" and "-- CMS Energy
Reasons for the Merger."
Recommendations of the CNG Board of Directors and CNG Reasons for the
Merger. The Board of Directors of CNG (the "CNG Board") believes that the terms
of the Merger are fair to and in the best interests of CNG and its shareholders.
Accordingly, the CNG Board recommends that CNG shareholders vote "FOR" the
adoption and approval of the Merger Agreement. The terms of the Merger
Agreement, including the financial consideration provided therein, were the
result of arms' length negotiations between CMS Energy and CNG and their
respective representatives. In reaching a conclusion to approve the Merger
Agreement, the CNG Board considered a number of factors including, but not
limited to, (i) the terms and conditions of the Merger Agreement, including the
amount of the Merger Consideration, (ii) the structure of the Merger, which will
permit the CNG shareholders to exchange their CNG Common Stock for CMS Energy
Common Stock on a tax-free basis, (iii) the compatibility of the respective
managements and corporate cultures, and (iv) the opinion of CIBC Oppenheimer,
financial advisor to CNG, to the effect that the Merger Consideration was fair
from a financial point of view to the holders of the CNG Common Stock. See "THE
MERGER -- Recommendation of the CNG Board of Directors and CNG Reasons for the
Merger" and "-- Background of the Merger."
Opinion of Financial Advisor to CNG. CIBC Oppenheimer has served as
financial advisor, and has delivered its written opinion dated August 3, 1998,
as updated to September 10, 1998, to the CNG Board to the effect that the Merger
Consideration is fair to CNG shareholders from a financial point of view. CNG
has agreed to pay CIBC Oppenheimer a fee for their services which is in part
contingent on the consummation of the Merger. See "THE MERGER -- Opinion of
CNG's Financial Advisor." The full text of CIBC Oppenheimer's written opinion,
which sets forth the assumptions made, matters considered and limits on their
review, is attached hereto as Annex C. CNG shareholders are urged to and should
read such opinion in its entirety.
Effective Time of the Merger. If the Merger Agreement is approved by the CNG
shareholders, and assuming that the other conditions described in the Merger
Agreement are satisfied, it is anticipated that the Merger will become effective
during the fourth quarter of 1998. See "THE MERGER -- Effective Time of Merger."
No Solicitation. In the Merger Agreement, CNG has agreed not to solicit,
initiate or encourage the submission of, enter into any agreement with respect
to, any Acquisition Proposal (as defined in the Merger Agreement) or (except to
the extent required by law as advised by independent legal counsel in writing)
participate in any discussions or negotiations regarding, or furnish to any
person any information for the purpose of facilitating or making, or take any
similar action that may reasonably be expected to lead to, any Acquisition
Proposal. See "THE MERGER -- No Solicitation."
Conditions to the Merger; Termination; Termination Fees. The obligations of
CMS Energy, CMS Merging and CNG, as the case may be, to consummate the Merger
are subject to various conditions set forth in the Merger Agreement including,
but not limited to, obtaining the requisite shareholder and regulatory
approvals; the absence of any materially burdensome condition imposed for any
requisite regulatory approval; the absence of any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger by any governmental entity which makes the Merger illegal, requires any
material divestiture or imposes a materially burdensome condition; the accuracy
in all material respects of the representations and warranties of, and
performance in all material respects of the covenants required to be performed
prior to the Effective Time of the Merger by, the other parties to the Merger
Agreement; the absence of any materially adverse change to the other parties or
their subsidiaries; receipt of an opinion with respect of certain federal income
tax consequences (see "THE MERGER -- Certain Federal Income Tax Consequences");
receipt by the parties of certain legal opinions and approval of their
respective legal counsel of the transactions contemplated by the Merger
Agreement; approval for listing of the shares of the CMS Energy Common Stock to
be issued in the Merger on the NYSE and
6
<PAGE> 14
receipt from Arthur Andersen LLP of an opinion, in form and substance
satisfactory to CMS Energy, to the effect that the Merger will be treated for
accounting purposes as a "pooling of interests."
The obligation of CNG to consummate the Merger is subject to, among other
things, the receipt of the opinion of CIBC Oppenheimer prior to the mailing of
this Proxy Statement/Prospectus and at closing to the effect that the Merger
Consideration is fair to CNG shareholders from a financial point of view.
There can be no assurance that the conditions to the Merger will be
satisfied. See "THE MERGER AGREEMENT -- Conditions to the Merger."
Under certain circumstances, CMS Energy or CNG may terminate the Merger
Agreement, either prior to or after approval thereof by CNG shareholders. In the
event of such termination, CNG may be required to pay CMS Energy a termination
fee of $3 million. See "THE MERGER AGREEMENT -- Termination; Termination Fees."
Conduct of Business Pending the Merger. In the Merger Agreement, CNG has
agreed to carry on its business through the Effective Time in substantially the
manner as conducted prior to the execution of the Merger Agreement, to notify
CMS Energy promptly of any changes that would have a material adverse effect on
CNG, and to provide CMS Energy with certain reports and information. CNG has
also agreed in the Merger Agreement that it will not take certain actions,
including by way of example and not of limitation, CNG will not issue capital
stock (other than pursuant to outstanding CNG Stock Options), issue other
securities convertible into capital stock, acquire or dispose of material
assets, incur indebtedness other than in the ordinary course of business or
declare or pay any dividend. See "THE MERGER AGREEMENT -- Conduct of Business
Pending the Merger."
Operations After the Merger. If the Merger is consummated, CNG will be
merged into CMS Merging as the Surviving Corporation of the Merger, with the
articles of incorporation of CMS Merger being the articles of incorporation of
the Surviving Corporation. The separate existence of CNG will cease, and the
Surviving Corporation will continue as a wholly-owned subsidiary of CMS Energy.
The initial Board of Directors of the Surviving Corporation will be the
directors of CMS Merging serving in those capacities at the Effective Time. Upon
consummation of the Merger, CMS Energy intends to contribute the stock of the
Surviving Corporation to its indirect wholly-owned subsidiary, CMS Gas
Transmission & Storage Company.
Interests of Certain Persons in the Merger. Certain members of CNG's
management may be deemed to have certain interests in the Merger that are in
addition to their interests as shareholders of CNG generally. In connection with
the Merger, CMS Energy and CMS Merging have agreed to indemnify the officers and
directors of CNG and to provide directors and officers' insurance coverage for
such individuals. Following the Merger, the officers of CNG will continue to
provide services to the Surviving Corporation pursuant to the terms of existing
employment or consulting agreements. It is not anticipated, however, that CNG's
officers will continue as directors or executive officers of the Surviving
Corporation. The Majority Stockholders have, subject to certain limitations,
agreed to indemnify CMS Energy and the Surviving Corporation with respect to the
accuracy of certain representations made in the Merger Agreement. The CNG Board
was aware of these interests and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated thereby. See
"THE MERGER -- Interests of Certain Persons in the Merger" and "THE MERGER
AGREEMENT -- Representations and Warranties."
Anticipated Accounting Treatment. The Merger is expected to be treated as a
"pooling of interests" for accounting and financial reporting purposes. See "THE
MERGER -- Anticipated Accounting Treatment."
Certain Federal Income Tax Consequences. The obligations of CMS Energy and
CNG to effect the Merger are conditioned upon the receipt of a legal opinion
dated the Effective Time of the Merger from CMS Energy tax counsel, subject to
exceptions and assumptions customarily included, and in form and substance
reasonably satisfactory to CMS Energy and CNG, to the effect that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"IRC"), and that CMS Energy and CNG will each be a party to that reorganization
within the meaning of Section 368(b) of the IRC. As a result of such treatment,
no gain or loss will be recognized for federal income tax purposes by holders of
CNG Common Stock upon receipt of CMS Energy Common Stock in accordance with the
Merger Agreement. Any payment attributable to cash received by holders of CNG
Common Stock in lieu of fractional shares of CMS Energy Common Stock generally
will be taxed as capital gain or loss. No information is provided herein with
respect to the tax consequences, if any, of the Merger to shareholders under any
state, local or foreign tax laws. CNG SHAREHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISERS AS TO ALL TAX CONSEQUENCES OF THE MERGER AFFECTING THEM. The
material federal income tax consequences of the proposed
7
<PAGE> 15
transactions to the parties and to shareholders of CNG are summarized under "THE
MERGER -- Certain Federal Income Tax Consequences."
Stock Exchange Listing. The CMS Energy Common Stock is listed on the New
York Stock Exchange ("NYSE"). CMS Energy has agreed to apply for the listing of
the shares of CMS Energy Common Stock to be issued in the Merger on the NYSE.
The obligations of the parties to the Merger Agreement to consummate the Merger
are subject to approval for listing by the NYSE of such shares. See "THE MERGER
- -- Stock Exchange Listing."
Appraisal Rights. Under Section 1091 of the Oklahoma General Corporation Act
(the "OGCA"), holders of record of shares of CNG Common Stock who do not wish to
accept the Merger Consideration have the right to seek an appraisal to determine
the fair value of their shares of CNG Common Stock in the Oklahoma District
Court.
Each shareholder who has not voted in favor of the Merger Agreement and who
wishes to assert a right to appraisal must make a written demand upon CNG which
reasonably informs CNG of the shareholder's identity and his or her intention to
demand an appraisal for his or her shares of CNG Common Stock. Failure to make
such demand before the vote is taken to approve the Merger or the Merger
Agreement will eliminate a shareholder's right to an appraisal.
Within 120 days after the Effective Time (the "120-Day Period"), any
shareholder who has properly demanded an appraisal and who has not withdrawn his
or her demand (such shareholders are hereinafter referred to collectively as the
"Dissenting Shareholders") has the right to file in the District Court a
petition (the "Petition") demanding a determination of the fair value of the
shares of CNG Common Stock (the "Dissenting Shares") held by all of the
Dissenting Shareholders. If, within the 120-Day Period, no Petition shall have
been filed as provided above, all rights to an appraisal will cease and all of
the Dissenting Shareholders will receive the Merger Consideration without
interest. CNG is not obligated and does not intend to file a Petition.
Upon the filing of the Petition, service of a copy is required to be made
upon the Surviving Corporation, which shall, within 20 days after such service,
file in the office of the court in which the Petition was filed, a duly verified
list containing the names and addresses of all Dissenting Shareholders. The
District Court may order that notice of the time and place fixed for the hearing
on the Petition be sent by registered or certified mail to the Surviving
Corporation and all of the Dissenting Shareholders, and be published at least
one week before the day of the hearing in a newspaper of general circulation
published in the City of Tulsa, Oklahoma, or in another publication determined
by the District Court. If a hearing on the Petition is held, the District Court
is empowered to determine which Dissenting Shareholders have complied with the
provisions of Section 1091 of the OGCA and are entitled to an appraisal of their
shares of CNG Common Stock. See "THE MERGER -- Appraisal Rights" and Annex B.
Certain Regulatory Considerations. CMS Energy and CNG filed notification
reports with the United States Department of Justice ("DOJ") and the United
States Federal Trade Commission ("FTC") pursuant to applicable federal antitrust
laws on September 4, 1998. It is anticipated that the DOJ or FTC will grant the
companies' request for early termination of the waiting period under such
antitrust laws prior to the Special Meeting, satisfying one of the conditions to
the Merger. As a condition to the Merger, CNG has agreed to file a Notice of
Cancellation with the FERC with respect to a Power Marketing Certificate issued
to a CNG affiliate. The Notice of Cancellation was filed on August 11, 1998.
Although certain state regulatory filings may be required subsequent to
consummation of the Merger, CMS Energy and CNG are not aware of any other
governmental or regulatory approvals required for consummation of the Merger,
other than compliance with applicable corporate and securities laws. See "THE
MERGER -- Certain Regulatory Considerations."
Comparison of Shareholder Rights. CMS Energy is incorporated under the laws
of Michigan, and CNG is incorporated under the laws of Oklahoma. Upon
consummation of the Merger and subject to appraisal rights, CNG shareholders
will become CMS Energy shareholders and their rights as such will be governed by
Michigan law and CMS Energy's Restated Articles of Incorporation and Bylaws. See
"COMPARISON OF SHAREHOLDER RIGHTS."
8
<PAGE> 16
MARKET PRICE INFORMATION
CMS Energy Common Stock and Class G Common Stock are listed on the New York
Stock Exchange ("NYSE"). CNG Common Stock is listed on the NASDAQ National
Market System ("NASDAQ"). The following table sets forth the high and low sales
prices of CMS Energy Common Stock, Class G Common Stock, and CNG Common Stock
for the calendar periods indicated, as reported on the NYSE Composite
Transactions Tape and on NASDAQ, respectively. The prices shown do not include
retail mark-ups, mark-downs or commissions and, with respect to CNG Common
Stock, reflect inter-dealer quotations which may not represent actual
transactions. There can be no assurance that such transactions or those
reflected in the table of actual high and low sales prices represent all or a
representative sample of the actual transactions which occurred or that the high
and low prices shown reflect the full ranges at which transactions occurred
during the period indicated.
<TABLE>
<CAPTION>
CMS Energy Class G CNG
Period Common Stock Common Stock Common Stock
- ------ --------------- ------------- ---------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1996 (1)
First Quarter .............................. $ 31.875 $ 27.813 $ 20.000 $ 17.875 $ - $ -
Second Quarter ............................. 31.250 28.000 19.375 17.500 - -
Third Quarter .............................. 31.625 29.000 18.875 16.625 - -
Fourth Quarter ............................. 33.750 30.125 19.250 17.375 - -
Fiscal Year Ended December 31, 1997 (1)
First Quarter .............................. $ 34.500 $ 31.500 $ 19.875 $ 17.875 $ - $ -
Second Quarter ............................. 35.625 31.125 19.875 17.625 - -
Third Quarter (2) .......................... 38.063 34.875 22.000 19.000 12.500 11.125
Fourth Quarter ............................. 44.063 35.688 27.125 20.625 12.875 10.750
Fiscal Year Ending December 31, 1998
First Quarter .............................. $ 47.313 $ 41.875 $ 26.625 $ 22.250 $11.250 $ 7.375
Second Quarter ............................. 47.188 40.688 26.875 23.250 10.375 6.250
Third Quarter (through September , 1998)..
</TABLE>
(1) CNG completed its initial public offering on August 1, 1997; thus, there was
no publicly reported trading activity prior to that date.
(2) For CNG Common Stock, reflects the period from August 1, 1997 through
September 30, 1997.
The following table sets forth the closing price per share of CMS Energy
Common Stock on the NYSE Composite Transactions Tape and CNG Common Stock on
NASDAQ and the equivalent per share price of CNG Common Stock on July 31, 1998,
the last trading day preceding the announcement of the Merger Agreement, and on
September ,1998, the last practicable date prior to the mailing of this
Proxy Statement/Prospectus:
<TABLE>
<CAPTION>
CMS Energy CNG CNG Equivalent
Market Price Per Share at: Common Stock Common Stock Per Share Price
- -------------------------- ------------ ------------ ---------------
<S> <C> <C> <C>
July 31, 1998 .............................................. $42.188 $9.188 $10.041
September , 1998......................................... $ $ $
</TABLE>
Equivalent per share prices of CNG Common Stock as compared to CMS Energy
Common Stock assume a Merger Consideration of .238 shares of CMS Energy Common
Stock in exchange for each share of CNG Common Stock issued and outstanding. The
Merger Consideration for this purpose is calculated by dividing the agreed upon
CNG Common Stock price of $10.00 per share by an assumed CMS Energy Common Stock
"Average Price" of $42.00 per share. The actual Average Price and Merger
Consideration will be determined at the Effective Time in accordance with the
Merger Agreement. See "THE MERGER - Merger Consideration."
CNG SHAREHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR CMS
ENERGY COMMON STOCK. NO ASSURANCE CAN BE GIVEN CONCERNING THE MARKET PRICE OF
CMS ENERGY COMMON STOCK BEFORE OR AFTER THE DATE ON WHICH THE MERGER IS
CONSUMMATED. THE MARKET PRICE OF CMS ENERGY COMMON STOCK WILL FLUCTUATE BETWEEN
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS AND THE DATE ON WHICH THE MERGER IS
CONSUMMATED AND THEREAFTER.
9
<PAGE> 17
The approximate number of record holders of CNG Common Stock at September
10, 1998 was ___________.
CNG does not pay any cash dividends on CNG Common Stock and does not have
any plans to do so in the future.
10
<PAGE> 18
CMS ENERGY HISTORICAL SELECTED FINANCIAL INFORMATION
The following summary financial information has been derived from the
historical consolidated financial statements of CMS Energy. Selected unaudited
financial data for the six months ended June 30, 1997 and 1998 include all
adjustments (consisting only of normal recurring adjustments) that CMS Energy
considers necessary for a fair presentation of consolidated operating results
and financial position for such interim periods. Results for the interim periods
are not necessarily indicative of results for the full year. Certain historical
selected financial information presented herein has been restated as a result of
a 1998 change in accounting for investments in oil and gas properties. Please
refer to the CMS Energy Form 8-K dated July 30, 1998 incorporated by reference
in this Proxy Statement/Prospectus. Other data presented herein which was not
previously restated within the Form 8-K has also been restated to reflect the
change in accounting method. The financial information set forth below should be
read in conjunction with CMS Energy's consolidated financial statements, related
notes and other financial information incorporated by reference in this Proxy
Statement/Prospectus. See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue............................. $3,476 $3,614 $3,890 $4,324 $4,781 $2,317 $2,506
Pretax operating income....................... 407 516 608 676 716 362 385
Operating expenses............................ 3,069 3,098 3,282 3,648 4,065 1,955 2,121
Income taxes.................................. 62 91 113 137 108 72 45
Net income before cumulative effect of
change in accounting principle.............. $ 130 $ 177 $ 195 $ 224 $ 244 $ 125 $ 110
Cumulative effect of change in accounting
for property taxes, net of tax (1).......... - - - - - - 43
Net income attributable to common stocks (1)
CMS Energy.................................. $ 130 $ 177 $ 192 $ 210 $ 229 $ 114 $ 143
Class G..................................... - - 3 14 15 11 10
Average common shares outstanding
CMS Energy.................................. 81 86 89 92 96 95 101
Class G..................................... - - 8 8 8 8 8
Earnings per average common share (1)
CMS Energy Common Stock
Basic................................. $ 1.61 $ 2.07 $ 2.16 $ 2.27 $ 2.39 $ 1.21 $ 1.42
Diluted............................... $ 1.60 $ 2.06 $ 2.16 $ 2.26 $ 2.37 $ 1.20 $ 1.39
Class G Common Stock
Basic and Diluted.................... - - .38 1.82 1.84 1.34 1.20
Dividends declared per common share
CMS Energy.................................. .60 .78 .90 1.02 1.14 .54 .60
Class G..................................... - - .56 1.15 1.21 .59 .62
</TABLE>
11
<PAGE> 19
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 28 $ 79 $ 56 $ 58 $ 69 $ 53 $ 230
Net plant and property........................ 4,367 4,595 4,814 5,029 5,144 5,112 5,148
Total assets.................................. 6,742 7,159 7,909 8,363 9,508 8,864 9,858
Long-term debt, excluding current
maturities.................................. 2,405 2,709 2,906 2,842 3,272 3,077 4,294
Non-current portion of capital leases......... 115 108 106 103 75 89 78
Notes payable................................. 259 339 341 333 382 246 255
Other liabilities............................. 2,973 2,681 2,881 3,093 3,361 3,188 2,723
Company-obligated mandatorily
redeemable Trust Preferred Securities
of Consumers Energy Company
Financing I.................................. - - - 100 100 100 100
Company-obligated mandatorily
redeemable Trust Preferred Securities
of Consumers Energy Company
Financing II................................. - - - - 120 - 120
Preferred Stock of subsidiary.................. 163 356 356 356 238 356 238
Company-obligated convertible Trust
Preferred Securities of CMS Energy
Trust I...................................... - - - - 173 173 173
Common stockholders' equity.................... $ 827 $ 966 $1,319 $1,536 $1,787 $1,635 $1,877
</TABLE>
(1) During the first quarter of 1998, CMS Energy's subsidiary, Consumers Energy
Company, implemented a change in the method of accounting for property
taxes which had the cumulative effect of increasing other income by $66
million, including $18 million attributable to the portion of CMS Energy's
business relating to Class G Common Stock. Earnings, net of tax, increased
for CMS Energy Common Stock and Class G Common Stock by $43 million and $12
million, respectively, or $.40 per share for CMS Energy Common Stock and
$.36 per share for Class G Common Stock.
12
<PAGE> 20
CNG HISTORICAL SELECTED FINANCIAL INFORMATION
The following summary financial information has been derived from the
historical consolidated financial statements of CNG. Selected unaudited
financial data for the six months ended June 30, 1997 and 1998 include all
adjustments (consisting only of normal recurring adjustments) that CNG considers
necessary for a fair presentation of consolidated operating results and
financial position for such interim periods. Results for the interim periods are
not necessarily indicative of results for the full year. The financial
information set forth below should be read in conjunction with "ADDITIONAL
INFORMATION WITH RESPECT TO CNG -- Management's Discussion and Analysis of
Financial Condition and Results of Operations of CNG" and the consolidated
financial statements of CNG, including the notes thereto, included elsewhere in
this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------ ----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue.............................. $ 151 $ 120 $ 121 $ 247 $ 341 $ 156 $ 146
Pretax operating income........................ 2 - 4 7 4 4 (2)
Operating expenses............................. 149 120 117 240 337 152 148
Income taxes (benefit)......................... - - (2) (4) (1) 1 1
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle......................... $ 1 $ 5 $ 5 $ 8 $ (1) $ 1 $ 1
Net income (loss) attributable to
common stock................................. 2 5 5 7 (1) 1 1
Average common shares outstanding.............. 3 3 3 4 5 4 6
Earnings per average common share
Basic ...................................... $ .52 $ 1.47 $ 1.61 $1.87 $ (.31) $ .17 $ .21
Diluted..................................... $ .52 $ 1.45 $ 1.59 $1.67 $ (.31) $ .17 $ .21
Dividends declared per common share............ - - - - - - -
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 2 $ 6 $ 5 $ 21 $ 1 $ 6 $ 6
Net plant, property and equipment........... 22 14 28 61 15 65 121
Total assets................................ 46 35 58 146 179 111 187
Long-term debt, excluding current
maturities................................ 6 4 7 33 74 38 79
Non-current portion of capital leases....... 3 1 3 7 6 7 6
Other current and non-current liabilities... 29 17 30 84 58 43 59
Stockholders' equity........................ $ 7 $ 12 $ 17 $ 22 $ 41 $ 23 $ 43
</TABLE>
13
<PAGE> 21
COMPARATIVE PER SHARE DATA
The following table presents comparative per share information for CMS
Energy and CNG on a historical basis, for CMS Energy on a pro forma combined
basis and for CNG on an equivalent pro forma basis assuming that the Merger had
been consummated and accounted for as a pooling of interests. Pro forma
information for CMS Energy is determined using an assumed Merger Consideration
of .238 shares of CMS Energy Common Stock in exchange for each share of CNG
Common Stock issued and outstanding. The Merger Consideration for this purpose
is calculated by dividing the agreed upon CNG Common Stock price of $10.00 per
share by an assumed CMS Energy Common Stock "Average Price" of $42.00 per share.
The actual Average Price and Merger Consideration will be determined at the
Effective Time in accordance with the Merger Agreement. Equivalent pro forma
information for CNG is presented on an equivalent share basis, which reflects
CMS Energy's pro forma amounts multiplied by the Merger Consideration. The table
should be read in conjunction with (i) the consolidated financial statements of
CMS Energy incorporated by reference in this Proxy Statement/Prospectus and (ii)
the consolidated financial statements of CNG, including the notes thereto,
elsewhere herein. Additional pro forma financial information, including a
balance sheet and income statement, are not presented herein because CNG does
not fall within the definition of a "significant business" as defined in Rule
11-01 of Regulation S-X.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- --------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CMS ENERGY - HISTORICAL:
Book value per common share....................... $ 9.59 $11.16 $13.51 $15.24 $16.84 $16.06 $17.60
Cash dividends per common share
CMS Energy....................................... .60 .78 .90 1.02 1.14 .54 .60
Class G.......................................... - - .56 1.15 1.21 .59 .62
Earnings per average common share
CMS Energy
Basic........................................ 1.61 2.07 2.16 2.27 2.39 1.21 1.42
Diluted...................................... 1.60 2.06 2.16 2.26 2.37 1.20 1.39
Class G-Basic and Diluted....................... - - .38 1.82 1.84 1.34 1.20
CMS ENERGY - PRO FORMA
COMBINED (UNAUDITED):
Book value per common share....................... $ 9.59 $11.20 $13.58 $15.28 $17.00 $16.09 $17.76
Cash dividends per common share
CMS Energy....................................... .60 .78 .90 1.02 1.14 .54 .60
Class G.......................................... - - .56 1.15 1.21 .59 .62
Earnings per average common share
CMS Energy
Basic........................................ 1.61 2.10 2.20 2.32 2.34 1.20 1.41
Diluted...................................... 1.61 2.10 2.20 2.31 2.33 1.20 1.39
Class G-Basic and Diluted....................... - - .38 1.82 1.84 1.34 1.20
CNG - HISTORICAL:
Book value per common share....................... $ 2.32 $ 3.80 $ 5.32 $ 4.48 $ 6.56 $ 4.65 $ 6.83
Cash dividends per common share................... - - - - - - -
Net income (loss) per average common share
Basic........................................ .52 1.47 1.61 1.87 (.31) .17 .21
Diluted...................................... .52 1.45 1.59 1.67 (.31) .17 .21
CNG - EQUIVALENT PRO FORMA (UNAUDITED):
Book value per common share....................... $ 2.28 $ 2.67 $ 3.23 $ 3.64 $ 4.05 $ 3.83 $ 4.23
Cash dividends per common share................... .14 .19 .21 .24 .27 .13 .14
Net income per average common share
Basic........................................ .38 .50 .52 .55 .56 .29 .33
Diluted...................................... .38 .50 .52 .55 .55 .29 .33
</TABLE>
14
<PAGE> 22
THE PARTIES
CMS ENERGY CORPORATION AND CMS MERGING CORPORATION
CMS Energy, a Michigan corporation 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, services and trading; (iv)
storage, transmission and processing of natural gas; and (v) international
energy distribution. On June 30, 1998, CMS Energy and its subsidiaries had
consolidated assets of $9.9 billion and common shareholders' equity of $1.9
billion.
CMS Energy conducts its principal operations through the following six
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; and (vi) storage,
transmission and processing of natural gas. Consumers and its subsidiaries are
engaged in two segments: electric utility operations and gas utility 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 1997 consolidated operating revenue was $4.8 billion. This
consolidated operating revenue was derived from its electric utility operations
(approximately 53%), its gas utility operations (approximately 25%), marketing,
services and trading activities (approximately 14%), independent power
production and other non-utility activities (approximately 4%), gas
transmission, storage and processing activities (approximately 2%), and oil and
gas exploration and production activities (approximately 2%). 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 independent power production, gas
transmission and storage, marketing, services and trading, and international
energy distribution revenue for 1997 was $913 million.
Consumers is a public utility serving gas or electricity to almost six
million of Michigan's 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' 1997 consolidated operating revenue of $3.8 billion was derived 67%
from its electric utility business, 32% from its gas utility business and 1%
from its non-utility business. Consumers' rates and certain other aspects of its
business are subject to the jurisdiction of the Michigan Public Service
Commission and the Federal Energy Regulatory Commission ("FERC"). Consumers'
nuclear operations are subject to the jurisdiction of the Nuclear Regulatory
Commission.
CMS Merging is a direct wholly owned subsidiary of CMS Energy organized in
July 1998 for the sole purpose of effecting the Merger. CMS Merging currently
has no assets or operations.
The address of the principal executive offices of CMS Energy is Fairlane
Plaza South, 330 Town Center Drive, Suite 1100, Dearborn, Michigan 48126. Its
telephone number is (313) 436-9200.
The foregoing information concerning CMS Energy and its subsidiaries does
not purport to be comprehensive. For additional information concerning CMS
Energy and its subsidiaries' business and affairs, including their capital
requirements and external financing plans, pending legal and regulatory
proceedings and descriptions of certain laws and regulations to which those
companies are subject, CNG shareholders should refer to the Incorporated
Documents. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE
INFORMATION" above.
CONTINENTAL NATURAL GAS, INC. AND THE MAJORITY STOCKHOLDERS
CNG, an Oklahoma corporation incorporated in 1983, is an independent
mid-stream energy company engaged in the purchasing, gathering, treating,
processing and marketing of natural gas and natural gas liquids ("NGL(s)"). CNG,
through its direct and indirect subsidiaries, owns and operates approximately
2,000 miles of natural gas gathering pipelines and interests in six natural gas
processing plants located in Texas and Oklahoma. CNG's gathering lines have a
combined throughput capacity of 550 MMcf/d, while CNG's processing plants have a
combined NGL production capacity of 1,400 Mgal/d. CNG provides services to
natural gas
15
<PAGE> 23
producers in the area of its gathering systems and plants by (i) connecting the
producers' wells to CNG's gathering systems, (ii) treating the producers'
natural gas to ensure that it meets pipeline specifications, (iii) transporting
the natural gas from the wellhead to CNG's processing plants where NGLs are
extracted from the natural gas stream and (iv) providing access for the natural
gas and NGLs to various markets in the United States. CNG markets off-system
gas, as well as on-system gas, to utilities, end-users, other marketers and
pipeline affiliates. On June 30, 1998, CNG and its subsidiaries had consolidated
assets of $187 million and shareholders' equity of $43 million.
Through 1990, CNG's activities were primarily limited to marketing
off-system gas. Concurrent with the evolving deregulation of the natural gas
industry, CNG began to acquire natural gas gathering systems and processing
plants to complement its marketing business. Since 1990, CNG has completed
approximately $124 million of acquisitions and system expansion projects. During
1997, CNG's average gathering throughput was 113 MMcf/d and average processing
plant throughput was 140 MMcf/d, compared to 1996 when CNG's average gathering
throughput was 79 MMcf/d and average processing plant throughput was 129 MMcf/d.
CNG's NGL production for 1997 averaged 349 Mgal/d, compared to 1996 NGL
production averaging 264 Mgal/d. Over the three years ended December 31, 1997,
CNG's daily natural gas throughput has increased 102%. CNG's operating income
plus depreciation, depletion and amortization ("EBITDA") was $5.4 million, $9.5
million and $7.7 million for the years ended 1995, 1996 and 1997, respectively.
CNG's net income (loss) was $5.1 million, $7.2 million and ($1.2) million for
the years ended 1995, 1996 and 1997, respectively.
At the beginning of 1997, CNG's principal assets were located in the
panhandle areas of Oklahoma and Texas, which is a major natural gas producing
area with significant long-lived natural gas reserves. These assets consisted
of: (i) a natural gas processing plant located in Beaver County, Oklahoma (the
"Beaver Plant") and the related gas gathering system (the "Beaver Gathering
System"), (ii) the Mocane Plant and (iii) approximately 800 miles of gas
gathering lines located throughout the Texas panhandle (the "Texas Gathering
Assets"). Consistent with its business strategy to make investments which
complement its existing operations and to expand into new strategic areas,
during 1997 and the first half of 1998 CNG completed approximately $63 million
in acquisitions and capital expansions. These acquisitions included purchase and
upgrade of a gas processing plant located in Ochiltree County, Texas (the
"Spearman Plant"), purchase of approximately a 67% interest in a gas gathering
plant located in Harper County, Oklahoma (the "Laverne Plant"), and purchase of
Taurus Energy Corp. with assets consisting of 761 miles of gathering systems and
two processing plants located in north central Texas ("Taurus"). The acquisition
of the Beaver Gathering System and of Taurus added a new geographic area to
CNG's gathering and processing operations. Thus far in 1998, CNG has acquired
interests in four additional gathering systems located principally in
southeastern Oklahoma. CNG's interest in one of these systems (the Sycamore gas
gathering system) was subsequently sold in the second quarter of 1998.
Although CNG's principal growth in recent years has been derived from its
gathering and processing operations, CNG's sale of off-system gas, which does
not enter its gathering or processing facilities, remains a significant portion
of its business. In 1997, revenue from the sale of off-system gas accounted for
approximately 61% of CNG's total operating revenue. This off-system gas was
purchased from over 70 producers and transported through 18 interstate and
intrastate pipelines during 1997.
The Majority Stockholders of CNG consist of Cottonwood Partnership, an
Oklahoma general partnership, and Adams Affiliates, Inc., an Oklahoma
corporation. Gary C. Adams, the Chairman of the Board, President and Chief
Executive Officer of CNG, is the Chief Executive Officer of Cottonwood
Partnership. Cottonwood Partnership is owned by certain trusts, the
beneficiaries of which are members of the immediate family of Mr. Adams.
Cottonwood Partnership owns approximately 98% of the outstanding common stock of
Adams Affiliates, Inc. Mr. Adams is a director and the Chairman of the Board of
Adams Affiliates, Inc.
The address of the principal executive offices of CNG are 1437 South
Boulder, Suite 1250, Tulsa, Oklahoma 74119. Its telephone number is
918-582-4700.
The foregoing information concerning CNG and its subsidiaries and the
Majority Stockholders does not purport to be comprehensive. For additional
information concerning CNG and its subsidiaries' business strategy, recent
developments, description of the business, operational risks and competition,
governmental regulation, environmental matters, employees, properties, legal
proceedings, management including executive compensation, certain transactions
among related entities, and principal stockholders of CNG, see "ADDITIONAL
INFORMATION WITH RESPECT TO CNG." For additional information concerning the
Majority Stockholders, see "ADDITIONAL INFORMATION WITH RESPECT TO CNG --
Certain Transactions Among Related Entities" and "-- Principal Stockholders of
CNG."
16
<PAGE> 24
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to shareholders of CNG
in connection with the solicitation of proxies by the Board of Directors of CNG
(the "CNG Board") for use at the Special Meeting of Shareholders of CNG (the
"Special Meeting") to be held at _____________, Tulsa, Oklahoma, on October ___,
1998 at 10:00 a.m. local time, and at any adjournments or postponements thereof.
At the Special Meeting, the shareholders of CNG will be asked to consider and
vote upon a proposal to adopt and approve an Agreement and Plan of Merger, dated
as of July 31, 1998, as amended September 9, 1998 (the "Merger Agreement"), by
and among CNG, CMS Merging, CMS Energy and the Majority Stockholders and all of
the transactions contemplated thereby relating to the proposed merger (the
"Merger") of CNG into CMS Merging.
THE CNG BOARD RECOMMENDS THAT CNG SHAREHOLDERS VOTE "FOR" ADOPTION AND
APPROVAL OF THE MERGER AGREEMENT.
VOTE REQUIRED
Under Oklahoma law, the affirmative vote of the holders of a majority of
the outstanding shares of CNG Common Stock entitled to vote thereon is required
for approval of the Merger Agreement. Thus, any shares of CNG Common Stock which
for any reason, including abstentions or broker non-votes, are not voted for
approval of the Merger Agreement will not count toward the required total and
will have the same effect as shares voted against the Merger Agreement. See "THE
SPECIAL MEETING -- Record Date; Shares Entitled to Vote; Quorum."
The directors and executive officers of CNG control, with the power to
vote, an aggregate of 3,839,378 shares of CNG Common Stock, comprising 60.80% of
the total shares of CNG Common Stock issued and outstanding and entitled to vote
at the Special Meeting. Cottonwood Partnership and Adams Affiliates, Inc., which
collectively own or control 54.44% of the issued and outstanding CNG Common
Stock, have agreed in the Merger Agreement to vote their shares in favor of the
Merger Agreement.
CMS Merging has 10 shares of common stock, no par value, issued and
outstanding, all of which are owned and held by CMS Energy. Subject to the
satisfaction or waiver of all of the conditions to the parties' obligations to
effect the Merger, CMS Energy, as the sole shareholder of CMS Merging, will
approve the Merger Agreement in the manner prescribed by the Michigan Business
Corporation Act.
No vote of CMS Energy's shareholders is required in connection with the
approval of the Merger Agreement and the transactions contemplated thereby.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
Only holders of record of CNG Common Stock at the close of business on
September 10, 1998 (the "Record Date") will be entitled to receive notice of,
and to vote at, the Special Meeting. At the Record Date, CNG had outstanding
6,315,000 shares of CNG Common Stock. As of the Record Date, there were ____
holders of record of CNG Common Stock. Each share of CNG Common Stock is
entitled to one vote. Holders of a majority of the outstanding shares of CNG
Common Stock entitled to vote must be represented in person or by proxy at the
Special Meeting in order for a quorum to be present at the Special Meeting
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
At September 10, 1998, CNG directors, executive officers and their
affiliates may be deemed to be the beneficial owners of 3,839,378 shares of CNG
Common Stock, including options exercisable within 60 days, representing 60.80%
of the then outstanding shares of CNG Common Stock. At that date, the Majority
Stockholders of CNG collectively beneficially owned or controlled 3,438,004
shares of CNG Common Stock, representing 54.44% of the then outstanding shares
of CNG Common Stock. Pursuant to the Merger Agreement, the Majority Stockholders
have agreed to vote the shares of CNG Common Stock owned or controlled by them
in favor of the Merger Agreement. See "THE MERGER AGREEMENT -- Majority
Stockholder Agreements."
As of the Record Date, no shares of CNG Common Stock were beneficially
owned by CMS Energy, CMS Merging or any of their subsidiaries, directors or
executive officers, or their affiliates.
17
<PAGE> 25
VOTING OF PROXIES
Shares of CNG Common Stock represented by properly executed proxies
received at or prior to the Special Meeting will be voted at the Special Meeting
in the manner specified by the holders of such shares. Properly executed proxies
which do not contain voting instructions will be voted "FOR" approval of the
Merger Agreement.
If any other matters are properly presented at the Special Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Special Meeting to another time and/or place (including, without
limitation, for the purpose of soliciting additional proxies), the persons named
in the form of proxy enclosed herewith and acting thereunder will have
discretion to vote on such matters in accordance with their best judgment.
At present, the CNG Board does not have any knowledge of any matters to be
presented at the Special Meeting other than those matters referred to and
described in the Notice of the Special Meeting and herein.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form of proxy does not preclude a
shareholder from voting in person or otherwise revoking a proxy. Attendance at
the Special Meeting will not in and of itself constitute revocation of a proxy.
A shareholder may revoke a proxy at any time prior to its exercise by filing
with Garry D. Smith, Corporate Secretary of CNG at CNG's address above, a duly
executed revocation or a proxy bearing a later date or by voting in person at
the Special Meeting.
SOLICITATION OF PROXIES
CNG will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by mail, the directors, officers and
employees of CNG may solicit proxies from shareholders by telephone or telegram
or in person. Such persons will not be additionally compensated, but will be
reimbursed for reasonable out-of-pocket expenses incurred in connection with
such solicitation. Arrangements will also be made with brokerage firms,
nominees, fiduciaries and other custodians, for the forwarding of solicitation
materials to the beneficial owners of shares held of record by such persons, and
CNG will reimburse such persons for their reasonable out-of-pocket expenses in
connection therewith.
CNG has retained the services of Corporate Investor Communications, Inc.
("CIC") to facilitate the distribution of solicitation materials. CNG will pay
CIC an estimated fee of $750.00 for its services, plus reasonable out-of-pocket
costs.
CNG SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
THE MERGER
The following section of this Proxy Statement/Prospectus describes certain
aspects of the proposed Merger as contemplated by the Merger Agreement.
Additional details concerning the Merger Agreement are described in a subsequent
section captioned "THE MERGER AGREEMENT." The description of the Merger and the
Merger Agreement contained in this Proxy Statement/Prospectus does not purport
to be complete and is qualified in its entirety by reference to the Merger
Agreement, a copy of which is included as Annex A to this Proxy
Statement/Prospectus and is incorporated in its entirety by reference. All
shareholders of CNG are urged to read the Merger Agreement in its entirety.
FORM OF THE MERGER
Pursuant to the Merger Agreement, at the Effective Time (as defined below
under "Effective Time of Merger") of the Merger, CNG shall be merged with and
into CMS Merging with CMS Merging being the Surviving Corporation. The Surviving
Corporation will have the articles of incorporation of CMS Merging and will be
named "CMS Continental Natural Gas, Inc." Upon consummation of the Merger, CMS
Energy intends to contribute the stock of the Surviving Corporation to its
indirect wholly-owned subsidiary, CMS Gas Transmission & Storage Company. After
the Merger, CMS Energy will continue to conduct CNG's historic business as an
indirect wholly-owned subsidiary of CMS Energy.
18
<PAGE> 26
MERGER CONSIDERATION
Subject to certain provisions regarding fractional shares and appraisal
rights, each share of CNG Common Stock issued and outstanding immediately prior
to the Effective Time (exclusive of shares of CNG Common Stock held in the
treasury of CNG or by any of its wholly-owned subsidiaries or by CMS Energy or
by any of its wholly-owned subsidiaries) shall be converted into the number of
shares of CMS Energy Common Stock and represent the right to receive the
consideration payable as set forth below, rounded to the nearest thousandth of a
share, equal to the quotient of (i) $10.00 divided by (ii) the average of the
per share daily prices on the NYSE of CMS Energy Common Stock (the "Average
Price") as reported in the New York Stock Exchange Composite Transactions (on
the Transaction Reporting System operated by the Consolidated Tape Association)
during the ten consecutive trading days ending on the fifth trading day prior to
the Effective Time of the Merger (the "Merger Consideration"). In lieu of the
issuance of any fractional share of CMS Energy Common Stock resulting from the
Merger Consideration application, cash payments will be made to CNG shareholders
in an amount equal to the product of (a) the Average Price multiplied by (b) the
fraction of the share of CMS Energy Common Stock to which the CNG shareholder
would otherwise be entitled.
The Merger Agreement also requires the Merger Consideration to be
appropriately adjusted to reflect any reclassification, stock split, stock
dividend or similar change in respect of CMS Energy Common Stock effective
during the ten trading day period used to determine the Average Price.
BACKGROUND OF THE MERGER
The managements of each of CMS Energy and CNG regularly consider the
possibility of acquisitions and strategic combinations with a variety of
energy-related assets and businesses and their potential strategic fit with
management and employee cultures, geographic locations and breadth of their
businesses.
CNG's management has been continuously monitoring the natural gas industry
and commodity markets to analyze and determine how to best position its
organization to maximize shareholder value. In 1997, CNG management had
contemplated the potential sale of the majority of CNG assets prior to its
initial public offering in August 1997. At that time, management and the CNG
Board concluded that an initial public offering would best enhance shareholder
value rather than liquidating the assets. However, CNG management believed other
business combinations would still be considered in the future as opportunities
arose. In an effort to further improve shareholder value and to enhance its
existing systems, CNG acquired or made investments in a number of transactions
since its public offering. These transactions typically involved CNG acquiring
natural gas gathering, processing, treating and fractionation assets. See
"ADDITIONAL INFORMATION WITH RESPECT TO CNG -- Business Strategy."
Over the period from 1996 through 1998, CMS Energy began expanding its
natural gas gathering and processing operations through new asset developments
and acquisitions of existing natural gas gathering and processing assets in
natural gas supply areas including Texas and Oklahoma. During this period, CMS
Energy completed acquisitions of the Crescent and Lucien natural gas assets in
Oklahoma. CMS Energy management recently made the strategic decision to expand
this segment of its business, in part through the acquisition of a small to
mid-sized energy company engaged in natural gas gathering, processing and
marketing. As part of this strategic decision, CMS Energy evaluated a number of
potential candidates through negotiated purchases or public bids.
During March and April 1998, two separate investment bankers suggested CMS
Energy consider a strategic business combination with CNG, as a company in the
mid-continent region that would potentially fit well with CMS Energy's strategic
plan and vision. An initial contact was made by CMS Energy representatives to
Gary C. Adams, Chairman and Chief Executive Officer of CNG.
During May 1998, a CMS Energy management team evaluated the potential CNG
combination from a qualitative and quantitative strategic business perspective
with the use of public information. In June 1998, the CMS Energy management team
and advisors commenced due diligence investigations of CNG's business
activities. During June and July of 1998 potential terms and structure of a
business combination were discussed by CMS Energy and CNG, but no definitive
agreement concerning such terms and structure was reached as a result of these
discussions until the end of July.
From time to time, the CMS Energy management team advised certain members
of the CMS Energy Board of the status of such discussions, and on July 24, 1998,
the CMS Energy Board met and approved management's recommendation to authorize
the proposed business combination for the reasons discussed in the following
section.
19
<PAGE> 27
The CNG Board held a special meeting for the express purpose of
considering the CMS Energy proposal. At the meeting, management again reviewed
for the CNG Board the strategic reasons for an alternative to a merger or sale.
The CNG Board discussed with its general counsel the terms and conditions of CMS
Energy's proposal. A representative of CIBC Oppenheimer was also present and
discussed CMS Energy's proposal and how it compared to other comparable
transactions, the historical results and future prospects of CNG and CMS Energy
and their respective stock prices. Management gave its impression of CMS Energy
and the results of CNG's due diligence investigation of CMS Energy, and the CNG
Board discussed its fiduciary duties on behalf of CNG and the process involved
in the negotiation of a merger. The CNG Board also considered the alternatives
available to CNG for increasing shareholder value, including the potential sale
of CNG assets in a taxable transaction and the prospects of CNG if it were to
remain an independent public company. After such consideration and subject to
the receipt of a written fairness opinion from CIBC Oppenheimer, the CNG Board
directed management to finalize negotiations with CMS Energy and authorized the
execution of the Merger Agreement. The CNG Board subsequently received a written
fairness opinion from CIBC Oppenheimer that, based upon the assumptions,
limitations and qualifications disclosed to the CNG Board, the Merger
Consideration was fair from a financial point of view to the holders of CNG
Common Stock. The Merger Agreement was executed by the respective parties on the
evening of July 31, 1998, and a joint press release was issued announcing the
Agreement.
CMS ENERGY REASONS FOR THE MERGER
It is part of CMS Energy's current business strategy to expand its
domestic energy market reach from its traditional Midwestern base into new
regions such as the mid-continent United States where management believes there
are long-term opportunities which will benefit CMS Energy and its shareholders.
Management believes that through the Merger, CMS Energy will be able to
substantially increase its penetration in the Oklahoma and Texas natural gas
supply regions which is complementary to CMS Energy activities. The Merger would
also substantially increase CMS Energy's non-utility domestic natural gas
pipeline and natural gas gathering presence, and expand CMS Energy's natural gas
marketing presence into the mid-continent region of the United States, creating
new markets and an expanded customer base. Furthermore, the CNG management team
and employees would significantly increase CMS Energy's natural gas pipeline,
natural gas and liquids processing operational expertise. Therefore, CMS Energy
believes the Merger would enhance CMS Energy shareholder value.
RECOMMENDATION OF THE CNG BOARD OF DIRECTORS AND CNG REASONS FOR THE MERGER
The CNG Board considered the Merger and the terms of the Merger Agreement,
including the Merger Consideration to be received by CNG shareholders in the
Merger, in light of economic, financial, legal and market factors and concluded
that the Merger is in the best interests of CNG. The terms of the Merger
Agreement are the result of arms' length negotiations between CNG and CMS
Energy, as well as consultations between CNG and its financial advisor, CIBC
Oppenheimer, and general counsel.
In the course of its deliberations, the CNG Board reviewed and considered
the following factors: (i) the terms and conditions of the Merger Agreement,
including the amount and form of the consideration, which the CNG Board believed
represented the most favorable transaction possible with CMS Energy for the CNG
stockholders; (ii) the premium over recent trading prices of the CNG Common
Stock represented by the value of $10.00 per CNG Common Stock under the terms of
the Merger Agreement; (iii) information regarding CMS Energy's and CNG's
respective businesses, prospects, financial performance, financial condition and
operations; (iv) the comparative trading prices of CMS Common Stock and CNG
Common Stock; (v) the structure of the Merger, which will permit the CNG
stockholders to exchange their CNG Common Stock for CMS Common Stock on a
tax-free basis; (vi) the compatibility of the respective managements and
corporate cultures of CMS Energy and CNG; (vii) the opinion, dated August 3,
1998, of CIBC Oppenheimer to the effect that, as of July 31, 1998, the Merger
Consideration was fair, from a financial point of view, to the holders of CNG
Common Stock (other than CMS Energy and its affiliates); (viii) reports from CNG
management on the results of their investigation of CMS Energy; (ix) recent CNG
operating results and trends, including the fact that CNG has experienced net
losses from continuing operations; (x) recent and expected operating losses that
have caused, and are expected to continue to cause, a continuing decline in
capital resources and the potential that CNG will experience liquidity problems
in the future unless CNG can eliminate or significantly reduce operating losses
or obtain additional capital; (xi) the need, to be successful in the long term,
for CNG to continue to devote significant resources to project development
(including capital expenditures to develop existing assets) and the potential
that liquidity problems may cause CNG to curtail or eliminate some of these
activities; (xii) the Merger gives CNG shareholders a stake in a large
diversified energy company which reduces overall risk of investment and, given
the current unfavorable gas processing environment,
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generates value for CNG shareholders; (xiii) the Merger gives the CNG business
strong financial backing to pursue and develop capital acquisitions and projects
which it would not have the resources to develop internally in the short term;
and (xiv) the willingness of the Majority Stockholders to take the
responsibility of certain indemnification agreements with CMS Energy.
The CNG Board specifically reviewed and discussed the terms of the Merger
Agreement which limits CNG's ability to solicit other offers. The CNG Board
believed that it possessed a body of reliable information with which to evaluate
the fairness of the combination proposal, without conducting an active survey of
the market for CNG. The CNG Board further believed that CNG and its shareholders
would not do better by going to such an active survey of the market. In
particular, the CNG Board found that the exclusivity provisions of the Merger
Agreement are acceptable because its members have had unsolicited discussions
with other potential parties and investment bankers, from time to time, to
ascertain the interests of such parties and investment bankers in a transaction
with CNG, and the CNG Board believed that the CMS Energy combination proposal
was the best available transaction for the CNG shareholders. The CNG Board
considered other factors including, but not limited to, the following: (i) the
desirability of CNG as a candidate; (ii) the unwillingness of CMS Energy to make
the combination proposal in an auction environment; (iii) whether the
combination proposal would be considered a preemptive bid at the high range of
fairness; (iv) whether the market is generally aware that CNG is for sale; (v)
the advice of CIBC Oppenheimer, CNG's financial advisor; (vi) whether the
combination proposal was within the same range of pricing that transactions with
similar companies have been effected; and (vii) the investigation taken by the
CNG Board and CNG's officers of the combination proposal.
The CNG Board also considered the following potentially negative factors:
(i) the potential disruption of CNG's business that might result from employee
uncertainty and lack of focus following announcement of the Merger and during
the integration of the operations of CMS Energy and CNG; (ii) the possibility
that the Merger might not be consummated, and the effects of the public
announcement of the Merger on (a) CNG's sales and operating results, (b) CNG's
ability to attract and retain key personnel and (c) progress of certain
development projects; (iii) the risk that, despite the intentions and the
efforts of CNG to support its business, the implementation of the Merger could
result in decisions by suppliers or customers to curtail purchases or sales of
natural gas or NGLs from CNG; (iv) the risk that the other benefits sought to be
achieved in the Merger will not be achieved; and (v) the fact that the Merger
Agreement prohibits CNG from initiating, soliciting or encouraging discussions
with third parties relating to alternative transactions and requires payment of
a termination fee of $3 million to CMS Energy in certain events.
The foregoing discussion of the information and factors considered by the CNG
Board is not intended to be exhaustive, but constitutes the material factors
considered by the CNG Board. In view of the wide variety of factors, both
positive and negative, considered by the CNG Board, the CNG Board did not find
it practical to, and did not, quantify or otherwise assign relative weights to
the specific factors considered.
THE CNG BOARD RECOMMENDS THAT CNG SHAREHOLDERS VOTE TO APPROVE THE MERGER
AGREEMENT. THE CNG BOARD HAS APPROVED THE MERGER AGREEMENT EVEN THOUGH MEMBERS
OF THE BOARD HAVE CERTAIN INTERESTS WHICH MAY PRESENT THEM WITH CONFLICTS OF
INTEREST IN CONNECTION WITH THE MERGER. SEE "ADDITIONAL INFORMATION WITH RESPECT
TO CNG -- Other Relationships."
OPINION OF CNG'S FINANCIAL ADVISOR
CIBC Oppenheimer Corp. ("CIBC Oppenheimer") has delivered its written
opinion, dated August 3, 1998, as updated to September 10, 1998 (the "Opinion"),
to the CNG Board, to the effect that, as of such date, and based on its review
and assumptions and subject to the limitations summarized below, the Merger
Consideration is fair, from a financial point of view, to the holders of CNG
Common Stock.
THE FULL TEXT OF THE OPINION OF CIBC OPPENHEIMER, DATED SEPTEMBER 10, 1998,
WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED
AND LIMITATIONS ON tHE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PROXY
STATEMENT/PROSPECTUS. CNG SHAREHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY
AND IN ITS ENTIRETY. THE SUMMARY OF THE OPINION SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIEd IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In connection with the CNG Board's consideration of the Merger Agreement,
CIBC Oppenheimer delivered the Opinion that, based on its review and assumptions
and subject to the limitations summarized below, the Merger Consideration is
fair, from a financial point of view, to the holders of CNG Common Stock. The
Opinion was prepared at the request and for the information of the CNG Board and
does not constitute a recommendation to any holder of CNG Common Stock as to how
any such shareholder should
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vote with respect to the Merger. It should be understood that, although
subsequent developments may affect the conclusions reached in the Opinion, CIBC
Oppenheimer does not have any obligation to update, revise or reaffirm the
Opinion.
In arriving at its opinion, CIBC Oppenheimer, among other things: (i)
reviewed, among other public information, CNG's Annual Report, Form 10-K and
related financial information for the fiscal years ended December 31, 1995, 1996
and 1997, CNG's Form 10-Q and the related unaudited financial information for
the three months ended March 31, 1998, draft balance sheet as of June 30, 1998
and financial and operating forecasts; (ii) reviewed, among other public
information, CMS Energy's Annual Reports, Forms 10-K and related financial
information for the fiscal years ended December 31, 1995, 1996 and 1997 and CMS
Energy's Form 10-Q and the related unaudited financial information for the three
months ended March 31, 1998; (iii) reviewed certain information, including
financial forecasts, relating to the business, earnings, cash flow, assets and
prospects of CNG, furnished to CIBC Oppenheimer by CNG; (iv) conducted
discussions with members of senior management of CNG and CMS Energy concerning
their respective businesses and prospects; (v) compared the historical market
prices and trading activity for CNG Common Stock and CMS Common Stock with those
of certain other publicly traded companies which CIBC Oppenheimer deemed
relevant; (vi) compared the financial position and operating results of CNG and
CMS Energy with those of certain publicly traded companies which CIBC
Oppenheimer deemed relevant; (vii) compared the financial terms of the Merger
with the financial terms of certain other business combinations which CIBC
Oppenheimer deemed relevant; (viii) reviewed the Merger Agreement and Exhibits
thereto; and (ix) reviewed such other financial studies and analyses and
performed such other investigations and took into account such other matters as
CIBC Oppenheimer deemed necessary, including CIBC Oppenheimer's assessment of
regulatory, general economic, market and monetary conditions.
In preparing the Opinion, CIBC Oppenheimer relied on the accuracy and
completeness of all information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. CIBC Oppenheimer did not
assume any responsibility to independently verify the same. CIBC Oppenheimer
assumed that the financial forecasts examined by it were reasonably prepared on
bases reflecting the best currently available estimates and good faith judgment
of the senior management team of CNG as to the future performance of CNG. CIBC
Oppenheimer also assumed, with the consent of CNG, that the Merger will be
accounted for under the pooling-of-interests method of accounting and that the
Merger will qualify as a tax-free reorganization. CIBC Oppenheimer did not
undertake, and was not provided with, an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of CNG or CMS Energy and
assumed that all liabilities (contingent or otherwise, known or unknown) of CNG
and CMS Energy are as set forth in their respective consolidated financial
statements. The Opinion is based upon regulatory, economic, monetary and market
conditions existing on the date thereof. Furthermore, CIBC Oppenheimer expressed
no opinion as to the price or trading range at which CNG Common Stock or CMS
Common Stock will trade after the date of the Opinion. The Opinion does not
address the relative merits of the Merger and any other transactions or business
strategies discussed by the CNG Board as alternatives to the Merger, or the
decision of the CNG Board to proceed with the Merger. The Merger Consideration
was determined by CNG and CMS Energy in arm's-length negotiations. CIBC
Oppenheimer did not, and was not requested to, make any recommendations as to
the form or amount of consideration to be paid pursuant to the Merger Agreement.
CNG did not place any limitations upon CIBC Oppenheimer with respect to the
procedures followed or factors considered in rendering the Opinion.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analysis and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Accordingly, CIBC Oppenheimer believes that its analysis must be
considered as a whole and that considering any portion of such analysis and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the Opinion. In
its analysis, CIBC Oppenheimer made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of CNG and CMS Energy. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses relating
to the value of businesses do not purport to be appraisals or to reflect the
prices at which businesses may actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty and neither CNG nor
CIBC Oppenheimer assume responsibility for the accuracy of such analyses and
estimates.
The following paragraphs summarize the significant analyses performed by
CIBC Oppenheimer in arriving at the Opinion.
Comparable Acquisition Analysis. CIBC Oppenheimer reviewed certain proposed
and completed transactions involving mergers and acquisitions with and among
natural gas distribution, natural gas pipeline, natural gas marketing and
natural gas liquids processing companies or assets which were reasonably
comparable to the Merger (the "Comparable Transactions"). The Comparable
Transactions were not intended to represent the complete list of transactions
which have occurred or been announced related to natural
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gas distribution, natural gas pipeline, natural gas marketing and natural gas
liquids processing; rather, such transactions represent selected recent
transactions involving companies that were deemed by CIBC Oppenheimer to operate
in comparable operating areas or have comparable financial and operating
characteristics to CNG. The Comparable Transactions included KN Energy,
Inc./Occidental Petroleum Corp. (MidCon), TransCanada Pipelines/Nova
Corporation, CNG/Taurus Energy Corp., Williams Companies/MAPCO Inc., Shell Oil
Co./Tejas Gas Corp., NGC Corp./Destec Energy Inc., Union Pacific Resources Group
Inc./Highlands Gas Corp., PacifiCorp/TPD Corp., PG&E Corp./Valero Energy Corp.
and TransMontaigne Oil Co./Koch Industries, Inc.
CIBC Oppenheimer calculated the "implied total transaction value" (herein
"TTV," defined as the sum of the value of common equity consideration, plus debt
and the liquidation value of preferred stock, minus cash and cash equivalents)
for each of the Comparable Transactions as a multiple of each company's
respective latest pro forma twelve-month EBITDA ("LTM EBITDA"). This analysis
produced a TTV/LTM EBITDA of 15.3x with respect to the Merger. CIBC
Oppenheimer's analysis of Comparable Transactions produced TTV/LTM EBITDA ratios
ranging from 5.9x to 12.2x, with an average, excluding the highest and lowest
values (the "Adjusted Average"), of 9.7x. Based on this analysis, the Merger's
TTV as a multiple of LTM EBITDA represents a 25% premium to the high end of the
range of Comparable Transactions.
Comparable Company Trading Analysis. Using publicly available information,
CIBC Oppenheimer compared selected financial information for CNG with
corresponding financial information and ratios for a group of companies deemed
by CIBC Oppenheimer to be reasonably comparable to CNG (the "Comparable
Companies"). The Comparable Companies possessed general business, operating and
financial characteristics representative of companies in industries in which CNG
operates. The Comparable Companies included Aquila Gas Pipeline Corporation,
Dynegy, Inc., KN Energy, Inc., Markwest Hydrocarbons, Inc., Midcoast Energy
Resources, Inc. and Western Gas Resources, Inc.
CIBC Oppenheimer's analysis included, among other things, the consideration
of a company's market capitalization of common stock as of July 30, 1998 (the
"Market Capitalization") as a multiple of estimated 1999 net income and
estimated 1998 and 1999 operating cash flow ("OCF"). OCF is defined as net
income before extraordinary items plus deferred taxes, depreciation, depletion
and amortization and any other non-cash charges, excluding changes to working
capital. CIBC Oppenheimer's analysis also included the consideration of a
company's Market Capitalization plus total debt, and preferred stock less cash
and cash equivalents ("Aggregate Value"), as a multiple of estimated 1998 and
1999 earnings before interest, taxes and depreciation, depletion and
amortization ("EBITDA"). Projected net income, OCF and EBITDA for CNG and the
Comparable Companies were based on estimates compiled by published estimates of
selected investment banking firms, including CIBC Oppenheimer.
Although CIBC Oppenheimer used the information with respect to these
companies for comparison purposes, none of such companies are identical to CNG.
Such analysis indicated that the Adjusted Average of Market Capitalization as a
multiple of estimated fiscal year 1999 net income was 12.0x for the Comparable
Companies as compared to the Company's implied multiple 16.7x based upon the
proposed Merger Consideration. The Adjusted Average of Market Capitalization as
a multiple of estimated fiscal years 1998 and 1999 OCF were 7.3x and 5.6x,
respectively, for the Comparable Companies as compared to the Company's implied
multiples of 10.5x and 5.0x, respectively, based upon the proposed Merger
Consideration. The Adjusted Average of Aggregate Value as a multiple of
estimated fiscal years 1998 and 1999 EBITDA were 8.3x and 6.6x respectively, for
the Comparable Companies as compared to the Company's implied multiples of 13.2x
and 7.8x, respectively, based on the Merger Consideration.
Merger Premium Analysis. CIBC Oppenheimer analyzed purchase price per share
premiums paid in selected publicly-disclosed merger transactions announced and
completed since January 1, 1996 which it deemed appropriate for this analysis.
This analysis indicated adjusted average premiums to the target's closing stock
price one week and four weeks prior to the announcement of the transaction of
26% and 36%, respectively. Based on the closing stock prices of CNG's Common
Stock one week and four weeks prior to its closing stock price on July 30, 1998,
the premium paid on CNG Common Stock in connection with the Merger Consideration
for one week and four weeks prior to July 30, 1998 were 33% and 43%,
respectively.
CIBC Oppenheimer, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes. CNG
selected CIBC Oppenheimer to be its financial advisor in connection with the
Merger because CIBC Oppenheimer is a prominent investment banking and financial
advisory firm with substantial experience in transactions similar to the Merger.
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Pursuant to an engagement letter between CNG and CIBC Oppenheimer dated
July 31, 1998, CIBC Oppenheimer has earned a fee of $250,000 for the rendering
of the Opinion. In addition, CIBC Oppenheimer will receive a fee of $500,000,
payable upon completion of the Merger, and will be reimbursed for certain of its
related expenses. CIBC Oppenheimer will not be entitled to any additional fees
or compensation in the event the Merger is not approved or otherwise
consummated. CNG also agreed, to indemnify CIBC Oppenheimer, its affiliates and
each of its directors, officers, agents and employees and each person, if any,
controlling CIBC Oppenheimer or any of its affiliates against certain
liabilities, including liabilities under federal securities laws.
CIBC Oppenheimer has provided certain investment banking and financial
advisory services to CNG from time to time, including acting as Lead-Manager of
CNG's initial public offering in July 1997. In addition, CIBC Oppenheimer has
provided certain investment banking and financial advisory services to CMS
Energy from time to time and may provide certain investment banking and
financial advisory services in the future. William H. Bauch is an officer of
CIBC Oppenheimer and a Director of CNG. In the ordinary course of their
business, CIBC Oppenheimer and its affiliates may actively trade the securities
of CNG and CMS Energy for their own account or for the accounts of their
customers and, accordingly, may at any time hold a long or short position in
such securities. See "ADDITIONAL INFORMATION WITH RESPECT TO CNG -- Other
Relationships."
MAJORITY STOCKHOLDERS AGREEMENTS
Pursuant to the terms of the Merger Agreement, each of the Majority
Stockholders of CNG have agreed to take all necessary action to cause the Merger
Agreement to be approved, including voting their shares of CNG Common Stock in
favor of the adoption and approval of the Merger Agreement. The Majority
Stockholders collectively own or control 3,438,004 shares or 54.44% of the CNG
Common Stock and are affiliates of Gary C. Adams, the Chairman of the Board,
President, and Chief Executive Officer of CNG. For additional information
relating to the Majority Stockholders, see "ADDITIONAL INFORMATION WITH RESPECT
TO CNG -- Certain Transactions Among Related Entities" and "-- Principal
Stockholders of CNG."
EFFECTIVE TIME OF MERGER
The Merger will become effective at the time (the "Effective Time") and on
the date specified in a Certificate of Merger to be filed in the State of
Michigan and Articles of Merger to be filed in the State of Oklahoma pursuant to
their respective state corporate laws. It is currently anticipated that if the
Merger is approved by CNG shareholders at the Special Meeting and all the other
conditions to the Merger are satisfied, the Merger will become effective during
the fourth quarter of 1998.
There can be no assurance, however, that the Effective Time will not be
delayed. In the event the Merger has not become effective by October 31, 1998,
CMS Energy or CNG may terminate the Merger Agreement notwithstanding any
approvals previously given by the shareholders of CNG. See "THE MERGER AGREEMENT
- -- Termination; Termination Fees."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
The conversion of outstanding shares of CNG Common Stock into shares of CMS
Energy Common Stock will occur automatically at the Effective Time. Outstanding
shares of CNG Common Stock will be converted into the right to receive that
number of shares of CMS Energy Common Stock determined in accordance with the
Merger Consideration calculation. See "-- Merger Consideration" above.
Promptly after the Effective Time, the stock transfer agent of CMS Energy,
acting in its capacity as Exchange Agent (the "Exchange Agent"), will send to
each CNG shareholder a form of letter of transmittal (which will specify that
delivery will be effected, and risk of loss and title to certificates for shares
of CNG Common Stock will pass, only upon proper delivery of such certificates to
the Exchange Agent) and instructions for use in effecting the exchange of the
certificates for shares of CMS Energy Common Stock and cash in lieu of
fractional shares.
CNG SHAREHOLDERS SHOULD NOT FORWARD CNG CERTIFICATES TO THE EXCHANGE AGENT
UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. CNG SHAREHOLDERS SHOULD NOT RETURN
STOCK CERTIFICATES WITH THE ENCLOSED FORM OF PROXY.
Until the certificates representing CNG Common Stock are surrendered for
exchange after the Effective Time of the Merger, holders of such certificates
will not be paid dividends or other distributions that are declared on CMS
Energy Common Stock, or have the right to vote or exercise rights with respect
to the shares of CMS Energy Common Stock to which they will be entitled. Upon
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surrender and exchange of such certificates, any such unpaid dividends or other
distributions, declared or paid from and after the Effective Time, will be paid
(without interest) in accordance with the terms of such CMS Energy Common Stock.
No transfer taxes will be payable by any shareholder in respect of the
issuance of the new certificates, except that if any new certificate is to be
issued in a name other than that in which the CNG certificates surrendered shall
have been registered, it shall be a condition of such issuance that the holder
requesting such issuance shall properly endorse the certificate or certificates
and shall pay to CMS Energy or the Exchange Agent any transfer taxes payable on
the issuance, or on any prior transfer of such surrendered certificate, or
establish to the satisfaction of CMS Energy or the Exchange Agent that such
taxes have been paid or are not payable.
If any holder of CNG Common Stock shall be unable to surrender such
holder's certificates for such stock because such certificates have been lost or
destroyed, such holder may deliver in lieu thereof an affidavit and indemnity
bond in form and substance with surety reasonably satisfactory to the Exchange
Agent and CMS Energy.
After the Effective Time, there will be no further registration of
transfers on the stock transfer books of the Surviving Corporation or CMS Energy
of the shares of CNG Common Stock which were outstanding immediately prior to
the Effective Time. If, after the Effective Time, certificates representing such
shares are presented to the Surviving Corporation or CMS Energy, they will be
canceled and exchanged for CMS Energy Common Stock as provided in the Merger
Agreement.
No fractional shares of CMS Energy Common Stock will be issued to any CNG
shareholder upon consummation of the Merger. In lieu of the issuance of any
fractional share of CMS Energy Common Stock, cash payments will be made to CNG
shareholders in respect of any fractional share in an amount equal to the
product of (a) the Average Price of CMS Energy Common Stock as determined for
purposes of calculating the Merger Consideration multiplied by (b) the fraction
of the share of CMS Energy Common Stock to which the CNG shareholder would
otherwise be entitled. No such shareholder will be entitled to dividends or
other rights in respect of any such fractional share. No interest on the cash
payments to be made in lieu of the issuance of fractional shares will accrue
pending surrender to the Exchange Agent of certificates representing CNG Common
Stock.
NO SOLICITATION
In the Merger Agreement, CNG has agreed that it shall not, nor shall it
authorize or permit any officer, director or employee of it or its subsidiaries
or affiliates or any investment banker, attorney or other adviser or
representative of CNG or any of its subsidiaries or affiliates to, (i) solicit,
initiate, or encourage the submission of, any Acquisition Proposal (as
hereinafter defined), (ii) enter into any agreement with respect to any
Acquisition Proposal or (iii) except to the extent required by law as advised by
independent legal counsel in writing, participate in any discussions or
negotiations regarding, or furnish to any person any information for the purpose
of facilitating the making of, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal. CNG has agreed to advise CMS
Energy immediately of any Acquisition Proposal and any inquiries with respect to
any Acquisition Proposal. An Acquisition Proposal is defined in the Merger
Agreement as any proposal for a merger or other business combination involving
CNG or any of its subsidiaries or affiliates or any proposal or offer to acquire
in any manner, directly or indirectly, an equity interest in CNG or any of its
subsidiaries or affiliates, any of the voting securities of CNG or any of its
subsidiaries or affiliates or substantially all of the assets of CNG and its
subsidiaries taken as a whole.
Notwithstanding the foregoing, under the Merger Agreement the CNG Board
may, if it has received a bona fide offer, and if it concludes in good faith
(after consultation with its independent legal and financial advisors) that it
is required to do so in order to comply with its fiduciary duties to CNG
shareholders under applicable law, (i) withdraw or modify its approval or
recommendation of the Merger or the Merger Agreement or (ii) approve or
recommend such other bona fide offer or, subject to compliance with certain
requirements relating to termination and termination payments (See "THE MERGER
AGREEMENT -- Termination; Termination Payments."), terminate the Merger
Agreement (and concurrently with or after such termination, if it so chooses
cause CNG to enter into any agreement with respect to any other bona fide offer)
but only at a time that is after the fifth business day following CMS Energy's
receipt of written notice from CNG advising CMS Energy that the CNG Board has
received a bona fide offer, specifying the material terms and conditions of such
offer and identifying the persons making such bona fide offer.
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CONDITIONS TO THE CONSUMMATION OF THE MERGER; TERMINATION; TERMINATION FEES
The obligations of CMS Energy, CMS Merging and CNG, as the case may be, to
consummate the Merger are subject to various conditions set forth in the Merger
Agreement. There can be no assurance that the conditions to the Merger will be
satisfied. See "THE MERGER AGREEMENT -- Conditions to the Merger."
Under certain circumstances, CMS Energy or CNG may terminate the Merger
Agreement, either prior to or after approval thereof by CNG shareholders. In the
event of such termination, CNG may be required to pay to CMS Energy a
termination fee of $3 million. See "THE MERGER AGREEMENT -- Termination;
Termination Fees."
OPERATIONS AFTER THE MERGER
If the Merger is consummated, CNG will be merged into CMS Merging as the
Surviving Corporation of the Merger, with the Articles of Incorporation of CMS
Merger and the name "CMS Continental Natural Gas, Inc." The separate existence
of CNG will cease, and the Surviving Corporation will continue as a wholly-owned
subsidiary of CMS Energy. The initial Board of Directors of the Surviving
Corporation will be the directors of CMS Merging serving in those capacities at
the Effective Time. Upon consummation of the Merger, CMS Energy intends to
contribute the stock of the Surviving Corporation to its indirect wholly-owned
subsidiary, CMS Gas Transmission & Storage Company.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of CNG management and CNG Board have certain interests in
the Merger that are in addition to their general interests as shareholders of
CNG. The CNG Board was aware of these interests and considered them, among other
matters, in approving the Merger Agreement and the transactions contemplated
thereby.
CMS Energy and the Surviving Corporation have agreed that from and after
the Effective Time, they will (i) for six years after the Effective Time,
indemnify each present and former director, officer, employee and agent of CNG
to the full extent permitted under CNG's or its subsidiaries' articles of
incorporation or bylaws, with respect to any matter, including the transactions
contemplated by the Merger Agreement, occurring at or prior to the Effective
Time, (ii) for six years after the Effective Time, maintain in effect directors'
and officers' liability insurance covering those persons on terms comparable to
those applicable to the directors and officers of CMS Energy. The Majority
Stockholders have, subject to certain limitations, agreed to indemnify CMS
Energy and the Surviving Corporation with respect to the accuracy of certain
representations and warranties contained in the Merger Agreement. See "THE
MERGER AGREEMENT -- Representations and Warranties."
Subsequent to the Merger, certain consulting agreements or employment
agreements between CNG and its executive officers will continue in effect. See
"ADDITIONAL INFORMATION WITH RESPECT TO CNG -- Executive Compensation."
Subsequent to the Merger, none of the officers or directors of CNG will continue
as officers or directors of the Surviving Corporation.
As of September 10, 1998, the directors and executive officers of CNG
beneficially owned 3,839,378 shares of CNG Common Stock, representing
approximately 60.80% of CNG Common Stock outstanding at that time. See
"ADDITIONAL INFORMATION WITH RESPECT TO CNG -- Principal Stockholders of CNG."
CNG STOCK OPTIONS
All existing rights with respect to CNG Common Stock pursuant to
outstanding CNG stock options (the "CNG Stock Options") under the CNG stock
option plans will be converted into a number of shares of CMS Energy
Common Stock equivalent to the fair value of the CNG Stock Options at the
Effective Time, as such fair value is determined by an independent consultant.
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ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to qualify as a "pooling of interests" for
accounting and financial reporting purposes. Under this method of accounting,
the historical financial statements of the combining companies for periods prior
to consummation of the Merger are restated as though the companies had been
combined from inception. The holders of CMS Energy Common Stock and CNG Common
Stock will be deemed to have combined their existing voting common stock
interests by virtue of the exchange of CNG Common Stock and CMS Energy Common
Stock. Accordingly, the book value of the assets, liabilities and stockholders'
equity of each of CMS Energy and CNG, as reported on its respective consolidated
balance sheet, will be carried over to the consolidated balance sheet of the
combined company and no goodwill will be created. The combined company will
include in its consolidated income the consolidated income of both companies for
the entire fiscal year in which the Merger occurs; however, expenses incurred to
effect the Merger will be treated as current charges against income rather than
adjustments to the balance sheet.
It is a condition to consummation of the Merger that CMS Energy receive
from Arthur Andersen LLP an opinion to the effect that the Merger will be
treated for accounting purposes as a pooling of interests; provided, that in the
event that the pooling opinion cannot be issued due to certain actions taken by
CMS Energy and through no fault of CNG, then such opinion shall not be a
condition to consummation; and provided further, that if in the event CMS Energy
and CNG are unable to cause amendments to the grants issued under the CNG 1997
stock option plan or that the pooling opinion cannot be otherwise obtained as a
consequence of the 1997 stock option plan, then such opinion shall not be a
condition to CMS Energy's obligations to consummate the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Required Tax Opinion Regarding the Merger. The obligations of CMS Energy
and CNG to effect the Merger are conditioned upon the receipt of an opinion of
tax counsel to CMS Energy dated the Effective Time, subject to assumptions and
exceptions customarily included, and in form and substance reasonably
satisfactory to CMS Energy and CNG, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "IRC"),
and that CMS Energy, CMS Merging and CNG will each be a party to that
reorganization within the meaning of Section 368(b) of the IRC. It is expected
that Theodore J. Vogel, Tax Counsel for CMS Energy, will deliver such an
opinion to CMS Energy and CNG.
Summary of Anticipated Federal Income Tax Consequences. The following is a
summary of the anticipated material United States federal income tax
consequences of the Merger to CNG shareholders. It is not intended as tax
advice and is based upon the parties' understanding of the federal income tax
laws as currently interpreted and does not address issues of state or local
taxation. It does not constitute a representation by CNG, CMS Merging, CMS
Energy, or their counsel. The following discussion is included solely for
purposes of general information only.
BECAUSE OF THE COMPLEXITIES OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS,
IT IS RECOMMENDED THAT CNG SHAREHOLDERS CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE MERGER.
This summary is limited to those persons who hold shares of CNG Common
Stock as "capital assets" (generally, property held for investment) within the
meaning of Section 1221 of the IRC. (Any reference herein to a "Section" is a
reference to a section of the IRC unless otherwise specified.) The tax
consequences to any particular shareholder of CNG Common Stock may be affected
by matters not discussed below. For example, certain taxpayers, including
without limitation life insurance companies, tax-exempt organizations,
and foreign taxpayers, may be subject to special rules not addressed herein. In
addition, the tax consequences to CNG shareholders who acquired their shares of
CNG Common Stock pursuant to the exercise of employee stock options or
otherwise as compensation is not discussed below.
Assuming the Merger satisfies all requirements of Section 368(a), the
Merger will have the federal income tax consequences described below.
Receipt of CMS Energy Common Stock in Exchange for CNG Common Stock.
A shareholder who receives shares of CMS Energy Common Stock and no other
consideration in exchange for shares of CNG Common Stock in the Merger will not
recognize gain or loss on the exchange. The shareholder's tax basis in the CMS
Energy Common Stock received will be the same as the shareholder's tax basis in
the shares of CNG Common Stock exchanged in the Merger, and the holding period
of the CMS Energy Common Stock received will include the holding period of the
CNG Common Stock exchanged.
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Receipt of Cash in Lieu of Fractional Shares. Pursuant to the Merger, CNG
shareholders will receive cash in lieu of fractional shares of CMS Energy Common
Stock. Since the payment to a shareholder of cash in lieu of a fractional share
in this transaction is undertaken solely for the purpose of saving the expense
and inconvenience of issuing and transferring fractional shares, and is not
separately bargained for consideration, these payments generally will be treated
as having been received as distributions in full payment in exchange for the
fractional shares of CMS Energy Common Stock redeemed as provided in Section
302(a) and taxed as capital gain or loss.
STOCK EXCHANGE LISTING
The CMS Energy Common Stock is listed on the NYSE. CMS Energy has agreed to
apply for NYSE listing of the shares of CMS Energy Common Stock to be issued in
the Merger. The obligations of the parties to the Merger Agreement to consummate
the Merger are subject to approval of that application and the listing by the
NYSE of such shares. See "THE MERGER AGREEMENT -- Conditions to the Merger."
APPRAISAL RIGHTS
The following is a summary of the provisions of Section 1091 of the OGCA
relating to appraisal rights. Section 1091 of the OGCA is reproduced in its
entirety as Annex B to this Proxy Statement/Prospectus, and this summary is
qualified in its entirety by reference to Annex B. Shareholders should read
carefully Annex B and, if they wish to exercise their rights to an appraisal,
follow the procedures set forth therein. Any shareholder who wishes to demand an
appraisal is advised to consult legal counsel.
Under Section 1091 of the OGCA, holders of record of shares of CNG Common
Stock who do not wish to accept the Merger Consideration have the right to seek
an appraisal to determine the fair value of their shares of CNG Common Stock in
the Oklahoma District Court. EACH SHAREHOLDER IS URGED TO CAREFULLY READ THE
MATERIALS CONTAINED IN THIS PROXY STATEMENT, INCLUDING ANNEX B, AND THE OTHER
MATERIALS INCORPORATED HEREIN IN MAKING A DETERMINATION WHETHER TO ACCEPT THE
MERGER CONSIDERATION OR TO SEEK AN APPRAISAL PURSUANT TO THE OGCA. FAILURE TO
COMPLY WITH THE PROCEDURES SET FORTH HEREIN OR IN THE OGCA MAY RESULT IN A LOSS
OF APPRAISAL RIGHTS WITH RESPECT TO CNG COMMON STOCK.
Each shareholder who has not voted in favor of the Merger Agreement and who
wishes to assert a right to appraisal must make written demand for the appraisal
of his or her shares of CNG Common Stock at the address set forth below. A VOTE
AGAINST THE MERGER AGREEMENT WILL NOT CONSTITUTE A DEMAND FOR APPRAISAL OF
STOCK. Failure to make such demand before the vote is taken to approve the
Merger Agreement will eliminate a shareholder's right to an appraisal. The
demand must reasonably inform CNG of the identity of the shareholder making the
demand as well as the intention of such shareholder to demand an appraisal of
the fair value of the shares of CNG Common Stock held by such shareholder.
For purpose of making an appraisal demand, the address of CNG is:
Continental Natural Gas, Inc., 1437 South Boulder, Suite 1250, Tulsa, Oklahoma
74119, Attention: Garry D. Smith, Secretary.
Only a holder of record of shares of CNG Common Stock, or a person duly
authorized and explicitly purporting to act on the record holder's behalf, is
entitled to assert an appraisal right with respect to CNG Common Stock
registered in the record holder's name. BENEFICIAL OWNERS WHO ARE NOT RECORD
HOLDERS AND WHO WISH TO EXERCISE APPRAISAL RIGHTS ARE ADVISED TO CONSULT
PROMPTLY WITH THE APPROPRIATE RECORD HOLDERS AS TO THE TIMELY EXERCISE OF
APPRAISAL RIGHTS. A record holder, such as a broker, who holds shares of CNG
Common Stock as a nominee for others may exercise appraisal rights with respect
to the shares of CNG Common Stock held for one or more beneficial owners, while
not exercising such rights for other beneficial owners. In such a case, the
written demand should set forth the number of shares of CNG Common Stock as to
which the demand is made. Where no shares of CNG Common Stock are expressly
mentioned, the demand will be presumed to cover all shares of CNG Common Stock
held in the name of such record holder.
A holder of shares of CNG Common Stock held in "street name" who desires an
appraisal must take such actions as may be necessary to ensure that a timely and
proper demand for an appraisal is made by the record holder of such shares of
CNG Common Stock. Shares of CNG Common Stock held through brokerage firms, banks
and other financial institutions are frequently deposited with and held of
record in the name of a nominee of a central security depository. Any holder of
shares of CNG Common Stock desiring an appraisal who holds his or her shares of
CNG Common Stock through a brokerage firm, bank or other financial institution
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is responsible for ensuring that the demand for an appraisal is made by the
record holder. The shareholder should instruct such firm, bank or institution
that the demand for an appraisal must be made by the record holder of the shares
of CNG Common Stock, which may be the nominee of a central security depository
if the shares of CNG Common Stock have been so deposited. As required by Section
1091 of the OGCA, a demand for an appraisal must reasonably inform CNG of the
identity of the record holder (which might be a nominee as described above) and
of such holder's intention to seek an appraisal of such shares of CNG Common
Stock.
A demand for an appraisal of shares of CNG Common Stock owned of record by
two or more joint holders must identify and be signed by or for all of the
holders. A demand for an appraisal signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity must so identify the persons
signing the demand.
An appraisal demand may be withdrawn by a shareholder within 60 days after
the Effective Time of the Merger, but thereafter the written approval of CNG is
needed for any such withdrawal. Upon withdrawal of the appraisal demand, a
holder of shares of CNG Common Stock will be entitled to receive the Merger
Consideration. No interest will be paid on this amount.
Within 120 days after the Effective Time (the "120-Day Period"), any
shareholder who has properly demanded an appraisal and who has not withdrawn his
or her demand as provided above (such shareholders are hereinafter referred to
collectively as the "Dissenting Shareholders") has the right to file in the
Oklahoma District Court a petition (the "Petition") to demand a determination of
the fair value of the dissenting shares of CNG Common Stock (the "Dissenting
Shares") held by all of the Dissenting Shareholders. If, within the 120-Day
Period, no Petition shall have been filed as provided above, all rights to an
appraisal will cease and all of the Dissenting Shareholders will become entitled
to receive the Merger Consideration, without interest thereon after the
Effective Time, with respect to such Dissenting Shares of CNG Common Stock. CNG
is not obligated and does not intend to file such a Petition. Any Dissenting
Shareholder is entitled, pursuant to a written request to CNG made within the
120-Day Period, to receive from CNG a statement setting forth the aggregate
number of CNG Common Stock with respect to which demands for appraisal have been
received and the aggregate number of the Dissenting Shareholders.
Upon the filing of the Petition, service of a copy thereof is required to
be made upon the surviving corporation, which, within 20 days after such
service, must file in the office of the court clerk of the District Court in
which the Petition was filed, a duly verified list containing the names and
addresses of all Dissenting Shareholders. The District Court may order that
notice of the time and place fixed for the hearing of the Petition be sent by
registered or certified mail to the surviving corporation and all of the
Dissenting Shareholders, and be published at least one week before the day of
the hearing in a newspaper of general circulation published in the City of
Tulsa, Oklahoma or in another publication determined by the District Court. The
District Court will approve the form of notice by mail and by publication. The
costs relating to these notices will be borne by CNG. If a hearing on the
Petition is held, the District Court is empowered to determine which Dissenting
Shareholders have complied with the provisions of Section 1091 of the OGCA and
are entitled to an appraisal of their shares of CNG Common Stock. The District
Court may require that Dissenting Shareholders submit their CNG Common Stock
certificates which had represented shares of CNG Common Stock for notation
thereon of the pendency of the appraisal proceedings. The District Court is
empowered to dismiss the proceedings as to any Dissenting Shareholder who does
not comply with such requirement. Accordingly, Dissenting Shareholders are
cautioned to retain their stock certificates pending resolution of the appraisal
proceedings.
Dissenting Shares of CNG Common Stock will be appraised by the District
Court at their fair value as of the Effective Time, exclusive of any element of
value arising from the accomplishment or expectation of the Merger. The value so
determined for the shares of CNG Common Stock could be equal to, more than or
less than the Merger Consideration and could be based upon considerations other
than, in addition to, or the same as the Merger Consideration, the market value
of the shares of CNG Common Stock, asset values and/or earning capacity. CNG
reserves the right to assert in any appraisal proceeding that the fair value of
the shares of CNG Common Stock as of the Effective Time is less than the Merger
Consideration.
The District Court may also, on application, (i) determine a fair rate of
interest, simple or compound, if any, to be paid to Dissenting Shareholders in
addition to the value of the Dissenting Shares of CNG Common Stock for the
period from the Effective Time to the date of payment, (ii) assess costs among
the parties as the District Court deems equitable, and (iii) order all or a
portion of the expenses incurred by any Dissenting Shareholders in connection
with the appraisal proceeding, including, without limitation, reasonable
attorney's fees and fees and expenses of experts, to be charged pro rata against
the value of all Dissenting Shares of CNG Common Stock. Determinations by the
District Court are subject to appellate review by the Oklahoma Supreme Court.
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Dissenting Shareholders are generally permitted to participate in the
appraisal proceedings. No appraisal proceeding in the District Court shall be
dismissed as to any Dissenting Shareholder without the approval of the District
Court, and this approval may be conditioned upon terms which the District Court
deems just.
From and after the Effective Time, Dissenting Shareholders will not be
entitled to vote their shares of CNG Common Stock for any purpose and will not
be entitled to receive payment of dividends or other distributions in respect of
such shares of CNG Common Stock payable to shareholders of record thereafter.
CERTAIN REGULATORY CONSIDERATIONS
Transactions such as the Merger are reviewed by the United States
Department of Justice ("DOJ") and the United States Federal Trade Commission
("FTC") to determine whether the transactions comply with antitrust laws. Under
the provisions of the Hart-Scott- Rodino Antitrust Improvements Act ("HSR Act"),
the Merger may not be consummated until such time as the specified waiting
period requirements of the HSR Act have been satisfied. CMS Energy and CNG filed
notification reports, together with requests for early termination of the
waiting period, with the DOJ and the FTC under the HSR Act on September 4, 1998.
It is anticipated that the FTC or DOJ will grant the companies' requests for
early termination of the waiting periods under the HSR Act prior to the Special
Meeting, satisfying one of the conditions to the Merger.
At any time before or after the Effective Time, the DOJ, the FTC or a
private person or entity could seek under the antitrust laws, among other
things, to enjoin the Merger or to cause CMS Energy to divest itself, in whole
or in part, of CNG or of other businesses conducted by CMS Energy. There can be
no assurance that a challenge to the Merger will not be made or that, if such a
challenge is made, CMS Energy and CNG will prevail.
Continental Energy Services, L.L.C. ("CES"), a wholly owned subsidiary of
CNG, holds a Power Marketing Certificate issued by the Federal Energy Regulatory
Commission ("FERC") on December 31, 1996. On August 11, 1998, CES filed its
Notice of Cancellation with the FERC terminating CES' Power Marketing
Certificate as of October 12, 1998. Cancellation of the Power Marketing
Certificate is a condition to consummate the Merger.
The Oklahoma Corporation Commission ("OCC") and the Texas Railroad
Commission ("RRC") regulate various facets of the oil and gas industry in
Oklahoma and Texas, including operations of pipelines, gas utilities, gas
gathering systems and natural gas liquids processing plants, as pertinent.
Compliance with reporting, safety and other regulations is mandated by the OCC
and RRC in order to maintain various permits in good standing. Following the
Merger, operating entities subject to OCC and RRC regulation may be required to
confirm any changes in operators, operations or primary officers.
Although certain state regulatory filings with various states may be
required subsequent to consummation of the Merger, CMS Energy and CNG are not
aware of any other governmental or regulatory approvals required for
consummation of the Merger, other than compliance with applicable corporate and
securities laws.
DESCRIPTION OF CMS ENERGY CAPITAL STOCK
The following description contains a summary of all of the material
features of the capital stock of CMS Energy but does not purport to be complete
and is subject to and qualified in its entirety by reference to the CMS Energy
Restated Articles of Incorporation (the "CMS Energy Articles of Incorporation")
and the CMS Energy Bylaws as well as the CMS Energy Registration Statement on
Form 8-B/A, all of which are filed as exhibits to documents filed with the
Commission and are incorporated herein by reference. See also "COMPARISON OF
SHAREHOLDER RIGHTS" below. The following description should be read carefully by
the CNG shareholders.
The authorized capital stock of CMS Energy consists of 250 million shares
of CMS Energy Common Stock, 60 million shares, no par value, of a class of
common stock designated as Class G (the "Class G Common Stock"), and 10 million
shares, $.01 par value, of CMS Energy preferred stock ("Preferred Stock"). As of
August 31, 1998, 101,904,083 shares of CMS Energy Common Stock and 8,375,604
shares of Class G Common Stock were issued and outstanding and there were no
shares of Preferred Stock issued or outstanding. The CMS Energy Common Stock and
the Class G Common Stock are sometimes together referred to herein as the
"Common Stock." The outstanding shares of Common Stock are fully paid and non-
assessable, and any additional Common Stock, when issued, will be fully paid and
non-assessable. The shares of Common Stock may be issued from time to time as
the Board of
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Directors shall determine for such consideration as shall be fixed by the Board
of Directors. A summary of the designations and the voting and other powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, of the Common Stock and of the Preferred Stock follows.
COMMON STOCK
As noted above, CMS Energy has two classes of 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
CMS Energy 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),
borrowings and sales of equity. CMS Energy's ability to pay dividends, including
dividends on CMS Energy Common Stock and Class G 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. Accordingly, the
ability of CMS Energy to pay dividends on its capital stock will depend on the
earnings, financial requirements, contractual restrictions of the subsidiaries
of CMS Energy, in particular Consumers, and other factors. CMS Energy's
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay any amounts on the capital stock of CMS Energy
or to make any funds available therefor, whether by dividends, loans or other
payments. See "-- Primary Source of Funds of CMS Energy; Restrictions on Sources
of Dividends."
Dividends on capital stock of CMS Energy are limited by Michigan law to
legally available assets of CMS Energy. In particular, 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 sums of its total liabilities plus the
amount that would be needed, if CMS Energy were to be dissolved at the time of
distribution to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the distribution. As
noted above, there are presently no shares of CMS Energy Preferred Stock issued
and outstanding.
Distributions on Common Stock may be subject to the rights of the holders,
if any, of the CMS Energy Preferred Stock. There are also restrictions on CMS
Energy's ability to pay dividends contained in certain credit and loan
agreements as well as certain indentures pursuant to which CMS Energy has issued
debt securities. These agreements and indentures are filed as exhibits to the
Registration Statement of which this Proxy Statement/Prospectus constitutes a
part, and CNG shareholders can obtain such documents as described in "AVAILABLE
INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
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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 CMS Energy 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 CMS Energy 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 CMS Energy 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, which, under certain circumstances, would enable the Board of
Directors to increase the number of authorized shares to satisfy the exchange
features of the Common Stock described below) or alter or change the powers,
preferences or special rights of the shares of such class so as to affect them
adversely. The CMS Energy 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 CMS Energy 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.
Preemptive Rights. The CMS Energy 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
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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 on matters voted upon by the
Shareholders.
Exchanges. The CMS Energy 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 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 CMS Energy Articles of Incorporation) equal to 110% of the Fair Market
Value of one share of Class G Common Stock.
CMS Energy may, in the sole discretion of the Board of Directors, at any
time, exchange each outstanding share of Class G Common Stock for a number of
shares of CMS Energy Common Stock having a Fair Market Value equal to 115% of
the Fair Market Value of one share of Class G Common Stock.
CMS Energy cannot predict the impact of the potential for such exchanges on
the market prices of the CMS Energy Common Stock.
Certain Considerations Relating to Two Classes of Common Stock. Although
CMS Energy is aware of no precedent concerning the manner in which Michigan law
would be applied to a board of directors' duties in the context of multiple
classes of common stock with divergent interests, CMS Energy believes that a
Michigan court would hold that a board of directors owes an equal duty to all
shareholders regardless of class and does not have separate or additional
fiduciary duties to the holders of separate classes of stock. That duty requires
each director to act in good faith with the care an ordinarily prudent person in
a like position would exercise under similar circumstances and in a manner such
director reasonably believes to be in the best interests of CMS Energy. CMS
Energy believes that, under Michigan law, a good faith determination by a
disinterested and adequately informed board, or a committee thereof, which
discharges such duty and which the directors honestly believe is in the best
interest of CMS Energy, would be a defense to any challenge by or on behalf of
the holders of either class of Common Stock to the Board of Directors'
determination that could have a disparate effect on each class of Common Stock.
Disproportionate ownership interests of members of the Board of Directors
in one or both classes of Common Stock of CMS Energy or disparate values of the
classes of Common Stock of CMS Energy could create or appear to create potential
conflicts of interest when directors are faced with decisions that could have
different implications for different classes. Nevertheless, CMS Energy believes
that a director would be able to discharge his or her fiduciary duties even if
his or her interests in shares of the classes of Common Stock were
disproportionate and/or had disparate values. CMS Energy's performance Incentive
Stock Plan permits the issuance of options for, or other incentive awards
consisting of, any class of Common Stock of CMS Energy.
The existence of separate classes of Common Stock could give rise to
occasions when the interests of the holders of Class G Common Stock and holders
of CMS Energy Common Stock may diverge or appear to diverge and determinations
of the Board of Directors could have disparate effects on each class of Common
Stock. Examples include determinations by the Board of Directors to (i) pay or
omit the payment of dividends on either class of Common Stock, (ii) attribute
the proceeds of issuances of securities of CMS Energy either to CMS Energy or to
the equity of the Consumers Gas Group, (iii) attribute consideration to be
received by common stockholders in connection with a merger or consolidation
including CMS Energy to either or both classes of Common Stock, (iv) exchange
CMS Energy Common Stock for all outstanding Class G Common Stock at a premium,
(v) approve dispositions of assets of CMS Energy attributable to the Consumers
Gas Group and (vi) make operational and financial decisions with respect to
either CMS Energy or the Consumers Gas Group that could be considered to be
detrimental to the other. Any determinations made in compliance with applicable
law by the Board of Directors under any of the provisions in the Articles of
Incorporation, as defined in the accompanying Prospectus, would be final and
binding on all shareholders of CMS Energy.
The Board of Directors has adopted certain management and accounting
policies with respect to dividends and the allocation of corporate expenses,
assets and liabilities (including contingent liabilities) including, without
limitation, its intention to attribute assets,
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liabilities and expenses between the Consumers Gas Group and CMS Energy only on
an arm's-length basis, any and all of which could be modified or rescinded in
the sole discretion of the Board of Directors without approval of the
shareholders. The Board of Directors may also adopt additional policies
depending upon the circumstances, including policies that would have disparate
impacts upon holders of Class G Common Stock and holders of CMS Energy Common
Stock.
The majority of the accounting allocation policies of CMS Energy have a
long standing basis whereby the financial statements for CMS Energy and the
Consumers Gas Group are prepared based upon consistent methods that management
believes are reasonable and appropriate to reflect their respective financial
positions, results of operations and cash flows. Where appropriate, the
financial statements of the Consumers Gas Group reflect the assets, liabilities,
revenues and expenses directly related to it. However, in instances where common
accounts (containing both electric and gas activities) are not readily
attributable to a single business segment, management allocates to CMS Energy
and the Consumers Gas Group financial statements based on certain measures of
business activities, such as gas revenues, salaries, other operations and
maintenance expenditures, number of gas customers in relationship to total
utility customers and/or functional use surveys. Management believes such
allocations are reasonable.
Convertible Trust Preferred Securities. In June 1997, a CMS Energy
affiliated trust issued $172.5 million of 7 3/8% convertible Trust Preferred
Securities ("Trust Preferred Securities"). The Trust Preferred Securities are
convertible at the option of the holder thereof into shares of CMS Energy Common
Stock. Such Trust Preferred Securities are convertible at an initial conversion
rate of 1.2255 shares of CMS Energy Common Stock for each Trust Preferred
Security (equivalent to a purchase price of $40.80 per share of CMS Energy
Common Stock), subject to certain adjustments. On or after July 16, 2001, CMS
Energy may, at its option, cause the conversion rights of the holders of the
Trust Preferred Securities to expire upon certain conditions.
Transfer Agent and Registrar. CMS Energy Common Stock and Class G Common
Stock are transferable at Consumers Investor Services Department, 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.
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 CMS Energy 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 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 Michigan Public Service
Commission.
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. 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.
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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 its preferred stock dividend
payments.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, Consumers would not be able to pay its debts as they become due in
the usual course of business, or its total assets would be less than the sum of
its total liabilities plus, unless the articles permit otherwise, the amount
that would be needed, if Consumers were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. Currently, it is Consumers' policy to pay annual dividends equal
to 80% of its annual consolidated net income. Consumers' Board of Directors
reserves the right to change this policy at any time.
COMPARISON OF SHAREHOLDER RIGHTS
In the event the proposed Merger is consummated, shareholders of CNG whose
shares of CNG Common Stock, are converted into shares of CMS Energy Common Stock
will become shareholders of CMS Energy. Their rights will be governed by
Michigan law, including particularly the Michigan Business Corporation Act (the
"MBCA"), and the CMS Energy Articles of Incorporation and the CMS Energy Bylaws.
For additional information with respect to CMS Energy Common Stock, see
"DESCRIPTION OF CMS ENERGY CAPITAL STOCK."
Certain differences between the rights of holders of CNG Common Stock and
the holders of CMS Energy Common Stock are set forth below. CNG is organized
under the laws of Oklahoma and CMS Energy is organized under the laws of
Michigan, and there are differences arising from various provisions of the CMS
Energy Articles of Incorporation, the CMS Energy Bylaws, the CNG Amended and
Restated Certificate of Incorporation (the "CNG Certificate of Incorporation"),
the CNG Amended and Restated Bylaws (the "CNG Bylaws") and state laws. This
summary contains a description of the material differences, but is not meant to
be relied upon as an exhaustive list or detailed description of the provisions
discussed and is qualified in its entirety by reference to the MBCA, the OGCA,
the CMS Energy Articles of Incorporation the CMS Energy Bylaws, the CNG
Certificate of Incorporation and the CNG Bylaws.
CLASSIFICATION, ELECTION AND REMOVAL OF BOARD OF DIRECTORS
The CMS Energy Bylaws provide that the CMS Energy Board of Directors (the
"CMS Energy Board") shall consist of not less than seven nor more than seventeen
members, as fixed from time to time by resolution of the CMS Energy Board. The
directors shall be elected annually at the annual meeting of shareholders and
serve until the next succeeding annual meeting and until their successors are
elected and shall qualify. The CMS Energy Board currently consists of 11
members. The CMS Energy Articles of Incorporation provide that a director may be
removed from office by the affirmative vote of a majority of the members of the
CMS Energy Board then in office. A director may also be removed by shareholders,
but only for cause, at an annual meeting of shareholders and by the affirmative
vote of a majority of the shares entitled to vote for the election of directors.
Cause, for purposes of removal, shall exist only if the director whose removal
is proposed has been convicted of a felony by a court of competent jurisdiction
and such conviction is no longer subject to appeal or has been adjudged by a
court of competent jurisdiction to be liable for willful misconduct in the
performance of his or her duty to CMS Energy in a matter of substantial
importance to CMS Energy and such adjudication is no longer subject to appeal.
Any vacancies occurring on the CMS Energy Board (whether by reason of death,
resignation or removal of a
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director) may be filled by a majority vote of the directors then in office
although less than a quorum. An increase in the number of members of the CMS
Energy Board shall be construed as creating a vacancy. Any vacancies occurring
on the CMS Energy Board (whether by reason of death, resignation or removal of a
director) may be filled by a majority vote of the directors then in office
although less than a quorum. An increase in the number of members of the CMS
Energy Board shall be constituted as creating a vacancy.
The CNG Certificate of Incorporation provides that the number of directors
on the CNG Board of Directors (the "CNG Board") shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of directors which CNG would have if there were no
vacancies on the CNG Board. The directors, other than those who may be elected
by the holders of any class or series of CNG Preferred Stock, are divided into
three classes, as nearly equal in number as reasonably possible, with the term
of office of the first class to expire at the conclusion of the 1998 annual
meeting of shareholders, the term of office of the second class to expire at the
conclusion of the 1999 annual meeting of shareholders and the term of office of
the third class to expire at the conclusion of the annual meeting of
shareholders in 2000, with each director to hold office until his or her
successor shall have been duly elected and qualified. At the 1998 annual meeting
of shareholders, the first class of directors was re-elected for a term expiring
at the conclusion of the annual meeting in 2001.
Subject to the rights of the holders of any CNG Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the CNG Board resulting from
death, resignation, retirement, disqualification, removal from office or other
cause may be filled only by a majority vote of the directors then in office,
though less than a quorum, and directors so chosen shall hold office for a term
expiring at the annual meeting of shareholders at which the term of office of
the class to which they have been elected expires, and until such director's
successor shall have been duly elected and qualified. No decrease in the number
of directors constituting the CNG Board shall shorten the term of any incumbent
director.
Subject to the rights of the holders of any CNG Preferred Stock then
outstanding, any directors, or the entire CNG Board, may be removed from office
at any time, but only for cause and only by the affirmative vote of the holders
of a majority of the voting power of all of the then-outstanding shares of
capital stock of CNG entitled to vote generally in the election of directors,
voting together as a single class.
SPECIAL MEETINGS OF SHAREHOLDERS
The CMS Energy Articles of Incorporation and CMS Energy Bylaws provide that
a special meeting of shareholders may be called only by CMS Energy Board and the
Chairman of the CMS Energy Board.
The CNG Bylaws provide that a special meeting of shareholders may be called
only by (i) the President of CNG, (ii) the CNG Board of Directors pursuant to a
resolution adopted by a majority of the whole Board, or (iii) by one or more
shareholders holding at least twenty-five (25%) of the outstanding shares of CNG
entitled to vote at the special meeting.
LIMITATION OF LIABILITY OF DIRECTORS
The CMS Energy Articles of Incorporation provide that a director shall not
be personally liable to CMS Energy or its shareholders for monetary damages for
breach of duty as a director except (i) for a breach of the director's duty of
loyalty to CMS Energy or its shareholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) for a violation of Section 551(1) of the Michigan Business Corporation
Act, and (iv) for any transaction from which the director derived an improper
personal benefit.
The CNG Certificate of Incorporation provides that to the fullest extent
permitted by law, a director of CNG shall not be personally liable to CNG or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
CNG or its shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 1053 of the Oklahoma General Corporation Act, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
Oklahoma General Corporation Act is hereafter amended to further eliminate or
limit the personal liability of directors, then the liability of a director of
CNG shall be eliminated or limited to the fullest extent permitted by the
Oklahoma General Corporation Act, as so amended.
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ACTION BY WRITTEN CONSENT
The CMS Energy Articles of Incorporation and Bylaws do not allow for
shareholder action by written consent.
The CNG Bylaws permit shareholder to adopt any resolution in writing which
is signed by all of the shareholders entitled to vote thereon only if it is
signed by the holders of outstanding shares.
CERTAIN BUSINESS COMBINATIONS
Certain provisions of the MBCA establish a statutory scheme similar to the
supermajority and fair price provisions found in many corporate charters (the
"Fair Price Act"). The Fair Price Act provides that a supermajority vote of 90%
of the shareholders and no less than two-thirds of the votes of noninterested
shareholders must approve a "business combination." The Fair Price Act defines a
"business combination" to encompass any merger, consolidation, share exchange,
sale of assets, stock issue, liquidation, or reclassification of securities
involving an "interested shareholder" or certain "affiliates." An "interested
shareholder" is generally any person who owns 10% or more of the outstanding
voting shares of the corporation. An "affiliate" is a person who directly or
indirectly controls, is controlled by, or is under common control with a
specified person.
The supermajority vote required by the Fair Price Act does not apply to
business combinations that satisfy certain conditions. These conditions include,
among others: (a) the purchase price to be paid for the shares of the
corporation in the business combination must be at least equal to the highest of
either (i) the market value of the shares or (ii) the highest per share price
paid by an interested shareholder within the preceding two-year period or in the
transaction in which the shareholder became an interested shareholder, whichever
is higher; and (b) once becoming an interested shareholder, the person may not
become the beneficial owner of any additional shares of the corporation except
as part of the transaction that resulted in the interested shareholder becoming
an interested shareholder or by virtue of proportionate stock splits or stock
dividends. The requirements of the Fair Price Act do not apply to business
combinations with an interested shareholder that the Corporation's board of
directors has approved or exempted from the requirements of the Fair Price Act
by resolution prior to the time that the interested shareholder first became an
interested shareholder.
The MBCA also regulates the acquisition of "control shares" of large
public Michigan corporations (the "Control Share Act"). The Control Share Act
establishes procedures governing "control share acquisitions." A control share
acquisition is defined as an acquisition of shares by an acquiror which, when
combined with other shares held by that person or entity, would give the
acquiror voting power at or above any of the following thresholds: 20%, 33 %,
and 50%. Under the Control Share Act, an acquiror may not vote "control shares"
unless the corporation's disinterested shareholders (defined to exclude the
acquiring person, officers of the target corporation and directors of the target
corporation who are also employees of the corporation) vote to confer voting
rights on the control shares. The Control Share Act does not affect the voting
rights of shares owned by an acquiring person prior to the control share
acquisition. The Control Share Act entitles corporations to redeem control
shares from the acquiring person under certain circumstances. In other cases,
the Control Share Act confers dissenters' right upon all of a corporation's
shareholders except the acquiring person.
Certain provisions of the Oklahoma Takeover Disclosure Act of 1985 (the
"Disclosure Act") regulate corporate takeovers. The Disclosure Act requires
certain notices to be given prior to making a takeover offer. Such notices
include filing a registration statement with the Securities Administrator of
Oklahoma and delivering a copy of such notice to the target company. The
Disclosure Act applies to offers to takeover an issuer of publicly traded
securities of which at least 20% are held by Oklahoma residents. A "takeover
offer" includes tender offers and requests for tender offers in which, as a
result of the offer: (i) the bidder will own 10% or more of any class of equity
securities or (ii) the offerer's ownership of any class of the target company's
equity securities will be increased by 5% or more.
Section 1090.3 of the OGCA provides, with certain exceptions, that an
Oklahoma corporation may not engage in any of a broad range of "business
combinations" with a person or an affiliate or associate of such person who is
an "Interested Shareholder" for a period of three years from the date that such
person became an Interested Shareholder unless: (a) the transaction, or business
combination, resulting in a person's becoming an Interested Shareholder is
approved by the board of directors of the corporation before the person becomes
an Interested Shareholder, (b) upon consummation of the transaction which
resulted in the person becoming an Interested Shareholder, the Interested
Shareholder owned 85% or more of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding shares owned by persons who are
both officers and directors of the corporation and shares held by certain
employee stock ownership plans) or (c) on or after the date the person became an
Interested Shareholder, the business
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combination is approved by the corporation's board of directors and by the
holders of at least 66 2/3% of the corporation's outstanding voting stock at an
annual or special meeting, excluding shares owned by the Interested Shareholder.
An "Interested Shareholder" is defined as any person that is (a) the owner of
15% or more of the outstanding voting stock of the corporation or (b) an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an Interested Shareholder.
The Oklahoma Shares Control Act ("OSCA") (Section 1145 et seq. of the OGCA)
prohibits the voting of "control shares" without the approval of a majority of
shares held by non-interested shareholders. Under the OSCA, "control shares" are
shares acquired by a person which give the acquiring party voting power at or
above any of the following thresholds: 20%, 33% and 50%. Under the OSCA, an
acquiring party may not vote control shares unless the corporation's
disinterested shareholders (which exclude the acquiring person, officers of the
target company and employees of the target company which are also directors)
vote to confer voting rights with respect to the control shares. The OSCA does
not affect the voting rights of shares owned by an acquiring person prior to the
control share acquisition.
AMENDMENT OF CERTIFICATE OF INCORPORATION
The CMS Energy Articles of Incorporation provide that any amendment,
alteration, change or repeal of such articles with respect to the provisions
relating to (i) special meeting of shareholders, (ii) number and vacancy of
directors, (iii) director removal, liability and indemnification, and (iv)
amendment of the CMS Energy Articles of Incorporation unless such amendment,
alteration, change or repeal is approved by the affirmative vote of the holders
of not less than 75% of the outstanding shares entitled to vote thereon.
Pursuant to Oklahoma law, the CNG Certificate of Incorporation may be
amended by the affirmative vote of the holders of a majority of the outstanding
CNG Common Stock.
DIVIDENDS
Dividends upon CNG Common Stock and CMS Energy Common Stock may be declared
by the Board of Directors of CNG and CMS Energy, respectively, pursuant to the
applicable provisions of Oklahoma and Michigan law. For a discussion of the
provisions of Michigan law and other provisions affecting the payment of
dividends by CMS Energy, see "DESCRIPTION OF CMS ENERGY CAPITAL STOCK -- CMS
Common Stock -- Dividend Rights and Policy; Restrictions on Dividends."
THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement not otherwise described in this Proxy Statement/Prospectus and is
qualified in its entirety by reference to the Merger Agreement which is attached
as Annex A to this Proxy Statement/Prospectus. The Merger Agreement is
incorporated herein by reference. CNG shareholders are urged to read the Merger
Agreement carefully. All capitalized terms not defined below have the meanings
given to them in the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, each of CNG, the Majority Stockholders, CMS Energy
and CMS Merging have made certain customary representations relating to, among
other things, (i) each of their organization and similar corporate matters; (ii)
authorization, execution, delivery, performance, and enforceability of the
Merger Agreement and related matters; (iii) the capital and organizational
structure of each party; (iv) in the case of CNG, documents filed with any
governmental or other regulatory authorities and the accuracy of information
contained therein;(v) in the case of CNG, the validity, payment, and
nonassessability of the outstanding capital stock of CNG; (vi) the accuracy of
information supplied by each party in connection with this Proxy
Statement/Prospectus and the Registration Statement on Form S-4 of which this
Proxy Statement/Prospectus forms a part; (vii) material compliance with
applicable laws; (viii) the absence of material pending or threatened litigation
except as disclosed by the parties prior to the date of the Merger Agreement;
(ix) in the case of CNG, the existence of insurance policies; (x) in the case of
CNG, good and defeasible title to real and personal property subject to
disclosed encumbrances; (xi) in the case of CNG, filing of tax returns and
payment of taxes; (xii) the use of brokers and finders; (xiii) in the case of
CNG, material contracts; (xiv) the absence of any material adverse changes to
the businesses of the parties; (xv) the absence of any material undisclosed
liabilities of the parties; (xvi) in the case
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of CNG, retirement and other employee plans and matters relating to the Employee
Retirement Income Security Act of 1974, as amended; (xvii) in the case of CNG,
certain intellectual property rights; (xviii) in the case of CNG, certain
environmental matters; (xix) disclosures made in the schedules to the Merger
Agreement; and (xx) in the case of CNG, subsidiaries.
Under the Merger Agreement, the Majority Stockholders have agreed to
indemnify and hold CMS Energy and the Surviving Corporation harmless with
respect to the accuracy of certain representations relating to CNG and the
Majority Stockholders. The Majority Stockholders' indemnity agreement
encompasses solely those representations which relate to: (i) organization,
qualification and similar corporate matters; (ii) authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters; (iii) the capital and organizational structure of CNG and its
subsidiaries, and (iv) certain other tax matters relating to CNG. The Majority
Stockholders' indemnity obligations are subject to a deductible of $100,000 and
a cap of $3,100,000. The Majority Stockholders' indemnity obligations survive
closing on the Merger Agreement for a period of one year from and after the
Effective Time (the "Survival Period"). In order to claim a right to
indemnification from the Majority Stockholders, CMS Energy or the Surviving
Corporation must deliver a written claim for indemnification during the Survival
Period. To support the indemnification agreement the Majority Stockholders are
required to place in escrow shares of CMS Common Stock having a value of $3.1
million (such value calculated in accordance with the Merger Agreement). Such
shares are to be released from escrow after expiration of the Survival Period
(assuming claims for indemnification are not then pending).
CONDUCT OF BUSINESS PENDING THE MERGER
In the Merger Agreement, CNG has agreed that during the period from the
date of the Merger Agreement through the Effective Time of the Merger, except as
expressly contemplated by the Merger, CNG will carry on its business in, and
will not enter into, any material transaction other than in, the ordinary course
of business consistent with past practice and, to the extent consistent
therewith, will use its reasonable efforts to preserve intact its current
business organization, to keep available the services of its current officers
and employees and to preserve its relationships with material customers,
material suppliers and others having material business dealings with it (except
with the written consent of CMS Energy and except as contemplated by the
Merger). Without limiting the generality of the foregoing, and except as
expressly contemplated by the Merger Agreement, CNG and its subsidiaries shall
not, without the prior written consent of CMS Energy, which, as to matters
relating to clauses (vii), (viii) or (xii) of this paragraph, CMS Energy agrees
not to unreasonably withhold or delay: (i) (a) declare, set aside or pay any
dividends on, or make any other actual, constructive or deemed distributions in
respect of, any of its capital stock, or otherwise make any payments to the
stockholders in their capacity as such, (b) split, combine or reclassify any of
its capital stock or issue, sell or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (c) purchase, redeem or otherwise acquire any shares of
capital stock of CNG or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities; (ii) issue, deliver,
sell, pledge, dispose of or otherwise encumber any shares of its capital stock
or other securities (including, without limitation, any rights, warrants or
options to acquire any securities); (iii) amend its articles of incorporation or
by-laws; (iv) acquire or agree to acquire, by merging or consolidating with, or
by purchasing a substantial portion of the assets of or equity in, or in any
other manner, any business or any corporation, partnership, association or other
business organization or division thereof; (v) sell, lease, exchange, mortgage,
pledge, transfer or otherwise dispose of, or agree to sell, lease exchange,
mortgage, pledge, transfer or otherwise dispose of, any of its material assets
or any material assets of any of its subsidiaries, except for dispositions of
inventories and of assets in the ordinary course of business and consistent with
past practice; a material asset for this purpose is defined as 10 percent or
more of the book value or market value of CNG's total assets, or contributing 10
percent or more of total annual CNG revenues or earnings, or resulting in a gain
or loss on disposition of 10 percent or more of annual CNG net income; (vi)
incur any indebtedness for borrowed money or guarantee any such indebtedness
material to the business or assets of CNG and its Subsidiaries, taken as a
whole, except in the ordinary course of business consistent with past practice
and except as contemplated thereunder or issue or sell any debt securities or
guarantee any debt securities of others, or make any loans, advances or capital
contributions to, or investments in, any other person, except the incurrence
and/or guarantee of indebtedness to fund working capital; (vii) with respect to
its operations, make or incur any new capital expenditure or capital
expenditures for any single project or related series of projects which are in
excess of $100,000; (viii) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than such payment, discharge or satisfaction in the ordinary
course of business consistent with past practice; (ix) alter through merger,
liquidation, reorganization, restructuring or in any other fashion its corporate
structure; (x) enter into or adopt, or amend, any existing bonus, incentive,
deferred compensation, insurance, medical, hospital, disability or severance
plan, agreement or arrangement or enter into or amend any Plan or material
employment, consulting or management agreement, other than any such amendment to
a Plan that is made to maintain the qualified status of such Plan or its
continued compliance with applicable law and except as contemplated thereunder;
(xi) make any change in accounting practices or policies applied in the
preparation of the financial statements referred to in the Merger Agreement
except as required by GAAP; (xii) except in the ordinary course of business
consistent with past practice,
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knowingly make any material modifications to any material agreements,
understandings, obligations, commitments, indebtedness or other material
obligations or enter into any agreement, understanding, obligation or
commitment, or incur any indebtedness or obligation, of the type that would have
been required to be disclosed in the Merger Agreement if in existence on the
date hereof, provided that no such modifications, agreements or incurrences of
indebtedness shall in any event cause the representations and warranties
contained in the Merger Agreement to be untrue or incorrect in any material
respect; (xiii) pay or commit to pay any bonus to or increase the salary of any
director, officer or employee of CNG other than payment to employees of bonuses
or the increase of salary of employees made in the ordinary course of business;
or (xiv) enter into any other transaction materially affecting the business of
CNG, other than in the ordinary course of business consistent with past practice
or as expressly contemplated by the Merger.
CMS Energy has agreed to use reasonable efforts to satisfy the conditions
to the Merger specified in the Merger Agreement, refrain from other actions that
would or might result in any of its representations and warranties under the
Merger Agreement becoming untrue, except to the extent such actions are required
by any applicable law, regulation, or at the direction of any regulatory
authority, and to refrain from any action that would disqualify the Merger as a
"reorganization" within the meaning of Section 368(a) of the IRC.
CONDITIONS To THE MERGER
Conditions in favor of CMS Energy, CMS Merging and CNG. Each of CMS
Energy's, CMS Merging's and CNG's obligation to effect the Merger shall be
subject to the fulfillment of the conditions specified in the Merger Agreement,
including, without limitation, the following: (i) the Merger Agreement and the
Merger shall have been validly approved by the holders of a majority of the
outstanding CNG Common Stock entitled to vote; (ii) all permits, approvals
(including Notice of Termination and Cessation by FERC with regard to CNG's
Power Marketing Certificate) and consents required to be obtained, and all
waiting periods required to expire, prior to the consummation of the Merger
under applicable federal laws of the United States or applicable laws of any
state having jurisdiction over the transactions contemplated by the Merger shall
have been obtained or expired, as the case may be (all such permits, approvals
and consents and the lapse of all such waiting periods being referred to as the
"Requisite Regulatory Approvals"), without the imposition of any condition which
in the reasonable judgment of the party on which it is imposed is materially
burdensome to such party; (iii) there shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, by any governmental entity which: (a) makes the
consummation of the Merger illegal; (b) requires the divestiture by CMS Energy
or CNG of any material Subsidiary or of a material portion of the business of
CMS Energy or CNG; or (c) imposes any condition upon CMS Energy, CNG or their
subsidiaries which in the judgment of the party on which it is imposed would be
materially burdensome; (iv) the Registration Statement covering the CMS Common
Stock to be issued in the Merger shall become effective under the Securities Act
and no stop order suspending the effectiveness of the Registration Statement
shall have been issued and shall remain in effect. No legal, administrative,
arbitration, investigatory or other proceeding by any governmental entity shall
have been instituted and, at what would otherwise have been the Effective Time,
remain pending by or before any governmental entity to restrain or prohibit the
transactions contemplated hereby; (v) the shares of CMS Common Stock deliverable
pursuant to the Merger Agreement shall have been duly authorized for listing,
subject to notice of issuance, on the NYSE; (vi) CMS Energy and CNG shall have
received an opinion from counsel to CMS Energy dated the Effective Time, subject
to assumptions and exceptions customarily included, and in form and substance
reasonably satisfactory to CMS Energy and CNG to the effect that the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the IRC and that CMS Energy and CNG will each be a
party to that reorganization within the meaning of Section 368(b) of the IRC;
and (vii) CMS Energy and CNG shall receive opinions of their respective counsel
addressed to the parties and dated the date the Registration Statement becomes
effective relating to the Registration Statement and the Proxy Statement and any
amendments and supplements thereto in substantially the forms agreed to by the
parties.
Conditions in favor of CMS Energy. The obligations of CMS Energy to effect
the Merger are subject to the fulfillment of the conditions specified in the
Merger Agreement, including, but not limited to, the following: (i) except as
otherwise provided in any of the other listed conditions in favor of CMS Energy,
(a) the representations and warranties of CNG and the Majority Stockholders
contained in the Merger Agreement shall be true and correct as of the Effective
Date as though made at the Effective Date, except to the extent they expressly
refer to an earlier time and except where the failure to be true, individually
or in the aggregate, would not have or would not be reasonably likely to have, a
Material Adverse Effect (as defined in the Merger Agreement) on CNG and its
subsidiaries taken as a whole or upon the consummation of the transactions
contemplated thereby; (b) CNG and the Majority Stockholders shall have duly
performed and complied with all agreements and covenants required by the Merger
Agreement to be performed or complied with by them prior to or at the Effective
Date, except where the failure to so perform and comply, individually or in the
aggregate, would not have or would not be reasonably likely to have, a Material
Adverse Effect on CNG and its subsidiaries taken as a whole, or upon the
consummation of the transactions contemplated thereby; (c) none of the events or
conditions entitling
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<PAGE> 48
CMS Energy to terminate the Merger Agreement shall have occurred and be
continuing; and (d) CNG shall have delivered to CMS Energy a certificate dated
the Effective Date and signed by its Chief Executive Officer to the effect set
forth in the Merger Agreement; (ii) any consent required for the consummation of
the Merger under any agreement, contract or license to which CNG is a party or
by or under which it is bound or licensed, the withholding of which might have a
Material Adverse Effect on CNG and its subsidiaries taken as a whole or upon the
transactions contemplated by the Merger Agreement, shall have been obtained;
(iii) CMS Energy shall have received the schedules to the Disclosure Schedule
and such schedules shall not reflect any item that was not on such schedules
delivered on the date of execution of the Merger Agreement that would have or
would be reasonably likely to have, a Material Adverse Effect on CNG and its
subsidiaries taken as a whole or upon the consummation of the transactions
contemplated thereby; (iv) between the date of the Merger Agreement and the
Effective Time, no event or circumstances shall have occurred which had a
Material Adverse Effect on CNG and its subsidiaries taken as a whole, and CMS
Energy shall have received a certificate signed on behalf of CNG by the Chief
Executive Officer of CNG to such effect; (v) CMS Energy shall have received from
CNG's transfer agent, letters dated the Effective Time, after customary review
but without audit in form and substance satisfactory to CMS Energy, setting
forth, as of the Business Day immediately prior to the Closing Date (as defined
in the Merger Agreement), the total number of shares of CNG Common Stock
outstanding; (vi) CMS Energy shall have received from counsel to CNG an opinion
as to securities and corporate matters in form and substance customary for
transactions of this nature and reasonably satisfactory to CMS Energy; (vii)
Counsel for CMS Energy shall have approved, in the exercise of counsel's
reasonable discretion, the validity of all transactions therein contemplated, as
well as the form and substance of all opinions, certificates, instruments of
transfer and other documents to be delivered to CMS Energy thereunder or that
are reasonably requested by such counsel; (viii) the sale of the CMS Energy
Common Stock resulting from the Merger shall have been qualified or registered
with the appropriate State securities law or "blue sky" regulatory authorities
of all States in which qualification or registration is required under the State
securities laws, and such qualifications or registrations shall not have been
suspended or revoked; (ix) CNG shall have delivered to CMS Energy not later than
ten days after the date of the Merger Agreement the executed agreements from
CNG's Affiliates pursuant to Rule 145 in the form attached as Exhibit B to the
Merger Agreement; (x) none of CNG or any of its subsidiaries shall be subject to
any order or other agreement with any governmental entity restricting the
conduct of CNG's and its subsidiaries' business, prospects and operations, so as
to have a Material Adverse Effect thereon; (xi) CMS Energy shall have received
from Arthur Andersen LLP, an opinion, dated the date of the Effective Time, in
form and substance satisfactory to CMS Energy, to the effect that the Merger on
the terms and conditions contained in the Merger Agreement will be treated for
accounting purposes as a pooling of interests; provided, that in the event the
pooling opinion referenced therein cannot be issued due to certain actions taken
by CMS Energy and through no fault of CNG, then such opinion shall not be a
condition to CMS Energy's obligations to effect the Merger as contemplated
therein; further provided that in the event CNG and CMS Energy are unable to
cause amendments to the awards under the CNG 1997 Stock Plan or, notwithstanding
such amendment, the pooling opinion cannot be obtained as a consequence of the
terms of or existence of the 1997 Stock Plan, then such opinion shall not be a
condition to CMS Energy's obligations to effect the Merger contemplated therein;
and (xii) CMS Energy shall have received the resignation of each of the
directors of CNG and the directors of each of its subsidiaries.
Conditions in favor of CNG. The obligation of CNG to effect the Merger
shall be subject to the fulfillment of the conditions specified in the Merger
Agreement, including, without limitation, the following: (i) except as otherwise
provided in the Merger Agreement, (a) the representations and warranties of CMS
Energy and CMS Merging contained in the Merger Agreement shall each be true in
all material respects as of the Effective Time as though made at the Effective
Time, except to the extent they expressly refer to an earlier time and except
where the failure to be true, individually or in the aggregate, would not have
or would not be reasonably likely to have, a Material Adverse Effect on CMS
Energy or upon the consummation of the transactions contemplated thereby; (b)
CMS Energy and CMS Merging shall have each duly performed and complied in all
material respects with all agreements and covenants required by the Merger
Agreement to be performed or complied with by it prior to or at the Effective
Time, except where the failure to so perform and comply, individually or in the
aggregate, would not have or would not be reasonably likely to have, a Material
Adverse Effect on CMS Energy or upon the consummation of the transactions
contemplated thereby; (c) none of the events or conditions entitling CNG to
terminate the Merger Agreement shall have occurred and be continuing; and (d)
CMS Energy shall have delivered to CNG a certificate dated the date of the
Effective Time and signed by a duly authorized officer to the effect set forth
in the Merger Agreement; (ii) any consent required for the consummation of the
Merger under any agreement, contract or license to which CMS Energy is a party
or by or under which it is bound or licensed, the withholding of which might
have a Material Adverse Effect on CNG or CMS Energy and its subsidiaries taken
as a whole or the transactions contemplated by the Merger Agreement shall have
been obtained; (iii) counsel for CNG shall have approved, in the exercise of
counsel's reasonable discretion, the validity of all transactions herein
contemplated by the Merger Agreement, as well as the form and substance of all
opinions, certificates, instruments of transfer and other documents to be
delivered to CNG and the Merger Agreement or reasonably requested by such
counsel; (iv) at Closing, CNG shall have received an opinion of CIBC Oppenheimer
Corp. dated the date of the Prospectus/Proxy Statement, to the effect that, as
of such date, the Merger Consideration is fair to CNG's shareholders from a
financial point of view; (v) there shall not have been
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<PAGE> 49
any change in the consolidated financial condition, aggregate net assets,
shareholders' equity, business, or operating results of CMS Energy and its
subsidiaries taken as a whole, from March 31, 1998 to the Effective Time that
results in a Material Adverse Effect as to CMS Energy and its subsidiaries taken
as a whole. CNG shall have received a certificate signed on behalf of CMS Energy
by the President or Chief Executive Officer of CMS Energy to such effect; (vi)
CNG shall have received from the general counsel or assistant general counsel to
CMS Energy an opinion as to securities and corporate matters in form and
substance customary for transactions of this nature and reasonably satisfactory
to CNG; and (vii) the sale of the CNG Common Stock resulting from the Merger
shall have been qualified or registered with the appropriate state securities
law or "blue sky" regulatory authorities of all states in which qualification or
registration is required under the state securities laws, and such
qualifications or registrations shall not have been suspended or revoked.
TERMINATION; TERMINATION FEES
Termination. The Merger Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the shareholders of CNG:
(a) by the mutual consent of CMS Energy and CNG; (b) by CMS Energy upon any
material breach by CNG or any Majority Stockholder of any of the covenants
contained in the Merger Agreement; (c) by CNG upon any material breach by CMS
Energy or CMS Merging of any of the covenants contained in the Merger Agreement;
(d) by CMS Energy if any of the conditions to CMS Energy's obligations specified
in the Merger Agreement have not been met in all material respects or waived by
CMS Energy at such time as such condition can no longer be satisfied; (e) by CNG
if any of the conditions to CNG's obligations specified in the Merger Agreement
have not been met in all material respects or waived by CNG and the Majority
Stockholders, as applicable, at such time as such condition can no longer be
satisfied; (f) by CMS Energy or CNG if the Merger shall not have been
consummated on or before October 31, 1998; provided, that the parties agree to
extend such time period for a reasonable period of time in the event the
Registration Statement did not become effective in a time frame so as to allow
the CNG Shareholders' meeting to occur prior to October 31, 1998; or (g) by CNG
if it shall receive any Acquisition Proposal (as defined the Merger Agreement)
after the date hereof from a third party or parties and the CNG Board shall have
received a written opinion from independent legal counsel to the effect that,
and the CNG Board shall have determined in good faith in the exercise of its
fiduciary duties that, CNG is legally required to pursue such Acquisition
Proposal.
Termination Fees. CNG has agreed that if the Merger Agreement is terminated
pursuant to: (a) the provisions of clause (b) of the immediately preceding
paragraph and (i) such termination is the result of a wilful breach of any
covenant or agreement of CNG contained herein, (ii) CNG shall have had contacts
or entered into negotiations relating to an Acquisition Proposal, in any such
case at any time within the period commencing on the date of the Merger
Agreement through the date of termination of the Merger Agreement, and (iii)
within ten months after the date of termination of the Merger Agreement, and
with respect to any person or group with whom the contacts or negotiations
referred to in clause (ii) of this paragraph have occurred, a Business
Combination (as defined in the Merger Agreement) shall have occurred or CNG
shall have entered into a definitive agreement providing for a Business
Combination; or (b) the provisions of clauses (d) or (e) of the immediately
preceding paragraph because the Merger Agreement and the Merger shall fail to
receive the requisite vote for approval and adoption by the shareholders of CNG
at the CNG shareholders meeting and at the time of such meeting there shall
exist an Acquisition Proposal; or (c) the provisions of clause (g) of the
immediately preceding paragraph and at the time of the withdrawal, modification
or change (or resolution to do so) of its recommendation by the CNG Board, there
shall exist an Acquisition Proposal; then CNG shall pay to CMS Energy an amount
equal to $3 Million which amount is inclusive of all of CMS Energy's acquisition
expenses, and is CMS Energy's sole and exclusive remedy as against CNG for
termination.
EXPENSES
Except as otherwise provided in the Merger Agreement, each of the parties
to the Merger shall bear its own costs and expenses (including, without
limitation, fees and disbursements of its counsel, accountants and other
financial, legal, accounting or other advisors), incurred by it or its
affiliates in connection with the preparation, negotiation, execution, delivery
and performance of the Merger Agreement and each of the other documents and
instruments executed in connection with or contemplated thereby, and the
consummation of the transactions contemplated thereby.
RESALES BY AFFILIATES
Pursuant to the terms of the Merger Agreement, certain persons believed by
CNG to be "affiliates" (as defined in Rule 144 of the Securities Act) of CNG
have entered into an "Affiliate's Agreement." The Affiliate's Agreement
generally provides that affiliates of
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CNG may not sell or otherwise dispose of (a) any shares of CNG Common Stock
currently owned by them or any shares of CMS Energy Common Stock received
pursuant to the Merger, for a period beginning not less than thirty days prior
to the consummation of the Merger and ending on the date that CMS Energy
publishes financial results covering a period of at least thirty days of
combined operations of CNG and CMS Energy following the consummation of the
Merger (except that such affiliates may exchange their shares of CNG Common
Stock for shares of CMS Energy Common Stock in the Merger and may make bona fide
gifts or distributions without consideration), or (b) any shares of CMS Energy
Common Stock received pursuant to the Merger or any securities that may be
distributed with respect thereto or issued in exchange or substitution therefor
(collectively, the "Restricted Securities"), or any option, right or other
interest with respect to any Restricted Securities, unless such sale or other
disposition is effected (i) pursuant to an exemption from the registration
requirements of the Securities Act, (ii) in conformity with the volume and other
limitations of Rule 145 of the Securities Act, or (iii) pursuant to an effective
registration statement under the Securities Act (except that such affiliates may
make bona fide gifts and distributions without consideration). Notwithstanding
the foregoing, affiliates may make bona fide gifts of such shares of CMS Energy
Common Stock so long as the recipients thereof agree not to sell or otherwise
dispose of the CMS Energy Common Stock except as provided in the Affiliate's
Agreement. Notwithstanding the foregoing, affiliates may pledge such shares of
CMS Energy Common Stock to secure loans, so long as the lender accepts such
pledge subject to the terms of the Merger Agreement.
AMENDMENT AND WAIVER
Subject to applicable law, the Merger Agreement may be amended by action
taken by or on behalf of CMS Energy, CMS Merging and CNG at any time before or
after approval by the shareholders of CNG but, after such shareholder approval,
no amendment shall reduce the Merger Consideration or materially and adversely
affect the rights of the CNG shareholders under the Merger Agreement without
required shareholder approval.
ADDITIONAL INFORMATION WITH RESPECT TO CNG
CNG, an Oklahoma corporation incorporated in 1983, is an independent
mid-stream energy company engaged in the purchasing, gathering, treating,
processing and marketing of natural gas and natural gas liquids ("NGL(s)"). CNG,
through its direct and indirect subsidiaries, owns and operates approximately
2,000 miles of natural gas gathering pipelines and interests in six natural gas
processing plants located in Texas and Oklahoma. CNG's gathering lines have a
combined throughput capacity of 550 MMcf/d, while CNG's processing plants have a
combined NGL production capacity of 1,400 Mgal/d. CNG provides services to
natural gas producers in the area of its gathering systems and plants by (i)
connecting the producers' wells to CNG's gathering systems, (ii) treating the
producers' natural gas to ensure that it meets pipeline specifications, (iii)
transporting the natural gas from the wellhead to CNG's processing plants where
NGLs are extracted from the natural gas stream and (iv) providing access for the
natural gas and NGLs to various markets in the United States. CNG markets
off-system gas, as well as on-system gas, to utilities, end-users, other
marketers and pipeline affiliates. On June 30, 1998, CNG and its subsidiaries
had consolidated assets of $187 million and common shareholders' equity of $43
million.
Through 1990, CNG's activities were primarily limited to marketing
off-system gas. Concurrent with the evolving deregulation of the natural gas
industry, CNG began to acquire natural gas gathering systems and processing
plants to complement its marketing business. Since 1990, CNG has completed
approximately $124 million of acquisitions and system expansion projects. During
1997, CNG's average gathering throughput was 113 MMcf/d and average processing
plant throughput was 140 MMcf/d, compared to 1996 when CNG's average gathering
throughput was 79 MMcf/d and average processing plant throughput was 129 MMcf/d.
CNG's NGL production for 1997 averaged 349 Mgal/d, compared to 1996 NGL
production averaging 264 Mgal/d. Over the three years ended December 31, 1997,
CNG's daily natural gas throughput has increased 102%. CNG's operating income
plus depreciation, depletion and amortization ("EBITDA") was $5.4 million, $9.5
million and $7.7 million for the years ended 1995, 1996 and 1997 respectively.
At the beginning of 1997, CNG's principal assets were located in the
panhandle areas of Oklahoma and Texas, which is a major natural gas producing
area with significant long-lived natural gas reserves. These assets consisted
of: (i) a natural gas processing plant located in Beaver Creek, Oklahoma (the
"Beaver Plant") and the related gas gathering system (the "Beaver Gathering
System"), (ii) the Mocane Plant and (iii) approximately 800 miles of gas
gathering lines located throughout the Texas panhandle (the "Texas Gathering
Assets"). Consistent with its business strategy to make investments which
complement its existing operations and to expand into new strategic areas,
during 1997 and the first half of 1998 CNG completed approximately $63 million
in acquisitions and capital expansions. These acquisitions included purchase and
upgrade of a gas processing plant located in Ochiltree County, Texas (the
"Spearman Plant"), purchase of approximately a 67% interest in a gas gathering
plant located in Harper County, Oklahoma (the "Laverne Plant"), and purchase of
Taurus Energy Corp. with assets consisting of 761 miles of gathering systems and
two processing
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plants located in north central Texas ("Taurus"). The acquisition of the Beaver
Gathering System and added a new geographic area to CNG's gathering and
processing operations. Thus far in 1998, CNG has acquired interests in four
additional gathering systems located principally in southeastern Oklahoma. CNG's
interest in one of these systems (the Sycamore gas gathering system) was
subsequently sold in the second quarter of 1998.
Although CNG's principal growth in recent years has been derived from its
gathering and processing operations, CNG's sale of off-system gas, which does
not enter its gathering or processing facilities, remains a significant portion
of its business. In 1997, revenue from the sale of off-system gas accounted for
approximately 61% of CNG's total operating revenue. This off-system gas was
purchased from over 70 producers and transported through 18 interstate and
intrastate pipelines during 1997.
BUSINESS STRATEGY
CNG's business strategy has been to achieve sustainable growth in cash flow
and earnings by (i) acquiring and constructing natural gas gathering systems and
processing plants, (ii) improving the profitability of CNG's existing systems
and plants and (iii) expanding its energy marketing services.
Expansion of Facilities. CNG seeks to acquire or make investments in
projects that complement its existing systems or allow it to expand into new
strategic areas and provide enhanced marketing opportunities. These investments
typically include natural gas gathering, processing, treating or fractionation
assets. In implementing this strategy, CNG has completed approximately $124
million of acquisitions and systems expansion projects since 1990.
Set forth below is a summary of the Company's significant acquisitions and
construction projects:
<TABLE>
<CAPTION>
YEAR ACQUIRED COST
OR PLACED (IN
NAME TYPE INTO SERVICES MILLIONS)
---- ---- -------------- ---------
<S> <C> <C> <C>
Beaver-Harper System Acquisition 1997 $ 2.4
Taurus Energy Corp. Acquisition 1997 42.0
Spearman Upgrade Construction 1997 1.4
Spearman Plant Acquisition 1997 1.0
Laverne Plant (1) Acquisition 1997 4.3
Occidental Petroleum Well
Connection Construction 1996 1.8
Texas Gathering Assets (2) Acquisition 1996 20.2
Beaver-to-Mocane as
Pipeline Interconnection Construction 1995 3.9
Mocane Fractionator Construction 1995 1.7
Mocane Processing Plant Acquisition 1995 3.5
Beaver/ANR Pipeline Interconnection Construction 1994 1.8
Carlsbad Cryogenic Plant (3) Construction 1992 5.8
Addition to Beaver System Acquisition 1992 1.0
Beaver Cryogenic Plant Construction 1992 4.9
Beaver Gathering System and
Processing Plant Acquisition/Construction 1990 1.2
</TABLE>
(1) This acquisition was accomplished through a series of purchases from
various owners in the Laverne Plant. In December 1997, CNG owned an
approximate 56% interest in the Laverne Plant, a natural gas processing
plant located in Harper County, Oklahoma. In the second quarter of 1998,
CNG acquired an additional 10% interest in the Laverne Plant (see "--
Recent Developments").
(2) This acquisition was accomplished in three separate transactions.
(3) CNG sold the Carlsbad System, which includes the Carlsbad Cryogenic Plant,
in 1994.
Improving Profitability of Existing Facilities. CNG seeks to maximize the
profitability of its operations by (i) increasing natural gas throughput and
processing levels, (ii) investing in assets that enhance product value and (iii)
controlling operating and overhead
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expenses. As part of this overall strategy, CNG has recently announced the
consolidation of its operations (with resulting cost savings) at the Mocane
Plant, a natural gas processing plant located in Beaver County, Oklahoma, with
those at other CNG plants located in the Oklahoma panhandle. In order to
maintain or increase natural gas throughput and processing volumes, CNG obtains
additional natural gas supplies for its facilities by connecting new wells to
CNG's existing operations and entering into contractual natural gas supply
arrangements with producers or other gatherers.
Expanding Energy Marketing Services and Sales Volumes. CNG is a marketer of
natural gas and NGLs. CNG plans to expand its energy marketing activities by
continuing to offer creative, flexible contract terms that satisfy the
objectives of producers at the wellhead and purchasers in the marketing of
natural gas. By offering flexible contract terms and using a portfolio approach
to marketing natural gas, CNG seeks to increase its on-system gas and NGL
volumes. CNG also seeks to increase its off-system marketing.
CNG also markets NGLs produced at its plants to wholesalers and end-users.
CNG's NGL marketing strategy is to increase sales to end-users and to expand its
NGL marketing operations into the purchase and sale of third-party NGLs.
RECENT DEVELOPMENTS
Gothic Acquisition. On January 23, 1998, CNG entered into a binding
agreement with Gothic Energy Corporation to acquire interests in four natural
gas gathering systems and Senior Redeemable Preferred Stock, Series A of Gothic.
The purchase price under the agreement is $12 million, which included $6 million
of Gothic's Senior Redeemable Preferred Stock, Series A. Gothic is traded on the
NASDAQ under the symbol "GOTH."
In January 1998, CNG closed on its purchase of an interest in one of
Gothic's gathering systems. In this transaction, CNG purchased all of the issued
and outstanding stock of Gothic Gas Corporation which indirectly owns an
undivided 55.23% interest in the Sycamore gathering system. The Sycamore
gathering system was subsequently sold in the second quarter of 1998 for a gain
of approximately $7.5 million. In March 1998, CNG acquired interests in the
three remaining gathering systems -- being an undivided 1/3 interest in the
Choctaw Thrust gathering system, all interest in the Panola gathering system and
all interest in the Northeast Wilburton gathering system. Together the Gothic
Systems are comprised of approximately 80 miles of pipeline and collect natural
gas from approximately 90 wells and redeliver such natural gas into various
interstate and intrastate pipelines. In connection with the acquisition of the
Gothic systems, CNG and Gothic entered into various natural gas purchase
arrangements.
During the second quarter of 1998, CNG acquired approximately an additional
ten percent (10%) interest in the Laverne Plant.
NATURAL GAS, NGL AND ELECTRICITY MARKETING
Natural Gas Marketing. During the year ended December 31, 1997, CNG
delivered natural gas to approximately 150 customers in 12 states. In 1997, CNG
delivered an average of approximately 289 MMcf/d and had natural gas sales
revenues of approximately $290 million. This compares to an average daily volume
in 1996 of 224 MMcf/d and natural gas sales revenues of approximately $209
million.
NGL Marketing. During 1997 CNG hired a liquids marketer to manage marketing
of the NGLs produced at CNG's plants. As a result of these marketing efforts,
the number of customers for CNG's NGLs increased from two at the beginning of
1997 to approximately 30 as of December 31, 1997. Management believes that the
increase in CNG's NGL customer base has greatly enhanced marketing flexibility
for the sale of NGLs and has increased the sales price which CNG receives for
its NGLs. During 1997, CNG sold an average of approximately 387 Mgal/d of NGLs
and had NGL sales revenues of approximately $46 million for the year. This
compares to an average daily volume in 1996 of 265 Mgal/d and NGL sales revenues
of approximately $35 million.
Electricity Marketing. In October 1997, CNG hired an electricity marketer
with the intent of developing the infrastructure necessary to engage in the
wholesale and retail trading of electricity. As a condition to the Merger, CNG
has agreed to cease electricity marketing activities and abandon its Power
Marketing Certificate previously issued by the FERC.
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DESCRIPTION OF THE BUSINESS
Gathering and Processing. CNG's natural gas gathering and processing
activities include contracting to purchase natural gas supplies, operating and
maintaining a system of gathering pipelines that connect these natural gas
supplies to transport lines or natural gas processing plants and operating and
maintaining processing plants linked to its gathering systems.
Purchasing. In 1997, CNG purchased natural gas from over 200 suppliers,
ranging from major producers to small independent companies. With the
acquisition of Taurus, CNG expanded its purchasing activities to north central
Texas. CNG's natural gas throughput in its gathering systems and processing
plants is generally supplied by producers pursuant to long-term contracts (i.e.,
contracts in excess of one year). In arranging new purchase contracts, CNG
submits to the producer an offer to purchase the natural gas from the
prospective acreage. The producer typically evaluates various offers based upon
the purchase price and other contract provisions, line pressure, the time period
required for well connection and the gathering company's reputation for service
and reliable marketing. CNG believes that its flexibility in negotiating
contract terms, prompt connection of wells, reliable performance under its
contracts and strong overall relationships with producers provide it with an
important competitive advantage in the acquisition of new natural gas supplies.
The terms of CNG's natural gas purchase contracts are determined based upon
negotiations with producers, competition and the desire to maximize the value to
be realized from its gathering and processing systems. CNG purchases a majority
of its on-system gas supplies pursuant to long-term contracts that require
producers to dedicate all natural gas produced from designated properties. The
pricing of these producer contracts is generally not fixed, however, and follows
the market price.
CNG's on-system gas contracts with producers may be classified as (i)
processing contracts, (ii) purchase contracts or (iii) gathering contracts. On
average in 1997, CNG contracted approximately 15% of its natural gas volumes
pursuant to processing contracts, approximately 50% pursuant to purchase
contracts (sometimes with processing included) and approximately 35% under
gathering contracts (sometimes with processing included).
Under processing contracts, CNG agrees to process the raw natural gas from
the wells on behalf of the producers and to allocate the NGLs recovered and the
residue natural gas to each well connected to its gathering systems. CNG retains
a percentage of the value of the NGLs extracted net of plant fuel and NGL
shrinkage. The producer bears a share of the cost of NGL extraction in return
for a share of NGL revenue. CNG's processing contracts are typically of two
types -- "keep whole" contracts and "percentage of proceeds" contracts. Under a
"keep whole" arrangement, CNG must reimburse the producer for fuel and
shrinkage. Under a percentage of proceeds contract, the processor does not
reimburse the producer for fuel and shrinkage. From the processor's share of
proceeds, it is obligated to pay its operating costs for its plants and
gathering systems. CNG's processing contracts in the Oklahoma and Texas
panhandle area are typically on a "keep whole" basis, while CNG's arrangements
with respect to the Taurus acquisition are typically "percentage of proceeds"
contracts.
Under a purchase contract, CNG generally pays for natural gas received at
the wellhead or at some other delivery point. CNG then usually resells the
natural gas and NGLs after processing the natural gas for its own account at its
processing facilities. CNG derives a gross margin equal to the difference
between sale proceeds of both the NGLs and the residue natural gas and the cost
of the natural gas purchased at the wellhead.
In (i) gas purchase, (ii) gathering contracts with processing and (iii)
keep-whole processing contracts, operating margins are enhanced by maximizing
the value of the NGLs extracted from the natural gas stream and minimizing the
operating costs (including the cost of natural gas) which CNG incurs during
processing and gathering. Margins under these contracts can be affected by
decreases or increases in NGL prices or increases or decreases in natural gas
prices.
Gathering. Under gathering contracts, CNG typically gathers natural gas on
behalf of a producer from various wellheads for redelivery to specific pipeline
interconnection or redelivery points. The producer is charged a gathering fee
plus a fuel charge for such gathering services. Generally, the producer will pay
CNG a discounted gathering fee in exchange for CNG retaining some or all of the
extracted NGLs.
Natural gas from CNG's Texas Gathering Assets, natural gas gathering assets
located in the panhandle of Texas and Oklahoma which were acquired by CNG from
Enron subsidiaries, is transported to CNG's processing plants located in the
Oklahoma and Texas panhandle area through interstate pipelines, primarily
Northern Natural Gas Pipeline ("NNG") and Transwestern Pipeline ("TW").
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Approximately 65% of the natural gas transported by NNG and TW for CNG is
subject to firm transportation agreements which obligate the pipelines to give
priority to the transportation of CNG's natural gas. The Beaver Gathering System
delivers on-system gas to CNG's Beaver Plant and the Hamlin and Shackelford
Gathering Systems deliver on-system gas to CNG's Hamlin and Shackelford Plants,
respectively. In addition, natural gas may be transported to CNG's processing
plants through interruptible transportation agreements with pipelines and
third-party natural gas gatherers. Interruptible transportation agreements
require the pipelines to deliver natural gas on a "first-come, first-served"
basis after satisfaction of commitments under firm transportation agreements.
Processing. CNG owns interests in and operates six natural gas processing
plants. These processing plants complement CNG's gathering operations by
enabling CNG to offer to its producers the option of wellhead purchase or
processing contracts. The sale of NGLs contributes to the overall earnings of
CNG because of the added value from NGL extraction. In addition, natural gas
processing complements and diversifies the earnings derived from natural gas
sales. CNG's processing plants at present have excess capacity which, if
increased natural gas supplies can be obtained, can be utilized to increase CNG
revenues with a minimal increase in operating costs. Management of CNG will
attempt to obtain the natural gas supplies necessary to utilize such excess
capacity and benefit by the resultant efficiency.
CNG's processing plants extract NGLs and remove water vapor, solids and
other contaminants contained in the natural gas stream. Each of these plants is
capable of recovering substantially all isobutane, normal butane and natural
gasoline components from the natural gas stream. Propane and ethane are CNG's
two primary NGL products.
Beaver Plant. The Beaver Plant was built in 1961. When acquired by CNG in
1990, the Beaver Plant consisted of a 40 MMcf/d design capacity refrigeration
plant, capable of extracting approximately 40% of the propane, nearly all of the
butane and gasoline, and virtually none of the ethane from the inlet natural gas
stream. Average throughput was less than 10 MMcf/d prior to CNG's acquisition of
the facility. In 1992, CNG purchased and relocated a 65 MMcf/d cryogenic
processing plant to the Beaver Plant.
The added facility chills natural gas to -155 degrees Fahrenheit and
separates the natural gas from the NGLs condensed at the low temperatures. The
Beaver cryogenic processing plant currently recovers 95% of the propane, 80% of
the ethane and nearly 100% of the heavier butane and natural gasoline from the
natural gas stream.
The design of the Beaver Plant allows for relatively fuel-efficient,
low-pollution extraction of a high volume of NGLs from natural gas. The combined
cryogenic and refrigeration facilities have a processing capacity of 105 MMcf/d
of inlet natural gas and 215 Mgal/d of extracted NGLs. The Beaver Plant's
average throughput for 1997 was 70 MMcf/d yielding 200 Mgal/d of NGLs. The
Beaver Plant and gathering system have over 24,000 horsepower of gathering and
processing compression capability. The cryogenic facilities typically run at
full capacity while the refrigeration unit is typically idle.
The NGLs produced consist of a mixture (commonly known as "Y-Grade") of
ethane, propane, isobutane, normal butane and natural gasoline. The Y-Grade
mixture is delivered into an NGL pipeline operated by an affiliate of Koch
Industries, Inc. which is connected to the Beaver Plant.
Mocane Plant. The Mocane Plant was built in 1959, was partially updated in
1985 and was acquired by CNG in early 1995. The Mocane Plant is located about 13
miles northwest of the Beaver Plant. The Mocane Plant has a demonstrated inlet
natural gas capacity of 200 MMcf/d and is designed to extract up to 280 Mgal/d
of NGLs. The Mocane Plant's average throughput for March 1997 was 65 MMcf/d,
yielding 101 Mgal/d of NGLs. As a result of CNG's current cost-savings efforts,
the Mocane Plant is currently idle.
The Mocane Plant uses refrigeration and lean oil absorption processes to
extract NGLs. Propane recovery is approximately 85% and ethane recovery is
approximately 25% with nearly 100% of the heavier butane and natural gasoline
being recovered. The Mocane Plant has over 7,500 horsepower of compression used
in the NGL extraction process.
At times when the Mocane Plant is operational, NGLs produced at the Mocane
Plant may be sold and delivered to NGL pipelines operated by affiliates of Koch
Industries, Inc. and Mapco, Inc. Alternatively, CNG may fractionate the NGLs
into the various components at its on-site fractionation facility and deliver
these NGLs to purchasers via truck racks. The Mocane Plant has fractionation
capacity of 281 Mgal/d. The Mocane facility can produce propane, isobutane,
normal butane, natural gasoline and a mixture of ethane and propane.
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Spearman Plant. The Spearman Plant, a natural gas processing plant, located
in Ochiltree County, Texas, was built in 1959 and acquired by CNG in July 1997.
The current maximum throughput of the Spearman Plant is estimated to be
approximately 40 MMcf/d utilizing a refrigerated lean- oil absorption process,
producing approximately 68 Mgal/d of NGLs. Although the Spearman Plant is
currently idle, during the period October through December, 1997, CNG processed
approximately 39 MMcf/d at the Spearman Plant and recovered approximately 62
Mgal/d of NGLs.
At the Spearman Plant, propane recovery is approximately 70% with nearly
100% of the heavier butane and natural gasoline being recovered. The Spearman
Plant does not recover ethane. The Spearman Plant has over 900 horsepower of
compression used in the NGL extraction process. Y-Grade produced at the Spearman
Plant is sold and delivered in an NGL pipeline operated by an affiliate of Koch
Industries, Inc.
Laverne Plant. The Laverne Plant consists of a 200 MMcf/d cryogenic gas
processing facility, complete with liquid fractionation capability and
above-ground storage. The plant is located in Harper County, Oklahoma,
approximately twenty-one (21) miles east of the Beaver Plant. During the period
August through December 1997, the Laverne Plant processed approximately 51
MMcf/d and recovered approximately 108 Mgal/d of NGLs.
The Laverne Plant is a cryogenic gas processing facility complete with
liquid fractionation capability and above-ground storage. Propane recovery is
approximately 95% and ethane recovery is approximately 60% under current
conditions (the plant is capable of recovering 85% ethane at optimum conditions)
with nearly 100% of the heavier butane and natural gasoline being recovered. The
Laverne Plant has over 12,400 horsepower of compression used in the NGL
extraction process.
Y-Grade produced at the Laverne Plant may be sold and delivered to an NGL
pipeline operated by an affiliate of Koch Industries, Inc. Alternatively, CNG
may fractionate the NGLs into the various components at the on-site
fractionation facility and deliver these NGLs to purchasers via truck racks. The
Laverne Plant has fractionation capacity of 540 Mgal/d. The Laverne
fractionation facility can produce propane, isobutane, normal butane, natural
gasoline and a mixture of ethane and propane.
Shackelford and Hamlin Plants. The Shackelford Plant is a 30 MMcf/d
capacity refrigerated lean oil absorption plant located near Putnam, Texas. The
Hamlin Plant has a capacity of 20 MMcf/d utilizing a propane refrigeration plant
and a cryogenic plant and is located near Hamlin, Texas. Together the
Shackelford and Hamlin Plants are capable of extracting 290 Mgal/d of NGLs.
At the Shackelford Plant propane recovery is approximately 85% and ethane
recovery is approximately 20% with nearly 100% of the heavier butane and natural
gasoline being recovered. The Shackelford Plant has over 340 horsepower of
compression used in the NGL extraction process. At the Hamlin Plant, propane
recovery is approximately 98%, ethane recovery is approximately 85% with nearly
100% recovery of the heavier butanes and natural gasoline. The Hamlin Plant has
over 1,500 horsepower of compression used in the NGL extraction process.
Y-Grade produced at the Hamlin Plant is sold and delivered to an NGL
pipeline operated by an affiliate of Mobil Oil Corporation. Y-Grade produced at
the Shackelford Plant is sold and delivered to an NGL pipeline operated by an
affiliate of Koch Industries, Inc.
SALES AND MARKETING
Natural Gas Marketing. CNG markets natural gas to local distribution
companies ("LDCs"), marketing affiliates of pipeline companies, electric
utilities, various business and industrial end-users and other natural gas
marketers. A portion of the natural gas which CNG markets is produced in the
Oklahoma and Texas panhandle area and is transported from CNG's plants through
pipeline interconnections with ANR Pipeline Company ("ANR"), Williams Natural
Gas Company ("WNG"), NNG and Colorado Interstate Gas Company ("CIG"). Additional
volumes of natural gas which CNG markets are produced at the Hamlin and
Shackelford Plants and are sold at the outlet of such Plants. The Hamlin Plant
interconnects with Lone Star Pipeline and Transok, L.L.C.'s Palo Duro System.
The Shackelford Plant interconnects with Loan Star Pipeline and a pipeline
operated by Valero. In addition, CNG purchases and resells off-system gas on
numerous pipeline systems.
During the year ended December 31, 1997, CNG delivered natural gas to
approximately 150 customers located in 12 states. In 1997, CNG delivered an
average of approximately 289 MMcf/d and had natural gas sales revenues of
approximately $290 million. No
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one customer accounted for more than 10% of total natural gas sales revenues
during 1997. During 1997 and 1996, CNG experienced average daily natural gas
sales of 224 MMcf/d and 165 MMcf/d, respectively. Sales growth in 1996 and 1997
has resulted largely from CNG's hiring of four additional marketing
representatives during the period of May 1, 1996 to the present.
CNG sells natural gas under sales agreements which may be classified by (i)
the duration of the contract, (ii) pricing terms and (iii) the nature of the
delivery obligations. "Term" contracts have a duration in excess of one month,
"spot" contracts have a duration of one month or less and "peaking" contracts
apply during short periods of high demand. CNG sells natural gas at "fixed"
prices or at "index" prices which vary on a month-to-month basis with market
conditions. Under "baseload" contracts CNG is required (subject to extremely
limited exceptions) to deliver a specific volume of natural gas, while under
"best efforts" contracts delivery obligations may be suspended at the option of
CNG or the purchaser. Due to varying market conditions, the "mix" of CNG's sales
agreements vary substantially from time to time.
Transportation. CNG arranges for transportation of the natural gas it
markets from the supplier's point of receipt to the sales customer's delivery
point. To facilitate the transportation of its natural gas CNG must schedule,
nominate and monitor transportation availability on a continual basis. CNG
believes that its knowledge of the pipeline network within its market area is an
important element in its success as a natural gas marketer. This allows CNG to
provide its suppliers with multiple outlets for their natural gas and, in times
of changes in demand or supply due to weather or other factors, to route natural
gas to areas where higher sales prices may be achieved. In an effort to improve
profit margins, CNG attempts to reduce transportation charges by taking
advantage of its broad array of transportation arrangements and by negotiating
Capacity Release, storage and competitive transportation discounts.
CNG transports natural gas on interstate pipelines under interruptible and
firm transportation agreements. Under interruptible transportation agreements, a
pipeline is usually obligated to transport on a non-discriminatory basis up to a
specified maximum quantity of natural gas, subject to available capacity. In
return, CNG pays a transportation fee based on the quantity of natural gas
actually transported. An interruptible transportation agreement may provide the
customer with priority over other interruptible shippers based on the rate paid
and subject to the availability of capacity not utilized by parties shipping
under firm transportation agreements.
As of December 31, 1997, CNG had over 150 interruptible transportation
contracts. The majority of off-system gas purchased and sold by CNG is
transported under interruptible transportation arrangements.
Under firm transportation agreements, a pipeline is obligated to transport
up to a specified maximum quantity of natural gas without interruption, except
upon the occurrence of a force majeure event. Certain of CNG's customers,
including LDCs and electric utilities, and some of CNG's long-term supply
contracts require dependable transportation services provided under firm
transportation agreements. Some customers who purchase natural gas from CNG
transport such natural gas under their own transportation arrangements, while
other customers require or allow CNG to arrange for such transportation services
on their behalf.
Under contractual arrangements with pipelines, CNG is required to balance
its deliveries and receipts from each pipeline on a monthly or daily basis. The
pipelines are authorized to impose "imbalance penalties" in the event that CNG's
deliveries or receipts from any pipeline are not balanced on a monthly or daily
basis. These penalties are typically quite severe. In addition, CNG may be
required to purchase or sell natural gas at unacceptable prices in the event it
has not accurately balanced its deliveries or receipts from the pipeline (i.e.
it must purchase natural gas to make up deficient volumes or sell natural gas to
reduce excess volumes).
Due to regulatory changes resulting from Order 636 of the FERC, the
availability of firm transportation has increased, while the availability of
interruptible transportation on certain pipelines has decreased. In particular,
Order 636 permits current holders of pipeline firm transportation rights,
generally LDCs and large end-users, either to enter into Capacity Releases (firm
transportation which one has acquired by purchase or assignment from another
party on a particular pipeline) of dedicated capacity with replacement shippers
or to turn that capacity back to the pipeline to be posted on an electronic
bulletin board for sale. Typically, LDCs sell Capacity Release during periods of
low demand and compete with released capacity by other LDCs or the pipeline's
unsubscribed capacity. As a result, CNG is often able to purchase Capacity
Release at a discount from posted rates.
NGL Marketing. CNG presently sells NGLs primarily to wholesale markets with
some sales in the local retail market. In 1997, CNG hired an NGL marketer with
the intent of realizing higher margins on NGLs through increased sales to the
retail market and increasing the marketing of third-party NGLs. Generally,
prices for NGLs tend not to vary directly with natural gas prices, but more
closely follow the prices of crude oil derivatives. Processing margins increase
when natural gas prices are lower in relation to NGL
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prices. CNG had NGL sales of approximately $46 million in 1997 on NGL average
volumes of 387 Mgal/d compared to NGL sales of approximately $37 million in 1996
on NGL average volumes of 265 Mgal/d.
NGLs are typically used as petrochemical feedstocks, petroleum refinery
blendstocks or fuel. Petrochemical plants use ethane, propane, butane and
natural gasoline in the production of ethylene, which is used in the manufacture
of plastics, building materials, automobile antifreeze and other products.
Refineries use normal butane and isobutane as motor fuel additives. Propane has
agricultural applications and is used as fuel for household consumption,
vehicles and industrial heaters and boilers.
As feedstock, demand for NGLs is influenced by the demand for the end
products in which they are used. Also, the demand for normal butane and
isobutane, which are important feedstocks for the production of the oxygenate,
methyl tertiary butyl ether ("MTBE"), is expected to increase as demand for MTBE
increases in gasoline production. The required use of oxygenates in motor
gasoline under the Clean Air Act Amendments of 1990 in many parts of the United
States is expected to increase demand for MTBE. Seasonal requirements of
purchasers using NGLs as a fuel source also affect demand. NGL production is
dependent upon the supply and NGL content of domestic natural gas. The market
price of NGLs relative to natural gas affects the volume of natural gas
processed and the NGLs extracted from the natural gas. Certain NGLs are produced
outside North America and imported by ship, which may from time to time affect
NGL prices.
Risk Management Activities. CNG uses risk management tools to reduce
commodity price risk for (i) purchases of natural gas to replace fuel and
shrinkage in connection with processing operations and (ii) its NGL and natural
gas sales. With respect to fuel and shrinkage for processing operations CNG
examines the prevailing price environment on an ongoing basis to determine if
opportunities exist to lock-in prices for replacement natural gas at levels
acceptable to CNG. CNG's management is responsible for monitoring the price
environment for replacement natural gas and makes any decisions necessary to
implement CNG's hedging strategies.
CNG employs several procedures to manage its risk with respect to the
purchases and sales of natural gas. CNG's principal strategy is to balance
purchases and sales of natural gas on a daily and monthly basis. This means on
any given day or in any given month CNG has commitments to purchase and sell
approximately the same volume of natural gas. This strategy is accomplished
through active management and monitoring of natural gas supply and sales through
CNG's natural gas marketing department.
A second strategy employed by CNG to manage risk is to enter into contracts
for the "back-to-back" purchase and sale of natural gas. Under this strategy,
CNG enters into natural gas purchase contracts and natural gas sales contracts
for a corresponding volume of natural gas. CNG thereby locks in its profit and
also locks in a supply of natural gas in order to assure performance under the
applicable sales contract.
Finally, CNG enters into other hedging transactions with respect to its
fixed price purchases and sales of natural gas, which constitute less than 10%
of its total purchases and sales. These transactions include futures contracts,
swaps and basis agreements and other arrangements common in the financial
markets. CNG consistently has hedging positions to cover substantially all of
its purchases and sales under fixed price agreements.
CNG generally does not use hedging transactions for speculative purposes.
CNG has, however, on certain occasions taken open positions on carefully
selected arbitrage opportunities. While these occasions have been relatively few
and are carefully reviewed by CNG's management, CNG believes that the
competitive information it obtains from its energy marketing activities allows
it to take advantage of certain opportunities in the market. CNG's management
oversees all hedging activity of CNG. A daily book on all positions is
maintained and daily and monthly reports are given to management. See Note 15 to
the CNG Financial Statements included herein.
In addition to the risk associated with price movements, credit risk is
also inherent in CNG's risk management activities. Credit risk relates to the
risk of loss resulting from the nonperformance of a counterparty of its
contractual obligations. CNG maintains credit policies with regard to
counterparties that CNG believes significantly minimize overall credit risk.
These policies include the thorough review of potential counterparties'
financial condition, collateral requirements under certain circumstances,
monitoring of net exposure to each counterparty and the use of standardized
agreements which allow for the netting of positive and negative exposures
associated with each counterparty.
Electric Power Marketing. CNG formed Continental Energy Services, L.L.C.
("CES") in 1996 to pursue electric power marketing opportunities that are being
created as the domestic electric power industry becomes increasingly deregulated
pursuant to the Energy
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Policy Act of 1992 and certain actions taken by the FERC (including
implementation of wholesale open access under Order 888) and public utility
commissions in various states. As a condition to the Merger, CNG intends to
relinquish the Power Marketing Certificate which was issued by FERC in December
1996.
OPERATIONAL RISKS AND INSURANCE
CNG's operations are subject to potential hazards incident to the
gathering, processing, separation and storage of natural gas and NGLs, such as
explosions, product spills, leaks, emissions and fires. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, and pollution or other environmental damage, and may result in
curtailment or suspension of operations at the affected facility.
CNG maintains general public liability, property and business interruption
insurance in amounts that it considers to be adequate for such risks. Such
insurance is subject to deductibles that CNG considers reasonable and not
excessive. Consistent with CNG's proactive approach to risk management, CNG's
pollution liability policies not only provide protection for sudden and
accidental occurrences, but also, subject to the policy terms and conditions,
provide protection for gradual pollution incidents occurring over time.
The occurrence of a significant event for which CNG is not fully insured or
indemnified, and/or the failure of a party to meet its indemnification
obligations, could materially and adversely affect CNG's operations and
financial condition. Moreover, no assurance can be given that CNG will be able
to maintain adequate insurance in the future at rates it considers reasonable.
To date, however, CNG has maintained adequate coverage at reasonable rates and
has experienced no material uninsured losses.
COMPETITION
CNG faces intense competition in obtaining natural gas supplies for its
gathering and processing operations and in marketing its products and services.
Principal competitors include marketing affiliates of interstate pipeline
companies, national and local natural gas gatherers and marketers of varying
sizes, financial resources and experience. Many of CNG's competitors have
capital resources and control supplies of natural gas substantially greater than
those of CNG.
CNG competes against other companies in the natural gas processing business
both for supplies of natural gas and for customers to which it sells its
products. Competition for natural gas supplies is based primarily on price,
location of natural gas gathering facilities and gas processing plants, line
pressures, operating efficiency, reliability and quality producer relationships.
Competition for sales customers is based primarily on price, delivery
capabilities, reliability, price flexibility and maintenance of quality customer
relationships.
CNG's fractionation business competes against other fractionation
facilities that serve local markets. Competitive factors affecting its
fractionation business include proximity to customers, quality of NGL products,
price, efficiency and reliability of service.
In marketing its products and services, CNG has numerous competitors,
including marketing affiliates of major interstate pipelines, major natural gas
producers, and local and national gatherers and marketers of widely varying
sizes, financial resources and experience. Marketing competition is primarily
based upon reliability, transportation, flexibility and price.
GOVERNMENTAL REGULATION
Currently, federal, state and local regulations do not materially affect
the purchase and sale of natural gas and the fees received for gathering and
processing by CNG. Therefore, except as constrained by competitive factors and
contracts, CNG has considerable pricing flexibility. However, federal, state and
local laws and regulations, directly or indirectly, govern some aspects of the
operations of CNG. These laws and regulations may in the future have a
significant impact upon CNG's overall operations.
In 1992, the FERC issued Order 636 which generally opens access to
interstate pipelines by requiring the operators of such pipelines to unbundle
their transportation services from sales services and allow customers to choose
and pay for only the services they require, regardless of whether the customer
purchases natural gas from such pipeline or from other suppliers. Order 636 also
requires upstream pipelines to permit downstream pipelines to assign upstream
capacity to their suppliers, and places analogous, unbundled requirements on the
downstream pipelines. This mandated access to interstate pipelines was and is of
vital importance to CNG's off-
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system gas business and to the delivery of natural gas from the Texas Gathering
Assets to its processing plants in Oklahoma. A change in such regulation could
adversely affect these portions of CNG's business.
The FERC retains jurisdiction over the interstate transportation of natural
gas and of liquid hydrocarbons, such as NGLs and product streams derived
therefrom. The gathering and processing of natural gas for the removal of
liquids currently is not viewed by the FERC as an activity subject to its
jurisdiction. If a processing plant's primary function is extraction of NGLs and
not natural gas transportation, the FERC has traditionally maintained that the
plant is not a facility for transportation or sale for resale of natural gas in
interstate commerce and, therefore, is not subject to jurisdiction under the
Natural Gas Act of 1938 (the "NGA").
The NGA exempts natural gas gathering facilities from the jurisdiction of
the FERC. Interstate transmission facilities, on the other hand, remain subject
to the FERC jurisdiction. The FERC has historically distinguished between these
two types of facilities on a fact- specific basis. CNG believes that its
gathering facilities and operations meet the current tests that the FERC uses to
determine a nonjurisdictional gathering facility status. While certain recent
cases have applied these tests in a manner supporting CNG's view that the FERC
lacks jurisdiction over its gathering facilities, these cases are, however,
still subject to rehearing and appeal. In addition, the FERC's articulation and
application of the tests used to distinguish between jurisdictional pipelines
and nonjurisdictional gathering facilities have varied over time. While CNG
believes the current definitions create nonjurisdictional status for CNG's
gathering facilities, no assurance can be given that such facilities will remain
classified as natural gas gathering facilities and the possibility exists that
the rates, terms, and conditions of the services rendered by those facilities,
and the construction and operation of the facilities, will be subject to
regulation by the FERC.
Two complaints were filed with the FERC in which parties alleged that the
FERC should regulate the rates and operations of certain aspects of CNG's
business (GPM Gas Corporation v. Continental Natural Gas, Inc., Docket No.
C96-495-000; Plant Owners v. Continental Natural Gas, Inc., Docket No.
CP96-577-000). The persons initiating these proceedings alleged that the use of
the CNG's facilities to receive natural gas from, and deliver natural gas to,
interstate pipelines renders those facilities subject to FERC's jurisdiction. On
September 12, 1997, the FERC issued an Order Denying the Complaint filed by GPM.
On the same day the FERC issued an Order on the Complaint filed by the Plant
Owners. The second Order issued by FERC determined that an eleven mile section
of pipeline (the "Residue Line") from Registrant's Beaver Plant to an
interconnection with an interstate pipeline operated by ANR Pipeline Company is
subject to FERC jurisdiction. The second Order also indicated that the FERC
would exempt the Residue Line from the FERC's reporting and rate-making
regulations.
On December 1, 1997, CNG filed its Application for Section 7 Certificate
and blanket certificate under the Natural Gas Act (the "NGA"). In its
application, CNG requested a waiver of filing and rate-making requirements under
the NGA. On April 22, 1998, the Federal Energy Regulatory Commission entered its
Order Issuing Certificates as requested in CNG's application. On April 30, 1998,
CNG formally accepted the requested certificates. In its Order Issuing
Certificates the FERC exempted CNG from certain filing requirements (including
the requirement to file tariff sheets) in connection with the Residue Line so
long as CNG transports natural gas solely on its own behalf. CNG must seek
additional approval from the FERC and will be subject to additional filing and
rate-making requirements in the event CNG transports gas on behalf of third
parties.
Traditionally, the FERC has regulated the rates for gathering service
performed by interstate pipelines and their affiliates. In 1995, the FERC held
that interstate pipeline affiliates that performed gathering services could have
their rates and services deregulated. In addition, the FERC established a
two-year default (i.e., transition) period during which the new owners of
gathering facilities formerly owned by interstate pipelines would have to
provide service at the same rates and on the same terms and conditions as was
provided by the pipelines. As a result, many interstate pipelines have
transferred their facilities to gathering affiliates or sold them to
third-parties. On August 2, 1996, the United States Court of Appeals for the
District of Columbia Circuit upheld the FERC's decision to deregulate gathering
but voided the two year default period. As a result, there could be numerous
additional unregulated gathering companies. Certain of those gathering companies
may compete with CNG. Notwithstanding the decision of the D.C. Circuit, many
owners of facilities acquired from interstate pipelines have committed to
continue providing service at the same rates and on the same terms and
conditions during the default period. At the expiration of these default
periods, it is possible that the cost of gathering service paid by CNG could
increase substantially. In addition, CNG (as a shipper on these systems) could
be placed at a competitive disadvantage vis-a-vis the owner of the gathering
facilities in acquiring natural gas and NGLs. It should be noted that the Texas
Gathering Assets were freed of the FERC-mandated rate controls when their
associated default period expired at the end of 1997. As competition permits,
CNG intends to increase the rates which it charges for gathering services with
respect to the Texas Gathering Assets. Moreover, CNG does not believe that it
will be affected by any action taken by the FERC with respect to gathering
materially differently than any other producers, gatherers, processors or
marketers with which it competes.
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Construction of some of CNG's gathering pipelines are subject to federal
safety standards promulgated by the Department of Transportation ("DOT") under
applicable federal pipeline safety legislation (including the "Pipeline Safety
Act") as supplemented by various state safety statutes and regulations. In
addition, certain of CNG's pipeline operations are subject to DOT reporting
requirements. To CNG's belief only the ANR Residue Line and a short segment of
pipeline associated with the Shackelford Gathering System are subject to DOT
construction standards and reporting requirements. Nonetheless, CNG constructs
all of its gathering lines in compliance with DOT construction standards.
CNG is required by the DOT to conduct drug tests in connection with the
operation of DOT-regulated facilities. Although not required, CNG currently
conducts drug tests of all field personnel in compliance with DOT standards.
Certain activities of CNG could be subject to regulation by the Texas
Railroad Commission ("RRC") pursuant to its jurisdiction over common purchasers
and natural gas utilities or its jurisdiction over the transportation and
gathering of natural gas. CNG is a "common purchaser" under Texas law. It is not
presently registered as a "gas utility" though no assurance can be given that it
will not at some future time be required to register as such.
Although the RRC does not regulate the activities of CNG at this time, the
RRC has authority to regulate the volumes of natural gas purchased by common
purchasers and the rates charged for the intrastate transportation, gathering
and sale of natural gas by gas utilities in Texas. Under the Gas Utility
Regulatory Act and other Texas statutes, the RRC has the duty to ensure that
rates for the transportation, gathering and sale of natural gas are just and
reasonable and gas utilities are prohibited from charging rates that are
unreasonably preferential, prejudicial or discriminatory. CNG believes that its
activities are in compliance with applicable laws and regulations.
CNG's Oklahoma operations are subject to regulation by the State of
Oklahoma. The majority of these regulations are administered by the Oklahoma
Corporation Commission ("OCC"). Any entity engaged in the business of carrying
or transporting natural gas by pipeline is declared to be a common carrier under
Oklahoma law and is prohibited from any unjust or unlawful discrimination in the
carriage, transportation or delivery of natural gas. Although Oklahoma law may
be sufficiently broad to permit the OCC to set rates and terms of service for
the transportation and delivery of natural gas involving CNG's Oklahoma assets,
the OCC has not done so to date. There can be no assurance that the OCC will not
do so in the future. Recent Oklahoma legislation prohibits entities which gather
natural gas for hire from charging any fee which is unjustly or unlawfully
discriminatory. CNG does not expect this legislation to have any significant
impact on CNG's operations.
An entity carrying or transporting natural gas by pipeline which is engaged
in the business of purchasing natural gas is declared to be a common purchaser
under Oklahoma law and is required to purchase without discrimination in favor
of persons or price all natural gas in the vicinity of its lines. Ratable
purchase is required if a purchaser is unable to purchase all natural gas
offered. To date, such legislation has not had any significant effect on CNG's
Oklahoma operations.
The OCC and the RRC regulate the amount of natural gas which producers can
sell or deliver to CNG. Currently, substantially all natural gas received by CNG
in its Oklahoma and Texas operations is produced from wells for which the OCC or
RRC establish allowable rates. To date, CNG has not experienced any material
reductions in available supplies due to these regulations. Nevertheless, future
regulations could materially affect CNG's ability to purchase natural gas
supplies.
The Federal Power Act regulates the transmission of electric power in
interstate commerce and sales of electric power for resale. The FERC asserts
jurisdiction over such sales, but allows electric power marketers such as
Continental Energy Services, L.L.C. ("CES") to make wholesale sales at
market-based rates. Pursuant to the terms of the Merger Agreement, CES has
agreed to abandon its Power Marketing Certificate issued by the FERC in
December, 1996.
ENVIRONMENTAL MATTERS
CNG is subject to environmental risks normally incident to the operation
and construction of gathering lines, pipelines, plants and other facilities for
gathering, processing, treatment, storing and transporting natural gas and other
products. These environmental risks include uncontrollable flows of natural gas,
fluids and other substances into the environment, explosions, fires, pollution
and other environmental and safety risks. The following is a discussion of
certain environmental and safety concerns related to CNG. It is not intended to
constitute a complete discussion of the various federal, state and local
statutes, rules, regulations, or orders to which CNG's operations may be
subject. For example, CNG, without regard to fault, could incur liability under
the Comprehensive Environmental
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<PAGE> 61
Response, Compensation, and Liability Act of 1980, as amended (also known as the
"Superfund" law), or state counterparts, in connection with the disposal or
other releases of hazardous substances and for damage to natural resources.
Further, the recent trend in environmental legislation and regulations is toward
stricter standards, and this will likely continue in the future.
CNG's activities in connection with the operation and construction of
gathering lines, pipelines, plants, storage caverns, and other facilities for
gathering, processing, treatment, storing and transporting natural gas and other
products are subject to environmental and safety regulation by federal and state
authorities, including, without limitation, the state environmental agencies and
the EPA, which can increase the costs of designing, installing and operating
such facilities. In most instances, the regulatory requirements relate to the
discharge of substances into the environment and include measures to control
water and air pollution.
Environmental laws and regulations may require the acquisition of a permit
or other authorization before certain activities may be conducted by CNG. These
laws also include fines and penalties for non-compliance. Further, these laws
and regulations may limit or prohibit activities on certain lands lying within
wilderness areas, wetlands, areas providing habitat for certain species or other
protected areas. CNG is also subject to other federal, state, and local laws
covering the handling, storage or discharge of materials used by CNG, or
otherwise relating to protection of the environment, safety and health. CNG
believes that it is in material compliance with all applicable environmental
laws and regulations. CNG periodically conducts environmental assessments of its
assets and is not aware of any material environmental problems requiring
remediation. Because the requirements imposed by environmental laws and
regulations frequently change, CNG is unable to predict the ultimate costs of
compliance with such requirements or whether the incurrence of such costs would
have a material adverse effect on the operations of CNG.
In March 1992, an environmental site assessment of the Laverne Plant
indicated the presence of hydrocarbon contaminated groundwater underlying a
portion of the plant site. Under the direction of the Oklahoma Corporation
Commission in Cause No. PD-920024760 and based on the results of a pilot
remediation project, a plan has been developed to remediate the site utilizing a
biofiltration process to be installed at an estimated cost of $1 million. Based
on CNG's recent acquisition of additional interests in the Laverne Plant, CNG's
share of this total cost is expected to be approximately $250,000.
EMPLOYEES
As of December 31, 1997, CNG had 150 employees. Of these, 96 employees are
located in the field (72 of such employees provide general operational and
maintenance activities in the panhandle region of Oklahoma and Texas and 24 of
such employees provide general operational and maintenance activities in north
central Texas), while the balance are located at CNG's executive offices in
Tulsa, Oklahoma, and are engaged in gas marketing activities, plant supervision
or accounting and administration. CNG considers its relations with employees to
be excellent.
PROPERTIES
Gathering Systems and Processing Plants. As of December 31, 1997, CNG had
approximately 2,000 miles of natural gas gathering pipelines, interest in six
natural gas processing plants, each of which has extraction equipment and two of
which have fractionation equipment and 102 compressor units located at 60 field
stations and its six plant sites.
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<PAGE> 62
The following table provides information concerning CNG's natural gas
processing plants and gathering systems:
<TABLE>
<CAPTION>
Acquired or Average Natural Average
placed into Gas Throughout NGL Production
service as of DESIGN -------------- --------------
June 30, CAPACITY 1997 1996 1997 1996
------------- --------
1998 MMCF/D MMCF/D MMCF/D MGAL/D MGAL/D
---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PROCESSING PLANTS
Beaver Plant 1990 105 70 65 180 158
Mocane Plant 1995 200 65 64 101 106
........
Spearman Plant 1997 40(1) 30 N/A 51(1) N/A
........
Laverne Plant(2) 1997 220(3) 51 N/A 108(3) N/A
........
Shackelford Plant 1997 30(4) 114 N/A 37(4) N/A
........
Hamlin Plant 1997 20(4) 74 N/A 61(4) N/A
........
GATHERING SYSTEMS
Beaver-Mocane
Gathering 1990 195 25 25 N/A N/A
........
Texas Gathering
Assets 1996 188 88 54 N/A N/A
Shackelford System 1997 50 11 N/A N/A N/A
........
Hamlin System 1997 30 7.3 N/A N/A N/A
Vintage System 1997 16 6 N/A N/A N/A
........
Choctaw Thrust
System 1998 -- N/A N/A N/A N/A
(5).............
Northeast Wilburton
System........ 1998 -- N/A N/A N/A N/A
Panola System......... 1998 -- N/A N/A N/A N/A
</TABLE>
- ----------
(1) The Mocane Plant is currently idle.
(2) For the period October through December, 1997.
(3) CNG owns approximately an undivided 67% interest in the Laverne Plant. CNG
serves as operator of the Laverne Plant.
(4) For the period August through December, 1997.
(5) CNG acquired Taurus at the end of November 1997. Volumes are for the month
of December 1997.
(6) CNG owns an undivided 1/3 interest in the Choctaw System. CNG serves as
operator of the Choctaw system.
CNG owns approximately 43 acres of land at its Beaver Plant site,
approximately 40 acres at its Mocane Plant site, approximately 30 acres at its
Spearman Plant site, approximately 10 acres at its Shackelford Plant site and
approximately 8 acres at its Hamlin Plant site. Approximately 50 acres are held
in connection with operation at the Laverne Plant. While this real property is
necessary in order to operate CNG's plants, it does not contribute significantly
to the value of CNG.
CNG's gas processing plants are fed directly by a network of low and
intermediate pressure steel and polypipe gas gathering pipelines. The Beaver
Gathering System consists of approximately 300 miles of pipelines connecting
over 100 wells for ultimate delivery to CNG's Beaver and Mocane Plants.
Approximately 30% of the Beaver and Mocane Plants' current throughput originates
from the Beaver Gathering System. CNG's Texas Gathering Assets extend for
approximately 800 miles across the northern Texas Panhandle providing
substantial gathering exposure along the western edge of the Anadarko Basin,
south of its existing processing plants in the Panhandle Area. Approximately 500
wells are connected to the Texas Gathering Assets for redelivery to the
interstate pipelines of either NNG or TW. The Texas Gathering Assets, which are
steel pipelines, operate at low pressures.
CNG installed two pipelines connecting the Mocane Plant to the Beaver Plant
in 1995. These pipelines allow CNG to optimize processing capacity utilization
by shifting raw and processed natural gas between the Beaver and Mocane Plants.
As part of an overall effort to save operating costs, CNG has suspended
operations at the Mocane Plant and transports all such natural gas for
processing at the Beaver Plant. In addition, CNG has constructed approximately
27 miles of residue interconnect line, connecting the Beaver Plant to the ANR,
WNG and CIG interstate pipelines, thus expanding the markets for CNG's on-system
gas.
CNG's operations in the Oklahoma and Texas panhandle area consist of the
Beaver, Mocane, Laverne and Spearman Plants, natural gas gathering systems,
compression equipment, NGL storage, fractionation and truck terminal facilities
(the Mocane and Spearman Plants are currently idle). CNG believes that this area
has favorable production, supply and market access characteristics.
CNG's operation in North Central Texas consist of the Shackelford Plant and
Gathering System and the Hamlin Plant and Gathering System. The Shackelford
Gathering System consists of approximately 250 miles of gathering lines
connecting approximately 250 wells for ultimate delivery to the Shackelford
Plant. The Hamlin Gathering System collects natural gas from approximately 450
wells utilizing 500 miles of pipelines -- gas collected on the Hamlin Gathering
System is delivered to the Hamlin Plant for processing.
Compression and Storage Facilities. In connection with the operation of its
gathering systems, CNG operates 102 compressor units located at 60 field
stations and six plant sites with approximately 63,000 horsepower of natural gas
compression. Compressors are used to boost natural gas produced and gathered at
low field pressure to higher pipeline pressures. Approximately 31% of CNG's
compression capacity is leased under various capital lease agreements. Under
such capital lease agreements, CNG makes approximately $1.8 million per year in
payments. The terms under such capital leases range from 1998 to 2003 at which
time CNG
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<PAGE> 63
has an option to purchase (generally at a nominal price) the leased equipment.
CNG continues to enter into capital lease agreements for compression and other
natural gas processing equipment. Under its credit facility, CNG is permitted to
incur capital lease obligations which require annual payments of up to $3
million per year.
Corporate Offices. CNG leases its Tulsa, Oklahoma headquarters under a
commercial office lease covering approximately 28,832 square feet, expiring in
September 2002. The annual rental payments are approximately $313,589. CNG also
has a local marketing office in Houston, Texas and a local operations office in
Dallas, Texas.
LEGAL PROCEEDINGS
On May 31, 1998, CNG was served with a summons in a lawsuit initiated by
Aurora National Gas, L.L.C. and filed in Dallas, Texas (Aurora Natural Gas
L.L.C. v. Continental Natural Gas, Inc. and Gary C. Adams, Case No. DV-98-3831,
District Court of Dallas County, Texas, 68th Judicial District). CNG has removed
the case to federal court in Dallas, Texas and has filed pleadings in federal
court to (i) dismiss Gary C. Adams as a defendant and (ii) transfer the case to
federal court in Tulsa, Oklahoma. Aurora has filed a motion in federal court to
remand the case to state court. CNG does not know whether any of these motions
will be granted.
Aurora's lawsuit is based on a gas purchase contract which CNG entered into
with Gothic on January 23, 1998. Aurora alleges that it had a prior contract
with Gothic and that CNG "tortiously interfered" with Aurora's contract. This
lawsuit is in the early stages of discovery it is not possible to fully evaluate
Aurora's claims. After consultation with CNG's trial counsel, management
believes that CNG will prevail on the claims made by Aurora and intends to
vigorously defend this lawsuit--accordingly, the outcome of this lawsuit is not
likely to have a material effect on the financial condition, results of
operations or prospects of CNG. However, CNG cannot guarantee an outcome
favorable to CNG.
CNG is at various times a party to additional claims and involved in
various other litigation and administrative proceedings arising in the normal
course of business. CNG believes it is unlikely that the final outcome of any of
the claims, litigation or proceedings discussed above to which CNG is a party
would have a material adverse effect on CNG's financial position or results of
operations; however, due to the inherent uncertainty of litigation, CNG cannot
give assurance regarding the effect on CNG of an adverse resolution of any
particular claim or proceeding.
MANAGEMENT OF CNG
The current officers and directors of CNG and their ages as of August 31,
1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------- --- --------
<S> <C> <C>
Gary C. Adams 47 Chairman, President, Chief Executive
Officer and Director(1)
Scott C. Longmore 38 Vice President of Marketing and
Director
Terry K. Spencer 38 Vice President of Marketing and
Director
Garry D. Smith 41 Vice President, Controller and
Director(2)
William W. Pritchard 47 Director(1)(2)
William H. Bauch 36 Director(1)(2)
</TABLE>
- -----------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
GARY C. ADAMS has been CNG's Chairman of the Board since his founding of
CNG in 1983. In 1994 he assumed the role of Chief Executive Officer, and in
March 1997, was elected President. Mr. Adams is also Chairman of Adams
Affiliates, which is engaged in different segments of the oil and gas industry.
Most of Mr. Adams' 25-year career has been spent in the oil and gas industry.
Prior to his association with Adams Affiliates, Mr. Adams served as Executive
Vice President of OKC Corporation, then a New York Stock Exchange listed
company, where he was responsible for its oil and gas operations. Mr. Adams
graduated from the
56
<PAGE> 64
University of Kansas in 1973 with a Bachelor of Science degree in Business
Administration. Mr. Adams is the son of the late K.S. "Boots" Adams, former
Chairman of Phillips Petroleum Company.
SCOTT C. LONGMORE has been Vice President of Marketing of CNG since 1988
and was elected to the Board of Directors of CNG in March 1997. His primary
responsibilities are to supervise the acquisition of markets, supplies and
storage, the transportation of natural gas and risk management activities. Prior
to joining CNG in 1987, Mr. Longmore was employed with Cabot Energy Marketing
Corporation, where he served as a gas marketing and supply representative. Mr.
Longmore has 12 years of experience in the natural gas marketing business. Prior
to Cabot, he was an independent petroleum landman in Oklahoma. Mr. Longmore
graduated from the University of Oklahoma in 1982 with a Bachelor of Business
Administration degree in Petroleum Land Management.
GARRY D. SMITH has been Vice President and Controller of CNG since 1990 and
was elected to the Board of Directors of CNG in March 1997. He is responsible
for managing the financial and accounting functions of CNG. Prior to joining CNG
in 1988, Mr. Smith served in various capacities at Mustang Fuel Corporation,
including management of the financial and oil and gas revenue accounting
functions. He received his Bachelor of Science degree in Accounting from Central
Oklahoma State University in 1979, and his Masters of Business from the
University of Oklahoma in 1987. Mr. Smith is a Certified Public Accountant and a
Certified Management Accountant.
TERRY K. SPENCER has been Vice President of Operations of CNG since 1991
and was elected to the Board of Directors of CNG in March 1997. He is
responsible for the management of pipeline and plant operations, engineering
design and construction, new project development, reservoir engineering and
economic evaluation. Prior to joining CNG in 1989, Mr. Spencer served as Manager
of Project Development for Stellar Gas Company and held various
engineering-related positions in Delhi Gas Pipeline Corporation. Mr. Spencer
earned his Bachelor of Science degree in Petroleum Engineering from the
University of Alabama in 1981.
WILLIAM W. PRITCHARD became a member of the Board of Directors of CNG and
the Compensation and Audit Committees of the Board on August 6, 1997. Mr.
Pritchard has more than 21 years of experience in the domestic and international
oil and gas industry. Beginning in 1976, Mr. Pritchard assumed various
managerial positions with Parker Drilling Company, a New York Stock Exchange
company, serving its domestic and international operations, and in 1984 he
became Vice President and General Counsel with Parker Drilling, positions he
held until he concluded his tenure at Parker in 1996. Mr. Pritchard became Of
Counsel to the law firm of Hall, Estill, Hardwick, Gable, Golden & Nelson P.C.
("Hall, Estill") in 1996 and his corporate practice focuses on acquisitions,
contracts, securities law and other legal matters related to the oil and gas
industry. Mr. Pritchard received a Bachelor of Arts from the University of
Kansas and a Juris Doctorate from the University of Tulsa.
WILLIAM H. BAUCH became a member of the Board of Directors of CNG and the
Compensation and Audit Committees on August 6, 1997. Mr. Bauch has been Managing
Director in the corporate finance department of CIBC Oppenheimer (previously
Senior Vice President with Oppenheimer & Co., Inc. which was subsequently
acquired by CIBC Corp.) since 1996. Prior to that, he was a Vice President in
the investment banking department of Prudential Securities Incorporated from
1994 to 1996, a Vice President with Jefferies & Company, Inc. from 1993 to 1994
and a Vice President with Howard, Weil, Labouisse & Friedrichs from 1991 to
1993. He holds a Bachelors of Accountancy and Juris Doctorate degrees from the
University of Mississippi and a Masters of Law degree from the New York
University School of Law.
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for
fiscal years 1995, 1996 and 1997 awarded to or earned by (i) the individual who
served as CNG's Chief Executive Officer ("CEO") in fiscal year 1997; and (ii)
CNG's three most highly compensated executive officers, other than the CEO, who
were serving as executive officers for fiscal year 1997. CNG had no other
executive officers for fiscal year 1997:
57
<PAGE> 65
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
# OF SHARES
ANNUAL COMPENSATION(1) UNDERLYING
--------------------------------------------------
STOCK
NAME AND PRINCIPAL OTHER ANNUAL OPTION ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(4)GRANTED COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Gary C. Adams 1997 --- --- --- (1) --- $ 150,000(2)
Chief Executive 1996 --- --- --- (1) --- $ 150,000(2)
Officer 1995 --- --- --- (1) --- $ 150,000(2)
Scott C. Longmore 1997 $127,203 $ 73,949 --- --- ---
President of 1996 $ 97,500 $152,842 $16,800(3) 68,000 ---
Marketing 1995 $ 94,845 $146,266 --- --- ---
Garry D. Smith 1997 $131,488 $ 12,151 --- --- ---
Vice President 1996 $104,195 $ 80,293 $12,600(3) 68,000 ---
And Controller 1995 $101,773 $ 14,871 --- --- ---
Terry K. Spencer 1997 $127,203 $ 12,151 --- --- ---
Vice President 1996 $ 94,500 $ 80,293 $12,600(3) --- ---
Of Operations 1995 $100,733 $ 93,625 --- --- ---
</TABLE>
(1) CNG was charged a fee of $137,000 and $210,000 for management services in
1995 and 1996, respectively, by Adams Affiliates, Inc., an affiliate of the
named person. CNG was charged a fee of $240,000 for management services in
1997 by Adams Affiliates, Inc., an affiliate of the named person.
(2) The amounts shown represent the premiums paid by CNG under a split dollar
life insurance policy. Under this policy, CNG pays the premiums for life
insurance issued to the named person. Repayment of the premiums is secured
by the death benefit or the cash surrender value of the policy, if any, if
the named person cancels and surrenders the policy.
(3) Represents the difference between the fair market value of Common Stock
purchased by the named person in 1996 and the amount paid for such Common
Stock.
(4) No disclosure regarding items included in this column is required unless
the amount in any year exceeds the lesser of $50,000 or 10% of the total
annual salary and bonus reported for any such executive officer.
Employment and Consulting Agreements. CNG is a party to employment
agreements with Terry K. Spencer, Scott C. Longmore and Garry D. Smith. The
employment agreements will continue in effect until December 31, 1999, subject
to customary termination provisions. The employment agreements provide annual
salary payments to each of such executive officers in the amount of $150,000,
subject to annual CPI adjustment, and for annual bonuses based upon CNG
exceeding designated annual income levels. In addition, Mr. Longmore's
employment agreement provides for the payment of annual commissions based upon
gross margins of natural gas sales.
CNG and Adams Affiliates, Inc. are parties to a Consulting Agreement dated
as of April 1, 1997, under which Adams Affiliates, Inc. has agreed to provide
consulting services to CNG in return for payments of $20,000 per month ($240,000
per year). It is anticipated that such consulting services will be provided
primarily by Gary C. Adams as an agent of Adams Affiliates, Inc. The Consulting
Agreement had a term which expired on March 31, 1998, subject to automatic one
month renewals thereafter until terminated by one of the parties. Mr. Adams is
an affiliate of Adams Affiliates, Inc.
CNG believes that its Employment and Consulting Agreements entered into
with or on behalf of its executive officers provide compensation to its
executive officers which is consistent with the compensation paid by other
companies in the industry which of a comparable size to CNG and in consideration
of such officers responsibilities and duties.
No options or stock appreciation rights ("SARs") were granted to any of the
executive officers of CNG in 1997.
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<PAGE> 66
AGGREGATE OPTION/EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR OPTION/VALUES
The following table provides information with respect to the executive
officers concerning the exercise of options during the last fiscal year ending
December 31, 1997, and unexercised options held as of December 31, 1997. No
options were exercised by any such executive officer in 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
OPTIONS/SARS AT FISCAL YEAR-END(#) SARS AT FISCAL YEAR-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C>
Gary C. Adams 0/0 $0/$0
Scott C. Longmore 0/68,000 $0/$713,320 (1)
Garry D. Smith 0/68,000 $0/$713,320 (1)
Terry K. Spencer 0/68,000 $0/$713,320 (1)
</TABLE>
(1) Based on closing price of $10.75 at December 31, 1997, and an exercise
price of $0.26/share. All options issued under CNG's 1996 Incentive Stock
Option Plan.
1996 Incentive Stock Option Plan. Effective as of February 28, 1996, CNG
adopted the 1996 Incentive Stock Option Plan (the "1996 Stock Plan"), and
granted options under the plan to acquire a total of 204,000 shares of common
stock to Terry K. Spencer, Garry D. Smith and Scott C. Longmore. The 1996 Stock
Plan is intended to comply with Section 422 of the Internal Revenue Code of
1986, as amended. Each incentive stock option ("ISO") granted entitled the
optionee to purchase up to 68,000 shares of common stock at an exercise price of
$0.26 per share, which the Board of Directors determined to represent the fair
market value of the common stock on the grant date. The exercise of each ISO is
conditioned upon CNG achieving certain specified financial performance goals for
each of calendar years 1997, 1998 and 1999, and the optionee may not in any
event exercise ISOs to acquire common stock having a fair market value in excess
of $150,000 for any one calendar year. The ISOs shall expire on the earlier of
ninety days after termination of the optionee's employment agreement or February
28, 2006.
No more ISOs may be issued under the 1996 Stock Plan. As a result of CNG's
financial performance, no ISOs issued under the 1996 Stock Plan are currently
exercisable. Pursuant to the Merger Agreement, all options outstanding under the
1996 Stock Plan will be exchanged for shares of CMS Energy Common Stock
equivalent to the fair value of such options at the Effective Time.
1997 Stock Plan. The purpose of the Continental Natural Gas, Inc. 1997
Stock Plan (the "1997 Stock Plan") is to promote the overall financial
objectives of CNG and its shareholders by motivating those person selected to
participate in the 1997 Stock Plan to achieve long-term growth in shareholder
equity in CNG and by retaining the association of those individuals who are
instrumental in achieving this growth. Executive officers, key employees and
non-employee directors, as well as such other employees or consultants as the
Board of Directors selects, are eligible recipients of awards under the 1997
Stock Plan. The maximum number of shares authorized to be issued under the 1997
Stock Plan is 600,000 shares of Common Stock.
The 1997 Stock Plan is administered by the Board of Directors of CNG. The
Board of Directors is authorized to determine plan participants, the types and
amounts of awards to be granted and the terms, conditions and provisions of
awards, prescribe forms of award agreements, interpret the 1997 Stock Plan,
establish, amend and rescind rules and regulations relating to the 1997 Stock
Plan and make all other determinations which may be necessary or advisable for
the administration of the 1997 Stock Plan. In 1998 CNG filed a Registration
Statement on Form S-8 with respect to options to be granted to its employees for
250,000 shares of common stock of CNG. Following such registration, the Board of
Directors of CNG granted non-qualified stock options to purchase 207,210 shares
of CNG's common stock at an average exercise price of $7.47/share. No options
have been granted to CNG's executive officers under the 1997 Stock Plan.
The 1997 Stock Plan permits the granting of any or all of the following
types of awards: (a) stock options, (b) stock appreciation rights ("SARs") and
(c) restricted stock. Generally, awards under the 1997 Stock Plan are granted
for no consideration other than prior and future services. Awards granted under
the 1997 Stock Plan may, in the discretion of the Board, be granted alone or in
addition to, in tandem with or in substitution for, any other award under the
1997 Stock Plan or other plan of CNG. Such grants could
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<PAGE> 67
include grants of options after a decline in the market price of the Common
Stock in substitution for previously granted options having a higher exercise
price.
Stock options granted pursuant to the 1997 Stock Plan, may, at the
discretion of the Board, be either ISOs within the meaning of Section 422 of the
Code, or non-qualified stock options. The exercise price of an ISO may not be
less than the fair market value of the Common Stock on the date of grant (or
110% of such fair market value in the case of ISOs granted to employees who
possess more than 10% of the combined voting power of all classes of stock of
CNG). In the case of non-qualified stock options, the exercise price shall be as
determined by the Board in its sole discretion, but in no event shall be less
than 50% of the fair market value of the Common Stock on the date of grant.
Options granted pursuant to the 1997 Stock Plan are exercisable in whole or in
part at such time or times as may be determined by the Board, except that ISOs
may not be exercised after the expiration of 10 years from the date granted (or
5 years in case of ISOs granted to employees who possess more than 10% of the
combined voting power of all classes of stock of CNG). Generally, options may be
exercised by the payment of cash, promissory notes, stock or combination
thereof.
Any SARs granted under the 1997 Stock Plan will give the holder the right
to receive cash or stock in an amount equal to the difference between the fair
market value of a share of Common Stock on the date of exercise and the exercise
price of the options issued in conjunction with the SARs or such other amount as
the Board has established with respect to SARs issued on a stand-alone basis.
Methods of exercise and settlement and other terms of SARs are determined by the
Board.
The Board may award restricted stock, generally consisting of shares which
may not be disposed of by participants until certain restrictions established by
the Board lapse. Such restrictions may lapse in whole or in installments as the
Board determines. A participant receiving restricted stock will have all of the
rights of a shareholder of CNG, including the right to vote the shares and the
right to receive any dividends, unless the Board otherwise determines, but shall
not be permitted to sell, assign, or otherwise transfer the stock during the
restriction period established by the Board. Upon termination of employment
during the restriction period for any reason other than death or disability,
restricted stock will be forfeited subject to such exceptions, if any, as are
authorized by the Board.
In the event of any change affecting the shares of common stock by reason
of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, combination or exchange of shares, or other corporate change or any
distributions to shareholders, the Board may make such substitution or
adjustment in the aggregate number of kind of shares which may be distributed
under the 1997 Stock Plan and in the number, kind and exercise, grant or
purchase price of shares subject to the outstanding awards granted under the
1997 Stock Plan,. Or make provisions for a cash payment relating to any award,
as it deems to be appropriate in order to maintain the purpose of the original
grant.
The Board of Directors may amend, alter, suspend, discontinue or terminate
the 1997 Stock Plan without the consent of shareholders or participants, except
that shareholder approval of such action will be sought if such approval is
required by any federal or state law or regulation or by any agreement, or if
the Board of Directors in its discretion determines that obtaining such
shareholder approval is advisable. Unless earlier terminated by the Board of
Directors, the 1997 Stock Plan will terminate when no shares remain reserved and
available for issuance, and CNG has no further obligation with respect to any
award granted under the 1997 Stock Plan.
In the event of a change of control of CNG, as defined in the 1997 Stock
Plan, all outstanding awards under the 1997 Stock Plan, regardless of any
limitations or restrictions, become fully exercisable and freed of all
restrictions. Pursuant to the Merger Agreement, all outstanding option awards
under the 1997 Stock Plan will be exchanged for shares of CMS Energy Common
Stock equivalent to the fair value of such options at the Effective Time.
Performance Based Bonuses. From time to time the Board of Directors of CNG
awards cash bonuses to its executive officers and other employees based on the
performance of CNG and the performance of such individual. Employment agreements
between CNG and Scott C. Longmore, Garry D. Smith and Terry K. Spencer provide
for payment of bonuses based on certain financial thresholds. The bonuses paid
to the executive officers for 1997 were calculated solely in relation to the
employment agreements. Due to the financial performance of CNG in 1997, no
additional bonuses were paid to such executive officers.
Director Compensation. Directors receive no set compensation from CNG for
serving on the Board of Directors but are eligible to receive awards under the
1997 Stock Plan and may be reimbursed for out-of-pocket expenses incurred while
attending board and committee meetings. Pursuant to CNG's 1997 Stock Plan, each
non-employee director received options to purchase 5,000 shares of common stock
from CNG during December 1997. The exercise price for such options was the fair
market value of CNG's stock on the date of grant ($11.25).
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CERTAIN TRANSACTIONS AMONG RELATED ENTITIES
Gary C. Adams, the Chairman of the Board, President and Chief Executive
Officer of CNG, is the chief executive officer of Cottonwood Partnership.
Cottonwood Partnership is owned by certain trusts, the beneficiaries of which
are members of the immediate family of Mr. Adams (the "Family Trusts").
Cottonwood Partnership owns approximately 98% of the outstanding common stock of
Adams Affiliates, Inc. ("Adams Affiliates") and all of the outstanding common
stock of Bird Creek Resources, Inc. ("Bird Creek"). Mr. Adams is a director and
the chairman of Adams Affiliates and a director of Bird Creek. The Family Trusts
are also partners in Mountain Meadows Partnership, a general partnership. Adams
Affiliates owns, directly or indirectly, all of the outstanding equity interests
of Continental Natural Gas Marketing, L.L.C. ("CNGM") and CPA Aviation, Inc.
("CPA Aviation"). Mr. Adams is a director of CPA Aviation.
The following paragraphs generally describe the recent financial status of
the relationships between CNG and the affiliated parties described above. The
amounts owed by such affiliates, plus certain interest charges thereon, are to
be repaid to CNG in connection with the Merger. CNG believes that the
transactions described below are on terms at least as fair to CNG as could have
obtained from unaffiliated third parties.
CNG sold approximately $20 million of natural gas to CNGM in 1997. The
natural gas was sold at cost plus $0.02 per Mcf to CNGM, which resold such
volumes under long-term sales contracts. At December 31, 1997, CNGM owed CNG
approximately $6.3 million, for such purchases.
In 1997, CNG purchased approximately $278,000 of natural gas located in New
Mexico and Oklahoma from Bird Creek under a month-to-month contract. CNG's
purchases from Bird Creek are made at a market index price less gathering fees.
No such amounts were payable at December 31, 1997.
In 1997, CNG provided office space and general administrative services to
Bird Creek and billed it for such rentals and fees in the aggregate amount of
$260,800. Additionally, in 1997 CNG was charged $14,329 by Bird Creek for
general and administrative expenses incurred on its behalf. In 1997, Adams
Affiliates charged CNG $240,000 for consulting services. Adams Affiliates and
CNG are parties to a Consulting Agreement dated as of April 1, 1997, under which
Adams Affiliates provided consulting services to CNG.
See "Executive Compensation."
Bird Creek and Adams Affiliates are parties to Administrative Services
Agreements with CNG dated as of April 1, 1997, under which CNG provides office
space, accounting, clerical and other administrative services to Bird Creek and
Adams Affiliates in return for reimbursement to CNG of the allocable cost to CNG
of providing such services. These Administrative Service Agreements expired on
March 31, 1998, subject to automatic renewal on a month-to-month basis
thereafter until terminated by either of the contracting parties. Bird Creek
provides certain accounting, clerical and administrative services to CNG
(primarily accounting services) under the terms of an Administrative Services
Agreement dated as of April 1, 1997. CNG reimburses Bird Creek for the allocable
cost to Bird Creek of providing such services. This Administrative Services
Agreement expired on March 31, 1998, subject to automatic renewal on a
month-to-month basis thereafter until terminated by one of the parties.
In 1997, CNG paid CPA Aviation a total of $89,400 for aviation services.
CNG and CPA Aviation are parties to a Flight Services Agreement dated as of
April 1, 1997, under which CPA Aviation agrees to provide aviation services to
CNG on an "as needed" basis. CNG pays CPA Aviation for such services at the
rates of $100 per hour for usage of Cessna Model Turbo 210 aircraft and $1,000
per hour for usage of a Learjet Model 24F plus reimbursement of any taxes, fees,
customs duties or other charges which CPA Aviation may be required to pay by
reason of CNG's usage. The Flight Services Agreement expired on March 31, 1998,
subject to automatic renewal on a month-to-month basis thereafter until
terminated by one of the parties. As of July 1, 1998, rates for the Cessna
Turbo 210 and the Learjet Model 24F were increased to $125/hour and $1,250/hour
respectively.
As of December 31, 1997, Adams Affiliates was indebted to CNG in the amount
of approximately $98,492 and Mountain Meadows partnership was indebted to CNG in
the amount of approximately $800,000. Various other affiliates of Cottonwood
Partnership were indebted to CNG in the aggregate amount of approximately
$153,702 as of December 31, 1997 (of such amount no affiliate was indebted to
CNG in excess of $60,000). The amounts owed by Adams Affiliates and the other
affiliates of Cottonwood Partnership (exclusive of Mountain Meadows Partnership)
arise primarily as a result of administrative services provided by CNG.
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<PAGE> 69
OTHER RELATIONSHIPS
CIBC Oppenheimer served as an underwriter in relation to CNG's initial
public offering. Mr. William H. Bauch is an officer of CIBC Oppenheimer and is a
director of CNG. CNG incurred $1.8 million as underwriters' discounts in
connection with its initial public offering. CNG believes that CIBC Oppenheimer
received approximately $960,000 of such amount. The law firm of Hall, Estill,
Hardwick, Golden & Nelson has advised CNG on certain legal matters. Mr. William
W. Pritchard is Of Counsel to Hall, Estill, Hardwick, Golden & Nelson and is a
director of CNG. During 1997, the legal fees paid by the Company to Hall, Estill
were approximately $168,000.
PRINCIPAL STOCKHOLDERS OF CNG
The following table sets forth certain information regarding beneficial
ownership of the CNG Common Stock as of September 10, 1998: (i) by each person
(or group of affiliated persons) who is known by CNG to own beneficially more
than five percent (5%) of the CNG Common Stock; (ii) by each of the named
executive officers; (iii) by each of CNG's directors; and (iv) by all directors
and executive officers as a group. CNG believes that the persons and entities
named in the table have sole voting and investment power with respect to all
shares of the CNG Common Stock shown as beneficially owned by them, subject to
community property laws, where applicable.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES (1) PERCENT OF CLASS (2)
- ---------------- -------------------- --------------------
<S> <C> <C>
Adams Affiliates, Inc. (3) 297,864 4.72%
1437 South Boulder, Suite 1250
Tulsa, Oklahoma 74119
Cottonwood Partnership (3) 3,438,004 54.44%
1437 South Boulder, Suite 1250
Tulsa, Oklahoma 74119
Brinson Holdings, Inc. (4) 309,400 4.85%
209 South LaSalle
Chicago, Illinois 60605-1295
Brinson Partners, Inc. (4) 309,400 4.85%
209 South LaSalle
Chicago, Illinois 60605-1295
SBC Holdings (USA), Inc. (4) 309,400 4.85%
222 Broadway
New York, New York 10038
Swiss Bank Corporation (4) 309,400 4.85%
Aeschenplatz 6 CH-4002
Basel, Switzerland
Wellington Management 350,600 5.55%
Company, LLP(5)
75 State Street
Boston, Massachusetts 02109
Gary C. Adams (3) 3,438,004 54.44%
Scott C. Longmore 154,562 2.45%
Garry D. Smith 115,906 1.84%
Terry K. Spencer 115,906 1.84%
William W. Pritchard (6) 10,000 *
William H. Bauch (6) 5,000 *
Executive Officers and Directors (6) 3,839,378 60.80%
Of CNG as a Group (6 persons)
</TABLE>
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* Less than one percent (1%) of outstanding common stock of CNG.
(1) Unless otherwise noted, each of the persons has sole voting and investment
power with respect to the shares reported.
(2) Based upon 6,315,000 shares of CNG Common Stock actually outstanding at
September 10, 1998 (although with respect to certain individuals who have the
right to acquire shares of CNG Common Stock within 60 days of September 10, 1998
pursuant to the exercise of options or warrants, the number of shares of CNG
Common Stock not outstanding which are subject to such options or warrants have
been deemed to be outstanding for the purpose of computing the percentage of
outstanding shares of CNG Common Stock owned by such individuals pursuant to
Rule 13d-3(d) of the Securities Exchange Act of 1934).
(3) Gary C. Adams does not own of record any shares of CNG Common Stock. Gary C.
Adams, President, Chief Executive Office and a director of CNG is the Chief
Executive Officer of Cottonwood Partnership. Cottonwood Partnership owns
approximately 98% of the outstanding common stock of Adams Affiliates, Inc.
("Adams Affiliates"). The shares reflected as beneficially owned by Cottonwood
Partnership include 297,864 shares held of record by Adams Affiliates. The
shares reflected as beneficially owned by Gary C. Adams include all shares
reflected as beneficially held by Cottonwood Partnership.
(4) Based solely on information reported in a Schedule 13G dated February 11,
1998, the named persons had shared voting power and shared investment power as
of December 31, 1997, with respect to 309,400 shares of CNG Common Stock. Such
Schedule 13G filed on behalf of the named persons reflects a percentage of 5.7%,
but CNG believes that 4.85% is the appropriate percentage.
(5) Based solely on information reported in a Schedule 13G dated January 13,
1998, the named person had, as of December 31, 1997, shared dispositive power as
an investment advisor to certain unnamed persons. Based solely on the
representations contained in such Schedule 13G, no such individual beneficially
owns 5% or more of CNG Common Stock.
(6) Each of the named directors has been granted options to acquire 5,000 shares
of CNG Common Stock. Such options are presently exercisable and, therefore, are
deemed beneficially owned by such individuals pursuant to Rule 13d-3(d)(1). Such
beneficial ownership is also reflected in the number of shares and percentage
for officers and directors as a group.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCiAL CONDITION AND RESULTS OF
OPERATIONS OF CNG
Since its formation, CNG has grown primarily as a result of acquisitions,
facilities expansions and connections of additional natural gas reserves to its
natural gas gathering systems. Additionally, CNG has increased its natural gas
and natural gas liquid marketing operations. All historical financial
information has been restated to reflect CNG's approximate 136-for-1 stock split
effected in July 1997. This discussion and analysis should be read in
conjunction with the Consolidated Financial Statements of CNG and the notes
thereto included elsewhere in this Proxy Statement/Prospectus.
RESULTS OF OPERATIONS
CNG's results of operations are determined primarily by the volume and
price of natural gas purchased, processed and resold in its natural gas
gathering systems and processing plants. CNG also purchases for resale natural
gas unrelated to its gathering or processing business ("off-system gas") which
contributes to its profitability.
Fluctuations in the price levels of natural gas and natural gas liquids
("NGLs") affect results of operations since CNG generally receives a portion of
the natural gas and NGL revenue from natural gas throughput in its gathering
systems and processing plants. In the fourth quarter of 1997 and the first and
second quarters of 1998, high natural gas prices relative to NGL prices created
a significant
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negative impact on operating results. Most of CNG's operating expenses do not
vary materially with changes in natural gas throughput volume on existing
systems; thus, increases or decreases in volumes on existing systems generally
have a direct effect on CNG's profitability. Conversely, operating expenses such
as compression rental and compression maintenance expenses vary with volume
changes as compressor units are added or removed accordingly.
During the first half of 1996, CNG acquired several gathering systems
located in the Texas panhandle (the "Texas Gathering Assets") which have had a
significant impact on CNG's results of operations for 1997 and 1996. On November
25, 1997 CNG acquired Taurus Energy Corp. ("Taurus") for approximately $42
million. Acquisition of Taurus has had a significant impact on CNG's results of
operations for the first and second quarters of 1998.
On January 23, 1998, CNG entered into an agreement with Gothic Energy
Corporation ("Gothic") to acquire interests in four natural gas gathering
systems and $6 million of Gothic Senior Redeemable Preferred Stock (the
"Preferred Stock") for a total purchase price of $12 million. The closings of
these purchase transactions were consummated in January and March of 1998. On
April 27, 1998, the Preferred Stock was redeemed by Gothic for $6 million plus
related fees and dividends. On May 28, 1998, CNG sold its interest in the
Sycamore gas gathering system, which had been acquired from Gothic, for $12
million. The sale resulted in a gain of approximately $7.5 million to CNG. CNG
used $9 million of the proceeds from the sale as payment on its outstanding
indebtedness under its Credit Agreement (as defined below).
On May 28, 1998, CNG acquired an additional interest in the Laverne Plant
for a purchase price of $3 million.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues. Total operating revenue decreased 7% to $145.7 million for the
six months ended June 30, 1998 as compared to $155.9 million for the same period
in 1997. Total natural gas sales decreased 11% to $119.9 million for the six
months ended June 30, 1998 from $134.8 million for the same period in 1997 as a
result of a $12.4 million price-related decrease due to average sales prices of
$2.46 per Mcf in 1998 compared to $2.72 per Mcf in 1997 and a $2.5 million
volume-related decrease due to sales of 269.0 MMcf/d in 1998 compared to 274.0
MMcf/d in 1997. This decrease in volume resulted from decreases in on-system gas
marketing sales offset by increases in off-system gas marketing sales.
NGL sales increased 20% to $21.6 million for the six months ended June 30,
1998 as compared to $18.0 million for the same period last year as a result of a
$6.1 million price-related decrease due to average NGL sales prices of $.28 per
gallon in 1998 compared to $.36 per gallon in 1997 and a $9.7 million
volume-related increase due to increased natural gas processing throughput.
CNG earned gathering fees of $4.0 million for the six months ended June 30,
1998 as compared to $3.1 million for the same period in 1997 as a result of
increased fees from the Texas Gathering Assets and the gathering systems
acquired from Gothic.
Costs and Expenses. Total operating costs and expenses decreased to $147.5
million for the six months ended June 30, 1998 as compared to $152.1 million for
the same period in 1997. Total natural gas costs decreased 7% to $133.9 million
in 1998 from $143.6 million in 1997 as a result of a $14.5 million price-related
decrease due to average purchase prices of $2.38 per Mcf in 1998 compared to
$2.63 per Mcf in 1997 and a $4.8 million volume-related increase due to
purchases of 311.1 MMcf/d in 1998 compared to 301.1 MMcf/d in 1997.
Operating expenses increased to $5.2 million for the six months ended June
30, 1998 from $3.1 million for the same period in 1997. This was due mainly to
operating activities from the acquisition of Taurus.
General and administrative expenses increased 36% to $4.9 million for the
six months ended June 30, 1998 from $3.6 million in the same period last year.
This increase was due primarily to compensation expense of $400,000 related to
CNG's 1997 Stock Plan and the addition of administrative support activities and
other related expenses associated with the Taurus acquisition.
Depreciation, depletion and amortization increased 94% to $3.6 million for
the six months ended June 30, 1998 from $1.8 million for the same period in 1997
principally due to the acquisition of Taurus.
Other Income (Expense). Interest income decreased to $81,000 for the six
months ended June 30, 1998 from $411,000 for the same period in 1997 due to
decreased cash investments. During these same time periods, interest expense
increased 50% to $4.2
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million from $2.8 million due primarily to additional debt incurred to finance
the Taurus, Laverne Plant and Gothic acquisitions. In addition, CNG recognized
$.6 million from fees and dividends earned on the Gothic Senior Redeemable
Preferred Stock investment and a $7.5 million gain from the sale of the Sycamore
gathering system acquired from Gothic in January of 1998.
Income Taxes. CNG had income tax expense of $.9 million for the six months
ended June 30, 1998 as compared to $ .6 million for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Total operating revenue increased 38% to $340.6 million for the
year ended December 31, 1997 as compared to $246.7 million for the same period
in 1996. Total natural gas sales increased 39% to $289.6 million in 1997 from
$208.8 million for the same period in 1996 as a result of a $20.5 million
price-related increase due to average sales prices of $2.75 per Mcf in 1997
compared to $2.55 per Mcf in 1996 and a $60.3 million volume-related increase
due to sales of 288.8 MMcf/d in 1997 compared to 224.1 MMcf/d in 1996. This
increase in volume resulted from increases in both off-system and on-system gas
marketing sales.
NGL sales increased 33% to $46.2 million for the year ended December 31,
1997 as compared to $34.8 million for the same period in 1996 as a result of a
$4.7 million price-related decrease due to average NGL sales prices of $0.33 per
gallon in 1997 compared to $0.36 per gallon in 1996 and a $16.1 million
volume-related increase due to increased natural gas processing throughput.
CNG earned gathering fees of $4.4 million in 1997 as compared to $2.0
million for the same period in 1996 primarily as a result of the acquisition of
the Texas Gathering Assets.
Costs and Expenses. Total operating costs and expenses increased 40% to
$337.0 million for year ended December 31, 1997 as compared to $240.0 million
for the same period in 1996. Total natural gas costs increased 41% to $318.3
million in 1997 from $225.5 million in 1996 as a result of increases in price
and volume. The $26.5 million price-related increase (resulting from a change in
average purchase prices of $2.68 per Mcf in 1997 from $2.46 per Mcf in 1996) was
mitigated by approximately $3.1 million of avoided gathering fees caused by the
integration of the Texas Gathering Assets into CNG's processing business. A
$66.3 million volume-related increase resulted from purchases of 325.0 MMcf/d in
1997 compared to 251.1 MMcf/d in 1996. This increase in volume resulted
primarily from increases in off-system gas marketing purchases.
Operating expenses increased to $7.1 million for the year ended December
31, 1997 from $6.0 million for the same period in 1996. This was due mainly to
operating activities from the acquisition of the Texas Gathering Assets and the
Laverne Plant.
General and administrative expenses increased 34% to $7.6 million for the
year ended December 31, 1997 from $5.6 million in the same period last year.
This increase was due primarily to the addition of marketing personnel and
administrative support activities related to the Texas Gathering Assets and
other acquisitions.
Depreciation, depletion and amortization increased 43% to $4.1 million for
the year ended December 31, 1997 from $2.9 million for the same period in 1996
principally due to the acquisition of the Texas Gathering Assets, expansions at
CNG's Beaver Plant and the Laverne Plant acquisition.
Other Income (Expense). Interest income increased to $0.5 million for the
year ended December 31, 1997 from $0.1 million for the year ended December 31,
1996 due to increased cash investments associated with contract advances
received in the fourth quarter of 1996. During these same time periods, interest
expense increased 95% to $5.3 million from $2.7 million due primarily to
additional debt incurred to finance the acquisition of the Texas Gathering
Assets, the Laverne plant and the expansion of CNG's existing facilities. In
addition, CNG incurred a $.6 million charge in the fourth quarter of 1997 as a
result of a litigation settlement.
Income Taxes. CNG had an income tax benefit of $644,000 for the year ended
December 31, 1997 as compared to $3.6 million for 1996. For 1997, CNG's tax rate
approximates the sum of the federal and state statutory rates while in 1996,
CNG's effective tax rate was significantly impacted by its net operating loss
carryforwards.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Total operating revenue increased 104% to $246.7 million for the
year ended December 31, 1996, compared to $121.2 million for the same period in
1995. Total natural gas sales increased 118% to $208.8 million in 1996 from
$95.6 million in 1995 as a result of a $79.1 million price-related increase due
to average sales prices of $2.56 per Mcf in 1996, compared to $1.59 per Mcf in
1995 and a $34.1 million volume-related increase due to sales of 224.1 MMcf/d in
1996, compared to 165.1 MMcf/d in 1995. This increase in volume resulted
primarily from increases in off-system gas marketing sales.
NGL sales increased 40% to $34.8 million for the year ended December 31,
1996, compared to $24.8 million in 1995, primarily as a result of a $10.0
million price-related increase due to average NGL sales prices of $0.36 per
gallon in 1996, compared to $0.26 per gallon in 1995.
CNG earned gathering fees of $2.0 million for the year ended December 31,
1996, as a result of the acquisition of the Texas Gathering Assets in the second
quarter of 1996.
Other revenues including sales from oil and gas properties increased to
$1.1 million in 1996 from $0.8 million in 1995. All CNG's oil and gas properties
were sold to an affiliated entity in the third quarter of 1996 for $0.3 million,
which approximated book value. Oil and gas producing activities contributed
revenues of $0.6 million and $0.5 million in 1996 and 1995, respectively.
Costs and Expenses. Total operating costs and expenses increased 105% to
$240.0 million for the year ended December 31, 1996, compared to $117.2 million
for the same period in 1995. Total natural gas costs increased 110% to $225.5
million in 1996 from $107.6 million in 1995 as a result of increases in price
and volume. The $85.2 million price-related increase (resulting from a change in
average purchase prices of $2.46 per Mcf in 1996 from $1.53 per Mcf in 1995) was
mitigated by approximately $0.5 million of avoided gathering fees caused by the
integration of the Texas Gathering Assets into CNG's processing business. A
$32.7 million volume-related increase resulted from purchases of 251.1 MMcf/d in
1996, compared to 192.6 MMcf/d in 1995. This increase in volume resulted
primarily from increases in off-system marketing purchases.
Operating expenses increased 37% to $6.0 million in 1996 from $4.4 million
in 1995. This was due mainly to the increased operating activities from
acquisition of the Texas Gathering Assets, expansions at the Beaver Plant and
inclusion of Mocane Plant operating expenses for the full year.
General and administrative expenses increased 46% to $5.6 million in 1996
from $3.8 million in 1995. This increase was due primarily to the addition of
marketing personnel, administrative support activities related to the Texas
Gathering Assets and ad valorem tax increases in connection with the acquisition
of the Texas Gathering Assets and Beaver Plant expansion projects.
Depreciation, depletion and amortization increased 109% to $2.9 million in
1996 from $1.4 million in 1995 primarily due to the acquisition of the Texas
Gathering Assets, expansions at Beaver Plant and inclusion of the Mocane Plant
for the full year.
Other Income (Expense). Interest expense increased 196% to $2.7 million in
1996 from $0.9 million in 1995 due primarily to additional debt incurred to
finance the acquisition of the Texas Gathering Assets.
Income Taxes. CNG's effective income tax rate in 1996 and 1995 was
significantly impacted by its net operating loss carryforwards. For financial
statement purposes, recognition of the net operating loss carryforwards resulted
in a tax benefit of $3.6 million in 1996 and $2.2 million in 1995. CNG
anticipates that its effective tax rate in 1997 will approximate the sum of the
federal and state statutory rates. See Note 10 to CNG's financial statements
included elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
General. CNG's primary sources of liquidity and capital resources
historically have been net cash provided by operating activities and
bank borrowings. CNG completed an initial public offering of Common Stock on
August 6, 1997, selling 2,115,000 shares for $11.25 per share, yielding net
proceeds of approximately $21.3 million. The proceeds were used to pay $17.3
million on CNG's term loan facility and $2.0 million on its revolving facility,
to pay $0.6 million in accrued dividends on its Convertible Preferred Stock and
the remainder for other general corporate purposes.
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The following summary table reflects comparative cash flows
for CNG for the years ended December 31, 1997, 1996 and 1995 and the six months
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- --------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
Operating activities $ 8,825 $ 23,536 $ (29,946) (16,009) 2,854
Net cash provided by (used in)
Investing activities $ (12,286) $(30,458) $ (57,022) (6,009) (2,488)
Net cash provided by (used in)
Financing activities $ 2,326 $ 23,344 $ 67,127 6,541 4,736
</TABLE>
The increase in net cash provided by operating activities for the period
ended June 30, 1998 as compared to the same period in 1997, was mainly
attributable to changes in working capital. Excluding net changes in working
capital components, CNG's operating activities used cash of $1.2 million for
this period in 1998 and generated cash of $3.3 million in 1997. The decrease in
net cash provided by operating activities in 1997 as compared to 1996 was mainly
attributable to changes in working capital including the repayment of contract
advances totaling $24.3 million. Excluding net changes in working capital
components, CNG's operating activities generated cash of $2.4 million in 1997
and $6.6 million in 1996.
Cash used in investing activities for the six months ended June 30, 1998
was primarily for the $12.0 million Gothic acquisition including interests in
four gas gathering systems and $6.0 million of Gothic Senior Redeemable
Preferred Stock. In addition, CNG acquired additional interests in the Laverne
gas processing plant for $3.0 million. Cash generated by investing activities
included the $6.0 million redemption of the Gothic Senior Redeemable Preferred
Stock and proceeds from the sale of the Sycamore gathering system for $12.0
million. Cash used in investing activities for the same period in 1997 was
mainly for expansion projects on the Texas Gathering Assets. Cash used in
investing activities for the year ended December 31, 1997 was primarily for the
$42 million acquisition of Taurus Energy Corp., expansion projects on the Texas
Gathering Assets and the $2.9 million acquisition of a 56% interest in the
Laverne gas processing plant. Cash used in investing activities for the same
period in 1996 was mainly for the acquisition of the Texas Gathering Assets in
the second quarter of 1996. In 1995, cash used in investing activities was
related primarily to the acquisition of the Mocane Plant and related
expenditures for the expansion of the Mocane fractionation facility and dual
interconnecting pipelines from the Mocane Plant to the Beaver Plant.
Cash provided by financing activities for the six months ended June 30,
1998 resulted from borrowings under CNG's revolving loan facility and the Bridge
Loan (see below) used for working capital requirements and funding the Gothic
acquisition. Cash provided by financing activities for the same period in 1997
resulted mainly from borrowings under CNG's revolving loan facility used for
working capital requirements and funding various capital projects. Cash provided
by financing activities for the year ended December 31, 1997 resulted mainly
from borrowings under CNG's term loan facility and the net proceeds of CNG's
initial public offering. Cash provided by financing activities for the same
period in 1996 resulted mainly from long-term borrowing for the acquisition of
the Texas Gathering Assets. In 1995, cash provided by financing activities
resulted primarily from increased borrowing levels for various capital
expenditures.
Fluctuations of natural gas prices in relation to the price of NGLs
experienced by CNG have negatively impacted CNG's operating results and the
associated operating cash flows. Continued depressed margins (and consequent
negative operating cash flows) could delay or limit CNG's planned capital
expenditures, negatively impact CNG's ability to service its debt or limit CNG's
ability to fund working capital requirements. Consequently, CNG may be required
to seek additional sources of funding, which may include the disposition of
non-strategic assets.
At December 31, 1997, CNG had net operating loss carryforwards ("NOLs")
totaling approximately $42 million for regular tax purposes and $40 million for
alternative minimum tax purposes. At June 30, 1998, CNG had NOLs totaling
approximately $40 million for each of regular tax purposes and alternative
minimum tax purposes. If not utilized, these carryforwards will expire from 2000
to 2012. Due to the lack of existing legal precedent with respect to the tax
rules governing CNG's NOLs, both the availability of approximately $10 million
of CNG's NOLs and its prior utilization of NOLs (totaling approximately $34
million) may be challenged. Disallowance of the use of the NOLs would result in
certain taxes associated with prior utilization of the NOLs being
67
<PAGE> 75
currently payable. In March of 1998, CNG received notification that the Internal
Revenue Service plans to audit CNG's 1995 tax return.
Realization of CNG's deferred tax assets is dependent upon the generation
of sufficient taxable income prior to the expiration of the NOLs and, for
financial reporting purposes, the resolution of the matters noted above.
Although realization is not assured, management believes it is more likely than
not that the recorded net deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable could be increased or decreased by a
material amount in the near-term pending resolution of these matters.
Financing Facilities. CNG entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with ING Capital Corporation as of November
25, 1997. The Credit Agreement contains a revolving facility and a term loan
facility. The revolving facility has a maximum borrowing base of $25.0 million
which had outstanding borrowings of $21.3 million as of June 30, 1998. The
revolving facility contains a sub-limit permitting the Company to issue Letters
of Credit amounting, in the aggregate, to $18.0 million. As of June 30, 1998,
the aggregate amount outstanding under the Letters of Credit was $3.7 million.
Under the term loan facility approximately $65.2 million was outstanding as of
June 30, 1998. Interest rates under both the revolving facility and term
facility are variable, at CNG's election, at: (i) up to 3/4% (depending upon
CNG's financial performance) above the greater of (x) the arithmetic average of
the prime rates announced by Chase Manhattan Bank, Citibank, N.A. and Morgan
Guaranty Trust Company of New York or (y) the federal funds rate as published by
the Federal Reserve Bank of New York plus 1/2%; or (ii) 1.375% to 2.5%
(depending upon CNG's financial performance) above the London Interbank Offered
Rate ("LIBOR"). Current interest payments on the revolving facility and under
the term facility began on December 31, 1997. Repayments of principal under the
term facility began on March 31, 1998.
The Credit Agreement includes covenants regarding various financial and
legal matters. A breach of these covenants could constitute a default under the
Credit Agreement resulting in CNG's indebtedness becoming immediately due and
payable and entitling the lenders under the Credit Agreement to foreclose
against collateral pledged by CNG. For the fiscal year ending December 31, 1997
and for the quarters ending March 31 and June 30, 1998, CNG requested and
obtained waivers of some of the financial covenants contained in the Credit
Agreement. There can be no assurance that CNG's lenders will grant such waivers
in the future and, if such waivers are not granted, all of CNG's indebtedness
under the Credit Agreement would become immediately due and payable.
At year end 1996, CNG had a Letter of Credit and Reimbursement Agreement
with Christiania Bank, New York, Branch. Under this agreement, Christiania Bank
initially issued letters of credit in the aggregate amount of approximately
$21.0 million to secure CNG's obligation under various contract advances. All
letters of credit under this agreement expired during the third quarter of 1997.
CNG paid a fee of 1.5% per annum for the amount of each letter of credit which
was issued.
On February 11, 1998, CNG entered into a Subordinated Secured Bridge Note
(the "Bridge Loan") with ING (U.S.) Capital Corporation in the amount of $3.0
million. The purpose of the Bridge Loan was to fund short term capital
requirements of CNG. Lenders under the Credit Agreement consented to the Bridge
Loan. Amounts outstanding under the Bridge Loan were to bear interest at: (i)
the arithmetic average of the base rates announced publicly by the Chase
Manhattan Bank (National Association), Citibank, N.A. and Morgan Guaranty Trust
Company, plus (ii) 4%. Interest on the Bridge Loan was payable on the first day
of each month with a final maturity of April 30, 1998. Although the Company had
the option to extend the maturity of the Bridge Loan until January 31, 2008, the
Bridge Loan was paid in full April 30, 1998.
SEASONALITY
CNG's results of operations fluctuate from quarter to quarter, due to
variations in the prices and sales volumes of NGLs and natural gas. CNG's
primary NGL product is propane, which is used for agricultural and home heating
in CNG's market areas. Demand and prices of propane usually increase during the
winter season and decrease during the summer season. CNG's principal commodity,
natural gas, is used primarily for heating fuel for homes and industry, and for
electric power generation. Demand and prices for natural gas usually increase
during the winter season. While CNG's gross revenues typically increase or
decrease seasonally, profitability from natural gas processing operations is
affected by the margins between the cost of natural gas purchased and the sales
prices of the NGLs extracted, which may not follow seasonal patterns.
68
<PAGE> 76
YEAR 2000 STATEMENT
The Year 2000 issue is the result of computer programs being written to use
two digits to define year dates. Computer programs running date-sensitive
software may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in systems failure or miscalculations causing
disruptions of operations.
CNG has initiated a comprehensive assessment of its information technology
("IT") and non-information technology ("non-IT") systems to ensure that such
systems will be upgraded to ensure compliance with Year 2000 standards. In
general, CNG's IT systems consist of its office computer network and financial
management software and related computer programs. CNG's non-IT systems consist
of certain office equipment and other systems associated with its processing
plants and gathering facilities. CNG is also evaluating the Year 2000 compliance
of its customers and suppliers to ascertain the potential impact on CNG.
CNG began in-house an assessment of the year 2000 problem with respect to
its IT systems early in 1997. Since that time CNG has upgraded most of its
financial management software to newer versions which are Year 2000 compliant.
In addition, CNG has replaced nearly all of its IT hardware such that this
hardware is now Year 2000 compliant. To date the cost to CNG of the upgrade and
of its IT software and hardware has been approximately $40,000. A small amount
of internally-generated software, some vendor provided software and some
hardware remains Year 2000 non-compliant. CNG anticipates that the remaining
non-compliant software and hardware components of its IT systems will be
replaced during the first quarter of 1999 at an estimated cost of $50,000.
Additionally, CNG is conducting an assessment of its non-IT systems which
consist primarily of embedded technology at one of CNG's processing plants and
its gathering systems (e.g. the Beaver Plant operating system and various
electronic metering equipment). During the later half of 1998 CNG intends to
complete this assessment of the readiness of its non-IT systems and obtain an
estimate of the costs to replace or otherwise render such systems Year 2000
compliant. CNG believes that its non-IT systems will be Year 2000 compliant by
June 1999.
CNG is presently conducting an assessment of Year 2000 exposures related to
CNG's suppliers and customers. CNG is in the process of identifying its key
customers and suppliers and intends to request information to the Year 2000
compliance of such customers. CNG will require Year 2000 certification from its
outside vendors and service providers--in particular, CNG will request
certification from the interstate and intrastate pipelines upon which it
transports natural gas. Although no contingency plans have been developed to
date, CNG will begin to formulate such plans as it ascertains the preparedness
of its customers and suppliers.
At present, CNG's Year 2000 program is estimated to be 25% complete and
management's goal is to have all systems and equipment Year 2000 compliant by
June 1999. CNG intends to have all Year 2000 issues evaluated by the end of the
fourth quarter of 1998 with good estimates of applicable compliance costs. CNG
believes that the total costs associated with modifying its existing systems
will not have a material adverse effect on CNG's results of operations or
financial condition. CNG believes that with the necessary upgrades to new
hardware and software, that the Year 2000 will not present significant
operational problems or have a material adverse effect on CNG's business or
results of operations. Nonetheless, if all Year 2000 issues are not adequately
assessed or if the necessary remedial efforts are not implemented on a timely
basis, CNG may not be Year 2000 complaint which, in turn, could have a material
adverse effect on CNG's business, operating results or financial condition. In
addition, CNG's operations may be disrupted in the event its suppliers or
service providers are not Year 2000 compliant (e.g. interstate or intrastate
pipelines which transport natural gas for CNG) and such failure could have a
material adverse effect on CNG's business, operating results or financial
condition.
LEGAL MATTERS
The legality of the CMS Energy Common Stock to be issued in connection with
the Merger will be passed upon by Michael D. Van Hemert, Assistant General
Counsel of CMS Energy. As of June 30, 1998, Mr. Van Hemert beneficially owned
approximately 2,785 shares of CMS Energy Common Stock. Certain tax consequences
of the Merger will be passed upon by Theodore J. Vogel, Tax Counsel for CMS
Energy. As of June 30, 1998, Mr. Vogel beneficially owned approximately 7,135
shares of CMS Energy Common Stock.
69
<PAGE> 77
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements and schedules of CMS Energy as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997 incorporated by reference in this Prospectus, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
With respect to the unaudited interim consolidated financial information
for the period ended June 30, 1998, Arthur Andersen LLP has applied limited
procedures in accordance with professional standards for a review of such
information. However, their separate report thereon states that they did not
audit and they did not express an opinion on that interim consolidated financial
information. Accordingly, the degree of reliance on their report on that
information should be restricted in light of the limited nature of the review
procedures applied. In addition, the accountants are not subject to the
liability provisions of Section 11 of the Securities Act for their reports on
the unaudited interim consolidated financial information, because those reports
are not a "report" or "part" of the registration statement prepared or certified
by the accountants within the meaning of Sections 7 and 11 of the Securities
Act.
Future consolidated financial statements of CMS Energy and the reports
thereon of Arthur Andersen LLP also will be incorporated by reference in this
Proxy Statement/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.
The consolidated balance sheets of CNG as of December 31, 1996 and 1997 and
the consolidated statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997 included in
this Proxy Statement/Prospectus, have been included herein in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing. With respect to
the unaudited interim financial information of CNG for the six month periods
ended June 30, 1997 and 1998, included in this Proxy Statement/Prospectus, the
independent accountants have reported that they have applied limited procedures
in accordance with professional standards for a review of such information.
However, their separate report included herein, states that they did
not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of the review
procedures applied under Section 11 of the Securities Act for their report on
the unaudited interim financial information because that report is not a
"report" or a "part" of the registration statement prepared or certified by the
accountants within the meaning of Sections 7 and 11 of the Securities Act.
CNG SHAREHOLDER PROPOSALS
CNG will hold a 1999 Annual Meeting of Shareholders only if the Merger is
not consummated before the time of such meeting, which it is presently expected
would be held in late-June, 1999. In such event, as disclosed in the proxy
materials for CNG's 1998 Annual Meeting, in order to be eligible for inclusion
in CNG's proxy materials for the 1999 Annual Meeting, any shareholder proposal
to take action at such meeting must be received at the main office of CNG, 1437
South Boulder, Suite 1250, Tulsa, Oklahoma no later than December 15, 1998. Any
such proposal shall be subject to the requirements of the proxy rules adopted
under the Exchange Act.
70
<PAGE> 78
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants -- audited 1997 financial
statements................................................ F-2
Report of Independent Accountants -- interim 1998 financial
statements................................................ F-3
Consolidated Balance Sheets at June 30, 1998 (unaudited) and
December 31, 1996 and 1997................................ F-4
Consolidated Statements of Operations for the six months
ended June 30, 1997 and 1998 (unaudited) and for each of
the three years in the period ended December 31, 1997..... F-5
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 1997 and
for the six months ended June 30, 1998 (unaudited)........ F-6
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1998 (unaudited) and for each of
the three years in the period ended December 31, 1997..... F-7
Notes to Consolidated Financial Statements.................. F-8
Selected Consolidated Financial Data and Other
Information............................................... F-20
</TABLE>
F-1
<PAGE> 79
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Continental Natural Gas, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Continental
Natural Gas, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1995, 1996 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Continental
Natural Gas, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1995, 1996 and 1997 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
March 27, 1998
F-2
<PAGE> 80
REPORT OF INDEPENDENT ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of Continental
Natural Gas, Inc. and Subsidiaries as of June 30, 1998, and the related
consolidated statements of operations and cash flows for the six months ended
June 30, 1997 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Tulsa, Oklahoma
August 13, 1998
F-3
<PAGE> 81
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- JUNE 30,
1996 1997 1998
---- ---- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21,078 $ 1,237 $ 6,339
Accounts receivable:
Trade, net of allowance for doubtful accounts of $258,
$328 and $328........................................ 44,931 38,184 39,921
Affiliates............................................. 5,969 7,386 5,384
Other.................................................. 1,150 5,533 3,809
Notes receivable -- affiliates............................ 18 18 18
Gas inventory............................................. 3,149 1,679 1,361
Prepaid expenses.......................................... 164 240 260
-------- -------- --------
Total current assets...................................... 76,459 54,277 57,092
Investments (Note 5)........................................ 656 527 479
Property and equipment, net (Note 6)........................ 61,045 114,785 121,096
Deferred tax asset.......................................... 7,075 7,683 6,836
Other assets................................................ 694 1,662 1,663
-------- -------- --------
Total assets................................................ $145,929 $178,934 $187,166
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 56,708 $ 48,755 $ 50,415
Affiliate payables........................................ 464 -- --
Contract advances......................................... 24,788 -- --
Current portion of long-term debt......................... 867 7,500 7,500
Current portion of capital lease obligations.............. 1,165 1,402 1,316
-------- -------- --------
Total current liabilities................................. 83,992 57,657 59,231
Long-term debt.............................................. 32,946 73,500 79,097
Capital lease obligations................................... 6,583 6,226 5,626
Deferred gain on sale-leaseback............................. 254 132 71
-------- -------- --------
Total liabilities........................................... 123,775 137,515 144,025
Commitments and contingencies (Notes 8, 10 and 11)
Shareholders' equity (Note 14):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued................................ -- -- --
Convertible preferred stock, $1 par value, $40,000
liquidation value, 200 shares authorized, 149 shares
issued and outstanding in 1996 and none issued and
outstanding in 1997.................................... -- -- --
Common stock, $.01 par value, 60,000,000 shares authorized
and 3,919,156 issued in 1996 and 6,621,003 shares
issued in 1997 and 1998................................ 39 66 66
Additional paid-in capital................................ 12,376 34,472 34,472
Retained earnings......................................... 10,043 7,987 9,338
Treasury stock, at cost................................... (204) (204) (204)
Receivable from stock sale................................ (100) (100) (100)
Unearned compensation associated with stock options....... -- (802) (431)
-------- -------- --------
Total shareholders' equity................................ 22,154 41,419 43,141
-------- -------- --------
Total liabilities and shareholders' equity.................. $145,929 $178,934 $187,166
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 82
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Natural gas sales......................... $ 95,631 $196,729 $269,517 $124,661 $111,023
Natural gas sales -- related party........ -- 12,050 20,098 10,102 8,850
Natural gas liquids sales................. 24,804 34,757 46,224 17,978 21,602
Gathering fees............................ -- 1,995 4,449 3,128 3,977
Other..................................... 763 1,130 330 6 242
-------- -------- -------- -------- --------
Total operating revenue................... 121,198 246,661 340,618 155,875 145,694
-------- -------- -------- -------- --------
Operating costs and expenses:
Cost of purchased gas................... 107,642 225,535 318,283 143,612 133,853
Operating expenses...................... 4,366 5,978 7,096 3,077 5,221
General and administrative.............. 3,840 5,623 7,560 3,598 4,894
Depreciation, depletion and
amortization......................... 1,367 2,854 4,089 1,832 3,551
-------- -------- -------- -------- --------
Total operating costs and expenses...... 117,215 239,990 337,028 152,119 147,519
-------- -------- -------- -------- --------
Operating income.......................... 3,983 6,671 3,590 3,756 (1,825)
-------- -------- -------- -------- --------
Other income (expense):
Interest income......................... 310 132 527 411 82
Equity in loss of investee.............. (83) (136) (94) (63) (48)
Interest expense........................ (914) (2,702) (5,266) (2,781) (4,229)
Minority interest....................... (404) -- -- -- --
Gain on sale of gathering system........ -- -- -- -- 7,515
Other, net.............................. 44 20 (646) 90 720
-------- -------- -------- -------- --------
Total other income (expense)............ (1,047) (2,686) (5,479) (2,343) 4,040
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item...................... 2,936 3,985 (1,889) 1,413 2,215
Income tax (expense) benefit.............. 2,174 3,635 644 (566) (864)
-------- -------- -------- -------- --------
Income (loss) before extraordinary item... 5,110 7,620 (1,245) 847 1,351
Extraordinary loss on retirement of debt
(net of income taxes of $262)........... -- (427) -- -- _--
-------- -------- -------- -------- --------
Net income (loss)......................... $ 5,110 $ 7,193 $ (1,245) $ 847 $ 1,351
======== ======== ======== ======== ========
Basic earnings per share:
Income (loss) before extraordinary
item................................. $ 1.61 $ 1.99 $ (.31) $ .17 $ .21
======== ======== ======== ======== ========
Net income (loss)....................... $ 1.61 $ 1.87 $ (.31) $ .17 $ .21
======== ======== ======== ======== ========
Diluted earnings per share:
Income (loss) before extraordinary
item................................. $ 1.59 $ 1.77 $ (.31) $ .17 $ .21
======== ======== ======== ======== ========
Net income (loss)....................... $ 1.59 $ 1.67 $ (.31) $ .17 $ .21
======== ======== ======== ======== ========
Weighted average common shares
outstanding:
Basic................................... 3,151 3,536 4,739 3,613 6,315
Diluted................................. 3,185 4,307 4,739 3,613 6,355
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 83
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------------- ADDITIONAL RETAINED
PREFERRED COMMON TREASURY PREFERRED COMMON PAID-IN EARNINGS TREASURY
STOCK STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) STOCK
--------- ------ -------- --------- ------ ---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 1,000 3,457,159 263,435 $ 315 $34 $12,034 $ (74) $(156)
Acquisition of preferred
stock.................. (1,000) (315)
Purchase of treasury
stock.................. 42,568 (48)
Common stock dividends
($.01 per share)....... (24)
Preferred stock
dividends ($122.06 per
share)................. (122)
Net income.............. 5,110
------ --------- ------- ----- --- ------- ------- -----
Balance at December 31,
1995................... 3,457,159 306,003 34 12,034 4,890 (204)
Issuance of preferred
stock.................. 200 201
Sale of common stock to
management (Note 14)... 461,997 5 141
Redemption of preferred
stock.................. (51) (2,040)
Net income.............. -- 7,193
------ --------- ------- ----- --- ------- ------- -----
Balance at December 31,
1996................... 149 3,919,156 306,003 39 12,376 10,043 (204)
Preferred stock
dividends ($5,441 per
share)................. (811)
Conversion of preferred
stock.................. (149) 586,847 6 (6)
Sale of common stock.... 2,115,000 21 21,267
Grant of stock
options................ 835
Net loss................ (1,245)
------ --------- ------- ----- --- ------- ------- -----
Balance at December 31,
1997................... -- 6,621,003 306,003 -- 66 34,472 7,987 (204)
Compensation associated
with stock options
(unaudited)............
Net income
(unaudited)............ 1,351
------ --------- ------- ----- --- ------- ------- -----
Balance at June 30, 1998
(unaudited)............ -- 6,621,003 306,003 $ -- $66 $34,472 $ 9,338 $(204)
====== ========= ======= ===== === ======= ======= =====
<CAPTION>
UNEARNED
COMPENSATION
RECEIVABLE ASSOCIATED
FROM STOCK WITH STOCK
SALE OPTIONS TOTAL
---------- ------------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31,
1994................... $ $ $12,153
Acquisition of preferred
stock.................. (315)
Purchase of treasury
stock.................. (48)
Common stock dividends
($.01 per share)....... (24)
Preferred stock
dividends ($122.06 per
share)................. (122)
Net income.............. 5,110
----- ----- -------
Balance at December 31,
1995................... 16,754
Issuance of preferred
stock.................. 201
Sale of common stock to
management (Note 14)... (100) 46
Redemption of preferred
stock.................. (2,040)
Net income.............. 7,193
----- ----- -------
Balance at December 31,
1996................... (100) 22,154
Preferred stock
dividends ($5,441 per
share)................. (811)
Conversion of preferred
stock.................. --
Sale of common stock.... 21,288
Grant of stock
options................ (802) 33
Net loss................ (1,245)
----- ----- -------
Balance at December 31,
1997................... (100) (802) 41,419
Compensation associated
with stock options
(unaudited)............ 371 371
Net income
(unaudited)............ 1,351
----- ----- -------
Balance at June 30, 1998
(unaudited)............ $(100) $(431) $43,141
===== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statement.
F-6
<PAGE> 84
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 5,110 $ 7,193 $ (1,245) $ 847 $ 1,351
-------- -------- -------- -------- --------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization......... 1,367 2,854 4,089 1,833 3,551
Amortization of debt issuance costs.............. 128 269 176 76 173
Gain on disposition of gathering system.......... -- -- -- -- (7,515)
Gain on disposition of assets.................... (124) (133) (122) (61) (61)
Minority interest................................ 404 -- -- -- --
Equity in loss of investee....................... 82 136 94 63 48
Deferred income tax benefit...................... (2,220) (4,213) (644) 536 847
Noncash compensation on stock issuance........... -- 46 -- -- --
Noncash compensation on grant of stock options... -- 33 -- 371
Extraordinary loss on retirement of debt......... -- 427 -- -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (6,717) (35,408) 5,674 21,177 1,988
Gas inventory.................................. 85 (2,263) 1,469 1,892 319
Prepaid expenses............................... (42) (102) (39) 70 (19)
Accounts payable and accrued liabilities....... 11,508 31,899 (14,644) (21,563) 1,801
Contract advances.............................. (756) 22,831 (24,787) (20,879) --
-------- -------- -------- -------- --------
Total adjustments............................ 3,715 16,343 (28,701) (16,856) 1,503
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities....................................... 8,825 23,536 (29,946) (16,009) 2,854
-------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of gas system................... -- -- -- -- 12,000
Capital expenditures............................... (12,310) (30,761) (15,065) (6,043) (14,488)
Purchase of preferred stock investment............. -- -- -- -- 6,000
Redemption of preferred stock investment........... -- -- -- -- (6,000)
Acquisition of Taurus Energy Corp.................. -- -- (42,000) -- --
Proceeds from sale of property and equipment....... 7 308 9 -- --
(Increase) decrease in investments................. 54 (5) 34 34 --
(Increase) decrease in notes receivable --
affiliate........................................ -- -- -- -- --
(Increase) decrease in other assets................ (37) -- -- -- --
-------- -------- -------- -------- --------
Net cash used in investing activities.............. (12,286) (30,458) (57,022) (6,009) (2,488)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Preferred dividends paid........................... (146) -- (811) (224) --
Sale of common stock............................... -- -- 21,288 -- --
Purchase of preferred and Treasury Stock........... (363) -- -- -- --
Principal payments on long-term debt............... (11,126) (45,904) (39,208) (434) (40,250)
Proceeds of long-term debt......................... 14,750 70,466 86,395 7,861 45,847
Cash overdrafts.................................... -- -- 1,842 -- --
Purchase of warrants............................... (315) -- -- -- --
Debt issuance costs................................ (141) (524) (1,144) (83) (175)
Principal payments under capital lease
obligations...................................... (333) (694) (1,235) (579) (686)
-------- -------- -------- -------- --------
Net cash provided by financing activities.......... 2,326 23,344 67,127 6,541 4,736
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (1,135) 16,422 (19,841) (15,477) 5,102
Cash and cash equivalents at beginning of year..... 5,791 4,656 21,078 21,078 1,237
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year........... $ 4,656 $ 21,078 $ 1,237 $ 5,601 $ 6,339
======== ======== ======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 745 $ 2,472 $ 5,266
======== ======== ========
Income taxes paid................................ $ 100 $ 100 $ 520
======== ======== ========
</TABLE>
Supplemental disclosure of noncash investing and financing activities -- In
1995, 1996, and 1997, the Company incurred approximately $2.4 million, $5.2
million and $2.4 million, respectively, relating to capital lease obligations
for the acquisition of equipment. In 1997, 586,847 shares of common stock were
issued as a result of the conversion of 149 shares of convertible preferred
stock. In 1996, the Company issued preferred stock and cancelled certain
indebtedness to acquire the minority interest ownership of a partnership holding
one of the Company's processing plants. Also in 1996, the Company redeemed 51
shares of preferred stock in exchange for the cancellation of indebtedness due
from an affiliated entity.
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 85
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS -- Continental Natural Gas, Inc. and Subsidiaries (the
"Company") is involved principally in natural gas gathering, processing and
marketing with operations principally in the central United States. The
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and its investments in majority-owned partnerships.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
with maturities of three months or less at date of purchase to be cash
equivalents.
INVENTORY -- Gas inventory is stated at the lower of market or average
cost.
PROPERTY AND EQUIPMENT -- The Company's property and equipment is carried
at cost and depreciated on the straight-line basis over their estimated useful
lives ranging from 3 to 20 years. Gain or loss on disposal of such property and
equipment is reflected in operations. Maintenance and repairs are charged to
expense as incurred.
The carrying value of property and equipment is reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Assets determined to be impaired based on
undiscounted estimated future net cash flows are reduced to estimated fair
value. No such reduction in the carrying value of assets has been reflected in
the accompanying financial statements.
DEBT ISSUANCE COSTS -- Costs associated with obtaining financing are
capitalized and amortized using the straight-line method over the term of the
agreement.
REVENUE RECOGNITION -- Revenue is recognized when product is delivered or
when services are rendered.
INCOME TAXES -- The Company accounts for income taxes utilizing Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
EARNINGS PER SHARE -- In the fourth quarter of 1997, the Company adopted
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 128, Earnings per share ("FAS 128"), which requires the presentation of
basic and diluted earnings per share (see Note 3). Earnings per share amounts
for all previous periods presented have been restated to give effect to the
application of FAS 128.
ACCOUNTING ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 86
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITION OF TAURUS ENERGY CORP.
On November 20, 1997, the Company acquired Taurus Energy Corp. for total
acquisition costs of $42.1 million. The acquisition has been accounted for as a
purchase and the results of Taurus Energy Corporation have been included in the
accompanying consolidated financial statements, since the date of acquisition.
The acquisition is summarized as following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 4,764
Gas gathering systems....................................... 42,268
Current liabilities......................................... (4,882)
-------
Total acquisition...................................... $42,150
=======
</TABLE>
Unaudited summary pro forma results of operations for the Company,
reflecting the above described acquisition as if it had occurred at the
beginning of the years ended December 31, 1996 and December 31, 1997, are as
follows, respectively: revenues, $290.8 million and $380.1 million; net income
(loss), $7.6 million and ($1.5 million); and net income (loss) per common share
(diluted), $1.76 and $(.37). The pro forma results of operations are not
necessarily indicative of the actual results of operations that would have
occurred had the purchase actually been made at the beginning of the respective
periods nor of the results which may occur in the future.
3. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share
for income before extraordinary item.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------------------
INCOME WEIGHTED SHARES
(NUMERATOR) (DENOMINATOR) PER SHARE AMOUNT
----------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Income before extraordinary item.................... $5,110
Less: Preferred stock dividends..................... (47)
------
Basic earnings per common share..................... $5,063 3,151 $1.61
=====
Warrants............................................ 34
-----
Diluted earnings per common share................... $5,063 3,185 $1.59
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
INCOME WEIGHTED SHARES
(NUMERATOR) (DENOMINATOR) PER SHARE AMOUNT
----------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Income before extraordinary item.................... $7,620
Less: Preferred stock dividends..................... (587)
------
Basic earnings per common share..................... $7,033 3,536 $1.99
=====
Convertible preferred stock......................... 587 771
------ -----
Diluted earnings per common share................... $7,620 4,307 $1.77
====== ===== =====
</TABLE>
F-9
<PAGE> 87
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
LOSS WEIGHTED SHARES
(NUMERATOR) (DENOMINATOR) PER SHARE AMOUNT
----------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Loss before extraordinary item...................... $(1,245)
Less: Preferred stock dividends..................... (223)
-------
Basic earnings per common share..................... $(1,468) 4,739 $(.31)
=====
Diluted earnings per common share................... $(1,468) 4,739 $(.31)
======= ===== =====
</TABLE>
Contingently issuable options on 204,000 shares of common stock with an
exercise price of $.26 were not included in the computation of diluted earnings
per share for 1996 and 1997 in accordance with the provisions of FAS 128.
Options on 207,210 shares of common stock with an average exercise price of
$7.47 were not included in the computation of diluted earnings per share for
1997 because their effect would have been antidilutive.
4. RELATED PARTY TRANSACTIONS
In 1995, 1996 and 1997, the Company provided office space to an affiliated
entity and billed it for rentals of $40,399, $40,399 and $51,075, respectively.
The Company provided general and administrative services to affiliates and
billed them $265,351, $218,253 and $209,724 in 1995, 1996 and 1997,
respectively. Additionally, the Company in 1995, 1996 and 1997, was charged by
affiliates $36,786, $190,366 and $14,329, respectively, for general and
administrative expenses incurred on its behalf and $138,000, $210,000, and
$240,000 in 1995, 1996, and 1997 for management services.
The Company purchased gas from Bird Creek Resources ("BCR"), an affiliated
entity, totaling $125,284, $316,466 and $278,161 in 1995, 1996 and 1997,
respectively. At December 31, 1996, the Company had accounts payable to BCR
totaling $463,884. No such amounts were payable at December 31, 1997.
In 1996, the Company sold its oil and gas producing properties to an
affiliated entity for approximately $308,000, which approximated book value.
Revenues from these properties are included in other revenues and totaled
$461,984, and $602,656 for the years ended December 31, 1995 and 1996,
respectively.
The Company had natural gas sales totaling approximately $12 million and
$20.1 million in 1996 and 1997 to an affiliated entity, which gas was sold at
the Company's cost in 1996 and cost plus $.02 per mcf in 1997. Receivables at
December 31, 1996 and 1997 related to these gas sales were approximately $5
million and $6.3 million. During 1996, the Company entered into futures
contracts on behalf of another affiliate, with gains or losses or such contracts
paid or billed to the affiliate. The Company also had advances receivable from
other affiliates totaling approximately $.98 million and $1.034 million at
December 31, 1996 and 1997, respectively.
At December 31, 1996 and 1997, notes receivable from affiliates related to
a sale of a gathering system in prior years were $17,801. This note bears
interest at 8% and is collateralized by the gathering system.
5. INVESTMENTS
The Company, through two limited partnerships of which it is the general
partner, owns a 6.88% interest in a partnership which owns and operates a
natural gas gathering system in Texas. The Company's ownership interest is
accounted for using the equity method. Accordingly, during 1995, 1996 and 1997,
the Company has recognized losses of $82,769, $136,196 and $94,065,
respectively, from the investment.
F-10
<PAGE> 88
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1997, consisted of:
<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Gathering systems and processing plants................... $55,723 $111,485
Compressor equipment...................................... 10,162 11,765
Furniture, fixtures and other............................. 1,342 1,806
Less accumulated depreciation, depletion and
amortization............................................ (6,182) (10,271)
------- --------
Net property and equipment................................ $61,045 $114,785
======= ========
</TABLE>
7. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 consists of the following :
<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Term loan payable in quarterly installments with a final
maturity in 2002, plus interest at either the bank's
base rate plus .5% or LIBOR plus 2.5% (7.69% at
December 31, 1997)..................................... $33,813 $75,000
Revolving loan payable on December 31, 1999, plus
interest at either the bank's base rate plus .5% or
LIBOR plus 2.5% (8.5% at December 31, 1997)............ -- 6,000
Less current portion..................................... (867) (7,500)
------- -------
Long-term debt........................................... $32,946 $73,500
======= =======
</TABLE>
In December 1996, the Company obtained a new credit facility including a
term loan of $39 million and a revolving credit facility of $25 million. Letters
of credit totaling approximately $6.9 million were outstanding related to this
credit facility at December 31, 1996. At December 31, 1996, no amount was
outstanding on the revolving credit facility. Associated with obtaining the new
credit facility, the Company retired its prior long-term debt and expensed the
remaining unamortized debt issuance costs of $689,062, which expense (net of
income taxes of $261,842) is classified as an extraordinary item in the
statement of operations. This expense reduced basic and diluted earnings per
share by $.12 and $.10, respectively, for the year ended December 31, 1996.
In November 1997, the Company entered into an Amended and Restated Credit
Agreement. The Credit Agreement provides for a term loan facility of $75 million
and a revolving credit facility of $25 million, of which up to $18 million may
be utilized to support letters of credit. Letters of credit totaling $8.5
million were outstanding related to this credit facility at December 31, 1997.
Interest rates under both the revolving facility and term facility are variable,
at the Company's election, at: (i) up to 1/4% (depending upon the Company's
financial performance) above the greater of (x) the arithmetic average of the
prime rates announced by Chase Manhattan Bank, Citibank, N.A. and Morgan
Guaranty Trust Company of New York or (y) the federal funds rate as published by
the Federal Reserve Bank of New York plus 1/2%; or (ii) 1.375% to 2.5%
(depending upon the Company's financial performance) above the London Interbank
Offered Rate (LIBOR).
The debt under the agreements is collateralized by inventory, accounts
receivable, property and equipment and other assets. The agreement includes
various restrictive covenants including the maintenance of specified levels of
working capital and net worth, limitations on the incurrence of additional
indebtedness and limitations on dividends to shareholders, and includes a
subjective acceleration clause. During 1997, the
F-11
<PAGE> 89
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company was not in compliance with certain covenants of its debt agreement,
which were waived by the lender.
At December 31, 1997, the aggregate amount of long-term debt is payable as
follows: $7.5 million in 1998; $13.5 million in 1999; $10 million in 2000; $10
million in 2001 and $40 million in 2002. Beginning in 1998, certain additional
principal amounts may be due based on the Company's levels of operating cash
flows as defined by the agreement.
8. CAPITAL LEASES
Property and equipment include the following property under capital leases
at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Compressor equipment...................................... $9,105 $10,220
Less accumulated amortization............................. (616) (1,131)
------ -------
$8,489 $ 9,089
====== =======
</TABLE>
Future minimum lease payments as of December 31, 1997 under capital leases
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 2,017
1999........................................................ 1,693
2000........................................................ 1,662
2001........................................................ 1,662
2002........................................................ 1,546
Thereafter.................................................. 1,017
-------
Future minimum lease payments............................... 9,597
Less amount representing interest........................... (1,969)
-------
Present value of future minimum lease payments.............. 7,628
Less current portion........................................ (1,402)
-------
Long-term portion........................................... $ 6,226
=======
</TABLE>
9. CONTRACT ADVANCES
In December, 1996, the Company received contract advances totaling
approximately $22.8 million related to commitments to sell natural gas and
natural gas liquids. The advances did not bear interest and were paid in product
delivered over approximately nine months beginning in January 1997.
10. INCOME TAXES
Components of income tax expense (benefit) for the years ended December 31,
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current........................................ $ 46 $ 578 $ --
Deferred....................................... (2,220) (4,213) (644)
------- ------- -----
$(2,174) $(3,635) $(644)
======= ======= =====
</TABLE>
F-12
<PAGE> 90
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income tax expense computed by applying the federal
statutory rate to pre-tax income to the Company's effective income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense computed by applying statutory
rate.............................................. $ 998 $ 1,355 $(642)
State income taxes.................................. 118 159 (75)
Other............................................... 18 29 73
Benefit of net operating loss carryforward.......... (1,088) (965) --
Change in valuation allowance associated with
deferred tax assets............................... (2,220) (4,213) --
------- ------- -----
Income tax expense (benefit)........................ $(2,174) $(3,635) $(644)
======= ======= =====
</TABLE>
Deferred tax assets and liabilities at December 31, 1996 and 1997 are
comprised of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for losses and other........................... $ 159 $ 251
Deferred gain on sale leaseback.......................... 97 50
Contract advances........................................ 9,419 --
Net operating loss carryforwards......................... 4,449 16,202
Deferred gain on futures contracts....................... 411 --
Alternative minimum tax credit carryforwards............. 773 768
------- -------
Total deferred tax assets................................ 15,308 17,271
------- -------
Deferred tax liabilities:
Depreciation of property and equipment................... (2,225) (3,211)
Deferred loss on futures contracts....................... -- (369)
------- -------
Total deferred tax liabilities............................. (2,225) (3,580)
------- -------
Valuation allowance........................................ (6,008) (6,008)
------- -------
Net deferred tax asset..................................... $ 7,075 $ 7,683
======= =======
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards
(NOLs) totaling approximately $42 million for regular tax purposes and $40
million for alternative minimum tax purposes. If not utilized, these
carryforwards will expire from 2000 to 2012. Due to the lack of existing legal
precedent with respect to the tax rules governing the Company's NOLs, both the
availability of approximately $10 million the Company's NOLs and its prior
utilization of NOLs (totaling approximately $34 million) may be challenged.
Disallowance of the use of the NOLs would result in certain taxes associated
with prior utilization of the NOLs being currently payable. In March of 1998,
the Company received notification that the Internal Revenue Service plans to
audit the Company's 1995 tax return.
Realization of the Company's deferred tax assets is dependent upon the
generation of sufficient taxable income prior to the expiration of the NOLs and,
for financial reporting purposes, the resolution of the matters noted above.
Although realization is not assured, management believes it is more likely than
not that the recorded net deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable could be increased or decreased by a
material amount in the near-term pending resolution of these matters.
F-13
<PAGE> 91
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, enters into fixed price
sales contracts of natural gas. At December 31, 1996, the Company had fixed
price gas sales contracts for prices ranging between $1.83 and $2.46 for the
period January 1, 1997 to August 31, 1998. At December 31, 1997, the Company had
fixed price gas sales contracts for prices ranging between $1.92 and $3.25 for
the period January 1, 1998 and July 31, 1999.
As of December 31, 1997, the Company has outstanding approximately $8.5
million of credit from commercial banks related to its purchases and sales of
gas and has pledged inventory, accounts receivable, property and equipment and
other assets as collateral.
The Company occupies office space and maintains certain compressor
equipment under operating leases and incurred rent expense of approximately $1.8
million, $1.9 million, $2 million in 1995, 1996 and 1997, respectively. Future
minimum rental payments under the terms of the leases are $917,171 in 1998;
$224,039 in 1999; $218,326 in 2000; $213,644 in 2001; and $106,820 thereafter.
As of December 31, 1997, the Company was a defendant in litigation
involving claims made by Colorado Interstate Gas ("CIG"). The case primarily
involved claims made by CIG that the Company and Continental Hydrocarbons, Inc.
("CHI"), a former subsidiary of the Company, improperly withheld proceeds from
the sale of NGLs processed at the Mocane Plant, and committed other wrongful
acts, and, as a result, was liable to CIG for unspecified actual and punitive
damages. In February 1998, the Company and CIG reached a settlement with respect
to all such claims, agreeing to pay CIG $2 million in cash. Through September
30, 1997, the Company had established reserves of approximately $1.4 million in
connection with CIG's claims. The Company incurred a $.6 million pre-tax charge
to earnings in the fourth quarter of 1997 as a result of the settlement, which
is included in other expense.
The Company is at various times a party to additional claims and involved
in various other litigation and administrative proceedings arising in the normal
course of business. The Company believes it is unlikely that the final outcome
of any of the claims, litigation or proceedings discussed above to which the
Company is a party would have a material adverse effect on the Company's
financial position or results of operations.
12. PROFIT SHARING AND THRIFT PLAN
The Company participates with certain affiliates in a defined contribution
plan (the "Plan") covering substantially all employees. Under the Plan
provisions, the Company contributes 2% of each participant's annual salary, plus
up to an additional 3% to match voluntary contributions by employees. Employees
may make voluntary contributions of up to 10% of their annual compensation. The
Company makes contributions to the Plan each pay period. Total expense for 1995,
1996 and 1997 was approximately $106,000, $141,500 and $199,000, respectively.
13. STOCK OPTIONS
During 1995, the Company granted certain employees phantom stock rights
under which certain amounts would be due upon the occurrence of specified
events. On February 28, 1996, these phantom stock rights were cancelled and
certain members of management were granted stock options for 204,000 shares of
common stock. These options become exercisable only if certain performance
criteria of the Company are met during the years of 1997 through 1999. The
options, if earned, are exercisable at $.26 per share and expire at March 31,
2000. The amount of the options exercisable may also be limited based on the
fair value of the Company's common stock at the date of exercise. None of these
options vested during 1997.
In June 1997, the Company approved the adoption of an Employee Stock Plan
(the "Plan") whereby 600,000 shares of common stock were authorized for issuance
under the Plan. Options to purchase 207,210
F-14
<PAGE> 92
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock at a weighted average exercise price of $7.47 per share
were granted on December 23, 1997, which options become exercisable in 25%
increments on February 28, 1998, December 31, 1998, December 31, 1999 and
December 31, 2000 and expire after 10 years from the original grant. The Company
applies APB 25 in accounting for such stock options. Under this standard,
compensation expense is recognized associated with these options as they are
earned, based on the fair value of the Company's common stock at the dates they
are granted. Accordingly, the Company has recognized approximately $33,000 of
compensation expense and approximately $802,000 of unearned compensation. Such
unearned compensation will be recognized as an expense over the vesting period
of the options.
Based on the provisions of FASB No. 123, "Accounting for Stock-Based
Compensation," the grant date fair value of options issued prior to 1997 are not
material and, accordingly, disclosure of pro forma information as required by
this standard has not been presented for 1996 and 1995. Had compensation been
determined on the basis of fair value pursuant to FASB Statement No. 123, net
income and earnings per share for 1997 would have been reduced as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Net Loss (In thousands):
As reported............................................... $1,245
------
Pro Forma................................................. $1,267
------
Basic Earnings per Share:
As reported............................................... $ (.31)
------
Pro forma................................................. $ (.31)
------
Diluted Earnings per Share:
As reported............................................... $ (.31)
------
Pro Forma................................................. $ (.31)
======
</TABLE>
The above FASB Statement No. 123 pro forma disclosures are not necessarily
representative of the effect FASB No. 123 will have in the pro forma disclosure
of future years.
The fair value of each option granted is estimated using the Black-Scholes
model. The Company's stock volatility was .25 in 1997 based on previous stock
performance. Dividend yield was estimated to remain at zero with a risk free
interest rate of 5.7 percent in 1997. Expected life ranged from 5 to 8 years
depending on the vesting periods involved and the make up of participating
employees. The aggregate fair value of options granted during 1997 under the
Stock Option Plan was approximately $1.4 million.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
EXERCISE PRICES NUMBER OF SHARES CONTRACTUAL LIFE EXERCISE PRICE
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
$6.00-$8.00...................... 176,210 10 $ 6.78
$11.25-$11.75.................... 31,000 10 $11.41
</TABLE>
14. SHAREHOLDERS' EQUITY
On January 1, 1996, the Company issued 200 shares of preferred stock in
exchange for the minority interest ownership in the Beaver gas processing plant.
As the minority interest ownership was held by affiliates of the Company with
common ownership, the assets and liabilities associated with the acquired
interest have been reflected at their historical amounts. Subsequently, the
Company redeemed 51 shares of the preferred stock in exchange for cancellation
of indebtedness owed the Company. Dividends on the preferred stock are
cumulative from the date of issuance at a rate of 7 1/2% applied to the
liquidation value. At December 31, 1996,
F-15
<PAGE> 93
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unpaid dividends totaling $587,250 had accumulated on the Preferred Stock, which
dividends were paid in 1997. During 1997, all outstanding preferred stock was
converted into 586,847 shares of common stock of the Company.
Also, on February 28, 1996, the Company sold 461,997 shares of common stock
of the Company to certain members of Company Management for $100,000 payable in
the form of notes receivable with interest at 8%. Based on the fair value of the
Company's common stock at this date, compensation expense and a contribution of
capital of $46,000 has been recognized in 1996.
On August 6, 1997 the Company completed its initial public offering
selling, 2,115,000 shares of common stock for net proceeds of approximately
$21.3 million.
15. FINANCIAL INSTRUMENTS
DERIVATIVES -- The Company enters into futures contracts and options
related to its buying and selling of natural gas. Specifically, the Company
hedges its cost of future purchases of natural gas associated with its fixed
price sales commitments. At December 31, 1996, the Company had futures contracts
to purchase natural gas totaling approximately $6.5 million for the period from
January of 1997 to April of 1998. Also at December 31, 1996, the Company had
swap contracts whereby the Company had fixed its price with respect to future
purchases of natural gas totaling approximately $7.2 million for the period of
January of 1997 to August of 1997. At December 31, 1997, the Company had futures
contracts to purchase natural gas totaling approximately $11.6 million for the
period from January 1998 to July 1999. At December 31, 1996 and 1997, the
Company had deposits totaling approximately $1.0 million and $3.8 million,
respectively, related to these contracts which are reflected as Accounts
Receivable -- Other.
Gains or losses on futures contracts, swaps and options designated as
hedges are reported as natural gas sales in the Consolidated Statement of
Operations in the same period as the hedged sale of gas occurs. Gains or losses
on futures contracts, swaps and options not designated as hedges are recognized
as fluctuations occur in the value of the contracts. The effectiveness of hedges
is measured by historical and probable future high correlation of changes in the
fair value of the hedging instruments with changes in value of the hedged sale
of gas. If correlation ceases to exist, hedge accounting is terminated with
gains or losses recognized. To date, high correlation has always been achieved
on the Company's hedge instruments. All futures contracts at December 31, 1996
and 1997 and swap contracts at December 31, 1996 were designated as hedges.
Gains on futures contracts of $1.1 million at December 31, 1996 and losses on
futures contracts totaling approximately $1.0 million at December 31, 1997,
respectively, have been deferred. At December 31, 1996, the fair value of the
swap contracts was approximately $2 million, which amount had also been
deferred.
Additionally, the Company periodically enters into futures contracts on
behalf of its gas purchasers, with gains or losses on such contracts paid or
billed to these customers. At December 31, 1996 and 1997, such contracts were
not material.
FAIR VALUE -- Based on the interest rates currently available to the
Company for borrowings with similar terms and maturities, long-term debt and
capital leases at December 31, 1996 and 1997 approximate fair value.
The estimated fair value of the contract advance liabilities at December
31, 1996, assuming repayment under the scheduled terms of the agreements, was
approximately $24.3 million.
The fair value of the Company's futures positions and swaps at December 31,
1996 was approximately $1.1 million and $2 million, respectively. The fair value
of the Company's futures at December 31, 1997 was a loss of $1.0 million.
F-16
<PAGE> 94
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONCENTRATIONS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with a
variety of companies located in the central United States. Such credit risk is
considered by management to be limited due to the large number of customers
comprising the Company's customer base. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral related
to its receivables. The Company's derivative activities also subject it to
credit risk. Such credit risk is considered by management to be limited based on
its assessment of the financial strength of the individual counterparties to its
derivative positions. Additionally, the Company had approximately $32.2 million
and $8.4 million of cash balances in excess of federally insured limits with
banks at December 31, 1996 and 1997, respectively.
In fiscal years 1995 and 1996, one customer accounted for approximately 23%
and 12%, respectively, of consolidated revenues. At December 31, 1996, accounts
receivable from this customer were approximately $2.4 million. No individual
customer accounted for greater than 10% of revenues for the year ended December
31, 1997.
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last two years.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
STATEMENTS OF OPERATIONS DATA:
Operating revenues................................. $39,320 $42,066 $61,034 $104,241
Operating income(1)................................ 1,662 446 774 3,789
Income (loss) before extraordinary item............ 1,368 (157) (34) 6,443
Net income (loss).................................. 1,368 (157) (34) 6,016
EARNINGS PER SHARE(2):
Basic:
Income (loss) before extraordinary item.......... .37 (.08) (.05) 1.75
Net income (loss)................................ .37 (.08) (.05) 1.63
Diluted:
Income (loss) before extraordinary item.......... .33 (.08) (.05) 1.49
Net income (loss)................................ .33 (.08) (.05) 1.39
YEAR ENDED DECEMBER 31, 1997:
STATEMENTS OF OPERATIONS DATA:
Operating revenues................................. $88,527 $66,329 $81,762 $104,000
Operating income(1)................................ 2,810 946 905 (1,071)
Net income (loss).................................. 987 (140) (118) (1,974)(3)
EARNINGS PER SHARE(2):
Basic:
Net income (loss)................................ .24 (.07) (.02) (.31)
Diluted:
Net income (loss)................................ .23 (.07) (.02) (.31)
</TABLE>
- -------------------------
(1) Operating revenues less operating costs and expenses.
(2) Earnings per share are calculated independently for each quarter, and
accordingly the sum of the four quarters may not equal the annual earnings
per share amounts.
(3) Includes $.6 million loss on settlement of litigation.
F-17
<PAGE> 95
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENTS
On January 23, 1998, the Company entered into an agreement with Gothic
Energy Corporation ("Gothic") to acquire interests in four natural gas gathering
systems and $6 million of Gothic Senior Redeemable Preferred Stock for a total
purchase price of $12 million. The closing of these purchase transactions was
consummated in January and March of 1998.
19. INTERIM FINANCIAL INFORMATION (UNAUDITED)
BASIS OF PRESENTATION. The interim consolidated financial statements
presented herein are unaudited, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary for fair
presentation of the results for such periods.
MERGER WITH CMS. On August 3, 1998, the Company announced the completion of
an agreement with CMS Energy Corporation ("CMS") in which CMS will acquire 100
percent of the Company's common stock in exchange for shares of CMS common stock
totaling approximately $65 million. The agreement is subject to ratification by
the holders of a majority of the Company's stock. The majority shareholders have
announced their intentions to vote in favor of the transaction and expect to
close the transaction early in the fourth quarter.
EARNINGS PER SHARE. The following data shows the amounts used in computing
earnings per share.
<TABLE>
<CAPTION>
FOR THE 6 MONTHS ENDED JUNE 30, 1997
------------------------------------------------
INCOME WEIGHTED SHARES
(NUMERATOR) (DENOMINATOR) PER SHARE AMOUNT
----------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income.......................................... $847
Less: Preferred stock dividends..................... (223)
----
Basic earnings per common share..................... 624 3,613 $ 17
---- ----- ----
Diluted earnings per common share................... $624 3,613 $ 17
==== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE 6 MONTHS ENDED JUNE 30, 1998
------------------------------------------------
INCOME WEIGHTED SHARES
(NUMERATOR) (DENOMINATOR) PER SHARE AMOUNT
----------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic earnings per common share..................... $1,351 6,315 $ 21
====
Effect of dilutive stock options.................... -- 40
------ -----
Diluted earnings per common share................... $1,351 6,355 $ 21
====== ===== ====
</TABLE>
Options on 31,000 shares of common stock with an average exercise price of
$11.41 were not included in the computation of diluted earnings per share for
three and six months ended June 30, 1998 because their effect would have been
antidilutive. Contingently issuable options on 204,000 shares of common stock
with an exercise price of $.26 were not included in the computation of diluted
earnings per share for 1998 and 1997 in accordance with the provisions of FAS
128.
INVESTMENTS. On January 23, 1998, the Company entered into an agreement
with Gothic Energy Corporation ("Gothic") to acquire interests in four natural
gathering systems and $6 million of Gothic Senior Redeemable Preferred Stock for
a total purchase price of $12 million. The closing of these purchase
transactions was consummated in January and March of 1998.
On April 27, 1998, the Preferred Stock was redeemed by Gothic for $6
million plus related fees and dividends.
F-18
<PAGE> 96
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SALE OF SYSTEM. On May 29 (effective as of June 1), 1998, the Company sold
a gas system for approximately $12 million, resulting in a gain on sale of
approximately $7.5 million.
CONTINGENCIES. On May 31, 1998, the Company was served with a summons in a
lawsuit initiated by Aurora National Gas, L.L.C. and filed in Dallas, Texas
(Aurora Natural Gas L.L.C. v. Continental Natural Gas, Inc. and Gary C. Adams,
Case No. DV-98-3831, District Court of Dallas County, Texas, 68th Judicial
District). The Company has removed the case to federal court in Dallas, Texas
and has filed pleadings to (i) dismiss Gary C. Adams as a defendant and (ii)
transfer the case to federal court in Tulsa, Oklahoma. Aurora has filed a motion
in federal court to remand the case to state court. The Company does not know
whether any of these motions will be granted.
Aurora's lawsuit is based on a gas purchase contract which the Company
entered into with Gothic on January 23, 1998. Aurora alleges that it had a prior
contract with Gothic and that the Company "tortuously interfered" with Aurora's
contract. This lawsuit is in the early stages of discovery it is not possible to
fully evaluate Aurora's claims. After consultation with the Company's trial
counsel, management believes that the Company will prevail on the claims made by
Aurora and intends to vigorously defend this lawsuit -- accordingly, the outcome
of this lawsuit is not likely to have a material effect on the financial
condition, results of operations or prospects of the Company. However, the
Company cannot guarantee an outcome favorable to the Company.
At June 30, 1998, the Company had net operating loss carryforwards (NOLs)
totaling approximately $40.0 million for regular tax purposes and $40.0 million
for alternative minimum tax purposes. If not utilized, these carryforwards will
expire from 2000 to 2012. Due to the lack of existing legal precedent with
respect to the tax rules governing the Company's NOLs, both the availability of
approximately $10.0 million of the Company's NOLs and its prior utilization of
NOLs (totaling approximately $34.0 million) may be challenged. Disallowance of
the use of the NOLs would result in certain taxes associated with prior
utilization of the NOLs being currently payable. In March of 1998, the Company
received notification that the Internal Revenue plans to audit the Company's
1995 tax return.
Realization of the Company's deferred tax assets is dependent upon the
generation of sufficient taxable income prior to the expiration of the NOLs and,
for financial purposes, the resolution of the matters noted above. Although
realization is not assured, management believes it is more likely than not that
the recorded net deferred tax asset will be realized. The amount of the deferred
tax asset considered realizable could be increased or decreased by a material
amount in the near-term pending resolution of these matters.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("FAS 131").
FAS 131 amends standards regarding the disclosure of information on business
segments in annual financial statements and also requires selected financial
information on segments for interim financial statements. FAS 131 will become
effective for the Company when the annual financial statements are filed for
1998. Since this Statement requires only additional disclosure, there will be no
effect on the Company's results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"). FAS 133 is effective for fiscal years
beginning after June 15, 1999, but earlier application is permitted as of the
beginning of any fiscal quarter subsequent to June 15, 1998. FAS 133
standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities and measured at fair value.
Upon the Statement's initial application, all derivatives are required to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The Company does not believe adoption of
the new standard will have a material impact on its financial statements.
F-19
<PAGE> 97
SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION
The following table presents selected financial and operating information
for the Company as of the end of and for each of the five years in the period
ended December 31, 1997 and for the six month periods ended June 30, 1997 and
1998. The data for and at the end of the six month periods ended June 30, 1997
and 1998, have been derived from the unaudited Consolidated Financial Statements
of the Company and reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary for fair presentation of
the results for such periods. Results of operations for the six months ended
June 30, 1998, are not necessarily indicative of the results to be achieved for
the year ending December 31, 1998. The selected financial data should be read in
conjunction with the Company's Financial Statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- -------- -----------
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Natural gas sales............................. $126,583 $100,477 $ 95,631 $208,779 $289,615 $134,763 $119,873
Natural gas liquids sales..................... 23,177 19,572 24,804 34,757 46,224 17,978 21,602
Gathering fees................................ -- -- -- 1,995 4,449 3,128 3,977
Other......................................... 1,308 260 763 1,130 330 6 242
-------- -------- -------- -------- -------- -------- --------
Total operating revenue................... 151,068 120,309 121,198 246,661 340,618 155,875 145,694
Operating costs and expenses
Cost of purchased natural gas................. 137,560 111,038 107,642 225,535 318,283 143,612 133,853
Operating expenses............................ 5,530 3,930 4,366 5,978 7,096 3,077 5,221
General and administrative.................... 3,847 3,601 3,840 5,623 7,560 3,598 4,894
Depreciation, depletion and amortization...... 1,741 1,505 1,367 2,854 4,089 1,832 3,551
-------- -------- -------- -------- -------- -------- --------
Total operating costs and expenses........ 148,678 120,074 117,215 239,990 337,028 152,119 147,519
Operating income................................ 2,390 235 3,983 6,671 3,590 3,756 (1,825)
Other income (expense), net..................... (1,028) 4,648 (1,047) (2,686) (5,479) (2,343) 4,040
-------- -------- -------- -------- -------- -------- --------
Income before income taxes, extraordinary item
and cumulative effect of accounting change...... 1,362 4,883 2,936 3,985 (1,889) 1,413 2,215
Income tax (expense) benefit..................... (47) (127) 2,174 3,635 644 (566) (864)
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item and cumulative
effect of accounting change..................... $ 1,315 $ 4,756 $ 5,110 $ 7,620 $ (1,245) $ 847 $ 1,351
======== ======== ======== ======== ======== ======== ========
Net income....................................... $ 1,695 $ 4,756 $ 5,110 $ 7,193 $ (1,245) $ 847 $ 1,351
======== ======== ======== ======== ======== ======== ========
EARNINGS PER SHARE:
Primary:
Income before extraordinary item and cumulative
effect of accounting change................... $ .40 $ 1.47 $ 1.61 $ 1.99 $ (.31) $ .17 $ .21
Net income...................................... .52 1.47 1.61 1.87 (.31) .17 .21
Fully Diluted:
Income before extraordinary item and
cumulative effect of accounting change...... .40 1.45 1.59 1.77 (.31) .17 .21
Net income.................................... .52 1.45 1.59 1.67 (.31) .17 .21
Weighted average common shares outstanding:
Primary......................................... 3,194 3,194 3,151 3,536 4,739 3,613 6,315
Fully diluted................................... 3,217 3,258 3,185 4,307 4,739 3,613 6,355
STATEMENT OF CASH FLOWS DATA:
Cash flows provided by (used in) operating
activities.................................... 12,787 1,785 8,825 23,536 (29,946) (16,009) 2,854
Cash flows provided by (used in) investing
activities.................................... (1,444) 10,188 (12,286) (30,458) (57,022) (6,009) (2,488)
Cash flows provided by (used in) financing
activities.................................... (10,325) (7,800) 2,326 23,344 67,127 6,541 4,736
OTHER DATA:
Capital expenditures............................ 2,267 3,097 12,310 30,761 57,065 6,043 14,488
EBITDA(1)....................................... 4,132 1,739 5,350 9,525 7,679 5,588 1,726
Natural gas throughput gathered and/or processed
(MMcf/d)...................................... 93 95 125 182 253 219 215
NGLs production (Mgal/d)........................ 251 249 265 264 349 276 424
Average NGL price (per gal)..................... .26 .22 .26 .36 .33 .36 .28
BALANCE SHEET DATA:
Cash and cash equivalents....................... 1,618 5,791 4,655 21,078 1,237 5,601 6,339
Property, plant and equipment (net)............. 22,231 13,554 28,346 61,045 114,785 65,477 121,096
Total asset..................................... 46,298 35,264 58,099 145,929 178,934 111,119 187,166
Long-term debt, excluding current portion....... 5,626 3,750 6,534 32,946 73,500 38,123 79,097
Capital lease obligations, excluding current
portion....................................... 2,554 954 2,745 6,583 6,226 6,942 5,626
Other current and non-current liabilities....... 28,797 17,139 30,393 84,246 57,789 43,277 59,302
Shareholders' equity............................ 7,397 12,153 16,754 22,154 41,419 22,777 43,141
</TABLE>
- -------------------------
(1) "EBITDA" represents operating income plus depreciation, depletion and
amortization.
F-20
<PAGE> 98
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
CMS ENERGY CORPORATION
CMS MERGING CORPORATION
CONTINENTAL NATURAL GAS, INC.
ADAMS AFFILIATES, INC.
AND
COTTONWOOD PARTNERSHIP
-----------------------------------------------
Dated as of July 31, 1998,
as amended September 9, 1998
<PAGE> 99
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I THE MERGER................................................................................... A-2
Section 1.1. The Merger.......................................................................... A-2
Section 1.2. Filing Certificate of Merger and Effectiveness...................................... A-2
Section 1.3. Effects of the Merger............................................................... A-2
Section 1.4. Articles of Incorporation, By-Laws, Directors and Officers.......................... A-2
Section 1.5. Further Assurances.................................................................. A-2
ARTICLE II CONVERSION OF SHARES........................................................................ A-3
Section 2.1. Conversion of Securities............................................................ A-3
Section 2.2. Closing............................................................................. A-3
Section 2.3. Dissenting Shares................................................................... A-3
Section 2.4. Payment of Cash and Delivery of Certificates........................................ A-4
Section 2.5. Dividends and Distributions......................................................... A-5
Section 2.6. Fractional Shares................................................................... A-5
Section 2.7. Changes in CMS Common Stock......................................................... A-5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF CNG
AND THE MAJORITY STOCKHOLDERS.............................................................. A-6
Section 3.1. Organization of CNG................................................................. A-6
Section 3.2. Subsidiaries and Investments........................................................ A-6
Section 3.3. Capitalization...................................................................... A-7
Section 3.4. Authority........................................................................... A-8
Section 3.5. Financial Statements................................................................ A-9
Section 3.6. Operations Since Balance Sheet Date................................................. A-9
Section 3.7. No Undisclosed Liabilities.......................................................... A-10
Section 3.8. Taxes............................................................................... A-10
Section 3.9. Condition of Tangible Assets........................................................ A-13
Section 3.10. Title to Property................................................................... A-13
Section 3.11. Availability and Ownership of Assets................................................ A-13
Section 3.12. Personal Property Leases............................................................ A-13
Section 3.13. Accounts Receivable................................................................. A-14
Section 3.14. Intellectual Property............................................................... A-14
Section 3.15. Real Property....................................................................... A-14
Section 3.16. [Intentionally Omitted.............................................................. A-15
Section 3.17. Litigation.......................................................................... A-15
Section 3.18. No Guaranties; Extensions of Credit................................................. A-15
Section 3.19. Compliance with Laws................................................................ A-15
Section 3.20. Permits............................................................................. A-15
Section 3.21. Insurance........................................................................... A-15
</TABLE>
A-i
<PAGE> 100
<TABLE>
<S> <C>
Section 3.22. Employee Benefit Plans.............................................................. A-16
Section 3.23. Employees and Agents and Related Agreements......................................... A-17
Section 3.24. Employee Relations and Labor Matters................................................ A-17
Section 3.25. Absence of Certain Business Practices............................................... A-18
Section 3.26. Territorial Restrictions............................................................ A-18
Section 3.27. Transactions with Certain Persons................................................... A-18
Section 3.28. [Intentionally Omitted]............................................................. A-18
Section 3.29. Environmental Matters............................................................... A-18
Section 3.30. Contracts........................................................................... A-20
Section 3.31. [Intentionally omitted]............................................................. A-21
Section 3.32. Gas Imbalances...................................................................... A-21
Section 3.33. [Intentionally omitted]............................................................. A-21
Section 3.34. CNG Filings; Registration Statement Information..................................... A-22
Section 3.35. Disclosure.......................................................................... A-22
Section 3.36. Brokers............................................................................. A-23
Section 3.37. PUHCA............................................................................... A-23
Section 3.38. Vote Required....................................................................... A-23
Section 3.39. Knowledge of Facts or Circumstances................................................. A-23
Section 3.40. Information Supplied................................................................ A-23
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CMS ENERGY................................................ A-23
Section 4.1. Organization of CMS Energy.......................................................... A-24
Section 4.2. Authority........................................................................... A-24
Section 4.3. Shares of CMS Common Stock.......................................................... A-25
Section 4.4. Capitalization...................................................................... A-25
Section 4.5. Operations Since March 31, 1998..................................................... A-25
Section 4.6. Compliance with Laws................................................................ A-25
Section 4.7. SEC Documents....................................................................... A-26
Section 4.8. No Finder........................................................................... A-26
Section 4.9. Section 368 Representations......................................................... A-26
Section 4.10 Information Supplied................................................................ A-26
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SUB....................................................... A-27
Section 5.1. Organization and Standing........................................................... A-27
Section 5.2. Capital Structure................................................................... A-27
Section 5.3. Authority........................................................................... A-27
ARTICLE VI ACTIONS PRIOR TO THE EFFECTIVE DATE......................................................... A-27
Section 6.1. Issuance of CMS Common Shares....................................................... A-27
Section 6.2. Action by Majority Stockholders of CNG.............................................. A-28
Section 6.3. Subsequent Financial Statements..................................................... A-28
Section 6.4. Investigation of CNG................................................................ A-28
Section 6.5. Lawsuits, Proceedings, Etc.......................................................... A-30
</TABLE>
A-ii
<PAGE> 101
<TABLE>
<S> <C>
Section 6.6. Conduct of Business by CNG Pending the Merger....................................... A-30
Section 6.7. Mutual Cooperation; Reasonable Best Efforts......................................... A-32
Section 6.8. Public Announcement................................................................. A-32
Section 6.9. No Solicitation..................................................................... A-32
Section 6.10 Antitrust Law Compliance............................................................ A-33
Section 6.11 CMS SEC Information................................................................. A-33
Section 6.12 Director Indemnification............................................................ A-33
Section 6.13 Notice of Default................................................................... A-33
Section 6.14 Dissenting Shareholders' Appraisal Rights........................................... A-33
Section 6.15 CNG Options......................................................................... A-34
ARTICLE VII ADDITIONAL COVENANTS AND AGREEMENTS......................................................... A-34
Section 7.1. Tax-Free Nature; Tax Consequences................................................... A-34
Section 7.2. Taxes............................................................................... A-34
Section 7.3. [Intentionally Omitted.............................................................. A-35
Section 7.4. CNG Incentive Stock Option Plan..................................................... A-35
Section 7.5. Power Marketing Certificate......................................................... A-35
Section 7.6. Pooling of Interests................................................................ A-36
ARTICLE VIII CONDITIONS PRECEDENT TO CLOSING............................................................. A-36
Section 8.1. Conditions to the Parties' Obligations.............................................. A-36
Section 8.2. Conditions to CMS Energy's Obligations.............................................. A-37
Section 8.3. Conditions to CNG's Obligations..................................................... A-38
ARTICLE IX INDEMNIFICATION; SURVIVAL................................................................... A-40
Section 9.1. Indemnification by the Majority Stockholders........................................ A-40
Section 9.2. [Intentionally Omitted]............................................................. A-40
Section 9.3. Notice of Claims.................................................................... A-40
Section 9.4. Third Party Claims.................................................................. A-40
Section 9.5. [Intentionally Omitted]............................................................. A-41
Section 9.6. Survival of Obligations............................................................. A-41
Section 9.7. Update of the Representations and Warranties........................................ A-41
ARTICLE X TERMINATION................................................................................. A-42
Section 10.1 Termination......................................................................... A-42
Section 10.2 Effect of Termination............................................................... A-43
Section 10.3 Effect of Termination and Abandonment............................................... A-43
ARTICLE XI OTHER PROVISIONS............................................................................ A-44
Section 11.1 Confidential Nature of Information.................................................. A-44
Section 11.2 Fees and Expenses................................................................... A-46
Section 11.3 Notices............................................................................. A-46
Section 11.4 Definitions......................................................................... A-48
</TABLE>
A-iii
<PAGE> 102
<TABLE>
<S> <C>
Section 11.5 Partial Invalidity.................................................................. A-48
Section 11.6 Successors and Assigns.............................................................. A-49
Section 11.7 Execution in Counterparts........................................................... A-49
Section 11.8 Titles and Headings................................................................. A-49
Section 11.9 Schedules and Exhibits.............................................................. A-49
Section 11.10. Entire Agreement/No Third Party Rights/ Assignment.................................. A-49
Section 11.11. Independent Investigation and Scope of Representations.............................. A-49
Section 11.12. Governing Law; Arbitration.......................................................... A-50
Section 11.13. No Third-Party Beneficiaries........................................................ A-50
Section 11.14. Interpretation...................................................................... A-50
Section 11.15. Guarantee........................................................................... A-50
Section 11.16. [Intentionally Omitted]............................................................. A-50
Section 11.17. Time of Essence..................................................................... A-50
Section 11.18. Attorneys Fees...................................................................... A-51
Section 11.19. Amendment........................................................................... A-51
</TABLE>
EXHIBITS
Exhibit A Certificate of Merger and Articles of Merger
Exhibit B Affiliate Letter
<PAGE> 103
SCHEDULE OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM
DEFINITION SECTION
<S> <C>
AAA ............................................ 11.12(b)
Acquisition Expenses.......................................... 11.2
Acquisition Proposal.......................................... 6.9(a)
affiliate ............................................ 11.4(a)
Agreement ............................................ Preamble
Applicable Environmental Laws................................. 3.29(c)(i)
associate ............................................ 11.4(b)
Average Price ............................................ 2.1(b)
Balance Sheet ............................................ 3.5
Balance Sheet Date............................................ 3.5
BCA ............................................ 1.1
Best Knowledge ............................................ 11.4(c)
Business Combination.......................................... 10.3(c)
CERCLA ............................................ 3.29(a)(iv)
CERCLIS ............................................ 3.29(a)(iv)
Certificates ............................................ 2.4
Claim Notice ............................................ 9.3
Closing ............................................ 2.2
Closing Date ............................................ 2.2
CMS Common Shares ............................................ 2.1(b), 2.7
CMS Common Stock ............................................ First Recital
CMS Energy ............................................ Preamble
CMS Energy SEC Documents...................................... 4.7
CMS Option Agreement.......................................... Ninth Recital
CNG ............................................ Preamble
CNG Agreements ............................................ 3.30(b)
CNG Business ............................................ Fifth Recital
CNG Common Stock ............................................ Third Recital
Code ............................................ Eighth Recital
Company Group ............................................ 3.8(d)(i)
Disclosure Schedule........................................... 3.1
Dispute ............................................ 11.12(b)
Dissenting Shares ............................................ 2.3
Easements ............................................ 3.10(b)
Effective Date ............................................ 1.2
Effective Time ............................................ 1.2
ERISA ............................................ 3.22(a)
</TABLE>
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<TABLE>
<S> <C>
ERISA Affiliate ............................................ 3.22(a)
Evaluation Documents.......................................... 11.1(a)
Exchange Act ............................................ 4.7, 11.1(e)
Exchange Agent ............................................ 2.4(c)
Expense ............................................ 9.1
FERC ............................................ 7.5
GAAP ............................................ 35
Hazardous Substance........................................... 3.29(c)(ii)
HSR Act ............................................ 3.4(c)
Loss ............................................ 9.1
Majority Stockholders......................................... Preamble
Market Conditions ............................................ 11.4(d)
material ............................................ 3.8(d)(ii),
............................................ 3.29(c)(iii)
Material Adverse Change or Effect............................. 11.4(e)
Merger ............................................ 1.1
Merger Consideration.......................................... 2.1(b)
Non-Wholly Owned Subsidiaries................................. 3.2(b)
NPL ............................................ 3.29(a)(iv)
NYSE ............................................ 2.1(b)
OGCA ............................................ 1.1
Option(s) ............................................ 3.3(a)
Participants ............................................ 3.22(a)
Partnerships ............................................ 3.2(b)
Partnerships Agreements....................................... 3.2(b)
Permits ............................................ 3.20
Permitted Encumbrances........................................ 11.4(f)
Per Share Amount ............................................ 2.1(b)
person ............................................ 11.4(g)
Phase I ............................................ 6.4(b)
Pipeline Assets ............................................ 3.10(a)
Plans ............................................ 3.22(a)
Power Marketing Certificate................................... 7.5
Property ............................................ 3.29(c)(iv)
Proprietary Information....................................... 11.1(a)
Prospectus ............................................ 6.1
Real Property ............................................ 3.15
Registration Statement........................................ 3.34(b)
Release ............................................ 3.29(c)(v)
Remedial Action ............................................ 3.29(c)(vi)
Representatives ............................................ 6.4(g)
representatives ............................................ 11.1(a)
</TABLE>
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<TABLE>
<S> <C>
Requisite Regulatory Approvals................................ 8.1(b)
SEC ............................................ 4.2
Securities Act ............................................ 4.2
Seller Filings ............................................ 3.34(a)
Statement of Income........................................... 3.5
Sub ............................................ Preamble
Sub Common Stock ............................................ Second Recital
Subsidiary ............................................ 3.8(d)(iii)
Subsidiaries ............................................ 3.2(a)
Surviving Corporation......................................... 1.1
Tax, Taxes, and Taxable....................................... 3.8(d)(iv)
Tax Partnership ............................................ 3.8(d)(v)
Tax Return ............................................ 3.8(d)(vi)
Tax Sharing Arrangement....................................... 3.8(d)(vii)
Title IV Plan ............................................ 3.22(b)
Unaudited Balance Sheet....................................... 3.5
Unaudited Balance Sheet Date.................................. 3.5
Unaudited Statement of Income................................. 3.5
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT and Plan of Merger, dated as of July 31, 1998, as amended
September 9, 1998 (this "Agreement") among CMS Energy Corporation, a Michigan
Corporation ("CMS Energy"), CMS Merging Corporation, a Michigan corporation and
a wholly-owned subsidiary of CMS Energy ("Sub"), Continental Natural Gas, Inc.,
an Oklahoma Corporation ("CNG"), Adams Affiliates, Inc., an Oklahoma
corporation, and Cottonwood Partnership, an Oklahoma general partnership (the
latter two parties collectively, the "Majority Stockholders"). Unless otherwise
indicated, capitalized terms used herein are those as defined herein.
W I T N E S S E T H :
WHEREAS, CMS Energy is a Michigan corporation having an authorized capital
of (i) 250,000,000 shares of common stock, $0.01 par value (the "CMS Common
Stock"), of which, as of June 30, 1998, 101,512,647 shares were issued and
outstanding, (ii) 10,000,000 shares of preferred stock, $0.01 par value, none of
which, on the date hereof, is issued and outstanding, and (iii) 60,000,000
shares of Class G common stock, no par value, of which, as of June 30, 1998,
8,341,097 shares were issued and outstanding;
WHEREAS, Sub is a Michigan corporation formed by CMS Energy solely for the
purpose of consummating the transactions contemplated herein having an
authorized capital of 60,000 shares of common stock, no par value (the "Sub
Common Stock"), of which, on the date hereof, 10 shares are issued and
outstanding;
WHEREAS, Continental is an Oklahoma corporation having an authorized
capital of 60,000,000 shares of common stock, $0.01 par value (the "CNG Common
Stock"), of which, on the date hereof, 6,315,000 shares are issued and
outstanding;
WHEREAS, the Majority Stockholders directly control approximately 54% of
the CNG Common Stock and exercise management control over CNG.
WHEREAS, CNG, itself and through its Subsidiaries, is engaged in the
purchasing, gathering, treating, processing and marketing of natural gas and
natural gas liquids related thereto (hereinafter generally referred to as the
"CNG Business");
WHEREAS, the respective Boards of Directors of CMS Energy, Sub and CNG have
approved the Merger of Sub into CNG pursuant to the terms and conditions of this
Agreement and the related transactions contemplated by this Agreement, the Board
of Directors of CNG has directed that this Agreement be submitted to its
stockholders for adoption, and CMS Energy as the sole stockholder of Sub has
adopted this Agreement;
WHEREAS, this Agreement is intended to be treated as a pooling of interests
for financial accounting purposes;
WHEREAS, the parties hereto intend the Merger to constitute a
reorganization described in Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code");
WHEREAS, CMS Energy, Sub, CNG and the Majority Stockholders desire to make
certain representations, warranties and agreements in connection with the Merger
and the related transactions contemplated by this Agreement
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and also to prescribe various conditions to the Merger and such transactions;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions
contained herein, and in accordance with the provisions of this Agreement and
the Michigan Business Corporation Act (the "BCA") and the Oklahoma General
Corporation Act (the "OGCA"), at the Effective Time (as hereinafter defined),
CNG shall be merged with and into Sub (the "Merger") pursuant to the
Certificates of Merger in substantially the form of Exhibit A hereto or in such
other form as the parties may agree to accomplish the Merger. As the corporation
surviving in the Merger (the "Surviving Corporation"), Sub shall continue
unaffected and unimpaired by the Merger to exist under and be governed by the
laws of the State of Michigan. Upon the effectiveness of the Merger, the
separate existence of CNG shall cease except to the extent provided by law in
the case of a corporation after its merger into another corporation.
SECTION 1.2. FILING CERTIFICATE OF MERGER AND EFFECTIVENESS. Upon the
satisfaction or waiver of the conditions to the obligations of each of the
parties contained herein, the Certificates of Merger, executed in accordance
with the laws of the State of Michigan and Oklahoma, shall be filed in the
office of the Corporation, Securities and Land Development Bureau, Department of
Consumers and Industry Services, of the State of Michigan and the Oklahoma
Secretary of State. The Merger shall become effective on the date specified in
the Certificate of Merger to be filed as provided in the BCA and the OGCA. The
Effective Time of the Merger shall be 11:59 p.m. on the Effective Date or such
other time as the parties may mutually agree and specify in the Articles of
Merger and Certificates of Merger. The date and the time on such date of
effectiveness of the Merger are herein called, respectively, the "Effective
Date" and the "Effective Time."
SECTION 1.3. EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in Section 724 of the BCA and in Section 1081 of the OGCA.
SECTION 1.4. ARTICLES OF INCORPORATION, BY-LAWS, DIRECTORS AND OFFICERS.
The Articles of Incorporation and By-Laws of Sub, as in effect at the Effective
Time, shall continue in full force and effect as the Articles of Incorporation
and By-Laws of the Surviving Corporation. The initial directors of the Surviving
Corporation shall consist of the directors of Sub immediately prior to the
Effective Time, who shall serve until their respective successors are duly
elected and qualified. The initial officers of the Surviving Corporation shall
consist of the officers of Sub immediately prior to the Effective Time, who
shall serve until their respective successors are duly elected and qualified.
SECTION 1.5. FURTHER ASSURANCES. From time to time after the Effective
Time, the officers and directors of the Surviving Corporation shall be
authorized to execute and deliver, in the name and on behalf of CNG or
otherwise, such deeds and other instruments and to take or cause to be taken
such further or other action as shall be necessary or desirable in order to vest
or perfect in or to confirm, of record or otherwise, in the Surviving
Corporation title to, and possession of, all of the property, rights,
privileges, powers, immunities and franchises of CNG and otherwise
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carry out the purposes of this Agreement.
ARTICLE II
CONVERSION OF SHARES
SECTION 2.1. CONVERSION OF SECURITIES. As of the Effective Time, by virtue
of the Merger and without any action on the part of any of the parties:
(a) All shares of CNG Common Stock that immediately prior to the Effective
Time are held in the treasury of CNG or by any wholly-owned Subsidiary of CNG or
by CMS Energy or any wholly-owned subsidiary of CMS Energy shall be canceled and
no capital stock of CMS Energy or other consideration shall be delivered in
exchange therefor.
(b) Subject to the provisions of Sections 2.6 and 2.7 hereof, each share
of CNG Common Stock issued and outstanding immediately prior to the Effective
Time (exclusive of shares of CNG Common Stock referred to in Section 2.1(a) and
Dissenting Shares); shall be converted into the number of shares of CMS Common
Stock (such shares of CMS Common Stock, are referred to herein as "CMS Common
Shares") and represent the right to receive the consideration payable as set
forth below, rounded to the nearest thousandth of a share, equal to the quotient
of (i) $10.00 (Ten Dollars) ("Per Share Amount"); divided by (ii) the average of
the per share Daily Prices (as hereinafter defined) on the New York Stock
Exchange, Inc. (the "NYSE") of CMS Common Stock (the "Average Price") as
reported in the New York Stock Exchange Composite Transactions (on the
Transaction Reporting System operated by the Consolidated Tape Association)
during the ten (10) consecutive trading days ending on the fifth trading day
prior to the Effective Time of the Merger (the "Exchange Ratio").
All such shares of CNG Common Stock, when so converted, shall no
longer be outstanding and shall automatically be canceled and retired and each
holder of a Certificate (as hereinafter defined) theretofore representing any
such shares shall cease to have any rights with respect thereto, except the
right to receive, upon surrender of such Certificate in accordance with Section
2.4, shares of CMS Common Stock and cash in lieu of fractional shares as
contemplated by Section 2.6 (The "Merger Consideration"). As used herein, the
term Daily Price shall mean the average of the high and low prices per share of
CMS Common Stock, or the closing bid price if no sale occurred, on the day in
question.
(c) Each share of CMS Common Stock and of Sub Common Stock which is issued
and outstanding immediately prior to the Effective Time shall continue to be
outstanding without any change thereto.
SECTION 2.2. CLOSING. Upon the terms and subject to the conditions hereof,
as soon as practicable after the vote of the shareholders of CNG in favor of the
approval and adoption of this Agreement has been obtained, and the satisfaction
or waiver, if permissible, of the conditions set forth in Article VIII hereof,
CNG and CMS Energy shall execute and deliver the Articles of Merger and the
Certificates of Merger, as described in Section 1.1, and the parties hereto
shall take all such other and further actions as may be required by law to make
the Merger effective. Prior to the filing referred to in this Section, a closing
(the "Closing") will be held at such place as the parties may agree for the
purpose of confirming all of the foregoing. The date on which the Closing
actually occurs is herein referred to as the "Closing Date".
SECTION 2.3. DISSENTING SHARES. Notwithstanding anything in this Agreement
to the contrary, shares of CNG
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Common Stock which are issued and outstanding immediately prior to the Effective
Time and which are held by shareholders who have not voted such shares in favor
of the Merger and who shall have delivered a written demand for payment of the
fair value of such shares within the time and in the manner provided in Section
1091 of the OGCA (the "Dissenting Shares") shall not be converted into or be
exchangeable for the right to receive the Merger Consideration provided in
Section 2.1 of this Agreement, unless and until such holder shall have failed to
perfect or shall have effectively withdrawn or lost his right to appraisal and
payment under the OGCA. If any such holder shall have so failed to perfect or
shall have effectively withdrawn or lost such right, such holder's shares shall
thereupon be deemed to have been converted into and to have become exchangeable
for, at the Effective Time, the right to receive the Merger Consideration
without any interest thereon. All payments in respect of Dissenting Shares shall
be made by CNG from funds contributed by CMS.
SECTION 2.4. PAYMENT OF CASH AND DELIVERY OF CERTIFICATES. (a) At or after
the Effective Time, each holder, except for any holder referred to in Section
2.1(a), of a certificate or certificates representing issued and outstanding
shares of record of CNG Common Stock immediately prior to the Effective Time
(collectively, the "Certificates") may surrender such Certificate or
Certificates to the Exchange Agent, and the Exchange Agent shall deliver or
cause to be delivered, in exchange therefor, (i) cash in lieu of fractional
shares or interests pursuant to Section 2.6, by check or wire transfer of funds
to the account or accounts designated by such holder in a notice to the Exchange
Agent, and (ii) one or more certificates representing the aggregate number of
whole CMS Common Shares into which the CNG Common Stock represented by the
Certificate or Certificates so surrendered shall have been converted pursuant to
Section 2.1.
(b) Any certificates representing CMS Common Shares or cash in lieu of
fractional shares deliverable pursuant to Section 2.1(b) shall be deliverable
upon the surrender to CMS Energy of a Certificate or Certificates representing
issued and outstanding shares of record of CNG Common Stock immediately prior to
the Effective Time. Until so surrendered, each outstanding certificate
representing issued and outstanding shares of record of CNG Common Stock
immediately prior to the Effective Time shall not be transferable on the books
of the Surviving Corporation or CMS Energy, but shall be deemed for all
corporate purposes, subject to Section 2.5, to evidence the right to receive
such cash and ownership of the number of whole CMS Common Shares, as the case
may be, into which the shares of CNG Common Stock which immediately prior to the
Effective Time were represented thereby shall have been converted pursuant to
Sections 2.1 and 2.4. At the close of business on the business day next
preceding the Effective Date, the stock transfer books of CNG shall be closed
and no transfer of CNG Common Stock shall thereafter be made or consummated.
Notwithstanding the foregoing, holders of certificates representing shares of
CNG Common Stock immediately prior to the Effective Time shall thereafter cease
to be, and shall have no rights as, shareholders of CNG or CMS Energy until such
holders surrender such certificates in accordance with this Agreement.
(c) Promptly after the Effective Time but in no event later than five
business days after the Effective Time, CMS Energy's stock transfer agent acting
in the role of exchange agent (the "Exchange Agent") shall mail to each record
holder of Certificates, a form letter of transmittal approved by CNG and CMS
Energy (which shall specify that delivery shall be effected, and risk of loss
and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates for payment therefore. Upon surrender to the
Exchange Agent of a Certificate, together with such letter of transmittal duly
executed, the holder of such Certificate shall be entitled to receive in
exchange therefor cash and CMS Common Stock in the amount provided in Sections
2.1 and 2.4, and such Certificate shall forthwith be canceled. CMS Energy shall
provide the Exchange Agent with certificates for CMS Common Stock, as requested
by the Exchange Agent, in the amounts provided in Section 2.1(b) hereof. No
interest will be paid or accrued on the cash payable upon surrender of the
Certificate and no dividend will be disbursed with respect to the shares of CMS
Common Stock until the
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holder's Certificates are surrendered in exchange therefor. If payment or
delivery of CMS Common Stock is to be made to a person other than the person in
whose name the Certificate surrendered is registered, it shall be a condition of
payment that the Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
payment shall pay any transfer or other taxes required by reason of the payment
and delivery of CMS Common Stock to a person other than the registered holder of
the Certificate surrendered or establish to the satisfaction of CMS Energy that
such tax has been paid or is not applicable. Until surrendered in accordance
with the provisions of this Section 2.4, each Certificate (other than
Certificates representing Dissenting Shares) shall represent for all purposes
the right to receive the Merger Consideration.
SECTION 2.5. DIVIDENDS AND DISTRIBUTIONS. Any dividend or other
distribution paid in respect of CMS Common Stock to holders of record on or
after the Effective Date and otherwise payable to the holder of an outstanding
Certificate which, immediately prior to the Effective Time, represented issued
and outstanding shares of CNG Common Stock until the surrender of such
Certificate and the issuance of a certificate or certificates for CMS Common
Shares in respect thereof, shall be retained by CMS Energy pending such
surrender, and no such dividend or other distribution payable in respect of CMS
Common Stock shall be paid to the holder of such Certificate representing CNG
Common Stock until such Certificate shall have been so surrendered to CMS Energy
and a certificate or certificates for CMS Common Shares shall have been so
issued. Upon surrender of each such Certificate and issuance in exchange
therefor of CMS Common Shares, there shall be paid by CMS Energy to or at the
direction of the holder of the certificate for such CMS Common Shares the amount
of all dividends and distributions which became payable to holders of record on
or after the Effective Date in respect of the number of whole CMS Common Shares
represented by the certificate or certificates so issued. In no event shall any
holder of any Certificate which, immediately prior to the Effective Time,
represented issued and outstanding shares of CNG Common Stock be entitled to
receive interest on any of the funds to be received in the Merger or any
dividends or distributions which became payable to holders of record of CMS
Common Shares on or after the Effective Date.
SECTION 2.6. FRACTIONAL SHARES. No certificates for fractions of shares of
CMS Common Stock and no scrip or other certificates evidencing fractional
interests in such shares shall be issued pursuant to Section 2.1. If the
exchange or conversion of a person's aggregate holdings of CNG Common Stock or
other right to obtain CMS Common Shares at any time results in a fractional
share of CMS Common Stock or interest therein, such person shall, in lieu
thereof, be paid in cash within 21 days after receipt by Exchange Agent of
completed transfer documents, including certificates, in an amount equal to the
value of such fractional share or interest based on the Average Price of CMS
Common Stock. Any person otherwise entitled to a fractional share or interest
shall not be entitled by reason thereof to any voting, dividend or other rights
as a stockholder of CMS Energy.
SECTION 2.7. CHANGES IN CMS COMMON STOCK. In the event that, during the
period of ten (10) trading days which is used to determine the Average Price, or
subsequent to such period but prior to the Effective Time, there has occurred
the record date of any reclassification, stock split, stock dividend or similar
change in respect of the CMS Common Stock, then appropriate adjustment shall be
made in the number of shares of CMS Common Stock and/or kind of securities
issued in respect to CMS Common Shares in order to provide holders of CNG Common
Stock or of any other right to obtain CMS Common Shares pursuant to the
transactions contemplated by this Agreement with the same number of shares of
CMS Common Stock and/or securities that they would have received after such
reclassification, stock split, stock dividend or similar change if the Effective
Time had occurred immediately prior to the record date of such reclassification,
stock split, stock dividend or similar change (and all references herein to the
"CMS Common Shares" shall refer to such adjusted number and/or kind of
securities).
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CNG AND THE MAJORITY STOCKHOLDERS
As an inducement to CMS Energy and Sub to enter into this Agreement and to
consummate the transactions contemplated hereby, CNG and the Majority
Stockholders jointly and severally represent and warrant to CMS Energy and Sub
and agree, as follows:
SECTION 3.1. ORGANIZATION OF CNG. CNG is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Oklahoma.
Except as set forth on Schedule 3.1 of the Disclosure Schedule delivered to CMS
Energy by CNG and the Majority Shareholders on the date hereof and as
incorporated herein by reference for all purposes (the "Disclosure Schedule")
CNG is duly qualified to transact business as a foreign corporation and is in
good standing in each of the jurisdictions in which the ownership or leasing of
the properties used in its business or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing would not have a Material Adverse Effect. CNG has
full corporate power and authority necessary to own or lease and operate its
properties and to carry on its business as now conducted. CNG has made available
to CMS Energy complete and correct copies of the articles of incorporation and
by-laws of CNG, in each case as amended and in effect on the date hereof.
SECTION 3.2. SUBSIDIARIES AND INVESTMENTS. (a) CNG owns beneficially and of
record, or indirectly, all of the issued and outstanding shares of capital stock
of each of the corporations listed under the heading "Subsidiaries" on Schedule
3.2 of the Disclosure Schedule (each such corporation, together with any
partnership or limited liability company (whether or not a Tax Partnership, of
which CNG or any such corporation is a general or managing partner or member or
of which CNG or any such corporation owns at least 50% of the partnership or
membership interest, each of which is identified in Schedule 3.2 of the
Disclosure Schedule, referred to as "Subsidiaries"). Except as disclosed on
Schedule 3.2 of the Disclosure Schedule, CNG does not, directly or indirectly,
(i) own, of record or beneficially, any outstanding securities or other interest
in any corporation, limited liability company, partnership, joint venture or
other entity (other than investments in publicly traded securities, cash
equivalents and short-term investment grade debt) or (ii) control any
corporation, limited liability company, partnership, joint venture or other
entity.
(b) Except as disclosed on Schedule 3.2 of the Disclosure Schedule, each of
the Subsidiaries is duly organized, validly existing and, in the case of
corporate Subsidiaries, in good standing, under the laws of its jurisdiction of
organization, and each has full corporate, partnership or limited liability
company power and authority, as the case may be, necessary to own or lease and
operate its properties as now conducted. Each of the Subsidiaries is duly
qualified to transact business as a foreign corporation, foreign partnership or
foreign limited liability company, as the case may be, and is in good standing
in each of the jurisdictions in which conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing would not have a Material Adverse Effect.
Schedule 3.2 of the Disclosure Schedule contains a list of each jurisdiction in
which each Subsidiary is duly qualified to transact business. Schedule 3.2 of
the Disclosure Schedule sets forth the authorized, and issued and outstanding
shares of, capital stock of each corporate Subsidiary and a complete and
accurate list of each corporation in which CNG directly or indirectly owns at
least 20% but less than 100% of the issued and outstanding shares of capital
stock (the "Non-Wholly Owned Subsidiaries") and a complete and accurate list of
each partnership or limited liability company (whether or not a Tax Partnership)
of which CNG or any Subsidiary is or at any time within the last seven (7) years
has been a managing, general or limited partner or a member or has served in a
similar capacity (the "Partnerships"), together with the state and
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date of organization of each Partnership, the name and address of each general
or limited partner or member of each Partnership as they appear in the records
of CNG or such subsidiary, and the percentage interest of CNG or any of its
Subsidiaries in each Partnership. CNG has made available to CMS Energy true and
complete copies of each partnership agreement, limited liability company
agreement, regulations or similar governing instrument and all amendments
thereto pursuant to which each Partnership was organized (the "Partnership
Agreements").
SECTION 3.3. CAPITALIZATION. (a) The authorized capital of CNG consists of
60,000,000 shares of common stock, $0.01 par value, of which 6,315,000 shares
are duly and validly issued and outstanding and, except for shares issuable upon
exercise of the Options (as hereinafter defined) granted by CNG. All of the
outstanding shares of CNG Common Stock are duly authorized, validly issued,
fully paid and nonassessable. The record owners of the CNG Common Stock as of
April 22, 1998 are listed in Schedule 3.3(a) of the Disclosure Schedule and a
list of the record owners of the CNG Common Stock as of the Effective Time will
be provided to CMS Energy on the Effective Date. CNG has issued to its employees
or directors options (individually an "Option", collectively the "Options") to
purchase shares of CNG Common Stock. The aggregate outstanding Options and the
exercise price thereof are listed in Schedule 3.3(a) of the Disclosure Schedule
hereto. Complete and correct copies of the material agreements relating to the
Options have been made available to CMS Energy. Except for the Options, there
are no options, warrants or other rights to acquire, or agreements or
commitments of CNG to issue, sell, purchase or redeem, or of the holders of any
CNG Common Stock to sell or purchase, shares of capital stock or any other
equity interest of CNG, whether on conversion of other securities or otherwise.
None of the issued and outstanding shares of CNG Common Stock has been issued in
violation of, or is subject to, any preemptive or subscription rights. Except as
set forth in Schedule 3.3(b) of the Disclosure Schedule, there are no
stockholder agreements, voting trust agreements or any other similar contracts,
agreements, arrangements, commitments, plans or understandings restricting or
otherwise relating to voting, dividend, ownership or transfer rights with
respect to any shares of capital stock of CNG.
(b) Each Majority Stockholder severally represents and warrants as to
himself that (i) he is the beneficial owner of the shares of CNG Common Stock
listed in Schedule 3.3(a) of the Disclosure Schedule opposite his name; (ii) all
such shares are owned free from all liens, claims, encumbrances or other
restrictions of any kind, other than liens, claims, encumbrances or other
restrictions listed on Schedule 3.3(b) of the Disclosure Schedule.
(c) All outstanding shares of capital stock of each corporate Subsidiary
are duly authorized, validly issued, fully paid and nonassessable. CNG or
another wholly-owned Subsidiary is the record and beneficial owner of all of the
issued and outstanding shares of capital stock of each such Subsidiary is the
record and beneficial owner of the shares of capital stock of each Non-Wholly
Owned Subsidiary as indicated on Schedule 3.2 of the Disclosure Schedule. All
such shares of capital stock are so owned free from all liens, claims,
encumbrances or other restrictions of any kind, other than liens, claims,
encumbrances or other restrictions listed on Schedule 3.3(c) of the Disclosure
Schedule. Except as set forth on Schedule 3.3(c) of the Disclosure Schedule,
there are no options, warrants or other rights to acquire, or agreements or
commitments to issue, sell, purchase or redeem, shares of capital stock of any
corporate Subsidiary, whether on conversion of other securities or otherwise.
None of the issued and outstanding shares of common stock of any corporate
Subsidiary has been issued in violation of, or is subject to, any preemptive or
subscription rights. There are no voting trust agreements or any other similar
contracts, agreements, arrangements, commitments, plans or understandings
restricting or otherwise relating to voting, dividend, ownership or transfer
rights with respect to any shares of common stock of any corporate Subsidiary.
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(d) All outstanding partnership or membership interests in each Partnership
Subsidiary (including any limited liability company Subsidiary) are duly
authorized and validly issued. CNG or another Subsidiary is the record and
beneficial owner of such partnership or membership interests of each such
Partnership Subsidiary to the extent set forth in Schedule 3.2 of the Disclosure
Schedule. All such partnership or membership interests are so owned free from
all liens, claims, encumbrances or other restrictions of any kind, other than
liens, claims, encumbrances or other restrictions listed on Schedule 3.3(d) of
the Disclosure Schedule and other than as set forth in the relevant Partnership
Agreements. There are no options, warrants or other rights to acquire, or
agreements or commitments to issue, sell, purchase or redeem, any partnership or
membership interests in any Partnership Subsidiary, other than as set forth in
the relevant Partnership or Limited Liability Company Agreements.
SECTION 3.4. AUTHORITY. (a) CNG has full corporate power and authority to
enter into this Agreement and, subject to adoption of this Agreement by the
stockholders of CNG, to consummate the transactions contemplated hereby.
(b) The execution, delivery and performance of this Agreement by CNG and
the consummation by CNG of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of CNG, subject to
adoption of this Agreement by the stockholders of CNG. This Agreement has been
duly executed and delivered by CNG and is, and each other agreement or
instrument of CNG contemplated hereby when executed and delivered by or on
behalf of CNG will be, the legal, valid and binding agreement of CNG,
enforceable against CNG in accordance with its respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
(c) Each Majority Stockholder severally represents and warrants as to
himself and as to CNG that neither the execution or delivery of this Agreement
by CNG or such Majority Stockholder nor consummation of the transactions
contemplated hereby or compliance with or fulfillment of the terms and
provisions hereof by CNG or such Majority Stockholder will (i) conflict with,
result in a breach of the terms, conditions or provisions of, or constitute a
default, an event of default or an event creating rights of acceleration,
termination or cancellation or a loss of rights, or result in the creation or
imposition of any encumbrance upon any of the material assets of CNG or any
Subsidiary, under the articles of incorporation or the by-laws or partnership
agreement, limited liability company agreement, regulations or similar governing
instrument of CNG or any Subsidiary, any instrument, agreement (including any
partnership agreement), mortgage, debt instrument, indenture, deed of trust,
permit, concession, grant, franchise, license, judgment, order, award, decree or
other restriction to which CNG or any Subsidiary is a party or any of its
respective properties is subject or by which it is bound or any statute, other
law or regulatory provision affecting it, except for such conflicts, breaches,
defaults, events, creations and impositions that are set forth on Schedule
3.4(a) of the Disclosure Schedule or (ii) to CNG's and each Majority
Stockholder's best knowledge require the approval, consent or authorization of,
or the making of any declaration, filing or registration with, any third party
or any foreign, federal, state or local court, governmental authority or
regulatory body, by or on behalf of CNG or any Subsidiary, except for the
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act"), the filing of a Certificate of Merger with the Corporation
and Securities Bureau, Department of Commerce, of the State of Michigan, the
filing of the Certificate of Merger with the Oklahoma Secretary of State and
appropriate documents with the relevant authorities of other jurisdictions in
which CNG is qualified to do business, adoption of this Agreement by the
stockholders of CNG and as set forth in Schedule 3.4(a) of the Disclosure
Schedule.
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SECTION 3.5. FINANCIAL STATEMENTS. CNG has previously provided CMS Energy
with: (i) the consolidated balance sheet (the "Balance Sheet") of CNG as of
December 31, 1997(the "Balance Sheet Date") and the consolidated statements of
income (the "Statement of Income"), shareholders' equity and cash flows for the
year then ended, together with the notes and any schedules to such financial
statements, as audited by Coopers and Lybrand LLP independent public
accountants, and (ii) the consolidated unaudited balance sheet (the "Unaudited
Balance Sheet") of CNG as of June 30, 1998 (the "Unaudited Balance Sheet
Date"),the related unaudited consolidated statement of income (the "Unaudited
Statement of Income"),cash flow statement and statement of shareholders' equity
for the six months then ended. Except as set forth on Schedule 3.5 of the
Disclosure Schedule or disclosed in the notes or any schedules to the
consolidated financial statements referred to in clause (i) of the preceding
sentence to the best knowledge of CNG, the consolidated balance sheets and
statements of income, shareholders' equity and cash flows referred to in such
clause (i) have been prepared in conformity with generally accepted accounting
principles ("GAAP") consistently applied and fairly present in all material
respects the consolidated financial position of CNG and its consolidated
subsidiaries at the dates of such balance sheets and the consolidated results of
its operations and consolidated cash flows for the respective periods indicated.
SECTION 3.6. OPERATIONS SINCE BALANCE SHEET DATE. (a) Except as set forth
in Schedule 3.6(a) of the Disclosure Schedule, since the Balance Sheet Date,
there has been: (i) no Material Adverse Change in CNG and its Subsidiaries taken
as a whole, and (ii) no damage, destruction, loss or claim with respect to,
whether or not covered by insurance, or condemnation or other taking of, assets
having a Material Adverse Effect on CNG and its Subsidiaries taken as a whole.
(b) Except as set forth in Schedule 3.6(b)of the Disclosure Schedule, as
contemplated hereby or with the prior written consent of CMS Energy after the
date hereof, since the Balance Sheet Date, CNG has conducted its business only
in the ordinary course and in general conformity with past practice. Without
limiting the generality of the foregoing, except as set forth in Schedule 3.6(b)
of the Disclosure Schedule, as contemplated by any provision of this Agreement
or with the prior written consent of CMS Energy after the date hereof, since the
Balance Sheet Date, neither CNG nor any of its Subsidiaries has: (i) issued,
delivered or agreed (actually or contingently) to issue or deliver any of its
capital stock, or granted any option, warrant or right to purchase any of its
capital stock or other equity interest, or security convertible into its capital
stock or other equity interest, or, other than in the ordinary course of
business consistent with past practice, any of its bonds, notes or other
securities, or borrowed or agreed to borrow any funds; (ii) paid any obligation
or liability (absolute or contingent) other than current liabilities reflected
on the balance sheets referred to in Section 3.5 and current liabilities
incurred since the Balance Sheet Date in the ordinary course of business
consistent with past practice; (iii) declared or made, or agreed to declare or
make, any payment of dividends or distributions to stockholders or purchased or
redeemed, or agreed to purchase or redeem, any of its capital stock or other
equity interest, (iv) mortgaged, pledged or encumbered any assets other than in
the ordinary course of business consistent with past practice; (v) except for
assets sold, leased or transferred in the ordinary course of business consistent
with past practice and except for the sale of the Sycamore gas gathering system
effective June 1, 1998 sold, leased or transferred or agreed to sell, lease or
transfer any material assets or rights; (vi) to the best knowledge of CNG,
except in the ordinary course of business consistent with past practice,
canceled or agreed to cancel any material debts or claims, waived or agreed to
waive any rights of material value, or allowed to lapse or failed to keep in
force any material franchise, permit or other material right; (vii) to the best
knowledge of CNG, except in the ordinary course of business consistent with past
practice, made or permitted any material amendment or termination of any
material contract, excluding, however, the expiration of the primary term of any
such contract, agreement or license; (viii) undertaken or committed to capital
expenditures exceeding $100,000 for any single project or related series of
projects;(ix) made any increase in the compensation paid or to become payable
to, or paid any bonus or incentive compensation to,
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any of its directors, officers or employees except for increases in base
compensation in the normal course of business consistent with past practice,
increases required to be made pursuant to the terms of any written employment or
other agreement or employee benefit plan entered into prior to the Balance Sheet
Date, any bonus or incentive compensation the payment of which has been approved
in writing by CMS Energy, and any bonus or incentive compensation which is
referred to in Section 6.6(a)(xiii); (x) amended its articles of incorporation
or by-laws; (xi) to the best knowledge of CNG, undergone any Material Adverse
Change in its relationship with any material supplier, purchaser, distributor,
lessor, governmental body, or consultant; (xii) made charitable donations in
excess of $20,000 in the aggregate; (xiii) incurred any liability or obligation
(whether absolute, accrued, contingent or otherwise and whether direct or as
guarantor or otherwise with respect to obligations of others) material to the
business or assets of CNG and its Subsidiaries, taken as a whole, except in the
ordinary course of business consistent with past practice and except as
contemplated hereunder; (xiv) instituted, settled or agreed to settle any
litigation, action, or proceeding before any court or governmental body relating
to the business or assets of CNG or any of its Subsidiaries and involving an
amount in excess of $100,000 or materially affecting CNG or its Subsidiaries;
(xv) entered into, or amended in any material respect, any employment,
collective bargaining, deferred compensation, retention, change of control,
termination or other material agreement or arrangement for the benefit of
employees (whether or not legally binding) or entered into, adopted or amended
in any material respect any Plan (as hereinafter defined); (xvi) suffered any
strike or other employment related problem which would have a Material Adverse
Effect on CNG and its Subsidiaries taken as a whole; (xvii) suffered the loss of
any key employees, consultants or agents which would have a Material Adverse
Effect on CNG and its Subsidiaries taken as a whole or, to the best knowledge of
CNG, had any Material Adverse Change in its relations with its employees,
consultants or agents; (xviii) received any notice of termination of any
material contract other than termination at the expiration of the primary term
of any such contract, or lease or other material agreement; (xix) transferred or
expressly granted any rights under, or entered into any settlement regarding the
breach or infringement of, any material United States or foreign license,
patent, copyright, trademark, trade name, invention or other material
intellectual property or modified in any material respect any existing rights
with respect thereto; (xx) changed its accounting reference period; (xxi)
entered into any transaction of the type described in Section 3.30 except as
permitted hereunder; or (xxii) entered into or become committed to enter into
any other material transaction except in the ordinary course of business
consistent with past practice.
SECTION 3.7. NO UNDISCLOSED LIABILITIES. Neither CNG nor any of its
Subsidiaries is subject to any material liability which is required in
accordance with GAAP to be shown on the Balance Sheet but which is not so shown,
and, to the best knowledge of CNG, neither CNG nor any of its Subsidiaries is
subject to any material liability, absolute or contingent, which is not shown on
the Balance Sheet or which is in excess of amounts shown or reserved for in the
Balance Sheet, other than, in each case, (i) as referred to in the notes to the
Balance Sheet or in the discussion of the accounting methodologies contained
therein, (ii) as disclosed in Schedule 3.7 of the Disclosure Schedule and (iii)
liabilities incurred after the Balance Sheet Date in the ordinary course of its
business consistent with past practice.
SECTION 3.8. TAXES. (a) Except as set forth on Schedule 3.8 of the
Disclosure Schedule: (i) each of CNG and its Subsidiaries (as hereinafter
defined) has filed on or before the date hereof (or will timely file) all Tax
Returns (as hereinafter defined) that are required to be filed on or before the
date hereof or the Effective Date; (ii) all such Tax Returns for taxable years
or periods ending on or before December 31, 1997 are (or will be) complete and
accurate in all material respects and disclose all Taxes (as hereinafter
defined) required to be paid by CNG and its Subsidiaries for the periods covered
thereby and all Taxes shown to be due on such Tax Returns have been timely
paid;(iii) none of CNG or any Subsidiary has waived or been requested to waive
any statute of limitations in respect of Taxes; (iv) the period for assessment
of Taxes in respect of the Tax Returns referred to in
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clause (i) for taxable years or periods ending on or before December 31, 1993
has expired; (v) except as disclosed on Schedule 3.8 of the Disclosure Schedule
there is no action, suit, investigation, audit, claim or assessment pending or,
to the best knowledge of CNG, proposed or threatened with respect to Taxes of
CNG or any Subsidiary for taxable years or periods ending on or before December
31, 1997 and, to the best knowledge of CNG, no basis exists therefor for which
adequate reserves have not been established; (vi) all deficiencies actually
asserted or assessments actually made as a result of any examination of the Tax
Returns referred to in clause (i) for taxable years or periods ending on or
before December 31, 1997 have been paid in full; (vii) all Tax Sharing
Arrangements (as hereinafter defined) will terminate prior to the Effective Date
and neither CNG nor any Subsidiary will have any liability thereunder on or
after the Effective Date; (viii) there are no Tax indemnity agreements to which
CNG or any Subsidiary is a party or is bound; (ix) there are no liens for Taxes
upon the assets of CNG or any Subsidiary except liens relating to current Taxes
not yet due; (x) all Taxes which CNG or any Subsidiary is required by law to
withhold or to collect for payment (and with respect to the bonuses referred to
in Section 6.6(a)(xiii), collection of withholding due with respect thereto)
have been duly withheld and collected, and have been paid or accrued; (xi) none
of CNG or any of its Subsidiaries has been a member of any consolidated group
other than the Company Group of which it is a member on the date hereof; (xii)
to the best knowledge of CNG, the accruals for deferred Taxes reflected in the
Balance Sheet are adequate to cover any deferred tax liability of CNG and its
Subsidiaries determined in accordance with GAAP through the date thereof; (xiii)
there are no Tax rulings, requests for private letter rulings or requests for
technical advice, in each case initiated by CNG or any Subsidiary, or requests
for a change in method of accounting or closing agreements relating to CNG or
any Subsidiary, which in each case could affect the liability of CNG or any
Subsidiary for Taxes for any period after December 31, 1997; (xiv) none of CNG
or any Subsidiary has filed a consent under Section 341(f) of the Code or any
comparable provision of state statutes; (xv) since January 1, 1994, none of CNG
or any Subsidiary has taken any action not in accordance with past practice that
would have the effect of deferring any Tax liability for CNG or any Subsidiary
from any taxable period ending on or before December 31, 1997 to any taxable
period ending after December 31, 1997; (xvi) no income or gain of CNG or any
Subsidiary has been deferred pursuant to Treasury Regulation Sections 1.1502-13
or -14, or Temporary Treasury Regulation Sections 1.1502-13T or -14T, (xvii) no
power of attorney has been granted with respect to any matter relating to Taxes
of CNG or any Subsidiary which is currently in force; (xviii) none of the
property of CNG or any Subsidiary is required to be treated as owned by another
person pursuant to Section 168(f)(8) of the Code (as in effect prior to its
amendment by the Tax Equity and Fiscal Responsibility Act of 1982) or is "tax
exempt use property" within the meaning of Section 168(h) of the Code or is
subject to a so-called TRAC lease under Section 7701(h) of the Code or any
predecessor provision; (xix) CNG and each Subsidiary is the owner for income tax
purposes of all property which it has leased to any other person; (xx) neither
CNG nor any Subsidiary has participated in or cooperated with an international
boycott, within the meaning of Section 999 of the Code, and all filing
requirements imposed by Section 999 of the Code with respect to CNG and its
Subsidiaries have been and will be complied with; (xxi) neither CNG nor any
Subsidiary has disposed of property in a transaction being accounted for under
the installment method pursuant to Section 453 or 453A of the Code; (xxii)
neither CNG nor any Subsidiary has any corporate acquisition indebtedness, as
described in Section 279(b) of the Code; and (xxiii) no taxes with respect to
any period ending on or before December 31, 1997 were paid by CNG or any
Subsidiary (or charged to CNG or any Subsidiary through any intercompany account
or payment) after December 31, 1997 which were not included in the provision for
income taxes on the Statement of Income; (xxiv) all facts contained in Schedule
3.8(a) of the Disclosure Schedule are complete and accurate in all material
respects.
(b) No disposition by CNG or any of the Majority Stockholders pursuant to
this Agreement is subject to withholding under Section 1445 of the Code and no
stock transfer taxes, real estate transfer taxes, or other similar taxes will be
imposed in respect of the Merger.
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(c) As a result of the Merger and the transactions contemplated by this
Agreement, none of CNG, any Subsidiary or the Surviving Corporation will be
obligated (limited, in the case of the Surviving Corporation, to obligations to
which the Surviving Corporation becomes subject as a result of any agreement or
arrangement entered into by CNG or any Subsidiary prior to the Merger) to make a
payment to an individual that would be an "excess parachute payment" to a
"disqualified individual" as those terms are defined in Section 280G of the
Code, without regard to whether such payment is reasonable compensation for
personal services performed or to be performed in the future.
(d) For purposes of this Section 3.8 and Section 7.2, notwithstanding any
other provision hereof, the following definitions shall apply:
(i) "Company Group" shall mean any "affiliated group" (as defined in
Section 1504(a) of the Code without regard to the limitations contained in
Section 1504(b) of the Code) that, at any time on or before the Effective
Date, includes or has included CNG, any of its Subsidiaries or any
predecessor of or successor to CNG or any of its Subsidiaries (or another
such predecessor or successor), or any other group of corporations which,
at any time on or before the Effective Date, files or has filed Tax Returns
on a combined, consolidated or unitary basis with CNG or any of its
Subsidiaries or any predecessor of or successor to CNG or any of its
Subsidiaries (or another such predecessor or successor).
(ii) "material" shall mean, with respect to Taxes, that the failure on
a timely basis to pay all such Taxes would result in an aggregate Tax
liability of not less than $25,000.
(iii) "Subsidiary" shall have the meaning ascribed thereto in Section
3.2(a).
(iv) "Tax" (and, with correlative meaning, "Taxes" and "Taxable") shall
mean (i) any federal, state, local or foreign net income, gross income,
gross receipts, windfall profits, severance, property, production, sales,
use, value added, license, excise, franchise, employment, payroll,
withholding, alternative or add-on minimum, ad valorem, transfer, excise,
stamp, or environmental tax, or any other tax, custom, duty, governmental
fee or import or export duty or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, addition to tax or
additional amount imposed by any governmental authority, and (ii) liability
of CNG or any of its Subsidiaries for the payment of amounts with respect
to payments of a type described in clause (i) as a result of being a member
of an affiliated, consolidated, combined or unitary group, or as a result
of any obligation of CNG or any of its Subsidiaries under any Tax Sharing
Arrangement or Tax indemnity arrangement.
(v) "Tax Partnership" shall mean any entity, organization, agreement or
group deemed to be a partnership within the meaning of Section 761 of the
Code or any similar state or federal statute, rule or regulation and that
is not excluded from the application of the partnership provisions of
Subchapter K of Chapter 1 of Subtitle A of the Code and of all similar
provisions of state tax statutes or regulations by reason of elections
made, pursuant to Section 761(a) of the Code and all such similar state or
federal statutes, rules and regulations.
(vi) "Tax Return" shall mean any return, report or similar statement
required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim
for refund, amended return and declaration of estimated Tax.
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(vii) "Tax Sharing Arrangement" shall mean any written or unwritten
agreement or arrangement for the allocation or payment of Tax liabilities
or payment for Tax benefits with respect to a consolidated, combined or
unitary Tax Return, which Tax Return includes CNG or any of its
Subsidiaries.
SECTION 3.9. CONDITION OF TANGIBLE ASSETS. Except as otherwise disclosed in
Schedule 3.9 of the Disclosure Schedule and subject to Section 11.11, to the
best knowledge of CNG, the tangible personal property and equipment owned or
leased by CNG or any of its Subsidiaries and having a book or fair market value
in excess of $100,000 as to any single item is in good operating condition
(subject to reasonable wear and tear and immaterial impairments of value and
damage) and generally suitable for the uses for which intended.
SECTION 3.10. TITLE TO PROPERTY. (a) Except for Permitted Encumbrances and
liens arising in the ordinary course of business after the date hereof and
properties and assets disposed of in the ordinary course of business after the
date of the Balance Sheet and except as otherwise set forth in Schedule 3.10(a)
of the Disclosure Schedule, CNG and its Subsidiaries have defensible title (or,
with respect to pipelines, equipment, other tangible personal property,
easements, rights-of-way, servitudes, permits, surface leases and other similar
assets and rights used in connection with CNG's natural gas gathering and
processing operations (collectively, "Pipeline Assets"), title to or interest in
the applicable Pipeline Asset sufficient to enable CNG, its Subsidiaries and
Surviving Corporation to conduct their business with respect thereto without
material interference as it is currently being conducted), free and clear of all
liens, the existence of which would have Material Adverse Effect on CNG and its
Subsidiaries taken as a whole. All buildings, and all fixtures, equipment and
other property and assets which are material to its business on a consolidated
basis, held under leases by any of CNG or its Subsidiaries are held under valid
instruments enforceable by CNG or its Subsidiaries in accordance with their
respective terms.
(b) Except as set forth in Schedule 3.10(b); (i) the business of CNG and
its Subsidiaries has been operated in a manner which does not violate the
material terms of any easements, rights-of-way, permits, servitudes, licenses,
leasehold estates and similar rights relating to real property used by CNG and
its Subsidiaries in such business (collectively, "Easements") material to such
business (ii) to the best knowledge of CNG, all material Easements are valid and
enforceable and grant the rights purported to be granted thereby and all rights
necessary thereunder for the current operation of such business; and (iii) there
are no spacial gaps in the Easements which would materially impair the conduct
of such business, and no material part of the Pipeline Assets is located on
property which is not owned in fee by CNG or a Subsidiary or subject to an
Easement in favor of CNG or a Subsidiary.
SECTION 3.11. AVAILABILITY AND OWNERSHIP OF ASSETS. The assets shown on the
Balance Sheet and as reflected on the Unaudited Balance Sheet, taken as a whole,
include all the material properties and assets owned or used or held by CNG or
its Subsidiaries during the period covered thereby and required, in accordance
with GAAP, to be reflected on the Balance Sheet (except properties and assets
sold, cash disposed of, accounts receivable collected, prepaid expenses
realized, contracts fully performed, and properties or assets which had become
worn out, obsolete or surplus, in each case in the ordinary course of business
or as contemplated by this Agreement). Except as set forth on Schedule 3.11 of
the Disclosure Schedule, there are no material assets used in the CNG Business
owned by any person other than CNG or its Subsidiaries which are leased or
licensed pursuant to a lease or license that will terminate as a result of the
consummation of the Merger and the other transactions contemplated hereby.
SECTION 3.12. PERSONAL PROPERTY LEASES. Schedule 3.12 of the Disclosure
Schedule identifies each lease or other agreement or right, whether written or
oral, under which CNG or any of its Subsidiaries is lessee of, or holds or
operates, any machinery, equipment, vehicle or other tangible personal property
owned by a third person
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having scheduled rental payments in excess of $10,000 per year.
SECTION 3.13. ACCOUNTS RECEIVABLE. To the best knowledge of CNG, all
outstanding accounts receivable of CNG and its Subsidiaries have arisen from
bona fide transactions, except to the extent that a reserve in respect thereof
shall have been established on the Balance Sheet or the Unaudited Balance Sheet.
To the best knowledge of CNG, (i) the accounts receivable reflected in the
Balance Sheet, taken as a whole, are good and collectible in all material
respects in the ordinary course of business at the aggregate recorded amounts
thereof, net of any applicable allowances for doubtful accounts reflected
therein; and (ii) the accounts receivable to be reflected in the books and
records of CNG and its Subsidiaries as of the Effective Date, taken as a whole,
will be good and collectible on the Effective Date in all material respects in
the ordinary course of business at the aggregate recorded amounts thereof, net
of any applicable allowances for doubtful accounts reflected thereon, which
allowances will be determined on a basis consistent with the basis used in
determining the allowances for doubtful accounts reflected in the Balance Sheet.
SECTION 3.14. INTELLECTUAL PROPERTY. (a) Except for the corporate names
under which they operate their respective businesses, neither CNG nor any
Subsidiary has any trade names, trademarks, service marks, patents or copyrights
or any pending applications for any of the foregoing. Except as listed on
Schedule 3.14 of the Disclosure Schedule, neither CNG nor any Subsidiary has any
material technology, know-how or processes which it is licensed or authorized to
use by others. CNG and each Subsidiary owns or is licensed or otherwise has the
full and exclusive right to use all trade names, trademarks, service marks,
patents and copyrights necessary for its business as presently conducted and the
actual and contemplated use thereof does not, to the knowledge of CNG, conflict
with or infringe upon or otherwise violate any material rights of others. Except
as set forth in Schedule 3.14 of the Disclosure Schedule, no claim has been
asserted by any person against CNG or any Subsidiary with respect to the use of
any trademark, trade name, service mark, patent, copyright, know-how or process
used by any Subsidiary challenging or questioning the validity or effectiveness
of such use or any such license or agreement and to the best knowledge of CNG,
there exists no valid basis for any such claim.
(b) To the best knowledge of CNG, no infringement of any patent, patent
right, trademark, service mark, trade name, or copyright or registration thereof
has occurred or results in any way from the operations or business of CNG or its
Subsidiaries, except for such infringements that would not have a Material
Adverse Effect on CNG and its Subsidiaries taken as whole.
SECTION 3.15. REAL PROPERTY. Schedule 3.15 of the Disclosure Schedule
contains a brief description of each parcel of the real property (excluding,
however, rights-of-way, easements or surface leases held by CNG or any
Subsidiary in connection with such entity's operations) owned or leased by CNG
or any of its Subsidiaries (the "Real Property") and of each option held by CNG
or any of its Subsidiaries to acquire any such Real Property. Complete and
correct copies of any title opinions, surveys and appraisals in the possession
of CNG or any of its Subsidiaries or any policies of title insurance currently
in force and in the possession of CNG or any of its Subsidiaries with respect to
each such parcel have heretofore been made available by CNG to CMS Energy.
Except as set forth in Schedule 3.15 of the Disclosure Schedule, CNG or a
Subsidiary has the right to quiet enjoyment of all the leased Real Property for
the full term of each such lease or similar agreement (and any renewal option)
relating thereto, and the leasehold or other interest of CNG or such Subsidiary
in such leased real property is not subject or subordinate to any encumbrance,
except for any failure to have such right or the existence of any such
encumbrance that would not have a Material Adverse Effect on CNG and its
Subsidiaries taken as whole.
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SECTION 3.16. [INTENTIONALLY OMITTED]
SECTION 3.17. LITIGATION. Except as set forth in Schedule 3.17 of the
Disclosure Schedule, there are no claims, actions, suits or proceedings to which
CNG or any of its Subsidiaries is a party or any of their respective properties
is subject or by which any of them is bound, pending or, to the best knowledge
of CNG, threatened before or by any court or governmental agency, which in the
case of threatened claims, actions, suits or proceedings, would, if adversely
determined, have a Material Adverse Effect on CNG and its Subsidiaries taken as
a whole, or prevent or hinder the consummation of the transactions contemplated
hereby.
SECTION 3.18. NO GUARANTIES; EXTENSIONS OF CREDIT. Except as set forth in
Schedule 3.18 of the Disclosure Schedule, except for customary indemnification
and guaranty provisions and extensions of credit made in the ordinary course of
business, no material obligations or liabilities of CNG or any of its
Subsidiaries are guaranteed by or subject to a similar contingent obligation of
any other person, nor has CNG or any of its Subsidiaries guaranteed or become
subject to a similar contingent obligation in respect of the obligations or
liabilities of, or extended credit to any other person.
SECTION 3.19. COMPLIANCE WITH LAWS. To the knowledge of CNG, except as
disclosed in Schedule 3.19 of the Disclosure Schedule, CNG and its Subsidiaries
are in compliance with the provisions of all applicable existing laws and
regulations (but excluding environmental laws and regulations, which are the
subject of Section 3.29, and also excluding laws and regulations pertaining to
employee benefits matters, which are the subject of Section 3.22) of all
federal, state, local and foreign governments, except to the extent that the
failure to comply therewith would not have a Material Adverse Effect on CNG and
its Subsidiaries taken as whole. Except as disclosed in Schedule 3.19 of the
Disclosure Schedule, there are no proposed or pending orders, judgments,
decrees, governmental takings, condemnations or other proceedings, in each case
binding upon the business, operations or properties of CNG or any of its
Subsidiaries and which would have a Material Adverse Effect on CNG and its
Subsidiaries taken as a whole.
SECTION 3.20. PERMITS. To the best knowledge of CNG, each of CNG and its
Subsidiaries possesses all material federal, state, local and foreign
governmental and regulatory franchises, rights, privileges, permits, grants,
concessions, licenses, certificates, variances, authorizations, approvals, and
other material authorizations (including any amendments to any thereof)
necessary to own or lease and operate its assets and material properties and to
conduct its business as now conducted (collectively, the "Permits"), excluding
environmental Permits, which are the subject of Section 3.29.
To the best knowledge of CNG, all Permits are in full force and effect
and will continue in full force and effect immediately following the
consummation of the Merger without the breach of any terms or conditions thereof
or the forfeiture or impairment of any rights thereunder and no consent,
approval or act of, or the making of any filing with, any governmental body,
regulatory commission or other party will be required to be obtained or made by
CNG or any of its Subsidiaries in respect of any Permit as a result of the
consummation of the Merger and the other transactions contemplated hereby.
Neither CNG nor any of its Subsidiaries is in default in any material respect
under the terms of any such Permit nor has received notice of any material
default thereunder which has not been resolved.
SECTION 3.21. INSURANCE. Schedule 3.21 of the Disclosure Schedule contains
a list and brief description (including type of coverage, policy number(s),
limits, claims made or occurrence coverage for liability policies, deductibles,
carriers, retroactive date of liability policies, if any, and effective and
termination dates) of all
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policies of fire, liability (general, product and other liability), workers'
compensation and other forms of insurance and bonds maintained by CNG or any of
its Subsidiaries since December 31, 1995 up to and including the Effective Date,
and except as disclosed in Schedule 3.21 of the Disclosure Schedule, each of CNG
and its Subsidiaries is a named insured or is otherwise covered under each such
policy, and each such policy is in full force and effect and will not in any
material way be affected by or terminate or lapse by reason of the transactions
contemplated by this Agreement.
CNG has made available to CMS Energy complete and correct copies of all
policies listed on Schedule 3.21 of the Disclosure Schedule, together with all
riders and amendments thereto, and, to the best knowledge of CNG, no insurer
under such policies has a basis to void such policies on grounds of
non-disclosure on the part of the policyholder or the insured thereunder.
(i) Schedule 3.21 of the Disclosure Schedule hereto includes a list of
each claim and each notice of claim submitted under any such policy since
December 31, 1995 and all open claims which occurred prior to December 31,
1995; (ii) except for any such claims or notices of claim, the full policy
limits (subject to deductibles provided therein) are available and unimpaired
under each such policy; and (iii) each of CNG and its Subsidiaries and
affiliates has complied with each such policy in all material respects and has
not failed to give any notice or present any claim thereunder in a due and
timely manner.
SECTION 3.22. EMPLOYEE BENEFIT PLANS. (a) Schedule 3.22 of the Disclosure
Schedule sets forth a list of and CNG has made available to CMS Energy copies
of, any pension, profit sharing, retirement, disability, health, welfare or
other "employee benefit plan", as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), bonus,
stock option or other equity based, incentive, severance, termination, retention
or other material employee benefit or compensation plan, policy, arrangement or
agreement, whether written or unwritten, (i) under which any employee or former
employee of CNG or any of its Subsidiaries or the beneficiary or dependent of
any such employee or former employee (collectively, the "Participants") is
eligible to participate or derive a benefit and (ii) that is established,
maintained or contributed to by CNG or any of its Subsidiaries or any trade or
business, whether or not incorporated, which would be treated as a single
employer together with CNG and its Subsidiaries under Section 414 of the Code,
as of any date of determination (each, an "ERISA Affiliate") or to which CNG or
any of its Subsidiaries or any ERISA Affiliate is obligated to contribute
(collectively, the "Plans"). Neither CNG nor, to the best knowledge of CNG, any
such Plan nor any trust created thereunder has engaged in a transaction
prohibited by Section 406 of ERISA or Section 4975 of the Code that would result
in any material liability to CNG or any of its Subsidiaries. Except as set forth
in Schedule 3.22 of the Disclosure Schedule, each of the Plans has been operated
and administered in material compliance with ERISA, the Code and all other
applicable laws, regulations and rules, except where any such noncompliance
would not result in a material liability to CNG or any of its Subsidiaries.
There are no material pending or, to the best knowledge of CNG, threatened,
claims by or on behalf of any Plan, by or on behalf of any Participant or
otherwise involving any Plan (other than routine claims for benefits). Each Plan
which is subject to the minimum funding standards of Section 412 of the Code or
Section 302 of ERISA satisfies such standards, and no such Plan has incurred an
"accumulated funding deficiency," whether or not waived, within the meaning of
such Sections of the Code or ERISA. To CNG's best knowledge, all contributions
required to have been made by CNG or any of its Subsidiaries and each ERISA
Affiliate to each Plan under the terms of any such Plan or pursuant to
applicable law or any applicable collective bargaining agreement have been made
within the time prescribed by any such Plan, law or agreement, as the case may
be.
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(b) Except as set forth in Schedule 3.22 of the Disclosure Schedule,
neither CNG or any of its Subsidiaries nor any ERISA Affiliate would be liable
for any material amount pursuant to Title IV of ERISA if any employee pension
benefit plan (within the meaning of Section 3(2) of ERISA) subject to such Title
(a "Title IV Plan") were to terminate. Except as disclosed on Schedule 3.22 of
the Disclosure Schedule hereto, as of the last day of the 1994 plan year of each
Plan which is a Title IV Plan, the "projected benefit obligations" (within the
meaning of the Financial Accounting Standards Board Statement No. 87) under each
such Plan did not exceed the fair market value of the assets of each such Plan,
determined on the basis of actuarial assumptions each of which is reasonable.
Neither CNG or any of its Subsidiaries nor any ERISA Affiliate has engaged in a
transaction which could cause CNG or any such Subsidiary or such ERISA Affiliate
to be subject to liability under Section 4069 or 4212 of ERISA. Neither CNG nor
any of its Subsidiaries nor any ERISA Affiliate has incurred any material
liability under or pursuant to Title I or IV of ERISA or the penalty, excise tax
or joint and several liability provisions of the Code or ERISA relating to
employee benefit plans for failure to comply with such provisions with respect
to the Plans and no event or condition has occurred or exists which could result
in any material liability following the Effective Date to CMS Energy under or
pursuant to Title I or IV of ERISA or such penalty, excise tax or liability
provisions of the Code or ERISA for failure to comply with such provisions with
respect to the Plans.
(c) Except as set forth in Schedule 3.22 of the Disclosure Schedule, no
Plan is a "multiemployer plan" or a "multiple employer plan" within the meaning
of ERISA or the Code.
(d) No Participant is or may become entitled to post-employment welfare
benefits of any kind by reason of employment with CNG or any of its
Subsidiaries, including, without limitation, death or medical benefits (whether
or not insured), other than coverage mandated by Section 4980B of the Code or
Part 6 of Title I of ERISA. Except as set forth in Schedule 3.22 of the
Disclosure Schedule, the consummation of the transactions contemplated by this
Agreement will not result in an increase in the amount of compensation or
benefits or accelerate the vesting or timing of payment of any compensation or
benefits payable under any Plan to or in respect of any participant.
SECTION 3.23. EMPLOYEES AND AGENTS AND RELATED AGREEMENTS. (a) Except as
set forth in Schedules 3.23(a) or 3.30 of the Disclosure Schedule, neither CNG
nor any of its Subsidiaries is a party to or bound by any material oral or
written employment agreement, consulting agreement (other than employment or
consulting agreements under which the obligations of CNG or such Subsidiary are
terminable by CNG or such Subsidiaries without premium or penalty (other than
statutory severance or termination benefits) on notice of 30 days or less),
deferred compensation agreement, confidentiality agreement or covenant not to
compete with any officer, director, Majority Stockholder, employee, agent or
attorney-in-fact of CNG or any of its Subsidiaries. CNG has delivered to CMS
Energy complete and correct copies of each such agreement or instrument.
SECTION 3.24. EMPLOYEE RELATIONS AND LABOR MATTERS. (a) To the best
knowledge of CNG, CNG and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations which relate to wages,
hours, discrimination in employment and collective bargaining and are not liable
for any material arrearages of wages or any material taxes or penalties for
failure to comply with any of the foregoing. CNG believes that the relations of
CNG and its Subsidiaries with their employees are generally good.
(b) Neither CNG nor any of its Subsidiaries is a party to any collective
bargaining agreement. Neither CNG nor any of its Subsidiaries is a party to or,
to the best knowledge of CNG, is threatened with, any dispute or controversy
with a union or with respect to unionization or collective bargaining involving
its employees. Neither
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CNG nor any of its Subsidiaries is materially affected by any dispute or
controversy with a union or with respect to unionization or collective
bargaining involving any of its suppliers or customers. Schedule 3.24(b) of the
Disclosure Schedule hereto sets forth a list of any union organizing or election
activities involving any non-union employees of CNG or any of its Subsidiaries
known to CNG which have occurred since December 31, 1997 or, to the best
knowledge of CNG, are threatened as of the date hereof.
SECTION 3.25. ABSENCE OF CERTAIN BUSINESS PRACTICES. None of CNG or any of
its Subsidiaries, any officer, employee or agent of CNG or any of its
Subsidiaries or any other person acting on its behalf, has, directly or
indirectly, given or agreed to give any gift or similar benefit (other than with
respect to bona fide payments for which adequate consideration has been given)
to any customer, supplier, governmental employee or other person who is or may
be in a position to help or hinder the business of CNG or any of its
Subsidiaries (or assist CNG or any of its Subsidiaries in connection with any
actual or proposed transaction) (a) which might subject CNG or any of its
Subsidiaries to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (b) which, if not continued in the future, would have
a Material Adverse Effect on CNG or any of its Subsidiaries or which would
subject CNG or any of its Subsidiaries to suit or penalty in any private or
governmental litigation or proceeding, (c) for any of the purposes described in
Section 162(c) of the Code, or (d) for establishment or maintenance of any
concealed fund or concealed bank account.
SECTION 3.26. TERRITORIAL RESTRICTIONS. Except as set forth on Schedule
3.26 of the Disclosure Schedule, neither CNG nor any of its Subsidiaries is
restricted in any material respect by any written agreement or understanding
(including area of mutual interest or similar agreements or provisions, but
excluding confidentiality agreements or provisions) with third parties from
carrying on its business in any geographical area.
SECTION 3.27. TRANSACTIONS WITH CERTAIN PERSONS. Except as set forth in
Schedule 3.27 of the Disclosure Schedule hereto since January 1, 1995 neither
CNG nor any of its Subsidiaries has purchased, leased or otherwise acquired any
material property or obtained any material services from, or sold, leased or
otherwise disposed of any material property or furnished any material services
to (except with respect to remuneration for services rendered as a director,
officer or employee of CNG or any of its Subsidiaries), in the ordinary course
of business or otherwise, (i) any Majority Stockholder, (ii) any affiliate of
CNG or any of its Subsidiaries or (iii) any person who is an officer or director
of CNG or any of its Subsidiaries or except as set forth in Schedule 3.27 of the
Disclosure Schedule hereto and except for the transactions contemplated by this
Agreement, neither CNG nor any of its Subsidiaries owes any amount in excess of
$50,000 to, or has any contract with or commitment to, any Majority Stockholder,
director, officer or employee of CNG or any of its Subsidiaries (other than for
compensation for current services not yet due and payable and reimbursement of
expenses arising in the ordinary course of business) and none of such persons
owes any amount in excess of $50,000 to CNG or any of its Subsidiaries.
SECTION 3.28. [INTENTIONALLY OMITTED]
SECTION 3.29. ENVIRONMENTAL MATTERS. (a) Except as set forth in Schedule
3.29 of the Disclosure Schedule, to the best knowledge of CNG, each of CNG and
its Subsidiaries:
(i) is in material compliance with all Applicable Environmental Laws,
including without limitation those with respect to the use, handling,
transportation, discharge, release and/or disposal of any Hazardous
Substance;
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(ii) is not the subject of any investigation, judicial or
administrative proceeding, or settlement concerning (A) a Release (as
hereinafter defined) or threatened Release of any Hazardous Substance or
(B) the violation of any Applicable Environmental Laws or permits issued
thereunder;
(iii) is not under a duty to file any notice under any Applicable
Environmental Laws reporting the violation of any Applicable Environmental
Laws or the Release or threatened Release of any Hazardous Substance;
(iv) has no material liability or contingent liability, either on-site
or off-site in connection with any Release or threatened Release of any
Hazardous Substance nor has any present Property or past Property been
listed or proposed for listing on the National Priorities List ("NPL")
pursuant to the federal Comprehensive Environmental Response, Compensation
and Liability Act, 42 U.S.C. Section 9601 et seq., ("CERCLA") or on the
Comprehensive Environmental Response Compensation Liability Information
System List ("CERCLIS") or any similar state or foreign list of sites
requiring Remedial Action;
(v) has generated, treated, stored, recycled, transported or disposed
of any Hazardous Substances in material accordance with Applicable
Environmental Laws;
(vi) has installed underground storage tanks or surface impoundments on
its Property only in connection with the treating or transportation of,
oil, gas or other hydrocarbons and in accordance with Applicable
Environmental Laws and, to the extent that underground storage tanks have
been removed, all underground storage tanks have been removed in accordance
with applicable Environmental Laws;
(vii) is operating all pipelines, storage tanks and other storage
vessels operated by it in material compliance with all secondary
containment, spill prevention and financial assurance requirements of
Applicable Environmental Laws;
(viii) has no outstanding Lien filed on its assets in favor of any
governmental agency in connection with any Applicable Environmental Laws;
(ix) is in material compliance with all permits and has no unresolved
notices of violation or letters of violation with respect to any permit;
and
(x) has received no claims, demands, suits or threats alleging common
law nuisance or a violation of Applicable Environmental Laws based upon
allegations of odors, noises, dust or other particulate matter emanating
from its Property.
(b) To the best knowledge of CNG, each of CNG and its Subsidiaries possess
all material federal, state, local and foreign rights, privileges, permits and
other material authorizations (including any amendments to any thereof) under
Applicable Environmental Laws necessary to own or lease and operate its
properties and to conduct its business as now conducted.
(c) For purposes of this Section 3.29, the following definitions shall
apply:
(i) "Applicable Environmental Laws" shall mean any environmental,
health, safety statutes, laws, rules, regulations, ordinances, common law
decisions and codes, relating to land use, air, soil,
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surface water, groundwater (including the protection, cleanup, removal,
remediation or damage thereof) and including, without limitation, those
imposing liability or standards of care with respect to the handling,
transport, treatment or disposal of Hazardous Substances, and any
governmental agency orders, guidelines, directives and instructions,
whether United States federal or state or any foreign government or
political subdivision thereof, applicable to the relevant operation;
(ii) "Hazardous Substance" means any hazardous or toxic waste,
substance, material or any constituent thereof, pollutant, contaminant,
including petroleum and its various fractions, natural gas, drilling mud or
production wastes, and equipment and Property affected thereby, as defined,
listed or regulated under any Applicable Environmental Laws;
(iii) "material" means any fines, penalties, natural resource damages,
costs or expenses, including without limitation attorney fees, consultant
fees and expert fees, arising under Applicable Environmental Laws that
would result in an aggregate liability to CNG and its Subsidiaries taken as
a whole of more than $250,000 per year;
(iv) "Property" means any real or personal property, plant, building,
facility, structure, well, pipeline, storage tank, equipment or unit, or
other asset owned, leased or operated by CNG or any of its Subsidiaries;
(v) "Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal; leaching or migration
into the indoor or outdoor environment or into or out of any Property,
including the movement of Hazardous Substances through or in the air, soil,
surface water, groundwater or Property; and
(vi) "Remedial Action" shall mean any action required to (A) clean up,
remove, treat or in any other way address Hazardous Substances in the
indoor or outdoor environment; (B) prevent the Release or threat of Release
or minimize the further Release of any Hazardous Substance; or (C) perform
pre-remedial studies and investigations and post remedial care.
SECTION 3.30. CONTRACTS. (a) Except as contemplated hereby or as set forth
in Schedule 3.30 of the Disclosure Schedule, or in another Schedule to this
Agreement, neither CNG nor any of its Subsidiaries is a party to or is bound by
any written or material oral contract, agreement, commitment or instrument or
amendment with respect to any of the following (excluding any of the following
which has been fully performed by all parties):
(i) for the purchase, sale or lease (except if the scheduled lease
payments are less than $50,000 per year) of real property;
(ii) gas purchase contracts, gas sales contracts, transportation and
fractionation agreements, processing agreements and gathering agreements;
(iii) natural gas hedging and swap agreements or other financial
derivative products;
(iv) which individually provides for, or relates to, the guarantee by
CNG or any of its Subsidiaries of any obligation of any customers,
suppliers, officers, directors, employees or affiliates of CNG or such
Subsidiaries;
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(v) which provides for, or relates to, the incurrence by CNG or any of
its Subsidiaries of debt for borrowed money in excess of $500,000;
(vi) which provides for, or relates to, any non-competition,
confidentiality or exclusive arrangement with any person, including any
current or former director, officer or employee of CNG or any of its
Subsidiaries;
(vii) for capital expenditures in excess of $100,000 for any single
project or related series of projects;
(viii) any partnership, joint venture or other similar arrangements or
agreements involving a sharing of profits or losses;
(ix) which (other than contracts, agreements, commitments and
instruments of the nature described in clauses (i) through (viii) above)
involve payments or receipts by CNG or any of its Subsidiaries of more than
$100,000; and
(x) for any purpose (whether or not made in the ordinary course of the
business or otherwise not required to be listed or described in Schedule
3.30 of the Disclosure Schedule) which is material to the business of CNG
and its Subsidiaries taken as a whole.
(b) To the best knowledge of CNG, except as set forth in Schedule 3.30 of
the Disclosure Schedule, (i) CNG and its Subsidiaries have fulfilled and
performed their obligations in all material respects under each of the leases,
contracts and other agreements listed in Schedule 3.30 of the Disclosure
Schedule or referred to in clause (ii) of Section 3.30 (collectively, together
with other leases, contracts and other agreements listed in other Schedules
under this Article III, the "CNG Agreements") and are not, and are not alleged
to be, in breach or default in any material respect under, nor is there or is
there alleged to be any basis for termination of, other than termination at the
expiration of the primary term thereof, any of the CNG Agreements, and (ii) no
event has occurred and no condition or state of facts exists which, with the
passage of time or the giving of notice or both, would constitute such a default
or breach by CNG or any of its Subsidiaries.
The CNG Agreements (i) have been duly authorized, executed and delivered or
duly entered into by CNG or the Subsidiaries of CNG that are a party thereto,
and (ii) are in full force and effect and constitute legal, valid, binding and
enforceable obligations of CNG or such Subsidiaries and will continue in full
force and effect according to the terms thereof following the consummation of
the Merger without the breach of any terms or conditions thereof or the
forfeiture or impairment of any rights thereunder and without the consent,
approval or act of, or the making of any filing with, any other person or party.
SECTION 3.31. [INTENTIONALLY OMITTED]
SECTION 3.32. GAS IMBALANCES. Except as disclosed on Schedule 3.32, there
are no material gas imbalances pertaining to the marketing of gas as between CNG
or any of its subsidiaries and any third party.
SECTION 3.33. [INTENTIONALLY OMITTED]
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SECTION 3.34. CNG FILINGS; REGISTRATION STATEMENT INFORMATION.
(a) Since August 1, 1997, CNG and its Subsidiaries have filed all reports,
registrations and statements, together with any amendments required to be made
with respect thereto, copies of which have been made available to CMS Energy
except to the extent prohibited by law, that were required to be filed with (a)
the Federal Energy Regulatory Commission; (b) the Oklahoma and Texas regulatory
authorities; (c) the Securities and Exchange Commission; and (d) any other
federal, state or local governmental or regulatory authority, except to the
extent failure to make such filings would not have a Material Adverse Effect on
CNG and the Subsidiaries, taken as a whole. All such reports, registrations and
filings are collectively referred to as the "Seller Filings". As of their
respective filing dates, each of the past Seller Filings (a) was true and
complete in all material respects (or was amended so as to be so promptly
following discovery of any discrepancy); and (b) complied in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the governmental or regulatory authority with which it was filed (or was
amended so as to be so promptly following discovery of any such noncompliance)
and none contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) None of the information supplied or to be supplied by CNG and/or the
Majority Stockholders for inclusion or incorporation by reference in, or
relating to CNG and/or the Majority Stockholders and included or incorporated by
reference in, (i) the Registration Statement on Form S-4 to be filed with the
SEC by CMS Energy in connection with the issuance of shares of CMS Common Stock
in the Merger (including, the Proxy Statement and prospectus constituting a part
thereof, the "Registration Statement") will, at all times from the date the
Registration Statement becomes effective under the Securities Act (through the
Effective time of the Merger), contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; (ii) the Proxy Statement and any amendment or supplement
thereto will, at all times from the date of the mailing to shareholders of CNG
through the date of the meeting of shareholders of CNG to be held in connection
with the Merger, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and (iii) the statements, correspondence, applications and forms
to be filed with securities or "blue sky" authorities, self regulatory
authorities, the NYSE or any governmental entity in connection with the Merger,
or any requisite regulatory approvals will, at the time filed, during their
pendency, or at the time they become effective, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Proxy Statement (except for such
portions thereof that related only to CMS Energy and its Subsidiaries) will
comply in all material respects with the provisions of the Securities Exchange
Act of 1934, as amended and the rules and regulations thereunder.
SECTION 3.35. DISCLOSURE. To the best knowledge of CNG, none of the
representations and warranties contained herein, the information contained in
the Schedules referred to in this Article III or the other information or
documents referred to in this Article III as having been furnished or to be
furnished or made available to CMS Energy or any of its representatives by CNG,
the Majority Stockholders or their representatives pursuant to the terms of this
Agreement is false or misleading in any material respect or omits to state a
fact necessary to make the statements herein or therein not misleading in any
material respect.
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SECTION 3.36. BROKERS. Other than the fee to be paid to CIBC Oppenheimer
Corp. as disclosed on Schedule 3.36 of the Disclosure Schedule, no broker,
investment banker, financial advisor or other person is entitled to any
broker's, financial advisor's or other finder's fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of CNG.
SECTION 3.37. PUHCA. Public Utility Holding Company Act, Etc. None of CNG
or the Subsidiaries is a "public utility company" or a "holding company": or a
"subsidiary company" of a "holding company", or an affiliate of "holding
company" or a "subsidiary company" of a "holding company", in each case within
the meaning of the Public Utility Holding Company Act of 1935, as amended, and,
except to the extent CNG or Subsidiary is a utility under the definitions of the
Texas Railroad Commission regulations, or may deemed a utility by virtue of
CNG's Section 7(c) under the Natural Gas Act, none of CNG the Subsidiaries is a
utility under federal or any state law.
SECTION 3.38. VOTE REQUIRED. The only vote of the holders of any class or
series of CNG capital stock necessary to approve the Merger and adopt this
Agreement is the affirmative vote of the holders of a majority of the
outstanding shares of CNG Common Stock.
SECTION 3.39. KNOWLEDGE OF FACTS OR CIRCUMSTANCES. Notwithstanding the
foregoing, except as heretofore disclosed to CMS Energy or except as
contemplated in this Agreement, CNG, the Subsidiaries and the Majority
Stockholders have not taken and will not take any action and do not have
knowledge of any fact or circumstance, that would (i) materially impede or delay
the consummation of the transactions contemplated by this Agreement or the
ability of CMS Energy, CNG or the Subsidiaries to obtain any approval of any
Regulatory Authority required for the transactions contemplated by this
Agreement or to perform its covenants and agreements under this Agreement, or
(ii) prevent the Merger from qualifying as a reorganization within the meaning
of Section 368(a) of the Code, or (iii) make any of the representations and
warranties in Article III of this Agreement untrue or incorrect in any material
respect if made anew after engaging in such activity, entering into such
transaction, or taking such other act.
SEC]TION 3.40. INFORMATION SUPPLIED. Without limiting any of the
representations and warranties contained herein, no representation or warranty
of CNG or the Majority Stockholders and no statement by CNG or the Majority
Stockholders or other information contained in the Disclosure Schedule,
Schedules, Exhibits or any document incorporated herein by reference as of the
date of such representation, warranty, statement or document, contains or
contained any untrue statement of material fact, or, at the date thereof, omits
or omitted to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which such statements are
or were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CMS ENERGY
As an inducement to CNG and the Majority Stockholders to enter into this
Agreement and to consummate the transactions contemplated hereby, CMS Energy
hereby warrants and represents to CNG and the Majority Stockholders as follows:
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SECTION 4.1. ORGANIZATION OF CMS ENERGY. CMS Energy is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Michigan. CMS Energy is duly qualified to transact business as a foreign
corporation and is in good standing in each of the jurisdictions in which the
ownership or leasing of the properties used in its business or the conduct of
its business requires such qualification, other than in such jurisdictions where
the failure to be so qualified and in good standing would not have a Material
Adverse Effect on the financial condition or results of operation of CMS Energy
and its consolidated subsidiaries taken as a whole. CMS Energy has full
corporate power and authority to own or lease and operate its properties and to
carry on its business as now conducted.
SECTION 4.2. AUTHORITY. CMS Energy has full corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by CMS Energy
and the consummation by CMS Energy of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of CMS
Energy, subject to the adoption of this Agreement by CMS Energy as the sole
stockholder of Sub. This Agreement is, and each other agreement or instrument of
CMS Energy contemplated hereby when executed and delivered by CMS Energy will
be, the legal, valid and binding obligation of CMS Energy enforceable against
CMS Energy in accordance with its respective terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
Neither the execution and delivery of this Agreement by CMS Energy nor
consummation of the transactions contemplated hereby or compliance with or
fulfillment of the terms and provisions hereof by CMS Energy will (a) result in
a breach of the terms, conditions or provisions of, or constitute a default, an
event of default or an event creating rights of acceleration, termination or
cancellation or a loss of rights, or result in the creation or imposition of any
encumbrance upon any of the material assets of CMS Energy, under (i) the
articles of incorporation or the by-laws of CMS Energy, (ii) any material
instrument, agreement, mortgage, indenture, deed of trust, permit, concession,
grant, franchise, license, judgment, order, award, decree or other restriction
to which CMS Energy is a party or any of its material properties is subject or
by which it is bound or (iii) any material statute, other law or regulatory
provision affecting CMS Energy other than, in the case of clauses (ii) or (iii),
any such breaches, defaults, rights or encumbrances that, individually or in the
aggregate, would not have a Material Adverse Effect on the financial condition
or results of operation of CMS Energy and its consolidated subsidiaries taken as
a whole, materially impair the ability of CMS Energy to perform its obligations
hereunder or prevent the consummation of any of the transactions contemplated
hereby, or (b) require the approval, consent or authorization of, or the making
of any declaration, filing or registration with, any third party or any foreign,
federal, state or local court, governmental authority or regulatory body, by or
on behalf of CMS Energy or Sub, except for the filing of a Form S-4 Registration
Statement with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act") and the declaration of
effectiveness thereof by the SEC, and for the applicable requirements of the HSR
Act, the filing of a Certificate of Merger in the proper office of the State of
Michigan and Articles of Merger in the office of the Oklahoma Secretary of
State, and appropriate documents with the relevant authorities of other
jurisdictions in which CMS Energy is qualified to do business, such filings and
consents as may be required under any environmental, health or safety law or
regulation pertaining to any notification, disclosure or required approval
triggered by the Merger or the transactions contemplated by this Agreement, such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under the corporation, takeover or blue sky laws of
various states, and such other consents, orders, authorizations, registrations,
declarations and filings the failure of which to be obtained or made would not,
individually or in the aggregate, have a Material Adverse Effect on the
financial
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condition or results of operation of CMS Energy and its consolidated
subsidiaries taken as a whole, materially impair the ability of CMS Energy to
perform its obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby.
SECTION 4.3. SHARES OF CMS COMMON STOCK. The CMS Common Shares to be
delivered to the CNG stockholders pursuant to this Agreement will, when issued
and delivered in accordance with the terms hereof, be duly and validly issued
and outstanding, fully paid and nonassessable shares of CMS Common Stock free
and clear of all Liens other than those arising by or through any such
stockholder, and the issuance of all shares of CMS Common Stock issuable in
connection with the consummation of the transactions contemplated hereby will be
duly registered with the SEC on a Form S-4 Registration Statement under the
Securities Act and prior to the Effective Time all CMS Common Shares issuable in
connection with the consummation of the transactions contemplated hereby shall
have been listed, or approved for listing upon notice of issuance, on the NYSE.
Upon delivery of the CMS Common Stock in exchange for the CNG Common Stock in
accordance with the terms of this Agreement, the holders of the CNG Common Stock
will be the owners of the CMS Common Stock.
SECTION 4.4. CAPITALIZATION. The authorized capital of CMS Energy consists
of (i) 250,000,000 shares of CMS Common Stock, of which, as of June 30, 1998,
101,512,647 shares were issued and outstanding, (ii) 10,000,000 shares of
preferred stock, $.01 par value, none of which is issued and outstanding or
reserved for any purpose, and (iii) 60,000,000 shares of Class G common stock,
no par value, of which, as of June 30, 1998, 8,341,097 shares were issued and
outstanding. All of the outstanding shares of CMS Common Stock are duly
authorized, validly issued, fully paid and nonassessable. Except for options
granted, CMS Common Stock issuable pursuant to certain CMS Energy compensation
plans, and shares issuable upon conversion of certain affiliated trust preferred
securities and as contemplated hereby, there are no options, warrants or other
rights to acquire from CMS Energy or agreements or commitments by CMS Energy to
issue or sell shares of its capital stock, whether on conversion of other
securities or otherwise. None of the issued and outstanding shares of CMS Common
Stock has been issued in violation of, or is subject to, any preemptive or
subscription rights. There are no shareholder agreements, voting trust
agreements or any other similar contracts, agreements, arrangements,
commitments, plans or understandings to which CMS Energy is a party restricting
or otherwise relating to voting, dividend, ownership or transfer rights with
respect to any shares of capital stock of CMS Energy.
SECTION 4.5. OPERATIONS SINCE MARCH 31, 1998. Except as set forth in the
CMS Energy SEC Documents, since March 31, 1998, there has been: (i) no material
adverse change in the financial condition or results of operation of CMS Energy
and its consolidated subsidiaries taken as a whole; and (ii) no damage,
destruction, loss or claim with respect to, whether or not covered by insurance,
or condemnation or other taking of, assets having a material adverse effect on
the financial condition or results of operation of CMS Energy and its
consolidated subsidiaries taken as a whole.
SECTION 4.6. COMPLIANCE WITH LAWS. To the knowledge of CMS Energy, it is in
compliance with the provisions of all applicable laws and regulations of the
federal, state, local and foreign governments, except to the extent that the
failure to comply therewith would not have a Material Adverse Effect on the
financial condition or results of operation of CMS Energy and its consolidated
subsidiaries taken as a whole. Except as set forth in the CMS Energy SEC
Documents, to the knowledge of CMS Energy, there are no proposed orders,
judgments, decrees, governmental takings, condemnations or other proceedings, in
each case binding upon the business, operations or properties of CMS Energy or
any subsidiary thereof, which would have a Material Adverse Effect on the
financial condition or results of operation of CMS Energy and its consolidated
subsidiaries taken as a whole.
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SECTION 4.7. SEC DOCUMENTS. CMS Energy has previously made available to CNG
and the Majority Stockholders complete and correct copies of all reports
(including annual reports on Form 10-K, current reports on Form 8-K, quarterly
reports on Form 10-Q and proxy statements) filed by it with the SEC pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") since
December 31, 1997 (the "CMS Energy SEC Documents"). None of the information
supplied by CMS Energy and to be included in the Registration Statement, the
Prospectus (as hereinafter defined)or the Proxy Statement, as they may be
amended or supplemented, or the documents filed under the Exchange Act which are
incorporated by reference therein, as of their respective effective, issue,
filing mailing or meeting dates, does or will, as the case may be, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Registration Statement and Prospectus will comply as to form in all material
respects with the applicable provisions of the Securities Act and the rules and
regulations promulgated thereunder. All documents that CMS Energy is responsible
for filing with any regulatory or governmental agency in connection with the
Merger will comply in all material respects with the provisions of applicable
law.
SECTION 4.8. NO FINDER. Except for discussions with CIBC Oppenheimer Corp.,
neither CMS Energy nor any party acting on its behalf has paid or become
obligated to pay any fee or any commission to any broker, finder or intermediary
for or on account of the transactions contemplated herein.
SECTION 4.9. SECTION 368 REPRESENTATIONS. (a) Prior to the Merger, CMS
Energy will be in control of Sub within the meaning of Section 368(c) of the
Code.
(b) Following the transaction, CMS Energy has no plan or intention to issue
additional shares of the Surviving Corporation's stock that would result in CMS
Energy losing control of the Surviving Corporation within the meaning of Section
368(c) of the Code.
(c) CMS Energy has no plan or intention to reacquire any of the CMS Common
Stock issued in the Merger.
(d) CMS Energy has no plan or intention to liquidate the Surviving
Corporation; to merge the Surviving Corporation with and into another
corporation; to sell or otherwise dispose of the stock of the Surviving
Corporation except that the stock will be contributed to CMS Enterprises Company
which will, in turn, contribute the stock to CMS Gas Transmission and Storage
Company; or to cause the Surviving Corporation to sell or otherwise dispose of
any of the assets of the Surviving Corporation acquired in the transaction,
except for dispositions made in the ordinary course of business or transfers
described in Section 368(a)(2)(C) of the Code.
(e) Following the Merger, the Surviving Corporation will continue the
historical business of CNG or use a significant portion of the Surviving
Corporation business assets in a business.
SECTION 4.10 INFORMATION SUPPLIED. Without limiting any of the
representations and warranties contained herein, no representation or warranty
of CMS Energy or the Sub and no statement by CMS Energy, or the Sub or other
information contained in the Disclosure Schedule, Exhibits, Schedules or any
document incorporated herein by reference as of the date of such representation,
warranty, statement or document, contains or contained any untrue statement of
material fact, or, at the date thereof, omits or omitted to state a material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which such statements are or were made, not misleading.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SUB
As an inducement to CNG and the Majority Stockholders to enter into this
Agreement and to consummate the transactions contemplated hereby, CMS Energy and
Sub hereby jointly and severally warrant and represent to CNG and the Majority
Stockholders as follows:
SECTION 5.1. ORGANIZATION AND STANDING. Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Michigan. Sub was organized solely for the purpose of engaging in the
transactions contemplated by this Agreement and has not engaged in any business
since it was incorporated which is not in connection with this Agreement and has
no material assets or liabilities (other than the rights and obligations
referred to in this Agreement).
SECTION 5.2. CAPITAL STRUCTURE. The authorized capital stock of Sub
consists of 60,000 shares of common stock, no par value, of which 10 shares are
validly issued and outstanding, fully paid and nonassessable and are owned by
CMS Energy free and clear of all liens, claims and encumbrances.
SECTION 5.3. AUTHORITY. Sub has full corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement, the performance by Sub of its
obligations hereunder and the consummation of the transactions contemplated
hereby have been duly authorized by its Board of Directors and by CMS Energy as
its sole shareholder, and, except for the corporate filings required by state
law, no other corporate proceedings on the part of Sub are necessary to
authorize this Agreement and the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Sub and this
Agreement is, and each other agreement or instrument of Sub contemplated hereby
when executed and delivered by Sub will be, the legal, valid and binding
agreement of Sub enforceable against Sub in accordance with its respective
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
ARTICLE VI
ACTIONS PRIOR TO THE EFFECTIVE DATE
CMS Energy, Sub, CNG and the Majority Stockholders covenant and agree to
take the following respective actions between the date hereof and the Effective
Date:
SECTION 6.1. ISSUANCE OF CMS COMMON SHARES. (a) CMS Energy shall prepare
and, subject to the timely contribution, review and consent of CNG, will file as
soon as reasonably practicable, the Registration Statement on Form S-4 with the
SEC containing the combined Proxy Statement for CNG and prospectus (the
"Prospectus") covering the issuance and sale of the CMS Common Shares to be
delivered hereunder. CMS Energy will use all reasonable efforts to cause such
Registration Statement and the related Proxy Statement to be effective at least
twenty (20) Business Days prior to the date on which the meeting of the CNG
stockholders is scheduled pursuant to Section 6.2. CMS Energy will use its best
efforts to respond to the comments of the SEC in connection
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therewith and to furnish all information required to prepare such Registration
Statement for which it has drafting responsibility. CMS Energy shall also take
any reasonable action required to be taken under any applicable state "blue sky"
or securities laws in connection with the issuance of such shares. CMS Energy
shall advise CNG promptly when the Registration Statement has become effective
and of any supplements or amendments thereto, and shall furnish CNG with copies
of all such documents. Each of the parties will use all reasonable efforts to
mail the Proxy Statement mailed to the CNG stockholders as promptly as
practicable after such Registration Statement is deemed effective by the SEC.
(b) CMS Energy shall use all reasonable efforts to list the CMS Common
Shares to be issued hereunder on the NYSE.
SECTION 6.2. ACTION BY MAJORITY STOCKHOLDERS OF CNG. CNG, acting through
its Board of Directors, shall duly call, give notice of, convene and hold a
meeting of its stockholders for the purpose of approving the Merger and adopting
this Agreement. Unless required to do otherwise by the fiduciary obligations of
its Board of Directors under applicable law, CNG, acting through its Board of
Directors, will recommend to its stockholders that they vote for the adoption of
this Agreement. In lieu of such meeting, the stockholders of CNG may take the
actions described in the preceding sentence by unanimous written consent in
accordance with the OGCA. Each of the Majority Stockholders agrees to take all
necessary action to cause this Agreement to be adopted including voting their
shares of CNG Common Stock in favor of the Merger and adopting this Agreement.
SECTION 6.3. SUBSEQUENT FINANCIAL STATEMENTS. Prior to the Effective Date,
CNG shall deliver to CMS Energy, not later than forty-five (45) days after the
end of each monthly period beginning after June 30, 1998 and in the form
customarily prepared by CNG, the unaudited internal consolidated financial
statements of CNG, including an income statement, for the monthly period then
ended and for the period from the beginning of the fiscal year to the end of
such monthly period.
SECTION 6.4. INVESTIGATION OF CNG. (a) CNG shall afford to the officers,
employees and authorized representatives of CMS Energy (including, without
limitation, independent public accountants, attorneys, environmental consultants
and financial advisors, if any, of CMS Energy), reasonable access during normal
business hours to the offices, properties, employees, agents and business,
environmental and financial records (including, without limitation, computer
files, retrieval programs and similar documentation) of CNG to the extent CMS
Energy shall deem necessary or desirable, and shall furnish to CMS Energy or its
authorized representatives such additional information concerning the
operations, properties and businesses of CNG as may be reasonably requested in
writing, to enable CMS Energy or its authorized representatives to verify the
accuracy of the representations and warranties contained in this Agreement, to
verify the accuracy of the financial statements referred to in Section 3.5 and
to determine whether the conditions set forth in Article VIII have been
satisfied. CMS Energy agrees that such investigations shall be conducted in such
manner as not to interfere unreasonably with the operation of the business of
CNG.
(b) CMS Energy is hereby granted a license, without any obligation to pay
rent or other charges, to enter the Property to conduct a site inspection of the
Property and to conduct a Phase I environmental assessment and, at CMS's
election, soils and/or groundwater analysis (collectively the "Phase I");
provided, however: (i) all documents (including the Phase I report) generated as
a result of such activity shall be provided to CNG within five (5) calendar days
of receipt by CMS Energy and (ii) the Phase I shall (A) be addressed to CMS
Energy and CNG, (B) include a legend indicting that the report is a privileged,
compliance report (i.e., "COMPLIANCE REPORT: PRIVILEGED DOCUMENT") and (C)
within ten (10) days after completion of field work and
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laboratory testing, be prepared in written form and provided to CMS Energy and
CNG. CMS Energy and CNG specifically acknowledge and agree that CMS Energy shall
not undertake any other activity on the Property until such time as CMS Energy
is authorized to do so in writing by CNG, which authorization shall not be
unreasonably withheld.
(c) Such license shall be for a period ending on the earlier of the
Effective Date or termination of this Agreement in accordance with Section 10.1.
(d) CMS Energy shall maintain in full force and effect a policy providing
commercial general liability insurance coverage in a minimum amount of One
Million Dollars ($1,000,000.00) combined single limit, which policy shall insure
against bodily injury, and property damage. Such policy shall name CNG or the
Subsidiaries, as applicable depending upon ownership of the subject Property, as
an additional insured and shall contain a cross-liability endorsement. Such
policy shall be non-cancellable with respect to CNG and the Subsidiaries, as
applicable, except upon thirty (30) days written notice. A certificate of such
insurance shall be delivered by CMS Energy to CNG and the Subsidiaries as soon
as reasonably practicable after the date of this Agreement.
(e) If, because of any actual or alleged act or omission of CMS Energy's
agents, employees or contractors any lien, affidavit, charge or order for the
payment of money shall be filed against CNG or the Subsidiaries, the Property or
any portion thereof or interest therein, whether or not such lien, affidavit or
charge or order is valid or enforceable, shall, at its own cost and expense,
cause the same to be discharged of record by payment, bonding or otherwise as
soon as reasonably practicable after notice to CMS Energy of the filing thereof,
but in all events prior to the foreclosure thereof.
(f) EXCEPT FOR THE FAULT OR NEGLIGENCE OF CNG, THE SUBSIDIARIES, ITS AGENTS
OR EMPLOYEES, FOR WHICH EITHER OR BOTH BE LEGALLY LIABLE, UPON CMS ENERGY's
ENTERING THE PROPERTY, CMS ENERGY AGREES TO INDEMNIFY AND HOLD CNG AND THE
SUBSIDIARIES, THEIR RESPECTIVE OFFICERS, AGENTS, REPRESENTATIVES AND EMPLOYEES
HARMLESS FROM ALL LOSSES, CLAIMS, SUITS, ACTIONS, DAMAGES AND LIABILITY
INCLUDING COSTS AND EXPENSES OF DEFENDING AGAINST ALL OF THE AFORESAID) ARISING
OR ALLEGED TO ARISE FROM ANY ACT OR OMISSION OF CMS ENERGY OR CMS ENERGY'S
AGENTS, EMPLOYEES, ASSIGNEES, LICENSEES, CONTRACTORS, SUBCONTRACTORS, LABORERS
OR INVITEES, OR ARISING FROM ANY INJURY OR DEATH OF ANY PERSON OR PERSONS OR
DAMAGE OR DESTRUCTION OF THE PROPERTY OF ANY PERSON OR PERSONS OCCURRING OR
ALLEGED TO HAVE OCCURRED INCIDENT TO CMS ENERGY'S PRESENCE ON THE PROPERTY OR
THE PERFORMANCE OF THE PHASE I, AND CMS ENERGY ASSUMES RESPONSIBILITY FOR THE
CONDITION OF THE PROPERTY. THIS PROVISION SHALL SURVIVE TERMINATION OF THIS
CONTRACT OR THE CLOSING OF THIS TRANSACTION, WHICHEVER IS APPLICABLE.
(g) Upon entering the Property, CMS Energy shall perform and complete the
Phase I at CMS Energy's sole cost and expense in a timely manner in accordance
with all applicable statutes, ordinances and other regulations applicable
thereto. Notwithstanding the foregoing: (i) CNG and the Subsidiaries acknowledge
that disclosure of certain materials relating to the Phase I will need to be
made to CMS Energy's attorneys and environmental consultants (for convenience,
collectively the "Representatives") in order to evaluate such information and
the feasibility of the Property for CMS Energy's proposed use, and it shall be
permissible for CMS Energy to disclose such information to its Representatives
so long as such disclosure is made on the condition that: (A) such
Representatives, prior to CMS Energy's disclosure of such information, provide
CNG with a signed agreement
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binding such Representatives to maintain the confidentiality of such
information, except as otherwise required by law, and (B) such Representatives
treat such information in a confidential manner; and (ii) in the event CMS
Energy in good faith reasonably believes that information contained or revealed
in the Phase I may require remedial action or reporting to any governmental
authority under applicable environmental laws, then prior to CMS Energy's
disclosure of same to any governmental authority, CMS Energy shall promptly
notify CNG of the existence of such information and CMS Energy's
responsibility(ies) for disseminating such information to the applicable
governmental authorities in accordance with applicable environmental laws.
(h) Within twenty-four (24) hours of the termination of the license
contemplated herein, CMS Energy shall return the Property to the safe, clean and
level condition the Property existed on the date of this Agreement.
SECTION 6.5. LAWSUITS, PROCEEDINGS, ETC. Each of CMS Energy and CNG shall
notify the other promptly of any lawsuit, proceeding, claim or investigation
that may be threatened, brought, asserted or commenced against any party hereto
involving in any way the transactions contemplated by this Agreement or that
would have been listed in Schedule 3.17 of the Disclosure Schedule or the CMS
Energy SEC Documents if such lawsuit, proceeding, claim or investigation had
arisen prior to the date hereof.
SECTION 6.6. CONDUCT OF BUSINESS BY CNG PENDING THE MERGER. (a) During the
period from the date of this Agreement through the Effective Time, except as set
forth in Schedule 6.6 of the Disclosure Schedule or any other Schedules to this
Agreement or as expressly contemplated by this Agreement, CNG will carry on its
business in, and will not enter into, any material transaction other than in,
the ordinary course of business consistent with past practice and, to the extent
consistent therewith, will use its reasonable efforts to preserve intact its
current business organization, to keep available the services of its current
officers and employees and to preserve its relationships with material
customers, material suppliers and others having material business dealings with
it (except with the written consent of CMS Energy and except as set forth in any
Schedules to this Agreement or the Disclosure Schedule or as contemplated by
this Agreement). Without limiting the generality of the foregoing, and except as
set forth in any Schedules to this Agreement or the Disclosure Schedule or as
expressly contemplated by this Agreement, CNG and its Subsidiaries shall not,
without the prior written consent of CMS Energy, which, as to matters relating
to clauses (vii), (viii) or (xii) of this Section 6.6(a), CMS Energy agrees not
to unreasonably withhold or delay:
(i) (A) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to the stockholders in their
capacity as such, (B) split, combine or reclassify any of its capital stock
or issue, sell or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock, or (C)
purchase, redeem or otherwise acquire any shares of capital stock of CNG or
any other securities thereof or any rights, warrants or options to acquire
any such shares or other securities;
(ii) issue, deliver, sell, pledge, dispose of or otherwise encumber any
shares of its capital stock or other securities (including, without
limitation, any rights, warrants or options to acquire any securities);
(iii) amend its articles of incorporation or by-laws;
(iv) acquire or agree to acquire, by merging or consolidating with, or by
purchasing a substantial portion of the assets of or equity in, or in any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof;
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(v) sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose
of, or agree to sell, lease exchange, mortgage, pledge, transfer or otherwise
dispose of, any of its material assets or any material assets of any of its
subsidiaries, except for dispositions of inventories and of assets in the
ordinary course of business and consistent with past practice; a material
asset for this purpose is defined as 10 percent or more of the book value or
market value of CNG's total assets, or contributing 10 percent or more of
total annual CNG revenues or earnings, or resulting in a gain or loss on
disposition of 10 percent or more of annual CNG net income.
(vi) incur any indebtedness for borrowed money or guarantee any such
indebtedness material to the business or assets of CNG and its Subsidiaries,
taken as a whole, except in the ordinary course of business consistent with
past practice and except as contemplated hereunder or issue or sell any debt
securities or guarantee any debt securities of others, or make any loans,
advances or capital contributions to, or investments in, any other person,
except the incurrence and/or guarantee of indebtedness to fund working
capital;
(vii) with respect to its operations, make or incur any new capital
expenditure or capital expenditures for any single project or related series
of projects which are in excess of $100,000.
(viii) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than such payment, discharge or satisfaction in the ordinary course of
business consistent with past practice;
(ix) alter through merger, liquidation, reorganization, restructuring or in
any other fashion its corporate structure;
(x) enter into or adopt, or amend, any existing, bonus, incentive, deferred
compensation, insurance, medical, hospital, disability or severance plan,
agreement or arrangement or enter into or amend any Plan or material
employment, consulting or management agreement, other than any such amendment
to a Plan that is made to maintain the qualified status of such Plan or its
continued compliance with applicable law and except as contemplated
hereunder;
(xi) make any change in accounting practices or policies applied in the
preparation of the financial statements referred to in Section 3.5 except as
required by GAAP;
(xii) except in the ordinary course of business consistent with past
practice, knowingly make any material modifications to any material
agreements, understandings, obligations, commitments, indebtedness or other
material obligations or enter into any agreement, understanding, obligation
or commitment, or incur any indebtedness or obligation, of the type that
would have been required to be listed on Schedule 3.30 of the Disclosure
Schedule or that would otherwise would have been included in the CNG
Agreements if in existence on the date hereof; provided that no such
modifications, agreements or incurrences of indebtedness shall in any event
cause the representations and warranties contained in Section 3.6(a) hereof
to be untrue or incorrect in any material respect;
(xiii) pay or commit to pay any bonus to or increase the salary of any
director, officer or employee of CNG other than payment to employees of
bonuses or the increase of salary of employees made in the ordinary course of
business; or
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(xiv) enter into any other transaction materially affecting the business of
CNG, other than in the ordinary course of business consistent with past
practice or as expressly contemplated by this Agreement.
(b) CNG shall promptly advise CMS Energy orally and in writing of any
change or event having a Material Adverse Effect on CNG and its Subsidiaries
taken as a whole.
SECTION 6.7. MUTUAL COOPERATION; REASONABLE BEST EFFORTS. The respective
parties hereto shall cooperate with each other, and shall use their respective
reasonable best efforts, to cause the fulfillment, to the extent within their
reasonable control, of the conditions to each party's obligations hereunder
which are within such reasonable control and to obtain as promptly as possible,
to the extent within their reasonable control, all consents, authorizations,
orders or approvals from each and every third party, whether private or
governmental, required in connection with the transactions contemplated by this
Agreement; provided, however, that the foregoing shall not require CMS Energy or
CNG to make any divestiture or consent to any divestiture in order to obtain any
waiver, consent or approval.
SECTION 6.8. PUBLIC ANNOUNCEMENT. Other than required filings with the SEC,
CNG and CMS Energy shall consult with each other before issuing any press
release or otherwise making any public statements with respect to the Merger and
shall not issue any such press release or make any such public statement prior
to such consultation; provided, that nothing herein shall be deemed to interfere
with the filing by (i) CMS Energy of a form 8K or the Registration Statement or
(ii) CNG of a form 8K or the Proxy Statement. The press release announcing the
execution and delivery of this Agreement shall be a joint press release of CNG
and CMS Energy.
SECTION 6.9. NO SOLICITATION. (a) CNG shall not, nor shall it authorize or
permit any officer, director or employee of it or its Subsidiaries or affiliates
or any investment banker, attorney or other adviser or representative of CNG or
any of its Subsidiaries or affiliates to, (i) solicit, initiate, or encourage
the submission of, any Acquisition Proposal (as hereinafter defined), (ii) enter
into any agreement with respect to any Acquisition Proposal or (iii) except to
the extent required by law as advised by independent legal counsel in writing,
participate in any discussions or negotiations regarding, or furnish to any
person any information for the purpose of facilitating the making of, or take
any other action to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal.
CNG shall advise CMS Energy immediately of any Acquisition Proposal and any
inquiries with respect to any Acquisition Proposal. For purposes of this
Agreement, "Acquisition Proposal" means any proposal for a merger or other
business combination involving CNG or any of its Subsidiaries or affiliates or
any proposal or offer to acquire in any manner, directly or indirectly, an
equity interest in CNG or any of its Subsidiaries or affiliates, any of the
voting securities of CNG or any of its Subsidiaries or affiliates or
substantially all of the assets of CNG and its Subsidiaries taken as a whole.
(b) Notwithstanding the foregoing, the Board of Directors of CNG may, if it
has received a bona fide offer, and if it concludes in good faith (after
consultation with its independent legal and financial advisors) that it is
required to do so in order to comply with its fiduciary duties to CNG's
shareholders under applicable law, (i) withdraw or modify its approval or
recommendation of this transaction or this Agreement or (ii) approve or
recommend such other bona fide offer or, subject to compliance with the
requirements of Sections 10.1 and 10.3, terminate this Agreement (and
concurrently with or after such termination, if it so chooses cause CNG to enter
into any agreement with respect to any other bona fide offer) but only at a time
that is after the fifth Business Day following CMS Energy's receipt of written
notice from CNG advising CMS Energy that the Board of Directors of CNG has
received a bona fide offer, specifying the material terms and conditions of such
bona fide offer and
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identifying the persons making such bona fide offer.
(c) Nothing contained in this Section 6.9 shall prohibit CNG from taking
and disclosing to its shareholders a position contemplated by Rule 14e2(a)
promulgated under the Exchange Act or from making any disclosure to CNG's
shareholders if, in the good faith judgment of the Board of Directors of CNG
(after consultation with its independent legal and financial advisors), it
determines that it is legally required to do so in order to comply with its
fiduciary duties to CNG's shareholders under applicable law.
SECTION 6.10. ANTITRUST LAW COMPLIANCE. CMS Energy and CNG shall file and
CNG shall cause to be filed with the Federal Trade Commission and the United
States Department of Justice the notification and other information required to
be filed with respect to the transactions contemplated hereby under the HSR Act
and the rules and regulations promulgated thereunder. CMS Energy warrants that
all such filings by it shall be, and CNG warrants that all such filings by it
shall be, accurate as of the date filed and in accordance with the requirements
of the HSR Act and all such rules and regulations. CMS Energy and CNG agree to
make available, or cause to be made available, to the other parties such
information as may reasonably be requested relative to the businesses, assets
and property of CMS Energy and CNG, as the case may be, as may be required to
file any additional information requested by such agencies under the HSR Act and
such rules and regulations. CMS Energy agrees to pay all filing fees related to
the HSR Act compliance.
SECTION 6.11. CMS SEC INFORMATION. Promptly following their availability,
CMS Energy will provide CNG with copies of all filings it makes with the SEC or
the NYSE, including but not limited to Form 10-Q's and Form 10-K's.
SECTION 6.12. DIRECTOR INDEMNIFICATION. The Surviving Corporation shall
indemnify the present and former officers, directors, employees and agents of
CNG and the Subsidiaries with respect to any matter including the transactions
contemplated hereby, occurring at or prior to the Effective Time to the full
extent permitted by CNG's Articles of Incorporation or Bylaws or the
organizational documents of the Subsidiaries, in each case as in effect as of
the date of this Agreement, for a period of six years commencing at the
Effective Time. This Section 6.12 shall survive the closing of the transactions
contemplated hereby, is intended to benefit CNG and each of the indemnified
parties (each of whom shall be entitled to enforce this Section 6.12 against CNG
and CMS Energy, as the case may be) and shall be binding on all successors and
assigns of CMS Energy and CNG. In the event CMS Energy or any of its successors
or assigns (i) consolidates with or merges into any other person and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then, and in each such case, proper provisions shall be made so
that the successors and assigns of CMS Energy shall assume the obligations set
forth in this Section 6.12. CMS agrees to provide coverage under CMS director's
and officer's liability policy for the period referenced herein.
SECTION 6.13. NOTICE OF DEFAULT. Each party will promptly give notice to
the other party of the occurrence of any event or the failure of any event to
occur that results in a breach of any representation or warranty by that party
contained herein or a failure by that party to comply with any covenant,
condition or agreement contained herein.
SECTION 6.14. DISSENTING SHAREHOLDERS' APPRAISAL RIGHTS. CMS Energy and
CNG, as applicable, will comply with all applicable notification and other
provisions of regulations or statutes relating to Dissenting Shares.
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SECTION 6.15, CNG OPTIONS
On the Effective Date, CMS Energy shall issue such shares of CMS Common
Stock to those employees granted Options which shares of CMS Common Stock shall
be equivalent to the fair value of such Options; and CNG and CMS Energy shall
use their reasonable efforts to amend the 1997 Plan and to seek the consent of
all Option holders to an amendment for the receipt of such shares of CMS Common
Stock, in lieu of cash as provided for in the 1997 Plan.
ARTICLE VII
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 7.1. TAX-FREE NATURE; TAX CONSEQUENCES.
(a) CNG and CMS Energy intend the Merger to constitute a reorganization
described in Section 368(a) of the Code and shall use their best efforts to
cooperate in achieving such a tax-free reorganization. Each party is not
relying, and will not rely, on any representations or assurances of any other
party regarding such consequences other than the representations and covenants
set forth in writing in this Agreement or any other agreement or certificate
delivered in connection herewith. In the event that the Merger does not qualify
as such a tax-free reorganization, the validity of the Merger and the
transactions contemplated thereby shall nevertheless be binding and final upon
the parties to this Agreement. Neither CNG nor CMS Energy will take any tax
reporting positions or make any tax elections inconsistent with the
characterization of the Merger as a reorganization described in Section 368(a)
of the Code except as may be required upon examination (or the result of a prior
determination) by the Internal Revenue Service or any other Tax authority.
SECTION 7.2. TAXES.
(a) Tax Returns. CNG shall file when due (after taking into account all
extensions properly obtained) all Tax Returns that are required to be filed by
or with respect to CNG and its Subsidiaries on or before the Effective Date and
shall remit or cause to be remitted any Taxes shown to be due on such Tax
Returns, and the Surviving Corporation shall file when due (after taking into
account all extensions properly obtained) all Tax Returns that are required to
be filed by CNG and its Subsidiaries after the Effective Date and shall remit or
cause to be remitted any Taxes due in respect of such Tax Returns. All Tax
Returns which CNG is required to file in accordance with this paragraph (a)
shall be prepared and filed in a manner consistent with past practice and, on
such Tax Returns, no position shall be taken or method adopted that is
inconsistent with positions taken or methods used in preparing and filing
similar Tax Returns in prior periods except for changes required by law or
changes in facts.
(b) Assistance and Cooperation. After the Effective Date, each of the
Majority Stockholders shall:
(i) assist (and cause their respective affiliates to assist) the other
parties in preparing any Tax Returns which such other parties are
responsible for preparing and filing in accordance with paragraph (b) of
this Section 7.2;
(ii) cooperate fully in preparing for any audits of, or disputes with
taxing authorities regarding, any Tax Returns of CNG and its Subsidiaries;
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(iii) make available to the other parties and to any taxing authority as
reasonably requested all information, records, and documents relating to
Taxes of CNG and its Subsidiaries;
(iv) provide timely notice to the other parties in writing of any
pending or threatened Tax audits or assessments of CNG and its Subsidiaries
for taxable periods for which the other may have a liability under this
Section 7.2; and
(v) furnish the other with copies of all correspondence received from
any taxing authority in connection with any Tax audit or information request
with respect to any such taxable period.
(c) Survival of Obligations. Notwithstanding Article X, the obligations of
the Majority Stockholders set forth in this Section 7.2 shall be unconditional
and absolute and shall remain in effect until thirty (30) days after the
expiration of the applicable statute of limitations.
(d) Section 338 Elections. CMS Energy and Sub jointly and severally represent
and warrant that their acquisition of the CNG Common Stock will not result in
Taxes to the shareholders or their affiliates pursuant to or as a result
of Section 338 of the Code or provisions under other tax Laws which are
comparable to Section 338 of the Code and that no election (express or
otherwise) will be made or suffered by CMS Energy or Sub or their affiliates
which will result in any such Taxes.
(e) Tax Records. On the Effective Date, Surviving Corporation shall retain
possession of Tax records currently in CNG's possession; provided, however,
that the Majority Shareholders and their affiliates may retain copies of such
records as are necessary or required by the Majority Shareholders or their
affiliates in connection with (a) the filing of tax returns, (b) ongoing
businesses or responsibilities or (c) other legal purposes. The Majority
Shareholders, CMS Energy, Surviving Corporation and their affiliates shall make
available to each other for inspection and copying during normal business
hours, and provide to any taxing authority as reasonably requested, all Tax
records in their possession relating to CNG or the business (unless the same is
subject to legal or confidentiality restrictions). The Majority Shareholders,
CMS Energy, Surviving Corporation and their affiliates shall preserve and keep
all such Tax records in their possession until the expiration of any applicable
statutes or limitation or extensions thereof and as otherwise required by law,
but in any event for a period not less than ten years after the Effective Date.
Before any such Tax records are disposed of by the Majority Shareholders, CMS
Energy, Surviving Corporation or their affiliates (through a future sale of
Surviving Corporation, the business or otherwise), notice to that effect shall
be given the other parties who shall have the opportunity to at their own cost
and expense to copy within thirty (30) days after the date of such notice, all
or any part of such tax Records. For the purpose of this Section 7.2, tax
Records shall include journal vouchers, cash vouchers, general ledgers, and
authorizations for expenditures.
SECTION 7.3. [INTENTIONALLY OMITTED]
SECTION 7.4. CNG Incentive Stock Option Plan. On the Effective Date, CMS
Energy shall issue such shares of CMS Common Stock to those employees granted
options to purchase shares of CNG Common Stock pursuant to the terms and
conditions of that certain 1996 CNG Incentive Stock Option Plan and those
certain Grants of Incentive Stock Options dated February 28, 1996 which shares
of CMS Common Stock shall be equivalent to the fair value of such options.
SECTION 7.5. POWER MARKETING CERTIFICATE. CNG shall file a Notice of
Termination and Notice of Cessation of Services with the Federal Energy
Regulatory Commission ("FERC") with regard to a power marketing certificate
currently issued to one of the Subsidiaries ("Power Marketing Certificate").
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SECTION 7.6. POOLING OF INTERESTS. Neither CNG or any of its Subsidiaries
shall intentionally take, cause to be taken or intentionally fail to take any
action, other than as may be required by a governmental agency, after the date
of this Agreement that would disqualify the Merger as a pooling of interests for
accounting purposes or would prevent CMS from receiving an opinion from Arthur
Andersen LLP pursuant to Section 8.2(k) of this Agreement to the effect that the
Merger will be treated for accounting purposes as a pooling of interests.
ARTICLE VIII
CONDITIONS PRECEDENT TO CLOSING
SECTION 8.1. CONDITIONS TO THE PARTIES' OBLIGATIONS. The obligations of all
the parties to effect the Merger shall be subject to the fulfillment of the
following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
validly approved by the holders of a majority of the outstanding CNG Common
Stock entitled to vote.
(b) Consents Obtained. All permits, approvals (including Notice of
Termination and Cessation by FERC with regard to the Power Marketing
Certificate) and consents required to be obtained, and all waiting periods
required to expire, prior to the consummation of the Merger under applicable
federal laws of the United States or applicable laws of any state having
jurisdiction over the transactions contemplated by the Merger shall have been
obtained or expired, as the case may be (all such permits, approvals and
consents and the lapse of all such waiting periods being referred to as the
"Requisite Regulatory Approvals"), without the imposition of any condition which
in the reasonable judgment of the party on which it is imposed is materially
burdensome to such party.
(c) Governmental Action. There shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, by any governmental entity which: (i) makes the
consummation of the Merger illegal; (ii) requires the divestiture by CMS Energy
or CNG of any material Subsidiary or of a material portion of the business of
CMS Energy or CNG; or (iii) imposes any condition upon CMS Energy, CNG or their
Subsidiaries which in the judgment of the party on which it is imposed would be
materially burdensome.
(d) Registration Statement. The Registration Statement covering the CMS
Common Stock to be issued in the Merger shall become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and shall remain in effect. No
legal, administrative, arbitration, investigatory or other proceeding by any
governmental entity shall have been instituted and, at what would otherwise have
been the Effective Time, remain pending by or before any governmental entity to
restrain or prohibit the transactions contemplated hereby.
(e) CMS Energy Shares. The shares of CMS Common Stock deliverable pursuant
to this Agreement shall have been duly authorized for listing, subject to notice
of issuance, on the New York Stock Exchange.
(f) Section 368 Reorganization. CMS Energy and CNG shall have received an
opinion from counsel to CMS Energy dated the Effective Time, subject to
assumptions and exceptions customarily included, and in form and substance
reasonably satisfactory to CMS Energy and CNG to the effect that the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the IRC and that CMS Energy
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and CNG will each be a party to that reorganization within the meaning of
Section 368(b) of the IRC.
(g) Legal Opinions. CMS Energy and CNG shall receive opinions of their
respective counsel addressed to the parties and dated the date the Registration
Statement becomes effective relating to the Registration Statement and the Proxy
Statement and any amendments and supplements thereto (except for the financial
statements and notes thereto and other financial statistical and accounting data
included in, incorporated by reference in or which should have been included in
or incorporated by reference in the Registration Statement or the Proxy
Statement as to which they need express no opinion) in substantially the forms
agreed to by the parties.
SECTION 8.2. CONDITIONS TO CMS ENERGY'S OBLIGATIONS. The obligations of CMS
Energy to effect the Merger shall be subject to the fulfillment (or waiver by
CMS Energy) of the following conditions:
(a) Representations and Warranties True. Except as otherwise provided in
this Section 8.2, (i) the representations and warranties of CNG and the Majority
Stockholders contained in Article III shall be true and correct as of the
Effective Date as though made at the Effective Date, except to the extent they
expressly refer to an earlier time and except where the failure to be true,
individually or in the aggregate, would not have or would not be reasonably
likely to have, a Material Adverse Effect on CNG and its Subsidiaries taken as a
whole or upon the consummation of the transactions contemplated hereby; (ii) CNG
and the Majority Stockholders shall have duly performed and complied with all
agreements and covenants required by this Agreement to be performed or complied
with by them prior to or at the Effective Date, except where the failure to so
perform and comply, individually or in the aggregate, would not have or would
not be reasonably likely to have, a Material Adverse Effect on CNG and its
Subsidiaries taken as a whole, or upon the consummation of the transactions
contemplated hereby; (iii) none of the events or conditions entitling CMS Energy
to terminate this Agreement under Article X shall have occurred and be
continuing; and (d) CNG shall have delivered to CMS Energy a certificate dated
the Effective Date and signed by its Chief Executive Officer to the effect set
forth in subsections 8.2(a)(i) and (ii) and (b).
(b) Required Consents. Any consent required for the consummation of the
Merger under any agreement, contract or license to which CNG is a party or by or
under which it is bound or licensed, the withholding of which might have a
Material Adverse Effect on CNG and its Subsidiaries taken as a whole or upon the
transactions contemplated by this Agreement, shall have been obtained.
(c) Schedules. CMS Energy shall have received the schedules to the
Disclosure Schedule and such schedules shall not reflect any item that was not
on such schedules delivered on the date of execution of this Agreement that
would have or would be reasonably likely to have, a Material Adverse Effect on
CNG and its Subsidiaries taken as a whole or upon the consummation of the
transactions contemplated hereby.
(d) No Material Adverse Effect. Between the date of this Agreement and the
Effective Time, no event or circumstances shall have occurred which had a
Material Adverse Effect on CNG and its Subsidiaries taken as a whole, and CMS
Energy shall have received a certificate signed on behalf of CNG by the Chief
Executive Officer of CNG to such effect.
(e) CNG Outstanding Common Stock. CMS Energy shall have received from CNG's
transfer agent, letters dated the Effective Time, after customary review but
without audit in form and substance satisfactory to CMS Energy, setting forth,
as of the Business Day immediately prior to the Closing Date, the total number
of shares of CNG Common Stock outstanding;
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(f) CNG's Legal Opinion. CMS Energy shall have received from counsel to CNG
an opinion as to securities and corporate matters in form and substance
customary for transactions of this nature and reasonably satisfactory to CMS
Energy.
(g) Approval of Counsel. Counsel for CMS Energy shall have approved, in the
exercise of counsel's reasonable discretion, the validity of all transactions
herein contemplated, as well as the form and substance of all opinions,
certificates, instruments of transfer and other documents to be delivered to CMS
Energy hereunder or that are reasonably requested by such counsel.
(h) Blue Sky. The sale of the CMS Energy Common Stock resulting from the
Merger shall have been qualified or registered with the appropriate State
securities law or "blue sky" regulatory authorities of all States in which
qualification or registration is required under the State securities laws, and
such qualifications or registrations shall not have been suspended or revoked.
(i) Affiliate Agreement. CNG shall have delivered to CMS Energy not later
than ten (10) days after the date of this Agreement the executed agreements from
CNG's Affiliates pursuant to Rule 145 in the form attached hereto as Exhibit B.
(j) No Material Restrictions. None of CNG or any of its Subsidiaries shall
be subject to any order or other agreement with any governmental entity
restricting the conduct of CNG's and its Subsidiaries' business, prospects and
operations, so as to have a Material Adverse Effect thereon.
(k) Pooling Opinion. CMS Energy shall have received from Arthur Andersen
LLP, an opinion, dated the date of the Effective Time, in form and substance
satisfactory to CMS Energy, to the effect that the Merger on the terms and
conditions contained in this Agreement will be treated for accounting purposes
as a pooling of interests; provided, that in the event the pooling opinion
referenced herein cannot be issued due to certain actions taken by CMS Energy
and through no fault of CNG, then such opinion shall not be a condition to CMS
Energy's obligations to effect the Merger as contemplated herein; further
provided that in the event CNG and CMS are unable to cause an amendment to the
CNG 1997 Stock Plan pursuant to Section 6.13 hereof or, notwithstanding such
amendment, the pooling opinion cannot be obtained as a consequence of the terms
of or existence of the 1997 Stock Plan, then such opinion shall not be a
condition to CMS Energy's obligations to effect the Merger contemplated herein.
(l) [INTENTIONALLY OMITTED]
(m) Resignation of Directors. CMS Energy shall have received the
resignation of each of the directors of CNG and the directors of each of its
Subsidiaries.
SECTION 8.3. CONDITIONS TO CNG'S OBLIGATIONS. The obligation of CNG to
effect the Merger shall be subject to the fulfillment of the following
conditions:
(a) Representations and Warranties True. Except as otherwise provided in
this Section 8.3, (i) the representations and warranties of CMS Energy and the
Sub contained in Articles IV and V shall each be true in all
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material respects as of the Effective Time as though made at the Effective Time,
except to the extent they expressly refer to an earlier time and except where
the failure to be true, individually or in the aggregate, would not have or
would not be reasonably likely to have, a Material Adverse Effect on CMS Energy
or upon the consummation of the transactions contemplated hereby; (ii) CMS
Energy and Sub shall have each duly performed and complied in all materials
respects with all agreements and covenants required by this Agreement to be
performed or complied with by it prior to or at the Effective Time, except where
the failure to so perform and comply, individually or in the aggregate, would
not have or would not be reasonably likely to have, a Material Adverse Effect on
CMS Energy or upon the consummation of the transactions contemplated hereby;
(iii) none of the events or conditions entitling CNG to terminate this Agreement
under Article X shall have occurred and be continuing; and (d) CMS Energy shall
have delivered to CNG a certificate dated the date of the Effective Time and
signed by a duly authorized officer to the effect set forth in subsections
8.3(i)and (ii) and(b).
(b) Required Consents. Any consent required for the consummation of the
Merger under any agreement, contract or license to which CMS Energy is a party
or by or under which it is bound or licensed, the withholding of which might
have a Material Adverse Effect on CNG or CMS Energy and its Subsidiaries taken
as a whole or the transactions contemplated by this Agreement shall have been
obtained.
(c) Approval of Counsel. Counsel for CNG shall have approved, in the
exercise of counsel's reasonable discretion, the validity of all transactions
herein contemplated, as well as the form and substance of all opinions,
certificates, instruments of transfer and other documents to be delivered to CNG
hereunder or reasonably requested by such counsel.
(d) Fairness Opinion. Prior to the mailing of the Prospectus/Proxy
Statement to the shareholders of CNG and at Closing, CNG shall have received an
opinion of CIBC Oppenheimer Corp. dated the date of the Prospectus/Proxy
Statement, to the effect that, as of such date, the Merger Consideration is fair
to CNG's shareholders from a financial point of view.
(e) No Material Adverse Effect. There shall not have been any change in the
consolidated financial condition, aggregate net assets, shareholders' equity,
business, or operating results of CMS Energy and its Subsidiaries taken as a
whole, from March 31, 1998 to the Effective Time that results in a Material
Adverse Effect as to CMS Energy and its Subsidiaries taken as a whole. CNG shall
have received a certificate signed on behalf of CMS Energy by the President or
Chief Executive Officer of CMS Energy to such effect.
(f) CMS Energy's Legal Opinion. CNG shall have received from the general
counsel or assistant general counsel to CMS Energy an opinion as to securities
and corporate matters in form and substance customary for transactions of this
nature and reasonably satisfactory to CNG.
(g) Blue Sky. The sale of the CNG Common Stock resulting from the Merger
shall have been qualified or registered with the appropriate State securities
law or "blue sky" regulatory authorities of all States in which qualification or
registration is required under the State securities laws, and such
qualifications or registrations shall not have been suspended or revoked.
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ARTICLE IX
INDEMNIFICATION; SURVIVAL
SECTION 9.1. INDEMNIFICATION BY THE MAJORITY STOCKHOLDERS. From and after
the Effective Time, each of the Majority Stockholders shall jointly and
severally indemnify and hold harmless CMS Energy, the Surviving Corporation and
their subsidiaries, affiliates and successors from and against any and all (a)
liabilities, losses, costs or damages ("Loss") and (b) reasonable attorneys',
consultants' and accountants' fees and expenses, court costs and all other
reasonable out-of-pocket expenses ("Expense") incurred by CMS Energy, the
Surviving Corporation and their subsidiaries, affiliates and successors in
connection with or arising from any breach of any warranty or the inaccuracy of
any representation of CNG or any Majority Stockholder contained in Sections 3.1,
3.2, 3.3, 3.4(a), 3.4(b) and 3.8, as updated in accordance with Section 9.7
hereof, or in any certificate delivered by or on behalf of CNG or any Majority
Stockholder pursuant thereto; provided, however, that the Majority Stockholders
shall be required to indemnify and hold harmless CMS Energy and the Surviving
Corporation under this Section 9.1 with respect to the breach or inaccuracy of
any representations or warranties as hereinabove provided only to the extent
that the aggregate amount of Loss and Expense referred to above in this Section
9.1 relating thereto exceeds $100,000; and provided further, that the obligation
of the Majority Stockholders to indemnify and hold harmless CMS Energy and the
Surviving Corporation pursuant to this Section 9.1 shall be limited to the
aggregate payment by such Majority Stockholders of an amount equal to
$3,100,000, which indemnification obligation shall be satisfied by a return of
the number of CMS Common Shares necessary to meet any such obligation and as
further deposited in escrow pursuant to an agreement in a form mutually
acceptable to the parties; which return and deposit into escrow shall occur
within 10 day of issuance of certificates for the CMS Common Shares.
SECTION 9.2. [INTENTIONALLY OMITTED]
SECTION 9.3. NOTICE OF CLAIMS. If CMS Energy (with respect to Section 9.1)
believes that any of the persons entitled to indemnification under this Article
IX has suffered or incurred any Loss or incurred any Expense, CMS Energy, shall
so notify the Majority Stockholder promptly in writing (a "Claim
Notice")describing such Loss or Expense, the amount thereof, if known, and the
method of computation of such Loss or Expense, all with reasonable particularity
and containing a reference to the provisions of this Agreement or any
certificate delivered pursuant hereto in respect of which such Loss or Expense
shall have occurred; provided, however, CMS Energy must deliver its Claims
Notice within the survival period set forth in Section 9.6. In the event CMS
Energy fail to deliver a Claim Notice during the survival period set forth in
Section 9.6, CMS Energy shall not thereafter be able to claim indemnification
with respect to any matter which has not been made the subject of a Claim Notice
during the survival period.
SECTION 9.4. THIRD PARTY CLAIMS. Subject to the limitations on
indemnification set forth in Section 9.1 and 9.6 in the event of any claim for
indemnification hereunder resulting from or in connection with any claim or
legal proceeding by a third party, the indemnified persons shall give such
notice thereof to the indemnifying party not later than twenty (20) days prior
to the time any response to the asserted claim is required, if possible, and in
any event within fifteen (15) days following the date such indemnified person
has actual knowledge thereof; provided, however, that the omission by such
indemnified party to give notice as provided herein shall relieve the
indemnifying party of its indemnification obligation under this Article IX only
if such omission results in a failure of actual notice to the indemnifying party
and then only to the extent that such indemnifying party is materially damaged
as a result of such failure to give notice. In the event of any such claim for
indemnification resulting
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from or in connection with a claim or legal proceeding by a third party, the
indemnifying party may, at its sole cost and expense, assume the defense
thereof; provided, however, that counsel for the indemnifying party, who shall
conduct the defense of such claim or legal proceeding, shall be reasonably
satisfactory to the indemnified party; and provided, further, that if the
defendants in any such actions include both the indemnified persons and the
indemnifying party and the indemnified persons shall have reasonably concluded
that there may be legal defenses or rights available to them which have not been
waived and are in actual or potential conflict with those available to the
indemnifying party, the indemnified persons shall have the right to select one
law firm reasonably acceptable to the indemnifying party to act as separate
counsel, on behalf of such indemnified persons, at the expense of the
indemnifying party. Subject to the second proviso of the immediately preceding
sentence, if an indemnifying party assumes the defense of any such claim or
legal proceeding, such indemnifying party shall not consent to entry of any
judgment, or enter into any settlement, that (a) is not subject to full
indemnification hereunder, (b) provides for injunctive or other non-monetary
relief affecting the indemnified persons or (c) does not include as an
unconditional term thereof the giving by each claimant or plaintiff to such
indemnified persons of a release from all liability with respect to such claim
or legal proceeding, without the prior written consent of the indemnified
persons (which consent, in the case of clauses (b) and (c), shall not be
unreasonably withheld); provided, however, that subject to the second proviso of
the immediately preceding sentence, the indemnified persons may, at their own
expense, participate in any such proceeding with the counsel of their choice
without any right of control thereof. So long as the indemnifying party is in
good faith defending such claim or proceeding, the indemnified persons shall not
compromise or settle such claim or proceeding without the prior written consent
of the indemnifying party, which consent shall not be unreasonably withheld. If
the indemnifying party does not assume the defense of any such claim or
litigation in accordance with the terms hereof, the indemnified persons may
defend against such claim or litigation in such manner as they may deem
appropriate, including, without limitation, settling such claim or litigation
(after giving prior written notice of the same to the indemnifying party and
obtaining the prior written consent of the indemnifying party, which consent
shall not be unreasonably withheld) on such terms as the indemnified persons may
deem appropriate, and the indemnifying party will promptly indemnify the
indemnified persons in accordance with the provisions of this Section 9.4.
SECTION 9.5. [INTENTIONALLY OMITTED]
SECTION 9.6. SURVIVAL OF OBLIGATIONS. All representations, warranties,
covenants and obligations contained in this Agreement shall survive the
consummation of the transactions contemplated by this Agreement; provided,
however, that each and every representation and warranty contained in this
Agreement, except for those representation and warranties contained in Sections
3.1, 3.2, 3.3, 3.4(a), 3.4(b), 3.8., 4.1, 4.2, 4.3 and 4.4 which shall each
survive for the lessor of (i) one year or (ii) the time allowed to satisfy the
requirements for pooling-of-interests accounting, shall expire with, and be
terminated and extinguished by, the Effective Date and thereafter neither CNG,
the Majority Shareholder, CMS Energy or the Sub or their respective directors,
officers, employees, agents and representatives shall be under any liability
whatsoever with respect to any such representation or warranty contained in this
Agreement. This Article IX shall have no effect upon any other obligation of the
parties hereto, whether performed before or after the Effective Time; further
provided, that the indemnity obligation of Majority Shareholders under this
article IX shall be CMS' sole and exclusive remedy for breach of the
representations and warranties set forth in Sections 3.1, 3.2, 3.3, 3.4(a),
3.4(b) and 3.8 of this Agreement.
SECTION 9.7. UPDATE OF THE REPRESENTATIONS AND WARRANTIES. (a) Not later
than five (5) days prior to the Effective Date, CNG and/or any Majority
Stockholder may deliver a written notice to CMS Energy setting forth any and all
facts, conditions, occurrences, changes and other matters, in each case,
occurring after the date
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hereof, that has caused or may cause the representations and warranties of CNG
and/or the Majority Stockholders contained herein (including the Schedules to
the Disclosure Schedule hereto) not to be true and correct in all respects (in
the case of any representation or warranty containing any materiality
qualification) or in all material respects (in the case of any representation or
warranty without any materiality qualification). In the event that any of such
facts, conditions, occurrences, changes and other matters shall have caused or
will cause, on or prior to the Effective Date, any such representation or
warranty not to be true and correct in all respects (in the case of any
representation or warranty containing any materiality qualification) or in all
material respects (in the case of any representation or warranty without any
materiality qualification) on the Effective Date with the same effect as though
made on the Effective Date, CMS Energy may elect to terminate this Agreement
pursuant to Section 10.1(b) based on such facts, conditions, occurrences,
changes or other matters. If CMS Energy shall nevertheless proceed to consummate
the Merger, such facts, conditions, occurrences, changes and other matters so
disclosed as to each such representation or warranty of the Majority
Stockholders contained herein (including the Schedules) shall be deemed to
constitute an exception to such representation or warranty reflecting the facts,
conditions, occurrences, changes and other matters so disclosed with the same
effect as if such exception had been made in such representation or warranty as
of the date hereof in this Agreement to the extent, but only to the extent, of
such disclosure.
(b) Not later than five (5) days prior to the Effective Date, CMS Energy
may deliver a written notice to CNG, the Majority Stockholders setting forth any
and all facts, conditions, occurrences, changes and other matters, in each case,
occurring after the date hereof, that has caused or may cause the
representations and warranties of CMS Energy contained herein (including the
Schedules to the Disclosure Schedules hereto) not to be true and correct in all
respects (in the case of any representation or warranty containing any
materiality qualification) or in all material respects (in the case of any
representation or warranty without any materiality qualification). In the event
that any of such facts, conditions, occurrences, changes and other matters shall
have caused or will cause, on or prior to the Effective Date, any such
representation or warranty not to be true and correct in all respects (in the
case of any representation or warranty containing any materiality qualification)
or in all material respects (in the case of any representation or warranty
without any materiality qualification) on the Effective Date with the same
effect as though made on the Effective Date, CNG may elect to terminate this
Agreement pursuant to Section 10.1(c) based on such facts, conditions,
occurrences, changes or other matters. If CNG shall nevertheless proceed to
consummate the Merger, such facts, conditions, occurrences, changes or other
matters so disclosed as to each such representation or warranty of CMS Energy
contained herein (including the Schedules) shall be deemed to constitute an
exception to such representation or warranty reflecting the facts, conditions,
occurrences, changes and other matters so disclosed with the same effect as if
such exception had been made in such representation or warranty as of the date
hereof in this Agreement to the extent, but only to the extent, of such
disclosure.
ARTICLE X
TERMINATION
SECTION 10.1. TERMINATION. Anything contained in this Agreement to the
contrary notwithstanding, this Agreement may be terminated at any time prior to
the Effective Time:
(a) by the mutual consent of CMS Energy and CNG;
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(b) by CMS Energy upon any material breach by CNG or any Majority
Stockholder of any of the covenants contained in Article VI or VII or Section
11.1;
(c) by CNG upon any material breach by CMS Energy or Sub of any of the
covenants contained in Article VI or VII or Section 11.1;
(d) by CMS Energy if any of the conditions to CMS Energy's obligations
specified in Article VIII have not been met in all material respects or waived
by CMS Energy at such time as such condition can no longer be satisfied;
(e) by CNG if any of the conditions to CNG's obligations specified in
Article VIII has not been met in all material respects or waived by CNG and the
Majority Stockholders, as applicable, at such time as such condition can no
longer be satisfied;
(f) by CMS Energy or CNG if the Merger shall not have been consummated on
or before October 31, 1998; provided, that the parties agree to extend such time
period for a reasonable period of time in the event the Registration Statement
did not become effective in a time frame so as to allow the CNG Stockholders'
meeting to occur prior to October 31, 1998; or
(g) By CNG if it shall receive any Acquisition Proposal after the date
hereof from a third party or parties and the Board of Directors of CNG shall
have received a written opinion from independent legal counsel to the effect
that, and the Board of Directors shall have determined in good faith in the
exercise of its fiduciary duties that, CNG is legally required to pursue such
Acquisition Proposal.
SECTION 10.2. EFFECT OF TERMINATION. Except to the extent provided in
Section 10.3, in the event that this Agreement shall be terminated pursuant to
Section 10.1, all further obligations of the parties under this Agreement
(other than this Section and Sections 6.4. 6.12, 7.2. 10.3. 11.1, 11.2 and
11.12) shall terminate without further liability of any party to the others;
provide , however, that nothing herein shall relieve any party from liability
for its breach of this Agreement during its effectiveness.
SECTION 10.3. EFFECT OF TERMINATION AND ABANDONMENT. CNG agrees that if
this Agreement is terminated pursuant to: (a) Section 10.1(b) and (i) such
termination is the result of a wilful breach of any covenant or agreement of CNG
contained herein, (ii) CNG shall have had contacts or entered into negotiations
relating to an Acquisition Proposal, in any such case at any time within the
period commencing on the date of this Agreement through the date of termination
of this Agreement, and (iii) within ten months after the date of termination of
this Agreement, and with respect to any person or group with whom the contacts
or negotiations referred to in clause (ii) have occurred, a Business Combination
(as defined below) shall have occurred or CNG shall have entered into a
definitive agreement providing for a Business Combination; or (b) Section 10.
1(d) or 10.1(e) because this Agreement and the Merger shall fail to receive the
requisite vote for approval and adoption by the stockholders of CNG at the CNG
stockholders meeting and at the time of such meeting there shall exist an
Acquisition Proposal; or (c) Section 10.1 (2) and at the time of the
withdrawal, modification or change (or resolution to do so) of its
recommendation by the Board of Directors of CNG, there shall exist an
Acquisition Proposal; then CNG shall pay to CMS Energy an amount equal to $3
Million which amount is inclusive of all of CMS Energy's Acquisition Expenses,
and is CMS' sole and exclusive remedy as against CNG for termination under this
Section 10.3.
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(b) Any payment required to be made pursuant to Section 10.3(a) of this
Agreement shall be made as promptly as practicable but not later than three
business days after termination of this Agreement, and shall be made by wire
transfer of immediately available funds to an account designated by CMS Energy;
(c) For purposes of this Section 10.3, the term "Business Combination"
means (i) a merger, consolidation, share exchange, business combination or
similar transaction involving CNG, (ii) a sale, lease, exchange, transfer or
other disposition of 35% or more of the assets of CNG and the Subsidiaries,
taken as a whole, in a single transaction or a series of the transactions, or
(iii) the acquisition, by a person (other than CMS Energy or any affiliate
thereof) or group (as such term is defined under Section 13(d) of the Exchange
Act and the rules and regulations thereunder) of beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of 35% or more of the CNG Common
Stock whether by tender or exchange offer or otherwise.
ARTICLE X1
OTHER PROVISIONS
SECTION 11.1. CONFIDENTIAL NATURE OF INFORMATION. (a) All information about
CNG furnished by CNG, the Majority Shareholders and their affiliates, and by
their respective directors, officer, members, managers, partners, employees and
agents (all such affiliates and other persons are collectively referred to
herein as "representatives"), whether furnished to CMS Energy or to CMS Energy's
representatives before or after the date hereof and regardless of the manner in
which it is furnished, is referred to in this Section 11.1 as "Proprietary
Information". For purposes of this Section 11.1, Proprietary Information (a)
shall include all documents which are prepared by CMS Energy and CMS Energy's
representatives, including all correspondence, memoranda, notes, summaries,
analysis, studies, models, extracts of and documents and records reflecting,
based on or derived from Proprietary Information as well as all copies and other
reproductions thereof, whether in writing or stored or maintained in or by
electronic, magnetic or other means, media or devices (all such documents and
writings which are prepared by CMS Energy or CMS Energy's representatives are
sometimes referred to herein as "Evaluation Documents") and (b) shall not
include information which (i) is or becomes generally available to the public
other than as a result of a disclosure by CMS Energy or CMS Energy's
representatives, (ii) was available to CMS Energy on a nonconfidential basis
prior to its disclosure by CNG or its representatives or (iii) becomes available
to CMS Energy on a nonconfidential basis from a person other than CNG or its
representatives who is not otherwise bound by a confidentiality agreement with
CNG or its representatives, or is otherwise prohibited from transmitting the
information to CMS Energy.
(b) CMS Energy agrees that (i) CMS Energy and CMS Energy's representatives
will keep all Proprietary Information confidential and not disclose or reveal
any Proprietary Information to any person other than those of CMS Energy's
representatives who are actively and directly participating in the evaluation of
the Merger or who otherwise need to know the Proprietary Information for the
purpose of evaluating the Merger and to cause those persons to observe the terms
of this Agreement, (ii) CMS Energy and CMS Energy's representatives will not use
the Proprietary Information for any purpose other than in connection with the
consummation of the Merger in a manner which CNG has approved and (iii) CMS
Energy and CMS Energy's representatives will not, without CNG's prior written
consent, disclose to any person (other than to CMS Energy's representatives
actively and directly participating in the Merger) any information about the
Merger, or the terms, conditions or other facts relating thereto, including the
fact that discussions are taking place with respect thereto or the status
thereof, or the fact that the Proprietary Information has been made available to
CMS Energy. CMS Energy will be
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responsible for any breach of the terms hereunder by CMS Energy or CMS Energy's
representatives.
(c) In the event that CMS Energy or any of CMS Energy's representatives is
requested pursuant to, or required by, applicable law or regulation or by legal
process to disclose any Proprietary Information or any other information
concerning CNG or the Merger (including any facts or information referred to in
paragraph (b)(3) above), CMS Energy agree that CMS Energy will provide CNG with
prompt notice of such request(s) or the receipt(s) of legal process to enable
CNG to seek an appropriate protective order, to consult with CMS Energy with
respect to CNG or CMS Energy taking steps to resist or narrow the scope of such
request or process and/or to waive compliance in whole or in part with CMS
Energy's agreement to maintain the confidentiality of the Proprietary
Information. If and to the extent that after the foregoing notice, in the
absence of a protective order or receipt of a waiver under this Agreement, CMS
Energy or CMS Energy's representatives are, in the written opinion of CMS
Energy's counsel, compelled to disclose Proprietary Information or other
information concerning CNG or the Merger (including any facts or information
referred to in paragraph (b)(3) above) or risk being liable for contempt or
suffer censure or penalty or violate applicable laws or regulation, CMS Energy
and CMS Energy's representatives may disclose such Proprietary Information or
other information without liability to CNG under this Agreement.
(d) If this Agreement is terminated, CMS Energy agrees that it will, upon
CNG's request, promptly deliver to CNG all of the Proprietary Information, as
more completely described above, in CMS Energy's possession or control or in the
possession or control of any of CMS Energy's representatives. CMS Energy may,
however, destroy such of the Proprietary Information as constitutes Evaluation
Documents in CMS Energy's and CMS Energy's representative's possession or
control, whether prepared by CMS Energy or CMS Energy's representatives, in
which case CMS Energy will do so promptly and, if requested by CNG, will provide
a written statement by an officer of CMS Energy's organization familiar with CMS
Energy's consideration of the Merger certifying that all such Evaluation
Documents, including all copies thereof, have been destroyed.
(e) In consideration of CMS Energy's receipt of the Proprietary Information
and except as otherwise provided in this Agreement, CMS Energy hereby agrees
that for a period of two (2) years from the date hereof neither CMS Energy, nor
CMS Energy's affiliates, as defined in Rule 12b-2 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), will (and CMS Energy and they will not
assist or encourage others to), directly or indirectly, unless specifically
requested in writing to do so in advance or consented prior thereto in writing
by CNG:
(1) acquire or agree, offer, seek or propose to acquire, or cause to be
acquired, ownership (including, but not limited to, beneficial ownership as
defined in Rule l3d-3 of the Exchange Act) of any of CNG's assets or
business or any of its subsidiaries or any securities issued by CNG or any
of its subsidiaries, or any rights or options to acquire such ownership
(including from a third party); or
(2) make, or in any way participate in, any "solicitation" of "proxies"
(as such terms are defined in Regulation 14A of the Exchange Act) to vote
or seek to advise or influence in any matter whatsoever any person or
entity with respect to the voting or any securities of CNG or any of its
subsidiaries; or
(3) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) with respect to any
voting securities of CNG or any of its subsidiaries; or
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(4) arrange, or in any way participate in, any financing for the
purchase of any voting securities or securities convertible or exchangeable
into or exercisable for any voting securities or assets of CNG or any of
its subsidiaries; or
(5) otherwise act, whether alone or in concert with others, to seek to
propose to CNG or any of its stockholders any merger, business combination,
restructuring, recapitalization or similar transaction to or with CNG or
any of its subsidiaries or otherwise seek or propose to influence or
control CNG's management or policies; or
(6) seek to negotiate or influence the terms and conditions of
employment of key employees of CNG or any of its subsidiaries or any
agreement of collective bargaining with employees of CNG or any of its
subsidiaries; or
(7) enter into any discussions, negotiations, arrangements or
understandings with or advise, or assist any third party with respect to
any of the foregoing.
CMS Energy will promptly advise CNG of any inquiry or proposal made to
CMS Energy with respect to any of the foregoing.
(f) Without prejudice to the rights and remedies otherwise available to
CNG, CMS Energy agrees that CNG shall be entitled to equitable relief by way of
injunction if CMS Energy or any of CMS Energy's representatives breach or
threaten to breach any of the provisions of this Agreement. It is understood
that any failure or delay by CNG in exercising any right, power or privilege
hereunder shall not operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof.
SECTION 11.2. FEES AND EXPENSES. Except as otherwise provided in this
Agreement, each of the parties hereto shall bear its own costs and expenses
(including, without limitation, fees and disbursements of its counsel,
accountants and other financial, legal, accounting or other advisors), incurred
by it or its affiliates in connection with the preparation, negotiation,
execution, delivery and performance of this Agreement and each of the other
documents and instruments executed in connection with or contemplated by this
Agreement, and the consummation of the transactions contemplated hereby and
thereby (collectively "Acquisition Expenses").
SECTION 11.3. NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be deemed given when delivered
personally or by overnight mail, or four (4) days after being mailed (by
registered mail, return receipt requested) to a party at the following address
(or to such other address as such party may have specified by notice given to
the other parties pursuant to this provision):
If to CMS Energy to:
CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
Attention: Corporate Secretary
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with a copy to:
Rodger A. Kershner
CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
If to Sub to:
CMS Merging Corporation
c/o CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
Attention: Corporate Secretary
with a copy to:
Rodger A. Kershner
CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
If to CNG to:
Continental Natural Gas, Inc.
1437 S. Boulder, Suite 1250
Tulsa, Oklahoma 74119
Attention: Gary C. Adams
with a copy to:
Gerald R. Shrader
1437 S. Boulder, Suite 1250
Tulsa, Oklahoma 74119
If to the Majority Stockholders to the
Majority Stockholders' Representative as follows:
Cottonwood Partnership
1437 S. Boulder, Suite 1250
Tulsa, Oklahoma 74119
Attention: Gary C. Adams
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SECTION 11.4. DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person;
(b) an "associate" of any person means (i) a corporation or organization of
which such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10 percent or more of a class of equity securities, (ii) any
trust or other estate in which such person has substantial beneficial interest
or as to which such person serves as trustee or in a similar capacity and (iii)
any relative or spouse of such person, or any relative of such spouse, who has
the same home as such person or who is a director or officer of the person or
any of its parents or subsidiaries.
(c) "Best Knowledge" shall mean that any such representations, warranties
and other statements made by a party to this Agreement is made to the best of
the actual knowledge and belief, after due inquiry, of the officers of the party
making such statement.
(d) "Market Conditions" means fluctuation in the price of natural gas and
natural gas liquids or other general economic market conditions (including
conditions in the overall natural gas, natural gas liquids and securities
markets) outside the control of CNG that affect the United States economy, stock
and bond markets or the energy industry (or segment thereof) generally, but not
specifically CNG.
(e) "Material Adverse Change" or "Material Adverse Effect" means any change
or effect (or any development that, insofar as can reasonably be foreseen, would
result in any change or effect) that is materially adverse to the business,
properties, operations, assets, condition (financial or otherwise) or results of
operations of the applicable person or persons; provided, however, that no
Material Adverse Change or Effect shall occur or shall be deemed to occur as a
result of a change in Market Conditions or any change, event, circumstance or
occurrence permitted in this Agreement (or in any Schedule hereto).
(f) "Permitted Encumbrances" shall mean (i) liens for taxes, assessments
and similar governmental charges incurred or payable by CNG or its Subsidiaries
that are not delinquent or, if delinquent, that are being contested in good
faith by CNG and for which adequate reserves have been established by CNG and
reflected on the Statement of Income and/or the Balance Sheet (and taken into
account in determining CNG Consolidated Net Working Capital); (ii) liens and
encumbrances securing CNG Debt; (iii) liens and encumbrances that shall be
released at or prior to the Effective Time at no cost to CNG; (iv) easements,
servitudes, rights-of-way and other similar rights relating to the Leases that
do not materially interfere with the use of the Leases; and (v) rights reserved
to or vested in any municipality or to governmental, statutory or public
authority to control or regulate any of the Interest in any manner, and all
applicable laws, rules and orders of governmental authorities.
(g) "person" means an individual, corporation, partnership, association,
trust, unincorporated organization or other entity.
SECTION 11.5. PARTIAL INVALIDITY. In case any one or more of the provisions
contained herein shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provision or
provisions had never been contained herein unless the deletion of such
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provision or provisions would result in such a material change as to cause
completion of the transactions contemplated hereby to be unreasonable.
SECTION 11.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective permitted
successors or assigns.
SECTION 11.7. EXECUTION IN COUNTERPART. This Agreement may be executed in
one or more counterparts, each of which shall be considered an original
counterpart, and shall become a binding agreement when CMS Energy, Sub, CNG and
the Majority Stockholders shall have each executed one counterpart.
SECTION 11.8. TITLES AND HEADINGS. Titles and headings to Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
SECTION 11.9. SCHEDULES AND EXHIBITS. The Schedules, Exhibits, Disclosure
Schedule and CMS Option Agreement referred to in this Agreement shall be
construed with and as an integral part of this Agreement to the same extent as
if the same had been set forth verbatim herein.
SECTION 11.10. ENTIRE AGREEMENT/NO THIRD PARTY RIGHTS/ ASSIGNMENT. This
Agreement (including the Schedules to the Disclosure Schedule, Exhibits,
documents and instruments referred to herein): (a) constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the par-ties with respect to the subject matter hereof; (b)
except as expressly set forth herein, is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder; and (c) shall
not be assigned by a party, by operation of law or otherwise, without the
consent of the other parties. successors and assigns.
SECTION 11.11. INDEPENDENT INVESTIGATION AND SCOPE OF REPRESENTATIONS. CMS
Energy acknowledges and confirms that (i) in making the decision to enter into
this Agreement and to consummate the transactions contemplated hereby, it has
relied on the representations, warranties, covenants and agreements of CNG and
the Majority Stockholder set forth in the Agreement (including the exhibits and
schedules) and on no other representations, warranties, covenants and
agreements, and (ii) it has made its own independent investigation, analysis and
evaluation of CNG's properties (including CMS Energy's own estimate and
appraisal of the extent and value of CNG's pipelines and contracts), business,
financial condition, operations and prospects. Except to the extent expressly
set forth in this Agreement, including Section 3.35, no party makes any
representation or warranty whatsoever. Without limiting the generality of the
foregoing, except as set forth in Article III, NO REPRESENTATIONS OR WARRANTIES,
EITHER EXPRESS OR IMPLIED, ARE MADE WITH RESPECT TO THE MERCHANTABILITY,
USEFULNESS OR SUITABILITY FOR ANY PURPOSE OF ANY PERSONAL PROPERTY OF CNG OR ITS
SUBSIDIARIES, INCLUDING WITHOUT LIMITATION (a) ANY IMPLIED OR EXPRESS WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, (b) ANY RIGHTS OF CMS
ENERGY UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION, (c) THE
QUALITY OF THE LABOR OR MATERIALS INCLUDED IN THE PROPERTIES OR ASSETS,
INCLUDING ANY LATENT OR PATENT DEFECTS; (d) ANY FEATURES OR CONDITIONS,
INCLUDING ANY LATENT OR PATENT DEFECTS, AT OR WHICH AFFECT THE PROPERTIES OR
ASSETS WITH RESPECT TO ANY PARTICULAR PURPOSE, USE, POTENTIAL OR OTHERWISE; (e)
THE SIZE, SHAPE, CONFIGURATION, CAPACITY, QUANTITY, QUALITY, CASH FLOW,
EXPENSES, VALUE, MAKE, MODEL OR CONDITION OF THE PROPERTIES OR ASSETS; (f) ALL
EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES CREATED BY
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ANY AFFIRMATION OF FACT OR PROMISE OR BY ANY DESCRIPTION OF THE PROPERTIES OR
ASSETS; (g) ANY ENVIRONMENTAL, STRUCTURAL OR OTHER CONDITION OR HAZARD OR THE
ABSENCE THEREOF HERETOFORE, NOW, OR HEREAFTER AFFECTING IN ANY MANNER ANY OF THE
PROPERTIES OR ASSETS; (h) ALL OTHER EXPRESS OR IMPLIED WARRANTIES AND
REPRESENTATIONS BY CNG WHATSOEVER, AND (i) ANY CLAIM FOR DAMAGES BECAUSE OF
DEFECTS, WHETHER KNOWN OR UNKNOWN, WITH RESPECT TO SUCH REAL OR PERSONAL
PROPERTY, IT BEING UNDERSTOOD THAT, EXCEPT AS AFORESAID, SUCH PERSONAL PROPERTY
SHALL EXIST IN ITS PRESENT CONDITION AND STATE OF REPAIR, "AS IS" AND "WHERE
IS," WITH ALL FAULTS.
SECTION 11.12. GOVERNING LAW; ARBITRATION. (a) This Agreement, and the
application or interpretation thereof, shall be governed by its terms and by the
internal laws of the State of Michigan, without regard to principles of
conflicts of laws as applied in the State of Michigan or any other jurisdiction
which, if applied, would result in the application of any laws other than the
internal laws of the State of Michigan except to the extent that the OGCA
governs aspects of the Merger.
(b) Any action, dispute, claim or controversy arising under, out of, in
connection with, or relating to, this Agreement, or any amendment hereof, or the
breach hereof (a "Dispute"), shall be determined and settled by binding
arbitration in Chicago, Illinois, by a person or persons mutually agreed upon,
or in the event of a disagreement as to the selection of the arbitrator or
arbitrators, in accordance with the rules of the American Arbitration
Association ("AAA"). Any award rendered therein shall specify the findings of
fact of the arbitrator or arbitrators and the reasons for such award, with the
reference to and reliance on relevant law. Any such award shall be final and
binding on each and all of the parties thereto and their personal
representatives, and judgment may be entered thereon in any court having
jurisdiction thereof. Any party may, by summary proceedings, bring an action in
court to compel arbitration of any Dispute. Any arbitration hereunder shall be
administered by the AAA in accordance with the terms of this Section 11.12, the
Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable,
the Federal Arbitration Act. Each party agrees to keep all Disputes and
arbitration proceedings strictly confidential except for disclosure of
information required by applicable law.
SECTION 11.13. NO THIRD-PARTY BENEFICIARIEs. Except for Section 7.2 and
Article X, nothing in this Agreement, expressed or implied, is intended or shall
be construed to confer upon any person other than the parties hereto and
successors and assigns permitted by Section 11.6 any right, remedy or claim
under or by reason of this Agreement (but excluding for the purpose of this
provision the Exhibits and Schedules).
SECTION 11.14. INTERPRETATION. Except as expressly stated otherwise, any
reference herein to "he," "she" or "it", or comparable terms, with respect to
any person or entity shall mean and include references to any or all of the same
as applicable whether or not so stated and regardless of gender, and any
reference herein to "this Agreement," "herein," "hereof," "hereby,"
"hereunder," or comparable terms shall mean and include references to this
Agreement and the Schedules and Exhibits to this Agreement.
SECTION 11.15. GUARANTEE. CMS Energy guarantees all of the obligations of
the Sub under this Agreement.
SECTION 11.16. [INTENTIONALLY OMITTED]
SECTION 11.17. TIME OF ESSENCE. Time is of the essence in the performance
of the obligations stated herein.
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SECTION 11.18. ATTORNEYS FEES. If any action at law, in arbitration or in
equity, including an action for declaratory relief, is brought to enforce or
interpret the provisions of this Agreement, the prevailing party shall be
entitled to recover reasonable attorneys fees from the other party, which fees
may be set by the court or the arbitrators in the trial of such action or may be
enforced in a separate action brought for that purpose, and which fees shall be
in addition to any other relief which may be awarded.
SECTION 11.19. AMENDMENT. To the extent permitted by applicable law, this
Agreement may be amended by action taken by or on behalf of CNG, CMS Energy and
the Sub at any time before or after adoption of this Agreement by the
shareholders of CNG but, after any submission of this Agreement to such
shareholders for approval, no amendment shall be made which reduces the Merger
consideration or which materially and adversely affects the rights of CNG's
shareholders hereunder without any required approval of such shareholders. This
Agreement may not be amended except by an instrument signed on behalf of all the
parties.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the parties hereto or by their duly authorized officers, all as of the date
first above written.
CMS ENERGY CORPORATION,
a Michigan corporation
By: /s/ Victor J. Fryling
----------------------------
Name: Victor J. Fryling
Title: President & CEO
CMS MERGING CORPORATION,
a Michigan corporation
By: /s/ William J. Haener
----------------------------
Name: William J. Haener
Title: President & CEO
CONTINENTAL NATURAL GAS, INC.,
an Oklahoma corporation
By: /s/ Gray C. Adams
----------------------------
Name: Gary C. Adams
Title: President
ADAMS AFFILIATES, INC.,
an Oklahoma corporation
By: /s/ Gary C. Adams
----------------------------
Name: Gary C. Adams
Title: Chairman of the Board
COTTONWOOD PARTNERSHIP,
an Oklahoma general partnership
By: /s/ Gary C. Adams
----------------------------
Name: Gary C. Adams
Title: President
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ANNEX B
TITLE 18, OKLAHOMA STATUTES [CORPORATIONS]
CHAPTER 22. - OKLAHOMA GENERAL CORPORATION ACT
Section 1091. APPRAISAL RIGHTS.
A. Any shareholder of a corporation of this state who holds shares of stock
on the date of the making of a demand pursuant to the provisions of
subsection D of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with the provisions of
subsection D of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to the
provisions of Section 1073 of this title shall be entitled to an appraisal
by the district court of the fair value of his shares of stock under the
circumstances described in subsections B and C of this section. As used in
this section, the word "shareholder" means a holder of record of stock in
a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by
those words and also membership or membership interest of a member of a
nonstock corporation. The provisions of this subsection shall be effective
only with respect to mergers or consolidations consummated pursuant to an
agreement of merger or consolidation entered into after November 1, 1988.
B. 1. Except as otherwise provided for in this subsection, appraisal rights
shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation, or of the acquired
corporation in a share acquisition, to be effected pursuant to the
provisions of Sections 1081, 1082, 1086, 1087, or 1091.1 of this title or
Section 12 of this act.
2. a. No appraisal rights under this section shall be available for
the shares of any class or series of stock which, at the record
date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting of shareholders to act upon the
agreement of merger or consolidation, were either:
(1) listed on a national securities exchange; or
(2) held of record by more than two thousand shareholders.
b. In addition, no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger
if the merger did not require for its approval the vote of the
shareholders of the surviving corporation as provided for in
subsection F of Section 1081 of this title.
3. Notwithstanding the provisions of paragraph 2 of this subsection,
appraisal rights provided for in this section shall be available for the
shares of any class or series of stock of a constituent corporation if
the holders thereof are required by the terms of an agreement of merger
or consolidation pursuant to the provisions of Sections 1081, 1082, 1086
or 1087 of this title to accept for such stock anything except:
a. shares of stock of the corporation surviving or resulting from
such merger or consolidation; or
b. shares of stock of any other corporation which at the effective
date of the merger or consolidation will be either listed on a
national securities exchange or held of record by more than two
thousand shareholders; or
c. cash in lieu of fractional shares of the corporations described
in subparagraphs a and b of this paragraph; or
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d. any combination of the shares of stock and cash in lieu of the
fractional shares described in subparagraphs a, b and c of this
paragraph.
4. In the event all of the stock of a subsidiary Oklahoma corporation
party to a merger effected pursuant to the provisions of Section
1083 of this title is not owned by the parent corporation
immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Oklahoma corporation.
C. Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections D and E
of this section, shall apply as nearly as is practicable.
D. Appraisal rights shall be perfected as follows:
1. If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of shareholders, the corporation, not less than twenty (20) days prior
to the meeting, shall notify each of its shareholders entitled to such
appraisal rights that appraisal rights are available for any or all of
the shares of the constituent corporations, and shall include in such
notice a copy of this section. Each shareholder electing to demand the
appraisal of the shares of the shareholder shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of the shares of the
shareholder. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the shareholder and that the shareholder
intends thereby to demand the appraisal of the shares of the
shareholder. A proxy or vote against the merger or consolidation shall
not constitute such a demand. A shareholder electing to take such action
must do so by a separate written demand as herein provided. Within ten
(10) days after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each shareholder of each
constituent corporation who has complied with the provisions of this
subsection and has not voted in favor of or consented to the merger or
consolidation as of the date that the merger or consolidation has become
effective; or
2. If the merger or consolidation was approved pursuant to the
provisions of Section 1073 or 1083 of this title, the surviving or
resulting corporation, either before the effective date of the merger or
consolidation or within ten (10) days thereafter, shall notify each of
the shareholders entitled to appraisal rights of the effective date of
the mergeror consolidation and that appraisal rights are available for
any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent
by certified or registered mail, return receipt requested, addressed to
the shareholder at the address of the shareholder as it appears on the
records of the corporation. Any shareholder entitled to appraisal rights
may, within twenty (20) days after the date of mailing of the notice,
demand in writing from the surviving or resulting corporation the
appraisal of the shares of the shareholder. Such demand will be
sufficient if it reasonably informs the corporation of theidentity of
the shareholder and that the shareholder intends to demand the appraisal
of the shares of the shareholder.
E. Within one hundred twenty (120) days after the effective date of the
merger or consolidation, the surviving or resulting corporation or any
shareholder who has complied with the provisions of subsections A and D of this
section and who is otherwise entitled to appraisal rights, may file a petition
in district court demanding a determination of the value of the stock of all
such shareholders. Provided, however, at any time within sixty (60) days after
the effective date of the merger or consolidation, any shareholder shall have
the right to withdraw the demand of the shareholder for appraisal and to accept
the terms offered upon the merger or consolidation. Within one hundred twenty
(120) days after the effective date of the merger or consolidation, any
shareholder who has complied with the requirements of subsections A and D of
this section, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which
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demands for appraisal have been received and the aggregate number of holders of
such shares. Such written statement shall be mailed to the shareholder within
ten (10) days after the shareholder's written request for such a statement is
received by the surviving or resulting corporation or within ten (10) days after
expiration of the period for delivery of demands for appraisal pursuant to the
provisions of subsection D of this section, whichever is later.
Upon the filing of any such petition by a shareholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which, within
twenty (20) days after such service, shall file in the office of the court clerk
of the district court in which the petition was filed a duly verified list
containing the names and addresses of all shareholders who have demanded payment
for their shares and with whom agreements as to the value of their shares have
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The court clerk, if so ordered by the
court, shall give notice of the time and place fixed for the hearing of such
petition by registered or certified mail to the surviving or resulting
corporation and to the shareholders shown on the list at the addresses therein
stated. Such notice shall also be given by one or more publications at least one
(1) week before the day of the hearing, in a newspaper of general circulation
published in the City of Oklahoma City. Oklahoma, or such publication as the
court deems advisable. The forms of the notices by mail and by publication shall
be approved by the court, and the costs thereof shall be borne by the surviving
or resulting corporation.
G. At the hearing on such petition, the court shall determine the
shareholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The court may require the shareholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the court clerk for
notation thereon of the pendency of the appraisal proceedings; and if any
shareholder fails to comply with such direction, the court may dismiss the
proceedings as to such shareholder.
H. After determining the shareholders entitled to an appraisal, the court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
court shall take into account all relevant factors. In determining the fair rate
of interest, the court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any shareholder entitled to participate
in the appraisal proceeding, the court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the shareholder entitled to an appraisal. Any
shareholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to the provisions of subsection F of this section and who
has submitted the certificates of stock of the shareholder to the court clerk,
if such is required, may participate fully in all proceedings until it is
finally determined that the shareholder is not entitled to appraisal rights
pursuant to the provisions of this section.
I. The court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
shareholders entitled thereto. Interest may be simple or compound, as the court
may direct. Payment shall be so made to each such shareholder, in the case of
holders of uncertificated stock immediately, and in the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The court's decree may be enforced as
other decrees in the district court may be enforced, whether such surviving or
resulting corporation be a corporation of this state or of any other state.
J. The costs of the proceeding may be determined by the court and taxed
upon the parties as the court deems equitable in the circumstances. Upon
application of a shareholder, the court may order all or a portion of the
expenses incurred by any shareholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
K. From and after the effective date of the merger or consolidation, no
shareholder who has demanded the appraisal rights of the shareholder as provided
for in subsection D of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock,
except dividends or other distributions payable to shareholders of record at a
date which is prior to the effective date of the merger or consolidation;
provided, however, that if
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no petition for an appraisal shall be filed within the time provided for in
subsection E of this section, or if such shareholder shall deliver to the
surviving or resulting corporation a written withdrawal of the shareholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within sixty (60) days after the effective date of the merger or consolidation
as provided for in subsection is of this section or thereafter with the written
approval of the corporation, then the right of such shareholder to an appraisal
shall cease. Provided, however, no appraisal proceeding in the district court
shall be dismissed as to any shareholder without the approval of the court, and
such approval may be conditioned upon such terms as the court deems just.
L. The shares of the surviving or resulting corporation into which the
shares of such objecting shareholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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ANNEX C
September 10, 1998
PERSONAL AND CONFIDENTIAL
The Board of Directors
Continental Natural Gas, Inc.
1437 South Boulder, Suite 1250
Tulsa, Oklahoma 74119
Gentlemen:
You have requested CIBC Oppenheimer Corp. ("CIBC Oppenheimer") to render an
opinion (the "Opinion") as to the fairness to the holders of the Common Stock,
par value $0.01 per share (the "CNG Shares"), of Continental Natural Gas, Inc.
("CNG" or the "Company"), from a financial point of view, of the Merger
Consideration (as defined below) to be received by such holders pursuant to the
Agreement and Plan of Merger dated as of July 31, 1998 (the "Merger Agreement"),
by and among CMS Energy Corporation ("CMS Energy"), CMS Merging Corporation, a
wholly-owned subsidiary of CMS Energy, CNG, Adams Affiliates, Inc. and
Cottonwood Partnership. The Merger Agreement provides that each issued and
outstanding CNG Share will be converted into the right to receive the number of
shares of CMS Energy Common Stock, par value $0.01 per share (the "CMS Energy
Shares"), equal to the quotient of (i) $10.00 (ten dollars) divided by (ii) the
average of the per share Daily Prices (as defined in the Merger Agreement) on
the New York Stock Exchange, Inc. of CMS Energy Shares as reported in the New
York Stock Exchange, Inc. Composite Transactions during the ten (10) consecutive
trading days ending on the fifth trading day prior to the Effective Time (as
defined in the Merger Agreement) of the Merger (as defined in the Merger
Agreement) (the "Merger Consideration").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of the Company concerning its business, operations and prospects.
We examined certain publicly available business and financial information
relating to the Company as well as certain financial forecasts and other data
that were provided to us by CNG's senior management. We reviewed the Merger
Consideration and related financial terms set forth in the Merger Agreement in
relation to, among other things, the current and historic market prices and
related trading volumes of the CNG Shares, the Company's historic and projected
earnings and cash flow and the Company's capitalization and financial condition.
We also considered, to the extent publicly available, the financial terms of
certain other similar transactions recently effected that we considered
comparable to the Merger set forth in the Merger Agreement and we analyzed
certain financial stock market and other publicly available information relative
to the business of other companies whose operations we considered comparable to
those of the Company. In addition to the foregoing, we conducted such other
analyses and examinations and considered such other financial, economic, market
and other criteria as we deemed necessary to arrive at the Opinion.
In rendering our Opinion, we have relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
financial and other information available to us from public sources and provided
to us by CNG and its representatives including, but not limited to (i) CNG's
Form 10-K for
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the year ended December 31, 1997, Form 10-Q for the quarter ended March 31,
1998, Prospectus dated July 31, 1997, draft balance sheet as of June 30, 1998
and financial and operating forecasts and (ii) CMS Energy's Form 10-K for the
year ended December 31, 1997 and Form 10-Q for the quarter ended March 31, 1998.
With respect to financial forecasts and other information so provided or
otherwise discussed with us by CNG, we assumed, with the consent of CNG's Board
of Directors, that such forecasts and other information were reasonably prepared
to reflect the best currently available estimates and good faith judgments of
CNG's management as to CNG's expected future financial performance. We have not
been provided with, nor have we made any independent evaluations or appraisals
of, CNG's assets or liabilities (contingent or otherwise). In addition, we have
not made a physical inspection of all of CNG's properties or other assets. Our
Opinion is necessarily based upon financial, economic, stock market and other
conditions and circumstances existing and disclosed to us as of the date hereof
and changes in such conditions and circumstances would require re-evaluation of
this Opinion. We disclaim any obligations to update, revise or reaffirm this
Opinion.
CIBC Oppenheimer, as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities and private placements. CIBC Oppenheimer has provided
certain investment banking and financial advisory services to CNG from time to
time, including acting as Lead-Manager of CNG's initial public offering in July
1997. CIBC Oppenheimer has been engaged to render financial advisory services to
CNG in connection with the activities leading up to the offer of the Merger
Consideration as set forth in the Merger Agreement. We will receive fees for
such services including a fee if the Merger is completed and a fee for the
delivery of this Opinion. CIBC Oppenheimer is being indemnified with respect to
certain matters by CNG. In addition, CIBC Oppenheimer has provided certain
investment banking and financial advisory services to CMS Energy from time to
time and may provide certain investment banking and financial advisory services
in the future. William H. Bauch is an officer of CIBC Oppenheimer and a Director
of CNG. In the ordinary course of our business, we and our affiliates may
actively trade the securities of CNG and CMS Energy (collectively, the
"Securities"), for our own account or for the accounts of our customers and,
accordingly, may at any time hold a long or short position in the Securities.
Our advisory services and the Opinion expressed herein are provided for the
use of CNG's Board of Directors in its evaluation of the Merger Agreement, and
are not intended to confer rights or remedies upon any stockholder of the
Company. The Opinion may not be published or otherwise used or referred to, in
whole or in part, nor shall any public reference to CIBC Oppenheimer be made
without our prior written consent; provided that this Opinion may be included in
its entirety in any filing made by CNG or CMS Energy with the Securities and
Exchange Commission with respect to the Merger contemplated by the Merger
Agreement and the transactions related thereto. This Opinion does not constitute
a recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the Merger contemplated by the Merger Agreement.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Merger Consideration to be
received by the holders of the CNG Shares, pursuant to the Merger Agreement, is
fair from a financial point of view to the holders of the CNG Shares.
Very truly yours,
CIBC OPPENHEIMER CORP.
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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following resolution was adopted by the Board of Directors of CMS Energy on
May 6, 1987:
RESOLVED: That effective March 1, 1987 the Corporation shall indemnify to the
full extent permitted by law every person (including the estate, heirs and legal
representatives of such person in the event of the decease, incompetency,
insolvency or bankruptcy of such person) who is or was a director, officer,
partner, trustee, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against all liability, costs, expenses, including attorneys'
fees, judgments, penalties, fines and amounts paid in settlement, incurred by or
imposed upon the person in connection with or resulting from any claim or any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative, investigative or of whatever nature, arising from the
person's service or capacity as, or by reason of the fact that the person is or
was, a director, officer, partner, trustee, employee or agent of the Corporation
or is or was serving at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. Such right of indemnification shall not be
deemed exclusive of any other rights to which the person may be entitled under
statute, bylaw, agreement, vote of shareholders or otherwise.
CMS Energy's Bylaws provide:
The Corporation may purchase and maintain liability insurance, to the full
extent permitted by law, on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against such person and incurred by such person in any such
capacity.
Article VIII of CMS Energy's Articles of Incorporation provides:
A director shall not be personally liable to the Corporation or its shareholders
for monetary damages for breach of duty as a director except (I) for a breach of
the director's duty of loyalty to the Corporation or its shareholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) for a violation of Section 551 (I) of the
Michigan Business Corporation Act, and (iv) any action from which the director
derived an improper personal benefit. No amendment to or repeal of this Article
VIII, and no modification to its provisions by law, shall apply to, or have any
effect upon, the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment, repeal or modification.
Article IX of CMS Energy's Articles of Incorporation provides:
Each director and each officer of the Corporation shall be indemnified by the
Corporation to the fullest extent permitted by law against expenses (including
attorneys' fees), judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with the defense of
any proceeding in which he or she was or is a party or is threatened to be made
a party by reason of being or having been a director or an officer of the
Corporation. Such right of indemnification is not exclusive of any other rights
to which such director or officer may be entitled under any now or thereafter
existing statute, any other provision of these Articles, bylaw, agreement, vote
of shareholders or otherwise. If the Business Corporation Act of the State of
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Michigan is amended after approval by the shareholders of this Article IX to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Business
Corporation Act of the State of Michigan, as so amended. Any repeal or
modification of this Article IX by the shareholders of the Corporation shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
Sections 561 through 571 of the Michigan Business Corporation act provides CMS
Energy with the power to indemnify directors, officers, employees and agents
against certain expenses and payments, and to purchase and maintain insurance on
behalf of directors, officers, employees and agents.
Officers and directors are covered within specified monetary limits by insurance
against certain losses arising from claims made by reason of their being
directors or officers of CMS Energy or of CMS Energy's subsidiaries and CMS
Energy's officers and directors are indemnified against such losses by reason of
their being or having been directors of officers or another corporation,
partnership, joint venture, trust or other enterprise at CMS Energy's request.
In addition, CMS Energy has indemnified each of its present directors by
contracts that contain affirmative provisions essentially similar to those in
sections 561 through 571 of the Michigan Business Corporation Act cited above.
Item 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
2 - Agreement and Plan of Merger, dated as of July 31, 1998, among
CMS Energy, CMS Merging Corporation, Continental Natural Gas,
Inc., Adams Affiliates, Inc., and Cottonwood Partnership.
(Included as Annex A to the Proxy Statement/Prospectus which
forms a part of this Registration Statement).
*3(a) - Restated Articles of Incorporation of CMS Energy dated March 25,
1994. (Designated in CMS Energy's Form S-4 Registration
Statement dated June 6, 1995, File No. 33-60007, as Exhibit
3(i).)
*3(b) - Certificate of Amendment to the Restated Articles of
Incorporation of CMS Energy dated March 10, 1997. (Designated in
w CMS Energy's Form 10-K for the year ended December 31, 1996,
File No. 1-5611, as Exhibit 3(c).)
*3(c) - By-Laws of CMS Energy. (Designated in CMS Energy's Form 10-K for
the year ended December 31, 1994, File No. 1-9513, as Exhibit
3(c).)
*4(a) - Indenture dated as of September 15, 1992 between CMS Energy and
NBD Bank, as Trustee. (Designated in CMS Energy's Form S-3
Registration Statement filed May 1, 1992, File No. 33-47629, as
Exhibit (4)(a).)
First Supplemental Indenture dated as of October 1, 1992
between CMS Energy and NBD Bank, as Trustee. (Designated in
CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513,
as Exhibit (4).)
</TABLE>
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Second Supplemental Indenture dated as of October 1, 1992
between CMS Energy and NBD Bank, as Trustee. (Designated in CMS
Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as
Exhibit 4(a).)
Third Supplemental Indenture dated as of May 6, 1997 between CMS
Energy and NBD Bank, as Trustee. (Designated in CMS Energy's
Form 10-Q for the quarter ended March 31, 1997, File No. 1-9513,
as Exhibit (4).)
Fourth Supplemental Indenture dated as of September 26, 1997
between CMS Energy and NBD Bank, as Trustee. (Designated in CMS
Energy's form S-3 Registration Statement filed October 6, 1997,
File No. 333-37241, as Exhibit (4)(a).)
Fifth Supplemental Indenture dated as of November 4, 1997
between CMS Energy and NBD Bank, as Trustee. (Designated in CMS
Energy's Form 10-Q for the quarter ended September 30, 1997,
File No. 1-9513, as Exhibit (4)(b).)
Sixth Supplemental Indenture dated as of January 1, 1998 between
CMS Energy and NBD Bank, as Trustee. (Designated in CMS Energy's
Form 10-K for the year ended December 3 1, 1997, File No.
1-9513, as Exhibit (4)(a).)
*4(b) - Indenture dated as of January 15, 1994 between CMS Energy
and The Chase Manhattan Bank, as Trustee. (Designated in CMS
Energy's Form 8-K dated March 29. 1994, File No. 1-9513. as
Exhibit (4)(a).)
First Supplemental Indenture dated as of January 20, 1994
between CMS Energy and The Chase Manhattan Bank, as Trustee.
(Designated in CMS Energy's Form 8-K dated March 29, 1994, File
No. 1-9513, as Exhibit (4)(b).)
Second Supplemental Indenture dated as of March 19, 1996 between
CMS Energy and The Chase Manhattan Bank, as Trustee. (Designated
in CMS Energy's Form 10-Q for the quarter ended March 31, 1996,
File No. 1-9513, as Exhibit (4).)
Third Supplemental Indenture dated as of March 17, 1997 between
CMS Energy and The Chase Manhattan Bank, as Trustee. (Designated
in CMS Energy's Form 8-K dated May 1, 1997, File No. 1-9513, as
Exhibit (4)(a)(iv).)
Fourth Supplemental Indenture dated as of September 17, 1997
between CMS Energy and The Chase Manhattan Bank, as Trustee.
(Designated in CMS Energy's Form S-3 Registration Statement
filed September 22, 1997, File No. 333-36115, as Exhibit
(4)(d).)
4(c) - Fifth Supplemental Indenture dated as of August 26, 1998
between CMS Energy and The Chase Manhattan Bank, as Trustee.
*4(d) - Indenture dated as of June 1, 1997 between CMS Energy and The
Bank of New York, as Trustee. (Designated in CMS Energy's Form
8-K dated July 1. 1997, File No. 1-9513, as Exhibit (4)(a).)
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<TABLE>
<CAPTION>
<S> <C> <C>
First Supplemental Indenture dated as of June 20, 1997 between
CMS Energy and The Bank of New York, as Trustee. (Designated in
CMS Energy's Form 8-K dated July 1, 1997, File No. 1-9513 as
Exhibit (4)(b).)
*4(e) - Credit Agreement dated as of July 21, 1997, among CMS Energy,
the Banks, the Administrative Agent, the Collateral Agent, the
Documentation Agent, the Syndication Agent, the Co-Agents and
the Lead Manager, all as defined therein, and the Exhibits
thereto. (Designated in CMS Energy's Form 10-Q for the quarter
ended June 30, 1997, File No. 1-9513, as Exhibit (4).)
4(f) - Amendment No. 1 dated January 30, 1998 to Credit Agreement dated
as of July 21, 1997, among CMS Energy, the Banks, the
Administrative Agent, the Collateral Agent, the Documentation
Agent, the Syndication Agent, the Co-Agents and the Lead
Manager, all as defined therein, and the Exhibits thereto.
*4(g) - Form of Exchange Note. (Designated in CMS Energy's Form 10-Q for
the quarter ended September 30, 1997, File No. 1-9513, as
Exhibit (4)(b).)
*4(h) - Registration Rights Agreement dated as of November 7, 1997 by
and among CMS Energy and Donaldson, Lufkin & Jenrette Securities
Corporation, Chase Securities Inc., CIBC Oppenheimer Corp.,
Morgan Stanley & Co. Incorporated, and Salomon Brothers Inc.
(Designated in CMS Energy's Form S-4 Registration Statement
filed December 23, 1997, File No. 333-43077, as Exhibit (4)(d).)
5 - Opinion of Michael D. Van Hemert, Assistant General Counsel for
CMS Energy.
8 - Opinion of Theodore J. Vogel, Tax Counsel for CMS Energy,
regarding tax matters.
15(a) - Letter of Arthur Andersen LLP re: CMS Energy unaudited interim
financial information for the quarter ended March 31, 1998.
15(b) - Letter of Arthur Andersen LLP re: CMS Energy unaudited interim
financial information for the quarter ended June 30, 1998.
15(c) - Letter of PricewaterhouseCoopers LLP re: Continental Natural
Gas, Inc. unaudited interim financial information.
23(a) - Consent of Michael D. Van Hemert, Assistant General Counsel for
CMS Energy (included in Exhibit 5 above).
23(b) - Consent of Theodore J. Vogel, Tax Counsel for CMS Energy
(included in Exhibit 8 above).
23(c) - Consent of Arthur Anderson LLP.
23(d) - Consent of PricewaterhouseCoopers LLP.
23(e) - Consent of CIBC Oppenheimer Corp.
</TABLE>
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24 - Powers of Attorney of Directors whose names are signed to this
Registration Statement pursuant to such powers.
99(a) - Form of Proxy for Special Meeting of Shareholders of
Continental Natural Gas, Inc.
99(b) - Form of Letter of Chairman of Continental Natural Gas, Inc. to
Shareholders regarding Special Meeting. (Included as cover
letter to the Proxy Statement/Prospectus which forms a part of
this Registration Statement.)
99(c) - Notice of Special Meeting of Shareholders of Continental
Natural Gas, Inc. (Included as cover notice to the Proxy
Statement/Prospectus which forms a part of this Registration
Statement.)
- -----------------
*Previously filed
Exhibits listed above which have been filed with the Securities and Exchange
Commission are incorporated herein by reference with the same effect as if filed
with this Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or a party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form.
(2) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that as
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
II-5
<PAGE> 169
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and be governed by the final adjudication of such issue.
(5) To respond to requests for information that is incorporated by reference
in to the prospectus pursuant to Item 4, 10(b), 11, or 13 of Form S-4, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-6
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dearborn, and State of
Michigan, on the 10th day of September, 1998.
CMS ENERGY CORPORATION
By: /s/ A.M. Wright
----------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the 10th day of September, 1998.
Name Title
---- -----
(i) Principal executive officer
/s/ William T. McCormick, Jr. Chairman of the Board, Chief
---------------------------------
William T. McCormick, Jr. Executive Officer and Director
(ii) Principal financial officer:
/s/ A.M. Wright Senior Vice President and
---------------------------------
Alan M. Wright Chief Financial Officer
(iii) Controller or principal
accounting officer
/s/ P.D. Hopper Senior Vice President, Controller
---------------------------------
Preston D. Hopper Chief Accounting Officer
*
--------------------------------- Director
(John M. Deutch)
*
---------------------------------
(James J. Duderstadt) Director
II-7
<PAGE> 171
*
---------------------------------
(Kathleen R. Flaherty) Director
*
---------------------------------
(Victor J. Fryling) Director
*
---------------------------------
(Earl D. Holton) Director
*
---------------------------------
(William U. Parfet) Director
*
---------------------------------
(Percy A. Pierre) Director
*
---------------------------------
(Kenneth L. Way) Director
*
---------------------------------
(Kenneth Whipple) Director
*
---------------------------------
(John B. Yasinsky) Director
*By: /s/ A.M. Wright
---------------------------------
Alan M. Wright
Attorney in-fact
II-8
<PAGE> 172
EXHIBIT LIST
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
2 - Agreement and Plan of Merger, dated as of July 31, 1998, among
CMS Energy, CMS Merging Corporation, Continental Natural Gas,
Inc., Adams Affiliates, Inc., and Cottonwood Partnership.
(Included as Annex A to the Proxy Statement/Prospectus which
forms a part of this Registration Statement).
*3(a) - Restated Articles of Incorporation of CMS Energy dated March 25,
1994. (Designated in CMS Energy's Form S-4 Registration
Statement dated June 6, 1995, File No. 33-60007, as Exhibit
3(i).)
*3(b) - Certificate of Amendment to the Restated Articles of
Incorporation of CMS Energy dated March 10, 1997. (Designated in
w CMS Energy's Form 10-K for the year ended December 31, 1996,
File No. 1-5611, as Exhibit 3(c).)
*3(c) - By-Laws of CMS Energy. (Designated in CMS Energy's Form 10-K for
the year ended December 31, 1994, File No. 1-9513, as Exhibit
3(c).)
*4(a) - Indenture dated as of September 15, 1992 between CMS Energy and
NBD Bank, as Trustee. (Designated in CMS Energy's Form S-3
Registration Statement filed May 1, 1992, File No. 33-47629, as
Exhibit (4)(a).)
First Supplemental Indenture dated as of October 1, 1992
between CMS Energy and NBD Bank, as Trustee. (Designated in
CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513,
as Exhibit (4).)
Second Supplemental Indenture dated as of October 1, 1992
between CMS Energy and NBD Bank, as Trustee. (Designated in CMS
Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as
Exhibit 4(a).)
Third Supplemental Indenture dated as of May 6, 1997 between CMS
Energy and NBD Bank, as Trustee. (Designated in CMS Energy's
Form 10-Q for the quarter ended March 31, 1997, File No. 1-9513,
as Exhibit (4).)
Fourth Supplemental Indenture dated as of September 26, 1997
between CMS Energy and NBD Bank, as Trustee. (Designated in CMS
Energy's form S-3 Registration Statement filed October 6, 1997,
File No. 333-37241, as Exhibit (4)(a).)
Fifth Supplemental Indenture dated as of November 4, 1997
between CMS Energy and NBD Bank, as Trustee. (Designated in CMS
Energy's Form 10-Q for the quarter ended September 30, 1997,
File No. 1-9513, as Exhibit (4)(b).)
Sixth Supplemental Indenture dated as of January 1, 1998 between
CMS Energy and NBD Bank, as Trustee. (Designated in CMS Energy's
Form 10-K for the year ended December 3 1, 1997, File No.
1-9513, as Exhibit (4)(a).)
</TABLE>
1
<PAGE> 173
<TABLE>
<S> <C> <C>
*4(b) - Indenture dated as of January 15, 1994 between CMS Energy
and The Chase Manhattan Bank, as Trustee. (Designated in CMS
Energy's Form 8-K dated March 29. 1994, File No. 1-9513. as
Exhibit (4)(a).)
First Supplemental Indenture dated as of January 20, 1994
between CMS Energy and The Chase Manhattan Bank, as Trustee.
(Designated in CMS Energy's Form 8-K dated March 29, 1994, File
No. 1-9513, as Exhibit (4)(b).)
Second Supplemental Indenture dated as of March 19, 1996 between
CMS Energy and The Chase Manhattan Bank, as Trustee. (Designated
in CMS Energy's Form 10-Q for the quarter ended March 31, 1996,
File No. 1-9513, as Exhibit (4).)
Third Supplemental Indenture dated as of March 17, 1997 between
CMS Energy and The Chase Manhattan Bank, as Trustee. (Designated
in CMS Energy's Form 8-K dated May 1, 1997, File No. 1-9513, as
Exhibit (4)(a)(iv).)
Fourth Supplemental Indenture dated as of September 17, 1997
between CMS Energy and The Chase Manhattan Bank, as Trustee.
(Designated in CMS Energy's Form S-3 Registration Statement
filed September 22, 1997, File No. 333-36115, as Exhibit
(4)(d).)
4(c) - Fifth Supplemental Indenture dated as of August 26, 1998
between CMS Energy and The Chase Manhattan Bank, as Trustee.
*4(d) - Indenture dated as of June 1, 1997 between CMS Energy and The
Bank of New York, as Trustee. (Designated in CMS Energy's Form
8-K dated July 1. 1997, File No. 1-9513, as Exhibit (4)(a).)
First Supplemental Indenture dated as of June 20, 1997 between
CMS Energy and The Bank of New York, as Trustee. (Designated in
CMS Energy's Form 8-K dated July 1, 1997, File No. 1-9513 as
Exhibit (4)(b).)
*4(e) - Credit Agreement dated as of July 21, 1997, among CMS Energy,
the Banks, the Administrative Agent, the Collateral Agent, the
Documentation Agent, the Syndication Agent, the Co-Agents and
the Lead Manager, all as defined therein, and the Exhibits
thereto. (Designated in CMS Energy's Form 10-Q for the quarter
ended June 30, 1997, File No. 1-9513, as Exhibit (4).)
4(f) - Amendment No. 1 dated January 30, 1998 to Credit Agreement dated
as of July 21, 1997, among CMS Energy, the Banks, the
Administrative Agent, the Collateral Agent, the Documentation
Agent, the Syndication Agent, the Co-Agents and the Lead
Manager, all as defined therein, and the Exhibits thereto.
*4(g) - Form of Exchange Note. (Designated in CMS Energy's Form 10-Q for
the quarter ended September 30, 1997, File No. 1-9513, as
Exhibit (4)(b).)
*4(h) - Registration Rights Agreement dated as of November 7, 1997 by
and among CMS Energy and Donaldson, Lufkin & Jenrette Securities
Corporation, Chase Securities Inc., CIBC Oppenheimer Corp.,
Morgan Stanley & Co. Incorporated, and Salomon Brothers Inc.
(Designated in CMS Energy's Form S-4 Registration Statement
filed December 23, 1997, File No. 333-43077, as Exhibit (4)(d).)
</TABLE>
2
<PAGE> 174
<TABLE>
<S> <C> <C>
5 - Opinion of Michael D. Van Hemert, Assistant General Counsel for
CMS Energy.
8 - Opinion of Theodore J. Vogel, Tax Counsel for CMS Energy,
regarding tax matters.
15(a) - Letter of Arthur Andersen LLP re: CMS Energy unaudited interim
financial information for the quarter ended March 31, 1998.
15(b) - Letter of Arthur Andersen LLP re: CMS Energy unaudited interim
financial information for the quarter ended June 30, 1998.
15(c) - Letter of PricewaterhouseCoopers LLP re: Continental Natural
Gas, Inc. unaudited interim financial information.
23(a) - Consent of Michael D. Van Hemert, Assistant General Counsel for
CMS Energy (included in Exhibit 5 above).
23(b) - Consent of Theodore J. Vogel, Tax Counsel for CMS Energy
(included in Exhibit 8 above).
23(c) - Consent of Arthur Anderson LLP.
23(d) - Consent of PricewaterhouseCoopers LLP.
23(e) - Consent of CIBC Oppenheimer Corp.
24 - Powers of Attorney of Directors whose names are signed to this
Registration Statement pursuant to such powers.
99(a) - Form of Proxy for Special Meeting of Shareholders of
Continental Natural Gas, Inc.
99(b) - Form of Letter of Chairman of Continental Natural Gas, Inc. to
Shareholders regarding Special Meeting. (Included as cover
letter to the Proxy Statement/Prospectus which forms a part of
this Registration Statement.)
99(c) - Notice of Special Meeting of Shareholders of Continental
Natural Gas, Inc. (Included as cover notice to the Proxy
Statement/Prospectus which forms a part of this Registration
Statement.)
</TABLE>
- ---------------
*Previously filed
3
<PAGE> 1
EXHIBIT 4(c)
FIFTH SUPPLEMENTAL INDENTURE
DATED AS OF AUGUST 26, 1998
--------------------
This Fifth Supplemental Indenture, dated as of the 26th day of August,
1998 between CMS Energy Corporation, a corporation duly organized and existing
under the laws of the State of Michigan (hereinafter called the "Company") and
having its principal office at Fairlane Plaza South, 330 Town Center Drive,
Suite 1100, Dearborn, Michigan 48126, and The Chase Manhattan Bank, a New York
banking corporation (hereinafter called the "Trustee") and having its principal
Corporate Trust Office at 450 West 33rd Street, 15th Floor, New York, New York
10001.
WITNESSETH:
WHEREAS, the Company and the Trustee entered into an Indenture, dated
as of January 15, 1994 (the "Original Indenture"), pursuant to which one or more
series of debt securities of the Company (the "Securities") may be issued from
time to time; and
WHEREAS, Section 301 of the Original Indenture permits the terms of
any series of Securities to be established in an indenture supplemental to the
Original Indenture; and
WHEREAS, Section 901(7) of the Original Indenture provides that a
supplemental indenture may be entered into by the Company and the Trustee
without the consent of any Holders of the Securities to establish the form and
terms of the Securities of any series; and
<PAGE> 2
WHEREAS, the Company has requested the Trustee to join with it in the
execution and delivery of this Fifth Supplemental Indenture in order to
supplement and amend the Original Indenture by, among other things, establishing
the form and terms of a series of Securities to be known as the Company's
"General Term Notes(R), Series E (the "General Term Notes"), providing for the
issuance of the General Term Notes and amending and adding certain provisions
thereof for the benefit of the Holders of the General Term Notes; and
WHEREAS, the Company and the Trustee desire to enter into this Fifth
Supplemental Indenture for the purposes set forth in Sections 301 and 901(7) of
the Original Indenture as referred to above; and
WHEREAS, all things necessary to make this Fifth Supplemental
Indenture a valid agreement of the Company and the Trustee and a valid
supplement to the Original Indenture have been done,
- ---------------------------
(R) Registered servicemark of J. W. Korth & Company
2
<PAGE> 3
NOW, THEREFORE, THIS FIFTH SUPPLEMENTAL INDENTURE
WITNESSETH:
For and in consideration of the premises and the purchase of the
General Term Notes to be issued hereunder by holders thereof, the Company and
the Trustee mutually covenant and agree, for the equal and proportionate benefit
of the respective holders from time to time of the General Term Notes, as
follows:
ARTICLE I
STANDARD PROVISIONS; DEFINITIONS
SECTION 101. Standard Provisions. The Original Indenture together with
this Fifth Supplemental Indenture and all indentures supplemental thereto
entered into pursuant to the applicable terms thereof are hereinafter sometimes
collectively referred to as the "Indenture." All of the terms, conditions,
covenants and provisions contained in the Original Indenture as heretofore
supplemented are incorporated herein by reference in their entirety and, except
as specifically noted herein or unless the context otherwise requires, shall be
deemed to be a part hereof to the same extent as if such provisions had been set
forth in full herein. All capitalized terms which are used herein and not
otherwise defined herein are defined in the Indenture and are used herein with
the same meanings as in the Indenture.
SECTION 102. Definitions. Section 101 of the Indenture is amended to
insert the new definitions applicable to the General Term Notes, in the
appropriate alphabetical sequence, as follows:
3
<PAGE> 4
"Amortization Expense" means, for any period, amounts recognized
during such period as amortization of capital leases, depletion, nuclear fuel,
goodwill and assets classified as intangible assets in accordance with generally
accepted accounting principles.
"Average Life" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (i) the sum of the products
of (x) the number of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness and (y) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Lease Obligation" of a Person means any obligation that is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; the stated maturity thereof shall be the date of the last payment of
rent or any other amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty; and
such obligation shall be deemed secured by a Lien on any property or assets to
which such lease relates.
"Capital Stock" means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock, including any Preferred Stock or Letter
Stock; provided that Hybrid Preferred Securities shall not be considered Capital
Stock for purposes of this definition.
4
<PAGE> 5
"Change in Control" means an event or series of events by which (i)
the Company ceases to own beneficially, directly or indirectly, at least 80% of
the total voting power of all classes of Capital Stock then outstanding of
Consumers (whether arising from issuance of securities of the Company or
Consumers, any direct or indirect transfer of securities by the Company or
Consumers, any merger, consolidation, liquidation or dissolution of the Company
or Consumers or otherwise); (ii) any "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner"
(as such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person or group shall be deemed to have "beneficial ownership" of all
shares that such person or group has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 30% of the Voting Stock of the Company; or (iii) the
Company consolidates with or merges into another corporation or directly or
indirectly conveys, transfers or leases all or substantially all of its assets
to any Person, or any corporation consolidates with or merges into the Company,
in either event pursuant to a transaction in which the outstanding Voting Stock
of the Company is changed into or exchanged for cash, securities, or other
property, other than any such transaction in which (A) the outstanding Voting
Stock of the Company is changed into or exchanged for Voting Stock of the
surviving corporation and (B) the holders of the Voting Stock of the Company
immediately prior to such transaction retain, directly or indirectly,
substantially proportionate ownership of the Voting Stock of the surviving
corporation immediately after such transaction.
"Consolidated Assets" means, at any date of determination, the
aggregate assets of the Company and its Consolidated Subsidiaries determined on
5
<PAGE> 6
a consolidated basis in accordance with generally accepted accounting
principles.
"Consolidated Capital" means, at any date of determination, the sum of
(a) Consolidated Indebtedness, (b) consolidated equity of the common
stockholders of the Company and the Consolidated Subsidiaries, (c) consolidated
equity of the preference stockholders of the Company and the Consolidated
Subsidiaries (d) consolidated equity of the preferred stockholders of the
Company and the Consolidated Subsidiaries and (e) the aggregate amount of all
Hybrid Preferred Securities, in each case determined at such date in accordance
with generally accepted accounting principles.
"Consolidated Coverage Ratio" with respect to any period means the
ratio of (i) the aggregate amount of Operating Cash Flow for such period to (ii)
the aggregate amount of Consolidated Interest Expense for such period.
"Consolidated Indebtedness" means, at any date of determination, the
aggregate Indebtedness of the Company and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles provided, however that Consolidated Indebtedness shall not
include any subordinated debt owned by any Hybrid Preferred Securities
Subsidiary.
"Consolidated Interest Expense" means, for any period, the total
interest expense in respect of Consolidated Indebtedness of the Company and its
Consolidated Subsidiaries, including, without duplication, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount, (iii)
6
<PAGE> 7
capitalized interest, (iv) cash and noncash interest payments, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs under Interest Rate Protection
Agreements (including amortization of discount) and (vii) interest expense in
respect of obligations of other Persons deemed to be Indebtedness of the Company
or any Consolidated Subsidiaries under clause (v) or (vi) of the definition of
Indebtedness, provided, however, that Consolidated Interest Expense shall
exclude any costs otherwise included in interest expense recognized on early
retirement of debt.
"Consolidated Leverage Ratio" means, at any date of determination, the
ratio of Consolidated Indebtedness to Consolidated Capital.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries determined on a consolidated basis in
accordance with generally accepted accounting principles; provided, however,
that there shall not be included in such Consolidated Net Income:
(i) any net income of any Person if such Person is not a Subsidiary,
except that (A) the Company's equity in the net income of any such Person
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Consolidated Subsidiary as a dividend or other
distribution and (B) the Company's equity in a net loss of any such Person
for such period shall be included in determining such Consolidated Net
Income;
7
<PAGE> 8
(ii) any net income of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition; and
(iii) any gain or loss realized upon the sale or other disposition of
any property, plant or equipment of the Company or its Consolidated
Subsidiaries which is not sold or otherwise disposed of in the ordinary
course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person.
"Consolidated Net Worth" of any Person means the total of the amounts
shown on the consolidated balance sheet of such Person and its consolidated
subsidiaries, determined on a consolidated basis in accordance with generally
accepted accounting principles, as of any date selected by such Person not more
than 90 days prior to the taking of any action for the purpose of which the
determination is being made (and adjusted for any material events since such
date), as (i) the par or stated value of all outstanding Capital Stock plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock and (C) any amounts attributable to
Exchangeable Stock.
"Consolidated Subsidiary" means, any Subsidiary whose accounts are or
are required to be consolidated with the accounts of the Company in accordance
with generally accepted accounting principles.
8
<PAGE> 9
"Consumers" means Consumers Energy Company, a Michigan corporation,
all of whose common stock is on the date hereof owned by the Company.
"Enterprises" means CMS Enterprises Company, a Michigan corporation.
"Event of Default" with respect to the General Term Notes has the
meaning specified in Article VI of this Fifth Supplemental Indenture.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchangeable Stock" means any Capital Stock of a corporation that is
exchangeable or convertible into another security (other than Capital Stock of
such corporation that is neither Exchangeable Stock, or Redeemable Stock).
"Hybrid Preferred Securities" means any preferred securities issued by
a Hybrid Preferred Securities Subsidiary, where such preferred securities have
the following characteristics:
(i) such Hybrid Preferred Securities Subsidiary lends substantially
all of the proceeds from the issuance of such preferred
securities to the Company or Consumers in exchange for
subordinated debt issued by the Company or Consumers,
respectively;
(ii) such preferred securities contain terms providing for the
deferral of distributions corresponding to provisions providing
for the deferral of interest payments on such subordinated debt;
and
9
<PAGE> 10
(iii)the Company or Consumers (as the case may be) makes periodic
interest payments on such subordinated debt, which interest
payments are in turn used by the Hybrid Preferred Securities
Subsidiary to make corresponding payments to the holders of the
Hybrid Preferred Securities.
"Hybrid Preferred Securities Subsidiary" means any business trust (or
similar entity)(i) all of the common equity interest of which is owned (either
directly or indirectly through one or more wholly-owned Subsidiaries of the
Company or Consumers)at all times by the Company or Consumers, (ii) that has
been formed for the purpose of issuing Hybrid Preferred Securities and (iii)
substantially all of the assets of which consist at all times solely of
subordinated debt issued by the Company or Consumers (as the case may be) and
payments made from time to time on such subordinated debt.
"Indebtedness" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and
10
<PAGE> 11
all obligations under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (i)
through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than the
third Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit);
(v) all obligations of the type referred to in clauses (i) through
(iv) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable as obligor,
guarantor or otherwise; and
(vi) all obligations of the type referred to in clauses (i) through
(v) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured.
11
<PAGE> 12
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect the Company or any Subsidiary against
fluctuations in interest rates.
"Letter Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
intended to reflect the separate performance of certain of the businesses or
operations conducted by such corporation or any of its subsidiaries.
"Lien" means any lien, mortgage, pledge, security interest,
conditional sale, title retention agreement or other charge or encumbrance of
any kind.
"Net Proceeds" means, with respect to any issuance or sale or
contribution in respect of Capital Stock, the aggregate proceeds of such
issuance, sale or contribution, including the fair market value (as determined
by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by the Company, net of attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts, or commissions and
brokerage, consultant and other fees actually incurred in connection with such
issuance or sale and net of taxes paid or payable as a result thereof, provided,
however, that if such fair market value as determined by the Board of Directors
of property other than cash is greater than $25 million, the value thereof shall
be based upon an opinion from an independent nationally recognized firm
experienced in the appraisal or similar review of similar types of transactions.
12
<PAGE> 13
"NOMECO" means, CMS NOMECO Oil & Gas Co., a Michigan corporation and
wholly-owned subsidiary of the Company.
"Non-Convertible Capital Stock" means, with respect to any
corporation, any non-convertible Capital Stock of such corporation and any
Capital Stock of such corporation convertible solely into non-convertible
Capital Stock other than Preferred Stock of such corporation; provided, however,
that Non-Convertible Capital Stock shall not include any Redeemable Stock or
Exchangeable Stock.
"Operating Cash Flow" means, for any period, with respect to the
Company and its Consolidated Subsidiaries, the aggregate amount of Consolidated
Net Income after adding thereto Consolidated Interest Expense (adjusted to
include costs recognized on early retirement of debt), income taxes,
depreciation expense, Amortization Expense and any noncash amortization of debt
issuance costs, any nonrecurring, noncash charges to earnings and any negative
accretion recognition.
"Other Rating Agency" means any of Duff & Phelps Credit Rating Co.,
Fitch Investors Service, L.P. or Moody's Investors Service, Inc., and any
successor to any of these organizations which is a nationally recognized
statistical rating organization.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) that is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation,
13
<PAGE> 14
over shares of Capital Stock of any other class of such corporation; provided
that Hybrid Preferred Securities shall not be considered "Preferred Stock" for
purposes of this definition.
"Redeemable Stock" means any Capital Stock that by its terms or
otherwise is required to be redeemed prior to the first anniversary of the
Maturity of any Outstanding General Term Notes or is redeemable at the option of
the holder thereof at any time prior to the first anniversary of the Maturity of
any Outstanding General Term Notes.
"Restricted Subsidiary" means any Subsidiary (other than Consumers and
its subsidiaries) of the Company which, as of the date of the Company's most
recent quarterly consolidated balance sheet, constituted at least 10% of the
total Consolidated Assets of the Company and its Consolidated Subsidiaries and
any other Subsidiary which from time to time is designated a Restricted
Subsidiary by the Board of Directors provided that no Subsidiary may be
designated a Restricted Subsidiary if, immediately after giving effect thereto,
an Event of Default or event that, with the lapse of time or giving of notice or
both, would constitute an Event of Default would exist or the Company and its
Restricted Subsidiaries could not incur at least $1 of additional Indebtedness
under Section 510, and (i) any such Subsidiary so designated as a Restricted
Subsidiary must be organized under the laws of the United States or any State
thereof, (ii) more than 80% of the Voting Stock of such Subsidiary must be owned
of record and beneficially by the Company or a Restricted Subsidiary, (iii) such
Restricted Subsidiary must be a Consolidated Subsidiary, and (iv) such
Subsidiary must not theretofore have been designated as a Restricted Subsidiary.
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<PAGE> 15
"Standard & Poor's" shall mean Standard & Poor's Ratings Group, a
division of McGraw Hill Inc., and any successor thereto which is a nationally
recognized statistical rating organization, or if such entity shall cease to
rate the General Term Notes or shall cease to exist and there shall be no such
successor thereto, any other nationally recognized statistical rating
organization selected by the Company which is acceptable to the Trustee.
"Support Obligations" means, for any person, without duplication, any
financial obligation, contingent or otherwise, of such person guaranteeing or
otherwise supporting any debt or other obligation of any other person in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such person, direct or indirect, (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such debt or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such debt, (ii) to purchase property, securities or services for the purpose
of assuring the owner of such debt of the payment of such debt, (iii) to
maintain working capital, equity capital, available cash or other financial
statement condition of the primary obligor so as to enable the primary obligor
to pay such debt, (iv) to provide equity capital under or in respect of equity
subscription arrangements (to the extent that such obligation to provide equity
capital does not otherwise constitute debt), or (v) to perform, or arrange for
the performance of, any non-monetary obligations or non-funded debt payment
obligations of the primary obligor.
"Tax-Sharing Agreement" means the Amended and Restated Agreement for
the Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as
amended or supplemented from time to time, by and among Company, each of the
15
<PAGE> 16
members of the Consolidated Group (as defined therein), and each of the
corporations that become members of the Consolidated Group.
Certain terms, used principally in Articles Three, Four and Seven of
this Fifth Supplemental Indenture, are defined in those Articles.
ARTICLE II
DESIGNATION AND TERMS OF THE GENERAL TERM NOTES; FORMS
SECTION 201. Establishment of Series. There is hereby created a series
of Securities to be known and designated as the "General Term Notes(R), Series E
and limited in aggregate principal amount (except as contemplated in Section
301(2) of the Indenture) to $400,000,000.
Each General Term Note will be dated and issued as of the date of its
authentication by the Trustee. Each General Term Note shall also bear an
Original Issue Date (as hereinafter defined) which, with respect to any General
Term Note (or any portion thereof), shall mean the date of its original issue,
as specified in such General Term Note (the "Original Issue Date"), and such
Original Issue Date shall remain the same if such General Term Note is
subsequently issued upon transfer, exchange, or substitution of such General
Term Note regardless of its date of authentication. Principal on any General
Term Note shall become due and payable from nine months to twenty-five years
from the Original Issue Date of such General Term Note, as specified on such
General Term Note.
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<PAGE> 17
Each General Term Note will bear interest from the Original Issue
Date, or from the most recent date to which interest has been paid or duly
provided for, at the rate per annum stated therein until the principal thereof
is paid or made available for payment. Interest will be payable either monthly,
quarterly or semi-annually on each Interest Payment Date and at Maturity, as
specified below and in each General Term Note. Interest will be payable to the
person in whose name a General Term Note is registered at the close of business
on the Regular Record Date next preceding each Interest Payment Date; provided,
however, interest payable at Maturity will be payable to the person to whom
principal shall be payable. Interest on the General Term Notes will be computed
on the basis of a 360-day year of twelve 30-day months.
The Interest Payment Dates for a General Term Note that provides for
monthly interest payments shall be the fifteenth day of each calendar month;
provided, however, that in the case of a General Term Note issued between the
first and fifteenth day of a calendar month, interest otherwise payable on the
fifteenth day of such calendar month will be payable on the fifteenth day of the
next succeeding calendar month. In the case of a General Term Note that provides
for quarterly interest payments, the Interest Payment Dates shall be the
fifteenth day of each of the months specified in such General Term Note,
commencing on the day that is three months from (i) the day on which such
General Term Note is issued, if such General Term Note is issued on the
fifteenth day of a calendar month, or (ii) the fifteenth day of the calendar
month immediately preceding the calendar month in which such General Term Note
is issued, if such General Term Note is issued prior to the fifteenth day of a
calendar month, or (iii) the fifteenth day of the calendar month in which such
General Term Note is issued, if such General Term Note is issued after the
fifteenth day of a calendar
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<PAGE> 18
month. In the case of a General Term Note that provides for semi-annual interest
payments, the Interest Payment Dates shall be the fifteenth day of each of the
months specified in such General Term Note, commencing on the day that is six
months from (i) the day on which such General Term Note is issued, if such
General Term Note is issued on the fifteenth day of a calendar month, or (ii)
the fifteenth day of the calendar month immediately preceding the calendar month
in which such General Term Note is issued, if such General Term Note is issued
prior to the fifteenth day of a calendar month, or (iii) the fifteenth day of
the calendar month in which such General Term Note is issued, if such General
Term Note is issued after the fifteenth day of a calendar month.
Payment of principal of the General Term Notes (and premium, if any)
and, unless otherwise paid as hereinafter provided, any interest thereon will be
made at the office or agency of the Company in New York, New York; provided,
however, that payment of interest (other than interest at Maturity) may be made
at the option of the Company by check or draft mailed to the Person entitled
thereto at such Person's address appearing in the Security Register or by wire
transfer to an account designated by such Person not later than ten days prior
to the date of such payment.
The Regular Record Date referred to in Section 301 of the Indenture
for the payment of the interest on any General Term Note payable on any Interest
Payment Date (other than at Maturity) shall be the first day (whether or not a
Business Day) of the calendar month in which such Interest Payment Date occurs
as is specified in such General Term Note, and, in the case of interest payable
at Maturity, the Regular Record Date shall be the date of Maturity. Unless
otherwise specified in such General Term Notes, the cities of New York, New York
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<PAGE> 19
and Chicago, Illinois shall be the reference cities for determining a Business
Day.
The General Term Notes may be issued only as registered notes, without
coupons, in denominations of $1,000 and any larger denomination which is in an
integral multiple of $1,000.
Upon the execution of this Fifth Supplemental Indenture, or from time
to time thereafter, General Term Notes may be executed by the Company and
delivered to the Trustee for authentication, and the Trustee shall thereupon
authenticate and deliver said General Term Notes in accordance with the
procedures set forth in or upon a Company Order complying with Sections 301 and
303 of the Indenture.
SECTION 202. Forms Generally. The General Term Notes shall be in
substantially the form set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by the Indenture, and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such General Term
Notes, as evidenced by their execution thereof.
The definitive General Term Notes shall be printed, lithographed or
engraved on steel engraved borders or may be produced in any other manner, all
as determined by the officers executing such General Term Notes, as evidenced by
their execution thereof.
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<PAGE> 20
SECTION 203. Form of Face of General Term Note.
[Insert any legend required by the Internal Revenue
Code and the regulations thereunder.]
CMS ENERGY CORPORATION
GENERAL TERM NOTE(R), Series E
No. ________ $__________
[Initial Redemption Date]
CMS Energy Corporation, a corporation duly organized and existing
under the laws of the State of Michigan (herein called the "Company", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to _________________________________, or
registered assigns, the principal sum of ____________________ Dollars on
__________________________ and to pay interest thereon from _____________ (the
"Original Issue Date") or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, [choose one of the following --
monthly/quarterly/semi-annually [insert as applicable -- on ___________
[________, ____________] and _________ in each [year/month], commencing
______________, and at Maturity at the rate of ____% per annum, until the
principal hereof is paid or made available for payment [if applicable, insert
- --, and at the rate of ___% per annum on any overdue principal and premium and
on any overdue installment of interest]. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in
such Indenture, be paid to the Person in whose name this General Term Note (or
one or more Predecessor Securities) is registered at the close of business on
the Regular Record Date for such interest, which shall be the first day of the
calendar month in which such Interest
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<PAGE> 21
Payment Date occurs (whether or not a Business Day) next preceding such Interest
Payment Date except that the Regular Record Date for interest payable at
Maturity shall be the date of Maturity. Any such interest not so punctually paid
or duly provided for will forthwith cease to be payable to the Holder on such
Regular Record Date and may either be paid to the Person in whose name this
General Term Note (or one or more Predecessor Securities) is registered at the
close of business on a Special Record Date for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof shall be given to Holders of
General Term Notes not less than 10 days prior to such Special Record Date, or
be paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the General Term Notes may be
listed, and upon such notice as may be required by such exchange, all as more
fully provided in said Indenture.
[If the General Term Note is not to bear interest prior to Maturity,
insert -- The principal of this General Term Note shall not bear interest except
in the case of a default in payment of principal upon acceleration, upon
redemption or at Stated Maturity and in such case the overdue principal of this
General Term Note shall bear interest at the rate of ___% per annum, which shall
accrue from the date of such default in payment to the date payment of such
principal has been made or duly provided for. Interest on any overdue principal
shall be payable on demand. Any such interest on any overdue principal that is
not so paid on demand shall bear interest at the rate of ____% per annum, which
shall accrue from the date of such demand for payment to the date payment of
such interest has been made or duly provided for, and such interest shall also
be payable on demand.]
Payment of the principal of (and premium, if any) and interest, if
any, on this General Term Note will be made at the office or agency of the
Company
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<PAGE> 22
maintained for that purpose in New York, New York (the "Place of Payment"), in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts; provided, however, that
at the option of the Company payment of interest (other than interest payable at
Maturity) may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register or by wire
transfer to an account designated by such Person not later than ten days prior
to the date of such payment.
Reference is hereby made to the further provisions of this General
Term Note set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this General
Term Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purpose.
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<PAGE> 23
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
CMS ENERGY CORPORATION
By____________________________
Attest:
_________________________
SECTION 204. Form of Reverse of General Term Note.
This General Term Note(R), Series E is one of a duly authorized issue
of securities of the Company (herein called the "General Term Notes"), issued
and to be issued in one or more series under an Indenture, dated as of January
15, 1994, as supplemented by certain supplemental indentures, including the
Fifth Supplemental Indenture, dated as of ________, 1998 (herein collectively
referred to as the "Indenture"), between the Company and The Chase Manhattan
Bank, a New York banking corporation, as Trustee (herein called the "Trustee",
which term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the Trustee, the Holders of the General Term Notes
and of the terms upon which the General Term Notes are, and are to be,
authenticated and delivered. This General Term Note is one of the series
designated on the face hereof, limited in aggregate principal amount to
$400,000,000.
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<PAGE> 24
[If applicable, insert -- The General Term Notes of this series are
subject to redemption upon not more than 60 nor less than 30 days' notice as
provided in the Indenture, at any time [on or after __________, _____,] as a
whole or in part from time to time, at the election of the Company, at the
following Redemption Prices (expressed as percentages of the principal amount):
If redeemed [on or before _____________, ___%, and if redeemed] during the
12-month period beginning ____________ of the years indicated,
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Redemption Redemption
Year Price Year Price
- ---- ---------- ---- -----------
</TABLE>
and thereafter at a Redemption Price equal to ___% of the principal amount,
together in the case of any such redemption with accrued interest to the
Redemption Date, but interest installments whose Stated Maturity is on or prior
to such Redemption Date will be payable to the Holders of such General Term
Notes, or one or more Predecessor Securities, of record at the close of business
on the relevant Record Dates referred to on the face hereof, all as provided in
the Indenture.]
[Notwithstanding the foregoing, the Company may not, prior to
__________, redeem this General Term Note as a part of, or in anticipation of,
any refunding operation by the application, directly or indirectly, of moneys
borrowed having an effective interest cost to the Company (calculated in
accordance with generally accepted financial practice) of less than the
effective interest cost to the Company (similarly calculated) of this General
Term Note.]
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<PAGE> 25
[If the General Term Note is subject to redemption, insert -- In the
event of redemption of this General Term Note in part only, a new General Term
Note or Notes of this series and of like tenor for the unredeemed portion hereof
will be issued in the name of the Holder hereof upon the cancellation hereof.]
If a Change in Control occurs, the Company shall notify the Holder of
this General Term Note of such occurrence and such Holder shall have the right
to require the Company to make a Required Repurchase of all or any part of this
General Term Note at a Change in Control Purchase Price equal to 101% of the
principal amount of this General Term Note to be so purchased as more fully
provided in the Indenture and subject to the terms and conditions set forth
therein. In the event of a Required Repurchase of only a portion of this General
Term Note, a new General Term Note or Notes for the unrepurchased portion hereof
will be issued in the name of the Holder hereof upon the cancellation hereof.
[If this General Term Note is subject to redemption upon exercising a
Survivor's Option, insert -- As more fully provided in the Indenture and subject
to the terms and conditions set forth therein, the Company will repay this
General Term Note (or portion thereof) properly tendered for repayment by or on
behalf of the person (the "Representative") that has authority to act on behalf
of a deceased owner of the beneficial interest in this General Term Note under
the laws of the appropriate jurisdiction (including, without limitation, the
personal representative or executor of such deceased beneficial owner) at a
price equal to 100% of the principal amount hereof plus accrued interest to the
date of such repayment. Notwithstanding the foregoing, the Survivor's Option
will not be available to persons who are surviving joint tenants or surviving
tenants by the entirety. The Company may, in its sole discretion, limit the
aggregate principal
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<PAGE> 26
amount of all outstanding General Term Notes as to which exercises of this
option (the "Survivor's Option") will be accepted in any calendar year to one
percent (1%) of the outstanding principal amount of all General Term Notes as of
the end of the most recent fiscal year, but not less than $500,000 in any such
calendar year, or such greater amount as the Company in its sole discretion may
determine for any calendar year, and may limit to $100,000, or such greater
amount as the Company in its sole discretion may determine for any calendar
year, the aggregate principal amount of General Term Notes (or portions thereof)
as to which exercise of the Survivor's Option will be accepted in such calendar
year with respect to any individual deceased owner of beneficial interests in
such General Term Notes. Notwithstanding the foregoing, the Survivor's Option
will not be available to persons who are surviving joint tenants or surviving
tenants by the entirety.
[If the General Term Note is not an Original Issue Discount Security,
insert -- If an Event of Default with respect to this General Term Note shall
occur and be continuing, the principal of this General Term Note may be declared
due and payable in the manner and with the effect provided in the Indenture.]
In any case where any Interest Payment Date, Redemption Date,
Repayment Date, Stated Maturity or Maturity of any General Term Note shall not
be a Business Day at any Place of Payment, then (notwithstanding any other
provision of the Indenture or this General Term Note), payment of interest or
principal (and premium, if any) need not be made at such Place of Payment on
such date, but may be made on the next succeeding Business Day at such Place of
Payment with the same force and effect as if made on the Interest Payment Date,
Redemption Date or Repayment Date or at the Stated Maturity or Maturity;
provided that no interest shall accrue on the amount so payable for the period
from and after such Interest
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<PAGE> 27
Payment Date, Redemption Date, Repayment Date, Stated Maturity or Maturity, as
the case may be, to such Business Day.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of all Outstanding Securities under the
Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in principal amount of all Outstanding
Securities affected. The Indenture also contains provisions permitting the
Holders of specified percentages in principal amount of all Outstanding
Securities, on behalf of the Holders of all Outstanding Securities, to waive
compliance by the Company with certain provisions of the Indenture. Any such
consent or waiver by the Holder of this General Term Note shall be conclusive
and binding upon such Holder and upon all future Holders of this General Term
Note and of any General Term Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this General Term Note.
The Indenture permits the Holders of not less than a majority in
principal amount of all Outstanding Securities of any series thereunder to waive
on behalf of the Holders of all Outstanding Securities of such series any past
default by the Company, provided that no such waiver may be made with respect to
a default in the payment of the principal of or premium, if any, or the interest
on any Security of such series or the default by the Company in respect of
certain covenants or provisions of the Indenture, the modification or amendment
of which must be consented to by the Holder of each Outstanding Security of each
series affected.
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<PAGE> 28
As set forth in, and subject to, the provisions of the Indenture, no
Holder of any General Term Note will have any right to institute any proceeding
with respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing Event
of Default, the Holders of not less than 25% in principal amount of the
Outstanding General Term Notes shall have made written request, and offered
satisfactory indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the Holders of a majority in
principal amount of the Outstanding General Term Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days; provided, however, that such limitations do not apply to a suit instituted
by the Holder hereof for the enforcement of payment of the principal of (and
premium, if any) or any interest on this General Term Note on or after the
respective due dates expressed herein.
No reference herein to the Indenture and no provision of this General
Term Note or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of and any
premium and interest on this General Term Note at the times, place and rate, and
in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this General Term Note is registerable in the
Security Register, upon surrender of this General Term Note for registration of
transfer at the office or agency of the Company in any place where the principal
of and any premium and interest on this General Term Note are payable, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed by, the
Holder hereof or his attorney duly
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<PAGE> 29
authorized in writing, and thereupon one or more new General Term Notes of this
series and of like tenor, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
The General Term Notes of this series are issuable only in registered
form without coupons in denominations of $1,000 and any integral multiple
thereof. As provided in the Indenture and subject to certain limitations therein
set forth, General Term Notes of this series are exchangeable for a like
aggregate principal amount of General Term Notes of this series and of like
tenor of a different authorized denomination, as requested by the Holder
surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
[If this General Term Note is redeemable at the option of the Company,
insert -- The Company shall not be required (i) to issue, register the transfer
of or exchange this General Term Note if this General Term Note may be among
those selected for redemption during a period beginning at the opening of
business 15 days before selection of the General Term Notes to be redeemed under
Section 1103 of the Indenture and ending at the close of business on the day of
the mailing of the relevant notice of redemption, (ii) to register the transfer
of or exchange any General Term Note so selected for redemption in whole or in
part, except, in the case of any General Term Note to be redeemed in part, the
portion thereof not to be redeemed, or (iii) to issue, register the transfer of
or exchange any General Term Note which has been surrendered for repayment at
the option of the Holder, except the portion, if any, of such General Term Note
not to be so repaid.]
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<PAGE> 30
Prior to due presentment of this General Term Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this General Term Note is registered as the
owner hereof for all purposes, whether or not this General Term Note be overdue,
and neither the Company, the Trustee nor any such agent shall be affected by
notice to the contrary.
All terms used in this General Term Note without definition which are
defined in the Indenture shall have the meanings assigned to them in the
Indenture.
- ------------------------------
(R) Registered servicemark of J. W. Korth & Company
-------------------------
SECTION 205. Form of Legend for Global Notes. Any Global Note (as
defined in Article VII below) authenticated and delivered hereunder shall bear a
legend in substantially the following form:
"This Security is a Global Note within the meaning of the Indenture
hereinafter referred to and is registered in the name of a Depositary or a
nominee of a Depositary. This General Term Note is not exchangeable for
General Term Notes registered in the name of a Person other than the
Depositary or its nominee except in the limited circumstances described in
the Indenture, and no transfer of this General Term Note (other than a
transfer of this General Term Note as a whole by the Depositary to a
nominee of the Depositary or by a nominee of the Depositary to the
Depositary or another nominee of the Depositary) may be registered except
in the limited circumstances described in the Indenture."
SECTION 206. Form of Trustee's Certificate of Authentication. The
Trustee's certificates of authentication shall be in substantially the following
form:
30
<PAGE> 31
This is one of the General Term Notes of the series designated therein
referred to in the within-mentioned Indenture.
_______________________________________,
as Trustee
By______________________________________
Authorized Officer
ARTICLE III
REDEMPTION OF GENERAL TERM NOTES; CHANGE OF CONTROL
SECTION 301. Redemption of General Term Notes. (a) Each General Term
Note may be redeemed by the Company in whole or in part if so provided in, and
in accordance with, the terms of such General Term Note issued by the Company.
The Company may redeem any General Term Note which by its terms is redeemable
prior to Stated Maturity without also redeeming any other General Term Note
which is redeemable prior to Stated Maturity.
(b) Change of Control. Upon the occurrence of a Change in Control (the
effective date of such Change in Control being the "Change in Control Date"),
each Holder of a General Term Note shall have the right to require that the
Company repurchase (a "Required Repurchase") all or any part of such Holder's
General Term Note at a repurchase price payable in cash equal to 101% of the
principal amount of such General Term Note plus accrued interest to the Purchase
Date (the "Change in Control Purchase Price").
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<PAGE> 32
(1) Within 30 days following the Change in Control Date, the Company
shall mail a notice (the "Required Repurchase Notice") to each Holder with
a copy to the Trustee stating:
(i) that a Change in Control has occurred and that such Holder
has the right to require the Company to repurchase all or any part of
such Holder's General Term Notes at the Change of Control Purchase
Price;
(ii) the Change of Control Purchase Price;
(iii) the date on which any Required Repurchase shall be made
(which shall be no earlier than 60 days nor later than 90 days from
the date such notice is mailed) (the "Purchase Date");
(iv) the name and address of the Paying Agent; and
(v) the procedures that Holders must follow to cause the General
Term Notes to be repurchased, which shall be consistent with this
Section and the Indenture.
(2) Holders electing to have a General Term Note repurchased must
deliver a written notice (the "Change in Control Purchase Notice") to the
Paying Agent (initially the Trustee) at its office in The City of New York,
or any other office of the Paying Agent maintained for such purposes, not
later than 30 days prior to the Purchase Date. The Change in Control
Purchase Notice shall state: (i) the portion of the principal amount of any
General Term Notes to be repurchased, which portion must be $1,000 or an
integral
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<PAGE> 33
multiple thereof; (ii) that such General Term Notes are to be repurchased
by the Company pursuant to the change in control provisions of the
Indenture; and (iii) unless the General Term Notes are represented by one
or more Global Notes, the certificate numbers of the General Term Notes to
be delivered by the Holder thereof for repurchase by the Company. Any
Change in Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the Paying Agent not later than
three Business Days prior to the Purchase Date. The notice of withdrawal
shall state the principal amount and, if applicable, the certificate
numbers of the General Term Notes as to which the withdrawal notice relates
and the principal amount of such General Term Notes, if any, which remains
subject to a Change in Control Purchase Notice.
If a General Term Note is represented by a Global Note (as described
in Article VII below), the Depositary or its nominee will be the Holder of
such General Term Note and therefore will be the only entity that can elect
a Required Repurchase of such General Term Note. To obtain repayment
pursuant to this Section 301(b) with respect to such General Term Note, the
beneficial owner of such General Term Note must provide to the broker or
other entity through which it holds the beneficial interest in such General
Term Note (i) the Change in Control Purchase Notice signed by such
beneficial owner, and such signature must be guaranteed by a member firm of
a registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an
office or correspondent in the United States, and (ii) instructions to such
broker or other entity to notify the Depositary of such beneficial owner's
desire to obtain repayment pursuant to this Section 301(b). Such broker or
other entity will provide to the
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<PAGE> 34
Paying Agent (i) the Change of Control Purchase Notice received from such
beneficial owner and (ii) a certificate satisfactory to the Paying Agent
from such broker or other entity stating that it represents such beneficial
owner. Such broker or other entity will be responsible for disbursing any
payments it receives pursuant to this Section 301(b) to such beneficial
owner.
(3) Payment of the Change of Control Purchase Price for a General Term
Note for which a Change in Control Purchase Notice has been delivered and
not withdrawn is conditioned (except in the case of a General Term Note
represented by one or more Global Notes) upon delivery of such General Term
Note (together with necessary endorsements) to the Paying Agent at its
office in The City of New York, or any other office of the Paying Agent
maintained for such purpose, at any time (whether prior to, on or after the
Purchase Date) after the delivery of such Change in Control Purchase
Notice. Payment of the Change of Control Purchase Price for such General
Term Note will be made promptly following the later of the Purchase Date or
the time of delivery of such General Term Note. If the Paying Agent holds,
in accordance with the terms of the Indenture, money sufficient to pay the
Change in Control Purchase Price of such General Term Note on the Business
Day following the Purchase Date, then, on and after such date, interest
will cease accruing, and, if applicable, amounts will no longer accrue on
any such General Term Note that is an Original Issue Discount Security,
whether or not such General Term Note is delivered to the Paying Agent, and
all other rights of the Holder shall terminate (other than the right to
receive the Change of Control Purchase Price upon delivery of the General
Term Note).
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(4) The Company shall comply with the provisions of Rule 13e-4 and any
other tender offer rules under the Exchange Act, which may then be
applicable and shall file Schedule 13E-4 or any other schedule required
thereunder in connection with any offer by the Company to repurchase
General Term Notes at the option of Holders upon a Change in Control.
(5) No General Term Note may be repurchased by the Company as a result
of a Change in Control if there has occurred and is continuing an Event of
Default (other than a default in the Payment of the Change in Control
Purchase Price with respect to the General Term Notes).
ARTICLE IV
REPAYMENT UPON DEATH
If so specified in any General Term Note, the Holder of such General
Term Note will have the option (the "Survivor's Option") to elect repayment of
such General Term Note prior to its Stated Maturity in the event of the death of
the beneficial owner of such General Term Note.
Pursuant to exercise of the Survivor's Option, if applicable, the
Company will repay any General Term Note (or portion thereof) properly tendered
for repayment by or on behalf of the person (the "Representative") that has
authority to act on behalf of the deceased beneficial owner of such General Term
Note under the laws of the appropriate jurisdiction (including, without
limitation, the personal representative or executor of such deceased beneficial
owner) at a price equal to one-hundred percent (100%) of the principal amount of
the beneficial interest of the deceased owner of such General Term Note plus
accrued interest to
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the date of such payment, subject to the following limitations. Notwithstanding
the foregoing, the Survivor's Option will not be available to persons who are
surviving joint tenants or surviving tenants by the entirety. The Company may,
in its sole discretion, limit the aggregate principal amount of General Term
Notes as to which exercises of the Survivor's Option will be accepted in any
calendar year (the "Annual Put Limitation") to one percent (1%) of the
outstanding principal amount of the General Term Notes as of the end of the most
recent fiscal year, but not less than $500,000 in any such calendar year, or
such greater amount as the Company in its sole discretion may determine for any
calendar year, and may limit to $100,000, or such greater amount as the Company
in its sole discretion may determine for any calendar year, the aggregate
principal amount of General Term Notes (or portions thereof) as to which
exercise of the Survivor's Option will be accepted in such calendar year with
respect to any individual deceased owner of beneficial interests in such General
Term Notes (the "Individual Put Limitation"). Moreover, the Company will not
make principal repayments pursuant to exercise of the Survivor's Option in
amounts that are less that $1,000, and, in the event that the limitations
described in the preceding sentence would result in the partial repayment of any
General Term Note, the principal amount of such General Term Note remaining
outstanding after repayment must be at least $1,000 (the minimum authorized
denomination of the General Term Notes). Any General Term Note (or portion
thereof) tendered pursuant to exercise of the Survivor's Option may be withdrawn
by a written request of its Holder received by the Trustee prior to its
repayment.
Each General Term Note (or portion thereof) that is tendered pursuant
to a valid exercise of the Survivor's Option will be accepted promptly in the
order all such General Term Notes are tendered, except for any General Term Note
(or
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portion thereof) the acceptance of which would contravene (i) the Annual Put
Limitation, if applied, or (ii) the Individual Put Limitation, if applied, with
respect to the relevant individual deceased owner of beneficial interests
therein. If, as of the end of any calendar year, the aggregate principal amount
of General Term Notes (or portions thereof) that have been accepted pursuant to
exercise of the Survivor's Option for such year has not exceeded the Annual Put
Limitation, if applied, for such year, any exercise(s) of the Survivor's Option
with respect to General Term Notes (or portions thereof) not accepted during
such calendar year because such acceptance would have contravened the Individual
Put Limitation, if applied, with respect to an individual deceased owner of
beneficial interests therein will be accepted in the order all such General Term
Notes (or portions thereof) were tendered, to the extent that any such exercise
would not exceed the Annual Put Limitation, if applied, for such calendar year.
Any General Term Note (or portion thereof) accepted for repayment pursuant to
exercise of the Survivor's Option will be repaid no later than the first
Interest Payment Date that occurs 20 or more calendar days after the date of
such acceptance. Each General Term Note (or any portion thereof) tendered for
repayment that is not accepted in any calendar year because of the application
of the Annual Put Limitation will be deemed to be tendered in the following
calendar year in the order in which all such General Term Notes (or portions
thereof) were originally tendered, unless any such General Term Note (or portion
thereof) is withdrawn by the Representative for the deceased owner prior to its
repayment. In the event that a General Term Note (or any portion thereof)
tendered for repayment pursuant to valid exercise of the Survivor's Option is
not accepted, the Trustee will deliver a notice by first-class mail to the
registered Holder thereof at its last known address as indicated in the Security
Register that states the reasons such General Term Note (or portion thereof) has
not been accepted for repayment.
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Subject to the foregoing, in order for a Survivor's Option to be
validly exercised with respect to any General Term Note (or portion thereof),
the Trustee must receive from the Representative of the individual deceased
owner of beneficial interests therein (i) a written request for payment signed
by the Representative, and such signature must be guaranteed by a member firm of
a registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States, (ii) if any such General Term Note is not
represented by a Global Note (as described in Article VII below), tender of the
General Term Note (or portion thereof) to be repaid, (iii) appropriate evidence
satisfactory to the Company and the Trustee that (A) the Representative has
authority to act on behalf of the individual deceased beneficial owner, (B) the
death of such beneficial owner has occurred and (C) the deceased individual was
the owner of a beneficial interest in such General Term Note at the time of
death, (iv) if applicable, a properly executed assignment or endorsement, and
(v) if the beneficial interest in such General Term Note is held by a nominee of
the deceased beneficial owner, a certificate satisfactory to the Trustee from
such nominee attesting to the deceased's ownership of a beneficial interest in
such General Term Note. All questions as to the eligibility or validity of any
exercise of the Survivor's Option will be determined by the Company, in its sole
discretion, which determinations will be final and binding on all parties.
If a General Term Note is represented by a Global Note (as described
in Article VII below), the Depositary or its nominee will be the Holder of such
General Term Note and therefore will be the only entity that can exercise the
Survivor's Option for such General Term Note. To obtain repayment pursuant to
exercise of the Survivor's Option with respect to such General Term Note, the
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Representative must provide to the broker or other entity through which the
beneficial interest in such General Term Note is held by the deceased owner (i)
the documents described in clauses (i) and (iii) of the preceding paragraph and
(ii) instructions to such broker or other entity to notify the Depositary of
such Representative's desire to obtain repayment pursuant to exercise of the
Survivor's Option. Such broker or other entity shall provide to the Trustee (i)
the documents received from the Representative referred to in clause (i) of the
preceding sentence and (ii) a certificate satisfactory to the Trustee from such
broker or other entity stating that it represents the deceased beneficial owner.
Such broker or other entity will be responsible for disbursing any payments it
receives pursuant to exercise of the Survivor's Option to the appropriate
Representative.
ARTICLE V
ADDITIONAL COVENANTS OF THE COMPANY
WITH RESPECT TO THE GENERAL TERM NOTES
SECTION 501. Statement by Officers as to Default. (a) The Company will
deliver to the Trustee, within 120 days after the end of each fiscal year a
brief certificate from the principal executive officer, principal financial
officer or principal accounting officer as to his or her knowledge of the
Company's compliance with all conditions and covenants under this Fifth
Supplemental Indenture. For such purposes, such compliance shall be determined
without regard to any period of grace or requirement of notice provided
hereunder and, if the Company shall be in default, specifying all such defaults
and the nature and status thereof of which they may have knowledge.
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(b) The Company shall deliver to the Trustee, as soon as possible and
in any event within 10 days after the Company becomes aware of the occurrence of
an Event of Default or an event which, with notice or the lapse of time or both,
would constitute an Event of Default, an Officers' Certificate setting forth the
details of such Event of Default or default, and the action which the Company
proposes to take with respect thereto.
SECTION 502. Existence. So long as any of the General Term Notes are
Outstanding, subject to Article 8 of the Indenture, the Company will do or cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence and all rights (charter and statutory) and franchises
other than rights or franchises the loss of which would not be disadvantageous
in any material respect to the Holders of the General Term Notes.
SECTION 503. Maintenance of Properties. So long as any of the General
Term Notes are Outstanding, the Company will cause all properties used or useful
in the conduct of its business to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and will
cause to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Company may be necessary so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided, however, that nothing in this
Section shall prevent the Company from discontinuing the operation or
maintenance of any of such properties if such discontinuance is, in the judgment
of the Company, desirable in the conduct of its business and not disadvantageous
in any material respect to the Holders.
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SECTION 504. Payment of Taxes and Other Claims. So long as any of the
General Term Notes are Outstanding, the Company will pay or discharge or cause
to be paid or discharged, before the same shall become delinquent, (1) all
taxes, assessments and governmental charges levied or imposed upon the Company
or any Subsidiary or upon the income, profits or property of the Company or any
Subsidiary, and (2) all lawful claims for labor, materials and supplies which,
if unpaid, might by law become a Lien upon the property of the Company or any
Subsidiary; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim the amount of which, applicability or validity is being contested in good
faith by appropriate proceedings.
SECTION 505. Insurance. So long as any of the General Term Notes are
Outstanding, the Company shall, and each of its Restricted Subsidiaries and
Consumers shall, keep insured by financially sound and reputable insurers all
property of a character usually insured by entities engaged in the same or
similar businesses similarly situated against loss or damage of the kinds and in
the amounts customarily insured against by such entities and carry such amounts
of other insurance as is usually carried by such entities.
SECTION 506. Compliance with Laws. So long as any of the General Term
Notes are Outstanding, the Company shall, and each of its Restricted
Subsidiaries and Consumers shall, comply in all material respects with all laws
applicable to the Company or such Restricted Subsidiary or Consumers, as the
case may be, its respective business and properties.
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SECTION 508. Limitation on Certain Liens. (a) So long as any of the
General Term Notes are outstanding, the Company shall not create, incur, assume
or suffer to exist any Lien or any other type of arrangement intended or having
the effect of conferring upon a creditor of the Company or any Subsidiary a
preferential interest (hereinafter in this Section referred to as a "Lien") upon
or with respect to the Capital Stock of Consumers, Enterprises or NOMECO without
making effective provision whereby the General Term Notes shall (so long as any
such other creditor shall be so secured) be equally and ratably secured (along
with any other creditor similarly entitled to be secured) by a direct Lien on
all property subject to such Lien, provided, however, that the foregoing
restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies to the
extent not past due;
(ii) pledges or deposits to secure (a) obligations under workmen's
compensation laws or similar legislation, (b) statutory obligations of the
Company or (c) Support Obligations not to exceed $30 million at any one time
outstanding;
(iii) Liens imposed by law, such as materialmen's, mechanics', carriers',
workmen's and repairmen's Liens and other similar Liens arising in the ordinary
course of business securing obligations which are not overdue or which have been
fully bonded and are being contested in good faith;
(iv) purchase money Liens upon or in property acquired and held by the
Company in the ordinary course of business to secure the purchase price of such
property or to secure Indebtedness incurred solely for the purpose of financing
the
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acquisition of any such property to be subject to such Liens, or Liens existing
on any such property at the time of acquisition, or extensions, renewals or
replacements of any of the foregoing for the same or a lesser amount, provided
that no such Lien shall extend to or cover any property other than the property
being acquired and no such extension, renewal or replacement shall extend to or
cover property not theretofore subject to the Lien being extended, renewed or
replaced, and provided, further, that the aggregate principal amount of the
Indebtedness at any one time outstanding secured by Liens permitted by this
clause (iv) shall not exceed $10,000,000; and
(v) Liens not otherwise permitted by clauses (i) through (iv) of this
Section securing Indebtedness of the Company; provided that on the date such
Liens are created, and after giving effect to such Indebtedness, the aggregate
principal amount at maturity of all of the secured Indebtedness of the Company
at such date shall not exceed 10% of Consolidated Assets at such date.
SECTION 509. Limitation on Consolidation, Merger, Sale or Conveyance.
In addition to the limitations set forth in Article 8 of the Indenture, so long
as the General Term Notes are Outstanding and until the General Term Notes are
rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other
Rating Agency (or if Standard & Poor's shall change its rating system, an
equivalent of such rating then employed by such organization) at which time the
Company shall be permanently released from the following provisions, the Company
shall not consolidate with or merge into any other Person or sell, lease or
convey the property of the Company in the entirety or substantially as an
entirety unless (i) immediately after giving effect to such transaction the
Consolidated Net Worth of the surviving entity is at least equal to the
Consolidated Net Worth of the Company
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immediately prior to the transaction, and (ii) after giving effect to such
transaction, the surviving entity would be entitled to incur at least one dollar
of additional Indebtedness (other than revolving Indebtedness to banks) without
violation of the limitations in Section 510 hereof.
SECTION 510. Limitation on Consolidated Indebtedness. (a) So long as
any of the General Term Notes are Outstanding and until the General Term Notes
are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one
Other Rating Agency (or if Standard & Poor's shall change its rating system, an
equivalent of such rating then employed by such organization) at which time the
Company shall be permanently released from the provision of this Section 510,
the Company shall not, and shall not permit any Restricted Subsidiary of the
Company to, issue, create, assume, guarantee, incur or otherwise become liable
for (collectively, "issue"), directly or indirectly, any Indebtedness unless (i)
the Consolidated Coverage Ratio of the Company and its Consolidated Subsidiaries
for the four consecutive fiscal quarters immediately preceding the issuance of
such Indebtedness (as shown by a pro forma consolidated income statement of the
Company and its Consolidated Subsidiaries for the four most recent fiscal
quarters ending at least 30 days prior to the issuance of such Indebtedness
after giving effect to (i) the issuance of such Indebtedness and (if applicable)
the application of the net proceeds thereof to refinance other Indebtedness as
if such Indebtedness was issued at the beginning of the period, (ii) the
issuance and retirement of any other Indebtedness since the first day of the
period as if such Indebtedness was issued or retired at the beginning of the
period and (iii) the acquisition of any company or business acquired by the
Company or any Subsidiary since the first day of the period (including giving
effect to the pro forma historical earnings of such company or business),
including any acquisition which will be consummated
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contemporaneously with the issuance of such Indebtedness, as if in each case
such acquisition occurred at the beginning of the period) exceeds a ratio of 1.6
to 1.0 and (ii), immediately after giving effect to the issuance of such
Indebtedness and (if applicable) the application of the net proceeds thereof to
refinance other Indebtedness, the Consolidated Leverage Ratio is equal to or
less than a ratio of 0.75 to 1.0.
(b) Notwithstanding the foregoing paragraph, the Company or any
Restricted Subsidiary may issue, directly or indirectly, the following
Indebtedness:
(1) Revolving Indebtedness to banks not to exceed $1,000,000,000 in
the aggregate outstanding principal amount at any time;
(2) Indebtedness (other than Indebtedness described in clause (1) of
this Subsection) outstanding on the date of the original Indenture, as set
forth on Schedule 510(b)(2) attached hereto and made a part hereof, and
Indebtedness issued in exchange for, or the proceeds of which are used to
refund or refinance, any Indebtedness permitted by this clause (2);
provided, however, that (i) the principal amount (or accreted value in the
case of Indebtedness issued at a discount) of the Indebtedness so issued
shall not exceed the principal amount (or accreted value in the case of
Indebtedness issued at a discount) of, premium, if any, and accrued but
unpaid interest on, the Indebtedness so exchanged, refunded or refinanced
and (ii) the Indebtedness so issued (A) shall not mature prior to the
stated maturity of the Indebtedness so exchanged, refunded or refinanced,
(B) shall have an Average Life equal to or greater than the remaining
Average Life of the
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Indebtedness so exchanged, refunded or refinanced and (C) if the
Indebtedness to be exchanged, refunded or refinanced is subordinated to the
General Term Notes, the Indebtedness is subordinated to the General Term
Notes in right of payment;
(3) Indebtedness of the Company owed to and held by a Subsidiary and
Indebtedness of a Subsidiary owed to and held by the Company; provided,
however, that, in the case of Indebtedness of the Company owed to and held
by a Subsidiary, (i) any subsequent issuance or transfer of any Capital
Stock that results in any such Subsidiary ceasing to be a Subsidiary or
(ii) any transfer of such Indebtedness (except to the Company or a
Subsidiary) shall be deemed for the purposes of this Subsection to
constitute the issuance of such Indebtedness by the Company;
(4) Indebtedness of the Company issued in exchange for, or the
proceeds of which are used to refund or refinance, Indebtedness of the
Company issued in accordance with Subsection (a) of this Section, provided
that (i) the principal amount (or accreted value in the case of
Indebtedness issued at a discount) of the Indebtedness so issued shall not
exceed the principal amount (or accreted value in the case of Indebtedness
issued at a discount) of, premium, if any, and accrued but unpaid interest
on, the Indebtedness so exchanged, refunded or refinanced and (ii) the
Indebtedness so issued (A) shall not mature prior to the stated maturity of
the Indebtedness so exchanged, refunded or refinanced, (B) shall have an
Average Life equal to or greater than the remaining Average Life of the
Indebtedness so exchanged, refunded or refinanced and (C) if the
Indebtedness to be exchanged, refunded
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or refinanced is subordinated to the General Term Notes, the Indebtedness
so issued is subordinated to the General Term Notes in right of payment;
and
(5) Indebtedness of a Restricted Subsidiary issued in exchange for, or
the proceeds of which are used to refund or refinance, Indebtedness of a
Restricted Subsidiary issued in accordance with Subsection (a) of this
Section, provided that (i) the principal amount (or accreted value in the
case of Indebtedness issued at a discount) of the Indebtedness so issued
shall not exceed the principal amount (or accreted value in the case of
Indebtedness issued at a discount) of, premium, if any, and accrued but
unpaid interest on, the Indebtedness so exchanged, refunded or refinanced
and (ii) the Indebtedness so issued (A) shall not mature prior to the
stated maturity of the Indebtedness so exchanged, refunded or refinanced
and (B) shall have an Average Life equal to or greater than the remaining
Average Life of the Indebtedness so exchanged, refunded or refinanced.
SECTION 511. Limitation on Restricted Payments. (a) So long as the
General Term Notes are Outstanding and until the General Term Notes are rated
BBBor above (or an equivalent rating) by Standard & Poor's and one Other Rating
Agency (or if Standard & Poor's shall change its rating system, an equivalent of
such rating then employed by such organization) at which time the Company shall
be permanently released from the provision of this Section 511, the Company
shall not, and shall not permit any Restricted Subsidiary of the Company,
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 the Capital Stock of the Company (except dividends or distributions
payable solely in Non-Convertible Capital Stock of the Company or in options,
warrants or other rights to purchase
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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 (any such dividend,
distribution, purchase, redemption, other acquisition or retirement being
hereinafter referred to as a "Restricted Payment") if at the time the Company or
such Subsidiary makes such Restricted Payment:
(1) an Event of Default, or an event that with the lapse of time
or the giving of notice or both would constitute an Event of Default, shall
have occurred and be continuing (or would result therefrom); or
(2) the aggregate amount of such Restricted Payment and all other
Restricted Payments made since September 30, 1993, would exceed the sum of:
(A) $120,000,000;
(B) 100% of Consolidated Net Income, accrued during the period
(treated as one accounting period) from September 30, 1993 to the end
of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment (or, in case such sum shall be a
deficit, minus 100% of the deficit); and
(C) the aggregate Net Proceeds received by the Company from the
issue or sale of or contribution with respect to its Capital Stock
subsequent to September 30, 1993.
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For the purpose of determining the amount of any Restricted Payment not in the
form of cash, the amount shall be the fair value of such Restricted Payment as
determined in good faith by the Board of Directors, provided that if the value
of the non-cash portion of such Restricted Payment as determined by the Board of
Directors is in excess of $25 million, such value shall be based on the opinion
from a nationally recognized firm experienced in the appraisal of similar types
of transactions.
(b) The provisions of Section 511(a) shall not prohibit:
(i) any purchase or redemption of Capital Stock of the Company
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than
Redeemable Stock or Exchangeable Stock); provided, however, that such
purchase or redemption shall be excluded from the calculation of the
amount of Restricted Payments;
(ii) dividends or other distributions paid in respect of any
class of the Company's Capital Stock issued in respect of the
acquisition of any business or assets by the Company or a Restricted
Subsidiary if the dividends or other distributions with respect to
such Capital Stock are payable solely from the net earnings of such
business or assets;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have
complied with this Section; provided, however, that at the time of
payment of such dividend, no Event of Default shall have occurred and
be continuing (or
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result therefrom), and provided further, however, that such dividends
shall be included (without duplication) in the calculation of the
amount of Restricted Payments; or
(iv) payments pursuant to the Tax-Sharing Agreement.
SECTION 512. Limitation on Transactions with Affiliates. So long as
any of the General Term Notes are Outstanding, the Company shall not directly or
indirectly, conduct any business or enter into any transaction or series of
related transactions (including the purchase, sale, lease or exchange of any
property or the rendering of any service) with an Affiliate unless the terms of
such business, transaction or series of transactions are as favorable to the
Company as terms that could be obtainable at the time for a comparable
transaction or series of related transactions in arm's-length dealings with an
unrelated third Person. This Section shall not apply to (x) compensation paid to
officers and directors of the Company which has been approved by the Board of
Directors of the Company or (y) loans to the Company or an Affiliate pursuant to
a global cash management program, which loans mature within one year from the
date thereof.
ARTICLE VI
ADDITIONAL EVENTS OF DEFAULT
WITH RESPECT TO THE GENERAL TERM NOTES
SECTION 601. Definition. All of the events specified in Section 501
of the Indenture and the events specified in Section 602 of this Article shall
be "Events of Default" with respect to the General Term Notes.
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SECTION 602. Additional Events of Default. As contemplated by Sections
301(15) and 501(7) of the Indenture, any one of the following events (whatever
the reason for such Event of Default and whether or not 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) shall be an Event of Default with respect
to the General Term Notes for all purposes of the Indenture:
(a) a default or event of default in respect of any Indebtedness of
the Company having an aggregate outstanding principal amount at the time of such
default in excess of $25,000,000 shall occur which results in the acceleration
of such Indebtedness or Indebtedness of the Company having an outstanding
principal amount at maturity in excess of $25,000,000 shall not be paid at
maturity thereof, which default shall not have been waived by the holder or
holders of such Indebtedness within 30 days of such default; or
(b) the entry of a final judgment or judgments against the Company
aggregating in excess of $25,000,000 which remain undischarged or unbonded for a
period (during which execution shall not be effectively stayed) of 60 days.
ARTICLE VII
GLOBAL NOTES
The General Term Notes will be issued initially in the form of Global
Notes. "Global Note" means a registered General Term Note evidencing one or more
General Term Notes issued to a depositary (the "Depositary") or its nominee, in
accordance with this Article and bearing the legend prescribed in this Article.
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A single Global Note will represent all General Term Notes issued on the same
date and having the same terms, including, but not limited to, the same Interest
Payment Dates, rate of interest, Stated Maturity, and redemption provisions (if
any). The Company shall execute and the Trustee shall, in accordance with this
Article and the Company Order with respect to the General Term Notes,
authenticate and deliver one or more Global Notes in temporary or permanent form
that (i) shall represent and shall be denominated in an aggregate amount equal
to the aggregate principal amount of the General Term Notes to be represented by
such Global Note or Notes, (ii) shall be registered in the name of the
Depositary for such Global Note or Notes or the nominee of such Depositary,
(iii) shall be delivered by the Trustee to such Depositary or pursuant to such
Depositary's instructions and (iv) shall bear a legend substantially to the
following effect: "Unless this Global Note is presented by an authorized
representative of the Depositary to the Company or its agent for registration of
transfer, exchange or payment, and any Note issued is registered in the name of
the Depositary or in such other name as is requested by the Depositary, any
transfer, pledge or other use hereof for value or otherwise by or to any person
shall be wrongful inasmuch as the registered owner hereof, the Depositary, has
an interest herein."
Notwithstanding Section 305 of the Indenture, unless and until it is
exchanged in whole or in part for General Term Notes in definitive form, a
Global Note representing one or more General Term Notes may not be transferred
except as a whole by the Depositary, to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary or by such Depositary or any such nominee to a successor Depositary
for General Term Notes or a nominee of such successor Depositary.
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If at any time the Depositary for the General Term Notes is unwilling
or unable to continue as Depositary for the General Term Notes, the Company
shall appoint a successor Depositary with respect to the General Term Notes. If
a successor Depositary for the General Term Notes is not appointed by the
Company by the earlier of (i) 90 days from the date the Company receives notice
to the effect that the Depositary is unwilling or unable to act, or the Company
determines that the Depositary is unable to act or (ii) the effectiveness of the
Depositary's resignation or failure to fulfill its duties as Depositary, the
Company will execute, and the Trustee, upon receipt of a Company Order for the
authentication and delivery of definitive General Term Notes, will authenticate
and deliver General Term Notes in definitive form in an aggregate principal
amount equal to the principal amount of the Global Note or Notes representing
such General Term Notes in exchange for such Global Note or Notes.
The Company may at any time and in its sole discretion determine that
the General Term Notes issued in the form of one or more Global Notes shall no
longer be represented by such Global Note or Notes. In such event the Company
will execute, and the Trustee, upon receipt of a Company Order for the
authentication and delivery of definitive General Term Notes, will authenticate
and deliver General Term Notes in definitive form in an aggregate principal
amount equal to the principal amount of the Global Note or Notes representing
such General Term Notes in exchange for such Global Note or Notes.
The Depositary for such General Term Notes may surrender a Global Note
or Notes for such General Term Notes in exchange in whole or in part for General
Term Notes in definitive form on such terms as are acceptable to the Company and
53
<PAGE> 54
such Depositary. Thereupon, the Company shall execute, and the Trustee shall
authenticate and deliver, without service charge:
(i) to each Person specified by such Depositary a new General Term
Note or Notes, of any authorized denomination as requested by such
Person in aggregate principal amount equal to and in exchange for such
Person's beneficial interest in the Global Note; and
(ii) to such Depositary a new Global Note in a denomination equal
to the difference, if any, between the principal amount of the
surrendered Global Note and the aggregate principal amount of General
Term Notes in definitive form delivered to Holders thereof.
In any exchange provided for in this Article, the Company will execute
and the Trustee will authenticate and deliver General Term Notes in definitive
registered form in authorized denominations.
Upon the exchange of a Global Note for General Term Notes in
definitive form, such Global Note shall be canceled by the Trustee. General Term
Notes in definitive form issued in exchange for a Global Note pursuant to this
Article shall be registered in such names and in such authorized denominations
as the Depositary for such Global Note, pursuant to instructions from its direct
or indirect participants or otherwise, shall instruct the Trustee or Security
Registrar. The Trustee shall deliver such General Term Notes to the persons in
whose names such General Term Notes are so registered.
54
<PAGE> 55
ARTICLE VIII
DEFEASANCE
All of the provisions of Article Fourteen of the Original Indenture
shall be applicable to the General Term Notes. Upon satisfaction by the Company
of the requirements of Section 1404 of the Indenture, in connection with any
covenant defeasance (as provided in Section 1403 of the Indenture), the Company
shall be released from its obligations under Article Eight of the Original
Indenture and under Articles III and V of this Fifth Supplemental Indenture with
respect to the General Term Notes.
ARTICLE IX
SUPPLEMENTAL INDENTURES
This Fifth Supplemental Indenture is a supplement to the Original
Indenture. As supplemented by this Fifth Supplemental Indenture, the Original
Indenture is in all respects ratified, approved and confirmed, and the Original
Indenture and this Fifth Supplemental Indenture shall together constitute one
and the same instrument.
The Company may, by supplemental indenture, amend this Fifth
Supplemental Indenture to provide for additional definitions, terms and
provisions relating to General Term Notes. Any such supplemental indenture shall
not adversely affect the rights and privileges of Holders of General Term Notes
issued prior to such supplemental indenture. Any such supplemental indenture may
include,
55
<PAGE> 56
but is not limited to including, additional provisions permitting payment of
General Term Notes prior to Stated Maturity at the option of the Holders,
issuance of General Term Notes in currencies other than Dollars, and special
provisions relating to interest rate provisions.
TESTIMONIUM
This Fifth Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
56
<PAGE> 57
IN WITNESS WHEREOF, the parties hereto have caused this Fifth
Supplemental Indenture to be duly executed and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first written
above.
CMS ENERGY CORPORATION
By: /s/ A.M. Wright
------------------------------------
Name: Alan M. Wright
Title: Senior Vice President and
Chief Financial Officer
Attest:
/s/ Thomas A. McNish (Corporate Seal)
- ----------------------------------
Name: Thomas A.McNish
Title: Vice President and Secretary
THE CHASE MANHATTAN BANK
as Trustee
By: /s/ William G. Keenan
------------------------------------
Attest:
/s/ William B. Doge (Corporate Seal)
- ----------------------------------
57
<PAGE> 58
Schedule 510(b)(2)
------------------
Indebtedness of CMS Energy Corporation outstanding on January 20, 1994:
1. $146,000,000 of Series A Senior Deferred Coupon Notes due 1997; and
2. $248,000,000 of Series B Senior Deferred Coupon Notes due 1999.
58
<PAGE> 1
EXHIBIT 4(F)
AMENDMENT NO. 1 TO
CREDIT AGREEMENT
This AMENDMENT NO. 1, dated as of January 30, 1998, is made by and
among CMS ENERGY CORPORATION, a Michigan corporation (the "BORROWER"), the
lenders parties to the Credit Agreement referred to below (the "LENDERS"), THE
CHASE MANHATTAN BANK, as administrative agent (the "ADMINISTRATIVE AGENT"),
documentation agent (the "DOCUMENTATION AGENT"), collateral agent (the
"COLLATERAL AGENT") and syndication agent (the "SYNDICATION AGENT") for the
Lenders, and the Co-Agents (the "CO-AGENTS") and Lead Managers (the "LEAD
MANAGERS") named therein.
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders, the Administrative Agent, the
Documentation Agent, the Collateral Agent, the Syndication Agent, the Co-Agents
and the Lead Managers have entered into a Credit Agreement, dated as of July 2,
1997 (the "CREDIT AGREEMENT"). Unless otherwise defined herein, the terms
defined in the Credit Agreement shall be used herein as therein defined.
(2) The Borrower has requested (i) the deletion of the requirement
under Section 8.01(l) of the Credit Agreement to provide to the Collateral
Agent, within 30 days after any Trigger Date, a perfected first priority pledge
of 100% of the issued and outstanding shares of common stock of Enterprises,
(ii) an amendment to the calculation of the cash dividend coverage ratio set
forth in Section 8.01(j)(ii) of the Credit Agreement to exclude interest accrued
on Junior Subordinated Debt, (iii) the exclusion of Project Finance Debt and
related equity from Consolidated Debt and Consolidated Capital and (iv) an
amendment to Section 11.07(a)(i) of the Credit Agreement to permit the Lenders
to assign their Revolving 364-Day Commitments on a non-pro rata basis. The
Lenders have agreed to the Borrower's requests, upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is,
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof, hereby amended as follows:
(a) The defined terms "Collateral Release Date", "Pledged Stock",
"Prepayment Event" and "Trigger Date" contained in Section 1.01 of the Credit
Agreement are deleted in their entirety.
(b) Clause (i) of the proviso to the defined term "Consolidated
Capital" contained in Section 1.01 of the Credit Agreement is amended in full to
read as follows:
"(i) Consolidated Capital shall (A) include Project Finance Equity of
the Borrower and the Consolidated Subsidiaries in any Consolidated
Subsidiary only to the extent of the Borrower's Ownership Interest in
such Consolidated Subsidiary and (B) exclude that portion of
consolidated equity of the stockholders of the Borrower and the
Consolidated Subsidiaries attributable to assets securing Project
Finance Debt of the Borrower or any Consolidated Subsidiary,"
<PAGE> 2
2
(c) Subsection (e) of the proviso to the defined term "Consolidated
Debt" contained in Section 1.01 of the Credit Agreement is amended in full to
read as follows:
"(e) Consolidated Debt shall not include any Project
Finance Debt of the Borrower or any Consolidated Subsidiary."
(d) The defined term "Debt" contained in Section 1.01 of the Credit
Agreement is amended by adding the following sentence to the end thereof:
"Notwithstanding the foregoing, solely for purposes of the calculation
required under Section 8.01(j)(ii), Debt shall not include any Junior
Subordinated Debt issued by the Borrower and owned by any Hybrid
Preferred Securities Subsidiary."
(e) The defined term "Index Debt" contained in Section 1.01 of the
Credit Agreement is amended by deleting the phrase "provided, however, that in
the event that all such senior unsecured indebtedness becomes equally and
ratably secured by the Pledged Stock, the Index Debt shall be such senior
secured indebtedness" in its entirety.
(f) The defined term "Percentage" contained in Section 1.01 of the
Credit Agreement is amended by deleting the phrase "provided, that a Lender's
Percentage of the Commitments under any Tranche shall in all cases equal such
Lender's Percentage of the Commitments under any other Tranche" in its entirety
and substituting therefor the new phrase "provided, that a Lender's Percentage
of the Commitments under the Term Tranche shall in all cases equal such Lender's
Percentage of the Commitments under the Revolving Three-Year Tranche".
(g) The defined term "Required Lenders" contained in Section 1.01 of
the Credit Agreement is amended in full to read as follows:
"REQUIRED LENDERS" means, collectively, the Required Term
Lenders, the Required 364-Day Lenders and the Required Three-Year
Lenders; provided, however, that upon (i) the indefeasible payment in
full of all amounts owing under the Term Tranche, the Revolving 364-Day
Tranche or the Revolving Three-Year Tranche and (ii) the termination of
the Lenders' Commitments under such Tranche, the Required Lenders shall
be determined without regard to the Required Term Lenders, the Required
364-Day Lenders or the Required Three-Year Lenders, as the case may be.
Any determination of those Lenders constituting the Required Lenders
shall be made by the Administrative Agent and shall be conclusive and
binding on all parties absent manifest error.
(h) The following new defined terms are added to Section 1.01 of the
Credit Agreement:
"REQUIRED TERM LENDERS" means, on any date of determination,
Lenders that,
<PAGE> 3
3
collectively, on such date (i) hold at least 51% of the then aggregate
unpaid principal amount of the Term Loans owing to Lenders and (ii) if
no Term Loans are then outstanding, have Percentages in the aggregate
under the Term Tranche of at least 51%. Any determination of those
Lenders constituting the Required Term Lenders shall be made by the
Administrative Agent and shall be conclusive and binding on all parties
absent manifest error.
"REQUIRED THREE-YEAR LENDERS" means, on any date of
determination, Lenders that, collectively, on such date (i) hold at
least 51% of the then aggregate unpaid principal amount of the
Revolving Three-Year Loans owing to Lenders and (ii) if no Revolving
Three-Year Loans are then outstanding, have Percentages in the
aggregate under the Revolving Three-Year Tranche of at least 51%. Any
determination of those Lenders constituting the Required Three-Year
Lenders shall be made by the Administrative Agent and shall be
conclusive and binding on all parties absent manifest error.
(i) Section 2.02(b) of the Credit Agreement is amended by deleting each
reference therein to "the Required Lenders" and substituting therefor in each
case a reference to "the Required Three-Year Lenders".
(j) Section 3.04(c)(ii) of the Credit Agreement is amended by deleting
the phrase "the Required Lenders shall, at least one Business Day before the
date of any requested Borrowing, notify the Administrative Agent that the
Eurodollar Rate for Eurodollar Rate Loans to be made in connection with such
Borrowing will not adequately reflect the cost to such Required Lenders" in its
entirety and substituting therefor the new phrase "the Required Term Lenders,
the Required 364-Day Lenders or the Required Three-Year Lenders shall, at least
one Business Day before the date of any requested Borrowing, notify the
Administrative Agent that the Eurodollar Rate for Eurodollar Rate Loans to be
made in connection with such Borrowing will not adequately reflect the cost to
such Required Term Lenders, Required 364-Day Lenders or Required Three-Year
Lenders, as the case may be,".
(k) Section 5.03(c) of the Credit Agreement is deleted in its entirety
and the phrase "Intentionally omitted" is substituted therefor.
(l) Section 8.01(i) of the Credit Agreement is amended by deleting the
phrase "provided, however, that in the event that the Collateral Release Date
occurs prior to June 30, 1999, the Borrower shall maintain at all times from the
Collateral Release Date through June 30, 1999 a ratio of Consolidated Debt to
Consolidated Capital of not more than 0.66:1.0" in its entirety.
(m) Section 8.01(l) of the Credit Agreement is deleted in its entirety
and the phrase "Intentionally omitted" is substituted therefor.
(n) Section 8.03(m) of the Credit Agreement is amended by deleting the
phrase "the Required Lenders may" in its entirety and substituting therefor the
new phrase "the Required Term Lenders, the Required 364-Day Lenders or the
Required Three-Year Lenders may".
(o) Section 10.01(c) of the Credit Agreement is amended by deleting the
phrase "with the consent or at the request of the Required Lenders (or such
other number or percentage of the Lenders as shall be necessary under the
circumstances as provided in Section 11.01)" in its entirety and substituting
therefor the new phrase "with the consent or at the request of the Required
Lenders (or
<PAGE> 4
4
such other number or percentage of the Lenders as shall be necessary under the
circumstances as provided in Section 11.01 or any other provision of this
Agreement)".
(p) Section 11.01(v) of the Credit Agreement is amended by deleting the
phrase "the definition of "Required Lenders" contained in Section 1.01" in its
entirety and substituting therefor the new phrase "the definition of "Required
Lenders", "Required Term Lenders", "Required 364-Day Lenders" or "Required
Three-Year Lenders" contained in Section 1.01".
(q) Section 11.01(vii) of the Credit Agreement is amended by deleting
the phrase "Section 8.01(l), the definition of "Collateral Release Date" or
"Trigger Date" contained in Section 1.01," in its entirety.
(r) Section 11.07(a)(i) of the Credit Agreement is amended in full to
read as follows:
"(i) each such assignment in respect of the Revolving Three-Year
Tranche or the Term Tranche shall be made by such Lender on a pro rata
basis between such Lender's Revolving Three-Year Commitment and Term
Commitment,"
(s) Exhibit F to the Credit Agreement is deleted in its entirety and
Exhibit F attached hereto is substituted therefor.
SECTION 2. CONDITIONS OF EFFECTIVENESS. (a) The amendments to the
Credit Agreement contained in Section 1 hereof (other than subsections (b), (c),
(d) and (s) thereof) shall become effective when, and only when, the
Administrative Agent shall have received (i) counterparts of this Amendment
executed by the Borrower and all of the Lenders and (ii) evidence, in form and
substance satisfactory to the Administrative Agent, that the Letter of Credit
and Reimbursement Agreement, dated as of September 11, 1997, among the Borrower,
Bank of America National Trust and Savings Association, as Administrative Agent
and Letter of Credit Issuing Bank, and the other financial institutions party
thereto, has been amended to delete the requirement to provide a pledge of the
common stock of Enterprises.
(b) The amendments to the Credit Agreement contained in subsections
(b), (c), (d) and (s) of Section 1 hereof shall become effective when, and only
when, the Administrative Agent shall have received (i) counterparts of this
Amendment executed by the Borrower and the Required Lenders and (ii) evidence,
in form and substance satisfactory to the Administrative Agent, that the Letter
of Credit and Reimbursement Agreement, dated as of September 11, 1997, among the
Borrower, Bank of America National Trust and Savings Association, as
Administrative Agent and Letter of Credit Issuing Bank, and the other financial
institutions party thereto, has been amended in a manner substantially similar
to the amendments contained in subsections (b), (c), (d) and (s) of Section 1
hereof.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
(a) The execution, delivery and performance by the Borrower of this
Amendment, and the performance by the Borrower of the Credit Agreement, as
amended by this Amendment, (i) are within the Borrower's corporate powers, (ii)
have been duly authorized by all necessary corporate action and (iii) do not and
will not (A) require any consent or approval of the stockholders of the
Borrower, (B) violate any provision of the charter or by-laws of the Borrower or
of law, (C) violate
<PAGE> 5
5
any legal restriction binding on or affecting the Borrower, (D) result in a
breach of, or constitute a default under, any indenture or loan or credit
agreement or any other agreement, lease or instrument to which the Borrower is a
party or by which it or its properties may be bound or affected, or (E) result
in or require the creation of any Lien (other than pursuant to the Loan
Documents) upon or with respect to any of its properties.
(b) No Governmental Approval is required for the due execution,
delivery and performance by the Borrower of this Amendment.
(c) This Amendment and the Credit Agreement, as amended by this
Amendment, are the legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their respective terms;
subject to the qualification, however, that the enforcement of the rights and
remedies herein and therein is subject to bankruptcy and other similar laws of
general application affecting rights and remedies of creditors and the
application of general principles of equity (regardless of whether considered in
a proceeding in equity or at law). This Amendment has been duly executed and
delivered on behalf of the Borrower.
(d) The representations and warranties of the Borrower set forth in
Section 7.01 of the Credit Agreement are true and correct on and as of the date
hereof, as though made on and as of such date.
(e) No event has occurred and is continuing that constitutes a Default
or an Event of Default.
SECTION 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the
effectiveness of all or any portion of this Amendment, on and after the date
hereof each reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Credit Agreement, and each
reference in the other Loan Documents to "the Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement and all
other Loan Documents are and shall continue to be in full force and effect and
are hereby in all respects ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Agents under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 5. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same agreement.
SECTION 6. GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York.
<PAGE> 6
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CMS ENERGY CORPORATION
By /s/ Doris F. Galvin
-------------------------------
Title: Vice President and Treasurer
THE CHASE MANHATTAN BANK, as
Administrative Agent, Collateral Agent,
Documentation Agent and Syndication Agent
By /s/ Thomas L. Casey
-------------------------------
Vice President
LENDERS
THE CHASE MANHATTAN BANK
By /s/ Thomas L. Casey
-----------------------------
Vice President
ABN AMRO BANK N.V.
By /s/ Mark R. Lasek
-----------------------------
Title: Vice President
By /s/ Peter D. Gaw
-----------------------------
Title: Senior Vice President
BANK OF AMERICA ILLINOIS
By /s/ Vanesse Sheh Meyer
-----------------------------
Title: Managing Director
<PAGE> 7
7
BANKBOSTON, N.A.
By /s/ Rita M. Cahill
---------------------------
Title: Director
BARCLAYS BANK PLC
By /s/ Sidney G. Dennis
---------------------------
Title: Director
DRESDNER BANK AG, NEW YORK
AND GRAND CAYMAN BRANCHES
By /s/ Thomas Lake /s/ Michael E. Terry
--------------------------- --------------------------
Title: Vice President Assistant Vice President
NATIONAL AUSTRALIA BANK
LIMITED
By /s/ Thomas F. Kilfoyle
---------------------------
Title: Vice President
<PAGE> 8
8
NATIONSBANK, N,A.
By /s/ Gretchen P. Burud
------------------------------
Title: Vice President
THE SUMITOMO BANK, LIMITED,
CHICAGO BRANCH
By /s/ Ken-Ichiro Kobayashi
------------------------------
Title: Joint General Manager
BANK OF MONTREAL
By /s/ Howard Turner
------------------------------
Title: Director
THE BANK OF NEW YORK
By /s/ Joan N. Watt
------------------------------
Title: Vice President
BANK OF SCOTLAND
By /s/ Annie Chin Tat
------------------------------
Title: Vice President
<PAGE> 9
9
BANQUE PARIBAS
By /s/ Donald Maley
----------------------------------
Title: Director
COMERICA BANK
By /s/ Charles L. Weddell
----------------------------------
Title: Vice President
CREDIT LYONNAIS CHICAGO
BRANCH
By /s/ Sandra E. Horwartz
----------------------------------
Title: Senior Vice President
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By /s/ Masashi Sakai
----------------------------------
Title: Joint General Manager
MICHIGAN NATIONAL BANK
By /s Mark S. Aben
----------------------------------
Title: Senior Relationship Manager
<PAGE> 10
10
THE MITSUBISHI TRUST AND
BANKING CORPORATION, LOS
ANGELES AGENCY
By /s/ Yasushi Satomi
--------------------------------------
Title: Senior Vice President
SOCIETE GENERALE, CHICAGO
BRANCH
By /s/ Joseph A. Philabin
--------------------------------------
Title: Vice President
TORONTO DOMINION (TEXAS), INC.
By /s/ Neva Nesbitt
--------------------------------------
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By /s/ Jason P. DiNapoli
--------------------------------------
Title: Vice President
AUSTRALIA AND NEW ZEALAND
BANKING GROUP LIMITED
By /s/ Geoffrey Pack
--------------------------------------
Title: Senior Vice President
THE BANK OF NOVA SCOTIA
By /s/ F.C.H. Ashby
--------------------------------------
Title: Senior Manager, Loan Operations
<PAGE> 11
11
BANQUE NATIONALE DE PARIS
By /s/ Arnaud Collin du Bocage
-----------------------------------
Title: Executive Vice President and
General Manager
BHF-BANK AKTIENGESELLSCHAFT
By /s/ Thomas J. Scifo /s/ John Sikes
----------------------------------- -------------------------
Title: Assistant Vice President Assistant Vice President
CHANG HWA COMMERCIAL BANK,
LTD., NEW YORK BRANCH
By /s/ Wan-Tu Yeh
-----------------------------------
Title: Vice President and
General Manager
CIBC INC.
By /s/ John Burke
-----------------------------------
Title: Executive Director
<PAGE> 12
12
CITIBANK, N.A.
By /s/ J. Nicholas McKee
----------------------------
Title: Vice President
THE FIRST NATIONAL BANK OF
CHICAGO
By /s/ Jane Beck
----------------------------
Title: Vice President
MELLON BANK, N.A.
By /s/ Richard A. Matthews
----------------------------
Title: Vice President
NATIONAL WESTMINSTER BANK PLC NATIONAL WESTMINSTER BANK PLC
New York Branch Nassau Branch
By /s/ Maria Amaral-LeBlanc /s/ Maria Amaral-LeBlanc
---------------------------- ----------------------------
Title: Vice President Vice President
THE ROYAL BANK OF SCOTLAND
PLC
By /s/ Derek Bonnar
----------------------------
Title: Vice President
<PAGE> 13
13
THE SAKURA BANK, LIMITED
By /s/ Yukiharu Sakumoto
----------------------------
Title: Joint General Manager
THE SANWA BANK, LIMITED,
CHICAGO BRANCH
By /s/ Richard H. Ault
----------------------------
Title: Vice President
THE SUMITOMO TRUST & BANKING
CO., LTD., NEW YORK BRANCH
By /s/ Suraj P. Bhatia
----------------------------
Title: Senior Vice President
UNION BANK OF SWITZERLAND
NEW YORK BRANCH
By /s/ Robert L. Wells
----------------------------
Title: Director
By /s/ Barry T. Warren
----------------------------
Title: Officer
<PAGE> 14
14
FIRST COMMERCIAL BANK
(INCORPORATED IN TAIWAN,
R.O.C.), LOS ANGELES BRANCH
By /s/ June Shiong Lu
-----------------------------
Title: Vice President and
General Manager
THE FUJI BANK, LIMITED
By /s/ Peter L. Chinnici
-----------------------------
Title: Joint General Manager
ARAB AMERICAN BANK
By /s/ William Reynolds
-----------------------------
Title: Vice President
<PAGE> 15
15
COMPUTATIONS USED BY BORROWER
IN DETERMINING COMPLIANCE WITH COVENANTS
CONTAINED IN SECTIONS 8.01(i) AND 8.01(j)
(Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Credit Agreement, dated as of July 2, 1997, among CMS
Energy Corporation, the banks named therein, The Chase Manhattan Bank, as
Administrative Agent, Collateral Agent, Documentation Agent and Syndication
Agent, and the Co-Agents and Lead Managers named therein)
I. SECTION 8.01(i) (Consolidated Leverage Ratio)
<TABLE>
<CAPTION>
<S> <C>
(i) Consolidated Debt
-----------------
(a) Debt of the Borrower (See worksheet
set forth on Schedule 1 hereto) $
-----------------------
(b)(1) Aggregate debt (as such term is
construed in accordance with GAAP)
of the Consolidated Subsidiaries $
-----------------------
Total Consolidated Debt $
-----------------------
=======================
(ii) Consolidated Capital
--------------------
(a) Total Consolidated Debt (See (i) above) $
-----------------------
(b)(2) Consolidated equity of the common
stockholders of the Borrower and the
Consolidated Subsidiaries $
-----------------------
(c)(2) Consolidated equity of the preference
stockholders of the Borrower and the
Consolidated Subsidiaries $
-----------------------
(d)(2) Consolidated equity of the preferred
stockholders of the Borrower and the
- ---------------------------
</TABLE>
(1) Project Finance Debt of the Consolidated Subsidiaries should not be
included.
(2) To the extent included in (b), (c) or (d) above, Project Finance Equity
of the Borrower and the Consolidated Subsidiaries in any Consolidated
Subsidiary should be included only to the extent of the Borrower's
Ownership Interest in each such Consolidated Subsidiary. In addition, the
portion of consolidated equity of the stockholders of the Borrower and the
Consolidated Subsidiaries attributable to assets securing Project Finance
Debt of the Borrower or any Consolidated Subsidiary should be excluded.
<PAGE> 16
16
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders of the Borrower and
the
Consolidated Subsidiaries $
-----------------------
Total Consolidated Capital(3) $
-----------------------
=======================
(iii) Consolidated Leverage Ratio (i/ii)
-----------------------------------
Maximum Ratio - Section 8.01(i)
=======================
II. SECTION 8.01(j) (Cash Dividend Coverage Ratio)
(i) Cash Dividend Income
(a) Cash Dividend Income $
-----------------------
(b) 25% of Equity Distributions
received by the Borrower
(not to exceed $10,000,000) $
------------------------
(c) All amounts received by the Borrower from its
Subsidiaries and Affiliates constituting
reimbursement of interest expense (including
commitment, guaranty and letter of credit fees)
paid by the Borrower on behalf of any such
Subsidiary or Affiliate $
-----------------------
Total Cash Dividend Income $
-----------------------
=======================
(ii) Interest expense (including commitment, guaranty
and letter of credit fees) accrued by the Borrower in
respect of all Debt (other
- --------------------------
</TABLE>
(3) The consolidated equity of the stockholders of the Borrower shall include
(i) the aggregate amount of all Hybrid Preferred Securities and (ii) only
such percentage of the Net Proceeds from any issuance of any hybrid
debt/equity securities (other than Junior Subordinated Debt and Hybrid
Preferred Securities) by the Borrower or any Consolidated Subsidiary as
shall be agreed by the Administrative Agent and the Borrower (and consented
to by the Required Lenders) prior to such issuance, which percentage shall
be based on, among other things, the treatment (if any) given to such
hybrid securities by the rating agencies.
<PAGE> 17
17
<TABLE>
<CAPTION>
<S> <C> <C>
than Junior Subordinated Debt) $
-----------------------
(iii) Cash Dividend Income/Interest
Expense Ratio ((i)/(ii)) -----------------------
Minimum Ratio - Section 8.01(j)
-----------------------
III. Project Finance Debt(4)
IV. Support Obligations(5)
V. Junior Subordinated Debt/Guaranties of Hybrid Preferred Securities(6)
VI. Other Hybrid Debt/Equity Securities(7)
- ------------------------
</TABLE>
(4) Set forth all Project Finance Debt of any Consolidated
Subsidiary and the Borrower's Ownership Interest in such
Consolidated Subsidiary.
(5) Set forth all Support Obligations of the Borrower of the types
described in clauses (iv) and (v) of the definition of Support
Obligations (whether or not each such Support Obligation or
the primary obligation so supported is fixed, conclusively
determined or reasonably quantifiable) unless such Support
Obligation is previously disclosed as "CONSOLIDATED DEBT"
pursuant to Section I or II above.
(6) Set forth all Junior Subordinated Debt owned by any Hybrid
Preferred Securities Subsidiary and all guaranties by the
Borrower of payments with respect to any Hybrid Preferred
Securities.
(7) Set forth any hybrid debt/equity securities (other than Junior
Subordinated Debt and Hybrid Preferred Securities) issued by
the Borrower or any Consolidated Subsidiary and the amount of
the Net Proceeds from each such
<PAGE> 18
i
SCHEDULE 1
TO EXHIBIT F
COMPUTATION OF AGGREGATE DEBT OF THE BORROWER
---------------------------------------------
Aggregate Debt of the Borrower shall include (without duplication) any and all
indebtedness, liabilities and other monetary obligations of the Borrower
(whether for principal, interest, fees, costs, expenses
or otherwise, and contingent or otherwise)(1)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(i) for borrowed money or evidenced
by bonds, debentures, notes or other
similar instruments $
-------------------
(ii) to pay the deferred purchase price of property
or services (except trade accounts payable arising in the
ordinary course of business which are not overdue) $
-------------------
(iii) as lessee under leases which shall have been or
should be, in accordance with GAAP, recorded as capital
leases $
-------------------
(iv) under reimbursement or similar
agreements with respect to letters of
credit issued thereunder $
-------------------
(v) under any interest rate swap, "cap",
"collar" or other hedging agreements;
provided, however, for purposes of the
calculation of Debt for this clause
only, the actual amount of Debt of the
Borrower shall be determined on a
net basis to the extent such agreements
permit such amounts to be calculated on
a net basis $
-------------------
(vi) to pay rent or other amounts under leases entered
into in connection with sale and leaseback transactions
involving assets of the Borrower being sold in connection $
-------------------
- ----------------------
</TABLE>
(1) See the definition of "Consolidated Debt" contained in the Credit
Agreement for certain exclusions from Debt of the Borrower.
<PAGE> 19
ii
<TABLE>
<CAPTION>
<S> <C> <C> <C>
therewith $
------------------
(vii) arising from any accumulated funding deficiency (as
defined in Section 412(a) of the Internal Revenue Code
of 1986, as amended) for a Plan $
------------------
(viii) direct or indirect guaranties in respect of,
and obligations to purchase or otherwise acquire, or
otherwise to warrant or hold harmless, pursuant to a
legally binding agreement, a creditor against loss in
respect of, Debt of others referred to in clauses
(i) through (vii) above $
------------------
(ix)(2) other guaranty or similar financial
obligations in respect of the performance
of others, including, without limitation,
any financial obligation, contingent or
otherwise, of the Borrower guaranteeing
or otherwise supporting any Debt or other
obligation of any other Person in any
manner, whether directly or indirectly,
and including, without limitation, any
obligation of such Person, direct or indirect $
------------------
(A) to purchase or pay (or advance or supply
funds for the purchase or payment of) such Debt or
to purchase (or to advance or supply funds for the
purchase of) any security for the payment of such
Debt $
------------------
(B) to purchase property, securities or services for
the purpose of assuring the owner of such Debt of
the payment of such Debt $
------------------
(C) to maintain working capital, equity capital,
available cash or other financial statement
condition of the $
------------------
- -------------------
</TABLE>
(2) Set forth only the net amount of certain Support Obligations provided by
the Borrower in connection with sales of natural gas, natural gas liquids,
electricity, oil, propane or coal by MS&T, as detailed in Annex A to this
Schedule 1.
<PAGE> 20
<TABLE>
<CAPTION>
<S> <C> <C>
primary obligor so as to enable the
primary obligor to pay such Debt $
-----------------------
(D)(3) to provide equity capital under or in
respect of equity subscription arrangements
(to the extent that such obligation to
provide equity capital does not otherwise
constitute Debt) $
-----------------------
(E)(3) to perform, or arrange for the
performance of, any non-monetary
obligations or non-funded debt
payment obligations of the primary
obligor $
-----------------------
(F) Other $
-----------------------
Total of Debt of the Borrower $
-----------------------
=======================
</TABLE>
- --------------------------
(3) For purposes of this clause do not include Support Obligations if such
Support Obligation or the primary obligation so supported is not fixed or
conclusively determined or is not otherwise reasonably quantifiable as of
the date of determination.
<PAGE> 21
ANNEX A TO SCHEDULE 1
DETAILS REGARDING MS&T TRANSACTIONS(4)
1. Support Obligations Relating to Payment Obligations
Aggregate amount of Support Obligations provided by the
Borrower in respect of MS&T's payment obligations under any
Covering Transaction
(a) [List each such Support Obligation] $________
(b) $________
(c) $________
(d) $________
Less:
Aggregate amount of any Support Obligations provided by
any Purchasing Party Guarantor or any irrevocable letter
of credit issued for the account of any Purchasing Party or
Purchasing Party Guarantor
(a) [List each such Support Obligation or
letter of credit that relates to the
corresponding subsection above]
$________
(b) $________
(c) $________
(d) $________
- ----------------------
(4) See subsection (d) of the definition of "Consolidated Debt" contained in
the Credit Agreement for the specific requirements of any offsetting
Support Obligations.
<PAGE> 22
v
2. Support Obligations Relating to Performance Obligations
Aggregate amount of Support Obligations provided by the
Borrower in respect of MS&T's performance obligations to
any Purchasing Party
(i) [List each such Support Obligation] $________
(ii) $________
(iii) $________
(iv) $________
Less:
Aggregate amount of any Support Obligations provided by
any Counterparty Guarantor or any performance bond issued
for the account of any counterparty to a Covering
Transaction or any Counterparty Guarantor
(i) [List each such Support Obligation
or performance bond that relates to
the corresponding subsection above] $________
(ii) $________
(iii) $________
(iv) $________
<PAGE> 1
EXHIBIT 5
September 10, 1998
CMS Energy Corporation
Fairlane Plaza South
330 Town Center Drive
Suite 1100
Dearborn, MI 48126
Ladies and Gentlemen:
I am the Assistant General Counsel of CMS Energy Corporation, a
Michigan corporation ("CMS Energy" or the "Company"), and have acted as Company
counsel in connection with the Registration Statement on Form S-4 (the
"Registration Statement") being filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to up to 1,600,000 shares of common
stock, $0.01 par value per share, of CMS Energy ("CMS Energy Common Stock")
which may be issuable to holders of common stock, $0.01 par value per share, of
Continental Natural Gas, Inc. ("Continental") in the proposed merger of
Continental with and into CMS Merging Corporation, a wholly owned subsidiary of
CMS Energy Corporation (the "Merger").
In rendering this opinion, I have examined and relied upon a copy of
the Registration Statement. I have also examined, or have arranged for the
examination by an attorney or attorneys under my general supervision, originals,
or copies of originals certified to my satisfaction, of such agreements,
documents, certificates and other statements of governmental officials and other
instruments, and have examined such questions of law and have satisfied myself
as to such matters of fact, as I have considered relevant and necessary as a
basis for this opinion. I have assumed the authenticity of all documents
submitted to me as originals, the genuineness of all signatures, the legal
capacity of all natural persons and the conformity with the original documents
of any copies thereof submitted to me for examination.
Based on the foregoing, it is my opinion that:
1. The Company is duly incorporated and validly existing under the
laws of the State of Michigan.
2. The CMS Energy Common Stock will be legally issued, fully paid
and non-assessable when: (i) the Registration Statement, as
finally amended, shall have become effective under the
Securities Act; (ii) the Merger is consummated in compliance and
accordance with appropriate State and Federal laws and in
accordance with the terms of the Agreement and Plan of Merger
dated as of July 31, 1998 among CMS Energy, CMS Merging
Corporation, Continental, Adams Affiliates, Inc., and Cottonwood
Partnership; and (iii) upon delivery of certificates duly
executed, countersigned and registered representing the CMS
Energy Common Stock to the shareholders of Continental in
connection with the Merger.
<PAGE> 2
For purposes of this opinion, I have assumed that there will be no
changes in the laws currently applicable to the Company and that such laws will
be the only laws applicable to the Company.
I do not find it necessary for the purposes of this opinion to cover,
and accordingly I express no opinion as to, the application of the securities or
blue sky laws of the various states to the sale of the CMS Energy Common Stock.
I am a member of the bar of the State of Michigan and I express no
opinion as to the laws of any jurisdiction other than the State of Michigan and
the federal law of the United States of America.
I hereby consent to the filing of this opinion as an exhibit to the
Company's Registration Statement on Form S-4 relating to the CMS Energy Common
Stock and to all references to me included in or made a part of the Registration
Statement.
Very truly yours,
/s/ Michael D. Van Hemert
-------------------------------
Michael D. Van Hemert
<PAGE> 1
EXHIBIT 8
September 10, 1998
CMS Energy Corporation
Fairlane Plaza South
330 Town Center Drive
Dearborn, Michigan 48126
Ladies and Gentleman:
Reference is made to the Proxy Statement/Prospectus (the "Prospectus")
which constitutes part of the registration statement on Form S-4 (the
"Registration Statement") to be filed by CMS Energy Corporation ("CMS Energy")
with the Securities and Exchange Commission on or about the date hereof pursuant
to the Securities Act of 1933, as amended, with respect to up to 1,600,000
shares of common stock, $0.01 par value per share, of CMS Energy ("CMS Energy
Common Stock") which may be issuable to holders of common stock, $0.01 par
value per share, of Continental Natural Gas, Inc. in the proposed merger (the
"Merger") of Continental Natural Gas, Inc. with and into CMS Merging
Corporation, a wholly owned subsidiary of CMS Energy.
I am of the opinion that the statements set forth under the caption "THE
MERGER -- Federal Income Tax Consequences" in the Prospectus constitute an
accurate description, in general terms, of certain United States federal income
tax considerations that may be relevant to the prospective recipients of CMS
Energy Common Stock in the Merger.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to me included in or made a part of
the Registration Statement.
Very truly yours,
/s/ Theodore J. Vogel
---------------------
Theodore J. Vogel
<PAGE> 1
EXHIBIT (15a)
To CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in
this registration statement its Form 10-Q for the quarter ended March 31, 1998,
which includes our report dated May 11, 1998, covering the unaudited interim
financial information contained therein. In June 1998, CMS Energy Corporation
changed its method of accounting for its investments in oil and gas properties
from the full cost method of accounting to the successful efforts method of
accounting. The interim financial information contained therein has not been
restated to reflect the change in accounting. However, CMS Energy Corporation's
Form 8-K dated July 30, 1998 contains certain restated financial information for
the quarter ended March 31, 1998 such information has not been subject to audit
or review procedures. Pursuant to this change in accounting, our report
contained therein has not been modified to reflect this change in accounting.
Pursuant to Regulation C of the Securities Act of 1933, this report is not
considered a part of the registration statement prepared or certified by our
Firm or report prepared or certified by our Firm within the meaning of Sections
7 and 11 of the Act.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan,
September 3, 1998.
<PAGE> 1
EXHIBIT (15b)
To CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in
this registration statement its Form 10-Q for the quarter ended June 30, 1998,
which includes our report dated August 11, 1998, covering the unaudited interim
financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, this report is not considered a part of the registration
statement prepared or certified by our Firm or report prepared or certified by
our Firm within the meaning of Sections 7 and 11 of the Act.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan,
September 3, 1998.
<PAGE> 1
EXHIBIT 15(c)
September 8, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: CMS Energy Corporation Registration Statement on Form S-4
We are aware that our report dated August 13, 1998 on our review of interim
financial information of Continental Natural Gas, Inc. and Subsidiaries for the
six month periods ended June 30, 1997 and 1998 is included in the CMS Energy
Corporation's registration statement on Form S-4. Pursuant to Rule 436(c)
under the Securities Act of 1933, this report should not be considered a part
of the registration statement prepared or certified by us within the meaning
of Sections 7 and 11 of that Act.
PricewaterhouseCoopers LLP
<PAGE> 1
EXHIBIT 23(c)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our report dated July 27, 1998
included or incorporated by reference in CMS Energy Corporation's Form 8-K dated
July 30, 1998 and to all references to our Firm included in this registration
statement.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan,
September 3, 1998.
<PAGE> 1
EXHIBIT 23(d)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of CMS Energy
Corporation on Form S-4 of our report dated March 27, 1998, on our audits of the
consolidated financial statements of Continental Natural Gas, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1996 and 1997. We also consent to the
reference to our firm under the caption "Independent Public Accountants."
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
September 8, 1998
<PAGE> 1
EXHIBIT 23(e)
CONSENT OF CIBC OPPENHEIMER CORP.
We hereby consent to the use of our name and to the description of our
opinion letter dated September 9, 1998, in, and to the inclusion of such opinion
letter as Appendix C to, the Proxy Statement/Prospectus which is part of the
Registration Statement on Form S-4 of CMS Energy Corporation filed with the
Securities and Exchange Commission on the date hereof. By giving such consent we
do not thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "expert" as used in, or
that we come within the category of persons whose consent is required under, the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
CIBC OPPENHEIMER CORP.
By: /s/ CIBC Oppenheimer Corp.
----------------------------
Dated: September 10, 1998
<PAGE> 1
EXHIBIT 24
July 24, 1998
Mr. Alan M. Wright and
Mr. Thomas A. McNish
CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, MI 48126
CMS Energy Corporation proposes to file a registration statement with the
Securities and Exchange Commission with respect to the issue and sale of shares
of the Corporation's Common Stock with an aggregate market value of
approximately $65 million in connection with the proposed acquisition of all the
issued and outstanding voting securities of Continental Natural Gas, Inc., an
Oklahoma corporation.
We hereby appoint each of you lawful attorney for each of us and in each of our
names to sign and cause to be filed with the Securities and Exchange Commission
registration statement(s) and/or any appropriate amendment or amendments to said
registration statement(s) and other necessary documents required to be filed
with the Securities and Exchange Commission.
Very truly yours,
/s/ William t. McCormick, Jr. /s/ Victor J. Fryling
- ----------------------------- ----------------------------
William T. McCormick, Jr. Victor J. Fryling
/s/ John Deutch /s/ W. U. Parfet
- ----------------------------- ----------------------------
John M. Deutch William U. Parfet
/s/ James J. Duderstadt /s/ Percy A. Pierre
- ----------------------------- ---------------------------
James J. Duderstadt Percy A. Pierre
/s/ K. R. Flaherty /s/ K. L. Way
- ----------------------------- ---------------------------
Kathleen R. Flaherty Kenneth L. Way
/s/ Earl D. Holton /s/ K. Whipple
- ----------------------------- ---------------------------
Earl D. Holton Kenneth Whipple
/s/ John B. Yasinsky
---------------------------
John B. Yasinsky
<PAGE> 2
Extract from the minutes of a meeting of the Board of Directors of CMS Energy
Corporation (the "Corporation") held on July 24, 1998.
- - - - - - - - - -
Proposed Issue and Sale of Common Stock - Acquisition
Management recommended that the Corporation acquire
Continental Natural Gas, Inc. ("Continental") by issuing shares of the
Corporation's Common Stock with a market value of approximately $65 million and
assumption of approximately $90 million of Continental's debt. A small portion
of the $65 million may be paid in cash rather than Common Stock to reflect the
exercise of dissenters' rights, option cash-out provisions, etc. Continental is
a publicly-held Oklahoma corporation involved in the purchasing, gathering,
treating, processing and marketing of natural gas and natural gas liquids. The
Corporation would exchange approximately 1.5 million shares of its Common Stock
for all the voting securities of Continental; Continental would merge with a
newly organized subsidiary of the Corporation; and the surviving corporation
would ultimately become a subsidiary of CMS Gas Transmission and Storage
Company. In connection therewith, drafts of a proposed Agreement and Plan of
Merger among the Corporation, CMS Merging Corporation, Continental, Adams
Affiliates, Inc. and Cottonwood Partnership (these latter two entities being the
majority shareholders of Continental), as well as a proposed Stock Option
Agreement between the Corporation and Continental, were presented to the
meeting. The matter was discussed fully.
Upon motion duly made and seconded, the following resolutions
were thereupon unanimously adopted:
RESOLVED: That the Board and the Corporation, as the sole
shareholder of CMS Merging Corporation, hereby approve and adopt the
proposed Agreement and Plan of Merger among the Corporation, CMS Merging
Corporation, Continental Natural Gas, Inc. ("Continental"), Adams
Affiliates, Inc. and Cottonwood Partnership, as well as the proposed
Stock Option Agreement between the Corporation and Continental, each in
substantially the form presented to the meeting, with such changes as
may be approved by the officers of the Corporation executing the same
and as counsel may advise; and
RESOLVED FURTHER: That, upon the effectiveness of the
merger, the officers of the Corporation, and each of them, are
authorized and empowered for and on behalf of the Corporation, to
contribute the shares of the surviving corporation to CMS Enterprises
Company, a wholly-owned subsidiary of the Corporation; and
RESOLVED FURTHER: That the officers of the Corporation,
and each of them, are authorized and empowered, in the name and on
behalf of the Corporation, to sign, seal and deliver such documents,
papers and instruments, and to do or cause to be done all acts and
things which any of them may consider necessary or advisable to carry
out the intent and purposes of the foregoing resolutions with respect to
the proposed acquisition of Continental, including without limitation
the execution and delivery of applications, filings or notices with all
appropriate parties; and
RESOLVED FURTHER: That the officers of the Corporation,
and each of them, are authorized in their discretion, on its behalf, to
execute and file with the Securities and Exchange Commission a
registration statement with respect to the issue and sale of
approximately $65 million aggregate market value of authorized but
unissued common stock, $.01 par value, (the "Common Stock") of the
Corporation, in such form as may be approved by the officers of the
Corporation executing the same, and to do all other things necessary to
make such registration effective, including the execution and filing of
any necessary or appropriate amendments; and
<PAGE> 3
RESOLVED FURTHER: That, it may be desirable for the Common
Stock to be qualified or registered for sale in various jurisdictions;
therefore, the officers of the Corporation, and each of them, are
authorized and directed to determine the jurisdictions in which
appropriate action shall be taken to qualify or register for sale all or
such part of the Common Stock of the Corporation as they may deem
advisable; to perform on behalf of the Corporation any and all such acts
as they may deem necessary or advisable in order to comply with the
applicable laws of any such jurisdictions, and in connection therewith,
to execute and file all requisite papers and documents, including but
not limited to, applications, reports, surety bonds, irrevocable
consents and appointments of attorneys for service of process; and the
execution by such officers or any of them of any such paper or document
or the doing by them of any act in connection with the foregoing matters
shall conclusively establish their authority therefor from the
Corporation; and
RESOLVED FURTHER: That the officers of the Corporation,
and each of them, are authorized to cause the Corporation to make
application to the New York Stock Exchange for the listing on such
Exchange, upon notice of issuance, of the Common Stock; that
Messrs. Alan M. Wright and Thomas A. McNish are, and each of them is,
designated to represent the Corporation in connection with any
application or applications for listing and to appear on behalf of the
Corporation before such official or body of said Exchange as may be
appropriate, with authority to make such changes, upon the advice of
counsel, in said application or in any agreements or other papers
relating thereto as may be necessary or appropriate to conform with the
requirements for listing; and
RESOLVED FURTHER: That the officers of the Corporation,
and each of them, are authorized to have issued and to deliver, at one
time or from time to time, certificates representing the Common Stock;
and
RESOLVED FURTHER: That the officers of the Corporation,
and each of them, are authorized and empowered, in the name and on
behalf of the Corporation, to sign, seal and deliver such documents,
papers and instruments, and to do or cause to be done all acts and
things which any of them may consider necessary or advisable to carry
out the intent and purposes of all the foregoing resolutions with
respect to the issue and sale of the Common Stock.
- - - - - - - - - -
<PAGE> 1
EXHIBIT 99(a)
DETACH HERE
PROXY
CONTINENTAL NATURAL GAS, INC.
1437 South Boulder, Suite 1250
Tulsa, Oklahoma 74119
THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
The undersigned, having duly received the Notice of Special Meeting and
Proxy Statement dated September ___, 1998, appoints Gary C. Adams and William W.
Pritchard proxies (each with the power to act alone and with the power of
substitution and revocation), to represent the undersigned and to vote, as
designated below, all shares of Common Stock of Continental Natural Gas, Inc.
which the undersigned is entitled to vote at the Special Meeting of Stockholders
of Continental Natural Gas, Inc. to be held on October ___, 1998 at the
_________________________________________________, Tulsa, Oklahoma ______, at
10:00 a.m., C.D.T., and any adjournment thereof. Each of the matters set forth
below has been proposed by the Company.
SEE SEE REVERSE
REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
<PAGE> 2
DETACH HERE
[x] Please mark
votes as in
this example.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this Proxy will be
voted FOR all of the above items.
1. APPROVAL OF AGREEMENT AND PLAN OF MERGER DATED JULY 31, 1998, BY AND
AMONG CONTINENTAL NATURAL GAS, INC. AND CMS ENERGY CORPORATION, ET AL.
AND ALL RELATED TRANSACTIONS CONTEMPLATED THEREIN.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW [ ]
PLEASE SIGN, DATE AND MAIL THIS PROXY IN THE ENCLOSED ADDRESSED ENVELOPE
WHICH REQUIRES NO POSTAGE IF MAILED IN THE U.S.
Please sign exactly as your name appears hereon. Jointly owned shares
will be voted as directed if one owner signs unless another owner
instructs to the contrary, in which case the shares will not be voted. If
signing in a representative capacity, please indicate title and
authority.
<TABLE>
<S> <C>
Signature:__________________________________ Date:________________ Signature:_______________________________ Date:_______________
</TABLE>
