<PAGE> 1
Filed Pursuant to Rule 424b5
Registration Statement Numbers: 333-68937
333-68937-02
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 7, 1999)
$500,000,000
[CMS ENERGY LOGO]
9 7/8% SENIOR NOTES DUE 2007
------------------------
Interest payable on April 15 and October 15
------------------------
WE MAY REDEEM THE NOTES AT ANY TIME. THE REDEMPTION PRICE FOR THE NOTES WILL BE
100% OF THEIR PRINCIPAL AMOUNT, PLUS ANY APPLICABLE PREMIUM AND ANY ACCRUED
INTEREST. SEE "DESCRIPTION OF THE NOTES--OPTIONAL REDEMPTION."
------------------------
THE NOTES WILL RANK EQUALLY WITH THE OTHER UNSECURED AND UNSUBORDINATED
INDEBTEDNESS OF CMS ENERGY CORPORATION.
FOR A MORE DETAILED DESCRIPTION OF THE NOTES, SEE "DESCRIPTION OF THE NOTES"
BEGINNING ON PAGE S-27.
------------------------
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE S-11
OF THIS PROSPECTUS SUPPLEMENT.
------------------------
PRICE 99.378% AND ACCRUED INTEREST, IF ANY
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS TO COMPANY
------------ ------------- ------------
<S> <C> <C> <C>
Per Note...................................... 99.378% 1.625% 97.753%
Total......................................... $496,890,000 $8,125,000 $488,765,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities or determined if this prospectus
supplement or the accompanying prospectus are truthful or complete. Any
representation to the contrary is a criminal offense.
Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Stanley & Co.
Incorporated expect to deliver the Notes to purchasers on or about October 12,
2000.
------------------------
Joint Book-Running Managers
DONALDSON, LUFKIN & JENRETTE MORGAN STANLEY DEAN WITTER
------------------------
BARCLAYS CAPITAL
CHASE SECURITIES INC.
CIBC WORLD MARKETS
October 6, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
--------------------- ----
<S> <C>
Summary......................... S-3
Risk Factors.................... S-11
Forward-Looking Information..... S-15
Use of Proceeds................. S-18
Ratio of Earnings to Fixed
Charges....................... S-18
Capitalization.................. S-19
The Company..................... S-21
Description of the Notes........ S-27
Underwriters.................... S-45
Legal Matters................... S-46
Experts......................... S-46
Unaudited Pro Forma Financial
Information................... F-1
</TABLE>
<TABLE>
<CAPTION>
PROSPECTUS PAGE
---------- ----
<S> <C>
Available Information........... 2
Incorporation of Certain
Documents by Reference........ 3
CMS Energy Corporation.......... 4
CMS Energy Trusts............... 6
Use of Proceeds................. 8
Ratio of Earnings to Fixed
Charges and Ratio of Earnings
to Fixed Charges and Preferred
Stock Dividends............... 8
Description of Securities....... 9
Effect of Obligations Under the
Debt Securities and the
Guarantees.................... 24
Legal Opinions.................. 29
Experts......................... 29
Plan of Distribution............ 29
</TABLE>
-------------------------
You should rely only on the information contained in or incorporated by
reference into this document. We have not authorized anyone to provide you with
information that is different from that contained in this document. We are
offering to sell, and seeking offers to buy, the Notes only in jurisdictions
where offers and sales are permitted. The information contained in this document
is accurate only as of the date hereof, regardless of the time of delivery of
this document or of any sale of the Notes.
FORWARD-LOOKING STATEMENTS
The prospectus supplement and the accompanying prospectus contain or incorporate
by reference forward-looking statements. The factors identified under "Risk
Factors" are important factors, but not necessarily all important factors, that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, us or our subsidiaries.
Where any forward-looking statement includes a statement of the assumptions or
bases underlying such forward-looking statement, we caution that, while such
assumptions or bases are believed to be reasonable and are made in good faith,
assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, we,
our subsidiaries, or our management, express an expectation or belief as to
future results, this expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "believe," "expect," "estimate," "project," and "anticipate" or
similar expressions identify forward-looking statements.
S-2
<PAGE> 3
SUMMARY
This summary may not contain all the information that may be important to
you. You should read this prospectus supplement, the accompanying prospectus and
the documents incorporated by reference in this document in their entirety
before making an investment decision. The terms "CMS," "CMS Energy," "Company,"
"Our" and "We" as used in this prospectus supplement and the accompanying
prospectus refer to CMS Energy Corporation and its subsidiaries.
In this document, "Bcf" means billion cubic feet, "GWh" means
gigawatt-hour, "KWh" means kilowatt-hour, "MBbls" means thousand barrels, "Mcf"
means thousand cubic feet, "MMBoe" means million barrels of oil equivalent,
"MMBbls" means million barrels, "MMcf" means million cubic feet, "MW" means
megawatts, and "Tbtu" means trillion british thermal units.
CMS ENERGY CORPORATION
CMS Energy is a leading diversified energy company operating in the United
States and around the world. Our two principal subsidiaries are Consumers Energy
Company ("Consumers") and CMS Enterprises Company ("Enterprises"). Consumers is
a public utility that provides natural gas or electricity to almost six million
of the approximately 9.5 million residents in Michigan's lower peninsula.
Enterprises, through subsidiaries, is engaged in a wide range of diversified
energy businesses in the United States and in approximately 20 countries on five
continents.
Our assets and services are broad and include electric and natural gas
utility operations; independent power production; natural gas transmission,
storage and processing; oil and gas exploration and production; international
energy distribution; and marketing, services and trading. In 1999,
-- Consumers' electric utility owned and operated 31 electric generating
plants with an aggregate of 6,252 MW of capacity and served 1.7
million customers in Michigan's lower peninsula;
-- Consumers' gas utility owned and operated over 25,000 miles of
transmission and distribution lines throughout the lower peninsula of
Michigan, providing natural gas to 1.6 million customers;
-- CMS Generation had ownership interests in approximately 41
independent power plants with 8,110 MW gross and 3,713 MW net
capacity. The plants are located primarily in the U.S., Argentina,
Australia, Chile, India, Morocco and Thailand;
-- CMS Gas Transmission owned and operated over 21,300 miles of
pipelines with a daily capacity of approximately 10.0 Bcf per day.
The pipelines are located in the U.S., Argentina, Australia, Chile
and Tunisia. It also owns extensive gathering systems and processing
facilities;
-- CMS Oil and Gas had proved reserves of 248 MMBoe and exploration and
production activities in the U.S., Venezuela, Colombia, the Republic
of Congo, Cameroon, Equatorial Guinea and Tunisia;
-- CMS Electric and Gas, our international energy distribution
subsidiary, owned energy distribution interests in Venezuela,
Argentina and Brazil, serving approximately 464,000 customers and
recording sales of approximately 3,000 GWh;
-- CMS Marketing, Services and Trading marketed 470 Bcf of gas, 3,709
GWh of electricity, 23 MMBbls of crude oil and 6.5 MMBbls of natural
gas liquids; and
S-3
<PAGE> 4
-- Our various subsidiaries currently have ownership interests in
projects under construction or in advanced stages of development,
including approximately 2,700 MW of electric generation, 2.5 Bcf per
day of pipeline throughput, 2 MMBbls of storage capacity, a 2,500
metric tons per day methanol production facility, and conversion of a
natural gas pipeline to an 800 mile liquids product pipeline.
In 1999, we had consolidated operating revenue of $6.1 billion, earnings
before interest, taxes, depreciation and amortization ("EBITDA") of $1.517
billion and net income of $277 million. For the six months ended June 30, 2000,
we had consolidated operating revenue of $3.4 billion, EBITDA of $879 million
and net income of $161 million.
We were incorporated in Michigan in 1987 and our world wide web address is
http://www.cmsenergy.com. Our web site is not part of this prospectus
supplement. Our telephone number is (313) 436-9200.
BUSINESS STRATEGY
Our objective is to be a leading diversified energy company developing
energy facilities and marketing energy and related services in the United States
and selected world growth markets. The key elements of our strategy to achieve
this objective are as follows:
USE OUR NATURAL GAS PIPELINE BUSINESS FOR GROWTH OPPORTUNITIES ACROSS OUR
OTHER BUSINESSES
Our March 1999 acquisition of Panhandle Eastern Pipe Line Company,
Panhandle Storage Company, Trunkline LNG Company and their subsidiaries
(collectively, the "Panhandle Companies" or "Panhandle") significantly enhanced
our domestic natural gas pipeline business. We intend to use Panhandle as a
platform for growth in the United States and derive added value through
expansion opportunities for multiple CMS businesses. Our growth strategy around
Panhandle includes enhancing the opportunities for other CMS businesses involved
in electric power generation and distribution, mid-stream activities (gathering
and processing), and exploration and production. By providing additional
transportation, storage and other asset-based value-added services to customers
such as new gas fueled power plants, local distribution companies, industrials
and end-users, marketers and others, we expect to expand our natural gas
pipeline business. We also plan to convert certain Panhandle facilities to
permit the throughput of liquid products.
EFFECTIVELY IMPLEMENT THE MICHIGAN ELECTRIC RESTRUCTURING LEGISLATION
Our Consumers subsidiary is a leading generator and distributor of
electricity and distributor of natural gas in the lower peninsula of Michigan.
After several years of discussion and uncertainty in the Michigan electric
utility industry, in June 2000 the Michigan legislature enacted electric utility
restructuring legislation. The legislation requires an immediate 5% rate
reduction for residential customers that will reduce our annual revenues.
However, the legislation will allow Consumers to offset the earnings impact of
the 5% rate reduction after an order approving securitization is received from
the Michigan Public Service Commission ("MPSC"). Ultimately, sale of
securitization bonds will be required for the full rate reduction offset to
continue over the term of the bonds. The new legislation also provides for rate
freezes and rate caps as more fully discussed below under "Risk Factors--Risks
Relating to CMS Energy--New electric restructuring and proposed gas
restructuring legislation could adversely affect our business." In response,
Consumers must develop cost-effective solutions to manage the challenges of the
new legislation. For example, we intend to further intensify our efforts to
manage costs including the management of fuel costs and purchased power costs in
light of the rate freezes and rate caps.
S-4
<PAGE> 5
Without regard to the electric utility restructuring legislation, Consumers
expects average annual growth of approximately 2.5% per year in electric system
deliveries for the years 2000 to 2005 based on a steadily growing customer base.
Also, Consumers currently anticipates gas deliveries, including gas customer
choice deliveries (excluding transportation to a natural gas-fueled,
combined-cycle cogeneration facility operated by the Midland Cogeneration
Venture, Partnership Limited (the "MCV Facility") and off-system deliveries), to
grow at an average annual rate of between 1% and 2% over the next five years
based primarily on a steadily growing customer base.
EXPAND THE RANGE OF ENERGY-RELATED SERVICES
In addition to the delivery of electricity and natural gas, we offer a
variety of energy-related services to electric and gas customers. These services
focus upon appliance maintenance, home safety, commodity choice and assistance
to customers purchasing heating, ventilation and air conditioning equipment. We
will continue to look for additional growth opportunities in energy-related
services for Consumers' customers.
EXPAND PRESENCE IN SELECT HIGH GROWTH INTERNATIONAL MARKETS THROUGH OUR
DIVERSIFIED ENERGY BUSINESSES
We expect to continue to sharpen our geographic focus on key growth areas
where we already have significant business concentrations and opportunities.
These markets are India, the Middle East, South America and West Africa. In
pursuing our global growth, we intend to make energy investments that provide
expansion opportunities for multiple existing businesses. For example, we are
seeking to exploit our West Africa oil and gas reserves by expanding the
undersea pipeline and onshore processing facilities at that location. We will
use the gas from the processing plant in a new methanol plant and in a gas-fired
power plant in West Africa. Our gas pipelines in South America are being
extended to carry fuel for power plants in the area. In addition, we are a
partner in the first independent power and water project in the United Arab
Emirates and we are building our third power plant in India.
OPTIMIZE OUR ASSETS THROUGH THE MARKETING, SERVICES AND TRADING BUSINESS
We intend to use our marketing, services and trading business to improve
the return on our other businesses. This means that we plan to continue
centralizing the marketing of energy products produced by our various
non-utility businesses. Other strategies include expanding our industrial and
commercial energy services to enhance our commodity marketing business and
developing risk management products that address customer needs.
CONTINUE MANAGEMENT OF OUR ASSET PORTFOLIO
In February 2000, we announced a financial plan to strengthen our balance
sheet, reduce fixed charges and enhance earnings per share growth. As a part of
the plan, we identified for possible sale certain assets that we expect to
contribute little or no earnings benefit in the short to medium terms. With the
sale of certain of these assets, our goal is to generate approximately $1
billion of asset sale proceeds and $400 million of consolidated project debt
eliminations from asset sales by year-end 2000.
We also intend to enhance our long-term growth through an active portfolio
management program that entails the ongoing sale of assets. We expect to
reinvest the proceeds from this program in assets having greater potential for
synergies with our existing or planned assets. In particular, we are reviewing
our options regarding certain assets performing below prior expectations,
including
S-5
<PAGE> 6
generating assets in Argentina. We also continue to seek improvement in the
operating efficiency and profitability of all assets retained in our portfolio.
RECENT DEVELOPMENTS
CMS ENERGY
In August 2000, 8.8 million units of 7 1/4% Premium Equity Participating
Security Units were sold by CMS Energy and CMS Energy Trust III, a Delaware
statutory business trust established by CMS Energy. Each security consists of a
trust preferred security of CMS Energy Trust III maturing in four years and a
contract requiring the purchase, no later than August 2003, of CMS Energy common
stock at a conversion rate that adjusts for the market price at the time of
conversion. Net proceeds from the sale totaled approximately $213 million and
were used, together with approximately $37 million from our revolving credit
facility, to redeem all of the outstanding Auction Rate Reset Subordinated
Notes, due September 2001 of CMS Energy.
On October 2, 2000, we announced that we intend to accelerate the sale of
$300 million of CMS Energy common stock which had been planned for mid-year
2001. In addition, we also announced that we intend to sell to the public up to
a 50% stake in CMS Oil and Gas Company, our wholly-owned oil and gas exploration
and production subsidiary. We anticipate that these combined transactions will
raise approximately $800 million of cash which will be used to reduce our debt,
and improve our equity capitalization by approximately $450 million.
CONSUMERS
Regulatory Matters. On July 5, 2000, Consumers filed an application with
the MPSC to begin the securitization process for approximately $470 million in
qualified costs, in compliance with the Customer Choice Electricity and
Reliability Act ("Customer Choice Act") and related securitization laws.
Securitization typically involves the issuance of bonds with a high credit
rating. The MPSC approval of the application will not increase current electric
rates for any of Consumers' customers, but will allow Consumers to offset the
earnings impact of the 5% rate reduction that was implemented for the utility's
1.5 million residential electric customers in June 2000 as required by the
Customer Choice Act. Ultimately, sale of the securitization bonds will be
required for the full rate reduction offset to continue over the expected term
of the bonds. The application requests that the MPSC find that Consumers'
Palisades nuclear plant capital costs (net of depreciation) and other regulatory
assets be identified as "qualified costs" and therefore eligible for
securitization. Absent appeals, Consumers anticipates that securitization bonds
will be issued at the earliest by the end of 2000.
In March 1999, Consumers signed a long-term power sales agreement to resell
to PECO Energy Company, a non-affiliated company, its capacity and energy
purchases under the Power Purchase Agreement between Consumers and the Midland
Cogeneration Venture Partnership until September 2007. Implementation of the
agreement was contingent upon regulatory treatment satisfactory to Consumers.
Since March 1999, Consumers has engaged in proceedings before the MPSC to secure
satisfactory accounting and ratemaking approvals related to the PECO agreement.
The last in a series of MPSC orders was issued in August 2000 refusing to grant
Consumers' request. Consumers recently gave notice to PECO of its intention to
terminate this long-term agreement at the end of 2000 as contemplated under the
terms of the agreement. Due to uncertainties associated with electric industry
restructuring legislation in Michigan, Consumers and PECO had entered into an
interim arrangement for the sale of 125 MW of Power Purchase Agreement capacity
and associated energy to PECO during 2000. The completion of the interim
arrangement will not effect the termination of the long-term agreement.
S-6
<PAGE> 7
THE OFFERING
Issuer....................... CMS Energy Corporation.
Securities Offered........... $500 million principal amount of 9 7/8% Senior
Notes Due 2007 (the "Notes").
Maturity..................... October 15, 2007.
Interest Rate................ The Notes will bear interest at the rate of
9.875% per annum, payable semiannually in arrears
on April 15 and October 15 commencing on April
15, 2001.
Optional Redemption.......... The Notes will be redeemable at our option, in
whole or in part, at any time or from time to
time, on not less than 30 days' notice, at the
redemption prices determined as described herein,
plus any accrued interest to the date fixed for
redemption.
Change in Control............ If a change in control were to occur, each holder
of Notes would be able to require us to
repurchase such Notes, in whole or in part, at a
price equal to 101% of the principal amount of
those Notes, plus any accrued and unpaid
interest.
Ranking...................... The Notes will be unsecured debt securities of
the Company. As of June 30, 2000, we had
outstanding approximately $3.8 billion aggregate
principal amount of indebtedness (excluding
subsidiaries), none of which was secured. None of
such indebtedness would be senior to the Notes
and the Notes will not be senior to such
indebtedness. The Notes will be senior to certain
subordinated indebtedness of the Company
(excluding subsidiaries). The Notes will rank
equally in right of payment with all other
unsecured and unsubordinated indebtedness of the
Company (excluding subsidiaries).
Certain Covenants............ The Indenture governing the Notes will contain
covenants that will, among other things, limit
our ability to pay dividends or distributions,
incur additional indebtedness, incur additional
liens, sell, transfer or dispose of certain
assets, enter into certain transactions with
affiliates or enter into certain mergers or
consolidations.
Use of Proceeds.............. We ultimately intend to use the estimated net
proceeds of approximately $489 million to repay
$300 million aggregate principal amount of our
7 3/8% Unsecured Notes due November 15, 2000 at
maturity and to reduce the outstanding balance
under our revolving credit facility. Pending
application of any proceeds to repay the
Unsecured Notes, these funds will also be used to
reduce the outstanding balance under our
revolving credit facility.
S-7
<PAGE> 8
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following selected historical and pro forma financial information has
been derived from our historical consolidated financial statements. We have
prepared pro forma financial information to reflect our acquisition of the
common stock of the Panhandle Companies. Please refer to our Form 10-K for the
fiscal year ended December 31, 1999 which is incorporated by reference. The
financial information set forth below should be read in conjunction with our
consolidated financial statements, related notes and other financial information
incorporated by reference in the accompanying prospectus. See "Incorporation of
Certain Documents by Reference" in the accompanying prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- --------------------------
PRO PRO
FORMA FORMA
1997 1998 1999 1999(1) 1999 1999(1) 2000
------- ------- ------- ----------- ------- ------- ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue...... $ 4,781 $ 5,141 $ 6,103 $ 6,216 $ 2,869 $2,982 $3,426
Operating expenses..... 4,065 4,366 5,191 5,244 2,393 2,446 2,928
------- ------- ------- ------- ------- ------- ------
Pretax operating
income............. 716 775 912 972 476 536 498
Income taxes........... 108 100 64 72 67 74 68
Consolidated net income
before cumulative
effect of change in
accounting
principle............ 244 242 277 287 173 184 161
Cumulative effect of
change in accounting
for property taxes,
net of tax(2)........ -- 43 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------
Consolidated net
income............... $ 244 $ 285 $ 277 $ 287 $ 173 $ 184 $ 161
======= ======= ======= ======= ======= ======= ======
Net income attributable
to common stocks(2)
CMS Energy........... $ 229 $ 272 $ 241(10) $ 251(10) $ 162 $ 173 $ 161
Class G.............. 15 13 36(10)(11) 36(10)(11) 11 11 --
Average common shares
outstanding
CMS Energy........... 96 102 110 110 108 108 112
Class G.............. 8 8 9(11) 9(11) 9 9 --
Earnings per average
common share(2)
CMS Energy
Basic.............. $ 2.39 $ 2.65 $ 2.18(10) $ 2.27(10) $ 1.50 $ 1.59 $ 1.44
Diluted............ 2.37 2.62 2.17(10) 2.26(10) 1.48 1.57 1.42
Class G Basic and
Diluted.............. 1.84 1.56 4.21(10)(11) 4.21(10)(11) 1.28 1.28 --
Dividends declared per
common share
CMS Energy........... 1.14 1.26 1.39 1.39 .66 .66 .73
Class G.............. 1.21 1.27 .99(11) .99(11) .65 .65 --
OTHER DATA:
EBITDA(3)............ $ 1,171 $ 1,213 $ 1,517 $ 1,595 $ 781 $ 859 $ 879
Cash flow
From operating
activities....... 624 516 917 912 440 435 183
From investing
activities....... (1,551) (1,634) (3,564) (3,585) (2,441) (2,462) (37)
From financing
activities....... 938 1,150 2,678 2,678 2,113 2,113 (38)
Capital
Expenditures....... 678 1,295 1,124 1,128 291 295 488
Ratio of EBITDA to
interest expense... 3.79x 3.61x 2.92x 2.82x 3.38x 3.09x 3.12x
Ratio of earnings to
fixed charges(4)... 1.78x 1.59x 1.38x 1.45x 1.71x 1.62x 1.35x
</TABLE>
S-8
<PAGE> 9
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF AS OF
---------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
------ ------- ------- -------- --------
(IN MILLIONS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 69 $ 101 $ 132 $ 213 $ 240
Net plant and property................ 5,144 6,040 8,121 7,252 8,099
Total assets.......................... 9,508 11,310 15,462 14,139 15,707
Long-term debt, excluding current
maturities.......................... 3,272 4,726 6,987 7,079 6,918
Non-current portion of capital
leases.............................. 75 105 88 92 197
Notes payable......................... 382 328 230 264 278
Other liabilities..................... 3,361 3,304 4,538 3,479 4,594
Company-obligated mandatorily
redeemable trust preferred
securities of:
Consumers Power Company Financing
I(5).............................. 100 100 100 100 100
Consumers Energy Company Financing
II(5)............................. 120 120 120 120 120
Consumers Energy Company Financing
III(6)............................ -- -- 175 -- 175
CMS RHINOS Trust(9)................. -- -- 250 250 250
Company-obligated convertible trust
preferred securities of:
CMS Energy Trust I(7)............... 173 173 173 173 173
CMS Energy Trust II(8).............. -- -- 301 -- 301
Preferred stock of subsidiary......... 238 238 44 44 44
Common stockholders' equity........... 1,787 2,216 2,456 2,390 2,345
</TABLE>
------------
(1) The pro forma selected financial information illustrates the effects of (i)
various restructuring, realignment, and elimination of activities between
the Panhandle Companies and Duke Energy Corporation prior to the closing of
the acquisition of the Panhandle Companies by CMS Energy, (ii) the
adjustments resulting from the acquisition of the Panhandle Companies and
(iii) financing transactions which include the public issuance of $800
million of senior notes by Panhandle, $850 million of senior notes by CMS
Energy and the private sale of $250 million of trust preferred securities
by CMS Energy.
(2) During the first quarter of 1998, our subsidiary, Consumers, 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 our business relating to Class G
common stock. Earnings, net of tax, increased by $43 million or $0.40 per
share for CMS Energy common stock and $12 million or $0.36 per share for
Class G common stock.
(3) EBITDA represents earnings before interest, income taxes, depreciation
and amortization. EBITDA is not intended to represent cash flow for the
period, nor is it presented as an alternative to operating income as an
indicator of operating performance, and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles ("GAAP") in the
United States and is not indicative of operating income or cash flow from
operations as determined under GAAP.
(4) For the purpose of computing the ratio, earnings represent net income
before income taxes, net interest charges and the estimated interest
portions of lease rentals.
(5) The primary asset of Consumers Power Company Financing I is approximately
$103 million principal amount of 8.36% subordinated deferrable interest
notes due 2015 from Consumers. The primary asset of Consumers Energy
Company Financing II is $124 million principal amount of 8.20% subordinated
deferrable interest notes due 2027 from Consumers.
(6) The primary asset of Consumers Energy Company Financing III is $180 million
principal amount of 9.25% subordinated deferrable interest notes due 2029
from Consumers.
S-9
<PAGE> 10
(7) The primary asset of CMS Energy Trust I is approximately $178 million
principal amount of 7.75% convertible subordinated debentures due 2027 from
us.
(8) The primary asset of CMS Energy Trust II is approximately $310 million
principal amount of 8.625% convertible junior subordinated deferrable
interest debentures due 2004 from us.
(9) The primary asset of CMS RHINOS Trust was approximately $258 million
principal amount of floating rate, subordinated interest notes due 2001
from us. These securities were redeemed on August 22, 2000.
(10) Reflects the reallocation of net income and earnings per share as a result
of the premium on exchange of Class G common stock. As a result, CMS
Energy's basic and diluted earnings per share were reduced $0.26 and $0.25,
respectively, and Class G's basic and diluted earnings per share were
increased $3.31.
(11) From January 1, 1999 to October 25, 1999.
S-10
<PAGE> 11
RISK FACTORS
In considering whether to purchase our Notes, you should carefully consider
all the information we have included or incorporated by reference in this
prospectus supplement and the accompanying prospectus. In particular, you should
carefully consider the risk factors described below. In addition, please read
"Forward-Looking Information" on page S-15 of this prospectus supplement, where
we describe additional uncertainties associated with our business and the
forward-looking statements in this prospectus supplement and the accompanying
prospectus.
RISKS RELATED TO THE NOTES
WE DEPEND ON DIVIDENDS FROM OUR SUBSIDIARIES TO MEET OUR DEBT SERVICE
OBLIGATIONS
Due to our holding company structure and the restrictions on dividend and
other types of payments by our subsidiaries to us as the parent company, the
Notes are effectively subordinated to the payment of interest, principal and
preferred distributions on the debt, preferred securities and other liabilities
of Consumers and Enterprises and each of their subsidiaries. None of these
entities will be obligated to pay amounts due on the Notes.
WE MAY BE UNABLE TO PURCHASE NOTES UPON A CHANGE OF CONTROL
In the event of a change of control of our Company, each holder of Notes
may require us to purchase all or a portion of its Notes at a purchase price
equal to 101% of the principal amount thereof, plus accrued interest. Our
ability to purchase the Notes will be limited by the terms of our other debt
agreements and our ability to finance the purchase. It is expected that we will
issue additional debt with similar change of control provisions in the future.
If this occurs, the financial requirements for any purchases could be increased
significantly. In addition, the terms of any debt securities issued to purchase
debt under these change of control provisions may be unfavorable to us. We
cannot assure holders of Notes that we will be able to finance these purchase
obligations or obtain consents to do so from holders of Notes under other debt
agreements restricting these purchases.
RISKS RELATING TO CMS ENERGY
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT OUR FINANCIAL FLEXIBILITY
As of June 30, 2000, we had outstanding $3.8 billion aggregate principal
amount of indebtedness (excluding subsidiaries), none of which was secured. None
of such indebtedness would be senior to the Notes and the Notes will not be
senior to such indebtedness. On a consolidated basis, we and our subsidiaries
had approximately $8.3 billion in total indebtedness and mandatorily redeemable
trust preferred securities as of June 30, 2000. We may incur additional
indebtedness in the future. The level of our indebtedness could have several
important effects on our future operations, including, among others:
-- a significant portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness and will not be available for other purposes;
-- covenants contained in our existing debt arrangements require us to
meet certain financial tests, which may affect our flexibility in
planning for, and reacting to, changes in our business;
-- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate and other
purposes may be limited;
-- we may be at a competitive disadvantage to our competitors that are
less leveraged; and
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-- our vulnerability to adverse economic and industry conditions may
increase.
Our ability to meet our debt service obligations and to reduce our total
indebtedness will be dependent upon our future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors affecting our operations, many of which are beyond our
control. We cannot assure you that our business will continue to generate
sufficient cash flow from operations to service our indebtedness. If we are
unable to generate sufficient cash flow from operations, we may be required to
sell assets, to refinance all or a portion of our indebtedness or to obtain
additional financings. We cannot assure you that any such refinancing will be
possible or that additional financing will be available on commercially
acceptable terms or at all.
Covenants contained in our existing debt arrangements and guarantees limit,
among other things, the incurrence of indebtedness by CMS Energy and its
subsidiaries and require maintenance of a minimum net worth and fixed-charge
coverage ratio and a maximum debt-to-capitalization ratio. There can be no
assurance that the requirements of our existing debt arrangements or other
indebtedness will be met in the future. Failure to comply with such covenants
may result in a default with respect to the related debt and could lead to
acceleration of such debt or any instruments evidencing indebtedness that
contain cross-acceleration or cross-default provisions. In such a case, there
can be no assurance that we would be able to refinance or otherwise repay such
indebtedness.
WE ARE SUBJECT TO RESTRICTIONS ON OUR ABILITY TO PAY DIVIDENDS
We conduct substantially all of our operations through our subsidiaries. We
must receive dividends or other distributions from our subsidiaries or jointly
owned enterprises to meet our payment obligations. In addition, restrictions
contained in Consumers' mortgage bond indenture and preferred stock provisions
and other legal restrictions limit Consumers' ability to pay dividends or
acquire its own stock from us. Based upon its Articles of Incorporation, the
most restrictive provision, as of June 30, 2000, Consumers would be able to pay
an aggregate of $360 million in dividends to us. In the four years ending
December 31, 1999, Consumers paid out $921 million or 71% of its earnings in
cash dividends to us. Enterprises is also limited in the amount of dividends it
is able to pay since it is expanding its developing businesses.
If we do not receive adequate distributions from our subsidiaries and
jointly owned enterprises, there can be no assurance that we will be able to
make payments on the Notes.
WE FACE INCREASED COMPETITION, WHICH COULD REDUCE OUR MARKET SHARES AND
PROFIT MARGINS
Regulatory changes and other developments have resulted and will continue
to result in increased competition in our domestic energy businesses. Generally,
increased competition threatens our market shares in certain segments of our
business and can reduce our profit margins.
Increased competition and direct access in the gas industry. Regulatory
changes have been significant in our gas utility business. These changes have
resulted in increased competition from other sellers of natural gas for sale of
the gas commodity to our customers. As a result of the regulatory changes that
separated (unbundled) the transportation and storage of natural gas from the
sale of natural gas by interstate pipelines and Michigan gas distributors,
Consumers offers unbundled services (transportation and some storage) to its
larger end-use customers who choose to acquire gas supplies from alternative
sources. Additionally, to prepare for the unbundled market, Consumers is
conducting an expanded gas customer choice pilot program which, through March
2001, will allow 300,000 residential, commercial and industrial retail gas sales
customers to choose an alternative gas supplier in direct competition with
Consumers as a supplier of the gas commodity. At this time, we do not know the
full impact of competition, particularly if or when, by
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legislation or regulatory action, the existing pilot program of Consumers
providing other gas suppliers direct access to Consumers' gas customers will be
extended or expanded to all of its gas customers.
Increased competition and direct access in the electric industry. Consumers
has in the last several years experienced and expects to continue to experience
a significant increase in competition for generation services with the
introduction of retail direct access in the state of Michigan. Under the new
electric restructuring legislation enacted in June 2000, all electric customers
will have the choice of electric generation suppliers by January 1, 2002.
Increased competition in the gas pipeline industry. Since we have completed
the acquisition of the Panhandle companies, a significant portion of our
domestic revenue and cash flow comes from our interstate pipeline business. The
Federal Energy Regulatory Commission ("FERC") policy allows the issuance of
certificates authorizing the construction of new interstate pipelines which are
competitive with existing pipelines. A number of new pipeline and pipeline
expansion projects have been approved or are pending approval by the FERC in
order to transport large additional volumes of natural gas to the midwestern
United States from Canada. These pipelines will be able to compete with
Panhandle's pipelines. Increased competition could reduce the volumes of gas
transported by Panhandle to their existing markets or cause them to lower rates
in order to meet competition. This could lower the financial benefits we receive
from the acquisition of the Panhandle companies.
INCREASES IN GAS PRICES COULD RESULT IN SIGNIFICANT LOSSES
In December 1997, the MPSC approved Consumers' application to implement,
effective April 1, 1998, a gas customer choice pilot program that was designed
to encourage Consumers to minimize its purchased natural gas commodity costs
while providing rate stability for its customers. The pilot program ends on
March 31, 2001. This three-year program, among other things, freezes gas
distribution rates through March 31, 2001, establishing a delivered gas
commodity cost at a fixed rate of $2.84 per Mcf. During the first two years of
the pilot program, Consumers realized a benefit of $45 million as delivered gas
commodity prices were below the $2.84 per Mcf level collected from customers.
Recent significant increases in gas prices have exposed Consumers to gas
commodity losses during the last year of the program that ends March 31, 2001.
Estimated loss of earnings for this last year of the program could range from
$45 million to $135 million, of which Consumers has already recognized $45
million in the second quarter 2000 as a regulatory obligation. Under the
provisions of the pilot program, Consumers has the right to request termination
of the program at any time and to return to a gas cost recovery mechanism,
pursuant to which the customer gas commodity prices would increase significantly
from the current frozen rate. As an alternative to exercising that right,
Consumers is considering an approach that, if approved by the MPSC, would
potentially avoid further losses any greater than the $45 million already
recognized and mitigate the customer rate increases that would otherwise result.
It is expected that such an approach could be implemented this fall, but there
is no assurance that the MPSC would approve Consumers' approach.
NEW ELECTRIC RESTRUCTURING AND PROPOSED GAS RESTRUCTURING LEGISLATION COULD
ADVERSELY AFFECT OUR BUSINESS
Federal and state regulation of electric and natural gas utilities,
interstate pipelines and independent electric power producers has changed
dramatically in the last two decades and could continue to change over the next
several years. These changes could adversely affect our business, financial
condition and profitability.
New electric restructuring legislation. In June 2000, the Michigan
Legislature enacted electric industry restructuring and securitization laws that
became effective June 5, 2000. The new
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legislation first reduces residential rates by 5% then freezes them as of the
effective date of the new legislation through December 31, 2003. All other
electric rates are frozen through December 31, 2003 without first being reduced.
After that date, electric rates are subject to a rate cap. The length of the
rate cap varies depending upon whether the customer is a residential, commercial
or industrial customer, among other determinations. Ultimately, the rate cap
could extend until December 31, 2013 depending upon whether Consumers and two
other utilities jointly complete expansion of available transmission capability
in the state of Michigan of at least 2,000 MW and do not exceed the market
control test established by the legislation (a requirement Consumers is
currently in compliance with). Under circumstances specified in the statute,
certain costs can be deferred for future recovery after the expiration of the
rate cap period. However, the rate cap could result in Consumers being unable to
collect customer rates sufficient to recover fully its cost of doing business.
It is not certain that Consumers' profit margins in its electric utility
business will be maintained over the long run.
This new legislation and existing MPSC restructuring orders provide for
recovery of the stranded costs associated with customers purchasing power from
other sources. The new legislation also permits the MPSC annually to review
Consumers' stranded cost recovery charges implemented for the preceding 12
months, and adjust the stranded costs recovery charge (a true-up adjustment), by
way of supplemental surcharges or credits, to allow the netting of stranded
costs. Consumers is uncertain how the MPSC will ultimately calculate the amount
of stranded costs and the true-up adjustments, and the manner in which the
annual stranded cost true-up operates.
The new legislation also allows for securitization of stranded costs, which
fit the definition under the legislation of qualified costs for securitization
purposes, in order to offset the earnings impact of the 5% residential rate
reduction mandated by the legislation. Ultimately, sale of securitization bonds
will be required for the full rate reduction offset to continue over the term of
the bonds. In accordance with the securitization law, Consumers filed an
application, and a supplement thereto, in July 2000, to begin the securitization
process for approximately $470 million in qualified costs. The MPSC is required
to issue a financing order within 90 days of the supplemental application
filing. As with other significant MPSC orders, a securitization order is subject
to appeal by any party during which time the suspension of amortization of the
approved regulatory asset would cease, thereby offsetting the loss in revenue
discussed above.
Proposed gas restructuring legislation. In December 1999, several bills
relating to gas industry restructuring were introduced in the Michigan
legislature. It is uncertain whether this legislation will be enacted and what
effect any legislation would have on Consumers.
WE MAY NOT BE ABLE TO SELL ASSETS AS PLANNED TO IMPROVE OUR BALANCE SHEET
As of August 2000, we sold assets resulting in approximately $850 million
of cash proceeds and associated debt reduction of consolidated project debt
under our financial plan announced in February 2000. There are no assurances
that we can sell an additional $550 million of assets by the end of the year
2000 as planned. Failure to sell assets as planned would undermine our financial
plan, which could in turn make it more difficult for us to raise additional
funds and effect our growth strategy.
WE HAVE MADE SUBSTANTIAL INTERNATIONAL INVESTMENTS
Our international investments in approximately 20 countries in electric
generating facilities, oil and gas exploration, production and processing
facilities, natural gas pipelines and electric distribution systems face a
number of risks inherent in acquiring, developing and owning these types of
facilities. Although we maintain insurance for various risk exposures including
political risk from possible nationalization, expropriation or inability to
convert currency, we are exposed to some risks that include local political and
economic factors over which we have no control, such as
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changes in foreign governmental and regulatory policies (including changes in
industrial regulation and control and changes in taxation), changing political
conditions and international monetary fluctuations. In some cases the investment
may have to be abandoned or disposed of at a loss. These factors could
significantly adversely affect the financial results of the affected subsidiary
and, in turn, our growth plans for Enterprises' international investments and
our financial position and results of operations.
Financial risk during development phase. In developing new projects,
significant time and expense is required to prepare proposals or competitive
bids, obtain the numerous required permits, licenses and approvals, negotiate
the necessary agreements with governmental and private parties, and obtain
financing. Money spent for these purposes is at risk until all these elements
are successfully finalized. It is often impractical to finalize all elements
before significant sums have been spent. As a result, there is a risk that these
up-front expenditures will be of little value if one of the required approvals
or other elements is not finally achieved and the project does not go forward or
is not completed.
Expropriation and violation of agreements by third parties. International
investments of the type we are making are subject to the risk that they may be
expropriated or that the required agreements, licenses, permits and other
approvals may be changed or terminated in violation of their terms. These kinds
of changes could result in a partial or total loss of our investment.
Foreign currency risk. The local foreign currency may be devalued or the
conversion of the currency may be restricted or prohibited or other actions,
such as increases in taxes, royalties or import duties, may be taken which
adversely affect the value and the recovery of our investment.
WE COULD INCUR SIGNIFICANT CAPITAL EXPENDITURES TO COMPLY WITH
ENVIRONMENTAL STANDARDS
We and our subsidiaries are subject to costly and increasingly stringent
environmental regulations. We expect that the cost of future environmental
compliance, especially compliance with clean air laws, will be significant.
The Environmental Protection Agency in 1997 introduced new regulations
regarding nitrogen oxide and particulate-related emissions which are the subject
of litigation. The nitrogen oxide litigation has been appealed to the U.S.
Supreme Court. These regulations, if upheld, will require us to make significant
capital expenditures. The state of Michigan has introduced alternative less
stringent clean air regulations. The preliminary estimates of capital
expenditures to reduce nitrogen oxide-related emissions to the level proposed by
the state of Michigan for Consumers' fossil-fueled generating units range from
$150 million to $290 million, calculated in year 2000 dollars. If Consumers had
to meet the EPA's proposed requirements, the estimated cost to Consumers would
be between $290 million and $500 million, calculated in year 2000 dollars.
Consumers anticipates that it will incur these capital expenditures between 2000
and 2004, or between 2000 and 2003 if the EPA ultimately imposes its limits. In
addition, Consumers expects to incur cost of removal related to this effort, but
is unable to predict the amount at this time.
Consumers may need an equivalent amount of capital expenditures to comply
with the new small particulate standards sometime after 2004 if those standards
become effective.
These and other required environmental expenditures may have a material
adverse effect upon our financial condition and results of operations.
FORWARD-LOOKING INFORMATION
From time to time, we may make statements regarding our assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "Forward-Looking
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<PAGE> 16
Statements" under the Private Securities Litigation Reform Act of 1995. We
caution that these statements may and often do vary from actual results and the
differences between these statements and actual results can be material.
Accordingly, we cannot assure you that actual results will not differ materially
from those expressed or implied by the forward-looking statements. Some of the
factors that could cause actual achievements and events to differ materially
from those expressed or implied in any forward-looking statements are:
-- the ability to sell assets in accordance with our plans;
-- the ability to achieve operating synergies and revenue enhancements;
-- capital and financial market conditions, including the current price
of our common stock, interest rates and availability of financing;
-- market perceptions of the energy industry, our company or any of our
subsidiaries;
-- our or any of our subsidiaries' securities ratings;
-- currency exchange controls;
-- factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs, unanticipated
changes to fossil fuel, nuclear fuel or gas supply costs or
availability due to higher demand, shortages, transportation problems
or other developments;
-- environmental incidents;
-- electric transmission or gas pipeline system constraints;
-- international, national, regional and local economic, competitive and
regulatory conditions and developments;
-- adverse regulatory or legal decisions, including environmental laws
and regulations;
-- pace of implementation and provisions for deregulation of the natural
gas industry, whether by legislative or regulatory action;
-- implementation of the Michigan electric industry restructuring
legislation;
-- federal regulation of electric sales and transmission of electricity
that grants independent power producers, electricity marketers and
other utilities "direct access" to the interstate electric
transmission systems owned by electric utilities, creating
opportunities for competitors to market electricity to our wholesale
customers;
-- energy markets, including the timing and extent of unanticipated
changes in commodity prices for oil, coal, natural gas, natural gas
liquids, electricity and certain related products due to higher
demand, shortages, transportation problems or other developments;
-- the timing and success of business development efforts;
-- potential disruption, expropriation or interruption of facilities or
operations due to accidents or political events and the ability to
get or maintain insurance coverage for such events;
-- nuclear power performance, decommissioning, policies, procedures,
incidents and regulation, including spent nuclear fuel storage
availability;
-- technological developments in energy production, delivery and usage;
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-- financial or regulatory accounting principles or policies;
-- cost and other effects of legal and administrative proceedings,
settlements, investigations and claims;
-- limitations on our ability to control the development or operation of
projects in which our subsidiaries have minority interests; and
-- other uncertainties, all of which are difficult to predict and many
of which are beyond our control.
These and other factors are discussed more completely in our public filings
with the SEC, including our annual report on Form 10-K for the year ended
December 31, 1999.
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USE OF PROCEEDS
The net proceeds to us from this offering, after deducting underwriting
discounts and commissions, will be approximately $489 million. We ultimately
intend to apply the net proceeds of this offering to the repayment at maturity
of $300 million aggregate principal amount of our 7 3/8% Unsecured Notes due
November 15, 2000 and the reduction of borrowings under our $1 billion revolving
credit facility with The Chase Manhattan Bank, as lead agent (the "Revolving
Credit Facility"). Pending application of any net proceeds to the repayment at
maturity of the Unsecured Notes later in 2000, these funds will also be used to
reduce the outstanding balance under the Revolving Credit Facility. The
Revolving Credit Facility has a weighted average interest rate of 8.82% as of
August 31, 2000.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the years ended December
31, 1995 through 1999 and for the six months ended June 30, 2000 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------ JUNE 30,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges........................... 1.90x 1.96x 1.78x 1.59x 1.38x 1.35x
</TABLE>
For the purpose of computing the ratio, earnings represent net income
before income taxes, net interest charges and the estimated interest portions of
lease rentals.
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<PAGE> 19
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 (1)
on an actual basis and (2) as adjusted to reflect the sale of $500 million of
Notes in this offering and the application of the net proceeds as described
under "Use of Proceeds," the sale of $220 million of Premium Equity
Participating Security Units and the redemption of $250 million of preferred
securities of CMS RHINOS Trust on August 22, 2000. This table should be read in
conjunction with our consolidated financial statements and related notes
included in the incorporated documents as described under "Incorporation of
Certain Documents by Reference" in the accompanying prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
----------------------
AS
ACTUAL ADJUSTED
------- -----------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Current portion of long-term debt and capital lease
obligations............................................... $ 547 $ 247
======= =======
Non-current portion of capital leases....................... $ 197 $ 197
Long-term debt:
9 7/8% Senior Notes due 2007(1)........................... -- 500
Other long-term debt (excluding current maturities)....... 6,918 6,766
------- -------
Total long-term debt................................. 7,115 7,463
Total stockholders' equity:
Company-obligated mandatorily redeemable preferred
securities of:
Consumers Power Company Financing I(2)................. 100 100
Consumers Energy Company Financing II(3)............... 120 120
Consumers Energy Company Financing III(4).............. 175 175
CMS RHINOS Trust(5).................................... 250 --
Company-obligated convertible preferred securities of:
CMS Energy Trust I(6).................................. 173 173
CMS Energy Trust II(7)................................. 301 301
CMS Energy Trust III(8)................................ -- 220
Preferred stock of subsidiary............................. 44 44
Common stockholders' equity............................... 2,345 2,345
------- -------
Total stockholders' equity........................... 3,508 3,478
------- -------
Total capitalization.............................. $10,623 $10,941
======= =======
</TABLE>
------------
(1) Adjusted to reflect the issuance of $500 million aggregate principal amount
of 9 7/8% Senior Notes due 2007. The net proceeds from this offering will
ultimately be used to fund the repayment of $300 million of our 7 3/8%
Unsecured Notes due November 15, 2000 and reduce borrowings under the
Revolving Credit Facility.
(2) The primary asset of Consumers Power Company Financing I is approximately
$103 million principal amount of 8.36% subordinated deferrable interest
notes due 2015 from Consumers.
(3) The primary asset of Consumers Energy Company Financing II is approximately
$124 million principal amount of 8.20% subordinated deferrable interest
notes due 2027 from Consumers.
(4) The primary asset of Consumers Energy Company Financing III is $180 million
principal amount of 9.25% subordinated deferrable interest notes due 2029
from Consumers.
(5) The primary asset of CMS RHINOS Trust was approximately $258 million
principal amount of floating rate, subordinated interest notes due 2001 from
CMS Energy. The "As Adjusted" column reflects the redemption of $250 million
of preferred securities of CMS RHINOS Trust using the proceeds of the
Premium Equity Participating Security Units issued on August 22, 2000 and
additional borrowings under the Revolving Credit Facility.
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(6) The primary asset of CMS Energy Trust I is approximately $178 million
principal amount of 7.75% convertible subordinated debentures due 2027 from
the Company.
(7) The primary asset of CMS Energy Trust II is approximately $310 million
principal amount of 8.625% junior subordinated deferrable interest
debentures due 2004 from the Company.
(8) The primary asset of CMS Energy Trust III is approximately $227 million
principal amount of 7.25% subordinated deferrable notes issued in connection
with the issuance of Premium Equity Participating Security Units on August
22, 2000.
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THE COMPANY
OVERVIEW
CMS Energy is a leading diversified energy company operating in the United
States and around the world. Our two principal subsidiaries are Consumers Energy
and CMS Enterprises. Consumers is a public utility that provides natural gas or
electricity to almost 6 million of the approximately 9.5 million residents in
Michigan's lower peninsula. Enterprises, through subsidiaries, is engaged in
several domestic and international diversified energy businesses.
In 1999, we generated consolidated operating revenue of $6.1 billion and
EBITDA of $1.517 billion. The following table shows the EBITDA contribution from
each of our business segments:
<TABLE>
<CAPTION>
EBITDA
---------------------
AMOUNT % TOTAL
---------- -------
(MILLIONS)
<S> <C> <C>
CONSUMERS
Consumers electric utility.................................. $ 809 53.3%
Consumers gas utility....................................... 239 15.8
------ -----
Total Consumers........................................... 1,048 69.1
ENTERPRISES
Independent power production................................ 193 12.7
Natural gas transmission, storage and processing............ 159 10.5
Oil and gas exploration and production...................... 61 4.0
International energy distribution and other non-utility
operations................................................ 39 2.6
Marketing, services and trading............................. 7 0.5
------ -----
Total Enterprises......................................... 459 30.3
OTHER....................................................... 10 0.6
------ -----
Total.................................................. $1,517 100.0%
====== =====
</TABLE>
CONSUMERS
Consumers primarily consists of our electric and gas utility operations.
Consumers was formed in Michigan in 1968 and is the successor to a corporation
organized in Maine in 1910 and which did business in Michigan from 1915 to 1968.
Consumers' consolidated operations account for a majority of our total assets,
revenues and pre-tax operating income. Consumers' service areas include
automotive, metal, chemical, food and wood products and a diversified group of
other industries.
ELECTRIC UTILITY OPERATIONS
If independent, Consumers' electric utility operation would be the twelfth
largest electric company in the United States based upon the number of customers
in 1998. The electric operations of Consumers include the generation, purchase,
transmission, distribution and sale of electricity. In 1999, operating revenue
from this segment was $2,667 million and total electric sales were 41 billion
KWh. At year-end 1999, Consumers served 1.67 million customers in 61 of the 68
counties of Michigan's lower peninsula. Principal cities served include Battle
Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Midland, Muskegon and Saginaw.
Consumers' electric utility customer base includes a mix of residential,
commercial and diversified industrial customers, the largest segment of which is
the automotive industry. Consumers' electric operations are not
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dependent upon a few customers, and the loss of any one or even a few of such
customers is not reasonably likely to have a material adverse effect on its
financial condition, subject to appropriate regulatory treatment that allows an
adjustment to Consumers rates to compensate for the loss of revenues from such
customers.
In 1999, Consumers owned and operated 31 electric generating plants with an
aggregate of 6,252 MW of capacity. In addition, Consumers purchased 2,388 MW of
net capacity, which amounted to 32% of Consumers' total system requirements,
from other power producers, the largest being the Midland Cogeneration Venture
Limited Partnership in which Consumers has a 49% interest through CMS Midland
(the "MCV Partnership"). Consumers also owns 8,640 miles of electric
transmission lines operating at up to 345 kilovolts, owns 60,456 miles of
electric distribution lines and owns substations having an aggregate transformer
capacity of 40,452,870 kilovolt-amperes.
Consumers generates electricity principally from coal and nuclear fuel.
Consumers has four generating plant sites that use coal as a fuel source and
which constituted 78.5% of its baseload capacity in 1999. Combined, these plants
produced a total of 19,085 GWh of electricity in 1999 and required 8.9 million
tons of coal. Consumers' coal inventory on December 31, 1999 amounted to
approximately 40 days' supply. During 1999, Consumers owned two nuclear power
plants of which only one was operating. The Big Rock nuclear power plant was
closed permanently in 1997 and is in the process of being decommissioned. The
Palisades nuclear power plant had net generation of 5,105 GWh, constituting 21%
of Consumers' baseload generation. Consumers has two contracts for uranium
concentrate sufficient to provide up to 50% of the plant's requirements.
Consumers intends to purchase the balance of its concentrate, conversion and
enrichment requirements for the next Palisades reload throughout the year 2000.
GAS UTILITY OPERATIONS
If independent, Consumers' gas utility operation would be the fifth largest
gas company in the United States based upon the number of customers in 1998.
Consumers' gas utility operation purchases, transports, stores, distributes and
sells natural gas. Total deliveries of natural gas sold by Consumers and from
other sellers over Consumers' pipeline and distribution network to ultimate
customers, including the MCV Partnership, in 1999 totaled 389 Bcf. Operating
revenue for 1999 was $1,156 million. As of December 31, 1999, Consumers rendered
gas sales and delivery service to 1.58 million customers and is authorized to
provide service in 54 of the 68 counties in Michigan's lower peninsula.
Principal cities served include Bay City, Flint, Jackson, Kalamazoo, Lansing,
Pontiac and Saginaw, as well as the suburban Detroit area, where over 900,000 of
the gas customers are located. Consumers' gas operation is not dependent upon a
few customers, and the loss of any one or even a few of such customers is not
reasonably likely to have a material adverse effect on its financial condition,
subject to appropriate regulatory treatment that allows an adjustment to
Consumers rates to compensate for the loss of revenues from such customers.
Consumers, together with its wholly owned subsidiary, Michigan Gas Storage,
owns 23,933 miles of distribution mains and 1,674 miles of transmission lines
throughout the lower peninsula of Michigan. Consumers and its subsidiary also
own and operate 8 compressor stations with a total of 162,000 installed
horsepower. Consumers' gas storage fields have an aggregate working storage
capacity of approximately 130 Bcf.
In 1999, Consumers' purchased 80% of its required gas supply under
contracts longer than one year. Consumers also has firm transportation
arrangements with affiliates and other independent pipeline companies for the
delivery of over 90% of its total gas supply requirements to Michigan for
ultimate deliveries to market. These contracts have expiration dates ranging
from March 2000 to March 2004. Consumers transports the balance of its required
gas supply under interruptible contracts.
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ENTERPRISES
INDEPENDENT POWER PRODUCTION
CMS Generation, formed in 1986, invests in, acquires, develops, constructs
and operates non-utility power generation plants both in the United States and
internationally. As of December 31, 1999, CMS Generation had ownership interests
in operating power plants with capacity totaling 8,110 gross MW (3,713 net MW)
throughout the United States and in Argentina, Australia, Chile, India, Jamaica,
Morocco, the Philippines and Thailand. At year-end 1999, its projects range in
size from 3 MW to 2,000 MW and are powered by water, coal, natural gas, oil,
wood, wind and waste material. Additional projects totaling approximately 4,847
gross MW are under construction or in advanced development at December 31, 1999.
The following table details CMS Generation's interest in independent power
plants in the United States as well as abroad as of year end 1999:
<TABLE>
<CAPTION>
OWNERSHIP GROSS
LOCATION FUEL TYPE INTEREST CAPACITY
-------- ---------- ------------ --------
(%) (MW)
<S> <C> <C> <C>
DOMESTIC
North Carolina................................... Wood 50.0 45
Michigan......................................... Wood 50.0 35
Michigan......................................... Wood 50.0 39
California....................................... Wood 50.0 36
New York......................................... Fossil 50.0 4
Michigan......................................... Fossil 100.0 160
Michigan......................................... Fossil 50.0 62
Michigan......................................... Fossil 100.0 68
Michigan......................................... Fossil 100.0 156
New Jersey(1).................................... Fossil 80 239
Oklahoma......................................... Fossil 8.8 124
Connecticut...................................... Scrap tire 50.0 31
Virginia......................................... Hydro 55.0 3
Maine............................................ Hydro 50.0 4
New York......................................... Hydro 12.5 58
New York......................................... Hydro 1.0 14
New York......................................... Hydro 50.0 3
California....................................... Wind 8.5 72
California....................................... Wind 22.7 30
INTERNATIONAL
Argentina........................................ Fossil 100 128
Jamaica.......................................... Fossil 41 63
India............................................ Fossil 25.3 - 49.0 435
Argentina........................................ Fossil 92.6 540
Argentina........................................ Hydro 17.2 1,320
Morocco.......................................... Fossil 50.0 660
Thailand......................................... Fossil 66.2 300
Chile............................................ Fossil 50.0 555
Australia........................................ Fossil 49.6 2,000
Latin America.................................... Other Various 780
Other............................................ Fossil 41.2 - 100.0 337
</TABLE>
------------
(1)In the second quarter 2000, CMS Generation sold its interest in the Lakewood
cogeneration plant located in New Jersey.
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<PAGE> 24
Through CMS Midland and CMS Holdings, we also own a 49% interest in the MCV
Partnership and through a trust, we have a 35% indirect beneficial interest in
the MCV Facility. The MCV Partnership was formed in January 1987 to convert a
portion of an abandoned Midland County, Michigan nuclear plant owned by
Consumers into the MCV Facility. The MCV Facility has gross capacity of
approximately 1,500 MW (735 net MW).
NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING
CMS Gas Transmission, formed in 1988, owns, develops and manages domestic
and international natural gas facilities consisting of a total of 21,359 miles
of pipeline (including 488 miles of projects under construction) with a daily
capacity of approximately 10.0 Bcf per day. At December 31, 1999, CMS Gas
Transmission had processing capabilities of 1.0 Bcf per day of natural gas. Its
Michigan carbon dioxide removal plants processed approximately 330 MMcf per day,
representing more natural gas processed than any other processor in the state of
Michigan.
We expanded the importance of this business segment with the acquisition of
the Panhandle Companies in March 1999. CMS Gas Transmission also acquired
natural gas pipeline assets in Western Australia and gathering systems and
processing plants in the panhandle region of Texas and Oklahoma and the Powder
River region of Montana and Wyoming.
In early 2000, CMS Gas Transmission sold a partial interest in its Northern
Header gathering system. In March 2000, CMS Gas Transmission, through a
subsidiary of Panhandle, acquired a 1.0 Bcf per day natural gas and condensate
pipeline in the Gulf of Mexico offshore Louisiana, west of an existing CMS-owned
system.
Panhandle Companies
In March 1999, we acquired the following companies: a) Panhandle Eastern
Pipe Line Company, formed in Delaware in 1929, and its principal consolidated
subsidiaries, Trunkline Gas Company and Pan Gas Storage, and b) Panhandle
Eastern Pipe Line Company's affiliates, Trunkline LNG Company and Panhandle
Storage Company. As a result, Panhandle Eastern Pipe Line Company and the other
Panhandle companies are now a wholly owned subsidiary of CMS Gas Transmission.
Panhandle is primarily engaged in the interstate transmission and storage
of natural gas. The company operates one of the nation's largest natural gas
pipeline networks, providing customers in the Midwest and Southwest with a
comprehensive array of transportation services. This interconnected 10,400 mile
system accesses virtually all major natural gas regions in the United States.
Panhandle had throughput of 1,139 Tbtu in 1999. A significant portion of
the delivered volumes of Panhandle's interstate pipelines represents gas
transported under long-term service agreements with local distribution company
customers in the pipeline's market areas. Firm transportation services are also
provided under contract to gas marketers, producers, other pipelines, electric
power generators and a variety of end-users. In addition, the pipelines offer
both firm and interruptible transportation to customers on a short-term or
seasonal basis.
Panhandle's major customers include approximately 25 utilities located
primarily in the Midwest market area that encompasses large portions of
Michigan, Ohio, Indiana, Illinois, Missouri and Tennessee. Panhandle's
consolidated operating revenue in 1999 was $471 million, of which 84% was
generated from transportation services, 10% from storage services, and 6% from
other business.
In March 2000, Panhandle announced an agreement to own a one third interest
in a limited liability company to extend and to convert an existing 26-inch loop
pipeline from natural gas
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<PAGE> 25
transmission service to liquid products service by the end of 2001. This plan
requires FERC approval of an abandonment of 720 miles of this pipeline.
OIL AND GAS EXPLORATION AND PRODUCTION
CMS Oil and Gas (formerly known as CMS NOMECO Oil & Gas Co.), formed in
1967, conducts oil and gas exploration and development operations throughout the
United States and seven other countries. Historically, our domestic operations
primarily focused on gas exploration and production in Michigan and Texas and
coal bed methane exploration and production in Wyoming. We anticipate that our
future domestic operations will focus on oil and gas exploration and production
in Texas and coal bed methane exploration and production in Wyoming. Our
international operations are focused on oil exploration and production in South
America and Africa. In 1999, CMS Oil and Gas achieved production levels of 7.3
MMBbls of oil and condensate, 0.4 MMBbls of plant products and 26.4 Bcf of gas.
As of December 31, 1999, CMS Oil and Gas' proven oil and gas reserves totaled
248.2 MMBoe reflecting a balanced portfolio of reserves, including 47% oil and
condensate and 53% natural gas.
The following table shows net oil and gas production by CMS Oil and Gas for
1997, 1998 and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Oil and condensate (MBbls)(1)............................. 6,564 7,307 7,288
Natural gas (MMcf)(1)..................................... 27,157 26,495 26,412
Plant products (MBbls)(1)................................. 321 413 396
Average daily production(2)
Oil (MBbls)............................................. 20.5 23.8 24.8
Gas (MMcf).............................................. 89.1 89.3 119.6
Reserves to annual production ratio
Oil (MMBbls)............................................ 14.3 11.5 15.2
Gas (Bcf)............................................... 11.9 21.3 29.9
</TABLE>
------------
Notes: (1) Revenue interest to CMS Oil and Gas.
(2) CMS Oil and Gas working interest (includes CMS Oil and Gas' share of
royalties).
For the year ended December 31, 1999, CMS Oil and Gas' estimated oil and
gas reserves were as follows:
<TABLE>
<CAPTION>
SOUTH
U.S. AMERICA AFRICA TOTAL
----- ------- ------ -----
<S> <C> <C> <C> <C>
Estimated Proved Developed and Undeveloped
Reserves:
Oil (MMBbls)..................................... 1.9 45.9 69.1 116.9
Gas (Bcf)........................................ 204.2 -- 583.9 788.1
Estimated Proved Developed Reserves:
Oil (MMBbls)..................................... 1.8 21.8 50.9 74.5
Gas (Bcf)........................................ 191.8 -- 460.9 652.7
</TABLE>
These reserves include all of the northern Michigan oil and gas properties
and working interests in oil reserves located in Ecuador's Oriente Basin, each
of which was sold in the second quarter of 2000.
INTERNATIONAL ENERGY DISTRIBUTION
CMS Electric and Gas, formed in 1996, is CMS Energy's international energy
distribution subsidiary. As of February 2000, it has ownership interests in
electric distribution companies which provide service in the states of Sao Paulo
and Minas Gerais in Brazil, the province of Entre Rios in
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<PAGE> 26
Argentina, and on Margarita Island in Venezuela. These electric distribution
companies serve a total of 464,000 customers with electricity sales of 3,096 GWh
in 1999, after accounting for the sale in January 2000 of CMS Electric and Gas'
interest in Companhia Forca e Luz Cataguazes--Leopoldina and its subsidiaries in
Brazil.
MARKETING, SERVICES AND TRADING
CMS MST, formed in 1996, provides natural gas, oil, coal and electric
marketing, risk management and energy management services to industrial,
commercial, utility and municipal energy users throughout the United States and
internationally. CMS MST has grown dramatically since its inception. CMS Energy
intends to use CMS MST to enhance performance of CMS Energy assets, such as gas
reserves and power plants. CMS MST markets annually approximately 470 Bcf of
natural gas, 3,709 GWh of electricity, 23 MMBbls of crude oil and 6.5 MMBbls of
natural gas liquids. CMS MST also provided energy management services to 1,600
projects from 1997 through 1999. At December 31, 1999, CMS MST had more than
10,000 customers, transported gas on more than 30 gas pipelines and was active
in 35 states and 2 countries.
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<PAGE> 27
DESCRIPTION OF THE NOTES
GENERAL
The following information concerning the Notes supplements, and should be
read in conjunction with, the statements under "Description of Securities--Debt
Securities" in the accompanying prospectus. Capitalized terms not defined herein
are used as defined in the accompanying prospectus.
The Notes will be issued as a series of Senior Debentures under the senior
debt indenture as supplemented by the tenth supplemental indenture thereto dated
as of October 12, 2000 (the "Supplemental Indenture"), and will be limited in
aggregate principal amount to $500 million.
The Notes will be unsecured debt securities of the Company.
As of June 30, 2000, the Company had outstanding approximately $3.8 billion
aggregate principal amount of indebtedness (excluding subsidiaries), none of
which was secured. None of such indebtedness would be senior to the Notes and
the Notes will not be senior to such indebtedness, except that the Notes will be
senior to certain subordinated debentures in aggregate principal amount of $746
million, issued in connection with certain preferred securities of subsidiary
trusts. The Notes will rank equally in right of payment with all other unsecured
and unsubordinated indebtedness of the Company (excluding subsidiaries).
CMS Energy is a holding company and its assets consist primarily of
investments in its subsidiaries. The Notes will be obligations exclusively of
CMS Energy. CMS Energy's ability to service its indebtedness, including the
Notes, is dependent primarily upon the earnings of its subsidiaries and the
distribution or other payment of such earnings to CMS Energy in the form of
dividends, loans or advances, and repayment of loans and advances from CMS
Energy. The subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
Notes or to make any funds available therefor, whether by dividends, loans or
other payments.
A substantial portion of the consolidated liabilities of CMS Energy has
been incurred by its subsidiaries. Therefore, CMS Energy's rights and the rights
of its creditors, including Holders of Notes, to participate in the distribution
of assets of any subsidiary upon the latter's liquidation or reorganization will
be subject to prior claims of the subsidiary's creditors, including trade
creditors, except to the extent that CMS Energy may itself be a creditor with
recognized claims against the subsidiary (in which case the claims of CMS Energy
would still be subject to the prior claims of any secured creditor of such
subsidiary and of any holder of indebtedness of such subsidiary that is senior
to that held by CMS Energy).
The Notes will be issued in the form of one or more global notes (each, a
"Global Note"), in registered form, without coupons, in denominations of $1,000
or an integral multiple thereof as described under "--Book-Entry System" below.
The Global Notes will be registered in the name of a nominee of the Depository
Trust Company ("DTC"). Except as set forth under "--Certificated Notes" below,
owners of beneficial interests in a Global Note will not be entitled to have
Notes registered in their names, will not receive or be entitled to receive
physical delivery of any such Note and will not be considered the registered
holder thereof under the senior debt indenture.
PAYMENT AND MATURITY
The Notes will mature on October 15, 2007, and will bear interest at the
rate of 9.875% per annum. At maturity, the Company will pay the aggregate
principal amount of the Notes then outstanding.
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<PAGE> 28
Each Note will bear interest from the original date of issue, payable
semiannually in arrears on April 15 and October 15, commencing on April 15,
2001.
In any case where any interest payment date, redemption date, repurchase
date or maturity of any Note shall not be a Business Day (as hereinafter
defined) at any place of payment, then payment of interest or principal (and
premium, if any) need not be made 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, repurchase date or at
maturity; and no interest shall accrue on the amount so payable for the period
from and after such interest payment date, redemption date, repurchase date or
maturity, as the case may be, to such Business Day.
OPTIONAL REDEMPTION
The Notes will be redeemable at the Company's option, in whole or in part,
at any time or from time to time, at a redemption price equal to 100% of the
principal amount of such Notes being redeemed plus the Applicable Premium, if
any, thereon at the time of redemption, together with accrued interest, if any,
thereon to the redemption date. In no event will the redemption price be less
than 100% of the principal amount of the Notes plus accrued interest, if any,
thereon to the redemption date.
The following definitions are used to determine the Applicable Premium:
"Applicable Premium" means, with respect to a Note (or portion thereof)
being redeemed at any time, the excess of (A) the present value at such time of
the principal amount of such Note (or portion thereof) being redeemed plus all
interest payments due on such Note (or portion thereof) after the redemption
date, which present value shall be computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (B) the principal amount of such Note
(or portion thereof) being redeemed at such time. For purposes of this
definition, the present values of interest and principal payments will be
determined in accordance with generally accepted principles of financial
analysis.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) (the
"Statistical Release") which has become publicly available at least two Business
Days prior to the redemption date or, in case of defeasance, prior to the date
of deposit (or, if such Statistical Release is no longer published, any publicly
available source of similar market data) most nearly equal to the then remaining
average life to stated maturity of the Notes; provided, however, that if the
average life to stated maturity of the Notes is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given.
If less than all of the Notes are to be redeemed, the trustee under the
senior debt indenture shall select, in such manner as it shall deem appropriate
and fair, the particular Notes or portions thereof to be redeemed. Notice of
redemption shall be given by mail not less than 30 nor more than 60 days prior
to the date fixed for redemption to the Holders of Notes to be redeemed (which,
as long as the Notes are held in the book-entry only system, will be DTC (or its
nominee) or a successor depositary); provided, however, that the failure to duly
give such notice by mail, or any defect therein, shall not affect the validity
of any proceedings for the redemption of Notes as to which there shall have been
no such failure or defect. On and after the date fixed for redemption (unless
the Company shall default in the payment of the Notes or portions thereof to be
redeemed
S-28
<PAGE> 29
at the applicable redemption price, together with accrued interest, if any,
thereon to such date), interest on the Notes or the portions thereof so called
for redemption shall cease to accrue.
No sinking fund is provided for the Notes.
PURCHASE OF NOTES UPON CHANGE IN CONTROL
In the event of any Change in Control (as defined below) each Holder of a
Note will have the right, at such Holder's option, subject to the terms and
conditions of the senior debt indenture, to require the Company to repurchase
all or any part of such Holder's Note on a date selected by the Company that is
no earlier than 60 days nor later than 90 days (the "Change in Control Purchase
Date") after the mailing of written notice by the Company of the occurrence of
such Change in Control, at a repurchase price payable in cash equal to 101% of
the principal amount of such Notes plus accrued interest, if any, thereon to the
Change in Control Purchase Date (the "Change in Control Purchase Price").
Within 30 days after the Change in Control Date, the Company is obligated
to mail to each Holder of a Note a notice regarding the Change in Control, which
notice shall state, among other things:
-- that a Change in Control has occurred and that each such Holder has
the right to require the Company to repurchase all or any part of
such Holder's Notes at the Change in Control Purchase Price;
-- the Change in Control Purchase Price;
-- the Change in Control Purchase Date;
-- the name and address of the Paying Agent; and
-- the procedures that Holders must follow to cause the Notes to be
repurchased.
To exercise this right, a Holder must deliver a written notice (the "Change
in Control Purchase Notice") to the Paying Agent at its corporate trust office
in Detroit, Michigan, or any other office of the Paying Agent maintained for
such purposes, not later than 30 days prior to the Change in Control Purchase
Date. The Change in Control Purchase Notice shall state:
-- the portion of the principal amount of any Notes to be repurchased,
which must be $1,000 or an integral multiple thereof;
-- that such Notes are to be repurchased by the Company pursuant to the
applicable change-in-control provisions of the senior debt indenture;
and
-- unless the Notes are represented by one or more Global Notes, the
certificate numbers of the Notes to be repurchased.
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 Change in Control Purchase Date. The notice of
withdrawal shall state the principal amount and, if applicable, the certificate
numbers of the Notes as to which the withdrawal notice relates and the principal
amount, if any, which remains subject to a Change in Control Purchase Notice.
If a Note is represented by a Global Note, the Depositary (as defined
herein) or its nominee will be the holder of such Note and therefore will be the
only entity that can require the Company to repurchase Notes upon a Change in
Control. To obtain repayment with respect to such Note upon a Change in Control,
the beneficial owner of such Note must provide to the broker or other entity
through which it holds the beneficial interest in such Note (1) the Change in
Control
S-29
<PAGE> 30
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. ("NASD") or a commercial
bank or trust company having an office or correspondent in the United States and
(2) instructions to such broker or other entity to notify the Depositary of such
beneficial owner's desire to cause the Company to repurchase such Notes. Such
broker or other entity will provide to the Paying Agent (1) a Change in Control
Purchase Notice received from such beneficial owner and (2) a certificate
satisfactory to the Paying Agent from such broker or other entity that it
represents such beneficial owner. Such broker or other entity will be
responsible for disbursing any payments it receives upon the repurchase of such
Notes by the Company.
Payment of the Change in Control Purchase Price for a Note in registered,
certificated form (a "Certificated Note") for which a Change in Control Purchase
Notice has been delivered and not withdrawn is conditioned upon delivery of such
Certificated Note (together with necessary endorsements) to the Paying Agent at
its office in Detroit, Michigan, or any other office of the Paying Agent
maintained for such purpose, at any time (whether prior to, on or after the
Change in Control Purchase Date) after the delivery of such Change in Control
Purchase Notice. Payment of the Change in Control Purchase Price for such
Certificated Note will be made promptly following the later of the Change in
Control Purchase Date or the time of delivery of such Certificated Note.
If the Paying Agent holds, in accordance with the terms of the senior debt
indenture, money sufficient to pay the Change in Control Purchase Price of a
Note on the Business Day following the Change in Control Purchase Date for such
Note, then, on and after such date, interest on such Note will cease to accrue,
whether or not such Note is delivered to the Paying Agent, and all other rights
of the Holder shall terminate (other than the right to receive the Change in
Control Purchase Price upon delivery of the Note).
Under the senior debt indenture, a "Change in Control" means an event or
series of events by which:
-- the Company ceases to beneficially own, 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); or
-- any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act) becomes the "beneficial owner" (as such
term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person or group shall be deemed to have "beneficial ownership"
of all shares that such person or group has the right to acquire,
whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 35% of the
Voting Stock of the Company; or
-- 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 where (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.
S-30
<PAGE> 31
The senior debt indenture requires the Company to comply with the
provisions of Regulation 14E and any other tender offer rules under the Exchange
Act which may then be applicable in connection with any offer by the Company to
purchase Notes at the option of Holders upon a Change in Control. The Change in
Control purchase feature of the Notes may in certain circumstances make more
difficult or discourage a takeover of the Company and, thus, the removal of
incumbent management. The Change in Control purchase feature, however, is not
the result of management's knowledge of any specific effort to accumulate shares
of its common stock or to obtain control of the Company by means of a merger,
tender offer, solicitation or otherwise, or part of a plan by management to
adopt a series of anti-takeover provisions. Instead, the Change in Control
purchase feature is a term contained in many similar debt offerings and the
terms of such feature result from negotiations between the Company and the
underwriters. Management has no present intention to propose any anti-takeover
measures although it is possible that the Company could decide to do so in the
future.
No Note may be repurchased by the Company as a result of a Change of
Control if there has occurred and is continuing an Event of Default described
under "Events of Default" below or in the accompanying prospectus (other than a
default in the payment of the Change in Control Purchase Price with respect to
the Notes). In addition, the Company's ability to purchase Notes may be limited
by its financial resources and its inability to raise the required funds because
of restrictions on issuance of securities contained in other contractual
arrangements.
CERTAIN RESTRICTIVE COVENANTS
The senior debt indenture contains the covenants described below. Certain
capitalized terms used below are defined under the heading "Certain Definitions"
below.
LIMITATION ON RESTRICTED PAYMENTS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding and until the Notes are rated BBB- or above (or an equivalent
rating) by Standard & Poor's and one Other Rating Agency, at which time the
Company will be permanently released from the provisions of this "Limitation on
Restricted Payments," the Company will not, and will not permit any of its
Restricted Subsidiaries, directly or indirectly, to:
-- declare or pay any dividend or make any distribution on the Capital
Stock of the Company to the direct or indirect holders of its Capital
Stock (except dividends or distributions payable solely in its
Non-Convertible Capital Stock or in options, warrants or other rights
to purchase such Non-Convertible Capital Stock and except dividends
or distributions payable to the Company or a Subsidiary);
-- purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company; or
-- purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity or scheduled repayment
thereof, any Subordinated Indebtedness (any such dividend,
distribution, purchase, redemption, repurchase, defeasing, other
acquisition or retirement being hereinafter referred to as a
"Restricted Payment"),
if at the time the 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 May 6, 1997
would exceed the sum of: (a) $100,000,000 plus 100% of Consolidated Net Income
from May 6, 1997 to the end of the most recent fiscal quarter ending at least 45
days prior to the
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<PAGE> 32
date of such Restricted Payment (or, in case such sum shall be a deficit, minus
100% of the deficit) and (b) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of or contribution with respect to its Capital
Stock after May 6, 1997.
The foregoing provisions will not prohibit:
-- dividends or other distributions paid in respect of any class of
Capital Stock issued by the Company in connection with the
acquisition of any business or assets by the Company or a Restricted
Subsidiary where the dividends or other distributions with respect to
such Capital Stock are payable solely from the net earnings of such
business or assets;
-- 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);
-- dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividends would have complied
with this covenant; or
-- payments pursuant to the Tax Sharing Agreement.
LIMITATION ON CERTAIN LIENS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding, the Company shall not create, incur, assume or suffer to exist
any Lien upon or with respect to any of its property of any character, including
without limitation any shares of Capital Stock of Consumers or Enterprises,
without making effective provision whereby the Notes shall be (so long as any
such other creditor shall be so secured) equally and ratably secured. The
foregoing restrictions shall not apply to (a) Liens 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
the secured Indebtedness of the Company at such date shall not exceed 5% of
Consolidated Net Tangible Assets or (b) certain liens for taxes, pledges to
secure workman's compensation, other statutory obligations and Support
Obligations, certain materialmen's, mechanic's and similar liens and certain
purchase money liens.
LIMITATION ON ASSET SALES
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding, the Company may not sell, transfer or otherwise dispose of any
property or assets of the Company, including Capital Stock of any Consolidated
Subsidiary, in one transaction or a series of transactions in an amount which
exceeds $50,000,000 (an "Asset Sale") unless the Company shall (1) apply an
amount equal to such excess Net Cash Proceeds to permanently repay Indebtedness
of a Consolidated Subsidiary or Indebtedness of the Company which is pari passu
with the Notes or (2) invest an equal amount not so used in clause (1) in
property or assets of related business within 24 months after the date of the
Asset Sale (the "Application Period") or (3) apply such excess Net Cash Proceeds
not so used in (1) or (2) (the "Excess Proceeds") to make an offer, within 30
days after the end of the Application Period, to purchase from the Holders on a
pro rata basis an aggregate principal amount of Notes on the relevant purchase
date equal to the Excess Proceeds on such date, at a purchase price equal to
100% of the principal amount of the Notes on the relevant purchase date and
unpaid interest, if any, to the purchase date. The Company shall only be
required to make an offer to purchase Notes from Holders pursuant to subsection
(3) if the Excess Proceeds equal or exceed $25,000,000 at any given time.
The procedures to be followed by the Company in making an offer to purchase
Notes from the Holders with Excess Proceeds, and for the acceptance of such
offer by the Holders, shall be the
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<PAGE> 33
same as those set forth above in "-- Purchase of Notes Upon Change of Control"
with respect to a Change in Control.
LIMITATION ON CONSOLIDATION, MERGER, SALE OR CONVEYANCE
In addition to the terms of the senior debt indenture relating to
consolidations or mergers described in the accompanying prospectus, so long as
any of the Notes are outstanding and until the Notes are rated BBB- or above (or
an equivalent rating) by Standard & Poor's and one Other Rating Agency, at which
time the Company will be permanently released from the provisions of this
"Limitation on Consolidation, Merger, Sale or Conveyance" (but not from the
provisions described in the accompanying prospectus which permit a consolidation
or merger provided that the surviving corporation assumes the obligations of the
Company under the Notes and the senior debt indenture and is organized and
existing under the laws of the United States of America, any state thereof or
the District of Columbia), 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 (1) 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 immediately prior to
the transaction, and (2) 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) pursuant to the first paragraph
under "-- Limitation on Consolidated Indebtedness" below. Notwithstanding the
foregoing provisions, such a transaction may constitute a Change of Control as
described in "-- Purchase of Notes Upon Change in Control" above and give rise
to the right of a Holder to require the Company to repurchase all or part of
such Holder's Notes.
LIMITATION ON CONSOLIDATED INDEBTEDNESS
Under the terms of the senior debt indenture, so long as any of the Notes
are outstanding and until the Notes are rated BBB- or above (or an equivalent
rating) by Standard & Poor's and one Other Rating Agency, at which time the
Company will be permanently released from the provisions of this "Limitation on
Consolidated Indebtedness," the Company will not, and will not permit any of its
Consolidated Subsidiaries to, issue, create, assume, guarantee, incur or
otherwise become liable for (collectively, "issue"), directly or indirectly, any
Indebtedness unless the Consolidated Coverage Ratio of the 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 (1) 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, (2) 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 (3) 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 contemporaneously
with the issuance of such Indebtedness, as if in each case such acquisition
occurred at the beginning of the period) exceeds a ratio of 1.7 to 1.0.
The foregoing limitation is subject to exceptions for:
-- Indebtedness of the Company to banks not to exceed $1,000,000,000 in
aggregate outstanding principal amount at any time;
-- Indebtedness outstanding on the date of the Supplemental Indenture
and certain refinancings thereof;
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-- certain refinancings and Indebtedness of the Company to a Subsidiary
or by a Subsidiary to the Company;
-- Indebtedness of a Consolidated Subsidiary issued to acquire, develop,
improve, construct or to provide working capital for a gas, oil or
electric generation, exploration, production, distribution, storage
or transmission facility and related assets; provided that such
Indebtedness is without recourse to any assets of the Company,
Consumers, Enterprises, CMS Generation, CMS Oil & Gas, CMS Electric
and Gas, CMS Gas Transmission, CMS MST or any other Designated
Enterprises Subsidiary;
-- Indebtedness of a Person existing at the time at which such Person
became a Subsidiary and not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary;
-- Indebtedness issued by the Company not to exceed $150,000,000 in
aggregate outstanding principal amount at any time; and
-- Indebtedness of a Consolidated Subsidiary in respect of rate
reduction bonds issued to recover electric restructuring transition
costs of Consumers provided that such Indebtedness is without
recourse to the assets of Consumers.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the senior
debt indenture. Reference is made to the senior debt indenture for a full
definition of all terms as well as any other capitalized terms used herein and
not otherwise defined.
"Business Day" means a day on which banking institutions in New York, New
York or Detroit, Michigan are not authorized or required by law or regulation to
close.
"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 are not considered Capital
Stock for purposes of this definition.
"CMS Electric and Gas" means CMS Electric and Gas Company, a Michigan
corporation and wholly-owned subsidiary of Enterprises.
"CMS Gas Transmission" means CMS Gas Transmission Company (formerly known
as CMS Gas Transmission and Storage Company), a Michigan corporation and
wholly-owned subsidiary of Enterprises.
"CMS Generation" means CMS Generation Co., a Michigan corporation and
wholly-owned subsidiary of Enterprises.
"CMS MST" means CMS Marketing, Services and Trading Company, a Michigan
corporation and wholly-owned subsidiary of Enterprises.
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"CMS Oil & Gas" means, CMS Oil & Gas Co. (formerly known as, "CMS NOMECO
Oil & Gas Co."), a Michigan corporation and wholly-owned subsidiary of the
Company.
"Consolidated Assets" means, at any date of determination, the aggregate
assets of the Company and its Consolidated Subsidiaries determined on a
consolidated basis in accordance with generally accepted accounting principles.
"Consolidated Coverage Ratio" with respect to any period means the ratio of
(1) the aggregate amount of Operating Cash Flow for such period to (2) the
aggregate amount of Consolidated Interest Expense for such period.
"Consolidated Current Liabilities" means, for any period, the aggregate
amount of liabilities of the Company and its Consolidated Subsidiaries which may
properly be classified as current liabilities (including taxes accrued as
estimated), after (1) eliminating all inter-company items between the Company
and any Consolidated Subsidiary and (2) deducting all current maturities of
long-term Indebtedness, all as determined in accordance with generally accepted
accounting principles.
"Consolidated Indebtedness" means, at any date of determination, the
aggregate Indebtedness of the Company and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that Consolidated Indebtedness shall not include
any subordinated debt owned by any Hybrid Preferred Securities Subsidiary.
"Consolidated Interest Expense" means, for any period, the total interest
expense in respect of Consolidated Indebtedness of the Company and its
Consolidated Subsidiaries, including, without duplication:
-- interest expense attributable to capital leases,
-- amortization of debt discount,
-- capitalized interest,
-- cash and noncash interest payments,
-- commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing,
-- net costs under Interest Rate Protection Agreements (including
amortization of discount) and
-- interest expense in respect of obligations of other Persons deemed to
be Indebtedness of the Company or any Consolidated Subsidiaries under
the fifth or sixth bullet points of the definition of Indebtedness,
provided, however, that Consolidated Interest Expense shall exclude (a) any
costs otherwise included in interest expense recognized on early retirement of
debt and (b) any interest expense in respect of any Indebtedness of any
Subsidiary of Consumers, CMS Generation, CMS Oil & Gas, CMS Electric and Gas,
CMS Gas Transmission, CMS MST or any other Designated Enterprises Subsidiary,
provided that such Indebtedness is without recourse to any assets of the
Company, Consumers, Enterprises, CMS Generation, CMS Oil & Gas, CMS Electric and
Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises
Subsidiary.
"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
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accepted accounting principles; provided, however, that there shall not be
included in such Consolidated Net Income:
-- 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;
-- 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;
-- 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; and
-- any net income of any Subsidiary of Consumers, CMS Generation, CMS
Oil & Gas, CMS Electric and Gas, CMS Gas Transmission, CMS MST or any
other Designated Enterprises Subsidiary whose interest expense is
excluded from Consolidated Interest Expense, provided, however, that
for purposes of this bullet point, any cash, dividends or
distributions of any such Subsidiary to the Company shall be included
in calculating Consolidated Net Income.
"Consolidated Net Tangible Assets" means, for any period, the total amount
of assets (less accumulated depreciation or amortization, allowances for
doubtful receivables, other applicable reserves and other properly deductible
items) as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Consolidated Subsidiaries,
determined on a consolidated basis in accordance with generally accepted
accounting principles, and after giving effect to purchase accounting and after
deducting therefrom, to the extent otherwise included, the amounts of:
-- Consolidated Current Liabilities;
-- minority interests in Consolidated Subsidiaries held by Persons other
than the Company or a Restricted Subsidiary;
-- excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors as evidenced by
Board resolutions;
-- any revaluation or other write-up in value of assets subsequent to
December 31, 1996, as a result of a change in the method of valuation
in accordance with generally accepted accounting principles;
-- unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses organization or developmental expenses and other
intangible items;
-- treasury stock; and
-- any cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of
Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities.
"Consolidated Net Worth" of any Person means the total of the amounts shown
on the consolidated balance sheet of such Person and its consolidated
subsidiaries, determined on a
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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 (1) the par or stated
value of all outstanding Capital Stock plus (2) paid-in capital or capital
surplus relating to such Capital Stock plus (3) 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.
"Consumers" means Consumers Energy Company, a Michigan corporation, all of
whose common stock is on the date hereof owned by the Company.
"Designated Enterprises Subsidiary" means any wholly-owned subsidiary of
Enterprises formed after the date of the Supplemental Indenture which is
designated a Designated Enterprises Subsidiary by the Board of Directors.
"Enterprises" means CMS Enterprises Company, a Michigan corporation and
wholly-owned subsidiary of the Company.
"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 nor Redeemable Stock).
"Holder" means the Person in whose name a Note is registered in the
security register kept by the Company for that purpose.
"Hybrid Preferred Securities" means any preferred securities issued by a
Hybrid Preferred Securities Subsidiary, where such preferred securities have the
following characteristics:
-- 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;
-- 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
-- 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):
-- 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;
-- that has been formed for the purpose of issuing Hybrid Preferred
Securities; and
-- 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.
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"Indebtedness" of any Person means, without duplication:
-- 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;
-- all Capital Lease Obligations of such Person;
-- all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
obligations under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business);
-- 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 the bullet
points 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);
-- all obligations of the type referred to in the bullet points above 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
-- all obligations of the type referred to in the bullet points above 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.
"Lien" means any lien, mortgage, pledge, security interest, conditional
sale, title retention agreement or other charge or encumbrance of any kind.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
aggregate proceeds of such Asset Sale including the fair market value (as
determined by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by the Company, net of (1) brokerage commissions and other
fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (2) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Company and
its Restricted Subsidiaries, taken as a whole, (3) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (4) appropriate amounts to be
provided by the Company or any Restricted Subsidiary of the Company as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with generally accepted accounting principles and (b) with respect to any
issuance or sale or contribution in respect of Capital Stock, the aggregate
proceeds of such issuance, sale or contribution, including the fair market value
(as determined by the Board of Directors and net of any associated debt and of
any consideration other than Capital Stock received in return) of property other
than cash, received by the Company, net of attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof, provided, however, that if
such fair market value as
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determined by the Board of Directors of property other than cash is greater than
$25 million, the value thereof shall be based upon an opinion from an
independent nationally recognized firm experienced in the appraisal or similar
review of similar types of transactions.
"Non-Convertible Capital Stock" means, with respect to any corporation, any
non-convertible Capital Stock of such corporation and any Capital Stock of such
corporation convertible solely into non-convertible Capital Stock other than
Preferred Stock of such corporation; provided, however, that Non-Convertible
Capital Stock shall not include any Redeemable Stock or Exchangeable Stock.
"Other Rating Agency" shall mean any one of Fitch, Inc. or Moody's
Investors Service, Inc., and any successor to any of these organizations which
is a nationally recognized statistical rating organization.
"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.
"Paying Agent" means any person authorized by the Company to pay the
principal of (and premium, if any) or interest on any of the Notes on behalf of
the Company. Initially, the Paying Agent is the trustee under the senior debt
indenture.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision of any government.
"Preferred Stock" as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation; provided that
Hybrid Preferred Securities are not considered Preferred Stock for purposes of
this definition.
"Redeemable Stock" means any Capital Stock that by its terms or otherwise
is required to be redeemed prior to the first anniversary of the stated maturity
of the outstanding Notes or is redeemable at the option of the holder thereof at
any time prior to the first anniversary of the stated maturity of the
outstanding 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 one dollar of additional Indebtedness
pursuant to the first paragraph under "Description of the Notes Limitation on
Consolidated Indebtedness," and (1) any such Subsidiary so designated as a
Restricted Subsidiary must be organized under the laws of the United States or
any State thereof, (2) more than 80% of the Voting Stock of such Subsidiary must
be owned of record and beneficially by the Company or a Restricted Subsidiary
and (3) such Restricted Subsidiary must be a Consolidated Subsidiary.
"Standard & Poor's" shall mean Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc., and any successor thereto which is
a nationally recognized
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statistical rating organization, or if such entity shall cease to rate the 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.
"Subordinated Indebtedness" means any Indebtedness of the Company (whether
outstanding on the date of the Supplemental Indenture or thereafter incurred)
which is contractually subordinated or junior in right of payment to the Notes.
"Subsidiary" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries, or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock which ordinarily
has voting power for the election of directors, whether at all times or only so
long as no senior class of stock has such voting power by reason of any
contingency.
"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:
-- 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;
-- to purchase property, securities or services for the purpose of
assuring the owner of such debt of the payment of such debt;
-- 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;
-- 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
-- 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 the Company, each of the
members of the Consolidated Group (as defined therein), and each of the
corporations that become members of the Consolidated Group.
"Voting Stock" means securities of any class or classes the holders of
which are ordinarily, in the absence of contingencies, entitled to vote for
corporate directors (or persons performing similar functions).
EVENTS OF DEFAULT
The occurrence of any of the following events with respect to the Notes
will constitute an "Event of Default" with respect to the Notes:
-- default for 30 days in the payment of any interest on any of the
Notes;
-- default in the payment when due of any of the principal of or the
premium, if any, on any of the Notes, whether at maturity, upon
redemption, acceleration, purchase by the Company at the option of
the Holders or otherwise;
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-- default for 60 days by the Company in the observance or performance
of any other covenant or agreement contained in the senior debt
indenture relating to the Notes after written notice thereof as
provided in the senior debt indenture;
-- certain events of bankruptcy, insolvency or reorganization relating
to the Company or Consumers;
-- entry of final judgments against the Company or Consumers aggregating
in excess of $25,000,000 which remain undischarged or unbonded for 60
days; or
-- a default resulting in the acceleration of indebtedness of the
Company or Consumers in excess of $25,000,000, which acceleration has
not been rescinded or annulled within ten days after written notice
of such default as provided in the senior debt indenture.
If an Event of Default on the Notes shall have occurred and be continuing,
either the trustee or the Holders of not less than 25% in aggregate principal
amount of the Notes then outstanding may declare the principal of all the Notes
and the premium thereon and interest, if any, accrued thereon to be due and
payable immediately.
The senior debt indenture provides that the trustee will be under no
obligation to exercise any of its rights or powers under the senior debt
indenture at the request, order or direction of the Holders of the Notes, unless
such Holders shall have offered to the trustee reasonable indemnity. Subject to
such provisions for indemnity and certain other limitations contained in the
senior debt indenture, the Holders of a majority in aggregate principal amount
of the Senior Debentures of each affected series then outstanding (voting as one
class) will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the trustee, or exercising any trust
or power conferred on the trustee, with respect to the Senior Debentures of such
affected series.
The senior debt indenture provides that no Holder of Notes may institute
any action against the Company under the senior debt indenture (except actions
for payment of overdue principal, premium or interest) unless such Holder
previously shall have given to the trustee written notice of default and
continuance thereof and unless the Holders of not less than 25% in aggregate
principal amount of Senior Debentures of the affected series then outstanding
(voting as one class) shall have requested the trustee to institute such action
and shall have offered the trustee reasonable indemnity, the trustee shall not
have instituted such action within 60 days of such request and the trustee shall
not have received direction inconsistent with such request by the Holders of a
majority in aggregate principal amount of the Senior Debentures of the affected
series then outstanding (voting as one class).
The senior debt indenture requires the Company to furnish to the trustee
annually a statement as to the Company's compliance with all conditions and
covenants under the senior debt indenture. The senior debt indenture provides
that the trustee may withhold notice to the Holders of the Notes of any default
affecting such Notes (except defaults as to payment of principal, premium or
interest on the Notes) if it considers such withholding to be in the interests
of the Holders of the Notes.
BOOK-ENTRY SYSTEM
The Notes will be issued initially in the form of one or more Global Notes
that will be deposited with, or on behalf of, DTC, which will act as securities
depository for the Notes. The Notes will be issued as fully-registered
securities registered in the name of Cede & Co. (DTC's nominee). DTC and any
other depository which may replace DTC as depositary for the Notes are sometimes
referred to herein as the "Depositary." Except under the limited circumstances
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described below, Notes represented by Global Notes will not be exchangeable for
Certificated Notes.
So long as the Depositary, or its nominee, is the registered owner of a
Global Note, such Depositary or such nominee, as the case may be, will be
considered the sole registered holder of the individual Notes represented by
such Global Note for all purposes under the senior debt indenture. Payments of
principal of and premium, if any, and any interest on individual Notes
represented by a Global Note will be made to the Depositary or its nominee, as
the case may be, as the registered holder of such Global Note. Except as set
forth below, owners of beneficial interests in a Global Note will not be
entitled to have any of the individual Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of any such Note and will not be considered the registered holder
thereof under the senior debt indenture, including, without limitation, for
purposes of consenting to any amendment thereof or supplement thereto as
described in the accompanying prospectus.
The following is based upon information furnished by DTC:
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
("Direct Participants") include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations. DTC is owned
by a number of its Direct Participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc., and the NASD. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Commission.
Purchases of Notes under the DTC system must be made by or through Direct
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual purchaser of each Note ("Beneficial Owner") is
in turn to be recorded on the Direct and Indirect Participants' records.
Beneficial Owners will not receive written confirmation from DTC of their
purchase, but Beneficial Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the Direct or Indirect Participant through which the Beneficial
Owner entered into the transaction. Transfers of ownership interests in the
Notes are to be accomplished by entries made on the books of Participants acting
on behalf of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in Notes, except in the event that use of
the book-entry system for one or more Notes is discontinued.
To facilitate subsequent transfers, all Global Notes deposited by
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of Global Notes with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Notes; DTC's records reflect
only the identity of the Direct Participants to whose accounts such Notes are
credited, which may or may not be the Beneficial Owners. The Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to
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Beneficial Owners will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to Notes.
Under its usual procedures, DTC mails an Omnibus Proxy to the Company as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Notes are credited on the record date (identified in a listing attached to the
Omnibus Proxy).
Principal and interest payments on the Notes will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on the payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date. Payments
by Participants to Beneficial Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name" and will be the
responsibility of such Participant and not of DTC, any Agents, or the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of principal and interest to DTC is the responsibility of
the Company, disbursement of such payments to Direct Participants shall be the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners shall be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Notes at any time by giving 90 days' notice to the Company or the
trustee. Under such circumstances, in the event that a successor securities
depository is not obtained, Certificated Notes are required to be printed and
delivered in exchange for the Notes represented by the Global Notes held by the
DTC. See "Certificated Notes."
In addition, the Company may decide to discontinue use of the system of
book-entry transfers through DTC (or a successor securities depositary). In that
event, Certificated Notes will be printed and delivered in exchange for the
Notes represented by the Global Notes held by DTC. See "--Certificated Notes"
below.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from DTC. The Company believes such information to be
reliable, but the Company takes no responsibility for the accuracy thereof.
None of the Company, the underwriters, the trustee, any paying agent or the
registrar for the Notes will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in a Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
CERTIFICATED NOTES
If the Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by the Company by the
earlier of (1) 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 (2) the effectiveness of the
Depositary's resignation or failure to fulfill its duties as Depositary, the
Company will issue Certificated Notes in exchange for the Notes represented by
the Global Notes held by the Depositary. Further, within seven days after the
occurrence of an Event of Default described in the first, second or third bullet
points under "Description of Securities--Events of Default" in the accompanying
prospectus, the Company will issue Certificated Notes in exchange for Notes
represented by a Global Note. In addition, the Company may at any time and in
its sole discretion determine not to have Notes represented by a Global Note
and, in such event, will issue individual Certificated Notes in exchange for the
Notes represented by the Global Note. In any such
S-43
<PAGE> 44
instance, the owner of a beneficial interest in a Note represented by a Global
Note will be entitled to have such Notes registered in its name and will be
entitled to physical delivery of such Note in certificated form. Individual
Certificated Notes so issued will be issued in fully registered form, without
coupons, in one or more authorized denominations as described above under
"--General."
Certificated Notes will be exchangeable for other Certificated Notes of any
authorized denominations and of a like aggregate principal amount and tenor.
Certificated Notes may be presented for exchange as provided above, and may
be presented for registration of transfer (duly endorsed, or accompanied by a
duly executed written instrument of transfer), at the office of the trustee, in
Detroit, Michigan (the "Security Registrar"). The Security Registrar will not
charge a service charge for any registration of transfer or exchange of Notes;
however, the Company may require payment by a Holder of a sum sufficient to
cover any tax, assessment or other governmental charge payable in connection
therewith, as described in the senior debt indenture. Such transfer or exchange
will be effected upon the Security Registrar or such other transfer agent, as
the case may be, being satisfied with the documents of title and identity of the
person making the request. The Company may at any time designate additional
transfer agents with respect to the Notes.
The Company shall not be required to (a) issue, exchange or register the
transfer of any Certificated Note for a period of 15 days next preceding the
mailing of notice of redemption of such Note or (b) exchange or register the
transfer of any Certificated Note or portion thereof selected, called or being
called for redemption, except in the case of any Certificated Note to be
redeemed in part, the portion thereof not so to be redeemed.
If a Certificated Note is mutilated, destroyed, lost or stolen, it may be
replaced at the office of the Security Registrar upon payment by the Holder of
such expenses as may be incurred by the Company and the Security Registrar in
connection therewith and the furnishing of such evidence and indemnity as the
Company and the Security Registrar may require. Mutilated Notes must be
surrendered before new Notes will be issued.
S-44
<PAGE> 45
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus supplement, the underwriters named
below have severally agreed to purchase, and CMS has agreed to sell to them,
severally, the principal amount of Notes indicated below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME OF NOTES
---- ----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... $187,500,000
Morgan Stanley & Co. Incorporated........................... 187,500,000
Barclays Capital Inc........................................ 50,000,000
CIBC World Markets Corp..................................... 50,000,000
Chase Securities Inc........................................ 25,000,000
------------
Total..................................................... $500,000,000
============
</TABLE>
The underwriters are offering the Notes subject to their acceptance of the
Notes from CMS and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept delivery
of the Notes offered by this prospectus supplement are subject to the approval
of certain legal matters by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the Notes offered by this
prospectus supplement if any such Notes are taken.
The underwriters initially propose to offer part of the Notes directly to
the public at the initial public offering price listed on the cover page of this
prospectus supplement and part to certain dealers at a price that represents a
concession not in excess of 1.00% of the principal amount of the Notes. The
underwriters may allow, and such dealers may reallow, a concession to certain
other dealers not to exceed .50% of the principal amount of the Notes. After the
initial offering of the Notes, the offering price and other selling terms may
from time to time be varied by the underwriters.
The Notes are a new issue of securities with no established trading market.
CMS does not intend to apply for listing the Notes on any securities exchange or
for quotation through any inter-dealer quotation system. CMS has been advised by
the underwriters that they presently intend to make a market in the Notes as
permitted by applicable laws and regulations. The underwriters are not
obligated, however, to make a market in any of the Notes and any such market
making may be discontinued at any time without notice at the discretion of the
underwriters. No assurances can be given as to the liquidity of, or the trading
market for, the Notes.
In order to facilitate the offering of the Notes, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Notes. Specifically, the underwriters may over-allot in connection with the
offering, creating a short position in the Notes for their own account. In
addition, to cover over-allotments or to stabilize the price of the Notes, the
underwriters may bid for, and purchase, Notes in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an underwriter
or a dealer for distributing the Notes in the offering, if the syndicate
repurchases previously distributed Notes in transactions to cover syndicate
short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Notes above
independent market levels. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
Affiliates of each of Barclays Capital Inc., Chase Securities Inc. and CIBC
World Markets Corp. act as lenders to CMS under its Revolving Credit Facility.
Since the net proceeds of this offering will initially be used to reduce CMS's
outstanding balance under the Revolving Credit Facility, those affiliates may
receive over 10% of the net proceeds. Under the provisions of
S-45
<PAGE> 46
Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers, when NASD members such as the underwriters distribute securities of a
company in which they or their affiliates intend to receive more than 10% of the
net offering proceeds, not including underwriter compensation, the yield at
which the securities are offered can be no lower than that recommended by the
"qualified independent underwriter," as such term is defined in Rule 2720 of the
Conduct Rules of the NASD. In accordance with these requirements, Donaldson,
Lufkin & Jenrette Securities Corporation has agreed to serve as a "qualified
independent underwriter" and has conducted due diligence and has recommended a
minimum yield for the Notes.
From time to time, some of the underwriters and their affiliates have
provided, and continue to provide, investment banking and commercial banking
services to CMS and its affiliates.
CMS has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
Opinions as to the legality of the Notes will be rendered for CMS by
Michael D. Van Hemert, Assistant General Counsel for CMS. Certain legal matters
with respect to the Notes will be passed upon by Skadden, Arps, Slate, Meagher &
Flom LLP. As of June 30, 2000, an attorney currently employed by Skadden, Arps,
Slate, Meagher & Flom LLP, and formerly employed by CMS, owned approximately
51,734 shares of CMS common stock, 10 shares of Consumers $4.50 Series preferred
stock, $100 par value, and $50,000 aggregate principal amount of certain debt
securities issued by CMS. As of June 30, 2000, Mr. Van Hemert beneficially owned
approximately 4,500 shares of CMS common stock.
EXPERTS
The consolidated financial statements and schedule of CMS as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999 incorporated by reference in this prospectus supplement and the
accompanying prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
With respect to the unaudited interim consolidated financial information
for the periods ended March 31 and June 30, 2000 and 1999, Arthur Andersen LLP
has applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report thereon states that
they did not audit and they did not express an opinion on that interim
consolidated financial information. Accordingly, the degree of reliance on their
report on that information should be restricted in light of the limited nature
of the review procedures applied. In addition, the accountants are not subject
to the liability provisions of Section 11 of the Securities Act for their report
on the unaudited interim consolidated financial information because that report
is not a "report" or "part" of the registration statement prepared or certified
by the accountants within the meaning of Sections 7 and 11 of the Securities
Act.
Future consolidated financial statements of CMS and the reports thereon of
Arthur Andersen LLP also will be incorporated by reference in this prospectus
supplement and the accompanying 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.
S-46
<PAGE> 47
CMS ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PANHANDLE COMPANIES
PRE-ACQUISITION PRO FORMA PRO FORMA ACQUISITION
---------------------------------------- --------------------------
ELIMINATION
OF
RESTRUCTURING OF DUKE
CMS ENERGY PANHANDLE AND ENERGY ACQUISITION FINANCING
HISTORICAL HISTORICAL REALIGNMENT ACTIVITIES ADJUSTMENTS TRANSACTIONS
---------- ---------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue............ $6,103 $133 $-- $ (3)(b) $(2)(g) $ --
Operating expenses Operations
and maintenance............. 4,342 43 (1)(a) 4(c)
Depreciation and
amortization................ 595 14 (1)(a) (1)(d) 2(h)
Property and other taxes.... 254 7 -- --
------ ---- --- ---- --- ----
5,191 64 (2) 3 2 --
------ ---- --- ---- --- ----
Pretax operating income...... 912 69 2 (6) (4) --
Other income (deductions).... 10 5
Fixed charges................ 581 19 2 (13)(e) 48(j)
(9)(k)
Income before income taxes... 341 55 -- 7 (4) (39)
Income taxes................. 64 21 -- 2(f) (1)(i) (13)(l)
------ ---- --- ---- --- ----
Consolidated net income...... $ 277 $ 34 $-- $ 5 $(3) $(26)
====== ==== === ==== === ====
Basic earnings per average
common share
CMS Energy.................. $ 2.18(o)
======
Class G..................... $ 4.21(o)
======
Diluted earnings per average
common share
CMS Energy.................. $ 2.17(o)
======
Class G..................... $ 4.21(o)
======
Average common shares
outstanding CMS Energy...... 110
======
Class G..................... 9(o)
======
<CAPTION>
PRO FORMA ACQUISITION
------------------------
CMS
INTERCOMPANY ENERGY
ELIMINATIONS PRO FORMA
------------ ---------
<S> <C> <C>
Operating revenue............ $ (4)(n) $6,216
(11)(m)
Operating expenses Operations
and maintenance............. (2)(n) 4,375
(11)(m)
Depreciation and
amortization................ (1)(n) 608
Property and other taxes.... 261
---- ------
(14) 5,244
---- ------
Pretax operating income...... (1) 972
Other income (deductions).... 15
Fixed charges................ 628
Income before income taxes... (1) 359
Income taxes................. (1) 72
---- ------
Consolidated net income...... $ -- $ 287
==== ======
Basic earnings per average
common share
CMS Energy.................. $ 2.27(o)
======
Class G..................... $ 4.21(o)
======
Diluted earnings per average
common share
CMS Energy.................. $ 2.26(o)
======
Class G..................... $ 4.21(o)
======
Average common shares
outstanding CMS Energy...... 110
======
Class G..................... 9(o)
======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Income Statement.
F-1
<PAGE> 48
CMS ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
RESTRUCTURING AND REALIGNMENT:
(a) To reflect the results of operations of Panhandle Storage Company and
Trunkline LNG Company, both acquired by CMS Energy, and the transfer of
Panhandle's interest in Northern Border Partners LP and certain
non-operating assets to other subsidiaries of Duke Energy under the
provisions of the Stock Purchase Agreement.
ELIMINATION OF DUKE ENERGY ACTIVITIES:
(b) To reflect the elimination of rental income earned by Panhandle on an
office building, which was transferred to Duke Energy under the provisions
of the Stock Purchase Agreement.
(c) To reflect the elimination of pension income recognized by Panhandle on the
overfunded pension plans of Duke Energy. Under the provisions of the Stock
Purchase Agreement, Duke Energy transferred to CMS Energy an amount of
pension assets equivalent to the Panhandle Companies' liabilities assumed
by CMS Energy.
(d) To reflect the elimination of deprecation associated with an office
building and certain other assets, which were transferred to Duke Energy
under the provisions of the Stock Purchase Agreement.
(e) To reflect a reduction in interest expense relating to the settlement of
certain short-term notes payable to Duke Energy under the provisions of the
Stock Purchase Agreement.
(f) To reflect the income tax expense effects of the pro forma adjustments (b)
through (e) at an estimated rate of 35%.
ACQUISITION ADJUSTMENTS:
(g) To reflect the elimination of non-cash amortization of deferred credits
associated with a Trunkline LNG Company rate settlement.
(h) To reflect depreciation expense on the fair value of property, plant and
equipment prospectively depreciated over a revised estimated average
remaining life of 40 years. Also reflects amortization expense over a
40-year period of the estimated goodwill recognized in the Acquisition.
(i) To reflect the income tax expense effects of pro forma adjustment (g) and
(h) at an estimated rate of 35%.
FINANCING TRANSACTIONS:
(j) To reflect the increase of interest expense relating to the issuance of
$800 million of Panhandle senior notes with a weighted average interest
rate of 6.8% and $1.1 billion of CMS Energy senior notes and trust
preferred securities with a weighted average interest rate of 7.5%.
(k) To reflect the elimination of interest expense incurred in connection with
the utilization of bridge financing facilities.
F-2
<PAGE> 49
(l) To reflect the income tax expense effects of pro forma adjustment (j) and
(k) at an estimated rate of 35%.
INTERCOMPANY ELIMINATIONS:
(m) To reflect the elimination of intercompany transactions between CMS Energy
and the Panhandle Companies.
(n) To eliminate three days of activity subsequent to the acquisition which is
included in CMS Energy historical amounts.
OTHER:
(o) Reflects Class G common stock as outstanding from January 1, 1999 to
October 25, 1999. Reflects the reallocation of net income and earnings per
share as a result of the premium on exchange of Class G common stock. As a
result, CMS Energy's basic and diluted earnings per share were reduced
$0.26 and $0.25, respectively, and Class G's basic and diluted earnings per
share were increased $3.31.
F-3
<PAGE> 50
CMS ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PANHANDLE COMPANIES
PRE-ACQUISITION PRO FORMA PRO FORMA ACQUISITION
---------------------------------------- -----------------------------------------------------
ELIMINATION
RESTRUCTURING OF DUKE CMS
CMS ENERGY PANHANDLE AND ENERGY ACQUISITION FINANCING INTERCOMPANY ENERGY
HISTORICAL HISTORICAL REALIGNMENT ACTIVITIES ADJUSTMENTS TRANSACTIONS ELIMINATIONS PRO FORMA
---------- ---------- ------------- ----------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue.... $2,869 $133 $-- $ (3)(b) $(2)(g) $ -- $ (4)(n) $2,982
(11)(m)
Operating expenses
Operations and
maintenance......... 1,979 43 (1)(a) 4(c) (2)(n) 2,012
(11)(m)
Depreciation and
amortization........ 288 14 (1)(a) (1)(d) 2(h) (1)(n) 301
Property and other
taxes............... 126 7 -- -- 133
------ ---- --- ---- --- ---- ---- ------
2,393 64 (2) 3 2 -- (14) 2,446
------ ---- --- ---- --- ---- ---- ------
Pretax operating
income.............. 476 69 2 (6) (4) -- (1) 536
Other income
(deductions)........ 17 5 22
Fixed charges........ 253 19 2 (13)(e) (9)(k) 300
48(j)
Income before income
taxes............... 240 55 -- 7 (4) (39) (1) 258
Income taxes......... 67 21 -- 2(f) (1)(i) (14)(l) (1) 74
------ ---- --- ---- --- ---- ---- ------
Consolidated net
income.............. $ 173 $ 34 $-- $ 5 $(3) $(25) $ -- $ 184
====== ==== === ==== === ==== ==== ======
Basic earnings per
average common share
CMS Energy.......... $ 1.50 $ 1.59
====== ======
Class G............. $ 1.28 $ 1.28
====== ======
Diluted earnings per
average common share
CMS Energy.......... $ 1.48 $ 1.57
====== ======
Class G............. $ 1.28 $ 1.28
====== ======
Average common shares
outstanding CMS
Energy.............. 108 108
====== ======
Class G............. 9 9
====== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Income Statement.
F-4
<PAGE> 51
CMS ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1999
RESTRUCTURING AND REALIGNMENT:
(a) To reflect the results of operations of Panhandle Storage Company and
Trunkline LNG Company, both acquired by CMS Energy, and the transfer of
Panhandle's interest in Northern Border Partners LP and certain
non-operating assets to other subsidiaries of Duke Energy under the
provisions of the Stock Purchase Agreement.
ELIMINATION OF DUKE ENERGY ACTIVITIES:
(b) To reflect the elimination of rental income earned by Panhandle on an
office building, which was transferred to Duke Energy under the provisions
of the Stock Purchase Agreement.
(c) To reflect the elimination of pension income recognized by Panhandle on the
overfunded pension plans of Duke Energy. Under the provisions of the Stock
Purchase Agreement, Duke Energy transferred to CMS Energy an amount of
pension assets equivalent to the Panhandle Companies' liabilities assumed
by CMS Energy.
(d) To reflect the elimination of deprecation associated with an office
building and certain other assets, which were transferred to Duke Energy
under the provisions of the Stock Purchase Agreement.
(e) To reflect a reduction in interest expense relating to the settlement of
certain short-term notes payable to Duke Energy under the provisions of the
Stock Purchase Agreement.
(f) To reflect the income tax expense effects of the pro forma adjustments (b)
through (e) at an estimated rate of 35%.
ACQUISITION ADJUSTMENTS:
(g) To reflect the elimination of non-cash amortization of deferred credits
associated with a Trunkline LNG Company rate settlement.
(h) To reflect depreciation expense on the fair value of property, plant and
equipment prospectively depreciated over a revised estimated average
remaining life of 40 years. Also reflects amortization expense over a
40-year period of the estimated goodwill recognized in the Acquisition.
(i) To reflect the income tax expense effects of pro forma adjustment (g) and
(h) at an estimated rate of 35%.
FINANCING TRANSACTIONS:
(j) To reflect the increase of interest expense relating to the issuance of
$800 million of Panhandle senior notes with a weighted average interest
rate of 6.8% and $1.1 billion of CMS Energy senior notes and trust
preferred securities with a weighted average interest rate of 7.5%.
(k) To reflect the elimination of interest expense incurred in connection with
the utilization of bridge financing facilities.
F-5
<PAGE> 52
(l) To reflect the income tax expense effects of pro forma adjustments (j) and
(k)at an estimated rate of 35%.
INTERCOMPANY ELIMINATIONS:
(m) To reflect the elimination of intercompany transactions between CMS Energy
and the Panhandle Companies.
(n) To eliminate three days of activity subsequent to the acquisition which is
included in CMS Energy historical amounts.
F-6
<PAGE> 53
CMS ENERGY CORPORATION
CMS ENERGY COMMON STOCK
CLASS G COMMON STOCK
SENIOR DEBENTURES
SUBORDINATED DEBENTURES
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
GUARANTEES
AND
CMS ENERGY TRUST II
CMS ENERGY TRUST III
TRUST PREFERRED SECURITIES
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
CMS ENERGY CORPORATION
OFFERING PRICE: $1,500,000,000
------------------------
We may offer, from time to time:
(i) shares of CMS Energy Common Stock,
(ii) shares of Class G Common Stock,
(iii) unsecured senior or subordinated debt securities consisting of
debentures, convertible debentures, notes and other unsecured evidence of
indebtedness,
(iv) stock purchase contracts to purchase CMS Energy Common Stock,
(v) stock purchase units, each representing ownership of a stock purchase
contract and unsecured senior or subordinated debt securities or trust preferred
securities or debt obligations of third parties, including U.S. Treasury
Securities, securing the holder's obligation to purchase the CMS Energy Common
Stock under the stock purchase contract, or any combination of the above, and
(vi) Guarantees of CMS Energy with respect to Trust Preferred Securities of
CMS Energy Trusts II and III.
For each type of securities listed above, the amount, price and terms will be
determined at or prior to the time of sale.
CMS Energy Trust II and CMS Energy Trust III, which are Delaware business
trusts, may offer trust preferred securities. The trust preferred securities
represent preferred undivided beneficial interests in the assets of CMS Energy
Trust II and CMS Energy Trust III in amounts, at prices and on terms to be
determined at or prior to the time of sale.
We will provide the specific terms of these securities in an accompanying
prospectus supplement or supplements. You should read this prospectus and the
accompanying prospectus supplement or supplements carefully before you invest.
CMS Energy Common Stock and Class G Common Stock are traded on the New York
Stock Exchange under the symbol "CMS". CMS Energy Common Stock and Class G
Common Stock sold pursuant to a prospectus supplement or supplements
accompanying this prospectus will also be listed for trading on the New York
Stock Exchange, subject to official notice of issuance.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
We intend to sell these securities through underwriters, dealers, agents or
directly to a limited number of purchasers. The names of, and any securities to
be purchased by or through, these parties, the compensation of these parties and
other special terms in connection with the offering and sale of these securities
will be provided in the related prospectus supplement or supplements.
This prospectus may not be used to consummate sales of any of these securities
unless accompanied by a prospectus supplement.
The date of this prospectus is May 7, 1999
<PAGE> 54
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT, AND ANY INFORMATION
OR REPRESENTATION NOT CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY CMS ENERGY OR ANY UNDERWRITER, DEALER OR AGENT.
THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH THEY RELATE OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT
NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED OR INCORPORATED HEREIN OR THEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
AVAILABLE INFORMATION
CMS Energy is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "COMMISSION"). Information, as of particular dates, concerning
CMS Energy's directors and officers, their remuneration, the principal holders
of CMS Energy's securities and any material interest of such persons in
transactions with CMS Energy is disclosed in proxy statements distributed to
shareholders of CMS Energy and filed with the Commission. Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at 500 West Madison Street, Chicago, Illinois 60661 and at Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
also maintains a Web site (http://www.sec.gov) that contains reports, proxy
statements and other information regarding CMS Energy. The outstanding shares of
CMS Energy Common Stock and Class G Common Stock are listed on the New York
Stock Exchange ("NYSE") and reports, proxy statements and other information
concerning CMS Energy may also be inspected and copied at the offices of such
exchange at 20 Broad Street, New York, New York 10005.
No separate financial statements of the Trusts have been included herein.
CMS Energy and the Trusts do not consider that such financial statements would
be material to holders of Trust Preferred Securities because each Trust is a
newly organized special purpose entity, has no operating history and no
independent operations and is not engaged in, and does not propose to engage in,
any activity other than as described under "CMS Energy Trusts". Further, CMS
Energy believes that financial statements of the Trusts are not material to the
holders of the Trust Preferred Securities since CMS Energy will guarantee the
Trust Preferred Securities such that the holders of the Trust Preferred
2
<PAGE> 55
Securities, with respect to the payment of distributions and amounts upon
liquidation, dissolution and winding-up, are at least in the same position
vis-a-vis the assets of CMS Energy as a preferred stockholder of CMS Energy. CMS
Energy beneficially owns directly or indirectly all of the undivided beneficial
interests in the assets of the Trusts (other than the beneficial interests
represented by the Trust Preferred Securities). See "CMS Energy Trusts,"
"Description of Securities -- Trust Preferred Securities" and "Description of
Securities -- The Guarantees." In future filings under the Exchange Act, an
audited footnote to CMS Energy's annual financial statements will state that the
Trusts are wholly-owned by CMS Energy, that the sole assets of the Trusts are
the Senior Debentures or the Subordinated Debentures of CMS Energy having a
specified aggregate principal amount, and, considered together, the back-up
undertakings, including the Guarantees, constitute a full and unconditional
guarantee by CMS Energy of the Trusts' obligations under the Trust Preferred
Securities issued by the Trusts.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by CMS Energy (File No. 1-9513) with the
Commission pursuant to the Exchange Act are hereby incorporated by reference in
this prospectus and shall be deemed to be a part hereof:
(1) CMS Energy's Registration Statement on Form 8-B/A dated November 21,
1996;
(2) CMS Energy's Annual Report on Form 10-K for the year ended December 31,
1998; and
(3) CMS Energy's Current Reports on Form 8-K filed January 20 and April 6,
1999.
All documents subsequently filed by CMS Energy pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act and prior to the termination of the
offering made by this prospectus (the "OFFERING") shall be deemed to be
incorporated by reference herein and shall be deemed to be a part hereof from
the date of filing of such documents (such documents, and the documents
enumerated above, being hereinafter referred to as "INCORPORATED DOCUMENTS").
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this prospectus to the extent that a
statement contained herein or in any other subsequently filed Incorporated
Document modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
CMS Energy undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this prospectus has been delivered, upon
the written or oral request of any such person, a copy of any and all of the
documents referred to above which have been or may be incorporated in this
prospectus by reference, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference into such documents).
Requests for such copies should be directed to CMS Energy at its principal
executive offices located at Fairlane Plaza South, Suite 1100, 330 Town Center
Drive, Dearborn, Michigan 48126, Attention: Office of the Secretary, telephone:
(313) 436-9200.
Certain information contained in this prospectus summarizes, is based upon,
or refers to information and financial statements contained in one or more
Incorporated Documents;
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accordingly, such information contained herein is qualified in its entirety by
reference to such documents and should be read in conjunction therewith.
CMS ENERGY CORPORATION
CMS Energy Corporation, a Michigan corporation ("CMS ENERGY") incorporated
in 1987, is the parent holding company of Consumers Energy Company ("CONSUMERS")
and CMS Enterprises Company ("ENTERPRISES"). Consumers, a combination electric
and gas utility company serving 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
segment 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.
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 or Consumers' subsidiaries
are engaged in two segments: electric operations and gas operations. Consumers'
electric and gas businesses are principally regulated utility operations. CMS
Energy and its subsidiaries routinely evaluate, invest in, acquire and divest
energy-related assets and/or companies both domestically and internationally.
Consideration for such transactions may involve the delivery of cash or
securities.
CMS Energy's 1998 consolidated operating revenue was $5.1 billion. This
consolidated operating revenue was derived from its electric utility operations
(approximately 51%), its gas utility operations (approximately 21%), marketing,
services and trading (approximately 18%), independent power production and other
non-utility activities (approximately 6%), gas transmission, storage and
processing activities (approximately 3%), and oil and gas exploration and
production activities (approximately 1%). Consumers' consolidated operations in
the electric and gas utility businesses account for the majority 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 1998 was $1.317
billion.
Consumers is a public utility serving gas or electricity to almost six
million of Michigan's nine and a half million residents in Michigan's Lower
Peninsula. Industries in Consumers' service area include automotive, metal,
chemical, food and wood products industries and a diversified group of other
industries. Consumers' 1998 consolidated operating revenue of $3.7 billion was
derived approximately 70% from its electric utility business, approximately 29%
from its gas utility business and approximately 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 (the "MPSC") and
the Federal Energy Regulatory Commission. Consumers' nuclear operations are
subject to the jurisdiction of the Nuclear Regulatory Commission.
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CMS Energy and its subsidiaries routinely evaluate, invest in, acquire and
divest energy-related assets and/or businesses both domestically and
internationally. Consideration for such transactions may involve the delivery of
cash or securities.
The foregoing information concerning CMS Energy and it 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, prospective purchasers should refer to the Incorporated
Documents. See "Incorporation of Certain Documents by Reference" and "Available
Information" above.
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.
RECENT DEVELOPMENTS
ACQUISITION OF THE PANHANDLE COMPANIES
On March 29, 1999 we acquired from Duke Energy Corporation all of the
outstanding common stock of Panhandle Eastern Pipe Line Company ("PANHANDLE")
and its principal subsidiaries, Trunkline Gas Company ("TRUNKLINE") and Pan Gas
Storage Company, as well as its affiliates, Panhandle Storage Company and
Trunkline LNG Company ("TRUNKLINE LNG" and, collectively, the "PANHANDLE
COMPANIES"). We paid $1.9 billion in cash to Duke Energy Corporation and assumed
approximately $300 million of existing Panhandle debt.
The Panhandle Companies are primarily engaged in the interstate
transmission and storage of natural gas. The Panhandle Companies operate one of
the nation's largest natural gas pipeline networks, providing customers in the
Midwest and Southwest with a comprehensive array of transportation services.
This interconnected 10,400 mile system accesses virtually all major natural gas
regions in the United States.
Panhandle's transmission system consists of four large-diameter parallel
pipelines and extends approximately 1,300 miles from producing areas in the
Anadarko Basin of Texas, Oklahoma and Kansas through the states of Missouri,
Illinois, Indiana and Ohio into Michigan. Panhandle's system connects with the
Trunkline system at Tuscola, Illinois.
Trunkline's transmission system consists principally of three
large-diameter parallel pipelines extending approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. Trunkline also owns and operates two offshore Louisiana
natural gas supply systems consisting of 337 miles of pipeline extending
approximately 81 miles into the Gulf of Mexico.
Panhandle's major customers include approximately 20 utilities located in
the Midwest market area that encompasses large portions of Michigan, Ohio,
Indiana, Illinois and Missouri. Trunkline's major customers include six
utilities located in portions of Illinois, Indiana, Michigan, Ohio and
Tennessee. Transportation service for Consumers accounted for approximately 10%
of the combined revenue of the Panhandle Companies.
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The Panhandle Companies own and operate five underground gas storage fields
located in Illinois, Michigan, Kansas, Oklahoma and Louisiana with a combined
maximum working gas storage capacity of 70 billion cubic feet.
Trunkline LNG owns a liquified natural gas ("LNG") regasification plant and
related LNG tanker port, unloading facilities and LNG and gas storage facilities
located at Lake Charles, Louisiana. The LNG plant has the capacity to deliver
700 million cubic feet per day but has been operated on a limited basis for a
number of years.
The rates and operations of the Panhandle Companies are subject to
regulation by the Federal Energy Regulatory Commission.
We used approximately $600 million in bridge financing, $500 million in
revolving credit loans and $800 million of senior unsecured notes issued by CMS
Panhandle Holding Company to fund the cash portion of the purchase price for the
acquisition of the Panhandle Companies. We expect to complete permanent
financing of the acquisition with existing arrangements and the sale of
approximately $600 million of our common stock and/or other securities.
Please refer to our Forms 8-K filed January 20 and April 6, 1999 for
further information concerning this transaction.
CMS ENERGY TRUSTS
CMS Energy Trust II and CMS Energy Trust III are statutory business trusts
formed under the Delaware Business Trust Act (the "TRUST ACT") (each, a "TRUST"
and collectively, the "TRUSTS") pursuant to: (i) a trust agreement executed by
CMS Energy, as sponsor, and the trustees of the Trusts (the "CMS TRUSTEES"); and
(ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware. At the time of public issuance of Trust Preferred Securities,
each trust agreement will be amended and restated in its entirety (as so amended
and restated, the "TRUST AGREEMENT") and will be qualified as an indenture under
the Trust Indenture Act of 1939, as amended (the "TRUST INDENTURE ACT"). CMS
Energy will directly or indirectly acquire common securities of each Trust (the
"COMMON SECURITIES" and, together with the Trust Preferred Securities, the
"TRUST SECURITIES") in an aggregate liquidation amount equal to approximately 3%
of the total capital of the Trust. Each Trust exists for the exclusive purposes
of: (i) issuing the Trust Preferred Securities and Common Securities
representing undivided beneficial interests in the assets of the Trust; (ii)
investing the gross proceeds of the Trust Securities in the Senior Debentures or
Subordinated Debentures; and (iii) engaging in only those other activities
necessary or incidental thereto. Each Trust has a term of approximately 30
years, but may terminate earlier as provided in the Trust Agreement.
The undivided common beneficial interests in the Trust will be owned by CMS
Energy. The proceeds from the offering of the Trust Preferred Securities and the
sale of the Common Securities may be contributed by the Trust to purchase from
CMS Energy Senior Debentures or Subordinated Debentures in an aggregate
principal amount equal to the aggregate liquidation preference of the Trust
Securities, bearing interest at an annual rate equal to the annual distribution
rate of such Trust Securities and having certain redemption terms which
correspond to the redemption terms for the Trust Securities. The Senior
Debentures will rank on an equal basis with all other unsecured debt of CMS
Energy except subordinated debt. The Subordinated Debentures will rank
subordinate in right of payment to all of CMS Energy's Senior Indebtedness (as
defined herein).
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Distributions on the Trust Securities may not be made unless the Trust receives
corresponding interest payments on the Senior Debentures or the Subordinated
Debentures from CMS Energy. CMS Energy will irrevocably guarantee, on a senior
or subordinated basis, as applicable, and to the extent set forth therein, with
respect to each of the Trust Securities, the payment of distributions, the
redemption price, including all accrued or deferred and unpaid distributions,
and payment on liquidation, but only to the extent of funds on hand. Each
Guarantee will be unsecured and will be either equal to or subordinate to, as
applicable, all Senior Indebtedness, of CMS Energy. Upon the occurrence of
certain events (subject to the conditions to be described in an accompanying
prospectus supplement) the Trust may be liquidated and the holders of the Trust
Securities could receive Senior Debentures or Subordinated Debentures in lieu of
any liquidating cash distribution.
Pursuant to the Trust Agreement, the number of CMS Trustees will initially
be three. Two of the CMS Trustees (the "ADMINISTRATIVE TRUSTEES") will be
persons who are employees or officers of or who are affiliated with CMS Energy.
The third trustee will be a financial institution that is unaffiliated with CMS
Energy, which trustee will serve as property trustee under the Trust Agreement
and as indenture trustee for the purposes of compliance with the provisions of
the Trust Indenture Act (the "PROPERTY TRUSTEE"). Initially, either The Bank of
New York, a New York banking corporation, or NBD Bank, a Michigan banking
corporation, will be the Property Trustee until removed or replaced by the
holder of the Common Securities. For the purpose of compliance with the
provisions of the Trust Indenture Act, The Bank of New York or NBD Bank will
also act as trustee (each a "GUARANTEE TRUSTEE" and collectively the "GUARANTEE
TRUSTEES"). The Bank of New York (Delaware) will act as the Delaware Trustee for
the purposes of the Trust Act, until removed or replaced by the holder of the
Common Securities. See "Description of Securities -- The Guarantees."
Each Property Trustee will hold title to the applicable Debt Securities for
the benefit of the holders of the Trust Securities and each Property Trustee
will have the power to exercise all rights, powers and privileges under the
applicable indentures (as defined herein) as the holder of the Debt Securities.
In addition, each Property Trustee will maintain exclusive control of a
segregated non-interest bearing bank account (the "PROPERTY ACCOUNT") to hold
all payments made in respect of the Debt Securities for the benefit of the
holders of the Trust Securities. Each Property Trustee will make payments of
distributions and payments on liquidation, redemption and otherwise to the
holders of the Trust Securities out of funds from the Property Account. The
Guarantee Trustees will hold the Guarantees for the benefit of the holders of
the Trust Securities. CMS Energy, as the direct or indirect holder of all the
Common Securities, will have the right to appoint, remove or replace any CMS
Trustee and to increase or decrease the number of CMS Trustees; provided, that
the number of CMS Trustees shall be at least three, a majority of which shall be
Administrative Trustees. CMS Energy will pay all fees and expenses related to
the Trusts and the offering of the Trust Securities.
The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
Trust Agreement, the Trust Act and the Trust Indenture Act.
The trustee in the State of Delaware is The Bank of New York (Delaware),
White Clay Center, Route 273, Newark, Delaware 19711.
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The principal place of business of each Trust shall be c/o CMS Energy
Corporation, Fairlane Plaza South, 330 Town Center Drive, Suite 1100, Dearborn,
Michigan 48126-2712.
USE OF PROCEEDS
The proceeds received by each of the Trusts from the sale of its Trust
Preferred Securities or the Common Securities will be invested in the Senior
Debentures or the Subordinated Debentures. As will be more specifically set
forth in the applicable prospectus supplement, CMS Energy will use such borrowed
amounts and the net proceeds from the sale of CMS Energy Common Stock, Class G
Common Stock, Stock Purchase Contracts, Stock Purchase Units and any Senior
Debentures or Subordinated Debentures offered hereby for its general corporate
purposes, including capital expenditures, investment in subsidiaries, working
capital and repayment of debt.
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The ratios of earnings to fixed charges and the ratios of earnings to fixed
charges and preferred stock dividends for each of the years ended December 31,
1993 through 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges.......... 1.59 1.78 1.96 1.90 2.07 1.75
Ratio of earnings to fixed charges and
preferred stock dividends................. 1.43 1.59 1.75 1.74 1.88 1.68
</TABLE>
For the purpose of computing such ratios, earnings represent net income
before income taxes, net interest charges and the estimated interest portion of
lease rentals.
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DESCRIPTION OF SECURITIES
INTRODUCTION
Specific terms of the shares of Common Stock, par value $.01 per share
("CMS ENERGY COMMON STOCK"), shares of Class G Common Stock, no par value
("CLASS G COMMON STOCK"), unsecured senior debt securities (the "SENIOR
DEBENTURES") and unsecured subordinated debt securities (the "SUBORDINATED
DEBENTURES") (individually a "DEBT SECURITY" and collectively the "DEBT
SECURITIES") consisting of debentures, convertible debentures, notes and other
unsecured evidence of indebtedness, Stock Purchase Contracts (the "STOCK
PURCHASE CONTRACTS") to purchase CMS Energy Common Stock, Stock Purchase Units
(the "STOCK PURCHASE UNITS"), each representing ownership of a Stock Purchase
Contract and Debt Securities, or Trust Preferred Securities or debt obligations
of third parties, including U.S. Treasury Securities, securing the holder's
obligation to purchase the CMS Energy Common Stock under the Stock Purchase
Contract, or any combination of the foregoing, irrevocable guarantees
(individually a "GUARANTEE" and collectively "GUARANTEES") of CMS Energy, on a
senior or subordinated basis as applicable, and to the extent set forth therein,
with respect to each of the Trust Securities, the payment of distributions, the
redemption price, including all accrued or deferred and unpaid distributions,
and payment on liquidation, but only to the extent of fund on hand, and trust
preferred securities (the "TRUST PREFERRED SECURITIES") representing preferred
undivided beneficial interests in the assets of the Trust, in respect of which
this prospectus is being delivered (collectively, the "OFFERED SECURITIES"),
will be set forth in an accompanying prospectus supplement or supplements,
together with the terms of the offering of the Offered Securities, the initial
price thereof and the net proceeds from the sale thereof. The prospectus
supplement will set forth with regard to the particular Offered Securities,
without limitation, the following: (i) in the case of Debt Securities, the
designation, aggregate principal amount, denomination, maturity, premium, if
any, any exchange, conversion, redemption or sinking fund provisions, interest
rate (which may be fixed or variable), the time or method of calculating
interest payments, the right of CMS Energy, if any, to defer payment or interest
on the Debt Securities and the maximum length of such deferral, put options, if
any, public offering price, ranking, any listing on a securities exchange and
other specific terms of the offering; (ii) in the case of CMS Energy Common
Stock or Class G Common Stock, the designation, number of shares, public
offering price and other specific terms of the Offering, from the sale thereof;
(iii) in the case of Trust Preferred Securities, the designation, number of
shares, liquidation preference per security, initial public offering price, any
listing on a securities exchange, dividend rate (or method of calculation
thereof), dates on which dividends shall be payable and dates from which
dividends shall accrue, any voting rights, any redemption, exchange, conversion
or sinking fund provisions and any other rights, preferences, privileges,
limitations or restrictions relating to a specific series of the Trust Preferred
Securities including a description of the Guarantee (as defined herein), as the
case may be; and (iv) in the case of Stock Purchase Units, the specific terms of
the Stock Purchase Contracts and any Debt Securities, Trust Preferred
Securities, or debt obligations of third parties securing the holders obligation
to purchase CMS Energy Common Stock and Class G Common Stock under the Stock
Purchase Contracts, and the terms of the offering and sale thereof.
CAPITAL STOCK
The following summary of certain rights of the holders of CMS Energy
capital stock does not purport to be complete and is qualified in its entirety
by express reference to the
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Restated Articles of Incorporation of CMS Energy (the "ARTICLES OF
INCORPORATION") and the By-Laws of CMS Energy, copies of which are filed as
exhibits to the Registration Statement of which this prospectus is a part, and
by express reference to the Registration Statement on Form 8-B/A, which is
incorporated into this prospectus by reference. See "Incorporation of Certain
Documents by Reference" herein.
The authorized capital stock of CMS Energy consists of 250 million shares
of CMS Energy Common Stock, 60 million shares of Class G Common, and 10 million
shares of CMS Energy Preferred Stock, $.01 par value ("PREFERRED STOCK"). The
CMS Energy Common Stock and the Class G Common Stock are sometimes together
referred to herein as the "Common Stock."
COMMON STOCK
The Class G Common Stock is intended to reflect the separate performance of
the gas distribution, storage and transportation businesses conducted by
Consumers and Michigan Gas Storage, a subsidiary of Consumers (such businesses,
collectively, have been attributed to the "CONSUMERS GAS GROUP"). The CMS Energy
Common Stock is intended to reflect the performance of all businesses of CMS
Energy and its subsidiaries, including the businesses of the Consumers Gas
Group, except for the interest in the Consumers Gas Group attributable to the
outstanding shares of Class G Common Stock.
DIVIDEND RIGHTS AND POLICY; RESTRICTIONS ON DIVIDENDS
Dividends on the CMS Energy Common Stock are paid at the discretion of the
Board of Directors based primarily upon the earnings and financial condition of
CMS Energy, including the Consumers Gas Group, except for the interest in the
Consumers Gas Group attributable to the outstanding shares of the Class G Common
Stock, and other factors. Dividends are payable out of the assets of CMS Energy
legally available therefore, including the Available Class G Dividend Amount (as
defined in the Articles of Incorporation).
Dividends on the Class G Common Stock are paid at the discretion of the
Board of Directors based primarily upon the earnings and financial condition of
the Consumers Gas Group, and, to a lesser extent, CMS Energy as a whole.
Dividends are payable out of the lesser of (i) the assets of CMS Energy legally
available therefor 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 and cash flows of its subsidiaries and the
distribution or other payment of such earnings to CMS Energy in the form of
dividends,
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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.
Dividends on capital stock of CMS Energy are limited by Michigan law to
legally available assets of CMS Energy. Distributions on Common Stock may be
subject to the rights of the holders, if any, of the CMS Energy Preferred Stock.
There are restrictions on CMS Energy's ability to pay dividends contained
in certain revolving credit and term loan agreements, the indenture dated as of
September 15, 1992, as amended and supplemented, between CMS Energy and NBD
Bank, as Trustee, and the indenture dated as of January 15, 1994, as amended and
supplemented, between CMS Energy and The Chase Manhattan Bank, as Trustee. A
discussion of specific restrictions on CMS Energy's ability to pay dividends
will be set forth in an accompanying prospectus supplement pursuant to which
convertible Senior Debentures, Subordinated Debentures, convertible Trust
Preferred Securities, Stock Purchase Contracts, Stock Purchase Units, CMS Energy
Common Stock or Class G Common Stock are offered.
VOTING RIGHTS
The holders of CMS Energy Common Stock vote with the holders of Class G
Common Stock as a single class, except on matters which would be required by law
or the Articles of Incorporation to be voted on by class. Each holder of Common
Stock is entitled to one vote for each share of Common Stock held by such holder
on each matter voted upon by the shareholders. Such right to vote is not
cumulative. A majority of the votes cast by the holders of shares entitled to
vote thereon is sufficient for the adoption of any question presented, except
that certain provisions of the Articles of Incorporation relating to special
shareholder meetings, the removal, indemnification and liability of the Board of
Directors and the requirements for amending these provisions may not be amended,
altered, changed or repealed unless such amendment, alteration, change or repeal
is approved by the affirmative vote of at least 75% of the outstanding shares
entitled to vote thereon.
Under Michigan law, the approval of the holders of a majority of the
outstanding shares of a class of Common Stock, voting as a separate class, would
be necessary for authorizing, effecting or validating the merger or
consolidation of CMS Energy into or with any other corporation if such merger or
consolidation would adversely affect the powers or special rights of such class
of stock, and to authorize any amendment to the Articles of Incorporation that
would increase or decrease the aggregate number of authorized shares of such
class (except pursuant to Section 303 of the Michigan Business Corporation Act,
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
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
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entity if such merger or consolidation would adversely affect the powers or
special rights of such class of Common Stock, either directly by amendment to
the Articles of Incorporation or indirectly by requiring the holders of such
class to accept or retain, in such merger or consolidation, anything other than
(i) shares of such class or (ii) shares of the surviving or resulting
corporation, having, in either case, powers and special rights identical to
those of such class prior to such merger or consolidation. The effect of these
provisions may be to permit the holders of a majority of the outstanding shares
of either class of Common Stock to block any such merger or amendment which
would adversely affect the powers or special rights of holders of such class of
Common Stock.
PREEMPTIVE RIGHTS
The Articles of Incorporation provide that holders of Common Stock will
have no preemptive rights to subscribe for or purchase any additional shares of
the capital stock of CMS Energy of any class now or hereafter authorized, or
Preferred Stock, bonds, debentures, or other obligations or rights or options
convertible into or exchangeable for or entitling the holder or owner to
subscribe for or purchase any shares of capital stock, or any rights to exchange
shares issued for shares to be issued.
LIQUIDATION RIGHTS
In the event of the dissolution, liquidation or winding up of CMS Energy,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of CMS Energy and after there shall have been paid
or set apart for the holders of Preferred Stock the full preferential amounts
(including any accumulated and unpaid dividends) to which they are entitled, the
holders of CMS Energy Common Stock and Class G Common Stock shall be entitled to
receive, on a per share basis, the same portion of all of the assets of CMS
Energy remaining for distribution to the holders of Common Stock, regardless of
whether or not any of such assets were attributed to the Consumers Gas Group.
Neither the merger or consolidation of CMS Energy into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with CMS Energy nor any sale, transfer or lease of all or any part of the assets
of CMS Energy, shall be deemed to be a dissolution, liquidation or winding up
for the purposes of this provision.
Because CMS Energy has subsidiaries which have debt obligations and other
liabilities of their own, CMS Energy's rights and the rights of its creditors
and its stockholders to participate in the distribution of assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
prior claims of the subsidiary's creditors, except to the extent that CMS Energy
may itself be a creditor with recognized claims against the subsidiary.
SUBDIVISION OR COMBINATION
If CMS Energy subdivides (by stock split, stock dividend or otherwise) or
combines (by reverse stock split or otherwise) the outstanding shares of either
Class G Common Stock or CMS Energy Common Stock, the voting and liquidation
rights of shares of CMS Energy Common Stock relative to Class G Common Stock
will be appropriately adjusted so as to avoid any dilution in aggregate voting
or liquidation rights of either class of Common Stock. For example, in case CMS
Energy were to effect a two-for-one split of Class G Common Stock, the per share
liquidation rights of CMS Energy Common Stock would be multiplied by two in
order to avoid dilution in the aggregate liquidation rights of
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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 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 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.
TRANSFER AGENT AND REGISTRAR
CMS Energy Common Stock and Class G Common Stock are transferable at
Consumers Energy Company, 212 W. Michigan Avenue, Jackson, MI 49201. CMS Energy
is the registrar and transfer agent for CMS Energy Common Stock and Class G
Common Stock.
PREFERRED STOCK
The authorized Preferred Stock may be issued without the approval of the
holders of Common Stock in one or more series, from time to time, with each such
series to have such designation, powers, preferences and relative,
participating, optional or other special rights, voting rights, if any, and
qualifications, limitations or restrictions thereof, as shall be stated in a
resolution providing for the issue of any such series adopted by CMS Energy's
Board of Directors. The Articles of Incorporation provide that holders of
Preferred Stock will not have any preemptive rights to subscribe for or purchase
any additional shares of the capital stock of CMS Energy of any class now or
hereafter authorized, or any Preferred Stock, bonds, debentures or other
obligations or rights or options convertible into or exchangeable for or
entitling the holder or owner to subscribe for or purchase any shares of capital
stock. The future issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of CMS Energy.
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PRIMARY SOURCE OF FUNDS OF CMS ENERGY; RESTRICTIONS ON SOURCES OF DIVIDENDS
The ability of CMS Energy to pay (i) dividends on its capital stock and
(ii) its indebtedness, including the Debt Securities, depends and will depend
substantially upon timely receipt of sufficient dividends or other distributions
from its subsidiaries, in particular Consumers. Consumers' ability to pay
dividends on its common stock depends upon its revenues, earnings and other
factors. Consumers' revenues and earnings will depend substantially upon rates
authorized by the MPSC.
Consumers' ability to pay dividends is restricted by its First Mortgage
Bond Indenture (the "MORTGAGE INDENTURE") and its Articles of Incorporation
("ARTICLES"). The Mortgage Indenture provides that Consumers can only pay
dividends on its common stock out of retained earnings accumulated subsequent to
September 30, 1945, provided that upon such payment, there shall remain of such
retained earnings an amount equivalent to any deficiency in maintenance and
replacement expenditures as compared with maintenance and replacement
requirements since December 31, 1945. Because of restrictions in its Articles
and Mortgage Indenture, Consumers was prohibited from paying dividends on its
common stock from June 1991 to December 31, 1992. However, as of December 31,
1992, Consumers effected a quasi-reorganization in which Consumers' accumulated
deficit of $574 million was eliminated against other paid-in capital. With the
accumulated deficit eliminated, Consumers satisfied the requirements under its
Mortgage Indenture and resumed paying dividends on its common stock in May 1993.
Consumers' Articles also provide two restrictions on its payment of
dividends on its common stock. First, prior to the payment of any common stock
dividend, Consumers must reserve retained earnings after giving effect to such
dividend payment of at least (i) $7.50 per share on all then outstanding shares
of its preferred stock, (ii) in respect to its Class A Preferred Stock, 7.5% of
the aggregate amount established by its Board of Directors to be payable on the
shares of each series thereof in the event of involuntary liquidation of
Consumers, and (iii) $7.50 per share on all then outstanding shares of all other
stock over which its preferred stock and Class A Preferred Stock do not have
preference as to the payment of dividends and as to assets. Second, dividend
payments during the 12 month period ending with the month the proposed payment
is to be paid are limited to: (i) 50% of net income available for the payment of
dividends during the base period (hereinafter defined) if the ratio of common
stock and surplus to total capitalization and surplus for 12 consecutive
calendar months within the 14 calendar months immediately preceding the proposed
dividend payment (the "BASE PERIOD"), adjusted to reflect the proposed dividend,
is less than 20%; and (ii) 75% of net income available for the payment of
dividends during the base period if the ratio of common stock and surplus to
total capitalization and surplus for the base period, adjusted to reflect the
proposed dividend, is at least 20% but less than 25%.
In addition, Consumers' Indenture dated January 1, 1996, between Consumers
and Bank of New York as Trustee ("INDENTURE"), and certain Preferred Securities
Guarantees by Consumers dated January 23, 1996 and September 11, 1997
(collectively the "CONSUMERS PREFERRED SECURITIES GUARANTEES"), in connection
with which the 8.36% Trust Preferred Securities of Consumers Power Company
Financing 1 and the 8.20% Trust Securities of Consumers Energy Financing II
(collectively the "CONSUMERS TRUST PREFERRED SECURITIES") were issued, provide
that Consumers shall not declare or pay any dividend on, make any distributions
with respect to, or redeem, purchase or make a liquidation payment with respect
to, any of its capital stock if: (i) there shall have occurred any event that
would constitute an event of default under the Indenture or the
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trust agreements pursuant to which the Consumers Trust Preferred Securities were
issued, (ii) a default with respect to its payment of any obligations under the
Consumers Preferred Securities Guarantees or certain Consumers common stock
guarantees, or (iii) it gives notice of its election to extend the interest
payment period on the subordinated notes issued under the Indenture, at any time
for up to 20 consecutive quarters provided, however, Consumers may declare and
pay stock dividends where the dividend stock is the same stock as that on which
the dividend is being paid.
Consumers' Articles also prohibit the payment of cash dividends on its
common stock if Consumers is in arrears on preferred stock dividend payments.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, Consumers would not be able to pay its debts as they become due in
the usual course of business, or its total assets would be less than the sum of
its total liabilities plus, unless the articles permit otherwise, the amount
that would be needed, if Consumers were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. 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.
DEBT SECURITIES
The Debt Securities offered by this prospectus will be unsecured
obligations of CMS Energy and will be either senior or subordinated debt. Senior
Debentures will be issued under a senior debt indenture and Subordinated
Debentures will be issued under a subordinated debt indenture. The senior debt
indenture and the subordinated debt indenture are sometimes referred to in this
prospectus individually as an "INDENTURE" and collectively as the "INDENTURES."
The following briefly summarizes the material provisions of the indentures
and the Debt Securities. You should read the more detailed provisions of the
applicable indenture, including the defined terms, for provisions that may be
important to you. You should also read the particular terms of a series of Debt
Securities, which will be described in more detail in the applicable prospectus
supplement. Copies of the indentures may be obtained from CMS Energy or the
applicable trustee.
Unless otherwise provided in the applicable prospectus supplement, the
trustee under the senior debt indenture will be NBD Bank and the trustee under
the subordinated debt indenture will be The Bank of New York.
GENERAL
The indentures provide that Debt Securities of CMS Energy may be issued in
one or more series, with different terms, in each case as authorized from time
to time by CMS Energy.
Federal income tax consequences and other special considerations applicable
to any Debt Securities issued by CMS Energy at a discount will be described in
the applicable prospectus supplement.
Because CMS Energy is a holding company, the claims of creditors of CMS
Energy's subsidiaries will have a priority over CMS Energy's equity rights and
the rights of CMS
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Energy's creditors, including the holders of Debt Securities, to participate in
the assets of the subsidiary upon the subsidiary's liquidation.
The applicable prospectus supplement relating to any series of Debt
Securities will describe the following terms, where applicable:
- the title of the Debt Securities;
- whether the Debt Securities will be senior or subordinated debt;
- the total principal amount of the Debt Securities;
- the percentage of the principal amount at which the Debt Securities will
be sold and, if applicable, the method of determining the price;
- the maturity date or dates;
- the interest rate or the method of computing the interest rate;
- the date or dates from which any interest will accrue, or how such date
or dates will be determined, and the interest payment date or dates and
any related record dates;
- the location where payments on the Debt Securities will be made;
- the terms and conditions on which the Debt Securities may be redeemed at
the option of CMS Energy;
- any obligation of CMS Energy to redeem, purchase or repay the Debt
Securities at the option of a holder upon the happening of any event and
the terms and conditions of redemption, purchase or repayment;
- any provisions for the discharge of CMS Energy's obligations relating to
the Debt Securities by deposit of funds or United States government
obligations;
- whether the Debt Securities are to trade in book-entry form and the terms
and any conditions for exchanging the global security in whole or in part
for paper certificates;
- any material provisions of the applicable indenture described in this
prospectus that do not apply to the Debt Securities;
- any additional amounts with respect to the Debt Securities that CMS
Energy will pay to a non-United States person because of any tax,
assessment or governmental charge withheld or deducted and, if so, any
option of CMS Energy to redeem the Debt Securities rather than paying
these additional amounts; and
- any other specific terms of the Debt Securities.
CONCERNING THE TRUSTEES
Each of NBD Bank, the trustee under the senior debt indenture, and The Bank
of New York, the trustee under the subordinated debt indenture, is one of a
number of banks with which CMS Energy and its subsidiaries maintain ordinary
banking relationships, including credit facilities.
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EXCHANGE AND TRANSFER
Debt Securities may be presented for exchange and registered Debt
Securities may be presented for registration of transfer at the offices and
subject to the restrictions set forth therein and in the applicable prospectus
supplement without service charge, but upon payment of any taxes or other
governmental charges due in connection therewith, subject to any limitations
contained in the applicable indenture. Debt Securities in bearer form and the
coupons appertaining thereto, if any, will be transferable by delivery.
PAYMENT
Distributions on the Debt Securities in registered form will be made at the
office or agency of the applicable trustee in the Borough of Manhattan, the City
of New York or its other designated office. However, at the option of CMS
Energy, payment of any interest may be made by check or by wire transfer.
Payment of any interest due on Debt Securities in registered form will be made
to the persons in whose name the Debt Securities are registered at the close of
business on the record date for such interest payments. Payments made in any
other manner will be specified in the prospectus supplement.
EVENTS OF DEFAULT
Each indenture provides that events of default regarding any series of Debt
Securities will be:
- failure to pay required interest on any Debt Security of such series for
30 days;
- failure to pay principal other than a scheduled installment payment or
premium, if any, on any Debt Security of such series when due;
- failure to make any required scheduled installment payment for 30 days on
Debt Securities of such series;
- failure to perform for 90 days after notice any other covenant in the
relevant indenture other than a covenant included in the relevant
indenture solely for the benefit of a series of Debt Securities other
than such series;
- certain events of bankruptcy or insolvency, whether voluntary or not; or
- entry of final judgments against CMS Energy or Consumers for more than
$25,000,000 which remain undischarged or unbonded for 60 days or a
default resulting in the acceleration of indebtedness of CMS Energy or
Consumers more than $25,000,000, and the acceleration has not been
rescinded or annulled within 10 days after written notice of such default
as provided in the applicable indenture; and
Additional events of default may be prescribed for the benefit of the
holders of a particular series of Debt Securities and will be described in the
prospectus supplement relating to those Debt Securities.
If an event of default regarding Debt Securities of any series issued under
the indentures should occur and be continuing, either the trustee or the holders
of 25% in the principal amount of outstanding Debt Securities of such series may
declare each Debt Security of that series due and payable.
Holders of a majority in principal amount of the outstanding Debt
Securities of any series will be entitled to control certain actions of the
trustee under the indentures and to
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waive past defaults regarding such series. The trustee generally will not be
requested, ordered or directed by any of the holders of Debt Securities, unless
one or more of such holders shall have offered to the trustee reasonable
security or indemnity.
Before any holder of any series of Debt Securities may institute action for
any remedy, except payment on such holder's Debt Security when due, the holders
of not less than 25% in principal amount of the Debt Securities of that series
outstanding must request the trustee to take action. Holders must also offer and
give the satisfactory security and indemnity against liabilities incurred by the
trustee for taking such action.
CMS Energy is required to annually furnish the relevant trustee a statement
as to CMS Energy's compliance with all conditions and covenants under the
applicable indenture. Each indenture provides that the relevant trustee may
withhold notice to the holders of the Debt Securities of any series of any
default affecting such series, except payment on holders' Debt Securities when
due, if it considers withholding notice to be in the interests of the holders of
the Debt Securities of such series.
CONSOLIDATION, MERGER OR SALE OF ASSETS
Each indenture provides that CMS Energy may consolidate with or merge into,
or sell, lease or convey its property as an entirety or substantially as an
entirety to, any other corporation if the new corporation assumes the
obligations of CMS Energy under the Debt Securities and the indentures and is
organized and existing under the laws of the United States of America, any U.S.
state or the District of Columbia.
MODIFICATION OF THE INDENTURE
Each indenture permits CMS Energy and the relevant trustee to enter into
supplemental indentures without the consent of the holders of the Debt
Securities to establish the form and terms of any series of securities under the
indentures.
Each indenture also permits CMS Energy and the relevant trustee, with the
consent of the holders of at least a majority in total principal amount of the
Debt Securities of all series then outstanding and affected (voting as one
class), to change in any manner the provisions of the applicable indenture or
modify in any manner the rights of the holders of the Debt Securities of each
such affected series. CMS Energy and the relevant trustee may not, without the
consent of the holder of each Debt Security affected, enter into any
supplemental indenture to:
- change the time of payment of the principal;
- reduce the principal amount of such Debt Security;
- reduce the rate or change the time of payment of interest on such Debt
Security;
- reduce the amount payable on any securities issued originally at a
discount upon acceleration or provable in bankruptcy; or
- impair the right to institute suit for the enforcement of any payment on
any Debt Security when due.
In addition, no such modification may reduce the percentage in principal
amount of the Debt Securities of the affected series, the consent of whose
holders is required for any such modification or for any waiver provided for in
the applicable indenture.
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Prior to the acceleration of the maturity of any Debt Security, the
holders, voting as one class, of a majority in total principal amount of the
Debt Securities with respect to which a default or event of default shall have
occurred and be continuing may on behalf of the holders of all such affected
Debt Securities waive any past default or event of default and its consequences,
except a default or an event of default in respect of a covenant or provision of
the applicable indenture or of any Debt Security which cannot be modified or
amended without the consent of the holder of each Debt Security affected.
DEFEASANCE, COVENANT DEFEASANCE AND DISCHARGE
Each indenture provides that, at the option of CMS Energy:
- CMS Energy will be discharged from all obligations in respect of the Debt
Securities of a particular series then outstanding (except for certain
obligations to register the transfer of or exchange the Debt Securities
of such series, to replace stolen, lost or mutilated Debt Securities of
such series, to maintain paying agencies and to maintain the trust
described below); or
- CMS Energy need not comply with certain restrictive covenants of the
relevant indenture (including those described under "Consolidation,
Merger or Sale of Assets").
If CMS Energy in each case irrevocably deposits in trust with the relevant
trustee money, and/or securities backed by the full faith and credit of the
United States which, through the payment of the principal thereof and the
interest thereon in accordance with their terms, will provide money in an amount
sufficient to pay all the principal and interest on the Debt Securities of such
series on the stated maturities of such Debt Securities in accordance with the
terms thereof.
To exercise this option, CMS Energy is required to deliver to the relevant
trustee an opinion of independent counsel to the effect that:
- the exercise of such option would not cause the holders of the Debt
Securities of such series to recognize income, gain or loss for United
States federal income tax purposes as a result of such defeasance, and
such holders will be subject to United States federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred; and
- in the case of a discharge as described above, such opinion is to be
accompanied by a private letter ruling to the same effect received from
the Internal Revenue Service, a revenue ruling to such effect pertaining
to a comparable form of transaction published by the Internal Revenue
Service or appropriate evidence that since the date of the applicable
indenture there has been a change in the applicable federal income tax
law.
In the event:
- CMS Energy exercises its option to effect a covenant defeasance with
respect to the Debt Securities of any series as described above,
- the Debt Securities of such series are thereafter declared due and
payable because of the occurrence of any event of default other than an
event of default caused by failing to comply with the covenants which are
defeased,
- the amount of money and securities on deposit with the relevant trustee
would be insufficient to pay amounts due on the Debt Securities of such
series at the time of the acceleration resulting from such event of
default,
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CMS Energy would remain liable for such amounts.
GOVERNING LAW
Each indenture and the Debt Securities will be governed by, and construed
in accordance with, the laws of the State of Michigan unless the laws of another
jurisdiction shall mandatorily apply.
SENIOR DEBENTURES
The Senior Debentures will be issued under the senior debt indenture and
will rank on an equal basis with all other unsecured debt of CMS Energy except
subordinated debt.
SUBORDINATED DEBENTURES
The Subordinated Debentures will be issued under the subordinated debt
indenture and will rank subordinated and junior in right of payment, to the
extent set forth in the subordinated debt indenture, to all "SENIOR
INDEBTEDNESS" (as defined below) of CMS Energy.
If CMS Energy defaults in the payment of any distributions on any Senior
Indebtedness when it becomes due and payable after any applicable grace period,
then, unless and until the default is cured or waived or ceases to exist, CMS
Energy cannot make a payment on account of or redeem or otherwise acquire the
Subordinated Debentures. The subordinated debt indenture provisions described in
this paragraph, however, do not prevent CMS Energy from making sinking fund
payments in Subordinated Debentures acquired prior to the maturity of Senior
Indebtedness or, in the case of default, prior to such default and notice
thereof. If there is any insolvency, bankruptcy, liquidation or other similar
proceeding relating to CMS Energy, its creditors or its property, then all
Senior Indebtedness must be paid in full before any payment may be made to any
holders of Subordinated Debentures. Holders of Subordinated Debentures must
return and deliver any payments received by them, other than in a plan of
reorganization or through a defeasance trust as described above, directly to the
holders of Senior Indebtedness until all Senior Indebtedness is paid in full.
"SENIOR INDEBTEDNESS" means distributions on the following, whether
outstanding on the date of execution of the subordinated debt indenture or
thereafter incurred, created or assumed:
- indebtedness of CMS Energy for money borrowed by CMS Energy or evidenced
by debentures (other than the Subordinated Debentures), notes, bankers'
acceptances or other corporate debt securities or similar instruments
issued by CMS Energy;
- obligations of CMS Energy with respect to letters of credit;
- all indebtedness of others of the type referred to in the two preceding
clauses assumed by or guaranteed in any manner by CMS Energy or in effect
guaranteed by CMS Energy; or
- renewals, extensions or refundings of any of the indebtedness referred to
in the preceding three clauses unless, in the case of any particular
indebtedness, renewal, extension or refunding, under the express
provisions of the instrument creating or evidencing the same or the
assumption or guarantee of the same, or pursuant to which the same is
outstanding, such indebtedness or such renewal, extension or
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refunding thereof is not superior in right of payment to the subordinated
debt securities.
The subordinated debt indenture does not limit the total amount of Senior
Indebtedness that may be issued. As of December 31, 1998, Senior Indebtedness of
CMS Energy totaled approximately $2.766 billion.
CERTAIN COVENANTS
If Debt Securities are issued to a Trust or a trustee of such Trust in
connection with the issuance of Trust Preferred Securities by such Trust, CMS
Energy will covenant that it will not, and it will not cause any of its
subsidiaries to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
CMS Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu (in the case of Subordinated Debentures) with or junior (in the
case of Senior and Subordinated Debentures) to that Debt Security (other than
(a) any dividend, redemption, liquidation, interest, principal or guarantee
payment by CMS Energy where the payment is made by way of securities (including
capital stock) that rank pari passu with or junior to the securities on which
such dividend, redemption, interest, principal or guarantee payment is being
made, (b) payments under the Guarantees, (c) purchases of CMS Energy Common
Stock related to the issuance of CMS Energy Common Stock under any of CMS
Energy's benefit plans for its directors, officers or employees, (d) as a result
of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock and (e) the purchase of fractional
interests in shares of CMS Energy's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged) if at such time (i) there shall have occurred any event of which CMS
Energy has actual knowledge that (a) with the giving of notice or the lapse of
time, or both, would constitute an event of default under the indentures and (b)
in respect of which CMS Energy shall not have taken reasonable steps to cure,
(ii) CMS Energy shall be in default with respect to its payment of any
obligations under the Guarantees or (iii) CMS Energy shall have given notice of
its selection of an Extension Period as provided in the indentures with respect
to the Debt Securities and shall not have rescinded such notice, or such
Extension Period, or any extension thereof, shall be continuing. CMS Energy will
also covenant (i) for so long as Trust Preferred Securities are outstanding, not
to convert the Debt Securities except pursuant to a notice of conversion
delivered to the Conversion Agent (as defined in the indentures) by a holder of
Trust Preferred Securities, (ii) to maintain directly or indirectly 100%
ownership of the Common Securities, provided that certain successor which are
permitted pursuant to the indentures may succeed to CMS Energy's ownership of
the Common Securities, (iii) not to voluntarily terminate, wind-up or liquidate
such Trust, except (a) in connection with a distribution of the Debt Securities
to the holders of the Trust Preferred Securities in liquidation of such Trust or
(b) in connection with certain mergers, consolidations or amalgamations
permitted by the Trust Agreement, (iv) to maintain the reservation for issuance
of the number of shares of CMS Energy Common Stock that would be required from
time to time upon the conversion of all the Debt Securities then outstanding,
(v) to use its reasonable efforts, consistent with the terms and provisions of
the Trust Agreement, to cause such Trust to remain classified as a grantor trust
and not as an association taxable as a corporation for United States federal
income tax purposes and (vi) to deliver shares
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of CMS Energy Common Stock upon an election by the holders of the Trust
Preferred Securities to convert such Trust Preferred Securities into CMS Energy
Common Stock.
As part of the Guarantees, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Trust Preferred Securities into or for CMS Energy Common Stock, Senior
Debentures or Subordinated Debentures.
CONVERSION RIGHTS
If the prospectus supplement provides, the Holders of Debt Securities may
convert such Debt Securities into CMS Energy Common Stock, as defined herein
(see "Description of Securities -- Common Stock"), at the option of the Holders
at the principal amount thereof, or of such portion thereof, at any time during
the period specified in the prospectus supplement, at the conversion price or
conversion rate specified in the prospectus supplement; except that, with
respect to any Debt Securities (or portion thereof) called for redemption, such
conversion right shall terminate at the close of business on the fifteenth day
prior to the date fixed for redemption of such Debt Security, unless CMS Energy
shall default in payment of the amount due upon redemption thereof.
The conversion privilege and conversion price or conversion rate will be
adjusted in certain events, including if CMS Energy:
- pays a dividend or makes a distribution in shares of CMS Energy Common
Stock;
- subdivides its outstanding shares of CMS Energy Common Stock into a
greater number of shares;
- combines its outstanding shares of CMS Energy Common Stock into a smaller
number of shares;
- pays a dividend or makes a distribution on its CMS Energy Common Stock
other than in shares of its CMS Energy Common Stock;
- issues by reclassification of its shares of CMS Energy Common Stock any
shares of its capital stock;
- issues any rights or warrants to all holders of shares of its CMS Energy
Common Stock entitling them (for a period expiring within 45 days, or
such other period as may be specified in the prospectus supplement) to
purchase shares of CMS Energy Common Stock (or Convertible Securities as
defined in the indentures) at a price per share less than the Average
Market Price (as defined in the indentures) per share for such CMS Energy
Common Stock; and
- distributes to all holders of shares of its CMS Energy Common Stock any
assets or Debt Securities or any rights or warrants to purchase
securities, provided that no adjustment shall be made under (vi) or (vii)
above if the adjusted conversion price would be higher than, or the
adjusted conversion rate would be less than, the conversion price or
conversion rate, as the case may be, in effect prior to such adjustment.
CMS Energy may reduce the conversion price or increase the conversion rate,
temporarily or otherwise, by any amount but in no event shall such adjusted
conversion price or conversion rate result in shares of CMS Energy Common Stock
being issuable upon conversion of the Debt Securities if converted at the time
of such adjustment at an
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effective conversion price per share less than the par value of the CMS Energy
Common Stock at the time such adjustment is made. No adjustments in the
conversion price or conversion rate need be made unless the adjustment would
require an increase or decrease of at least one percent (1%) in the initial
conversion price or conversion rate. Any adjustment which is not made shall be
carried forward and taken into account in any subsequent adjustment. The
foregoing conversion provisions may be modified to the extent set forth in the
prospectus supplement.
TRUST PREFERRED SECURITIES
GENERAL
Each Trust may issue, from time to time, Trust Preferred Securities having
terms described in the prospectus supplement relating thereto. The Trust
Agreement of each Trust will authorize the establishment of no more than one
series of Trust Preferred Securities, having such terms, including
distributions, redemption, voting, liquidation rights and such other preferred,
deferred or other special rights or such rights or restrictions as shall be set
forth therein or otherwise established by the Trust Trustees pursuant thereto.
Reference is made to the prospectus supplement relating to the Trust Preferred
Securities for specific terms, including: (i) the distinctive designation and
the number of Trust Preferred Securities to be offered which will represent
undivided beneficial interests in the assets of the Trust; (ii) the annual
distribution rate and the dates or date upon which such distributions will be
paid, provided, however that distributions on the Trust Preferred Securities
will be paid quarterly in arrears to holders of Trust Preferred Securities as of
a record date on which the Trust Preferred Securities are outstanding; (iii)
whether holders can convert the Trust Preferred Securities into shares of CMS
Energy Common Stock; (iv) whether distributions on Trust Preferred Securities
would be deferred during any deferral of interest payments on the Debt
Securities, provided, however that no such deferral, including extensions, if
any, may exceed 20 consecutive quarters nor extend beyond the stated maturity
date of the Debt Securities, and at the end of any such deferrals, CMS Energy
shall make all interest payments then accrued or deferred and unpaid (including
any compounded interest); (v) the amount of any liquidation preference; (vi) the
obligation, if any, of the Trust to redeem Trust Preferred Securities through
the exercise of CMS Energy of an option on the corresponding Debt Securities and
the price or prices at which, the period or periods within which and the terms
and conditions upon which Trust Preferred Securities shall be purchased or
redeemed, in whole or in part, pursuant to such obligation; (vii) the period or
periods within which and the terms and conditions, if any, including the price
or prices or the rate or rates of conversion or exchange and the terms and
conditions of any adjustments thereof, upon which the Trust Preferred Securities
shall be convertible or exchangeable at the option of the holder of the Trust
Preferred Securities or other property or cash; (viii) the voting rights, if
any, of the Trust Preferred Securities in addition to those required by law and
in the Trust Agreement, or set forth under a Guarantee (as defined below); (ix)
the additional payments, if any, which the Trust will pay as a distribution as
necessary so that the net amounts reserved by the Trust and distributable to the
holders of the Trust Preferred Securities, after all taxes, duties, assessments
or governmental charges of whatever nature (other than withholding taxes) have
been paid will not be less than the amount that would have been reserved and
distributed by the Trust, and the amount the holders of the Trust Preferred
Securities would have reserved, had no such taxes, duties, assessments or
governmental charges been imposed; (x) the terms and conditions, if any, upon
which the Debt Securities may be distributed to holders of Trust Preferred
Securities; and (xi) any other relative rights,
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powers, preferences, privileges, limitations or restrictions of the Trust
Preferred Securities not inconsistent with the Trust Agreement or applicable
law. All Trust Preferred Securities offered hereby will be irrevocably
guaranteed by CMS Energy, on a senior or subordinated basis, as applicable, and
to the extent set forth below under "The Guarantees." Any applicable federal
income tax considerations applicable to any offering of the Trust Preferred
Securities will be described in the prospectus supplement relating thereto. The
aggregate number of Trust Preferred Securities which the Trust shall have
authority to issue will be pursuant to the terms of the Trust Agreement.
EFFECT OF OBLIGATIONS UNDER THE DEBT SECURITIES
AND THE GUARANTEES
As set forth in the Trust Agreement, the sole purpose of the Trust is to
issue the Trust Securities evidencing undivided beneficial interests in the
assets of each of the Trust, and to invest the proceeds from such issuance and
sale to acquire directly the Debt Securities from CMS Energy.
As long as payments of interest and other payments are made when due on the
Debt Securities, such payments will be sufficient to cover distributions and
payments due on the Trust Securities because of the following factors:
- the aggregate principal amount of Debt Securities will be equal to the
sums of the aggregate stated liquidation amount of the Trust Securities;
- the interest rate and the interest and other payment dates on the Debt
Securities will match the distribution rate and distribution and other
payment dates for the Trust Securities;
- CMS Energy shall pay all, and the Trust shall not be obligated to pay,
directly or indirectly, all costs, expenses, debt and obligations of the
Trust (other than with respect to the Trust Securities); and
- the Trust Agreement further provides that CMS Energy Trustees shall not
take or cause or permit the Trust to, among other things, engage in any
activity that is not consistent with the purposes of the Trust.
Payments of distributions (to the extent funds therefore are available) and
other payments due on the Trust Preferred Securities (to the extent funds
therefor are available) are guaranteed by CMS Energy as and to the extent set
forth under "The Guarantees" below. If CMS Energy does not make interest
payments on the Debt Securities purchased by the Trust, it is expected that the
Trust will not have sufficient funds to pay distributions on the Trust Preferred
Securities. The Guarantees do not apply to any payment of distributions unless
and until the Trust has sufficient funds for the payment of distributions and
other payments on the Trust Preferred Securities only if and to the extent that
CMS Energy has made a payment of interest or principal on the Debt Securities
held by the Trust as its sole asset. The Guarantees, when taken together with
CMS Energy's obligations under the Debt Securities and the Indenture and its
obligations under the Trust Agreement, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Trust securities), provide a full and unconditional guarantee of amounts on the
Trust Preferred Securities.
If CMS Energy fails to make interest or other payments on the Debt
Securities when due (taking account of any extension period), the Trust
Agreement provides a mechanism
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whereby the holders of the Trust Preferred Securities may direct a Property
Trustee to enforce its rights under the Debt Securities. If a Property Trustee
fails to enforce its rights under the Debt Securities, a holder of Trust
Preferred Securities may institute a legal proceeding against CMS Energy to
enforce a Property Trustee's rights under the Debt Securities without first
instituting any legal proceeding against a Property Trustee or any other person
or entity. Notwithstanding the foregoing, if an event of default has occurred
and is continuing under the Trust Agreement, and such event is attributable to
the failure of CMS Energy to pay interest or principal on the Debt Securities on
the date such interest or principal is otherwise payable (or in the case of
redemption on the redemption date), then a holder of Trust Preferred Securities
may institute legal proceedings directly against CMS Energy to obtain payment.
If CMS Energy fails to make payments under the Guarantees, the Guarantees
provide a mechanism whereby the holders of the Trust Preferred Securities may
direct a Guarantee Trustee to enforce its rights thereunder. Any holder of Trust
Preferred Securities may institute a legal proceeding directly against CMS
Energy to enforce a Guarantee Trustee's rights under a Guarantee without first
instituting a legal proceeding against the Trust, the Guarantee Trustee, or any
other person or entity.
THE GUARANTEES
Set forth below is a summary of information concerning the Guarantees which
will be executed and delivered by CMS Energy for the benefit of the holders,
from time to time, of the Trust Preferred Securities. Each Guarantee will be
qualified as an indenture under the Trust Indenture Act of 1939. Either The Bank
of New York, or NBD Bank, each an independent trustee, will act as indenture
trustee under the Guarantees for the purpose of compliance with the provisions
of the Trust Indenture Act of 1939. This summary does not purport to be complete
and is subject in all respects to the provisions of, and is qualified in its
entirety by reference to, the Guarantees, which is filed as an exhibit to the
Registration Statement of which this prospectus forms a part.
GENERAL
CMS Energy will irrevocably agree to pay in full, on a senior or
subordinated basis, as applicable, to the extent set forth herein, the Guarantee
Payments (as defined below) to the holders of the Trust Preferred Securities, as
and when due, regardless of any defense, right of set-off or counterclaim that
the Trust may have or assert other than the defense of payment. The following
payments with respect to the Trust Preferred Securities, to the extent not paid
by or on behalf of the Trust (the "GUARANTEE PAYMENTS"), will be subject to a
Guarantee: (i) any accumulated and unpaid distributions required to be paid on
the Trust Preferred Securities, to the extent that the Trust has funds on hand
available therefor at such time; (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption to the extent that the Trust
has funds on hand available therefor at such time; or (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Trust (unless the Debt
Securities are distributed to holders of the Trust Preferred Securities), the
lesser of (a) the liquidation distribution, to the extent that the Trust has
funds on hand available therefor at such time, and (b) the amount of assets of
the Trust remaining available for distribution to holders of Trust Preferred
Securities. CMS Energy's obligation to make a Guarantee Payment may be satisfied
by direct payment of the required amounts of CMS Energy to the holders of the
Trust Preferred Securities or by causing the Trust to pay such amount to such
holders.
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Such Guarantees will be irrevocable guarantees, on a senior or subordinated
basis, as applicable, of the Trust's obligations under the Trust Preferred
Securities, but will apply only to the extent that the Trust has funds
sufficient to make such payments, and are not guarantees of collection. If CMS
Energy does not make interest payments on the Debt Securities held by the Trust,
the Trust will not be able to pay distributions on the Trust Preferred
Securities and will not have funds legally available therefor.
CMS Energy has, through the Guarantees, the Trust Agreements, the Senior
Debentures, the Subordinated Debentures, the indentures and the Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed all
of the Trust's obligations under the Trust Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Trust Preferred
Securities.
CMS Energy has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities to
the same extent as the Guarantees, except that upon the occurrence and during
the continuation of a Trust Agreement Event of Default, holders of Trust
Preferred Securities shall have priority over holders of Common Securities with
respect to distributions and payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF CMS ENERGY
CMS Energy will covenant in each Guarantee that if and so long as (i) the
Trust is the holder of all the Debt Securities, (ii) a Tax Event (as defined in
the Guarantee) in respect of the Trust has occurred and is continuing and (iii)
CMS Energy has elected, and has not revoked such election, to pay Additional
Sums (as defined in the Guarantee) in respect of the Trust Preferred Securities
and Common Securities, CMS Energy will pay to the Trust such Additional Sums.
CMS Energy will also covenant that it will not, and it will not cause any of its
subsidiaries to (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of CMS
Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu (in the case of Subordinated Debentures with or junior in the
case of the Senior and Subordinated Debentures) to the Debt Securities (other
than (a) any dividend, redemption, liquidation, interest, principal or guarantee
payment by CMS Energy where the payment is made by way of securities (including
capital stock) that rank pari passu with or junior to the securities on which
such dividend, redemption, interest, principal or guarantee payment is being
made, (b) payments under the Guarantees, (c) purchases of CMS Energy Common
Stock related to the issuance of CMS Energy Common Stock under any of CMS
Energy's benefit plans for its directors, officers or employees, (d) as a result
of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock and (e) the purchase of fractional
interests in shares of CMS Energy's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged) if at such time (i) there shall have occurred any event of which CMS
Energy has actual knowledge that (a) with the giving of notice or the lapse of
time, or both, would constitute a event of default and (b) in respect of which
CMS Energy shall
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not have taken reasonable steps to cure, (ii) CMS Energy shall be in default
with respect to its payment of any obligations under the Guarantee or (iii) CMS
Energy shall have given notice of its selection of an Extension Period as
provided in the indentures with respect to the Debt Securities and shall not
have rescinded such notice, or such Extension Period, or any extension thereof,
shall be continuing. CMS Energy also will covenant to (i) for so long as Trust
Preferred Securities are outstanding, not convert Debt Securities except
pursuant to a notice of conversion delivered to the Conversion Agent by a holder
of Trust Preferred Securities, (ii) maintain directly or indirectly 100%
ownership of the Common Securities, provided that certain successors which are
permitted pursuant to the indentures may succeed to CMS Energy's ownership of
the Common Securities, (iii) not voluntarily terminate, wind-up or liquidate the
Trust, except (a) in connection with a distribution of the Debt Securities to
the holders of the Trust Preferred Securities in liquidation of the Trust or (b)
in connection with certain mergers, consolidations or amalgamations permitted by
the Trust Agreement, (iv) maintain the reservation for issuance of the number of
shares of CMS Energy Common Stock that would be required from time to time upon
the conversion of all the Debt Securities then outstanding, (v) use its
reasonable efforts, consistent with the terms and provisions of the Trust
Agreement, to cause the Trust to remain classified as a grantor trust and not as
an association taxable as a corporation for United States federal income tax
purposes and (vi) deliver shares of CMS Energy Common Stock upon an election by
the holders of the Trust Preferred Securities to convert such Trust Preferred
Securities into CMS Energy Common Stock.
As part of the Guarantees, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Trust Preferred Securities into or for CMS Energy Common Stock, Senior
Debentures or Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Trust Preferred Securities (in which case no vote
will be required), the Guarantees may not be amended without the prior approval
of the holders of not less than a majority in aggregate liquidation amount of
such outstanding Trust Preferred Securities. All guarantees and agreements
contained in the Guarantees shall bind the successors, assigns, receivers,
trustees and representatives of CMS Energy and shall inure to the benefit of the
holders of the Trust Preferred Securities then outstanding.
TERMINATION OF THE GUARANTEES
The Guarantees will terminate and be of no further force and effect upon
full payment of the redemption price of the Trust Preferred Securities, upon
full payment of the amounts payable upon liquidation of the Trust, upon the
distribution, if any, of CMS Energy Common Stock to the holders of Trust
Preferred Securities in respect of the conversion of all such holders' Trust
Preferred Securities into CMS Energy Common Stock or upon distribution of the
Debt Securities to the holders of the Trust Preferred Securities in exchange for
all of the Trust Preferred Securities. The Guarantees will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of Trust Preferred Securities must restore payment of any sums paid under such
Trust Preferred Securities or the Guarantees.
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EVENTS OF DEFAULT
An event of default under a Guarantee will occur upon the failure of CMS
Energy to perform any of its payment or other obligations thereunder. The
holders of a majority in aggregate liquidation amount of the Trust Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to a Guarantee Trustee in respect of a
Guarantee or to direct the exercise of any trust or power conferred upon a
Guarantee Trustee under the Guarantees.
If a Guarantee Trustee fails to enforce a Guarantee, any holder of the
Trust Preferred Securities may institute a legal proceeding directly against CMS
Energy to enforce its rights under such Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person or
entity. In addition, any record holder of Trust Preferred Securities shall have
the right, which is absolute and unconditional, to proceed directly against CMS
Energy to obtain Guarantee Payments, without first waiting to determine if the
Guarantee Trustee has enforced a Guarantee or instituting a legal proceeding
against the Trust, the Guarantee Trustee or any other person or entity. CMS
Energy has waived any right or remedy to require that any action be brought just
against the Trust, or any other person or entity before proceeding directly
against CMS Energy.
CMS Energy, as guarantor, is required to file annually with each Guarantee
Trustee a certificate as to whether or not CMS Energy is in compliance with all
the conditions and covenants applicable to it under the Guarantees.
STATUS OF THE GUARANTEES
The Guarantees will constitute unsecured obligations of CMS Energy and will
rank equal to or subordinate and junior in right of payment to all other
liabilities of CMS Energy, as applicable. The Guarantees will rank pari passu
with or senior to, as applicable, any guarantee now or hereafter entered into by
CMS Energy in respect of any preferred or preference stock of any affiliate of
CMS Energy.
The Guarantees will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantees will be held for the benefit of the holders of the Trust Preferred
Securities. The Guarantees will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust or upon
distribution of the Debt Securities to the holders of the Trust Preferred
Securities. The Guarantees do not place a limitation on the amount of additional
indebtedness that may be incurred by CMS Energy or any of its subsidiaries.
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
CMS Energy may issue Stock Purchase Contracts, representing contracts
obligating holders to purchase from CMS Energy, and CMS Energy to sell to the
holders, a specified number of shares of CMS Energy Common Stock at a future
date or dates. The price per share of CMS Energy Common Stock may be fixed at
the time the Stock Purchase Contracts are issued or may be determined by
reference to a specific formula set forth in the Stock Purchase Contracts. The
Stock Purchase Contracts may be issued separately or as part of Stock Purchase
Units consisting of a Stock Purchase Contract and Senior Debentures,
Subordinated Debentures, Trust Preferred Securities or debt obligations of
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third parties, including U.S. Treasury securities, securing the holders'
obligations to purchase the Common Stock under the Stock Purchase Contracts. The
Stock Purchase Contracts may require CMS Energy to make periodic payments to the
holders of the Stock Purchase Units or visa versa, and such payments may be
unsecured or refunded on some basis. The Stock Purchase Contracts may require
holders to secure their obligations thereunder in a specified manner.
The applicable prospectus supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units. The description in the prospectus
supplement will not purport to be complete and will be qualified in its entirety
by reference to the Stock Purchase Contracts, and, if applicable, collateral
arrangements and depositary arrangements, relating to such Stock Purchase
Contracts or Stock Purchase Units.
LEGAL OPINIONS
Opinions as to the legality of certain of the Offered Securities will be
rendered for CMS Energy by Michael D. Van Hemert, Esq., Assistant General
Counsel for CMS Energy. Certain matters of Delaware law relating to the validity
of the Trust Preferred Securities will be passed upon on behalf of the Trusts by
Skadden, Arps, Slate, Meagher & Flom LLP, special Delaware counsel to the
Trusts. Certain United States Federal income taxation matters may be passed upon
for CMS Energy and the Trust by either Theodore J. Vogel, tax counsel for CMS
Energy, or by special tax counsel to CMS Energy and of the Trust, who will be
named in the prospectus supplement. Certain legal matters with respect to
Offered Securities will be passed upon by counsel for any underwriters, dealers
or agents, each of whom will be named in the related prospectus supplement.
EXPERTS
The consolidated financial statements and schedule of CMS Energy as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 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.
Future consolidated financial statements of CMS Energy and the reports
thereon of Arthur Andersen LLP also will be incorporated by reference in this
prospectus in reliance upon the authority of that firm as experts in giving
those reports to the extent that said firm has audited said consolidated
financial statements and consented to the use of their reports thereon.
PLAN OF DISTRIBUTION
CMS Energy and/or the Trusts may sell the Offered Securities: (i) through
the solicitation of proposals of underwriters or dealers to purchase the Offered
Securities; (ii) through underwriters or dealers on a negotiated basis; (iii)
directly to a limited number of purchasers or to a single purchaser; or (iv)
through agents. The prospectus supplement with respect to any Offered Securities
will set forth the terms of such offering, including the name or names of any
underwriters, dealers or agents; the purchase price of
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the Offered Securities and the proceeds to CMS Energy and/or the Trust from such
sale; any underwriting discounts and commissions and other items constituting
underwriters' compensation; any initial public offering price and any discounts
or concessions allowed or reallowed or paid to dealers and any securities
exchange on which such Offered Securities may be listed. Any initial public
offering price, discounts or concessions allowed or reallowed or paid to dealers
may be changed from time to time.
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Offered Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Offered Securities will be
named in the prospectus supplement relating to such offering and, if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of such prospectus supplement. Unless otherwise set forth
in the prospectus supplement relating thereto, the obligations of the
underwriters to purchase the Offered Securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all the
Offered Securities if any are purchased.
If dealers are utilized in the sale of Offered Securities, CMS Energy
and/or the Trusts will sell such Offered Securities to the dealers as
principals. The dealers may then resell such Offered Securities to the public at
varying prices to be determined by such dealers at the time of resale. The names
of the dealers and the terms of the transaction will be set forth in the
prospectus supplement relating thereto.
The Offered Securities may be sold directly by CMS Energy and/or the Trusts
or through agents designated by CMS Energy and/or the Trusts from time to time.
Any agent involved in the offer or sale of the Offered Securities of which this
prospectus is delivered will be named, and any commissions payable by CMS Energy
and/or the Trusts to such agent will be set forth, in the prospectus supplement
relating thereto. Unless otherwise indicated in the prospectus supplement, any
such agent will be acting on a best efforts basis for the period of its
appointment.
The Offered Securities may be sold directly by CMS Energy and/or the Trust
to institutional investors or others, who may be deemed to be underwriters
within the meaning of the Securities Act with respect to any resale thereof. The
terms of any such sales will be described in the prospectus supplement relating
thereto.
The CMS Energy Common Stock and the Class G Common Stock may be offered
other than through the facilities of a national securities exchange and other
than to or through a market marker other than on an exchange.
Agents, dealers and underwriters may be entitled under agreements with CMS
Energy and/or the Trust to indemnification by CMS Energy and/or the Trust
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments which such agents, dealers or
underwriters may be required to make in respect thereof. Agents, dealers and
underwriters may be customers of, engage in transactions with, or perform
services for CMS Energy and/or the Trust in the ordinary course of business.
The Offered Securities may also be offered and sold, if so indicated in the
applicable prospectus supplement, in connection with a remarketing upon their
purchase, in
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accordance with a redemption or repayment pursuant to their terms, or otherwise,
by one or more firms ("REMARKETING FIRMS"), acting as principals for their own
accounts or as agents for CMS Energy and/or the Trusts. Any remarketing firm
will be identified and the terms of its agreement, if any, with its compensation
will be described in the applicable prospectus supplement. Remarketing firms may
be deemed to be underwriters, as such term is defined in the Securities Act, in
connection with the Offered Securities remarketed thereby. Remarketing firms may
be entitled under agreements which may be entered into with CMS Energy and/or
the Trusts to indemnification or contribution by CMS Energy and/or the Trusts
against certain civil liabilities, including liabilities under the Securities
Act, and may be customers of, engage in transactions or perform services for CMS
Energy and its subsidiaries in the ordinary course of business.
The Offered Securities may or may not be listed on a national securities
exchange. Reference is made to the prospectus supplement with regard to such
matter. No assurance can be given that there will be a market for any of the
Offered Securities.
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