<PAGE> 1
Filed Pursuant to Rule 424b5
Registration Statement Numbers: 333-68937
333-68937-02
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 7, 1999)
8,800,000 Units
[CMS ENERGY LOGO]
CMS Energy Trust III
7 1/4% PEPS(SM) Units
(Premium Equity Participating Security Units--PEPS(SM) Units)
------------------------
EACH PEPS UNIT CONSISTS OF A PURCHASE CONTRACT ISSUED BY US AND A TRUST
PREFERRED SECURITY DUE 2004 ISSUED BY CMS ENERGY TRUST III.
- THE PURCHASE CONTRACT WILL OBLIGATE YOU TO PURCHASE FROM US, NO LATER THAN
AUGUST 18, 2003 FOR A PRICE OF $25, THE FOLLOWING NUMBER OF SHARES OF CMS
ENERGY CORPORATION COMMON STOCK, $.01 PAR VALUE:
- IF THE AVERAGE CLOSING PRICE OF OUR COMMON STOCK OVER THE 20-TRADING DAY
PERIOD ENDING ON THE THIRD TRADING DAY PRIOR TO AUGUST 18, 2003 EQUALS OR
EXCEEDS $30.403, .8223 SHARES;
- IF THE AVERAGE CLOSING PRICE OF OUR COMMON STOCK OVER THE SAME PERIOD IS
LESS THAN $30.403 BUT GREATER THAN $13.218, A NUMBER OF SHARES HAVING A
VALUE, BASED ON THE 20-TRADING DAY AVERAGE CLOSING PRICE, EQUAL TO $25; AND
- IF THE AVERAGE CLOSING PRICE OF OUR COMMON STOCK OVER THE SAME PERIOD IS
LESS THAN OR EQUAL TO $13.218, 1.8913 SHARES.
- EACH TRUST PREFERRED SECURITY WILL HAVE A STATED LIQUIDATION AMOUNT OF $25 AND
WILL REPRESENT AN UNDIVIDED BENEFICIAL INTEREST IN THE ASSETS OF THE TRUST.
THE TRUST PREFERRED SECURITY WILL BE PLEDGED TO SECURE YOUR OBLIGATION TO
PURCHASE OUR COMMON STOCK UNDER THE RELATED PURCHASE CONTRACT. YOU MAY USE THE
PROCEEDS FROM THE REMARKETING OF YOUR TRUST PREFERRED SECURITY TO SATISFY YOUR
PAYMENT OBLIGATIONS UNDER THE PURCHASE CONTRACT.
- THE TRUST PREFERRED SECURITY WILL PAY A CASH DISTRIBUTION AT A RATE OF 7.25%
OF THE STATED LIQUIDATION AMOUNT PER YEAR, OR $1.8125, PRIOR TO AUGUST 18,
2003, AND AT A RESET RATE THAT MAY BE LESS THAN, EQUAL TO OR GREATER THAN
7.25% PER YEAR AFTER THAT DATE. THESE PAYMENTS WILL BE MADE ON FEBRUARY 18,
MAY 18, AUGUST 18 AND NOVEMBER 18 OF EACH YEAR, BEGINNING NOVEMBER 18, 2000.
WE WILL GUARANTEE THE PAYMENTS OF THE DISTRIBUTIONS ON THE TRUST PREFERRED
SECURITIES TO THE EXTENT SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS.
- THE ASSETS OF THE TRUST WILL CONSIST SOLELY OF OUR SUBORDINATED DEFERRABLE
NOTES MATURING ON AUGUST 18, 2004. WE MAY DEFER INTEREST PAYMENTS ON THE
SUBORDINATED DEFERRABLE NOTES. ANY DEFERRED INTEREST PAYMENTS WILL BEAR
ADDITIONAL INTEREST AT 7.25% UNTIL AUGUST 18, 2003 AND AT THE RESET RATE
THEREAFTER. IF WE DEFER INTEREST PAYMENTS ON THE SUBORDINATED DEFERRABLE
NOTES, THE TRUST WILL NOT HAVE FUNDS TO MAKE DISTRIBUTION PAYMENTS ON THE
TRUST PREFERRED SECURITIES.
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THE PEPS UNITS HAVE BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "CMS PRM".
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INVESTING IN THE PEPS UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
S-25 OF THIS PROSPECTUS SUPPLEMENT.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS TO COMPANY
------------ ------------- ------------
<S> <C> <C> <C>
Per PEPS Unit............................................... $25.00 See below $25.00
Total....................................................... $220,000,000 See below $220,000,000
</TABLE>
The Trust will not pay any underwriting commissions. We will pay underwriting
commissions of $.7875 per PEPS Unit sold ($6,930,000 for all 8,800,000 PEPS
Units and $7,875,000 if the over-allotment option referred to below is executed
in full).
Any accumulated distributions on the trust preferred securities that are a part
of the PEPS Units from August 22, 2000 will be added to the price to public.
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 prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
We and the Trust have granted the underwriters a 30-day option to purchase up to
1,200,000 additional PEPS Units on the same terms and conditions set forth above
solely to cover over-allotments, if any. Morgan Stanley & Co. Incorporated
expects to deliver the PEPS Units to purchasers on or about August 22, 2000.
------------------------
Joint Book-Running Managers
MORGAN STANLEY DEAN WITTER BANC OF AMERICA SECURITIES LLC
------------------------
DONALDSON, LUFKIN & JENRETTE
August 17, 2000
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
--------------------- ----
<S> <C>
Summary.............................. S-3
Risk Factors......................... S-25
Forward-Looking Information.......... S-32
Use of Proceeds...................... S-34
Ratio of Earnings to Fixed Charges... S-34
Price Range of Common Stock and
Dividends.......................... S-35
Capitalization....................... S-39
The Company.......................... S-40
Accounting Treatment................. S-45
Description of the PEPS Units........ S-45
Description of the Purchase
Contracts.......................... S-49
Certain Provisions of the Purchase
Contracts, the Purchase Contract
Agreement and the Pledge
Agreement.......................... S-56
Description of the Trust Preferred
Securities......................... S-59
Description of the Subordinated
Deferrable Notes................... S-67
Description of the Guarantee......... S-71
Book Entry Systems................... S-74
United States Federal Income Tax
Consequences....................... S-76
ERISA Considerations................. S-82
Underwriters......................... S-83
Legal Matters........................ S-84
Experts.............................. S-84
Unaudited Pro Forma Financial
Information........................ F-1
</TABLE>
<TABLE>
<CAPTION>
PROSPECTUS PAGE
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<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>
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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 PEPS Units 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 PEPS Units.
FORWARD-LOOKING STATEMENTS
The prospectus supplement and the accompanying base 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,
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.
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SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus supplement, the accompanying
prospectus and the documents incorporated by reference in this document 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 6 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
- 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, pre-tax
operating income of $912 million and net income of $277 million. For the six
months ended June 30, 2000, we had consolidated operating revenue of $3.4
billion, pre-tax operating income of $498 million and net income of $161
million.
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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 the Panhandle companies 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 valued-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 the
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 "Recent Developments."
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.
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 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
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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 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
Second Quarter Results. On August 3, 2000, we reported second quarter 2000
consolidated net income of $81 million, compared to $75 million in the same
quarter of 1999. Earnings per diluted share were $.72, compared to $.67 per
diluted share earned in the second quarter of 1999. Second quarter results
include $.13 per share of gains from asset sales which exceed the amount we
expect to sustain in future years. Second quarter operating revenue totaled $1.6
billion, up 20% from $1.3 billion in the second quarter of 1999.
For the first six months of 2000, consolidated net income totaled $161
million, or $1.42 per diluted share, compared to $173 million, or $1.48 per
diluted share, for the same period in 1999. Operating revenue for the first half
of 2000 totaled $3.4 billion, up 19% from $2.9 billion in the first half of
1999.
The second quarter earnings reflect strong operating performance of our
diversified energy businesses, including independent power production, gas
transmission and storage, and international energy distribution, as well as
gains on the sale of non-strategic assets. These results were partially offset
by lower electric and gas utility earnings. The lower electric utility earnings
resulted from recently enacted legislation that reduced residential electric
rates by 5%. In future periods, after the MPSC issues an order in Consumers'
securitization case, the reduced earnings are expected to be offset by savings
realized from securitization recently authorized by legislation.
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
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<PAGE> 6
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.
Sale of Assets. In June 2000 we closed the sale of the Lakewood
cogeneration plant located in New Jersey. During that same month we sold the
stock representing our 14% working interest in oil reserves located in Ecuador's
Oriente Basin. As of August 1, 2000, we completed the sale of five assets
resulting in approximately $850 million of cash proceeds and associated debt
reduction of consolidated project debt this year.
Loy Yang A. In February 2000, due to extreme price competition and
unpredictability in the Australian energy market, we announced an intention to
sell our interest in Loy Yang A, a power generation facility in Australia. The
amount that we ultimately realize from the sale of Loy Yang A could be
materially less than the approximate $500 million investment amount currently
reflected as an asset on the balance sheet.
CONSUMERS
Regulatory Matters. Since 1997, repeated efforts have been made in the
Michigan legislature to enact electric restructuring legislation. On June 3,
2000, these efforts resulted in the passage of the "Customer Choice and
Reliability Act," which became effective June 5, 2000. This Act:
- permits all customers to exercise choice of electric generation suppliers
by January 1, 2002;
- cuts residential electric rates by 5%;
- freezes all electric rates through December 31, 2003, and establishes a
rate cap for residential customers through at least December 31, 2005,
and a rate cap for small commercial and industrial customers through at
least December 31, 2004, all of which precludes Consumers from recovering
any cost increases by raising rates, including those associated with
rising fuel and purchased power prices;
- allows for the recovery of stranded costs and implementation costs;
- allows for securitization of stranded costs to offset the 5% residential
rate reduction;
- establishes a market power test that may require the transfer of control
of a portion of generation resources in excess of that required to serve
firm retail sales load, however, Consumers is presently in compliance
with this requirement;
- requires Michigan utilities to join a regional multi-state transmission
system organization approved by the Federal Energy Regulatory Commission
("FERC") or divest its interest in transmission facilities to an
independent transmission owner, however, Consumers has been participating
for the past two years in the development of a regional transmission
organization that would satisfy this requirement once it receives FERC
approval (although Consumers is also evaluating other options); and
- requires the expansion of available transmission capacity in the state of
Michigan by at least 2,000 MW by January 1, 2003, of which Consumers must
work jointly with Detroit Edison and American Electric Power to
accomplish, and of which Consumers has included its share as a part of
its capital budget.
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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 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 as required by the Acts. 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 June 2000, the Michigan Court of Appeals issued an opinion relating to
consolidated MPSC restructuring orders which preceded the enactment of the
Customer Choice and Electricity Reliability Act. The opinion primarily involves
issues that the Act has rendered moot.
In 1997, ABATE, an association of large industrial customers, filed a
complaint with the MPSC. The complaint alleged that Consumers' electric earnings
were more than its authorized rate of return and sought an immediate reduction
in Consumers' electric rates that approximated $189 million annually. As a
result of the passage of the rate freeze imposed by the Act, the MPSC issued an
order on June 19, 2000 dismissing the ABATE complaint. On July 12, 2000, ABATE
filed with the MPSC a petition for a rehearing.
Before 1998, the Power Supply Cost Recovery ("PSCR") process provided for
the reconciliation of actual power supply costs with power supply revenues. This
process assured recovery of all reasonable and prudent power supply costs
actually incurred by Consumers, such as, the actual cost of fuel, interchange
power and purchased power. In 1998, as part of the electric restructuring
efforts, the MPSC suspended the PSCR process through December 31, 2001. Under
the suspension, the MPSC would not grant adjustment of customer rates through
2001. In March 2000, Consumers filed an application with the MPSC requesting
reinstatement of the PSCR clause, approval of a PSCR plan, and authorization of
monthly PSCR factors from July 2000 through June 2001. As a result of the rate
freeze imposed by the Act, the MPSC issued an order on June 19, 2000 dismissing
this application.
-------------------------
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.
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THE OFFERING
Each PEPS Unit consists of a
purchase contract and a trust
preferred security................. We are offering 8,800,000 7 1/4% Premium
Equity Participating Security
Units--PEPS(SM) Units. The stated amount
and issue price of each PEPS Unit is $25.
Each PEPS Unit consists of two parts:
- a purchase contract for shares of our
common stock, $.01 par value; and
- a trust preferred security issued by
CMS Energy Trust III.
The trust preferred security will be
pledged to secure the PEPS Unit holder's
obligation to us under the purchase
contract to purchase shares of our common
stock.
You will receive from each PEPS Unit:
- cash distributions on the trust
preferred security at the rate of 7.25%
per year, or $1.8125 per year, paid
quarterly; and
- on August 18, 2003, between .8223 and
1.8913 shares of our common stock,
depending on the average closing price
of our common stock over the 20-trading
day period ending on the third trading
day prior to August 18, 2003.
You will be required under the
purchase contract to purchase our
common stock on or prior to August
18, 2003........................... We will enter into a purchase contract
agreement with The Bank of New York,
which will act as agent for all of the
holders of the PEPS Units (as well as the
holders of the Treasury PEPS Units
discussed below). For each PEPS Unit that
you purchase a contract will be issued
under the purchase contract agreement,
which creates a contractual arrangement
between you and us for the purchase of
shares of our common stock. We refer to
this contract as a "purchase contract."
Under each purchase contract, you will be
obligated to purchase, at an aggregate
purchase price of $25 for each of your
PEPS Units, a variable number of shares
of our common stock. You will not be
obligated to pay the purchase price until
August 18, 2003, which has been set as
the "purchase contract settlement date"
and you will not receive shares of our
common stock until you have settled your
purchase contract. You will have the
option of settling your purchase contract
by settling early, by settling with cash
or by applying the proceeds from the
remarketing of your trust preferred
security, as more fully described later
under "Description of the Purchase
Contracts" in this prospectus supplement.
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<PAGE> 9
The number of shares of our common stock
that you will be entitled to receive on
the purchase contract settlement date
will depend on the average closing price
of a share of our common stock over a
20-trading day period ending on the third
trading day prior to the purchase
contract settlement date. Until you
actually purchase the shares of our
common stock, your obligation to pay the
$25 purchase price will be secured by the
trust preferred security that is part of
your PEPS Unit, which will be pledged to
our collateral agent as collateral. You
may substitute as collateral a U.S.
treasury security for the trust preferred
security. See "Description of the PEPS
Units--Creating Treasury PEPS Units by
Substituting a Treasury Security for
Trust Preferred Securities" in this
prospectus supplement.
The trust preferred security will
mature on August 18, 2004.......... In addition to the purchase contract,
each PEPS Unit will also include a trust
preferred security that represents an
undivided beneficial interest in the
assets of the Trust. The Trust will pay
you cash distributions of $.4531 each
quarter (which is equal to 7.25% per year
of the $25 stated liquidation amount) on
your trust preferred security, provided
that the first distribution will cover a
period of less than three months and will
therefore be proportionately less than
the regular quarterly distribution.
Distributions will accumulate from the
date the PEPS Units are issued and will
continue until August 18, 2004. If you
continue to own your trust preferred
security after the purchase contract
settlement date, the Trust will pay you
distributions on your trust preferred
security from August 18, 2003 until
August 18, 2004, at a reset rate that is
described in more detail later in this
prospectus supplement. The Trust will pay
distributions only when it has funds
available for payment. The Trust's sole
source of funds for distributions are the
payments of interest we make on the
subordinated deferrable notes that the
Trust will hold. We have the right to
defer interest on the subordinated
deferrable notes, in which case
distributions on the trust preferred
securities will also be deferred.
Distributions not paid on the scheduled
payment date will accumulate and compound
quarterly at the rate of 7.25% per year
through and including August 18, 2003,
and at the reset rate thereafter.
The guarantee...................... We will guarantee the payment of
distributions on the trust preferred
securities and the payment of the
redemption price of the trust preferred
securities, to the extent that the Trust
has funds available for payment. Taken
together with our obligations under the
subordinated deferrable notes and the
related indenture, this guarantee
effectively provides a full, irrevocable
and unconditional guarantee of the trust
preferred securities.
S-9
<PAGE> 10
You can find more information about this
guarantee arrangement under the heading
"Description of the Guarantee" in this
prospectus supplement.
The trust preferred security will
be pledged as collateral under the
pledge arrangement................. When you purchase a PEPS Unit, the trust
preferred security that is part of that
PEPS Unit will be pledged as collateral
to secure your obligation to purchase our
common stock on or prior to August 18,
2003 under the related purchase contract.
We will enter into a pledge agreement
under which The Chase Manhattan Bank will
act as collateral agent and hold your
trust preferred security until the $25
purchase price under the purchase
contract has been paid. Even though your
trust preferred security will be pledged
as collateral, you will be the beneficial
owner of it.
You may settle the purchase
contract by paying cash or using
the proceeds from the remarketing
of the trust preferred
securities......................... Under the purchase contract that is part
of each PEPS Unit, you will be obligated
to pay, on or prior to August 18, 2003,
$25 to purchase shares of our common
stock. To satisfy this obligation and at
the same time release your related trust
preferred security from the pledge, you
may deliver at any time until the seventh
business day preceding August 18, 2003 a
cash payment of $25 for every purchase
contract you wish to settle and receive
shares of our common stock on the
purchase contract settlement date at the
applicable settlement rate. If you do not
pay cash, your trust preferred securities
held as collateral under the pledge
arrangement will be sold or "remarketed"
to the public for a price equal to
$25.125. Morgan Stanley & Co.
Incorporated will act as the remarketing
agent. If you are a Treasury PEPS Unit
holder you must settle your purchase
contracts with cash in groups of 40
purchase contracts.
If you pay cash to settle your
purchase contract, your trust
preferred security will be released
from the pledge arrangement........ If you choose not to participate in the
remarketing and instead pay cash for your
shares of our common stock, then:
- you must pay $25 in cash to us under
each purchase contract;
- we will deliver to you the number of
shares of our common stock determined
based on the applicable settlement rate
on the purchase contract settlement
date; and
- your trust preferred security will be
released from the pledge arrangement
and delivered to you. Starting on
August 18, 2003, the settlement date of
the remarketing, and continuing until
August 18, 2004,
S-10
<PAGE> 11
distributions on the trust preferred
security will be payable at the reset
rate that will be determined by the
remarketing agent in the remarketing.
If you do not pay cash under your
purchase contract, your trust
preferred security will be
remarketed......................... On the third business day prior to the
purchase contract settlement date, the
remarketing agent will remarket the trust
preferred securities of those holders of
PEPS Units who have not delivered cash
payments for the shares of our common
stock by the seventh business day
preceding August 18, 2003.
If you hold a trust preferred
security that is not part of a PEPS
Unit, you may choose to have it
remarketed......................... If you hold a trust preferred security
that is not part of a PEPS Unit, you may
choose to have your trust preferred
security remarketed in the remarketing.
PEPS Unit holders who have created
Treasury PEPS Units or who have settled
their purchase contracts early may make
such an election, as more fully described
in this prospectus supplement.
The reset rate will be determined
by the remarketing agent........... After the trust preferred securities have
been remarketed, the distribution rate on
the trust preferred securities will be
the rate determined by the remarketing
agent in the remarketing, the "reset
rate."
If the remarketing succeeds, the
remarketed trust preferred
securities will be sold and, if you
are a PEPS Unit holder, you will
receive our common stock........... If you do not notify the purchase
contract agent that you will pay cash for
the shares of our common stock by 5:00
p.m., New York City time, on the seventh
business day prior to the purchase
contract settlement date, or if you
notify the purchase contract agent that
you will pay cash but you do not deliver
the cash by 11:00 a.m., New York City
time, on the fifth business day preceding
the purchase contract settlement date,
your trust preferred securities will be
remarketed.
- On the third trading day prior to the
purchase contract settlement date, the
remarketing agent will use reasonable
efforts to sell your trust preferred
security, together with all other trust
preferred securities being remarketed.
If the market value of the trust
preferred securities immediately prior
to the remarketing is greater than or
less than $25.125 per trust preferred
security, then the remarketing agent
will adjust the distribution rate on
the trust preferred securities so that
the market value will be equal to
$25.125 per trust preferred security at
the time of the remarketing.
S-11
<PAGE> 12
- If the remarketing is successful, then
your trust preferred security will be
sold. Of the proceeds:
- $25 will be delivered to us as
payment for the shares of our common
stock;
- $.125 will be paid as a remarketing
fee to the remarketing agent; and
- if you are a PEPS Unit holder, you
will receive shares of our common
stock.
If the remarketing fails and you
are a PEPS Unit holder, we may take
possession of your trust preferred
security........................... If the remarketing agent is unable to
remarket the trust preferred securities
we will exercise our rights as a secured
party, and we will take possession of
your trust preferred security. Your
obligation to purchase shares of our
common stock would then be fully
satisfied, and you will receive the
shares of our common stock.
Upon settlement, you will receive a
number of shares of our common
stock equal to the settlement
rate............................... Unless you elect to settle your purchase
contract early, the number of shares of
our common stock you will receive under
your purchase contract will depend on the
average of the closing price per share of
our common stock as reported on the New
York Stock Exchange for the 20-trading
day period ending on the third trading
day prior to the purchase contract
settlement date.
The number of shares of our common stock
you will receive for each purchase
contract will be determined as follows:
- if the average closing price during the
20-trading day period equals or exceeds
$30.403, you will receive .8223 shares
of our common stock;
- if the average closing price during the
20-trading day period is less than
$30.403 but greater than $13.218, you
will receive a number of shares of our
common stock having a value, based on
the average closing price during that
period, equal to $25; and
- if the average closing price during the
20-trading day period is less than or
equal to $13.218, you will receive
1.8913 shares of our common stock.
During the term of the PEPS Units, we
will adjust the settlement rate to
reflect the occurrence of certain stock
dividends, stock splits and other
specified transactions that could affect
the number of shares issuable upon the
settlement of the purchase contract. See
"Description of the Purchase
Contracts--Anti-Dilution Adjustments."
S-12
<PAGE> 13
You can create Treasury PEPS Units
by substituting a treasury security
for trust preferred securities..... For every 40 PEPS Units you own, you may
create 40 Treasury PEPS Units by
substituting U.S. treasury securities for
the trust preferred securities that are a
part of the PEPS Units.
A Treasury PEPS Unit will consist of:
- a purchase contract for shares of our
common stock that is identical to the
purchase contract that is a part of the
PEPS Unit; and
- a 1/40 undivided beneficial ownership
interest in a zero-coupon U.S. treasury
security (CUSIP No. 912820BG1), the
"treasury security," that has a
principal amount at maturity of $1,000,
and matures on August 15, 2003, the
business day prior to the purchase
contract settlement date.
To create Treasury PEPS Units, you must:
- for each group of 40 Treasury PEPS
Units you wish to create, transfer the
treasury security to The Chase
Manhattan Bank, which is acting as the
securities intermediary under the
pledge agreement. The treasury security
will become the collateral supporting
your obligation to purchase shares of
our common stock, and the collateral
agent will release the 40 trust
preferred securities from the pledge.
Those trust preferred securities then
will be separately tradable and will no
longer be a part of a PEPS Unit or a
Treasury PEPS Unit; and
- pay to the collateral agent any fees or
expenses incurred in connection with
the substitution.
You may substitute a treasury security
for trust preferred securities at any
time prior to or on the seventh business
day preceding August 18, 2003.
Distributions will continue to be made on
the trust preferred security. Because
each treasury security has a principal
amount at maturity of $1,000, you may
substitute Treasury PEPS Units for PEPS
Units only in multiples of 40. For each
group of 40 PEPS Units you own, after
substitution of the U.S. treasury
securities for the trust preferred
securities that are part of the 40 PEPS
Units, you will receive 40 Treasury PEPS
Units.
A Treasury PEPS Unit holder will be
required to accrue original issue
discount on the Treasury PEPS Unit
and will not receive any cash
payments on the Treasury PEPS
Unit............................... If you own Treasury PEPS Units, because
the treasury security included in the
Treasury PEPS Units is a zero-coupon
security, you will generally be required
for U.S.
S-13
<PAGE> 14
federal income tax purposes to include in
gross income each year your allocable
share of original issue discount or
acquisition discount on the treasury
security that accrues in such year. You
will not, however, receive any payments
on the Treasury PEPS Units. See "United
States Federal Income Tax Consequences"
in this prospectus supplement.
So long as you continue to own any trust
preferred securities, whether as part of
a PEPS Unit or as a separate security,
you will receive distributions on them,
separately from the Treasury PEPS Units.
You can recreate PEPS Units........ If you own 40 Treasury PEPS Units, you
may recreate 40 PEPS Units at any time
prior to or on the seventh business day
preceding August 18, 2003. Because the
treasury security has a principal amount
at maturity of $1,000, you must recreate
PEPS Units from Treasury PEPS Units in
multiples of 40. For each group of 40
Treasury PEPS Units you submit, you will
receive 40 PEPS Units.
To recreate PEPS Units, you must:
- for each group of 40 PEPS Units you
wish to recreate, transfer 40 trust
preferred securities to the securities
intermediary. The securities
intermediary then will deposit the
trust preferred securities in the
collateral account maintained under the
pledge arrangement. The 40 trust
preferred securities will become the
collateral supporting your obligation
to purchase the shares of our common
stock, and the collateral agent will
release the treasury security from the
pledge. That treasury security then
will be separately tradable and will
not be part of any PEPS Unit; and
- pay to the collateral agent any fees or
expenses incurred in connection with
the substitution.
You may settle the purchase
contracts of Treasury PEPS Units by
paying cash or having the proceeds
of the pledged treasury security
applied............................ Unless you notify the purchase contract
agent that you will pay cash for the
shares of our common stock, upon
settlement of the purchase contracts
related to the Treasury PEPS Units, we
will receive the proceeds of the treasury
security being held as collateral under
the pledge arrangement. This will satisfy
your obligation to deliver the purchase
price for the shares of our common stock,
and you will receive the shares of our
common stock.
You may settle the purchase
contract early..................... You may satisfy your obligation to
purchase shares of our common stock under
your purchase contract at any time prior
to 5:00 p.m., New York City time, on the
seventh business day preceding the
purchase contract settlement date.
S-14
<PAGE> 15
If you choose to settle early:
- you must deliver to the purchase
contract agent a notice indicating your
election to "settle early";
- you must deliver to the purchase
contract agent a cash payment of $25
for each purchase contract being
settled prior to 5:00 p.m., New York
City time, on the seventh business day
preceding the purchase contract
settlement date;
- you will receive, for each PEPS Unit or
Treasury PEPS Unit you surrender, both:
- .8223 shares of our common stock,
regardless of the market price of
the shares of our common stock on
the date of early settlement,
subject to anti-dilution
adjustments; and
- your trust preferred security (if
you are settling a PEPS Unit) or a
1/40 undivided beneficial interest
in a treasury security (if you are
settling a Treasury PEPS Unit); and
- you will retain the right to have your
trust preferred securities remarketed.
You may settle Treasury PEPS Units early
only in multiples of 40 Treasury PEPS
Units.
If you hold PEPS Units and a cash
merger event occurs, you may settle
the related purchase contracts in
cash or have the underlying trust
preferred securities applied to
settle the purchase contracts...... Generally, if a consolidation or merger
involving us occurs in which 30% or more
of the total consideration given to our
shareholders is cash and which closes
before July 1, 2003 (a "cash merger
event"), then you will be able to settle
the purchase contracts related to your
PEPS Units early, either in cash or by
having the related trust preferred
securities applied, at the applicable
settlement rate. See "Description of the
Purchase Contracts--Early Settlement in
the Event of a Cash Merger."
If you have the related trust preferred
securities applied to settle the purchase
contracts, they will be redeemed by the
Trust at a make-whole price that will be
the sum of the stated liquidation amount
of the trust preferred securities and the
present value of scheduled future
distributions on the trust preferred
securities, assuming a redemption date of
August 18, 2003, plus accumulated and
unpaid distributions to date. See
"Description of the Trust Preferred
Securities--Early Redemption in the Event
of a Cash Merger." After applying amounts
owed to us to settle your obligations
under the purchase contracts, any
remaining redemption proceeds will be
paid to you.
S-15
<PAGE> 16
If a cash merger event occurs, you
may elect to have any trust
preferred securities that you hold
separately from PEPS Units redeemed
at the make-whole price............ If you hold trust preferred securities
that are not part of PEPS Units and a
cash merger event occurs that allows for
an early settlement on purchase contracts
you may elect to have some or all of them
redeemed at the make-whole price.
If you elect to have your trust
preferred securities that are not
part of PEPS Units remarketed and
the remarketing fails, you will
retain possession of your trust
preferred securities and the reset
rate will be determined pursuant to
a formula.......................... If the remarketing agent cannot remarket
the trust preferred securities by three
business days prior to the purchase
contract settlement date, you will retain
possession of your trust preferred
securities and the reset rate will be
determined pursuant to a formula
described under "Description of the Trust
Preferred Securities--Failed Remarketing"
in this prospectus supplement.
Interest payments on the
subordinated deferrable notes...... The Trust will use all the proceeds from
the sale of its common securities and the
trust preferred securities, collectively,
the "trust securities," to purchase the
subordinated deferrable notes from us.
The subordinated deferrable notes will be
the sole assets of the Trust. We will pay
interest at a rate of 7.25% on the
subordinated deferrable notes to the
Trust on a quarterly basis. The Trust
will use those interest payments to pay
distributions on the trust preferred
securities. We have the right to defer
interest payments on the subordinated
deferrable notes in which case the Trust
will not have any funds to pay
distributions on the trust preferred
securities and the trustee and the Trust
will therefore defer payments on the
trust preferred securities. We will pay
to the Trust additional interest on any
deferred interest payments at the current
rate (compounded quarterly). In
connection with a resetting of the
distribution rate on the trust preferred
securities, the interest rate on the
subordinated deferrable notes will reset
to equal the reset rate on the trust
preferred securities.
Substitution of treasury portfolio
upon tax event..................... If the tax laws change or are interpreted
in a way that adversely affects the tax
treatment of the Trust or the
subordinated deferrable notes, then we as
issuer of the subordinated deferrable
notes, may elect to redeem the
subordinated deferrable notes held by the
Trust. If the subordinated deferrable
notes are redeemed before August 15,
2003, the money received from the
redemption will be used to purchase a
treasury portfolio of zero-coupon U.S.
treasury securities that mature on or
prior to
S-16
<PAGE> 17
August 15, 2003, and the Trust will be
dissolved. The treasury portfolio will
replace the trust preferred securities as
the collateral securing your obligations
to purchase our common stock under the
purchase contracts. If the subordinated
deferrable notes are redeemed, then each
PEPS Unit will consist of a purchase
contract for our common stock and an
ownership interest in the treasury
portfolio.
Distribution of the subordinated
deferrable notes................... We may dissolve the Trust at any time if
certain conditions are met. If the Trust
is dissolved after the purchase contract
settlement date (other than as a result
of the redemption of the subordinated
deferrable notes) and you continue to
hold trust preferred securities, you will
receive your pro rata share of the
subordinated deferrable notes held by the
Trust (after any creditors of the Trust
have been paid). If the Trust is
dissolved prior to the purchase contract
settlement date, then these subordinated
deferrable notes will be substituted for
the trust preferred securities and will
be pledged as collateral to secure your
obligation to purchase our common stock
under your purchase contracts.
Investing in the PEPS Units is not
the equivalent of investing in our
common stock....................... The distributions on the trust preferred
securities will be paid at a rate per
year that is greater than the current
dividend yield on our common stock. In
addition, because the number of shares of
our common stock that you will receive
upon settlement of the purchase contracts
may decline by approximately 13% as the
applicable market value increases, the
PEPS Units give you less opportunity for
equity appreciation than you would have
if you invested directly in our common
stock.
The purchase contracts will
terminate upon our bankruptcy...... The purchase contracts will terminate
automatically if certain bankruptcy,
insolvency or reorganization events occur
with respect to us. If the purchase
contracts terminate upon one of these
events, then your rights and obligations
under your purchase contract also will
terminate, including your obligation to
pay for, and your right to receive,
shares of our common stock. Upon
termination, you will receive your trust
preferred security or your treasury
security, as the case may be, free of our
security interest.
Application has been made to list
the PEPS Units on the New York
Stock Exchange..................... Application has been made to list the
PEPS Units on the New York Stock Exchange
under the symbol "CMS PrM".
If Treasury PEPS Units are created and
then traded at a volume that satisfies
applicable exchange listing
S-17
<PAGE> 18
requirements, we will try to list them on
the national securities exchanges or
associations on which the PEPS Units are
then listed or quoted. We, however, have
no obligation to do so.
The symbol for our common stock on
the New York Stock Exchange........ CMS
Summary of United States federal
income tax consequences............ Because a PEPS Unit will consist of a
purchase contract and a trust preferred
security, the purchase price of each PEPS
Unit will be allocated between the
purchase contract and the related trust
preferred security in proportion to their
relative fair market values at the time
of purchase. We expect that, at the date
of issuance of the PEPS Units, the fair
market value of each purchase contract
will be $1.459 and the fair market value
of each trust preferred security will be
$23.541.
If you own a PEPS Unit, you will normally
include in gross income your
proportionate share of income on the
trust preferred securities when such
income is paid or accrued in accordance
with your regular method of tax
accounting. You will also be required to
include in gross income your allocable
share of the original issue discount on
the subordinated deferrable notes as it
accrues, over the first three years of
the term of the subordinated deferrable
notes. The amount of original issue
discount attributable to each trust
preferred security will be $1.584, which
is equal to the excess of the remarketed
price of the trust preferred security of
$25.125 over the amount of the purchase
price allocated to the trust preferred
security.
If you own a Treasury PEPS Unit, you will
be required to include in gross income
each year your allocable share of
original issue discount or acquisition
discount on the treasury security that
accrues in such year.
Because there is no statutory, judicial
or administrative authority directly
addressing the tax treatment of the PEPS
Units or instruments similar to the PEPS
Units, you are urged to consult your tax
advisor concerning the tax consequences
of an investment in the PEPS Units. For
additional information, see "United
States Federal Income Tax Consequences"
in this prospectus supplement.
Use of proceeds.................... The Trust will use all of the net
proceeds received from the sale of the
PEPS Units to purchase the subordinated
deferrable notes from us. We estimate
that we will receive net proceeds from
the sale of the subordinated deferrable
notes to the Trust of $213.1 million. We
intend to use the net proceeds plus $36.9
million from our Revolving Credit
Facility to redeem $250.0 million
principal amount of our Auction Rate
Reset Subordinated Notes, Series A, due
S-18
<PAGE> 19
September 2001, which have a current
interest rate of 8.59% and are held by
CMS RHINOS Trust. Simultaneously with
this redemption, we will cause CMS RHINOS
Trust to use the proceeds to redeem all
of its outstanding trust preferred
securities.
Unless we state otherwise, the information in this prospectus supplement
does not include 1,200,000 PEPS Units that may be issued to the underwriters
pursuant to their over-allotment option. If the underwriters exercise their
over-allotment option in full, the total number of PEPS Units offered will be
10,000,000.
ILLUSTRATION OF TERMS AND FEATURES OF PEPS UNITS
The following illustrates some of the key terms and features of the PEPS
Units.
Components of each PEPS Unit:...... - A contract to purchase shares of our
common stock on or prior to August 18,
2003.
- A trust preferred security of the Trust
due August 18, 2004
Issue price of each PEPS Unit:..... $25
Yield on each PEPS Unit:........... 7.25%, consisting of distributions on the
trust preferred security at a rate of
7.25% per year, paid quarterly, until
August 18, 2003. On August 18, 2003,
following a remarketing of the trust
preferred securities, the distribution
rate will be reset.
Reference price (or price of common
stock at time of issuance of PEPS
Units):............................ $26.4375 (the last sale price of our
common stock on the NYSE on August 16,
2000)
Floor price:....................... $13.218 (50% less than the reference
price)
Threshold appreciation price:...... $30.403 (a 15% premium to the reference
price)
A PEPS Unit consists of two components, a purchase contract and a trust
preferred security. The return to an investor on a PEPS Unit will depend upon
the return provided by each of these components. For an investor that holds the
PEPS Unit until remarketing and uses the proceeds from the remarketing to settle
the purchase contract, the return will be comprised of the following:
<TABLE>
<S> <C> <C>
Value of shares of common stock + Distributions on the trust
delivered at maturity of the preferred securities at 7.25% of
purchase contract on August 18, the stated liquidation amount per
2003 year until August 18, 2003
</TABLE>
PURCHASE CONTRACT
The purchase contract obligates you to purchase, and us to sell, our common
stock. You can satisfy this obligation by settling early in cash or by electing
to pay cash before seven business days prior to August 18, 2003 or by
participating in the remarketing. If you settle early you will receive for each
PEPS Unit .8223 shares of our common stock, regardless of the market price of
our common stock on the date of early settlement.
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<PAGE> 20
Otherwise the number of shares delivered to you will depend on the average
closing price of our common stock for the 20-trading day period ending on the
third trading day prior to August 18, 2003, as follows:
- if the average closing price equals or exceeds $30.403, the threshold
appreciation price, you will receive .8223 shares. This is calculated by
dividing the PEPS Unit issue price by the threshold appreciation price
($25.00/$30.403 = .8223);
- if the average closing price for the period is greater than $13.218, the
floor price, but less than $30.403, the threshold appreciation price, you
will receive a number of shares that produces a value of $25;
- if the average closing price for the period is less than or equal to
$13.218, the floor price, the investor will receive 1.8913 shares. This
is calculated by dividing the PEPS Unit issue price by the floor price
($25.00/$13.218 = 1.8913).
The following graphs show the number of shares of our common stock that
will be delivered for each purchase contract on August 18, 2003 and the value of
the shares that will be delivered on August 18, 2003, depending upon our common
stock share price performance.
SHARES DELIVERABLE PER PURCHASE CONTRACT ON AUGUST 18, 2003
[GRAPHIC]
Average Closing Price of CMS Common Stock During 20-Trading Day Period Ending
August 13, 2003
S-20
<PAGE> 21
VALUE OF SHARES DELIVERABLE PER PURCHASE CONTRACT ON AUGUST 18, 2003
[GRAPHIC]
Average Closing Price of CMS Common Stock During 20-Trading Day Period Ending
August 13, 2003.
TRUST PREFERRED SECURITY
The Trust will pay quarterly cash distributions on each trust preferred
security described above at a rate per annum of 7.25% of its $25 stated
liquidation amount until August 18, 2003. After that date, the distribution rate
may be reset in connection with the remarketing of the trust preferred
securities. The trust preferred securities will mature on August 18, 2004.
The trust preferred security will serve as collateral for your purchase
contract obligation. If you do not substitute a treasury security for the trust
preferred security or elect to settle the purchase contract for cash or to
settle the purchase contract early, the trust preferred security will be
remarketed and the proceeds from the remarketing will be used to settle the
purchase contract.
COMPARISON OF INVESTMENT RETURNS FOR A PEPS UNIT AND OUR COMMON STOCK
The following table compares the return you would realize by investing at
the same time $25 in a PEPS Unit (the stated amount and purchase price of each
unit) compared to investing $25 in our common stock (or 0.9456 share, assuming a
common stock price of $26.4375 per share). If you buy a PEPS Unit, your
investment would be substantially similar to the risks and rewards of an
investment in our common stock. However, you would not benefit from the first
15% appreciation in the market value of the common stock underlying the PEPS
Unit. In addition, after the first 15% appreciation in the market value of our
common stock, you would receive only 86.96% of any additional appreciation in
the market value of the common stock underlying the PEPS Unit. On the other
hand, you will not bear the first 50.0% depreciation in the market value of the
common stock. Finally, until you settle your purchase contract, you would not
receive any dividends on our common stock. Instead, you would receive payments
on your PEPS Unit at a rate of 7.25% per year (representing distributions on the
trust preferred security included in your PEPS Unit) until
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<PAGE> 22
August 18, 2003. You should note that this analysis also assumes that we
continue to pay quarterly dividends on our common stock totaling $1.46 per share
per year.
<TABLE>
<CAPTION>
MARKET VALUE
CHANGES IN OF .9456 SHARE PRETAX PRETAX
CMS COMMON CMS COMMON OF CMS VALUE OF ANNUALIZED ANNUALIZED
STOCK PRICE STOCK PRICE COMMON STOCK COMMON STOCK RATE OF RETURN RATE OF
FROM (PER SHARE) AT AT SETTLEMENT DELIVERED PER ON CMS RETURN ON
REFERENCE PRICE SETTLEMENT DATE DATE PURCHASE CONTRACT COMMON STOCK PEPS UNITS
--------------- --------------- --------------- ----------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
(60.0)% $10.58 $10.00 $20.00 (20.88)% 0.64%
(50.0)% $13.22 $12.50 $25.00 (14.82)% 7.25%
(40.0)% $15.86 $15.00 $25.00 (9.68)% 7.25%
(20.0)% $21.15 $20.00 $25.00 (1.26)% 7.25%
(10.0)% $23.79 $22.50 $25.00 2.29 % 7.25%
0.0 % $26.44 $25.00 $25.00 5.52 % 7.25%
10.0 % $29.08 $27.50 $25.00 8.48 % 7.25%
20.0 % $31.73 $30.00 $26.09 11.22 % 8.54%
40.0 % $37.01 $35.00 $30.43 16.15 % 13.27%
50.0 % $39.66 $37.50 $32.61 18.38 % 15.42%
60.0 % $42.30 $40.00 $34.78 20.49 % 17.45%
</TABLE>
The above diagrams and tables do not represent all potential outcomes from
an investment in PEPS Units. For example, prior to seven business days preceding
August 18, 2003, an investor may substitute a treasury security for the trust
preferred security as collateral. By substituting a zero-coupon treasury
security for 40 trust preferred securities, an investor may achieve higher or
lower rates of return than shown above. The actual returns will vary depending
upon a number of factors, including:
- the price of the zero-coupon treasury security;
- the potential trading price of the trust preferred securities; and
- the costs and expenses associated with creating a Treasury PEPS Unit.
An investor that creates a Treasury PEPS Unit, or an investor that settles
the purchase contract early or for cash, and continues to hold the trust
preferred security will continue to receive cash distributions on the trust
preferred security until August 18, 2003. The distribution rate on the trust
preferred securities will be reset on August 18, 2003 to the rate determined by
the remarketing agent in the remarketing of the trust preferred securities or in
the case of a failed remarketing, in accordance with the formula described in
this prospectus supplement.
S-22
<PAGE> 23
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 Panhandle Eastern Pipe Line Company, Panhandle Storage Company
and Trunkline LNG Company. 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 base 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(8) $ 251(8) $ 162 $ 173 $ 161
Class G..................... 15 13 36(8)(9) 36(8)(9) 11 11 --
Average common shares
outstanding
CMS Energy.................. 96 102 110 110 108 108 112
Class G..................... 8 8 9(9) 9(9) 9 9 --
Earnings per average common
share(2)
CMS Energy
Basic..................... $ 2.39 $ 2.65 $ 2.18(8) $ 2.27(8) $ 1.50 $ 1.59 $ 1.44
Diluted................... 2.37 2.62 2.17(8) 2.26(8) 1.48 1.57 1.42
Class G Basic and Diluted..... 1.84 1.56 4.21(8)(9) 4.21(8)(9) 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(9) .99(9) .65 .65 --
</TABLE>
S-23
<PAGE> 24
<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(3)........ 100 100 100 100 100
Consumers Energy Company Financing II(3)...... 120 120 120 120 120
Consumers Energy Company Financing III(4)..... -- -- 175 -- 175
Company-obligated convertible trust preferred
securities of:
CMS Energy Trust I(5)......................... 173 173 173 173 173
CMS Energy Trust II(6)........................ -- -- 301 -- 301
Company-obligated trust preferred securities of
CMS RHINOS Trust(7)........................... -- -- 250 250 250
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 $.40 per
share for CMS Energy common stock and $12 million or $.36 per share for
Class G common stock.
(3) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36% subordinated deferrable interest notes due 2015
from Consumers. The primary asset of Consumers Energy Company Financing II
is $124 million principal amount of 8.20% subordinated deferrable interest
notes due 2027 from Consumers.
(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 Energy Trust I is $178 million principal amount of
7.75% convertible subordinated debentures due 2027 from us.
(6) The primary asset of CMS Energy Trust II is $310 million principal amount of
8.625% convertible junior subordinated deferrable interest debentures due
2004 from us.
(7) The primary asset of CMS RHINOS Trust is $258 million principal amount of
floating rate, subordinated interest notes due 2001 from us.
(8) 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 $.26 and $.25,
respectively, and Class G's basic and diluted earnings per share were
increased $3.31.
(9) From January 1, 1999 to October 25, 1999.
S-24
<PAGE> 25
RISK FACTORS
In considering whether to purchase our PEPS Units, 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-32 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.
Because a PEPS Unit consists of a purchase contract to acquire shares of
our common stock and a trust preferred security issued by the Trust, you are
making an investment decision with regard to our common stock and the trust
preferred securities, as well as the PEPS Units.
RISKS RELATED TO THE PEPS UNITS
YOU WILL BEAR THE RISK OF A DECLINE IN THE PRICE OF OUR COMMON STOCK
The value of the shares of our common stock that you will receive upon the
settlement of the purchase contract is not fixed, but rather will depend on the
market value of our common stock near the time of settlement. Because the price
of our common stock fluctuates, the aggregate market value of the shares of our
common stock receivable upon settlement of the purchase contract may be more or
less than the stated amount of $25 per PEPS Unit. If the market value of our
common stock near the time of settlement is less than $13.218, the aggregate
market value of the shares issuable upon settlement generally will be less than
the stated amount of the trust preferred securities, and your investment in a
PEPS Unit will result in a loss. Any such loss could be substantial.
YOU WILL RECEIVE ONLY A PORTION OF ANY APPRECIATION IN THE MARKET PRICE OF
OUR COMMON STOCK
The aggregate market value of the shares of our common stock receivable
upon settlement of the purchase contract generally will exceed the stated amount
of $25 only if the average closing price of our common stock over the 20-trading
day period ending on the third trading day before August 18, 2003 equals or
exceeds the threshold appreciation price of $30.403 (which represents an
appreciation of 15% over the reference price of $26.4375). Therefore, during the
period prior to settlement, an investment in a PEPS Unit affords less
opportunity for equity appreciation than a direct investment in shares of our
common stock. If the applicable average closing price exceeds the reference
price of $26.4375 but is less than the threshold appreciation price of $30.403,
you will realize no equity appreciation on our common stock for the period
during which you own the purchase contract. Furthermore, if the applicable
average closing price equals or exceeds the threshold appreciation price, you
will realize only 86.96% of the equity appreciation for that period above the
threshold appreciation price. See "Description of the Purchase
Contracts--General" in this prospectus supplement for an illustration of the
number of shares of our common stock that you would receive at various average
market prices.
THE MARKET PRICE OF OUR COMMON STOCK IS UNPREDICTABLE
It is impossible to predict whether the market price of our common stock
will rise or fall. Many factors influence the trading price of our common stock,
including those described below in this risk factors section.
The market for our common stock likely will influence, and be influenced
by, any market that develops for the PEPS Units. For example, investors'
anticipation of the distribution into the market of the additional shares of our
common stock issuable upon settlement of the purchase contracts could depress
the price of our common stock and increase its volatility. If the underwriters'
over-allotment option is exercised in full, the largest number of shares of our
common stock issuable upon settlement of the purchase contracts would constitute
approximately 17.19% of our common stock outstanding as of July 31, 2000. The
price of our common stock also could be affected by possible sales of our common
stock by investors who view the PEPS
S-25
<PAGE> 26
Units as a more attractive means of equity participation in us and by hedging or
arbitrage trading activity that may develop involving the PEPS Units and our
common stock.
OUR OBLIGATIONS UNDER THE SUBORDINATED DEFERRABLE NOTES AND THE GUARANTEE
RANK JUNIOR TO OUR SENIOR OBLIGATIONS AND ARE EFFECTIVELY JUNIOR TO THE
OBLIGATIONS OF OUR SUBSIDIARIES
The ability of the Trust to pay amounts due on the trust preferred
securities is dependent upon our making payments on the subordinated deferrable
notes as and when required.
Our obligations under the subordinated deferrable notes and the guarantee
will be unsecured and subordinate and rank junior in right of payment to all of
our present and future senior indebtedness as described in the indenture and the
guarantee, respectively. We cannot make payments of principal of or interest on
the subordinated deferrable notes if (1) we are in default under any payment
obligation with respect to senior indebtedness beyond any applicable grace
period, (2) we are otherwise in default with respect to any senior indebtedness
permitting the holders of the senior indebtedness to accelerate the maturity of
the senior indebtedness, unless such default has been cured or waived or has
ceased to exist and such acceleration has been rescinded or annulled, or (3) any
judicial proceeding is pending with respect to any default as described in the
indenture and this prospectus supplement.
In the event of the acceleration of the maturity of subordinated deferrable
notes, the holders of all senior indebtedness outstanding at that time will
first be entitled to receive payment in full of all amounts due in respect of
such senior indebtedness before the holders of subordinated deferrable notes
will be entitled to receive or retain any payment in respect of subordinated
deferrable notes.
None of the indenture, the guarantee or any agreement relating to the PEPS
Units places any limitation on the amount of additional secured or unsecured
debt, including senior indebtedness, that may be incurred by us.
In addition, 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 subordinated deferrable notes and the guarantee are effectively
subordinated to payments on the debt, preferred securities and other obligations
of Consumers and Enterprises and each of their subsidiaries. None of these
entities will be obligated to pay amounts due on the subordinated deferrable
notes or the guarantee.
THE PEPS UNITS AND TREASURY PEPS UNITS PROVIDE LIMITED SETTLEMENT RATE
ADJUSTMENTS
The number of shares of our common stock issuable upon settlement of each
purchase contract is subject to adjustment only for stock splits and
combinations, stock dividends and certain other specified transactions. The
number of shares of our common stock issuable upon settlement of each purchase
contract is not subject to adjustment for other events, such as employee stock
option grants, offerings of our common stock for cash or in connection with
certain acquisitions or other transactions, which may adversely affect the price
of our common stock. The terms of the PEPS Units do not restrict our ability to
offer our common stock in the future or to engage in other transactions that
could dilute our common stock. We have no obligation to consider the interests
of the holders of the PEPS Units for any reason.
YOU HAVE NO SHAREHOLDER RIGHTS WITH RESPECT TO OUR COMMON STOCK
Until you acquire shares of our common stock upon settlement of your
purchase contract, you will have no rights with respect to the shares of our
common stock, including voting rights, rights to respond to tender offers and
rights to receive any dividends or other distributions on our common stock. Upon
settlement of your purchase contract, you will be entitled to exercise the
rights of a holder of shares of our common stock only as to actions for which
the applicable record date occurs after the settlement date.
S-26
<PAGE> 27
HOLDERS OF TRUST PREFERRED SECURITIES WILL HAVE LIMITED VOTING RIGHTS
You will not be entitled to vote to appoint, remove, replace or change the
number of the trustees of the Trust, and generally will have no voting rights,
except in the limited circumstances described under "Description of the Trust
Preferred Securities--Voting Rights" in the accompanying prospectus.
WE WILL HAVE THE OPTION TO DEFER INTEREST PAYMENTS ON THE SUBORDINATED
DEFERRABLE NOTES HELD BY THE TRUST
If we exercise our right to defer interest payments on the subordinated
deferrable notes, the Trust will not have enough funds to make the distributions
on the trust preferred securities. In this case, even though you would not be
receiving distributions on your trust preferred securities, you would be
required to include the stated distribution amount on the trust preferred
securities in gross income, as original issue discount, on a daily economic
accrual basis, regardless of your method of accounting. As a result, you would
recognize income for United States federal income tax purposes in advance of the
receipt of cash attributable to such income, and would not receive cash
distributions on your trust preferred securities until we make an interest
payment on the subordinated deferrable notes. See "United States Federal Income
Tax Consequences--United States Holders--Trust Preferred Securities--Interest
Income and Original Issue Discount" in this prospectus supplement.
If we exercise our right to defer payments of interest on the subordinated
deferrable notes, the market price of the PEPS Units is likely to decrease. In
addition, the mere existence of the right to defer interest payments may cause
the market price of the PEPS Units to be more volatile than the market price of
other securities that are not subject to such deferrals.
THE GUARANTEE ONLY COVERS PAYMENTS ON THE TRUST PREFERRED SECURITIES TO THE
EXTENT WE HAVE MADE CORRESPONDING PAYMENTS ON THE SUBORDINATED DEFERRABLE NOTES
Under the guarantee to be executed by us for the benefit of the holders of
the trust preferred securities, we will irrevocably guarantee the payment of
various amounts payable with respect to the trust preferred securities,
including accumulated distributions, the redemption price and amounts payable
upon dissolution of the Trust, but only to the extent that the Trust has funds
available for those payments. The Trust depends on us for its source of funds to
make distributions on the trust preferred securities when due. If we were to
default on our obligations to pay principal of or interest on the subordinated
deferrable notes, the Trust would not have sufficient funds to pay distributions
or other amounts on the trust preferred securities, and you would not be able to
rely upon the guarantee for payment of these amounts. Instead, you would have to
(1) rely on the property trustee enforcing its rights as the registered holder
of the subordinated deferrable notes or (2) enforce the rights of the property
trustee or assert your own right to bring an action directly against us to
enforce payments on the subordinated deferrable notes. The declaration of trust
provides that, by acceptance of the trust preferred securities, you agree to the
provisions of the guarantee and the indenture under which the subordinated
deferrable notes will be issued.
YOUR PLEDGED TRUST PREFERRED SECURITY WILL BE ENCUMBERED BY OUR SECURITY
INTEREST
Although you will be the beneficial owner of the underlying pledged trust
preferred security, that pledged trust preferred security will be pledged with
the collateral agent to secure your obligation under the purchase contract.
Therefore, for so long as the purchase contract remains in effect, you will not
be allowed to withdraw your pledged trust preferred security from this pledge
arrangement, except to create Treasury PEPS Units or if you settle the purchase
contract early or settle the purchase contracts for cash on the purchase
contract settlement date as described in this prospectus supplement.
S-27
<PAGE> 28
SECONDARY TRADING IN THE PEPS UNITS, TREASURY PEPS UNITS AND THE TRUST
PREFERRED SECURITIES MAY BE LIMITED
It is impossible to predict how the PEPS Units, the Treasury PEPS Units and
the trust preferred securities will trade in the secondary market or whether the
market for any of these securities will be liquid or illiquid. There currently
is no secondary market for any of these securities, and we cannot assure you as
to the liquidity of any trading market that may develop, the ability of holders
to sell their securities in that market or whether any such market will
continue.
Application has been made to list the PEPS Units on the New York Stock
Exchange under the symbol "CMS PrM" . However, listing on the New York Stock
Exchange does not guarantee the depth or liquidity of the market for the PEPS
Units. If holders of the PEPS Units create Treasury PEPS Units, the liquidity of
the PEPS Units could be adversely affected. Moreover, if the number of the PEPS
Units falls below the New York Stock Exchange's requirement for continued
listing (whether as a result of the creation of Treasury PEPS Units or
otherwise), the PEPS Units could be delisted from the New York Stock Exchange,
or trading in the PEPS Units could be suspended.
If Treasury PEPS Units are traded to a sufficient extent to meet applicable
exchange listing requirements, we will try to list those securities on the same
national securities exchanges or associations as the PEPS Units. However, we do
not presently plan to list the Treasury PEPS Units or the trust preferred
securities on any securities exchange and have no obligation to do so in the
future. The underwriters have advised us that they presently intend to make a
market for the PEPS Units, the Treasury PEPS Units and the trust preferred
securities. However, they are not obligated to do so and they may discontinue
any market making at any time.
THE PURCHASE CONTRACT AGREEMENT IS NOT QUALIFIED UNDER THE TRUST INDENTURE
ACT AND THEREFORE THE OBLIGATIONS OF THE PURCHASE CONTRACT AGENT ARE LIMITED
The purchase contract agreement is not an indenture under the Trust
Indenture Act. Therefore, the purchase contract agent will not qualify as a
trustee under the Trust Indenture Act, and you will not benefit from the
protections of that law, such as disqualification of an indenture trustee for
"conflicting interests," provisions preventing an indenture trustee from
improving its own position at the expense of the security holders and the
requirement that an indenture trustee deliver reports at least annually with
respect to the indenture trustee and the securities. Under the terms of the
purchase contract agreement, the purchase contract agent will have only limited
obligations to you as a holder of the PEPS Unit.
THE DELIVERY OF SECURITIES IS SUBJECT TO POTENTIAL DELAY
The purchase contracts will terminate automatically if certain bankruptcy,
insolvency or reorganization events occur with respect to us. If the purchase
contracts terminate upon one of these events, your rights and obligations under
your purchase contract also will terminate, including your obligation to pay
for, and your right to receive, shares of our common stock. Upon termination,
you will receive your trust preferred security or your treasury security.
Notwithstanding the automatic termination of the purchase contracts, imposition
of an automatic stay under Section 362 of the Bankruptcy Code may delay the
delivery to you of your securities being held as collateral under the pledge
arrangement.
RISKS RELATING TO CMS ENERGY
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT OUR FINANCIAL FLEXIBILITY
As of June 30, 2000, we had approximately $8.3 billion in total
indebtedness and mandatorily redeemable trust preferred securities. 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;
S-28
<PAGE> 29
- 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
- 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 at a rapid rate
and also has various restrictions on its ability to pay dividends or acquire its
own stock.
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 subordinated deferrable notes, and as a result you may not
receive payments on the trust preferred securities.
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
S-29
<PAGE> 30
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 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. 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 Midwest 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.
S-30
<PAGE> 31
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 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 simply 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 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 the 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 on July 5, 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. As with other significant MPSC orders, a
securitization order is subject to appeal by any party.
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 July 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 traditional insurance similar to comparable
companies in the same line of business for various risk exposures including
political risk from possible nationalization or expropriation, we are exposed to
some risks that include local political and economic factors over which we have
no control, such as 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.
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<PAGE> 32
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 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 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 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;
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<PAGE> 33
- 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 state 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 opportunity 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;
- 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.
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<PAGE> 34
USE OF PROCEEDS
The net proceeds to us from this offering, after deducting underwriting
discounts and estimated expenses, will be approximately $213.1 million. We
intend to use the net proceeds of this offering plus $36.9 million from our
Revolving Credit Facility to redeem $250.0 million principal amount of our
Auction Rate Reset Subordinated Notes, Series A, due September 2001, which have
a current interest rate of 8.59% and are held by CMS RHINOS Trust, a Delaware
business trust sponsored by CMS Energy.
Simultaneously with this redemption, we will cause CMS RHINOS Trust to use
the proceeds to redeem $250.0 million, liquidation amount, of its Auction Rate
Reset Preferred Securities.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges and the ratio of earnings to fixed
charges and preferred stock dividends 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................ 1.90 1.96 1.78 1.59 1.38 1.35
Ratio of earnings to fixed charges and preferred
stock dividends................................. 1.74 1.75 1.59 1.43 1.28 1.28
</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> 35
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock is traded on the New York Stock Exchange, or NYSE, under
the symbol CMS. The closing price of common stock on August 16, 2000, as
reported on the NYSE was $26 7/16 per share. As of August 16, 2000, there were
109,817,713 shares of common stock held by 68,003 holders of record. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock, as reported on the NYSE Composite Transactions
Tape, and quarterly cash dividends declared on shares of our common stock.
<TABLE>
<CAPTION>
COMMON
STOCK PRICE
-------------- CASH DIVIDEND
HIGH LOW PER SHARE
---- --- -------------
<S> <C> <C> <C>
1998:
First Quarter............................................ $47 5/16 $41 7/8 $.300
Second Quarter........................................... 47 3/16 40 11/16 .300
Third Quarter............................................ 44 3/4 38 3/4 .330
Fourth Quarter........................................... 50 1/8 43 3/16 .330
1999:
First Quarter............................................ $48 7/16 $39 9/16 $.330
Second Quarter........................................... 47 1/16 39 1/4 .330
Third Quarter............................................ 41 15/16 35 5/8 .365
Fourth Quarter........................................... 38 1/16 30 5/16 .365
2000:
First Quarter............................................ $32 1/16 $16 1/16 $.365
Second Quarter........................................... 23 1/16 17 3/4 .365
Third Quarter (through August 16, 2000).................. 27 7/8 22 1/16 .365
</TABLE>
RESTRICTIONS AND LIMITATIONS ON ABILITY TO PAY DIVIDENDS
Reference is made to "Description of Securities--Common Stock--Dividend
Rights and Policy; Restrictions on Dividends" and "--Primary Source of Funds of
CMS Energy; Restrictions on Sources of Dividends" in the accompanying base
prospectus for information about our dividend policies and other matters
relating to dividends on our common stock, including restrictions and
limitations on our ability to pay such dividends. In addition to the
restrictions and limitations on payment of dividends described in the
accompanying base prospectus, CMS Energy is subject to the following contractual
restrictions on its ability to pay dividends:
Revolving Credit Facility
Under the terms of our Revolving Credit Facility, we have agreed that we
will not, and will not permit certain of our subsidiaries, directly or
indirectly, to:
- declare or pay any dividend, payment or other distribution of assets,
properties, cash, rights, obligations or securities on account of any
shares of any class of our capital stock or the capital stock of those
subsidiaries; or
- purchase, redeem, retire or otherwise acquire for value any such capital
stock (each, a "restricted payment");
unless (1) there is no event of default under the Revolving Credit Facility (or
event that with the lapse of time or giving of notice would constitute an event
of default) which has occurred and is continuing, or would occur as a result of
the restricted payment, and (2) after giving effect to any restricted payment
described above, the aggregate amount of all restricted payments made since
September 30, 1993 does not exceed the sum of:
- $120 million;
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<PAGE> 36
- 100% of our consolidated net income from September 30, 1993 to the end of
the most recent fiscal quarter ending at least 45 days prior to the date
of the restricted payment (or, in the case of a deficit, minus 100% of
the deficit); and
- the aggregate net proceeds we have received for any issuance or sale of,
or contribution with respect to, our capital stock subsequent to
September 30, 1993.
At June 30, 2000, we could pay cash dividends of $1.951 billion pursuant to this
restriction.
Senior Debt Indenture
Under the terms of an Indenture dated as of September 15, 1992, as amended
and supplemented, between us and Bank One (formerly NBD Bank), as Trustee,
pursuant to which we have issued our 7 3/8% Unsecured Notes Due 2000, 8 1/8%
Unsecured Notes Due 2002, 6.75% Senior Notes Due 2004, 7 5/8% Unsecured Notes
Due 2004, X-TRAS(SM) Pass-Through Trust I Certificates Due 2005, 7.5% Senior
Notes Due 2009, 8% Senior Notes Due 2011, and 8 3/8% Senior Notes Due 2013, so
long as any of the notes issued thereunder are outstanding and until those notes
are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one
other rating agency, at which time we will be permanently released from the
provisions of this limitation, we have agreed that we will not, and will not
permit any of our restricted subsidiaries, directly or indirectly, to:
- declare or pay any dividend or make any distribution on our capital stock
to the direct or indirect holders of our capital stock (except dividends
or distributions payable solely in our non-convertible capital stock (as
defined in the Indenture) or in options, warrants or other rights to
purchase such non-convertible capital stock and except dividends or other
distributions payable to us or one of our subsidiaries);
- purchase, redeem or otherwise acquire or retire for value any of our
capital stock; or
- purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to the scheduled maturity or scheduled repayment thereof,
any of our subordinated indebtedness (each, a "restricted payment");
if at the time of any restricted payment described above (1) an event of default
under the Indenture (or event that with the lapse of time or giving of notice
would constitute an event of default) has occurred and is continuing, or would
occur as a result of the restricted payment, or (2) after giving effect to any
restricted payment described above, the aggregate amount of all restricted
payments made since May 6, 1997 would exceed the sum of:
- $100 million;
- 100% of our consolidated net income from May 6, 1997 to the end of the
most recent fiscal quarter ending at least 45 days prior to the date of
the restricted payment (or, in the case of a deficit, minus 100% of the
deficit); and
- the aggregate net proceeds we have received for any issuance or sale of,
or contribution with respect to, our capital stock subsequent to May 6,
1997.
At June 30, 2000, we could pay cash dividends of $985.9 million pursuant to this
restriction.
General Term Note Indenture
Similarly, the Indenture, dated as of January 15, 1994, as amended and
supplemented, between us and The Chase Manhattan Bank, as Trustee, pursuant to
which we have issued our General Term Notes, Series A, Series B, Series C,
Series D and Series E, provides that so long as any general term notes issued
thereunder are outstanding and until the notes are rated BBB- or above (or an
equivalent rating) by Standard & Poor's
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<PAGE> 37
and one other rating agency, at which time we will be permanently released from
the provisions of this limitation, we have agreed that we will not, and will not
permit any of our restricted subsidiaries, directly or indirectly, to:
- declare or pay any dividend or make any distribution on our capital stock
to the direct or indirect holders of our capital stock (except dividends
or distributions payable solely in our non-convertible capital stock (as
defined in the Indenture) or in options, warrants or other rights to
purchase such non-convertible capital stock and except dividends or other
distributions payable to us or one of our subsidiaries);
- purchase, redeem or otherwise acquire or retire for value any of our
capital stock; or
- purchase, repurchase, redeem, or otherwise acquire or retire for value,
prior to the scheduled maturity or scheduled repayment thereof, any of
our subordinated indebtedness (each, a "restricted payment");
if at the time of any restricted payment described above (1) an event of default
under the Indenture (or event that with the lapse of time or giving of notice
would constitute an event of default) has occurred and is continuing, or would
occur as a result of the restricted payment, or (2) after giving effect to any
restricted payment described above, the aggregate amount of all restricted
payments made since September 30, 1993 would exceed the sum of:
- $120 million;
- 100% of our consolidated net income from September 30, 1993 to the end of
the most recent fiscal quarter ending at least 45 days prior to the date
of the restricted payment (or, in the case of a deficit, minus 100% of
the deficit); and
- the aggregate net proceeds we have received for any issuance or sale of,
or contribution with respect to, our capital stock subsequent to
September 30, 1993.
At June 30, 2000, we could pay cash dividends of $1.951 billion pursuant to
this restriction.
The provisions described above do not prohibit (1) dividends or other
distributions in respect of capital stock issued in connection with the
acquisition of any business or assets by us where the payment of such dividends
or distributions are payable solely from the net earnings of such business or
assets, (2) any purchase or redemption of capital stock made by exchange for, or
out of the proceeds of the substantially concurrent sale of, our capital stock
(other than certain redeemable stock or exchangeable stock), (3) dividends paid
within 60 days after the date of declaration thereof if at the date of
declaration such dividends would have complied with the limitations described
above or (4) payments pursuant to the tax sharing agreement among us and our
subsidiaries.
Trust Preferred Securities
In June 1997, a CMS Energy affiliated trust issued $172.5 million of 7 3/4%
Convertible Trust Preferred Securities. The preferred securities are convertible
at the option of the holder into shares of CMS Energy common stock at an initial
conversion rate of 1.2255 shares of CMS Energy common stock for each preferred
security (equivalent to a purchase price of $40.80 per share of CMS Energy
common stock), subject to certain adjustments. On or after July 16, 2001, we
may, at our option, cause the conversion rights of the holders of the preferred
securities to expire upon certain conditions.
In July 1999, a CMS Energy affiliated trust issued $300.875 million of
8.750% Adjustable Convertible Trust Securities. Each unit of adjustable
convertible trust securities obligates the holder to purchase from us not more
than 1.2121 and not less than 0.7830 shares of CMS Energy common stock based on
the average trading price of that common stock during a 20-day period ending
before July 1, 2002.
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<PAGE> 38
Under the terms of the Indenture, dated June 1, 1997, between us and The
Bank of New York, as trustee, as amended and supplemented, and the guarantee
agreements dated June 20, 1997, June 1, 1999 and July 8, 1999 between us and The
Bank of New York relating to the preferred securities of CMS Energy Trust I, CMS
RHINOS Trust and CMS Energy Trust II pursuant to which the preferred securities
and the related convertible subordinated debentures due 2027, the Auction Rate
Reset Subordinated Notes, Series A due 2001 and the Junior Subordinated
Deferrable Interest Debentures due 2004, respectively, were issued, we have
agreed that we will not, and will not cause any of our subsidiaries to, declare
or pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of our capital stock, if at such time:
- an event has occurred, of which we have actual knowledge, that with the
giving of notice or the lapse of time, or both, would constitute an event
of default and in respect of which we have not taken reasonable steps to
cure;
- we are in default with respect to the payment of any obligations under
the Guarantee Agreement; or
- we have given notice of our selection of an extension period as provided
in the subordinated debt indenture with respect to the subordinated
debentures and have not rescinded such notice, or such extension period
(or any extension thereof) is continuing.
DIVIDEND RESTRICTIONS UNDER MICHIGAN LAW
Michigan law prohibits payment of a dividend if, after giving it effect, a
corporation 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 of incorporation provide otherwise, the
amount that would be needed, if the corporation 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 (including the rights of holders of preferred stock, if any).
Under the provisions of the Michigan Business Corporation Act, at June 30,
2000, our net assets available for the payment of dividends were $2.337 billion.
CONSUMERS' DIVIDEND RESTRICTIONS
Consumers' ability to pay dividends to CMS Energy is restricted by
Consumer's articles of incorporation and certain agreements to which it is a
party, as described under "Description of Securities--Primary Source of Funds of
CMS Energy; Restrictions on Sources of Dividends" in the accompanying base
prospectus.
Under the provisions of the Michigan Business Corporation Act, at June 30,
2000, Consumers' net assets available for payment of dividends were $1.867
billion. Under its Articles of Incorporation, the most restrictive dividend
limitation, Consumers would be able to pay $360 million in dividends. In July
2000, Consumers declared a $17 million common dividend payable in August 2000.
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<PAGE> 39
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 $220 million of
PEPS Units in this offering and the application of the net proceeds as described
under "Use of Proceeds." 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 base prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
----------------------
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Non-current portion of capital leases....................... $ 197 $ 197
Long-term debt.............................................. $ 6,918 $ 6,955
------- -------
Total stockholders' equity:
Company-obligated mandatorily redeemable preferred
securities of:
Consumers Power Company Financing I (1)................ 100 100
Consumers Energy Company Financing II (2).............. 120 120
Consumers Energy Company Financing III (3)............. 175 175
CMS RHINOS Trust (4)................................... 250 --
Company-obligated convertible preferred securities of:
CMS Energy Trust I (5)................................. 173 173
CMS Energy Trust II (6)................................ 301 301
CMS Energy Trust III (7)............................... -- 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 $10,630
======= =======
</TABLE>
------------------
(1) 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.
(2) 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.
(3) 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.
(4) The primary asset of CMS RHINOS Trust is approximately $258 million
principal amount of floating rate, subordinated interest notes due 2001 from
CMS Energy. Adjusted to reflect the payment from the proceeds of the units
offered hereby of $250 million of preferred securities.
(5) 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.
(6) 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.
(7) The primary asset of CMS Energy Trust III will be approximately $227 million
principal amount of 7.25% subordinated deferrable notes being issued in
connection with the units being offered hereby.
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<PAGE> 40
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
pre-tax operating income of $912.0 million. The following table shows the
pre-tax operating income contribution from each of our business segments:
<TABLE>
<CAPTION>
PRE-TAX
OPERATING INCOME
---------------------
AMOUNT % TOTAL
---------- -------
(MILLIONS)
<S> <C> <C>
CONSUMERS
Consumers electric utility.................................. $494 54.2%
Consumers gas utility....................................... 132 14.4
---- -----
Total Consumers........................................... 626 68.6
ENTERPRISES
Independent power production................................ 157 17.2
Natural gas transmission, storage and processing............ 91 10.0
Oil and gas exploration and production...................... 17 1.9
International energy distribution and other non-utility
operations................................................ 17 1.9
Marketing, services and trading............................. 4 0.4
---- -----
Total Enterprises......................................... 286 31.4
---- -----
Total.................................................. $912 100.0%
==== =====
</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 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.
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<PAGE> 41
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, 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.
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 advanced development at December 31, 1999.
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<PAGE> 42
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.
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 1,370 MW
(671 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
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<PAGE> 43
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 and Pan Gas Storage, and b) Panhandle Eastern Pipe Line
Company's affiliates, Trunkline LNG and Panhandle Storage. As a result,
Panhandle Eastern Pipe Line Company and the other Panhandle companies are now a
wholly owned subsidiary of CMS Gas Transmission. We refer to these companies
collectively as Panhandle.
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 majority of 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
pipeline from natural gas transmission service to liquid products service by the
end of 2001. This plan is in conjunction with a FERC filing requesting
abandonment of 720 miles of the 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.
CMS Oil and Gas' proven oil and gas reserves total 248.2 MMBoe reflecting a
balanced portfolio of reserves, including 47% oil and condensate and 53% natural
gas.
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<PAGE> 44
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>
In the second quarter 2000, CMS Oil and Gas sold all of its northern
Michigan oil and gas properties. In that same quarter, it sold its working
interest in oil reserves located in Ecuador's Oriente Basin.
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 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> 45
ACCOUNTING TREATMENT
The financial statements of the Trust will be reflected in our consolidated
financial statements, with the trust preferred securities shown on our balance
sheet as Company-obligated mandatorily redeemable preferred capital trust
securities of a subsidiary trust holding solely CMS subordinated notes. The
footnotes to our consolidated financial statements will reflect that the sole
asset of the Trust will be the subordinated deferrable notes. Distributions on
the trust preferred securities will be reflected as a charge to our consolidated
income, identified as "Distributions on Preferred Securities of a Subsidiary
Trust," whether paid or accumulated.
The purchase contracts are forward transactions in our common stock. Upon
settlement of a purchase contract, we will receive the stated amount of $25 on
the purchase contract and will issue the requisite number of shares of our
common stock. The stated amount received will be credited to shareholders'
equity.
Prior to the issuance of shares of our common stock upon settlement of the
purchase contracts, the PEPS Units will be reflected in our diluted earnings per
share calculations using the treasury stock method. Under this method, the
number of shares of our common stock used in calculating diluted earnings per
share is deemed to be increased by the excess, if any, of the number of shares
issuable upon settlement of the purchase contracts over the number of shares
that could be purchased by us in the market (at the average market price during
the period) using the proceeds receivable upon settlement. Consequently, we
expect there will be no dilutive effect on our diluted earnings per share except
during periods when the average market price of a share of our common stock is
above the threshold appreciation price.
DESCRIPTION OF THE PEPS UNITS
The following is a summary of some of the terms of the PEPS Units. This
summary together with the summary of some of the terms of the purchase
contracts, the purchase contract agreement, the pledge agreement and the trust
preferred securities set forth under the captions "Description of the Purchase
Contracts," "Certain Provisions of the Purchase Contracts, the Purchase Contract
Agreement and the Pledge Agreement" and "Description of the Trust Preferred
Securities" in this prospectus supplement contain a description of all of the
material terms of the PEPS Units but is not complete. We refer you to the forms
of the purchase contract agreement, the pledge agreement and the trust preferred
securities that have been filed or incorporated by reference as exhibits to the
registration statement of which this prospectus supplement and the accompanying
prospectus form a part. This summary supplements the description of the stock
purchase units in the accompanying prospectus, and, to the extent it is
inconsistent, replaces the description in the prospectus.
PEPS UNITS
Each PEPS Unit offered will initially consist of:
- a purchase contract under which the holder will purchase from us on the
purchase contract settlement date, or upon early settlement, for $25, a
number of shares of our common stock equal to the applicable settlement
rate described under "Description of the Purchase Contracts--General" or
"Description of the Purchase Contracts--Early Settlement" in this
prospectus supplement, as the case may be; and
- a trust preferred security, having a stated liquidation amount of $25,
representing an undivided beneficial ownership interest in the assets of
the Trust, which assets will consist solely of the subordinated
deferrable notes, under which we will pay cash distributions at the rate
of 7.25% per year, or $1.8125 per year, paid quarterly.
The trust preferred security will be pledged under the pledge agreement to
secure your obligation to purchase our common stock under the purchase contract.
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<PAGE> 46
We will have the right at any time to dissolve the Trust and, after
satisfaction of liabilities to creditors of the Trust, if any, to cause the
subordinated deferrable notes to be distributed to the holders of the trust
securities. Prior to the distribution of the subordinated deferrable notes, we
will be required to obtain an opinion of counsel that the distribution of the
subordinated deferrable notes will not be taxable to the holders of the trust
preferred securities for United States federal income tax purposes. References
in this prospectus supplement to trust preferred securities, unless the context
otherwise requires, include the subordinated deferrable notes that would be
delivered to the holders of the trust preferred securities upon dissolution of
the Trust.
In addition, if a tax event occurs prior to the purchase contract
settlement date, we may cause the subordinated deferrable notes (and, thus, the
trust preferred securities) to be redeemed. Upon such a "tax event redemption,"
the securities intermediary will use the proceeds from the redemption of the
subordinated deferrable notes to purchase a portfolio of zero-coupon U.S.
treasury securities that mature one business day prior to the purchase contract
settlement date and on the various dates upon which payments would have been due
on the subordinated deferrable notes. We refer to this portfolio of treasury
securities as the "treasury portfolio." The treasury portfolio will be
substituted for the redeemed trust preferred securities as the collateral
securing the holders' obligations under the related purchase contracts and the
Trust will be dissolved.
If the Trust is dissolved at a time when the trust preferred securities are
part of the PEPS Unit, each PEPS Unit thereafter will consist of a purchase
contract plus a subordinated deferrable note having a principal amount of $25,
instead of a trust preferred security. If the Trust is dissolved at a time when
the trust preferred securities are no longer a part of the PEPS Unit, the holder
of the trust preferred securities will receive a subordinated deferrable note or
cash in an amount equal to the redemption price of the subordinated deferrable
note, as applicable.
An "applicable ownership interest" means, with respect to a PEPS Unit that
includes a treasury portfolio, (1) a 1/40, or 2.5%, undivided beneficial
ownership interest in a $1,000 face amount of a principal or interest strip in a
U.S. treasury security included in the treasury portfolio that matures on or
prior to August 18, 2003 and (2) for each scheduled interest payment date on the
subordinated deferrable notes that occurs after the date upon which the
subordinated deferrable notes are redeemed due to a tax event, a 1/40, or 2.5%,
undivided beneficial ownership interest in a $1,000 face amount of a principal
or interest strip in a U.S. treasury security included in the treasury portfolio
that matures on or prior to such date. Unless otherwise specified, references in
this prospectus supplement to the "applicable ownership interest of the treasury
portfolio" have the meaning specified in clause (1) of this definition.
The purchase price of each PEPS Unit will be allocated between the purchase
contract and the trust preferred security in proportion to their respective fair
market values at the time of purchase. We expect that, at the time of issuance,
the fair market value of each purchase contract will be $1.459 and the fair
market value of each trust preferred security will be $23.541. This position
will generally be binding on each beneficial owner of a PEPS Unit (but not on
the IRS).
So long as the units are in the form of PEPS Units, the related trust
preferred securities or the applicable ownership interest of the treasury
portfolio, as applicable, will be pledged to the collateral agent to secure the
holders' obligations to purchase our common stock under the related purchase
contracts.
CREATING TREASURY PEPS UNITS BY SUBSTITUTING A TREASURY SECURITY FOR TRUST
PREFERRED SECURITIES
Each holder of 40 PEPS Units may create 40 Treasury PEPS Units by
substituting for the trust preferred securities that are a part of the PEPS
Units a treasury security having an aggregate principal amount at maturity equal
to $1,000.
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<PAGE> 47
Each Treasury PEPS Unit will consist of:
- a purchase contract under which the holder will purchase from us on the
purchase contract settlement date, or upon early settlement, for $25, a
number of shares of our common stock equal to the applicable settlement
rate; and
- a 1/40 undivided beneficial ownership interest in a zero-coupon U.S.
treasury security (CUSIP No. 912820BG1) with a principal amount at
maturity equal to $1,000 and maturing on August 15, 2003, the business
day preceding the purchase contract settlement date.
The term "business day" means any day other than a Saturday or a Sunday or
a day on which banking institutions in New York City or Delaware are authorized
or required by law or executive order to remain closed or a day on which The
Bank of New York, a New York banking corporation, acting as indenture trustee
with respect to the subordinated deferrable notes and property trustee under the
declaration of trust, is closed for business.
The Treasury PEPS Unit holder's beneficial ownership in the treasury
security will be pledged under the pledge agreement to secure the holder's
obligation to purchase shares of our common stock under the purchase contract.
Holders of PEPS Units may create Treasury PEPS Units at any time on or
prior to the seventh business day preceding August 18, 2003. Because the
treasury security is issued in integral multiples of $1,000, holders of PEPS
Units may create Treasury PEPS Units only in integral multiples of 40.
To create 40 Treasury PEPS Units, a holder is required to:
- deposit with the securities intermediary a zero-coupon U.S. treasury
security (CUSIP No. 912820BG1) with a principal amount at maturity equal
to $1,000 and maturing on August 15, 2003; and
- transfer to the purchase contract agent 40 PEPS Units, accompanied by a
notice stating that the holder of the PEPS Units has deposited a treasury
security with the securities intermediary and requesting that the
purchase contract agent instruct the collateral agent to release the
related 40 trust preferred securities.
Upon receiving instructions from the purchase contract agent and
confirmation of receipt of the treasury security by the securities intermediary,
the collateral agent will cause the securities intermediary to release the
related 40 trust preferred securities from the pledge and deliver them to the
purchase contract agent, free and clear of our security interest. The purchase
contract agent then will:
- cancel the 40 PEPS Units;
- transfer the related 40 trust preferred securities to the holder; and
- deliver 40 Treasury PEPS Units to the holder.
The treasury security will be substituted for the trust preferred
securities and will be pledged to the collateral agent to secure the holder's
obligation to purchase shares of our common stock under the related purchase
contracts. These trust preferred securities thereafter will trade separately
from the Treasury PEPS Units.
Holders who create Treasury PEPS Units or recreate PEPS Units (as discussed
below) will be responsible for any fees or expenses payable to the collateral
agent in connection with substitutions of collateral. See "Certain Provisions of
the Purchase Contracts, the Purchase Contract Agreement and the Pledge
Agreement--Miscellaneous" in this prospectus supplement.
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<PAGE> 48
RECREATING PEPS UNITS
Each holder of 40 Treasury PEPS Units may recreate 40 PEPS Units by:
- depositing with the securities intermediary 40 trust preferred
securities; and
- transferring to the purchase contract agent 40 Treasury PEPS Units,
accompanied by a notice stating that such holder has deposited 40 trust
preferred securities with the securities intermediary and requesting that
the purchase contract agent instruct the collateral agent to release the
related treasury security.
Upon receiving instructions from the purchase contract agent and
confirmation of receipt of the trust preferred securities by the securities
intermediary, the collateral agent will cause the securities intermediary to
release the related treasury security from the pledge and deliver it to the
purchase contract agent, on behalf of the holder, free and clear of our security
interest. The purchase contract agent then will:
- cancel the 40 Treasury PEPS Units;
- transfer the related treasury security to the holder; and
- deliver 40 PEPS Units to the holder.
Holders of Treasury PEPS Units may recreate PEPS Units at any time on or
prior to the seventh business day preceding August 18, 2003.
CURRENT PAYMENTS
The payments on the PEPS Units will consist of cash distributions payable
on the trust preferred securities by the Trust or the subordinated deferrable
notes, as applicable, payable at the rate of 7.25% of the stated liquidation or
principal amount per year, payable quarterly in arrears, on February 18, May 18,
August 18, and November 18, starting November 18, 2000. We may defer interest
payments on the subordinated deferrable notes which will effectively be a
deferral of the cash distribution on the trust preferred securities since the
Trust's only source of funds is the interest payments we make on the
subordinated deferrable notes.
If a holder of PEPS Units creates Treasury PEPS Units by substituting a
treasury security for the trust preferred securities, such holder will not
receive any payments with respect to the Treasury PEPS Units. If a Treasury PEPS
Unit holder continues to hold the trust preferred security that has been
separated from the PEPS Unit, it will continue to receive distributions on such
trust preferred security.
LISTING OF THE PEPS UNITS AND THE TREASURY PEPS UNITS
We have been approved for listing the PEPS Units on the New York Stock
Exchange under the symbol "CMS PrM". If Treasury PEPS Units are created and then
traded to a sufficient extent that applicable exchange listing requirements are
met, we will try to list them on the national securities exchanges or
associations on which the PEPS Units are then listed or quoted, but we have no
obligation to do so. We do not intend to list the trust preferred securities on
any securities exchange.
REPURCHASE OF THE PEPS UNITS
We may purchase from time to time any of the PEPS Units offered by this
prospectus supplement and the accompanying prospectus that are then outstanding
by tender, in the open market, by private agreement or otherwise.
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<PAGE> 49
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
The following description is a summary of some of the terms of the purchase
contracts. It supplements the description of the stock purchase contracts in the
accompanying prospectus and, to the extent it is inconsistent, replaces the
description in the prospectus. The purchase contracts will be issued pursuant to
the purchase contract agreement between us and The Bank of New York, as purchase
contract agent. The description of the purchase contracts and the purchase
contract agreement in this prospectus supplement and the accompanying prospectus
contain a summary of their material terms but do not purport to be complete, and
reference is hereby made to the form of the purchase contract agreement that is
filed as an exhibit or incorporated by reference to the registration statement.
A holder of a PEPS Unit or a Treasury PEPS Unit can satisfy his or her
obligation under the purchase contract to purchase our common stock on or prior
to the purchase contract settlement date in one of three ways. Such holder can
settle his or her purchase contract obligation by:
- settling on the purchase contract settlement date through the remarketing
procedures described under "--Settlement through Remarketing";
- settling on the purchase contract settlement date by paying cash as
described under "--Notice to Settle with Cash"; or
- settling early in the event of a cash merger involving CMS, as described
under "--Early Settlement."
Each of the three settlement methods requires you to make a decision about
how you wish to satisfy your purchase contract obligation to purchase our common
stock and take the appropriate steps no later than seven business days prior to
August 18, 2003. If you are a PEPS Unit holder and you fail to make an effective
election on your trust preferred securities, your purchase contract obligation
will be settled on the purchase contract settlement date through the remarketing
procedures and if you are a Treasury PEPS Unit holder and you fail to elect to
settle in cash on the purchase contract settlement date the principal amount of
the related treasury security will be applied to satisfy your obligation under
your purchase contracts, in each case as more fully described under
"--Settlement through Remarketing."
Each purchase contract that is a part of a PEPS Unit or a Treasury PEPS
Unit will obligate its holder to purchase, and us to sell, on the purchase
contract settlement date (unless the purchase contract terminates prior to that
date or is settled early at the holder's option), a number of shares of our
common stock equal to the settlement rate, for $25 in cash. The number of shares
of our common stock issuable upon settlement of each purchase contract on the
purchase contract settlement date (which we refer to as the "settlement rate")
will be determined as follows, (subject to adjustment as described under
"--Anti-Dilution Adjustments" below):
- If the average of the closing prices of our common stock on the 20
trading days ending on the third trading day prior to the purchase
contract settlement date, is equal to or greater than $30.403, the
threshold appreciation price, then each purchase contract will be settled
for .8223 shares.
- If the average of the closing prices of our common stock on the 20
trading days ending on the third trading day prior to the purchase
contract settlement date, is less than $30.403 but greater than $13.218,
the floor price, then each purchase contract will be settled for a number
of shares having a value, based on such 20-trading day average, equal to
$25.
- If the average of the closing prices of our common stock on the 20
trading days ending on the third trading day prior to the purchase
contract settlement date, is less than or equal to $13.218, then each
purchase contract will be settled for 1.8913 shares of our common stock.
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<PAGE> 50
Except under the limited circumstances described under "--Anti-Dilution
Adjustments," if you elect to settle your purchase contract early, the number of
shares of our common stock issuable upon settlement of such purchase contract
will be .8223.
FOR ILLUSTRATIVE PURPOSES ONLY, THE FOLLOWING TABLE SHOWS THE NUMBER OF
SHARES OF OUR COMMON STOCK ISSUABLE UPON SETTLEMENT OF EACH PURCHASE CONTRACT AT
VARIOUS ASSUMED VALUES FOR THE AVERAGE OF THE CLOSING PRICES OF OUR COMMON STOCK
ON THE 20 TRADING DAYS ENDING ON THE THIRD TRADING DAY PRIOR TO THE PURCHASE
CONTRACT SETTLEMENT DATE, THE "APPLICABLE MARKET VALUE," AND A FLOOR PRICE OF
$13.218 AND A THRESHOLD APPRECIATION PRICE OF $30.403. The threshold
appreciation price represents an appreciation of 15% above the reference price
of $26.4375. The floor price represents a discount of 50% below the reference
price of $26.4375. The table assumes that there will be no adjustments to the
settlement rate described under "--Anti-Dilution Adjustments" below. We cannot
assure you that the actual applicable market value will be within the range set
forth below. A holder of a PEPS Unit or a Treasury PEPS Unit will receive on the
purchase contract settlement date, in settlement of each purchase contract, the
following shares of our common stock at the following assumed applicable market
values:
<TABLE>
<CAPTION>
SHARES OF OUR
ASSUMED APPLICABLE COMMON
MARKET VALUE STOCK
------------------ -------------
<S> <C>
$10.00...................................................... 1.8913
$12.50...................................................... 1.8913
$15.00...................................................... 1.6667
$20.00...................................................... 1.2500
$25.00...................................................... 1.0000
$30.00...................................................... 0.8333
$35.00...................................................... 0.8223
$37.50...................................................... 0.8223
$40.00...................................................... 0.8223
</TABLE>
As the above table illustrates, if, on the purchase contract settlement
date, the applicable market value is greater than or equal to the threshold
appreciation price of $30.403, we would be obligated to deliver .8223 shares of
our common stock for each purchase contract. As a result, the holder would
receive 86.96% of the appreciation in the market value of the shares of our
common stock underlying each purchase contract above $30.403. If, on the
purchase contract settlement date, the applicable market value is less than the
threshold appreciation price of $30.403 but greater than the floor price of
$13.218 we would be obligated to deliver a number of shares of our common stock
having a value, based on the applicable market value, equal to $25 and we would
retain all appreciation in the market value of the shares of our common stock
underlying each purchase contract for that period. If, on the purchase contract
settlement date, the applicable market value is less than or equal to the floor
price of $13.218, we would be obligated to deliver in settlement of the purchase
contract 1.8913 shares of our common stock for each purchase contract,
regardless of the market price of the shares of our common stock. As a result,
the holder would realize a loss on the decline in market value of the shares of
our common stock underlying each purchase contract for that period.
The term "closing price" of shares of our common stock means, on any date
of determination (1) the closing sale price (or, if no closing sale price is
reported, the last reported sale price) of shares of our common stock on the New
York Stock Exchange on such date or, if shares of our common stock are not
listed for trading on the New York Stock Exchange on any such date, as reported
in the composite transactions for the principal United States securities
exchange on which the shares of our common stock are so listed, or if shares of
our common stock are not so listed on a United States national or regional
securities exchange, as reported by the Nasdaq National Market or (2) if shares
of our common stock are not so reported, the last quoted bid price for the
shares of our common stock in the over-the-counter market as reported by the
National Quotation Bureau or a similar organization, or, if such bid price is
not available, the average of the mid-point of the last bid and ask prices of
shares of our common stock on such date from at least three nationally
recognized independent investment banking firms retained for this purpose by us.
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The term "trading day" means a day on which the shares of our common stock
(1) are not suspended from trading on any national or regional securities
exchange or association or over-the-counter market at the close of business and
(2) has traded at least once on the national or regional securities exchange or
association or over-the-counter market that is the primary market for the
trading of the shares of our common stock.
We will not issue any fractional shares of our common stock upon settlement
of a purchase contract. Instead of a fractional share, the holder will receive
an amount of cash equal to such fraction multiplied by the applicable market
value. If, however, a holder surrenders for settlement at one time more than one
purchase contract, then the number of shares of our common stock issuable
pursuant to such purchase contracts will be computed based upon the aggregate
number of purchase contracts surrendered.
Prior to the settlement of a purchase contract, the shares of our common
stock underlying each purchase contract will not be outstanding, and the holder
of the purchase contract will not have any voting rights, rights to dividends or
other distributions or other rights (including under our shareholder rights
plan) of a holder of our common stock by virtue of holding such purchase
contract.
By purchasing a PEPS Unit or a Treasury PEPS Unit, a holder will be deemed
to have, among other things:
- irrevocably authorized the purchase contract agent as its
attorney-in-fact to enter into and perform that holder's obligations
under the related purchase contract and pledge agreement on behalf of
such holder;
- agreed to be bound by the terms and provisions of the related purchase
contract; and
- agreed to be bound by the pledge arrangement contained in the related
pledge agreement.
In addition, each holder will be deemed to have agreed to treat itself as
the owner of the related trust preferred security or treasury security, as the
case may be, and to treat the subordinated deferrable notes as our indebtedness
for United States federal, state and local income and franchise tax purposes.
SETTLEMENT THROUGH REMARKETING
PEPS Unit holders:
- who fail to notify the purchase contract agent, prior to 5:00 p.m., New
York City time, on the seventh business day prior to August 18, 2003, of
their intention to effect settlement of the related purchase contracts
with cash in the manner described under "--Notice to Settle with Cash,"
or
- who so notify the purchase contract agent but fail to deliver such cash
prior to 11:00 a.m., New York City time, on the fifth business day prior
to August 18, 2003, or
- who do not settle early the related purchase contract prior to 5:00 p.m.,
New York City time, on the seventh business day prior to August 18, 2003
in the manner described under "--Early Settlement"
will have their trust preferred securities remarketed three business days prior
to August 18, 2003, the remarketing date. These PEPS Unit holders will join the
holders of trust preferred securities who have elected to have their trust
preferred securities remarketed.
Pursuant to the remarketing agreement among the remarketing agent, the
Trust and us, the remarketing agent will use its reasonable efforts to remarket
the trust preferred securities on the remarketing date at a price equal to
$25.125. If the remarketing agent determines that it will be able to remarket
all the trust preferred securities tendered or deemed tendered for a purchase
price in excess of $25.125 per trust preferred security immediately prior to the
remarketing, then the remarketing agent will decrease the distribution rate on
the trust preferred securities so that the market value will be equal to $25.125
per trust preferred security at the time of the remarketing. If the remarketing
agent determines that it will not be able to remarket all the trust preferred
securities tendered or deemed tendered for a purchase price of $25.125 per trust
preferred security
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immediately prior to remarketing, then the remarketing agent will increase the
distribution rate on the trust preferred securities so that the market value
will be equal to $25.125 per trust preferred security at the time of the
remarketing. Of the proceeds from the remarketing of the trust preferred
securities that are a part of the PEPS Units, $25 will automatically be applied
to satisfy in full your obligation to purchase shares of our common stock under
the related purchase contracts and $.125 will automatically be applied to pay
the remarketing agent for its services in connection with the remarketing. See
"Description of the Trust Preferred Securities--Distribution Rate Reset" in this
prospectus supplement.
If the remarketing agent is unable to remarket the trust preferred
securities, a "failed remarketing" will be deemed to have occurred. If you are a
PEPS Unit holder who did not settle your purchase contract early, we will be
entitled to exercise our rights as a secured party and, subject to applicable
law, retain your trust preferred security pledged as collateral under the pledge
agreement or sell it in one or more private sales. In either case, your
obligations under the related purchase contracts would be satisfied in full. If
we exercise our rights as a secured creditor, we will pay any accrued and unpaid
distributions on such trust preferred security in cash to the purchase contract
agent for payment to the holders of the PEPS Units of which such trust preferred
securities are a part. We will cause a notice of such failed remarketing to be
published on August 14, 2003, the second business day prior to the purchase
contract settlement date in a daily newspaper in the English language of general
circulation in New York City, which is expected to be The Wall Street Journal,
and on Bloomberg News or a similar news service.
In the event of a failed remarketing, if you are a holder of a trust
preferred security that is not a part of a PEPS Unit, such as a PEPS Unit holder
who settled the purchase contract early or a Treasury PEPS Unit holder, the
distribution rate on your trust preferred security will be set at the rate
determined by a formula, set forth under "Description of the Trust Preferred
Securities--Failed Remarketing" in this prospectus supplement.
As long as the PEPS Units, Treasury PEPS Units or the trust preferred
securities are evidenced by one or more global security certificates deposited
with The Depository Trust Company, we will request, not later than 15 nor more
than 30 calendar days prior to the remarketing date, that DTC notify its
participants holding PEPS Units, Treasury PEPS Units or trust preferred
securities of such remarketing and of the procedures to be followed for
settlement with cash. We have agreed that, if required under the U.S. federal
securities laws, we will try to have in effect a registration statement covering
the trust preferred securities to be remarketed in a form that the remarketing
agent may use in connection with the remarketing process.
NOTICE TO SETTLE WITH CASH
A holder of a PEPS Unit wishing to settle the related purchase contract
with cash must notify the purchase contract agent by delivering a "Notice to
Settle with Cash" prior to 5:00 p.m., New York City time, on the seventh
business day preceding August 18, 2003. If you hold a Treasury PEPS Unit you
have until 5:00 p.m., New York City time, on the second business day preceding
August 18, 2003 to deliver your "Notice to Settle with Cash." A Treasury PEPS
Unit holder may only settle their purchase contracts in integral multiples of 40
purchase contracts.
Such holder must deliver to the securities intermediary a cash payment in
the form of a certified or cashier's check or by wire transfer, in each case in
immediately available funds payable to or upon the order of the securities
intermediary. Such payment must be delivered prior to 11:00 a.m., New York City
time, on the fifth business day prior to August 18, 2003. If you hold a Treasury
PEPS Unit, you have until 11:00 a.m., New York City time on the business day
prior to August 18, 2003 to deliver your cash payment.
Upon receipt of such cash payment, the related trust preferred security or
treasury security, as the case may be, will be released from the pledge
arrangement and transferred to the purchase contract agent for distribution to
the holder of the related PEPS Unit. The holder of the PEPS Unit will then
receive the applicable number of shares of our common stock on the purchase
contract settlement date.
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If the cash payment is not delivered by you by the applicable time and date
specified above, the related trust preferred security will be remarketed and we
will use the proceeds to satisfy in full your purchase contract obligation or we
will receive at maturity the principal amount of the related treasury security
in full satisfaction of your purchase contract to buy our common stock on the
purchase contract settlement date.
Any cash received by the securities intermediary upon cash settlement will
be invested promptly in permitted investments and paid to us on the purchase
contract settlement date. Any funds received by the securities intermediary in
excess of the funds necessary to settle the purchase contracts in respect of the
investment earnings from such investments will be distributed to the purchase
contract agent for payment to the holders who settled with cash.
EARLY SETTLEMENT
A holder of a PEPS Unit or Treasury PEPS Unit may settle the related
purchase contract prior to the remarketing date by delivering to the purchase
contract agent (1) a completed "Election to Settle Early" form and (2) a cash
payment in the form of a certified or cashier's check or by wire transfer, in
each case in immediately available funds payable to, or upon the order of, CMS
Energy Corporation in an amount equal to $25 multiplied by the number of
purchase contracts being settled. A holder of a PEPS Unit or a Treasury PEPS
Unit may settle early the related purchase contract at any time prior to 5:00
p.m., New York City time, on the seventh business day preceding August 18, 2003.
If you are a Treasury PEPS Unit holder you may settle your purchase contracts
early only in integral multiples of 40 purchase contracts.
Upon early settlement, we will sell, and the holder will be entitled to
buy, 0.8223 shares of our common stock for each purchase contract being settled
(regardless of the market price of one share of our common stock on the date of
early settlement), subject to adjustment under the circumstances described under
"--Anti-Dilution Adjustments" below. We will cause (1) the shares of our common
stock to be delivered and (2) the related trust preferred security, treasury
security or applicable ownership interest in the treasury portfolio, as the case
may be, securing such purchase contract to be released from the pledge under the
pledge agreement, and, within three business days following the settlement date,
each will be transferred to the purchase contract agent for delivery to the
holder.
If the purchase contract agent receives a completed "Election to Settle
Early" form and payment of $25 for each purchase contract being settled earlier
than 5:00 p.m., New York City time, on any business day, then that day will be
considered the settlement date. If the purchase contract agent receives the
foregoing on or after 5:00 p.m., New York City time, on any business day or at
any time on a day that is not a business day, then the next business day will be
considered the settlement date. As long as the PEPS Units or Treasury PEPS
Units, as applicable, are evidenced by one or more global PEPS Unit or a
Treasury PEPS Unit certificates deposited with DTC, procedures for early
settlement also will be governed by standing arrangements between DTC and the
purchase contract agent.
EARLY SETTLEMENT IN THE EVENT OF A CASH MERGER
In the case of our consolidation with or merger into any other person, any
merger of another person into us (other than a merger that does not result in
any reclassification, conversion, exchange or cancellation of outstanding shares
of common stock) in which 30% or more of the total consideration paid to our
shareholders consists of cash or cash equivalents and which closes before July
1, 2003 (each, a "cash merger"), as a holder of PEPS Units, you may settle your
purchase contract with cash or by having the related trust preferred securities
applied during the one-week period beginning on the twenty-third trading day
following the closing date of the merger (the "early settlement period") at the
applicable settlement rate. For this purpose, the twenty-third trading date
after the closing date of the merger will be deemed to be the "purchase contract
settlement date" for the purpose of determining the "applicable market value."
The trust preferred securities of PEPS Units whose purchase contracts are
to be settled early but not in cash in connection with a cash merger will be
redeemed by the Trust as described under "Description of the Trust Preferred
Securities--Early Redemption in the Event of a Cash Merger," at the make-whole
price. If a
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holder of a PEPS Unit who elects an early settlement of the related purchase
contract in connection with a cash merger does not deliver cash payment to
satisfy such holder's payment obligations under such purchase contract by the
end of the early settlement period, then we will be entitled to exercise our
rights as a secured party and, subject to applicable law, retain sufficient cash
proceeds from the redemption of the PEPS Units' trust preferred security to
settle your obligations under the purchase contract and return the remaining
amounts to you.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the settlement rate will be adjusted if certain
events occur, including:
- the payment of dividends (and other distributions) on our common stock
made in our common stock;
- the issuance to all holders of our common stock of rights, warrants or
options entitling them, for a period of up to 45 days, to subscribe for
or purchase our common stock at less than the "current market price," as
defined below, of our common stock;
- subdivisions, splits or combinations of our common stock;
- distributions to all holders of our common stock of evidences of our
indebtedness, shares of capital stock, securities, cash or property
(excluding any dividend or distribution covered by the first and second
bullets above and any dividend or distribution paid exclusively in cash);
- distributions by CMS or any successor entity consisting exclusively of
cash to all common stock holders, excluding any quarterly cash dividend
on common stock to the extent that the aggregate cash dividend in respect
of each share of our common stock or the corresponding amount of a
successor's common stock in any fiscal quarter does not exceed $.365, as
adjusted to give effect to any exchange or conversion of our common stock
into the stock of a successor entity, and excluding any dividend or
distribution in connection with a liquidation, dissolution or termination
(if an adjustment is required to be made as set forth in this clause as a
result of a distribution (i) that is a quarterly dividend, such an
adjustment would be based on the amount by which such dividend exceeds
$.365, before giving effect to any required adjustments, or (ii) that is
not a quarterly dividend, such an adjustment would be based on the full
amount of such distribution); and
- the successful completion of a tender or exchange offer made by us or any
of our subsidiaries for our common stock that involves an aggregate
consideration having a fair market value that, when combined with (a) any
cash and the fair market value of other consideration payable in respect
of any tender or exchange offer by us or any of our subsidiaries for our
common stock concluded within the preceding 12 months and (b) the
aggregate amount of any all-cash distributions to all holders of our
common stock made within the preceding 12 months, exceeds 15% of our
aggregate market capitalization on the expiration of such tender or
exchange offer.
The term "current market price" per share of our common stock on any day
means the average of the daily closing prices for the five consecutive trading
days selected by us commencing not more than 30 trading days before, and ending
not later than, the earlier of the day in question and the day before the "ex
date" with respect to the issuance or distribution requiring such computation.
For purposes of this paragraph, the term "ex date", when used with respect to
any issuance or distribution, will mean the first date on which the shares of
our common stock trade on the applicable exchange or in the applicable market
without the right to receive such issuance or distribution.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which our common stock is
converted into the right to receive other securities, cash or property, each
purchase contract then outstanding would become, without the consent of the
holder of the related PEPS Unit or Treasury PEPS Unit, as the case may be, a
contract to purchase only the kind and amount of securities, cash and other
property receivable upon consummation of the transaction by a holder of
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the number of shares that would have been received by the holder of the related
PEPS Unit or Treasury PEPS Unit if the purchase contract settlement date had
occurred immediately prior to the date of consummation of such transaction.
If at any time we make a distribution of property to holders of our common
stock that would be taxable to such shareholders as a dividend for United States
federal income tax purposes (i.e., distributions of evidences of our
indebtedness or assets, but generally not stock dividends or rights to subscribe
to capital stock) and, pursuant to the settlement rate adjustment provisions of
the purchase contract agreement, the settlement rate is increased, such increase
may give rise to a taxable dividend to holders of the PEPS Units and Treasury
PEPS Units. See "United States Federal Income Tax Consequences--PEPS
Units--Purchase Contracts--Adjustment to Settlement Rate" in this prospectus
supplement.
In addition, we may make such increases in the settlement rate as we deem
advisable in order to avoid or diminish any income tax to holders of our common
stock resulting from any dividend or distribution of our common stock (or rights
to acquire our common stock) or from any event treated as such for income tax
purposes or for any other reason.
Adjustments to the settlement rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the settlement rate will be required
unless such adjustment would require an increase or decrease of at least 1% in
the settlement rate; provided that any adjustments not made by reason of the
foregoing will be carried forward and taken into account in any subsequent
adjustment.
Whenever the settlement rate is adjusted, we must deliver to the purchase
contract agent a certificate setting forth the settlement rate, detailing the
calculation of the settlement rate and describing the facts upon which the
adjustment is based. In addition, we must notify the holders of the PEPS Units
and Treasury PEPS Units of the adjustment within ten business days of any event
requiring such adjustment and describe in reasonable detail the method by which
the settlement rate was adjusted.
Each adjustment to the settlement rate will result in a corresponding
adjustment to the number of shares of our common stock issuable upon early
settlement of a purchase contract.
If an adjustment is made to the settlement rate, an adjustment also will be
made to the applicable market value solely to determine which settlement rate
will be applicable on the purchase contract settlement date.
TERMINATION
The purchase contracts and the obligations and rights of us and of the
holders of the PEPS Units and Treasury PEPS Units thereunder (including the
holders' obligation and right to purchase and receive shares of our common
stock) will terminate automatically upon the occurrence of certain events of
bankruptcy, insolvency or reorganization with respect to us. Upon such
termination, the collateral agent will release the related trust preferred
securities or treasury securities, as the case may be, from the pledge
arrangement and cause the securities intermediary to transfer such trust
preferred securities or treasury securities to the purchase contract agent for
distribution to the holders of the PEPS Units and Treasury PEPS Units subject,
in the case of the applicable ownership interest of the treasury portfolio, to
the purchase contract agent's disposition of the subject securities for cash and
the payment of such cash to the holders to the extent that the holders otherwise
would have been entitled to receive less than $1,000 of any such security. Upon
such termination, however, such release and distribution may be subject to a
delay. In the event that we become the subject of a case under the Bankruptcy
Code, such delay may occur as a result of the automatic stay under the
Bankruptcy Code and continue until such automatic stay has been lifted.
PLEDGED SECURITIES AND PLEDGE
The trust preferred securities that are a part of the PEPS Units (or the
applicable ownership interests of the treasury portfolio that are part of the
PEPS Units, if a tax event redemption has occurred) or, if substituted, the
treasury securities that are a part of the Treasury PEPS Units collectively, the
"pledged
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securities," will be pledged to the collateral agent for our benefit pursuant to
the pledge agreement to secure your obligation to purchase shares of our common
stock under the related purchase contracts. The rights of the holders of the
PEPS Units and Treasury PEPS Units with respect to such pledged securities will
be subject to our security interest therein. No holder of PEPS Units or Treasury
PEPS Units will be permitted to withdraw the pledged securities related to such
PEPS Units or Treasury PEPS Units from the pledge arrangement except:
- in the case of a PEPS Unit, to substitute a treasury security for the
related trust preferred security;
- in the case of a Treasury PEPS Unit, to substitute trust preferred
securities for the related treasury security (for this bullet point and
the one above, as provided for under "Description of the PEPS
Units--Creating Treasury PEPS Units by Substituting a Treasury Security
for Trust Preferred Securities" and "--Recreating PEPS Units" in this
prospectus supplement; and
- upon early settlement, settlement for cash or termination of the related
purchase contracts.
Subject to our security interest and the terms of the purchase contract
agreement and the pledge agreement, each holder of PEPS Units (unless a tax
event redemption has occurred) will be entitled, through the purchase contract
agent and the collateral agent, to all of the proportional rights and
preferences of the related trust preferred securities (including distribution,
voting, redemption, repayment and liquidation rights), and each holder of
Treasury PEPS Units will retain beneficial ownership of the related treasury
securities (or the applicable ownership interest of the treasury portfolio, as
applicable) pledged in respect of the related purchase contracts. We will have
no interest in the pledged securities other than our security interest.
Upon receipt of distributions on the pledged securities, the securities
intermediary will distribute such payments to the purchase contract agent, which
in turn will distribute those payments to the holders in whose names the PEPS
Units are registered at the close of business on the record date preceding the
date of such distribution.
CERTAIN PROVISIONS OF THE PURCHASE CONTRACTS,
THE PURCHASE CONTRACT AGREEMENT AND THE PLEDGE AGREEMENT
GENERAL
Payments on the PEPS Units and Treasury PEPS Units will be payable, the
purchase contracts will be settled and transfers of the PEPS Units and Treasury
PEPS Units will be registrable at the office of the purchase contract agent in
the Borough of Manhattan, New York City. In addition, if the PEPS Units or
Treasury PEPS Units do not remain in book-entry form, we have the option to make
payments on the PEPS Units and Treasury PEPS Units by check mailed to the
address of the person entitled thereto as shown on the security register.
No service charge will be made for any registration of transfer or exchange
of the PEPS Units or Treasury PEPS Units, except for any tax or other
governmental charge that may be imposed in connection therewith.
MODIFICATION
Subject to certain limited exceptions, we and the purchase contract agent
may not modify the terms of the purchase contracts or the purchase contract
agreement without the consent of the holders of not less than a majority of the
outstanding purchase contracts, except that no such modification may, without
the consent of the holder of each outstanding purchase contract affected
thereby:
- change any payment date;
- change the amount or type of collateral required to be pledged to secure
a holder's obligations under the purchase contract, impair the right of
the holder of any purchase contract to receive distributions on such
collateral, or otherwise adversely affect the holder's rights in or to
such collateral;
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- change the place or currency of payment;
- impair the right to institute suit for the enforcement of a purchase
contract;
- reduce the number of shares of our common stock purchasable under a
purchase contract, increase the purchase price of the shares of our
common stock on settlement of any purchase contract, change the purchase
contract settlement date or otherwise adversely affect the holder's
rights under a purchase contract; or
- reduce the above-stated percentage of outstanding purchase contracts
whose holders' consent is required for the modification or amendment of
the provisions of the purchase contracts, the purchase contract agreement
or the pledge agreement;
provided that if any amendment or proposal would adversely affect only the PEPS
Units or only the Treasury PEPS Units, then only the affected voting group of
holders will be entitled to vote on such amendment or proposal, and such
amendment or proposal will not be effective except with the consent of the
holders of not less than a majority of such voting group or, if referred to in
the first through sixth bullets above, all of the holders of such voting group.
Subject to certain limited exceptions, we, the collateral agent, the
securities intermediary and the purchase contract agent may not modify the terms
of the pledge agreement without the consent of the holders of not less than a
majority of the outstanding purchase contracts, except that no such modification
may, without the consent of the holder of each outstanding purchase contract
affected thereby:
- change the amount or type of collateral required to be pledged to secure
a holder's obligations under the purchase contract, impair the right of
the holder of any purchase contract to receive interest payments on such
collateral or otherwise adversely affect the holder's rights in or to
such collateral;
- otherwise effect any action that under the purchase contract agreement
would require the consent of the holders of each outstanding purchase
contract affected thereby; or
- reduce the above-stated percentage of outstanding purchase contracts
whose holders' consent is required for the modification or amendment;
provided that if any amendment or proposal would adversely affect only the PEPS
Units or only the Treasury PEPS Units, then only the affected voting group of
holders will be entitled to vote on such amendment or proposal, and such
amendment or proposal will not be effective except with the consent of the
holders of not less than a majority of such voting group or, if referred to in
the first through third bullets above, all of the holders of such voting group.
NO CONSENT TO ASSUMPTION
Each holder of a PEPS Unit or a Treasury PEPS Unit will be deemed under the
terms of the purchase contract agreement, by the purchase of such PEPS Unit or
Treasury PEPS Unit, to have expressly withheld any consent to the assumption
(i.e., affirmance) of the related purchase contracts by us, our receiver,
liquidator or trustee in the event that we become the subject of a case under
the Bankruptcy Code or other similar state or federal law providing for
reorganization or liquidation.
MERGER, SALE OR LEASE
We will covenant in the purchase contract agreement that we will not merge
or consolidate with any other entity or sell, assign, transfer, lease or convey
all or substantially all of our properties and assets to any other entity or
group of affiliated entities unless:
- either we are the continuing corporation or the successor corporation is
a corporation organized under the laws of the United States of America, a
state thereof or the District of Columbia and such
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corporation expressly assumes all of our obligations under the purchase
contracts, the purchase contract agreement and the pledge agreement by
one or more supplemental agreements in form reasonably satisfactory to
the purchase contract agent and the collateral agent; and
- we are, or such successor corporation is, not, immediately after such
merger, consolidation, sale, assignment, transfer, lease or conveyance,
in default in the performance of any of our or its obligations
thereunder.
GOVERNING LAW
The purchase contracts, the purchase contract agreement and the pledge
agreement will be governed by, and construed in accordance with, the laws of the
State of New York.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
The Bank of New York will be the purchase contract agent. The purchase
contract agent will act as the agent and attorney in fact for the holders of the
PEPS Units and Treasury PEPS Units. The purchase contract agent will not be
obligated to take any discretionary action in connection with a default under
the terms of the PEPS Units, the Treasury PEPS Units or the purchase contract
agreement.
The purchase contract agreement will contain provisions limiting the
liability of the purchase contract agent. The purchase contract agreement also
will contain provisions under which the purchase contract agent may resign or be
replaced. Such resignation or replacement will be effective upon the appointment
of a successor.
INFORMATION CONCERNING THE COLLATERAL AGENT
The Chase Manhattan Bank will be the collateral agent. The collateral agent
will act solely as our agent and will not assume any obligation or relationship
of agency or trust for or with any of the holders of the PEPS Units and the
Treasury PEPS Units except for the obligations owed by a pledgee of property to
the owner thereof under the pledge agreement and applicable law.
The pledge agreement will contain provisions limiting the liability of the
collateral agent. The pledge agreement also will contain provisions under which
the collateral agent may resign or be replaced. Such resignation or replacement
will be effective upon the appointment of a successor.
INFORMATION CONCERNING THE SECURITIES INTERMEDIARY
The Chase Manhattan Bank will be the securities intermediary. All property
delivered to the securities intermediary pursuant to the purchase contract
agreement or the pledge agreement will be credited to a collateral account
established by the securities intermediary for the collateral agent. The
securities intermediary will treat the purchase contract agent as entitled to
exercise all rights relating to any financial asset credited to such collateral
account, subject to the provisions of the pledge agreement.
MISCELLANEOUS
The purchase contract agreement will provide that we will pay all fees and
expenses related to (1) the retention of the collateral agent and the securities
intermediary and (2) the enforcement by the purchase contract agent of the
rights of the holders of the PEPS Units and Treasury PEPS Units. Holders who
elect to substitute the related pledged securities, thereby creating Treasury
PEPS Units or recreating PEPS Units, however, will be responsible for any fees
or expenses payable in connection with such substitution, as well as for any
commissions, fees or other expenses incurred in acquiring the pledged securities
to be substituted. We will not be responsible for any such fees or expenses.
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DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The following description is a summary of the terms of the trust preferred
securities. It supplements the description of the trust preferred securities in
the accompanying prospectus and, to the extent it is inconsistent with the
accompanying prospectus, replaces the description in the accompanying
prospectus. The trust preferred securities, which initially form a part of the
PEPS Units and which, under certain circumstances, will trade separately from
the purchase contracts also forming a part of the PEPS Units, will be issued
pursuant to the terms of the declaration of trust. The terms of the trust
preferred securities will include those stated in the declaration of trust and
those made part of the declaration of trust by the Trust Indenture Act. The
following description of certain terms of the trust preferred securities and
certain provisions of the declaration of trust in this prospectus supplement and
their description in the accompanying prospectus contain a description of
certain of their terms but do not purport to be complete, and reference is
hereby made to the copy of the declaration of trust (including the definitions
of certain terms used therein) that is filed as an exhibit or incorporated by
reference to the registration statement, the Delaware Business Trust Act and the
Trust Indenture Act.
SECURITIES ISSUABLE BY THE TRUST
The declaration of trust authorizes the Trust to issue the trust preferred
securities and the trust common securities. The trust preferred securities and
the trust common securities represent undivided beneficial interests in the
assets of the Trust. We will own all of the trust common securities. We may
transfer the trust common securities only to an affiliate that is a U.S. person
for U.S. federal income tax purposes. The trust preferred securities and the
trust common securities will generally have equivalent terms, except that:
- if an event of default under the declaration of trust occurs and is
continuing, the holders of the trust preferred securities will have the
right to receive periodic distributions and liquidation, redemption and
other payments before the holder of the trust common securities receives
any payments; and
- the holder of trust common securities will have the exclusive right to
dissolve the Trust or to appoint, remove or replace the trustees and to
increase or decrease the number of trustees.
DISTRIBUTIONS
Distributions on each trust preferred security will accumulate and be
payable at a rate per year 7.25% of the stated liquidation amount of $25 per
trust preferred security until August 18, 2003, and at the reset rate
thereafter. Distributions not paid on the scheduled payment date will accumulate
and compound quarterly at the rate of 7.25% per year through and including
August 18, 2003, and at the reset rate thereafter. The term "distribution", as
used herein, includes any such distributions payable unless otherwise stated.
The amount of distributions payable for any period will be computed (1) for any
full quarterly distribution period, on the basis of a 360-day year of twelve
30-day months, and (2) for any period shorter than a full quarterly distribution
period, on the basis of a 30-day month and, for any period of less than one
month, on the basis of the actual number of days elapsed per 30-day month. To
the extent that payments on the subordinated deferrable notes are deferred as
described under "Description of the Subordinated Deferrable Notes -- Option to
Defer Interest Payments," the Trust will not have sufficient funds to make its
scheduled distributions and will therefore defer such distributions.
Distributions on the trust preferred securities will be cumulative, will
accumulate from the first date of issuance of the trust preferred securities and
will be payable quarterly, in arrears, on February 18, May 18, August 18 and
November 18 of each year, commencing November 18, 2000.
Distributions are payable only to the extent that payments are made to the
Trust in respect of the subordinated deferrable notes held by the property
trustee and to the extent the Trust has funds available for the payment of such
distributions. We have the right to defer interest on the subordinated
deferrable notes, in which case distributions on the trust preferred securities
will also be deferred.
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EARLY REDEMPTION IN THE EVENT OF A CASH MERGER
In the event of a cash merger, as described under "Description of the
Purchase Contracts--Early Settlement in the Event of a Cash Merger," the trust
preferred securities underlying PEPS Units whose purchase contracts are to be
settled early shall, unless cash payment is delivered by the end of the early
settlement period to settle such purchase contracts, be redeemed on the business
day following the end of the second week (the "early settlement redemption
date") after the last day of the early settlement period, at a redemption price
equal to the make-whole price of such trust preferred securities. In addition, a
holder of trust preferred securities that do not constitute part of any PEPS
Units may elect to have some or all of such holder's separately held trust
preferred securities redeemed on the early settlement redemption date at a
redemption price equal to the make-whole price of such trust preferred
securities. No later than the closing date of the cash merger, the Trust will
mail a notice of your right to redeem the trust preferred securities, setting
forth the procedures to be followed by holders. As a holder of trust preferred
securities, you will have the right to elect to redeem your securities until
5:00 p.m. on the day before the early settlement redemption date. Until that
time, you may also withdraw your election to have trust preferred securities
redeemed.
The "make-whole price" means an amount equal to the sum of
(1) 100% of the stated liquidation amount of the trust preferred securities
to be redeemed; and
(2) as determined by an "independent investment banker," the sum of the
present values of the remaining scheduled payments of distributions
assuming that the trust preferred securities would otherwise be
redeemed on August 18, 2003, discounted to the date of early redemption
on a quarterly basis (assuming a 360-day year consisting of twelve
30-day months) at the "adjusted treasury rate,"
plus accumulated and unpaid distributions thereon to the date of early
redemption.
Unless there is a default in the payment of the redemption price, on and
after the date of early redemption, distributions will cease to accumulate on
the trust preferred securities or portions thereof called for redemption.
"Adjusted treasury rate" means, with respect to any date of early
redemption, the rate per annum equal to the quarterly equivalent yield to
maturity of the comparable treasury issue, assuming a price for the "comparable
treasury issue" (expressed as a percentage of its principal amount) equal to the
"comparable treasury price" at such date of early redemption, plus 2.50%.
"Comparable treasury issue" means the United States treasury security
selected by an independent investment banker as having a maturity on August 15,
2003, to be redeemed that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of trust
preferred securities and corporate debt securities of comparable maturity.
"Comparable treasury price" means, with respect to any date of early
redemption:
(1) the average of the bid and asked prices for the comparable treasury
issue (expressed in each case as a percentage of its principal amount)
on the third business day preceding such date of redemption, as set
forth in the daily statistical release (or any successor release)
published by the Federal Reserve Bank of New York and designated
"Composite 3:30 p.m. Quotations for U.S. Government Securities"; or
(2) if such release (or any successor release) is not published or does not
contain such prices on such business day, (a) the average of the
"reference treasury dealer quotations" for such date of redemption,
after excluding the highest and lowest such reference treasury dealer
quotations, or (b) if The Bank of New York obtains fewer than three
such reference treasury dealer quotations, the average of both such
reference treasury dealer quotations.
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"Independent investment banker" means one of the "reference treasury
dealers" appointed by The Bank of New York after consultation with CMS.
"Reference treasury dealer" means, for the trust preferred securities, each
of Morgan Stanley & Co. Incorporated, Banc of America Securities LLC and
Donaldson, Lufkin & Jenrette Securities Corporation and their respective
successors; provided, however, that if any of the foregoing shall not be a
primary U.S. government securities dealer in New York City (a "primary treasury
dealer"), CMS shall substitute therefor another primary treasury dealer.
"Reference treasury dealer quotations" means, with respect to each
reference treasury dealer and any dealer of early redemption, the average, as
determined by The Bank of New York, of the bid and asked prices for the
comparable treasury issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the trustee by such reference treasury
dealer at 5:00 p.m. on the third business day preceding such date of redemption.
To the extent any trust preferred securities are to be redeemed in the
event of a cash merger as set forth above, a corresponding principal amount of
subordinated deferrable notes will also be redeemed.
The Trust will comply with the requirements of Rule 14e-1 and Rule 13e-4
under the Securities Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the redemption of trust preferred securities as a result of a cash merger
event.
TAX REDEMPTION
If a tax event, as defined under "Description of the Subordinated
Deferrable Notes--Tax Redemption" occurs and we elect to redeem the subordinated
deferrable notes, then the trust preferred securities are subject to redemption
as described under "Description of the Subordinated Deferrable Notes--Tax
Redemption."
DISTRIBUTION RATE RESET
The reset rate on the trust preferred securities will be determined on the
third business day prior to the purchase contract settlement date, the
"remarketing date" and actually reset on August 18, 2003. The reset rate, which
may be less than, equal to or greater than 7.25% per year, will be the rate per
year that results from the remarketing of (1) the trust preferred securities
that are a part of PEPS Units as to which the holders have not given notice of
their election to settle the related purchase contracts with cash, or have given
such notice but failed to deliver cash, and (2) the trust preferred securities
that are not a part of PEPS Units (that is, the trust preferred securities that
are owned by Treasury PEPS Unit holders, by PEPS Unit holders who elected to
settle for cash or to settle early or by holders who purchased trust preferred
securities in a secondary trading transaction), as to which the holders have
requested remarketing.
On the remarketing date, the remarketing agent will use reasonable efforts
to remarket these trust preferred securities. If the remarketing agent
determines that it can remarket the trust preferred securities at $25.125 per
trust preferred security without an increase in the rate, then the reset rate
will equal 7.25%. If the remarketing agent determines that it will be able to
remarket all the trust preferred securities tendered or deemed tendered for a
purchase price in excess of $25.125 per trust preferred security prior to 4:00
p.m., New York City time, on the remarketing date, the remarketing agent will
decrease the distribution rate on the trust preferred securities so that the
market value will be equal to $25.125 per trust preferred security at that time,
and then the reset rate will equal that decreased rate. If the remarketing agent
determines that it will not be able to remarket all the trust preferred
securities tendered or deemed tendered for a purchase at a price of $25.125 per
trust preferred security prior to 4:00 p.m., New York City time, on the
remarketing date, the remarketing agent will increase the distribution rate on
the trust preferred securities so that the market value will be equal to $25.125
per trust preferred security at that time, and then the reset rate will equal
that increased rate.
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REMARKETING PROCEDURES
Set forth below is a summary of the procedures to be followed in connection
with a remarketing of the trust preferred securities (or, if the subordinated
deferrable notes have been distributed to holders of the trust preferred
securities in liquidation of the Trust, a remarketing of the subordinated
deferrable notes):
As long as the PEPS Units or the trust preferred securities are evidenced
by one or more global security certificates deposited with DTC, we will request,
not later than 15 nor more than 30 calendar days prior to the remarketing date,
that DTC notify its participants holding trust preferred securities or PEPS
Units of the remarketing.
Not later than 5:00 p.m., New York City time, on the seventh business day
preceding August 18, 2003, any holder of trust preferred securities that are a
part of the PEPS Units may elect to have its trust preferred securities
remarketed. Holders of PEPS Units that do not settle their related purchase
contract early or that do not give notice prior to such time of their intention
to settle their related purchase contract early or to settle their related
purchase contract for cash, and holders who give such notice but fail to deliver
such cash prior to 11:00 a.m., New York City time, on the fifth business day
prior to August 18, 2003, will be deemed to have consented to the disposition of
the trust preferred securities that are a part of their PEPS Units in the
remarketing. Holders of trust preferred securities that are not a part of a PEPS
Unit who wish to have their trust preferred securities remarketed must give
notice of their election to the property trustee prior to 11:00 a.m., New York
City time, on the fifth business day prior to August 18, 2003. Any such notice
will be irrevocable and may not be conditioned upon the level at which the reset
rate is established in the remarketing.
If none of the holders elects to have their trust preferred securities
remarketed in the remarketing, the reset rate will be the rate determined by the
remarketing agent, in its sole, reasonable discretion, as the rate that would
have been established had a remarketing been held on the remarketing date.
FAILED REMARKETING
If, by 4:00 p.m., New York City time, on the remarketing date, the
remarketing agent is unable to remarket all the trust preferred securities
tendered or deemed tendered for purchase, a "failed remarketing" will be deemed
to have occurred, and the remarketing agent will so advise DTC, the property
trustee, the Trust and us.
If a failed remarketing occurs and you are a PEPS Unit holder who has not
settled your purchase contract early or has not settled its purchase contract
with cash or has given notice of your election to settle your purchase contract
with cash but failed to do so, we may exercise our rights as a secured party and
take possession of your trust preferred securities. Your obligation to purchase
the shares of our common stock then will be fully satisfied, and you will
receive the appropriate number of shares of our common stock.
If a failed remarketing occurs and you are a holder of trust preferred
securities that are not part of a PEPS Unit, you will retain possession of your
trust preferred securities and the reset rate will be equal to (1) the two-year
benchmark treasury rate, as defined below, plus (2) the applicable spread, as
defined below.
The term "two-year benchmark treasury rate" means the bid side rate
displayed at 10:00 a.m., New York City time, on the third business day prior to
the purchase contract settlement date for direct obligations of the United
States having a maturity comparable to the remaining term to maturity of the
subordinated deferrable notes, as agreed upon by us and the remarketing agent.
This rate will be as displayed in the Telerate system or, if the Telerate system
is no longer available or, in the opinion of the remarketing agent (after
consultation with us), no longer an appropriate system from which to obtain such
rate, such other nationally recognized quotation system as, in the opinion of
the remarketing agent (after consultation with us) is appropriate. If this rate
is not so displayed, the two-year benchmark treasury rate will be calculated by
the remarketing agent as the yield to maturity of the trust preferred
securities, expressed as a bond equivalent on the basis of a year of 365 or 366
days, as applicable, and applied on a daily basis, and computed by taking the
arithmetic mean of the secondary market bid rates, as of 10:30 a.m., New York
City time, on the third business day prior to the
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purchase contract settlement date of three leading United States government
securities dealers selected by the remarketing agent (after consultation with
us) (which may include the remarketing agent or an affiliate thereof).
The term "applicable spread" means the spread determined as set forth
below, based on the prevailing rating, as defined below, of our subordinated
notes in effect at the close of business on the business day immediately
preceding the date of a failed remarketing:
<TABLE>
<CAPTION>
PREVAILING RATING ON OUR SUBORDINATED NOTES SPREAD
------------------------------------------- ------
<S> <C>
AA/"Aa"..................................................... 3.00%
A/"a"....................................................... 4.00%
BBB/"Baa"................................................... 5.00%
Below BBB/"Baa"............................................. 7.00%
</TABLE>
You should know that we are using the rating on our subordinated notes as a
convenient bench mark to ascertain the "applicable spread" and that if a rating
were given to your trust preferred securities by a nationally recognized rating
agency, it may or may not be the same as the rating on our subordinated notes.
For purposes of this definition, the "prevailing rating" of our
subordinated notes shall be:
(1) AA/"Aa" if our subordinated notes have a credit rating of AA- or
better by Standard & Poor's Ratings Services and "Aa3" or better by Moody's
Investors Service, Inc. or the equivalent of such ratings by such agencies
or a substitute rating agency or substitute rating agencies selected by the
remarketing agent (after consultation with us);
(2) if not under clause (1) above, then A/"a" if our subordinated
notes have a credit rating of A- or better by S&P and "A3" or better by
Moody's or the equivalent of such ratings by such agencies or a substitute
rating agency or substitute rating agencies selected by the remarketing
agent (after consultation with us);
(3) if not under clauses (1) or (2) above, then BBB/"Baa" if our
subordinated notes have a credit rating of BBB- or better by S&P and "Baa3"
or better by Moody's or the equivalent of such ratings by such agencies or
a substitute rating agency or substitute rating agencies selected by the
remarketing agent (after consultation with us); or
(4) if not under clauses (1) through (3) above, then Below BBB/"Baa."
Notwithstanding the foregoing, (A) if (i) the credit rating of our subordinated
notes by S&P shall be on the "Credit Watch" of S&P with a designation of
"negative implications" or "developing," or (ii) the credit rating of our
subordinated notes by Moody's shall be on the "Corporate Credit Watch List" of
Moody's with a designation of "downgrade" or "uncertain," or, in each case, on
any successor list of S&P or Moody's with a comparable designation, the
prevailing ratings of our subordinated notes shall be deemed to be within a
range one full level lower in the above table than those actually assigned to
our subordinated notes by Moody's and S&P and (B) if our subordinated notes are
rated by only one rating agency on or before the remarketing date, the
prevailing rating will at all times be determined without reference to the
rating of any other rating agency; provided that if no such rating agency shall
have in effect a rating of our subordinated notes and the remarketing agent is
unable to identify a substitute rating agency or rating agencies, the prevailing
rating shall be Below BBB/"Baa".
By approximately 4:30 p.m., New York City time, on the remarketing date,
provided that there has not been a failed remarketing, the remarketing agent
will advise (1) DTC, the Trust, the property trustee and us of the reset rate
determined in the remarketing and the number of trust preferred securities sold
in the remarketing, (2) each person purchasing trust preferred securities in the
remarketing (or the appropriate DTC participant) of the reset rate and the
number of trust preferred securities such person is to purchase and (3) each
such purchaser to give instructions to its DTC participant to pay the purchase
price on the purchase
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contract settlement date in same day funds against delivery of the trust
preferred securities purchased through the facilities of DTC.
In accordance with DTC's normal procedures, three business days after the
remarketing date, the transactions described above with respect to each trust
preferred security tendered for purchase and sold in the remarketing will be
executed through DTC, and the accounts of the respective DTC participants will
be debited and credited and such trust preferred securities delivered by book
entry as necessary to effect purchases and sales of such trust preferred
securities. DTC will make payment in accordance with its normal procedures.
If any trust preferred securities holder selling trust preferred securities
in the remarketing fails to deliver such trust preferred securities, the direct
or indirect DTC participant of such selling holder and of any other person that
was to have purchased trust preferred securities in the remarketing may deliver
to any such other person a number of trust preferred securities that is less
than the number of trust preferred securities that otherwise was to be purchased
by such person. In such event, the number of trust preferred securities to be so
delivered will be determined by such direct or indirect participant, and
delivery of such lesser number of trust preferred securities will constitute
good delivery.
The right of each holder to have trust preferred securities tendered for
purchase will be limited to the extent that (1) the remarketing agent conducts a
remarketing pursuant to the terms of the remarketing agreement, (2) the
remarketing agent is able to find a purchaser or purchasers for tendered trust
preferred securities and (3) such purchaser or purchasers deliver the purchase
price therefor to the remarketing agent.
The remarketing agent is not obligated to purchase any trust preferred
securities that would otherwise remain unsold in the remarketing. Neither we nor
the Trust nor the property trustee nor the remarketing agent will be obligated
in any case to provide funds to make payment upon tender of trust preferred
securities for remarketing. Whether or not there has been a "failed remarketing"
will be determined in the sole, reasonable discretion of the remarketing agent.
We will be liable for any and all costs and expenses incurred in connection
with the remarketing. However, for the performance of its services, the
remarketing agent will retain from the proceeds of the remarketing an amount
equal to .50% of the aggregate stated liquidation amount of all remarketed trust
preferred securities.
REMARKETING AGENT
The remarketing agent will be Morgan Stanley & Co. Incorporated. We, the
Trust and the remarketing agent will enter into the remarketing agreement which
provides, among other things, that Morgan Stanley & Co. Incorporated, will act
as the exclusive remarketing agent and will use reasonable efforts to remarket
securities tendered or deemed tendered for purchase in the remarketing. Under
certain circumstances, some portion of the trust preferred securities tendered
in the remarketing may be purchased by the remarketing agent.
The remarketing agreement provides that the remarketing agent will incur no
liability to us or the Trust or to any holder of the PEPS Units or the trust
preferred securities in its individual capacity or as remarketing agent for any
action or failure to act in connection with a remarketing or otherwise, except
as a result of the negligence or willful misconduct on its part.
We have agreed to indemnify the remarketing agent against certain
liabilities, including liabilities under the Securities Act of 1933, arising out
of or in connection with its duties under the remarketing agreement.
The remarketing agreement also will provide that the remarketing agent may
resign and be discharged from its duties and obligations under the remarketing
agreement. No such resignation, however, will become effective unless a
nationally recognized broker-dealer has been appointed by us as successor
remarketing agent and that successor remarketing agent has entered into a
remarketing agreement with the Trust and us. In such
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case, we will use reasonable efforts to appoint a successor remarketing agent
and enter into a remarketing agreement with such person as soon as reasonably
practicable.
REDEMPTION PROCEDURES
Any trust preferred securities being redeemed will be redeemed by the trust
at the applicable redemption price with the proceeds received by the trust from
our contemporaneous redemption of the subordinated deferrable notes. Redemptions
of trust preferred securities will be made and the applicable redemption price
will be payable only to the extent that the trust has funds on hand available
for the payment of such redemption price.
If the trust notifies the holders of the trust preferred securities of a
redemption and if the trust preferred securities to be redeemed are issued in
global form, then on the applicable redemption date, the property trustee will
deposit irrevocably with the depositary for the trust preferred securities funds
sufficient to pay the applicable redemption price, to the extent funds are
available. In addition, the property trustee will give the depositary
irrevocable instructions and authority to pay the redemption price to the
beneficial owners of the trust preferred securities. If the trust preferred
securities are not issued in global form, the property trustee will give the
paying agent irrevocable instructions and authority to pay the redemption price
to the holders of the trust preferred securities upon surrender of their
certificates evidencing the trust preferred securities. The property trustee
will pay the applicable redemption price to the holders of the trust preferred
securities by check mailed to their respective addresses appearing on the
register of the trust on the redemption date. Notwithstanding the foregoing,
distributions payable on or prior to a redemption date for the trust preferred
securities will be payable to the holders of the trust preferred securities on
the relevant record dates for the related distribution dates. If a notice of
redemption has been given and funds have been deposited as required, then upon
the date of such deposit, all of the rights of the holders of the trust
preferred securities to be redeemed will cease, except for the right of such
holders to receive the redemption price (without interest thereon), and the
trust preferred securities will cease to be outstanding. If the redemption date
is not a business day, then payment of the applicable redemption price will be
made on the next business day (and without any interest or other payment in
respect of any such delay). If, however, the next business day falls in the next
calendar year, then payment of the redemption price will be made on the business
day immediately preceding the redemption date.
If any payments for the redemption of any trust preferred securities are
improperly withheld or refused and not paid either by the trust or by us
pursuant to the guarantee relating to the trust preferred securities, then
distributions on the trust preferred securities will continue to accumulate at
the then applicable rate, from the redemption date originally established by the
trust until the day upon which such redemption payments actually are paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the applicable redemption price.
Subject to applicable law (including, without limitation, U.S. federal
securities laws), we or our subsidiaries may purchase at any time and from time
to time outstanding preferred securities by tender in the open market or by
private agreement.
Any notice of a mandatory redemption or redemption at the option of the
Trust of trust securities or the distribution of subordinated deferrable notes
in exchange for trust securities will be mailed to each holder of trust
preferred securities being so redeemed at least 30 days but not more than 60
days before the applicable redemption date, at such holder's registered address.
Unless we default in the payment of the redemption price on the subordinated
deferrable notes, interest will cease to accrue on the subordinated deferrable
notes or portions thereof (and distributions will cease to accumulate on the
trust preferred securities or portions thereof) called for redemption on and
after the redemption date.
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SUBORDINATION OF TRUST COMMON SECURITIES
The payment of distributions on, and any payment upon redemption of, the
trust preferred securities and trust common securities, as applicable, will be
made pro rata based on their respective liquidation amounts, If, however, an
event of default under the indenture (which is also a "trust enforcement event"
under the declaration of trust) has occurred and continues on any distribution
date or redemption date, then the amounts payable on such date will not be made
on any of the trust common securities, and no other payment on account of the
redemption, liquidation or other acquisition of any trust common securities will
be made until all accumulated and unpaid distributions or redemption payments,
as the case may be, on all of the outstanding trust preferred securities for
which distributions are to be paid or that have been called for redemption, as
the case may be, are fully paid. All funds available to the property trustee
first will be applied to the payment in full in cash of all distributions on, or
the redemption price of, the trust preferred securities then due and payable.
The Trust will not issue any securities or other interests in the assets of the
Trust other than the trust preferred securities and the trust common securities.
In the event that a trust enforcement event has occurred and is continuing
with respect to the trust preferred securities, then we, as sole holder of the
trust common securities, will be deemed to have waived any right to act with
respect to any such trust enforcement event until the effect of such trust
enforcement event with respect to the trust preferred securities has been cured,
waived or otherwise eliminated. Until such trust enforcement event has been so
cured, waived or otherwise eliminated, the property trustee will act solely on
behalf of the holders of the trust preferred securities and not on behalf of us,
as holder of the trust common securities, and only the holders of the trust
preferred securities will have the right to direct the property trustee to act
on their behalf.
TRUST ENFORCEMENT EVENTS
Under the declaration of trust, the occurrence and continuation of any
event of default under the indenture is a trust enforcement event with respect
to the trust securities issued under the declaration. If a trust enforcement
event has occurred and is continuing, the trust preferred securities will have a
preference over the trust common securities upon dissolution of the Trust, as
described above.
VOTING RIGHTS
Except as provided below and as otherwise required by the declaration of
trust, the Delaware Business Trust Act, the Trust Indenture Act and other
applicable law, the holders of the trust securities will have no voting rights.
Subject to the requirement of the property trustee obtaining a tax opinion
in certain circumstances set forth in the last sentence of this paragraph, the
holders of not less than a majority in aggregate liquidation amount of the trust
preferred securities, voting separately as a class, have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the property trustee, or to direct the exercise of any trust or power conferred
upon the property trustee under the declaration of trust. This includes the
right to direct the property trustee, as holder of the subordinated deferrable
notes to:
- exercise the remedies available to it under the indenture
- consent to any amendment or modification of the indenture or the
subordinated deferrable notes where such consent will be required, or
- waive any past default and its consequences that is waiveable under the
indenture; provided that if an event of default under the indenture has
occurred and is continuing, then the holders of not less than 25% of the
aggregate liquidation amount of the trust preferred securities may direct
the property trustee to declare the principal of and interest on the
subordinated deferrable notes due and payable; and provided further that
where a consent or action under the indenture would require the consent
or act of the holders of more than a majority of the aggregate principal
amount of subordinated deferrable
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notes affected thereby, the property trustee only may give such consent
or take such action at the direction of the holders of at least the same
proportion in aggregate stated liquidation amount of the preferred
securities
The property trustee will notify all holders of the trust preferred securities
of any notice of any event of default under the indenture that it has received
from us. The notice will state that the event of default also constitutes a
trust enforcement event. Except with respect to directing the time, method and
place of conducting a proceeding for a remedy, the property trustee will have no
obligation to take any of the actions described in the first and second bullets
above unless it first obtains an opinion of independent tax counsel experienced
in such matters to the effect that, as a result of such action, the Trust will
not fail to be classified as a grantor trust for United States federal income
tax purposes and that each holder of trust securities will be treated as owning
an undivided beneficial ownership interest in the subordinated deferrable notes.
In the event the consent of the property trustee, as the holder of the
subordinated deferrable notes, is required under the indenture with respect to
any amendment or modification of the indenture, the property trustee will
request the direction of the holders of the trust securities with respect to
such amendment or modification and will vote with respect to such amendment or
modification as directed by the holders of a majority in stated liquidation
amount of the trust securities voting together as a single class; provided that
where a consent under the indenture would require the consent of the holders of
more than a majority of the aggregate principal amount of the subordinated
deferrable notes, the property trustee only may give such consent at the
direction of the holders of at least the same proportion in aggregate stated
liquidation amount of the trust securities. The property trustee will not take
any action in accordance with the directions of the holders of the trust
securities unless the property trustee has obtained an opinion of independent
tax counsel to the effect that the Trust will not be classified as other than a
grantor trust for United States federal income tax purposes as a result of such
action, and that each holder of trust securities will be treated as owning an
undivided beneficial ownership interest in the subordinated deferrable notes.
PAYMENT AND PAYING AGENCY
Payments in respect of the trust preferred securities will be made to the
depositary, which will credit the relevant participants' accounts on the
distribution dates or, if the trust preferred securities are not held by a
depositary, such payments will be made by check mailed to the address of the
holder of the trust preferred security that appear on the trust's security
register. The Paying agent for the trust preferred securities initially will be
the property trustee. The paying agent will be permitted to resign as paying
agent upon 30 days' written notice to the property trustee and us.
REGISTRAR AND TRANSFER AGENT
The property trustee will act as registrar and transfer agent for the trust
preferred securities.
Registration of transfers of trust preferred securities will be made
without charge by or on behalf of the Trust, but the Trust may require payment
of any tax or other governmental charges that may be imposed in connection with
any transfer or exchange of trust preferred securities.
DESCRIPTION OF THE SUBORDINATED DEFERRABLE NOTES
The following description is a summary of the terms of the subordinated
deferrable notes. It supplements the description of the debt securities in the
accompanying prospectus and, to the extent it is inconsistent with the
accompanying prospectus, replaces the description in the accompanying
prospectus. The subordinated deferrable notes will be issued under an indenture,
as supplemented, between us and The Bank of New York, as indenture trustee, or a
resolution of our Board of Directors or a committee thereof as provided for in
the indenture. The descriptions in this prospectus supplement and the
accompanying prospectus contain a description of certain terms of the
subordinated deferrable notes and the indenture but do not purport to be
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complete, and reference is hereby made to the indenture, the supplemental
indenture, and the form of subordinated deferrable note that are or will be
filed as exhibits or incorporated by reference to the registration statement and
to the Trust Indenture Act.
GENERAL
The subordinated deferrable notes will be our direct, unsecured obligations
and will rank without preference or priority among themselves and subordinated
to the extent described in the accompanying prospectus under "Description of
Securities--Subordinated Debentures," to all "Senior Indebtedness." The
subordinated deferrable notes will initially be issued in aggregate principal
amount equal to $227 million, such amount being the sum of the maximum aggregate
stated liquidation amounts of the trust preferred securities and the common
securities. If the over-allotment option is exercised in full by the
underwriters an additional $31 million of the subordinated deferrable notes will
be issued to the Trust.
The subordinated deferrable notes will not be subject to a sinking fund
provision. Unless a tax event redemption occurs, the entire principal amount of
the subordinated deferrable notes will mature and become due and payable,
together with any accrued and unpaid interest thereon, on August 18, 2004.
We will have the right at any time, subject to certain conditions, to
dissolve the Trust and cause the subordinated deferrable notes to be distributed
to the holders of the trust securities. If the Trust is dissolved after the
purchase contract settlement date (other than as a result of the redemption of
the subordinated deferrable notes) and you continue to hold trust preferred
securities, you will receive your pro rata share of the subordinated deferrable
notes held by the Trust (after any creditors of the Trust have been paid). If
the Trust is dissolved prior to the purchase contract settlement date, then
these subordinated deferrable notes will be substituted for the trust preferred
securities and will be pledged as collateral to secure your obligation to
purchase our common stock under your purchase contracts.
If the subordinated deferrable notes are distributed to the holders of the
trust securities in liquidation of such holders' interests in the Trust, the
subordinated deferrable notes will initially be issued in the form of one or
more global certificates deposited with DTC. Under certain limited
circumstances, the subordinated deferrable notes may be issued in certificated
form in exchange for the global certificates. In the event that the subordinated
deferrable notes are issued in certificated form, the subordinated deferrable
notes will be in denominations of $25 and integral multiples thereof and may be
transferred or exchanged at the offices described below. Payments on
subordinated deferrable notes issued as global certificates will be made to DTC,
a successor depositary or, in the event that no depositary is used, to a paying
agent for the subordinated deferrable notes. In the event the subordinated
deferrable notes are issued in certificated form, principal and interest will be
payable, the transfer of the subordinated deferrable notes will be registrable
and the subordinated deferrable notes will be exchangeable for subordinated
deferrable notes of other denominations of a like aggregate principal amount at
the corporate trust office or agency of the indenture trustee in New York City,
provided that at our option, payment of interest may be made by check.
Notwithstanding the foregoing, so long as the holder of any subordinated
deferrable notes is the property trustee, we will make payment of principal and
interest on the subordinated deferrable notes held by the property trustee at
such place and to such account as may be designated by the property trustee.
The indenture does not contain provisions that afford holders of the
subordinated deferrable notes protection in the event we are involved in a
highly leveraged transaction or other similar transaction that may adversely
affect such holders. We and the Trust will treat the subordinated deferrable
notes as our indebtedness for all United States tax purposes. There is, however,
no statutory, administrative or judicial authority that directly addresses this
treatment. If the IRS were to disregard this classification, it could have a
material adverse effect on our financial condition.
INTEREST
Each subordinated deferrable note will bear interest at the rate of 7.25%
per year from August 22, 2000 until August 18, 2003, and at the reset rate
thereafter, payable quarterly in arrears on February 18, May 18,
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August 18 and November 18 of each year, each an "interest payment date,"
commencing November 18, 2000, to the person in whose name such subordinated
deferrable note is registered, subject to certain exceptions, at the close of
business on the business day preceding such interest payment date. In the event
the subordinated deferrable notes do not remain in book-entry only form, the
record date will be 15 business days prior to each interest payment date. The
interest rate on the subordinated deferrable notes will be reset on August 18,
2003.
The amount of interest payable on the subordinated deferrable notes for any
period will be computed (1) for any full quarterly period on the basis of a
360-day year of twelve 30-day months and (2) for any period shorter than a full
quarterly period, on the basis of a 30-day month and, for any period less than a
month, on the basis of the actual number of days elapsed per 30-day month. In
the event that any date on which interest is payable on the subordinated
deferrable notes is not a business day, then payment of the interest payable on
such date will be made on the next day that is a business day (and without any
interest or other payment in respect of any such delay), except that, if such
business day is in the next calendar year, then such payment will be made on the
preceding business day.
OPTION TO DEFER INTEREST PAYMENTS ON THE SUBORDINATED DEFERRABLE NOTES
So long as no event of default has occurred and is continuing, we have the
right under the indenture at any time during the term of the subordinated
deferrable notes to defer the payment of interest for a period not extending
beyond the maturity date of the subordinated deferrable notes. We refer to any
such period of deferral as an "extension period". During such extension period
the Trust will no longer have sufficient funds to make quarterly distribution
payments on the trust preferred securities, but such distribution payments will
continue to accrue. At the end of an extension period, we must pay all interest
then accrued and unpaid (together with accrued interest at the deferral rate
compounded on each succeeding interest payment date) to the Trust. At the end of
an extension period, the Trust will make all unpaid distributions (together with
accrued distribution payments at the deferral rate compounded on each succeeding
payment date) to holders of the trust preferred securities.
During any extension period, we may not take any of the prohibited actions
described in the first sentence under "Description of Securities--Certain
Covenants" in the accompanying prospectus.
Prior to the expiration of any extension period, we may further extend the
extension period, but not beyond the maturity date of the subordinated
deferrable notes. Upon the termination of any extension period and the payment
of all amounts then due on any interest payment date, we may elect to begin a
new extension period, subject to the same requirements as described above. No
interest will be due and payable during an extension period. We must give the
indenture trustee written notice of our election of any extension period (or our
further extension) at least five business days prior to the earlier of:
- the date the interest on the subordinated deferrable notes would have
been payable except for the election to begin or extend the extension
period;
- the date the indenture trustee is required to give notice to any
securities exchange or to holders of the subordinated deferrable notes of
the record date or the date the interest is payable; and
- the record date.
The indenture trustee must give notice of our election to begin a new
extension period or continue an extension period to the holders of the
subordinated deferrable notes. There is no limitation on the number of times
that we may elect to begin an extension period.
EARLY REDEMPTION IN THE EVENT OF A CASH MERGER
To the extent that trust preferred securities are to be redeemed in the
event of a cash merger, as described under "Description of the Trust Preferred
Securities -- Early Redemption in the Event of a Cash Merger," a corresponding
principal amount of the subordinated deferrable notes will also be redeemed. In
addition, in the event that the Trust has been dissolved and subordinated
deferrable notes have been distributed to holders of trust securities,
subordinated deferrable notes shall be subject to the redemption procedures
described under "Description of the Trust Preferred Securities -- Early
Redemption in the Event of a Cash Merger."
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TAX EVENT REDEMPTION
If a tax event, as defined below, occurs and is continuing, we may redeem
at our option, the subordinated deferrable notes in whole (but not in part), at
a price equal to, for each subordinated deferrable note, the redemption amount,
as defined below, plus accrued and unpaid interest thereon to the date of
redemption, the "tax event redemption date". Upon a tax event redemption, the
Trust will use the proceeds of such tax event redemption to redeem trust
securities having an aggregate liquidation amount equal to the aggregate
principal amount of the subordinated deferrable notes redeemed by distributing
the redemption amount plus any accumulated and unpaid distributions. If a tax
event redemption occurs prior to the purchase contract settlement date, the
redemption price payable in liquidation of the PEPS Unit holders' interests in
the Trust will be distributed to the securities intermediary, which in turn will
apply an amount equal to the redemption amount of such redemption price to
purchase the treasury portfolio on behalf of the holders of the PEPS Units and
remit the remaining portion, if any, of such redemption price to the purchase
contract agent for payment to the holders of the PEPS Units. Thereafter, the
applicable ownership interest of the treasury portfolio will be substituted for
the trust preferred securities and will be pledged to the collateral agent to
secure the PEPS Unit holders' obligations to purchase our common stock under the
related purchase contract. If a tax event redemption occurs after the purchase
contract settlement date, the treasury portfolio will not be purchased and the
proceeds will be distributed to the purchase contract agent for payment to the
holders of the PEPS Units. If a tax event redemption occurs, holders of trust
preferred securities that are not part of PEPS Units will directly receive
proceeds from the redemption of the subordinated notes.
"Tax event" means the receipt by us and the Trust of an opinion of counsel,
rendered by a law firm having a recognized national tax practice, to the effect
that, as a result of any amendment to, change in or announced proposed change in
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative decision, pronouncement, judicial decision or action
interpreting or applying such laws or regulations, which amendment or change is
effective or which proposed change, pronouncement, action or decision is
announced on or after the date of issuance of the trust preferred securities,
there is more than an insubstantial increase in the risk that (1) the Trust is,
or within 90 days of the date of such opinion will be, subject to United States
federal income tax with respect to income received or accrued on the
subordinated deferrable notes, (2) interest payable by us on the subordinated
deferrable notes is not, or within 90 days of the date of such opinion, will not
be, deductible by us, in whole or in part, for United States federal income tax
purposes, or (3) the Trust is, or within 90 days of the date of such opinion
will be, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
"Redemption amount" means, for each subordinated deferrable note, the
product of the principal amount of such subordinated deferrable note and a
fraction, the numerator of which is the treasury portfolio purchase price, as
defined below, and the denominator of which is the applicable principal amount,
as defined below.
"Treasury portfolio purchase price" means the lowest aggregate price quoted
by a primary U.S. government securities dealer in New York City, a "primary
treasury dealer", to the quotation agent, as defined below, on the third
business day preceding the tax event redemption date for the purchase of the
treasury portfolio for settlement on the tax event redemption date.
"Applicable principal amount" means either (1) if the tax event redemption
date occurs prior to the purchase contract settlement date, the aggregate
principal amount of the subordinated deferrable notes corresponding to the
aggregate stated liquidation amount of the trust preferred securities that are
part of the PEPS Units on the tax event redemption date or (2) if the tax event
redemption date occurs on or after the purchase contract settlement date, the
aggregate principal amount of the subordinated deferrable notes corresponding to
the aggregate stated liquidation amount of the trust preferred securities
outstanding on the tax event redemption date.
"Treasury portfolio" means, with respect to the applicable principal amount
of subordinated deferrable notes, a portfolio of zero-coupon U.S. treasury
securities consisting of (a) principal or interest strips of U.S. treasury
securities that mature on or prior to the purchase contract settlement date in
an aggregate amount at
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maturity equal to the applicable principal amount and (b) with respect to each
scheduled interest payment date on the subordinated deferrable notes that occurs
after the tax event redemption date, principal or interest strips of U.S.
treasury securities that mature on or prior to such date in an aggregate amount
at maturity equal to the aggregate interest payment that would be due on the
applicable principal amount of the subordinated deferrable notes on such date.
"Quotation agent" means (1) Morgan Stanley & Co. Incorporated and its
respective successors, provided that if Morgan Stanley & Co. Incorporated ceases
to be a primary treasury dealer, we will substitute another primary treasury
dealer therefor, or (2) any other primary treasury dealer selected by us.
ADDITIONAL INDENTURE PROVISION APPLICABLE TO THE SUBORDINATED DEFERRABLE NOTES
As long as the subordinated deferrable notes are held by the Trust, it will
be an event of default with respect to the subordinated deferrable notes if the
Trust voluntarily or involuntarily dissolves, winds-up its business or otherwise
terminates its existence except in connection with (1) the distribution of the
subordinated deferrable notes to holders of trust preferred securities and trust
common securities in liquidation of their interests in the Trust, (2) the
redemption of all of the outstanding trust preferred securities and trust common
securities, or (3) certain mergers, consolidations or amalgamations, each as
permitted by the declaration of trust.
CERTAIN COVENANTS OF THE COMPANY
In the indenture governing the subordinated deferrable notes, CMS Energy
will covenant that, so long as any trust preferred securities remain
outstanding, if there shall have occurred an event of default under the
indenture or the guarantee that is continuing or if an extension period, as
described under subsection "Option to Defer Interest Payments on the
Subordinated Deferrable Notes" above, has begun and is continuing, then CMS
Energy will not take any of the prohibited actions described under "Description
of Securities -- Certain Covenants."
BOOK-ENTRY ISSUANCE
If distributed to holders of trust preferred securities in connection with
the involuntary or voluntary dissolution of the Trust, the subordinated
deferrable notes will be issued as one or more global certificates registered in
the name of DTC or its nominee. The subordinated deferrable notes will be issued
only as fully-registered securities registered in the name of Cede & Co., DTC's
nominee. The subordinated deferrable notes will be issued in accordance with the
procedures set forth in this prospectus supplement under "Book-Entry Systems."
DESCRIPTION OF THE GUARANTEE
The following description is a summary of the terms of the guarantee that
will be executed and delivered by us for the benefit of the holders of the trust
preferred securities. It supplements the description of the guarantee in the
accompanying prospectus and, to the extent it is inconsistent with the
accompanying prospectus, replaces the description in the accompanying
prospectus. The terms of the guarantee will be those set forth in the guarantee
and those made part of the guarantee by the Trust Indenture Act. The
descriptions contained in this prospectus supplement and the accompanying
prospectus contain a description of certain terms of the guarantee, but do not
purport to be complete, and reference is hereby made to the form of guarantee
(including definitions of certain terms used therein) that is filed as an
exhibit or incorporated by reference to the registration statement.
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GENERAL
To the extent described below, we will agree to pay the following amounts
in full if they are not paid by the Trust:
- any accumulated and unpaid distributions and additional amounts on the
trust preferred securities to the extent we have made corresponding
payments on the subordinated deferrable notes to the property trustee;
- the redemption price for any trust preferred securities called for
redemption by the trust, including all accumulated and unpaid
distributions to the date of redemption, to the extent we have made
corresponding payments on the subordinated deferrable notes to the
property trustee; and
- payments upon the dissolution, winding-up or termination of the Trust
equal to the lesser of:
- the liquidation amount plus all accumulated and unpaid distributions and
additional amounts on the trust preferred securities to the extent the
Trust has funds legally available for those payments; and
- the amount of assets of the trust remaining legally available for
distribution to the holders of the trust preferred securities in
liquidation of the trust.
We will not be required to make these liquidation payments if:
- the Trust distributes the subordinated deferrable notes to the holders of
the trust preferred securities in exchange for their trust preferred
securities; or
- the trust redeems the trust preferred securities in full upon the
maturity or redemption of the subordinated deferrable notes.
The guarantee is a guarantee from the time of issuance of the trust
preferred securities. We will be obligated to make guarantee payments when due,
regardless of any defense, right of set-off or counterclaim that the Trust may
have or assert. We may satisfy our obligations to make guarantee payments either
by making payments directly to holders of the trust preferred securities or to
the guarantee trustee for remittance to the holders or by causing the Trust to
make the payments to them.
The guarantee only covers distributions and other payments on the trust
preferred securities if and to the extent we have made corresponding payments on
the subordinated deferrable notes to the property trustee. If we do not make
those corresponding payments:
- the property trustee will not make distributions on the trust preferred
securities;
- the Trust will not have funds available for payments on the trust
preferred securities; and
- we will not be obligated to make guarantee payments.
Our obligation to make guarantee payments will be:
- unsecured;
- subordinated and junior in right of payment to all Senior Indebtedness,
to the extent set forth therein, which is similar to the subordination of
the subordinated deferrable debentures;
- equal in rank to any securities or guarantees that are expressly made
equal by their terms; and
- senior to our share capital.
Because we are a holding company, the guarantee is effectively subordinated
to all existing and future liabilities and preferred equity obligations of our
subsidiaries, except to the extent we are a creditor of our subsidiaries and
recognized as such.
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We have, through the guarantee, the subordinated deferrable notes and the
indenture, taken together, fully 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 the
documents that has the effect of providing a full and unconditional guarantee of
the Trust's obligations under the declaration of trust.
EVENTS OF DEFAULT
An event of default under the guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of a majority in liquidation amount of the trust preferred securities
will have the right to (a) waive any past event of default under the guarantee
and its consequences, whereby such event of default shall cease to exist and any
event of default under the guarantee arising therefrom shall be deemed to have
been cured for every purpose of the guarantee and (b) direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
in respect of the guarantee or to direct the exercise of any trust or power
conferred upon the trustee under the guarantee.
Any holder of the trust preferred securities may institute a legal
proceeding directly against the Company to enforce its rights under the
guarantee without first instituting a legal proceeding against the trust, the
guarantee trustee or any other person or entity.
CERTAIN COVENANTS OF THE COMPANY
In the guarantee, CMS Energy will covenant that, so long as any trust
preferred securities remain outstanding, if there shall have occurred an event
of default under the indenture governing the subordinated deferrable notes or
the guarantee that is continuing or if an extension period, as described under
"Description of the Subordinated Deferrable Notes -- Option to Defer Interest
Payments on the Subordinated Deferrable Notes" above, has begun and is
continuing, then CMS Energy will not take any of the prohibited actions
described under "Description of Securities -- Certain Covenants."
AMENDMENTS AND ASSIGNMENT
CMS Energy and the guarantee trustee may amend the guarantee without the
consent of any holder of trust preferred securities if the amendment does not
adversely affect the rights of the holders in any material respect. In all other
cases, CMS Energy and the guarantee trustee may amend the guarantee only with
the prior approval of the holders of at least a majority of outstanding trust
preferred securities issued by the Trust.
CMS Energy may assign its obligations under the guarantee only in
connection with the consolidation, merger or asset sale involving CMS Energy
permitted under the indenture governing the subordinated deferrable notes.
TERMINATION OF THE GUARANTEE
The guarantee will terminate upon:
- full payment of the redemption price of all trust preferred securities of
the applicable trust
- distribution of the related subordinated deferrable notes, or any
securities into which those subordinated deferrable notes are
convertible, to the holders of the trust preferred securities and trust
common securities of that trust in exchange for all the securities issued
by that trust or
- full payment of the amounts payable upon liquidation of that trust
The guarantee will, however, continue to be effective or will be reinstated if
any holder of trust preferred securities must repay any amounts paid on those
trust preferred securities or under the guarantee.
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GOVERNING LAW
Michigan law will govern the guarantee.
BOOK-ENTRY SYSTEMS
The Depository Trust Company will act as securities depository for the PEPS
Units, the Treasury PEPS Units, the trust preferred securities and the
subordinated deferrable notes, as applicable the "securities." The securities
will be issued in fully-registered form in the name of Cede & Co. (DTC's
partnership nominee). We will issue one or more fully registered certificates as
global securities for each of the securities in their respective aggregate
principal or stated amounts and deposit the certificates with DTC.
DTC has provided us with the following information: 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 United States Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered under Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants deposit with DTC. DTC also facilitates the
settlement among direct participants of securities transactions, such as
transfers and pledges, in deposited securities through computerized book-entry
changes in direct participants' accounts. This eliminates the need for physical
movement of securities certificates. Direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations, and 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
National Association of Securities Dealers, Inc. 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. The rules that apply to DTC
and its participants are on file with the Securities and Exchange Commission.
If you intend to purchase any of the securities in the manner provided by
this prospectus supplement you must do so through the DTC system by or through
direct participants. The participant that you purchase through will receive a
credit for the applicable security on DTC's records. The ownership interest of
each actual purchaser of the applicable security, who we refer to as a
"beneficial owner," is in turn to be received on the participants' records.
Beneficial owners will not receive written confirmation from DTC of their
purchases, but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the participant through which the beneficial owner entered into
the transaction. Transfers of ownership interests in the securities 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 the applicable security except in the event that
use of the book-entry system for the securities is discontinued.
To facilitate subsequent transfers, all securities deposited by direct
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of securities 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 securities. DTC's records reflect only the
identity of the direct participants to whose accounts such securities 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
participants to 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 the
securities. Under its usual procedures, DTC would mail an Omnibus Proxy to us 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
securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
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We will make any payments on the securities 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, us or any trustee, subject to
any statutory or regulatory requirements as may be in effect from time to time.
We or the applicable trustee will be responsible for the payment of all
amounts to DTC. DTC will be responsible for the disbursement of those payments
to its participants, and the participants will be responsible for disbursements
of those payments to beneficial owners.
DTC may discontinue providing its service as securities depository with
respect to the securities at any time by giving reasonable notice to us or the
trustee. Under these circumstances, in the event that a successor securities
depository is not obtained, we will print and deliver to you certificates for
the securities.
Also, in case we decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository) we will print and
deliver to you certificates for the various certificates you may own.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be reliable (including DTC),
but we take no responsibility for its accuracy.
Neither we, nor any trustee nor the underwriters will have any
responsibility or obligation to participants, or the persons for whom they act
as nominees, with respect to:
- the accuracy of the records of DTC its nominee or any participant,
- any ownership interest in the securities, or
- any payments to, or the providing of notice to participants or beneficial
owners.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain of the material United States federal
income tax consequences of the purchase, ownership and disposition of PEPS
Units, Treasury PEPS Units, trust preferred securities, and our common stock
acquired under the purchase contracts. Unless otherwise stated, this summary
applies only to U.S. holders who acquire PEPS Units, Treasury PEPS Units, trust
preferred securities, and our common stock as capital assets (generally, assets
held for investment) upon original issuance. U.S. holders include the following:
- a person who is a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or any state thereof or the District of Columbia;
- an estate the income of which is subject to United States federal income
taxation, regardless of its source; and
- a trust that is subject to the supervision of a court within the United
States and the control of one or more United States persons or that has a
valid election in effect under applicable Treasury regulations to be
treated as a United States person.
The tax treatment of holders varies depending on their particular
situations. Unless otherwise stated, this summary assumes that you use the cash
method for tax accounting. This summary does not deal with special classes of
holders, such as, for example:
- tax consequences to holders who may be subject to special tax treatment,
such as banks, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or
currencies, and tax-exempt investors;
- tax consequences to persons that will hold PEPS Units, Treasury PEPS
Units, trust preferred securities, or the common stock acquired under the
purchase contracts as a position in a "straddle," "synthetic security,"
"hedge," "integrated transaction," "conversion transaction" or
"constructive sale;"
- tax consequences to holders of PEPS Units, Treasury PEPS Units, trust
preferred securities, or our common stock whose functional currency is
not the U.S. dollar;
- tax consequences to stockholders, partners or beneficiaries of a holder
of PEPS Units, Treasury PEPS Units, trust preferred securities, or our
common stock acquired under a purchase contract;
- alternative minimum tax consequences, if any; or
- any state, local or foreign tax consequences.
This summary is based upon the Internal Revenue Code of 1986, Treasury
regulations (including proposed Treasury regulations) issued under the Code, IRS
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change. Any such change may be applied retroactively in a manner
that could cause the tax consequences to vary materially from the consequences
described below, possibly adversely affecting you.
No statutory, administrative or judicial authority directly addresses the
treatment of PEPS Units or instruments similar to PEPS Units for United States
federal income tax purposes. As a result, we cannot assure you that the IRS will
agree with the tax consequences described below. We urge you to consult your own
tax advisor with respect to the tax consequences to you of the purchase,
ownership and disposition of the PEPS Units, including the tax consequences
under state, local, foreign and other tax laws and the possible effects of
changes in United States federal or other tax laws.
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PEPS UNITS
ALLOCATION OF THE PURCHASE PRICE
Your acquisition of a PEPS Unit will be treated as an acquisition of the
trust preferred security and the purchase contract constituting the PEPS Unit.
The purchase price will be allocated between the trust preferred security and
the purchase contract in proportion to their respective fair market values at
the time of purchase. This allocation will establish your initial tax basis in
the trust preferred security and the purchase contract. We will report the fair
market value as of the date of issuance of the PEPS Units of each trust
preferred security as $23.541 and the fair market value of each purchase
contract as $1.459. This position will be binding on you (but not on the IRS)
unless you explicitly disclose a contrary position in a statement attached to
your timely filed United States federal income tax return for the taxable year
in which you acquire a PEPS Unit. Thus, absent such disclosure, you should
allocate the purchase price for a PEPS Unit in accordance with the foregoing.
The remainder of this discussion assumes that this allocation of the purchase
price will be respected for United States federal income tax purposes.
TRUST PREFERRED SECURITIES
Ownership of Trust Preferred Securities. We, the Trust and you, by
acquiring PEPS Units, agree to treat you as the owner, for United States
federal, state and local income and franchise tax purposes, of the trust
preferred securities that are a part of the PEPS Units that you own. The
remainder of this summary assumes that you will be treated as owning the trust
preferred securities that are a part of such PEPS Units for United States
federal, state and local income and franchise tax purposes.
Classification of the Trust. In connection with the issuance of the PEPS
Units, Skadden, Arps, Slate, Meagher & Flom LLP will issue an opinion that,
under current law, assuming compliance with the terms of the declaration of
trust, and based on certain facts and assumptions contained in the opinion, the
Trust will be classified as a grantor trust and not as an association taxable as
a corporation for United States federal income tax purposes. As a result, each
U.S. holder of trust preferred securities will be treated as owning an undivided
beneficial interest in the subordinated deferrable notes held by the Trust.
Accordingly, you will be required to include in your gross income your pro rata
share of the income arising from the subordinated deferrable notes. See
"--Interest Income and Original Issue Discount." No corporate dividends received
deduction applies to income from the subordinated deferrable notes.
Classification of the Subordinated Deferrable Notes. CMS Energy intends to
take the position that the subordinated deferrable notes will be classified for
United States federal income tax purposes as indebtedness. CMS Energy and the
Trust, and you, by acquiring a PEPS Unit, agree to treat the subordinated
deferrable notes as indebtedness for United States federal income tax purposes.
No assurance can be given, however, that such position will not be challenged by
the IRS or, if so challenged, that the challenge would not be successful. The
remainder of this discussion assumes that the subordinated deferrable notes will
be classified for federal income tax purposes as our indebtedness.
Interest Income And Original Issue Discount. Except as set forth below, you
will be required to include your allocable share of the stated interest on the
subordinated deferrable notes in your income at the time the interest is paid or
accrues in accordance with your regular method of tax accounting.
You will also be required to include in income your allocable share of the
original issue discount on the subordinated deferrable notes as it accrues, in
accordance with a constant-yield-to-maturity method based on a compounding of
interest, over the first three years of the term of the subordinated deferrable
notes. The amount of original issue discount allocable to each trust preferred
security will be $1.584, which is equal to the excess of the remarketed price of
the trust preferred security of $25.125 over the amount of the purchase price
allocated to the trust preferred security. You must accrue the original issue
discount regardless of your method of tax accounting. Your initial basis in the
trust preferred security will equal the amount of the purchase price allocated
to the trust preferred security, and this basis will be increased by the amount
of original issue discount includable in your gross income as it accrues.
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In addition, if we exercise our right to defer payments of the stated
interest on the subordinated deferrable notes, the stated interest will also
become original issue discount. In such case, you will be required to accrue (in
addition to the original issue discount amount discussed above) an amount of
interest income each year that approximates your allocable share of the stated
interest payments called for under the terms of the subordinated deferrable
notes using the constant-yield-to-maturity method. You must accrue this
additional amount of original issue discount regardless of your method of tax
accounting. You will not separately report the actual cash payments of interest
on the subordinated deferrable notes as taxable income. Any amount of original
issue discount included in your gross income (whether or not during a deferral
period) with respect to the subordinated deferrable notes will increase your tax
basis in the trust preferred securities, and the amount of cash payments
received in respect of the accrued original issue discount will reduce your tax
basis in the trust preferred securities.
Treasury regulations would require deferrable interest on the subordinated
deferrable notes to be treated as original issue discount from the date of
issuance unless the likelihood of deferral is remote. We have determined that
the likelihood of interest deferral is remote and that original issue discount
attributable to the stated interest need not be reported in the absence of
actual deferral.
The Treasury regulations dealing with original issue discount and
deferrable payments have not been addressed in any rulings or other
interpretations by the IRS. It is possible that the IRS could take a position
contrary to that set forth in this summary. If the IRS were to assert
successfully that the stated interest on the subordinated deferrable notes was
original issue discount regardless of whether we exercise our right to defer
payments, you would be required to treat the stated interest as original issue
discount from the date of issuance of the subordinated deferrable notes.
Sale, Exchange or Other Disposition of Trust Preferred Securities. Upon the
sale, exchange or other disposition of trust preferred securities (including the
remarketing thereof), you will recognize capital gain or loss in an amount equal
to the difference between your amount realized (which does not include amounts
equal to any accrued but unpaid interest that you have not previously included
in gross income, which will be taxable as interest) and your tax basis in the
trust preferred securities (which includes the amount of original issue discount
that you have previously included in gross income). Selling expenses will reduce
your gain or increase your loss. Gains of individuals from capital assets held
for more than one year are eligible for reduced rates of taxation. Your ability
to deduct capital losses is subject to limitations.
Distribution of the Subordinated deferrable Notes. Under current law, a
distribution by the Trust of the subordinated deferrable notes will generally
not be a taxable event. You will have an aggregate tax basis in the subordinated
deferrable notes received in the liquidation equal to your aggregate tax basis
in the trust preferred securities surrendered, and the holding period of
distributed subordinated deferrable notes will include the period during which
you held the trust preferred securities. You will continue to include interest
and original issue discount from the subordinated deferrable notes you receive
from the Trust. Upon occurrence of a tax event as described in "Description of
Subordinated deferrable Notes--Tax Event Redemption" in this prospectus
supplement, we will have the option to redeem the subordinated deferrable notes
which will be taxable to you. See "--Tax Event Redemption."
PURCHASE CONTRACTS
Acquisition of Common Stock under a Purchase Contract. You will generally
not recognize gain or loss on the purchase of shares of our common stock under a
purchase contract, except with respect to any cash paid instead of a fractional
share of our common stock. Subject to the following discussion, your aggregate
initial tax basis in the shares of our common stock received under a purchase
contract should generally equal (1) the purchase price paid for those shares,
plus (2) your tax basis in the purchase contract, less (3) the portion of such
purchase price and tax basis allocable to any fractional share. The holding
period for shares of our common stock received under a purchase contract will
commence on the day you receive the shares.
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Ownership of Common Stock Acquired under the Purchase Contract. Any
dividend paid to you on shares of our common stock will be treated as dividend
income to you to the extent paid out of current or accumulated earnings and
profits, as determined under United States federal income tax principles. You
will be required to include any such dividend in your gross income as ordinary
income on the day you receive the dividend. Such dividends will be eligible for
the dividends received deduction allowed to corporations.
You will recognize capital gain or loss on any sale or exchange of our
common stock in an amount equal to the difference between your amount realized
upon the sale of our common stock and your tax basis in our common stock.
Capital gains of individuals derived with respect to capital assets held for
more than one year are eligible for reduced rates of taxation. Your ability to
deduct capital losses is subject to limitations.
Early Settlement of a Purchase Contract. You will not recognize gain or
loss on the receipt of trust preferred securities, treasury portfolio or
treasury securities, as the case may be, upon early settlement of a purchase
contract and you will have the same tax basis and holding period in such trust
preferred securities, treasury portfolio or treasury securities, as the case
maybe, as before the early settlement.
Termination of a Purchase Contract. If a purchase contract terminates, you
will recognize capital gain or loss equal to the difference between your amount
realized (if any) upon such termination and your adjusted tax basis in the
purchase contract at the time of the termination. Capital gains of individuals
derived in respect of capital assets held for more than one year are eligible
for reduced rates of taxation. Your ability to deduct capital losses is subject
to limitations. You will not recognize gain or loss on the receipt of the trust
preferred securities, treasury portfolio or treasury securities, as the case may
be, upon termination of the purchase contract and you will have the same tax
basis in the trust preferred securities, treasury portfolio or treasury
securities, as the case may be, as before termination.
Adjustment to Settlement Rate. You might be treated as receiving a
constructive distribution from us if (1) the settlement rate is adjusted and as
a result of that adjustment your proportionate interest in our assets or
earnings and profits is increased and (2) the adjustment is not made pursuant to
a bona fide, reasonable anti-dilution formula. An adjustment in the settlement
rate would not be considered made pursuant to such a formula if the adjustment
were made to compensate you for certain taxable distributions with respect to
our common stock. Thus, under some circumstances, an increase in the settlement
rate might give rise to a taxable dividend to you even though you would not
receive any cash.
TREASURY PEPS UNITS
Substitution of Treasury Security to Create Treasury PEPS Units. If you
hold PEPS Units and deliver a treasury security to the securities intermediary
in substitution for the trust preferred securities, you generally will not
recognize gain or loss upon the delivery of the treasury security or the release
of the trust preferred securities. You will continue to include in income any
interest and original issue discount with respect to the trust preferred
securities, and your tax basis in the trust preferred securities and the
purchase contracts will not be affected by the delivery and release.
Ownership of Treasury Securities. We, the trust and you, by acquiring a
PEPS Unit, agree to treat you as the owner, for United States federal, state and
local income and franchise tax purposes, of the treasury security that is part
of the PEPS unit that you own. Your initial tax basis in the treasury security
will be equal to the amount paid for the treasury security. The treasury
security will earn original issue discount over its life. As a result, you will
be required to include in income each year that the securities intermediary
holds a treasury security on your behalf the portion of the original issue
discount or acquisition discount that accrues on the treasury security in that
year. The tax treatment of original issue discount is described under
"--Treasury Portfolio--Interest Income and Original Issue Discount."
Substitution of Trust Preferred Securities to Recreate PEPS Units. If you
hold Treasury PEPS Units and deliver trust preferred securities to the
securities intermediary to recreate PEPS Units, you will generally not recognize
gain or loss upon the delivery of the trust preferred securities or the release
of the treasury security. You will continue to include in income any interest,
original issue discount or acquisition discount otherwise
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includable with respect to the treasury security and the trust preferred
securities, and your tax basis in the treasury security, the trust preferred
securities and the purchase contract will not be affected by the delivery and
release.
SALE OR DISPOSITION OF UNITS
Upon a disposition of a PEPS Unit or Treasury PEPS Unit, you will be
treated as having sold, exchanged or disposed of the purchase contract and the
trust preferred security or treasury security, as the case may be, that
constitute the PEPS Unit or Treasury PEPS Unit. You will generally have capital
gain or loss equal to the difference between the portion of your proceeds
allocable to the purchase contract and the trust preferred security or treasury
security, as the case may be, and your respective tax basis in the purchase
contract and the trust preferred security or treasury security. For purposes of
determining gain or loss, your proceeds will not include an amount equal to
accrued and unpaid interest on the subordinated deferrable note underlying the
trust preferred security or the treasury security not previously included in
income, which will be treated as ordinary interest income, and your basis in the
trust preferred security or treasury security will include the amount of
original issue discount that you have previously included in gross income with
respect to the underlying subordinated deferrable note or treasury security.
Capital gains of individuals derived in respect of capital assets held for more
than one year are eligible for reduced rates of taxation. Your ability to deduct
capital losses is subject to limitations. For a possible recharacterization of
gain or loss on the sale, exchange or other disposition of a trust preferred
security, see "--PEPS Units--Trust Preferred Securities--Possible Alternative
Characterization."
If the disposition of a PEPS Unit or Treasury PEPS Unit occurs when the
purchase contract has a negative value to you, you should be considered to have
received additional consideration for the trust preferred security or treasury
security in an amount equal to such negative value, and to have paid such amount
to be released from your obligation under the purchase contract. You should
consult your tax advisor regarding a disposition of a PEPS Unit or Treasury PEPS
Unit at a time when the purchase contract has a negative value.
TAX EVENT REDEMPTION
A tax event redemption will be a taxable event. You will generally
recognize capital gain or loss in an amount equal to the difference between (1)
the redemption price of the trust preferred securities (whether paid directly to
you or applied by the securities intermediary to the purchase of the treasury
portfolio on behalf of holders of the PEPS Units), except to the extent of
amounts paid in respect of accrued but unpaid interest not previously included
in income, which will be taxable as such, and (2) your adjusted tax basis in the
trust preferred securities. Capital gains of individuals derived in respect of
capital assets held for more than one year are eligible for reduced rates of
taxation. Your ability to deduct capital losses is subject to limitations.
TREASURY PORTFOLIO
Ownership of Treasury Portfolio. We, the Trust and you, by acquiring a PEPS
Unit, agree to treat you as the owner, for United States Federal, state and
local income and franchise tax purposes, of that portion of the treasury
portfolio that is a part of the PEPS Units that you own. You will be required to
include in income any amount earned on your pro rata share of the treasury
portfolio for all United States federal, state and local income and franchise
tax purposes. The remainder of this summary assumes that U.S. holders of the
PEPS Units will be treated as the owners of the applicable ownership interest of
the treasury portfolio that are a part of their PEPS Units for United States
federal, state and local income and franchise tax purposes.
Interest Income and Original Issue Discount. The treasury portfolio will
consist of stripped treasury securities. You will be required to treat your pro
rata share of each treasury security in the treasury portfolio as a bond that
was originally issued on the date the securities intermediary acquired the
relevant treasury securities and to include original issue discount in income
over the life of the treasury securities in an amount
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equal to your pro rata share of the excess of the amounts payable on the
treasury securities over the value of the treasury securities at the time the
securities intermediary acquired them on behalf of holders of the PEPS Units.
The amount of that excess will constitute only a portion of the total amount
payable in respect to the treasury portfolio. Consequently, a substantial
portion of each scheduled payment to you will be treated as a tax-free return of
your investment in the treasury portfolio and will not be considered current
taxable income for United States federal income tax purposes.
Whether you use the cash or accrual method of tax accounting, you will be
required to include original issue discount (other than original issue discount
on short-term treasury securities, as defined below) in income for federal
income tax purposes as it accrues on a constant-yield-to-maturity basis. In the
case of any treasury security with a maturity of one year or less from the date
it is purchased, a "short-term treasury security," in general, only accrual
basis taxpayers are required to include original issue discount in income as it
is accrued. If you use the accrual method of tax accounting you are required to
accrue original issue discount on short-term treasury securities on a
straight-line basis unless you elect to accrue the original issue discount using
a constant-yield-to-maturity method.
Tax Basis of the Treasury Portfolio. Your tax basis in your applicable
ownership interest of the treasury portfolio will equal your pro rata share of
the amount paid by the securities intermediary for the treasury portfolio. Your
tax basis in your applicable ownership interest of the treasury portfolio will
be increased by the amount of original issue discount that you include in your
income with respect thereto and decreased by the amount of cash you receive in
respect of it.
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ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), plans and
individual retirement accounts that are subject to Section 4975 of the Code and
entities whose assets are considered assets of such plans (collectively,
"plans") may purchase PEPS Units subject to the investing fiduciary's
determination that the investment satisfies ERISA's fiduciary standards and
other requirements applicable to investments by plans. Accordingly, among other
factors, the fiduciary should consider whether the investment would satisfy the
prudence and diversification requirements of ERISA and would be consistent with
the documents and instruments governing the plans.
Section 406 of ERISA and Section 4975 of the Code prohibit fiduciaries from
engaging in specified transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to the plan. A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Code. Thus, a plan
fiduciary considering an investment in PEPS Units also should consider whether
such an investment might constitute or give rise to a prohibited transaction
under ERISA or the Code for which no exemption is available. For example, the
purchase and holding of PEPS Units by a plan with respect to which we, the
underwriters or any of our affiliates is a party in interest or disqualified
person could constitute a prohibited transaction under ERISA or the Code unless
an exemption were available for such purchase.
In addition, the Department of Labor (the "DOL") has issued regulations
under which the assets of the Trust would be deemed to be "plan assets" for
purposes of ERISA and Section 4975 of the Code if 25% or more of the value of
any class of equity interests in the Trust were held by plans, other employee
benefit plans not subject to ERISA or Section 4975 of the Code (such as
governmental, church and foreign plans), or other entities holding "plan assets"
(collectively, "Benefit Plan Investors"). No assurance can be given that the
value of the PEPS Units held by Benefit Plan Investors will be less than 25% of
the total value of such PEPS Units at the completion of the initial offering or
thereafter, and no monitoring or other measures will be taken with respect to
the satisfaction of the conditions to this exception. Certain transactions
involving the Trust could be deemed to constitute direct or indirect prohibited
transactions if the PEPS Units were acquired with "plan assets" and the assets
of the Trust were deemed to be "plan assets" of plans investing in the Trust.
The United States Department of Labor has issued prohibited transaction
class exemptions, "PTCEs", that may apply to the acquisition and holding of the
PEPS Units, as well as transactions involving the Trust. These class exemptions
include PTCE 84-14 (respecting transactions determined by independent qualified
professional asset managers), PTCE 90-1 (respecting insurance company pooled
separate accounts), PTCE 91-38 (respecting bank collective trust funds), PTCE
95-60 (respecting insurance company general accounts) and PTCE 96-23 (respecting
transactions determined by in-house asset managers).
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in nonexempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the PEPS
Units on behalf of or with "plan assets" of any plan consult with counsel
regarding the potential consequences if the assets of the Trust were deemed to
be "plan assets" or if the acquisition and holding of the PEPS Units constitutes
a prohibited transaction and failed to satisfy applicable fiduciary requirements
imposed under ERISA. Any purchaser or holder of the PEPS Units or any interest
therein will be deemed to have represented by its purchase and holding thereof
that it: (a) is not a Plan or an entity holding "plan assets" and is not
purchasing such securities on behalf of or with "plan assets" of any plan or (b)
is eligible for exemptive relief and satisfies the applicable fiduciary
requirements of ERISA.
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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, for whom Morgan Stanley & Co. Incorporated, Banc of America Securities
LLC and Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives, have severally agreed to purchase, and CMS and the Trust have
agreed to sell to them, severally, the number of PEPS Units indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME PEPS UNITS
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 3,960,000
Banc of America Securities LLC.............................. 3,080,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,760,000
---------
Total..................................................... 8,800,000
=========
</TABLE>
The underwriters are offering the PEPS Units subject to their acceptance of
the PEPS Units from CMS and the Trust and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the PEPS Units 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 PEPS Units offered by this prospectus supplement, other than
those covered by the over-allotment option described below, if any such PEPS
Units are taken.
The per PEPS Unit price of any PEPS Unit sold by the underwriters shall be
the initial public offering price listed on the cover page of this prospectus
supplement, in United States dollars, less an amount not greater than the per
PEPS Unit amount of the concession to dealers described below.
The underwriters initially propose to offer part of the PEPS Units 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 $.4725 per PEPS Unit under the public
offering price. After the initial offering of the PEPS Units, the offering price
and other selling terms may from time to time be varied by the representatives.
CMS and the Trust have granted to the underwriters an option, exercisable
for 30 days from the date of this prospectus supplement, to purchase up to an
additional 1,200,000 PEPS Units at the initial public offering price listed on
the cover page of this prospectus supplement, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with this offering. To the
extent the option is exercised, each underwriter will become obligated to
purchase approximately the same percentage of the additional PEPS Units as the
number set forth next to that underwriter's name in the preceding table bears to
the total number of PEPS Units set forth next to the names of all underwriters
in the preceding table. If the underwriters' over-allotment option is exercised
in full, the total price to the public would be $250,000,000, the total
underwriters' discounts and commissions would be $7,875,000 and the total
proceeds to CMS would be $242,125,000.
Prior to this offering, there has been no public market for the PEPS Units.
The PEPS Units have been approved for listing on the New York Stock Exchange
under symbol "CMS PrM". In order to meet one of the requirements for listing on
the New York Stock Exchange, the underwriters have undertaken to sell the PEPS
Units to a minimum of 400 beneficial owners.
CMS and the Trust, jointly and severally, have agreed, that during the
period beginning from the date of this prospectus supplement and continuing for
a period of 60 days after the date of this prospectus supplement, not to offer,
sell, contract to sell or otherwise dispose of any PEPS Units, trust preferred
securities or common stock or any other securities of the Company which are
substantially similar to the PEPS Units, including any guarantee of such
securities, or any securities convertible into or exchangeable for or
representing the right to receive any of the foregoing securities, other than
shares of common stock issuable upon conversion of the
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PEPS Units or pursuant to the Company's stock purchase plan, performance
incentive stock plan, employee stock ownership plan and employee savings and
incentive plan, without the prior written consent of the underwriters.
In order to facilitate the offering of the PEPS Units, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the PEPS Units, the trust preferred securities or CMS's common stock.
Specifically, the underwriters may over-allot in connection with the offering,
creating a short position in the PEPS Units for their own account. In addition,
to cover over-allotments or to stabilize the price of the PEPS Units, the trust
preferred securities or CMS's common stock, the underwriters may bid for, and
purchase, PEPS Units, the trust preferred securities or shares of CMS's common
stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
PEPS Units in the offering, if the syndicate repurchases previously distributed
PEPS Units 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 PEPS Units, the trust preferred securities or CMS's common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
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 and the Trust have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Opinions as to the legality of the PEPS Units will be rendered for CMS by
Michael D. Van Hemert, Assistant General Counsel for CMS. Skadden, Arps, Slate,
Meagher & Flom LLP will act as special counsel for the underwriters, special tax
counsel for CMS and special Delaware counsel for the Trust and CMS. As of March
31, 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 March 31, 2000, Mr. Van Hemert beneficially owned approximately
3,500 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.
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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> 86
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.
(l) To reflect the income tax expense effects of pro forma adjustment (j)
and (k) at an estimated rate of 35%.
F-2
<PAGE> 87
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 $.26 and $.25,
respectively, and Class G's basic and diluted earnings per share were increased
$3.31.
F-3
<PAGE> 88
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> 89
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.
(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-5
<PAGE> 90
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> 91
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> 92
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;
3
<PAGE> 93
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.
4
<PAGE> 94
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.
5
<PAGE> 95
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).
6
<PAGE> 96
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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