AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 2004
REGISTRATION NO. _________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
CMS ENERGY CORPORATION
(Exact name of registrant as specified in
its charter)
MICHIGAN
(State or other jurisdiction of
incorporation or organization)
38-2726431
(I.R.S. Employer Identification No.)
ONE ENERGY PLAZA
JACKSON, MICHIGAN 49201
(517) 788-0550
(Address, including zip code, and
telephone number, including area code, of
registrant's principal executive office)
THOMAS J. WEBB
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
CMS ENERGY CORPORATION
ONE ENERGY PLAZA
JACKSON, MICHIGAN 49201
(517) 788-1030
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
It is respectfully requested that the Commission send copies of all notices,
orders and communications to:
ROBERT C. SHROSBREE
ASSISTANT GENERAL COUNSEL
CMS ENERGY CORPORATION
ONE ENERGY PLAZA
JACKSON, MICHIGAN 49201
(517) 768-7323
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.
[ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE (1) REGISTRATION FEE
-------------------------------------- ------------ ------------------------- -------------------------- ----------------
4.50% Cumulative Convertible Preferred
Stock $250,000,000 100% $ 250,000,000 $ 31,675
==============================================================================================================================
(1) Estimated pursuant to Rule 457(f) of the Securities Act solely for the
purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
PROSPECTUS
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion dated September 24, 2004
[CMS ENERGY LOGO]
5,000,000 SHARES
CMS ENERGY CORPORATION
4.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK
(liquidation preference $50.00 per share)
We issued 5,000,000 shares of our 4.50% Cumulative Convertible Preferred
Stock (the "PREFERRED STOCK") in a private placement during the fourth quarter
of 2003. Under this prospectus, the selling securityholders named herein or in
any prospectus supplements hereto may offer and sell their shares of Preferred
Stock and the shares of our common stock issuable upon conversion thereof.
Each share of the Preferred Stock has a liquidation preference of $50.00
and is convertible into 5.0541 shares of our common stock based on a conversion
price of $9.893 per share, subject to specified adjustments. Each Holder of
Preferred Stock has the option to convert the Preferred Stock into our common
stock in the following circumstances: (1) the price of our common stock issuable
upon conversion reaches specified thresholds described in this prospectus; (2)
upon the occurrence of specified corporate transactions as described in this
prospectus; or (3) subject to certain exceptions, during the five Business Day
period after any ten consecutive trading-day period in which the trading price
per share of Preferred Stock for each day of the ten trading-day period was less
than 95% of the product of the closing sale price per share of our common stock
and the applicable conversion rate of such share of Preferred Stock. On or after
December 5, 2008, if the closing price of our common stock exceeds 130% of the
applicable conversion price for 20 trading days during any consecutive 30
trading-day period (including the last trading day of such period), we may at
our option cause the Preferred Stock to be automatically converted into shares
of our common stock at the then applicable conversion price.
The Preferred Stock is not redeemable by us at any time.
The annual dividend on each share of Preferred Stock is $2.25 and is
payable quarterly in cash, in arrears, on each March 1, June 1, September 1 and
December 1, commencing on December 1, 2004, when, as and if declared by the
Board of Directors.
Our common stock is listed on the New York Stock Exchange under the symbol
"CMS." The last reported price of the common stock on September 22, 2004 was
$9.39 per share.
The Preferred Stock is eligible for trading in the Private Offerings,
Resales and Trading through Automatic Linkages Market commonly referred to as
the Portal Market.
INVESTING IN THE PREFERRED STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 13.
We will not receive any of the proceeds from the sale by any of the
selling securityholders of the Preferred Stock or the shares of our common
stock. The Preferred Stock and the shares of our common stock may be offered in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices. The timing and amount of any sale are within the
sole discretion of the selling securityholders. In addition, our common stock
may be offered from time to time through ordinary brokerage transactions on the
New York Stock Exchange. See "Plan of Distribution." The selling securityholders
may be deemed to be "underwriters" as defined in the Securities Act of 1933, as
amended (the "SECURITIES ACT"). Any profits realized by the selling
securityholders may be deemed to be underwriting commissions. If the selling
securityholders use any broker-dealers, any commission paid to broker-dealers
and, if broker-dealers purchase any Preferred Stock or shares of common stock as
principals, any profits received by such broker-dealers on the resale of the
Preferred Stock or shares of common stock may be deemed to be underwriting
discounts or commissions under the Securities Act.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is September 24, 2004
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT OR TO MAKE ANY REPRESENTATIONS ABOUT US OR THE
TRANSACTIONS WE DISCUSS IN THIS PROSPECTUS. IF YOU RECEIVE INFORMATION ABOUT
THESE MATTERS THAT IS NOT INCLUDED IN THIS PROSPECTUS, YOU MUST NOT RELY ON THAT
INFORMATION. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF
THIS DOCUMENT.
TABLE OF CONTENTS
PAGE
----
Where You Can Find More Information............................................. 2
Forward-Looking Statements and Information...................................... 3
Summary......................................................................... 5
Risk Factors.................................................................... 13
Use of Proceeds................................................................. 22
Ratio of Earnings to Combined Fixed Charges and Preference Dividends............ 23
Price Range of Our Common Stock and Dividend Policy............................. 23
CMS Energy...................................................................... 24
Description of the Preferred Stock.............................................. 28
Description of our Capital Stock................................................ 40
Material United States Federal Income Tax Considerations........................ 47
Selling Securityholders......................................................... 51
Plan of Distribution............................................................ 53
Legal Matters................................................................... 55
Experts......................................................................... 55
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC under
File No. 1-9513. Our SEC filings are available over the Internet at the SEC's
web site at http://www.sec.gov. You may also read and copy any document we file
at the SEC's public reference room at 450 Fifth Street N.W., Room 1024,
Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms and their copy charges. You may also
inspect our SEC reports and other information at the New York Stock Exchange, 20
Broad Street, New York, New York 10005. You can find additional information
about us, including our Annual Report on Form 10-K/A for the year ended December
31, 2003 and our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2004 and June 30, 2004, on our Web site at http://www.cmsenergy.com. The
information on this Web site is not a part of this prospectus.
We are "incorporating by reference" information into this prospectus. This
means that we are disclosing important information by referring to another
document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this prospectus, except for any information
superseded by information in this prospectus. This prospectus incorporates by
reference the documents set forth below that we have previously filed with the
SEC. These documents contain important information about us and our finances.
- Annual Report on Form 10-K/A for the year ended December 31, 2003
filed on July 21, 2004
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
filed on May 7, 2004 and Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 filed on August 6, 2004
- Current Reports on Form 8-K filed on January 22, 2004, March 18,
2004, April 14, 2004, June 3, 2004, August 20, 2004, August 31, 2004
and September 1, 2004
2
The documents filed by us with the SEC pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 (the "EXCHANGE ACT") after
the date of this prospectus and prior to the termination of this offering are
also incorporated by reference into this prospectus.
We will provide, upon your oral or written request, a copy of any or all
of the information that has been incorporated by reference in this prospectus
but not delivered with this prospectus. You may request a copy of these filings
at no cost by writing or telephoning us at the following address:
CMS Energy Corporation
One Energy Plaza
Jackson, Michigan 49201
Tel: (517) 788-0550
Attention: Office of the Secretary
FORWARD-LOOKING STATEMENTS AND INFORMATION
This prospectus contains forward-looking statements as defined in Rule
3b-6 of the Exchange Act, as amended, Rule 175 of the Securities Act, as
amended, and relevant legal decisions. Our intention with the use of such words
as "may," "could," "anticipates," "believes," "estimates," "expects," "intends,"
"plans," and other similar words is to identify forward-looking statements that
involve risk and uncertainty. We designed this discussion of potential risks and
uncertainties to highlight important factors that may impact our business and
financial outlook. We have no obligation to update or revise forward-looking
statements regardless of whether new information, future events or any other
factors affect the information contained in the statements. These
forward-looking statements are subject to various factors that could cause our
actual results to differ materially from the results anticipated in these
statements. Such factors include our inability to predict and/or control:
- the efficient sale of non-strategic and under-performing domestic
and international assets and discontinuation of certain operations;
- capital and financial market conditions, including the current price
of our common stock and the effect on our pension plan, interest
rates and availability of financing to us, to Consumers Energy
Company ("CONSUMERS"), a wholly owned subsidiary, or any of their
affiliates and to the energy industry;
- ability to access the capital markets successfully;
- market perception of the energy industry, us and Consumers or any of
their affiliates;
- our and Consumers' or any of their affiliates' securities ratings;
- currency fluctuations, transfer restrictions and exchange controls;
- factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs or electric
transmission or gas pipeline system constraints;
- international, national, regional and local economic, competitive
and regulatory policies, conditions and developments;
- adverse regulatory or legal decisions, including environmental laws
and regulations;
- the impact of adverse natural gas prices on the Midland Cogeneration
Venture Limited Partnership (the "MCV PARTNERSHIP") investment,
regulatory decisions concerning the MCV Partnership resource
conservation plan ("RCP"), and regulatory decisions that limit our
recovery of capacity and fixed energy payments;
- federal regulation of electric sales and transmission of
electricity, including re-examination by federal regulators of the
market-based sales authorizations by which our subsidiaries
participate in wholesale power markets without price restrictions
and proposals by the Federal Energy Regulatory Commission ("FERC")
to change the way it currently lets our subsidiaries and other
public utilities and natural gas companies interact with each other;
3
- 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 lower or
higher demand, shortages, transportation problems or other
developments;
- potential disruption, expropriation or interruption of facilities or
operations due to accidents, war, terrorism, or changing political
conditions and the ability to obtain or maintain insurance coverage
for such events;
- nuclear power plant performance, decommissioning, policies,
procedures, incidents and regulation, including the availability of
spent nuclear fuel storage;
- technological developments in energy production, delivery and usage;
- achievement of capital expenditure and operating expense goals;
- changes in financial or regulatory accounting principles or
policies;
- outcome, cost, and other effects of legal and administrative
proceedings, settlements, investigations and claims, including
particularly claims, damages and fines resulting from round-trip
trading and inaccurate commodity price reporting, including an
investigation by the U.S. Department of Justice regarding round-trip
trading and price reporting;
- limitations on our ability to control the development or operation
of projects in which our subsidiaries have a minority interest;
- disruptions in the normal commercial insurance and surety bond
markets that may increase costs or reduce traditional insurance
coverage, particularly terrorism and sabotage insurance and
performance bonds;
- other business or investment considerations that may be disclosed
from time to time in our or Consumers' SEC filings or in other
publicly disseminated written documents; and
- other uncertainties, which are difficult to predict and many of
which are beyond our control.
The factors identified under "Risk Factors" on page 13 are also important
factors, but not necessarily all of the 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.
4
SUMMARY
This summary may not contain all the information that may be important to
you. You should read this prospectus to which we refer you to in their entirety
before making an investment decision. The terms "CMS," "CMS ENERGY," "OUR," "US"
and "WE" as used in this prospectus refer to CMS Energy Corporation and its
subsidiaries as a combined entity, except where it is made clear that such term
means only CMS Energy Corporation.
In this document, "bcf" means billion cubic feet, "gWh" means
gigawatt-hour, "kWh" means kilowatt-hour, "mmbbls" means million barrels, "mmcf"
means million cubic feet and "MW" means megawatts.
CMS ENERGY CORPORATION
CMS Energy, formed in Michigan in 1987, is an integrated energy holding
company operating through subsidiaries in the United States and in selected
markets around the world. Its two principal wholly owned subsidiaries are
Consumers and CMS Enterprises Company ("ENTERPRISES"). Consumers is a public
utility that provides natural gas and/or electricity to almost 6.5 million of
Michigan's 10 million residents and serves customers in 61 of the 68 counties in
Michigan's Lower Peninsula. Enterprises, through subsidiaries and equity
investments, is engaged in several energy businesses in the United States and in
selected international markets.
Our assets and services include: electric and natural gas utility
operations; independent power production; natural gas transmission, storage and
processing; and international energy distribution. Our principal businesses are:
- Consumers' electric utility, which owns and operates 30 electric
generating plants with an aggregate of 6,431 MW of capacity and
serves 1.77 million customers in Michigan's Lower Peninsula;
- Consumers' gas utility, which owns and operates over 27,463 miles of
transmission and distribution lines throughout the Lower Peninsula
of Michigan, providing natural gas to 1.67 million customers;
- CMS Generation Co. ("CMS GENERATION"), a wholly owned subsidiary of
Enterprises, that has ownership interests in independent power
plants with 6,766 gross MW (3,157 net MW) throughout the United
States and abroad. The plants are located in the U.S., Argentina,
Chile, Ghana, India, Jamaica, Morocco and the United Arab Emirates.
CMS Generation currently has ownership interests in the Shuweihat
power plant, which is under construction in the United Arab
Emirates, and the Saudi Petrochemical Company power plant, which is
in advanced development and will be located in the Kingdom of Saudi
Arabia. These plants total approximately 1,784 gross MW (420 net MW)
of electric generation; and
- CMS Gas Transmission Company ("CMS GAS TRANSMISSION"), is a wholly
owned subsidiary of Enterprises that owns an interest in and
operates natural gas pipelines in various locations in North and
South America. The pipelines are located in the U.S., Argentina and
Chile. It also owns gathering systems and processing facilities.
In 2003, we had consolidated operating revenue of approximately $5.5
billion.
RECENT DEVELOPMENTS
SECOND QUARTER 2004 RESULTS OF OPERATIONS
UNAUDITED, IN MILLIONS (EXCEPT FOR PER SHARE AMOUNTS)
-----------------------------------------------------
RESTATED
THREE MONTHS ENDED JUNE 30 2004 2003 CHANGE
----------------------------------------------------------------- ------ -------- ------
Net Income (Loss) Available to Common Stock...................... $ 16 $ (65) $ 81
Basic Earnings (Loss) Per Share Attributable to Common Stock..... $ 0.10 $ (0.45) $ 0.55
Diluted Earnings (Loss) Per Share Attributable to Common Stock... $ 0.10 $ (0.45) $ 0.55
Electric utility................................................. $ 27 $ 35 $ (8)
Gas utility...................................................... 1 5 (4)
Enterprises...................................................... 38 8 30
Corporate interest and other..................................... (50) (60) 10
Discontinued operations.......................................... - (53) 53
------ -------- ------
CMS Energy Net Income (Loss) Available to Common Stock .......... $ 16 $ (65) $ 81
====== ======== ======
5
For the three months ended June 30, 2004, our net income available to
common stock was $16 million, compared to a loss of $65 million for the three
months ended June 30, 2003. The $81 million increase in net income available to
common stock primarily reflects:
- the absence of a $53 million loss from discontinued operations
recorded in 2003, comprised mainly of the loss on the sale of
Panhandle Eastern Pipe Line Company and its subsidiaries
("PANHANDLE"),
- the absence of a $31 million deferred tax asset valuation reserve
established in 2003,
- an $11 million increase in mark-to-market valuation adjustments on
interest rate swaps and power contracts, and
- a $6 million reduction in funded benefits expense primarily due to
the postretirement benefit plans, other than pensions, for retired
employees ("OPEB") plans accounting for the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 and the positive
impact of prior year pension plan contributions on pension plan
asset returns.
These increases were partially offset by:
- the absence of a $30 million Michigan Single Business Tax refund
received in 2003, and
- a reduction in Consumers' net income resulting primarily from
industrial and commercial customers choosing different electricity
suppliers and decreased gas deliveries caused primarily by milder
weather.
UNAUDITED, IN MILLIONS (EXCEPT FOR PER SHARE AMOUNTS)
RESTATED
SIX MONTHS ENDED JUNE 30 2004 2003 CHANGE
--------------------------------------------------------------- ----- -------- ------
Net Income Available to Common Stock........................... $ 9 $ 17 $ (8)
Basic Earnings Per Share Attributable to Common Stock.......... $ 0.06 $ 0.12 $(0.06)
Diluted Earnings Per Share Attributable to Common Stock........ $ 0.06 $ 0.14 $(0.08)
Electric utility............................................... $ 75 $ 86 $ (11)
Gas utility.................................................... 57 59 (2)
Enterprises.................................................... (23) 29 (52)
Corporate interest and other................................... (98) (111) 13
Discontinued operations........................................ (2) (22) 20
Accounting changes.............................................
- (24) 24
------ -------- ------
CMS Energy Net Income Available to Common Stock................ $ 9 $ 17 $ (8)
====== ======== ======
For the six months ended June 30, 2004, CMS Energy's net income available
to common stock was $9 million, compared to net income available to common stock
of $17 million for the six months ended June 30, 2003. The $8 million change
reflects:
- an $81 million charge to earnings related to the sale of our Loy
Yang A power plant ("LOY YANG");
- the absence of a $30 million Michigan Single Business Tax refund
received in 2003; and
- a reduction in Consumers' net income resulting primarily from
industrial and commercial customers choosing different electricity
suppliers and decreased gas deliveries caused primarily by milder
weather.
These losses were partially offset by:
- the exclusion in 2004 of a $24 million charge for changes in
accounting that occurred in the first quarter of 2003;
- the absence of a $31 million deferred tax asset valuation reserve
established in 2003;
- the decrease of $20 million in the net loss from discontinued
operations resulting from the sale of Panhandle and other businesses
in 2003;
- a $31 million increase in mark-to-market valuation adjustments on
interest rate swaps and power contracts; and
- a $13 million reduction in funded benefits expense primarily due to
the OPEB plans accounting for the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 and the positive impact
of prior year pension plan contributions on pension plan asset
returns.
SALE OF AUSTRALIAN PIPELINES
On August 17, 2004, we sold our interests in a business located in
Australia comprised of a pipeline, processing facilities, and a gas storage
facility ("PARMELIA") and a pipeline business located in Australia in which we
held a 39.7% ownership interest ("GOLDFIELDS") to the Australian Pipeline Trust
("APT") for approximately $206 million Australian (approximately $147 million in
U.S. dollars).
6
SALE OF LOY YANG
In April 2004, we and our partners sold the 2,000-megawatt Loy Yang power
plant and adjacent coal mine located in Victoria, Australia for approximately
$3.5 billion Australian (approximately $2.6 billion in U.S. dollars), including
$145 million Australian for the project equity. We owned 49.6% of Loy Yang. NRG
Energy Inc. and Horizon Energy Australia Investments each owned about 25% of Loy
Yang. CMS Energy's share of the proceeds was approximately $44 million in U.S.
dollars, net of closing adjustments and transaction costs. We recognized an $81
million after-tax impairment charge in the first quarter of 2004, primarily
related to prior currency translation adjustments.
CONSOLIDATION OF THE MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP AND THE
FIRST MIDLAND LIMITED PARTNERSHIP
Under revised FASB Interpretation No. 46 "Consolidation of Variable
Interest Entities," we determined that we are the primary beneficiary of both
the MCV Partnership and the First Midland Limited Partnership ("FMLP"). We have
a 49% partnership interest in the MCV Partnership and a 46.4% partnership
interest in the FMLP. Consumers is the primary purchaser of power from the MCV
Partnership through a long-term power purchase agreement. In addition, the FMLP
holds a 75.5% lessor interest in the MCV Partnership's facility (the "MCV
FACILITY"), which results in Consumers holding a 35% lessor interest in the MCV
Facility. Collectively, these interests make us the primary beneficiary of these
entities. As such, we consolidated their assets, liabilities and activities into
our financial statements for the first time as of and for the quarter ended
March 31, 2004. These partnerships had third-party obligations totaling $728
million at June 30, 2004. Property, plant and equipment serving as collateral
for these obligations had a carrying value of $1.453 billion at June 30, 2004.
The creditors of these partnerships do not have recourse to the general credit
of CMS Energy.
RECENT FINANCINGS AND SECURITIES OFFERINGS
We have initiated several transactions with various financial
institutions, lenders, banks and others to provide liquidity:
- As of August 3, 2004, we obtained an amended and restated $300
million secured revolving credit facility to replace both our $190
million facility and $185 million letter of credit facility. The
amended facility carries a three-year term and provides for a lower
interest rate.
- As of August 3, 2004, Consumers obtained an amended and restated
$500 million secured revolving credit facility to replace its $400
million facility. The amended facility carries a three-year term and
provides for a lower interest rate.
- On August 17, 2004, Consumers issued $800 million of first mortgage
bonds (the "BONDS") in a private placement to institutional
investors in three separate series. The $150 million Series K Bonds
will mature on August 15, 2009 and will bear interest at the rate of
4.40%. The $300 million Series L Bonds will mature on February 15,
2012 and will bear interest at the rate of 5.00%. The $350 million
Series M Bonds will mature on August 15, 2016 and will bear interest
at the rate of 5.50%.
7
THE PREFERRED STOCK
Issuer............................................... CMS Energy Corporation
Securities Offered................................... 5,000,000 shares of 4.50% Cumulative Convertible Preferred Stock.
Dividends............................................ Cumulative annual dividends of $2.25 per share payable quarterly in cash,
in arrears, on each March 1, June 1, September 1 and December 1,
commencing December 1, 2004, when, as and if declared by the board of
directors. Dividends will be paid in arrears on the basis of a 360-day
year consisting of twelve 30-day months. Dividends on the Preferred Stock
will accumulate and be cumulative from the date of issuance thereof.
Accumulated unpaid dividends accrue and cumulate dividends at the annual
rate of 4.50%.
Liquidation Preference............................... $50.00 per share, plus accumulated and unpaid dividends.
Ranking.............................................. The Preferred Stock ranks with respect to dividend rights and rights upon
our liquidation, winding-up or dissolution:
- senior to all of our common stock and to all of our other
capital stock or series of preferred stock established after
the original issue date of the Preferred Stock issued in the
future unless the terms of that stock expressly provide that
it ranks on a parity with the Preferred Stock;
- on a parity with any of our capital stock or series of
preferred stock established after the original issue date of
the Preferred Stock issued in the future the terms of which
expressly provide that it will rank on a parity with the
Preferred Stock;
- junior to all our existing and future liabilities and obligations,
whether or not for borrowed money; and
- effectively junior to all of our subsidiaries' existing and future
liabilities and capital stock held by others.
Redemption........................................... Shares of the Preferred Stock are not redeemable by us.
Conversion Rights.................................... A person who is a holder of record of Preferred Stock (a "HOLDER") may
convert its shares of Preferred Stock at any time into shares of our
common stock under any of the following circumstances:
- during any calendar quarter (and only during such calendar quarter)
if the last reported sale price of our common stock for at least 20
trading days during the period of 30 consecutive trading days ending
on the last trading day of the previous calendar quarter is greater
than or equal to 120% of the applicable conversion price of the
Preferred Stock on such last trading day;
- upon the occurrence of specified corporate transactions described
under "Description of the Preferred Stock -- Conversion Rights --
Conversion Upon Specified Corporate Transactions"; or
- subject to certain exceptions, during the five Business Day (as
defined herein) period immediately following any ten consecutive
trading-day period in which the trading price per share of Preferred
Stock for each day of that period was less than 95% of the product
of the closing sale price of
8
our common stock and the applicable conversion rate of such share of
Preferred Stock; provided, however, a Holder may not convert its
shares of Preferred Stock if the average closing sale price of our
common stock for such ten consecutive trading-day period was between
the then applicable conversion price of the Preferred Stock and 120%
of the then applicable conversion price of the Preferred Stock.
For each share of Preferred Stock surrendered for conversion, Holders
will receive 5.0541 shares of our common stock, which is the initial
conversion rate. This represents an initial conversion price of $9.893
per share of common stock. As described in this prospectus, the
conversion rate may be adjusted for certain reasons, including the
payment by us of dividends on our common stock, but it will not be
adjusted for accumulated and unpaid dividends on the Preferred Stock.
Except as otherwise described in this prospectus, Holders will not
receive any payment representing accumulated and unpaid dividends upon
conversion of their Preferred Stock; however, we will continue to pay
additional dividends, if any, on the Preferred Stock and our common
stock issuable upon conversion thereof to the Holder in accordance with
the registration rights agreement.
Mandatory Conversion................................. On or after December 5, 2008, we may, at our option, cause the Preferred
Stock to be automatically converted into that number of shares of our
common stock for each share of Preferred Stock equal to $50.00 (the
liquidation preference) divided by the applicable conversion price. We may
exercise our conversion right only if, for 20 trading days within any
period of 30 consecutive trading days (including the last trading day of
such 30-day period), the closing price of our common stock exceeds 130% of
the then applicable conversion price of the Preferred Stock.
Fundamental Change................................... If we undergo a Fundamental Change (as defined under "Description of the
Preferred Stock -- Fundamental Change Requires Purchase of Preferred Stock
by Us at the Option of the Holder"), Holders will have the right at their
option, subject to the terms of the certificate of designation, to require
us to purchase any or all of their Preferred Stock for cash. The cash
price we are required to pay is equal to 100% of the liquidation
preference of the Preferred Stock to be purchased plus accumulated and
unpaid dividends, and additional dividends owed, if any, to the
Fundamental Change purchase date. See "Description of the Preferred Stock
-- Fundamental Change Requires Purchase of Preferred Stock by Us at the
Option of the Holder."
Voting Rights........................................ Except as required by Michigan law and our Restated Articles of
Incorporation ("ARTICLES OF INCORPORATION"), which include the certificate
of designation for the Preferred Stock, the Holders of Preferred Stock
have no voting rights unless dividends payable on the Preferred Stock are
in arrears for six or more quarterly periods (whether or not consecutive).
In that event, the Holders of the Preferred Stock, voting as a single
class with the shares of any other preferred stock or preference
securities having similar voting rights that are exercisable, will be
entitled at the next regular or special meeting of our stockholders to
elect two additional directors (or one director if fewer than six
directors comprise our board prior to appointment) and the number of
directors that comprise our board will be increased by the number of
directors so elected. These voting rights and the terms of the directors
so elected will continue until such time as the dividend arrearage on the
Preferred Stock has been paid in full.
Form of Preferred Stock.............................. One or more global securities held in the name of DTC.
9
Use of Proceeds...................................... We will not receive any of the proceeds from sales of any of the
securities covered by this prospectus by the selling securityholders.
Common Stock......................................... Our common stock is listed on the New York Stock Exchange under the symbol
"CMS."
Absence of a Public Market........................... The Preferred Stock is not listed on any securities exchange or included
in any automated quotation system. The Preferred Stock is eligible for
trading in the Portal Market; however, no assurance can be given as to the
liquidity of or trading market for the Preferred Stock.
Tax Consequences..................................... The U.S. federal income tax consequences of purchasing, owning and
disposing of the Preferred Stock and any of our common stock received upon
its conversion are described in "Certain United States Federal Income Tax
Considerations." Prospective investors are urged to consult their own tax
advisors regarding the tax consequences of purchasing, owning and
disposing of the Preferred Stock and any of our common stock received upon
conversion thereof in light of their personal investment circumstances,
including consequences resulting from the possibility that actual or
constructive distributions on the Preferred Stock may exceed our current
and accumulated earnings and profits, as calculated for U.S. federal
income tax purposes, in which case they would not be treated as dividends
for U.S. federal income tax purposes.
Risk Factors......................................... An investment in the Preferred Stock involves certain risks that a
potential investor should carefully evaluate prior to making an investment
in the Preferred Stock. See "Risk Factors."
10
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from our audited
consolidated financial statements, which have been audited by Ernst & Young LLP,
independent registered public accounting firm, for the fiscal years ended
December 31, 2003, 2002, 2001 and 2000, except for amounts included from the
financial statements of the MCV Partnership and Jorf Lasfar Energy Company
S.C.A. ("JORF LASFAR") and by Arthur Andersen LLP, independent accountants (who
have ceased operations), for the fiscal year ended December 31, 1999. The MCV
Partnership represents an investment accounted for under the equity method of
accounting through December 31, 2003, which was audited by another independent
registered public accounting firm (the other auditors for 2001 and 2000 have
ceased operations), for the fiscal years ended December 31, 2003, 2002, 2001,
2000 and 1999. Jorf Lasfar represents an investment accounted for under the
equity method of accounting, which was audited by another independent registered
public accounting firm for the fiscal years ended December 31, 2003, 2002, 2001,
2000 and 1999. The following selected consolidated financial data for the six
months ended June 30, 2004 and 2003 have been derived from our unaudited
consolidated financial statements. Please refer to our financial statements for
the fiscal year ended December 31, 2003 and for the quarter ended June 30, 2004,
which are each incorporated by reference herein. The financial information set
forth below should be read in conjunction with our consolidated financial
statements, related notes and other financial information that is incorporated
by reference herein. Operating results for the six months ended June 30, 2004
are not necessarily indicative of results that may be expected for the entire
year ending December 31, 2004. See "Where You Can Find More Information."
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------
2004(a) 2003 2003 2002 2001 2000 1999
--------- -------- ------ ------- -------- -------- --------
(UNAUDITED, DOLLARS
IN MILLIONS
EXCEPT PER SHARE (DOLLARS IN MILLIONS
AMOUNTS) EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Operating revenue..................... $ 2,847 $ 3,094 $ 5,513 $ 8,673 $ 8,006 $ 6,623 $ 5,114
Earnings from equity method
investees............................. 60 97 164 92 172 213 136
Operating expenses.................... 2,614 2,779 5,082 8,690 8,027 6,342 4,549
Operating income...................... 293 412 595 75 151 494 701
Income (loss) from continuing
operations.......................... 17 63 (43) (394) (327) (85) 191
Net income (loss) available to
common shareholder.................... $ 9 $ 17 $ (44) $ (650) $ (459) $ 5 $ 277
======== ======== ======= ======= ======== ======== ========
Earnings per average common share:
Income (loss) from continuing
operations
Basic............................... $ 0.07 $ 0.43 $ (0.30) $ (2.84) $ (2.50) $ (0.76) $ 1.66
Income (loss) from continuing
operations
Diluted............................. 0.07 0.43 (0.30) (2.84) (2.50) (0.76) 1.66
CMS Energy Basic Net Income (Loss)
attributable to Common Stock.......... 0.06 0.12 (0.30) (4.68) (3.51) 0.04 2.18(i)
CMS Energy Diluted Net Income
(Loss) attributable to Common Stock... 0.06 0.14 (0.30) (4.68) (3.51) 0.04 2.17(i)
Dividends declared per average
common share:
CMS Energy............................ $ -- $ -- $ -- $ 1.09 $ 1.46 $ 1.46 $ 1.39
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 696 $ 917 $ 532 $ 351 $ 123 $ 143 $ 132
Restricted cash....................... 213 205 201 38 4 -- --
Net plant and property(a)............. 8,528 6,674 6,944 6,103 6,703 6,316 8,995
Total assets.......................... 15,307 13,939 13,838 14,781 17,633 17,801 16,336
Long-term debt, including current
Maturities(a)......................... 6,676 6,594 6,529 5,990 6,846 6,271 7,503
Long-term debt - related parties...... 684 -- 684 -- -- -- --
Non-current portion of capital
leases................................ 338 119 58 116 71 49 88
Notes payable......................... -- -- -- 458 416 403 230
Other liabilities..................... 4,862 5,120 4,604 6,174 7,008 7,486 4,924
Minority interest..................... 740 43 73 38 43 82 222
Company-obligated mandatorily
redeemable trust preferred
securities of subsidiaries (b)...... -- 393 -- 393 694 694 474
Company obligated trust preferred
securities of Consumers'
subsidiaries (b).................... -- 490 -- 490 520 395 395
11
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- -----------------------
2004 2003 2003 2002 2001 2000 1999
--------- ------ --------- -------- -------- ------ -------
(UNAUDITED, DOLLARS
IN MILLIONS
EXCEPT PER SHARE (DOLLARS IN MILLIONS
AMOUNTS) EXCEPT PER SHARE AMOUNTS)
Preferred stock.................. 261 -- 261 -- -- -- --
Preferred stock of subsidiary.... $ 44 $ 44 $ 44 $ 44 $ 44 $ 44 $ 44
Common stockholders' equity...... 1,702 1,136 1,585 1,078 1,991 2,377 2,456
OTHER DATA:
Cash Flow:
Provided by (Used in) operating $ 481 $ 147 $ (251) $ 614 $ 372 $ 600 $ 917
activities
Provided by (Used in) investing (214) 292 203 829 (1,349) (1,220) (3,564)
activities
Provided by (Used in) financing (276) 125 230 (1,223) 967 629 2,678
activities
Ratio of earnings to combined
fixed charges and preference
dividends (c)................... --(d) 1.13 --(e) --(f) --(g) --(h) 1.28
(a) Under revised FASB Interpretation No. 46 "Consolidation of Variable Interest
Entities," we are the primary beneficiary of the MCV Partnership and the
FMLP. As a result, we have consolidated their assets, liabilities, and
activities into our financial statements for the first time as of and for
the quarter ended March 31, 2004. These partnerships have third-party
obligations totaling $728 million at June 30, 2004. Property, plant, and
equipment serving as collateral for these obligations has a carrying value
of $1.453 billion at June 30, 2004.
(b) CMS Energy and Consumers each formed various statutory wholly owned business
trusts for the sole purpose of issuing preferred securities and lending the
gross proceeds to the parent companies. The sole assets of the trusts are
debentures of the parent company with terms similar to those of the
preferred securities. As a result of the adoption of FASB Interpretation No.
46 on December 31, 2003, we deconsolidated the trusts that hold the
mandatorily redeemable trust preferred securities. Therefore, $490 million,
previously reported by us as Company-obligated mandatorily redeemable trust
preferred securities of subsidiaries, plus $16 million owed to the trusts
and previously eliminated in consolidation, is now included in the balance
sheet as Long-term debt - related parties. Additionally, $173 million,
previously reported by us as Company-obligated convertible trust preferred
securities of subsidiaries, plus $5 million owed to the trusts and
previously eliminated in consolidation, is now included in the balance sheet
as Long-term debt - related parties.
(c) For the purpose of computing the ratio, earnings represents the sum of
income from continuing operations before income taxes and income from equity
method investees, net interest charges and preferred dividends of
subsidiary, the estimated interest portion of lease rentals and distributed
income of equity method investees.
(d) For the six months ended June 30, 2004, combined fixed charges and
preference dividends exceeded earnings by $47 million. Earnings as defined
include $125 million of asset impairment charges.
(e) For the year ended December 31, 2003, combined fixed charges and preference
dividends exceeded earnings by $59 million. Earnings as defined include $95
million of asset impairment charges.
(f) For the year ended December 31, 2002, combined fixed charges and preference
dividends exceeded earnings by $472 million. Earnings as defined include
$602 million of asset impairment charges.
(g) For the year ended December 31, 2001, combined fixed charges and preference
dividends exceeded earnings by $392 million. Earnings as defined include
$323 million of asset impairment charges.
(h) For the year ended December 31, 2000, combined fixed charges and preference
dividends exceeded earnings by $224 million. Earnings as defined include a
$329 million pretax impairment loss on the Loy Yang investment.
(i) Reflects the reallocation of net income and earnings per share as a result
of the premium on exchange of Class G Common Stock. As a result, CMS
Energy's basic and diluted earnings per share were reduced $0.26 and $0.25,
respectively, and Class G Common Stock's basic and diluted earnings per
share were increased $3.31.
12
RISK FACTORS
Before purchasing any of our securities offered by this prospectus, you
should carefully consider the following risk factors, as well as the other
information contained or incorporated by reference in this prospectus.
RISKS RELATING TO CMS ENERGY
WE DEPEND ON DIVIDENDS FROM OUR SUBSIDIARIES TO MEET OUR DEBT SERVICE
OBLIGATIONS. IF WE DO NOT RECEIVE ADEQUATE DIVIDENDS OR DISTRIBUTIONS FROM OUR
SUBSIDIARIES, WE MAY NOT BE ABLE TO PAY DIVIDENDS ON THE PREFERRED STOCK.
Due to our holding company structure, we depend on dividends from our
subsidiaries to meet our debt obligations, including the payment of any
dividends on the Preferred Stock. None of these entities are or will be
obligated to pay any dividends on the Preferred Stock. Therefore, payment of
dividends on the Preferred Stock is effectively subordinated to the payment of
interest, principal and preferred distributions on the debt, preferred
securities and other liabilities of Consumers and Enterprises and each of their
subsidiaries.
On June 2, 2003, the Michigan Public Service Commission ("MPSC") issued a
financing order authorizing the issuance of $554 million of securitization
bonds. The order would prohibit Consumers from paying any extraordinary
dividends to us until further order of the MPSC. Pursuant to the order,
extraordinary dividends are considered any amount over and above Consumers'
earnings. On July 1, 2003, Consumers filed a petition for rehearing and
clarification of certain portions of the order with the MPSC, including the
portion dealing with dividend restrictions. In December 2003, the MPSC issued
its order on rehearing, which rejected our requests for rehearing and
clarification and remanded the proceeding to the administrative law judge
("ALJ") for additional proceedings. In March 2004, the ALJ conducted the
remanded hearings and the matter is presently before the MPSC awaiting a
decision.
In December 2003, the MPSC issued an order granting interim gas rate
relief in the amount of $19.34 million annually. In connection with this rate
relief, Consumers agreed to limit its dividends to CMS Energy to a maximum of
$190 million annually during the period in which Consumers receives the interim
relief. The MPSC stated in its order that it was not determining at that time
whether dividend restrictions should continue after the issuance of a final
order.
Restrictions contained in Consumers' preferred stock provisions and other
legal restrictions limit Consumers' ability to pay dividends or acquire its own
stock from us. As of June 30, 2004, the most restrictive provisions in its
financing documents allowed Consumers to pay an aggregate of $300 million in
dividends to us during any year.
For additional information concerning restrictions on Consumers' ability
to pay dividends to us, see "Description of Our Capital Stock -- Primary Source
of Funds of CMS Energy; Restrictions on Sources of Dividends."
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT OUR FINANCIAL
FLEXIBILITY AND HENCE OUR ABILITY TO PAY DIVIDENDS ON THE PREFERRED STOCK.
As of June 30, 2004, we had outstanding approximately $3.2 billion
aggregate principal amount of indebtedness, including approximately $178 million
of subordinated indebtedness relating to our convertible preferred securities
and $506 million of subordinated indebtedness relating to Consumers' mandatorily
redeemable trust preferred securities but excluding approximately $4.5 billion
of indebtedness of our subsidiaries. All of such indebtedness would be senior to
the Preferred Stock. In August 2004, we entered into the Fifth Amended and
Restated Credit Agreement in the amount of approximately $300 million. This
facility is secured and the Preferred Stock would be effectively junior to such
indebtedness to the extent of the security pledged therefore. As of August 17,
2004, there were approximately $164 million of letters of credit outstanding
under the Fifth Amended and Restated Credit Agreement. We and our subsidiaries
may incur additional indebtedness in the future.
The level of our present and future indebtedness could have several
important effects on our future operations, including, among others:
- a significant portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness and will not be available for other purposes;
- covenants contained in our existing debt arrangements require us to
meet certain financial tests, which may affect our flexibility in
planning for, and reacting to, changes in our business;
13
- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, and 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 pay dividends on the Preferred Stock, 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 additional assets or obtain additional
financings. We also plan to refinance a substantial amount of our indebtedness
prior to its maturity. 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.
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 HAVE FINANCING NEEDS AND WE MAY BE UNABLE TO SUCCESSFULLY ACCESS BANK
FINANCING OR THE CAPITAL MARKETS.
As of June 30, 2004, we had approximately $395 million of debt maturities
in 2004 and 2005 excluding subsidiaries. These maturities include: approximately
$176 million of senior notes due in November 2004; $180 million of senior notes
due in January 2005; and approximately $39 million of general term notes that
mature at various times in 2004 and 2005. In addition, we expect to incur
significant costs for future environmental regulation compliance, especially
compliance with clean air laws. See "We could incur significant capital
expenditures to comply with environmental standards and face difficulty in
recovering these costs on a current basis" below. As of June 30, 2004 we had
incurred $489 million in capital expenditures to comply with these regulations
and future capital expenditures may total approximately $282 million between
2004 and 2009. We could also become subject to liquidity demands pursuant to
commercial commitments under guarantees, indemnities and letters of credit.
After giving effect to recent issuances of securities, along with asset sales,
capital markets or bank financing and cash flow from operations, we believe, but
can make no assurance, that we will have sufficient liquidity to meet our debt
maturities through 2005. Management is actively pursuing plans to refinance debt
and to sell assets. There can be no assurances that this business plan will be
successful and failure to achieve its goals could have a material adverse effect
on our liquidity and operations.
We continue to explore financing opportunities to supplement our financial
plan. These potential opportunities include: refinancing our bank credit
facilities; entering into leasing arrangements and/or vendor financing;
refinancing and issuing new capital markets debt, preferred and/or common
equity; and negotiating private placement debt. We cannot guarantee the capital
market's acceptance of our securities or predict the impact of factors beyond
our control, such as actions of rating agencies. If we are unable to access bank
financing or the capital markets to incur or refinance indebtedness, there could
be a material adverse effect upon our liquidity and operations.
Standard & Poor's Ratings Group, a division of The McGraw Hill Companies,
Inc. ("S&P"), has assigned the Preferred Stock a rating of B, Moody's Investors
Service, Inc. has assigned the Preferred Stock a rating of Ca and Fitch, Inc.
has assigned the Preferred Stock a rating of B--. We cannot assure you that
these credit ratings will remain in effect for any given period of time or that
one or more of these ratings will not be lowered or withdrawn entirely by a
rating agency. We note that these credit ratings are not recommendations to buy,
sell or hold our securities. Each rating should be evaluated independently of
any other rating. Any future reduction or withdrawal of one or more of our
credit ratings could have a material adverse impact on our ability to access
capital on acceptable terms. We cannot assure you that any of our current
ratings or those of our affiliates, including Consumers, will remain in effect
for any given period of time or that a rating will not be lowered or withdrawn
entirely by a rating agency.
Consumers accesses debt and other capital from various sources and carries
its own credit ratings. Any downgrade or other event negatively affecting the
credit ratings of Consumers could make its cost of borrowing higher or access to
funding sources more limited, which in turn could increase the need of CMS
Energy to provide liquidity in the form of capital contributions or loans, thus
reducing the liquidity and borrowing availability of the consolidated group.
Further, any adverse developments relating to Consumers,
14
which provides dividends to us, that result in a lowering of Consumers' credit
ratings could have an adverse effect on our credit ratings. Any lowering of the
ratings on the Preferred Stock would likely reduce the market value of the
Preferred Stock.
WE MAY BE ADVERSELY AFFECTED BY A REGULATORY INVESTIGATION AND LAWSUITS
REGARDING "ROUND TRIP" TRADING BY ONE OF OUR SUBSIDIARIES AS WELL AS CIVIL
LAWSUITS REGARDING PRICING INFORMATION THAT TWO OF OUR AFFILIATES PROVIDED TO
MARKET PUBLICATIONS.
As a result of round trip trading transactions at CMS Marketing Services
and Trading Company ("CMS MST"), we are under investigation by the United States
Department of Justice. We have received subpoenas from U.S. Attorneys Offices
regarding investigations of those trades. CMS Energy and Consumers have also
been named in numerous class action lawsuits by individuals who allege that they
purchased CMS Energy securities during a purported class period. These
complaints generally seek unspecified damages based on allegations that the
defendants violated United States securities laws and regulations by making
allegedly false and misleading statements about the company's business and
financial condition. The cases have been consolidated into a single lawsuit and
an amended and consolidated complaint was filed on May 1, 2003. The judge issued
an opinion and order dated March 31, 2004 in connection with various pending
motions, including the plaintiffs' motion to amend the complaint and the motions
to dismiss the complaint filed by us, Consumers and other defendants. The judge
directed the plaintiffs to file an amended complaint under seal and ordered an
expedited hearing on the motion to amend, which was held on May 12, 2004. At the
hearing, the judge ordered the plaintiffs to file an amended complaint deleting
certain counts related to purchasers of CMS Energy-related securities, which the
judge ordered dismissed with prejudice. The plaintiffs filed this complaint on
May 26, 2004. We, Consumers and the individual defendants filed new motions to
dismiss on June 21, 2004. A hearing on those motions occurred on August 2, 2004
and the judge has taken the matter under advisement.
Our Board of Directors has received a demand on behalf of a shareholder of
CMS Energy to commence civil actions (i) to remedy alleged breaches of fiduciary
duties by CMS Energy officers and directors in connection with round trip
trading at CMS MST and (ii) to recover damages sustained by CMS Energy as a
result of alleged insider trades alleged to have been made by certain current
and former officers of CMS Energy and its subsidiaries. In December 2002, two
new directors were appointed to our Board of Directors. A special litigation
committee was formed by the Board of Directors in January 2003 to determine
whether it is in the best interest of CMS Energy to bring the action demanded by
the shareholder. The disinterested members of the Board of Directors appointed
the two new directors to serve on the special litigation committee.
On December 2, 2003, during the continuing review by the special
litigation committee, we were served with a derivative complaint filed by the
shareholder in the Circuit Court of Jackson County, Michigan in furtherance of
his demands. The date for CMS Energy and other defendants to answer or otherwise
respond to the complaint was extended to December 1, 2004, subject to such
further extensions as may be mutually agreed upon by the parties and authorized
by the court.
We have notified appropriate regulatory and governmental agencies that
some employees at CMS MST and CMS Field Services, Inc. (now Cantera Gas Company)
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
Energy is cooperating with an investigation by the United States Department of
Justice regarding this matter. On November 25, 2003, the CFTC issued a
settlement order regarding this matter. CMS MST and CMS Field Services, Inc.
agreed to pay a fine to the CFTC totaling $16 million. In the settlement, CMS
Energy neither admits nor denies the findings of the CFTC in the settlement
order.
We have also been named as a defendant in several gas industry civil
lawsuits regarding inaccurate gas trade reporting that include a lawsuit
alleging violation of the Commodities Exchange Act and certain antitrust laws.
We cannot predict the outcome of the United States Department of Justice
investigation and the lawsuits. It is possible that the outcome in one or more
of the investigation or the lawsuits could adversely affect our financial
condition, liquidity or results of operations.
WE MAY BE NEGATIVELY IMPACTED BY THE RESULTS OF AN EMPLOYEE BENEFIT PLAN
LAWSUIT.
We are a defendant, along with Consumers, CMS MST and certain named and
unnamed officers and directors, in two lawsuits brought as purported class
actions on behalf of participants and beneficiaries of our 401(k) plan. The two
cases, filed in July 2002 in the United States District Court for the Eastern
District of Michigan, were consolidated by the trial judge and an amended and
consolidated complaint has been filed. Plaintiffs allege breaches of fiduciary
duties under the Employee Retirement Income Security Act of 1974 ("ERISA") and
seek restitution on behalf of the plan with respect to a decline in value of the
shares of our common stock held in the plan. The plaintiffs also seek other
equitable relief and legal fees. The judge issued an opinion and order dated
March 31, 2004 in connection with the motions to dismiss filed by us, Consumers
and the individuals. The judge dismissed certain of the
15
amended counts in the plaintiffs' complaint and denied our motion to dismiss the
other claims in the complaint. We, Consumers and the individual defendants filed
answers to the amended complaint on May 14, 2004. A trial date has not been set,
but is expected to be no earlier than late in 2005.
We cannot predict the outcome of the ERISA litigation and it is possible
that an adverse outcome in this lawsuit could adversely affect our financial
condition, liquidity or results of operations.
REGULATORY CHANGES AND OTHER DEVELOPMENTS HAVE RESULTED AND WILL CONTINUE TO
RESULT IN INCREASED COMPETITION IN OUR DOMESTIC ENERGY BUSINESS. GENERALLY,
INCREASED COMPETITION THREATENS OUR MARKET SHARE IN CERTAIN SEGMENTS OF OUR
BUSINESS AND CAN REDUCE OUR PROFITABILITY.
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 open access in the State of Michigan.
Pursuant to the Customer Choice Act, as of January 1, 2002, all electric
customers have the choice of buying electric generation service from an
alternative electric supplier. We continue to lose industrial and commercial
customers to other electric suppliers without receiving compensation for
stranded costs caused by the lost sales. As of July 2004, we had lost 858 MW or
11% of our electric generation business to these alternative electric suppliers.
We expect the loss to be in the range of 900 MW to 1,100 MW by year-end 2004. We
cannot predict the total amount of electric supply load that we may lose to
competitor suppliers in the future.
ELECTRIC INDUSTRY REGULATION COULD ADVERSELY AFFECT OUR BUSINESS,
INCLUDING OUR ABILITY TO RECOVER OUR EXPENSES FROM OUR CUSTOMERS.
Federal and state regulation of electric utilities 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.
In June 2000, the Michigan Legislature enacted the Customer Choice Act
that became effective June 5, 2000. Pursuant to the Customer Choice Act:
- residential rates were reduced by 5% and then capped through at
least December 31, 2005; and
- small commercial and industrial customer rates were capped through
at least December 31, 2004.
Ultimately, the rate caps could extend until December 31, 2013 depending
upon whether or not Consumers exceeds the market power supply test established
by the legislation (a requirement that Consumers believes itself to be in
compliance with at this time). Under circumstances specified in the Customer
Choice Act, certain costs can be deferred for future recovery after the
expiration of the rate cap period. The rate caps could, however, result in
Consumers being unable to collect customer rates sufficient to fully recover its
cost of conducting business. Some of these costs may be beyond Consumers'
ability to control. In particular, if Consumers needs to purchase power supply
from wholesale suppliers during the period when retail rates are frozen or
capped, the rate restrictions imposed by the Customer Choice Act may make it
impossible for Consumers to fully recover the cost of purchased power and
associated transmission costs through the rates it charges its customers. As a
result, it is not certain that Consumers can maintain its profit margins in its
electric utility business during the period of the rate freeze or rate caps.
There are multiple proceedings pending before FERC involving transmission
rates, regional transmission organizations and standard market design for
electric bulk power markets and transmission. We cannot predict the impact of
these electric industry-restructuring proceedings on our financial position,
liquidity or results of operations.
PENDING UTILITY LEGISLATION IN MICHIGAN MAY AFFECT US IN WAYS WE CANNOT
PREDICT.
In July 2004, as a result of legislative hearings, several bills were
introduced into the Michigan Senate that could change Michigan's Customer Choice
Act. The proposals include:
- requiring that rates be based on cost of service;
- establishing a defined Stranded Cost calculation method;
- allowing customers who stay with or switch to alternative electric
suppliers after December 31, 2005 to return to utility services, and
requiring them to pay current market rates upon return;
16
- establishing reliability standards that all electric suppliers must
follow;
- requiring utilities and alternative suppliers to maintain a 15%
power reserve margin;
- creating a service charge to fund the Low Income and Energy
Efficiency Fund;
- giving kindergarten through twelfth-grade schools a discount of 10%
to 20% on electric rates; and
- authorizing a service charge payable by all customers for meeting
Clean Air Act requirements.
Although we do not believe the terms of the pending bills would have a
material adverse effect on our business, the final form of any new utility
legislation may differ from the pending bills. We cannot predict whether these
or other measures will be enacted into law or their potential effect on us.
OUR ABILITY TO RECOVER OUR "NET" STRANDED COSTS IS UNCERTAIN AND MAY
AFFECT OUR FINANCIAL RESULTS.
The Customer Choice Act allows for the recovery, by an electric utility,
of the cost of implementing that Act's requirements and "net" Stranded Costs,
without defining the term. According to the MPSC, "net" Stranded Costs are to be
recovered from retail open access customers through a Stranded Cost transition
charge.
In 2002 and 2001, the MPSC issued orders finding that Consumers
experienced zero "net" Stranded Costs from 2000 to 2001. The MPSC also declined
to resolve numerous issues regarding the "net" Stranded Cost methodology in a
way that would allow a reliable prediction of the level of Stranded Costs for
future years. Consumers is currently in the process of appealing these orders
with the Michigan Court of Appeals and the Michigan Supreme Court.
In March 2003, Consumers filed an application with the MPSC seeking
approval of "net" Stranded Costs incurred in 2002 and for approval of a "net"
Stranded Cost recovery charge. In the application, Consumers' "net" Stranded
Costs incurred in 2002, including the cost of money, are estimated to be
approximately $47 million with the issuance of securitization bonds that include
Clean Air Act investments, or approximately $104 million without the issuance of
securitization bonds that include Clean Air Act investments. In July 2004, the
ALJ issued a proposal for decision in Consumers' 2002 "net" Stranded Cost case,
which recommended that the MPSC find that Consumers incurred "net" Stranded
Costs of $12 million. This recommendation includes the cost of money through
July 2004 and excludes Clean Air Act investments.
In April 2004, Consumers filed an application with the MPSC seeking
approval of "net" Stranded Costs incurred in 2003. Consumers also requested
interim relief for 2003 "net" Stranded Costs. In July 2004, Consumers revised
its request for approval of 2003 Stranded Costs incurred, including the cost of
money, to $69 million with the issuance of Securitization bonds that include
Clean Air Act investments, or $128 million without the issuance of
Securitization bonds that include Clean Air Act investments. The MPSC has
scheduled hearings for Consumers' 2003 Stranded Cost application for August
2004. In July 2004, the MPSC staff issued a position on Consumers' 2003 "net"
Stranded Cost application, which resulted in a Stranded Cost calculation of $52
million. The amount includes the cost of money, but excludes Clean Air Act
investments. We cannot predict how the MPSC will rule on Consumers' requests for
recoverability of 2002 and 2003 Stranded Costs or whether the MPSC will adopt a
Stranded Cost recovery method that will offset fully any associated margin loss
from retail open access.
We cannot predict the ability of Consumers to recover its "net" Stranded
Costs, including costs related to electric utility restructuring, and failure to
recover those "net" Stranded Costs could adversely affect our financial
condition.
WE COULD INCUR SIGNIFICANT CAPITAL EXPENDITURES TO COMPLY WITH
ENVIRONMENTAL STANDARDS AND FACE DIFFICULTY IN RECOVERING THESE COSTS ON A
CURRENT BASIS.
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.
In 1998, the Environmental Protection Agency ("EPA") issued regulations
requiring the State of Michigan to further limit nitrogen oxide emissions at our
coal-fired electric plants. The EPA and the State of Michigan regulations
require us to make significant capital expenditures estimated to be $771
million. As of June 30, 2004, Consumers has incurred $489 million in capital
17
expenditures to comply with the EPA regulations and anticipates that the
remaining $282 million of capital expenditures will be incurred between 2004 and
2009. Additionally, Consumers currently expects it will supplement its
compliance plan with the purchase of nitrogen oxide emissions credits for the
years 2004 through 2008. The cost of these credits based on the current market
is estimated to average $8 million per year; however, the market for nitrogen
oxide emissions credits and their price could change substantially. As new
environmental standards become effective, Consumers will need additional capital
expenditures to comply with the standards.
Based on the Customer Choice Act, beginning January 2004 an annual return
of and on these types of capital expenditures, to the extent they are above
depreciation levels, is expected to be recoverable from customers, subject to an
MPSC prudency hearing.
The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seek modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants and potentially pay fines.
These and other required environmental expenditures, if not recovered from
customers in Consumers' rates, may require us to seek significant additional
financing to fund such expenditures and could strain our cash resources.
OUR PLANNED ASSET SALES MAY NOT BE ACHIEVED OR MAY RESULT IN ADDITIONAL
ACCOUNTING CHARGES.
We are executing an ongoing asset sales program encompassing the sale of
non-strategic and under-performing assets, the proceeds of which are being and
will be used primarily to reduce debt. While we have successfully sold several
of our major properties, including most recently Goldfields, Parmelia, Loy Yang,
Panhandle and CMS Field Services, Inc., there are a number of additional assets
we are targeting for disposal through 2005. We cannot assure you that we will be
successful in selling these assets, most of which are located outside the United
States.
We are required by U.S. generally accepted accounting principles to
periodically review the carrying value of our assets, including those we are
targeting for sale. Market conditions, the operational characteristics of the
assets that may be sold and other factors could result in our recording
additional impairment charges for our assets, which could have an adverse effect
on our stockholders' equity and our access to additional financing. In addition,
we may be required to record impairment charges at the time we sell assets
depending on the sale prices we are able to secure.
WE RETAIN CONTINGENT LIABILITIES IN CONNECTION WITH OUR ASSET SALES.
The agreements we enter into for the sale of assets customarily include
provisions whereby we are required to:
- retain specified preexisting liabilities such as for taxes and
pensions;
- indemnify the buyers against specified risks, including the
inaccuracy of representations and warranties we make; and
- require payments to the buyers depending on the outcome of
post-closing adjustments, audits or other reviews.
Many of these contingent liabilities can remain open for extended periods
of time after the sales are closed. Depending on the extent to which the buyers
may ultimately seek to enforce their rights under these contractual provisions,
and the resolution of any disputes we may have concerning them, these
liabilities could have a material adverse effect on our financial condition,
liquidity and results of operations.
OUR REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO RISKS THAT ARE
BEYOND OUR CONTROL, INCLUDING BUT NOT LIMITED TO FUTURE TERRORIST ATTACKS OR
RELATED ACTS OF WAR.
The cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, may adversely impact our results of
operations, financial condition and cash flows. The occurrence or risk of
occurrence of future terrorist activity and the high cost or potential
unavailability of insurance to cover such terrorist activity may impact our
results of operations and financial condition in unpredictable ways. These
actions could also result in disruptions of power and fuel markets. In addition,
our natural gas distribution system and pipelines could be directly or
indirectly harmed by future terrorist activity.
18
WE HAVE MADE SUBSTANTIAL INTERNATIONAL INVESTMENTS THAT ARE SUBJECT TO
POSSIBLE NATIONALIZATION, EXPROPRIATION OR INABILITY TO CONVERT CURRENCY.
Our investments in selected international markets in electric generating
facilities, natural gas pipelines and electric distribution systems face a
number of risks inherent in acquiring, developing and owning these types of
international facilities. Although we maintain insurance for various risk
exposures, including political risk from possible nationalization, expropriation
or inability to convert currency, we are exposed to some risks that include
local political and economic factors over which we have no control, such as
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 an 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 our financial position and results of operations.
International investments of the type we have made 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.
The local foreign currency may be devalued, 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.
OUR OWNERSHIP OF A NUCLEAR GENERATING FACILITY CREATES RISK RELATING TO
NUCLEAR ENERGY.
Consumers owns the Palisades nuclear power plant and we are, therefore,
subject to the risks of nuclear generation and the storage and disposal of spent
fuel and other radioactive waste. The Nuclear Regulatory Commission ("NRC") has
broad authority under federal law to impose licensing and safety-related
requirements for the operation of nuclear generation facilities. In the event of
non-compliance, the NRC has the authority to impose fines or shut down a unit,
or both, depending upon its assessment of the severity of the situation, until
compliance is achieved. In addition, although we have no reason to anticipate a
serious nuclear incident at Consumers' plant, if an incident did occur, it could
harm our results of operations and financial condition. A major incident at a
nuclear facility anywhere in the world could cause the NRC to limit or prohibit
the operation or licensing of any domestic nuclear unit.
WE CURRENTLY DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.
We suspended the payments of dividends on our common stock in January 2003
and have no current plans to resume payment of a dividend. Our ability to
declare dividends in the future will depend on a variety of factors, including
improvement in our financial condition and liquidity and the terms of our
financing agreements. We cannot predict when resumption of dividends on our
common stock would occur, and if so the amount of any such dividends that might
be declared.
CONSUMERS CURRENTLY UNDERRECOVERS IN ITS RATES ITS PAYMENTS TO THE MCV
PARTNERSHIP FOR CAPACITY AND ENERGY, AND IS ALSO EXPOSED TO FUTURE CHANGES IN
THE MCV PARTNERSHIP'S FINANCIAL CONDITION THROUGH ITS EQUITY AND LESSOR
INVESTMENTS.
Consumers' power purchase agreement with the MCV Partnership ("PPA")
expires in 2025. We estimate that Consumers will incur estimated cash
underrecoveries of payments under the PPA aggregating $206 million through 2007.
For availability payments billed by the MCV Partnership after September 15,
2007, and not recovered from customers, Consumers would expect to claim a
"regulatory out" under the PPA. The effect of any such action would be to reduce
cash flow to the MCV Partnership, which could in turn have an adverse effect on
Consumers' equity and lessor interests in the MCV Facility.
Further, under the PPA, energy payments to the MCV Partnership are based
on the cost of coal burned at Consumers' coal plants and costs associated with
fuel inventory, operations and maintenance, and administrative and general
expenses associated with Consumers' coal plants. However, the MCV Partnership's
costs of producing electricity are tied, in large part, to the cost of natural
gas. Because natural gas prices have increased substantially in recent years,
while energy charge payments to the MCV Partnership have not, the MCV
Partnership's financial performance has been impacted negatively.
In February 2004, Consumers filed a RCP with the MPSC that is intended to
help conserve natural gas and thereby improve its investment in the MCV
Partnership. This plan seeks approval to:
- dispatch the MCV Facility based on natural gas market prices without
increased costs to electric customers;
19
- give Consumers a priority right to buy excess natural gas as a
result of the reduced dispatch of the MCV Facility; and
- fund $5 million annually for renewable energy sources such as wind
power projects.
The RCP would reduce the MCV Facility's annual natural gas consumption by
an estimated 30 to 40 bcf. This decrease in the quantity of high-priced natural
gas consumed by the MCV Facility would benefit Consumers' ownership interest in
the MCV Partnership. The amount of PPA capacity and fixed energy payments
recovered from retail electric customers would remain capped at 88.7%.
Therefore, customers would not be charged for any increased power supply costs,
if they occur. Consumers and the MCV Partnership have reached an agreement that
the MCV Partnership will reimburse Consumers for any incremental power costs
incurred to replace the reduction in power dispatched from the MCV Facility.
Presently, Consumers is in settlement discussions with the parties to the RCP
filing. However, in July 2004, several qualifying facilities filed for a stay on
the RCP proceeding in the Ingham County Circuit Court after their previous
attempt to intervene on the proceeding was denied by the MPSC. On August 11,
2004, the Judge granted the motion to stay the proceedings. We cannot predict if
or when the MPSC will approve the RCP or the outcome of the Ingham County
Circuit Court hearings.
We cannot estimate, at this time, the impact of these issues on Consumers'
future earnings or cash flow from its interest in the MCV Partnership. The
forward price of natural gas for the next 20 years and the MPSC decision in 2007
or later related to Consumers' recovery of capacity payments are the two most
significant variables in the analysis of the MCV Partnership's future financial
performance. Natural gas prices have historically been volatile and presently
there is no consensus in the marketplace on the price or range of prices of
natural gas beyond the next five years. Further, it is not presently possible
for us to predict the actions of the MPSC in 2007 or later. Even with an
approved RCP, if gas prices continue at present levels or increase, the
economics of operating the MCV Facility may be adverse enough to require
Consumers to recognize an impairment of its investment in the MCV Partnership.
For these reasons, at this time we cannot predict the impact of these issues on
Consumers' future earnings or cash flows or on the value of its equity interest
in the MCV Partnership.
CONSUMERS' ENERGY RISK MANAGEMENT STRATEGIES MAY NOT BE EFFECTIVE IN
MANAGING FUEL AND ELECTRICITY PRICING RISKS, WHICH COULD RESULT IN UNANTICIPATED
LIABILITIES TO CONSUMERS OR INCREASED VOLATILITY OF ITS EARNINGS.
Consumers is exposed to changes in market prices for natural gas, coal,
electricity and emission credits. Prices for natural gas, coal, electricity and
emission credits may fluctuate substantially over relatively short periods of
time and expose Consumers to commodity price risk. A substantial portion of
Consumers' operating expenses for its plants consists of the costs of obtaining
these commodities. Consumers manages these risks using established policies and
procedures, and it may use various contracts to manage these risks, including
swaps, options, futures and forward contracts. We cannot assure you that these
strategies will be successful in managing Consumers' pricing risk, or that they
will not result in net liabilities to Consumers as a result of future volatility
in these markets.
Natural gas prices in particular have historically been volatile. To
manage market risks associated with the volatility of natural gas prices, the
MCV Partnership maintains a gas hedging program. The MCV Partnership enters into
natural gas futures contracts, option contracts and over-the-counter swap
transactions in order to hedge against unfavorable changes in the market price
of natural gas in future months when gas is expected to be needed. These
financial instruments are being used principally to secure anticipated natural
gas requirements necessary for projected electric and steam sales, and to lock
in sales prices of natural gas previously obtained in order to optimize the MCV
Partnership's existing gas supply, storage, and transportation arrangements.
Consumers also routinely enters into contracts to offset its positions, such as
hedging exposure to the risks of demand, market effects of weather and changes
in commodity prices associated with its gas distribution business. Such
positions are taken in conjunction with the gas cost recovery mechanism, which
allows Consumers to recover prudently incurred costs associated with such
position. However, neither Consumers nor the MCV Partnership always hedges the
entire exposure of its operations from commodity price volatility. Furthermore,
the ability to hedge exposure to commodity price volatility depends on liquid
commodity markets. As a result, to the extent the commodity markets are
illiquid, Consumers may not be able to execute its risk management strategies,
which could result in greater open positions than we would prefer at a given
time. To the extent that open positions exist, fluctuating commodity prices can
improve or diminish our financial results and financial position.
In addition, Consumers currently has a power supply cost recovery
mechanism to recover the increased cost of fuel used to generate electricity
from its industrial and large commercial customers, but not from its residential
or small commercial customers. Therefore, to the extent that Consumers has not
hedged its fuel costs, it is exposed to changes in fuel prices to the extent
fuel for its electric generating facilities must be purchased on the open market
in order for Consumers to serve its residential and small commercial customers.
20
RISKS RELATED TO THE PREFERRED STOCK
WE MAY ISSUE ADDITIONAL SERIES OF PREFERRED STOCK THAT RANK EQUALLY TO THE
PREFERRED STOCK AS TO DIVIDEND PAYMENTS AND LIQUIDATION PREFERENCE.
Our Articles of Incorporation and the certificate of designation do not
limit our ability to issue additional series of preferred stock that would rank
equally to the Preferred Stock as to dividend payments and liquidation
preference. This could have the effect of reducing the amounts available to the
Preferred Stock in the event of our liquidation. It may also reduce dividend
payments on the Preferred Stock if we do not have sufficient funds to pay
dividends on all Preferred Stock outstanding and outstanding parity preferred
stock.
WE WILL ONLY PAY DIVIDENDS ON THE PREFERRED STOCK WHEN, AS AND IF DECLARED
BY OUR BOARD OF DIRECTORS OUT OF LEGALLY AVAILABLE FUNDS.
Dividends on the Preferred Stock will only be paid when, as and if
declared by the Board of Directors out of funds legally available therefor. The
Board of Directors may elect not to declare dividends on the Preferred Stock,
and CMS Energy may not have enough funds to legally declare dividends on the
Preferred Stock. Dividends on the capital stock of CMS Energy, including the
Preferred Stock, are limited by Michigan law to legally available assets of CMS
Energy.
CMS ENERGY MAY NOT HAVE SUFFICIENT EARNINGS AND PROFITS IN ORDER FOR
DISTRIBUTIONS ON THE PREFERRED STOCK TO BE TREATED AS DIVIDENDS.
The dividends paid by CMS Energy may exceed its current and accumulated
earnings and profits, as calculated for U.S. federal income tax purposes. This
will result in the amount of the dividends that exceeds such earnings and
profits being treated first as a return of capital to the extent of the holder's
adjusted tax basis in the Preferred Stock, and the excess as capital gain. Such
treatment will generally be unfavorable for corporate holders and may also be
unfavorable to certain other holders. See "Certain United States Federal Income
Tax Considerations -- Consequences to U.S. Holders of Preferred Stock or Common
Stock."
RESTRICTIVE COVENANTS IN FUTURE DEBT ISSUANCES COULD RESTRICT OUR ABILITY TO
PAY DIVIDENDS ON THE PREFERRED STOCK.
From time to time, we may enter into financing arrangements that contain
restrictive covenants that may limit our ability to declare and pay dividends on
the Preferred Stock.
THE MARKET PRICE OF THE PREFERRED STOCK COULD BE SIGNIFICANTLY AFFECTED BY THE
MARKET PRICE OF OUR COMMON STOCK.
We expect that the market price of the Preferred Stock will be
significantly affected by the market price of our common stock. This may result
in greater volatility in the market price of the Preferred Stock than would be
expected for nonconvertible Preferred Stock. The market price of our common
stock will likely continue to fluctuate in response to factors such as the
following, many of which are beyond our control:
- fluctuations in our operating and financial results;
- changes in financial estimates and recommendations by financial
analysts;
- changes in the ratings of the Preferred Stock or other securities of
ours or Consumers;
- developments related to litigation or regulatory proceedings involving
us;
- our asset sales and financings; and
- market perception of the energy industry and of us.
In addition, the stock markets in general, including the New York Stock
Exchange, recently have experienced significant price and trading fluctuations.
These fluctuations have resulted in volatility in the market prices of
securities that often has been unrelated or disproportionate to changes in
operating performance. These broad market fluctuations may affect adversely the
market prices of the Preferred Stock and our common stock.
21
WE MAY ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK OR SECURITIES CONVERTIBLE
OR EXCHANGEABLE FOR OUR COMMON STOCK AND THEREBY MATERIALLY AND ADVERSELY AFFECT
THE PRICE OF OUR COMMON STOCK.
We are not restricted from issuing additional shares of our common stock or
securities convertible into or exchangeable for our common stock during the life
of the Preferred Stock and have no obligation to consider the interests of
Holders for any reason. If we issue additional shares of our common stock or
securities convertible into or exchangeable for our common stock, it may
materially and adversely affect the market price of our common stock and, in
turn, the market price of the Preferred Stock.
A HOLDER OF PREFERRED STOCK WILL NOT BE ENTITLED TO ANY RIGHTS WITH RESPECT TO
OUR COMMON STOCK, BUT WILL BE SUBJECT TO ALL CHANGES MADE WITH RESPECT TO OUR
COMMON STOCK.
A Holder of Preferred Stock will not be entitled to any rights with respect
to our common stock (including, without limitation, voting rights and rights to
receive any dividends or other distributions on our common stock), but will be
subject to all changes affecting our common stock. Holders will only be entitled
to rights on our common stock if and when we deliver shares of common stock to
Holders upon conversion of Preferred Stock and in limited cases under the
conversion rate adjustments of the Preferred Stock. For example, in the event
that an amendment is proposed to our Articles of Incorporation or Bylaws
requiring stockholder approval and the record date for determining the
stockholders of record entitled to vote on the amendment occurs prior to such
delivery of our common stock, Holders will not be entitled to vote on the
amendment, although Holders will nevertheless be subject to any changes in the
powers, preferences or special rights of our common stock.
WE MAY NOT HAVE THE ABILITY TO PURCHASE THE PREFERRED STOCK UPON A FUNDAMENTAL
CHANGE.
Holders of the Preferred Stock may require us to purchase their shares of
Preferred Stock upon a Fundamental Change as described under "Description of the
Preferred Stock -- Fundamental Change Requires Purchase of Preferred Stock by Us
at the Option of the Holder." We cannot assure you that we would have sufficient
financial resources, or would be able to arrange financing, to pay the purchase
price for the Preferred Stock tendered by Holders upon a Fundamental Change.
Further, the terms of any debt agreements of CMS in effect at the time could
prohibit or limit repurchase of the Preferred Stock. Michigan law restricting
distributions could also limit our ability to repurchase the Preferred Stock.
THE PREFERRED STOCK RANKS JUNIOR TO ALL OF OUR AND OUR SUBSIDIARIES'
LIABILITIES.
In the event of our bankruptcy, liquidation or winding-up, our assets will
be available to pay obligations on our Preferred Stock only after all our
indebtedness and other liabilities have been paid. In addition, the Preferred
Stock will effectively rank junior to all existing and future liabilities of our
subsidiaries. The rights of Holders of the Preferred Stock to participate in the
distribution of assets of our subsidiaries will rank junior to the prior claims
of that subsidiary's creditors and any senior equity holders. If we are forced
to liquidate our assets to pay our creditors, we may not have sufficient assets
remaining to pay amounts due on any of the Preferred Stock then outstanding. We
and our subsidiaries may incur substantial amounts of additional debt and other
obligations that will rank senior to the Preferred Stock.
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE
PREFERRED STOCK.
The Preferred Stock is not listed on any national securities exchange or the
Nasdaq National Market, but is eligible for trading in the Portal Market of the
National Association of Securities Dealers, Inc. Each of the initial purchasers
informed us that it intends to make a market in the Preferred Stock. However,
the initial purchasers are not obligated to do so and may cease their
market-making at any time. Accordingly, there may not be development of or
liquidity in any market for the Preferred Stock. If a market for the Preferred
Stock were to develop, the Preferred Stock could trade at prices that depend
upon many factors, including prevailing interest rates, our operating results
and the markets for similar securities. In addition, such market-making activity
will be subject to limits imposed by the Securities Act and the Exchange Act and
may be limited during the pendency of the effectiveness of the shelf
registration statement. If an active trading market does not develop, the market
price and liquidity of the Preferred Stock may be adversely affected.
USE OF PROCEEDS
We will not receive any of the proceeds from sales of any of the securities
covered by this prospectus by the selling securityholders.
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RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERENCE DIVIDENDS
The ratio of earnings to combined fixed charges and preference dividends for
the six months ended June 30, 2004 and each of the years ended December 31, 1999
through 2003 is as follows:
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------
JUNE 30, 2004 2003 2002 2001 2000 1999
------------- ---- ---- ---- ---- ----
Ratio of earnings to
combined fixed charges
and preference dividends... --(1) --(2) --(3) --(4) --(5) 1.28
(1) For the six months ended June 30, 2004, combined fixed charges and
preference dividends exceeded earnings by $47 million. Earnings as defined
include $125 million of asset impairment charges.
(2) For the year ended December 31, 2003, combined fixed charges and preference
dividends exceeded earnings by $59 million. Earnings as defined include $95
million of asset impairment charges.
(3) For the year ended December 31, 2002, combined fixed charges and preference
dividends exceeded earnings by $472 million. Earnings as defined include
$602 million of asset revaluations and other charges.
(4) For the year ended December 31, 2001, combined fixed charges and preference
dividends exceeded earnings by $392 million. Earnings as defined include
$323 million of asset revaluations and other charges.
(5) For the year ended December 31, 2000, combined fixed charges and preference
dividends exceeded earnings by $224 million. Earnings as defined include a
$329 million pretax impairment loss on the Loy Yang investment.
For the purpose of computing the ratio, earnings represents the sum of
income from continuing operations before income taxes and income from equity
method investees, net interest charges and preferred dividends of subsidiary,
the estimated interest portion of lease rentals and distributed income of equity
method investees.
PRICE RANGE OF OUR COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the New York Stock Exchange. The following
table sets forth for the periods indicated the range of high and low sales
prices per share of our common stock as reported on the New York Stock Exchange
and the cash dividends declared on the common stock for the periods indicated.
HIGH LOW DIVIDENDS
---- --- ---------
Year Ended December 31, 2002
First Quarter................................... $ 24.62 $21.27 $0.365
Second Quarter.................................. 22.24 10.46 0.365
Third Quarter................................... 11.28 7.49 0.18
Fourth Quarter.................................. 10.48 5.79 0.18
Year Ended December 31, 2003
First Quarter................................... 10.59 3.49 --
Second Quarter.................................. 8.50 4.58 --
Third Quarter................................... 7.99 6.11 --
Fourth Quarter.................................. 8.63 7.44 --
Year Ending December 31, 2004
First Quarter................................... 9.51 8.36 --
Second Quarter.................................. 9.32 7.90 --
On September 22, 2004, the last sale price of our common stock as reported
on the New York Stock Exchange was $9.39 per share. On September 22, 2004 there
were approximately 59,226 holders of record of our common stock.
In January 2003, we suspended the payment of dividends on our common stock.
23
CMS ENERGY
OVERVIEW
CMS Energy, formed in Michigan in 1987, is an integrated energy holding
company operating through subsidiaries in the United States and in selected
markets around the world. Its two principal subsidiaries are Consumers and
Enterprises. Consumers is a public utility that provides natural gas and/or
electricity to almost 6.5 million of Michigan's 10 million residents and serves
customers in 61 of the 68 counties in Michigan's Lower Peninsula. Enterprises,
through subsidiaries and equity investments, is engaged in several energy
businesses in the United States and in selected international markets.
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
and income, as well as a substantial portion of our operating revenue.
Industries in Consumers' service areas include automotive, metal, chemical, food
and wood products and a diversified group of other industries.
ELECTRIC UTILITY OPERATIONS
Consumers' electric utility operating revenue was $2.590 billion in 2003,
$2.648 billion in 2002, and $2.633 billion in 2001. Based on the average number
of customers, Consumers' electric utility operations, if independent, would be
the thirteenth largest electric utility company in the United States. The
electric operations of Consumers include the generation, purchase, distribution
and sale of electricity. In 2003, total electric sales were 36 billion kWh and
retail open access deliveries were 3 billion kWh. At year-end 2003, it served
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 single customer, or even 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.
At December 31, 2003, Consumers owned and operated 30 electric generating
plants with an aggregate of 6,431 MW of capacity. Also, in 2003, Consumers
purchased up to 2,353 MW of net capacity from other power producers, which
amounted to 30.5% of Consumers' total system requirements, the largest of which
was the MCV Partnership in which Consumers has a 49% interest through CMS
Midland, Inc. Consumers also owns:
- 347 miles of high voltage distribution radial lines operating at 120
kilovolts and above;
- 4,164 miles of high voltage distribution overhead lines operating at
23 kilovolts and 46 kilovolts;
- 16 subsurface miles of high voltage distribution underground lines
operating at 23 kilovolts and 46 kilovolts;
- 54,922 miles of electric distribution overhead lines;
- 8,526 subsurface miles of underground distribution lines; and
- substations having an aggregate transformer capacity of 20,605,680
kilovoltamperes.
Consumers generates electricity principally from coal and nuclear fuel.
Consumers has four generating plant sites that use coal as a fuel source and
constituted 76% of its baseload capacity in 2003. In 2003, these plants produced
a combined total of 20,091 million KWhs of electricity and burned 10.1 million
tons of coal. Consumers owns Palisades, an operating nuclear power plant located
near South Haven, Michigan. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to the Nuclear Management Company
("NMC"). The Palisades nuclear fuel supply responsibilities are under the
control of NMC acting as agent for Consumers. During 2003, Palisades' net
generation was 6,151 million KWhs, constituting 23.3% of Consumers' baseload
supply.
GAS UTILITY OPERATIONS
Consumers' gas utility operating revenue was $1.845 billion in 2003, $1.519
billion in 2002, and $1.338 billion in 2001. Based on the average number of
customers, Consumers' gas utility operations, if independent, would be the tenth
largest gas utility company in the United States. Consumers' gas utility
operations purchase, transport, store, distribute and sell natural gas. In 2003,
total deliveries of natural gas sold by Consumers and by other sellers who
deliver natural gas through Consumers' pipeline and distribution network to
ultimate customers, including the MCV Partnership, totaled 388 bcf. As of
December 31, 2003, Consumers was authorized to provide
24
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 nearly 900,000 of the gas
customers are located. Consumers' gas operations are not dependent upon a single
customer, or even 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.
Consumers' gas distribution and transmission system consists of:
- 25,055 miles of distribution mains throughout Michigan's Lower
Peninsula;
- 2,405 miles of transmission lines throughout Michigan's Lower
Peninsula;
- 7 compressor stations with a total of 162,000 installed horsepower;
and
- 14 gas storage fields located across Michigan with an aggregate
storage capacity of 331 bcf and a working storage capacity of 130
bcf.
Total 2003 purchases of gas supply included 66% from United States producers
outside Michigan, 22% from Canadian producers and 3% from Michigan producers.
Authorized suppliers in the gas customer choice program supplied the remaining
9% of gas delivered by Consumers. Consumers also has firm transportation
agreements with independent pipeline companies for the delivery of gas.
Consumers uses these agreements to deliver gas to Michigan for ultimate
deliveries to market. In total, Consumers' firm transportation and city gate
arrangements are capable of delivering over 95% of Consumers' total gas supply
requirements.
ENTERPRISES
Enterprises, through subsidiaries and equity investments, is engaged in
domestic and international diversified energy businesses including natural gas
transmission, storage and processing, independent power production and energy
services. Enterprises' operating revenue was $1.085 billion in 2003, $4.508
billion in 2002 and $4.034 billion in 2001.
BUSINESSES OF ENTERPRISES' SUBSIDIARIES
NATURAL GAS TRANSMISSION
CMS Gas Transmission, formed in 1988, owns, develops and manages domestic
and international natural gas facilities. In 2003, CMS Gas Transmission's
operating revenue was $22 million.
In 1999, CMS Gas Transmission acquired Panhandle, which was primarily
engaged in the interstate transmission and storage of natural gas and also
provided LNG terminalling and regasification services. Panhandle operated a
large natural gas pipeline network, which provided customers in the Midwest and
Southwest with a comprehensive array of transportation services. Panhandle's
major customers included 25 utilities located primarily in the United States
Midwest market area, which encompassed large portions of Illinois, Indiana,
Michigan, Missouri, Ohio and Tennessee.
In February 2003, Panhandle sold its one-third equity interest in Centennial
Pipeline, LLC ("CENTENNIAL") for $40 million to Centennial's two other partners,
Marathon Ashland Petroleum, LLC and TE Products Pipeline Company, Limited
Partnership, through its general partner, Texas Eastern Products Pipeline
Company, LLC.
In March 2003, Panhandle transferred $63 million previously committed to
collateralize a letter of credit and its one-third ownership interest in
Guardian Pipeline, LLC ("GUARDIAN") to CMS Gas Transmission. CMS Gas
Transmission sold its interest in Guardian to a subsidiary of WPS Resources
Corporation in June 2003. Proceeds from the sale were $26 million and the $63
million of cash collateral was released.
In June 2003, CMS Gas Transmission sold Panhandle to Southern Union
Panhandle Corp., a newly formed entity owned by Southern Union Company. Southern
Union Panhandle Corp. purchased all of Panhandle's outstanding capital stock for
approximately $582 million in cash and 3 million shares of Southern Union
Company common stock. Southern Union Panhandle Corp. also assumed approximately
$1.166 billion in debt. In July 2003, Southern Union Company declared a 5%
common stock dividend resulting in an additional 150,000 shares of common stock
for CMS Gas Transmission. In October 2003, CMS Gas Transmission sold its 3.15
million shares to a private investor for $17.77 per share.
In July 2003, CMS Gas Transmission completed the sale of CMS Field Services
to Cantera Natural Gas, Inc. for gross cash proceeds of approximately $113
million, subject to post closing adjustments, and a $50 million face value note
of Cantera Natural
25
Gas, Inc. The note is payable to CMS Energy for up to $50 million subject to the
financial performance of the Fort Union and Bighorn natural gas gathering
systems from 2004 through 2008.
In August 2004, we sold our interests in Parmelia and Goldfields to APT for
approximately $206 million Australian (approximately $147 million in U.S.
dollars).
At December 31, 2003, CMS Gas Transmission had nominal processing
capabilities of approximately 0.33 bcf per day of natural gas in Michigan. At
December 31, 2003, CMS Gas Transmission had a total of 288 miles of gas
gathering and transmission pipelines located in the state of Michigan, with a
total capacity of approximately 0.95 bcf per day.
Internationally, at December 31, 2003, CMS Gas Transmission had ownership
interests in 5,517 miles of pipelines in Argentina, Chile and Australia.
INDEPENDENT POWER PRODUCTION
CMS Generation, formed in 1986, invests in, acquires, develops, constructs
and operates non-utility power generation plants in the United States and
abroad. In 2003, the independent power production business segment's operating
revenue, which includes revenues from CMS Generation and CMS Operating, S.A., as
well as from Consumers' interests in the MCV facility and the MCV Partnership,
was $204 million.
INDEPENDENT POWER PRODUCTION PROPERTIES
As of December 31, 2003, we had ownership interests in operating power
plants totaling 8,766 gross MW (including 2,000 MW from Loy Yang that was sold
in April 2004) (4,149 net MW). At December 31, 2003 additional plants totaling
approximately 1,784 gross MW (420 net MW) were under construction or in advanced
stages of development. These plants include the Shuweihat power plant, which is
under construction in the United Arab Emirates and the Saudi Petrochemical
Company power plant, which is under advanced development and will be located in
the Kingdom of Saudi Arabia. In 2004, CMS Generation plans to complete the
restructuring of its operations by narrowing the scope of its existing
operations and commitments from four to two regions: the U.S. and the Middle
East/North Africa. In addition, its plans include selling designated assets and
investments that are under-performing, non-region focused and non-synergistic
with other CMS Energy business units. We believe that the independent power
production business unit will continue to optimize the operations and management
of its remaining portfolio of assets in order to contribute to CMS Energy's
earnings and to maintain its reputation for solid performance in the
construction and operation of power plants.
The following table details our interests in independent power plants in the
United States as well as abroad as of year-end 2003 (excluding the plants owned
by CMS Operating, S.A. and CMS Electric and Gas Company and the MCV facility,
discussed further below, as well as Loy Yang that was sold in April 2004 (2,000
gross MW), as discussed in "Recent Developments" above):
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PERCENTAGE OF
GROSS CAPACITY
OWNERSHIP GROSS UNDER LONG-TERM
INTEREST CAPACITY CONTRACT
FUEL TYPE (%) (MW) (%)
------------ -------- -------- ---------------
LOCATION
California................................................... Wood 37.8 36 100
Connecticut.................................................. Scrap tire 100 31 100
Michigan..................................................... Coal 50 70 100
Michigan..................................................... Natural gas 100 710 85
Michigan..................................................... Natural gas 100 224 0
Michigan..................................................... Wood 50 40 100
Michigan..................................................... Wood 50 38 100
New York..................................................... Hydro 0.3 14 100
North Carolina............................................... Wood 50 50 100
Oklahoma..................................................... Natural gas 8.8 124 100
-----
DOMESTIC TOTAL.......................................... 1,337
Argentina.................................................... Hydro 17.2 1,320 20(a)
Chile........................................................ Natural gas 50 720 100(b)
Ghana........................................................ Crude oil 90 224 100
India........................................................ Coal 50 250 100
India........................................................ Natural gas 33.2 235 100
Jamaica...................................................... Diesel 42.3 63 100
Latin America................................................ Various Various 484 51
Morocco...................................................... Coal 50 1,356 100
United Arab Emirates......................................... Natural gas 40 777 100
-----
INTERNATIONAL TOTAL..................................... 5,429
TOTAL DOMESTIC AND INTERNATIONAL............................. 6,766
=====
PROJECTS UNDER CONSTRUCTION/ADVANCED DEVELOPMENT............. 1,784
(a) El Chocon is primarily on a spot market basis, however, it has a high
dispatch rate due to low cost.
(b) Atacama is not allowed to sell more than 440 MW to the grid. 100% of the 440
MW is under contract.
Through a CMS International Ventures, LLC subsidiary called CMS Operating,
S.R.L., we own a 128 MW natural gas power plant, and a 92.6% ownership interest
in a 540 MW natural gas power plant, each in Argentina. Through CMS Electric and
Gas Company we have an 86% ownership interest in 287 MW of gas turbine and
diesel generating capacity in Venezuela. Through CMS Midland, Inc. Consumers
owns a 49% interest in the MCV Partnership and, through a trust, 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 a
net electrical generating capacity of approximately 1,500 MW.
OIL AND GAS EXPLORATION AND PRODUCTION
CMS Energy used to own an oil and gas exploration and production company. In
October 2002, CMS Energy completed its exit from the oil and gas exploration and
production business.
INTERNATIONAL ENERGY DISTRIBUTION
In October 2001, CMS Energy discontinued the operations of its international
energy distribution business. In 2002, CMS Energy discontinued all new
development outside North America, which included closing all non-U.S.
development offices. In 2003, CMS Energy reclassified to continuing operations
SENECA, which is its energy distribution business in Venezuela, and CPEE, which
is its energy distribution business in Brazil, due to its inability to sell
these assets.
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ENERGY RESOURCE MANAGEMENT
In 2003, CMS Energy Resource Management Company, formerly CMS MST, ("CMS
ERM") moved its headquarters from Houston, Texas to Jackson, Michigan. In
February 2004, CMS ERM changed its name from CMS Marketing, Services and Trading
Company to CMS ERM. CMS ERM has reduced its business focus and in the future
will concentrate on the purchase and sale of energy commodities in support of
CMS Energy's generating facilities. CMS ERM previously provided gas, oil, and
electric marketing, risk management and energy management services to
industrial, commercial, utility and municipal energy users throughout the United
States. In January 2003, CMS ERM closed the sale of a major portion of its
wholesale natural gas trading book to Sempra Energy Trading. The cash proceeds
were approximately $17 million. In April 2003, CMS ERM sold its wholesale
electric power business to Constellation Power Source, Inc. Also in April 2003,
CMS ERM sold the federal business of CMS Viron, its energy management service
provider, to Pepco Energy Services, Inc. In July 2003, CMS ERM sold CMS Viron's
non-federal business to Chevron Energy Solutions Company, a division of Chevron
U.S.A. In 2003, CMS ERM marketed approximately 85 bcf of natural gas and 5,314
gWh of electricity. Its operating revenue was $711 million in 2003, $4.137
billion in 2002 and $3.616 billion in 2001.
DESCRIPTION OF THE PREFERRED STOCK
GENERAL
Under our Articles of Incorporation, our board of directors is authorized,
without further stockholder action, to issue up to 10,000,000 shares of
preferred stock, par value $0.01 per share, in one or more series, with such
voting powers or without voting powers, and with such designations, preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions, as shall be set forth in the
resolutions or certificate of designation providing therefor. Please read
"Description of Our Capital Stock." We currently have outstanding 5,000,000
shares of Preferred Stock.
The Preferred Stock and any of our common stock issued upon the conversion
of the Preferred Stock is fully paid and nonassessable. Holders of Preferred
Stock have no preemptive or preferential right to purchase or subscribe to
stock, obligations, warrants or other securities of CMS Energy of any class. The
transfer agent, registrar, redemption, conversion and dividend disbursing agent
for shares of both the Preferred Stock and our common stock is CMS Energy.
The Preferred Stock is subject to mandatory conversion, as described below
in "Mandatory Conversion," but is not redeemable by us.
The statements herein concerning the Preferred Stock are a summary of
certain provisions of the certificate of designation. They make use of defined
terms that are defined in the certificate of designation. A copy of the
certificate of designation and the form of Preferred Stock share certificate are
available upon request from us at the address set forth under "Where You Can
Find More Information." The following summary of the terms of Preferred Stock
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the certificate of designation, which is
incorporated herein by this reference.
REGISTRATION, TRANSFER AND EXCHANGE
The Preferred Stock was issued in the form of one or more global securities
as described under "Book-Entry System." The global Preferred Stock Certificates
are registered in the name of the nominee of DTC. Except as described under
"Book-Entry System," owners of beneficial interests in the global Preferred
Stock Certificates are not entitled to have shares of Preferred Stock registered
in their names, will not receive nor are entitled to receive physical delivery
of any such shares of Preferred Stock and are not considered the registered
holder thereof.
RANKING
The Preferred Stock, with respect to dividend rights or rights upon our
liquidation, winding-up or dissolution, ranks:
- senior to all classes of our common stock and each other class of capital
stock or series of preferred stock established after the original issue
date of the Preferred Stock (which we will refer to as the "ISSUE DATE"),
the terms of which do not expressly provide that such class or series
ranks senior to or on a parity with the Preferred Stock as to dividend
rights or rights upon our liquidation, winding-up or dissolution (which we
will refer to collectively as "JUNIOR STOCK");
- on a parity, in all respects, with any class of capital stock or series of
preferred stock established after the Issue Date, the terms of which
expressly provide that such class or series will rank on a parity with the
Preferred Stock as to dividend rights or rights
28
upon our liquidation, winding-up or dissolution (which we will refer to
collectively as "PARITY STOCK");
- junior to all our existing and future liabilities and obligations, whether
or not for borrowed money; and
- effectively junior to all of our subsidiaries' (i) existing and future
liabilities and (ii) capital stock held by others.
While any shares of Preferred Stock are outstanding, we may not authorize or
issue any class or series of capital stock or series of preferred stock
established after the Issue Date, the terms of which expressly provide that such
class or series will rank senior to the Preferred Stock as to dividend rights or
rights upon our liquidation, winding up or dissolution (which we will shall
refer to collectively as "SENIOR STOCK") (or any security convertible into
Senior Stock) without the affirmative vote or consent of the Holders of all of
the outstanding shares of Preferred Stock. Without the consent of any Holder of
Preferred Stock, however, we may authorize, increase the authorized amount of,
or issue any class or series of, Parity Stock or Junior Stock. See "Voting
Rights" below.
LIQUIDATION PREFERENCE
In the event of our voluntary or involuntary liquidation, winding-up or
dissolution, each Holder of Preferred Stock will be entitled to receive and to
be paid out of our assets available for distribution to our stockholders, before
any payment or distribution is made to holders of Junior Stock (including common
stock), a liquidation preference in the amount of $50.00 per share of Preferred
Stock, plus accumulated and unpaid dividends on the shares to the date fixed for
liquidation, winding-up or dissolution. If, upon our voluntary or involuntary
liquidation, winding-up or dissolution, the amounts payable with respect to the
liquidation preference of the Preferred Stock and all Parity Stock are not paid
in full, the Holders of the Preferred Stock and the Parity Stock will share
equally and ratably in any distribution of our assets in proportion to the full
liquidation preference and accumulated and unpaid dividends to which they are
entitled. After payment of the full amount of the liquidation preference and
accumulated and unpaid dividends to which they are entitled, the Holders of the
Preferred Stock will have no right or claim to any of our remaining assets.
Neither the sale of all or substantially all our assets or business (other than
in connection with our liquidation, winding-up or dissolution), nor our merger
or consolidation into or with any other person, will be deemed to be a voluntary
or involuntary liquidation, winding-up or dissolution.
The certificate of designation does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Preferred
Stock even though it is substantially in excess of the par value thereof.
DIVIDENDS
Holders of shares of Preferred Stock are entitled to receive, when, as and
if declared by our board of directors out of funds legally available for
payment, cumulative cash dividends at the rate per annum of 4.50% per share on
the liquidation preference thereof of $50.00 per share of Preferred Stock
(equivalent to $2.25 per annum per share). Dividends on the Preferred Stock are
payable quarterly on March 1, June 1, September 1 and December 1 of each year
(each, a "DIVIDEND PAYMENT DATE"), commencing December 1, 2004, at such annual
rate, and shall accumulate from the most recent date as to which dividends shall
have been paid or, if no dividends have been paid, from the Issue Date of the
Preferred Stock, whether or not in any dividend period or periods there have
been funds legally available for the payment of such dividends. Dividends will
be payable to Holders of record as they appear on our stock register on the
immediately preceding February 15, May 15, August 15 and November 15 (each, a
"RECORD DATE"). Accumulated unpaid dividends accrue and cumulate dividends at
the annual rate of 4.50% and are payable in the manner provided herein.
Dividends payable on the Preferred Stock including for any period less than a
full dividend period (based upon the number of days elapsed during the period)
are computed on the basis of a 360-day year consisting of twelve 30-day months.
No dividend will be declared or paid upon, or any sum set apart for the
payment of dividends upon, any outstanding share of Preferred Stock with respect
to any dividend period unless all dividends for all preceding dividend periods
have been declared and paid, or declared and a sufficient sum has been set apart
for the payment of such dividend, upon all outstanding shares of Preferred
Stock.
No dividends or other distributions (other than a dividend or distribution
payable solely in shares of Parity Stock or Junior Stock (in the case of Parity
Stock) or Junior Stock (in the case of Junior Stock) and cash in lieu of
fractional shares) may be declared, made or paid on, or set apart for payment
upon, any Parity Stock or Junior Stock, nor may any Parity Stock or Junior Stock
be redeemed, purchased or otherwise acquired for any consideration (or any money
paid to or made available for a sinking fund for the redemption of any Parity
Stock or Junior Stock) by us or on our behalf (except by conversion into or
exchange for shares of Parity Stock or Junior Stock (in the case of Parity
Stock) or Junior Stock (in the case of Junior Stock)) unless all accumulated and
unpaid dividends have been or contemporaneously are declared and paid, or are
declared and a sum sufficient for the payment thereof is set apart for such
payment, on the Preferred Stock and any Parity Stock for all dividend payment
periods terminating on or prior to the date of such
29
declaration, payment, redemption, purchase or acquisition. Notwithstanding the
preceding, if full dividends have not been paid on the Preferred Stock and any
Parity Stock, dividends may be declared and paid on the Preferred Stock and such
Parity Stock so long as the dividends are declared and paid pro rata so that the
amounts of dividends declared per share on the Preferred Stock and such Parity
Stock will in all cases bear to each other the same ratio that accumulated and
unpaid dividends per share on the shares of the Preferred Stock and such Parity
Stock bear to each other. Holders of shares of the Preferred Stock will not be
entitled to any dividend, whether payable in cash, property or stock, in excess
of full cumulative dividends.
Our ability to declare and pay dividends may be limited by applicable
Michigan law.
In any case where any dividend payment date or conversion date (including
upon the occurrence of a Fundamental Change) of any Preferred Stock shall not be
a Business Day at any place of payment, then payment of dividends (and
additional dividends, if any) need not be made on such date, but may be made on
the next succeeding Business Day at such place of payment with the same force
and effect as if made on the dividend payment date or conversion date (including
upon the occurrence of a Fundamental Change); and no interest shall accumulate
on the amount so payable for the period from and after such dividend payment
date or conversion date, as the case may be, to such Business Day. "BUSINESS
DAY" means a day on which banking institutions in New York, New York or Detroit,
Michigan are not authorized or required by law or regulation to close.
VOTING RIGHTS
The Holders of the Preferred Stock have no voting rights except as set forth
below or as otherwise required by our Articles of Incorporation, which will
include the certificate of designation, or by Michigan law from time to time.
If dividends on the Preferred Stock are in arrears and unpaid for six or
more quarterly periods (whether or not consecutive), the Holders of the
Preferred Stock, voting as a single class with any other preferred stock or
preference securities having similar voting rights that are exercisable, will be
entitled at our next regular or special meeting of stockholders to elect two
additional directors to our board of directors unless it is comprised of fewer
than six directors at such time, in which case such Holders will be entitled to
elect one additional director. Upon the election of any additional directors,
the number of directors that comprise our board shall be increased by such
number of additional directors. Such voting rights and the terms of the
directors so elected will continue until such time as the dividend arrearage on
the Preferred Stock has been paid in full.
In addition, the affirmative vote or consent of Holders of all of the
outstanding Preferred Stock will be required for the authorization or issuance
of any class or series of Senior Stock (or any security convertible into Senior
Stock) and for amendments to our Articles of Incorporation that would affect
adversely the rights of Holders of the Preferred Stock. The certificate of
designation will provide that the authorization of, the increase in the
authorized amount of, or the issuance of any shares of any class or series of
Parity Stock or Junior Stock will not require the consent of the Holders of the
Preferred Stock, and will not be deemed to affect adversely the rights of the
Holders of the Preferred Stock.
In all cases in which the Holders of Preferred Stock shall be entitled to
vote, each share of Preferred Stock shall be entitled to one vote.
CONVERSION RIGHTS
Subject to the conditions and during the periods and under the circumstances
described below, Holders may convert each share of their Preferred Stock into
shares of our common stock initially at a conversion rate of 5.0541 shares of
common stock per share of Preferred Stock (equivalent to an initial conversion
price of $9.893 per share of common stock). The conversion rate and the
equivalent conversion price in effect at any given time are referred to as the
"APPLICABLE CONVERSION RATE" and the "APPLICABLE CONVERSION PRICE,"
respectively, and will be subject to adjustment as described below. A Holder may
convert fewer than all of such Holder's Preferred Stock so long as the Preferred
Stock converted is an integral multiple of the $50.00 liquidation preference.
Except as otherwise described below, Holders will not receive any payment
(in cash or check, referred to as a "CASH PAYMENT") representing accumulated and
unpaid dividends upon conversion of a share of Preferred Stock and we will not
adjust the applicable conversion rate to account for accumulated and unpaid
dividends. Upon conversion we will deliver to Holders a fixed number of shares
of our common stock and any cash payment to account for fractional shares. The
cash payment for fractional shares will be based on the last reported sale price
of our common stock on the trading day immediately prior to the conversion date.
Accumulated and unpaid dividends will be deemed canceled, extinguished or
forfeited rather than paid in full. CMS Energy will act as the conversion agent.
Notwithstanding conversion of any Preferred Stock, the Holders of the Preferred
Stock and any common stock issuable upon conversion thereof will continue to be
entitled to receive additional dividends in accordance with the registration
rights agreement.
30
If a Holder converts Preferred Stock, we will pay any documentary, stamp or
similar issue or transfer tax due on the issue of shares of our common stock
upon the conversion, unless the tax is due because the Holder requests the
shares to be issued or delivered to a person other than the Holder, in which
case the Holder will pay that tax.
If a Holder wishes to exercise its conversion right, such Holder must
deliver a conversion notice, together, if the Preferred Stock is in certificated
form, with the certificated security, to the conversion agent along with
appropriate endorsements and transfer documents, if required, and pay any
transfer or similar tax, if required. The conversion agent will, on the Holder's
behalf, convert the shares of Preferred Stock into shares of our common stock.
Holders may obtain copies of the required form of the conversion notice from the
conversion agent. A certificate for the number of full shares of our common
stock into which any shares of Preferred Stock are converted, together with any
cash payment for fractional shares, will be delivered through the conversion
agent as soon as practicable, but no later than the fifth Business Day,
following the conversion date.
If a Holder has already delivered a purchase notice as described under
"Fundamental Change Requires Purchase of the Preferred Stock by Us at the Option
of the Holder" with respect to Preferred Stock, however, the Holder may not
surrender those shares of Preferred Stock for conversion until the Holder has
withdrawn the purchase notice in accordance with the certificate of designation.
Holders of the Preferred Stock at the close of business on a record date
will receive dividends, payable on the corresponding dividend payment date
notwithstanding the conversion of such Preferred Stock at any time after the
close of business on such record date. Preferred Stock surrendered for
conversion by a Holder during the period from the close of business on any
record date to the opening of business on the immediately following dividend
payment date must be accompanied by payment of an amount equal to the dividends
that the Holder is to receive on the Preferred Stock; provided, however, that no
such payment need be made if:
- we have specified a Mandatory Conversion Date that is after a record date
and on or prior to the immediately following dividend payment date;
- we have specified a purchase date following a Fundamental Change that is
during such period; or
- any accumulated and unpaid dividend exists at the time of conversion with
respect to such Preferred Stock to the extent of such accumulated and
unpaid dividend.
Holders may surrender their shares of Preferred Stock for conversion into
shares of our common stock only in the circumstances described below. For a
discussion of the federal income tax consequences of a conversion of the
Preferred Stock into our common stock, see "Certain United States Federal Income
Tax Considerations."
CONVERSION UPON SATISFACTION OF SALE PRICE CONDITION. A Holder may surrender
any of its shares of Preferred Stock for conversion into shares of our common
stock in any calendar quarter (and only during such calendar quarter) if the
last reported sale price of our common stock for at least 20 trading days during
the period of 30 consecutive trading days ending on the last trading day of the
previous calendar quarter is greater than or equal to 120% of the applicable
conversion price of the Preferred Stock on such last trading day.
CONVERSION UPON SPECIFIED CORPORATE TRANSACTIONS. If we elect to:
- distribute to all holders of our common stock certain rights entitling
them to purchase, for a period expiring within 60 days after the date of
the distribution, shares of our common stock at less than the last
reported sale price of a share of our common stock on the trading day
immediately preceding the declaration date of the distribution; or
- distribute to all holders of our common stock our assets, debt securities
or certain rights to purchase our securities, which distribution has a per
share value as determined by our board of directors exceeding 15% of the
last reported sale price of a share of our common stock on the trading day
immediately preceding the declaration date for such distribution, we must
notify the Holders of the Preferred Stock at least 20 Business Days prior
to the ex-dividend date (as defined herein) for such distribution. Once we
have given such notice, Holders may surrender their Preferred Stock for
conversion at any time until the earlier of the close of business on the
Business Day immediately prior to the ex-dividend date or our announcement
that such distribution will not take place, even if the Preferred Stock is
not otherwise convertible at such time; provided, however, that a Holder
may not exercise this right to convert if the Holder may participate in
the distribution without conversion. The "EX-DIVIDEND DATE" is the first
date upon which a sale of the common stock does not automatically transfer
the right to receive the relevant distribution from the seller of the
common stock to its buyer.
31
In addition, if we are party to a consolidation, merger or binding share
exchange pursuant to which our common stock would be converted into cash or
property other than securities, a Holder may surrender Preferred Stock for
conversion at any time from and after the date which is 15 days prior to the
anticipated effective date of the transaction until 15 days after the actual
effective date of such transaction. If we engage in certain reclassifications of
our common stock or are a party to a consolidation, merger, binding share
exchange or transfer of all or substantially all of our assets pursuant to which
our common stock is converted into cash, securities or other property, then, at
the effective time of the transaction, the right to convert Preferred Stock into
our common stock will be changed into a right to convert Preferred Stock into
the kind and amount of cash, securities or other property which the Holder would
have received if the Holder had converted its Preferred Stock immediately prior
to the transaction. If we engage in any transaction described in the preceding
sentence, the conversion rate will not be adjusted. If the transaction also
constitutes a Fundamental Change, a Holder can require us to purchase all or a
portion of its Preferred Stock as described below under "Fundamental Change
Requires Purchase of Preferred Stock by Us at the Option of the Holder."
CONVERSION UPON SATISFACTION OF TRADING PRICE CONDITION. A Holder may
convert its Preferred Stock into shares of our common stock during the five
Business Days immediately following any 10 consecutive trading-day period in
which the trading price per share of Preferred Stock (as determined following a
request by a Holder of Preferred Stock in accordance with the procedures
described below) for each day of that period was less than 95% of the product of
the closing sale price of our common stock and the then applicable conversion
rate of Preferred Stock; provided, however, a Holder may not convert its
Preferred Stock if the average closing sale price of our common stock for such
10 consecutive trading-day period was between the then applicable conversion
price of the Preferred Stock and 120% of the then applicable conversion price of
the Preferred Stock.
The "TRADING PRICE" of the Preferred Stock on any date of determination
means the average of the secondary market bid quotations per share of Preferred
Stock obtained by the conversion agent for $5,000,000 liquidation preference of
the Preferred Stock at approximately 3:30 p.m., New York City time, on such
determination date from three independent nationally recognized securities
dealers we select, provided that if three such bids cannot reasonably be
obtained by the conversion agent, but two such bids are obtained, then the
average of the two bids shall be used, and if only one such bid can reasonably
be obtained by the conversion agent, this one bid shall be used. If the
conversion agent cannot reasonably obtain at least one bid for $5,000,000
liquidation preference of the Preferred Stock from a nationally recognized
securities dealer, then the trading price per share of the Preferred Stock will
be deemed to be less than 95% of the product of the sale price of our common
stock and the then applicable conversion rate.
In connection with any conversion upon satisfaction of the above trading
price condition, the conversion agent shall have no obligation to determine the
trading price of the Preferred Stock unless we have requested such
determination; and we shall have no obligation to make such request unless a
Holder provides us with reasonable evidence that the trading price per share of
the Preferred Stock would be less than 95% of the product of the sale price of
our common stock and the then applicable conversion rate, at which time, we
shall instruct the conversion agent to determine the trading price of the
Preferred Stock beginning on the next trading day and on each successive trading
day until the trading price is greater than or equal to 95% of the product of
the sale price of our common stock and the then applicable conversion rate.
CONVERSION RATE ADJUSTMENTS. The conversion rate will be subject to
adjustment, without duplication, upon the occurrence of any of the following
events:
(1) the payment of dividends and other distributions on our common stock
payable exclusively in shares of our common stock or our other capital
stock;
(2) the issuance to all holders of our common stock of rights or
warrants that allow the holders to purchase shares of our common stock for a
period expiring within 60 days from the date of issuance of the rights or
warrants at less than the market price on the record date for the
determination of shareholders entitled to receive the rights or warrants;
(3) subdivisions, combinations or certain reclassifications of our
common stock;
(4) distributions to all holders of our common stock of our assets, debt
securities or rights or warrants to purchase our securities (excluding (A)
any dividend, distribution or issuance covered by clause (1) or (2) above
and (B) any dividend or distribution paid exclusively in cash). In cases
where (a) the fair market value per share of common stock of the assets,
debt securities or rights or warrants to purchase our securities distributed
to shareholders equals or exceeds the market price of our common stock on
the record date for the determination of shareholders entitled to receive
such distribution, or (b) the market price of our common stock on the record
date for determining the shareholders entitled to receive the distribution
exceeds the fair market value per share of
32
common stock of the assets, debt securities or rights or warrants so
distributed by less than $1.00, rather than being entitled to an adjustment
in the conversion rate, the Holder will be entitled to receive upon
conversion, in addition to the shares of our common stock, the kind and
amount of assets, debt securities or rights or warrants comprising the
distribution that the Holder would have received if the Holder had
converted the Holder's Preferred Stock immediately prior to the record
date for determining the shareholders entitled to receive the
distribution;
(5) dividends and distributions made during any of our quarterly fiscal
periods consisting exclusively of cash to all holders of outstanding shares
of common stock; and
(6) (A) other all-cash distributions other than dividends and
distributions covered by clause (5) above made during such quarterly fiscal
period and (B) any cash and the fair market value, as of the expiration of
the tender or exchange offer (other than consideration payable in respect of
any odd-lot tender offer) by us or any of our subsidiaries for shares of our
common stock concluded during such quarterly fiscal period.
With respect to clause (4) above, in the event that we make a distribution
to all holders of our common stock consisting of capital stock of, or similar
equity interests in, a subsidiary or other business unit of ours, the conversion
rate will be adjusted based on the market value of the securities so distributed
relative to the market value of our common stock, in each case based on the
average closing sale prices of those securities for the 10 trading days
commencing on and including the fifth trading day after the date on which
"ex-dividend trading" commences for such dividend or distribution on the New
York Stock Exchange or such other national or regional exchange or market on
which the securities are then listed or quoted.
Notwithstanding the foregoing, in no event will the conversion rate exceed
6.5703 shares of common stock as a result of an adjustment pursuant to clauses
(4) and (5) above.
In addition to these adjustments, we may increase the conversion rate as our
board of directors considers advisable to avoid or diminish any income tax to
holders of our common stock or rights to purchase our common stock resulting
from any dividend or distribution of stock (or rights to acquire stock) or from
any event treated as such for income tax purposes. We may also, from time to
time, to the extent permitted by applicable law, increase the conversion rate by
any amount, temporarily or otherwise, for any period of at least 20 days if our
board of directors has determined that such increase would be in our best
interests. If our board of directors makes such a determination, it will be
conclusive. We will give Holders of Preferred Stock at least 15 days' notice of
such an increase in the conversion rate.
As used in this offering memorandum, "MARKET PRICE" means the average of the
last reported sale price per share of our common stock for the 20 trading day
period ending on the applicable date of determination (if the applicable date of
determination is a trading day or, if not, then on the last trading day prior to
the applicable date of determination), appropriately adjusted to take into
account the occurrence, during the period commencing on the first of the trading
days during the 20 trading day period and ending on the applicable date of
determination, of any event that would result in an adjustment of the conversion
rate under the certificate of designation.
No adjustment to the conversion rate or the ability of a Holder of Preferred
Stock to convert will be made if the Holder will otherwise participate in the
distribution without conversion or in certain other cases.
The applicable conversion rate will not be adjusted:
- upon the issuance of any shares of our common stock pursuant to any
present or future plan providing for the reinvestment of dividends or
interest payable on our securities and the investment of additional
optional amounts in shares of our common stock under any plan;
- upon the issuance of any shares of our common stock or options or rights
to purchase those shares pursuant to any present or future employee,
director or consultant benefit plan or program of or assumed by us or any
of our subsidiaries;
- upon the issuance of any shares of our common stock pursuant to any
option, warrant, right or exercisable, exchangeable or convertible
security not described in the preceding bullet and outstanding as of the
date the Preferred Stock was first issued;
- for a change in the par value of the common stock; or
- for accumulated and unpaid dividends on the Preferred Stock, including
additional dividends, if any.
33
\
Holders will receive, upon conversion of the Preferred Stock, in addition to
common stock, rights under any rights plan we may adopt, whether or not the
rights have separated from the common stock at the time of conversion unless,
prior to conversion, the rights have expired, terminated or been redeemed or
exchanged.
No adjustment in the applicable conversion price will be required unless the
adjustment would require an increase or decrease of at least 1% of the
applicable conversion price. If the adjustment is not made because the
adjustment does not change the applicable conversion price by more than 1%, then
the adjustment that is not made will be carried forward and taken into account
in any future adjustment.
No adjustment in the conversion price or conversion rate need be made for a
merger or consolidation if Holders are to participate in the transaction on a
basis and with notice that the Board of Directors determines to be fair and
appropriate in light of the basis and notice on which holders of our common
stock participate in the transaction; provided, that the basis on which the
Holders are to participate in the transaction shall not be deemed to be fair if
it would require the conversion of Preferred Stock at any time prior to the
expiration of the conversion period specified for such Preferred Stock.
MANDATORY CONVERSION
At any time on or after December 5, 2008, we may, at our option, cause the
Preferred Stock to be automatically converted into that number of shares of our
common stock for each share of Preferred Stock equal to $50.00 (the liquidation
preference per share of Preferred Stock) divided by the applicable conversion
price of the Preferred Stock. We may exercise this right only if the closing
price of our common stock equals or exceeds 130% of the then applicable
conversion price of the Preferred Stock for at least 20 trading days in any
consecutive 30-day trading period, including the last trading day of such 30-
day period, ending on the trading day prior to our issuance of a press release
announcing the mandatory conversion as described below.
To exercise the mandatory conversion right described above, we must issue a
press release for publication on the Dow Jones News Service prior to the opening
of business on the first trading day following any date on which the conditions
described in the preceding paragraph are met, announcing such a mandatory
conversion. We will also give notice by mail or by publication (with subsequent
prompt notice by mail) to Holders of Preferred Stock (not more than four
Business Days after the date of the press release) of the mandatory conversion
announcing our intention to convert the Preferred Stock. The conversion date
will be a date selected by us (which we will refer to as the "MANDATORY
CONVERSION DATE") and will be no more than five days after the date on which we
issue such press release.
In addition to any information required by applicable law or regulation, the
press release and notice of mandatory conversion shall state, as appropriate:
- the Mandatory Conversion Date;
- the number of shares of common stock to be issued upon conversion of each
share of Preferred Stock;
- the number of shares of Preferred Stock to be converted; and
- that dividends on the Preferred Stock to be converted will cease to
accumulate on the Mandatory Conversion Date.
On and after the Mandatory Conversion Date, dividends will cease to
accumulate on the Preferred Stock called for a mandatory conversion and all
rights of holders of such Preferred Stock will terminate except for the right to
receive the shares of common stock issuable upon conversion thereof. The
dividend payment with respect to a share of Preferred Stock called for a
mandatory conversion on a date during the period between the close of business
on any record date for the payment of dividends to the close of business on the
corresponding dividend payment date will be payable on such dividend payment
date to the record holder of such share on such record date if such share has
been converted after such record date and prior to such dividend payment date.
Except as provided in the immediately preceding sentence with respect to a
mandatory conversion, no payment or adjustment will be made upon conversion of
Preferred Stock for accumulated and unpaid dividends or for dividends with
respect to our common stock issued upon such conversion.
We may not authorize, issue a press release or give notice of any mandatory
conversion unless, prior to giving the conversion notice, all accumulated and
unpaid dividends on the Preferred Stock for periods ended prior to the date of
such conversion notice shall have been paid in cash.
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In addition to the mandatory conversion provision described above, if there
are less than 250,000 shares of Preferred Stock outstanding, we may, at any time
on or after December 5, 2008, at our option, cause the Preferred Stock to be
automatically converted into that number of shares of our common stock equal to
$50.00 (the liquidation preference per share of Preferred Stock) divided by the
lesser of the then applicable conversion price and the market price for the five
trading-day period ending on the second trading day immediately prior to the
Mandatory Conversion Date. The provisions of the immediately preceding four
paragraphs shall apply to any such mandatory conversion; provided, that (1) the
Mandatory Conversion Date will not be less than 15 days nor more than 30 days
after the date on which we issue a press release announcing such mandatory
conversion and (2) the press release and notice of mandatory conversion will not
state the number of shares of our common stock to be issued upon conversion of
each share of Preferred Stock.
FRACTIONAL SHARES
We will not issue fractional shares of our common stock upon conversion of
Preferred Stock. Instead we will deliver cash or a check for the current value
of the fractional share. The current market value of a fractional share shall be
determined to the nearest 1/10,000th of a share by multiplying the last reported
sale price of our common stock (as determined by the procedures listed in the
certificate of designation) on the trading date immediately preceding the
conversion date by the fractional amount and rounding the product to the nearest
whole cent.
FUNDAMENTAL CHANGE REQUIRES PURCHASE OF PREFERRED STOCK BY US AT THE OPTION OF
THE HOLDER
Holders will have the right, at their option, subject to the terms of the
certificate of designation, to require us to purchase any or all of their
Preferred Stock for cash on a date selected by CMS Energy that is no earlier
than 60 days nor later than 90 days (the "FUNDAMENTAL CHANGE PURCHASE DATE")
after the mailing of written notice by CMS Energy of the occurrence of such
Fundamental Change. The cash price we are required to pay is equal to 100% of
the liquidation preference of the Preferred Stock to be purchased plus
accumulated and unpaid dividends, including additional dividends, if any, to the
Fundamental Change purchase date (the "FUNDAMENTAL CHANGE PURCHASE PRICE"). For
a discussion of the United States federal income tax treatment of a Holder
receiving cash, see "Certain United States Federal Income Tax Considerations."
A "FUNDAMENTAL CHANGE" will be deemed to have occurred at the time after the
Preferred Stock is originally issued that any of the following occurs:
(1) our common stock or other capital stock into which the Preferred
Stock is convertible is neither listed for trading on a United States
national securities exchange nor approved for trading on the Nasdaq National
Market or another established automated over-the-counter trading market in
the United States;
(2) a "person" or "group" within the meaning of Section 13(d) of the
Exchange Act, other than us, our subsidiaries or our or their employee
benefit plans, files a Schedule TO or any schedule, form or report under the
Exchange Act disclosing that such person or group has become the direct or
indirect ultimate "beneficial owner," as defined in Rule 13d-3 under the
Exchange Act, of our common equity representing more than 50% of the voting
power of our common equity entitled to vote generally in the election of
directors;
(3) consummation of any share exchange, consolidation or merger of us
pursuant to which our common stock will be converted into cash, securities
or other property or any sale, lease or other transfer in one transaction or
a series of transactions of all or substantially all of the consolidated
assets of us and our subsidiaries, taken as a whole, to any person other
than us or one or more of our subsidiaries; provided, however, that a
transaction where the Holders of our common equity immediately prior to such
transaction have, directly or indirectly, more than 50% of the aggregate
voting power of all classes of common equity of the continuing or surviving
corporation or transferee entitled to vote generally in the election of
directors immediately after such event shall not be a Fundamental Change; or
(4) continuing directors (as defined herein) cease to constitute at
least a majority of our Board of Directors.
A Fundamental Change will not be deemed to have occurred in respect of any
of the foregoing, however, if either:
(1) the last reported sale price of our common stock for any five
trading days within the 10 consecutive trading days ending immediately
before the later of the Fundamental Change or the public announcement
thereof equals or exceeds 105% of the applicable conversion price of the
Preferred Stock in effect immediately before the Fundamental Change or the
public announcement thereof; or
35
(2) at least 90% of the consideration, excluding cash payments for
fractional shares, in the transaction or transactions constituting the
Fundamental Change consists of shares of capital stock traded on a national
securities exchange or quoted on the Nasdaq National Market or which will be
so traded or quoted when issued or exchanged in connection with a
Fundamental Change (these securities being referred to as "PUBLICLY TRADED
SECURITIES") and as a result of this transaction or transactions the
Preferred Stock becomes convertible into such publicly traded securities,
excluding cash payments for fractional shares.
For purposes of the above paragraph, the term capital stock of any person
means any and all shares (including ordinary shares or American Depositary
Shares), interests, participations or other equivalents however designated of
corporate stock or other equity participations, including partnership interests,
whether general or limited, of such person and any rights (other than debt
securities convertible or exchangeable into an equity interest), warrants or
options to acquire an equity interest in such person.
"CONTINUING DIRECTOR" means a director who either was a member of our Board
of Directors on the date of this offering memorandum or who becomes a member of
our Board of Directors subsequent to that date and whose appointment, election
or nomination for election by our stockholders is duly approved by a majority of
the continuing directors on our Board of Directors at the time of such approval,
either by a specific vote or by approval of the proxy statement issued by us on
behalf of the Board of Directors in which such individual is named as nominee
for director.
Within 30 days after the occurrence of the Fundamental Change, CMS Energy is
obligated to mail to each Holder of shares of Preferred Stock a notice regarding
the Fundamental Change, which notice shall state, among other things:
- that a Fundamental Change has occurred, the date of such occurrence and
that each such Holder has the right to require CMS Energy to repurchase
all or any part of such Holder's Preferred Stock at the Fundamental Change
purchase price;
- the Fundamental Change purchase price;
- the Fundamental Change purchase date;
- the name and address of the paying agent and the conversion agent;
- the procedures that Holders must follow to cause the Preferred Stock to
be repurchased;
- the last date on which a Holder may exercise its purchase right;
- that the Preferred Stock with respect to which a Fundamental Change
purchase notice (as defined herein) has been given by the Holder may be
converted only if the Holder withdraws the Fundamental Change purchase
notice in accordance with the terms of the certificate of designation; and
- the conversion rate and any adjustments to the conversion rate.
To exercise this right, a Holder must deliver a written notice (the
"FUNDAMENTAL CHANGE PURCHASE NOTICE"), along with the Preferred Stock to be
purchased, duly endorsed for transfer, to the paying agent at its office in
Jackson, Michigan, or any other office of the paying agent maintained for such
purposes, not later than 30 days prior to the Fundamental Change purchase date.
The Fundamental Change purchase notice shall state:
- the Preferred Stock to be repurchased, which must be $50.00 or an integral
multiple thereof;
- that such Preferred Stock is to be repurchased by CMS Energy pursuant to
the applicable Fundamental Change provisions of the certificate of
designation; and
- unless the Preferred Stock is represented by one or more global
securities, the certificate numbers of the Preferred Stock to be
repurchased.
If the Preferred Stock is not in certificated form, the Fundamental Change
purchase notice must comply with appropriate DTC procedures.
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Holders may withdraw any Fundamental Change purchase notice (in whole or in
part) by a written notice of withdrawal delivered to the paying agent prior to
the close of business on the Business Day prior to the Fundamental Change
purchase date. The notice of withdrawal shall state:
- the number of shares of the withdrawn Preferred Stock;
- if certificated Preferred Stock has been issued, the certificate numbers
of the withdrawn shares of Preferred Stock; and
- the number of shares of Preferred Stock, if any, which remain subject to
the purchase notice.
If the Preferred Stock is not in certificated form, the notice of withdrawal
must comply with appropriate DTC procedures.
Payment of the Fundamental Change purchase price for shares of Preferred
Stock in registered, certificated form ("CERTIFICATED PREFERRED STOCK") for
which a Fundamental Change purchase notice has been delivered and not withdrawn
is conditioned upon delivery of such Certificated Preferred Stock (together with
necessary endorsements) to the paying agent at its office in Jackson, Michigan,
or any other office of the paying agent maintained for such purpose, at any time
(whether prior to, on or after the Fundamental Change purchase date) after the
delivery of such Fundamental Change purchase notice. Payment of the Fundamental
Change purchase price for such Certificated Preferred Stock will be made
promptly following the later of the Fundamental Change purchase date or the time
of delivery of such Certificated Preferred Stock.
If the paying agent holds, in accordance with the terms of the certificate
of designation, money sufficient to pay the Fundamental Change purchase price of
shares of Preferred Stock on the Business Day following the Fundamental Change
purchase date for such Preferred Stock, then, on and after such date, dividends
on such Preferred Stock (including additional dividends, if any,) will cease to
accumulate, whether or not such Preferred Stock is delivered to the paying
agent, and all other rights of the Holder shall terminate (other than the right
to receive the Fundamental Change purchase price upon delivery of such Preferred
Stock).
The definition of Fundamental Change includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our consolidated assets. There is no precise, established definition of the
phrase "substantially all" under applicable law. Accordingly, the ability of a
Holder of Preferred Stock to require us to purchase its shares of Preferred
Stock as a result of the conveyance, transfer, sale, lease or other disposition
of less than all of our assets may be uncertain.
If a Fundamental Change were to occur, we may not have enough funds to pay
the Fundamental Change purchase price. See "Risk Factors" under the caption
"Risks Related to the Preferred Stock -- We may not have the ability to purchase
the Preferred Stock upon a Fundamental Change."
The certificate of designation requires CMS Energy to comply with the
provisions of Regulation 14E and any other tender offer rules under the Exchange
Act which may then be applicable in connection with any offer by CMS Energy to
purchase Preferred Stock at the option of the Holder upon a Fundamental Change.
The Fundamental Change purchase feature of the Preferred Stock may in
certain circumstances make more difficult or discourage a takeover of CMS Energy
and, thus, the removal of incumbent management. The Fundamental Change purchase
feature, however, is not the result of management's knowledge of any specific
effort to accumulate shares of our common stock or to obtain control of us by
means of a merger, tender offer, solicitation or otherwise, or part of a plan by
management to adopt a series of anti-takeover provisions. Instead, the
Fundamental Change purchase feature is a term contained in many similar
preferred stock offerings and the terms of such feature result from negotiations
between CMS Energy and the initial purchasers. Management has no present
intention to propose any anti-takeover measures although it is possible that CMS
Energy could decide to do so in the future.
The definition of Fundamental Change is limited to specified transactions
and may not include other events that might adversely affect our financial
condition. In addition, the requirement that we offer to purchase the Preferred
Stock upon a Fundamental Change may not protect Holders in the event of a highly
leveraged transaction, reorganization, merger or similar transaction involving
us.
In addition, CMS Energy's ability to repurchase Preferred Stock may be
limited by its financial resources, its inability to raise the required funds
because of restrictions on issuance of securities contained in other contractual
arrangements and Michigan law.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The certificate of designation provides that we may, without the consent of
the Holders of any of the outstanding Preferred Stock,
37
consolidate with or merge into any other person or convey, transfer or lease all
or substantially all our assets to any person or may permit any person to
consolidate with or merge into, or transfer or lease all or substantially all
its properties to, us; provided, however, that: (a) the successor, transferee or
lessee is organized under the laws of the United States or any political
subdivision thereof; (b) the shares of Preferred Stock will become shares of
such successor, transferee or lessee, having in respect of such successor,
transferee or lessee the same powers, preferences and relative participating,
optional or other special rights and the qualification, limitations or
restrictions thereon, as the Preferred Stock had immediately prior to such
transaction; and (c) certain procedural conditions are met.
Under any consolidation by us with, or merger by us into, any other person
or any conveyance, transfer or lease of all or substantially all our assets as
described in the preceding paragraph, the successor resulting from such
consolidation or into which we are merged or the transferee or lessee to which
such conveyance, transfer or lease is made will succeed to, and be substituted
for, and may exercise every right and power of, ours under the shares of
Preferred Stock, and, thereafter, except in the case of a lease, the predecessor
(if still in existence) will be released from its obligations and covenants with
respect to the Preferred Stock. Notwithstanding the foregoing provisions, such a
transaction may constitute a Fundamental Change as described in "Fundamental
Change Requires Purchase of Preferred Stock by Us at the Option of the Holder."
RESTRICTIONS ON TRANSFER
The Preferred Stock, and any shares of common stock distributed pursuant to
the conversion of the Preferred Stock, may not be sold or otherwise transferred
until the expiration of two years following the date of payment for and delivery
of the Preferred Stock, except (a) pursuant to registration under the Securities
Act, (b) in accordance with Rule 144 (if applicable) or Rule 144A under the
Securities Act (if applicable) or (c) in offshore transactions in reliance on
Regulation S, and will bear a legend to this effect.
THE CONVERSION AND PAYING AGENT
CMS Energy is the paying agent and conversion agent under the certificate of
designation for the Preferred Stock.
CALCULATIONS IN RESPECT OF THE PREFERRED STOCK
We will be responsible for making all calculations called for under the
Preferred Stock. These calculations include, but are not limited to,
determinations of the market prices of our common stock, accumulated dividends
payable on the Preferred Stock and the conversion price of the Preferred Stock.
We will make all these calculations in good faith and, absent manifest error,
our calculations will be final and binding on Holders of Preferred Stock. We
will provide a schedule of our calculations to the conversion agent, and the
conversion agent is entitled to rely upon the accuracy of our calculations
without independent verification. We will forward our calculations to any Holder
of Preferred Stock upon the request of that Holder.
GOVERNING LAW
The certificate of designation and the Preferred Stock 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.
BOOK-ENTRY SYSTEM
The Preferred Stock is represented by one or more global securities. Each
global security is deposited with, or on behalf of, DTC and registered in the
name of a nominee of DTC. Except under circumstances described below, the
Preferred Stock will not be issued in definitive form.
The following is based upon information furnished by DTC:
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("PARTICIPANTS") deposit with DTC. DTC
also facilitates the settlement among participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
("DIRECT PARTICIPANTS") include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its direct participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others
38
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 applicable to DTC and its participants are on
file with the SEC.
Investors who purchase Preferred Stock in offshore transactions in
reliance on Regulation S under the Securities Act may hold their interest in a
global security directly through Euroclear Bank S.A./N.V., as operator of the
Euroclear System ("EUROCLEAR"), and Clearstream Banking, societe anonyme
("CLEARSTREAM"), if they are participants in such systems, or indirectly through
organizations that are participants in such systems. Euroclear and Clearstream
will hold interests in the global securities on behalf of their participants
through their respective depositaries, which in turn will hold such interests in
the global securities in customers' securities accounts in the depositaries'
names on the books of DTC.
Upon the issuance of a global security, DTC will credit on its book-entry
registration and transfer system the accounts of persons designated by the
initial purchaser with the respective number of shares of Preferred Stock
represented by the global security. Ownership of beneficial interests in a
global security will be limited to participants or persons that may hold
interests through participants. Ownership of beneficial interests in a global
security will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee (with respect to
interests of persons other than participants). The laws of some states require
that some purchasers of securities take physical delivery of the securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a global security.
So long as DTC or its nominee is the registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or Holder of the Preferred Stock represented by that global security for
all purposes. Except as provided below, owners of beneficial interests in a
global security will not be entitled to have Preferred Stock represented by that
global security registered in their names, will not receive or be entitled to
receive physical delivery of Preferred Stock in definitive form and will not be
considered the owners or Holders thereof. Dividend and any other payments, if
any, on Preferred Stock registered in the name of DTC or its nominee will be
made to DTC or its nominee, as the case may be, as the registered owner of the
relevant global security. Neither we, any paying agent or the security registrar
for the Preferred Stock will have any responsibility or liability for any aspect
of the records relating to nor payments made on account of beneficial interests
in a global security or for maintaining, supervising or reviewing any records
relating to such beneficial interests.
We expect that DTC or its nominee, upon receipt of any payment of
dividends, will credit immediately participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the number of
shares of the relevant global security as shown on the records of DTC or its
nominee. We also expect that payments by participants to owners of beneficial
interests in a global security held through these participants 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 the participants.
Beneficial owners of interests in global securities who desire to convert
their interests into common stock should contact their brokers or other
participants or indirect participants through whom they hold such beneficial
interests to obtain information on procedures, including proper forms and
cut-off times, for submitting requests for conversion.
Unless and until they are exchanged in whole or in part for Preferred
Stock in definitive form, the global securities may not be transferred except as
a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another
nominee of DTC. Transfers between participants in DTC will be effected in the
ordinary way in accordance with DTC rules and will be settled in same-day funds.
Transfers between participants in Euroclear and Clearstream will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Cross-market transfers between DTC, on the one hand, and directly or
indirectly through Euroclear or Clearstream participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(Brussels time). Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the global securities in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositaries for
Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in the global securities from a
DTC participant will be credited during the securities settlement processing day
(which must be a business
39
day for Euroclear or Clearstream, as the case may be) immediately following the
DTC settlement date, and such credit of any transactions interests in the global
securities settled during such processing day will be reported to the relevant
Euroclear or Clearstream participant on such day. Cash received by Euroclear or
Clearstream as a result of sales of interests in the global securities by or
through a Euroclear or Clearstream participant to a DTC participant will be
received with value on the DTC settlement date, but will be available in the
relevant Euroclear or Clearstream cash account only as of the business day
following settlement in DTC.
If DTC at any time is unwilling or unable to continue as a depositary,
defaults in the performance of its duties as depositary or ceases to be a
clearing agency registered under the Exchange Act or other applicable statute or
regulation, and a successor depositary is not appointed by us within 90 days, we
will issue Preferred Stock in definitive form in exchange for the global
securities relating to the Preferred Stock. In addition, we may at any time and
in our sole discretion determine not to have the Preferred Stock or portions of
the Preferred Stock represented by one or more global securities and, in that
event, will issue individual shares of Preferred Stock in exchange for the
global security or securities representing the Preferred Stock. Further, if we
so specify with respect to any Preferred Stock, an owner of a beneficial
interest in a global security representing the Preferred Stock may, on terms
acceptable to us and the depositary for the global security, receive individual
shares of Preferred Stock in exchange for the beneficial interest. In any such
instance, an owner of a beneficial interest in a global security will be
entitled to physical delivery in definitive form of shares of Preferred Stock
represented by the global security equal in number of shares to the beneficial
interest, and to have the shares of Preferred Stock registered in its name.
Preferred Stock so issued in definitive form will be issued as registered
Preferred Stock in denominations of $50.00 and integral multiples thereof,
unless otherwise specified by us.
LISTING
The Preferred Stock is eligible to be traded on the Portal Market of the
National Association of Securities Dealers, Inc.
DESCRIPTION OF OUR 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 Articles of Incorporation and the By-Laws of CMS
Energy, which are incorporated into this prospectus by reference. See "Where You
Can Find More Information." A copy of the By-Laws and Articles of Incorporation
have been previously filed with the SEC. The Articles of Incorporation are also
available on our website at http://www.cmsenergy.com.
The authorized capital stock of CMS Energy consists of:
- 350 million shares of CMS Energy Common Stock, par value $0.01 per
share ("COMMON STOCK"); and
- 10 million shares of CMS Energy Preferred Stock, par value $0.01 per
share ("PREFERRED STOCK").
As of September 22, 2004, we had 5,000,000 shares of preferred stock and
161,857,306 shares of common stock issued and outstanding.
COMMON STOCK
DIVIDEND RIGHTS AND POLICY; RESTRICTIONS ON DIVIDENDS
Dividends on the common stock are paid at the discretion of the Board of
Directors based primarily upon the earnings and financial condition of CMS
Energy. Dividends are payable out of the assets of CMS Energy legally available
therefore.
In January 2003, the Board of Directors suspended the payment of common
stock dividends.
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 on 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, 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
40
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 preferred stock, including
the currently issued and outstanding Preferred Stock. As long as the Preferred
Stock is outstanding, CMS Energy may not pay dividends on its common stock
unless certain conditions are met including, but not limited to, that dividends
on the Preferred Stock have been paid. See "Preferred Stock -- Dividends".
CMS Energy is subject to the following contractual restrictions on its
ability to pay dividends:
CMS ENERGY'S SENIOR SECURED CREDIT FACILITY
Under the terms of our Fifth Amended and Restated Senior Credit Agreement
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 common stock or the capital
stock or other ownership interests of certain subsidiaries (other
than stock splits and dividends payable solely in our
non-convertible equity securities (other than Redeemable Stock or
Exchangeable Stock (as such terms are defined in the senior debt
indenture on August 3, 2004)) and dividends and distributions made
to us or certain of our subsidiaries); or
- purchase, redeem, retire or otherwise acquire for value any such
capital stock or other ownership interests;
unless other than (i) pursuant to the terms of any class of our capital stock
issued and outstanding (and as in effect on August 3, 2004), any purchase or
redemption of our capital stock made by exchange for, or out of the proceeds of
the substantially concurrent sale of, our capital stock (other than Redeemable
Stock or Exchangeable Stock (as such terms are defined in the senior debt
indenture on August 3, 2004)) and (ii) payments made by us or certain
subsidiaries pursuant to our tax sharing agreement and (iii) after January 1,
2005 payments not to exceed certain amounts for any twelve-month period so long
as a certain amount of liquidity is held by CMS Energy.
SENIOR DEBT INDENTURE
Under the terms of the senior debt indenture we have the following issued
and outstanding securities: 7 5/8% Senior Unsecured Notes Due 2004, X-TRAS(SM)
Pass-Through Trust I Certificates Due 2005, 9.875% Senior Notes Due 2007, 7.5%
Senior Notes Due 2009, 8.9% Senior Notes Due 2008, 8.5% Senior Notes Due 2011,
3.375% Convertible Senior Notes Due 2023 and 7.75% Senior Notes Due 2010. So
long as any of such notes issued thereunder are outstanding and until those
notes are rated BBB - or above (or an equivalent rating) by S&P 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 senior debt 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 schedule maturity or scheduled repayment
thereof, any of our subordinated indebtedness (each, for purposes of
the senior debt indenture, a "RESTRICTED PAYMENT"),
if at the time of any restricted payment described above (1) an event of default
under the senior debt 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;
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- 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, 2004, we could pay cash dividends of $113.8 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 JPMorgan Chase Bank, as trustee, pursuant to which
we have issued our General Term Notes, Series D, Series E and Series F, 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 S&P 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 such 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); or
- purchase, redeem or otherwise acquire or retire for value any of our
capital stock (each, a "RESTRICTED PAYMENT");
if at the time of any restricted payment described above (1) an event of default
under such 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, 2004, we could pay cash dividends of $1.079 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 Quarterly Income Preferred Securities. The preferred securities
are convertible at the option of the holder into shares of common stock at an
initial conversion rate of 1.2255 shares of common stock for each preferred
security (equivalent to a purchase price of $40.80 per share of common stock),
subject to certain adjustments. We may, at our option, cause the conversion
rights of the holders of the preferred securities to expire upon certain
conditions.
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
agreement dated June 20, 1997 between us and The Bank of New York relating to
the preferred securities of CMS Energy Trust I pursuant to which the preferred
securities and the related 7 3/4% Convertible Subordinated
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Debentures due 2027 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 relevant guarantee agreement; or
- we have given notice of our selection of an extension period as
provided in such 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 or a repurchase of capital
stock 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,
2004, our net assets available for the payment of dividends were $1.702 billion.
VOTING RIGHTS
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 common stock 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 common stock, and to authorize any amendment to the
Articles of Incorporation that would increase or decrease the aggregate number
of authorized shares of common stock or alter or change the powers, preferences
or special rights of the shares of common stock 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 the shares of common stock then outstanding will be
necessary for authorizing, effecting or validating the merger or consolidation
of CMS Energy into or with any other entity if such merger or consolidation
would adversely affect the powers or special rights of the common stock, either
directly by amendment to the Articles of Incorporation or indirectly by
requiring the holders of the common stock 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 commons stock 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 common stock to block any such merger or
amendment that would adversely affect the powers or special rights of holders of
such shares 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
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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 common stock will be entitled to
receive, on a per share basis, the assets of CMS Energy remaining for
distribution to the holders of common stock. 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 voting and liquidation
rights of shares of common stock will be appropriately adjusted so as to avoid
any dilution in aggregate voting or liquidation rights.
EXCHANGES
The Articles of Incorporation do not provide for either the mandatory or
optional exchange or redemption of common stock.
TRANSFER AGENT AND REGISTRAR
Common stock is transferable at Consumers Energy Company, One Energy
Plaza, Jackson, Michigan 49201. CMS Energy is the registrar and transfer agent
for 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.
4.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Articles of Incorporation establish one series of preferred stock
designated as "4.50% Cumulative Convertible Preferred Stock" consisting of
5,000,000 shares with a liquidation preference of $50.00 per share. The
Preferred Stock ranks prior to any series of our common stock as to the payment
of dividends and distribution of assets upon dissolution, liquidation or winding
up of CMS Energy, and is convertible into shares of common stock. The holders of
the Preferred Stock have no preemptive rights.
DIVIDENDS
Holders of shares of Preferred Stock will be entitled to receive, when, as
and if declared by our board of directors out of funds legally available for
payment, cumulative cash dividends at the rate per annum of 4.50% per share on
the liquidation preference thereof of $50.00 per share (equivalent to $2.25 per
annum per share). Dividends on the Preferred Stock will be payable quarterly on
March 1, June 1, September 1 and December 1 of each year at such annual rate,
and shall accumulate from the most recent date as to which dividends shall have
been paid or, if no dividends have been paid, from the issue date of the
Preferred Stock, whether or not in any dividend period or periods there have
been funds legally available for the payment of such dividends. Accumulated
unpaid dividends accrue and cumulate dividends at the annual rate of 4.50%.
As long as any Preferred Stock is outstanding, we may not pay dividends or
distributions on, or purchase, redeem or otherwise acquire, subject to certain
exceptions, shares of our common stock unless all accumulated and unpaid
dividends on the Preferred Stock have been paid or set aside for payment.
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LIQUIDATION PREFERENCE
In the event of our voluntary or involuntary liquidation, winding-up or
dissolution, holders of Preferred Stock will be entitled to receive and to be
paid out of our assets available for distribution to our stockholders, before
any payment or distribution is made to holders of junior stock (including common
stock), a liquidation preference in the amount of $50.00 per share of Preferred
Stock, plus accumulated and unpaid dividends on the shares to the date fixed for
liquidation, winding-up or dissolution. If, upon our voluntary or involuntary
liquidation, winding-up or dissolution, the amounts payable with respect to the
liquidation preference of the Preferred Stock and all parity stock are not paid
in full, the holders of the Preferred Stock and the parity stock will share
equally and ratably in any distribution of our assets in proportion to the full
liquidation preference and accumulated and unpaid dividends to which they are
entitled.
VOTING RIGHTS
Except as required by Michigan law and our Articles of Incorporation, the
holders of Preferred Stock have no voting rights unless dividends payable on the
Preferred Stock are in arrears for six or more quarterly periods (whether or not
consecutive). In that event, the holders of the Preferred Stock, voting as a
single class with the shares of any other preferred stock or preference
securities having similar voting rights that are exercisable, will be entitled
at the next regular or special meeting of our stockholders to elect two
additional directors (or one director if fewer than six directors comprise our
board prior to appointment) and the number of directors that comprise our board
will be increased by the number of directors so elected. These voting rights and
the terms of the directors so elected will continue until such time as the
dividend arrearage on the Preferred Stock has been paid in full.
REDEMPTION
We cannot redeem shares of the Preferred Stock.
MANDATORY CONVERSION
On or after December 5, 2008, we may, at our option, cause the Preferred
Stock to be automatically converted into that number of shares of common stock
for each share of Preferred Stock equal to $50.00 (the liquidation preference)
divided by the applicable conversion rate. We may exercise our conversion right
only if, for 20 trading days within any period of 30 consecutive trading days
(including the last trading day of such 30-day period), the closing price of our
common stock exceeds 130% of the then prevailing conversion price of the
Preferred Stock.
CONVERSION RIGHTS
A holder of record of Preferred Stock may convert its shares of Preferred
Stock at any time into shares of our common stock under any of the following
circumstances:
- during any calendar quarter (and only during such calendar quarter)
if the last reported sale price of our common stock for at least 20
trading days during the period of 30 consecutive trading days ending
on the last trading day of the previous calendar quarter is greater
than or equal to 120% of the conversion price per share of our
common stock on such last trading day;
- upon the occurrence of specified corporate transactions; and
- subject to certain exceptions, during the five business day period
immediately following any ten consecutive trading-day period in
which the trading price per share of Preferred Stock for each day of
that period was less than 95% of the product of the closing sale
price of our common stock and the applicable conversion rate of such
share of Preferred Stock; provided, however, a holder may not
convert its shares of Preferred Stock if the average closing sale
price of our common stock for such ten consecutive trading-day
period was between the then current conversion price on the
Preferred Stock and 120% of the then applicable conversion price on
the Preferred Stock.
For each share of Preferred Stock surrendered for conversion, holders will
receive 5.0541 shares of our common stock. This represents an initial conversion
price of $9.893 per share of common stock. The conversion rate may be adjusted
for certain reasons, but it will not be adjusted for accumulated and unpaid
dividends on the preferred stock.
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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, depends and will depend substantially upon timely receipt
of sufficient dividends or other distributions from its subsidiaries, in
particular Consumers and Enterprises. Each of Consumers' and Enterprises'
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' Restated Articles of Incorporation ("ARTICLES") 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, 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 as of January 1, 1996, between
Consumers and The Bank of New York, as trustee (the "PREFERRED SECURITIES
INDENTURE"), and certain preferred securities guarantees by Consumers dated
January 23, 1996, September 11, 1997 and October 25, 1999 (collectively, the
"CONSUMERS PREFERRED SECURITIES GUARANTEES"), in connection with which the 8.36%
Trust Originated Preferred Securities of Consumers Power Company Financing I,
the 8.20% Trust Originated Preferred Securities of Consumers Energy Company
Financing II, the 9 1/4% Trust Originated Preferred Securities of Consumers
Energy Company Financing III and the 9.00% Trust Preferred Securities of
Consumers Energy Company Financing IV (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 Preferred Securities Indenture or the trust agreements pursuant to
which the Consumers Trust Preferred Securities were issued, (ii) a default has
occurred 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 Preferred Securities 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' ability to pay dividends is also restricted by several existing
loan agreements. The loan agreements are:
- The Amended and Restated Credit Agreement dated as of August 3, 2004
among Consumers, Bank One, N.A., as agent, and the financial
institutions named therein; and
- Term Loan Agreement dated as of November 7, 2003 among Consumers,
Bank One, N.A., as agent, and the financial institutions named
therein.
Pursuant to these loan agreements, so long as there exists no event of
default under these agreements, Consumers may pay dividends in an aggregate
amount not to exceed $300 million during any calendar year.
On June 2, 2003, the MPSC issued a financing order authorizing the
issuance of $554 million of securitization bonds. The order would prohibit
Consumers from paying any extraordinary dividends to us until further order of
the MPSC. Pursuant to the order, extraordinary dividends are considered any
amount over and above Consumers' earnings. The order also directed that the
securitization charges be designed such that retail open access customers would
pay a significantly smaller charge than would full service customers. On July 1,
2003, Consumers filed a petition for rehearing and clarification of certain
portions of the order with the MPSC, including the portion dealing with the
design of the securitization charges. In December 2003, the MPSC issued its
order on rehearing, which rejected our requests for rehearing and clarification
and remanded the proceeding to the administrative law judge for additional
proceedings.
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In December 2003, the MPSC issued an order granting interim gas rate
relief in the amount of $19.34 million annually. In connection with this rate
relief, Consumers agreed to limit its dividends to CMS Energy to a maximum of
$190 million annually during the period in which Consumers receives the interim
relief. The MPSC stated in its order that it was not determining at that time
whether dividend restrictions should continue after the issuance of a final
order.
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 or Enterprises 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 or Enterprises 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.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal income tax
consequences of the purchase, ownership, and disposition of the Preferred Stock
and any common stock received upon its conversion. This discussion is based upon
the provisions of the Internal Revenue Code of 1986, as amended (the "CODE"),
the final and temporary Treasury Regulations promulgated thereunder, and
administrative rulings and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. This summary does not purport to deal with all aspects of U.S.
federal income taxation that may be relevant to an investor's decision to
purchase shares of Preferred Stock, or with any tax consequences arising under
the laws of any state, locality or foreign jurisdiction. This summary is not
intended to be applicable to all categories of investors (such as dealers in
securities, banks, insurance companies, tax-exempt organizations, persons that
hold the Preferred Stock or common stock as part of a straddle, hedge,
constructive sale transaction, conversion transaction, "synthetic security" or
other integrated transaction for U.S. federal income tax purposes, or holders
subject to the alternative minimum tax) that may be subject to special rules. In
addition, this discussion is limited to persons that hold the Preferred Stock or
common stock as a "capital asset" (generally, property held for investment)
within the meaning of Section 1221 of the Code.
As used in this section, a "U.S. HOLDER" is a beneficial owner of
Preferred Stock or common stock that is, for U.S. federal income tax purposes:
- an individual U.S. citizen or resident alien;
- a corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States, any state
thereof or the District of Columbia;
- an estate whose world-wide income is subject to U.S. federal income
taxation; or
- a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust, or that has a valid election in
effect under applicable U.S. Treasury Regulations to be treated as a
United States person.
A "NON-U.S. HOLDER" is a beneficial owner of Preferred Stock or common
stock that is not a U.S. holder.
If a partnership holds Preferred Stock or common stock, the tax treatment
of a partner will generally depend upon the status of the partner and upon the
activities of the partnership.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, CONVERSION AND
DISPOSITION OF PREFERRED STOCK AND COMMON STOCK RECEIVED UPON ITS CONVERSION.
47
CONSEQUENCES TO U.S. HOLDERS OF PREFERRED STOCK OR COMMON STOCK
DISTRIBUTIONS
The amount of any distribution with respect to Preferred Stock or common
stock will be treated as a dividend to the extent of our current or accumulated
earnings and profits as determined under U.S. federal income tax principles. If
the distribution is a dividend, it may be taxable as ordinary income or, if you
are an individual, as "qualified dividend income," which is taxed at
preferential rates. One of the requirements for a dividend to qualify as
"qualified dividend income" is that, in the case of preferred stock, the holder
must have owned the stock for more than 90 days during the 180-day period
beginning on the date before the ex-dividend date and, in the case of common
stock, the holder must have owned the stock for more than 60 days during the
120-day period beginning on the date that is 60 days before the ex-dividend
date. You should consult your own tax advisor as to these and other possible
exceptions to qualified dividend income treatment.
To the extent the amount of any distribution exceeds our current and
accumulated earnings and profits, the excess will be applied against and will
reduce your tax basis (on a dollar-for-dollar basis) in the Preferred Stock or
common stock, as the case may be. Any amount in excess of your tax basis will be
treated as capital gain.
DIVIDENDS TO CORPORATE SHAREHOLDERS
In general, a distribution that is treated as a dividend for U.S. federal
income tax purposes and is made to a corporate shareholder with respect to the
Preferred Stock or common stock will qualify for the 70% dividends received
deduction under Section 243 of the Code. Corporate shareholders should note,
however, that there can be no assurance that the amount of distributions made
with respect to the Preferred Stock or the common stock will not exceed the
amount of our current and accumulated earnings and profits. Accordingly, there
can be no assurance that the dividends received deduction will be available in
respect of distributions on the Preferred Stock or common stock.
In addition, there are many exceptions and restrictions relating to the
availability of the dividends received deduction such as those relating to:
- the holder's holding period for the stock;
- debt-financed portfolio stock;
- dividends treated as "extraordinary dividends" for purposes of
Section 1059 of the Code; and
- holders that pay corporate alternative minimum tax.
Corporate shareholders should consult their own tax advisors regarding the
extent, if any, to which such exceptions and restrictions may apply to their
particular circumstances.
SALE OR OTHER DISPOSITION
Upon a sale or other disposition of Preferred Stock or common stock (other
than a conversion of Preferred Stock), you generally will recognize capital gain
or loss equal to the difference between the amount of cash and the fair market
value of any other property you receive on the sale or other disposition and
your adjusted tax basis in the Preferred Stock or common stock. Such capital
gain or loss will be long-term capital gain or loss if your holding period for
the Preferred Stock or common stock, as applicable, is more than one year.
If a Fundamental Change occurs and you exercise your option to require us
to purchase your Preferred Stock for cash, the transaction will generally be
treated as a redemption for U.S. federal income tax purposes. The U.S. federal
income tax treatment of such a redemption to a Holder will depend on the
particular facts relating to such Holder at the time of the redemption. The
receipt of cash in connection with such redemption will be treated as gain or
loss from the sale or other disposition of the Preferred Stock, taxable as
described in the preceding paragraph, if, taking into account stock that is
actually or constructively owned as determined under Section 318 of the Code:
- your interest in our stock is completely terminated as a result of
such redemption;
48
- your percentage ownership in our voting stock immediately after such
redemption is less than 80% of your percentage ownership immediately
before such redemption; or
- such redemption is "not essentially equivalent to a dividend"
(within the meaning of Section 302(b)(1) of the Code).
If none of the above tests giving rise to sale treatment is satisfied,
then a payment made in redemption of the Preferred Stock will be treated as a
distribution, taxable as described above under "Distributions," and your
adjusted tax basis in the redeemed Preferred Stock will be transferred to any
remaining ownership interest you hold in our stock. If you do not retain any
stock ownership in us following such redemption, then you may lose your basis
completely.
CONVERSION OF PREFERRED STOCK IN EXCHANGE FOR COMMON STOCK
You generally will not recognize gain or loss when you receive common
stock upon conversion of your Preferred Stock, except that gain or loss will be
recognized with respect to any cash received in lieu of fractional shares, and
the fair market value of any shares of common stock attributable to dividend
arrearages will be treated as a constructive distribution, taxable as described
above under "Distributions." The adjusted tax basis of the common stock
(including fractional share interests, but excluding any common stock treated as
a constructive distribution) will equal the tax basis of the shares of Preferred
Stock exchanged and the holding period of the common stock received (excluding
any common stock treated as a constructive distribution) will include the
holding period of the Preferred Stock. The tax basis of any common stock treated
as a constructive distribution will equal its fair market value on the date of
the conversion, and you will begin a new holding period for such common stock.
ADJUSTMENT OF CONVERSION PRICE
Holders of Preferred Stock may, in certain circumstances, be deemed to
have received constructive distributions of stock if the conversion rate for the
Preferred Stock is adjusted. Adjustments to the conversion price made pursuant
to a bona fide, reasonable adjustment formula that has the effect of preventing
the dilution of the interest of the holders of the Preferred Stock, however,
generally will not be considered to result in a constructive distribution of
stock. Certain adjustments provided in the anti- dilution provisions of the
Preferred Stock, including, without limitation, adjustments in respect of stock
dividends or the distribution of rights to subscribe for common stock should
qualify as being pursuant to a bona fide, reasonable adjustment formula and
should not result in a constructive distribution. In contrast, adjustments in
respect of distributions of our indebtedness or assets to our stockholders, for
example, will not qualify as being pursuant to a bona fide, reasonable
adjustment formula. In addition, an adjustment occasioned by a Fundamental
Change may not so qualify. If such adjustments are made, the Holders generally
will be deemed to have received constructive distributions in amounts based upon
the value of such Holders' increased interests in our equity resulting from such
adjustments. The amount of the distribution will be treated as a distribution to
a Holder, taxable as described above under "Distributions." Accordingly, you
could be considered to have received distributions taxable as dividends to the
extent of our current or accumulated earnings and profits even though you did
not receive any cash or property as a result of such adjustments.
CONVERSION OF PREFERRED STOCK AFTER DIVIDEND RECORD DATE
If a Holder exercises its right to convert the Preferred Stock into shares
of common stock after a dividend record date but before payment of the dividend,
then, upon conversion, the Holder generally will be required to pay to us in
cash an amount equal to the portion of such dividend attributable to the current
quarterly dividend period, which amount would increase the tax basis of the
common stock received. When the dividend is received, the Holder would recognize
the dividend payment in accordance with the rules described under
"Distributions" above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
You may be subject to information reporting and backup withholding with
respect to dividends paid on, or the proceeds of a sale, exchange or redemption
of, Preferred Stock or common stock unless:
- you are a corporation or come within certain other exempt categories
and, when required, demonstrate this fact; or
- within a reasonable period of time, you provide a taxpayer
identification number, certified under penalties of perjury, as well
as certain other information, or otherwise establish an exemption
from the backup withholding rules.
The amount of any backup withholding from a payment to you generally will
be allowed as a credit against your U.S. federal income tax liability and may
entitle you to a refund, provided that the required information is furnished to
the Internal Revenue Service.
49
CONSEQUENCES TO NON-U.S. HOLDERS OF PREFERRED STOCK OR COMMON STOCK
DIVIDENDS
In general, dividends received by you with respect to our Preferred Stock
or common stock will be subject to withholding of U.S. federal income tax at a
30% rate, unless such rate is reduced by an applicable income tax treaty.
Dividends that are effectively connected with your conduct of a trade or
business in the United States (and, if an income tax treaty applies, are
attributable to a U.S. permanent establishment) are generally subject to U.S.
federal income tax on a net income basis and are exempt from the 30% withholding
tax (assuming compliance with certain certification requirements). Any such
effectively connected dividends received by a non-U.S. holder that is a
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be applicable under
an income tax treaty.
For purposes of obtaining a reduced rate of withholding under an income
tax treaty, you generally will be required to provide a U.S. taxpayer
identification number as well as certain information concerning your country of
residence and entitlement to tax treaty benefits. Generally, this will be
accomplished by providing a properly executed IRS Form W-8BEN. If you instead
claim an exemption from withholding with respect to dividends effectively
connected with the conduct of a trade or business within the United States, you
will be required to provide an appropriate certification to us or our paying
agent (generally by providing a properly completed IRS Form W-8ECI).
SALE OR OTHER DISPOSITION
You generally will not be subject to U.S. federal income tax on any gain
recognized on the sale or other disposition of Preferred Stock or common stock
unless:
- the gain is considered effectively connected with the conduct of a
trade or business by you within the United States and, where an
income tax treaty applies, is attributable to a U.S. permanent
establishment (in which case, if you are a foreign corporation, you
may be subject to an additional "branch profits" tax equal to 30% or
a lower rate as may be specified by an applicable income tax
treaty);
- you are an individual who holds the Preferred Stock or common stock
as a capital asset and are present in the United States for 183 or
more days in the taxable year of the sale or other disposition and
other conditions are met; or
- we are or have been a "United States real property holding
corporation" for U.S. federal income tax purposes.
CONVERSION OF PREFERRED STOCK IN EXCHANGE FOR COMMON STOCK
You generally will not recognize any gain or loss when you receive common
stock upon conversion of your Preferred Stock, except that gain or loss will be
recognized with respect to any cash received in lieu of fractional shares, as
described above under "Sale or Other Disposition," and the fair market value of
any shares of common stock attributable to dividend arrearages will be treated
as a constructive distribution, and taxable as described above under
"Dividends."
INFORMATION REPORTING AND BACKUP WITHHOLDING
We must report annually to the Internal Revenue Service and to you the
amount of dividends paid to you and the tax withheld with respect to those
dividends, regardless of whether withholding was required. Copies of the
information returns reporting those dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty or other applicable agreements.
Backup withholding is generally imposed on certain payments to persons
that fail to furnish the necessary identifying information to the payor. You
generally will be subject to backup withholding tax with respect to dividends
paid on your Preferred Stock or common stock unless you certify as to your
non-U.S. status, provided we do not have actual knowledge or reason to know that
you are a U.S. holder.
The payment of proceeds of a sale of Preferred Stock or common stock
effected by or through a U.S. office of a broker is subject to both backup
withholding and information reporting unless you provide the payor with your
name and address and you certify under
50
penalties of perjury as to your non-U.S. status or you otherwise establish an
exemption. In general, backup withholding and information reporting will not
apply to the payment of the proceeds of a sale of Preferred Stock or common
stock by or through a foreign office of a broker. If, however, such broker is,
for U.S. federal income tax purposes, a United States person, a controlled
foreign corporation, a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or a foreign partnership that at any time during its tax year either is
engaged in the conduct of a trade or business in the United States or has as
partners one or more United States persons that, in the aggregate, hold more
than 50% of the income or capital interest in the partnership, such payments
will be subject to information reporting, but not backup withholding, unless
such broker has documentary evidence in its records that you are a non-U.S.
holder and certain other conditions are met or you otherwise establish an
exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against your U.S. federal income tax liability,
provided the required information is furnished in a timely manner to the
Internal Revenue Service.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO YOU IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES
AND INCOME TAX SITUATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES THAT WOULD RESULT FROM YOUR PURCHASE, OWNERSHIP AND
DISPOSITION OF THE PREFERRED STOCK AND ANY COMMON STOCK RECEIVED UPON ITS
CONVERSION, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN U.S. FEDERAL OR OTHER TAX
LAWS.
SELLING SECURITYHOLDERS
The Preferred Stock was originally issued by us and sold by Citigroup
Global Markets Inc., Merrill, Lynch, Pierce, Fenner & Smith Incorporated, J.P.
Morgan Securities, Inc., Deutsche Bank Securities Inc., Wachovia Capital
Markets, LLC, and Banc One Capital Markets, Inc. (the "INITIAL PURCHASERS") in
transactions exempt from the registration requirements of the Securities Act to
persons reasonably believed by the initial purchasers to be "qualified
institutional buyers" as defined by Rule 144A under the Securities Act. The
selling securityholders may from time to time offer and sell pursuant to this
prospectus any or all of the Preferred Stock listed below and the shares of
common stock issued upon conversion of such Preferred Stock. When we refer to
the "selling securityholders" in this prospectus, we mean those persons listed
in the table below, as well as the assignees, transferees, successors and others
who later hold any of the selling securityholders' interests in restricted
securities.
The table below sets forth the name of each selling securityholder, the
principal amount of Preferred Stock that each selling securityholder may offer
pursuant to this prospectus and the number of shares of common stock into which
such Preferred Stock is convertible. Unless set forth below, to our knowledge,
none of the selling securityholders has, or within the past three years has had,
any material relationship with us or any of our predecessors or affiliates or
beneficially owns in excess of 1% of our outstanding common stock.
The number of shares of the Preferred Stock provided in the table below is
based on information provided to us by the selling securityholders at various
dates through September 23, 2004, and the percentages are based on 5,000,000
shares of Preferred Stock outstanding. The number of shares of our common stock
that may be sold is based on the current conversion rate of 5.0541 shares of our
common stock per share of Preferred Stock surrendered for conversion.
Since the date on which each selling securityholder provided the
information below, such selling securityholder may have sold, transferred or
otherwise disposed of all or a portion of its shares of Preferred Stock in a
transaction exempt from the registration requirements of the Securities Act.
Information concerning the selling securityholders is expected to change from
time to time. If we are informed of any changed information, it will be set
forth in supplements to this prospectus to the extent required. In addition, the
conversion ratio, and therefore the number of shares of our common stock
issuable upon conversion of the shares of Preferred Stock, is subject to
adjustment under the circumstances described in this prospectus. Accordingly,
the number of shares of our common stock issuable upon conversion of the shares
of Preferred Stock may increase or decrease.
The selling securityholders may from time to time offer and sell any or
all of the securities under this prospectus. Because the selling securityholders
are not obligated to sell the shares of Preferred Stock or shares of our common
stock issuable upon conversion thereof, we cannot estimate the number of shares
of Preferred Stock or our common stock that the selling securityholders will
hold upon consummation of any such sales.
51
NUMBER OF SHARES OF PERCENTAGE OF NUMBER OF SHARES OF COMMON
PREFERRED STOCK THAT PREFERRED STOCK STOCK COVERED BY THIS
NAME MAY BE SOLD OUTSTANDING PROSPECTUS (1)
---- -------------------- --------------- --------------------------
Akela Capital Master Fund, Ltd. 320,000 6.40 1,617,312
Alta Partners Holdings LDC 550,000 11.00 2,779,755
Argent Classic Convertible Arbitrage Fund
(Bermuda) Ltd. 165,900 3.32 838,475
Argent Classic Convertible Arbitrage Fund L.P. 138,900 2.78 702,014
Argent Classic Convertible Arbitrage Fund II, L.P. 78,000 7.80 394,219
Argent LowLev Convertible Arbitrage Fund LLC 29,400 * 148,590
Argent LowLev Convertible Arbitrage Fund Ltd. 138,990 2.78 702,469
Argent LowLev Convertible Arbitrage II Fund LLC 4,400 * 22,238
Bank of America Pension Plan 50,000 1.00 252,705
Citigroup Global Markets 109,300 2.19 552,413
Class C Trading Company, Ltd. 10,400 * 52,562
Clinton Multistrategy Master Fund, Ltd. 65,100 1.30 329,021
Clinton Riverside Convertible Portfolio Ltd. 130,400 2.61 659,054
CQS Convertible & Quantatitive Strategies Master Fund
Limited 919,500 18.39 4,647,244
Credit Suisse First Boston Europe LTD 2,460 * 12,433
Custom Investments PCC, Ltd 2,000 * 10,108
Duckbill & Co. 10,000 * 50,541
Equitec Group LLC 50,000 1.00 252,705
Fore Convertible Master Fund, Ltd. 306,000 6.12 1,546,554
Fore Plan Asset Fund Ltd. 30,000 * 151,623
FrontPoint Convertible Arbitrage Fund, L.P. 60,500 1.21 305,773
Goldman Sachs & Co. 5,000 * 25,270
Grace Brothers, Ltd. 30,000 * 151,623
Grace Convertible Arbitrage Fund, Ltd. 145,000 2.90 732,844
Guggenheim Portfolio Company VIII(Cayman) Ltd. 50,000 1.00 252,705
HFR CA Global Select Master Trust Account 5,950 * 30,071
Kd Convertible Arbitrage L.P. 45,000 * 227,434
Kdc Convertible Arb Master Fund C.V. 45,000 * 227,434
Lexington Vantage Fund 280 * 1,415
Lord Abbett America's Value Fund 57,900 1.16 292,632
Lord Abbett Series Fund-America's Value Portfolio 1,600 * 8,086
Lyxor Master Fund Ltd 19,800 * 100,071
Man Mac 1 Limited 114,000 2.28 576,167
McMahan Securities Co. L.P. 35,000 * 176,893
Met Investor Series Trust-America's Value 3,000 * 15,162
Partners Group Alternative Strategies PCC LTD 10,100 * 51,046
Peoples Benefit Life Insurance Company Teamsters 50,000 1.00 252,705
Primerica Life Insurance Company 2,000 * 10,108
Retail Clerks Pension Trust 25,000 * 126,352
Silver Convertible Arbitrage Fund, LDC 9,700 * 49,024
Silvercreek II Limited 1,450 * 7,328
Sphinx Convertible Arbitrage (Clinton) Segregated
Portfolio 32,350 * 163,500
Sphinx Fund 700 * 3,537
Standard Fire Insurance Company 2,000 * 10,108
The Travelers Insurance Company - Life 13,000 * 65,703
Timberpass Trading LLC 30,200 * 152,633
TQA Master Fund, Ltd. 11,090 * 56,049
TQA Master Plus Fund, Ltd. 16,650 * 84,150
Travelers Casualty Insurance Company of America 6,000 * 30,324
52
Xavex Convertible Arbitrage 2 Fund 5,900 * 29,819
Xavex Convertible Arbitrage 7 Fund 2,530 * 12,786
Xavex Convertible Arbitrage 10 Fund 34,100 * 172,344
Zurich Institutional Benchmarks Master Fund Ltd. 2,640 * 13,342
* Less than 1%
(1) Assumes conversion of all of the holders' shares of Preferred Stock at a
conversion rate of 5.0541 shares of our common stock for each share of
Preferred Stock surrendered for conversion. This conversion rate is
subject to adjustment as described under "Description of the Preferred
Stock - Conversion Rights - Conversion Rate Adjustments." As a result, the
number of shares of our common stock issuable upon conversion of the
Preferred Stock may increase or decrease in the future.
PLAN OF DISTRIBUTION
The selling securityholders are the only persons authorized to offer and
sell the securities covered by this prospectus. We will not receive any of the
proceeds from the offering of the Preferred Stock or the common stock by the
selling securityholders. In connection with the initial offering of the
Preferred Stock, we entered into a registration rights agreement. Securities may
only be offered or sold under this prospectus pursuant to the terms of the
registration rights agreement. However, selling securityholders may resell all
or a portion of the securities in open market transactions in reliance upon Rule
144 or 144A under the Securities Act, provided they meet the criteria and
conform to the requirements of one of these rules. We are registering the
Preferred Stock and shares of our common stock covered by this prospectus to
permit holders to conduct public secondary trading of these securities from time
to time after the date of this prospectus. We have agreed, among other things,
to bear all expenses, other than underwriting discounts, expenses of each
Holder's counsel, selling commissions and transfer taxes, in connection with the
registration and sale of the Preferred Stock and shares of common stock covered
by this prospectus.
We have been advised by the selling securityholders that the selling
securityholders may sell all or a portion of the securities offered hereby from
time to time:
- directly; or
- through underwriters, broker-dealers or agents, who may
receive compensation in the form of discounts, commissions or
concessions from the selling securityholders or from the
purchasers of the securities for whom they may act as agent.
Shares of the Preferred Stock and our common stock may be sold from time
to time in one or more transactions at:
- fixed prices, which may be changed;
- prevailing market prices at the time of sale;
- varying prices determined at the time of sale; or
- negotiated prices.
These prices will be determined by the Holders of the securities or by
agreement between these Holders and underwriters or dealers who may receive fees
or commissions in connection with the sale. The aggregate proceeds to the
selling securityholders from the sale of the securities offered by them hereby
will be the purchase price of the securities less discounts and commissions, if
any.
The sales described in the preceding paragraph may be effected in
transactions:
- on any national securities exchange or quotation system on
which the Preferred Stock or shares of our common stock may be
listed or quoted at the time of sale, including the New York
Stock Exchange in the case of our common stock;
- in the over-the-counter market;
- in transactions otherwise than on such exchanges or services
or in the over-the-counter market; or
- through the writing of options or similar securities.
These transactions may include block transactions or crosses. Crosses are
transactions in which the same broker acts as an agent on both sides of the
trade.
53
In connection with the sales of shares of Preferred Stock and our common
stock or otherwise, the selling securityholders may enter into hedging
transactions with broker-dealers. These broker-dealers may in turn engage in
short sales of the securities in the course of hedging their positions. The
selling securityholders may also sell the securities short and deliver the
securities to close out short positions, or loan or pledge the securities to
broker-dealers that in turn may sell the securities.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of shares of Preferred Stock or our
common stock covered by this prospectus. Selling securityholders may sell none,
some or all of the securities covered by this prospectus. In addition, we cannot
assure you that a selling securityholder will not sell, donate or otherwise
transfer shares of Preferred Stock or common stock by other means not described
in this prospectus.
Our common stock is listed for trading on the New York Stock Exchange.
The selling securityholders and any broker-dealers, agents or underwriters
that participate with the selling securityholders in the distribution of shares
of Preferred Stock or our common stock may be deemed to be "underwriters" within
the meaning of the Securities Act. In this case, any commissions received by
these broker-dealers, agents or underwriters and any profit on the resale of
shares of Preferred Stock or our common stock purchased by them may be deemed to
be underwriting commissions or discounts under the Securities Act. In addition,
any profits realized by the selling securityholders may be deemed to be
underwriting commissions under the Securities Act. To the extent the selling
securityholders may be deemed to be underwriters, the selling securityholders
may be subject to statutory liabilities, including, but not limited to,
liabilities under Sections 11, 12 and 17 or the Securities Act and Rule 10b-5
under the Exchange Act.
The selling securityholders will be subject to the prospectus delivery
requirements of the Securities Act. At any time a particular offer of the
securities is made, we will, if reasonably requested, prepare a revised
prospectus or prospectus supplement, if required, which discloses information
required to be disclosed under the registration rights agreement including:
- the name of the selling securityholders and any participating
underwriters, broker-dealers or agents;
- the aggregate amount and type of securities being offered;
- the offering price of the securities and other material terms
of the offering; and
- any discounts, commissions, concessions or other items
constituting compensation from the selling securityholders and
any discounts, commissions or concessions allowed or reallowed
or paid to dealers.
The prospectus supplement or a post-effective amendment will be filed with
the SEC to reflect the disclosure of additional information with respect to the
distribution of the securities.
We have agreed to indemnify the initial purchasers and each selling
securityholder, and each selling securityholder has agreed to indemnify us, our
directors, our officers who sign the shelf registration statement to which this
prospectus relates and each person, if any, who controls CMS Energy within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act, against specified liabilities arising under the Securities Act, the
Exchange Act or other applicable law.
The selling securityholders and any other person participating in such
distribution will be subject to certain provisions of the Exchange Act. The
Exchange Act rules include, without limitation, Regulation M, which may limit
the timing of purchases and sales of any shares of Preferred Stock and our
common stock by the selling securityholders and any such other person. In
addition, Regulation M of the Exchange Act may restrict the ability of any
person engaged in the distribution of shares of Preferred Stock and our common
stock to engage in market-making activities with respect to the particular
shares of Preferred Stock and our common stock being distributed for a period of
up to five business days prior to the commencement of distribution. This may
affect the marketability of the shares of Preferred Stock and our common stock
and the ability of any person or entity to engage in market-making activities
with respect to shares of Preferred Stock and our common stock.
Under the registration rights agreement, we are obligated to use our
reasonable best efforts to keep the shelf registration statement of which this
prospectus forms a part effective until the earliest of:
- the time when all of the shares of Preferred Stock have been
sold pursuant to the shelf registration statement of which
this prospectus forms a part;
- the time when the Holders of shares of Preferred Stock are
able to sell all such shares of Preferred Stock pursuant to
Rule 144 under the Securities Act;
54
- the time when there are no longer any shares of Preferred
Stock outstanding; or
- December 5, 2005.
Our obligation to keep the shelf registration statement effective is
subject to specified, permitted exceptions set forth in the registration rights
agreement. In these cases, we may prohibit offers and sales of shares of
Preferred Stock and our common stock pursuant to the shelf registration
statement.
We may suspend the use of this prospectus upon the occurrence or existence
of certain specified events or conditions that, in our sole judgment, make it
appropriate for us to take such action. Each selling securityholder has agreed
not to trade securities from the time the selling securityholder receives notice
from us of this type of event or condition until the selling securityholder
receives a prospectus supplement or amendment, or is advised that this
prospectus may be used.
LEGAL MATTERS
Robert C. Shrosbree, Assistant General Counsel for CMS Energy Corporation,
will render opinions as to the legality of the Preferred Stock for CMS Energy.
EXPERTS
The consolidated financial statements and schedule of CMS Energy appearing
in its Annual Report (Form 10-K/A) for the year ended December 31, 2003, have
been audited by Ernst & Young LLP, independent registered public accounting
firm, as set forth in their report thereon included therein and incorporated
herein by reference which are based in part on the report of Price Waterhouse,
independent accountants, for Jorf Lasfar and the reports of
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
for 2003 and 2002 and Arthur Andersen LLP, independent accountants, (who have
ceased operations) for 2001 for the MCV Partnership. Such consolidated financial
statements and schedule are incorporated herein by reference in reliance upon
such reports given on the authority of such firms as experts in accounting and
auditing.
The financial statements of Emirates CMS Power Company PJSC appearing in
CMS Energy's Annual Report (Form 10-K/A) for the year ended December 31, 2003,
have been audited by Ernst & Young, independent registered public accounting
firm, as set forth in their report thereon included therein and incorporated
herein by reference. Such financial statements are incorporated herein by
reference in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The financial statements of Jorf Lasfar as of December 31, 2003 and 2002
and for each of the three years in the period ended December 31, 2003
incorporated herein by reference have been so included in reliance on the report
of Price Waterhouse, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The consolidated financial statements of the MCV Partnership as of and for
the years ended December 31, 2003 and 2002 incorporated herein by reference have
been so included in reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of said
firm as experts in auditing and accounting.
The audited consolidated financial statements of the MCV Partnership for
the year ended December 31, 2001, incorporated herein by reference, have been
audited by Arthur Andersen LLP, independent accountants. Arthur Andersen LLP has
not consented to the inclusion of their report on the financial statements of
the MCV Partnership for the year ended December 31, 2001 in this prospectus, and
we have dispensed with the requirement to file their consent in reliance upon
Rule 437a of the Securities Act. Because Arthur Andersen LLP has not consented
to the incorporation by reference of their report in this prospectus, you will
not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Arthur Andersen LLP or any omissions to state a
material fact required to be stated therein.
55
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
AMOUNT
--------
Filing fee -- Securities and Exchange Commission............................. $ 31,675
Listing on New York Stock Exchange........................................... 2,500
*Printing and Engraving...................................................... 30,000
*Services of counsel......................................................... 5,000
*Services of Registered Public Accounting Firms.............................. 25,000
*Rating Agency Fees.......................................................... 5,000
*Blue Sky fees and expenses.................................................. 5,000
*Miscellaneous............................................................... 5,000
--------
Total.............................................................. $109,175
========
----------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following resolution was adopted by the Board of Directors of CMS Energy on
May 6, 1987:
RESOLVED: That effective March 1, 1987 the Corporation shall
indemnify to the full extent permitted by law every person (including the
estate, heirs and legal representatives of such person in the event of the
decease, incompetency, insolvency or bankruptcy of such person) who is or was a
director, officer, partner, trustee, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against all liability, costs, expenses,
including attorneys' fees, judgments, penalties, fines and amounts paid in
settlement, incurred by or imposed upon the person in connection with or
resulting from any claim or any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative, investigative or of whatever
nature, arising from the person's service or capacity as, or by reason of the
fact that the person is or was, a director, officer, partner, trustee, employee
or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise. Such
right of indemnification shall not be deemed exclusive of any other rights to
which the person may be entitled under statute, bylaw, agreement, vote of
shareholders or otherwise.
CMS Energy's Bylaws provide:
The Corporation may purchase and maintain liability insurance, to
the full extent permitted by law, on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such person
in any such capacity.
Article VIII of CMS Energy's Articles of Incorporation, as
amended reads:
A director shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of duty as a director except (i)
for a breach of the director's duty of loyalty to the Corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for a violation of
Section 551(1) of the Michigan Business Corporation Act, and (iv) any
transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this Article VIII, and no modification to its
provisions by law, shall apply to, or have any effect upon, the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment, repeal or
modification.
Article IX of CMS Energy's Articles of Incorporation, as
amended reads:
Each director and each officer of the Corporation shall be
indemnified by the Corporation to the fullest extent permitted by law
56
against expenses (including attorneys' fees), judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with the defense of any proceeding in which he or she was or is a
party or is threatened to be made a party by reason of being or having been a
director or an officer of the Corporation. Such right of indemnification is not
exclusive of any other rights to which such director or officer may be entitled
under any now or thereafter existing statute, any other provision of these
Articles, bylaw, agreement, vote of shareholders or otherwise. If the Business
Corporation Act of the State of Michigan is amended after approval by the
shareholders of this Article IX to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Business Corporation Act of the State of Michigan, as so
amended. Any repeal or modification of this Article IX by the shareholders of
the Corporation shall not adversely affect any right or protection of a director
of the Corporation existing at the time of such repeal or modification.
Sections 561 through 571 of the Michigan Business Corporation Act
provides CMS Energy with the power to indemnify directors, officers, employees
and agents against certain expenses and payments, and to purchase and maintain
insurance on behalf of directors, officers, employees and agents.
Officers and directors are covered within specified monetary limits
by insurance against certain losses arising from claims made by reason of their
being directors or officers of CMS Energy or of CMS Energy's subsidiaries and
CMS Energy's officers and directors are indemnified against such losses by
reason of their being or having been directors of officers of another
corporation, partnership, joint venture, trust or other enterprise at CMS
Energy's request. In addition, CMS Energy has indemnified each of its present
directors by contracts that contain affirmative provisions essentially similar
to those in sections 561 through 571 of the Michigan Business Corporation Act
cited above.
ITEM 16. EXHIBITS.
EXHIBITS DESCRIPTION
(4) * -- Restated Articles of Incorporation of CMS Energy
(5) -- Opinion of Robert C. Shrosbree, Assistant General Counsel
for CMS Energy
(8) -- Opinion of Jay M. Silverman, Tax Counsel for CMS Energy
regarding tax matters
(12) -- Statement regarding computation of CMS Energy's Ratio of
Earnings to Combined Fixed Charges and Preference Dividends
(23)(a) -- Consent of Robert C. Shrosbree, Assistant General
Counsel for CMS Energy (included in Exhibit 5 above)
(23)(b) -- Consent of Jay M. Silverman, Tax Counsel for CMS Energy
(included in Exhibit 8 above)
(23)(c) -- Consent of Ernst & Young LLP
(23)(d) -- Consent of PricewaterhouseCoopers LLP
(23)(e) -- Consent of Price Waterhouse
(23)(f) -- Consent of Ernst & Young
(24) -- Power of Attorney for CMS Energy
* Previously filed with file number 1-9513, as exhibit number 99(a) to Form 8-K
filed on June 3, 2004.
ITEM 17. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (a) To include any
prospectus required by Section 10(a)(3) of the Securities Act; (b) To reflect in
the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the total, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the total, the changes in volume and price
represent no more than a 20% change in the maximum total offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; (c) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
57
statement or any material change to such information in the registration
statement; provided, however, that (a) and (b) do not apply if the registration
statement is on Form S-3 or Form S-8, and the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the SEC by the registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that as
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
be governed by the final adjudication of such issue.
(6) That (a) for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and (b) for the
purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Jackson, and State of Michigan, on the 24th day of
September, 2004.
CMS ENERGY CORPORATION
By: /s/ Thomas J. Webb
--------------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated and on the 24th day of September 2004.
NAME TITLE
---- -----
(i) PRINCIPAL EXECUTIVE OFFICER:
/s/ KENNETH WHIPPLE Chairman of the Board
----------------------------------------------- and Chief Executive Officer
Kenneth Whipple
(ii) PRINCIPAL FINANCIAL OFFICER:
/s/ THOMAS J. WEBB Executive Vice President and
----------------------------------------------- Chief Financial Officer
Thomas J. Webb
(iii) CONTROLLER OR PRINCIPAL ACCOUNTING OFFICER
/s/ GLENN P. BARBA Vice President, Controller and Chief
----------------------------------------------- Accounting Officer
Glenn P. Barba
-----------------------------------------------
(Merribel S. Ayers) Director
*
-----------------------------------------------
(Earl D. Holton) Director
*
-----------------------------------------------
(David W. Joos) Director
*
-----------------------------------------------
(Michael T. Monahan) Director
59
*
-----------------------------------------------
(Joseph F. Paquette, Jr.) Director
*
-----------------------------------------------
(William U. Parfet) Director
*
-----------------------------------------------
(Percy A. Pierre) Director
*
-----------------------------------------------
(S. Kinnie Smith, Jr.) Director
*
-----------------------------------------------
(Kenneth L. Way) Director
*
-----------------------------------------------
(Kenneth Whipple) Director
*
-----------------------------------------------
(John B. Yasinsky) Director
*By: /s/ THOMAS J. WEBB
-------------------------
Thomas J. Webb
Attorney in-fact
60
EXHIBIT INDEX
EXHIBITS DESCRIPTION
-------- -----------
(4) * -- Restated Articles of Incorporation of CMS Energy
(5) -- Opinion of Robert C. Shrosbree, Assistant General Counsel
for CMS Energy
(8) -- Opinion of Jay M. Silverman, Tax Counsel for CMS Energy
regarding tax matters
(12) -- Statement regarding computation of CMS Energy's Ratio of
Earnings to Combined Fixed Charges and Preference Dividends
(23)(a) -- Consent of Robert C. Shrosbree, Assistant General
Counsel for CMS Energy (included in Exhibit 5 above)
(23)(b) -- Consent of Jay M. Silverman, Tax Counsel for CMS Energy
(included in Exhibit 8 above)
(23)(c) -- Consent of Ernst & Young LLP
(23)(d) -- Consent of PricewaterhouseCoopers LLP
(23)(e) -- Consent of Price Waterhouse
(23)(f) -- Consent of Ernst & Young
(24) -- Power of Attorney for CMS Energy
* Previously filed with file number 1-9513, as exhibit number 99(a) to Form 8-K
filed on June 3, 2004.
61