The information in this prospectus supplement and the accompanying 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 and a final prospectus supplement is delivered. This prospectus
supplement and the accompanying prospectus are not an offer to sell these
securities and we are not soliciting offers to buy these securities in any state
where the offer or sale is not permitted.
Filed pursuant to Rule 424(a)
Registration Statement No.: 333-47938
SUBJECT TO COMPLETION, DATED OCTOBER 23, 2001.
PROSPECTUS SUPPLEMENT
To Prospectus Dated , 2001.
$468,592,000
Securitization Bonds, Series 2001-1
Consumers Funding LLC
Issuer of the Securitization Bonds
Consumers Energy Company
Seller and Servicer
<Table>
<Caption>
INITIAL FINAL
PRINCIPAL INTEREST UNDERWRITING NET EXPECTED FINAL MATURITY
AMOUNT RATE PRICE DISCOUNTS PROCEEDS PAYMENT DATE DATE
--------- -------- -------- ------------ -------- -------------- --------
Class A-1 $ % % % $
Class A-2 $ % % % $
Class A-3 $ % % % $
Class A-4 $ % % % $
</Table>
The total price to the public is $ . The total amount of the underwriting
discounts is $ . The total amount of proceeds before deduction of expenses
(estimated to be $ ) is $ .
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THE ACCOMPANYING
PROSPECTUS BEFORE BUYING THE SECURITIZATION BONDS.
THE SERIES 2001-1 SECURITIZATION BONDS ARE HIGHLY STRUCTURED. THERE CURRENTLY IS
NO SECONDARY MARKET FOR THE SECURITIZATION BONDS, AND THERE IS NO ASSURANCE THAT
ONE WILL DEVELOP.
The assets of the issuer consist principally of the securitization property,
which represents the irrevocable right to recover an amount sufficient to
recover a portion of Consumers' qualified costs, including an amount sufficient
to pay the principal of and interest on the series 2001-1 securitization bonds
and the expenses associated with the securitization bonds. This amount is to be
recovered through a non-bypassable securitization charge, approved by the
Michigan Public Service Commission, payable by all of Consumers' electric
customers taking delivery from Consumers or its successor on its Michigan Public
Service Commission approved rate schedules and under special contracts with
specific customers, as described further in this prospectus supplement and the
accompanying prospectus. The securitization bonds represent obligations only of
Consumers Funding LLC, which is the issuer, and are backed only by the assets of
the issuer. The securitization bonds do not represent obligations of Consumers
or of any agency or instrumentality of the State of Michigan.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MORGAN STANLEY
BANC ONE CAPITAL MARKETS, INC.
BARCLAYS CAPITAL
JPMORGAN
LOOP CAPITAL MARKETS, LLC
, 2001
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<Table>
<Caption>
PAGE
----
Introduction................................................ S-2
Parties to the Transaction.................................. S-4
The Series 2001-1 Securitization Bonds...................... S-5
The Collateral............................................ S-5
Payment Sources........................................... S-6
Principal Payments........................................ S-6
Distribution Following Acceleration....................... S-7
Optional Redemption....................................... S-8
Interest Payments......................................... S-8
Credit Enhancement.......................................... S-8
Periodic Adjustment of the Securitization Charge.......... S-9
Single Collection Account and Subaccounts................. S-9
Governing Law for the Relevant Documents.................. S-11
Description of Securitization Property.................... S-11
The Securitization Charge................................. S-11
Information Regarding Consumers Energy Company.............. S-12
Underwriting the Series 2001-1 Securitization Bonds......... S-13
The Underwriters' Sales Price for the Series 2001-1
Securitization Bonds................................... S-13
No Assurance as to Resale Price or Resale Liquidity for
the Securitization Bonds............................... S-13
United Kingdom Offering................................... S-13
Various Types of Underwriter Transactions Which May Affect
the Price of the Securitization Bonds.................. S-14
Ratings for the Series 2001-1 Securitization Bonds.......... S-14
</Table>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This prospectus supplement and the accompanying prospectus together
constitute the prospectus for the series 2001-1 securitization bonds and
together they provide information about the issuer and Consumers, including
terms and conditions that apply to the securitization bonds. The specific terms
of this series of securitization bonds are contained in this prospectus
supplement. The terms that apply to all series of securitization bonds appear in
the accompanying prospectus which follows this prospectus supplement. You should
read both this prospectus supplement and the accompanying prospectus in full
before buying the securitization bonds. Sales of the securitization bonds may
not be consummated unless you have received both this prospectus supplement and
the accompanying prospectus.
We have included cross-references to captions in these materials where you
can find further related discussions. Cross-references may be contained in the
introductory sections which will direct you elsewhere in this prospectus
supplement or the accompanying prospectus for more detailed description of a
particular topic. You can also find references to key topics in the Table of
Contents on the preceding page.
You should rely only on information on the securitization bonds provided in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
INTRODUCTION
The Issuer: Consumers Funding LLC, a Delaware limited
liability company
Issuer's Address: 212 W. Michigan Avenue, Suite M-1029, Jackson,
MI 49201
Issuer's Telephone Number: (517) 788-0179
Seller of the Securitization
Property to the Issuer: Consumers Energy Company, referred to as
Consumers, an operating electric and gas public
utility incorporated under the laws of the
State of Michigan, is the principal subsidiary
of CMS Energy Corporation. Consumers is engaged
in the generation, purchase, distribution and
sale of electricity to approximately 1.7
million customers in 61 of the 68 counties of
Michigan's lower peninsula.
Seller's Address: 212 W. Michigan Avenue, Jackson, MI 49201
Seller's Telephone Number: (517) 788-0550
Servicer of the Securitization
Property: Consumers will act as servicer of the
securitization property.
Consumers will be entitled to a monthly
servicing fee of 1/12th of 0.25% of the
outstanding principal amount of the
securitization bonds. If Consumers is replaced
by a successor servicer, the successor servicer
may be paid a servicing fee of up to 1.5% per
year of the outstanding principal amount of the
securitization bonds.
Trustee: The Bank of New York
Transaction Overview: The Customer Choice and Electricity Reliability
Act (Acts 141 and 142), enacted in the State of
Michigan in June 2000 (the "Customer Choice
Act"), authorizes electric utilities, such as
Consumers, to recover qualified costs.
Qualified costs are an electric utility's
regulatory assets as determined by the Michigan
Public Service Commission plus any costs that
the Michigan Public Service Commission
determines that the electric utility would be
unlikely to collect in a competitive market,
together with the costs of issuing, supporting
and servicing securitization bonds and any
costs of retiring and refunding the electric
utility's existing debt and equity securities
in connection with the issuance of
securitization bonds. An electric utility may
recover qualified costs through irrevocable
non-bypassable charges called securitization
charges that are collected from all of its
electric customers taking delivery on its
Michigan Public Service Commission approved
rate schedules and under special contracts with
specific customers. The Customer Choice Act
permits special purpose entities formed by
electric utilities to issue debt securities
secured by the right to receive revenues
arising from securitization charges. The
securitization property includes this right.
See "The Securitization Bonds" in the
prospectus.
The following sets forth the primary steps of
the transaction underlying the offering of the
securitization bonds:
- Consumers will sell the securitization
property to the issuer in exchange for the
proceeds available from the sale of the
S-2
securitization bonds after payment of the
issuer's issuance costs.
- The issuer, whose primary asset is the
securitization property, will sell the
securitization bonds to the underwriters
named in the prospectus supplement.
- Consumers will act as the servicer of the
securitization property on behalf of the
issuer.
The securitization bonds and the securitization
property securing the securitization bonds are
not an obligation of Consumers or any of its
affiliates, other than the issuer. The
securitization bonds are also not a debt or
obligation of the State of Michigan and are not
a charge on the full faith and credit or taxing
power of the State.
Associated Risks: Material risks are associated with an
investment in the securitization bonds. See
"Risk Factors" in the prospectus.
Expected Ratings: It is a condition of any underwriter's
obligation to purchase the series 2001-1
securitization bonds that each class of the
series 2001-1 securitization bonds be rated
"AAA" by S&P, "Aaa" by Moody's and "AAA" by
Fitch. A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the rating agency. In general,
ratings address credit risk and do not
represent any assessment of any particular rate
of principal payments on the securitization
bonds other than payment in full of each class
of the securitization bonds by the applicable
final maturity date, as well as the timely
payment of interest.
Tax Status: Consumers has received a private letter ruling
from the Internal Revenue Service to the effect
that the securitization bonds will be
classified as obligations of Consumers for U.S.
federal income tax purposes. Skadden, Arps,
Slate, Meagher & Flom LLP, special federal
income tax counsel to Consumers and the issuer,
has rendered its opinion that for federal
income tax purposes (i) the securitization
bonds will constitute debt of Consumers and
(ii) the issuer will not be subject to U.S.
federal income tax as an entity separate from
Consumers.
Minimum Denomination: $1,000, except for one securitization bond of
each class which may be of a smaller
denomination.
Listing: None of the classes of the series 2001-1
securitization bonds will be listed on any
stock exchange.
S-3
PARTIES TO THE TRANSACTION
[FLOW CHART]
S-4
THE SERIES 2001-1 SECURITIZATION BONDS
The securitization bonds will be issued under and secured pursuant to the
indenture between the issuer and the trustee, as supplemented for each series of
securitization bonds.
The series 2001-1 securitization bonds will be issued in minimum
denominations of $1,000 and in integral multiples of $1 above that amount, with
an exception for one securitization bond in each class which may have a smaller
denomination. The series 2001-1 securitization bonds will consist of four
classes, in the initial class principal balances, bearing the interest rates and
having the expected final payment dates and final maturity dates set forth
below:
TABLE 1
<Table>
<Caption>
INITIAL CLASS EXPECTED FINAL
PRINCIPAL BALANCE INTEREST RATE PAYMENT DATE FINAL MATURITY DATE
----------------- ------------- -------------- -------------------
A-1 $ [] [ ]% [] []
A-2 $ [] [ ]% [] []
A-3 $ [] [ ]% [] []
A-4 $ [] [ ]% [] []
</Table>
The expected final payment date for each class of the series 2001-1
securitization bonds is the date on which there is expected to be no further
outstanding principal balance of that class in accordance with the expected
amortization schedule for that class. The final maturity date for each class of
the series 2001-1 securitization bonds is the date on which the issuer is
required to pay any outstanding principal balance of that class. On each payment
date, payments will be made to the persons that were the holders of record as of
the business day before that payment date, which is referred to as the record
date. However, if certificated securitization bonds are issued to beneficial
owners of the securitization bonds as described in "The Securitization Bonds --
Certificated Securitization Bonds" in the prospectus, the record date will be
the last business day of the calendar month preceding the payment date.
THE COLLATERAL
The securitization bonds will be secured by securitization property, a
property right created under Michigan state legislation. In general terms, the
securitization property represents the irrevocable right to recover an amount
sufficient to recover a portion of Consumers' qualified costs, including an
amount sufficient to pay:
- the principal of and interest on the securitization bonds, and
- the expenses associated with the securitization bonds.
This amount is to be recovered through a non-bypassable securitization
charge approved by the Michigan Public Service Commission, referred to as the
MPSC, payable by all of Consumers' electric customers taking delivery from
Consumers or its successor on its MPSC-approved rate schedules and, for specific
customers, under special contracts, referred to collectively as customers.
Qualified costs include the electric utility's regulatory assets as determined
by the MPSC, plus any costs that the MPSC determines the electric utility would
be unlikely to collect in a competitive market. Qualified costs are described in
more detail under "The Customer Choice Act" in the prospectus and securitization
property is described in more detail under "The Sale Agreement -- Consumers'
Sale and Assignment of Securitization Property" in the prospectus.
In connection with the issuance of the securitization bonds, Consumers will
sell its securitization property to the issuer. Consumers, as servicer of the
securitization property, will collect the securitization charge from customers
on behalf of the issuer. The securitization charge is non-bypassable, as
described in the prospectus. See "The Customer Choice Act -- Consumers and Other
Utilities May Securitize Qualified Costs" and "The Servicing Agreement" in the
prospectus. Since the amount of securitization charge collections will depend in
part on the amount of electricity delivered by Consumers to its
S-5
customers, the amount of collections may vary substantially from period to
period. See "The Seller and Servicer of the Securitization Property" in the
prospectus.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts scheduled to be paid on
the securitization bonds from amounts available for withdrawal from a trust
account held by the trustee, including collections received from the servicer
with respect to the securitization charge. All series of securitization bonds,
including the series 2001-1 securitization bonds, will be payable from the same
securitization property. If another series of bonds is issued, the principal
source of payment for that series will also be the securitization charge
collections received by the servicer. The issuance of other series of
securitization bonds is not expected to adversely affect the sufficiency of
securitization charge collections to make payments on the series 2001-1
securitization bonds. This is because the securitization charge and adjustments
thereof are generally based on amounts owed with respect to securitization
bonds. Moreover, any additional series of securitization bonds will be issued
only if it will not result in the downgrading or withdrawal of any rating by a
rating agency on any outstanding securitization bonds. See "The Indenture" in
the prospectus.
PRINCIPAL PAYMENTS
On each payment date, the issuer will distribute principal of the series
2001-1 securitization bonds to the series 2001-1 securitization bondholders, in
accordance with the expected amortization schedule and to the extent funds are
available, in the following order:
1. to the holders of the class A-1 series 2001-1 securitization bonds,
until the principal balance of that class has been reduced to zero;
2. to the holders of the class A-2 series 2001-1 securitization bonds,
until the principal balance of that class has been reduced to zero;
3. to the holders of the class A-3 series 2001-1 securitization bonds,
until the principal balance of that class has been reduced to zero; and
4. to the holders of the class A-4 series 2001-1 securitization bonds,
until the principal balance of that class has been reduced to zero.
The issuer will not, however, pay principal on a payment date of any class
of series 2001-1 securitization bonds if making that payment would reduce the
principal balance of a class to an amount lower than that specified in the
expected amortization schedule in Table 2 below, referred to as the expected
amortization schedule, for that class on that payment date. The entire unpaid
principal balance of each class of series 2001-1 securitization bonds will be
due and payable on the final maturity date for the class. If an event of default
under the indenture has occurred and is continuing, the trustee may declare the
unpaid principal balance of all outstanding securitization bonds together with
accrued interest to be due and payable.
The expected amortization schedule in Table 2 sets forth the principal
balance from the issuance date to the expected final payment date that is
scheduled to remain outstanding for each class of the series 2001-1
securitization bonds. The table reflects the principal balance for each class at
each payment date after taking into account principal payments scheduled to be
made on that date. In establishing the expected amortization schedule, it has
been assumed, among other things, that:
1. the series 2001-1 securitization bonds are issued on November [ ],
2001;
2. principal and interest payments on the series 2001-1 securitization
bonds are made on each payment date, commencing on July 20, 2002;
3. the total servicing fee per annum for the series 2001-1 securitization
bonds equals 0.25% of the outstanding principal amount;
S-6
4. there are no net earnings on amounts on deposit in the account where
securitization charge collections are held, referred to as the
collection account;
5. monthly operating expenses, including all fees, costs and charges of the
issuer and the trustee, the administrator and the independent managers,
are paid in the amount of $[ ] in the aggregate for all series on
or before each payment date in arrears; and
6. all securitization charge collections are received in accordance with
Consumers' forecasts and deposited in the collection account.
There can be no assurance that the principal balance of any class of the
series 2001-1 securitization bonds will be reduced at the rate indicated in the
expected amortization schedule. The actual rates of reduction in class principal
balances may be slower, except in the case of optional redemption or
acceleration due to the events of default specified in the indenture, but not
faster than those indicated in Table 2. The series 2001-1 securitization bonds
will not be in default if principal is not paid as specified in Table 2 unless
the principal of any class is not paid in full on or before the final maturity
date of that class.
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
<Table>
<Caption>
PAYMENT DATE CLASS A-1 BALANCE CLASS A-2 BALANCE CLASS A-3 BALANCE CLASS A-4 BALANCE
------------ ----------------- ----------------- ----------------- -----------------
</Table>
DISTRIBUTION FOLLOWING ACCELERATION
Upon an acceleration of the maturity of the securitization bonds, the total
outstanding principal balance of and interest accrued on the series 2001-1
securitization bonds will be payable without priority of interest over principal
or principal over interest and without regard to series or class, in the
proportion that the total outstanding principal balance of, and accrued interest
on, the series 2001-1 securitization bonds bears to the total outstanding
principal balances of and interest accrued on all securitization bonds.
S-7
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding series 2001-1 securitization
bonds, at its option, on any payment date if the outstanding principal balance
of the series 2001-1 securitization bonds, after giving effect to payments to be
made on that payment date, is less than 5% of the total initial principal
balance of the series 2001-1 securitization bonds. The redemption price will
equal the outstanding principal balance of the series 2001-1 securitization
bonds and interest accrued and unpaid up to the redemption date. The trustee
will give notice of the redemption to securitization bondholders not less than
five days nor more than 45 days prior to the redemption date.
The series 2001-1 securitization bonds will not be redeemed before the
expected final payment date in any other circumstances, except in the case of
acceleration due to the occurrence of any one or more of those events of default
specified in the indenture. Those events of default are set forth in the
prospectus under the heading "The Indenture -- What Constitutes an Event of
Default on the Securitization Bonds".
INTEREST PAYMENTS
Holders of securitization bonds in each class of series 2001-1
securitization bonds will receive interest at the rate for that class as set
forth in Table 1 above.
Interest on each class of series 2001-1 securitization bonds will accrue
from and including the date of issuance to but excluding the first payment date,
and thereafter from and including the previous payment date to but excluding the
applicable payment date until the securitization bonds have been paid in full,
at the interest rate indicated in Table 1. Each of those periods is referred to
as an interest accrual period. The issuer is required to pay interest quarterly
on July 20, October 20, January 20 and April 20 for each year, beginning July
20, 2002, or, if any such day is not a business day, the following business day.
Each such day is referred to as a payment date.
On each payment date, the issuer will pay interest on each class of the
series 2001-1 securitization bonds as follows:
- if there has been a payment default, any interest payable but unpaid on
any prior payment dates, together with any accrued interest on that
unpaid interest; and
- accrued interest on the principal balance of each class of series 2001-1
securitization bonds from and including the preceding payment date, or
the date of issuance of series 2001-1 securitization bonds, as
applicable, after giving effect to all payments of principal made on the
preceding payment date.
The issuer will pay interest on the series 2001-1 securitization bonds
prior to paying principal of the series 2001-1 securitization bonds. See "The
Securitization Bonds -- Payments of Interest on and Principal of the
Securitization Bonds" in the prospectus. If there is a shortfall in the amount
necessary to make interest payments from the amount available to pay interest on
the series 2001-1 securitization bonds, the trustee will distribute interest to
each class of the series 2001-1 securitization bonds in the manner described in
"The Indenture -- How Funds in the Collection Account Will Be Allocated" in the
prospectus.
Interest on all classes of series 2001-1 securitization bonds will be
calculated by the servicer on the basis of a 360-day year of twelve 30-day
months.
CREDIT ENHANCEMENT
Credit enhancement for the series 2001-1 securitization bonds is intended
to protect you against losses or delays in scheduled payments on your
securitization bonds. See "Risk Factors -- Securitization Bondholders May
Experience Payment Delays or Losses as a Result of the Limited Sources of
Payment for the Securitization Bonds and Limited Credit Enhancement" in the
prospectus.
S-8
PERIODIC ADJUSTMENT OF THE SECURITIZATION CHARGE
Credit enhancement for the securitization bonds includes mandatory periodic
adjustments, after review by the MPSC, to the securitization charge to be billed
to customers. Consumers, as servicer, will implement the approved adjustment
annually through the beginning of the billing cycle for December 2013 and
quarterly commencing on the beginning of the billing cycle for December 2014.
The periodic adjustments will be designed to provide, among other things,
sufficient funds for timely payments of interest on and principal of the
securitization bonds in accordance with the expected amortization schedule set
forth in Table 2 above. See "The MPSC Financing Order and the Securitization
Charge -- The MPSC's Securitization Charge Adjustment Process" in the
prospectus. Adjustments will be made in order to provide sufficient remittances:
1. to pay transaction fees and expenses;
2. to make scheduled payments of principal of and interest on the
securitization bonds; and
3. to fund or replenish any of the subaccounts, including the capital
subaccount and the overcollateralization subaccount, to their required
levels.
SINGLE COLLECTION ACCOUNT AND SUBACCOUNTS
The issuer will establish a collection account with the trustee to hold the
capital contribution from Consumers to the issuer and the securitization charge
revenue collections remitted by the servicer from time to time. The collection
account will contain the funds available to pay the securitization bonds. The
collection account will consist of subaccounts including the following:
- the general subaccount;
- one or more series subaccounts;
- one or more class subaccounts;
- one or more series capital subaccounts, including the capital reserve
subaccount with respect to the series 2001-1 securitization bonds, as
discussed below;
- one or more series overcollateralization subaccounts; and
- the reserve subaccount.
Withdrawals from and deposits to all of these subaccounts will be made as
described under "The Indenture -- The Collection Account for the Securitization
Bonds" and "-- How Funds in the Collection Account Will Be Allocated" in the
prospectus.
The General Subaccount. Securitization charge revenue collections remitted
by the servicer to the trustee will be deposited into the general subaccount. On
each payment date, the trustee will allocate amounts in the general subaccount
as described under "The Indenture -- How Funds in the Collection Account Will Be
Allocated" in the prospectus.
The Series Subaccount. Upon the issuance of the series 2001-1
securitization bonds, a series subaccount will be established with respect to
that series. On each payment date, or the day before the payment date in the
case of interest allocated to the applicable class subaccounts as described
below, the trustee will allocate from amounts on deposit in the general
subaccount to the series subaccount for each series an amount sufficient to pay,
to the extent available:
- interest payable on that series on that payment date to each class on a
pro rata basis based on the amount of interest payable to that class;
- the principal of that series due on any class or series on the final
maturity date of that class or series, on a redemption date or upon
acceleration; and
S-9
- principal scheduled to be paid on that series on that payment date, as
set forth in the expected amortization schedule, excluding amounts
provided for in the immediately preceding clause above.
On each payment date, allocations will be made to each series subaccount as
described under "The Indenture -- How Funds in the Collection Account Will Be
Allocated" in the prospectus. On each payment date, the trustee will withdraw
funds from each series subaccount to make payments on the related series of
securitization bonds.
The Series Capital Subaccount. Upon the issuance of the series 2001-1
securitization bonds, a capital subaccount will be established for that series,
into which Consumers will deposit $2,342,960, which represents the required
capital amount for the series. Further, the trustee will establish a subaccount
within the capital subaccount, which will be referred to as the capital reserve
subaccount. The trustee will fund the capital reserve subaccount with $100,000
from the required capital amount for the series 2001-1 securitization bonds. If
depleted, the capital reserve subaccount will not be replenished. The capital
reserve subaccount will not be subject to the lien of the indenture or included
in the collateral securing any securitization bonds. If amounts available in the
general subaccount, the series subaccount, the reserve subaccount and the series
overcollateralization subaccount are not sufficient on any payment date to make
scheduled payments of principal and interest to the series 2001-1 securitization
bondholders and to pay the expenses, fees and charges specified in the
indenture, the trustee will draw on amounts in the series capital subaccount,
other than the amounts in the capital reserve subaccount, to make those
payments. The required capital amount has been set at a level sufficient to
obtain the ratings on the series 2001-1 securitization bonds described below
under "Ratings for the Series 2001-1 Securitization Bonds" in this prospectus
supplement.
The Series Overcollateralization Subaccount. Upon the issuance of the
series 2001-1 securitization bonds, an overcollateralization subaccount will be
established for the series 2001-1 securitization bonds. The required
overcollateralization amount for the series 2001-1 securitization bonds is
$2,342,960, which represents 0.5% of the initial outstanding principal balance
of the series. On each payment date, the trustee will deposit in the series
overcollateralization subaccount securitization charge revenue collections,
together with any earnings on investments in the collection account, up to a
specified amount for that payment date which is referred to as the scheduled
overcollateralization level for that date. The scheduled overcollateralization
level for each payment date is set forth below. The overcollateralization amount
and the scheduled overcollateralization levels have been set at amounts
sufficient to obtain the ratings on the series 2001-1 securitization bonds which
are described below under "Ratings for the Series 2001-1 Securitization Bonds"
in this prospectus supplement. See also "The Securitization Bonds -- Credit
Enhancement for the Securitization Bonds" in the prospectus.
If amounts available in the general subaccount, the series subaccount and
the reserve subaccount are not sufficient on any payment date to make scheduled
payments to the series 2001-1 securitization bondholders and to pay the
expenses, fees and charges specified in the indenture, the trustee will draw on
amounts in the series 2001-1 overcollateralization subaccount to make those
payments.
TABLE 3
SCHEDULED OVERCOLLATERALIZATION LEVELS
<Table>
<Caption>
SCHEDULED SCHEDULED
PAYMENT DATE OVERCOLLATERALIZATION LEVEL PAYMENT DATE OVERCOLLATERALIZATION LEVEL
------------ --------------------------- ------------ ---------------------------
</Table>
S-10
The Reserve Subaccount. The reserve subaccount will be funded with any
securitization charge revenue collections and earnings on amounts in the
collection account, other than the capital subaccount, in excess of the amount
necessary to pay on any payment date:
1. fees and expenses of the trustee and the servicer and other transaction
fees, expenses, costs and charges,
2. scheduled principal of and interest on the securitization bonds of each
series payable on that payment date,
3. any amount required to replenish the capital subaccount for each series,
and
4. the amounts required to fund or replenish the overcollateralization
subaccount for each series to the specified levels for that payment
date.
The securitization charge adjustments will be calculated to, among other
things, eliminate any amounts on deposit in the reserve subaccount. See also
"The Securitization Bonds -- Credit Enhancement for the Securitization Bonds"
and "The MPSC Financing Order and the Securitization Charge -- The MPSC's
Securitization Charge Adjustment Process" in the prospectus.
On any payment date, if amounts available in the general subaccount and the
series subaccount are not sufficient to make scheduled payments to the series
2001-1 securitization bondholders, and to pay the expenses, fees and charges
specified in the indenture, the trustee will draw first on any amounts in the
reserve subaccount to make those payments.
GOVERNING LAW FOR THE RELEVANT DOCUMENTS
The indenture, the series 2001-1 supplemental indenture, the sale
agreement, the servicing agreement and the administration agreement are governed
by the laws of the State of Michigan. The amended and restated certificate of
formation and the amended and restated limited liability company agreement are
governed by the laws of the State of Delaware. The intercreditor agreement will
be governed by New York law.
DESCRIPTION OF SECURITIZATION PROPERTY
Securitization property is a property right created by Michigan state
legislation. Securitization property represents the irrevocable right of a
Michigan electric utility to impose, collect and receive the securitization
charges, in an amount sufficient to provide full recovery of qualified costs as
approved by the MPSC under the MPSC financing order. Qualified costs are
described in more detail under "The Customer Choice Act" in the prospectus.
Securitization property also includes the right of an electric utility to obtain
periodic adjustments of securitization charges and all revenues, collections,
payments, money and proceeds with respect to the above.
THE SECURITIZATION CHARGE
The qualified costs authorized in the MPSC financing order are to be
recovered from customers of Consumers through the securitization charge.
Consumers Will Assess the Securitization Charge on Customers. Consumers, in
its capacity as servicer of the securitization property under the servicing
agreement, will assess the securitization charge on the bills of each customer.
A customer is a person that is an electric customer taking delivery of
electricity from Consumers or its successor on its MPSC-approved rate schedules
or under special contracts with specific customers. Each customer who is
physically connected to Consumers' facilities must pay the securitization charge
on all electricity delivered over those facilities, even if that customer elects
to purchase electricity from another supplier. See "The Customer Choice
Act -- Consumers and Other Utilities May Securitize Qualified Costs -- Customers
Cannot Avoid Paying the Securitization Charge" in the prospectus. The
securitization charge is assessed as a uniform per kilowatt-hour charge against
all customers of all rate classes and under all special contracts with specific
customers, subject to the
S-11
maximum lawful energy charges which may be in effect from time to time for any
of those rate classes or special contracts. The amount of the securitization
charge billed to a customer depends on the amount of electricity delivered to
the customer through Consumers' facilities. The initial securitization charge
for the series 2001-1 securitization bonds is expected to represent less than
[ ]% of any typical customer's bill.
Consumers Will Calculate the Securitization Charge. Consumers, as servicer,
will calculate the securitization charge based on the total amount required to
be billed to customers to generate securitization charge revenue collections
sufficient to provide funds for the timely payment of scheduled principal of and
interest on the securitization bonds and the other amounts required to be paid
by the issuer. The securitization charge will be reflected in each customer's
bill. Securitization charge revenue collections will vary from projections
because total electricity deliveries are affected by changes in usage, number of
customers, rates of payment of delinquencies and write-offs or other factors.
See Tables 1 through 7 under "The Seller and Servicer of the Securitization
Property" in the prospectus. Consumers, as servicer, is required to seek
adjustments to the securitization charge as described under "The MPSC Financing
Order and the Securitization Charge" in the prospectus, in order to adjust for
these variations.
The initial securitization charge will be calculated on the basis of:
- the issuance of $468,592,000 of series 2001-1 securitization bonds,
- the projected total payments required in relation to the securitization
bonds during the annual period commencing immediately after the date of
issuance of the series 2001-1 securitization bonds and ending on the
October 20, 2002 payment date for the series 2001-1 securitization bonds,
and
- the forecasted amount of kilowatt-hours of electricity to be delivered,
and for which Consumers bills and collects during the first annual
billing period.
The MPSC's Securitization Charge Adjustment Process. Securitization charge
revenues remitted to the trustee are intended to match the amount necessary to
pay the principal balance of the securitization bonds of each series in
accordance with the expected amortization schedule, to pay interest on each
series, to pay related fees, costs and expenses and to fund or replenish the
subaccounts. Furthermore, the servicer will make all filings with the MPSC as
required to adjust the securitization charge, until there are no securitization
bonds outstanding and all fees, costs, and expenses of the issuer have been
paid. In order to enhance the likelihood of remittances of a proper amount of
securitization charge revenues, the servicing agreement requires the servicer to
implement periodic adjustments to the securitization charge. Those adjustments
will be made annually through the beginning of the billing cycle for December
2013, and quarterly commencing with the beginning of the billing cycle for
December 2014. The adjustments to the securitization charge are intended to
produce sufficient revenues to pay scheduled principal of and interest on the
series 2001-1 securitization bonds and to provide for the full recovery of
qualified costs. See "The MPSC Financing Order and the Securitization
Charge -- The MPSC's Securitization Charge Adjustment Process" in the
prospectus.
Initially, the securitization charge can not be an amount in excess of
$0.00205 per kilowatt-hour for all customers, beginning with Consumers' first
billing cycle after the issuance date of the series 2001-1 securitization bonds.
See "The Customer Choice Act" and "The MPSC Financing Order and the
Securitization Charge" in the prospectus.
INFORMATION REGARDING CONSUMERS ENERGY COMPANY
For the year ended December 31, 2000, Consumers reported earnings of $304
million on revenue of $3.935 billion as compared with earnings of $340 million
on revenue of $3.874 billion for the year ended December 31, 1999. For the year
ended December 31, 2000, approximately 68% and 30% of revenues were derived from
electricity and gas, respectively. For the six months ending June 30, 2001,
approximately 62% and 37% of revenues were derived from electricity and gas,
respectively.
S-12
For the six months ending June 30, 2001, Consumers reported earnings of
$150 million on revenue of $2.092 billion as compared to earnings of $128
million on revenues of $1.934 billion for the six months ending June 30, 2000.
Consumers is a wholly owned subsidiary of CMS Energy Corporation. As of
June 30, 2001, Consumers' consolidated assets were $7,855 million and CMS Energy
Corporation's consolidated assets were $18,821 million.
UNDERWRITING THE SERIES 2001-1 SECURITIZATION BONDS
Subject to the terms and conditions set forth in the underwriting agreement
among the issuer, Consumers and the underwriters for whom Morgan Stanley is
acting as the representative, the issuer has agreed to sell to the underwriters,
and the underwriters have severally agreed to purchase, the principal balance of
series 2001-1 securitization bonds set forth opposite each underwriter's name
below:
<Table>
<Caption>
NAME CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 TOTAL
---- --------- --------- --------- --------- -----
Morgan Stanley & Co. Incorporated
Banc One Capital Markets, Inc.
Barclays Capital
J.P. Morgan Securities Inc.
Loop Capital Markets, LLC
Total $
========
</Table>
Under the underwriting agreement, the underwriters will take and pay for
all of the series 2001-1 securitization bonds offered hereby, if any are taken.
THE UNDERWRITERS' SALES PRICE FOR THE SERIES 2001-1 SECURITIZATION BONDS
Series 2001-1 securitization bonds sold by the underwriters to the public
will be initially offered at the prices set forth on the cover of this
prospectus supplement. The underwriters propose initially to offer the
securitization bonds to dealers at those prices, less a selling concession not
to exceed the percentage set forth below, and the underwriters may allow and
dealers may reallow a discount not to exceed the percentage set forth below.
<Table>
<Caption>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----- ---------- -----------
Class A-1
Class A-2
Class A-3
Class A-4
</Table>
After the initial public offering, the public offering prices, selling
concessions and reallowance discounts may change.
NO ASSURANCE AS TO RESALE PRICE OR RESALE LIQUIDITY FOR THE SECURITIZATION BONDS
The series 2001-1 securitization bonds are a new issue of securities with
no established trading market. They will not be listed on any securities
exchange. The issuer has been advised by the underwriters that they intend to
make a market in the securitization bonds but they are not obligated to do so
and may discontinue market making at any time without notice. No assurance can
be given as to the liquidity of the trading market for the securitization bonds.
UNITED KINGDOM OFFERING
Each underwriter has represented and agreed that (a) it only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of any floating
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rate class to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or who is a person to whom the document may otherwise lawfully be issued or
passed on, (b) it has complied and will comply with all applicable provisions of
the Financial Services Act 1986 of Great Britain with respect to anything done
by it in relation to any floating rate class in, from or otherwise involving the
United Kingdom and (c) if that underwriter is an authorized person under the
Financial Services Act 1986, it has only promoted and will only promote (as that
term is defined in Regulation 1.02 of the Financial Services (Promotion of
Unregulated Schemes) Regulations 1991) to any person in the United Kingdom the
scheme described herein if that person is of a kind described either in Section
76(2) of the Financial Services Act 1986 or in Regulation 1.04 of the Financial
Services (Promotion of Unregulated Schemes) Regulations 1991.
VARIOUS TYPES OF UNDERWRITER TRANSACTIONS WHICH MAY AFFECT THE PRICE OF THE
SECURITIZATION BONDS
The underwriters may engage in overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the securitization bonds in accordance with Regulation M under the Securities
Exchange Act of 1934. Overallotment transactions involve syndicate sales in
excess of the offering size, which create a syndicate short position.
Stabilizing transactions are bids to purchase the securitization bonds which are
permitted, so long as the stabilizing bids do not exceed a specified maximum
price. Syndicate covering transactions involve purchases of the securitization
bonds in the open market after the distribution has been completed in order to
cover syndicate short positions. Penalty bids permit the underwriters to reclaim
a selling concession from a syndicate member when the securitization bonds
originally sold by the syndicate member are purchased in a syndicate covering
transaction. These overallotment transactions, stabilizing transactions,
syndicate covering transactions and penalty bids may cause the prices of the
securitization bonds to be higher than they would otherwise be. None of the
seller, the issuer or the trustee or any of the underwriters represent that the
underwriters will engage in any of these transactions or that these
transactions, once commenced, will not be discontinued without notice at any
time.
In the ordinary course of business, each underwriter and its affiliates
have engaged and may engage in transactions with the issuer and its affiliates,
including Consumers. In addition, each underwriter may from time to time take
positions in the securitization bonds.
Under the terms of the underwriting agreement, the issuer and Consumers
have agreed to reimburse the underwriters for some expenses. The issuer and
Consumers have agreed to indemnify the underwriters against some liabilities,
including liabilities under the Securities Act of 1933.
RATINGS FOR THE SERIES 2001-1 SECURITIZATION BONDS
It is a condition of any underwriter's obligation to purchase the series
2001-1 securitization bonds that each class of the series 2001-1 securitization
bonds be rated "AAA" by Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, referred to as S&P, "Aaa" by Moody's Investors Service,
Inc., referred to as Moody's, and "AAA" by Fitch, Inc., referred to as Fitch.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the rating agency.
No person is obligated to maintain the rating on the securitization bonds, and,
accordingly, there can be no assurance that the ratings assigned to any class of
the securitization bonds upon initial issuance will not be revised or withdrawn
by a rating agency at any time thereafter. If a rating of any class of the
securitization bonds is revised or withdrawn, the liquidity of that class may be
adversely affected. In general, ratings address credit risk and do not represent
any assessment of any particular rate of principal payments on the
securitization bonds other than payment in full of each class of the
securitization bonds by the applicable final maturity date, as well as the
timely payment of interest.
S-14
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 WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SUBJECT TO COMPLETION, DATED OCTOBER 23, 2001
CONSUMERS FUNDING LLC
Issuer of the Securitization Bonds
Securitization Bonds
CONSUMERS ENERGY COMPANY
Seller and Servicer
of Securitization Property
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS PROSPECTUS
BEFORE BUYING THE SECURITIZATION BONDS.
The securitization bonds represent obligations only of Consumers Funding
LLC, which is the issuer, and are backed only by the assets of the issuer.
Neither Consumers, its parent, CMS Energy Corporation, nor any of their
respective affiliates, other than the issuer, is liable for payments on the
securitization bonds.
There currently is no secondary market for the securitization bonds, and
there is no assurance that one will develop.
This prospectus, together with the applicable prospectus supplement,
constitutes a summary of material terms of the offering of a series of
securitization bonds. Prospective investors are urged to read both this
prospectus and the prospectus supplement in full. Sales of the securitization
bonds may not be consummated unless the purchaser has received both this
prospectus and the prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[ ]
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Important Notice about Information Presented in this
Prospectus and the Prospectus Supplement.................. 1
Summary of Terms............................................ 2
Risk Factors................................................ 4
You May Experience Payment Delays or Losses as a Result of
the Limited Sources of Payment for the Securitization
Bonds and Limited Credit Enhancement................... 4
The Issuer May Not Impose Securitization Charges for
Electricity Delivered After 15 Years................... 4
The Amount of Securitization Charges May Not Exceed
Maximum Energy Rates................................... 4
Judicial, Legislative or Regulatory Action That May
Adversely Affect Your Investment.......................... 5
The Law Which Underpins the Securitization Bonds May Be
Invalidated............................................ 5
The Customer Choice Act May Be Overturned by the Federal
Government Without Full Compensation................... 6
Future Voter Initiatives, Referenda or Other State
Legislative Action May Invalidate the Securitization
Bonds or Their Underlying Assets....................... 6
The Michigan Public Service Commission May Take Action
Which Reduces the Value of the Securitization Bonds.... 7
Servicing Risks............................................. 8
Inaccurate Forecasting or Unanticipated Delinquencies or
Charge-Offs Could Result in Insufficient Funds to Make
Scheduled Payments on the Securitization Bonds......... 8
Initially, the Calculation of the Securitization Charge
May Be Affected by Limited Experience With the
Securitization Charge.................................. 9
Consumers May Encounter Unexpected Problems in the Initial
Administration of the Securitization Charge............ 9
If the Servicer Defaults or Becomes Bankrupt, It May Be
Difficult to Find a Successor Servicer, and Payments on
the Securitization Bonds May Be Suspended.............. 9
Billing and Collection Practices May Reduce the Amount of
Funds Available for Payments on the Securitization
Bonds.................................................. 9
It May Be Difficult for Successor Servicers to Collect the
Securitization Charge from Consumers' Customers........ 10
It May Be Difficult to Collect the Securitization Charge
from Alternative Electric Suppliers Who Provide
Electricity to Consumers' Customers.................... 10
Consumers' Customer Payments May Decline Initially Due to
Customer Confusion..................................... 11
Inability to Terminate Service to Certain Delinquent
Customers During the Heating Season May Temporarily
Reduce Amounts Available for Payments on the
Securitization Bonds................................... 11
Replacement of Consumers as Servicer Upon a Servicer
Default Would Require the Consent of the Parties to the
Consumers Receivables Financing Arrangement............ 11
The Risks Associated With Potential Bankruptcy or Creditors'
Rights Proceedings........................................ 11
Consumers Will Commingle Securitization Charge Collections
with Other Collections Which Could Result in Losses or
Delays in Payment on the Securitization Bonds.......... 11
Bankruptcy of Consumers Could Result in Losses or Delays
in Payments on the Securitization Bonds................ 12
The Sale of the Securitization Property Could Be Construed
as a Financing and Not a Sale in a Case of Consumers'
Bankruptcy............................................. 13
Securitization Property Might Not be Treated as Current
Property............................................... 13
Consumers and the Issuer Could Be Substantively
Consolidated in a Case of Consumers' Bankruptcy........ 14
A Michigan Public Service Commission Sequestration Order
for Securitization Property in Case of Default Might
Not Be Enforceable in Bankruptcy....................... 14
</Table>
<Table>
<Caption>
PAGE
----
Other Risks Associated With An Investment In The
Securitization Bonds...................................... 14
The Proceeds from Foreclosure on the Securitization
Property May Be Insufficient to Pay the Securitization
Bonds.................................................. 14
Consumers' Obligation to Indemnify the Issuer for a Breach
of a Representation or Warranty May Not Be Sufficient
to Protect Your Investment............................. 15
You May Have to Reinvest the Principal Amount of Your
Securitization Bonds at a Lower Rate of Return Because
of Optional Redemption of the Securitization Bonds..... 15
Risks Associated with the Use of Interest Rate Swap
Transactions........................................... 15
Consumers' Ratings May Affect the Market Value of the
Securitization Bonds................................... 15
Absence of Secondary Market for Securitization Bonds Could
Limit Your Ability to Resell Securitization Bonds...... 15
The Issuer May Issue Additional Series of Securitization
Bonds Whose Holders Have Conflicting Interests......... 16
The Ratings Have a Limited Function and They Are No
Indication of the Expected Rate of Payment of Principal
on the Securitization Bonds............................ 16
Forward-looking Statements.................................. 16
Consumers Energy Company.................................... 17
The Collateral.............................................. 18
Payment Sources........................................... 19
Priority of Distributions................................. 19
Floating Rate Securitization Bonds........................ 20
Credit Enhancement and Accounts........................... 20
State Pledge.............................................. 22
Payments of Interest and Principal.......................... 24
Optional Redemption....................................... 24
Payment Dates and Record Dates............................ 24
Material Income Tax Considerations........................ 24
ERISA Considerations...................................... 24
Reports to Securitization Bondholders....................... 24
Use of Proceeds............................................. 25
The Customer Choice Act..................................... 25
Recovery of Qualified Costs Is Allowed for Consumers and
Other Michigan Utilities............................... 26
Consumers and Other Utilities May Securitize Qualified
Costs.................................................. 27
The MPSC Financing Order and the Securitization Charge...... 29
The MPSC Financing Order.................................. 29
Appeals of the MPSC Financing Order....................... 30
The MPSC's Securitization Charge Adjustment Process....... 30
The Seller and Servicer of the Securitization Property...... 31
Consumers................................................. 31
Consumers' Customer Classes, Electricity Consumption and
Revenues............................................... 31
Percentage Concentration Within Consumers' Commercial and
Industrial Classes..................................... 33
How Consumers Forecasts the Number of Customers and the
Amount of Electricity To Be Delivered Over Its
Facilities............................................. 33
Actual Consumption Compared to Forecast................... 34
Credit Policy; Billing; Collections; Restoration of
Service................................................ 35
Credit Policy............................................. 35
Billing Process........................................... 36
Collection Process........................................ 36
Write-Off Process......................................... 37
</Table>
ii
<Table>
<Caption>
PAGE
----
Restoration of Service.................................... 37
Loss and Delinquency Experience........................... 38
Consumers Funding LLC, the Issuer........................... 40
Information Available to the Securitization Bondholders..... 41
The Securitization Bonds.................................... 42
General Terms of the Securitization Bonds................. 42
Payments of Interest on and Principal of the
Securitization Bonds................................... 43
Floating Rate Securitization Bonds........................ 44
Redemption of the Securitization Bonds.................... 44
Credit Enhancement for the Securitization Bonds........... 44
Securitization Bonds Will Be Issued in Book-Entry Form.... 45
Certificated Securitization Bonds......................... 47
Weighted Average Life and Yield Considerations for the
Securitization Bonds...................................... 49
The Sale Agreement.......................................... 49
Consumers' Sale and Assignment of Securitization
Property............................................... 49
Consumers' Representations and Warranties................. 50
Consumers' Covenants...................................... 53
Consumers' Obligation to Indemnify the Issuer and the
Trustee and to Take Legal Action....................... 55
Successors to Consumers................................... 56
The Servicing Agreement..................................... 57
Consumers' Servicing Procedures........................... 57
Securitization Charge Revenue Remittances................. 57
The MPSC's Securitization Charge Adjustment Process....... 58
Consumers' Securitization Charge Revenue Collections...... 58
Consumers' Compensation for its Role as Servicer and its
Release of Other Parties............................... 58
Consumers' Duties as Servicer............................. 58
Consumers' Representations and Warranties as Servicer..... 59
Consumers, as Servicer, Will Indemnify the Issuer and
Other Related Entities................................. 60
Consumers, as Servicer, Will Provide Statements to the
Issuer and to the Trustee.............................. 60
Consumers to Provide Compliance Reports Concerning the
Servicing Agreement.................................... 61
Matters Regarding Consumers as Servicer................... 61
Events Constituting a Default by Consumers in its Role as
Servicer............................................... 62
The Trustee's Rights if Consumers Defaults as Servicer.... 62
The Obligations of a Servicer That Succeeds Consumers..... 63
Intercreditor Agreement..................................... 63
The Indenture............................................... 63
The Security for the Securitization Bonds................. 64
Securitization Bonds May Be Issued in Various Series or
Classes................................................ 64
Opinion of Independent Certified Public Accountants
Required for Each Series or Class...................... 65
The Collection Account for the Securitization Bonds....... 65
How Funds in the Collection Account Will Be Allocated..... 69
The Issuer and the Trustee May Modify the Indenture; the
Issuer Must Enforce the Sale Agreement, the Servicing
Agreement and any Interest Rate Swap or Cap
Agreement.............................................. 72
What Constitutes an Event of Default on the Securitization
Bonds.................................................. 75
Covenants of the Issuer................................... 78
Access to the List of Holders of the Securitization
Bonds.................................................. 79
The Issuer Must File an Annual Compliance Statement....... 79
The Trustee Must Provide a Report to All Securitization
Bondholders............................................ 79
What Will Trigger Satisfaction and Discharge of the
Indenture.............................................. 80
</Table>
iii
<Table>
<Caption>
PAGE
----
The Issuer's Legal Defeasance and Covenant Defeasance
Options................................................ 80
The Trustee............................................... 81
Governing Law............................................. 81
How a Bankruptcy of the Seller or Servicer May Affect Your
Investment................................................ 82
Sale or Financing......................................... 82
Consolidation of the Issuer and Consumers................. 83
Claims in Bankruptcy; Challenge to Indemnity Claims....... 83
Status of Securitization Property as Current Property..... 83
Enforcement of Rights by Trustee.......................... 84
Bankruptcy or Creditors' Rights Proceedings of Servicer... 84
Material Income Tax Consequences for the Securitization
Bonds..................................................... 85
Material Federal Income Tax Consequences.................. 85
Income Tax Status of the Securitization Bonds............. 85
General................................................... 85
Tax Consequences to U.S. Holders.......................... 86
Tax Consequences to Non-U.S. Holders...................... 86
Backup Withholding........................................ 87
Material State of Michigan Tax Consequences............... 87
ERISA Considerations........................................ 88
Plan Asset Issues for an Investment in the Securitization
Bonds.................................................. 88
Prohibited Transaction Exemptions......................... 89
General Investment Considerations for Prospective Plan
Investors in the Securitization Bonds.................. 90
Plan of Distribution for the Securitization Bonds........... 90
Ratings for the Securitization Bonds........................ 91
Various Legal Matters Relating to the Securitization
Bonds..................................................... 91
</Table>
iv
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT
You should rely only on information related to the securitization bonds
provided in this prospectus and in the related prospectus supplement. No dealer,
salesperson or other person has been authorized to give any information or to
make any representations other than those contained in this prospectus and the
prospectus supplement and, if given or made, the information or representations
must not be relied upon as having been authorized by the issuer, Consumers, the
underwriters or any dealer, salesperson or other person.
This prospectus and the related prospectus supplement do not constitute an
offer to sell, or a solicitation of an offer to buy, any security in any
jurisdiction in which it is unlawful to make any similar offer or solicitation.
We include cross-references to sections where you can find additional
information. Check the table of contents to locate these sections.
SUMMARY OF TERMS
This summary contains a brief description of the securitization bonds that
applies to all series of securitization bonds issued under this prospectus.
Information that relates to a specific series of securitization bonds can be
found in the prospectus supplement related to that series. You will find a
detailed description of the terms of the offering of the securitization bonds in
"The Securitization Bonds" in this prospectus.
Consider carefully the risk factors beginning on page 4 of this prospectus.
The Issuer: Consumers Funding LLC, a Delaware limited
liability company, wholly owned by Consumers
Energy Company. The issuer was formed solely to
purchase securitization property and to issue
one or more series of securitization bonds
secured by the securitization property.
Issuer's Address: 212 W. Michigan Avenue, Suite M-1029 Jackson,
Michigan 49201
Issuer's Telephone Number: (517) 788-0179
Seller of the Securitization
Property to the Issuer: Consumers Energy Company, referred to as
Consumers, an operating electric and gas public
utility incorporated under the laws of the
State of Michigan, is the principal subsidiary
of CMS Energy Corporation. Consumers is engaged
in the generation, purchase, distribution and
sale of electricity to approximately 1.7
million customers in 61 of the 68 counties of
Michigan's lower peninsula.
Seller's Address: 212 W. Michigan Avenue
Jackson, Michigan 49201
Seller's Telephone Number: (517) 788-0550
Servicer of the Securitization
Property: Consumers, acting as servicer, and any
successor servicer, will service the
securitization property pursuant to a servicing
agreement with the issuer.
Consumers will be entitled to a monthly
servicing fee, in an amount specified in the
prospectus supplement.
Administrator: Consumers, acting as administrator, and any
successor administrator, will administer the
administrative affairs of the issuer pursuant
to an administration agreement with the issuer.
Trustee: The Bank of New York
The Assets of the Issuer: The issuer will own:
- the securitization property transferred to
the issuer by the seller (see "The Sale
Agreement -- Consumers' Sale and Assignment
of Securitization Property" in this
prospectus);
- trust accounts held by the trustee;
- other credit enhancement acquired or held to
provide for the payment of the securitization
bonds; and
- rights under any interest rate swap or cap
agreements.
2
Transaction Overview: The Customer Choice and Electricity Reliability
Act (Acts 141 and 142), enacted in the State of
Michigan in June 2000, referred to as the
"Customer Choice Act", authorizes electric
utilities, such as Consumers, to recover
qualified costs. Qualified costs are an
electric utility's regulatory assets as
determined by the Michigan Public Service
Commission plus any costs that the Michigan
Public Service Commission determines that the
electric utility would be unlikely to collect
in a competitive market, together with the
costs of issuing, supporting and servicing
securitization bonds and any costs of retiring
and refunding the electric utility's existing
debt and equity securities in connection with
the issuance of securitization bonds. Qualified
costs include taxes related to the recovery of
the securitization charge. An electric utility
may recover qualified costs through an
irrevocable non-bypassable charge called the
securitization charge that is collected from
all of its electric customers taking delivery
on its Michigan Public Service Commission
approved rate schedules and under special
contracts with specific customers. The Customer
Choice Act permits special purpose entities
formed by electric utilities to issue debt
securities secured by the right to receive
revenues arising from the securitization
charge. The securitization property includes
this right. See "The Securitization Bonds" in
this prospectus.
The following sets forth the primary steps of
the transaction underlying the offering of the
securitization bonds:
- Consumers will sell the securitization
property to the issuer in exchange for the
proceeds available from the sale of the
securitization bonds after payment of the
issuer's issuance costs.
- The issuer, whose primary asset is the
securitization property, will sell the
securitization bonds to the underwriters
named in the prospectus supplement.
- Consumers will act as the servicer of the
securitization property on behalf of the
issuer.
The securitization bonds and the securitization
property securing the securitization bonds are
not an obligation of Consumers or any of its
affiliates, other than the issuer. The
securitization bonds are also not a debt or
obligation of the State of Michigan and are not
a charge on the full faith and credit or taxing
power of the State.
3
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase securitization bonds.
YOU MAY EXPERIENCE PAYMENT DELAYS OR LOSSES AS A RESULT OF THE LIMITED SOURCES
OF PAYMENT
FOR THE SECURITIZATION BONDS AND LIMITED CREDIT ENHANCEMENT
You may suffer payment delays or losses on your securitization bonds if the
assets of the issuer are insufficient to pay interest or the scheduled principal
amount of the securitization bonds in full. The only source of funds for
payments on the securitization bonds will be the assets of the issuer. These
assets are limited to:
- the securitization property, including the right to collect the
securitization charge and to adjust the securitization charge annually;
- the funds on deposit in the collection account held by the trustee; and
- contractual rights under various contracts.
The securitization bonds will not be insured or guaranteed by Consumers,
including in its capacity as servicer, or by its parent, CMS Energy Corporation,
any of its affiliates, the trustee or any other person or entity. You must rely
for payment of the securitization bonds solely upon collections of
securitization charges, funds on deposit in the collection account held by the
trustee, contractual rights under various contracts and any other credit
enhancement described in the related prospectus supplement. See "Consumers
Funding LLC, the Issuer" in this prospectus.
THE ISSUER MAY NOT IMPOSE SECURITIZATION CHARGES FOR ELECTRICITY DELIVERED AFTER
15 YEARS
Consumers may not bill securitization charges fifteen years after the
beginning of the first complete billing cycle following the initial issuance of
the securitization bonds. Amounts collected from securitization charges billed
through this period, or from credit enhancement funds, may not be sufficient to
repay the securitization bonds in full. If that is the case, no other funds will
be available to pay the unpaid balance due on the securitization bonds. See "The
MPSC Financing Order and the Securitization Charge -- The MPSC Financing Order"
in this prospectus.
THE AMOUNT OF SECURITIZATION CHARGES MAY NOT EXCEED MAXIMUM ENERGY RATES
Because of the rate freeze created by the Customer Choice Act, the rate
design for the securitization charge approved in the Michigan Public Service
Commission financing order could reach the maximum energy rates that may be
charged to residential, commercial and industrial customers during the periods
specified in the Customer Choice Act for each rate class. However, the maximum
rates are substantially higher than the securitization charge approved in the
Michigan Public Service Commission financing order. In the unlikely event of a
severe or persistent shortfall in securitization charge revenue collections, the
maximum rate applicable to a rate class may ultimately prevent the servicer from
adjusting the securitization charge for that rate class in excess of that
maximum rate. If this does occur, the securitization charge would be increased
for the remaining rate classes to make up the securitization charge revenues in
excess of the maximum rate applicable to the first rate class. Those increases
could in turn result in the assessment of securitization charges on the
remaining rate classes at levels that are limited by maximum rates applicable at
that time to those remaining rate classes. This could reduce the amount or the
rate of collections of securitization charge revenues, which may materially and
adversely affect the value of your securitization bond investment. See "The MPSC
Financing Order and the Securitization Charge -- The MPSC Financing Order -- The
MPSC Authorizes Consumers to Impose the Securitization Charge and the Tax
Charge" in this prospectus.
4
JUDICIAL, LEGISLATIVE OR REGULATORY ACTION
THAT MAY ADVERSELY AFFECT YOUR INVESTMENT
THE LAW WHICH UNDERPINS THE SECURITIZATION BONDS MAY BE INVALIDATED
The securitization property is the creation of the Customer Choice Act and
the Michigan Public Service Commission financing order issued by the Michigan
Public Service Commission pursuant to the Customer Choice Act. The Customer
Choice Act was enacted in June 2000. Consumers is only the second utility to
issue securitization bonds pursuant to the Customer Choice Act. A court decision
or a federal or state law might seek to overturn or otherwise invalidate either
the Customer Choice Act or the Michigan Public Service Commission financing
order. If this occurs, you may lose some or all of your investment or you may
experience delays in recovering your investment. Because the securitization
property is a creation of statute, any event affecting the validity of the
relevant legislative provisions would have an adverse effect on the
securitization bonds because the securitization bonds are secured primarily by
the securitization property. For example, if the provisions of the Customer
Choice Act which create securitization property were invalidated, the servicer
could lose the right to collect the securitization charge. As another example,
if the provisions of the Customer Choice Act which allow for periodic adjustment
of the securitization charge were invalidated, the servicer could be prevented
from obtaining the adjustments required to provide sufficient funds for the
scheduled payments on the securitization bonds.
There is uncertainty associated with investing in bonds payable from an
asset which depends for its existence on recently enacted legislation because of
an absence of comprehensive judicial or regulatory experience implementing and
interpreting the legislation. See "The MPSC Financing Order and the
Securitization Charge" in this prospectus.
If a court were to determine that the relevant provisions of the Customer
Choice Act or the Michigan Public Service Commission financing order are
unlawful, invalid or unenforceable in whole or in part, it could adversely
affect the validity of the securitization bonds, the securitization property or
the issuer's ability to make payments on the securitization bonds. Although a
judicial determination of that kind may require Consumers to indemnify you,
Consumers might be unable to pay the indemnity. Moreover, the amount of any
indemnification may not be sufficient for you to recover all of your loss on the
securitization bonds.
The Michigan Attorney General filed appeals of the Michigan Public Service
Commission financing order on November 27, 2000 and on February 5, 2001 with the
Michigan Court of Appeals. On July 24, 2001, the Court of Appeals issued a
unanimous decision affirming the Michigan Public Service Commission financing
order. The Attorney General advised Consumers that she would not file an
application for a rehearing with the Michigan Court of Appeals or for leave to
appeal the Court of Appeals' decision with the Michigan Supreme Court. In
addition, the period to file an application for rehearing or for leave to appeal
with the Michigan Supreme Court expired on August 14, 2001. The period to file a
delayed application for leave to appeal with the Michigan Supreme Court expired
on September 18, 2001. See "The MPSC Financing Order and the Securitization
Charge -- Appeals from the MPSC Financing Order" in this prospectus.
Legal activity in other states may indirectly affect the value of your
investment. Laws similar to the Customer Choice Act have been enacted in other
states, including Arkansas, California, Connecticut, Illinois, Massachusetts,
Montana, New Jersey, Pennsylvania and Texas. The validity of similar legislation
in other states has been upheld in those states where court challenges have been
made and the judicial process has been completed. A court might yet overturn a
similar statute in another state in response to a pending or future claim. Such
a decision would not automatically invalidate the Customer Choice Act or the
Michigan Public Service Commission financing order, but it might give rise to a
challenge to the Customer Choice Act.
5
THE CUSTOMER CHOICE ACT MAY BE OVERTURNED BY THE FEDERAL GOVERNMENT WITHOUT FULL
COMPENSATION
A bill, H.R. 2233, has been introduced in the 107th Congress prohibiting
the recovery of any wholesale stranded costs of a public utility. This bill in
its current form would not prohibit the recovery of qualified costs as
authorized by the Customer Choice Act and would not prevent the imposition and
collection of securitization charges or the creation of securitization property
under the Customer Choice Act. H.R. 2233 was referred to the House Committee on
Energy and Commerce and the House Ways and Means Committee on June 19, 2001 and
has not been acted upon by either Committee. While the Congress has not enacted
any bill which prohibits the recovery of qualified costs or the imposition or
collection of securitization charges, no prediction can be made as to whether
any future bills that prohibit the recovery of qualified costs or the imposition
or collection of securitization charges, or securitized financing for the
recovery of these costs, will become law, or, if they become law, what their
final form or effect will be. The courts may conclude that any such preemption
is not a "taking" from securitization bondholders. Moreover, even if any such
preemption of the Customer Choice Act and/or the Michigan Public Service
Commission financing order by the federal government were considered a "taking"
under the U.S. Constitution for which the government had to pay just
compensation to securitization bondholders, there is no assurance that this
compensation would be sufficient to pay the full amount of principal of and
interest on the securitization bonds or to pay these amounts on a timely basis.
Neither the issuer nor Consumers will indemnify you for any changes in
federal law that may affect the value of your securitization bonds.
FUTURE VOTER INITIATIVES, REFERENDA OR OTHER STATE LEGISLATIVE ACTION MAY
INVALIDATE THE SECURITIZATION BONDS OR THEIR UNDERLYING ASSETS
Under the Michigan Constitution, the electorate has the powers of
initiative and referendum. The power of initiative gives the electorate the
ability to propose laws and to enact and repeal laws that the legislature has
the power otherwise to enact. The power of referendum gives the electorate the
ability to approve or reject laws previously enacted by the legislature. Among
other requirements, qualifying an initiative or a referendum for an election
requires petitions signed by registered electors constituting at least eight
percent and five percent, respectively, of the total votes cast at the
immediately preceding gubernatorial election. Both an initiative and a
referendum must be approved by a majority of the electors voting at the next
general election. In the case of a referendum, the requisite number of
signatures must be obtained within 90 days after the adjournment of the
legislative session in which the law in question was enacted. That period ended
with respect to the Customer Choice Act on March 27, 2001 without a petition for
referendum being submitted. As of the date of this prospectus, no voter
initiative or petition affecting the securitization bonds was pending or
certified, and Consumers is unaware of any efforts to circulate petitions for
action.
In the Customer Choice Act, the State of Michigan has pledged not to impair
the value of the securitization property. For a description of this pledge, see
"The Customer Choice Act -- Consumers and Other Utilities May Securitize
Qualified Costs" in this prospectus. Despite this pledge, the State of Michigan,
including the Michigan Public Service Commission, or the electorate pursuant to
its power of initiative may attempt in the future to repeal or amend the
Michigan Constitution, the Customer Choice Act or the Michigan Public Service
Commission financing order in a manner which might limit or alter the
securitization property so as to reduce its value or the value of the
securitization bonds. Moreover, the Michigan Public Service Commission, or the
Governor of the State of Michigan, exercising executive power, might attempt to
take action which is inconsistent with this pledge.
To date, no cases addressing these issues in the context of securitization
bonds have been decided. There have been cases in which courts have applied the
contract clause of the United States Constitution and parallel state
constitutional provisions to strike down legislation reducing or eliminating
taxes, public charges or other sources of revenues servicing bonds issued by
public instrumentalities or private issuers, or otherwise reducing or
eliminating the security for bonds. Based upon this case law, in the opinion of
6
Skadden, Arps, Slate, Meagher & Flom LLP, under the contract clause of the
United States Constitution, the State of Michigan, including the Michigan Public
Service Commission, could not constitutionally take any action of a legislative
character, including, but not limited to, the repeal or amendment of the
Customer Choice Act or the Michigan Public Service Commission financing order
(including repeal or amendment by voter initiative as defined in the Michigan
Constitution or by amendment of the Michigan Constitution), that would
substantially impair the value of the securitization property or substantially
reduce or alter, except as allowed under the adjustment provisions described in
Customer Choice Act, or substantially impair the securitization charges to be
imposed, collected and remitted to the issuer, unless this action is a
reasonable exercise of the State of Michigan's sovereign powers and of a
character reasonable and appropriate to the public purpose justifying this
action. Miller, Canfield, Paddock and Stone, P.L.C., Michigan counsel to
Consumers, will deliver an opinion substantially to the same effect under the
contract clause of the Michigan Constitution.
Moreover, in the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, under
the takings clause of the United States Constitution, the State of Michigan,
including the Michigan Public Service Commission, could not repeal or amend the
Customer Choice Act or the MPSC financing order (including repeal or amendment
by voter initiative as defined in the Michigan Constitution, or by amendment of
the Michigan Constitution) or take any other action in contravention of its
pledge described above, without paying just compensation to the securitization
bondholders, as determined by a court of competent jurisdiction, if this action
would constitute a permanent appropriation of a substantial property interest of
the securitization bondholders in the securitization property and deprive the
securitization bondholders of their reasonable expectations arising from their
investments in the securitization bonds. Miller, Canfield, Paddock and Stone,
P.L.C., Michigan counsel to Consumers, will deliver an opinion substantially to
the same effect under the takings clause of the Michigan Constitution. There is
no assurance, however, that, even if a court were to award just compensation, it
would be sufficient to pay the full amount of principal of and interest on the
securitization bonds.
There can be no assurance that a repeal of or amendment to the Customer
Choice Act, the Michigan Public Service Commission financing order or the
Michigan Constitution will not be sought or adopted or that any action by the
State of Michigan will not occur, any of which might constitute a violation of
the State of Michigan's pledge and agreement with the securitization
bondholders. In any event, costly and time-consuming litigation might ensue. Any
litigation might adversely affect the price and liquidity of the securitization
bonds and the dates of payments of interest on and principal of and,
accordingly, the weighted average lives of the securitization bonds. Moreover,
given the lack of judicial precedent directly on point and the novelty of the
security for the securitization bondholders, the outcome of any litigation
cannot be predicted with certainty and, accordingly, securitization bondholders
could incur a loss of their investment.
Neither the issuer nor Consumers will indemnify you for any changes in the
law that may affect the value of your securitization bonds.
THE MICHIGAN PUBLIC SERVICE COMMISSION MAY TAKE ACTION WHICH REDUCES THE VALUE
OF THE
SECURITIZATION BONDS
Pursuant to the Customer Choice Act, the Michigan Public Service Commission
financing order issued to Consumers is irrevocable and not subject to reduction,
impairment or adjustment by further action of the Michigan Public Service
Commission, except pursuant to the securitization charge adjustment provisions
of that Act. The possibility exists, however, that the Michigan Public Service
Commission might nevertheless attempt to revise or rescind its regulations or
orders in ways that ultimately have an adverse impact upon the securitization
property or the securitization charge. Apart from the pledge of the State of
Michigan and the terms of the Michigan Public Service Commission financing
order, the Michigan Public Service Commission retains the power to adopt, revise
or rescind rules or regulations affecting Consumers or a successor electric
utility. Any new or amended regulations or orders by the Michigan Public Service
Commission, for example, could directly or indirectly affect the ability of the
servicer to collect the securitization charge on a full and timely basis.
Consumers has agreed to take
7
legal or administrative actions, including instituting and prosecuting legal
actions, as may be reasonably necessary to block or overturn any attempts to
cause a repeal or any modification adverse to the trustee or the bondholders of
or a supplement to the Customer Choice Act, the Michigan Public Service
Commission financing order or the rights of securitization bondholders.
Consumers has also agreed to resist proceedings of third parties, which, if
successful, would result in a breach of its representations concerning the
securitization property, the Michigan Public Service Commission financing order
or the Customer Choice Act. See "The Sale Agreement" in this prospectus.
However, there is no assurance that any action Consumers takes would be
successful. Future Michigan Public Service Commission regulations or orders may
affect the ratings of the securitization bonds, their price or the rate of
securitization charge revenue collections and, accordingly, the amortization of
securitization bonds and their weighted average lives, and may not trigger any
obligation of Consumers to indemnify you. As a result, you could suffer a loss
in connection with your investment.
Consumers or any successor servicer is required to file for, on behalf of
the issuer, periodic adjustments to the securitization charge with the Michigan
Public Service Commission. These adjustments are intended to provide, among
other things, for timely payment of the securitization bonds. The Michigan
Public Service Commission may challenge the notice of a proposed periodic
adjustment, which may cause delay, or refuse to permit an adjustment to take
effect, on the ground that the notification contains an arithmetic error. Any
such delay in the implementation of the adjustment could cause a delay in the
payments on the securitization bonds.
SERVICING RISKS
INACCURATE FORECASTING OR UNANTICIPATED DELINQUENCIES OR CHARGE-OFFS COULD
RESULT IN INSUFFICIENT FUNDS TO MAKE SCHEDULED PAYMENTS ON THE SECURITIZATION
BONDS
Because the securitization charge is based on a forecast of future
deliveries of electricity by Consumers to its customers, a shortfall of payments
arising from the securitization charge could result if actual deliveries are
materially different. Differences between the forecast and actual levels of
customer delinquencies or charge-offs could also result in reduced
securitization charge revenue remittances. A shortfall in securitization charge
revenue collections could result in shortfalls in payments of interest on the
securitization bonds, or in principal of the securitization bonds not being paid
according to the expected amortization schedule, thereby lengthening the
weighted average lives of the securitization bonds, or in payments of principal
and interest not being made at all.
Inaccurate forecasting of electricity deliveries could result from, among
other things:
- warmer winters or cooler summers, resulting in less electricity
consumption than in the forecast;
- general economic conditions being worse than expected, causing customers
to migrate from Consumers' service territory or reduce their electricity
consumption;
- the occurrence of a natural disaster, such as a hurricane or blizzard,
unexpectedly disrupting electrical service and reducing consumption;
- problems with energy generation, transmission or distribution resulting
from a change in the market structure of the electric industry;
- customers physically disconnecting from Consumers' electric delivery
facilities;
- customers ceasing business or departing Consumers' service territory;
- customers consuming less electricity because of increased prices or
conservation efforts or other causes of reduced demand;
- customers switching to self-generation of electric power without being
required to pay the securitization charge under the Customer Choice Act;
or
8
- other unexpected actions by customers not captured by the forecast.
See "The Customer Choice Act" in this prospectus
Inaccurate forecasting of delinquencies or charge-offs could result from,
among other things:
- unexpected deterioration of the economy or the occurrence of a natural
disaster or dramatic increases in the cost of electricity, causing
greater delinquencies and charge-offs than expected or forcing Consumers
or a successor electric utility to grant additional payment relief to
more customers; or
- a change in law, rules or regulations that makes it more difficult for
Consumers or a successor electric utility to disconnect nonpaying
customers, or that requires Consumers or a successor electric utility to
apply more lenient credit standards in accepting customers.
INITIALLY, THE CALCULATION OF THE SECURITIZATION CHARGE MAY BE AFFECTED BY
LIMITED EXPERIENCE WITH THE SECURITIZATION CHARGE
Consumers has not previously calculated the initial securitization charge,
adjusted securitization charges, billed securitization charges or remitted
securitization charges to the trustee. Because these activities are new, there
are potentially unforeseen factors in this new process which may have an impact
on payments to bondholders.
CONSUMERS MAY ENCOUNTER UNEXPECTED PROBLEMS IN THE INITIAL ADMINISTRATION OF THE
SECURITIZATION CHARGE
The servicer has not previously administered a securitization charge on
behalf of a third party such as the issuer. As a result, the servicer may
encounter unexpected problems in billing and remitting the securitization charge
revenues and in managing customer payments on behalf of the issuer.
IF THE SERVICER DEFAULTS OR BECOMES BANKRUPT, IT MAY BE DIFFICULT TO FIND A
SUCCESSOR SERVICER, AND PAYMENTS ON THE SECURITIZATION BONDS MAY BE SUSPENDED
Consumers, as servicer, will be responsible for billing and remitting the
securitization charge revenues and for filing with the Michigan Public Service
Commission to adjust this charge. If it becomes a party in a bankruptcy
proceeding, Consumers might be excused from its contractual obligations as
servicer of the securitization property. If Consumers ceased servicing the
securitization property, it might be difficult to find a successor servicer and
fees required by a successor servicer might substantially exceed the fees
payable to Consumers as servicer. Upon a servicer default based upon the
commencement of a case by or against the servicer under the United States
Bankruptcy Code, referred to as the Bankruptcy Code, or similar laws, the
trustee and the issuer may be prevented from effecting a transfer of servicing.
Upon a servicer default because of a failure to make required remittances, the
issuer or the trustee would have the right to apply to the Michigan Public
Service Commission for sequestration and payment of revenues arising from the
securitization property. However, federal bankruptcy law may prevent the
Michigan Public Service Commission from issuing or enforcing this order. In
either case of a servicer default, payments on the securitization bonds may be
suspended. See "-- The Risks Associated With Potential Bankruptcy Proceedings"
below.
BILLING AND COLLECTION PRACTICES MAY REDUCE THE AMOUNT OF FUNDS AVAILABLE FOR
PAYMENTS ON THE SECURITIZATION BONDS
The methodology of determining the amount of the securitization charge the
issuer may impose on each customer is specified in the Michigan Public Service
Commission financing order. Consumers is not free to change this methodology.
However, billing and collection practices will also have an impact on
securitization charge revenues collected. For example, to recover part of an
outstanding electricity bill, Consumers may agree to extend a customer's payment
schedule or to write off the remaining portion of the bill. Also, Consumers, or
a successor to Consumers as servicer, in its discretion, may change billing
9
and collection practices, subject to obtaining required regulatory approvals and
compliance with applicable laws and regulations. Any change to billing and
collection practices may have an adverse or unforeseen impact on the timing and
amount of customer payments and may reduce the amount of securitization charge
revenues collected. This could limit the issuer's ability to make scheduled
payments on the securitization bonds. See "The Seller and Servicer of the
Securitization Property -- How Consumers Forecasts the Number of Customers and
the Amount of Electricity Consumption" in this prospectus. Similarly, the
Michigan Public Service Commission may require changes to these practices. Any
changes in billing and collection regulation might make it more difficult for
the servicer to collect the securitization charge. These changes may adversely
affect the value of the securitization bonds and their amortization and,
accordingly, their weighted average lives. See "The MPSC Financing Order and the
Securitization Charge" in this prospectus.
IT MAY BE DIFFICULT FOR SUCCESSOR SERVICERS TO COLLECT THE SECURITIZATION CHARGE
FROM CONSUMERS' CUSTOMERS
Any successor servicer may bring an action against a customer for
nonpayment of the securitization charge, but only a successor servicer that is
an electric utility may terminate service for failure to pay the securitization
charge. A successor servicer that does not have the threat of termination of
service available to enforce payment of the securitization charge may not be
able to fully collect total securitization charges. This inability may reduce
the value of your investment. See "The Servicing Agreement -- The Trustee's
Rights if Consumers Defaults as Servicer" in this prospectus.
IT MAY BE DIFFICULT TO COLLECT THE SECURITIZATION CHARGE FROM ALTERNATIVE
ELECTRIC SUPPLIERS WHO PROVIDE ELECTRICITY TO CONSUMERS' CUSTOMERS
Under the Customer Choice Act, Consumers is not required to allow
alternative electric suppliers to bill for Consumers' services and Consumers has
agreed with the issuer in the servicing agreement that it will not permit
alternative electric suppliers to bill or collect securitization charges.
Notwithstanding that agreement, in the future, applicable law and regulations
may be changed to allow alternative electric suppliers of electricity to
Consumers' customers to collect the securitization charge from customers on
behalf of the issuer. Under this scenario, Consumers may be required to enter
into contracts with alternative electric suppliers, and in that case may have
only limited rights to collect the securitization charge directly from those
customers who receive their electricity bills from an alternative electric
supplier. If many customers within Consumers' service territory elect to receive
their electricity from alternative electric suppliers and those suppliers are
allowed to collect the securitization charge from customers, the issuer may have
to rely on a number of different entities for the collection of the bulk of the
securitization charge. A default by an alternative electric supplier which
collects securitization charges from a large number of retail customers would
have a greater impact than a default by a single retail customer and therefore
have a greater impact on securitization charge revenue collections and, in turn,
on the issuer's ability to make timely payments on the securitization bonds.
Neither Consumers nor any successor servicer will pay any shortfalls
resulting from the failure of any alternative electric supplier to forward
securitization charge revenue collections to the servicer. Alternative electric
suppliers might use more permissive standards in bill collection and credit
appraisal than Consumers uses towards its retail customers or might be less
effective in billing and collecting. As a result, those entities may not be as
successful in collecting the securitization charge as Consumers anticipated when
determining the level of the securitization charge or adjusting it. There can be
no assurance that the servicer will be able to mitigate credit risks relating to
these alternative electric suppliers to the same extent to which it mitigates
the risks relating to Consumers' customers for generation services. The
adjustment mechanism, the deposits which may be required from alternative
electric suppliers and any other credit enhancement would be available to
compensate for a failure by an alternative electric supplier to remit the billed
securitization charge to the issuer. However, the amount of credit enhancement
funds may not be sufficient to prevent a delay in payments on the securitization
bonds.
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CONSUMERS' CUSTOMER PAYMENTS MAY DECLINE INITIALLY DUE TO CUSTOMER CONFUSION
The securitization charge is being introduced to customers for the first
time. Any change in customer billing and payment arrangements may result in
initial customer confusion and the misdirection or delay of payments or refusal
to make payment, which could have the effect of causing delays in initial
securitization charge revenue collections. Any problems arising from new and
untested systems or any lack of experience with customer billing and collections
could also cause delays in billing and collecting the securitization charge.
These delays could result in shortfalls in securitization charge revenue
collections and, therefore, reduce the ability of the issuer to make timely
payments on the securitization bonds.
INABILITY TO TERMINATE SERVICE TO CERTAIN DELINQUENT CUSTOMERS DURING THE
HEATING SEASON MAY TEMPORARILY REDUCE AMOUNTS AVAILABLE FOR PAYMENTS ON THE
SECURITIZATION BONDS
Except in limited circumstances, the Customer Choice Act prevents Consumers
from terminating service to certain delinquent residential customers who are
low-income customers or senior citizens during the heating season, currently
from November of each year until at least March of the following year. As a
result, Consumers must provide service to those residential customers during
this period without being assured of recovering the securitization charge from
those customers. Consumers' forecast of securitization charge revenues will take
into account expected unpaid accounts from such low-income and senior citizen
customers. However, an unexpected increase in unpaid accounts from such
low-income and senior citizen customers might reduce the amount of
securitization charge revenue collections available for payments on the
securitization bonds, although any associated reduction in payments will be
factored into the securitization charge adjustment. See "The Seller and Servicer
of the Securitization Property -- Credit Policy; Billing; Collections and
Write-Offs; Termination of Service" in this prospectus.
REPLACEMENT OF CONSUMERS AS SERVICER UPON A SERVICER DEFAULT WOULD REQUIRE THE
CONSENT OF THE PARTIES TO THE CONSUMERS RECEIVABLES FINANCING ARRANGEMENT
Consumers has an accounts receivable sale arrangement under which it sells
substantially all of its accounts receivable (other than the securitization
charges all of which are excluded from this arrangement) on a revolving basis.
Under the intercreditor agreement among Consumers, the issuer, the trustee and
the parties to Consumers' receivables sale program, replacement of the servicer
would require the agreement of both the trustee and the parties to the
receivables sale program. In the event of a default by the servicer under the
servicing agreement, if the trustee and the parties to the receivables sale
program are unable to agree on a replacement servicer, the trustee would not be
able to replace Consumers or any successor as servicer. This could adversely
affect the billing and collection of the securitization charges and the value of
your investment in the securitization bonds. See "Servicing
Agreement -- Intercreditor Agreement" in this prospectus.
THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY OR CREDITORS' RIGHTS PROCEEDINGS
CONSUMERS WILL COMMINGLE SECURITIZATION CHARGE COLLECTIONS WITH OTHER
COLLECTIONS WHICH COULD RESULT IN LOSSES OR DELAYS IN PAYMENT ON THE
SECURITIZATION BONDS
Consumers will not segregate the securitization charge revenue collections
from the other funds it collects from its customers. The securitization charge
revenue collections will only become segregated after Consumers remits the
revenues to the trustee. Consumers will remit securitization charge revenue
collections within two business days of the collection date. Consumers will be
permitted to remit revenue collections on a monthly basis only if:
- at any time Consumers has the requisite credit ratings from the rating
agencies; or
- Consumers provides credit enhancement satisfactory to the rating agencies
or otherwise obtains rating agency approval regarding how frequently it
remits securitization charge revenues.
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Despite these requirements, Consumers might fail to pay the full amount of the
securitization charge revenues to the trustee or might fail to do so on a timely
basis. In addition, because of commingling of collections, the lien of the
indenture might not cover securitization charge collections in the possession of
Consumers or a successor servicer. For these reasons commingling of collections
could materially reduce the value of your investment and cause material delays
in payment.
Because of commingling of collections, a court may rule that the issuer
does not own collections on securitization charges that are commingled with
other funds of Consumers. If so, the collections of the securitization charge
revenues held by Consumers would not be available to pay amounts owing on the
securitization bonds. In this case, the issuer would have a general unsecured
claim against Consumers for those amounts. This scenario could cause material
delays in payment or an inability of the issuer to gain access to the funds
required for scheduled payments on the securitization bonds.
BANKRUPTCY OF CONSUMERS COULD RESULT IN LOSSES OR DELAYS IN PAYMENTS ON THE
SECURITIZATION BONDS
The Customer Choice Act provides that as a matter of Michigan state law:
- securitization property constitutes presently existing property of
Consumers or its assignee;
- Consumers may sell, assign and otherwise transfer that property and
Consumers or the issuer may pledge or grant a security interest in the
property as collateral for securitization bonds; and
- a transfer of the securitization property from Consumers to the issuer is
a true sale and not a secured transaction and that title, legal and
equitable, has passed to the entity to which the securitization property
is transferred.
See "The Customer Choice Act" in this prospectus. These three provisions are
important to maintaining payments on the securitization bonds in accordance with
their terms during any bankruptcy of Consumers. In addition, the transaction has
been structured with the objective of keeping the issuer legally separate from
Consumers in the event of a bankruptcy of Consumers.
A bankruptcy court generally follows state property law on issues such as
those addressed by the three provisions described above. However, a bankruptcy
court has authority not to follow state law if it determines that the state law
is contrary to a paramount federal bankruptcy policy or interest. If a
bankruptcy court in a Consumers bankruptcy refused to enforce one or more of the
state property law provisions described above for this reason, the effect of
this decision on you as a securitization bondholder would be similar to the
treatment you would receive in a Consumers bankruptcy if the securitization
bonds had been issued directly by Consumers. A decision by the bankruptcy court
that, despite the separateness of Consumers and the issuer, the two companies
should be consolidated, would have a similar effect on you as a securitization
bondholder. That treatment could cause material delays in payment of, or losses
on, your securitization bonds and could materially reduce the value of your
investment. For example:
- the trustee could be prevented from exercising any remedies against
Consumers on your behalf, from recovering funds to repay the
securitization bonds, from replacing Consumers as servicer, or from using
funds held by the trustee to make payment on the securitization bonds,
without permission from the bankruptcy court;
- the bankruptcy court could order the trustee to exchange the
securitization property for other property, which might be of lower
value;
- securitization bondholders could be required to return payments on the
securitization bonds already received;
- tax or other government liens on Consumers' property that arose after the
transfer of the securitization property to the issuer might nevertheless
have priority over the trustee's lien and might be paid from
securitization charge revenue collections before payments on the
securitization bonds;
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- the trustee's lien might not be properly perfected in securitization
charge revenue collections that were commingled with other funds
Consumers collects from its customers, or might not be properly perfected
in all of the securitization property, and the lien could therefore be
set aside in the bankruptcy, with the result that the securitization
bonds would represent only general unsecured claims against Consumers;
- a reorganization plan might permanently modify the amount and timing of
payments to securitization bondholders, as well as any other terms of the
securitization bonds;
- the bankruptcy court might rule that the securitization charge revenues
collected by the issuer should be used to pay a portion of the cost of
providing electric service;
- the bankruptcy court might rule that the remedy provisions of the sale
agreement are unenforceable, leaving the issuer with a claim of actual
damages against Consumers, which may be difficult to prove; or
- Consumers might be permitted to cease acting as servicer.
Regardless of any specific adverse determinations in a Consumers bankruptcy
proceeding, the fact of a Consumers bankruptcy proceeding could have an adverse
effect on the liquidity and value of the securitization bonds.
THE SALE OF THE SECURITIZATION PROPERTY COULD BE CONSTRUED AS A FINANCING AND
NOT A SALE IN A CASE OF CONSUMERS' BANKRUPTCY
The Customer Choice Act provides that the characterization of a transfer of
securitization property as a sale or other absolute transfer will not be
affected or impaired in any manner by treatment of the transfer as a financing
for federal or state tax purposes or financial accounting purposes. Consumers
and the issuer will treat the transaction as a sale under applicable law,
although for financial reporting and federal and state tax purposes the
securitization will be treated as a financing and not a sale. In the event of a
bankruptcy of Consumers, a party in interest in the bankruptcy may assert that
the sale of the securitization property to the issuer was a financing
transaction and not a "sale or other absolute transfer" and that the treatment
of the transaction for financial reporting and tax purposes as a financing and
not a sale lends weight to that position. If a court were to characterize the
transaction as a financing, the issuer would be treated as a secured creditor of
Consumers in the bankruptcy proceedings. Although the issuer would in that case
have a security interest in the securitization property, it would not likely be
entitled to access to the securitization charge revenue collections during the
bankruptcy. As a result, repayment on the securitization bonds could be
significantly delayed and a plan of reorganization in the bankruptcy might
permanently modify the amount and timing of payments to the issuer of
securitization charge revenue collections and therefore the amount and timing of
funds available to the issuer to pay securitization bondholders. The other
consequences set forth above under "-- Bankruptcy of Consumers Could Result in
Losses or Delays in Payments on the Securitization Bonds" also could occur.
SECURITIZATION PROPERTY MIGHT NOT BE TREATED AS CURRENT PROPERTY
Consumers has represented in the sale agreement, and the Customer Choice
Act provides, that the securitization property constitutes an existing property
right and that it shall continue to exist until the securitization bonds and
related expenses have been paid in full. Nevertheless, no assurance can be given
that in the event of a bankruptcy of Consumers a party in interest in the
bankruptcy would not attempt to take the position that the securitization
property comes into existence only as customers use electricity. If a court were
to adopt this position, no assurance can be given that a security interest in
favor of the trustee would attach to the securitization charge, in respect of
electricity consumed after the commencement of the bankruptcy case. If it were
determined that the securitization property had not been sold to the issuer, and
the security interest in favor of the trustee did not attach to the
securitization charge in respect of electricity consumed after the commencement
of the bankruptcy case, then the issuer would be an unsecured creditor of
Consumers. If so, there would be delays and reductions in payments on
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the securitization bonds. Whether or not a court determined that the
securitization property had been sold to the issuer, no assurances can be given
that a court would not rule that any securitization charge relating to
electricity consumed after the commencement of the bankruptcy cannot be
transferred to the issuer or the trustee.
In addition, in the event of a bankruptcy of Consumers, a party in interest
in the bankruptcy could assert that the issuer should pay a portion of
Consumers' costs associated with the generation, transmission or distribution of
the electricity, consumption of which gave rise to the securitization charge
revenue collections used to make payments on the securitization bonds.
Regardless of whether Consumers is the debtor in a bankruptcy case, if a
court were to accept the argument that the securitization property comes into
existence only as customers use electricity, a tax or government lien or other
nonconsensual lien on property of Consumers arising before the securitization
property came into existence could have priority over the issuer's interest in
the securitization property. See "How a Bankruptcy of the Seller or Servicer May
Affect Your Investment -- Status of Securitization Property as Current Property"
in this prospectus.
CONSUMERS AND THE ISSUER COULD BE SUBSTANTIVELY CONSOLIDATED IN A CASE OF
CONSUMERS' BANKRUPTCY
Consumers and the issuer have taken steps to minimize the risk that in the
event Consumers or an affiliate of Consumers were to become the debtor in a
bankruptcy case, a court would order that the assets and liabilities of
Consumers or such affiliate be substantively consolidated with those of the
issuer. The issuer is a separate, special purpose limited liability company, the
organizational documents of which provide that it shall not commence a voluntary
bankruptcy case without the unanimous affirmative vote of all of its managers.
Nevertheless, no assurance can be given that if Consumers or an affiliate of
Consumers were to become a debtor in a bankruptcy case, a court would not order
that the assets and liabilities of the issuer be consolidated with those of the
Consumers or such affiliate, thus resulting in delays or reductions in payments
on the securitization bonds.
A MICHIGAN PUBLIC SERVICE COMMISSION SEQUESTRATION ORDER FOR SECURITIZATION
PROPERTY IN CASE OF DEFAULT MIGHT NOT BE ENFORCEABLE IN BANKRUPTCY
If Consumers defaults on its obligations as servicer, the Customer Choice
Act provides that upon application by a financing party, the Michigan Public
Service Commission or a court of appropriate jurisdiction shall order the
sequestration and payment of all securitization charge revenue collections to
the securitization bondholders. The Customer Choice Act states that this
Michigan Public Service Commission or court order would be effective even if
made while Consumers or its successor is in bankruptcy. However, federal
bankruptcy law may prevent the Michigan Public Service Commission or the court
from issuing or enforcing this order. Further, the indenture requires the
trustee to request an order from the bankruptcy court to permit the Michigan
Public Service Commission to issue and enforce the order. However, the
bankruptcy court may deny the request. If the bankruptcy court refused to permit
sequestration and payment to the securitization bondholders, the issuer would
lose access to the securitization charge revenue collections and thereby lose
its source of funds for scheduled payments on the securitization bonds.
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIZATION BONDS
THE PROCEEDS FROM FORECLOSURE ON THE SECURITIZATION PROPERTY MAY BE INSUFFICIENT
TO PAY THE SECURITIZATION BONDS
If an event of default occurs under the indenture, the securitization bonds
are accelerated, and the trustee attempts to foreclose on the securitization
property, a sale of the securitization property may not generate sufficient
funds for payment of the securitization bonds. The securitization property would
be likely to have limited value in a sale because there is likely to be a
limited market, if any, for the
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securitization property, and, because the securitization property may have
little or no value to any person other than the issuer and the trustee on behalf
of the holders of the securitization bonds.
CONSUMERS' OBLIGATION TO INDEMNIFY THE ISSUER FOR A BREACH OF A REPRESENTATION
OR WARRANTY MAY NOT BE SUFFICIENT TO PROTECT YOUR INVESTMENT
If Consumers breaches a representation, warranty or covenant in the sale
agreement, it is obligated to indemnify the issuer and the trustee for any
liabilities, obligations, claims, actions, suits or payments resulting from that
breach, as well as any reasonable costs and expenses incurred. In addition,
Consumers is obligated to indemnify the issuer and the trustee, for itself and
on behalf of the securitization bondholders, for (1) required payments of
principal of and interest on the securitization bonds in accordance with their
terms and (2) required remittances of amounts to the issuer, in each case, which
are not made when so required as a result of a breach by Consumers of a
representation, warranty or covenant. However, the amount of any indemnification
paid by Consumers may not be sufficient for you to recover all of your loss on
the securitization bonds. See "The Sale Agreement -- Consumers' Obligation to
Indemnify the Issuer and the Trustee and to Take Legal Action" in this
prospectus. Consumers will not be obligated to indemnify any party for any
changes of law. In addition, Consumers will not be obligated to repurchase the
securitization property in the event of a breach of any of its representations,
warranties or covenants, and neither the trustee nor the securitization
bondholders will have the right to accelerate payments on the securitization
bonds as a result of a breach of any of Consumers' representations, warranties
or covenants, absent an event of default under the indenture as described in
"The Indenture -- What Constitutes an Event of Default on the Securitization
Bonds." If Consumers becomes obligated to indemnify securitization bondholders,
the ratings on the securitization bonds will likely be downgraded as a result of
the circumstances causing the breach and that the securitization bondholders
will likely be unsecured creditors of Consumers with respect to any of those
indemnification amounts.
YOU MAY HAVE TO REINVEST THE PRINCIPAL AMOUNT OF YOUR SECURITIZATION BONDS AT A
LOWER RATE OF RETURN BECAUSE OF OPTIONAL REDEMPTION OF THE SECURITIZATION BONDS
If the issuer redeems the securitization bonds and the prevailing interest
rates have fallen, the redemption price may not be readily invested at a rate of
return equivalent to that which would have been generated by the securitization
bonds, had they not been redeemed.
RISKS ASSOCIATED WITH THE USE OF INTEREST RATE SWAP TRANSACTIONS
The related prospectus supplement will contain the risk factors, if any,
associated with any interest rate swap or cap agreement that may be entered into
by the issuer with respect to a series or class of floating rate securitization
bonds.
CONSUMERS' RATINGS MAY AFFECT THE MARKET VALUE OF THE SECURITIZATION BONDS
A downgrading of the credit ratings on the debt of Consumers or its
affiliates could have an adverse effect on the market value of your
securitization bonds.
ABSENCE OF SECONDARY MARKET FOR SECURITIZATION BONDS COULD LIMIT YOUR ABILITY TO
RESELL SECURITIZATION BONDS
The underwriters for the securitization bonds may assist in resales of the
securitization bonds but they are not required to do so. A secondary market for
the securitization bonds may not develop. If it does develop, it may not
continue or it may not be sufficiently liquid to allow you to resell any of your
securitization bonds.
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THE ISSUER MAY ISSUE ADDITIONAL SERIES OF SECURITIZATION BONDS WHOSE HOLDERS
HAVE CONFLICTING INTERESTS
The issuer may issue other series of securitization bonds without your
prior review or approval. These series may include terms and provisions which
would be unique to that particular series. A new series of securitization bonds
may not be issued if it would result in the credit ratings on any outstanding
series of securitization bonds being reduced or withdrawn. There can be no
assurance, however, that the issuance of additional series of securitization
bonds would not cause reductions or delays in payments on your securitization
bonds. Any additional series of securitization bonds issued by the issuer will
also be secured by, and payable from, and will have the right to share equally
in, all of the securitization property and amounts in the collection account
owned by the issuer with all of the outstanding securitization bonds. The
securitization property will comprise the combined securitization charge
collections imposed with respect to all series.
In addition, some matters may require the vote of the holders of all series
and classes of securitization bonds. Your interests in these votes may conflict
with the interests of the securitization bondholders of another series or of
another class. Thus, these votes could result in an outcome that is materially
unfavorable to you.
THE RATINGS HAVE A LIMITED FUNCTION AND THEY ARE NO INDICATION OF THE EXPECTED
RATE OF PAYMENT OF PRINCIPAL ON THE SECURITIZATION BONDS
The securitization bonds will be rated by one or more established rating
agencies. The ratings merely analyze the probability that the issuer will repay
the total principal balance of each class of the securitization bonds at its
final maturity and will make timely interest payments. The ratings do not
otherwise assess the speed at which the issuer will repay the principal of the
securitization bonds. Thus, the issuer may repay the principal of your
securitization bonds later than you expect, which may materially reduce the
value of your investment. A rating is not a recommendation to buy, sell or hold
securitization bonds. The rating may change at any time. A rating agency has the
authority to revise or withdraw its bond rating based solely upon its own
judgment. See "Ratings for the Securitization Bonds" in this prospectus.
FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus and the related prospectus
supplement concerning expectations, beliefs, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts, are
forward-looking statements within the meaning of the federal securities laws.
Although Consumers and the issuer believe that the expectations and the
underlying assumptions reflected in these statements are reasonable, there can
be no assurance that these expectations will prove to have been correct. The
forward-looking statements involve a number of risks and uncertainties and
actual results may differ materially from the results discussed in the
forward-looking statements. The following are among the important factors that
could cause actual results to differ materially from the forward-looking
statements:
- state and federal legal or regulatory developments;
- national or regional economic conditions;
- market demand and prices for energy;
- weather variations affecting customer energy usage;
- the effect of continued electric industry restructuring;
- operating performance of Consumers' facilities; and
- the payment patterns of customers including the rate of delinquencies.
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Any forward-looking statements should be considered in light of these
important factors and in conjunction with Consumers' other documents on file
with the SEC.
New factors that could cause actual results to differ materially from those
described in forward-looking statements emerge from time to time. It is not
possible for Consumers or the issuer to predict all of these factors, or the
extent to which any factor or combination of factors may cause actual results to
differ from those contained in any forward-looking statement. Any
forward-looking statement speaks only as of the date on which the statement is
made and neither Consumers nor the issuer undertakes any obligation to update
the information contained in the statement to reflect subsequent developments or
information.
CONSUMERS ENERGY COMPANY
Consumers, a wholly owned subsidiary of CMS Energy Corporation, referred to
as CMS Energy, is an electric and gas utility incorporated under the laws of the
State of Michigan in 1968. CMS Energy is an exempt public utility holding
company under the Public Utility Holding Company Act of 1935. Among other
sources of revenue, Consumers is engaged in the generation, purchase,
distribution and sale of electric energy in 61 of 68 counties in Michigan. The
principal cities to which Consumers serves electricity include Battle Creek,
Flint, Grand Rapids, Jackson, Kalamazoo, Muskegon, Saginaw and Wyoming.
Under the Customer Choice Act, Consumers is permitted to retain ownership
of its electric generation facilities and Consumers has done so. Consumers
believes that it has sufficient generating capacity and contracts or options to
purchase electric energy to meet its obligations to its customers.
In 2000, Consumers had operating revenues of $2.7 billion received from the
sale of 41 billion kilowatt hours of electricity to approximately 1.7 million
customers. Consumers is CMS Energy's principal operating subsidiary, with sales
of electricity by Consumers alone representing approximately 30 percent of CMS
Energy's revenues, as of December 31, 2000. As of December 31, 2000, Consumers'
thirty-one electric generating plants had an aggregate summer net generating
capacity of 6,437 megawatts. These generating plants represent primarily a mix
of coal-fired and other fossil-fueled plants, a hydroelectric pumped storage
plant, and a nuclear-fueled generating plant, Palisades, with a rated capacity
of 760 megawatts. Consumers sells electric energy wholesale in interstate
commerce and its facilities are connected directly or indirectly to other
systems that are involved in such interstate activities. Consumers' service
territory contains residential areas and a diversified mix of commerce and
industry, including major facilities of many corporations of national
prominence. While Consumers believes that it has all the franchises and consents
necessary for its electric and gas operations in the territory it serves, such
franchises are not exclusive.
Consumers presently provides retail electric service in Michigan pursuant
to franchises granted by approximately 983 local governments, and 168 of these
franchises are irrevocable during their term, which is typically 30 years in
length. By 2013, all existing irrevocable electric franchises will have expired
and most likely been replaced by revocable franchises. In addition, Consumers
has 54 franchises granted by the State of Michigan which are perpetual. All of
these franchises are nonexclusive. Present Michigan law contains provisions
which restrict existing customers of one utility from transferring to another
utility and does not generally allow other utilities to extend their electric
distribution facilities within one mile of Consumers' existing distribution
facilities without Consumers' consent, subject to some exceptions or to specific
determinations by the Michigan Public Service Commission, referred to as the
MPSC, to the contrary. However, this Michigan law might be changed.
Consumers' present local governmental franchises have remaining terms
ranging from 30 years to less than one year. However, unless the franchises are
irrevocable, they may be revoked by the local government after prior notice to
Consumers, but in the past such revocation has been very unusual. Consumers
expects all or substantially all of these franchises to be renewed. If any
franchise is not renewed, Consumers expects that the new franchisee or
franchisees will negotiate to purchase Consumers' distribution facilities in
order to continue providing service in the area largely by means of Consumers'
17
existing distribution facilities. The Customer Choice Act authorizes the MPSC to
issue financing orders that give rise to an obligation of all customers of the
applicant electric utility and its assignees or successors to pay the
securitization charge. The MPSC financing order provides that the servicer will
be entitled to collect the securitization charge from all customers of Consumers
or its successors on MPSC-approved rate schedules and special contracts with
specific customers.
Michigan law authorizes certain local municipalities to seek to acquire
portions of Consumers' electric distribution facilities through the power of
eminent domain for use as part of municipally-owned utility systems. Although
the power of eminent domain has not been used by municipalities in Michigan in
recent decades to acquire electric distribution systems, there have been recent
reports of increased interest by municipalities in other states in acquiring
electric distribution systems. There can be no assurance that one or more
municipalities will not acquire some or all of Consumers' electric distribution
facilities while securitization bonds remain outstanding. In the servicing
agreement Consumers has covenanted to assert that any municipality that acquires
any portion of Consumers' electric distribution facilities by eminent domain
must be treated by the court ordering the condemnation as a successor to
Consumers under the Customer Choice Act and the MPSC financing order. However,
such municipality might assert that it should not be treated as a successor to
Consumers for these purposes because municipally-owned utilities do not provide
service pursuant to MPSC-approved rate schedules. In any such cases, there can
be no assurance that the securitization charge will be collected from customers
of municipally-owned utilities who were formerly customers of Consumers.
CMS Energy, a holding company formed in 1987, is the holding company for a
number of operating companies engaged in energy-related businesses, including
Consumers, its principal subsidiary. The financial condition and results of
operation of Consumers are principal factors affecting the financial condition
and results of operations of CMS Energy.
Where to Find Information About Consumers. Consumers files periodic reports
with the SEC as required by the Exchange Act. Reports filed with the SEC are
available for inspection without charge at the public reference facility
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies
of periodic reports and exhibits thereto may be obtained at the above location
at prescribed rates and, for so long as any securitization bonds are listed on
the Luxembourg Stock Exchange and the rules of that exchange so require, will be
available for inspection by the holders of any listed securitization bonds at
the office of the listing agent in Luxembourg. Information as to the operation
of the public reference facility is available by calling the SEC at
1-800-SEC-0330. Information filed with the SEC can also be inspected at the SEC
site on the World Wide Web at http://www.sec.gov. Consumers also provides
information through CMS Energy's website at http://www.consumersenergy.com.
THE COLLATERAL
The securitization bonds will be secured by securitization property, a
property right created under the Customer Choice Act and the MPSC financing
order. In July 2000, Consumers filed an application with the Michigan Public
Service Commission, referred to as the MPSC, for the issuance of a financing
order under the Customer Choice Act, together with a proposed form of the
financing order. On October 24, 2000, the MPSC issued a financing order to
Consumers. On January 4, 2001, the Commission issued an order on rehearing in
response to a request for rehearing by Consumers. The financing order and the
order on rehearing are together referred to in this prospectus as the MPSC
financing order. The MPSC financing order provides, among other things, for the
creation of the securitization property and the issuance of the securitization
bonds. In general terms, the securitization property represents the irrevocable
right to recover an amount sufficient to recover Consumers' qualified costs,
including an amount sufficient to pay:
- the principal of and interest on the securitization bonds, and
- the expenses, fees, charges, credit enhancement costs and other amounts
associated with the securitization bonds.
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This amount is to be recovered through a non-bypassable securitization charge
payable by all electric customers who take delivery from Consumers or its
successor on Consumers' MPSC-approved rate schedules and, for specific
customers, under special contracts, referred to as customers. Qualified costs
are described in more detail under "The Customer Choice Act" in this prospectus.
Consumers will sell securitization property to the issuer. The
securitization property is described in more detail under "The Sale
Agreement -- Consumers' Sale and Assignment of Securitization Property" in this
prospectus. Consumers, as servicer of the securitization property, will collect
the securitization charge from customers on behalf of the issuer. See "The
Servicing Agreement" and "The Seller and Servicer of the Securitization
Property" in this prospectus.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts due on the
securitization bonds from:
- securitization charge revenues remitted by the servicer to the trustee;
- any third party credit enhancement;
- investment earnings on amounts held under the indenture;
- amounts payable to the trustee under any interest rate swap or cap
agreement;
- amounts received as payment of any indemnity obligation by Consumers
under the sale agreement or the servicing agreement; and
- other amounts available in the collection account held by the trustee.
This account is described in greater detail under "The Indenture -- The
Collection Account for the Securitization Bonds" in this prospectus.
PRIORITY OF DISTRIBUTIONS
The trustee will apply securitization charge revenues remitted by the
servicer, together with investment earnings on the collection account and any
other amounts referred to above, to the extent funds are available in the
general subaccount of the collection account, in the following order of
priority:
(a) Monthly, to the payment of the trustee fee for all series, together
with any legal fees and other expenses and any indemnity amounts (up to
a maximum of $10,000,000 in the aggregate for the then current and all
prior payment dates and for all series, provided that the payment of
such amounts does not result in an event of default, unless the issuer
has received confirmation from each of the applicable rating agencies
that a further amount will not result in a reduction or a withdrawal of
the then current rating of the outstanding securitization bonds).
(b) Monthly, to the payment of the servicing fee and any unpaid monthly
servicing fees for all series.
(c) Monthly, for all series to:
(1) payment of the administration fee to the administrator in an amount
specified in the administration agreement and payment of the fees of
the independent managers of the issuer; and
(2) so long as no event of default has occurred and is continuing or
would be caused by this payment, payment of any operating expenses
of the issuer, excluding items (a), (b) and (c)(1) above, up to a
total of $100,000 for that payment date for all series.
(d) On each payment date or before, if so specified in the related
prospectus supplement, to:
(1) payment of the interest then due on the securitization bonds or
payment to the counterparty under any interest rate swap agreement,
excluding any termination or similar non-recurring payments;
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(2) payment of the principal balance of the securitization bonds then
due:
- the outstanding principal balance of all series of the
securitization bonds upon an acceleration following an event of
default;
- on the final maturity date of any securitization bonds, the
outstanding principal balance of those securitization bonds;
- on the redemption date of any securitization bonds, the outstanding
principal balance of those securitization bonds called for
redemption;
(3) payment of the principal then scheduled to be paid on the
securitization bonds according to the expected amortization schedule
and any scheduled principal unpaid on prior payment dates, other
than principal paid under item (d)(2) above;
(4) payment of any remaining unpaid operating expenses, including
indemnity amounts (other than amounts paid pursuant to (a) above),
any amounts payable by the issuer under any hedging arrangement and
any termination or similar non-recurring payments under any interest
rate swap or cap agreement;
(5) replenishment of each series capital subaccount, pro rata, up to the
required capital amount for each series;
(6) replenishment and funding of each series overcollateralization
subaccount, pro rata, up to the scheduled overcollateralization
level for each series as of that payment date;
(7) so long as no event of default has occurred and is continuing,
release to the issuer of an amount equal to investment earnings
since the previous payment date (or in the case of the first payment
date, since the issuance date) on amounts in each series capital
subaccount; and
(8) allocation of the remainder, if any, to the reserve subaccount.
See also "The Indenture -- How Funds in the Collection Account Will Be
Allocated" in this prospectus. A diagram depicting how the securitization charge
revenues remitted to the trustee will be allocated may be found on page 23 of
this prospectus.
FLOATING RATE SECURITIZATION BONDS
If, in connection with the issuance of any class of securitization bonds
paying interest at a floating rate, referred to as a floating rate class, the
issuer arranges for any interest rate swap transactions, the material terms of
those transactions will be described in the related prospectus supplement.
CREDIT ENHANCEMENT AND ACCOUNTS
Securitization Charge Periodic Adjustments. Unless otherwise specified in
any prospectus supplement, the primary form of credit enhancement for the
securitization bonds will be mandatory periodic review and adjustment to the
securitization charge. Consumers, as servicer, is required to seek periodic
adjustments to the securitization charge, on behalf of the issuer, by filing a
notice with the MPSC, in order to provide revenues sufficient to cover all
ongoing transaction costs, including:
- interest on the securitization bonds, which in the case of interest on
any floating rate class will be calculated at the applicable gross fixed
rate;
- for each series of securitization bonds, payment of the principal of each
class of that series according to the expected amortization schedule;
- other ongoing transaction costs and expenses as specified in items (a)
through (d)(6) above;
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- for each payment date, for each series of securitization bonds, the
amount to be deposited in the capital subaccount for that series such
that the amount in that subaccount equals the required capital amount for
that series; and
- for each payment date, for each series of securitization bonds, the
amount to be deposited in the overcollateralization subaccount for that
series such that the amount in that subaccount equals the scheduled
overcollateralization level for that series as of that payment date;
and for the reserve subaccount to equal zero, all by the payment date
immediately preceding the next adjustment date.
Securitization charge adjustments will be calculated to include an amount
estimated to be sufficient to fully compensate for delays or losses that would
otherwise result from either the delinquent payment or non-payment of the
securitization charge and will reflect undercollections or overcollections of
securitization charge revenues during the prior period. Under the MPSC financing
order, Consumers, as servicer, is required to submit a request to the MPSC for
routine adjustments once per year through the date approximately twelve months
prior to the expected final payment date of the final class of the
securitization bonds, and once per quarter thereafter. The request for an
adjustment must be submitted at least 45 days before the adjustment may take
place. The adjustment will be reviewed by the MPSC for arithmetic error and
placed in effect at the beginning of the complete monthly billing cycle of
Consumers following the date of approval by the MPSC. Expressed generally, the
most likely causes of undercollections or overcollections of the securitization
charge revenues include the following situations:
- the actual electricity deliveries by Consumers to customers vary from
Consumers' forecasts; and
- the actual rate of collection of the securitization charge revenues
varies from Consumers' expected rate of collection.
See "Risk Factors -- Servicing Risks" in this prospectus. The securitization
charge remittances to the trustee will fund the collection account and various
subaccounts as set forth below.
Collection Account. Under the indenture, the trustee will hold a single
collection account, divided into various subaccounts, some of which may be
series specific and some of which may be held for all series of securitization
bonds. The primary subaccounts for credit enhancement purposes are:
- Capital Subaccount -- An amount specified in the prospectus supplement
for each series of securitization bonds will be deposited into that
series' capital subaccount on the date of issuance of that series. Any
withdrawals from the capital subaccount for an existing series not
replaced prior to the following adjustment date will be replenished by
adjustments to the securitization charge.
- Overcollateralization Subaccount -- The prospectus supplement for each
series of securitization bonds will specify a funding level for that
series' overcollateralization subaccount. That amount will be funded over
the term of the securitization bonds.
- Reserve Subaccount -- Any excess amount of securitization charge
remittances, indemnity payments and investment earnings, other than
earnings on any series capital subaccount, after payments have been made
on a payment date, will be held in the reserve subaccount for all series
of securitization bonds.
The capital subaccount and the overcollateralization subaccount for each
series will be available to make payments for that series on each payment date
and other amounts allocable to that series, as described in items (a) through
(d)(3) below under "The Indenture -- How Funds in the Collection Account Will be
Allocated" in this prospectus, for that series. The reserve subaccount will be
available to make payments for all series on each payment date and other
amounts, as described in items (a) through (d)(3), as well as clauses (d)(5) and
(d)(6) below under "The Indenture -- How Funds in the Collection Account Will be
Allocated" in this prospectus, for all series. To the extent that amounts on
deposit in the reserve subaccount are required to be applied to make payments in
relation to more than
21
one series, but are insufficient, the amounts on deposit will be allocated to
each series in proportion to the amounts then payable with respect to that
series.
Additional Credit Enhancement. Additional forms of credit enhancement, if
any, for each series will be specified in the related prospectus supplement.
However, the servicer may, but is not obligated to, obtain insurance or a letter
of credit in support of its obligation to remit securitization charge revenues
to the trustee. Credit enhancement for the securitization bonds is intended to
protect you against losses or delays in scheduled payments on your
securitization bonds.
STATE PLEDGE
Under the Customer Choice Act, the State of Michigan pledges, for the
benefit and protection of the holders of the securitization bonds, other persons
acting for the benefit of a holder and the electric utility, that it will not
take or permit any action that would impair the value of securitization
property, reduce or alter (except as allowed under the securitization charge
adjustment provisions), or impair the securitization charges to be imposed,
collected and remitted to the trustee, until the principal, interest and
premium, and any other charges incurred and contracts to be performed in
connection with the related securitization bonds have been paid and performed in
full.
The State of Michigan's pledge may be subject to subsequent actions
undertaken by the State which are a reasonable exercise of the State's sovereign
powers and of a character reasonable and appropriate to the public purpose
justifying such action. However, there is no existing case law addressing such
exercise of the State's sovereign powers with respect to securitization bonds.
In addition, the State may not take any action in contravention of its pledge
without paying just compensation to the securitization bondholders, as
determined by a court of competent jurisdiction, if doing so would constitute a
permanent appropriation of a substantial property interest of the securitization
bondholders in the securitization property and deprive the securitization
bondholders of their reasonable expectations arising from their investments in
the securitization bonds. There is also no existing case law addressing the
issue of just compensation in the context of securitization bonds. See "Risk
Factors -- Future Voter Initiatives, Referenda or Other State Legislative Action
May Invalidate the Securitization Bonds or Their Underlying Assets."
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ALLOCATIONS AND DISTRIBUTIONS
[FLOW CHART]
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PAYMENTS OF INTEREST AND PRINCIPAL
Interest on each class of securitization bonds will accrue at the interest
rate specified in the related prospectus supplement. On each payment date, the
trustee will distribute interest accrued on each class of securitization bonds
and will distribute the scheduled principal payment for that class, if any, to
the extent funds are available therefor until the outstanding principal balance
of that class has been reduced to zero.
Failure to pay the entire outstanding balance of the securitization bonds
of any class or series by the expected final payment date will not result in a
default with respect to that class or series until the final maturity date for
that class or series. The expected final payment date and the final maturity
date of each class and series of securitization bonds are specified in the
related prospectus supplement.
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding securitization bonds of any
series, at its option, on any payment date if (1) the outstanding principal
balance of that series of securitization bonds, after giving effect to payments
to be made on that payment date, is less than 5% of the total initial principal
balance of that series of securitization bonds, and (2) no interest rate swap
agreement remains in effect. The redemption price will equal the outstanding
principal balance of that series of securitization bonds and interest accrued
and unpaid up to the redemption date. The redemption price must be paid in cash;
the securitization bonds may not be exchanged for new bonds. Bondholders will
not be exposed to any direct or indirect liability as sellers of the assets of
the issuer as a result of an optional redemption.
PAYMENT DATES AND RECORD DATES
The payment dates and record dates for each series of securitization bonds
are specified in the related prospectus supplement.
MATERIAL INCOME TAX CONSIDERATIONS
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, for federal
income tax purposes, and in the opinion of Miller, Canfield, Paddock and Stone,
P.L.C., for Michigan state income tax purposes, (i) the securitization bonds
will constitute debt of Consumers, and (ii) the issuer will not be subject to
income tax as an entity separate from Consumers.
The issuer and Consumers have received a private letter ruling from the
Internal Revenue Service to the effect that the securitization bonds will be
classified as obligations of Consumers for U.S. federal income tax purposes. Tax
counsel has relied on that ruling in rendering their opinion that securitization
bonds will be treated as debt of Consumers. If you purchase a securitization
bond, you agree to treat it as debt of Consumers for tax purposes. See "Material
Income Tax Consequences for the Securitization Bonds" in this prospectus.
ERISA CONSIDERATIONS
Pension plans and other investors subject to ERISA may acquire the
securitization bonds subject to specified conditions. The acquisition and
holding of the securitization bonds could be treated as an indirect prohibited
transaction under ERISA. Accordingly, by purchasing the securitization bonds,
each investor purchasing on behalf of a pension plan will be deemed to certify
that the purchase and subsequent holding of the securitization bonds by the
investor would be exempt from the prohibited transaction rules of ERISA. For
further information regarding the application of ERISA, see "ERISA
Considerations" in this prospectus.
REPORTS TO SECURITIZATION BONDHOLDERS
With respect to each series and class of securitization bonds, on or prior
to each payment date, the trustee will deliver a statement to each
securitization bondholder of that series. This statement will include,
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to the extent applicable, the following information, as well as any other
information so specified in the related supplemental indenture, as to the
securitization bonds of that series and class with respect to that payment date
or the period since the previous payment date, or in the case of the first
payment date, from the issuance date:
1. the amount to be paid to securitization bondholders of that series and
class as interest;
2. the amount to be paid to securitization bondholders of that series and
class as principal;
3. the projected securitization bond principal balance and the actual
securitization bond principal balance for that series and class as of
that payment date;
4. the amount on deposit in the overcollateralization subaccount for that
series and the scheduled overcollateralization level for that series
as of that payment date;
5. the amount on deposit in the capital subaccount for that series as of
that payment date;
6. the amount, if any, on deposit in the reserve subaccount as of that
payment date;
7. the amount to be paid to any swap counterparty (on a gross and a net
basis, separately stated) under any interest rate swap agreement on or
before that payment date; and
8. the amount of any other transfers and payments to be made on that
payment date pursuant to the indenture.
If any securitization bonds are listed on the Luxembourg Stock Exchange,
and the rules of that exchange so require, notice that this report is available
with the listing agent in Luxembourg will be given to holders of those listed
securitization bonds by publication in a daily newspaper in Luxembourg, which is
expected to be the Luxemburger Wort.
USE OF PROCEEDS
The issuer will use the cash available from the sale of the securitization
bonds after payment of issuer expenses to purchase securitization property from
Consumers. See "The Sale Agreement" in this prospectus. As required by the
Customer Choice Act and the MPSC financing order, Consumers will apply the cash
received from the issuer from the sale of the securitization property after
payment of Consumers' expenses to the retirement of outstanding debt and equity
securities. Consumers will make the final decisions with respect to such
retirements on the basis of market conditions and other factors existing after
the sale of the securitization bonds.
THE CUSTOMER CHOICE ACT
The Customer Choice and Electricity Reliability Act, referred to as the
Customer Choice Act, signed into law in June 2000, provides, among other things,
for the restructuring of the electric utility industry in Michigan. The Customer
Choice Act allows alternative electric suppliers to compete in the retail market
for electric generation services in Michigan without being subject to price
regulation by the MPSC. On the other hand, the incumbent electric utilities are
required to remain under price regulation by the MPSC for generation services
under the Customer Choice Act. To this end, under the Customer Choice Act, all
customers will be able to purchase their electricity from any of a number of
MPSC-licensed alternative electric suppliers not later than January 1, 2002.
To maintain the financial integrity of electric utilities during the
transition to a competitive electric generation retail market, the Customer
Choice Act provides Consumers and Detroit Edison Company the opportunity to
recover qualified costs through the securitization charge and a separate tax
charge that will
25
be retained by Consumers and not be transferred to the issuer, referred to as
the tax charge. Qualified costs are:
1. an electric utility's regulatory assets as determined by the MPSC,
adjusted by the applicable portion of related investment tax credits;
2. any costs that the MPSC determines that the electric utility would be
unlikely to collect in a competitive market, including retail open
access implementation costs and the costs of an MPSC-approved
restructuring, buyout or buy-down of a power purchase contract;
3. the costs of issuing, supporting and servicing securitization bonds;
4. any costs of retiring and refunding the electric utility's existing
debt and equity securities in connection with the issuance of
securitization bonds; and
5. taxes related to the recovery of the securitization charge.
While the Customer Choice Act does not alter the obligation of electric
utilities to provide generation services at regulated prices, the Customer
Choice Act authorizes alternative electric suppliers licensed by the MPSC,
referred to as alternative electric suppliers, to provide electric generation
services to retail customers. Under the Customer Choice Act, alternative
electric suppliers will be subject to financial, managerial and technical
requirements to ensure adequate service to customers, but are generally not
subject to price regulation and other regulation by the MPSC as public
utilities. Electric distribution and transmission services will remain regulated
and subject to the traditional legal and regulatory requirements.
If a customer chooses an alternative electric supplier for generation
services, the customer may receive separate billings for those generation
services directly from the alternative electric supplier or it may receive
combined billings for all charges from Consumers. Under the Customer Choice Act,
Consumers is not required to allow alternative electric suppliers to bill for
Consumers' services and Consumers has agreed with the issuer in the sale
agreement that Consumers will not permit alternative electric suppliers to bill
or collect securitization charges unless it is so required by law.
Pursuant to the Customer Choice Act, Consumers' rates for electricity will
be frozen through 2003, except for reductions resulting from savings due to
securitization. Residential rates were immediately reduced by five percent from
the rates that were authorized or in effect on May 1, 2000. After 2003, rates
can be reduced but cannot be increased until the earlier of December 31, 2013 or
until certain statutory tests are met, except that, notwithstanding compliance
with the statutory tests, rates for small commercial customers (no more than 15
kilowatts) cannot be increased until 2005 and rates for residential customers
cannot be increased before 2006.
Under the Customer Choice Act, Consumers is permitted to retain ownership
of its electric generation facilities and Consumers has done so. Consumers
believes that it has sufficient generating capacity and contracts or options to
purchase electric energy to meet its obligations to its customers.
RECOVERY OF QUALIFIED COSTS IS ALLOWED FOR CONSUMERS AND OTHER MICHIGAN
UTILITIES
If the MPSC finds that the net present value of the revenues to be
collected under a financing order is less than the amount that would be
recovered over the remaining life of the qualified costs using conventional
financing methods and that a financing order is consistent with the standards in
the statute, the MPSC is required under the Customer Choice Act to issue that
financing order to allow the utility to recover its qualified costs. In issuing
a financing order, the MPSC is required to ensure all of the following:
- that the proceeds of the securitization bonds are used solely for the
purposes of the refinancing or retirement of debt or equity;
- that the securitization provides tangible and quantifiable benefits to
customers of the electric utility;
- that the expected structuring and expected pricing of the securitization
bonds will result in the lowest securitization charge consistent with
market conditions and the terms of the financing order;
26
- that the amount securitized does not exceed the net present value of the
revenue requirement over the life of the proposed securitization bonds
associated with the qualified costs sought to be securitized.
The Customer Choice Act allows electric public utilities an opportunity to
recover their qualified costs.
As a mechanism to recover qualified costs, the Customer Choice Act provides
for the imposition and collection of the securitization charge on customers'
bills. Because the securitization charge is a usage-based charge based on access
to the utility's distribution system, the customers will be assessed based on
usage on Consumers' distribution system regardless of whether the customers take
delivery of electricity supplied by the utility, or by an alternative electric
supplier, or supplied by the electricity generation facilities owned and
operated by the customer.
CONSUMERS AND OTHER UTILITIES MAY SECURITIZE QUALIFIED COSTS
The Recovery of Qualified Costs May be Facilitated by the Issuance of
Securitization Bonds. The Customer Choice Act authorizes the MPSC to issue
"financing orders," such as the MPSC financing order, approving, among other
things, the issuance of securitization bonds to recover the qualified costs of
an electric utility. A subsidiary of a utility or a third party assignee of a
utility may issue securitization bonds. Under the Customer Choice Act, proceeds
of securitization bonds are required to be used to refinance or retire an
electric utility's debt or equity. Securitization bonds are secured by and
payable from securitization property and may have a final maturity date of up to
15 years from the date of issuance. It is expected that the securitization bonds
will be paid in full on the expected final payment date which will be at least
three months before the related final maturity date, although failure to pay
principal of the securitization bonds before the final maturity date will not
constitute an event of default under the indenture.
The Customer Choice Act contains a number of provisions designed to
facilitate the securitization of qualified costs and related expenses.
A Financing Order is Irrevocable. Under the Customer Choice Act,
securitization property is created by the issuance by the MPSC of a financing
order. The Customer Choice Act provides that each financing order, including the
MPSC financing order, and the securitization charges authorized by the order,
are irrevocable, subject to rehearing by the MPSC only upon motion filed by the
utility. Notwithstanding its irrevocability, a party to the related MPSC
proceeding may appeal the financing order to the Michigan court of appeals
within 30 days after issuance by the MPSC. Under the Customer Choice Act, a
financing order and the securitization charges authorized in the MPSC financing
order are also not subject to reduction, impairment or adjustment by further
action of the MPSC, other than pursuant to the securitization charge adjustment
provisions of that Act.
In addition, under the Customer Choice Act, the State of Michigan pledges
for the benefit and protection of the financing parties, such as the
bondholders, and the electric utility, not to take or permit any action that
would impair the value of securitization property, reduce or alter, except as
contemplated by the periodic adjustments to the securitization charge authorized
by the Customer Choice Act, or impair the securitization charges to be imposed,
collected and remitted to the financing parties until the principal, interest
and premium, and any other charges incurred and contracts to be performed in
connection with the related securitization bonds have been paid and performed in
full. See "-- The Securitization Charge and Tax Charges are Adjusted
Periodically" below. See also "Risk Factors -- Judicial, Legislative or
Regulatory Action That May Adversely Affect Your Investment" and "The MPSC
Financing Order and the Securitization Charge -- The MPSC's Securitization
Charge Adjustment Process" in this prospectus. Securitization bonds do not
constitute a debt or obligation of the State and are not a charge on the full
faith and credit or taxing power of the State.
The Securitization Charge and Tax Charge are Adjusted Periodically. The
Customer Choice Act requires each financing order to include a mechanism
requiring that securitization charges be reviewed and
27
adjusted by the MPSC at least annually. The MPSC financing order provides for
Consumers, as servicer, to request adjustments annually, and quarterly beginning
approximately twelve months preceding the expected final payment date of the
final class of the securitization bonds. These adjustments are formula-based to
provide revenues sufficient to provide for timely payment of the principal of
and interest which, in the case of interest on any floating rate class, will be
calculated at the applicable gross fixed rate on the securitization bonds in
accordance with the expected amortization schedule and other required amounts
and charges in connection with the securitization bonds. The tax charge
described below will also be adjusted as necessary to provide Consumers with an
amount sufficient to recover federal and state taxes in respect of the
securitization charge revenue collections. Consumers agrees in the servicing
agreement to file at least annually with the MPSC a requested adjustment
calculated in accordance with the formula set forth in the MPSC financing order.
See "The MPSC Financing Order and the Securitization Charge -- The MPSC's
Securitization Charge Adjustment Process" in this prospectus.
Customers Cannot Avoid Paying the Securitization Charge. The Customer
Choice Act provides that the securitization charge is "non-bypassable" which
means that the charge will be payable by electric customers taking delivery of
electricity from Consumers or its successor on its MPSC-approved rate schedules
or under special contracts with specific customers, even if those customers
elect to purchase electricity from an alternative electric supplier.
The Customer Choice Act Provides Procedures for Perfecting the Transfer and
Pledge of Securitization Property. The Customer Choice Act specifies the
procedures for perfecting the transfer of the securitization property from
Consumers to the issuer under Michigan law and perfecting the security interest
granted by the issuer to the trustee in the securitization property under
Michigan law. The Customer Choice Act provides that a transfer of securitization
property will be perfected against all third parties, including subsequent
judicial and other lien creditors when a financing statement with respect to the
transfer has been filed in accordance with the Michigan Uniform Commercial Code,
referred to as the Uniform Commercial Code.
The Customer Choice Act Provides That Security Interests in the
Securitization Property are Perfected by Means of a Filing Under the Uniform
Commercial Code. A security interest in securitization property may be created
only by a financing order and the execution of a security agreement, such as the
indenture. A security interest in securitization property attaches automatically
upon receipt of the purchase price of the securitization bonds and is perfected
upon the filing of a financing statement under the Uniform Commercial Code,
whether or not the revenues or proceeds thereof have accrued and whether or not
the value of the securitization property is dependent on customers receiving
service. Perfection of the trustee's security interest in the securitization
property is necessary in order to establish the priority of the trustee's
security interest over claims of other parties to the securitization property.
The Customer Choice Act provides that priority of security interests in
securitization property will not be impaired by:
- commingling of securitization charge revenue collections with other funds
of the utility or its assignee (although this provision may not be
enforceable in a bankruptcy of the utility), or
- later modification of the financing order.
The Customer Choice Act Characterizes the Transfer of Securitization
Property as a True Sale and not a Secured Transaction. The Customer Choice Act
provides that a transfer by the utility or an assignee of securitization
property will be treated as a true sale and not a secured transaction and that
legal and equitable title has passed to the assignee, if the parties expressly
state in governing documents that a transfer is to be a sale or other absolute
transfer (although this provision may not be enforceable in a bankruptcy of the
utility). The characterization of the transfer as a true sale is not affected by
the fact that:
- the purchaser has any recourse against the assignor, or any other term of
the parties' agreement, including the assignor retaining an equity
interest in the securitization property;
- the electric utility acts as collector of the related securitization
charge; or
28
- the transfer is treated as a financing for tax, financial accounting or
other purposes.
See "Risk Factors" "-- The Risks Associated With Potential Bankruptcy
Proceedings" and "-- The Sale of Securitization Property Could Be Construed as a
Financing" in this prospectus.
THE MPSC FINANCING ORDER AND THE SECURITIZATION CHARGE
THE MPSC FINANCING ORDER
Consumers' Application and the MPSC Financing Order. In July 2000,
Consumers filed an application with the MPSC requesting the issuance by the MPSC
of a financing order under the Customer Choice Act, together with a proposed
form of the financing order. On October 24, 2000 the MPSC issued a financing
order under the Customer Choice Act. On January 4, 2001, the Commission issued
an order on rehearing in response to a request for rehearing by Consumers. Those
two orders together are referred to in this prospectus as the MPSC financing
order. In its application, Consumers requested that the MPSC allow the recovery
of a gross amount of $714,498,826 of generation-related regulatory assets, net
of $2,040,741 of certain regulatory liabilities, and a gross amount of
$12,500,000 of initial or up-front other qualified costs. Net of taxes and tax
credits, the MPSC approved $468,592,000 of qualified costs for recovery through
securitization. That amount represents a reduction from the amount requested by
$6,088,000. As a result, Consumers will be allowed to recover a gross amount of
$708,410,826 of generation-related regulatory assets. The MPSC also authorizes
Consumers to recover the state and federal taxes related to the principal amount
of securitization revenues through a non-bypassable tax charge which Consumers
may charge, collect and retain on its own behalf, referred to as the tax charge.
The MPSC Authorizes Consumers to Sell Securitization Property to the
Issuer. Under the MPSC financing order, the MPSC authorizes Consumers to assign,
sell, transfer or pledge securitization property to the issuer.
The MPSC Authorizes Issuance of Securitization Bonds. The MPSC financing
order authorizes the issuance of securitization bonds with an initial total
principal balance not to exceed $468,592,000, secured by securitization
property. The securitization bonds may have a final stated maturity not later
than 15 years from the date of issuance. The MPSC financing order also approves
the structure and other key terms of the securitization bonds.
The MPSC Authorizes Consumers to Impose the Securitization Charge and the
Tax Charge. Under the MPSC financing order, the MPSC authorizes Consumers to
impose and collect from customers the securitization charge in amounts
sufficient to provide for the timely payment of the principal of and interest on
the securitization bonds and all ongoing other qualified costs, referred to
together as the periodic payment requirement. Ongoing other qualified costs are
the actual costs which the issuer incurs in connection with the securitization
transaction in addition to the payment of principal of and interest on the
securitization bonds. These include the servicing fee, the fees and expenses of
the indenture trustee and of the independent managers or trustees of the issuer,
the administration fee, rating agency fees, legal and accounting fees and
expenses, indemnity payments, if any, funding of the overcollateralization
subaccount, replenishment of amounts withdrawn from the overcollateralization
subaccount or the capital subaccount, the ongoing costs of any additional credit
enhancement, the periodic or termination amounts payable under any interest rate
swaps or cap agreements, and other similar operating expenses of the issuer.
In addition, the MPSC financing order authorizes Consumers to impose and
collect the tax charge in an amount sufficient for Consumers to recover federal,
state and local taxes payable in connection with the securitization charge
revenue collections. Consumers will charge, collect and retain the tax charge
for its own account.
The securitization charge will be a uniform per kilowatt-hour charge
assessed against all customers of each rate class and under all special
contracts with specific customers, on a monthly basis as part of each customer's
regular monthly billings. The securitization charge will be subject to the
maximum lawful energy charges which may be in effect from time to time for any
of those rate classes and special
29
contracts. Consumers will set the initial per kilowatt-hour securitization
charge in an amount not to exceed $0.00205 per kWh and the initial tax charge in
an amount not to exceed $0.00025 per kWh, each based upon the formula approved
in the MPSC financing order. In comparison, the current average residential
energy charge is $0.0769 per kWh. In the unlikely event that adjustments to the
securitization charge would cause that charge to increase to the maximum lawful
rate for any rate class, any resulting shortfall in securitization charge
revenue collections would be borne by all remaining rate classes and special
contracts on a uniform per kWh basis. The securitization charge and the tax
charge will be reflected in each customer's bill as separate line items.
The securitization charge for each series of securitization bonds will be
assessed on all customer bills starting with the beginning of the first billing
cycle of Consumers after issuance of that series of securitization bonds. Upon
each adjustment of the securitization charge or issuance of additional series of
securitization bonds, the adjusted securitization charge will be assessed in the
same manner.
The periodic adjustments to the securitization charge are designed to
ensure that securitization charge revenue collections match the amount necessary
to provide for the timely payment of the periodic payment requirement. In
requesting periodic adjustments, subsequent forecasts will take into account
updated projections of electricity deliveries, the timing of revenue
collections, projected uncollectibles and expenses, any amounts held in the
reserve subaccount, any depletion of amounts in the capital subaccount or the
overcollateralization subaccount and the issuance of any additional series of
securitization bonds. Any additional series of securitization bonds will also be
secured by and payable from the securitization property which will comprise the
combined securitization charge collections imposed with respect to all series.
APPEALS OF THE MPSC FINANCING ORDER
The Michigan Attorney General filed appeals of the MPSC financing order on
November 27, 2000 and on February 5, 2001 with the Michigan Court of Appeals. On
July 24, 2001, the Court of Appeals issued a unanimous decision affirming the
MPSC financing order. The Attorney General advised Consumers that she would not
file an application for a rehearing with the Michigan Court of Appeals or for
leave to appeal the Court of Appeals' decision with the Michigan Supreme Court.
In addition, the period to file an application for rehearing or for leave to
appeal with the Michigan Supreme Court expired on August 14, 2001. The period to
file a delayed application for leave to appeal with the Michigan Supreme Court
expired on September 18, 2001. See "Risk Factors -- Judicial, Legislative or
Regulatory Action That May Adversely Affect Your Investment -- The Law Which
Underpins the Securitization Bonds May Be Invalidated" in this prospectus.
THE MPSC'S SECURITIZATION CHARGE ADJUSTMENT PROCESS
The servicer will seek adjustments to the securitization charge in order to
enhance the likelihood that securitization charge revenue collections, including
any amounts on deposit in the reserve subaccount, match the amount necessary to
provide for the timely payment of the periodic payment requirement. These
adjustments are formula-based, incorporating actual securitization charge
revenue collections, as well as updated assumptions regarding projected future
deliveries of electricity to customers, expected delinquencies and charge-offs
and future expenses relating to securitization property and the securitization
bonds, and the issuance of any additional series of securitization bonds. The
adjustments are designed to achieve the required level of revenue collections by
the payment date immediately preceding the next date on which the securitization
charge is adjusted, taking into account any amounts on deposit in the reserve
subaccount.
The Schedule for Making Adjustments to the Securitization Charge. Under the
Customer Choice Act, adjustments to the securitization charge must be reviewed
at least annually. Under the MPSC financing order, Consumers, as servicer, is
required to submit a request to the MPSC for adjustments each year through the
date approximately twelve months prior to the expected final payment date of the
final class of the securitization bonds, and quarterly thereafter. Requests for
adjustments must be submitted to the
30
MPSC at least 45 days before the adjustment may take place. The request must
show the computation of the proposed adjustments to the securitization charge
and that the proposed revision of the securitization charge will generate the
recovery of amounts sufficient to make on a timely basis all scheduled payments
on the securitization bonds and all other fees, charges and expenses of the
issuer. The adjustment will take effect at the beginning of the first complete
monthly billing cycle of Consumers following the date of approval by the MPSC of
the proposed adjustment. The previous securitization charge remains in effect
until that time. The MPSC has not determined the procedures to be applied in
conducting its review of a requested adjustment, including whether notice and an
opportunity for a hearing or comment will be allowed. However as required by the
financing order, each review must be completed within 45 days after the servicer
files its request for an adjustment and must be limited in scope to the
arithmetic computation contained in the proposed adjustment. In the case of
notification by the MPSC of error, the servicer will implement the corrected
adjustment. The date on which the servicer notifies the MPSC of a proposed
adjustment is referred to as a calculation date.
The MPSC Authorizes Consumers to Make "Non-Routine" Adjustments to the
Securitization Charge. The MPSC financing order also grants Consumers, as
servicer, the authority to make "non-routine" filings for adjustments in the
formula specified in the MPSC financing order for the mandatory periodic review
and adjustment in order to remedy a significant and recurring variance between
actual and expected securitization charge revenue collections and to assure
timely payment of the periodic payment requirement. Any such filing is required
to be made at least 90 days prior to the proposed effective date and would be
subject to MPSC hearing and approval.
THE SELLER AND SERVICER OF THE SECURITIZATION PROPERTY
CONSUMERS
Consumers is both the seller and the servicer of the securitization
property. See "Consumers Energy Company" in this prospectus. All tabular
information regarding Consumers will be updated in any prospectus supplement
issued after the date of this prospectus.
CONSUMERS' CUSTOMER CLASSES, ELECTRICITY CONSUMPTION AND REVENUES
Customer Classes. Consumers' retail customer base is divided into three
general customer classes: residential, commercial and industrial. Each customer
class is defined by type of customer business and not by voltage level. Several
rate classes are included within each customer class differentiated by type of
service and other service characteristics.
The residential customer class consists of approximately 1,500,000
residents in the State of Michigan. The commercial customer class is comprised
of enterprises such as restaurants, grocery stores, shopping malls, office and
apartment buildings. Additionally, the commercial customer class includes public
street and highway lighting units. The industrial customer class is comprised of
diverse industries such as oil and gas production, automotive assembly and
supply, chemical, pharmaceutical, airports, specialized steel manufacturing,
foundries and paper mills.
31
The following table shows the average number of Consumers' electric
customers in each customer class and the percentage each customer class bears to
the total average number of customers for the periods indicated.
TABLE 1
AVERAGE NUMBER OF ELECTRIC CUSTOMERS (CUSTOMER METERS)
<Table>
<Caption>
FOR THE YEAR ENDED
--------------------------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98
-------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
NUMBER OF NUMBER OF NUMBER OF
CUSTOMERS % OF TOTAL CUSTOMERS % OF TOTAL CUSTOMERS % OF TOTAL
--------- ---------- --------- ---------- --------- ----------
RESIDENTIAL.......... 1,397,966 88.46% 1,417,168 88.38% 1,437,678 88.32%
COMMERCIAL........... 173,190 10.96% 177,097 11.05% 180,916 11.11%
INDUSTRIAL........... 9,191 0.58% 9,204 0.57% 9,198 0.57%
--------- ------- --------- ------- --------- -------
TOTAL................ 1,580,347 100.00% 1,603,469 100.00% 1,627,792 100.00%
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
----------------------------------------------------------- --------------------------
12/31/99 12/31/00 6/30/01
-------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
NUMBER OF NUMBER OF NUMBER OF
CUSTOMERS % OF TOTAL CUSTOMERS % OF TOTAL CUSTOMERS % OF TOTAL
--------- ---------- --------- ---------- --------- ----------
RESIDENTIAL.......... 1,457,459 88.25% 1,478,730 88.16% 1,493,663 88.10%
COMMERCIAL........... 184,779 11.19% 189,298 11.29% 192,548 11.36%
INDUSTRIAL........... 9,198 0.56% 9,205 0.55% 9,202 0.54%
--------- ------- --------- ------- --------- -------
TOTAL................ 1,651,436 100.00% 1,677,233 100.00% 1,695,413 100.00%
</Table>
The following table shows the total billed electric consumption of
Consumers' customers in megawatt-hours (referred to as mWh) for each customer
class and the percentage each customer class bears to the total consumption for
the periods indicated.
TABLE 2
BILLED ELECTRIC CONSUMPTION
<Table>
<Caption>
FOR THE YEAR ENDED
------------------------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98
-------------------------- -------------------------- --------------------------
MWH % OF TOTAL MWH % OF TOTAL MWH % OF TOTAL
--- ---------- --- ---------- --- ----------
RESIDENTIAL.......... 10,792,821 32.10% 10,746,679 31.38% 11,032,749 31.23%
COMMERCIAL........... 10,083,081 30.00% 10,280,472 30.01% 10,773,484 30.50%
INDUSTRIAL........... 12,741,810 37.90% 13,222,932 38.61% 13,517,251 38.27%
---------- ------- ---------- ------ ---------- -------
TOTAL................ 33,617,712 100.01% 34,250,083 99.99% 35,323,484 100.00%
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
---------------------------------------------------------- --------------------------
12/31/99 12/31/00 6/30/01
-------------------------- -------------------------- --------------------------
MWH % OF TOTAL MWH % OF TOTAL MWH % OF TOTAL
--- ---------- --- ---------- --- ----------
RESIDENTIAL.......... 11,390,478 31.42% 11,371,086 31.47% 5,739,577 32.69%
COMMERCIAL........... 11,141,859 30.74% 11,326,042 31.35% 5,595,168 31.87%
INDUSTRIAL........... 13,718,953 37.84% 13,436,076 37.18% 6,220,745 35.44%
---------- ------- ---------- ------- ---------- -------
TOTAL................ 36,251,290 100.00% 36,133,204 100.00% 17,555,490 100.00%
</Table>
32
The following table shows the amount of Consumers' billed electric revenue
per customer class and the percentage of each customer class of the total billed
revenue for the periods indicated.
TABLE 3
BILLED ELECTRIC REVENUES ($000)
<Table>
<Caption>
FOR THE YEAR ENDED
-----------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98
----------------------- ----------------------- -----------------------
$ (000S) % OF TOTAL $ (000S) % OF TOTAL $ (000S) % OF TOTAL
-------- ---------- -------- ---------- -------- ----------
RESIDENTIAL.................... 863,040 37.42% 910,433 38.12% 938,229 38.40%
COMMERCIAL..................... 749,887 32.52% 767,322 32.13% 798,692 32.69%
INDUSTRIAL..................... 693,234 30.06% 710,602 29.75% 706,468 28.91%
--------- ------- --------- ------- --------- -------
TOTAL.......................... 2,306,161 100.00% 2,388,357 100.00% 2,443,389 100.00%
</Table>
<Table>
<Caption>
FOR THE
FOR THE YEAR ENDED SIX MONTHS ENDED
-------------------------------------------------- -----------------------
12/31/99 12/31/00 6/30/01
----------------------- ----------------------- -----------------------
$ (000S) % OF TOTAL $ (000S) % OF TOTAL $ (000S) % OF TOTAL
-------- ---------- -------- ---------- -------- ----------
RESIDENTIAL.................... 978,765 38.92% 930,703 38.01% 453,277 38.14%
COMMERCIAL..................... 825,693 32.84% 830,281 33.91% 407,777 34.32%
INDUSTRIAL..................... 710,133 28.24% 687,597 28.08% 327,232 27.54%
--------- ------- --------- ------- --------- -------
TOTAL.......................... 2,514,591 100.00% 2,448,581 100.00% 1,188,286 100.00%
</Table>
PERCENTAGE CONCENTRATION WITHIN CONSUMERS' COMMERCIAL AND INDUSTRIAL CLASSES
For the period ended December 31, 2000, the ten largest single site
electric customers represented approximately 7.39% of Consumers' kilowatt-hour
sales and the ten largest multi-site electric customers represented
approximately 13.05% of Consumers' kilowatt-hour sales. In both cases, the
customers are in the commercial or industrial customer classes. There are no
material concentrations in the residential class.
HOW CONSUMERS FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT OF ELECTRICITY TO
BE DELIVERED OVER ITS FACILITIES
Reliable projections of the number of customers, kWh deliveries and retail
electric revenues are important in setting, maintaining and adjusting the
securitization charge. The securitization charge must be sufficient to pay
interest on and principal of the securitization bonds as well as the other
periodic payment requirements. See "The MPSC Financing Order and the
Securitization Charge -- The MPSC's Securitization Charge Adjustment Process"
and "Risk Factors -- Servicing Risks" in this prospectus.
Consumers prepares annual forecasts of electric energy (megawatt-hour)
deliveries for the following year and several years thereafter. The primary uses
of the forecasts have been for capacity planning, financial planning, and rate
case support. Monthly energy forecasts are derived from the annual forecasts
based on allocation factors that consider monthly consumption growth trends.
Electric energy forecast models for Consumers were last updated in
September 2001. Econometric models are used in forecasting electric energy
deliveries to the residential, commercial, and industrial customer classes.
Where appropriate, these classes are segmented into further detail for purposes
of analysis and forecast development. These models forecast electric deliveries
as a function of regional housing start and personal income economic indicators,
as well as national indicators of industrial production and vehicle unit
production by its largest industrial customer, General Motors. The forecast also
considers the effects of planned industrial plant closings or expansions on
total electric deliveries as adjustments to the econometric model forecasts. The
forecast models are developed using historical data that has been adjusted for
abnormal weather conditions. As a result, the forecast reflects expected usage
33
under normal weather conditions. "Normal" weather conditions are based on thirty
year averages for heating and cooling degree days.
Consumers' forecasting process emphasizes the importance of high quality
analysis. When econometric forecast models are developed, they are evaluated
against specific logic and statistical tests. These tests form the basis of
making selections between alternative forecast models and variables. Actual
sales are compared to forecasted sales on a monthly basis in order to determine
if any significant condition exists that was not anticipated at the time the
forecast was made.
The econometric models forecast energy usage through 2006. Beyond 2006, it
is assumed that consumption will grow at an annual average rate of 2.3%. This
assumption is consistent with actual growth experienced by Consumers over a
long-term historical period.
Consumers utilizes the most current U.S. and Michigan economic forecasts
available at the time the forecast models are developed and considers any other
source of economic information that is relevant to its service territory.
ACTUAL CONSUMPTION COMPARED TO FORECAST
Consumers conducts sales forecast variance analysis on a regular basis to
monitor how well forecasts track actual consumption. This is important for
short-term resource procurement functions as well as for budgeting and financial
reporting.
The table below compares actual deliveries in gigawatt-hours (referred to
as gWh) for a particular year to the related forecast prepared by Consumers
during the previous year. For example, the 1999 annual variance is based on a
forecast prepared in 1998. The annual variances for all combined customer
classes from 1996 through 2000 range from 0.1% to 4.2% in absolute terms. During
the historical forecast periods, there are no discernable trends established
that can be used to predict future forecast variances.
Many factors can contribute to annual variances between actual electricity
consumption and the amount of sales forecast in the preceding year, including
unexpected weather conditions and unanticipated changes in economic conditions.
For example, the variance in 1997 can be attributed to a cooler than normal
summer which required less air conditioning and, therefore, reduced electric
consumption. The 1997 variance in the industrial class resulted in part from a
forecast assumption that demand side management programs would result in
decreased consumption to a degree greater than in fact occurred. The residential
variance in 2000 reflects the combined effect of reduced air conditioning and
space heating demand due to mild winter and summer temperatures. The industrial
variance in 2001 reflects the impact of reductions in manufacturing activity
that were not anticipated at the time the forecast was developed.
TABLE 4
NORMALIZED FORECAST COMPARED TO THE ACTUAL AMOUNT OF ELECTRICITY DELIVERED
<Table>
<Caption>
THROUGH
1996 1997 1998 1999 2000 JUNE 2001
------ ------ ------ ------ ------ ---------
RESIDENTIAL
Forecast (gWh)............................. 10,775 11,037 11,108 11,397 11,872 5,847
Actual (gWh)............................... 10,793 10,747 11,033 11,391 11,371 5,740
Variance-%................................. 0.2% -2.6% -0.7% -0.1% -4.2% -1.8%
COMMERCIAL
Forecast (gWh)............................. 10,190 10,375 10,619 10,934 11,313 5,646
Actual (gWh)............................... 10,084 10,281 10,774 11,142 11,326 5,595
Variance-%................................. -1.0% -0.9% 1.5% 1.9% 0.1% -0.9%
INDUSTRIAL
Forecast (gWh)............................. 13,035 12,826 13,626 13,805 13,467 6,733
Actual (gWh)............................... 12,742 13,223 13,517 13,719 13,436 6,221
Variance-%................................. -2.2% 3.1% -0.8% -0.6% -0.2% -7.6%
</Table>
34
The table below compares the actual number of customers at the end of each
period to the related forecast prepared during the previous year. For example,
the annual 1996 variance is based on a forecast prepared in 1995. There can be
no assurance that the future variance between actual and expected consumption
will be similar to the historical experience set forth below.
TABLE 5
FORECAST VARIANCE FOR THE NUMBER OF RETAIL CUSTOMERS
<Table>
<Caption>
FOR THE
SIX MONTHS
FOR THE YEAR ENDED ENDED
------------------------------------------------------------- ----------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 6/30/01
--------- --------- --------- --------- --------- ----------
RESIDENTIAL CUSTOMERS
Forecasted................. 1,404,916 1,419,889 1,447,160 1,465,171 1,487,323 1,494,872
Actual..................... 1,408,965 1,428,154 1,447,689 1,468,557 1,489,024 1,496,008
Variance................... 0.29% 0.58% 0.04% 0.23% 0.11% 0.08%
COMMERCIAL CUSTOMERS
Forecasted................. 174,579 177,576 181,988 186,162 189,630 191,700
Actual..................... 175,318 179,264 182,878 187,002 191,797 193,050
Variance................... 0.42% 0.95% 0.49% 0.45% 1.14% 0.70%
INDUSTRIAL CUSTOMERS
Forecasted................. 9,226 9,344 9,419 9,365 9,471 9,256
Actual..................... 9,231 9,180 9,197 9,203 9,199 9,170
Variance................... 0.05% -1.76% -2.36% -1.73% -2.87% -0.93%
</Table>
If actual kWh of electricity delivered is higher than the forecast used to
develop the securitization charge, then there will most likely be more
securitization charge revenues collected than assumed. Similarly, if actual kWh
of electricity delivered is lower than the forecast used to develop the
securitization charge, there will most likely be less securitization charge
revenues collected than assumed. Any variance will be taken into account in the
true-up mechanism approved in the MPSC financing order.
CREDIT POLICY; BILLING; COLLECTIONS; RESTORATION OF SERVICE
Consumers' policies and procedures pertaining to credit (including
requirements for deposits from customers), billing, collections (including
procedures for disconnection of service for non-payment) and restoration of
service after disconnection, are governed by applicable laws and Consumers'
rules and regulations as approved by the MPSC. To the extent permitted by
applicable laws, Consumers may change its rules and regulations and seek
approval from the MPSC for new tariffs governing these activities to enhance
Consumers' ability to collect payment for services received by customers and to
recover amounts billed to customers for utility services. Consumers will agree,
in the servicing agreement, not to initiate any changes to its customary and
usual practices and procedures in any manner that would materially and adversely
affect the issuer's or the trustee's interest in the transferred securitization
property unless it shall have provided the rating agencies with prior written
notice (although there is no requirement of any rating agency confirmation).
CREDIT POLICY
Under applicable law, Consumers is generally required to provide service to
retail customers and potential customers within its service area. Consumers'
review of the credit history of applicants applying for utility service
generally consists of a review to determine if the applicant has previously
received service from Consumers and, if so, whether there are any delinquent
billed amounts outstanding. Within this initial review process, Consumers
identifies customers making applications at premises which have demonstrated
chronic uncollectible debt write-off experience. In these instances, service
applicants are requested to physically apply for service at a Consumers office
location. In general, Consumers relies on the information provided by the
applicant and Consumers' customer information system, to determine
35
whether Consumers has previously served the applicant and whether any delinquent
billed amounts in the applicant's name remain outstanding. In accordance with
Consumers' tariffs, deposits may be required from applicants applying for
service or from existing customers to protect Consumers against losses.
Customers from whom deposits are most frequently obtained include residential
customers who have had their service disconnected for nonpayment of bills
outstanding, and from commercial and industrial customers with limited or no
credit history or exhibiting poor payment history. The typical maximum allowable
amount of the deposit following discontinuation of service for residential
customers is twice the average peak season monthly bill for the premises. The
maximum allowable amount of deposit for commercial and industrial accounts is
typically three times an average monthly bill for the customer. The deposit is
refunded to the residential customer upon satisfactory payment (as prescribed
within the regulations) by the customer for a period of 12 consecutive months.
The deposit is generally refunded to the commercial and industrial customer
after the customer has made 12 consecutive months of payments on or before the
due date.
BILLING PROCESS
Consumers bills its customers once every 27 to 33 days with approximately
an equal number of bills being distributed each servicer business day, that is,
five days a week except holidays and an occasional Saturday. Customers receiving
both electricity and gas service from Consumers receive combined bills for the
charges incurred for both types of service during the billing period. As of
December 2000, approximately 41% of Consumers' customers received electric
service only and 38% received gas service only. The remaining 21% were
combination accounts. For the year ending December 31, 2000, Consumers mailed an
average of 129,000 bills on each servicer business day to customers in its
various customer categories. Customer bills with potential billing errors are
retained for review. This review involves accounts that have abnormally high or
low bills and possible meter reading errors or meter malfunctions. As of
December 2000, 355,000 residential and small commercial and industrial
customers, which constitute approximately 13% of Consumers' electric and gas
customers, were billed on the equal monthly payment plan ("EMPP"). Customers on
this plan are billed equal monthly amounts based on twelve months of billing
history for each account. The EMPP year begins with the June bill month. The
EMPP customers' accounts are reconciled at the end of the plan year in May.
Overpayments or underpayments for the plan year are settled in May or for
underpayments spread over a 90-day period.
Consumers may change its billing policies and procedures from time to time.
It is expected that any such changes would be designed to enhance Consumers'
ability to make timely recovery of amounts billed to customers.
COLLECTION PROCESS
Consumers receives approximately 76% of its total bill payments, by number
of bills (both electric and gas), via United States mail through its central
mail remittance center. Approximately 6% of payments are received through
third-party collection agents (banks, grocery stores and other similar entities
which offer the processing of utility bill payments as a convenience to their
customers). Another 7% are received via Consumers' local offices and the
remaining 11% are received electronically.
Bills are processed and mailed to customers two days after the customer's
meter is read or estimated. Residential accounts are due 17 days after billing.
Commercial and industrial accounts are due 21 days after billing. Payments are
considered past due (late payment charges applied) if received five or more days
after the due date.
For Residential Customers, the standard credit cycle begins with a past due
reminder notice being sent with the residential bill if payment has not been
received by the time of the second month's billing. If the past due billing
remains unpaid two weeks after the reminder notice was sent to the customer, a
final notice is mailed to the customer. Approximately one week following the
mailing of the final notice, a series of collection calls are initiated by a
third-party collection agency on behalf of Consumers. At approximately 45 days
past due, an intent to discontinue service notice is mailed to the customer.
36
Following mailing of the intent to discontinue service notice, if the past due
balance has not been paid within three days, the account is scheduled for
service disconnection. If the account is being worked in the field for
disconnection, should the customer pay the past due balance at the time that the
service representative visits the premise, the service will be continued. If the
past due billing is not paid at that point, service is disconnected.
For commercial and industrial customers, the standard credit cycle aligns
closely to the residential cycle as described above, with the exception that
past due mailings and telephone contact attempts are manual in nature and
completed within Consumers' credit operational areas.
Customers are entitled to enter into deferred settlement agreements in
accordance with applicable laws and Consumers' tariffs as regulated by the MPSC.
Such payment agreements allow the customer to make partial payments, or to
extend an arrearage, during periods of financial hardship. Service disconnection
is not implemented against a customer who has entered into and is abiding by a
settlement agreement. Consumers is prohibited from disconnecting service under
certain conditions, such as for those customers who are enrolled and complying
with the winter protection program. Consumers is also subject to agreements with
agencies administering certain low-income programs which limits Consumers'
ability to disconnect service to customers receiving payment under such
programs.
On a monthly basis, net write-offs are calculated from the gross write-offs
for the month, less recoveries (payments, adjustments, deposits, etc) for that
month. Although most write-offs are associated with final accounts that have
reached the 90-100 day past due threshold, recoveries received during the month
could be associated with accounts charged off during any previous period.
If a customer declares bankruptcy, a final billing for the energy amount is
completed and claims are filed in the bankruptcy. In the majority of commercial
and industrial filings involving Chapter 11 bankruptcy filings, an attempt is
made to obtain a security deposit from the new entity. These deposits are
typically held until a formal reorganization plan has been established or timely
payments over a predetermined period have been received from the customer.
WRITE-OFF PROCESS
Consumers sends final billed accounts to an external collection agency
approximately 30 days after the due date of an unpaid final bill. Final bills
are issued to customers in three circumstances:
- a customer requests discontinuation of energy service from Consumers or
voluntarily discontinues its receipt of energy service during the credit
cycle,
- a customer has had energy service physically disconnected for nonpayment
of a final bill for 10 days, and
- a customer has had energy service physically disconnected for nonpayment
of a final bill and at the same location a new customer requests energy
service.
Upon receipt of an unpaid final bill, the collection agency takes a number of
progressive collection steps to solicit payment from the customer. If the past
due amount remains unpaid approximately 100 days after a final bill has been
issued, which is approximately 210 to 225 days from the beginning of the credit
collection cycle, the account is written-off as uncollectible. At the point of
write-off, the uncollectible accounts are distributed among three external
collection agencies for a final attempt at collection. On a monthly basis, net
write-offs are calculated from the gross write-offs for the month by subtracting
recoveries which include payments, deposits, transfers and adjustments for that
month.
RESTORATION OF SERVICE
Prior to restoring service that has been disconnected, Consumers has the
right to require payment of all of the following charges: (1) the total past due
amount owing for which the service was disconnected, (2) a security deposit in
accordance with Consumers' tariffs, (3) a restoration charge in accordance with
Consumers' tariffs, (4) a meter relocation charge in accordance with Consumers'
tariffs, and (5) actual costs associated with the theft of energy, stolen meters
or fraudulent switched meters in accordance with Consumers' tariffs.
37
Consumers may change its credit, billing, collections and
termination/restoration of service policies and procedures from time to time. It
is expected that any such changes would be designed to enhance Consumers'
ability to bill and collect customer charges on a timely basis. Under the
servicing agreement, any changes to customary billing and practices instituted
by Consumers will apply to collections of the securitization charge so long as
Consumers is the servicer.
Termination of Service for Certain Residential Customers in the Winter. The
winter protection program prevents discontinuance of service of electric and gas
service to qualified residential customers during the heating season, currently
from November 1 to March 31. Consumers cannot shut off service to an eligible
customer during the heating season for nonpayment of a delinquent account if the
customer is an eligible senior citizen customer or if the customer pays to
Consumers a monthly amount equal to 7% of the estimated annual bill for the
eligible customer and the eligible customer demonstrates, within 14 days of
requesting shutoff protection, that he or she has made application for state or
federal heating assistance. If an arrearage exists at the time an eligible
customer applies for protection from shutoff of service during the heating
season, Consumers will permit the customer to pay the arrearage in equal monthly
installments until the subsequent winter protection program begins. Consumers
may shut off service to an eligible low-income customer who does not pay the
monthly amounts after giving proper notice. At the conclusion of the heating
season, Consumers reconciles the accounts of eligible customers and permits
customers to pay any amounts owing in equal monthly installments between April 1
and November 1. Consumers may also shut off service to eligible customers who
fail to make these installments payments on a timely basis.
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth information relating to Consumers' total
billed revenues and delinquency and write-off experience for the past several
years. Such historical information is presented because Consumers' actual
experience with respect to delinquencies and write-offs may affect the timing of
securitization charge revenue collections. Consumers expects, but cannot assure,
that the delinquency and write-off experience with respect to securitization
charge revenue collections will not differ substantially from the rates
indicated.
Delinquency and write-off data is affected by factors such as the overall
economy, weather and changes in collection practices. While delinquency ratios
as a percentage of total retail billings have remained largely consistent over
the past three and one-half years, uncollectible charge-off experience has
improved significantly. Significant factors influencing this positive trend
include:
- increased emphasis on field collection and disconnection for non-payment,
- improved recovery results at external collection agencies,
- internal system enhancements which have assisted in the identification of
potentially "high risk" accounts,
- final billed and uncollectible accounts have been placed on-line to
enable Consumers to transfer these debts to active energy accounts more
efficiently,
- initiation of a dedicated fraud section within the credit and collection
operation which specifically investigates situations involving potential
customer identification fraud, and
- increased use of additional and convenient payment options such as credit
cards, checks by telephone and automated pay agents for all customers.
There can be no assurance, however, that this positive trend will continue and
changes in the retail electric market could result in delinquency and write-off
ratios that vary materially from those presented in the tables below.
38
The following table shows Consumers' total delinquencies as a percentage of
total billed revenues for the periods indicated.
TABLE 6
DELINQUENCIES AS A PERCENTAGE OF ANNUAL BILLED RETAIL REVENUES
<Table>
<Caption>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED(1)
-------------------------------------------------------- ---------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 6/30/01
-------- -------- -------- -------- -------- -------
RESIDENTIAL
0-30 days......................... 2.34% 1.84% 1.82% 1.65% 2.03% 1.21%
31-60 days........................ 0.37% 0.36% 0.43% 0.46% 0.50% 0.64%
61-90 days........................ 0.17% 0.17% 0.22% 0.22% 0.24% 0.35%
90+ days.......................... 0.29% 0.30% 0.31% 0.33% 0.35% 0.43%
NON-RESIDENTIAL
0-30 days......................... 1.32% 0.71% 0.82% 0.79% 0.91% 0.49%
31-60 days........................ 0.06% 0.05% 0.08% 0.06% 0.06% 0.09%
61-90 days........................ 0.03% 0.02% 0.03% 0.03% 0.08% 0.05%
90+ days.......................... 0.06% 0.13% 0.05% 0.10% 0.23% 0.14%
</Table>
-------------------------
(1) Annual revenues for this column were estimated based on actual revenues
through June 30, 2001.
The following table shows Consumers' total write-offs as a percentage of
total billed revenues for all electric customers for the periods indicated.
TABLE 7
WRITE-OFFS AS A PERCENTAGE OF BILLED ELECTRIC REVENUES
<Table>
<Caption>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
-------------------------------------------------------- ------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 6/30/01
-------- -------- -------- -------- -------- -------
RESIDENTIAL........................ 0.74% 0.60% 0.41% 0.35% 0.44% 0.26%
NON-RESIDENTIAL.................... 0.05% 0.05% 0.17% 0.04% 0.10% 0.12%
TOTAL.............................. 0.31% 0.26% 0.26% 0.16% 0.23% 0.17%
</Table>
Write-offs reflect amounts recovered by Consumers from deposits, bankruptcy
proceedings and payments received once an account has been either written-off by
Consumers or transferred to one of its external collection agencies.
39
CONSUMERS FUNDING LLC, THE ISSUER
Consumers Funding LLC, the issuer of the securitization bonds, was formed
as a Delaware limited liability company on October 11, 2000 pursuant to a
limited liability company agreement of Consumers as sole member of the issuer.
The assets of the issuer are limited to the securitization property which was
sold to the issuer, the trust funds held by the trustee, the rights of the
issuer under the transaction documents, any third party credit enhancement or
rights under any interest rate swap agreement and any money distributed to the
issuer from the collection account in accordance with the indenture and not
distributed to Consumers. The MPSC financing order and the indenture provide
that the securitization property, as well as the other collateral described in
the MPSC financing order and the indenture, will be pledged by the issuer to the
trustee. Pursuant to the indenture, the securitization charge revenue
collections remitted to the trustee by the servicer must be used to pay the
securitization bonds and other obligations of the issuer specified in the
indenture. As of the date of this prospectus, the issuer has not carried on any
business activities and has no operating history. Audited financial statements
of the issuer as of September 30, 2001 are included in this prospectus.
The Issuer's Purpose. The issuer has been created solely for the purposes
of:
- purchasing and owning the securitization property;
- issuing one or more series of securitization bonds, each of which may be
comprised of one or more classes, from time to time;
- pledging its interest in the securitization property and other collateral
to the trustee under the indenture in order to secure the securitization
bonds; and
- performing activities that are necessary, suitable or convenient to
accomplish these purposes, including the execution of any interest rate
swap agreement or hedging arrangement incident to the issuance of
securitization bonds.
The Interaction Between Consumers and the Issuer. On the issue date for
each series, Consumers will sell securitization property to the issuer pursuant
to the sale agreement between the issuer as buyer and Consumers as seller.
Consumers will service the securitization property pursuant to a servicing
agreement with the issuer. Consumers and any successor in the capacity of
servicer are referred to as the servicer.
The Issuer's Management. The issuer's business will be managed by five
managers, referred to as the managers, appointed from time to time by Consumers
or, in the event that Consumers transfers its interest in the issuer, by the new
owner or owners. The issuer will have at all times following the initial
issuance of the securitization bonds at least two independent managers who,
among other things, are not and have not been for at least five years from the
date of their appointment:
- a direct or indirect legal or beneficial owner of the issuer or Consumers
or any of their respective affiliates,
- a relative, supplier, employee, officer, director, manager, contractor or
material creditor of the issuer or Consumers or any of their respective
affiliates, or
- a person who controls Consumers or its affiliates.
The remaining managers will be employees or officers of Consumers. The
managers will devote the time necessary to conduct the affairs of the issuer.
The following are the managers as of the date of this prospectus:
<Table>
<Caption>
NAME AGE POSITION AT CONSUMERS
---- --- ---------------------
Alan M. Wright 56 Executive Vice President, Chief Financial Officer and
Chief Administrative Officer
David A Mikelonis 52 Senior Vice President and General Counsel
Thomas A. McNish 64 Vice President and Secretary
</Table>
40
Consumers, as the sole member of the issuer, will appoint the two
independent managers prior to the issuance of the initial series of
securitization bonds.
None of the managers has been involved in any legal proceedings which are
specified in Item 401(f) of the SEC's Regulation S-K.
The Managers' Compensation and Limitation on Liabilities. The issuer has
not paid any compensation to any manager since the issuer was formed. The
managers other than the independent managers will not be compensated by the
issuer for their services on behalf of the issuer. The independent managers will
be paid quarterly fees from the revenues of the issuer and will be reimbursed
for their reasonable expenses. These expenses include, without limitation, the
reasonable compensation, expenses and disbursements of such agents,
representatives, experts and counsel as the independent managers may employ in
connection with the exercise and performance of their rights and duties under
the issuer's limited liability company agreement, the indenture, the sale
agreement and the servicing agreement. The limited liability company agreement
provides that the managers will not be personally liable under any circumstances
except for:
- liabilities arising from their own willful misconduct or gross
negligence,
- liabilities arising from the failure by any of the managers to perform
obligations expressly undertaken in the issuer's limited liability
company agreement, or
- taxes, fees or other charges, based on or measured by any fees,
commissions or compensation received by the managers in connection with
the transactions described in this prospectus.
The limited liability company agreement further provides that, to the fullest
extent permitted by law, the issuer shall indemnify the managers against any
liability incurred in connection with their services as managers for the issuer
except in the cases described above.
The Issuer is a Separate and Distinct Legal Entity. The issuer's limited
liability company agreement provides that the issuer may not file a voluntary
petition for relief under the Bankruptcy Code without the unanimous vote of its
managers, including the independent managers (although this provision may not be
enforceable). Consumers has agreed that it will not cause the issuer to file a
voluntary petition for relief under the Bankruptcy Code. The limited liability
company agreement requires the issuer:
- to take all reasonable steps to continue its identity as a separate legal
entity;
- to make it apparent to third persons that it is an entity with assets and
liabilities distinct from those of Consumers, other affiliates of
Consumers, the managers or any other person; and
- to make it apparent to third persons that, except for federal and state
tax purposes, it is not a division of Consumers or any of its affiliated
entities or any other person.
The principal place of business of the issuer is 212 W. Michigan Avenue,
Suite M-1029, Jackson, Michigan 49201, and its telephone number is (517)
788-0179.
Administration Agreement. Consumers will provide administrative services
for the issuer pursuant to an administration agreement between the issuer and
Consumers. The issuer will pay Consumers a market rate fee for performing these
services.
INFORMATION AVAILABLE TO THE SECURITIZATION BONDHOLDERS
The issuer has filed with the SEC a registration statement under the
Securities Act, with respect to the securitization bonds. This prospectus, which
forms a part of the registration statement, and any prospectus supplement
describe the material terms of some documents filed as exhibits to the
registration statement. However, this prospectus and any prospectus supplement
do not contain all of the information contained in the registration statement
and its exhibits. Any statements contained in this prospectus or any prospectus
supplement concerning the provisions of any document filed as an exhibit to the
registration statement or otherwise filed with the SEC are not necessarily
complete, and in each instance reference is
41
made to the copy of the document so filed. For further information, reference is
made to the registration statement and the exhibits thereto, which are available
for inspection without charge at the public reference facility maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
registration statement and exhibits thereto may be obtained at the above
location at prescribed rates and, for so long as any securitization bonds are
listed on the Luxembourg Stock Exchange and the rules of that exchange so
require, will be available for inspection by the holders of any listed
securitization bonds at the office of the listing agent in Luxembourg.
Information as to the operation of the public reference facility is available by
calling the SEC at 1-800-SEC-0330. Information filed with the SEC can also be
inspected at the SEC site on the World Wide Web at http://www.sec.gov. The
issuer will file with the SEC all periodic reports as are required by the
Exchange Act and the rules, regulations or orders of the SEC thereunder. The
issuer may discontinue filing periodic reports under the Exchange Act at the
beginning of the fiscal year following the issuance of the securitization bonds
of any series if there are fewer than 300 holders of the securitization bonds.
All reports and other documents filed by the issuer pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
prospectus and prior to the termination of the offering of the securitization
bonds will be deemed to be incorporated by reference into this prospectus and to
be a part hereof. Any statement contained in this prospectus, in a prospectus
supplement or in a document incorporated or deemed to be incorporated by
reference in this prospectus or in the prospectus supplement will be deemed to
be modified or superseded for purposes of this prospectus and any prospectus
supplement to the extent that a statement contained in this prospectus, in a
prospectus supplement or in any separately filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes that
statement. Any statement so modified or superseded will not be deemed, except as
so modified or superseded, to constitute part of this prospectus or any
prospectus supplement. The issuer will provide without charge to each person to
whom a copy of this prospectus is delivered, on the written or oral request of
this person, a copy of any or all of the documents incorporated herein by
reference, except for the exhibits which are not specifically incorporated by
reference in the documents. Written requests for these copies should be directed
to the issuer, 212 W. Michigan Avenue, Suite M-1029, Jackson, Michigan 49201.
Telephone requests for these copies should be directed to the issuer at (517)
788-0179. In addition, for so long as any securitization bonds are listed on the
Luxembourg Stock Exchange and the rules of that exchange so require, these
documents will be available for inspection by the holders of any listed
securitization bonds at the office of the listing agent in Luxembourg.
THE SECURITIZATION BONDS
The securitization bonds will be issued under and secured by the indenture
between the issuer and the trustee substantially in the form filed as an exhibit
to the registration statement of which this prospectus forms a part. The terms
of each series of securitization bonds will be provided in the indenture and the
related supplemental indenture. The following summary, together with the terms
of a particular series of securitization bonds which are described in the
prospectus supplement, describes all material terms and provisions of the
securitization bonds.
GENERAL TERMS OF THE SECURITIZATION BONDS
The securitization bonds may be issued in one or more series, each made up
of one or more classes. The terms of a series may differ from the terms of
another series, and the terms of a class may differ from the terms of another
class of the same series. The terms of each series will be specified in the
related prospectus supplement and supplemental indenture.
The indenture requires, as a condition to the issuance of each series of
securitization bonds, that such issuance will not result in any rating agency
reducing or withdrawing its then current rating of any outstanding series or
class of securitization bonds. The requirement of confirmation by each of
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies,
referred to as S&P, Moody's Investors Service, Inc., referred to as Moody's, and
Fitch, Inc., referred to as Fitch, to the seller, the servicer, the
42
trustee and the issuer that any action will not result in a reduction or
withdrawal of its then current ratings is referred to as the rating agency
condition. In circumstances other than the original issuance of a series of
securitization bonds, however, so long as Moody's is notified of the proposed
action, the rating agency condition may be satisfied with respect to Moody's by
notice to Moody's without such confirmation from Moody's.
Consumers may sell other securitization property to one or more entities
other than the issuer in connection with the issuance of a new series of
securitization bonds. In that case, Consumers will need to obtain a separate
financing order from the MPSC. That separate financing order will specify a
separate securitization charge to be collected from customers for the
securitization bonds issued by that other entity.
PAYMENTS OF INTEREST ON AND PRINCIPAL OF THE SECURITIZATION BONDS
Interest will accrue on the outstanding principal balance of securitization
bonds of a series or class at the interest rate specified in or determined in
the manner specified in the related prospectus supplement. Interest will be
payable to the securitization bondholders of a series or class on each payment
date, commencing on the first payment date specified in the related prospectus
supplement. On any payment date with respect to any series, the issuer will make
principal payments on that series only until the outstanding principal balance
thereof has been reduced to the principal balance specified for that payment
date in the expected amortization schedule for that series, but only to the
extent funds are available for that series as described in this prospectus.
Accordingly, principal of the series or class of securitization bonds may be
paid later, but not sooner, than reflected in the expected amortization schedule
therefor, except in a case of any applicable optional redemption or
acceleration. See "Risk Factors -- Other Risks Associated With An Investment In
The Securitization Bonds" and "-- Servicing Risks" in this prospectus.
The indenture provides that failure to pay the entire outstanding principal
balance of the securitization bonds of any series or class by the applicable
expected final payment date will not result in an event of default under the
indenture until after the applicable final maturity date for the series or
class, as applicable.
On each payment date, the amount required to be paid as principal of the
securitization bonds of each series, from securitization charge revenue
collections allocable to that series, the capital subaccount and
overcollateralization subaccount for that series, and the reserve subaccount for
all series, will equal:
- the outstanding principal balance of any securitization bonds of each
class of that series due if that payment date is the final payment date
of that class; plus
- the outstanding principal balance of any securitization bonds of each
class of that series called for redemption; plus
- the outstanding principal balance of any securitization bonds of each
class of that series upon acceleration following those events of default
specified in the indenture; plus
- the principal scheduled to be paid on each class of that series of
securitization bonds on that payment date, plus any scheduled principal
not paid on prior payment dates.
The entire outstanding principal balance of a series of securitization
bonds will be due and payable if:
- an event of default as specified in the indenture occurs and is
continuing and
- the trustee or the holders of a majority in principal amount of the
securitization bonds of all series then outstanding, voting as a group,
have declared the securitization bonds to be immediately due and payable.
See "The Indenture -- What Constitutes an Event of Default on the Securitization
Bonds" and "Weighted Average Life and Yield Considerations for the
Securitization Bonds" in this prospectus.
43
FLOATING RATE SECURITIZATION BONDS
In connection with the issuance of any class of floating rate
securitization bonds, the issuer may enter into or arrange for one or more
interest rate swap or cap transactions. The related prospectus supplement will
include a description of:
- the material terms of any interest rate swap or cap transaction,
- the identity of any interest rate swap counterparty or cap provider,
- any payments due to be paid by or to the issuer or the trustee under any
interest rate swap or cap transaction,
- scheduled deposits in and withdrawals from any class subaccount of the
collection account with respect to any interest rate swap or cap
transaction,
- the formula for calculating the floating rate of interest of any floating
interest rate class, and
- the rights of securitization bondholders with respect to any interest
rate swap or cap transaction, including any right of termination of or
amendment to the interest rate swap or cap agreement.
Under the indenture, the issuer is obligated to perform all of its
obligations pursuant to any interest rate swap or cap agreement to which it is a
party.
REDEMPTION OF THE SECURITIZATION BONDS
If so specified in the related prospectus supplement, the issuer may redeem
at its option any series of securitization bonds on any payment date if the
outstanding principal balance of such series, after giving effect to payments to
be made on that payment date, is less than 5% of the initial principal balance
of that series of securitization bonds. If so specified in the related
prospectus supplement, additional optional redemption provisions may apply to a
series of securitization bonds. The redemption price will, in each case, equal
the outstanding principal amount of the securitization bonds being redeemed plus
accrued interest to the date of redemption. Notice of redemption of any series
of securitization bonds will be given by the trustee to each registered holder
of a securitization bond by first-class mail, postage prepaid, mailed not less
than 15 days nor more than 45 days prior to the date of redemption or in another
manner or at another time as may be specified in the related prospectus
supplement. For so long as any securitization bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, notice of redemption
also will be given by publication in a daily newspaper in Luxembourg, expected
to be the Luxemburger Wort, not less than 10 days prior to the date of
redemption.
All securitization bonds called for redemption will cease to bear interest
on or after the specified redemption date, if the redemption price is on deposit
with the trustee at that time, and will no longer be considered "outstanding"
under the indenture. The securitization bondholders will have no further rights
with respect thereto, except to receive payment from the trustee of the
redemption price thereof.
CREDIT ENHANCEMENT FOR THE SECURITIZATION BONDS
Credit enhancement with respect to the securitization bonds of each series
will be provided principally by adjustments to the securitization charge and
amounts on deposit in the reserve subaccount for all series and the
overcollateralization subaccount and capital subaccount for that series. In
addition, for any series of securitization bonds or one or more classes thereof,
additional credit enhancement, if any, may be provided. The amounts and types of
additional credit enhancement, if any, and the provider of any such additional
credit enhancement with respect to each series of securitization bonds or one or
more classes thereof will be described in the related prospectus supplement.
Additional credit enhancement may be in the form of:
- an additional reserve subaccount,
- subordination of one series for the benefit of another,
44
- additional overcollateralization,
- a financial guaranty insurance policy,
- a letter of credit,
- a credit or liquidity facility,
- a repurchase obligation,
- a third party payment or other support obligation,
- a cash deposit or other similar credit enhancement, or
- any combination of the foregoing, as may be set forth in the related
prospectus supplement.
If specified in the related prospectus supplement, credit enhancement for a
series of securitization bonds may cover one or more other series of
securitization bonds. See "Risk Factors -- Securitization Bondholders May
Experience Payment Delays or Losses as a Result of the Limited Sources of
Payment for the Securitization Bonds and Limited Credit Enhancement" in this
prospectus.
SECURITIZATION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM
Unless otherwise specified in the related prospectus supplement, all
classes of securitization bonds will initially be represented by one or more
bonds registered in the name of DTC, or another securities depository. The
securitization bonds will be available to investors only in the form of
book-entry securitization bonds. Securitization bondholders may also hold
securitization bonds through Clearstream Banking, Luxembourg, S.A., referred to
as Clearstream, or Euroclear in Europe, if they are participants in one of those
systems or indirectly through participants.
The Role of DTC, Clearstream and Euroclear. DTC will hold the global bond
or bonds representing the securitization bonds. Clearstream and Euroclear will
hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream's and Euroclear's names on the books of their
respective depositories. These depositories will in turn hold these positions in
customers' securities accounts in the depositories' names on the books of DTC.
The Function of DTC. DTC is a limited purpose trust company organized under
the laws of the State of New York, and is a member of the Federal Reserve
System. DTC is a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and to facilitate the clearance and settlement of securities transactions
between participants through electronic book-entries, thereby eliminating the
need for physical movement of securities. Direct participants of DTC include
securities brokers and dealers, banks, trust companies, clearing corporations
and some other organizations. DTC is owned by a number of its direct
participants and by the New York Stock Exchange, Inc., the Nasdaq-Amex Market
Group and the National Association of Securities Dealers, Inc. Access to DTC's
system is also available to indirect participants.
The Function of Clearstream. Clearstream holds securities for its customers
and facilitates the clearance and settlement of securities transactions between
Clearstream customers through electronic book-entry changes in accounts of
Clearstream customers, thereby eliminating the need for physical movement of
securities. Transactions may be settled by Clearstream in any of 36 currencies,
including United States dollars. Clearstream provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in over 30 countries
through established depository and custodial relationships. Clearstream is
registered as a bank in Luxembourg, subject to regulation by the Commission de
Surveillance du Secteur Financier, which supervises Luxembourg banks.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
45
approximately 2,000 customers located in over 80 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions that clear through or maintain a
custodial relationship with an account holder of Clearstream. Clearstream has
established an electronic bridge with Euroclear Bank S.A./N.V. as the Operator
of the Euroclear System, referred to as the Euroclear Operator or Euroclear, to
facilitate settlement of trades between Clearstream and Euroclear. In November
2000, Clearstream and Euroclear signed an agreement, effective in 2001, to
establish a new daytime transaction processing capability, to supplement the
existing bridge between Clearstream and Euroclear. The new daytime bridge will
initially operate manually, but it is expected to become automated by the end of
2001.
Clearstream and Euroclear customers are world-wide financial institutions,
including underwriters, securities brokers and dealers, banks, custodians and
other institutions professionally engaged in the securities markets. Indirect
access to Clearstream and Euroclear is available to other institutions that
clear through or maintain a custodial relationship with an account holder of
either system.
The Function of Euroclear. Euroclear was created in 1968 to hold securities
for Euroclear participants and to clear and settle transactions between
Euroclear participants through simultaneous electronic book-entry delivery
against payment. By performing these functions, Euroclear eliminated the need
for physical movement of securities and also eliminated any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 27 currencies, including United States dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
arrangements with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described below. The Euroclear
System is operated by the Euroclear Operator, under contract with the Euroclear
Clearance System S.C., a Belgian cooperative corporation, referred to as the
Cooperative. All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear participants. Euroclear participants
include central banks, commercial banks, securities brokers and dealers and
other professional financial intermediaries and may include any underwriters,
agents or dealers with respect to any class of securitization bonds offered in
this prospectus or in the related prospectus supplement. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear participant, either directly or
indirectly.
Terms and Conditions of Euroclear. Securities clearance accounts and cash
accounts with the Euroclear Operator are governed by the Terms and Conditions
Governing Use of Euroclear and the related Operating Procedures of Euroclear and
applicable Belgian law which are referred to in this prospectus as the Terms and
Conditions. The Terms and Conditions govern transfers of securities and cash
within Euroclear, withdrawals of securities and cash from Euroclear and receipts
of payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific securities to
specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear participants and has no record
of or relationship with persons holding through Euroclear participants.
The Rules for Transfers Among DTC, Clearstream or Euroclear
Participants. Transfers between participants will occur in accordance with DTC
rules. Transfers between Clearstream customers and Euroclear participants will
occur in accordance with their respective rules and operating procedures. Cross-
market transfers between persons holding directly or indirectly through DTC, on
the one hand, and directly or indirectly through Clearstream customers or
Euroclear participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its depository. Cross-market transactions will require delivery of instructions
to the relevant European international clearing system by the counterparty in
this system in accordance with its rules and procedures and within its
established deadlines, in European time. The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its depository to take action to effect final settlement
on its behalf by delivering or receiving securitization bonds in DTC, and making
or receiving payments in accordance with normal procedures for same-day funds
settlement
46
applicable to DTC. Clearstream customers and Euroclear participants may not
deliver instructions directly to the depositories.
DTC Will be the Holder of the Issuer's Securitization Bonds. Unless and
until definitive certificated securitization bonds are issued to beneficial
owners of the securitization bonds, which securitization bonds are referred to
as certificated securitization bonds, it is anticipated that the only "holder"
of securitization bonds of any series will be DTC. Securitization bondholders
will only be permitted to exercise their rights as securitization bondholders
indirectly through participants and DTC. All references herein to actions by
securitization bondholders thus refer to actions taken by DTC upon instructions
from its participants, unless certificated securitization bonds are issued. In
addition, all references herein to payments, notices, reports and statements to
securitization bondholders refer to payments, notices, reports and statements to
DTC, as the registered holder of the securitization bonds, for subsequent
payments to the beneficial owners of the securitization bonds in accordance with
DTC procedures, unless certificated securitization bonds are issued.
Book-Entry Transfers and Transmission of Payments. Except under the
circumstances described below, while any book-entry securitization bonds of a
series are outstanding, under DTC's rules, DTC is required to make book-entry
transfers among participants on whose behalf it acts with respect to the book-
entry securitization bonds. In addition, DTC is required to receive and transmit
payments of principal of, and interest on, the book-entry securitization bonds.
Participants with whom securitization bondholders have accounts with respect to
book-entry securitization bonds are similarly required to make book-entry
transfers and receive and transmit these payments on behalf of their respective
securitization bondholders. Accordingly, although securitization bondholders
will not possess certificated securitization bonds, DTC's rules provide a
mechanism by which securitization bondholders will receive payments and will be
able to transfer their interests.
DTC can only act on behalf of participants, who in turn act on behalf of
indirect participants and some banks. Thus, the ability of holders of beneficial
interests in the securitization bonds to pledge securitization bonds to persons
or entities that do not participate in the DTC system, or otherwise take actions
in respect of these securitization bonds, may be limited due to the lack of
certificated securitization bonds.
DTC has advised the trustee that it will take any action permitted to be
taken by a securitization bondholder under the indenture only at the direction
of one or more participants to whose account with DTC the securitization bonds
are credited.
How Securitization Bond Payments Will Be Credited by Clearstream and
Euroclear. Payments with respect to securitization bonds held through
Clearstream or Euroclear will be credited to the cash accounts of Clearstream
customers or Euroclear participants in accordance with the relevant systems'
rules and procedures, to the extent received by its depository. These payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "Material Income Tax Matters for the Securitization
Bonds" in this prospectus. Clearstream or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a securitization
bondholder under the indenture on behalf of a Clearstream customer or Euroclear
participant only in accordance with its relevant rules and procedures and
subject to its depository's ability to effect these actions on its behalf
through DTC.
DTC, Clearstream and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of securitization bonds among customers or
participants of DTC, Clearstream and Euroclear. However, they are under no
obligation to perform or continue to perform these procedures and these
procedures may be changed or discontinued at any time.
CERTIFICATED SECURITIZATION BONDS
The Circumstances That Will Result in the Issuance of Certificated
Securitization Bonds. Unless otherwise specified in the related prospectus
supplement, each class of securitization bonds will be issued
47
in fully registered, certificated form to beneficial owners of securitization
bonds or other intermediaries, rather than to DTC, only if:
- the issuer advises the trustee in writing that DTC is no longer willing
or able to discharge properly its responsibilities as depository with
respect to that class of securitization bonds and the issuer is unable to
locate a qualified successor;
- the issuer, at its option, elects to terminate the book-entry system
through DTC; or
- after the occurrence of an event of default under the indenture,
beneficial owners of securitization bonds representing at least a
majority of the outstanding principal balance of the securitization bonds
of all series advise the trustee through DTC in writing that the
continuation of a book-entry system through DTC, or a successor thereto,
is no longer in the securitization bondholders' best interest.
The Delivery of Certificated Securitization Bonds. Upon the occurrence of
any event described in the immediately preceding paragraph, DTC will be required
to notify the trustee and all affected beneficial owners of securitization bonds
through participants of the availability of certificated securitization bonds.
Upon surrender by DTC of the securitization bonds in the possession of DTC that
had represented the applicable securitization bonds and receipt of instructions
for re-registration, the trustee will authenticate and deliver certificated
securitization bonds to the beneficial owners. Any certificated securitization
bonds listed on the Luxembourg Stock Exchange will be made available to the
beneficial owners of such securitization bonds through the office of the
transfer agent in Luxembourg. Thereafter, the trustee will recognize the holders
of any of these certificated securitization bonds as the securitization
bondholders under the indenture.
The Payment Mechanism for Certificated Securitization Bonds. Payments of
principal of, and interest on, certificated securitization bonds will be made by
the trustee, as paying agent, in accordance with the procedures set forth in the
indenture. These payments will be made directly to holders of certificated
securitization bonds in whose names the certificated securitization bonds were
registered at the close of business on the related record date specified in each
prospectus supplement. These payments will be made by check mailed to the
address of the holder as it appears on the register maintained by the trustee.
The Transfer or Exchange of Certificated Securitization Bonds. Certificated
securitization bonds will be transferable and exchangeable at the offices of the
transfer agent and registrar, which will initially be the trustee. No service
charge will be imposed for any registration of transfer or exchange, but the
transfer agent and registrar may require payment of a sum sufficient to cover
any tax or other governmental charge imposed in connection therewith.
Final Payments on Securitization Bonds. The final payment on any
securitization bond, however, will be made only upon presentation and surrender
of the securitization bond at the office or agency specified in the notice of
final payment to securitization bondholders. The final payment of any
securitization bond listed on the Luxembourg Stock Exchange may also be made
upon presentation and surrender of the securitization bond at the office of the
paying agent in Luxembourg as specified in the notice of final distribution. A
notice of such final distribution will be published in a daily newspaper in
Luxembourg, which is expected to be the Luxemburger Wort, not later than the
fifth day of the month of such final distribution. Certificated securitization
bonds listed on the Luxembourg Stock Exchange will also be transferable and
exchangeable at the offices of the transfer agent in Luxembourg. With respect to
any transfer of these listed certificated securitization bonds, the new
certificated securitization bonds registered in the names specified by the
transferee and the original transferor will be available at the offices of the
transfer agent in Luxembourg.
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WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE SECURITIZATION BONDS
The rate of principal payments, the amount of each interest payment and the
actual final payment date for each series or class of securitization bonds will
be dependent on the rate and timing of receipt of securitization charge revenue
collections and the effectiveness of credit enhancement. Accelerated receipts of
securitization charge revenue collections will not, however, result in payment
of principal of the securitization bonds earlier than the related expected final
payment dates. This is because receipts in excess of the amounts necessary to
amortize the securitization bonds in accordance with the applicable expected
amortization schedule, to pay interest on the securitization bonds and to pay
the remainder of the periodic payment requirement will be allocated to the
reserve subaccount. However, delayed receipts of securitization charge revenue
collections may result in principal payments on the securitization bonds
occurring more slowly than as reflected in the expected amortization schedule or
later than the related expected final payment dates. Optional redemption of any
class or series of securitization bonds or acceleration of the final maturity
date after an event of default will result in payment of principal earlier than
the related expected final payment dates.
The Effect of Securitization Charge Revenue Collections on the Timing of
Securitization Bond Payments. The actual payments on each payment date for each
series or class of securitization bonds and the weighted average life thereof
will be affected primarily by the rate and the timing of receipt of
securitization charge revenue collections. Amounts available in the reserve
subaccount, the series overcollateralization subaccount and the series capital
subaccount may also affect the weighted average life of that series of
securitization bonds. The securitization charge will be calculated based on,
among other things, estimates of kWh deliveries of electricity to customers and
estimates of expenses, rates of collections and delinquencies and write-offs.
However, the aggregate amount of securitization charge revenue collections and
the rate of principal amortization of the securitization bonds will depend, in
part, on actual kWh deliveries to customers and rates of collections and
delinquencies and write-offs. There can be no assurance that the servicer will
forecast accurately actual electricity usage and the rate of collections or
implement adjustments to the securitization charge that will cause
securitization charge revenue collections to be received at the targeted rate.
A payment on a date that is later than the expected final payment date
might result in a longer weighted average life. In addition, if scheduled
payments on the securitization bonds are received later than the applicable
scheduled payment dates, this will result in a longer weighted average life of
the securitization bonds. See "Risk Factors -- Servicing Risks" and "The MPSC
Financing Order and the Securitization Charge -- The MPSC's Securitization
Charge Adjustment Process" in this prospectus.
THE SALE AGREEMENT
The following summary describes all material terms of the sale agreement
pursuant to which Consumers is selling and the issuer is purchasing the
securitization property. The sale agreement may be amended by the parties
thereto, with the consent of the trustee, if notice of the amendment is provided
by the issuer to each rating agency and the rating agency condition has been
satisfied. The form of the sale agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part.
CONSUMERS' SALE AND ASSIGNMENT OF SECURITIZATION PROPERTY
On the initial transfer date, pursuant to the sale agreement, the seller
will sell and assign to the issuer, without recourse, except as provided in the
sale agreement, the initial securitization property. The securitization property
includes the irrevocable right to receive through the securitization charge
amounts sufficient to recover qualified costs with respect to the related series
of securitization bonds. The proceeds received by the issuer from the sale of
the securitization bonds after payment of issuer's expenses will be applied to
the purchase of the securitization property. In addition, the seller may from
time to time offer to sell additional securitization property to the issuer,
subject to the satisfaction of the conditions specified in the sale agreement
and the indenture. Each subsequent sale will be financed through the issuance of
an
49
additional series of securitization bonds. If this offer is accepted by the
issuer, the subsequent sale will be effective on a subsequent transfer date.
In accordance with the Customer Choice Act, upon the issuance of the MPSC
financing order, the execution and delivery of the sale agreement and the
related bill of sale and the filing of a financing statement under the Uniform
Commercial Code, the transfer by the seller to the issuer of the initial
securitization property will be perfected under Michigan law as against all
third persons, including judicial and other lien creditors. In addition, upon
the execution of a subsequent bill of sale and the filing of a financing
statement under the Michigan Uniform Commercial Code, a transfer by the seller
to the issuer of subsequent securitization property will also be perfected under
Michigan law against all third persons, including judicial and other lien
creditors. The sale agreement provides that in the event that the transfer of
the securitization property is determined by a court not to be a true sale as
contemplated by the Customer Choice Act, then the transfer shall be treated as a
pledge of the securitization property and the seller shall be deemed to have
granted a security interest to the issuer in the securitization property, which
security interest will secure a payment obligation of the seller to the issuer
in an amount equal to the purchase price for the securitization property, plus
interest.
The initial securitization property is the securitization property, as
identified in the related bill of sale, sold to the issuer on the initial
transfer date pursuant to the sale agreement in connection with the issuance of
the initial series of securitization bonds. The subsequent securitization
property is the securitization property, as identified in the related bill of
sale, sold to the issuer on any subsequent transfer date pursuant to the sale
agreement in connection with the subsequent issuance of a series of
securitization bonds.
CONSUMERS' REPRESENTATIONS AND WARRANTIES
In the sale agreement, the seller will make representations and warranties
to the issuer as of the initial transfer date and any subsequent transfer date
to the effect, among other things, that:
1. all information provided by the seller to the issuer with respect to
the securitization property is correct in all material respects;
2. the transfers and assignments contemplated by the sale agreement
constitute sales of the initial securitization property or the
subsequent securitization property, as the case may be, from the
seller to the issuer, the seller will have no right, title or interest
in the securitization property and the securitization property would
not be part of the estate of the seller as debtor in the event of the
filing of a bankruptcy petition by or against the seller under any
bankruptcy law;
3. a. the seller is the sole owner of the securitization property being
sold to the issuer on the initial transfer date or subsequent
transfer date, as applicable,
b. the securitization property will be validly transferred and sold
to the issuer free and clear of all liens other than liens
created by the issuer pursuant to the indenture, and
c. all actions or filings (including filings under the either the
Michigan Uniform Commercial Code or the Delaware Uniform
Commercial Code) necessary in any jurisdiction to give the issuer
a valid first priority perfected ownership interest in the
transferred securitization property and to grant to the trustee a
first priority perfected security interest in the transferred
securitization property, free and clear of all liens of the
seller or anyone else claiming through the seller, have been
taken or made;
4. the MPSC financing order has been issued by the MPSC in accordance
with the Customer Choice Act, the MPSC financing order and the process
by which it was issued comply with all applicable laws, rules and
regulations; the MPSC financing order has become effective pursuant to
the Customer Choice Act and is and as of the date of issuance of any
securitization bonds will be in full force and effect and final and
non-appealable;
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5. as of the date of issuance of any series of securitization bonds, the
securitization bonds are entitled to the protections provided by the
Customer Choice Act and, in accordance with the Customer Choice Act,
the MPSC financing order and the securitization charge, subject to the
periodic adjustments to the securitization charge provided for in the
MPSC financing order, have become irrevocable;
6. a. under the Customer Choice Act, the State of Michigan may not
impair the value of the securitization property, reduce or alter
(except as allowed under the securitization charge adjustment
provisions), or impair the securitization charge to be imposed,
collected and remitted to the issuer, until the principal,
interest and premium, and any other charges incurred and
contracts to be performed in connection with the securitization
bonds have been paid and performed in full; and
b. under the contract clauses of the State of Michigan and United
States Constitutions, the State of Michigan, including the MPSC,
could not constitutionally take any action of a legislative
character, including, but not limited to, the repeal or amendment
of the Customer Choice Act or the MPSC financing order (including
repeal or amendment by voter initiative as defined in the
Michigan Constitution or by amendment of the Michigan
Constitution), that would substantially impair the value of the
securitization property or substantially reduce or alter, except
as allowed under the adjustment provisions described in Customer
Choice Act, or substantially impair the securitization charges to
be imposed, collected and remitted to the issuer, unless this
action is a reasonable exercise of the State of Michigan's
sovereign powers and of a character reasonable and appropriate to
the public purpose justifying this action and, under the takings
clauses of the State of Michigan and United States Constitutions,
the State of Michigan, including the MPSC, could not repeal or
amend the Customer Choice Act or the MPSC financing order
(including repeal or amendment by voter initiative as defined in
the Michigan Constitution, or by amendment of the Michigan
Constitution) or take any other action in contravention of its
pledge quoted above, without paying just compensation to the
securitization bondholders, as determined by a court of competent
jurisdiction, if this action would constitute a permanent
appropriation of a substantial property interest of the
securitization bondholders in the securitization property and
deprive the securitization bondholders of their reasonable
expectations arising from their investments in the securitization
bonds;
7. there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Customer Choice Act,
the MPSC financing order, the securitization property or the
securitization charge or any rights arising under any of them or to
enjoin the performance of any obligations under the MPSC financing
order;
8. the assumptions used in calculating the securitization charge in any
notice delivered by Consumers to the MPSC will be reasonable and made
in good faith;
9. a. securitization property constitutes a present property right;
b. securitization property includes, without limitation:
(1) the right under the Customer Choice Act to impose, collect and
receive securitization charges authorized in the MPSC financing
order in an amount necessary to provide the full recovery of all
qualified costs being securitized;
(2) the right under the Customer Choice Act and the MPSC financing
order to obtain periodic adjustments of securitization charges
pursuant to the Customer Choice Act; and
(3) all revenue, collections, payments, money and proceeds arising
out of the rights and interests described above;
51
c. the transferred securitization property is not subject to any lien
created by an existing indenture or any existing accounts
receivable arrangement; and
d. the MPSC financing order, together with the securitization charges
authorized therein, is irrevocable and the securitization charges
are not subject to reduction, impairment or adjustment by further
action of the MPSC, except pursuant to the periodic adjustment
provisions of the Customer Choice Act;
10. the seller is a corporation duly organized and in good standing under
the laws of the State of Michigan, with corporate power and authority
to own its properties and conduct its business as currently owned or
conducted;
11. the seller has the corporate power and authority to execute and deliver
the sale agreement and to carry out its terms; the seller has full
corporate power and authority to own the securitization property and
sell and assign the initial securitization property, in the case of the
initial transfer date, and the subsequent securitization property, in
the case of each subsequent transfer date, as applicable, to the
issuer; the seller has duly authorized this sale and assignment to the
issuer by all necessary corporate action; and the execution, delivery
and performance of the sale agreement have been duly authorized by the
seller by all necessary corporate action;
12. the sale agreement constitutes a legal, valid and binding obligation of
the seller, enforceable against the seller in accordance with its
terms, subject to customary exceptions relating to bankruptcy and
equitable principles;
13. the consummation of the transactions contemplated by the sale agreement
and the fulfillment of the terms thereof do not conflict with, result
in any breach of any of the terms and provisions of, or constitute
(with or without notice or lapse of time) a default under, the articles
of incorporation or by-laws of the seller, or any indenture, agreement
or other instrument to which the seller is a party or by which it is
bound; nor result in the creation or imposition of any lien upon any of
its properties pursuant to the terms of any applicable indenture,
agreement or other instrument, except as contemplated by the sale
agreement; nor violate any law or any order, rule or regulation
applicable to the seller of any court or of any federal or state
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the seller or the issuer or
their respective properties;
14. except for the filing of financing statements and continuation
statements under the Michigan Uniform Commercial Code or the Delaware
Uniform Commercial Code, no approval, authorization, consent, order or
other action of, or filing with, any court, federal or state regulatory
body, administrative agency or other governmental instrumentality is
required in connection with the execution and delivery by the seller of
the sale agreement, the performance by the seller of the transactions
contemplated by the sale agreement, the fulfillment by the seller of
the terms of the sale agreement or the creation or transfer of the
initial securitization property, except those which have previously
been obtained or made;
15. except as disclosed in writing by the seller to the issuer, there are
no proceedings or investigations pending or, to the seller's best
knowledge, threatened, before any court, federal or state regulatory
body, administrative agency or other governmental instrumentality
having jurisdiction over the seller, the issuer or their respective
properties:
a. asserting the invalidity of any of the sale agreement, any
intercreditor agreement, any bills of sale for securitization
property, the servicing agreement, the issuer's limited liability
company agreement and the certificate of formation, the
administration agreement, the indenture and the related securities
account control agreement and any interest rate swap agreement,
which are referred to together as the basic documents, the
securitization bonds, the Customer Choice Act or the MPSC financing
order;
52
b. seeking to prevent the issuance of securitization bonds or the
consummation of the transactions contemplated by the basic
documents or the securitization bonds;
c. seeking any determination or ruling that could be reasonably
expected to materially and adversely affect the performance by the
seller of its obligations under, or the validity or enforceability
of, the basic documents or the securitization bonds; or
d. challenging the seller's treatment of the securitization bonds as
debt of the seller for federal and state tax purposes;
16. upon giving effect to the sale of any securitization property under the
sale agreement, the seller:
a. is solvent and expects to remain solvent;
b. is adequately capitalized to conduct its business and affairs
considering its size and the nature of its business and intended
purposes;
c. is not engaged and does not expect to engage in a business for
which its remaining property represents an unreasonably small
capital;
d. reasonably believes that it will be able to pay its debts as they
become due; and
e. is able to pay its debts as they mature and does not intend to
incur, or believe that it will incur, indebtedness that it will
not be able to repay at its maturity; and
17. the seller is duly qualified to do business as a foreign corporation in
good standing, and has obtained all necessary licenses and approvals,
in all jurisdictions in which the ownership or lease of property or the
conduct of its business require any qualifications, licenses or
approvals, except where the failure to so qualify would not be
reasonably likely to have a material adverse effect on the seller's
business, operations, assets, revenues, properties or prospects, the
securitization property, the issuer or the securitization bonds.
The seller will make the above representations and warranties under
existing law as in effect as of the date of issuance of any series of
securitization bonds.
CONSUMERS' COVENANTS
In the sale agreement, the seller will covenant, among other things, that
so long as any of the securitization bonds are outstanding:
1. the seller will keep in full force and effect its existence as a
corporation and remain in good standing under the laws of the
jurisdiction of its organization, and will obtain and preserve its
qualification to do business in each jurisdiction in which such
qualification is or will be necessary to protect the validity and
enforceability of the sale agreement and each other instrument or
agreement to which the seller is a party necessary to the proper
administration of the sale agreement and the transactions contemplated
thereby;
2. except for the transactions contemplated in the sale agreement, the
seller will not sell, pledge, assign or transfer to any other person,
or grant, create, incur, assume or suffer to exist any lien on, any of
the securitization property, nor assert any lien against or with
respect to any securitization property, and will defend the right,
title and interest of the issuer and the trustee, in, to and under the
securitization property against all claims of third parties claiming
through or under the seller;
3. the seller will use proceeds from the sale of the securitization
property in accordance with the MPSC financing order and the Customer
Choice Act;
4. if the seller receives collections of the securitization charge, it
will pay the servicer any payments received in its capacity as seller
in respect of the securitization property no later than 2 business
days after receipt thereof;
53
5. the seller will notify the issuer and the trustee promptly after
becoming aware of any purported lien on any securitization property,
other than the conveyances under the sale agreement or the indenture;
6. the seller will comply with its organizational or governing documents
and all laws, treaties, rules, regulations and determinations of any
governmental instrumentality applicable to the seller, except to the
extent that any failure to comply would not materially adversely
affect:
(i) the interests of the issuer or the trustee in the securitization
property or under any of the basic documents; or
(ii) the seller's performance of its obligations under the sale
agreement or in its capacity as seller under any of the other basic
documents to which it is a party;
7. the seller will:
(i) treat the securitization bonds as debt for all purposes;
(ii) disclose in its financial statements that on a non-consolidated
basis it is not the owner of the securitization property and that the
assets of the issuer are not available to pay creditors of the seller or
any of its affiliates (other than the issuer);
(iii) disclose the effects of all transactions between the seller and
the issuer in accordance with generally accepted accounting principles; and
(iv) not own or purchase any securitization bonds;
8. the seller agrees that upon the sale of the transferred securitization
property to the issuer:
(i) the issuer will have all of the rights originally held by the
seller with respect to the transferred securitization property to the
fullest extent permitted by law, including the right to collect any amounts
payable by any customer, in respect of the transferred securitization
property; and
(ii) any payment of the securitization charge by any customer to the
issuer will discharge that customer's obligations to pay the securitization
charge by the amount paid;
9. so long as any of the securitization bonds are outstanding, the seller
will not make any statement or reference in respect of the
securitization property that is inconsistent with the ownership
thereof by the issuer, except for tax and financial reporting
purposes, nor take any action in respect of the securitization
property except as contemplated by the basic documents;
10. the seller will deliver to the issuer and the trustee written notice in
a certificate, signed by authorized officers of the seller, of the
occurrence of any event which currently requires or which would require
the seller to make an indemnification payment pursuant to the sale
agreement as soon as the seller obtains knowledge of the occurrence of
this event;
11. the seller will execute and file such filings, and take all such
actions as may be required by law fully to preserve, maintain, and
protect the interests of the issuer and the trustee in the
securitization property, including all filings required under the
Michigan Uniform Commercial Code and the Delaware Uniform Commercial
Code relating to the transfer of the ownership of the securitization
property by the seller to the issuer and the pledge of the
securitization property by the issuer to the trustee;
12. the seller will deliver to the issuer and the trustee file-stamped
copies of, or filing receipts for, any document filed as provided
above, as soon as available after the filing of that document;
13. the seller will take any legal or administrative action which may be
reasonably necessary to:
(i) protect the issuer and the securitization bondholders from claims,
state actions or other actions or proceedings of third parties which, if
successfully pursued, would result in a breach of any of its
representations or warranties which are listed in the sale agreement; or
54
(ii) block or overturn any attempts to cause a repeal of, modification
of or supplement to the Customer Choice Act, the MPSC financing order or
the rights of securitization bondholders by legislative enactment or
constitutional amendment that would be adverse to the issuer, the trustee
or the securitization bondholders; and
14. so long as any of the securitization bonds are outstanding, the seller,
and each of the seller's subsidiaries, will pay all material taxes,
assessments and governmental charges imposed upon it, before any
penalty accrues on these taxes, assessments and governmental charges,
if the failure to pay these taxes, assessments and governmental charges
would, after any applicable grace periods or other similar
requirements, result in a lien on the transferred securitization
property; provided that the seller or one of its affiliates need not
pay any tax if it is contesting this tax in good faith by appropriate
proceedings promptly instituted and diligently conducted and if it has
established appropriate reserves which conform with generally accepted
accounting principles.
CONSUMERS' OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE AND TO TAKE LEGAL
ACTION
Under the sale agreement, the seller is obligated to indemnify the issuer
and the trustee, for itself and on behalf of the securitization bondholders, and
related parties specified therein, against:
1. any and all franchise fees and taxes, other than any taxes imposed on
securitization bondholders solely as a result of their ownership of
securitization bonds, that may at any time be imposed on or asserted
against any of those persons under existing law as of the date of
issuance of the securitization bonds as a result of the sale and
assignment of the securitization property by the seller to the issuer,
the acquisition or holding of securitization property by the issuer or
the issuance and sale by the issuer of securitization bonds, including
any sales, gross receipts, general corporation, personal property,
privilege, franchise or license taxes, but excluding any taxes imposed
as a result of a failure of that person to properly withhold or remit
taxes imposed with respect to payments on any securitization bond; and
2. (a) any and all amounts of principal of and interest on the
securitization bonds not paid when due or when scheduled to be
paid in accordance with their terms and the amount of any deposits
to the issuer required to have been made in accordance with the
terms of the basic documents which are not made when so required,
as a result of the seller's breach of its representations,
warranties or covenants contained in the sale agreement; and
(b) any and all liabilities, obligations, claims, actions, suits or
payments of any kind whatsoever that may be imposed on or asserted
against any such person, other than any liabilities, obligations
or claims for or payments of principal of or interest on the
securitization bonds, together with any reasonable costs and
expenses incurred by that person, as a result of the seller's
breach of any of its representations, warranties or covenants
contained in the sale agreement.
These indemnification obligations will rank equally in right to payment
with other general unsecured obligations of the seller. The sale agreement
provides that the indemnities described above will survive the termination of
the sale agreement and include reasonable fees and expenses of investigation and
litigation, including reasonable attorneys' fees and expenses. The above
representations and warranties are made under existing law as in effect as of
the date of issuance of any series of securitization bonds. The seller will not
indemnify any party for any changes of law after the issuance of any series of
securitization bonds.
Consumers' Limited Obligation to Undertake Legal Action. The seller and the
servicer are required to institute legal or administrative actions as may be
reasonably necessary to protect the rights of the holders of the securitization
property. The cost of any action reasonably allocated by the servicer or the
seller to the serviced securitization property would be payable from amounts on
deposit in the collection account as an operating expense payable to the
servicer and, in the case of the seller, as reimbursed by the servicer to the
seller. Except for the foregoing and subject to the seller's further covenant to
fully preserve, maintain
55
and protect the interests of the issuer in the securitization property, the
seller will not be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its obligations under the sale agreement
and that in its opinion may involve it in any expense or liability.
SUCCESSORS TO CONSUMERS
The sale agreement provides that any person who executes an agreement of
assumption to perform every obligation of the seller under the sale agreement
will be the successor to the seller if that person is a person:
1. into which the seller may be merged or consolidated and which succeeds
to all or the major part of the electric distribution business of the
seller;
2. which results from the division of the seller into two or more persons
and which succeeds to all or the major part of the electric
distribution business of the seller;
3. which may result from any merger or consolidation to which the seller
shall be a party and which succeeds to all or the major part of the
electric distribution business of the seller;
4. which may succeed to the properties and assets of the seller
substantially as a whole and which succeeds to all or the major part
of the electric distribution business of the seller; or
5. which may otherwise succeed to all or the major part of the electric
distribution business of the seller.
The seller is not, however, permitted to enter into any of the transactions
contemplated by paragraphs 1. through 5. above, unless:
1. immediately after giving effect to that transaction, no representation
or warranty made in the sale agreement will have been breached and no
servicer default and no event that, after notice or lapse of time, or
both, would become a servicer default, will have occurred and be
continuing;
2. the seller will have delivered to the issuer and the trustee an
officer's certificate and an opinion of counsel each stating that the
consolidation, merger or succession and the agreement of assumption
comply with the sale agreement and that all conditions precedent, if
any, provided for in the sale agreement relating to that transaction
have been complied with;
3. the seller will have delivered to the issuer and the trustee an
opinion of counsel either:
a. stating that, in the opinion of counsel, all filings to be made
by the seller, including filings under the Michigan Uniform
Commercial Code and the Delaware Uniform Commercial Code filings,
that are necessary fully to preserve and protect the respective
interests of the issuer and the trustee in the transferred
securitization property have been executed and filed, and
reciting the details of those filings; or
b. stating that, in the opinion of counsel, no such action is
necessary to preserve and protect those interests;
4. the rating agencies will have received prior written notice of that
transaction (although there is no requirement of any rating agency
confirmation); and
5. the seller will have delivered to the issuer and the trustee an
opinion of independent tax counsel, as selected by the issuer and the
trustee, which opinion is in form and substance reasonably
satisfactory to the issuer and the trustee and which may be based on a
ruling from the IRS, to the effect that, for federal income tax
purposes, that consolidation or merger will not result in a material
adverse federal income tax consequence to the seller, the issuer, the
trustee or the then existing securitization bondholders.
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THE SERVICING AGREEMENT
The following summary describes all material terms of the servicing
agreement pursuant to which the servicer is undertaking to service
securitization property. The form of the servicing agreement has been filed as
an exhibit to the registration statement.
The servicing agreement may be amended by the parties thereto with the
consent of the trustee under the indenture, if the rating agency condition has
been satisfied.
CONSUMERS' SERVICING PROCEDURES
General. The servicer, as agent for the issuer, will manage, service,
administer and effect collections in respect of the securitization charge. The
servicer's duties will include:
1. obtaining meter reads, calculating and billing the securitization
charge and collecting the securitization charge revenues from
customers;
2. responding to inquiries by customers, alternative electric suppliers,
if any, the MPSC, or any federal, local or other state governmental
authority with respect to the securitization charge;
3. delivering bills or arranging for delivery of bills, accounting for
securitization charge revenue collections, investigating and resolving
delinquencies, processing and depositing collections, making periodic
remittances and furnishing periodic reports to the issuer, the trustee,
holders of securitization bonds, the SEC and the rating agencies
subject, in the case of processing and depositing collections, making
periodic remittances and furnishing periodic reports, to the provisions
of the intercreditor agreement;
4. selling, as agent for the issuer, defaulted or written-off accounts in
accordance with the servicer's usual and customary practices for
accounts of its own electric retail customers; and
5. taking action in connection with adjustments to the securitization
charge as described below.
The servicer is required to promptly notify the issuer, the trustee and the
rating agencies in writing of any laws or MPSC regulations promulgated after the
execution of the servicing agreement that have a material adverse effect on the
servicer's ability to perform its duties under the servicing agreement.
SECURITIZATION CHARGE REVENUE REMITTANCES
In the servicing agreement, the servicer agrees to remit securitization
charge revenue collections to the trustee on each business day. However, if:
1. Consumers or any successor to Consumers' electric distribution business
remains the servicer;
2. no servicer default has occurred and is continuing; and
3. any additional conditions or limitations imposed by the rating agencies
are complied with;
then the servicer will be permitted to remit securitization charge revenue
collections to the trustee on a monthly basis.
The servicer will remit to the trustee an amount equal to the amount of
securitization charge revenue collections based on the ratio of the preceding
month's total securitization charges billed by rate class to the total charges
billed by rate class multiplied by the total collections by rate class for
electric only and combination of electric and gas accounts during the current
billing month. This amount will be used for each daily remittance date or added
for each monthly remittance date, as applicable. Daily remittance dates and
monthly remittance dates are referred to collectively in this prospectus as
remittance dates.
A business day is any day other than a Saturday or Sunday or a day on which
banking institutions in Jackson, Michigan or New York, New York or, with respect
to payments to be made on any securitization bonds listed on the Luxembourg
Stock Exchange, in Luxembourg, are required or authorized by law or executive
order to close.
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THE MPSC'S SECURITIZATION CHARGE ADJUSTMENT PROCESS
Among other things, the servicing agreement requires Consumers or any
successor servicer to request periodic securitization charge adjustments from
the MPSC. The request for an adjustment must be submitted at least 45 days
before the adjustment may take place. The adjustment will take effect at the
beginning of the complete monthly billing cycle of Consumers following the date
of MPSC approval. Adjustments will be made annually followed by quarterly
beginning approximately one year before the expected final payment date of the
last maturing class of securitization bonds. Under the MPSC financing order the
servicer is permitted to make non-routine adjustments to the adjustment formula,
as discussed below. Adjustments to the securitization charge are based on actual
securitization charge revenue collections and updated assumptions by the
servicer as to projected future deliveries of electricity to customers, expected
delinquencies and write-offs, future payments and costs and expenses relating to
securitization property and the securitization bonds, any deficiency in the
capital subaccount or the overcollateralization subaccount and any amounts on
deposit in the reserve subaccount. Consumers will calculate the proposed
adjustments in accordance with the calculations specified in "The MPSC Financing
Order and the Securitization Charge -- The MPSC's Securitization Charge
Adjustment Process."
The servicer may also file for a non-routine adjustment to the
securitization charge in order to remedy a significant and recurring variance
between actual and expected securitization charge revenue collections and to
assure timely payment of the periodic payment requirement. Any non-routine
adjustment filing is subject to the MPSC hearing and approval requirements for
contested cases.
CONSUMERS' SECURITIZATION CHARGE REVENUE COLLECTIONS
The servicer is required to remit all securitization charge revenue
collections from whatever source to the trustee for deposit pursuant to the
indenture on each remittance date. Until securitization charge revenue
collections are remitted to the collection account, the servicer will not
segregate them from its general funds. Remittances of securitization charge
revenue collections will not include interest thereon prior to the remittance
date or late fees from customers, which the servicer may retain. See "Risk
Factors -- The Risks Associated With Potential Bankruptcy Proceedings" in this
prospectus.
CONSUMERS' COMPENSATION FOR ITS ROLE AS SERVICER AND ITS RELEASE OF OTHER
PARTIES
The issuer agrees to pay the servicer a monthly servicing fee, in the
amount specified in the related prospectus supplement. In the servicing
agreement, the servicer releases the issuer and the trustee from any and all
claims whatsoever relating to securitization property or the servicer's
servicing activities with respect thereto.
CONSUMERS' DUTIES AS SERVICER
In the servicing agreement, the servicer has agreed, among other things,
that, in servicing securitization property:
1. except where the failure to comply with any of the following would not
materially and adversely affect the issuer's or the trustee's
respective interests in securitization property:
a. it will manage, service, administer and make collections in
respect of securitization property with reasonable care and in
material compliance with applicable law and regulations, using
the same degree of care and diligence that the servicer exercises
with respect to billing and collection activities that the
servicer conducts for itself and others;
b. it will follow customary standards, policies and procedures;
c. it will use all reasonable efforts, consistent with its customary
servicing procedures, to enforce and maintain the issuer's and
the trustee's rights in respect of securitization property; and
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d. it will calculate the securitization charge in compliance with
the Customer Choice Act, the MPSC financing order and any
applicable tariffs;
2. it will keep on file, in accordance with customary procedures, all
documents related to securitization property and will maintain
accurate and complete accounts pertaining to securitization property;
and
3. it will use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of
securitization property as they become due.
CONSUMERS' REPRESENTATIONS AND WARRANTIES AS SERVICER
In the servicing agreement, the servicer will make representations and
warranties as of the date the seller sells or otherwise transfers securitization
property to the issuer to the effect, among other things, that:
1. the servicer is a corporation duly organized and in good standing
under the laws of the state of its incorporation, with the corporate
power and authority to own its properties and conduct its business as
its properties are currently owned and its business is presently
conducted and to execute, deliver and carry out the terms of the
servicing agreement and has the power, authority and legal right to
service the securitization property;
2. the servicer is duly qualified to do business as a foreign corporation
in good standing in all jurisdictions in which it is required to do
so, except where the failure to so qualify would not be reasonably
likely to have a material adverse effect;
3. the servicer's execution, delivery and performance of the servicing
agreement have been authorized by all necessary corporate action;
4. the servicing agreement constitutes a binding obligation of the
servicer, enforceable against the servicer in accordance with its
terms, subject to customary exceptions relating to bankruptcy and
equitable principles;
5. the consummation of the transactions contemplated by the servicing
agreement does not conflict with the servicer's articles of
incorporation or by-laws or any material agreement by which the
servicer is bound, nor result in any lien upon the servicer's
properties or violate any law or regulation applicable to the servicer
or its properties;
6. except for filings with the MPSC for adjusting the securitization
charge and filings under the Michigan Uniform Commercial Code and the
Delaware Uniform Commercial Code, no governmental actions or filings
are required for the servicer to execute, deliver and perform its
obligations under the servicing agreement, except those which have
been taken or made; and
7. no proceeding is pending or, to the servicer's best knowledge,
threatened before any court or other governmental instrumentality
having jurisdiction over the servicer or its properties:
a. seeking to prevent the issuance of the securitization bonds or
the consummation of any of the transactions contemplated by the
servicing agreement or any of the other basic documents;
b. except as disclosed by the servicer to the issuer, seeking any
determination or ruling that might materially and adversely
affect the performance by the servicer of its obligations under,
or the enforceability against the servicer of, the servicing
agreement or any of the other basic documents; or
c. relating to the servicer and which might materially and adversely
affect the federal or state tax attributes of the securitization
bonds.
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CONSUMERS, AS SERVICER, WILL INDEMNIFY THE ISSUER AND OTHER RELATED ENTITIES
Under the servicing agreement, the servicer agrees to indemnify the issuer
and the trustee, for itself and on behalf of the securitization bondholders, and
related parties specified in the servicing agreement, against any liabilities of
any kind that may be incurred by or asserted against any of those persons as a
result of:
1. the servicer's willful misconduct, bad faith or gross negligence in the
performance of its duties or observance of its covenants under the
servicing agreement or the servicer's reckless disregard of its
obligations and duties under the servicing agreement;
2. the servicer's breach of any of its representations or warranties under
the servicing agreement; and
3. litigation and related expenses relating to its status and obligations
as servicer.
The servicer will not be liable for any losses resulting from the willful
misconduct, bad faith or gross negligence of any person indemnified by the
servicer under the servicing agreement or resulting from a breach of a
representation or warranty made by an indemnified person in any of the basic
documents that gives rise to the servicer's breach.
CONSUMERS, AS SERVICER, WILL PROVIDE STATEMENTS TO THE ISSUER AND TO THE TRUSTEE
For each payment date, the servicer will provide to the issuer, the trustee
and the rating agencies and, so long as any securitization bonds are listed on
the Luxembourg Stock Exchange, any listing agent in Luxembourg, a statement
indicating:
1. the amount to be paid to securitization bondholders of each series and
class in respect of principal;
2. the amount to be paid to securitization bondholders of each series and
class in respect of interest;
3. the projected securitization bond principal balance and the
securitization bond principal balance for each series and class as of
that payment date;
4. the amount on deposit in the overcollateralization subaccount for each
series and the scheduled overcollateralization level for each series,
as of that payment date;
5. the amount on deposit in the capital subaccount for each series as of
that payment date;
6. the amount, if any, on deposit in the reserve subaccount as of that
payment date;
7. the amount to be paid to any swap counterparty (on a gross and a net
basis, separately stated) under any interest rate swap agreement on or
before that payment date; and
8. the amount of any other transfers and payments to be made on that
payment date pursuant to the indenture.
On the basis of this information, the trustee will furnish to the
securitization bondholders on each payment date the report described under "The
Indenture -- Reports to Holders of the Securitization Bonds." For so long as any
securitization bonds are listed on the Luxembourg Stock Exchange and the rules
of that exchange so require, notice that such report is available with the
listing agent in Luxembourg also will be published in a daily newspaper in
Luxembourg, which is expected to be the Luxemburger Wort.
On or before each remittance date, but not more frequently than monthly,
the servicer will furnish to the issuer and the trustee a statement setting
forth the aggregate amount remitted or to be remitted by the servicer to the
trustee for deposit on the related remittance date pursuant to the indenture.
In addition, under the servicing agreement, the servicer is required to
give written notice to the issuer, the trustee and each rating agency, promptly
after having obtained knowledge thereof, but in no event less than five business
days thereafter, of any event which, with the giving of notice or the passage of
time or
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both, would become a servicer default under the servicing agreement. For so long
as any securitization bonds are listed on the Luxembourg Stock Exchange and the
rules of that exchange so require, this notice also will be given by publication
in a daily newspaper in Luxembourg, which is expected to be the Luxemburger
Wort.
CONSUMERS TO PROVIDE COMPLIANCE REPORTS CONCERNING THE SERVICING AGREEMENT
A firm of independent public accountants will furnish to the issuer, the
trustee and the rating agencies, on or before March 31 of each year, commencing
March 31, 2002, a statement as to compliance by the servicer during the
preceding calendar year, or the relevant portion thereof, with procedures
relating to the servicing of securitization property. This report, which is
referred to as the annual accountant's report, will state that the firm has
performed the procedures in connection with the servicer's compliance with the
servicing obligations of the servicing agreement, identifying the results of
these procedures and including any exceptions noted. The accounting firm
providing the report will be independent of the servicer within the meaning of
the Code of Professional Ethics of the American Institute of Certified Public
Accountants. The servicing agreement will also provide for delivery to the
issuer and the trustee, on or before March 31 of each year, commencing March 31,
2002, a certificate signed by an officer of the servicer. This certificate will
state that the servicer has fulfilled its obligations under the servicing
agreement for the preceding calendar year, or the relevant portion thereof, or,
if there has been a default in the fulfillment of any relevant obligation,
describing each default. The servicer will give the issuer, each rating agency
and the trustee notice of any servicer default under the servicing agreement,
which notice also will be given by publication in a daily newspaper in
Luxembourg, which is expected to be the Luxemburger Wort, so long as any
securitization bonds are listed on the Luxembourg Stock Exchange and the rules
of that exchange so require.
The servicer will deliver to the trustee the annual accountant's report,
compliance certificates and monthly reports regarding distributions and other
statements required by the servicing agreement. See "The Servicing Agreement" in
this prospectus.
MATTERS REGARDING CONSUMERS AS SERVICER
Under the Customer Choice Act, any successor to Consumers, whether pursuant
to any bankruptcy, reorganization, or other insolvency proceeding or pursuant to
any merger or acquisition, sale or transfer, by operation of law, as a result of
electric utility restructuring or otherwise, must perform and satisfy all
obligations of Consumers under that Act to the same extent as Consumers,
including, but not limited to, collecting and paying to the issuer the revenues
with respect to the securitization property.
Pursuant to the servicing agreement, Consumers may assign its obligations
under the servicing agreement to a successor provided the rating agency
condition and other conditions specified in the MPSC financing order and the
intercreditor agreement have been satisfied.
Under the servicing agreement, any person which succeeds to the major part
of the electric distribution business of the servicer, and which assumes the
obligations of the servicer, will be the successor of the servicer under the
servicing agreement; provided that, among other items:
1. immediately after giving effect to the transaction referred to in this
paragraph, no representation or warranty made by the servicer in the
servicing agreement will have been breached, and no servicer default,
and no event which, after notice or lapse of time, or both, would
become a servicer default, will have occurred and be continuing;
2. officers' certificates and opinions of counsel will have been delivered
to the issuer and the trustee;
3. prior written notice will have been received by the rating agencies
(although there is no requirement of any rating agency confirmation);
and
4. the applicable requirements of the intercreditor agreement have been
satisfied.
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Subject to the foregoing provisions, Consumers may not resign from the
obligations and duties imposed on it as servicer under the servicing agreement.
However, Consumers may resign as servicer upon a determination communicated to
the issuer, the trustee and each rating agency and evidenced by an opinion of
counsel to the effect that the performance of Consumers' duties under the
servicing agreement is no longer permissible under applicable law. This
resignation will not become effective until a successor servicer has assumed the
duties of Consumers under the servicing agreement.
Except as expressly provided in the servicing agreement, the servicer will
not be liable to the issuer for any action taken or not taken pursuant to the
servicing agreement or for errors in judgment. However, the servicer will be
liable to the extent this liability is imposed by reason of the servicer's
willful misconduct, bad faith or gross negligence or by reason of reckless
disregard of its duties under the servicing agreement.
EVENTS CONSTITUTING A DEFAULT BY CONSUMERS IN ITS ROLE AS SERVICER
Servicer defaults will include, among other things:
1. any failure by the servicer to deliver to the trustee, on behalf of
the issuer, any required remittance that continues unremedied for a
period of five business days after written notice of this failure is
received by the servicer from the issuer or the trustee;
2. any failure by the servicer to perform in any material respect any
other agreement in the servicing agreement, which failure materially
and adversely affects securitization property and which continues
unremedied for 60 days after notice of this failure has been given to
the servicer by the issuer or the trustee, or after discovery of this
failure by an officer of the servicer, as the case may be;
3. any representation or warranty made by the servicer in the servicing
agreement proves to have been incorrect when made, which has a
material adverse effect on any of the securitization bondholders or
the issuer and which continues unremedied for 60 days after notice of
this failure has been given to the servicer by the issuer or the
trustee or after discovery of this failure by an officer of the
servicer, as the case may be; or
4. an event of bankruptcy, the appointment of a receiver or liquidator,
any general assignment for the benefit of creditors, or similar
proceedings with respect to the servicer or an action by the servicer
indicating its insolvency as specified in the servicing agreement.
The trustee with the consent of the holders of the majority of the total
outstanding principal balance of the securitization bonds of all series may
waive any default by the servicer, except a default in making any required
remittances to the trustee.
THE TRUSTEE'S RIGHTS IF CONSUMERS DEFAULTS AS SERVICER
Under the terms of the servicing agreement, if the servicer fails to fully
perform its servicing obligations, the trustee may, with the consent of the
holders of a majority of the total outstanding principal amount of the
securitization bonds of all series, but subject to the provisions of the
intercreditor agreement, appoint an alternate party to replace the defaulting
servicer. The appointment of an alternate party to replace the defaulting
servicer will terminate all of the rights and obligations of the defaulting
servicer under the servicing agreement, except for the indemnification
provisions under the servicing agreement. The defaulting servicer will be
required to perform its obligations under the servicing agreement until it is
replaced by a successor servicer. A potential successor servicer must be
qualified to perform the duties of the servicer under the Customer Choice Act,
MPSC financing order and the servicing agreement in order to replace the
defaulting servicer. The successor servicer must also enter into an agreement
with the issuer that is substantially similar to the servicing agreement,
subject to the limitations set forth in the servicing agreement, in the
indenture and the terms of any intercreditor agreement. In addition the
appointment of a successor servicer must not result in the downgrade or
withdrawal of a rating on any outstanding securitization bond. See "Risk
Factors -- Servicing Risks -- If
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the Servicer Defaults or Becomes Bankrupt, It May Be Difficult to Find a
Successor Servicer and Payments May Be Suspended" in this prospectus. The
trustee may make arrangements for compensation to be paid to any successor
servicer. Any successor servicer may bring an action against a customer for
nonpayment of the securitization charge, but only a successor servicer that is
an electric utility may terminate service for failure to pay the securitization
charge.
Upon a servicer default based upon the commencement of a case by or against
the servicer under the Bankruptcy Code or similar laws, the trustee and the
issuer may be prevented from effecting a transfer of servicing. Upon a servicer
default because of a failure to make required remittances, the issuer or the
trustee will have the right to apply to the MPSC for sequestration and payment
of revenues arising from the securitization property. See "Risk Factors -- The
Risks Associated With Potential Bankruptcy Proceedings" in this prospectus.
THE OBLIGATIONS OF A SERVICER THAT SUCCEEDS CONSUMERS
In accordance with the MPSC financing order and the servicing agreement, if
a third party succeeds to the role of the servicer, the servicer will cooperate
with the issuer, the trustee and the successor servicer in terminating the
servicer's rights and responsibilities under the servicing agreement. This
procedure includes the transfer to the successor servicer of all related
documentation and cash. The servicer will be liable for all reasonable costs and
expenses incurred in transferring servicing responsibilities. A successor
servicer may not resign unless it is prohibited from serving by law. The
predecessor servicer is obligated, on an ongoing basis, to cooperate with the
successor servicer and provide whatever information is, and take whatever
actions are, reasonably necessary to assist the successor servicer in performing
its obligations under the servicing agreement, including, without limitation,
furnishing to the successor servicer all information necessary to calculate the
securitization charge collections.
INTERCREDITOR AGREEMENT
Consumers has an accounts receivable sale program under which it sells
substantially all of its accounts receivable on a revolving basis. Those
accounts receivable do not include the securitization charges. Under that
program, Consumers acts as a servicer to collect accounts receivable. Consumers
will enter into an intercreditor agreement with the issuer, the trustee and the
parties to the receivables program, referred to as the intercreditor agreement,
pursuant to which a replacement servicer must be the same entity under both the
servicing agreement in respect of the securitization bonds and the receivables
agreements and both the trustee and the parties to the receivables program must
agree upon a replacement servicer. In the event of a default by the servicer
under the servicing agreement or by the receivables servicer under the
receivables agreements, if the trustee and the parties to the receivables
program are unable to agree on a replacement servicer, neither the trustee nor
the parties would be able to replace Consumers or any successor as servicer.
However, under the intercreditor agreement either of them could upon such a
default require all collections by the servicer and receivables servicer to be
deposited directly into designated accounts with Canadian Imperial Bank of
Commerce or another financial institution selected by the trustee and the
parties to the receivables arrangements, subject to satisfaction of the rating
agency condition. The financial institution holding the designated account would
then be responsible for allocating in accordance with the intercreditor
agreement the collections in the accounts between securitization charges and
receivables collections.
THE INDENTURE
The following summary describes all material terms of the indenture
pursuant to which securitization bonds will be issued. The form of the
indenture, including the form of the supplemental indenture, has been filed as
an exhibit to the registration statement of which this prospectus forms a part.
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THE SECURITY FOR THE SECURITIZATION BONDS
To secure the payment of principal of and interest on, and any other
amounts owing in respect of, the securitization bonds pursuant to the indenture,
all amounts owing to the trustee and, if and to the extent provided in any
prospectus supplement, any amounts owing to any swap counterparty, the issuer
will grant to the trustee for the benefit of the securitization bondholders, the
trustee and, if and to the extent provided in any prospectus supplement, any
swap counterparty, a security interest in all of the issuer's right, title and
interest in, to and under the following collateral:
1. the securitization property sold by the seller to the issuer pursuant
to the sale agreement and all proceeds thereof;
2. the sale agreement;
3. all bills of sale delivered by the seller pursuant to the sale
agreement;
4. the servicing agreement;
5. the administration agreement;
6. any interest rate swap agreement;
7. the intercreditor agreement;
8. the collection account, each subaccount therein and all amounts on
deposit therein from time to time, with the exception of up to
$100,000 to be held in the capital reserve subaccount free of the lien
of the indenture to ensure that the issuer has sufficient assets to
pay its fees, costs and expenses as they come due;
9. any other property of whatever kind owned from time to time by the
issuer, including rights under any interest rate swap or cap
agreement, other than:
a. cash released to the swap counterparty from any class subaccount
in accordance with the indenture and any interest rate swap or
cap agreement;
b. cash or other property released to the issuer by the Trustee from
any capital subaccount in accordance with the indenture;
c. proceeds from the sale of the securitization bonds used to pay
(1) the costs of issuance of the securitization bonds, and any
up-front other qualified costs as permitted under the MPSC
financing order, and (2) the purchase price of the securitization
property pursuant to the sale agreement;
10. all present and future claims, demands, causes and choses in action in
respect of any or all of the foregoing; and
11. all payments on or under and all proceeds of every kind and nature
whatsoever in respect of any or all of the foregoing.
See "-- How Funds in the Collection Account Will Be Allocated" below.
SECURITIZATION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES
Securitization bonds may be issued under the indenture from time to time in
series, so long as the rating agency condition is satisfied, to finance the
purchase by the issuer of securitization property, which is referred to as a
financing issuance. The total principal balance of securitization bonds
outstanding at any time that may be authenticated and delivered under the
indenture may not exceed $468,592,000, plus the total principal balance of any
securitization bonds the proceeds of which are used to refinance outstanding
securitization bonds, any issuance of which is referred to as a refunding
issuance. Any series of securitization bonds may include one or more classes
which differ, among other things, as to interest rate and amortization of
principal. The terms of all securitization bonds of the same series will be
identical,
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unless a series includes more than one class, in which case the terms of all
securitization bonds of the same class will be identical. The particular terms
of the securitization bonds of any series and class will be set forth in the
supplemental indenture and described in the related prospectus supplement. The
terms of any additional series and any classes thereof will not be subject to
prior review by, or consent of, the securitization bondholders of any previously
issued series. See "Risk Factors -- Other Risks Associated With An Investment In
The Securitization Bonds," and "The Securitization Bonds" in this prospectus.
The principal source of repayment for all series of securitization bonds
will be the securitization charge collected by the servicer. The issuance of
additional series of securitization bonds is not expected to adversely affect
the sufficiency of securitization charge revenue collections for payments on any
particular series of securitization bonds. This is because the securitization
charge and adjustments thereof are generally based on the total amounts owed
with respect to the outstanding securitization bonds. Moreover, any additional
series of securitization bonds will be issued only if the new issuance will not
result in the reduction or withdrawal of any rating by a rating agency on any
outstanding securitization bonds.
Under the indenture, the trustee will authenticate and deliver an
additional series of securitization bonds only upon receipt by the trustee of,
among other things, a certificate of the issuer that no event of default has
occurred and is continuing, an opinion of counsel to the issuer to the effect
that the requirements under the indenture for the issuance, authentication and
delivery of an additional series of securitization bonds have been satisfied,
and evidence of satisfaction of the rating agency condition.
OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REQUIRED FOR EACH SERIES OR
CLASS
In addition, in connection with the issuance of each new series, the
trustee will have to receive a certificate or opinion of a firm of independent
certified public accountants of recognized national reputation. This certificate
will be based on the assumptions used in calculating the initial securitization
charge with respect to the transferred securitization property or, if
applicable, the most recent revised securitization charge with respect to the
transferred securitization property. The certificate will state to the effect
that, after giving effect to the issuance of the new series and the application
of the proceeds therefrom, the securitization charge will be sufficient:
1. to pay all fees, costs and other operating expenses of the issuer,
2. to pay interest of each series of securitization bonds when due,
3. to pay principal of each series of securitization bonds in accordance
with the expected amortization schedule for that series,
4. to fund the overcollateralization subaccount for each series to the
overcollateralization amount and scheduled overcollateralization level
for that series, and
5. to pay amounts due by the issuer under any interest rate swap or cap
arrangement,
as of each payment date taking into account any amounts on deposit in the
reserve subaccount.
THE COLLECTION ACCOUNT FOR THE SECURITIZATION BONDS
Under the indenture, the issuer will establish the collection account, with
the trustee or at another eligible institution as described below. Funds
received from the securitization charge revenue collections, any amounts paid by
any swap counterparty or cap provider under any interest rate swap or cap
agreement and any providers of credit enhancement will be deposited into the
collection account. The collection account will be divided into the following
subaccounts, which need not be separate bank accounts:
1. the general subaccount,
2. one or more series and/or class subaccounts,
3. the overcollateralization subaccount for each series,
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4. the capital subaccount for each series (including the capital reserve
subaccount for the initial series, as described below under
"-- Capital Subaccount"),
5. if required by the indenture, one or more defeasance subaccounts, and
6. the reserve subaccount.
All amounts in the collection account not allocated to any other subaccount
will be allocated to the general subaccount. Unless the context indicates
otherwise, references to the collection account include all of the subaccounts
contained therein. All money deposited from time to time in the collection
account, all deposits therein pursuant to the indenture, and all investments
made in eligible investments will be held by the trustee in the collection
account as part of the collateral, with the exception of up to $100,000 held in
the capital reserve subaccount.
The following institutions are eligible institutions for the establishment
of the collection account:
1. the corporate trust department of the trustee, so long as any of the
securities of the trustee have an investment grade credit rating from
each rating agency; or
2. a depository institution organized under the laws of the United States
of America or any state or any domestic branch of a foreign bank,
which:
a. has either:
(1) a long-term unsecured debt rating of "AA-" by S&P and Fitch and
"Aa3" by Moody's; or
(2) a certificate of deposit rating of "A-1+" by S&P and "P-1" by
Moody's, or any other long-term, short-term or certificate of
deposit rating acceptable to the rating agencies; and
b. whose deposits are insured by the Federal Deposit Insurance
Corporation.
Appropriate Investments for Funds in the Collection Account. All funds in
the collection account shall be invested in any of the following eligible
investments:
1. direct obligations of, and obligations fully and unconditionally
guaranteed as to the timely payment by, the United States of America;
2. demand deposits, time deposits, certificates of deposit of depository
institutions or trust companies specified in the indenture;
3. commercial paper having, at the time of investment, a rating in the
highest rating category from each rating agency;
4. demand deposits, time deposits and certificates of deposit which are
fully insured by the Federal Deposit Insurance Corporation;
5. money market funds which have the highest rating from each rating
agency, including funds for which the trustee or any of its affiliates
is investment manager or advisor;
6. banker's acceptances issued by any depository institution or trust
company specified in the indenture;
7. repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States of America or
agencies or instrumentalities thereof, entered into with depository
institutions or trust companies, in each case, as specified in the
indenture;
8. repurchase obligations with respect to any security or whole loan, as
provided and with the ratings specified in the indenture; or
9. any other investment permitted by each rating agency and complying
with such further rating requirements as provided in the indenture.
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Eligible investments may not:
1. be sold, liquidated or otherwise disposed of at a loss, prior to the
maturity thereof; or
2. mature later than the day the eligible investment must be held in the
collection account in order for the trustee to make scheduled payments
or deposits into subaccounts as required under the indenture, if the
eligible investment is held by an affiliate of the trustee, or, if the
eligible investment is not held by an affiliate of the trustee, the
business day before that day.
In the case of a defeasance, the issuer will deposit U.S. Government
Obligations in the defeasance subaccount. U.S. Government Obligations are direct
obligations, or certificates representing an ownership interest in those
obligations, of the United States of America, including any agency or
instrumentality thereof, for the payment of which the full faith and credit of
the United States of America is pledged and which are not callable at the
issuer's option. No money held in the collection account may be invested, and no
investment held in the collection account may be sold, unless the security
interest in the collection account will continue to be perfected in the
investment or the proceeds of the sale.
Remittances to the Collection Account. On each remittance date, as
described under "The Servicing Agreement -- Consumers' Servicing Procedures"
above, the servicer will remit securitization charge revenue collections to the
trustee for deposit in the collection account. In addition, on each remittance
date the servicer will remit any indemnity amounts for deposit in the collection
account. An indemnity amount includes any amount paid by Consumers, as the
seller or the servicer, to the trustee, for the trustee itself or on behalf of
the securitization bondholders, in respect of indemnification obligations
pursuant to the basic documents. See "The Sale Agreement" and "The Servicing
Agreement" in this prospectus.
Collection Account. Securitization charge revenue collections and any
indemnity amounts will be deposited by the trustee into the collection account.
On each payment date, the trustee will allocate amounts in the collection
account to the general subaccount as described under "-- How Funds in the
Collection Account Will Be Allocated" below.
General Subaccount. Securitization charge revenue collections and any
indemnity amounts will be deposited into the general subaccount. On each payment
date, the trustee will allocate amounts in the general subaccount among the
other subaccounts as described under "-- How Funds in the Collection Account
Will Be Allocated" below.
Series Subaccount. Upon the issuance of each series of securitization
bonds, a series subaccount will be established for that series. On each payment
date (or before each payment date to the extent provided in any prospectus
supplement), the trustee will allocate from amounts on deposit in the general
subaccount to each series subaccount an amount sufficient to pay, to the extent
available:
1. interest payable on each class of that series on that payment date
(or, to the extent provided in any prospectus supplement, any amount
required to be allocated to a class subaccount with respect to any
floating rate class);
2. the principal of each class of that series payable as a result of an
acceleration following the occurrence of an event of default, the
principal of each class of that series if that payment date is the
final maturity date for that class, or the principal of each class of
that series if that payment date is the redemption date for that
series; and
3. principal scheduled to be paid on each class of that series on that
payment date according to the expected amortization schedule, plus any
scheduled principal not paid on prior payment dates, excluding amounts
provided for in clause 2. above.
Except as specified in any prospectus supplement with respect to any
deposits to any class subaccounts, on each payment date, allocations will be
made to each series subaccount, and the trustee will withdraw funds from the
series subaccount to make payments on the related series of securitization
bonds. See "-- How Funds in the Collection Account Will Be Allocated" below.
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Class Subaccount. If specified in the related prospectus supplement, upon
the issuance of a specified class of floating rate securitization bonds, a class
subaccount will be established with respect to that class. On or before each
payment date, a fixed amount specified in the related prospectus supplement will
be allocated to that class subaccount from the related series subaccount and
payments to and from any swap counterparty pursuant to the related interest rate
swap agreement will be made from or allocated to, as applicable, that class
subaccount as described in the related prospectus supplement. On or before each
payment date, amounts on deposit in the class subaccount will be applied to make
payments with respect to the related class, as specified in the related
prospectus supplement. Any balance remaining in any class subaccount on any
payment date after payments of interest have been made to securitization
bondholders of the related class will be transferred to the general subaccount
for allocation in connection with the next payment date.
Capital Subaccount. Upon the issuance of each series of securitization
bonds, Consumers will make a capital contribution to the issuer from Consumers'
general funds in an amount equal to the required capital amount. The issuer will
pay this amount to the trustee for deposit into the capital subaccount for that
series. The trustee will draw on amounts in the capital subaccount for that
series (other than the amounts in the capital reserve subaccount) to the extent
that, in allocating funds to that series in accordance with clauses (a) through
(d)(3) in "-- How Funds in the Collection Account Will Be Allocated" below,
amounts on deposit in the general subaccount, the series subaccount for such
series, the reserve subaccount and the overcollateralization subaccount for such
series are insufficient to make scheduled distributions and payments of fees and
expenses specified in those clauses. If any series of securitization bonds has
been retired as of any payment date, the amounts on deposit in the capital
subaccount for such series (other than the amounts in the capital reserve
subaccount if other series remain outstanding) will be released to the issuer,
free of the lien of the indenture. The issuer is not contractually obligated to
pay over to Consumers any amounts released to the issuer from the capital
subaccount upon retirement of any series of securitization bonds.
The trustee also will establish within the capital subaccount for the
initial series of securitization bonds an additional subaccount to be referred
to as the capital reserve subaccount. The trustee will fund the capital reserve
subaccount with $100,000 from the required capital amount for all series of
securitization bonds. If depleted, the capital reserve subaccount will not be
replenished. The capital reserve subaccount will not be subject to the lien of
the indenture or included in the collateral securing any securitization bonds.
Amounts in the capital reserve subaccount will be available to ensure that the
issuer has sufficient assets to pay any fees, costs and expenses of the issuer
as they come due free from the lien of the indenture.
Overcollateralization Subaccount. Securitization charge revenue collections
to the extent available as described in "-- How Funds in the Collection Account
Will Be Allocated" below will be allocated to the overcollateralization
subaccount for any series on each payment date. Each prospectus supplement will
specify the scheduled overcollateralization level for each payment date for the
related series of securitization bonds. The total overcollateralization amount
for any series will be funded over the life of the securitization bonds of each
series and in aggregate will equal the amount stated in the related prospectus
supplement for that series, which is referred to as the overcollateralization
amount.
On each payment date, the trustee will draw on the overcollateralization
subaccount for any series to the extent that, in allocating funds to such series
in accordance with clauses (a) through (d)(3) in "-- How Funds in the Collection
Account Will Be Allocated" below, amounts on deposit in the general subaccount,
the series subaccounts and the reserve subaccount are insufficient to make
scheduled distributions and payments of fees and expenses specified in those
clauses. If any series of securitization bonds has been retired as of any
payment date, the amounts on deposit in the overcollateralization subaccount for
such series will be released to the issuer, free of the lien of the indenture.
The issuer is not contractually obligated to pay over to Consumers any amounts
released to the issuer from the overcollateralization subaccount upon retirement
of any series of securitization bonds.
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Reserve Subaccount. Securitization charge revenue collections available on
any payment date that are not necessary to pay clauses (a) through (d)(7) in
"-- How Funds in the Collection Account Will Be Allocated" below will be
allocated to the reserve subaccount. Amounts in the reserve subaccount will be
invested in eligible investments. On each payment date, except to the extent set
forth in any prospectus supplement, the trustee will draw on the reserve
subaccount, if any, to the extent that, in allocating funds for all series in
accordance with clauses (a) through (d)(3), as well as clauses (d)(5) and (d)(6)
in "How Funds in the Collection Account Will Be Allocated" below, amounts on
deposit in the general subaccount and the series subaccounts are insufficient to
make scheduled distributions and payments of fees and expenses specified in
those clauses.
Defeasance Subaccount. In the event funds are remitted to the trustee in
connection with the exercise of the legal defeasance option or the covenant
defeasance option, the trustee will establish a defeasance subaccount for each
series. If this occurs, funds set aside for future payment of the securitization
bonds will be deposited into the defeasance subaccount. All amounts in a
defeasance subaccount will be applied by the trustee to the payment to the
holders of the affected securitization bonds until the securitization bonds have
been paid in full. These amounts will include all sums due for principal and
interest. These amounts will be applied in accordance with the provisions of the
securitization bonds and the indenture. See "-- The Issuer's Legal Defeasance
and Covenant Defeasance Options" below.
HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED
Amounts remitted from the servicer to the trustee, and all investment
earnings on the subaccounts in the collection account, will be deposited into
the general subaccount of the collection account. The trustee will allocate all
amounts in the general subaccount in the following priority, on the payment
date, or on any other date specified in any prospectus supplement with respect
to any class subaccount:
(a) The trustee fee will be paid to the trustee monthly, together with any
legal fees and other expenses and any indemnity amounts (up to a
maximum of $10,000,000 in the aggregate for the then current and all
prior payment dates and for all series, provided that the payment of
such amounts does not result in an event of default, unless the issuer
has received confirmation from each of the applicable rating agencies
that a further amount will not result in a reduction or a withdrawal of
the then current rating of the outstanding securitization bonds).
(b) The servicing fee will be paid to the servicer monthly, together with
any unpaid servicing fees for all series.
(c) On a monthly basis:
(1) the administration fee payable under the administration agreement
will be paid to Consumers as the administrator of the issuer, and
fees payable to the independent managers of the issuer will be paid
to the independent managers; and
(2) so long as no event of default has occurred and is continuing or
would be caused by this payment, any operating expenses of the
issuer, other than those specified in clauses (a), (b) and (c)(1)
above, will be paid to the persons entitled thereto, provided that
the amount paid on any payment date pursuant to this clause may not
exceed $100,000 in the aggregate for all series.
(d) On each payment date specified in the related prospectus supplement, or
before each payment date to the extent otherwise specified in any
prospectus supplement with respect to any class subaccount:
(1) an amount equal to interest payable on each class of each series of
securitization bonds for the payment date will be allocated pro rata
to the corresponding series subaccount, which, in the case of
interest on any floating rate class of any series of securitization
bonds as specified in the prospectus supplement for that series,
will be an amount equal to the applicable gross
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fixed amount of interest for that class specified in that prospectus
supplement and which will be allocated pro rata to the corresponding
class subaccount;
(2) an amount equal to (a) principal of each class of any series of
securitization bonds payable as a result of acceleration triggered
by an event of default, (b) principal of each class of any series of
securitization bonds payable on the final maturity date for that
class or series, or (c) principal of each class of any series of
securitization bonds payable on a redemption date, will be allocated
pro rata to the corresponding series subaccount;
(3) an amount equal to the principal then scheduled to be paid on each
class of each series of securitization bonds on that payment date
according to the expected amortization schedule, plus scheduled
principal not paid on any prior payment date, excluding amounts
provided for pursuant to clause (d)(2) above, will be allocated pro
rata to the corresponding series subaccount;
(4) all remaining unpaid operating expenses, including any indemnity
amounts (excluding those paid pursuant to (a) above) and any
termination or similar non-recurring payments under any interest
rate swap agreement, will be paid to the persons entitled thereto;
(5) any amount necessary to replenish each series capital subaccount
will be allocated to those subaccounts, pro rata, based on the
outstanding principal balance of each series, up to the required
capital amount for each series;
(6) an amount will be allocated to each series overcollateralization
subaccount to cause the amount in the overcollateralization
subaccount for each series to equal the scheduled
overcollateralization level for each series as of that payment date,
pro rata, based on the outstanding principal balance of each series;
(7) so long as no event of default has occurred and is continuing, an
amount equal to investment earnings since the preceding payment date
(or in the case of the first payment date, since the series issuance
date) on amounts in each series capital subaccount will be released
to the issuer;
(8) the balance, if any, will be allocated to the reserve subaccount;
and
(9) following repayment of all outstanding series of securitization
bonds, the balance, if any, will be released to the issuer free from
the lien of the indenture.
Amounts credited to any class subaccount will be paid from that subaccount
as specified in the related prospectus supplement. Overdue and unpaid amounts
due to a swap counterparty will be paid from that class subaccount on the same
priority as any overdue and unpaid interest due to the holders of the related
class of floating rate securitization bonds.
Interest means, for any payment date for any series or class of
securitization bonds, the sum, without duplication, of:
1. an amount equal to the amount of interest accrued at the applicable
interest rates from the prior payment date with respect to that series
or class;
2. any unpaid interest plus any interest accrued on this unpaid interest;
3. if the securitization bonds have been declared due and payable, all
accrued and unpaid interest thereon; and
4. with respect to a series or class to be redeemed prior to the next
payment date, the amount of interest that will be payable as interest
on the series or class on that redemption date.
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Principal means, with respect to any payment date and any series or class
of securitization bonds:
1. the amount of principal scheduled to be paid on that payment date;
2. the amount of principal due on the final maturity date of any series
or class if that payment date is the final maturity date;
3. the amount of principal due as a result of the occurrence and
continuance of an event of default and acceleration of the
securitization bonds;
4. the amount of principal due as a result of a redemption of
securitization bonds on that payment date pursuant to the indenture;
and
5. any overdue payments of principal.
If on any payment date funds in the general subaccount are insufficient to
make the allocations contemplated by clauses (a) through (d)(6) above for any
series, the trustee will draw from amounts on deposit in the following
subaccounts in the following order up to the amount of the shortfall for such
series:
1. from the reserve subaccount pro rata among series based on the total
amounts payable with respect to each series for the allocations
contemplated by clauses (a) through (d)(3) as well as clauses (d)(5)
and (d)(6) above,
2. from the overcollateralization subaccount for such series, for the
allocations contemplated by clauses (a) through (d)(3) above, and
3. from the capital subaccount for such series, for the allocations
contemplated by clauses (a) through (d)(3) above.
For the purpose of allocations among series prior to an acceleration, pro
rata has the following meaning, unless otherwise provided in the prospectus
supplement. With respect to a payment of interest on any payment date, pro rata
is the aggregate amount of interest payable on each series for that payment date
divided by the aggregate amount of interest payable on all series for that
payment date. With respect to a payment of principal on any payment date, pro
rata is the aggregate outstanding principal amount scheduled to be paid or
payable on that payment date for that series divided by the aggregate
outstanding principal amount scheduled to be paid or payable on that payment
date for all series.
For the purpose of allocations among classes within a series prior to an
acceleration, pro rata has the following meaning, unless otherwise provided in
the prospectus supplement. With respect to a payment of interest, pro rata means
the proportion that the aggregate amount of interest payable on each class,
including, for any floating rate class, the gross fixed amount for that class,
bears to the aggregate amount of interest payable on all classes within that
series, in each case, immediately before that payment date. With respect to a
payment of principal, pro rata means the proportion that the aggregate
outstanding principal amount of that class scheduled to be paid on that payment
date bears to the aggregate outstanding principal amount of all classes of that
series scheduled to be paid on that payment date.
Upon an acceleration of the maturity of the securitization bonds, the
aggregate amount of principal of and interest accrued on each securitization
bond will be payable without priority of interest over principal or principal
over interest and without regard to series or class, in the proportion that this
aggregate amount of principal of and accrued interest on that bond bears to the
aggregate amount of principal of and accrued interest on all securitization
bonds.
If the maturity of the securitization bonds is accelerated and the
collateral held under the indenture is liquidated in accordance with the
indenture and if any interest rate swap agreement so requires, the proceeds of
such liquidation allocated to the related class of floating rate securitization
bonds, will be deposited in the related class subaccount and allocated between
and paid to the holders of the related floating rate class of securitization
bonds, on the one hand, and the related swap counterparty, on the other hand,
pro rata based on the aggregate amount of principal and interest due and payable
on that class of
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securitization bonds and the aggregate amount payable to the related swap
counterparty in accordance with that interest swap agreement.
THE ISSUER AND THE TRUSTEE MAY MODIFY THE INDENTURE; THE ISSUER MUST ENFORCE THE
SALE AGREEMENT, THE SERVICING AGREEMENT AND ANY INTEREST RATE SWAP OR CAP
AGREEMENT
Modifications of the Indenture that Do Not Require Consent of
Securitization Bondholders. Without the consent of any of the holders of the
outstanding securitization bonds or the counterparty to any cap or swap
transaction, but with prior notice to the rating agencies, the issuer and the
trustee may execute a supplemental indenture for any of the following purposes:
1. to correct or amplify the description of the collateral, or better to
confirm to the trustee the collateral, or to subject to the lien of
the indenture additional property;
2. to evidence the succession, in compliance with the indenture, of
another person to the issuer, and the assumption by the successor of
the covenants of the issuer in the indenture and in the securitization
bonds;
3. to add to the covenants of the issuer, for the benefit of the holders
of the securitization bonds, or to surrender any right or power
conferred upon the issuer in the indenture;
4. to assign or pledge any property to or with the trustee;
5. to cure any ambiguity, to correct or supplement any inconsistent
provision of the indenture or any supplemental indenture or to make
any other provisions with respect to matters arising under the
indenture or in any supplemental indenture consistent with other
provisions of the basic documents or less ambiguous; but:
a. this action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
securitization bondholder or any cap or swap counterparty; and
b. the rating agency condition shall have been satisfied;
6. to provide for a successor trustee and to facilitate the
administration of the trusts under the indenture by more than one
trustee, pursuant to the indenture;
7. to modify the indenture to effect the qualification of the indenture
under the Trust Indenture Act or any similar federal statute hereafter
enacted and to add to the indenture any other provisions as may be
expressly required by the Trust Indenture Act;
8. to set forth the terms of any series that has not theretofore been
authorized by a supplemental indenture, provided that the rating
agency condition has been satisfied;
9. to provide for any interest rate swap or cap transactions with respect
to any floating rate series or class of securitization bonds or any
series or class with specified credit enhancement; but:
a. such action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
securitization bondholder or other swap counterparty; and
b. the rating agency condition shall have been satisfied; or
10. to authorize the appointment of any listing agent, transfer agent or
paying agent or additional registrar for any class of securitization
bonds required or advisable in connection with the listing of any class
of securitization bonds on the Luxembourg Stock Exchange or any other
stock exchange, and otherwise to amend the indenture to incorporate any
changes requested or required by any governmental authority, stock
exchange authority, listing agent, transfer agent or paying agent or
additional registrar for any class of securitization bonds in
connection with that listing.
Modifications That Require the Approval of the Securitization
Bondholders. The issuer and the trustee also may, upon satisfaction of the
rating agency condition and with the consent of the holders of not less than a
majority of the total outstanding principal balance of the securitization bonds
of each series
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or class to be affected thereby, execute a supplemental indenture to add any
provisions to, or change in any manner or eliminate any of the provisions of,
the indenture or modify in any manner the rights of the securitization
bondholders under the indenture. However, the supplemental indenture may not,
without the consent of the holder of each outstanding securitization bond of
each series or class affected thereby and each swap counterparty, if any,
affected thereby:
1. change the date of payment of any scheduled payment of principal of or
interest on any securitization bond, or reduce the principal balance
thereof, the interest rate thereof or the redemption price with
respect thereto, change the provisions of any interest rate swap
agreement relating to the amount, calculation or timing of payments,
change the provisions of the indenture and the applicable supplemental
indenture relating to the application of collections on, or the
proceeds of the sale of, the collateral to payment of principal of or
interest on the securitization bonds, or change the currency in which
any securitization bond or any interest thereon is payable;
2. impair the right to institute suit for the enforcement of the
provisions of the indenture regarding payment;
3. reduce the percentage of the total outstanding principal balance of
the securitization bonds, or of a series or class thereof, the consent
of the holders of which is required for any supplemental indenture, or
the consent of the holders of which is required for any waiver of
compliance with specified provisions of the indenture or of defaults
and their consequences;
4. reduce the percentage of the total outstanding principal balance of
the securitization bonds required to direct the trustee to direct the
issuer to liquidate or preserve the collateral pursuant to the
indenture;
5. reduce the percentage of the total outstanding principal balance of
the securitization bonds, or of a series or class thereof, the consent
of the holders of which is required for any amendments to the sale
agreement, the administration agreement, the servicing agreement or
any interest rate swap entered into in connection with any series or
class of securitization bonds;
6. modify the indenture to affect the amount of any payment of any
interest or principal payable on any securitization bond on any
payment date or change the redemption dates, expected amortization
schedules or series final maturity dates or class final maturity dates
of any securitization bonds or the method of calculation of interest
on any floating rate securitization bonds;
7. with respect to any series, decrease the required capital amount, the
overcollateralization amount or the scheduled overcollateralization
level with respect to any payment date;
8. modify the indenture regarding the voting of securitization bonds held
by the issuer, the seller, an affiliate of either of them or any
obligor on the securitization bonds;
9. decrease the percentage of the total outstanding principal balance of
the securitization bonds required to amend the sections of the
indenture which specify the applicable percentage of the total
outstanding principal balance of the securitization bonds necessary to
amend the indenture or any other basic document; or
10. permit the creation of any lien ranking prior to or on a parity with
the lien of the indenture with respect to any of the collateral for the
securitization bonds or, except as otherwise contemplated in the
indenture, terminate the lien of the indenture on any property or
deprive the holder of any securitization bond of the security of the
indenture.
Promptly following the execution of any amendment to the indenture or
supplemental indenture requiring the consent of any securitization bondholders,
the trustee will furnish written notice of the substance of such amendment to
each securitization bondholder. For so long as any of the securitization bonds
are listed on the Luxembourg Stock Exchange and the rules of that exchange so
require, this notice will be published in a daily newspaper in Luxembourg, which
is expected to be the Luxemburger Wort.
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Enforcement of the Sale Agreement, the Servicing Agreement and any Interest
Rate Swap Agreement. The indenture will provide that the issuer will take all
lawful actions to enforce its rights under the sale agreement and the servicing
agreement and any interest rate swap agreement. The indenture will also provide
that the issuer will take all lawful actions to compel or secure the performance
and observance by the seller, the servicer and any swap or cap counterparty of
each of their respective obligations to the issuer under the sale agreement, the
servicing agreement and any interest rate swap agreement. So long as no event of
default occurs and is continuing, except as otherwise directed by the trustee
under the circumstances described in the indenture or any supplemental
indenture, as described in any prospectus supplement, the issuer may exercise
any and all rights, remedies, powers and privileges lawfully available to the
issuer under or in connection with the sale agreement, the servicing agreement
and any interest rate swap agreement. However, if the issuer, Consumers or the
servicer propose to amend, modify, waive, supplement, terminate or surrender, or
agree to any amendment, modification, waiver, supplement, termination or
surrender of, the process for adjusting the securitization charge, the issuer
must notify the trustee and the trustee must notify securitization bondholders
of this proposal. In addition, the trustee may consent to this proposal only
with the consent of the holders of a majority of the total outstanding principal
balance of the securitization bonds of each series or class materially and
adversely affected thereby and only if the rating agency condition is satisfied.
If an event of default occurs and is continuing, the trustee may, and at
the direction of (1) the holders of a majority of the total outstanding
principal balance of the securitization bonds of all series, with respect to the
sale agreement and the servicing agreement, and (2) the holders of that
percentage of the total outstanding principal balance of the securitization
bonds of the related class specified in the related prospectus supplement, with
respect to any interest rate swap or cap agreement, shall, exercise all rights,
remedies, powers, privileges and claims of the issuer against the seller, the
servicer or any swap counterparty under or in connection with the sale
agreement, the servicing agreement and any interest rate swap agreement,
respectively, including the right or power to take any action to compel or
secure performance or observance by the seller, the servicer or any swap
counterparty of each of its obligations to the issuer thereunder and to give any
consent, request, notice, direction, approval, extension or waiver under the
sale agreement, the servicing agreement and any interest rate swap agreement,
and any right of the issuer to take this action shall be suspended. In the event
of a foreclosure, there is likely to be a limited market, if any, for the
securitization property, and, therefore, foreclosure may not be a realistic or
practical remedy.
Modifications to the Sale Agreement, the Servicing Agreement, the
Intercreditor Agreement and any Interest Rate Swap or Cap Agreement. With the
consent of the trustee, the sale agreement, the intercreditor agreement and the
servicing agreement may be amended, so long as the rating agency condition is
satisfied, at any time and from time to time, without the consent of the
securitization bondholders or the counterparty to any cap or swap transaction.
However, this amendment may not adversely affect in any material respect the
interest of any securitization bondholder or the counterparty to any cap or swap
agreement without the consent of the holders of a majority of the total
outstanding principal balance of the securitization bonds of each series or
class, and each counterparty to any swap transaction, materially and adversely
affected thereby.
Also, an interest rate swap or cap agreement may be amended with the
consent of the trustee and the related swap counterparty, so long as the rating
agency condition is satisfied. However, this amendment may not adversely affect
in any material respect the interest of any other series or class of
securitization bondholders or the counterparty to any swap transaction without
the consent of the holders of a majority of the total outstanding principal
balance of the securitization bonds of each other series or classes and each
counterparty to any swap transaction materially and adversely affected thereby.
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Notification of the Rating Agencies, the Trustee and the Securitization
Bondholders of any Modification. If the issuer, Consumers or the servicer
proposes to:
1. amend, modify, waive, supplement, terminate or surrender, or agree to
any other amendment, modification, waiver, supplement, termination or
surrender of, the terms of the sale agreement, the servicing agreement,
the intercreditor agreement or any interest rate swap agreement; or
2. waive timely performance or observance by Consumers, the servicer or
any swap counterparty under the sale agreement, the servicing
agreement, the intercreditor agreement or any interest rate swap
agreement, respectively;
in each case in a way which would materially and adversely affect the interests
of securitization bondholders or the counterparty to any swap transaction, the
issuer must first notify the rating agencies of the proposed amendment,
modification, termination or surrender. Upon receiving notification regarding
whether the rating agency condition will be satisfied with respect to such
projected action, the issuer must notify the trustee and the trustee must notify
the securitization bondholders and any swap counterparty of the proposed action
and whether the rating agency condition has been satisfied with respect to the
proposed action. With respect to any proposed action related to the sale
agreement, the intercreditor agreement and the servicing agreement, the trustee
will consent to this proposed action only with the consent of the holders of a
majority of the total outstanding principal amount of the securitization bonds
of each series or class, and each counterparty to any swap transaction,
materially and adversely affected thereby, and only upon satisfaction of the
rating agency condition. With respect to any proposed action related to any
interest rate swap agreement, the trustee will consent to this proposed action
only with the consent of the holders of a majority of the outstanding amount of
the securitization bonds of the related class, and each counterparty under any
interest rate swap agreement, materially and adversely affected thereby, and
upon satisfaction of the rating agency condition. For so long as any of the
securitization bonds are listed on the Luxembourg Stock Exchange and the rules
of that exchange so require, notice of this proposed action will be published in
a daily newspaper in Luxembourg, which is expected to be the Luxemburger Wort,
promptly following its effectiveness.
WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE SECURITIZATION BONDS
An "event of default" is defined in the indenture as:
1. a default for five business days in the payment of any interest on any
securitization bond;
2. a default in the payment of the principal of any securitization bond of
any series on the final maturity date for that series or, if
applicable, any class on the final maturity date for that class;
3. a default in the payment of the redemption price for any securitization
bond on the redemption date therefor;
4. a default in the observance or performance of any covenant or agreement
of the issuer made in the indenture (other than those specifically
dealt with in clauses 1., 2. or 3. above), or any representation or
warranty of the issuer made in the indenture proving to have been
incorrect in any material respect as of the time when made, and the
continuation of that default for a period of 30 days after the earliest
of the date (a) notice is given to the issuer by the trustee, (b)
notice is given to the issuer and the trustee by the holders of at
least 25% of the total outstanding principal balance of the
securitization bonds of any series or class, specifying such default or
incorrect representation or warranty or (c) the issuer has knowledge of
the default;
5. specified events of bankruptcy, receivership or liquidation of the
issuer; and
6. violation by the State of Michigan of its pledge with respect to the
Customer Choice Act.
If an event of default occurs and is continuing, other than a default
described in clause 6. above, the trustee or holders of a majority in the total
outstanding principal balance of the securitization bonds of all series may
declare the entire principal balance of all series of the securitization bonds
to be immediately
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due and payable by notice in writing to the issuer (and to the trustee if given
by the securitization bondholders) and upon any such declaration the unpaid
principal amount of the securitization bonds of all series, together with
accrued and unpaid interest thereon through the date of acceleration, shall
become immediately due and payable. This declaration of acceleration may, under
the circumstances specified in the indenture, be rescinded by the holders of a
majority in outstanding principal balance of all series of the securitization
bonds.
Remedies Available to the Trustee Following an Event of Default. In
addition to acceleration of the securitization bonds, the trustee may exercise
one or more of the following remedies upon an event of default:
1. institute proceedings in its own name and as trustee of an express
trust for the collection of all amounts then payable on the
securitization bonds or under the indenture with respect to the
securitization bonds, whether by declaration or otherwise, enforce any
judgment obtained, and collect from the issuer and any other obligor
upon the securitization bonds moneys adjudged due;
2. institute proceedings from time to time for the complete or partial
foreclosure of the indenture with respect to the collateral;
3. exercise any remedies of a secured party under the either the Michigan
Uniform Commercial Code, the Delaware Uniform Commercial Code or the
Customer Choice Act or any other applicable law and take any other
appropriate action to protect and enforce the rights and remedies of
the trustee and the holders of the securitization bonds of that series;
4. sell the collateral or any portion thereof or rights or interest
therein, at one or more public or private sales called and conducted in
any manner permitted by law;
5. exercise all rights, remedies, powers, privileges and claims of the
issuer against Consumers, the administrator, the servicer or any swap
counterparty under or in connection with the sale agreement, the
administration agreement, the servicing agreement or any interest rate
swap agreement; and
6. institute or participate in proceedings reasonably necessary to compel
performance of or to enforce the pledge of the State of Michigan under
the Customer Choice Act and collect any monetary damages incurred by
the holders of the securitization bonds or the trustee.
The remedy described in clause 6. above is the only remedy that the trustee
may exercise upon an event of default caused solely by a violation by the State
of Michigan of its pledge with respect to the Customer Choice Act. See "Risk
Factors -- The Proceeds from Foreclosure on the Securitization Property May Be
Insufficient to Pay the Securitization Bonds".
When the Trustee Can Sell the Collateral. If the securitization bonds of
all series have been declared to be due and payable following an event of
default, the trustee may, in its discretion, either:
1. sell the collateral, or
2. elect to have the issuer maintain possession of the collateral and
continue to apply distributions on the collateral as if there had been
no declaration of acceleration.
The trustee is prohibited from selling the collateral following an event of
default other than a default in the payment of any principal, a default for five
business days or more in the payment of any interest on any securitization bond
of any series or a default in the payment of the redemption price for any
securitization bond on the redemption date therefor unless:
1. the holders of 100% of the total outstanding principal balance of all
series of securitization bonds consent to this sale;
2. the proceeds of this sale, together with available amounts in the
collection account, are sufficient to pay in full the principal of and
accrued interest on the outstanding securitization bonds; or
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3. the trustee determines that funds provided by the collateral would not
be sufficient on an ongoing basis to make all payments on the
securitization bonds of all series as these payments would have become
due if the securitization bonds had not been declared due and payable,
and the trustee obtains the consent of the holders of 66 2/3% of the
total outstanding principal balance of the securitization bonds of all
series.
Right of Securitization Bondholders to Direct Proceedings. Subject to the
provisions for indemnification and the limitations contained in the indenture,
and except as may be described in any prospectus supplement regarding any
floating rate class of securitization bonds, the holders of a majority of the
total outstanding principal balance of the securitization bonds of all series
(or, if less than all series or classes are affected, the affected series or
class or classes) will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the trustee or exercising
any trust or power conferred on the trustee; provided that, among other things:
1. this direction shall not conflict with any rule of law or with the
indenture or any intercreditor agreement;
2. subject to the provisions specified in the indenture, any direction to
the trustee to sell or liquidate the collateral shall be by the holders
of 100% of the total outstanding principal balance of all series of
securitization bonds specified in the preceding paragraph; and
3. the trustee may take any other action deemed proper by the trustee that
is not inconsistent with this direction.
In case an event of default occurs and is continuing, the trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the direction of any of the holders of securitization bonds of any series if
it reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with this
request. The trustee does not need to take any action pursuant to the direction
of the securitization bondholders if it determines that this action might
materially adversely affect the rights of any securitization bondholder not
consenting to this action. Each holder of securitization bonds also has the
unconditional right to institute suit for the enforcement of payment of interest
and principal due on the securitization bonds of that holder.
Waiver of Default. Except as may be described in any prospectus supplement
regarding any floating rate class of securitization bonds, the holders of a
majority in total outstanding principal balance of the securitization bonds of
all series may, in those cases specified in the indenture, waive any default
with respect thereto. However, these holders may not waive a default in the
payment of principal of or interest on any of the securitization bonds or a
default in respect of a covenant or provision of the indenture that cannot be
modified without the waiver or consent by the holders of 100% of the outstanding
securitization bonds of all affected series and classes.
No securitization bondholder will have the right to institute any
proceeding, judicial or otherwise, or to avail itself of any remedies provided
in the Customer Choice Act, or to avail itself of the right to foreclose on the
securitization property or otherwise enforce the lien in the securitization
property, with respect to the indenture, unless:
1. the holder previously has given to the trustee written notice of a
continuing event of default;
2. the holders of not less than 25% of the total outstanding principal
balance of the securitization bonds of all series have made written
request of the trustee to institute the proceeding in its own name as
trustee;
3. the holder or holders have offered the trustee security or indemnity
reasonably satisfactory to the trustee against the liabilities to be
incurred in complying with the request;
4. the trustee for 60 days after its receipt of the notice, request and
offer of indemnity has failed to institute the proceeding; and
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5. no direction inconsistent with this written request has been given to
the trustee during the 60-day period referred to above by the holders
of a majority of the total outstanding principal balance of the
securitization bonds of all series.
COVENANTS OF THE ISSUER
The issuer will keep in effect its existence as a limited liability company
under Delaware law, provided that the issuer may consolidate with or merge into
another entity or sell substantially all of its assets to another entity and
dissolve if:
1. the entity formed by or surviving the consolidation or merger or to
whom substantially all of its assets are sold is organized and existing
under the laws of the United States or any state thereof and expressly
assumes by a supplemental indenture the due and punctual payment of the
principal of and interest on all securitization bonds and the
performance of the issuer's obligations under the indenture;
2. the entity expressly assumes all obligations and succeeds to all rights
of the issuer under the sale agreement, the administration agreement,
the servicing agreement, the intercreditor agreement and any interest
rate swap agreement pursuant to an assignment and assumption agreement
executed and delivered to the trustee;
3. no default or event of default under the indenture will have occurred
and be continuing immediately after giving effect to the merger,
consolidation or sale;
4. the rating agency condition will have been satisfied;
5. the issuer has received an opinion of counsel to the effect that this
consolidation, merger or sale would have no material adverse tax
consequence to the issuer or any securitization bondholder, the
consolidation or merger or sale complies with the indenture and all
conditions precedent provided in the indenture relating to the
consolidation, merger or sale and will result in the trustee
maintaining a continuing valid first priority security interest in the
collateral;
6. none of the securitization property, the MPSC financing order or the
seller's, the servicer's or the issuer's rights under the Customer
Choice Act or the MPSC financing order are impaired thereby; and
7. any action that is necessary to maintain the lien and security interest
created by the indenture will have been taken.
Additional Covenants of the Issuer. The issuer will take any action
necessary or advisable to, among other things, maintain and preserve the lien
and security interest, and priority thereof, of the indenture. The issuer will
not permit the validity of the indenture to be impaired, the lien to be amended,
subordinated or terminated or discharged, or any person to be released from any
covenants or obligations except as expressly permitted by the indenture. The
issuer will also not permit any lien, charge, pledge, equity or other
encumbrance, other than the lien and security interest created by the indenture,
to be created on or extend to or otherwise arise upon or burden the collateral
or any part thereof, any interest therein or the proceeds thereof. Finally, the
issuer will not permit the lien of the indenture not to constitute a continuing
valid first priority security interest in the collateral.
The issuer may not, among other things:
1. except as expressly permitted by the indenture, the sale agreement, the
servicing agreement, any interest rate swap agreement, any
intercreditor agreement or any other basic document, sell, transfer,
exchange or dispose of any of the collateral unless directed to do so
by the trustee in accordance with the indenture; or
2. claim any credit on, or make any deduction from, the principal or
interest payable in respect of, the securitization bonds, other than
amounts properly withheld under the United States Internal Revenue
Code, referred to as the Code, or pursuant to any interest rate swap
agreement, or assert
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any claim against any present or former securitization bondholder
because of the payment of taxes levied or assessed upon the issuer or
any part of the collateral.
The issuer may not engage in any business other than purchasing and owning
the securitization property, issuing securitization bonds from time to time,
pledging its interest in the collateral to the trustee to secure the
securitization bonds, entering into the basic documents and performing its
obligations thereunder and performing activities that are necessary, suitable or
convenient to accomplish these purposes or are incidental thereto and other than
as contemplated by the basic documents.
The Issuer May Not Engage in Any Other Financial Transactions. The issuer
may not issue, incur, assume or guarantee any indebtedness except for the
securitization bonds and any other obligations or indebtedness except as
contemplated by the basic documents. Also, the issuer may not guarantee or
otherwise become contingently liable in connection with the obligations, stocks
or dividends of, or own, purchase, repurchase or acquire, or agree contingently
to acquire, any stock, obligations, assets or securities of, or any other
interest in, or make any capital contribution to, any other person, other than
the eligible investments. The issuer may not make any loan or advance or credit
to any person. The issuer will not make any expenditure for capital assets or
lease any capital asset other than securitization property purchased from the
seller pursuant to, and in accordance with, the sale agreement. The issuer may
not make any payments, distributions or dividends to any member of the issuer in
respect of its membership interest in the issuer, other than any amount released
to the issuer by the trustee in accordance with the indenture and except as
otherwise provided in the indenture.
ACCESS TO THE LIST OF HOLDERS OF THE SECURITIZATION BONDS
Any securitization bondholder may, by written request to the trustee,
obtain access to the list of all securitization bondholders maintained by the
trustee for the purpose of communicating with other securitization bondholders
with respect to their rights under the indenture or the securitization bonds.
The trustee may elect not to afford a requesting securitization bondholder
access to the list of securitization bondholders if it agrees to mail the
desired communication or proxy, on behalf and at the expense of the requesting
securitization bondholder, to all securitization bondholders.
THE ISSUER MUST FILE AN ANNUAL COMPLIANCE STATEMENT
The issuer will be required to file annually with the trustee a written
statement as to the fulfillment of its obligations under the indenture. In
addition, the issuer will furnish to the trustee an opinion of counsel
concerning filings made by the issuer on an annual basis and before the
effectiveness of any amendment to the sale agreement, the servicing agreement or
the indenture.
THE TRUSTEE MUST PROVIDE A REPORT TO ALL SECURITIZATION BONDHOLDERS
If required by the Trust Indenture Act, the trustee will be required to
mail each year to all securitization bondholders a brief report. This report
must state, among other items:
1. the trustee's eligibility and qualification to continue as the trustee
under the indenture,
2. any amounts advanced by it under the indenture,
3. the amount, interest rate and maturity date of specific indebtedness
owing by the issuer to the trustee in the trustee's individual
capacity,
4. the property and funds physically held by the trustee,
5. any additional issue of a series of securitization bonds not
previously reported, and
6. any action taken by it that materially affects the securitization
bonds of any series and that has not been previously reported.
For so long as any of the securitization bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, the trustee will
publish or will cause to be published following the
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preparation of this annual report in a daily newspaper in Luxembourg, expected
to be the Luxemburger Wort, a notice to the effect that the information set
forth in the preceding paragraph will be available for review at the main office
of the listing agent in Luxembourg.
WHAT WILL TRIGGER SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged with respect to the securitization bonds
of any series upon the delivery to the trustee of funds sufficient for the
payment in full of all amounts owed under the securitization bonds of that
series. In addition, the issuer must deliver to the trustee the officer's
certificate and opinion of counsel specified in the indenture. The deposited
funds will be segregated and held apart solely for paying the securitization
bonds, and the securitization bonds will not be entitled to any amounts on
deposit in the collection account other than amounts on deposit in the
defeasance subaccount for the securitization bonds.
THE ISSUER'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS
Subject to the conditions described below, the issuer may, at any time,
terminate:
1. all of its obligations under the indenture with respect to the
securitization bonds of any series; or
2. its obligations to comply with some of the covenants in the indenture,
including all of the covenants described under "-- Covenants of the
Issuer" above.
The legal defeasance option is the right of the issuer to terminate at any
time its obligations under the indenture with respect to the securitization
bonds of any series. The covenant defeasance option is the right of the issuer
at any time to terminate its obligations to comply with the covenants in the
indenture. The issuer may exercise the legal defeasance option with respect to
any series of securitization bonds notwithstanding its prior exercise of the
covenant defeasance option with respect to that series. If the issuer exercises
the legal defeasance option with respect to any series, that series will be
entitled to payment only from the funds or other obligations set aside under the
indenture for payment thereof in accordance with the expected amortization
schedule and on the expected final payment date or redemption date therefor as
described below. That series will not be subject to payment through redemption
or acceleration prior to the expected final payment date or redemption date, as
applicable. If the issuer exercises the covenant defeasance option with respect
to any series, the final payment of the securitization bonds of that series may
not be accelerated because of an event of default relating to a default in the
observance or performance of any covenant or agreement of the issuer made in the
indenture.
The issuer may exercise the legal defeasance option or the covenant
defeasance option with respect to any series of securitization bonds only if:
1. the issuer irrevocably deposits or causes to be deposited in trust
with the trustee cash or U.S. Government Obligations for the payment
of principal of and interest on that series to the expected final
payment date or redemption date therefor, as applicable, the deposit
to be made in the defeasance subaccount for that series;
2. the issuer delivers to the trustee a certificate from a nationally
recognized firm of independent accountants expressing its opinion that
the payments of principal of and interest on the U.S. Government
Obligations when due and without reinvestment plus any cash deposited
in the defeasance subaccount will provide cash at times and in
sufficient amounts to pay in respect of the securitization bonds of
that series:
a. principal in accordance with the expected amortization schedule
therefor, and/or if that series is to be redeemed, the redemption
price on the redemption date therefor, and
b. interest when due;
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3. in the case of the legal defeasance option, 95 days pass after the
deposit is made and during the 95-day period no default by the issuer
relating to events of bankruptcy, insolvency, receivership or
liquidation of the issuer occurs during the period;
4. no default by the seller or the issuer has occurred and is continuing
on the day of this deposit and after giving effect thereto;
5. in the case of the legal defeasance option, the issuer delivers to the
trustee an opinion of nationally recognized tax counsel stating that:
a. the issuer has received from, or there has been published by, the
IRS a ruling; or
b. since the date of execution of the indenture, there has been a
change in the applicable federal income tax law; and
in either case confirming that the holders of the securitization bonds
of that series will not recognize income, gain or loss for federal
income tax purposes as a result of the exercise of the legal
defeasance option and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have
been the case if the legal defeasance had not occurred;
6. in the case of the covenant defeasance option, the issuer delivers to
the trustee an opinion of nationally recognized tax counsel to the
effect that the holders of the securitization bonds of that series
will not recognize income, gain or loss for federal income tax
purposes as a result of the exercise of the covenant defeasance option
and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if the
covenant defeasance had not occurred; and
7. the issuer delivers to the trustee a certificate of an authorized
officer of the issuer and an opinion of counsel, each stating that all
conditions precedent to the satisfaction and discharge of the
securitization bonds of that series have been complied with as
required by the indenture.
THE TRUSTEE
The Bank of New York will be the initial trustee under the indenture. The
trustee may resign at any time upon 30 days notice by so notifying the issuer.
The holders of a majority in total outstanding principal balance of the
securitization bonds of all series may remove the trustee by so notifying the
trustee and may appoint a successor trustee. The indenture provides that the
issuer will remove the trustee if the trustee ceases to be eligible to continue
in this capacity under the indenture, the trustee becomes insolvent, a receiver
or other public officer takes charge of the trustee or its property or the
trustee becomes incapable of acting. If the trustee resigns or is removed or a
vacancy exists in the office of trustee for any reason, the issuer will be
obligated promptly to appoint a successor trustee eligible under the indenture.
No resignation or removal of the trustee will become effective until acceptance
of the appointment by a successor trustee. The trustee must at all times satisfy
the requirements of the Trust Indenture Act and the Investment Company Act of
1940. The Trustee must also have a combined capital and surplus of at least $50
million and a long-term debt rating of at least "BBB-" by S&P, at least "Baa3"
or better by Moody's and at least "BBB-" by Fitch. If the trustee consolidates
with, merges or converts into, or transfers all or substantially all of its
corporate trust business or assets to, another entity, the resulting, surviving
or transferee entity will without any further action be the successor trustee.
For so long as any of the securitization bonds are listed on the Luxembourg
Stock Exchange, and to the extent the rules of that exchange so require, the
issuer will have a listing agent, a paying agent and a transfer agent in
Luxembourg.
GOVERNING LAW
The indenture will be governed by the laws of the State of Michigan.
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HOW A BANKRUPTCY OF THE SELLER OR
SERVICER MAY AFFECT YOUR INVESTMENT
SALE OR FINANCING
Consumers will represent and warrant in the sale agreement that the
transfer of the securitization property in accordance with that agreement
constitutes a valid sale and assignment by Consumers to the issuer of the
securitization property. Consumers will also represent and warrant in the sale
agreement, and it is a condition of closing the sale of securitization property,
that it will take the appropriate actions under the Customer Choice Act and the
Michigan Uniform Commercial Code, including filing a financing statement, to
perfect this sale. The Customer Choice Act provides that a transfer of
securitization property by an electric utility to an assignee which the parties
have in the governing documentation expressly stated to be a sale or other
absolute transfer, in a transaction approved in a financing order, shall be
treated as a true sale and not as a secured transaction and that title, legal
and equitable, in the securitization property, has passed to the transferee. The
Customer Choice Act also provides that the characterization of a transfer as a
sale or other absolute transfer applies regardless of whether the purchaser has
any recourse against the seller, or any other term of the parties' agreement,
including the seller's retention of an equity interest in the securitization
property, the fact that the electric utility acts as a collector of
securitization charges relating to the securitization property, or the treatment
of the transfer as a financing for tax, financial reporting, or other purposes.
Consumers and the issuer will treat the transaction as a sale under applicable
law, although for financial accounting and federal and state tax purposes the
securitization bonds will be treated as a financing and not a sale. See "The
Customer Choice Act -- Consumers and Other Utilities May Securitize Qualified
Costs" in this prospectus.
In the event of a bankruptcy of Consumers, a party in interest in the
bankruptcy might take the position that the sale of the securitization property
to the issuer was a financing transaction and not a "sale or other absolute
transfer." The party in interest might argue that the treatment of the
transaction for financial accounting and tax purposes as a financing and not a
sale lends weight to the position that the transaction should be treated as a
financing and not a sale. As noted above, the Customer Choice Act specifically
provides for the treatment of the transaction as a sale as a matter of state law
and that treatment is not affected by treatment of the transfer as a financing
for federal or state tax purposes or financial accounting purposes. However, a
bankruptcy court has authority not to follow state law if it determines that the
state law is contrary to a paramount federal bankruptcy policy or interest. If a
court were to characterize the transaction as a financing rather than a sale,
the issuer would be treated as a secured creditor of Consumers in the bankruptcy
proceedings. Although, as noted below, the issuer would in that case have a
security interest in the securitization property, it would not likely be
entitled to access to the securitization charge revenue collections during the
bankruptcy. As a result, repayment on the bonds could be significantly delayed
and a plan of reorganization in the bankruptcy might permanently modify the
amount and timing of payments of securitization charge revenue collections to
the issuer and therefore the amount and timing of funds available to the issuer
to pay securitization bondholders.
In order to mitigate the impact of the possible recharacterization of a
sale of securitization property as a financing transaction, the sale agreement
provides that in the event that the sale and transfer of the securitization
property is determined by a court not to be a true sale as contemplated by the
Customer Choice Act, then the sale and transfer shall be treated as a pledge of
the securitization property and the seller shall be deemed to have granted a
security interest to the issuer in the securitization property, and to have
incurred an obligation secured by this security interest in an amount equal to
the purchase price for the securitization property, plus interest. The sale
agreement requires that financing statements under the Michigan Uniform
Commercial Code naming the issuer as debtor be filed in the appropriate offices
in Michigan. The Customer Choice Act further provides that any relevant filing
in respect of securitization bonds takes precedence over any other filings. As a
result of these filings, the issuer may take the position that it is a secured
creditor of Consumers, and as a result, that it is entitled to recover against
the security, which includes the securitization property. None of this, however,
mitigates the risk of payment delays and other adverse effects caused by a
seller bankruptcy. Further, if, for any reason, proper notices are not filed
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under the Customer Choice Act or the issuer fails to otherwise perfect its
interest in the securitization property, and the transfer is thereafter deemed
not to constitute a sale or other absolute transfer, the issuer would be an
unsecured creditor of Consumers. In that event, the issuer's sole source of
payment for the securitization bonds would be whatever it recovered on its
unsecured claim in the Consumers bankruptcy case, which could differ materially
from the amount and timing of securitization charge revenue collections that
were intended to fund payments on the securitization bonds.
CONSOLIDATION OF THE ISSUER AND CONSUMERS
If Consumers were to become a debtor in a bankruptcy case, a party in
interest in the bankruptcy may attempt to substantively consolidate the assets
and liabilities of the issuer and Consumers. Consumers and the issuer have taken
steps to attempt to minimize this risk, as discussed in "Risk Factors -- The
Risks Associated With Potential Bankruptcy Proceedings -- Consumers and the
Issuer Could Be Substantively Consolidated in Case of Consumers' Bankruptcy" in
this prospectus. However, no assurance can be given that if Consumers or an
affiliate of Consumers other than the issuer were to become a debtor in a
bankruptcy case, a court would not order that the assets and liabilities of the
issuer be consolidated with those of Consumers or its affiliate. If the assets
and liabilities were ordered consolidated, the claims of the securitization
bondholders against the issuer would be treated as secured claims against the
consolidated entities. Payment of those claims would be subject to substantial
delay and to adjustment in timing and amount under a plan of reorganization in
the bankruptcy case.
CLAIMS IN BANKRUPTCY; CHALLENGE TO INDEMNITY CLAIMS
If Consumers were to become a debtor in a bankruptcy case, claims including
indemnity claims by the issuer against Consumers under the sale agreement and
the other documents executed in connection therewith would be unsecured claims
and would be subject to being discharged in the bankruptcy case. In addition, a
party in interest in the bankruptcy may request that the bankruptcy court
estimate any contingent claims of the issuer against Consumers. That party may
then take the position that these claims should be estimated at zero or at a low
amount because the contingency giving rise to these claims is unlikely to occur.
If Consumers were to become a debtor in a bankruptcy case and the indemnity
provisions of the sale agreement were triggered, a party in interest in the
bankruptcy might challenge the enforceability of the indemnity provisions. If a
court were to hold that the indemnity provisions were unenforceable, the issuer
would be left with a claim for actual damages against Consumers based on breach
of contract principles. The actual amount of these damages would be subject to
estimation and/or calculation by the court.
No assurances can be given as to the result of any of the above-described
actions or claims. Furthermore, no assurance can be given as to what percentage
of their claims, if any, unsecured creditors would receive in any bankruptcy
proceeding involving Consumers.
STATUS OF SECURITIZATION PROPERTY AS CURRENT PROPERTY
Consumers has represented in the sale agreement, and the Customer Choice
Act provides, that the securitization property constitutes an existing property
right and that it shall continue to exist until the securitization bonds and
related expenses have been paid in full. Nevertheless, no assurance can be given
that in the event of a bankruptcy of Consumers a party in interest in the
bankruptcy would not attempt to take the position that the securitization
property comes into existence only as customers use electricity. If a court were
to adopt this position, no assurance can be given that a security interest in
favor of the securitization bondholders would attach to the securitization
charge, in respect of electricity consumed after the commencement of the
bankruptcy case. If it were determined that the securitization property had not
been sold to the issuer, and the security interest in favor of the
securitization bondholders did not attach to the securitization charge in
respect of electricity consumed after the commencement of the bankruptcy case,
then the issuer would be an unsecured creditor of Consumers. If so, there would
be delays and reductions in payments on the securitization bonds. Whether or not
a court determined that the securitization property had been sold to the issuer,
no assurances can be given that a court would not rule
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that any securitization charge relating to electricity consumed after the
commencement of the bankruptcy cannot be transferred to the issuer or the
trustee.
In addition, in the event of a bankruptcy of Consumers, a party in interest
in the bankruptcy could assert that the issuer should pay a portion of
Consumers' costs associated with the generation, transmission or distribution of
the electricity, consumption of which gave rise to the securitization charge
revenue collections used to make payments on the securitization bonds.
Regardless of whether Consumers is the debtor in a bankruptcy case, if a
court were to accept the argument that the securitization property comes into
existence only as customers use electricity, a tax or government lien or other
nonconsensual lien on property of Consumers arising before the securitization
property came into existence could have priority over the issuer's interest in
the securitization property.
ENFORCEMENT OF RIGHTS BY TRUSTEE
Upon an event of default under the indenture, the Customer Choice Act
permits the trustee to enforce the security interest in the securitization
property in accordance with the terms of the indenture. In this capacity, the
trustee is permitted to request the MPSC to order the sequestration and payment
to securitization bondholders of revenues arising with respect to the
securitization property. The Customer Choice Act provides that this order will
remain in full force and effect notwithstanding any bankruptcy, reorganization
or other insolvency proceedings with respect to the utility or its assignee.
There can be no assurance, however, that the MPSC would issue this order after a
Consumers bankruptcy in light of the automatic stay provisions of Section 362 of
the Bankruptcy Code or, alternatively, that a bankruptcy court would lift the
automatic stay to permit this action by the MPSC. In that event, the trustee may
under the indenture seek an order from the bankruptcy court lifting the
automatic stay with respect to this action by the MPSC and an order requiring an
accounting and segregation of the revenues arising from the securitization
property. There can be no assurance that a court would grant either order.
BANKRUPTCY OR CREDITORS' RIGHTS PROCEEDINGS OF SERVICER
The servicer is entitled to commingle securitization charge revenue
collections with its own funds until each remittance date. The Customer Choice
Act provides that the priority of a lien and security interest created under the
Customer Choice Act is not impaired by the commingling of securitization charge
revenue collections arising with respect to the securitization property with
funds of the electric utility. However, a party in interest might assert, and a
court might rule, that securitization charge collections commingled by the
servicer with its own funds and held by the servicer were property of the
servicer and are therefore property of the servicer or its bankruptcy estate,
rather than property of the issuer. If the court so rules, then the court would
likely rule that the trustee has only a general unsecured claim against the
servicer for the amount of commingled securitization charge collections and
could not recover the commingled securitization charge revenue collections.
However the court rules on the ownership of the commingled securitization
charge revenue collections, the automatic stay arising upon the bankruptcy of
the servicer could delay the trustee from receiving the commingled
securitization charge revenue collections held by the servicer as of the date of
the bankruptcy until the court grants relief from the stay. A court ruling on
any request for relief from the stay could be delayed pending the court's
resolution of whether the commingled securitization charge revenue collections
are property of the issuer or of the servicer.
The servicing agreement provides that the trustee, as assignee of the
issuer, with the consent of a majority in principal amount of the securitization
bondholders, may vote to appoint a successor servicer that satisfies the rating
agency condition. However, the automatic stay might delay a successor servicer's
replacement of the servicer. Even if a successor servicer may be appointed and
may replace the servicer, a successor may be difficult to obtain and may not be
capable of performing all of the duties that Consumers as servicer was capable
of performing. Moreover, if Consumers were to become a debtor in a bankruptcy
proceeding, Consumers might be excused from its contractual obligations as
servicer of the securitization property.
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MATERIAL INCOME TAX CONSEQUENCES FOR THE SECURITIZATION BONDS
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
INCOME TAX STATUS OF THE SECURITIZATION BONDS
The issuer and Consumers have received a private letter ruling from the
Internal Revenue Service, referred to as the IRS, to the effect that the
securitization bonds will be classified as debt obligations of Consumers. Based
on that private letter ruling and the assumptions contained therein, including a
representation by Consumers that it will not make, or allow there to be made,
any election to the contrary, Skadden, Arps, Slate, Meagher & Flom LLP, special
federal income tax counsel to Consumers and the issuer, has rendered its opinion
that for federal income tax purposes (i) the securitization bonds will
constitute debt of Consumers and (ii) the issuer will not be subject to United
States federal income tax as an entity separate from Consumers.
GENERAL
The following is a summary of the material United States federal income tax
consequences of the purchase, ownership and disposition of the securitization
bonds applicable to an initial purchaser of securitization bonds that, for U.S.
federal income tax purposes, is a Non-U.S. Holder as defined below, and also
summarizes the similar principal United States federal income tax consequences
to U.S. Holders, as defined below, who are initial purchasers. This summary has
been prepared by Skadden, Arps, Slate, Meagher & Flom LLP, special federal
income tax counsel to Consumers and the issuer, which is referred to in this
prospectus as the special tax counsel. Special tax counsel is of the opinion
that its summary, as it relates to Non-U.S. Holders, is correct in all material
respects. Apart from that opinion and the opinions described in the preceding
paragraph, special tax counsel will render no other opinions to the issuer with
respect to the securitization bonds. This summary does not purport to furnish
information in the level of detail or with the attention to an investor's
specific tax circumstances that would be provided by an investor's tax adviser.
This summary also does not address the consequences to holders of the
securitization bonds under state, local or foreign tax laws. This summary is
based upon current provisions of the Code, Treasury Regulations thereunder,
current administrative rulings, judicial decisions and other applicable
authorities in effect as of the date hereof, all of which are subject to change,
possibly with retroactive effect. Legislative, judicial or administrative
changes may occur, perhaps with retroactive effect, which could affect the
accuracy of the statements and conclusions set forth herein as well as the tax
consequences to holders of the securitization bonds.
THE ISSUER SUGGESTS THAT ALL PROSPECTIVE INVESTORS CONSULT THEIR TAX ADVISERS
REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF SECURITIZATION BONDS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES,
AS WELL AS THE EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER LAWS.
As used herein, a U.S. Holder of a securitization bond means an investor
that is a U.S. Person and a Non-U.S. Holder of a securitization bond means an
investor that is not a U.S. Person. For purposes of this discussion, a U.S.
Person means:
1. an individual, who is a citizen or resident of the United States for
U.S. federal income tax purposes,
2. a corporation, partnership or other entity (treated as a corporation
or a partnership for federal income tax purposes) created or organized
in or under the laws of the United States, or any state or the
District of Columbia (other than a partnership that is not treated as
a U.S. person under any applicable Treasury Regulations);
3. an estate, the net income of which is subject to United States federal
income taxation regardless of its source, or
4. a trust, if a court within the United States is able to exercise
primary supervision over the administration of each trust and one or
more United States persons have the authority to control
85
all substantial decisions of that trust. Certain trusts in existence
on or before August 20, 1996, that were treated as U.S. Persons under
the law in effect on such date that fail to qualify as U.S. Persons
under current law, may elect to continue to be treated as U.S. Persons
to the extent prescribed in the Treasury Regulations.
TAX CONSEQUENCES TO U.S. HOLDERS
Interest. Subject to the discussion of alternative tax characterizations
with respect to any floating rate securitization bonds in a related prospectus
supplement, interest income on the securitization bonds, payable at a fixed rate
or at a floating rate, will be includible in income by a U.S. Holder when it is
received, in the case of a U.S. Holder using the cash receipts and disbursements
method of tax accounting, or as it accrues, in the case of a U.S. Holder using
the accrual method of tax accounting. Consumers and the issuer expect that the
securitization bonds will not be issued with original issue discount. If any
series of securitization bonds is in fact issued with original issue discount,
the prospectus supplement for such series of securitization bonds will address
the tax consequences of the purchase of securitization bonds with original issue
discount.
Sale or Retirement of Securitization Bonds. On a sale, exchange or
retirement of a securitization bond, a U.S. Holder will have taxable gain or
loss equal to the difference between the amount received by the U.S. Holder and
the U.S. Holder's tax basis in the securitization bond. A U.S. Holder's tax
basis in its securitization bonds is the U.S. Holder's cost, subject to
adjustments. Gain or loss will generally be capital gain or loss, and will be
long-term capital gain or loss if the securitization bond was held for more than
one year at the time of disposition. If a U.S. Holder sells the securitization
bond between interest payment dates, a portion of the amount received will
reflect interest that has accrued on the securitization bond but that has not
yet been paid by the sale date. To the extent that amount has not already been
included in the U.S. Holder's income, it is treated as ordinary interest income
and not as sale proceeds.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Withholding Taxation on Interest. Payments of interest income on the
securitization bonds received by a Non-U.S. Holder that does not hold its
securitization bonds in connection with the conduct of a trade or business in
the United States will generally not be subject to United States federal
withholding tax provided that the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of Consumers entitled to vote, is not a controlled foreign corporation
that is related to Consumers through stock ownership and, Consumers or its
paying agent receives:
1. from a Non-U.S. Holder appropriate documentation to treat the payment
as made to a foreign beneficial owner under Treasury Regulations
issued under Section 1441 of the Code;
2. a withholding certificate from a person claiming to be a foreign
partnership and the foreign partnership has received appropriate
documentation to treat the payment as made to a foreign beneficial
owner in accordance with these Treasury Regulations;
3. a withholding certificate from a person representing to be a
"qualified intermediary" that has assumed primary withholding
responsibility under these Treasury Regulations and the qualified
intermediary has received appropriate documentation from a foreign
beneficial owner in accordance with its agreement with the IRS; or
4. a statement, under penalties of perjury from an authorized
representative of a Financial Institution, stating that the Financial
Institution has received from the beneficial owner a withholding
certificate described in these Treasury Regulations or that it has
received a similar statement from another Financial Institution acting
on behalf of the foreign beneficial owner.
In general, it will not be necessary for a Non-U.S. Holder to obtain or
furnish to Consumers or its paying agent a United States taxpayer identification
number in order to claim any of the foregoing exemptions from United States
withholding tax on payments of interest. Interest paid to a Non-U.S.
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Holder will be subject to a United States withholding tax of 30% upon the actual
payment of interest income, except as described above and except where an
applicable tax treaty provides for the reduction or elimination of this
withholding tax. A Non-U.S. Holder generally will be taxable in the same manner
as a United States corporation or resident with respect to interest income if
the income is effectively connected with the Non-U.S. Holder's conduct of a
trade or business in the United States. Effectively connected income received by
a Non-U.S. Holder that is a corporation may in some circumstances be subject to
an additional "branch profits tax" at a 30% rate, or if applicable, a lower rate
provided by a treaty.
Capital Gains Tax Issues. A Non-U.S. Holder generally will not be subject
to United States federal income or withholding tax on gain realized on the sale
or exchange of securitization bonds, unless:
1. the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more during the taxable year and this gain is
from United States sources or
2. the gain is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States and other
requirements are satisfied.
BACKUP WITHHOLDING
Backup withholding of United States federal income tax may apply to
payments made in respect of the securitization bonds to registered owners who
are not "exempt recipients" and who fail to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the required manner. Generally, individuals are not exempt recipients, whereas
corporations and certain other entities generally are exempt recipients.
Payments made in respect of the securitization bonds to a U.S. Holder must be
reported to the IRS, unless the U.S. Holder is an exempt recipient or
establishes an exemption. A U.S. Holder can obtain a complete exemption from the
backup withholding tax by filing Form W-9 (Payer's Request for Taxpayer
Identification Number and Certification). Compliance with the identification
procedures described in the preceding section entitled -- "Withholding Taxation
on Interest" -- would establish an exemption from backup withholding for those
Non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a securitization bond to (or through) a
broker, the broker must withhold tax on the entire purchase price, unless either
(1) the broker determines that the seller is a corporation or other exempt
recipient or (2) the seller provides, in the required manner, certain
identifying information and, in the case of a Non-U.S. Holder, certifies that
the seller is a Non-U.S. Holder (and certain other conditions are met). The sale
must also be reported by the broker to the IRS, unless either (a) the broker
determines that the seller is an exempt recipient or (b) the seller certifies
its non-U.S. status (and certain other conditions are met). Certification of the
registered owner's non-U.S. status would be made normally on an IRS Form W-8BEN
under penalties of perjury, although in certain cases it may be possible to
submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States federal income tax provided the required
information is furnished to the IRS.
MATERIAL STATE OF MICHIGAN TAX CONSEQUENCES
It is the opinion of Miller, Canfield, Paddock and Stone, P.L.C., special
Michigan tax counsel to Consumers and the issuer, that interest from
securitization bonds, or gain from the disposition of such bonds, received by a
person who is not otherwise subject to any Michigan personal income tax, single
business tax, franchise tax, business activities tax, intangible property tax,
excise tax, stamp tax, or any other tax imposed by the State of Michigan or any
of its political subdivisions, will not cause such person to become subject to
these taxes. Persons otherwise subject to such taxes, however, may be required
to account for the interest from securitization bonds, or gain from the
disposition of such bonds, in their Michigan tax liabilities. The Michigan
Intangibles Tax was totally repealed effective January 1, 1998; therefore, the
interest from securitization bonds, or gain from the disposition of such bonds,
will not be
87
subject to that tax. Further, and relying upon the IRS letter ruling and the
federal tax opinion which have been obtained concerning this transaction, and
relying upon the Department's Revenue Administration Bulletins (RAB) 1999-9 and
RAB 1989-34, and assuming that the issuer, which is a single member limited
liability company, is not treated as an entity separate from its owner for
federal income tax purposes, then it is the opinion of Miller, Canfield,
Paddock, and Stone, P.L.C. that for purposes of Michigan Single Business Tax,
(i) the securitization bonds will constitute a debt of Consumers, and (ii) the
issuer will be treated as a division of Consumers and will not be subject to
Michigan Single Business Tax as an entity separate from Consumers.
ERISA CONSIDERATIONS
ERISA, and Section 4975 of the Code impose restrictions on:
1. employee benefit plans (as defined in Section 3(3) of ERISA) that are
subject to Title I of ERISA;
2. plans (as defined in Section 4975(e)(1) of the Code) that are subject
to Section 4975 of the Code, including individual retirement accounts
or Keogh plans;
3. any entities whose underlying assets include plan assets by reason of
that plan's investment in these entities, each of the entities
described in 1, 2 and 3, being referred to as a Plan; and
4. persons who have specified relationships to Plans which are "parties
in interest" under ERISA and "disqualified persons" under the Code,
which collectively are referred to as Parties in Interest.
Based on the reasoning of the United States Supreme Court in John Hancock
Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86 (1993), an insurance
company's general account may be deemed to include assets of the Plans investing
in the general account (e.g., through the purchase of an annuity contract), and
the insurance company might be treated as a Party in Interest with respect to a
Plan by virtue of that investment. Any purchaser that is an insurance company
using the assets of an insurance company general account should note that the
Small Business Job Protection Act of 1996 added new Section 401(c) of ERISA
relating to the status of the assets of insurance company general accounts under
ERISA and Section 4975 of the Code. Pursuant to Section 401(c), the United
States Department of Labor issued final regulations effective January 5, 2000
(the "General Account Regulations") with respect to insurance policies issued on
or before December 31, 1998 that are supported by an insurer's general account.
The General Account Regulations provide that assets held by an insurance company
general account will not constitute plan assets for purposes of the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code to the extent
such assets relate to contracts or policies issued to employee benefit plans on
or before December 31, 1988, provided the insurer complies with the specified
conditions. Additionally, the General Account Regulations do not apply to
insurance contracts and policies issued after December 31, 1998. PTCE 95-60
would, however, be applicable to purchases of the securitization bonds by
insurance company general accounts respecting contracts and policies issued
after December 31, 1998. The plan asset status of insurance company separate
accounts is unaffected by new Section 401(c) of ERISA, and separate account
assets continue to be treated as plan assets of any plan invested in a separate
account.
PLAN ASSET ISSUES FOR AN INVESTMENT IN THE SECURITIZATION BONDS
The Plan Asset Regulation is a regulation issued by the United States
Department of Labor, which states that if a Plan makes an "equity" investment in
a corporation, partnership, trust or other specified entities, the underlying
assets and properties of the entity will be deemed for purposes of ERISA and
Section 4975 of the Code to be assets of the investing Plan unless those
exceptions set forth in the regulation apply. Pursuant to the Plan Asset
Regulation, an equity interest is any interest in an entity other than an
instrument that is treated as indebtedness under applicable law and which has no
substantial equity features. Although there is little statutory or regulatory
guidance on this subject, and there can be
88
no assurances in this regard, it appears that the securitization bonds should
not be treated as an equity interest for purposes of the Plan Asset Regulation.
Those conclusions are based, in part, upon the traditional debt features of the
securitization bonds, including the reasonable expectation of purchasers of the
securitization bonds that the securitization bonds will be repaid when due, as
well as the absence of the conversion rights, warrants and other typical equity
features. Accordingly, the assets of the issuer should not be treated as the
assets of Plans investing in the securitization bonds.
PROHIBITED TRANSACTION EXEMPTIONS
It should be noted, however, that without regard to the treatment of the
securitization bonds as equity interests under the Plan Asset Regulation,
Consumers and/or its affiliates, as a provider of services to Plans, may be
deemed to be Parties in Interest with respect to many Plans. The purchase and
holding of securitization bonds by or on behalf of one or more of these Plans
could result in a prohibited transaction within the meaning of Section 406 or
407 of ERISA or Section 4975 of the Code. However, the purchase and holding of
securitization bonds may be subject to one or more statutory or administrative
exemptions from the prohibited transaction rules of ERISA and Section 4975 of
the Code.
Examples of Prohibited Transaction Class Exemptions. Potentially applicable
prohibited transaction class exemptions, which are referred to as PTCEs, include
the following:
1. PTCE 90-1, which exempts specific transactions involving insurance
company pooled separate accounts;
2. PTCE 95-60, which exempts specific transactions involving insurance
company general accounts;
3. PTCE 91-38, which exempts specific transactions involving bank
collective investment funds;
4. PTCE 84-14, which exempts specific transactions effected on behalf of a
Plan by a "qualified professional asset manager" as that term is
defined in ERISA, and which is referred to as a QPAM; or
5. PTCE 96-23, which exempts specific transactions effected on behalf of a
Plan by specific "in-house" asset managers.
It should be noted, however, that even if the conditions specified in one
or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
Conditions That Would Allow the QPAM Exemption to Apply. Plan fiduciaries
intending to rely upon the QPAM exemption should consider the following. As
noted above, although the issuer believes that the securitization bonds should
not constitute "equity interests" for purposes of the Plan Asset Regulation, it
is nonetheless possible that securitization charge revenue collections could be
deemed, for purposes of the prohibited transaction rules, to flow indirectly
from customers to Plans that own a class or series of securitization bonds.
Thus, if one or more customers were Parties in Interest with respect to a Plan
that owned that class or series of securitization bonds, such holding could be
deemed to constitute an indirect prohibited transfer of property between a Plan
and any Party in Interest with respect to the Plan. The QPAM exemption requires,
among other things, that at the time of the proposed transaction, the Party in
Interest, or its affiliate, does not have the authority to appoint or terminate
the QPAM as a manager of any of the Plan's assets. This means, however, that if
a Party in Interest with respect to a Plan that holds such class or series is a
customer that has the authority to appoint or terminate the QPAM as a manager of
the Plan's assets (for example, the Plan's sponsor or a director of the Plan
sponsor), the holding of that class or series of securitization bonds by the
Plan could be deemed to constitute an indirect prohibited transaction to which
the QPAM exemption does not apply. Accordingly, fiduciaries intending to rely
upon the QPAM exemption should carefully discuss the effectiveness of the QPAM
exemption with their legal advisors before purchasing any class or series of
securitization bonds.
Prior to making an investment in the securitization bonds of any series, a
Plan investor must determine whether, and each fiduciary causing the
securitization bonds to be purchased by, on behalf of or
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using "plan assets" of a Plan that is subject to the prohibited transaction
rules of ERISA or Section 4975 of the Code, including without limitation an
insurance company general account, shall be deemed to have represented and
warranted that, an exemption from the prohibited transaction rules applies, so
that the use of plan assets of the Plan to purchase and hold the securitization
bonds does not and will not constitute or otherwise result in a non-exempt
prohibited transaction in violation of Section 406 or 407 of ERISA or Section
4975 of the Code.
GENERAL INVESTMENT CONSIDERATIONS FOR PROSPECTIVE PLAN INVESTORS IN THE
SECURITIZATION BONDS
Prior to making an investment in the securitization bonds, prospective Plan
investors should consult with their legal advisors concerning the impact of
ERISA and the Code and the potential consequences of this investment with
respect to their specific circumstances. Moreover, each Plan fiduciary should
take into account, among other considerations,
1. whether the fiduciary has the authority to make the investment;
2. whether the investment constitutes a direct or indirect transaction
with a Party in Interest;
3. the composition of the Plan's portfolio with respect to diversification
by type of asset;
4. the Plan's funding objectives;
5. the tax effects of the investment; and
6. whether under the general fiduciary standards of investment prudence
and diversification an investment in the securitization bonds is
appropriate for the Plan, taking into account the overall investment
policy of the Plan and the composition of the Plan's investment
portfolio.
Governmental plans and some church plans are generally not subject to the
fiduciary responsibility provisions of ERISA or the provisions of Section 4975
of the Code. However, these plans may be subject to substantially similar rules
under state or other federal law, and may also be subject to the prohibited
transaction rules of Section 503 of the Code.
The sale of securitization bonds to a Plan shall not be deemed a
representation by Consumers or the underwriters that this investment meets all
relevant legal requirements with respect to Plans generally or any particular
Plan.
PLAN OF DISTRIBUTION FOR THE SECURITIZATION BONDS
The securitization bonds of each series may be sold to or through the
underwriters by a negotiated firm commitment underwriting and public reoffering
by the underwriters. The securitization bonds may also be sold to or through any
other underwriting arrangement as may be specified in the related prospectus
supplement or may be offered or placed either directly or through agents. The
issuer and the trustee intend that securitization bonds will be offered through
various methods from time to time. The issuer also intends that offerings may be
made concurrently through more than one of these methods or that an offering of
a particular series of securitization bonds may be made through a combination of
these methods.
The distribution of securitization bonds may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to the
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
The securitization bonds may be offered through one or more different
methods, including offerings through underwriters. Except as otherwise disclosed
in the related prospectus supplement, it is not anticipated that any of the
securitization bonds will be listed on any securities exchange. There can be no
assurance that a secondary market for any series of securitization bonds will
develop or, if one does develop, that it will continue.
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Compensation to Underwriters. In connection with the sale of the
securitization bonds, underwriters or agents may receive compensation in the
form of discounts, concessions or commissions. Underwriters may sell
securitization bonds to particular dealers at prices less a concession.
Underwriters may allow, and these dealers may reallow, a concession to other
dealers. Underwriters, dealers and agents that participate in the distribution
of the securitization bonds of a series may be deemed to be underwriters. Any
discounts or commissions received by the underwriters from the issuer and any
profit on the resale of the securitization bonds by them may be deemed to be
underwriting discounts and commissions under the Securities Act. These
underwriters or agents will be identified, and any compensation received from
the issuer will be described, in the related prospectus supplement.
Other Distribution Issues. Under agreements which may be entered into by
Consumers, the issuer and the trustee, underwriters and agents who participate
in the distribution of the securitization bonds may be entitled to
indemnification by Consumers and the issuer against liabilities specified
therein, including under the Securities Act. The underwriters may, from time to
time, buy and sell the securitization bonds, but there can be no assurance that
an active secondary market will develop and there is no assurance that this
market, if established, will continue.
RATINGS FOR THE SECURITIZATION BONDS
It is a condition of each Underwriter's obligation to purchase the
securitization bonds that each series or class be rated investment grade, that
is, in one of the four highest rating categories, by each of S&P, Moody's and
Fitch.
Limitations of Security Ratings. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating agency. No person is obligated to maintain the
rating on any securitization bonds, and, accordingly, there can be no assurance
that the ratings assigned to any series or class of securitization bonds upon
initial issuance will not be lowered or withdrawn by a rating agency at any time
thereafter. If a rating of any series or class of securitization bonds is
revised or withdrawn, the liquidity of this class of securitization bonds may be
adversely affected. In general, ratings address credit risk and do not represent
any assessment of any particular rate of principal payments on the
securitization bonds other than the payment in full of each series or class of
securitization bonds by the applicable final maturity date for such series or
class.
If any of the securitization bonds are listed on the Luxembourg Stock
Exchange and the rules of that exchange so require, the issuer will notify the
Luxembourg Stock Exchange if any rating assigned to any class of securitization
bonds listed on the Luxembourg Stock Exchange is reduced or withdrawn and will
cause such notice to be published in a daily newspaper published in Luxembourg,
which is expected to be the Luxemburger Wort.
VARIOUS LEGAL MATTERS RELATING TO THE SECURITIZATION BONDS
Some legal matters relating to Consumers, the issuer and the issuance of
the securitization bonds will be passed upon for Consumers and the issuer by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, Miller, Canfield,
Paddock and Stone, P.L.C., Lansing and Detroit, Michigan and Loomis, Ewert,
Parsley, Davis and Gotting, PC, Lansing, Michigan. As of September 30, 2001, an
attorney currently employed by Skadden, Arps, Slate, Meagher & Flom LLP, and
formerly employed by CMS Energy, owned approximately 51,734 shares of CMS Energy
common stock, ten shares of Consumers $4.50 Series preferred stock and $50,000
aggregate principal amount of certain debt securities issued by CMS Energy. Some
legal matters relating to the issuer and the issuance of the securitization
bonds will be passed upon for the underwriters by Orrick, Herrington & Sutcliffe
LLP, San Francisco, California. Some legal matters relating to the federal tax
consequences of the issuance of the securitization bonds will be passed upon for
the issuer by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Some
legal matters relating to State of Michigan tax consequences of the issuance of
the securitization bonds will be passed upon for the issuer by Miller, Canfield,
Paddock and Stone, P.L.C., Lansing and Detroit, Michigan.
91
INDEX TO FINANCIAL STATEMENTS OF CONSUMERS FUNDING LLC
<Table>
<Caption>
PAGE
----
Report of Independent Public Accountants.................... F-2
Balance Sheet............................................... F-3
Notes to Balance Sheet...................................... F-4
</Table>
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Consumers Funding LLC:
We have audited the accompanying balance sheet of CONSUMERS FUNDING LLC (a
Delaware limited liability corporation and wholly owned subsidiary of Consumers
Energy Company) as of September 30, 2001. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion of the balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Consumers Funding LLC as of
September 30, 2001 in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
October 12, 2001
F-2
CONSUMERS FUNDING LLC
BALANCE SHEET
AS OF SEPTEMBER 30, 2001
<Table>
ASSETS
Cash $1,000
------
Total assets $1,000
======
MEMBER'S EQUITY
Member's equity $1,000
------
Total member's equity $1,000
======
</Table>
The accompanying notes are an integral part of this balance sheet.
F-3
CONSUMERS FUNDING LLC
NOTES TO BALANCE SHEET
(1) ORGANIZATION AND NATURE OF OPERATIONS
Consumers Funding LLC (the "Company"), a Delaware limited liability
company, whose sole member is Consumers Energy Company ("Consumers"), was formed
on October 11, 2000. Consumers is an electric and gas utility and is a wholly
owned subsidiary of CMS Energy Corporation. The Company was organized for the
sole purpose of purchasing and owning securitization property ("SP") (as defined
below), issuing securitization bonds ("Bonds"), pledging its interest in SP and
other collateral to the trustee to collateralize the Bonds, and performing
activities that are necessary, suitable or convenient to accomplish these
purposes.
SP represents the irrevocable right of Consumers, or its successor or
assignee, to collect a non-bypassable securitization charge ("Securitization
Charge") from customers pursuant to a financing order ("MPSC Financing Order"),
which was issued on October 24, 2000 by the Michigan Public Service Commission
("MPSC") in accordance with the Customer Choice and Electricity Reliability Act
enacted in Michigan in June of 2000. The MPSC Financing Order authorizes the
Securitization Charge to be sufficient to recover $468,592,000 aggregate
principal amount of Bonds, plus an amount sufficient to provide for any credit
enhancement, to fund any reserves and to pay interest, redemption premiums, if
any, servicing fees and other expenses relating to the Bonds. For financial
reporting purposes, Consumers intends that the purchase of the SP will be
accounted for as a financing in the amount of $468,592,000. Accordingly, the
purchase of SP will be classified as a receivable from Consumers in the
financial statements subsequent to the issuance of the Bonds. Notwithstanding
such classification of the SP, the SP, for legal purposes, has been sold by
Consumers to the Company.
The Company's organizational documents require it to operate in a manner so
that it should not be consolidated in the bankruptcy estate of Consumers in the
event Consumers becomes subject to a bankruptcy proceeding. Both Consumers and
the Company will treat the transfer of SP to the Company as a sale under
applicable law. The Bonds will be treated as debt obligations of the Company.
For financial reporting, Federal income tax and State of Michigan income and
franchise tax purposes, the transfer of SP to the Company will be treated as
part of a financing arrangement and not as a sale. Furthermore, the results of
operations of the Company will be consolidated with Consumers for financial and
income tax reporting purposes.
The Company is legally separate from Consumers. The assets and revenues of
the Company, including without limitation, the SP, are not available to
creditors of Consumers or CMS Energy.
(2) SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
revenues, expenses, assets, and liabilities and disclosure of contingencies.
Actual results could differ from these estimates.
Debt Issuance Costs
All debt issuance costs will be paid by Consumers and reimbursed by the
Company upon issuance of the Bonds. The costs associated with the anticipated
issuance of the Bonds are capitalized by Consumers and will be amortized over
the life of the Bonds by Consumers.
F-4
(3) INCOME TAXES
The Company has elected not to be taxed as a corporation for Federal income
tax purposes. The Company is treated as a division of Consumers, and
accordingly, will not be treated as a separate taxable entity.
(4) SECURITIZATION BONDS
The sole purpose of the Company is to issue Bonds pursuant to authority
granted by the MPSC in the MPSC Financing Order. The Company intends to issue
Bonds in series (Series) from time to time, the maturities and interest rates of
which will depend upon market conditions at the time of issuance. The proceeds
will be used to fund the purchase of SP from Consumers. Under applicable law,
the Bonds will not be an obligation of Consumers or secured by the assets of
Consumers. Also under applicable law, the Bonds will be recourse to the Company
and will be collateralized on a pro rata basis by the SP and the equity and
assets of the Company. The source of repayment will be the Securitization Charge
authorized in the MPSC Financing Order, which will be collected from Consumers
customers by Consumers, as servicer. Securitization charge revenue collections
will be deposited at least monthly by Consumers with the Company and used to pay
the expenses of the Company, to pay debt service on the Bonds and to fund any
credit enhancement for the Bonds. The Company will also pledge the capital
contributed by Consumers to secure the debt service requirements of the Bonds.
The debt service requirements will include an overcollateralization subaccount,
a capital subaccount and a reserve subaccount which will be available to bond
holders. There will be no obligation to release these moneys to Consumers.
(5) MEMBER'S EQUITY
On January 22, 2001, Consumers completed a $1,000 equity contribution to
the Company.
(6) SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under the servicing agreement to be entered into by the Company and
Consumers concurrently with the issuance of the first Series of Bonds,
Consumers, as servicer, will be required to manage and administer the SP of the
Company and to collect the Securitization Charge on behalf of the Company. The
Company will pay an annual servicing fee to Consumers equal to 0.25% of the
outstanding principal balance of Bonds. The servicing fee will also be recovered
through the Securitization Charge.
F-5