1
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO.: 333-89363
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 25, 1999)
[CONSUMERS ENERGY LOGO]
7,000,000 PREFERRED SECURITIES
CONSUMERS ENERGY COMPANY FINANCING III
9 1/4% TRUST ORIGINATED PREFERRED SECURITIES(SM)("TOPRS"(SM))
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
CONSUMERS ENERGY COMPANY
------------------------
THE TRUST:
Consumers Energy Company Financing III is a Delaware business trust which
will:
- sell preferred securities to the public;
- sell common securities to Consumers;
- use the proceeds from these sales to buy an equal principal amount of
9 1/4% subordinated debentures due December 31, 2029 of Consumers; and
- distribute the cash payments it receives from Consumers on the debentures
to the holders of the preferred securities and the common securities.
QUARTERLY DISTRIBUTIONS:
- For each preferred security that you own, you will receive cumulative cash
distributions accumulating from November 4, 1999, at an annual rate of
9 1/4% of the liquidation amount of $25 per preferred security, on March
31, June 30, September 30 and December 31 of each year, beginning December
31, 1999.
- Consumers may defer interest payments on the subordinated debentures on
one or more occasions for up to 20 consecutive quarterly periods. If
Consumers does defer interest payments, the trust will also defer payments
of distributions on the preferred securities to you. However, deferred
distributions will themselves accumulate distributions at an annual rate
of 9 1/4% (to the extent permitted by law).
OPTIONAL REDEMPTION:
- The trust may redeem some or all of the preferred securities at times
discussed herein at a redemption price equal to $25 per preferred security
plus accumulated distributions, if any.
CONSUMERS ENERGY COMPANY:
- Consumers will effectively guarantee, fully and unconditionally, the
payment by the trust of amounts due on the preferred securities as
discussed in this prospectus supplement and in the accompanying base
prospectus.
The trust plans to list the preferred securities on the New York Stock
Exchange under the symbol "CMS PrL." Trading on the New York Stock Exchange is
expected to commence within 30 days after the preferred securities are first
issued.
INVESTING IN THE PREFERRED SECURITIES INVOLVES CERTAIN RISKS WHICH ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE S-6 OF THIS PROSPECTUS
SUPPLEMENT.
------------------------
PER TOPRS TOTAL
--------- -----
Public offering price(1)................................... $25.00 $175,000,000
Underwriting commission to be paid by Consumers............ $.7875 $5,512,500
Proceeds, before expenses, to the trust.................... $25.00 $175,000,000
(1) Plus accrued distributions from November 4, 1999, if settlement occurs after that date.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying base prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The preferred securities will be ready for delivery in book-entry form only
through The Depository Trust Company on or about November 4, 1999.
------------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
FIRST OF MICHIGAN
DIVISION OF FAHNESTOCK
& CO. INC.
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES
RAYMOND JAMES & ASSOCIATES, INC.
------------------------
The date of this prospectus supplement is October 29, 1999.
- ---------------
(SM)"Trust Originated Preferred Securities" and "TOPrS" are service marks of
Merrill Lynch & Co., Inc.
2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary Information -- Q&A.................................. S-3
Risk Factors................................................ S-6
Recent Developments......................................... S-10
Consumers Energy Company Financing III...................... S-13
Capitalization.............................................. S-14
Accounting Treatment........................................ S-14
Use of Proceeds............................................. S-14
Selected Financial Data of Consumers Energy Company......... S-15
Description of Securities................................... S-15
Certain United States Federal Income Tax Consequences....... S-24
ERISA Considerations........................................ S-27
Underwriting................................................ S-29
Legal Matters............................................... S-32
Experts..................................................... S-32
PROSPECTUS
Where You Can Find More Information......................... 2
Consumers Energy Company.................................... 3
Consumers Energy Company Trusts............................. 4
Use of Proceeds............................................. 6
Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Fixed Charges and Preferred Stock Dividends............... 6
Description of Securities................................... 7
Plan of Distribution........................................ 26
Legal Opinions.............................................. 27
Experts..................................................... 27
------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement or the accompanying base prospectus. We
have not, and the underwriters have not, authorized any person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus supplement and the accompanying
base prospectus is accurate as of the date on the front cover of this prospectus
supplement and the accompanying base prospectus, respectively. Consumers'
business, financial condition, results of operations and prospects may have
changed since such dates.
The following information concerning Consumers, the trust, the preferred
securities, the guarantee and the subordinated debentures adds to, and should be
read in conjunction with, the information contained in the accompanying base
prospectus. Capitalized terms used in this prospectus supplement have the same
meanings as in the accompanying base prospectus.
S-2
3
SUMMARY INFORMATION -- Q&A
This prospectus supplement and the accompanying base prospectus should be
read together. This summary highlights selected information from this prospectus
supplement and the accompanying base prospectus to help you understand the
preferred securities. You should carefully read this prospectus supplement and
the accompanying base prospectus to understand fully the terms of the preferred
securities, as well as the tax and other considerations that are important to
you in making a decision about whether to invest in the preferred securities.
You should pay special attention to the "Risk Factors" section beginning on page
S-6 of this prospectus supplement to determine whether an investment in the
preferred securities is appropriate for you.
For your convenience, we make reference to sections in this prospectus
supplement and the accompanying base prospectus for more detailed information
regarding some of the terms and concepts used throughout this prospectus
supplement.
WHAT ARE THE PREFERRED SECURITIES?
Each preferred security represents an undivided beneficial interest in the
assets of the trust. The underwriters are offering 7,000,000 preferred
securities at a public offering price of $25 for each preferred security. See
"Underwriting" in this prospectus supplement.
WHO IS THE TRUST?
Consumers Energy Company Financing III is a Delaware business trust. The
trust will sell its preferred securities to the public and its common securities
to Consumers. The trust will use the proceeds from these sales to buy a series
of 9.25% subordinated debentures due December 31, 2029 from Consumers with the
same economic terms as the preferred securities.
There will be four trustees of the trust. Two of the trustees are employees
or officers of Consumers, referred to as the "regular trustees." Bank of New
York will act as the property trustee of the trust and Bank of New York
(Delaware) will act as the Delaware trustee, in each case until removed or
replaced by the holder of the common securities. For the purposes of compliance
with the provisions of the Trust Indenture Act, Bank of New York will also act
as indenture trustee under the guarantee.
WHO IS CONSUMERS ENERGY COMPANY?
Consumers is a public utility that provides natural gas and electricity to
almost six million of the nine and one-half million residents in Michigan's
Lower Peninsula. Consumers' electric operations include the generation,
purchase, transmission and distribution of electricity. It provides electric
services in 61 of the 68 counties of Michigan's Lower Peninsula. Consumers' gas
utility operation purchases, transports, stores and distributes natural gas. It
renders gas sales and delivery service in 54 of the 68 counties in Michigan's
Lower Peninsula. At year end 1998, Consumers provided service to 1.6 million
electric customers and 1.5 million gas customers. Consumers' consolidated
operating revenue in 1998 was $3.7 billion. Of Consumers' operating revenue, 70%
was generated from its electric utility business, 29% from its gas utility
business, and 1% from its non-utility business.
WHEN WILL YOU RECEIVE QUARTERLY DISTRIBUTIONS ON THE PREFERRED SECURITIES?
If you purchase the preferred securities, you will be entitled to receive
cumulative cash distributions at an annual rate of 9.25% of the liquidation
amount of $25 per preferred security. Distributions will accumulate from
November 4, 1999, and will be payable quarterly in arrears on March 31, June 30,
September 30, and December 31 of each year, beginning December 31, 1999.
WHEN CAN PAYMENT OF YOUR DISTRIBUTIONS BE DEFERRED?
Consumers may, on one or more occasions, defer interest payments on the
debentures for up to 20 consecutive quarterly periods unless an event of default
under the debentures has occurred and is
S-3
4
continuing. See "Description of Securities -- Certain Terms of the
Debentures -- Option to Extend Interest Payment Period" in this prospectus
supplement. A deferral of interest payments cannot extend beyond the stated
maturity date of the debentures (which is December 31, 2029).
If Consumers defers interest payments on the debentures, the trust will
also defer its distributions on the preferred securities to you. During this
deferral period, distributions will continue to accumulate on the preferred
securities at an annual rate of 9.25% of the liquidation amount of $25 per
preferred security. Also, the deferred distributions will themselves accumulate
distributions at an annual rate of 9.25% (to the extent permitted by law). Once
Consumers makes all deferred interest payments on the debentures, with accrued
interest, it may again defer interest payments on the debentures if no event of
default under the debentures has then occurred and is continuing.
During any period in which Consumers defers interest payments on the
debentures, Consumers will not be permitted to, with some exceptions:
- pay a dividend or make any other payment or distribution on its capital
stock;
- redeem, purchase or make a liquidation payment on any of its capital
stock; or
- make a principal, premium or interest payment, or repurchase or redeem,
any of its debt securities that rank equal with or junior to the
debentures.
If Consumers defers interest payments on the debentures, you will be
required to accrue interest income for United States federal income tax purposes
before you receive cash distributions. See "Certain United States Federal Income
Tax Consequences" and "Risk Factors -- Ability to defer distributions has tax
consequences for you and may affect the trading price of the preferred
securities" in this prospectus supplement.
WHEN CAN THE TRUST REDEEM THE PREFERRED SECURITIES?
The trust will redeem all of the outstanding preferred securities when the
debentures are paid either at maturity on December 31, 2029, or upon early
redemption.
Consumers will pay the debentures at maturity on December 31, 2029.
Consumers may redeem, before their maturity at a redemption price equal to 100%
of the principal amount being redeemed plus accrued and unpaid interest to the
date of redemption:
- all or some of the debentures on one or more occasions any time on or
after November 4, 2004; or
- all but not some of the debentures before December 31, 2029, if certain
changes in tax or investment company law occur or will occur within 90
days (each of which is a "special event"). See "Description of
Securities -- Certain Terms of the Preferred Securities -- Special Event
Redemption" in this prospectus supplement.
If Consumers redeems any debentures before their maturity, the trust will
use the cash it receives on the redemption of the debentures to redeem,
proportionately, preferred securities and common securities having a total
liquidation amount equal to the total principal amount of the debentures
redeemed, unless an event of default under the amended and restated declaration
of trust has occurred and is continuing. In such a case, the preferred
securities will be redeemed before any common securities. An event of default
with respect to the debentures or the guarantee constitutes an event of default
under the trust agreement. See "Description of Securities -- Trust Preferred
Securities -- Effect of Obligations Under the Debt Securities and the
Guarantees" and "The Guarantees -- Events of Default" in the accompanying base
prospectus for a description of an event of default in respect of the debentures
and the guarantee, respectively. The redemption price will be equal to $25 per
security plus any accumulated distributions.
S-4
5
WHAT IS THE NATURE OF CONSUMERS' GUARANTEE OF THE PREFERRED SECURITIES?
Consumers will fully and unconditionally guarantee the preferred securities
through a combination of its obligations:
- to make payments on the debentures;
- under its guarantee of the preferred securities; and
- under the trust agreement and its subordinated indenture.
If Consumers does not make a required payment on the debentures, the trust
will not have sufficient funds to make the related payment on the preferred
securities. The guarantee does not cover payments on the preferred securities
when the trust does not have sufficient funds to make such payments. Consumers'
obligations under the debentures are junior to its obligations to make payments
on its senior indebtedness and Consumers' obligations under the guarantee are
junior to its obligations to make payments on its senior indebtedness in the
same manner as the debentures. See "Risk Factors -- Consumers' obligations under
the debentures and the guarantee are subordinated" in this prospectus
supplement.
WHEN CAN THE DEBENTURES BE DISTRIBUTED TO YOU?
Consumers, as the sponsor of the trust, has the right to dissolve the trust
at any time. If Consumers exercises this right to dissolve the trust, the trust,
after satisfying any creditors it has, will be liquidated by distribution of the
debentures to holders of the preferred securities and the common securities.
WHAT HAPPENS IF THE TRUST IS DISSOLVED AND THE DEBENTURES ARE NOT DISTRIBUTED?
The trust may also be dissolved in circumstances where the debentures will
not be distributed to you. In those situations, after satisfying any of its
creditors, the trust will be obligated to pay in cash the liquidation amount of
$25 for each preferred security plus accumulated distributions to the date such
payment is made. The trust will be able to make this liquidation distribution
only if the debentures are paid or redeemed by Consumers.
WILL THE PREFERRED SECURITIES BE LISTED ON A STOCK EXCHANGE?
The trust will apply to have the preferred securities listed on the New
York Stock Exchange under the symbol "CMS PrL." If approved for listing, trading
of the preferred securities on the New York Stock Exchange is expected to
commence within 30 days after the preferred securities are first issued. You
should be aware that the listing of the preferred securities will not
necessarily ensure that a liquid trading market will be available for the
preferred securities.
If the trust distributes the debentures, Consumers will use its best
efforts to list them on the New York Stock Exchange or any other exchange or
other organization on which the preferred securities are then listed.
IN WHAT FORM WILL THE PREFERRED SECURITIES BE ISSUED?
The preferred securities will be represented by one or more global
securities that will be deposited with, or on behalf of, and registered in the
name of, The Depository Trust Company, New York, New York ("DTC") or its
nominee. This means that you will not receive a certificate for your preferred
securities. Instead, you will hold your interest through DTC's book-entry
system. The trust expects that the preferred securities will be ready for
delivery through DTC on or about November 4, 1999.
S-5
6
RISK FACTORS
Your investment in the preferred securities will involve certain risks. You
should carefully consider the following discussion of risks, and the other
information included or incorporated by reference in this prospectus supplement
and the accompanying base prospectus, before deciding whether an investment in
the preferred securities is suitable for you. The risks described below are not
the only ones facing the trust and Consumers. Additional risks not presently
known to the trust and Consumers or that they currently deem immaterial may also
impair Consumers' business.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
CONSUMERS' OBLIGATIONS UNDER THE DEBENTURES AND THE GUARANTEE ARE SUBORDINATED
Consumers' obligations under the debentures are unsecured and will rank
junior in priority of payment to Consumers' senior indebtedness. This means that
Consumers may not make any payments of principal or interest on the debentures
if it defaults on a payment on its senior indebtedness. Also, payments on the
debentures may be blocked for up to 180 days in the event of certain non-payment
defaults by Consumers on its senior indebtedness. For more information on the
subordination provisions, see "Description of Securities -- Certain Terms of the
Debentures" in this prospectus supplement. In the event of the bankruptcy,
liquidation or dissolution of Consumers, its assets would be available to pay
obligations under the debentures only after all payments had been made on its
senior indebtedness. At June 30, 1999, as if on that date Consumers and the
trust had issued and sold the preferred securities and the debentures and
applied the estimated net proceeds thereof as described in this prospectus
supplement, the total amount of Consumers' senior indebtedness would have been
approximately $2,728 million. See "Capitalization" and "Use of Proceeds" in this
prospectus supplement.
Consumers' obligations under the guarantee are unsecured and will rank in
priority of payment as follows:
- junior to all of Consumers' senior indebtedness in the same manner as the
debentures; and
- equally with certain guarantees previously issued by Consumers with
respect to certain preferred securities and with all other guarantees of
securities issued by affiliates of Consumers similar to the preferred
securities issued by the trust.
This means that Consumers cannot make any payments on the guarantee if it
defaults on a payment of any of its senior indebtedness. In the event of the
bankruptcy, liquidation or dissolution of Consumers, its assets would be
available to pay obligations under the guarantee only after all payments had
been made on its senior indebtedness.
Neither the debentures nor the guarantee will limit the ability of
Consumers and its subsidiaries to incur additional indebtedness, including
indebtedness that ranks senior in priority of payment to the debentures and the
guarantee.
For more information, see "Description of Securities -- Certain Terms of
the Debentures -- Subordination" in this prospectus supplement and "Description
of Securities -- The Guarantees" in the accompanying base prospectus.
THE GUARANTEE COVERS PAYMENTS ONLY IF THE TRUST HAS CASH AVAILABLE
The ability of the trust to pay distributions on the preferred securities,
the redemption price of the preferred securities and the liquidation amount of
each preferred security is solely dependent upon Consumers making the related
payments on the debentures when due. If Consumers defaults on its obligation to
pay principal (including redemption payments) or interest on the debentures, the
trust will not have sufficient funds to pay distributions, the redemption price
or the liquidation amount of each preferred security. In those circumstances,
you will not be able to rely upon the guarantee for payment of
S-6
7
these amounts because the guarantee covers such payment only when the trust has
sufficient funds on hand but fails to make such payment.
Instead, you may:
- seek legal redress against Consumers directly or seek other remedies to
collect your proportionate share of payments owed; or
- rely on the property trustee to enforce the trust's rights under the
debentures.
ABILITY TO DEFER DISTRIBUTIONS HAS TAX CONSEQUENCES FOR YOU AND MAY AFFECT THE
TRADING PRICE OF THE PREFERRED SECURITIES
So long as no event of default under the debentures has occurred and is
continuing, Consumers may, on one or more occasions, defer interest payments to
the trust on the debentures as described in this prospectus supplement. See
"Description of Securities -- Certain Terms of the Debentures -- Option to
Extend Interest Payment Period" in this prospectus supplement. If Consumers
defers interest payments on the debentures, the trust will defer distributions
on the preferred securities to you during any deferral period. If Consumers
defers interest payments on the debentures, you will be required to accrue
interest income, as original issue discount or "OID," in respect of the deferred
stated interest allocable to your share of the preferred securities for United
States federal income tax purposes. As a result, you will include such income in
gross income for United States federal income tax purposes prior to the receipt
of any cash distributions. In addition, you will not receive cash from the trust
related to such income if you dispose of your preferred securities prior to the
record date on which distributions of such amounts are made.
Consumers has no current intention of deferring interest payments on the
debentures. However, if Consumers exercises its right to do so in the future,
the preferred securities may trade at a price that does not fully reflect the
value of accrued but unpaid interest on the debentures. If you sell the
preferred securities during an interest deferral period, you may not receive the
same return on investment as someone else who continues to hold the preferred
securities. In addition, the existence of Consumers' right to defer payments of
interest on the debentures may mean that the market price for the preferred
securities (which represent an undivided beneficial interest in the debentures)
may be more volatile than other securities that do not have this right.
See "Certain United States Federal Income Tax Consequences" in this
prospectus supplement for more information.
PREFERRED SECURITIES MAY BE REDEEMED BEFORE DECEMBER 31, 2029, IF A SPECIAL
EVENT OCCURS
Upon the occurrence of a special event before December 31, 2029, Consumers
may redeem all but not some of the debentures. The redemption price will equal
100% of the principal amount of the debentures plus any accrued and unpaid
interest to the redemption date. The trust will use the cash it receives on any
such redemption of the debentures to redeem an equivalent liquidation amount of
the preferred securities and the common securities on a proportionate basis,
unless an event of default under the trust agreement has occurred and is
continuing. In such a case, the preferred securities will be redeemed before any
common securities.
See "Description of Securities -- Certain Terms of the Preferred
Securities -- Special Event Redemption" in this prospectus supplement for more
information.
PREFERRED SECURITIES MAY BE REDEEMED ON OR AFTER NOVEMBER 4, 2004, AT CONSUMERS
OPTION
At Consumers' option, some or all of the debentures may be redeemed at any
time on or after November 4, 2004, at a redemption price equal to 100% of the
principal amount to be redeemed plus any accrued and unpaid interest to the
redemption date. See "Description of Securities -- Certain Terms of the
Debentures -- Redemption" in this prospectus supplement. You should assume that
Consumers will
S-7
8
exercise its redemption option when prevailing interest rates at the time are
lower than the interest rate on the debentures, so that the redemption proceeds
generally will not be able to be reinvested in a comparable security at as high
a rate. If Consumers exercises such redemption option, the trust will use the
cash it receives on the redemption of the debentures to redeem an equivalent
liquidation amount of the preferred securities and the common securities on a
proportionate basis, unless an event of default under the trust agreement has
occurred and is continuing. In such a case, the preferred securities will be
redeemed before any common securities.
See "Description of Securities -- Certain Terms of the Preferred
Securities -- Redemption" in this prospectus supplement for more information.
DISTRIBUTION OF DEBENTURES MAY HAVE A POSSIBLE ADVERSE EFFECT ON TRADING PRICE
Consumers has the right to dissolve the trust at any time. If Consumers
exercises this right, the trust, after satisfying any creditors it has, will be
liquidated by distribution of the debentures to holders of the preferred
securities and the common securities. Under current United States federal income
tax laws, a distribution of debentures to you on the dissolution of the trust
would not be a taxable event to you. See "Certain United Stated Federal Income
Tax Consequences -- Receipt of Debentures or Cash Upon Liquidation of the Trust"
in this prospectus supplement for more information.
Consumers has no current intention of causing the dissolution of the trust
and the distribution of the debentures. However, there are no restrictions on
its ability to do so at any time. Consumers anticipates that it would consider
exercising this right in the event that expenses associated with maintaining the
trust were substantially greater than currently expected, such as if a special
event occurred. Consumers cannot predict the other circumstances under which
this right would be exercised.
Although Consumers will use its best efforts to list the debentures on the
New York Stock Exchange (or any other exchange or organization on which the
preferred securities are then listed) if they are distributed, we cannot assure
you that the debentures will be approved for listing or that a liquid trading
market for the debentures will be available.
Consumers cannot predict the market prices for the debentures that may be
distributed. Accordingly, the debentures that you receive on a distribution, or
the preferred securities you hold pending such a distribution, may trade at a
discount to the price that you paid to purchase the preferred securities.
Because you may receive debentures, you should make an investment decision
with regard to the debentures in addition to the preferred securities. You
should carefully review all the information regarding the debentures contained
in this prospectus supplement and the accompanying base prospectus. See "Certain
United States Federal Income Tax Consequences -- Receipt of Debentures or Cash
Upon Liquidation of the Trust" in this prospectus supplement for more
information.
LIMITED VOTING RIGHTS
You will have limited voting rights. In general, unless an event of default
under the trust agreement has occurred and is continuing, only Consumers may
elect or remove any of the trustees, and in no event may holders of the
preferred securities remove the regular trustees.
See "Consumers Energy Company Trusts" in the accompanying base prospectus
and "Description of Securities -- Certain Terms of the Preferred
Securities -- Voting Rights" in this prospectus supplement for more information.
RISK FACTORS RELATING TO CONSUMERS
CONSUMERS' COMPETITION AND REGULATORY RESTRUCTURING
Federal and state regulation of electric and natural gas utilities,
interstate pipelines and independent electric power producers has changed
dramatically in the last two decades and could continue to change
S-8
9
over the next several years. In general, such regulatory changes have resulted
and will continue to result in increased competition in Consumers' domestic
energy businesses. Increased opportunities will present themselves as the
changes unfold.
The regulatory changes have been particularly significant in Consumers'
natural gas businesses. As a result of these changes, gas distribution companies
like Consumers transport the natural gas commodity which is sold to customers by
competitors like gas producers, marketers and others. Consumers' current gas
commodity rates are frozen until March 2001, under a pilot program which allows
Consumers to earn a margin on the commodity provided it can continue to purchase
gas at prices below that allowed in its rates. The full impact of competition
remains to be seen, particularly if and when Consumers' existing pilot program
providing other gas suppliers direct access to some of its customers is extended
to all Consumers' gas customers by way of legislation or regulatory action.
Further changes in federal and state regulation of the natural gas industry
could also adversely affect Consumers' gas utility business.
Federal regulation of electric sales and transmission of electricity has
also changed significantly since the 1992 enactment of the Energy Policy Act.
This legislation and the Federal Energy Regulatory Commission regulations which
followed have effectively granted independent power producers and electricity
marketers "direct access" to the interstate electric transmission systems owned
by electric utilities. All electric utilities are required to offer transmission
services to new market entrants on a non-discriminatory basis. As a result,
wholesale electricity markets have become much more competitive and wholesale
prices have become more volatile, affecting both purchasers and sellers of power
at wholesale. While this has not adversely affected Consumers to date, and does
present Consumers with the potential opportunity to expand the market reach for
electric power sales by Consumers, the rapidly changing nature of the
marketplace creates the opportunity for competitors to market electricity to
Consumers' wholesale customers.
In addition to the changes in federal regulation of the electric industry,
state regulation of the retail electric utility business is in the process of
undergoing significant changes. For example, the Michigan Public Service
Commission ("MPSC") issued several orders in 1997, 1998 and 1999 restructuring
the electric power industry in Michigan. Under these orders which Consumers has
voluntarily agreed to implement, Consumers will allow certain customers to elect
to purchase electric power directly from other suppliers, such as independent
power producers, power marketers and other utilities. Consumers will continue to
transmit and distribute such power purchases to the end-use retail customers.
Importantly, the orders provide for full recovery by Consumers of its stranded
costs. This electric customer choice program commenced in September 1999 and
will be phased in to cover 750 megawatts of Consumers' retail market by 2001. On
January 1, 2002, all of Consumers' electric customers will have this option. It
is not possible at this time to predict the extent to which Consumers' customers
will elect this option or what the ultimate financial impact will be to
Consumers.
Several bills relative to electric industry restructuring were introduced
in the Michigan House of Representatives and Senate for consideration in the
1999-2000 legislative session. Although Consumers has not specifically supported
any of these bills, Consumers believes legislation is desirable to provide
statutory support for MPSC orders. Consumers is uncertain as to whether
legislation will be enacted and what effect any enacted legislation will have on
Consumers. Similar uncertainty exists with respect to the possibility that
federal legislation restructuring the electric power industry will be enacted. A
variety of bills changing existing federal regulation of the industry and,
potentially, affecting state regulation have been introduced in the Congress in
recent years. None has been enacted.
Adverse federal or state legislation or adverse future rate determinations
by the MPSC could result in Consumers being unable to fully recover its current
investment in electric generating facilities and the cost of purchased power.
RISK OF YEAR 2000 NONCOMPLIANCE
Many existing computer programs were designed and developed without
considering the upcoming change in the century, which could lead to the failure
of computer applications or create erroneous results
S-9
10
by or at the year 2000. The year 2000 issue is a broad business issue, whose
impact extends beyond traditional computer hardware and software to possible
failure of automated plant systems and instrumentation as well as to third party
businesses. Also, there can be no guarantee that suppliers, large customers and
other third parties of importance to Consumers' business operations will
successfully reprogram or replace, and test, all of their own computer hardware,
software and process control systems to ensure such systems are year 2000
compliant. Failure by Consumers, any of the entities listed above, or other
institutions such as governments to become year 2000 compliant on a timely basis
or to recover from system interruptions on a timely basis could have a material
adverse effect on Consumers' financial position and results of operations.
RESULTS COULD DIFFER MATERIALLY FROM CERTAIN FORWARD-LOOKING STATEMENTS
On one or more occasions, Consumers may make statements regarding
Consumers' assumptions, projections, expectations, intentions or beliefs about
future events. These statements are intended as forward-looking statements under
the Private Securities Litigation Reform Act of 1995. Consumers cautions that
these statements may and often do differ materially from actual results. Some of
the factors that could cause actual results to differ materially from those
expressed or implied in any forward-looking statements are:
- ability to achieve operating synergies and revenue enhancements;
- national, regional and local economic, competitive and regulatory
conditions and developments;
- capital and financial market conditions, including interest rates;
- weather conditions;
- adverse legislative, regulatory or legal decisions, including
environmental laws and regulations;
- the pace of deregulation of the natural gas and electric industries;
- energy markets, including the timing and extent of changes in commodity
prices for oil, coal, natural gas, natural gas liquids, electricity and
certain related products;
- the timing and success of business development efforts;
- nuclear power performance and regulation;
- technological developments in energy production, delivery and usage; and
- other uncertainties, all of which are difficult to predict and many of
which are beyond Consumers' control.
RECENT DEVELOPMENTS
The MPSC issued an order on August 17, 1999 finding that it has
jurisdiction to approve rates, terms, and conditions for retail wheeling of
electricity (also known as "electric customer choice") if a utility voluntarily
chooses to offer that service. The MPSC issued this order after Consumers and
other parties submitted the briefs requested by the MPSC concerning the effects
of a June 29, 1999 Michigan Supreme Court decision. That Court found that the
MPSC does not have the statutory authority to order a mandatory retail wheeling
program. The August 17th order also requested that Consumers file a statement as
to whether it intended to continue with its electric customer choice program. On
September 1, 1999, Consumers filed a statement reaffirming its decision to
continue carrying out the electric customer choice program as previously
approved by the MPSC. The Association of Businesses Advocating Tariff Equity
("ABATE") and the Michigan Attorney General have each appealed the August 17th
order to the Michigan Court of Appeals. The issues raised by the MPSC's August
17th order could be resolved by the regulatory process, the appellate court or
by legislation codifying the retail wheeling and related stranded cost recovery
issues with the exact resolution being uncertain at this time.
S-10
11
In March 1999, Consumers signed a long-term electric power sales agreement
to resell to PECO Energy Company until September 2007 its capacity and energy
purchases under the long-term Power Purchase Agreement between Consumers and the
Midland Cogeneration Venture Limited Partnership (the "MCV PPA"). In March 1999,
Consumers also filed an application with the MPSC for accounting and rate-making
approvals related to the PECO agreement. If used as an offset to electric
customers stranded cost responsibility, Consumers estimates that there could be
a reduction of as much as $58 million (on a net present value basis) of stranded
cost related to the MCV PPA. In an order issued in April 1999, the MPSC
conditionally approved the requests for accounting and rate-making treatment
"but only to the extent that the resulting rates are lower than or equal to the
amount that they would be absent the PECO agreement." In response to Consumers'
and other parties' requests for clarification and rehearing, in an August 31,
1999 opinion, the MPSC partially granted the relief Consumers requested on
rehearing and attached certain additional conditions to its approval. Those
conditions relate to Consumers' continued decision to carry out the electric
customer choice program (which Consumers has affirmed as discussed above) and a
determination to revise Consumers' capacity solicitation process (which
Consumers has filed but is awaiting an MPSC decision). The August 31st opinion
is a companion order to a power supply cost reconciliation order issued on the
same date in another case. This order affects the level of frozen power supply
costs recoverable in rates during future years when the transaction with PECO
would be taking place. On September 30, 1999 Consumers filed motions for
clarification of the orders relating to the PECO agreement.
On November 12, 1997 ABATE filed a complaint with the MPSC that alleged
Consumers' electric earnings are more than its authorized rate of return and
sought an immediate reduction in Consumers' electric rates. The MPSC staff
investigated the complaint and concluded in an April 1998 report that no formal
rate proceeding was warranted at that time. The MPSC has now scheduled this
matter for further proceedings that should lead to more definitive MPSC
resolution in the first quarter of 2000, absent prior agreement among the
parties. In those proceedings, ABATE and intervenors bear the burden of
convincing the MPSC to reduce electric rates, which will otherwise remain
unchanged. In its testimony filed in this case, ABATE claimed that Consumers'
had approximately $189 million in excess revenues for 1998. In its testimony
MPSC staff stated that 1998 book results show excess revenues of $118 million
when actual results were compared to the previously authorized electric return
on equity, but recognized that no definitive conclusion could be reached from
such a simplistic computation about the proper level of future retail electric
rates. The MPSC staff presentation anticipated Consumers would file testimony
and exhibits using traditional ratemaking adjustments and normalizations which
would negate ABATE's claim of excessive earnings. Consumers has filed such
testimony showing that after such normalizations, there is a revenue deficiency
of approximately $3 million. The MPSC staff offered several alternatives for the
MPSC to consider. They involved several different refunds or reductions which
the MPSC could consider separately or in combination, but which, if made would
not result in a permanent future reduction in electric rates in the amount being
sought by ABATE. Consumers believes that ABATE, through its testimony, has not
met its burden of proving that a reduction in rates is appropriate. It also
believes that ABATE's request for refunds from 1995 to present is inappropriate
or unlawful because no such retroactive rate adjustment has ever been granted by
the MPSC in the past. On October 13, 1999, the MPSC granted Consumers' request
to deny questioning in this case concerning its power supply costs, and stated
that such matters were sufficiently addressed and determined in an earlier MPSC
order whereby such costs were frozen. An administrative law judge subsequently
ruled to permit testimony regarding the projected cost of coal. Consumers has
appealed this ruling to the MPSC.
The MPSC issued an order on September 28, 1999 relating to the 1997-98
heating year finding that Consumers did not demonstrate that its decision to
increase spot market and short-term gas purchases beyond the levels filed in its
gas cost recovery plan was reasonable and prudent, and disallowed recovery of
approximately $6.5 million of gas costs. The MPSC concluded that Consumers must
refund approximately $11.6 million (including interest) to its customers during
the December 1999 billing cycle. Consumers established a reserve for the refund
in the third quarter of 1999. Consumers has not yet determined whether to seek a
rehearing with the MPSC or appeal the MPSC's order with the Michigan Court of
Appeals.
S-11
12
Consumers' customers reached a record peak demand for electricity of 7,460
megawatts on July 30, 1999, surpassing the previous record of 7,315 MW by 2%.
Consumers satisfied this peak demand by utilizing its owned generating capacity
and long-term purchase contracts, and by taking actions such as exercising
rights under existing short-term option contracts, interrupting supply under its
interruptible contracts, exercising customer self-generation and load-shifting
options, and making public requests to its customers to conserve energy. By
carrying out these actions, none of Consumers' customers experienced an
involuntary reduction of firm load due to supply shortages.
In October 1999, Consumers announced that it is making progress in
discussions with its major commercial and industrial customers, which, if
successful, would result in agreement on the need for, and substance of,
electric restructuring legislation in Michigan and have the effect of resolving
Consumers' rate proceedings pending before the MPSC. While there are no
assurances that an agreement or legislation will result, Consumers is optimistic
that a positive outcome of the discussions can be achieved.
The Federal Clean Air Act, as amended, limits emissions of sulfur dioxide
and nitrogen oxides and requires emissions and air quality monitoring. In 1997
the EPA revised the national air quality standards to impose further limitations
on nitrogen oxide and small particulate-related emissions. In May 1999, a United
States Court of Appeals ruled however, that the EPA's revision of the standards
was an unconstitutional delegation of legislative power. As a result, the
standards will not be implemented under the 1997 rule. The EPA has requested a
rehearing of this ruling.
In September 1998, based in part upon the 1997 standards, the EPA
Administrator issued final regulations requiring the State of Michigan to
further limit nitrogen oxide emissions. The State of Michigan filed a lawsuit
objecting to the extent of the required emission reductions and requesting an
extension of the submission date. In May 1999, the United States Court of
Appeals for the District of Columbia granted an indefinite stay of the
submission date for the State of Michigan's implementation plan. Based upon the
recent court rulings, it is unlikely that the State of Michigan will establish
Consumers' nitrogen oxide emissions reduction target until late 1999. Until this
target is established, the estimated cost of compliance discussed below is
subject to revision.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions to the level proposed by the State of Michigan for
Consumers' fossil-fueled generating units ranges from approximately $150 million
to $290 million, in 1999 dollars. If Consumers had to meet the EPA's mandated
requirements it is estimated that it will cost Consumers between approximately
$290 million and $500 million, in 1999 dollars. In both these cases the lower
estimate represents the capital expenditure level that would satisfactorily meet
the proposed emissions limits but would result in higher operating expense. The
higher estimate in the range includes expenditures that result in lower
operating costs while complying with the proposed emissions limit. Consumers
anticipates that these capital expenditures will be incurred between 1999 and
2004, or between 1999 and 2003 if the EPA's limits are imposed. Consumers may
need an equivalent amount of capital expenditures to comply with the new small
particulate standards some time after 2004 if those standards become effective.
On October 22, 1999, CMS Energy Corporation, Consumers' parent company,
reported that operating earnings for Consumers' electric and gas businesses
increased three percent to $162.2 million from $158.2 million in the third
quarter of 1998. Total electric sales were 10.9 billion kilowatt-hours in the
third quarter, up two percent from the same period in 1998. Natural gas
deliveries were 43.6 billion cubic feet, an increase of four percent from the
third quarter of 1998, due mainly to increases in deliveries primarily to
transportation customers. For the first nine months, the utility business
operating earnings were up 12 percent due to increased electric sales and the
benefits of near-normal weather to the gas utility.
S-12
13
CONSUMERS ENERGY COMPANY FINANCING III
GENERAL
The trust is a statutory business trust created under Delaware law pursuant
to a declaration of trust and a certificate of trust, as filed with the
Secretary of State of the State of Delaware on October 12, 1999. The declaration
of trust will be amended and restated in its entirety, referred to as the
"declaration" or the "trust agreement," substantially in the form filed with the
SEC by Consumers and incorporated by reference into the registration statement
of which this prospectus supplement and the accompanying base prospectus form a
part. The declaration will be qualified as an indenture under the Trust
Indenture Act. Upon issuance of the preferred securities, the purchasers thereof
will own all of the preferred securities. Consumers will directly or indirectly
acquire common securities in a total liquidation amount equal to at least 3% of
the total capital of the trust and will own all of the issued and outstanding
common securities. The trust exists for the exclusive purposes of:
- issuing the preferred securities and the common securities representing
undivided beneficial interests in the assets of the trust;
- investing the gross proceeds of the preferred securities and the common
securities in the debentures; and
- engaging in only those other activities necessary, appropriate,
convenient or incidental thereto.
The trust has a term of approximately 55 years, but may be terminated
earlier as provided in the declaration.
Pursuant to the declaration, the number of trustees initially will be four.
Two of the trustees are employees or officers of Consumers. Bank of New York
will serve as property trustee under the declaration and as indenture trustee
for the purposes of the Trust Indenture Act. Bank of New York (Delaware) will
act as the Delaware trustee. The property trustee and the Delaware trustee may
at any time be removed or replaced by the holder of the common securities. For
purposes of compliance with the provisions of the Trust Indenture Act, Bank of
New York will also act as indenture trustee under the guarantee. See
"Description of Securities -- The Guarantees" in the base prospectus
accompanying this prospectus supplement.
The property trustee will hold title to the debentures for the benefit of
the trust and the holders of the preferred securities and common securities. So
long as the debentures are held by the trust, the property trustee will have the
power to exercise all rights, powers, and privileges of a holder of debentures
under the indenture. In addition, the property trustee will maintain exclusive
control of a segregated non-interest bearing bank account to hold all payments
made in respect of the debentures for the benefit of the holders of the
preferred securities and common securities. The property trustee will make
payments of distributions and payments on liquidation, redemption and otherwise
to the holders of the preferred securities and common securities out of funds
from the property account. The Bank of New York will hold the guarantee for the
benefit of the holders of the preferred securities. Consumers, as the direct or
indirect holder of all the common securities, will have the right to appoint,
remove or replace any trustee (subject to the limitations set forth in the
declaration) and to increase or decrease the number of trustees. Consumers will
pay all fees, expenses, debts and obligations (other than with respect to the
preferred securities and common securities) related to the trust and the
offering of the preferred securities.
The rights of the holders of the preferred securities, including economic
rights, rights to information and voting rights are set forth in the
declaration, the Delaware Business Trust Act, the indenture and the Trust
Indenture Act. See "Description of Securities -- Certain Terms of the Preferred
Securities" in this prospectus supplement.
S-13
14
CAPITALIZATION
The following table sets forth the consolidated short-term debt and
capitalization of Consumers as of June 30, 1999, and as adjusted to give effect
to the consummation of the offering of the preferred securities and the
application of the proceeds thereof. See "Use of Proceeds" in this prospectus
supplement. The following data should be read in conjunction with the
consolidated financial statements and notes thereto of Consumers incorporated by
reference herein as described in "Where You Can Find More Information" in the
base prospectus accompanying this prospectus supplement.
AT JUNE 30, 1999
--------------------
ACTUAL AS ADJUSTED
------ -----------
IN MILLIONS
(UNAUDITED)
Short-term debt (includes notes payable and current portion
of long-term debt and capital leases)..................... $ 412 $ 237
====== ======
Non-current portion of capital leases....................... $ 88 $ 88
Long-term debt (excluding current maturities)............... 2,008 2,008
Company-obligated mandatorily redeemable preferred
securities of:
Consumers Power Company Financing I....................... 100 100
Consumers Energy Company Financing II..................... 120 120
Consumers Energy Company Financing III(1)................. -- 175
Preferred Stock with no mandatory redemption................ 44 44
Common stockholder's equity................................. 1,981 1,981
------ ------
Total stockholder's equity........................ 2,025 2,025
------ ------
Total Capitalization.............................. $4,341 $4,166
====== ======
- ---------------
(1) As described in this prospectus supplement, the sole assets of the trust
will be 9.25% subordinated debentures due December 31, 2029 of Consumers
with a principal amount of $175,000,000, and upon redemption of such debt,
the preferred securities will be mandatorily redeemed.
ACCOUNTING TREATMENT
The financial statements of the trust will be reflected in Consumers'
consolidated financial statements, with the preferred securities shown as
"Company-obligated mandatorily redeemable preferred securities of subsidiaries."
In a footnote to Consumers' audited consolidated financial statements, there
will be a statement that the trust is wholly-owned by Consumers and that the
sole asset of the trust is the debentures (indicating the principal amount,
interest rate and maturity date thereof).
USE OF PROCEEDS
The proceeds from the sale of the preferred securities will be invested by
the trust in debentures of Consumers issued pursuant to the indenture described
herein. Consumers intends to use all of the net proceeds from the debentures to
repay short-term indebtedness. This short-term indebtedness was incurred on
April 1, 1999 for the redemption of Consumers' $2.08 Preferred Stock in an
aggregate amount of $200 million. As of October 7, 1999, the weighted average
interest rate of such short-term indebtedness was 6.05%.
S-14
15
SELECTED FINANCIAL DATA OF CONSUMERS ENERGY COMPANY
The following table presents selected financial data of Consumers for the
periods indicated and is qualified in its entirety by the information appearing
elsewhere in this prospectus supplement and by the information and financial
statements incorporated in this prospectus supplement by reference.
TWELVE MONTHS
ENDED YEAR ENDED DECEMBER 31
JUNE 30, --------------------------------------------
1999 1998 1997 1996 1995 1994
------------- ------ ------ ------ ------ ------
(UNAUDITED)
Operating Revenue (in millions)........ $3,832 $3,709 $3,769 $3,770 $3,511 $3,356
Net Income (Loss) (in millions)........ $ 360 $ 349(b) $ 321 $ 296 $ 255 $ 226
Net Income (Loss) after Preferred
Dividends and Distributions
(in millions)........................ $ 327 $ 312(b) $ 284 $ 260 $ 227 $ 202
Ratio of Earnings to:
Fixed Charges (a).................... 3.72 3.16(c) 3.31 3.27 2.82 2.81
Fixed Charges & Preferred
Dividends......................... 3.06 2.52(d) 2.61 2.54 2.30 2.32
- ---------------
(a) For purposes of computing the ratio, earnings represent net income before
income taxes, net interest charges and the estimated interest portions of
lease rentals, plus distributed income of equity investees less earnings
from minority interests of equity investees. Earnings for the ratio of
earnings to fixed charges and preferred stock dividends also includes the
amount required to pay distributions on preferred securities and the amount
of pretax earnings required to pay the dividends on outstanding preferred
stock.
(b) Includes a pre-tax $66 million increase due to a one-time change in method
of accounting for property taxes.
(c) Excludes a cumulative effect of change-in-accounting, after-tax gain of $43
million; if included, ratio would be 3.52.
(d) Excludes a cumulative effect of change-in-accounting, after-tax gain of $43
million: if included, ratio would be 2.81.
DESCRIPTION OF SECURITIES
This prospectus supplement and the accompanying base prospectus contain the
material terms and conditions for these securities, however, the summaries in
this prospectus supplement are not meant to be a complete description of the
preferred securities, the guarantee and the debentures. For more information,
refer to the trust agreement, the indenture and the guarantee. Forms of these
documents are filed as exhibits to the registration statement of which this
prospectus supplement and the accompanying base prospectus are a part. All terms
used in this prospectus supplement and the accompanying base prospectus that are
not defined in this prospectus supplement and the accompanying base prospectus
have the meanings given to them in the trust agreement, the indenture and the
guarantee.
CERTAIN TERMS OF THE PREFERRED SECURITIES
Distributions
The preferred securities represent undivided beneficial interests in the
assets of the trust. The only assets of the trust will be the debentures.
Distributions on the preferred securities are cumulative and will accumulate
from November 4, 1999, at the annual rate of 9.25% of the $25 liquidation amount
of each preferred security. Distributions will be payable quarterly in arrears
on March 31, June 30, September 30 and December 31 of each year, beginning
December 31, 1999. Distributions not paid when due will
S-15
16
themselves accumulate distributions at the annual rate of 9.25% (to the extent
permitted by law). When we refer to any payment of distributions, any such
additional distributions are included. The amount of distributions payable for
any full quarterly period will be computed on the basis of a 360-day year of
twelve 30-day months. The amount of distributions payable for any partial period
will be computed on the basis of the actual number of days elapsed in such
90-day quarterly period.
If distributions are payable on a date that is not a business day (as
defined below), payment will be made on the next business day (and without any
interest or other payment in respect of such delay). However, if the next
business day is in the next calendar year, payment of distributions will be made
on the preceding business day. A "business day" means any day other than a
Saturday or a Sunday or a day on which banking institutions in New York, New
York are authorized or required by law or executive order to close.
Deferral of Distributions
So long as no event of default has occurred and is continuing under the
debentures, Consumers may, on one or more occasions, defer interest payments on
the debentures to the trust for up to 20 consecutive quarterly periods. A
deferral of interest payments cannot extend beyond the stated maturity date of
the debentures on December 31, 2029. If Consumers defers interest payments on
the debentures, the trust will also defer quarterly distributions on the
preferred securities to you. During a deferral period, the amount of
distributions due to you would continue to accumulate and such deferred
distributions will themselves accumulate distributions at the rate stated above
(to the extent permitted by law).
Once Consumers makes all deferred interest payments on the debentures, with
accrued interest, it may again defer interest payments on the debentures if no
event of default under the debentures has then occurred and is continuing.
Consumers has no current intention of deferring interest payments on the
debentures. If Consumers defers interest payments on the debentures, Consumers
will be subject to certain restrictions relating to the payment of dividends on
or redemption of its capital stock and payments on its debt securities that rank
equal with or junior to the debentures. See "-- Certain Terms of the
Debentures -- Option to Extend Interest Payment Period" in this prospectus
supplement.
Payment of Distributions
Distributions on the preferred securities will be payable to holders named
on the securities register of the trust on the relevant record date. As long as
the preferred securities are represented by a global security, the record date
for the payment of distributions will be one business day before the relevant
payment date. If the preferred securities are ever issued in certificated form,
the record date for the payment of distributions will be the fifteenth day of
the last month of each quarterly distribution period, even if that day is not a
business day.
As long as the preferred securities are represented by a global security,
payments on the preferred securities will be made in immediately available funds
to DTC, the depositary for the preferred securities. If the preferred securities
are ever issued in certificated form, payment of distributions on the preferred
securities will be made by check mailed on or before the due date to the holders
thereof on the relevant record date.
S-16
17
Redemption
Consumers will repay the debentures at maturity on December 31, 2029.
Consumers may, before their maturity, redeem:
- all or some of the debentures on one or more occasions any time on or
after November 4, 2004; and
- all but not some of the debentures before December 31, 2029, if certain
changes in tax or investment company law occur or will occur within 90
days (each of which is a "Special Event" more fully described below).
When Consumers repays some or all of the debentures, either at maturity on
December 31, 2029 or upon early redemption, the trust will use the cash it
receives upon the redemption of the debentures to redeem a like liquidation
amount of the preferred securities and, unless an event of default under the
trust agreement has occurred and is continuing, the common securities. The
preferred securities and common securities (if applicable) will be redeemed at a
price equal to their liquidation amount of $25 per security plus accumulated
distributions, if any. The redemption price for the debentures is 100% of their
principal amount plus accrued and unpaid interest to the date of redemption. See
"-- Certain Terms of the Debentures -- Redemption" in this prospectus
supplement.
If less than all the preferred securities and common securities are to be
redeemed in situations where common securities may be redeemed consistent with
the provisions described under "-- Subordination of Common Securities" in this
prospectus supplement, then the total liquidation amount of preferred securities
and common securities to be redeemed will be allocated proportionately based on
the liquidation amount of the preferred securities and the common securities.
Special Event Redemption
Upon the occurrence of a Tax Event or an Investment Company Event as
defined below, Consumers may redeem all but not some of the debentures, within
90 days following the occurrence of the Special Event.
"Tax Event" means that the trust has received an opinion of counsel
experienced in such matters to the effect that, as a result of any:
- amendment to, or change (including any announced proposed change) in, the
laws or regulations of the United States or any political subdivision or
taxing authority affecting taxation; or
- official or administrative pronouncement or action, or judicial decision,
interpreting or applying such laws or regulations
where such change or amendment becomes effective, or such pronouncement, action
or decision is announced or occurs, on or after the date of this prospectus
supplement, there is more than an insubstantial risk that:
- the trust is or, within 90 days of the date of such opinion, would be
subject to United States federal income tax with respect to interest
accrued or received on the debentures;
- interest payable by Consumers on the debentures is not or, within 90 days
of the date of such opinion, would not be deductible by Consumers in
whole or in part for United States federal income tax purposes; or
- the trust is or, within 90 days of the date of such opinion, would be
subject to more than a minimal amount of other taxes, duties, assessments
or other governmental charges.
"Investment Company Event" means that the trust has received an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the trust is or will be considered an
S-17
18
"investment company" under the Investment Company Act of 1940 that is required
to be registered under this law, which change becomes effective on or after the
date of this prospectus supplement.
Redemption Procedures
The trust will give you at least 30 days, but not more than 60 days,
written notice before any redemption of preferred securities. To the extent
funds are available for payment, the trust will irrevocably deposit with DTC
sufficient funds to pay the redemption amount for the preferred securities being
redeemed. The trust will also give DTC irrevocable instructions and authority to
pay the redemption amount in immediately available funds to the beneficial
owners of the global securities representing the preferred securities.
Distributions to be paid on or before the redemption date for any preferred
securities called for redemption will be payable to the holders on the record
dates for the related dates of distribution.
Once notice of redemption is given and funds are irrevocably deposited,
distributions on the preferred securities will cease to accumulate immediately
prior to the close of business on the redemption date and all rights of the
holders of the preferred securities called for redemption will cease, except for
the right to receive the redemption amount (but without interest on such
redemption amount).
If any redemption date is not a business day, then the redemption amount
will be payable on the next business day (and without any interest or other
payment in respect of any such delay).
If payment of the redemption amount for any preferred securities called for
redemption is improperly withheld or refused and not paid either by the trust or
by Consumers, distributions on the preferred securities will continue to
accumulate at the applicable rate from the original redemption date scheduled to
the actual date of payment. In this case, the actual payment date will be
considered the redemption date for purposes of calculating the redemption
amount.
In compliance with applicable law (including the United States federal
securities laws), Consumers or its affiliates may, at any time, purchase
outstanding preferred securities by tender, in the open market, or by private
agreement.
Events of Default
An event of default under the indenture constitutes an event of default
under the declaration with respect to the preferred securities. However,
provided that pursuant to the declaration, the holder of the common securities
will be deemed to have waived any declaration event of default with respect to
the common securities until all declaration events of default with respect to
the preferred securities have been cured, waived or otherwise eliminated. Until
any declaration event of default with respect to the preferred securities has
been cured, waived or otherwise eliminated, the property trustee will be deemed
to be acting solely on behalf of the holders of the preferred securities and
only the holders of the preferred securities will have the right to direct the
property trustee with respect to certain matters under the declaration, and
therefore the indenture.
Upon the occurrence of a declaration event of default, the indenture
trustee or the property trustee will have the right under the indenture to
declare the principal of and interest on the debentures to be immediately due
and payable.
Voting Rights
Subject to the requirement of the property trustee obtaining a tax opinion
in certain circumstances set forth in the last sentence of this paragraph, the
holders of a majority in total liquidation amount of the preferred securities
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the property trustee, or direct the exercise of any
trust or power conferred upon
S-18
19
the property trustee under the declaration, including the right to direct the
property trustee, as holder of the debentures, to
- exercise the remedies available under the indenture with respect to the
debentures,
- waive any past indenture event of default that is waivable under the
indenture, or
- exercise any right to rescind or annul a declaration that the principal
of all the debentures shall be due and payable, or consent to any
amendment, modification or termination of the indenture or the
debentures, where such consent should be required.
However, where a consent or action under the indenture would require the
consent or act of the holders of greater than a majority in principal amount of
debentures affected thereby, the property trustee may only give such consent or
take such action at the written direction of the holders of at least the
proportion in liquidation amount of the preferred securities which the relevant
super-majority represents of the total principal amount of the debentures
outstanding. The property trustee shall notify all holders of the preferred
securities of any notice of default received from the indenture trustee with
respect to the debentures. Except with respect to directing the time, method and
place of conducting a proceeding for a remedy, the property trustee shall not
take any of the actions described in the bullet points above unless the property
trustee has obtained an opinion of tax counsel to the effect that, as a result
of such action, the trust will not be classified as an association taxable as a
corporation for United States federal income tax purposes.
In the event the consent of the property trustee, as the holder of the
debentures, is required under the indenture with respect to any amendment,
modification or termination of the indenture or the debentures, the property
trustee will request the direction of the holders of the preferred securities
with respect to such amendment, modification or termination. The property
trustee will then vote with respect to such amendment, modification or
termination as directed by a majority in liquidation amount of the preferred
securities voting together as a single class. However, where a consent under the
indenture would require the consent of a super-majority, the property trustee
may only give its consent at the direction of the holders of at least the
proportion in liquidation amount of the preferred securities which the relevant
super-majority represents of the total principal amount of the debentures
outstanding. The property trustee shall not take any such action in accordance
with the directions of the holders of the preferred securities unless the
property trustee has obtained an opinion of tax counsel to the effect that the
trust will not be classified as an association taxable as a corporation for
United States federal income tax purposes on account of such action.
Subordination of Common Securities
Payment of distributions on, and the redemption and liquidation amount of,
the preferred securities and the common securities will be made proportionately
based on the total liquidation amounts of the preferred securities and the
common securities. However, if an event of default under the trust agreement has
occurred and is continuing, no payments may be made on the common securities
unless all unpaid amounts on the preferred securities have been provided for or
paid in full.
If an event of default under the trust agreement has occurred and is
continuing, the common securities holder will be deemed to have waived any right
to take any action with respect to the event of default until the event of
default has been cured, waived or eliminated. Until any event of default has
been cured, waived or eliminated, the property trustee will act solely on behalf
of the holders of the preferred securities, and these holders will have the
right to direct the property trustee to act on their behalf.
Book-Entry-Only Issuance -- DTC
The preferred securities will be represented by one or more global
securities that will be deposited with, or on behalf of, and registered in the
name of, DTC or its nominee. This means that the trust will not issue
certificates to you for the preferred securities. Each global security will be
issued to DTC which will keep a computerized record of its participants (for
example, a broker) whose clients have purchased
S-19
20
the preferred securities. Each participant will then keep a record of its
clients. Unless a global security is exchanged in whole or in part for a
certificated security, a global security may not be transferred. However, DTC,
its nominees and their successors may transfer a global security as a whole to
one another.
Beneficial interests in a global security will be shown on, and transfers
of the global security will be made only through, records maintained by DTC and
its participants. DTC holds securities that its participants ("direct
participants") deposit with DTC. DTC also records the settlement among direct
participants of securities transactions, such as transfers and pledges, in
deposited securities through computerized records for direct participant's
accounts. This eliminates the need to exchange certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
direct participant. The rules that apply to DTC and its participants are on file
with the Securities and Exchange Commission.
DTC is owned by a number of its direct participants and by the New York
Stock Exchange, the American Stock Exchange and the National Association of
Securities Dealers.
DTC has advised Consumers and the trust that DTC is a limited-purpose trust
company organized under New York Banking Law, a "banking organization" within
the meaning of the New York Banking Law, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended.
Purchases under the DTC System -- When you purchase preferred securities
through the DTC system, the purchases must be made by or through a direct
participant, who will receive credit for the preferred securities on DTC's
records. Because you actually own the preferred security, you are the beneficial
owner. Your ownership interest will be recorded only on the direct (or indirect)
participants' records. DTC has no knowledge of your individual ownership of the
preferred securities. DTC's records show only the identity of the direct
participants and the amount of the preferred securities held by or through them.
You will not receive a written confirmation of your purchase or sale or any
periodic account statement directly from DTC. You will receive these from your
direct (or indirect) participant. As a result, the direct (or indirect)
participants are responsible for keeping accurate account of the holdings of
their customers, like you.
Payments under the DTC System -- The property trustee will wire payments on
the preferred securities to DTC's nominee. Consumers, the trust and the property
trustee will treat DTC's nominee as the owner and holder of each global security
representing preferred securities for all purposes. Accordingly, Consumers, the
trust and the property trustee will have no direct responsibility or liability
to pay amounts due on the global security to you or any other beneficial owners
in the global security.
Any redemption notices will be sent by Consumers and the Trust directly to
DTC, who will in turn inform the direct participants, who will then contact you
as a beneficial owner. If less than all of the preferred securities are being
redeemed, DTC's practice is to choose by lot the amount of the interest of each
direct participant to be redeemed. The direct participant will then use an
appropriate method to allocate the redemption among its beneficial owners, like
you.
It is DTC's current practice, upon receipt of any payment of distributions
or liquidation or redemption amount, to credit direct participants' accounts on
the payment date based on their holdings of beneficial interests in the global
securities as shown on DTC's records. In addition, it is DTC's current practice
to assign any consenting or voting rights to direct participants whose accounts
are credited with preferred securities on a record date, by using an omnibus
proxy. Payments by participants to owners of beneficial interests in the global
securities, and voting by participants, will be based on the customary practices
between the participants and owners of beneficial interests, as is the case with
securities held for the account of customers registered in "street name."
However, payments will be the responsibility of the participants and not of DTC,
the property trustee, Consumers or the trust.
S-20
21
Year 2000 Issues -- DTC management is aware that some computer
applications, systems, and the like for processing data that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter year 2000 problems. DTC has informed its participants and other
members of the financial community that it has developed and is implementing a
program so that its systems, as the same relate to the timely payment of
distributions (including principal and income payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
DTC's ability to perform properly its services is also dependent upon other
parties, including issuers and their agents, as well as DTC's direct and
indirect participants and third party vendors from whom DTC licenses software
and hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the financial community that
it is contacting (and will continue to contact) third party vendors from whom
DTC acquires services to:
(1) impress upon them the importance of such services being year 2000
compliant; and
(2) determine the extent of their efforts for year 2000 remediation
(and, as appropriate, testing) of their services. In addition, DTC is in
the process of developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the financial community for informational purposes only and is
not intended to serve as a representation, warranty or contract
modification of any kind.
Exchange of Global Securities -- Preferred securities represented by a
global security will be exchangeable for certificated securities with the same
terms in authorized denominations only if:
- DTC is unwilling, unable or ineligible to continue as depositary and a
successor depositary is not appointed by the trust within 90 days; or
- Consumers decides to discontinue use of the system of book-entry transfer
through DTC (or any successor depositary).
If the book-entry-only system is discontinued, the property trustee will
keep the registration books for the preferred securities at its corporate office
and follow the practices and procedures discussed below.
Certificated Securities -- Registration and Transfer
If the trust issues certificated securities, they will be registered in the
name of the securityholder. The preferred securities may be transferred or
exchanged, based on administrative procedures in the trust agreement, without
the payment of any service charge (other than any tax or other governmental
charge) by contacting the property trustee, Bank of New York, 101 Barclay
Street, 21W, New York, New York 10286, attention: Corporate Trust and Agency
Services -- Corporate Market Services.
CERTAIN TERMS OF THE DEBENTURES
The debentures will be issued as a series pursuant to a supplemental
indenture or a resolution of Consumers' board of directors or a committee
thereof as provided for in the indenture.
Subordination
The debentures are unsecured and are junior in right of payment to all of
Consumers' "senior indebtedness". Consumers may not make any payments of
principal (including redemption payments) or interest on the debentures if it
defaults on a payment on its senior indebtedness. Also, payments on the
debentures may be blocked for up to 180 days in the event of certain non-payment
defaults by Consumers on its senior indebtedness. See "Subordinated Debentures"
in the accompanying base prospectus for more detailed information.
S-21
22
On any distribution of assets of Consumers to creditors upon any
liquidation, dissolution, winding-up, reorganization, assignment for the benefit
of creditors, marshalling of assets or liabilities or any bankruptcy, insolvency
or similar proceedings, all principal, premium, if any, and interest due or to
become due on all senior indebtedness must be paid in full before the holders of
the debentures are entitled to receive or retain any payment.
Neither the debentures nor the guarantee will limit the ability of
Consumers and its subsidiaries to incur additional indebtedness, including
indebtedness that ranks senior in priority of payment to the debentures and the
guarantee. At June 30, 1999, as if on that date Consumers and the trust had
issued and sold the preferred securities and the debentures and applied the
estimated net proceeds thereof as described in this prospectus supplement, the
total amount of Consumers' senior indebtedness would have been approximately
$2,728 million. See "Capitalization" and "Use of Proceeds" in this prospectus
supplement.
Interest Rate and Maturity
The debentures will mature on December 31, 2029, and will bear interest,
accruing from November 4, 1999, at the annual rate of 9.25% of their principal
amount, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year, beginning December 31, 1999. Interest payments not
paid when due will themselves accrue additional interest at the annual rate of
9.25% (to the extent permitted by law). When we refer to any payment of
interest, interest includes such additional interest and any additional amounts,
as defined below. The interest payment provisions for the debentures correspond
to the distribution provisions of the preferred securities. The debentures do
not have a sinking fund. This means that Consumers is not required to make any
principal payments prior to maturity.
Additional Sums
If the trust is required to pay any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding taxes) imposed
by the United States, or any other taxing authority, then Consumers will be
required to pay additional amounts on the debentures so that after the trust
pays any taxes, the trust will be in the same position it would have been if it
did not have to pay such taxes.
Redemption
Consumers may redeem, before their maturity:
- all or some of the debentures on one or more occasions any time on or
after November 4, 2004; or
- all but not some of the debentures before December 31, 2029, upon the
occurrence of a special event.
If Consumers decides to redeem debentures in these circumstances, the
redemption price of each debenture redeemed will be equal to 100% of the
principal amount of such debenture plus accrued and unpaid interest on such
debenture to the date of redemption.
Distribution of Debentures
If the property trustee distributes the debentures to the preferred
securities holders and common securities holder upon the dissolution and
liquidation of the trust, the debentures will be issued in denominations of $25
principal amount and integral multiples thereof. Consumers anticipates that the
debentures would be distributed in the form of one or more global securities and
DTC, or any successor depositary for the preferred securities, would act as
depositary for the debentures. The depositary arrangements for the debentures
would be substantially similar to those in effect for the preferred securities.
S-22
23
For a description of DTC and the terms of the depositary arrangements
relating to payments, transfers, voting rights, redemption, other notices and
other matters, see "-- Certain Terms of the Preferred
Securities -- Book-Entry-Only Issuance -- DTC" in this prospectus supplement.
Option to Extend Interest Payment Period
Consumers may, on one or more occasions, defer interest payments on the
debentures for up to 20 consecutive quarterly periods, if no event of default
has occurred and is continuing with respect to the debentures. A deferral of
interest payments cannot extend beyond the stated maturity date of the
debentures. No interest will be due and payable on the debentures until the end
of the deferral period unless the debentures are redeemed prior to such time.
Consumers may pay at any time all or any portion of the interest accrued to
that point during a deferral period. At the end of the deferral period or at a
redemption or maturity date, Consumers will be obligated to pay all accrued and
unpaid interest.
Once Consumers makes all interest payments on the debentures, with accrued
interest, it may again defer interest payments on the debentures if no event of
default under the debentures has then occurred and is continuing.
During any deferral period and subject to certain exceptions, Consumers
will not be permitted to:
- declare or pay any dividends or distributions or redeem, purchase,
acquire or make a liquidation payment with respect to, any shares of its
capital stock;
- make any payment of principal, interest or premium, if any, on or repay
or repurchase or redeem any debt securities issued by Consumers which
rank equal with or junior to the debentures; or
- make any guarantee payments with respect to any guarantee by Consumers of
the debt securities of Consumers if such guarantee ranks equal with or
junior to the debentures.
Because the debentures to be issued to the trust will rank equal with all
other series of junior subordinated debt securities of Consumers initially
issued to the other trusts referred to in the accompanying base prospectus or to
certain other trusts, partnerships or other entities affiliated with Consumers,
during an interest deferral period, Consumers will not be permitted to make
payments on such other series of junior subordinated debt securities. Likewise,
if Consumers defers interest payments on any other of such series of junior
subordinated debt securities, it is not expected that Consumers will be
permitted to make payments on the debentures.
The restrictions described in the bullet points above will also apply if
there occurs and is continuing a default or event of default under the indenture
of which Consumers has actual knowledge and in respect of which Consumers has
not taken reasonable steps to cure or if Consumers defaults on its obligations
under the guarantee.
Consumers will give the trust, the regular trustees, the property trustee
and the indenture trustee notice if it decides to defer interest payments on the
debentures. As long as the debentures are held by the trust, Consumers will give
that notice at least one business day before the earlier of:
- the next date distributions on the preferred securities are payable; or
- the date the trust is required to give notice to the New York Stock
Exchange (or any other applicable self-regulatory organization) or to
holders of the preferred securities of the record date or the date
distributions are payable.
There is no limitation on the number of times that Consumers may elect to
begin an extension period. The regular trustees will give notice to the property
trustee and the holders of preferred securities if Consumers decides to defer
interest payments on the debentures.
S-23
24
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In this section, we summarize certain of the material United States federal
income tax consequences of purchasing, holding and selling the preferred
securities. Except where we state otherwise, this summary deals only with
preferred securities held as capital assets (as defined in the Internal Revenue
Code of 1986) by a U.S. Holder (as defined below) who purchases the preferred
securities at their original offering price when the trust originally issues
them.
We do not address all of the tax consequences that may be relevant to a
U.S. Holder. We also do not address, except as stated below, any of the tax
consequences to holders that may be subject to special tax treatment including
banks, thrift institutions, real estate investment trusts, personal holding
companies, tax-exempt organizations, regulated investment companies, insurance
companies, and brokers and dealers in securities or currencies. Further, we do
not address:
- the United States federal income tax consequences to shareholders in, or
partners or beneficiaries of, an entity that is a holder of the preferred
securities;
- the United States federal estate and gift or alternative minimum tax
consequences of the purchase, ownership or sale of the preferred
securities;
- persons who hold the preferred securities in a "straddle" or as part of a
"hedging," "conversion" or "constructive sale" transaction or whose
"functional currency" is not the United States dollar; or
- any state, local or foreign tax consequences of the purchase, ownership
and sale of preferred securities.
Accordingly, you should consult your tax advisor regarding the tax
consequences of purchasing, owning and selling the preferred securities in light
of your circumstances.
A "U.S. Holder" is a preferred securities holder who or which is:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States, any state thereof or the District of Columbia (unless,
in the case of a partnership, Treasury regulations provide otherwise);
- an estate if its income is subject to United States federal income
taxation regardless of its source; or
- a trust if (1) a United States court can exercise primary supervision
over its administration and (2) one or more United States persons have
the authority to control all of its substantial decisions.
This summary is based on the Internal Revenue Code, Treasury regulations
(proposed and final) issued under the Internal Revenue Code, and administrative
and judicial interpretations thereof, all as they currently exist as of the date
of this prospectus supplement. These income tax laws and regulations, however,
may change at any time, possibly on a retroactive basis. Any such changes may
affect this summary.
CLASSIFICATION OF THE DEBENTURES
Consumers intends to take the position that the debentures will be
classified for United States federal income tax purposes as indebtedness of
Consumers under current law, and, by acceptance of a preferred security, each
holder covenants to treat the debentures as indebtedness and the preferred
securities as evidence of an indirect beneficial ownership interest in the
debentures. No assurance can be given, however, that such position of Consumers
will not be challenged by the Internal Revenue Service or, if challenged, that
such a challenge would not be successful. The remainder of this discussion
assumes that
S-24
25
the debentures will be classified as indebtedness of Consumers for United States
federal income tax purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the preferred securities, tax counsel
for Consumers will render a legal opinion generally to the effect that, under
current law and assuming full compliance with the terms of the trust agreement,
the indenture, and certain other documents, and based on certain facts and
assumptions described in the opinion, the Trust will be classified for United
States federal income tax purposes as a grantor trust and will not be subject to
tax as a corporation. Accordingly, for United States federal income tax
purposes, you will generally be treated as the owner of an undivided interest in
the assets of the Trust, including the debentures. You will be required to
include in ordinary income for United States federal income tax purposes your
allocable share of interest (or OID, if any) paid or accrued on the debentures.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under the Treasury regulations relating to OID, a debt instrument will be
deemed to be issued with OID if there is more than a "remote" contingency that
periodic stated interest payments due on the instrument will not be timely paid.
Because the exercise by Consumers of its option to defer payments of stated
interest on the debentures would prevent Consumers from:
- declaring dividends, or engaging in certain other capital transactions,
with respect to its capital stock, or
- making any payment on any debt securities issued by Consumers which rank
equal with or junior to the debentures, Consumers believes that the
likelihood of its exercising the option is "remote" within the meaning of
the Treasury regulations.
As a result, Consumers intends to take the position that the debentures
will not be deemed to be issued with OID. Based on this position, stated
interest payments on the debentures will be includible in your ordinary income
at the time that such payments are received or accrued in accordance with your
regular method of accounting. Because the Internal Revenue Service has not yet
addressed the Treasury regulations in any published rulings or other
interpretations, it is possible that the Internal Revenue Service could take a
position contrary to the position taken by Consumers. In that event, the
Internal Revenue Service may, for example, require you to include interest on
the debentures in your taxable income as it accrues rather than when you receive
payment even though you use the cash method of accounting for federal income tax
purposes.
EXERCISE OF DEFERRAL OPTIONS
Under Treasury regulations, if Consumers were to exercise its option to
defer the payment of interest on the debentures, the debentures would be treated
as redeemed and reissued for OID purposes and the sum of the remaining interest
payments on the debentures would be treated as OID, which you would be required
to accrue and include in taxable income on an economic accrual basis (regardless
of your method of accounting for income tax purposes) over the remaining term of
the debentures (including any period of interest deferral), without regard to
the timing of payments under the debentures. The amount of interest income
includible in your taxable income would be determined on the basis of a constant
yield method over the remaining term of the debentures and the actual receipt of
future payments of stated interest on the debentures would no longer be
separately reported as taxable income. The total amount of OID that would accrue
during the deferred interest payment period would be approximately equal to the
amount of the cash payment due at the end of such period. Any OID included in
income would increase your adjusted tax basis in your preferred securities, and
your actual receipt of cash interest payments would reduce your basis in the
preferred securities.
S-25
26
CORPORATE U.S. HOLDERS
Corporate U.S. Holders of the preferred securities will not be entitled to
a dividends-received deduction for any income from the preferred securities.
SALES OF PREFERRED SECURITIES
If you sell your preferred securities, you will recognize gain or loss in
an amount equal to the difference between your adjusted tax basis in the
preferred securities and the amount realized from the sale (generally, your
selling price less any amount received in respect of accrued but unpaid interest
not previously included in your income). Your adjusted tax basis in the
preferred securities generally will equal:
- the initial purchase price that you paid for the preferred securities
plus
- any accrued and unpaid distributions that you were required to treat as
OID less any cash distributions received in respect of accrued OID.
Gain or loss on the sale of preferred securities generally will be capital
gain or loss.
The preferred securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest (or OID if the debentures are
treated as having been issued or reissued with OID) relating to the underlying
debentures. If you dispose of your preferred securities, you will be required to
include in ordinary income for United States federal income tax purposes any
portion of the amount realized that is attributable to accrued but unpaid,
interest (including OID, if any) through the date of sale. This income inclusion
will increase your adjusted tax basis in the preferred securities but may not be
reflected in the sale price. To the extent the sale price is less than your
adjusted tax basis, you will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
RECEIPT OF DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
If Consumers dissolves the trust and causes the trust to distribute the
debentures on a proportionate basis to you, you will not be subject to tax.
Rather, you would have an adjusted tax basis in the debentures received in the
liquidation equal to the adjusted tax basis in your preferred securities
surrendered for the debentures. Your holding period for the debentures would
include the period during which you had held the preferred securities. If,
however, the trust is classified, for United States federal income tax purposes,
as an association that is subject to tax as a corporation at the time of the
liquidation, the distribution of the debentures would constitute a taxable event
to you and you would acquire a new holding period in the debentures received.
If the debentures are redeemed for cash and the proceeds of the redemption
are distributed to you in redemption of your preferred securities, the
redemption would be treated as a sale of the preferred securities, in which gain
or loss would be recognized, as described immediately above.
INFORMATION REPORTING AND BACK-UP WITHHOLDING
Generally, income on the preferred securities will be reported to you on an
Internal Revenue Service Form 1099, which should be mailed to you by January 31
following each calendar year. If you fail to supply your correct taxpayer
identification number or under-report your tax liability, the Internal Revenue
Service may require the property trustee or its agent to withhold federal income
tax at the rate of 31% from each interest payment. You will be permitted to
credit any withheld tax against your federal income tax liability.
S-26
27
ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to Title I of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA
in the context of the Plan's particular circumstances before authorizing an
investment in the preferred securities with assets of the Plan. Accordingly,
among other factors, the fiduciary should consider whether the investment would
satisfy the prudence and diversification requirements of ERISA and would be
consistent with the documents and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code ("Parties in Interest") with respect to such Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other liabilities under ERISA and/or Section 4975 of the Code for such persons,
unless exemptive relief is available under an applicable statutory or
administrative exemption.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and
foreign plans (as described in Section 4(b)(4) of ERISA) are not subject to the
requirements of ERISA or Section 4975 of the Code; however, such plans may be
subject to federal, state or local laws or regulations which affect their
ability to invest in the preferred securities. Any fiduciary of such a
governmental, church or foreign plan considering an investment in the preferred
securities should determine the need for, and, if necessary, the availability
of, any exemptive relief under such laws or regulations.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of the trust may be deemed to be
"plan assets" of a Plan for purposes of ERISA and Section 4975 of the Code if
"plan assets" of the Plan were used to acquire an equity interest in the trust
and no exception were applicable under the Plan Assets Regulation. An "equity
interest" is defined under the Plan Assets Regulation as any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features and
specifically includes a beneficial interest in a trust.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of the trust would not be deemed to be "plan assets" of investing Plans
if, immediately after the most recent acquisition of any equity interest in the
trust, less than 25% of the value of each class of equity interests in the trust
were held by Plans, other employee benefit plans not subject to ERISA or Section
4975 of the Code (such as governmental, church and foreign plans), and entities
holding assets deemed to be "plan assets" of any Plan (collectively, "Benefit
Plan Investors"), or if the preferred securities were "publicly-offered
securities" for purposes of the Plan Assets Regulation. No assurance can be
given that the value of the preferred securities held by Benefit Plan Investors
will be less than 25% of the total value of such preferred securities at the
completion of the initial offering or thereafter, and no monitoring or other
measures will be taken with respect to the satisfaction of the conditions of
this exception. In addition, no assurance can be given that the preferred
securities would be considered to be "publicly-offered securities" under the
Plan Assets Regulation. All of the common securities will be purchased and held
by Consumers.
Certain transactions involving the trust could be deemed to constitute
direct or indirect prohibited transactions under ERISA and Section 4975 of the
Code with respect to a Plan if the preferred securities were acquired with "plan
assets" of such Plan and the assets of the trust were deemed to be "plan assets"
of Plans investing in the trust. For example, if Consumers were a Party in
Interest with respect to a Plan (either directly or by reason of ownership of
its subsidiaries), extensions of credit between Consumers and the trust (as
represented by the debentures and the guarantee) would likely be prohibited by
Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code, unless
exemptive relief were available under an applicable administrative exemption
(see below). In addition, if Consumers were considered to be a fiduciary with
respect to the trust as a result of certain powers it holds (such as the powers
to remove and replace the property trustee and the regular trustees), certain
operations of the trust,
S-27
28
including the optional redemption or acceleration of the debentures, could be
considered to be prohibited transactions under Section 406(b) of ERISA and
Section 4975(c)(1)(E) of the Code. In order to avoid such prohibited
transactions, each investing plan, by purchasing preferred securities, will be
deemed to have directed the trust to invest in the debentures and to have
appointed the property trustee.
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief if required for direct or indirect prohibited
transactions that may arise from the purchase or holding of the preferred
securities if assets of the trust were deemed to be "plan assets" of Plans
investing in the trust as described above. Those class exemptions are PTCE 96-23
(for certain transactions effected on behalf of a Plan by an in-house asset
manager), PTCE 95-60 (for certain transactions involving insurance company
general accounts), PTCE 91-38 (for certain transactions involving bank
collective investment funds), PTCE 90-1 (for certain transactions involving
insurance company separate pooled accounts), and PTCE 84-14 (for certain
transactions effected on behalf of a Plan by an independent qualified
professional asset manager).
Because the preferred securities may be deemed to be equity interests in
the trust for purposes of ERISA and Section 4975 of the Code, the preferred
securities may not be purchased and should not be held by any Plan, any entity
whose underlying assets include "plan assets" by reason of any Plan's investment
in the entity (a "Plan Asset Entity") or any person investing "plan assets" of
any Plan, unless such purchaser or holder is eligible for the exemptive relief
available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable
exemption. Any purchaser or holder of the preferred securities or any interest
therein will be deemed to have represented by its purchase and holding thereof
that it either (a) is not a Plan or a Plan Asset Entity and is not purchasing
such securities on behalf of or with "plan assets" of any Plan, or (b) is
eligible for the exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1
or 84-14 or another applicable exemption with respect to such purchase or
holding.
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in non-exempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the preferred
securities on behalf of or with "plan assets" of any Plan consult with their
counsel regarding the potential consequences if the assets of the trust were
deemed to be "plan assets" and the availability of exemptive relief under PTCE
96-23, 95-60, 91-38, 90-1 or 84-14 or any other applicable exemption.
The discussion herein of ERISA is general in nature and is not intended to
be complete. Any fiduciary of a plan, governmental plan, church plan or a
foreign plan considering an investment in the preferred securities should
consult with its legal advisors regarding the consequences and advisability of
such investment.
Insurance companies considering an investment in the preferred securities
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 DOL issued proposed regulations (the "Proposed General Account
Regulations") in December, 1997 with respect to insurance policies that are
supported by an insurer's general account. The Proposed General Account
Regulations are intended to provide guidance on which assets held by the insurer
constitute "plan assets" of an ERISA Plan for purposes of the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code.
S-28
29
UNDERWRITING
GENERAL
Subject to the terms and conditions of an underwriting agreement, the trust
has agreed to sell to each of the underwriters named below, and each of the
underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, A.G.
Edwards & Sons, Inc., Fahnestock & Co. Inc., Morgan Stanley & Co. Incorporated,
Prudential Securities Incorporated, and Raymond James & Associates, Inc., are
acting as the representatives, has severally agreed to purchase from the trust,
the number of preferred securities set forth opposite its name below:
NUMBER OF
UNDERWRITER PREFERRED SECURITIES
----------- --------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 950,000
A.G. Edwards & Sons, Inc. .................................. 950,000
Fahnestock & Co. Inc. ...................................... 950,000
Morgan Stanley & Co. Incorporated........................... 950,000
Prudential Securities Incorporated.......................... 950,000
Raymond James & Associates, Inc. ........................... 950,000
ABN AMRO Incorporated....................................... 65,000
Robert W. Baird & Co. Incorporated.......................... 65,000
Banc of America Securities LLC.............................. 65,000
Bear, Stearns & Co. Inc. ................................... 65,000
Jack V. Butterfield Investment Co. ......................... 65,000
CIBC World Markets Corp. ................................... 65,000
Dain Rauscher Incorporated.................................. 65,000
Deutsche Bank Securities Inc. .............................. 65,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 65,000
Fleet Securities, Inc. ..................................... 65,000
First Union Securities, Inc. ............................... 65,000
Legg Mason Wood Walker, Incorporated........................ 65,000
McDonald Investments Inc., A KeyCorp Company................ 65,000
Mesirow Financial, Inc. .................................... 65,000
The Robinson-Humphrey Company, LLC.......................... 65,000
SG Cowen Securities Corporation............................. 65,000
TD Securities (USA) Inc. ................................... 65,000
Tucker Anthony Incorporated................................. 65,000
U.S. Bancorp Piper Jaffrey Inc. ............................ 65,000
Warburg Dillon Read LLC..................................... 65,000
---------
Total.......................................... 7,000,000
=========
In the underwriting agreement the several underwriters have agreed, subject
to the terms and conditions set forth in that agreement, to purchase all of the
preferred securities offered hereby if any of the preferred securities are
purchased. In the event of default by an underwriter, the underwriting agreement
provides that, in certain circumstances, the purchase commitments of the
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated.
Consumers and the trust have agreed with the underwriters to indemnify them
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or to contribute with respect to payments which the underwriters
may be required to make.
Certain of the underwriters and their affiliates have in the past and may
in the future engage in transactions with, or perform services for, Consumers in
the ordinary course of their businesses.
S-29
30
Consumers will pay all expenses, estimated to be approximately $500,000,
associated with the offer and sale of the preferred securities.
COMMISSIONS AND DISCOUNTS
The underwriters will offer the preferred securities directly to the public
initially at $25 per preferred security. The underwriters may also offer the
preferred securities to certain dealers at the above-mentioned offering price
less a concession of $.50 per preferred security. The underwriters may allow,
and such dealers may reallow, a discount not in excess of $.35 per preferred
security to certain dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
Because the proceeds from the sale of the preferred securities and the
common securities will be used to purchase the debentures, Consumers has agreed
to pay to the underwriters an underwriting commission of $.7875 per preferred
security (or a total of $5,512,500).
NEW YORK STOCK EXCHANGE LISTING
Before this offering, there was no established public trading market for
the preferred securities. We plan to list the preferred securities on the New
York Stock Exchange under the symbol "CMS PrL." Trading of the preferred
securities on the New York Stock Exchange is expected to begin within 30 days of
the issuance of the preferred securities. In order to meet all of the
requirements for listing the preferred securities on the New York Stock
Exchange, the underwriters have agreed to sell the preferred securities to a
minimum of 400 beneficial holders. The representatives have advised Consumers
that they intend to make a market in the preferred securities prior to the
commencement of trading on the New York Stock Exchange. However, the
representatives are not obligated to do so and may discontinue market making at
any time without notice. We cannot give any assurance that a liquid trading
market for the preferred securities will be available.
NO SALES OF SIMILAR SECURITIES
Consumers and the trust have agreed that, during a period of 30 days from
the date of the pricing of the preferred securities, they will not offer, sell,
contract to sell, or otherwise dispose of any preferred securities, any other
beneficial interests of the trust, or any securities of Consumers, that are
substantially similar to the preferred securities, including the guarantee, and
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive preferred securities or
any such substantially similar securities of either the trust or Consumers
(except the debentures and the preferred securities offered by this prospectus
supplement), without the prior consent of the representatives.
T+4 SETTLEMENT
It is expected that delivery of the preferred securities will be made
against payment therefor on or about the date specified in the last paragraph of
the cover page of this prospectus supplement, which will be the fourth business
day following the date of pricing of the preferred securities. Under Rule
15(c)6-1 of the Securities Exchange Act of 1934, trades in the secondary market
generally are required to settle in three business days, unless the parties to
any such trade expressly agree otherwise. Accordingly, purchasers who wish to
trade the preferred securities on the date of pricing will be required, by
virtue of the fact that the preferred securities initially will settle in T+4,
to specify an alternate settlement cycle at the time of any such trade of T+4 on
such trading day to prevent failed settlement. Purchasers of the preferred
securities who wish to trade the preferred securities on the date of pricing
should consult their own advisor.
S-30
31
PRICE STABILIZATION AND SHORT POSITIONS
In connection with the sale of the preferred securities, SEC rules permit
the underwriters to engage in transactions that stabilize the price of the
preferred securities. These transactions may include purchases for the purpose
of fixing or maintaining the price of the preferred securities.
The underwriters may create a short position in the preferred securities in
connection with this offering. That means they may sell a larger number of the
preferred securities than is shown on the cover page of this prospectus
supplement. If they create a short position, the underwriters may purchase
preferred securities in the open market to reduce the short position.
If the underwriters purchase the preferred securities to stabilize the
price or to reduce their short position, the price of the preferred securities
could be higher than it might be if they had not made such purchases. The
underwriters make no representation or prediction about any effect that the
purchases may have on the price of the preferred securities.
The underwriters may suspend any of these activities at any time.
PENALTY BIDS
The representatives also may impose a penalty bid on certain underwriters
and selling group members. This means that, if the representatives purchase
preferred securities in the open market to reduce the underwriters' short
position or to stabilize the price of the preferred securities, they may reclaim
the amount of the selling concession from the underwriters and selling group
members who sold those preferred securities as part of this offering.
S-31
32
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the preferred
securities, the enforceability of the trust agreement and the creation of the
trust will be passed upon on behalf of the trust by Richards, Layton & Finger,
P.A., Wilmington, Delaware, special Delaware counsel to the trust. The validity
of the senior notes, the preferred securities guarantee, the debentures and
certain matters relating thereto will be passed upon on behalf of Consumers by
Michael D. VanHemert, Esq., Assistant General Counsel for CMS Energy
Corporation, Consumers' parent. Certain legal matters will be passed upon on
behalf of the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP. Certain
United States federal income taxation matters will be passed upon for Consumers
and the trust by Theodore J. Vogel, as tax counsel to Consumers. As of June 30,
1999, an attorney currently employed by Skadden, Arps, Slate, Meagher & Flom
LLP, and formerly employed by CMS Energy Corporation, owned approximately 50,326
shares of CMS Energy Common Stock, 2,000 shares of Class G Common Stock, 10
shares of Consumers $4.50 Series Preferred Stock, $100 par value, and $50,000
aggregate principal amount of certain debt securities issued by CMS Energy. As
of June 30, 1999, Mr. Van Hemert beneficially owned approximately 4,000 shares
of CMS Energy Common Stock. As of June 30, 1999, Mr. Vogel beneficially owned
approximately 8,400 shares of CMS Energy Common Stock, and 200 shares of Class G
Common Stock.
EXPERTS
The consolidated financial statements and schedule of Consumers as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 incorporated by reference in this prospectus supplement and
the accompanying base prospectus, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
With respect to the unaudited interim consolidated financial information
for the periods ended March 31 and June 30, 1999 and 1998, Arthur Andersen LLP
has applied limited procedures in accordance with professional standards for a
review of that information. However, their separate reports thereon state that
they did not audit and they did not express an opinion on that interim
consolidated financial information. Accordingly, the degree of reliance on their
reports on that information should be restricted in light of the limited nature
of the review procedures applied. In addition, the accountants are not subject
to the liability provisions of Section 11 of the Securities Act, for their
reports on the unaudited interim consolidated financial information because
these reports are not "reports" or a part of the registration statement prepared
or certified by the accountants within the meaning of Sections 7 and 11 of the
Securities Act.
Future consolidated financial statements of Consumers and the reports
thereon of Arthur Andersen LLP also will be incorporated by reference in this
base prospectus in reliance upon the authority of that firm as experts in giving
those reports to the extent that said firm has audited said consolidated
financial statements and consented to the use of their reports thereon.
S-32
33
CONSUMERS ENERGY COMPANY
SENIOR NOTES
SUBORDINATED DEBENTURES
GUARANTEES
AND
CONSUMERS ENERGY COMPANY FINANCING III
CONSUMERS ENERGY COMPANY FINANCING IV
TRUST PREFERRED SECURITIES
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
CONSUMERS ENERGY COMPANY
OFFERING PRICE: $525,000,000
------------------------
Consumers may offer, on one or more occasions:
- secured senior debt, unsecured senior debt or unsecured subordinated debt
securities consisting of debentures, convertible debentures, notes and
other unsecured evidence of indebtedness; and
- guarantees of Consumers Energy Company with respect to trust preferred
securities of Consumers Energy Company Financing III and Consumers Energy
Company Financing IV.
For each type of securities listed above, the amount, price and terms will
be determined at or prior to the time of sale.
Consumers Energy Company Financing III and Consumers Energy Company
Financing IV, which are Delaware business trusts, may offer trust preferred
securities. The trust preferred securities represent preferred undivided
beneficial interests in the assets of Consumers Energy Company Financing III and
Consumers Energy Company Financing IV in amounts, at prices and on terms to be
determined at or prior to the time of sale.
We will provide the specific terms of these securities in an accompanying
prospectus supplement or supplements. You should read this prospectus and the
accompanying prospectus supplement or supplements carefully before you invest.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
We intend to sell these securities through underwriters, dealers, agents or
directly to a limited number of purchasers. The names of, and any securities to
be purchased by or through, these parties, the compensation of these parties and
other special terms in connection with the offering and sale of these securities
will be provided in the related prospectus supplement or supplements.
This prospectus may not be used to consummate sales of any of these
securities unless accompanied by a prospectus supplement.
The date of this prospectus is October 25, 1999
34
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus is accurate as
of the date on the front cover of this prospectus. Consumers' business,
financial condition, results of operations and prospects may have changed since
such dates.
WHERE YOU CAN FIND MORE INFORMATION
Consumers files reports, proxy statements and other information with the
Securities and Exchange Commission. Our SEC filings are also available over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document it files at the SEC's public reference room at 450 Fifth Street
N.W., Room 1024, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for more information on the public reference rooms and their copy charges. You
may also inspect our SEC reports and other information at the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
Consumers is "incorporating by reference" information into this prospectus.
This means that Consumers is disclosing important information by referring to
another document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this prospectus, except for any information
superceded by information in this prospectus. This prospectus incorporates by
reference the documents set forth that Consumers has previously filed with the
SEC. These documents contain important information about Consumers and its
finances.
SEC FILINGS (FILE NO. 1-5611) PERIOD/DATE
- ------------------------------------------------ -----------
- - Annual Report on Form 10-K.................... Year ended December 31, 1998.
- - Quarterly Reports of Form 10-Q................ Quarter ended March 31, 1999.
Quarter ended June 30, 1999.
- - Current Reports on Form 8-K................... Filed July 1, September 9, September 24, October
18, and November 26, 1999.
The documents filed by Consumers with the SEC pursuant to Sections 13(a),
13(c), 14 and 15 of the Exchange Act after the date of this prospectus are also
incorporated by reference into this prospectus.
You may request a copy of these filings at no cost, by writing or
telephoning Consumers at the following address:
Consumers Energy Company
212 West Michigan Avenue
Jackson, Michigan 49201
Tel: (517) 788-0550
Attention: Office of the Secretary
You should rely only on the information contained or incorporated by
reference in this prospectus and accompanying prospectus supplement. Consumers
has not authorized anyone to provide you with information that is different from
this information.
Separate financial statements of the trusts have not been included in this
prospectus. Consumers and the trusts do not consider such financial statements
to be helpful because:
- Consumers beneficially owns directly or indirectly all of the undivided
beneficial interests in the assets of the trusts (other than the
beneficial interests represented by the trust preferred securities). See
"Consumers Energy Company Trusts," "Description of Securities -- Trust
Preferred Securities" and "Description of Securities -- The Guarantees."
2
35
- Consumers will guarantee the trust preferred securities such that the
holders of the trust preferred securities, with respect to the payment of
distributions and amounts upon liquidation, dissolution and winding-up,
are at least in the same position with regard to the assets of Consumers
as a preferred stockholder of Consumers.
- in future filings under the Securities Exchange Act of 1934, an audited
footnote to Consumers' annual financial statements will state that the
trusts are wholly-owned by Consumers, that the sole assets of the trusts
are the senior notes or the subordinated debentures of Consumers having a
specified total principal amount, and, considered together, the back-up
undertakings, including the guarantees, constitute a full and
unconditional guarantee by Consumers of the trusts' obligations under the
trust preferred securities issued by the trusts.
- each trust is a newly created special purpose entity, has no operating
history, no independent operations and is not engaged in, and does not
propose to engage in, any activity other than as described under
"Consumers Energy Company Trusts."
CONSUMERS ENERGY COMPANY
Consumers, formed in Michigan in 1968, is the successor to a corporation
organized in Maine in 1910 that did business in Michigan from 1915 to 1968.
Consumers was named Consumers Power Company from 1910 to the first quarter of
1997, when Consumers changed its name to Consumers Energy Company. Consumers is
the principal subsidiary of CMS Energy Corporation, a Michigan corporation.
Consumers is a public utility that provides natural gas and electricity to
almost six million of the nine and one-half million residents in Michigan's
Lower Peninsula. Consumers' electric operations include the generation,
purchase, transmission and distribution of electricity. It provides electric
services in 61 of the 68 counties of Michigan's Lower Peninsula. Consumers' gas
utility operation purchases, transports, stores and distributes natural gas. It
renders gas sales and delivery service in 54 of the 68 counties in Michigan's
Lower Peninsula. At year end 1998, Consumers provided service to 1.6 million
electric customers and 1.5 million gas customers.
Consumers' consolidated operating revenue in 1998 was $3.7 billion. Of
Consumers' operating revenue, 70% was generated from its electric utility
business, 29% from its gas utility business, and 1% from its non-utility
business.
Consumers' electric generating system consists of five fossil-fueled plant
sites, one nuclear plant, one pumped storage hydroelectric facility, seven gas
combustion turbine plants and 13 hydroelectric plants. Consumers' owned and
operated a total of 6,190 megawatts ("MW") of electric generating capacity in
1998. In 1998, Consumers purchased 2,545 MW of net capacity, which amounted to
34% of Consumers' total system requirements, from other power producers, the
largest being a natural gas-fueled cogeneration facility ("MCV Facility")
operated by the Midland Cogeneration Venture Limited Partnership ("MCV
Partnership"). Consumers, through wholly-owned subsidiaries, owns a 49%
ownership interest in the MCV Partnership and lessor interest in the MCV
Facility. Total electric sales in 1998 were 40 billion kilowatt hours ("kWh"), a
6% increase over 1997 levels. Consumers' electric operating revenue in 1998 was
$2.6 billion, an increase of 3.6% from 1997.
In 1998, Consumers' gas distribution and transmission system consisted of
23,392 miles of distribution mains and 1,165 miles of transmission lines
throughout the Lower Peninsula of Michigan. At December 31, 1998, Consumers
owned and operated six compressor stations with a total of 115,400 installed
horsepower. Consumers' gas operation is seasonal to the extent that peak demand
occurs in winter due to colder temperatures. Total deliveries of natural gas
sold by Consumers and from other sellers over Consumers' pipeline and
distribution network to ultimate customers, including the MCV Partnership,
totaled 360 billion cubic feet in 1998. Consumers' gas operating revenue in 1998
was $1.1 billion, a decrease of 12.7% from 1997.
3
36
Consumers is subject to regulation by various federal, state, local and
foreign governmental agencies. Consumers is subject to the jurisdiction of the
Michigan Public Service Commission ("MPSC"), which regulates public utilities in
Michigan with respect to retail utility rates, accounting, services, certain
facilities and various other matters. The Federal Energy Regulatory Commission
("FERC") also has jurisdiction under the Natural Gas Act over Michigan Gas
Storage Company, a subsidiary of Consumers, relating, among other things, to the
construction of facilities and to service provided and rates charged by Michigan
Gas Storage. Some of Consumers' gas business is also subject to regulation of
FERC, including a blanket transportation tariff pursuant to which Consumers can
transport gas in interstate commerce. Certain of Consumers' electric operations
are also subject to regulation by FERC, including compliance with FERC's
accounting rules and other regulations applicable to "public utilities" and
"licensees", the transmission of electric energy in interstate commerce and the
rates and charges for the sale of electric energy at wholesale and transmission
of electric energy in interstate commerce, the consummation of certain mergers,
the sale of certain facilities, the construction, operation and maintenance of
hydroelectric projects and the issuance of securities, as provided by the
Federal Power Act. Consumers is subject to the jurisdiction of the Nuclear
Regulatory Commission with respect to the design, construction and operation of
its Palisades nuclear power plant and the decommissioning of its closed Big Rock
power plant. Consumers is also subject to NRC jurisdiction with respect to
certain other uses of nuclear material.
The foregoing information concerning Consumers does not purport to be
comprehensive. For additional information concerning Consumers' business and
affairs, including their capital requirements and external financing plans,
pending legal and regulatory proceedings and descriptions of certain laws and
regulations to which those companies are subject, prospective purchasers should
refer to the Incorporated Documents. See "Where You Can Find More Information"
above.
The address of the principal executive offices of Consumers Energy Company
is 212 West Michigan Avenue, Jackson, Michigan 49201. Its telephone number is
(517) 788-0550.
CONSUMERS ENERGY COMPANY TRUSTS
Consumers Energy Company Financing III and Consumers Energy Company
Financing IV are statutory business trusts created under the Delaware Business
Trust Act by way of:
- trust agreements executed by Consumers, as sponsor, and the trustees of
the trusts and
- the filing of certificates of trust with the Secretary of State of the
State of Delaware.
At the time of public issuance of the trust preferred securities, each
trust agreement will be amended and restated in its entirety and will be
qualified as an indenture under the Trust Indenture Act of 1939, as amended.
Consumers will directly or indirectly acquire common securities of each trust in
a total liquidation amount equal to approximately 3% of the total capital of the
trust. Each trust exists for the exclusive purposes of:
- issuing the trust preferred securities and common securities representing
undivided beneficial interests in the assets of the trust;
- investing the gross proceeds of the common securities and the trust
preferred securities in the senior notes or subordinated debentures; and
- engaging in only those other activities necessary or incidental thereto.
Each trust has a term of approximately 55 years, but may terminate earlier
as provided in the amended and restated trust agreement.
The proceeds from the offering of the trust preferred securities and the
sale of the common securities may be used by each trust to purchase from
Consumers senior notes or subordinated debentures in a total principal amount
equal to the total liquidation preference of the common securities and the trust
preferred securities. The Consumers notes or debentures would bear interest at
an annual rate equal to the annual distribution rate of the common securities
and the trust preferred securities and would have certain
4
37
redemption terms which correspond to the redemption terms for the common
securities and the trust preferred securities. The senior notes will rank on an
equal basis with all other unsecured debt of Consumers except subordinated debt.
The subordinated debentures will rank subordinate in right of payment to all of
Consumers' senior indebtedness (as defined in this prospectus). Distributions on
the common securities and the trust preferred securities may not be made unless
each trust receives corresponding interest payments on the senior notes or the
subordinated debentures from Consumers. Consumers will irrevocably guarantee, on
a senior or subordinated basis, as applicable, and to the extent set forth in
the guarantee, with respect to each of the common securities and the trust
preferred securities, the payment of distributions, the redemption price,
including all accrued or deferred and unpaid distributions, and payment on
liquidation, but only to the extent of funds on hand. Each guarantee will be
unsecured and will be either equal to or subordinate to, as applicable, all
senior indebtedness, of Consumers. Upon the occurrence of certain events
(subject to the conditions to be described in an accompanying prospectus
supplement) each trust may be liquidated and the holders of the common
securities and the trust preferred securities could receive senior notes or
subordinated debentures in lieu of any liquidating cash distribution.
Pursuant to the amended and restated trust agreements, the number of
trustees of each trust will initially be four. Two of the trustees will be
persons who are employees or officers of or who are affiliated with Consumers
and will be referred to as the regular trustees. The third trustee will be a
financial institution that is unaffiliated with Consumers, which trustee will
serve as property trustee under the applicable amended and restated trust
agreement and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act of 1939. Initially, The Bank of New York,
a New York banking corporation, will be the property trustee until removed or
replaced by the holder of the common securities. For the purpose of compliance
with the provisions of the Trust Indenture Act of 1939, The Bank of New York
will also act as guarantee trustee. The fourth trustee, The Bank of New York
(Delaware), will act as the Delaware trustee for the purposes of the Delaware
Business Trust Act, until removed or replaced by the holder of the common
securities. See "Description of Securities -- The Guarantees."
The property trustee will hold title to the applicable senior notes or
subordinated debenture for the benefit of the holders of the common securities
and the trust preferred securities and the property trustee will have the power
to exercise all rights, powers and privileges under the applicable indentures as
the holder of the senior notes or subordinated debenture. In addition, the
property trustee will maintain exclusive control of a segregated non-interest
bearing bank account to hold all payments made in respect of the senior notes or
subordinated debentures for the benefit of the holders of the common securities
and the trust preferred securities. The property trustee will make payments of
distributions and payments on liquidation, redemption and otherwise to the
holders of the common securities and the trust preferred securities out of funds
from the segregated non-interest bearing bank account. The guarantee trustee
will hold the guarantees for the benefit of the holders of the common securities
and the trust preferred securities. Consumers, as the direct or indirect holder
of all the common securities, will have the right to appoint, remove or replace
any of the trustees. Consumers will also have the right to increase or decrease
the number of trustees, as long as the number of trustees shall be at least
three, a majority of which shall be regular trustees. Consumers will pay all
fees and expenses related to the trusts and the offering of the common
securities and the trust preferred securities.
The rights of the holders of the trust preferred securities, including
economic rights, rights to information and voting rights, are set forth in the
applicable amended and restated trust agreement, the Delaware Business Trust Act
and the Trust Indenture Act of 1939.
The trustee for each trust in the State of Delaware is The Bank of New York
(Delaware), White Clay Center, Route 273, Newark, Delaware 19711.
The principal place of business of each trust will be c/o Consumers Energy
Company, 212 West Michigan Avenue, Jackson, Michigan 49201.
5
38
USE OF PROCEEDS
The proceeds received by each of the trusts from the sale of its trust
preferred securities or the common securities will be invested in the senior
notes or the subordinated debentures. As will be more specifically set forth in
the applicable prospectus supplement, Consumers will use those borrowed amounts
and the net proceeds from the sale of senior notes or subordinated debentures
offered hereby for its general corporate purposes, including capital
expenditures, investment in subsidiaries, working capital and repayment of debt.
Any specific allocation of the proceeds to a particular purpose that has been
made at the date of any prospectus supplement will be described in the
appropriate prospectus supplement.
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The ratios of earnings to fixed charges and the ratios of earnings to fixed
charges and preferred stock dividends for each of the years ended December 31,
1994 through 1998 and for the twelve months ended June 30, 1999, are as follows:
TWELVE MONTHS
ENDED YEAR ENDED DECEMBER 31
JUNE 30, --------------------------------------
1999 1998 1997 1996 1995 1994
------------- ------ ---- ---- ---- ----
(UNAUDITED)
Ratio of Earnings to:
Fixed Charges (a).............................. 3.72 3.16(b) 3.31 3.27 2.82 2.81
Fixed Charges & Preferred Stock Dividends...... 3.06 2.52(c) 2.61 2.54 2.30 2.32
- ---------------
(a) For purposes of computing the ratio, earnings represent net income before
income taxes, net interest charges and the estimated interest portions of
lease rentals, plus distributed income of equity investees less earnings
from minority interests of equity investees. Earnings for the ratio of
earnings to fixed charges and preferred stock dividends also includes the
amount required to pay distributions on preferred securities and the amount
of pretax earnings required to pay the dividends on outstanding preferred
stock.
(b) Excludes a cumulative effect of change in accounting after-tax gain of $43
million; if included, ratio would be 3.52.
(c) Excludes a cumulative effect of change in accounting after-tax gain of $43
million: if included, ratio would be 2.81.
6
39
DESCRIPTION OF SECURITIES
INTRODUCTION
Specific terms of the debt securities consisting of the senior notes and
subordinated debentures, or the trust preferred securities, or any combination
of these securities, the irrevocable guarantees of Consumers, with respect to
each of the common securities and the preferred securities of the trust, for
which this prospectus is being delivered, will be set forth in an accompanying
prospectus supplement or supplements. The prospectus supplement will set forth
with regard to the particular offered securities, without limitation, the
following:
- in the case of debt securities, the designation, total principal amount,
denomination, maturity, premium, if any, any exchange, conversion,
redemption or sinking fund provisions, interest rate (which may be fixed
or variable), the time or method of calculating interest payments, the
right of Consumers, if any, to defer payment or interest on the debt
securities and the maximum length of such deferral, put options, if any,
public offering price, ranking, any listing on a securities exchange and
other specific terms of the offering; and
- in the case of trust preferred securities, the designation, number of
shares, liquidation preference per security, initial public offering
price, any listing on a securities exchange, dividend rate (or method of
calculation thereof), dates on which dividends shall be payable and dates
from which dividends shall accrue, any voting rights, any redemption,
exchange, conversion or sinking fund provisions and any other rights,
preferences, privileges, limitations or restrictions relating to a
specific series of the trust preferred securities including a description
of the Consumers guarantee, as the case may be.
DEBT SECURITIES
Senior notes will be issued under a senior debt indenture. The subordinated
debentures will be issued under a subordinated debt indenture. The senior debt
indenture and the subordinated debt indenture are sometimes referred to in this
prospectus individually as an "indenture" and collectively as the "indentures".
The following briefly summarizes the material provisions of the indentures
and the debt securities. You should read the more detailed provisions of the
applicable indenture, including the defined terms, for provisions that may be
important to you. You should also read the particular terms of a series of debt
securities, which will be described in more detail in the applicable prospectus
supplement. Copies of the indentures may be obtained from Consumers or the
applicable trustee.
Unless otherwise provided in the applicable prospectus supplement, the
trustee under the senior debt indenture will be Chase Manhattan Bank and the
trustee under the subordinated debt indenture will be The Bank of New York.
General
The indentures provide that debt securities of Consumers may be issued in
one or more series, with different terms, in each case as authorized on one or
more occasions by Consumers.
Federal income tax consequences and other special considerations applicable
to any debt securities issued by Consumers at a discount will be described in
the applicable prospectus supplement.
The applicable prospectus supplement relating to any series of debt
securities will describe the following terms, where applicable:
- the title of the debt securities;
- whether the debt securities will be senior or subordinated debt;
- the total principal amount of the debt securities;
7
40
- the percentage of the principal amount at which the debt securities will
be sold and, if applicable, the method of determining the price;
- the maturity date or dates;
- the interest rate or the method of computing the interest rate;
- the date or dates from which any interest will accrue, or how such date
or dates will be determined, and the interest payment date or dates and
any related record dates;
- the location where payments on the debt securities will be made;
- the terms and conditions on which the debt securities may be redeemed at
the option of Consumers;
- any obligation of Consumers to redeem, purchase or repay the debt
securities at the option of a holder upon the happening of any event and
the terms and conditions of redemption, purchase or repayment;
- any provisions for the discharge of Consumers' obligations relating to
the debt securities by deposit of funds or United States government
obligations;
- whether the debt securities are to trade in book-entry form and the terms
and any conditions for exchanging the global security in whole or in part
for paper certificates;
- any material provisions of the applicable indenture described in this
prospectus that do not apply to the debt securities;
- any additional amounts with respect to the debt securities that Consumers
will pay to a non-United States person because of any tax, assessment or
governmental charge withheld or deducted and, if so, any option of
Consumers to redeem the debt securities rather than paying these
additional amounts;
- any additional events of default; and
- any other specific terms of the debt securities.
Concerning the Trustees
Each of Chase Manhattan Bank, the trustee under the senior debt indenture
for the senior notes, and The Bank of New York, the trustee under the
subordinated debt indenture for the subordinated debentures, is one of a number
of banks with which Consumers and its subsidiaries maintain ordinary banking
relationships, including credit facilities.
Exchange and Transfer
Debt securities may be presented for exchange. Registered debt securities
may be presented for registration of transfer at the offices and, subject to the
restrictions set forth in the debt security and in the applicable prospectus
supplement, without service charge, but upon payment of any taxes or other
governmental charges due in connection with the transfer, subject to any
limitations contained in the applicable indenture. Debt securities in bearer
form and any related coupons, will be transferable by delivery.
Payment
Distributions on the debt securities in registered form will be made at the
office or agency of the applicable trustee in the Borough of Manhattan, the City
of New York or its other designated office. However, at the option of Consumers,
payment of any interest may be made by check or by wire transfer. Payment of any
interest due on debt securities in registered form will be made to the persons
in whose
8
41
name the debt securities are registered at the close of business on the record
date for such interest payments. Payments made in any other manner will be
specified in the prospectus supplement.
Governing Law
Each indenture and the debt securities will be governed by, and construed
in accordance with, the laws of the State of Michigan unless the laws of another
jurisdiction shall mandatorily apply. The rights, duties and obligations of the
subordinated note trustee are governed by and construed in accordance with the
laws of the State of New York.
SENIOR NOTES
General
The following summaries of some important provisions of the senior note
indenture (including its supplements by such reference) do not purport to be
complete and are subject to, and qualified in their entirety by, all of the
provisions of the senior note indenture. The senior note indenture is
incorporated by reference in this prospectus and is available upon request to
the senior note trustee. In addition, capitalized terms used in this section and
not otherwise defined in this prospectus shall have the meaning given to them in
the senior note indenture.
Security; Release Date
Until the release date (as described in the next paragraph), the senior
notes will be secured by one or more series of Consumers' first mortgage bonds
issued and delivered by Consumers to the senior note trustee. See "Description
of First Mortgage Bonds". Upon the issuance of a series of senior notes prior to
the release date, Consumers will simultaneously issue and deliver to the senior
note trustee, as security for all senior notes, a series of first mortgage bonds
that will have the same stated maturity date and corresponding redemption
provisions, and will be in the same total principal amount as the series of the
senior notes being issued. Any series of first mortgage bonds securing senior
notes may, but need not, bear interest. Any payment by Consumers to the senior
note trustee of principal of, interest and/or premium, if any, on a series of
first mortgage bonds will be applied by the senior note trustee to satisfy
Consumers' obligations with respect to principal of, interest and/or premium, if
any, on the corresponding senior notes.
The "release date" will be the date that all first mortgage bonds of
Consumers issued and outstanding under a mortgage indenture with the Chase
Manhattan Bank as mortgage trustee, other than first mortgage bonds securing
senior notes, have been retired (at, before or after their maturity) through
payment, redemption or otherwise. On the release date, the senior note trustee
will deliver to Consumers, for cancellation, all first mortgage bonds securing
senior notes. Not later than 30 days thereafter, the senior note trustee will
provide notice to all holders of senior notes of the occurrence of the release
date. As a result, on the release date, the first mortgage bonds securing senior
notes will cease to secure the senior notes. The senior notes will then become
unsecured general obligations of Consumers and will rank equally with other
unsecured indebtedness of Consumers. Each series of first mortgage bonds that
secures senior notes will be secured by a lien on certain property owned by
Consumers. See "Description of First Mortgage Bonds -- Priority and Security."
Upon the payment or cancellation of any outstanding senior notes, the senior
note trustee will surrender to Consumers for cancellation an equal principal
amount of the related series of first mortgage bonds. Consumers will not permit,
at any time prior to the release date, the total principal amount of first
mortgage bonds securing senior notes held by the senior note trustee to be less
than the total principal amount of senior notes outstanding. Following the
release date, Consumers will cause the mortgage to be discharged and will not
issue any additional first mortgage bonds under the mortgage. While Consumers
will be precluded after the release date from issuing additional first mortgage
bonds, it will not be precluded under the senior note indenture or senior notes
from issuing or assuming other secured debt, or incurring liens on its property,
except to the extent indicated below under "-- Certain Covenants of
Consumers -- Limitation on Liens."
9
42
Events Of Default
The following constitute events of default under senior notes of any
series:
(1) failure to pay principal of and premium, if any, on any senior
note of such series when due;
(2) failure to pay interest on any senior note of such series when due
for 60 days;
(3) failure to perform any other covenant or agreement of Consumers in
the senior notes of such series for 90 days after written notice to
Consumers by the senior note trustee or the holders of at least 33% in
total principal amount of the outstanding senior notes;
(4) prior to the release date, a default under the mortgage; provided,
however, that the waiver or cure of such default and the rescission and
annulment of the consequences under the mortgage will be a waiver of the
corresponding event of default under the senior note indenture and a
rescission and annulment of the consequences under the senior note
indenture; and
(5) certain events of bankruptcy, insolvency, reorganization,
assignment or receivership of Consumers.
If an event of default occurs and is continuing, either the senior note
trustee or the holders of a majority in total principal amount of the
outstanding senior notes may declare the principal amount of all senior notes to
be due and payable immediately.
The senior note trustee generally will be under no obligation to exercise
any of its rights or powers under the senior note indenture at the request or
direction of any of the holders of senior notes of such series unless those
holders have offered to the senior note trustee reasonable security or
indemnity. Subject to the provisions for indemnity and certain other limitations
contained in the senior note indenture, the holders of a majority in principal
amount of the outstanding senior notes of such series generally will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the senior note trustee, or of exercising any trust or power
conferred on the senior note trustee. The holders of a majority in principal
amount of the outstanding senior notes of such series generally will have the
right to waive any past default or event of default (other than a payment
default) on behalf of all holders of senior notes of such series.
No holder of senior notes of a series may institute any action against
Consumers under the senior note indenture unless:
(1) that holder gives to the senior note trustee advance written
notice of default and its continuance;
(2) the holders of not less than a majority in total principal amount
of senior notes of such series then outstanding affected by that event of
default request the senior note trustee to institute such action;
(3) that holder has offered the senior note trustee reasonable
indemnity; and
(4) the senior note trustee shall not have instituted such action
within 60 days of such request.
Furthermore, no holder of senior notes will be entitled to institute any
such action if and to the extent that that action would disturb or prejudice the
rights of other holders of senior notes of such series.
Within 90 days after the occurrence of a default with respect to the senior
notes of a series, the senior note trustee must give the holders of the senior
notes of such series notice of any such default known to the senior note
trustee, unless cured or waived. The senior note trustee may withhold such
notice if it determines in good faith that it is in the interest of such holders
to do so except in the case of default in the payment of principal of, and
interest and/or premium, if any, on any senior notes of such series. Consumers
is required to deliver to the senior note trustee each year a certificate as to
whether or not, to the knowledge of the officers signing such certificate,
Consumers is in compliance with the conditions and covenants under the senior
note indenture.
10
43
Modification
Consumers and the senior note trustee cannot modify and amend the senior
note indenture without the consent of the holders of a majority in principal
amount of the outstanding affected senior notes. Consumers and the senior note
trustee cannot modify and amend the senior note indenture without the consent of
the holder of each outstanding senior note of such series to:
(1) change the maturity date of any senior note of such series;
(2) reduce the rate (or change the method of calculation thereof) or
extend the time of payment of interest on any senior note of such series;
(3) reduce the principal amount of, or premium payable on, any senior
note of such series;
(4) change the coin or currency of any payment of principal of, and
interest and/or premium on any senior note of such series;
(5) change the date on which any senior note of such series may be
redeemed or repaid at the option of its holder or adversely affect the
rights of a holder to institute suit for the enforcement of any payment on
or with respect to any senior note of such series;
(6) impair the interest of the senior note trustee in the first
mortgage bonds securing the senior notes of such series held by it or,
prior to the release date, reduce the principal amount of any series of
first mortgage bond securing the senior notes of such series to an amount
less than the principal amount of the related series of senior notes or
alter the payment provisions of such senior note mortgage bonds in a manner
adverse to the holders of the senior notes; or
(7) modify the senior notes of such series necessary to modify or
amend the senior note indenture or to waive any past default to less than a
majority.
Consumers and the senior note trustee can modify and amend the senior note
indenture without the consent of the holders in certain cases, including:
(1) to add to the covenants of Consumers for the benefit of the
holders or to surrender a right conferred on Consumers in the senior note
indenture;
(2) to add further security for the senior notes of such series;
(3) to add provisions enabling Consumers to be released with respect
to one or more series of outstanding senior notes from its obligations
under the covenants upon satisfaction of conditions with respect to such
series of senior notes;
(4) to supply omissions, cure ambiguities or correct defects which
actions, in each case, are not prejudicial to the interests of the holders
in any material respect; or
(5) to make any other change that is not prejudicial to the holders of
senior notes of such series in any material respect.
A supplemental indenture which changes or eliminates any covenant or other
provision of the senior note indenture (or any supplemental indenture) which has
expressly been included solely for the benefit of one or more series of senior
notes, or which modifies the rights of the holders of senior notes of such
series with respect to such covenant or provision, will be deemed not to affect
the rights under the senior note indenture of the holders of senior notes of any
other series.
Defeasance and Discharge
The senior note indenture provides that Consumers will be discharged from
any and all obligations in respect to the senior notes of such series and the
senior note indenture (except for certain obligations such as obligations to
register the transfer or exchange of senior notes, replace stolen, lost or
mutilated senior notes and maintain paying agencies) if, among other things,
Consumers irrevocably deposits with the senior note trustee, in trust for the
benefit of holders of senior notes of such series, money or certain
11
44
United States government obligations, or any combination of money or government
obligations. Through the payment of interest and principal on the deposits in
accordance with their terms must provide money in an amount sufficient, without
reinvestment, to make all payments of principal of, and any premium and interest
on, the senior notes on the dates such payments are due in accordance with the
terms of the senior note indenture and the senior notes of such series. But, if
all of the senior notes of such series are to be due within 90 days of such
deposit by redemption or otherwise, Consumers must also deliver to the senior
note trustee an opinion of counsel to the effect that the holders of the senior
notes of such series will not recognize income, gain or loss for federal income
tax purposes as a result of that defeasance or discharge of the senior note
indenture. Thereafter, the holders of senior notes must look only to the deposit
for payment of the principal of, and interest and any premium on, the senior
notes.
Consolidation, Merger and Sale or Disposition of Assets
Consumers may consolidate with or merge into, or sell or otherwise dispose
of its properties as or substantially as an entirety if:
(1) the new corporation is a corporation organized and existing under
the laws of the United States of America, any state thereof, or the
District of Columbia,
(2) the new corporation assumes the due and punctual payment of the
principal of and premium and interest on all the senior notes and the
performance of every covenant of the senior note indenture to be performed
or observed by Consumers and
(3) if prior to the release date, the new corporation assumes
Consumers' obligations under the mortgage indenture with respect to first
mortgage bonds securing senior notes.
The conveyance or other transfer by Consumers of:
(1) all or any portion of its facilities for the generation of
electric energy,
(2) all of its facilities for the transmission of electric energy, or
(3) all of its facilities for the distribution of natural gas, in each
case considered alone or in any combination with properties described in
(1), (2) or (3) of this sentence, will not be considered a conveyance or
other transfer of all the properties of Consumers, as or substantially as
an entirety.
Certain Covenants Of Consumers
Limitation on Liens
So long as any senior notes are outstanding, Consumers may not issue,
assume, guarantee or permit to exist after the release date any debt that is
secured by any mortgage, security interest, pledge or lien (each a "lien") of or
upon any operating property of Consumers, whether owned at the date of the
senior note indenture or thereafter acquired, without in any such case
effectively securing the senior notes (together with, if Consumers shall so
determine, any other indebtedness of Consumers ranking equally with the senior
notes) equally and ratably with such debt (but only so long as such debt is so
secured). The foregoing restriction will not apply to:
(1) liens on any operating property existing at the time of its
acquisition (which liens may also extend to subsequent repairs, alterations
and improvements to such operating property);
(2) liens on operating property of a corporation existing at the time
such corporation is merged into or consolidated with, or such corporation
disposes of its properties (or those of a division) as or substantially as
an entirety to, Consumers;
(3) liens on operating property to secure the cost of acquisition,
construction, development or substantial repair, alteration or improvement
of property or to secure indebtedness incurred to provide funds for any
such purpose or for reimbursement of funds previously expended for any such
purpose, provided such liens are created or assumed contemporaneously with,
or within 18 months after, such
12
45
acquisition or the completion of substantial repair or alteration,
construction, development or substantial improvement;
(4) liens in favor of any state or any department, agency or
instrumentality or political subdivision of any state, or for the benefit
of holders of securities issued by any such entity (or providers of credit
enhancement with respect to such securities), to secure any debt
(including, without limitation, obligations of Consumers with respect to
industrial development, pollution control or similar revenue bonds)
incurred for the purpose of financing all or any part of the purchase price
or the cost of substantially repairing or altering, constructing,
developing or substantially improving operating property of Consumers; or
(5) any extension, renewal or replacement (or successive extensions,
renewals or replacements), in whole or in part, of any lien referred to in
clauses (1) through (4), provided, however, that the principal amount of
debt secured thereby and not otherwise authorized by said clauses (1) to
(4), inclusive, shall not exceed the principal amount of debt, plus any
premium or fee payable in connection with any such extension, renewal or
replacement, so secured at the time of such extension, renewal or
replacement.
These restrictions will not apply to the issuance, assumption or guarantee
by Consumers of debt secured by a lien which would otherwise be subject to the
foregoing restrictions up to a total amount which, together with all other
secured debt of Consumers (not including secured debt permitted under any of the
foregoing exceptions) and the value of sale and lease-back transactions existing
at such time (other than sale and lease-back transactions the proceeds of which
have been applied to the retirement of certain indebtedness, sale and lease-back
transactions in which the property involved would have been permitted to be
subjected to a lien under any of the foregoing exceptions in clauses (1) to (5)
and sale and lease-back transactions that are permitted by the first sentence of
"Limitation on Sale and Lease-Back Transactions" below), does not exceed the
greater of 15% of Net Tangible Assets or 15% of Capitalization.
Limitation on Sale and Lease-Back Transactions
So long as senior notes are outstanding, Consumers may not enter into or
permit to exist after the release date any sale and lease-back transaction with
respect to any operating property (except for transactions involving leases for
a term, including renewals, of not more than 48 months), if the purchaser's
commitment is obtained more than 18 months after the later of the completion of
the acquisition, construction or development of such operating property or the
placing in operation of such operating property or of such operating property as
constructed or developed or substantially repaired, altered or improved. This
restriction will not apply if:
(1) Consumers would be entitled under any of the provisions described
in clauses (1) to (5) of the first sentence of the second paragraph under
"Limitation on Liens" above to issue, assume, guarantee or permit to exist
debt secured by a lien on such operating property without equally and
ratably securing the senior notes,
(2) after giving effect to such sale and lease-back transaction,
Consumers could incur pursuant to the provisions described in the second
sentence of the second paragraph under "Limitation on Liens," at least
$1.00 of additional debt secured by liens (other than liens permitted by
clause (1)), or
(3) Consumers applies within 180 days an amount equal to, in the case
of a sale or transfer for cash, the net proceeds (not exceeding the net
book value), and, otherwise, an amount equal to the fair value (as
determined by its Board of Directors) of the operating property so leased
to the retirement of senior notes or other debt of Consumers ranking
equally with, the senior notes, subject to reduction for senior notes and
such debt retired during such 180-day period otherwise than pursuant to
mandatory sinking fund or prepayment provisions and payments at stated
maturity.
13
46
Voting Of Senior Note Mortgage Bonds Held By Senior Note Trustee
The senior note trustee, as the holder of first mortgage bonds securing
senior notes, will attend any meeting of bondholders under the mortgage
indenture, or, at its option, will deliver its proxy in connection therewith as
it relates to matters with respect to which it is entitled to vote or consent.
So long as no event of default under the senior note indenture has occurred and
is continuing, the senior note trustee will vote or consent:
(1) in favor of amendments or modifications of the mortgage indenture
of substantially the same tenor and effect as follows:
- to eliminate the maintenance and replacement fund and to recover
amounts of net property additions previously applied in
satisfaction thereof so that the same would become available as a
basis for the issuance of first mortgage bonds;
- to eliminate sinking funds or improvement funds and to recover
amounts of net property additions previously applied in
satisfaction thereof so that the same would become available as a
basis for the issuance of first mortgage bonds;
- to eliminate the restriction on the payment of dividends on common
stock and to eliminate the requirements in connection with the
periodic examination of the mortgaged and pledged property by an
independent engineer;
- to permit first mortgage bonds to be issued under the mortgage
indenture in a principal amount equal to 70% of unfunded net
property additions instead of 60%, to permit sinking funds
improvement funds requirements (to the extent not otherwise
eliminated) under the Mortgage to be satisfied by the application
of net property additions in an amount equal to 70% of such
additions instead of 60%, and to permit the acquisition of property
subject to certain liens prior to the lien of the Mortgage if the
principal amount of indebtedness secured by such liens does not
exceed 70% of the cost of such property instead of 60%;
- to eliminate requirements that Consumers deliver a net earnings
certificate for any purpose under the mortgage indenture;
- to raise the minimum dollar amount of insurance proceeds on account
of loss or damage that must be payable to the senior note trustee
from $50,000 to an amount equal to the greater of (A) $5,000,000
and (B) three per centum (3%) of the total principal amount of
first mortgage bonds outstanding;
- to increase the amount of the fair value of property which may be
sold or disposed of free from the lien of the mortgage indenture,
without any release or consent by the senior note trustee, from not
more than $25,000 in any calendar year to not more than an amount
equal to the greater of (A) $5,000,000 and (B) three per centum
(3%) of the total principal amount of first mortgage bonds then
outstanding;
- to permit certain mortgaged and pledged property to be released
from the lien of the mortgage indenture if, in addition to certain
other conditions, the senior note trustee receives purchase money
obligations of not more than 70% of the fair value of such property
instead of 60% and to eliminate the further requirement for the
release of such property that the total principal amount of
purchase money obligations held by the senior note trustee not
exceed 20% of the principal amount of first mortgage bonds
outstanding;
- to eliminate the restriction prohibiting the mortgage trustee from
applying cash held by it pursuant to the mortgage indenture to the
purchase of bonds not otherwise redeemable at a price exceeding
110% of the principal of such bonds, plus accrued interest; and
(2) with respect to any other amendments or modifications of the
mortgage indenture, as follows: the senior note trustee shall vote all
first mortgage bonds securing senior notes then held by it, or consent with
respect thereto, proportionately with the vote or consent of the holders of
all other
14
47
first mortgage bonds outstanding under the mortgage indenture, the holders
of which are eligible to vote or consent. However, the senior note trustee
will not vote in favor of, or consent to, any amendment or modification of
the mortgage which, if it were an amendment or modification of the senior
note indenture, would require the consent of senior notes holders (as
described under "Modification,") without the prior consent of holders of
senior notes which would be required for such an amendment or modification
of the senior note indenture.
Concerning The Senior Note Trustee
The Chase Manhattan Bank is both the senior note trustee under the senior
note indenture and the mortgage trustee under the mortgage indenture. Consumers
and its affiliates maintain depositary and other normal banking relationships
with The Chase Manhattan Bank. The Chase Manhattan Bank is also a lender to
Consumers and its affiliates. The senior note indenture provides that Consumers'
obligations to compensate the senior note trustee and reimburse the senior note
trustee for expenses, disbursements and advances will constitute indebtedness
which will be secured by a lien generally prior to that of the senior notes upon
all property and funds held or collected by the senior note trustee as such.
DESCRIPTION OF FIRST MORTGAGE BONDS
General
The first mortgage bonds securing senior notes are to be issued under a
mortgage indenture as amended and supplemented by various supplemental
indentures with The Chase Manhattan Bank, as the mortgage trustee. The
statements herein concerning the mortgage indenture are an outline and do not
purport to be complete and are subject to, and qualified in their entirety by,
all of the provisions of the mortgage indenture, which is incorporated by
reference herein. They make use of defined terms and are qualified in their
entirety by express reference to the cited sections and articles of the mortgage
indenture a copy of which will be available upon request to the senior note
trustee.
First mortgage bonds securing senior notes will be issued as security for
Consumers' obligations under the senior note indenture and will be immediately
delivered to and registered in the name of the senior note trustee. The first
mortgage bonds securing senior notes will be issued as security for senior notes
of a series and will secure the senior notes of that series until the release
date. The senior note indenture provides that the senior note trustee shall not
transfer any first mortgage bonds securing senior notes except to a successor
trustee, to Consumers (as provided in the senior note indenture) or in
compliance with a court order in connection with a bankruptcy or reorganization
proceeding of Consumers. The senior note trustee shall generally vote the first
mortgage bonds securing senior notes proportionately with what it believes to be
the vote of all other first mortgage bonds then outstanding except in connection
with certain amendments or modifications of the mortgage indenture, as described
under "Description of Senior Notes Voting of Senior Note Mortgage Bonds Held by
Senior Note Trustee."
First mortgage bonds securing senior notes will correspond to the senior
notes of its related series in respect of principal amount, interest rate,
maturity date and redemption provisions. Upon payment of the principal or
premium, if any, or interest on senior notes of a series, the related first
mortgage bonds in a principal amount equal to the principal amount of such
senior notes will, to the extent of such payment of principal, premium or
interest, be deemed fully paid and the obligation of Consumers to make such
payment shall be discharged.
Priority And Security
The first mortgage bonds securing senior notes of any series will rank
equally as to security with bonds of other series now outstanding or issued
later under the mortgage indenture. This security is a direct first lien on
substantially all of Consumers' property and franchises (other than certain
property expressly excluded from the lien (such as cash, bonds, stock and
certain other securities, contracts, accounts and bills receivables, judgments
and other evidences of indebtedness, stock in trade, materials or supplies
manufactured or acquired for the purpose of sale and/or resale in the usual
course of business or
15
48
consumable in the operation of any of the properties of Consumers, natural gas,
oil and minerals, motor vehicles and certain real property listed in Schedule A
to the mortgage indenture)). This lien is subject to excepted encumbrances (and
certain other limitations) as defined and described in the mortgage indenture.
It is also subject to certain provisions of Michigan law which provides that
under certain circumstances, the State of Michigan's lien against property on
which it has incurred costs related to any response activity that is subordinate
to prior recorded liens can become superior to such prior liens pursuant to
court order. The mortgage indenture permits, with certain limitations, the
acquisition of property subject to prior liens and, under certain conditions,
permits the issuance of additional indebtedness under such prior liens to the
extent of 60% of net property additions made by Consumers to the property
subject to such prior liens.
Release And Substitution Of Property
The mortgage indenture provides that, subject to various limitations,
property may be released from the lien thereof when sold or exchanged, or
contracted to be sold or exchanged, upon the basis of:
- cash deposited with the mortgage trustee;
- bonds or purchase money obligations delivered to the mortgage trustee;
- prior lien bonds delivered to the mortgage trustee or reduced or assumed
by the purchaser;
- property additions acquired in exchange for the property released; or
- upon a showing that unfunded net property additions exist. The mortgage
indenture also permits the withdrawal of cash upon a showing that
unfunded net property additions exist or against the deposit of bonds or
the application thereof to the retirement of bonds.
Modification Of Mortgage
The mortgage indenture, the rights and obligations of Consumers and the
rights of the bondholders may be modified by Consumers with the consent of the
holders of 75% in principal amount of the bonds and of not less than 60% of the
principal amount of each series affected. In general, however, no modification
of the terms of payment of principal or interest and no modification affecting
the lien or reducing the percentage required for modification is effective
against any bondholder without the bondholder's consent. Consumers has reserved
the right without any consent or other action by the holders of bonds of any
series created after September 15, 1993 or by the holder of any senior note or
exchange note, to amend the mortgage in order to substitute a majority in
principal amount of bonds outstanding under the mortgage for the 75% requirement
set forth above (and then only in respect of such series of outstanding bonds as
shall be affected by the proposed action) and to eliminate the requirement for a
series-by-series consent requirement.
Concerning The Mortgage Trustee
The Chase Manhattan Bank is both the mortgage trustee under the mortgage
indenture and the senior note trustee under the senior note indenture. Consumers
and its affiliates maintain depositary and other normal banking relationships
with The Chase Manhattan Bank. The Chase Manhattan Bank is also a lender to
Consumers and its affiliates. The mortgage indenture provides that Consumers'
obligations to compensate the mortgage trustee and reimburse the trustee for
expenses, disbursements and advances will constitute indebtedness which will be
secured by a lien generally prior to that of the first mortgage bonds securing
senior notes upon all property and funds held or collected by the mortgage
trustee as such.
The mortgage trustee or the holders of 20% in total principal amount of the
bonds may declare the principal due on default, but the holders of a majority in
total principal amount may annul such declaration and waive the default if the
default has been cured. Subject to certain limitations, the holders of a
majority in total principal amount may generally direct the time, method and
place of conducting any proceeding for the enforcement of the mortgage
indenture. No bondholder has the right to institute any
16
49
proceedings for the enforcement of the mortgage indenture unless that holder has
given the mortgage trustee written notice of a default, the holders of 20% of
outstanding bonds shall have tendered to the mortgage trustee reasonable
security or indemnity against costs, expenses and liabilities and requested the
mortgage trustee to take action, the mortgage trustee shall have declined to
take action or failed to do so within sixty days and no inconsistent directions
shall have been given by the holders of a majority in total principal amount of
the bonds.
Defaults
The mortgage defines the following as "defaults":
- failure to pay principal when due;
- failure to pay interest for sixty days;
- failure to pay any installment of any sinking or other purchase fund for
ninety days;
- certain events in bankruptcy, insolvency or reorganization; and
- failure to perform any other covenant for ninety days following written
demand by the mortgage trustee for Consumers to cure such failure.
Consumers has covenanted to pay interest on any overdue principal and (to
the extent permitted by law) on overdue installments of interest, if any, on the
bonds under the mortgage indenture at the rate of 6% per year. The mortgage
indenture does not contain a provision requiring any periodic evidence to be
furnished as to the absence of default or as to compliance with the terms
thereof. However, Consumers is required by law to furnish annually to the
trustee a certificate as to compliance with all conditions and covenants under
the mortgage indenture.
SUBORDINATED DEBENTURES
The subordinated debentures will be issued under the subordinated debt
indenture and will rank subordinated and junior in right of payment, to the
extent set forth in the subordinated debt indenture, to all "senior
indebtedness" (as defined below) of Consumers.
If Consumers defaults in the payment of any distributions on any senior
indebtedness when it becomes due and payable after any applicable grace period,
then, unless and until the default is cured or waived or ceases to exist,
Consumers cannot make a payment on account of or redeem or otherwise acquire the
subordinated debentures. The subordinated debt indenture provisions described in
this paragraph, however, do not prevent Consumers from making sinking fund
payments in subordinated debentures acquired prior to the maturity of senior
indebtedness or, in the case of default, prior to such default and notice
thereof. If there is any insolvency, bankruptcy, liquidation or other similar
proceeding relating to Consumers, its creditors or its property, then all senior
indebtedness must be paid in full before any payment may be made to any holders
of subordinated debentures. Holders of subordinated debentures must return and
deliver any payments received by them, other than in a plan of reorganization or
through a defeasance trust as described above, directly to the holders of senior
indebtedness until all senior indebtedness is paid in full.
"Senior indebtedness" means distributions on the following, whether
outstanding on the date of execution of the subordinated debt indenture or
thereafter incurred, created or assumed:
- indebtedness of Consumers for money borrowed by Consumers or evidenced by
debentures (other than the subordinated debentures), notes, bankers'
acceptances or other corporate debt securities or similar instruments
issued by Consumers;
- capital lease obligations of Consumers;
17
50
- obligations of Consumers incurred for deferring the purchase price of
property, with respect to conditional sales, and under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business);
- obligations of Consumers with respect to letters of credit;
- all indebtedness of others of the type referred to in the four preceding
clauses assumed by or guaranteed in any manner by Consumers or in effect
guaranteed by Consumers; or
- renewals, extensions or refundings of any of the indebtedness referred to
in the preceding three clauses unless, in the case of any particular
indebtedness, renewal, extension or refunding, under the express
provisions of the instrument creating or evidencing the same or the
assumption or guarantee of the same, or pursuant to which the same is
outstanding, such indebtedness or such renewal, extension or refunding
thereof is not superior in right of payment to the subordinated debt
securities.
The subordinated debt indenture does not limit the total amount of senior
indebtedness that may be issued. As of June 30, 1999, senior indebtedness of
Consumers totaled approximately $2,728 million.
Certain Covenants
If debt securities are issued to a trust or a trustee of such trust in
connection with the issuance of trust preferred securities of that trust,
Consumers will covenant that it will not (1) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of Consumers' capital stock or (2) make any payment of
principal, interest or premium, if any, on or repay or repurchase or redeem any
debt securities (including guarantees of indebtedness for money borrowed) of
Consumers that rank equal (in the case of subordinated debentures) with or
junior (in the case of senior and subordinated debentures) to that debt security
(other than (a) any dividend, redemption, liquidation, interest, principal or
guarantee payment by Consumers where the payment is made by way of securities
(including capital stock) that rank equal with or junior to the securities on
which such dividend, redemption, interest, principal or guarantee payment is
being made, (b) payments under the Consumers' guarantees of trust securities),
if at such time (1) there shall have occurred any event of which Consumers has
actual knowledge that (a) with the giving of notice or the lapse of time, or
both, would constitute an event of default under the indentures and (b) in
respect of which Consumers shall not have taken reasonable steps to cure, (2)
Consumers shall be in default with respect to its payment of any obligations
under the guarantees or (3) Consumers will have given notice of its selection of
an extension period as provided in the indentures with respect to the Debt
Securities and will not have rescinded such notice, or such extension period, or
any extension thereof, shall be continuing.
Consumers will also covenant:
(1) to maintain directly or indirectly 100% ownership of the common
securities, provided that certain successors which are permitted pursuant
to the indentures may succeed to Consumers' ownership of the common
securities,
(2) not to voluntarily dissolve, wind-up or liquidate the trust,
except:
(a) in connection with a distribution of the debt securities to the
holders of the trust preferred securities in liquidation of such trust
or
(b) in connection with certain mergers, consolidations or
amalgamations permitted by the amended and restated trust agreement, and
(3) to use its reasonable efforts, consistent with the terms and
provisions of the amended and restated trust agreement, to cause such trust
to remain classified as a grantor trust and not as an association taxable
as a corporation for United States federal income tax purposes.
18
51
Events of Default
The subordinated debt indenture provides that events of default regarding
any series of subordinated debentures will be:
- failure to pay required interest on any subordinated debentures of such
series for 30 days;
- failure to pay principal other than a scheduled installment payment or
premium, if any, on any subordinated note of such series when due;
- failure to make any required scheduled installment payment on
subordinates notes of such series;
- failure to perform for 60 days after notice any other covenant in the
relevant indenture other than a covenant included in the relevant
indenture solely for the benefit of a series of subordinated debentures
other than such series;
- certain events of bankruptcy or insolvency, whether voluntary or not; and
- if subordinated debentures are issued, such trust is voluntarily or
involuntarily dissolved, wound-up or terminated, except in connection
with the distribution of subordinated debentures to the holders of the
common securities and the trust preferred securities in liquidation of
the trust, the redemption of all outstanding trust securities of the
trust and certain mergers, consolidation or amalgamations permitted by
the declaration of that trust.
If an event of default regarding subordinated debentures of any series
issued should occur and be continuing, either the subordinated note trustee or
the holders of 25% in the principal amount of outstanding subordinated
debentures of such series may declare each subordinated note of that series due
and payable.
Holders of a majority in principal amount of the outstanding subordinated
debentures of any series will be entitled to control certain actions of the
subordinated note trustee and to waive past defaults regarding such series. The
trustee generally will not be requested, ordered or directed by any of the
holders of subordinated debentures, unless one or more of such holders shall
have offered to the trustee reasonable security or indemnity.
Before any holder of any series of subordinated debentures may institute
action for any remedy, except payment on such holder's subordinated debentures
when due, the holders of not less than 25% in principal amount of the
subordinated debentures of that series outstanding must request the subordinated
note trustee to take action. Holders must also offer and give the satisfactory
security and indemnity against liabilities incurred by the trustee for taking
such action.
Consumers is required to annually furnish the subordinated note trustee a
statement as to Consumers' compliance with all conditions and covenants under
the subordinated debt indenture. The subordinated debt indenture provides that
the subordinated note trustee may withhold notice to the holders of the
subordinated debentures of any series of any default affecting such series,
except payment on holders' subordinated debentures when due, if it considers
withholding notice to be in the interests of the holders of the subordinated
debentures of such series.
Consolidation, Merger or Sale of Assets
The subordinated debt indenture provides that Consumers may consolidate
with or merge into, or sell, lease or convey its property as an entirety or
substantially as an entirety to, any other corporation if the new corporation
assumes the obligations of Consumers under the subordinated debentures and the
subordinated debt indenture and is organized and existing under the laws of the
United States of America, any U.S. state or the District of Columbia.
19
52
Modification of the Indenture
The subordinated debt indenture permits Consumers and the subordinated note
trustee to enter into supplemental indentures without the consent of the holders
of the subordinated debentures to establish the form and terms of any series of
securities under the the subordinated debt indentures.
The subordinated debt indenture also permits Consumers and the subordinated
note trustee, with the consent of the holders of at least a majority in total
principal amount of the subordinated debentures of all series then outstanding
and affected (voting as one class), to change in any manner the provisions of
the subordinated debt indenture or modify in any manner the rights of the
holders of the subordinated debentures of each such affected series. Consumers
and the relevant trustee may not, without the consent of the holder of each
subordinated debenture affected, enter into any supplemental indenture to:
- change the time of payment of the principal;
- reduce the principal amount of such subordinated debentures;
- reduce the rate or change the time of payment of interest on such
subordinated debentures;
- impair the right to institute suit for the enforcement of any payment on
any subordinated debentures when due.
In addition, no such modification may reduce the percentage in principal
amount of the subordinated debentures of the affected series, the consent of
whose holders is required for any such modification or for any waiver provided
for in the subordinated debt indenture.
Prior to the acceleration of the maturity of any subordinated debentures,
the holders, voting as one class, of a majority in total principal amount of the
subordinated debentures with respect to which a default or event of default has
occurred and is continuing, may, on behalf of the holders of all such affected
subordinated debentures, waive any past default or event of default and its
consequences, except a default or an event of default in respect of a covenant
or provision of the applicable indenture or of any subordinated debenture which
cannot be modified or amended without the consent of the holder of each
subordinated debentures affected.
Defeasance, Covenant Defeasance and Discharge
The subordinated debt indenture provides that, at the option of Consumers,
Consumers will be discharged from all obligations in respect of the subordinated
debentures of a particular series then outstanding (except for certain
obligations to register the transfer of or exchange the subordinated debentures
of such series, to replace stolen, lost or mutilated subordinated debentures of
such series, to maintain paying agencies and to maintain the trust described
below).
If Consumers in each case irrevocably deposits in trust with the relevant
trustee money, and/or securities backed by the full faith and credit of the
United States which, through the payment of the principal thereof and the
interest thereon in accordance with their terms, will provide money in an amount
sufficient to pay all the principal and interest on the subordinated debentures
of such series on the stated maturities of such subordinated debentures in
accordance with the terms thereof.
To exercise this option, Consumers is required to deliver to the relevant
trustee an opinion of independent counsel to the effect that the exercise of
such option would not cause the holders of the subordinated debentures of such
series to recognize income, gain or loss for United States federal income tax
purposes as a result of such defeasance, and such holders will be subject to
United States federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not occurred.
TRUST PREFERRED SECURITIES
Each trust may issue, on one or more occasion, trust preferred securities
having terms described in the prospectus supplement relating thereto. The
amended and restated trust agreement of each trust will
20
53
authorize the establishment of no more than one series of trust preferred
securities, having such terms, including distributions, redemption, voting,
liquidation rights and such other preferred, deferred or other special rights or
such rights or restrictions as shall be set forth therein or otherwise
established by the trustees pursuant thereto. Reference is made to the
prospectus supplement relating to the trust preferred securities for specific
terms, including:
- the distinctive designation and the number of trust preferred securities
to be offered which will represent undivided beneficial interests in the
assets of the trust;
- the annual distribution rate and the dates or date upon which such
distributions will be paid, provided, however distributions on the trust
preferred securities will be paid quarterly in arrears to holders of
trust preferred securities as of a record date on which the trust
preferred securities are outstanding;
- whether distributions on trust preferred securities would be deferred
during any deferral of interest payments on the debt securities,
provided, however that no such deferral, including extensions, if any,
may exceed 20 consecutive quarters nor extend beyond the stated maturity
date of the debt securities, and at the end of any such deferrals,
Consumers will make all interest payments then accrued or deferred and
unpaid (including any compounded interest);
- the amount of any liquidation preference;
- the obligation, if any, of the trust to redeem trust preferred securities
through the exercise of Consumers of an option on the corresponding debt
securities and the price or prices at which, the period or periods within
which and the terms and conditions upon which trust preferred securities
will be purchased or redeemed, in whole or in part, under to such
obligation;
- the period or periods within which and the terms and conditions, if any,
including the price or prices or the rate or rates of conversion or
exchange and the terms and conditions of any adjustments, upon which the
trust preferred securities shall be convertible or exchangeable at the
option of the holder of the trust preferred securities of other property
or cash;
- the voting rights, if any, of the trust preferred securities in addition
to those required by law and in the amended and restated trust agreement,
or set forth under a Consumers' guarantee (as defined below);
- the additional payments, if any, which the trust will pay as a
distribution as necessary so that the net amounts reserved by the trust
and distributable to the holders of the trust preferred securities, after
all taxes, duties, assessments or governmental charges of whatever nature
(other than withholding taxes) have been paid will not be less than the
amount that would have been reserved and distributed by the trust, and
the amount the holders of the trust preferred securities would have
reserved, had no such taxes, duties, assessments or governmental charges
been imposed;
- the terms and conditions, if any, upon which the debt securities may be
distributed to holders of trust preferred securities; and
- any other relative rights, powers, preferences, privileges, limitations
or restrictions of the trust preferred securities not inconsistent with
the amended and restated trust agreement or applicable law.
All trust preferred securities offered hereby will be irrevocably
guaranteed by Consumers, on a senior or subordinated basis, as applicable, and
to the extent set forth below under "The Guarantees." Any applicable federal
income tax considerations applicable to any offering of the trust preferred
securities will be described in the prospectus supplement relating thereto. The
total number of trust preferred securities which the trust shall have authority
to issue will be pursuant to the terms of the amended and restated trust
agreement.
21
54
EFFECT OF OBLIGATIONS UNDER THE DEBT SECURITIES AND THE GUARANTEES
As set forth in the amended and restated trust agreements, the sole purpose
of the trusts are to issue the common securities and the trust preferred
securities evidencing undivided beneficial interests in the assets of each of
the trusts, and to invest the proceeds from such issuance and sale to acquire
directly the debt securities from Consumers.
As long as payments of interest and other payments are made when due on the
debt securities, such payments will be sufficient to cover distributions and
payments due on the common securities and the trust preferred securities because
of the following factors:
- the total principal amount of debt securities will be equal to the sums
of the total stated liquidation amount of the common securities and the
trust preferred securities;
- the interest rate and the interest and other payment dates on the debt
securities will match the distribution rate and distribution and other
payment dates for the common securities and the trust preferred
securities;
- Consumers will pay all, and each trust shall not be obligated to pay,
directly or indirectly, all its costs, expenses, debt and obligations
(other than with respect to the common securities and the trust preferred
securities); and
- the amended and restated trust agreement further provides that Consumers
trustees will not take or cause or permit the trust to, among other
things, engage in any activity that is not consistent with the purposes
of the trust.
Payments of distributions (to the extent funds for distributions are
available) and other payments due on the trust preferred securities (to the
extent funds for other payments are available) are guaranteed by Consumers as
and to the extent discussed under "The Guarantees" below. If Consumers does not
make interest payments on the debt securities purchased by the trust, it is
expected that the trusts will not have sufficient funds to pay distributions on
the trust preferred securities. The Consumers guarantees do not apply to any
payment of distributions unless and until the trusts have sufficient funds for
the payment of distributions and other payments on the trust preferred
securities only if and to the extent that Consumers has made a payment of
interest or principal on the debt securities held by the trusts as their sole
asset. The Consumers guarantees, when taken together with Consumers' obligations
under the debt securities and the related indenture and its obligations under
the applicable amended and restated trust agreement, including its obligations
to pay costs, expenses, debts and liabilities of the trust (other than with
respect to the common securities and the trust preferred securities), provide a
full and unconditional guarantee of amounts on the trust preferred securities.
If Consumers fails to make interest or other payments on the debt
securities when due (taking account of any extension period), the applicable
amended and restated trust agreements provide a mechanism whereby the holders of
the trust preferred securities may direct a property trustee to enforce its
rights under the debt securities. If a property trustee fails to enforce its
rights under the debt securities, a holder of trust preferred securities may, to
the fullest extent permitted by applicable law, institute a legal proceeding
against Consumers to enforce a property trustee's rights under the debt
securities without first instituting any legal proceeding against a property
trustee or any other person or entity. Notwithstanding the foregoing, if an
event of default has occurred and is continuing under the applicable amended and
restated trust agreement, and such event is attributable to the failure of
Consumers to pay interest or principal on the debt securities on the date such
interest or principal is otherwise payable (or in the case of redemption on the
redemption date), then a holder of trust preferred securities may institute
legal proceedings directly against Consumers to obtain payment. If Consumers
fails to make payments under the guarantees, the guarantees provide a mechanism
whereby the holders of the trust preferred securities may direct a guarantee
trustee to enforce its rights thereunder. Any holder of trust preferred
securities may institute a legal proceeding directly against Consumers to
enforce a guarantee trustee's rights under a guarantee without first instituting
a legal proceeding against the trust, the guarantee trustee, or any other person
or entity.
22
55
THE GUARANTEES
Set forth below is a summary of information concerning the guarantees which
will be executed and delivered by Consumers for the benefit of the holders, from
time to time, of the trust preferred securities. Each guarantee will be
qualified as an indenture under the Trust Indenture Act of 1939. The Bank of New
York will act as indenture trustee under the guarantees for the purpose of
compliance with the provisions of the Trust Indenture Act of 1939. This summary
does not purport to be complete and is subject in all respects to the provisions
of, and is qualified in its entirety by reference to, the guarantees, which is
filed as an exhibit to the Registration Statement of which this prospectus forms
a part.
General
Consumers will irrevocably agree to pay in full, on a senior or
subordinated basis, as applicable, to the extent set forth herein, the guarantee
payments (as described below) to the holders of the trust preferred securities,
as and when due, regardless of any defense, right of set-off or counterclaim
that the trust may have or assert other than the defense of payment. The
following payments with respect to the trust preferred securities, to the extent
not paid by or on behalf of the trust, will be subject to a guarantee by
Consumers of:
(1) any accumulated and unpaid distributions required to be paid on
the trust preferred securities, to the extent that the trust has funds on
hand available therefor at such time;
(2) the redemption price with respect to any trust preferred
securities called for redemption to the extent that the trust has funds on
hand available therefor at such time; or
(3) upon a voluntary or involuntary dissolution, winding up or
liquidation of the trust (unless the debt securities are distributed to
holders of the trust preferred securities), the lesser of (a) the
liquidation distribution, to the extent that the trust has funds on hand
available the distribution at such time, and (b) the amount of assets of
the trust remaining available for distribution to holders of trust
preferred securities.
Consumers' obligation to make a guarantee payment may be satisfied by
direct payment of the required amounts of Consumers to the holders of the trust
preferred securities or by causing the trust to pay such amount to such holders.
The Consumers guarantees will be irrevocable guarantees, on a senior or
subordinated basis, as applicable, of the trust's obligations under the trust
preferred securities, but will apply only to the extent that the trust has funds
sufficient to make such payments, and are not guarantees of collection. If
Consumers does not make interest payments on the debt securities held by the
trust, the trust will not be able to pay distributions on the trust preferred
securities and will not have funds legally available therefor.
Consumers has, through the guarantees, the applicable amended and restated
trust agreements, the senior notes, the subordinated debentures, and the
indentures, taken together, fully, irrevocably and unconditionally guaranteed
all of the trust's obligations under the trust preferred securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the trust's obligations under the trust preferred
securities.
Consumers has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the trust with respect to the common securities to
the same extent as the guarantees of the preferred securities, except that upon
the occurrence and during the continuation of a amended and restated trust
agreement Event of Default, holders of trust preferred securities shall have
priority over holders of common securities with respect to distributions and
payments on liquidation, redemption or otherwise.
23
56
Certain Covenants of Consumers
Consumers will also covenant that it will not
(1) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of
Consumers' capital stock or
(2) make any payment of principal, interest or premium, if any, on or
repay or repurchase or redeem any debt securities (including guarantees of
indebtedness for money borrowed) of Consumers that rank equal (in the case
of subordinated debentures with or junior in the case of the senior and
subordinated debentures) to the debt securities (other than (a) any
dividend, redemption, liquidation, interest, principal or guarantee payment
by Consumers where the payment is made by way of securities (including
capital stock) that rank equal with or junior to the securities on which
such dividend, redemption, interest, principal or guarantee payment is
being made, (b) payments under the Consumers guarantees of the trust
securities, (c) as a result of a reclassification of Consumers' capital
stock or the exchange or conversion of one series or class of Consumers'
capital stock for another series or class of Consumers' capital stock and
(d) the purchase of fractional interests in shares of Consumers' capital
stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged) if at such time (1)
there shall have occurred any event of which Consumers has actual knowledge
that (a) with the giving of notice or the lapse of time, or both, would
constitute a event of default and (b) in respect of which Consumers shall
not have taken reasonable steps to cure, (2) Consumers shall be in default
with respect to its payment of any obligations under the guarantee or
(3) Consumers shall have given notice of its selection of an extension
period as provided in the indentures with respect to the debt securities
and shall not have rescinded such notice, or such extension period, or any
extension thereof, shall be continuing.
Consumers also will covenant to:
(1) maintain directly or indirectly 100% ownership of the common
securities, provided that certain successors which are permitted pursuant
to the indentures may succeed to Consumers' ownership of the common
securities,
(2) not voluntarily dissolve, wind-up or liquidate the trust, except:
- in connection with a distribution of the debt securities to the
holders of the trust preferred securities in liquidation of the
trust, or
- in connection with certain mergers, consolidations or amalgamations
permitted by the amended and restated trust agreement, and
(3) use its reasonable efforts, consistent with the terms and
provisions of the applicable amended and restated trust agreement, to cause
the trust to remain classified as a grantor trust and not as an association
taxable as a corporation for United States federal income tax purposes.
Amendments and Assignment
Except with respect to any changes which do not materially adversely affect
the rights of holders of the trust preferred securities (in which case no vote
will be required), the Consumers guarantees of the trust preferred securities
may not be amended without the prior approval of the holders of not less than a
majority in total liquidation amount of such outstanding trust preferred
securities. All guarantees and agreements contained in the guarantees shall bind
the successors, assigns, receivers, trustees and representatives of Consumers
and shall inure to the benefit of the holders of the trust preferred securities
then outstanding.
24
57
Termination of the Guarantees
The Consumers guarantees of the trust preferred securities will terminate
and be of no further force and effect upon full payment of the redemption price
of the trust preferred securities, upon full payment of the amounts payable upon
liquidation of the trust or upon distribution of the debt securities to the
holders of the trust preferred securities in exchange for all of the trust
preferred securities. The guarantees will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of trust preferred
securities must restore payment of any sums paid under such trust preferred
securities or the guarantees.
Events of Default
An event of default under a Consumers guarantee of the trust preferred
securities will occur upon the failure of Consumers to perform any of its
payment or other obligations thereunder. The holders of a majority in total
liquidation amount of the trust preferred securities have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to a guarantee trustee in respect of a guarantee or to direct the exercise of
any trust or power conferred upon a guarantee trustee under the guarantees.
If a guarantee trustee fails to enforce a Consumers guarantee of the trust
preferred securities, any holder of the trust preferred securities may institute
a legal proceeding directly against Consumers to enforce its rights under such
guarantee without first instituting a legal proceeding against the trust, the
guarantee trustee or any other person or entity. In addition, any record holder
of trust preferred securities shall have the right, which is absolute and
unconditional, to proceed directly against Consumers to obtain guarantee
payments, without first waiting to determine if the guarantee trustee has
enforced a guarantee or instituting a legal proceeding against the trust, the
guarantee trustee or any other person or entity. Consumers has waived any right
or remedy to require that any action be brought just against the trust, or any
other person or entity before proceeding directly against Consumers.
Status of the Guarantees
The Consumers guarantee of the trust preferred securities will constitute
unsecured obligations of Consumers and will rank:
(1) equal to or subordinate and junior in right of payment to all
other liabilities of Consumers, as applicable,
(2) equal with the most senior preferred stock now or hereafter issued
by Consumers and with any guarantee now or hereafter entered into by
Consumers in respect of any preferred or preference stock of any affiliate
of Consumers, and
(3) senior to Consumers' common stock.
The Consumers guarantee of the trust preferred securities will constitute a
guarantee of payment and not of collection (i.e., the guaranteed party may
institute a legal proceeding directly against the guarantor to enforce its
rights under the guarantee without first instituting a legal proceeding against
any other person or entity). The guarantees will be held for the benefit of the
holders of the trust preferred securities. The guarantees will not be discharged
except by payment of the guarantee payments in full to the extent not paid by
the trust or upon distribution of the debt securities to the holders of the
trust preferred securities. The guarantees do not place a limitation on the
amount of additional indebtedness that may be incurred by Consumers.
25
58
PLAN OF DISTRIBUTION
Consumers and/or the trusts may sell the offered securities:
(1) through the solicitation of proposals of underwriters or dealers
to purchase the offered securities;
(2) through underwriters or dealers on a negotiated basis;
(3) directly to a limited number of purchasers or to a single
purchaser; or
(4) through agents.
The prospectus supplement with respect to any offered securities will set
forth the terms of such offering, including the name or names of any
underwriters, dealers or agents; the purchase price of the offered securities
and the proceeds to Consumers and/or the trust from such sale; any underwriting
discounts and commissions and other items constituting underwriters'
compensation; any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers and any securities exchange on which
such offered securities may be listed. Any initial public offering price,
discounts or concessions allowed or reallowed or paid to dealers may be changed
from time to time.
If underwriters are used in the sale, the offered securities will be
acquired by the underwriters for their own account and may be resold on one or
more occasions in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices determined at the time of
sale. The offered securities may be offered to the public either through
underwriting syndicates represented by one or more managing underwriters or
directly by one or more firms acting as underwriters. The underwriter or
underwriters with respect to a particular underwritten offering offered
securities will be named in the prospectus supplement relating to such offering
and, if an underwriting syndicate is used, the managing underwriter or
underwriters will be set forth on the cover of such prospectus supplement.
Unless otherwise set forth in the prospectus supplement relating thereto, the
obligations of the underwriters to purchase the offered securities will be
subject to certain conditions precedent, and the underwriters will be obligated
to purchase all the offered securities if any are purchased.
If dealers are utilized in the sale of offered securities, Consumers and/or
the trusts will sell such offered securities to the dealers as principals. The
dealers may then resell such offered securities to the public at varying prices
to be determined by such dealers at the time of resale. The names of the dealers
and the terms of the transaction will be set forth in the prospectus supplement
relating thereto.
The offered securities may be sold directly by Consumers and/or the trusts
or through agents designated by Consumers and/or the trusts from time to time.
Any agent involved in the offer or sale of the offered securities in respect to
which this prospectus is delivered will be named, and any commissions payable by
Consumers and/or the trusts to such agent will be set forth, in the prospectus
supplement relating thereto. Unless otherwise indicated in the prospectus
supplement, any such agent will be acting on a best efforts basis for the period
of its appointment.
The offered securities may be sold directly by Consumers and/or the trusts
to institutional investors or others, who may be deemed to be underwriters
within the meaning of the Securities Act with respect to any resale thereof. The
terms of any such sales will be described in the prospectus supplement relating
thereto.
Agents, dealers and underwriters may be entitled under agreements with
Consumers and/or the trusts to indemnification by Consumers and/or the trust
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments which such agents, dealers or
underwriters may be required to make in respect thereof. Agents, dealers and
underwriters may be customers of, engage in transactions with, or perform
services for Consumers and/or the trust in the ordinary course of business.
The offered securities may also be offered and sold, if so indicated in the
applicable prospectus supplement, in connection with a remarketing upon their
purchase, in accordance with a redemption or repayment pursuant to their terms,
or otherwise, by one or more firms ("remarketing firms"), acting as
26
59
principals for their own accounts or as agents for Consumers and/or the trusts.
Any remarketing firm will be identified and the terms of its agreement, if any,
with its compensation will be described in the applicable prospectus supplement.
Remarketing firms may be deemed to be underwriters, as such term is defined in
the Securities Act, in connection with the offered securities remarketed
thereby. Remarketing firms may be entitled under agreements which may be entered
into with Consumers and/or the trusts to indemnification or contribution by
Consumers and/or the trusts against certain civil liabilities, including
liabilities under the Securities Act, and may be customers of, engage in
transactions or perform services for Consumers and its subsidiaries in the
ordinary course of business.
The offered securities may or may not be listed on a national securities
exchange. Reference is made to the prospectus supplement with regard to such
matter. No assurance can be given that there will be a market for any of the
offered securities.
LEGAL OPINIONS
Opinions as to the legality of certain of the offered securities will be
rendered for Consumers by Michael D. Van Hemert, Esq., Assistant General Counsel
for CMS Energy. Certain matters of Delaware law relating to the validity of the
trust preferred securities will be passed upon on behalf of the trusts by
Richards, Layton & Finger, P.A., special Delaware counsel to the trusts. Certain
United States federal income taxation matters may be passed upon for Consumers
and the trust by either Theodore J. Vogel, tax counsel for Consumers, or by
special tax counsel to Consumers and of the trust, who will be named in the
prospectus supplement. Certain legal matters with respect to offered securities
will be passed upon by counsel for any underwriters, dealers or agents, each of
whom will be named in the related prospectus supplement.
EXPERTS
The consolidated financial statements and schedule of Consumers as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 incorporated by reference in this prospectus, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
With respect to the unaudited interim consolidated financial information
for the periods ended March 31 and June 30, 1999 and 1998, Arthur Andersen LLP
has applied limited procedures in accordance with professional standards for a
review of that information. However, their separate reports thereon state that
they did not audit and they did not express an opinion on that interim
consolidated financial information.
Accordingly, the degree of reliance on their reports on that information
should be restricted in light of the limited nature of the review procedures
applied. In addition, the accountants are not subject to the liability
provisions of Section 11 of the Securities Act, for their reports on the
unaudited interim consolidated financial information because these reports are
not "reports" or a part of the registration statement prepared or certified by
the accountants within the meaning of Sections 7 and 11 of the Securities Act.
Future consolidated financial statements of Consumers and the reports
thereon of Arthur Andersen LLP also will be incorporated by reference in this
prospectus in reliance upon the authority of that firm as experts in giving
those reports to the extent that said firm has audited said consolidated
financial statements and consented to the use of their reports thereon.
27
60
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[CONSUMBERS ENGERY LOGO]
7,000,000 PREFERRED SECURITIES
CONSUMERS ENERGY COMPANY
FINANCING III
9 1/4% TRUST ORIGINATED PREFERRED SECURITIES(SM)("TOPRS"(SM))
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
CONSUMERS ENERGY COMPANY
--------------------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
FIRST OF MICHIGAN
DIVISION OF FAHNESTOCK & CO. INC.
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES
RAYMOND JAMES & ASSOCIATES, INC.
OCTOBER 29, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------