AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 15, 2001
REGISTRATION NO. 333-47938
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO.2 TO FORM
S-3 Registration Statement Under The
Securities Act of 1933
---------------
Consumers Funding LLC
(Issuer of Securities)
(Exact name as specified in registrant's Certificate of Formation)
Delaware [ ]
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Consumers Funding LLC
Suite [ ]
212 W. Michigan Avenue
Jackson, MI 49201
(313) 436-[ ]
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
---------------
David A. Mikelonis Alan M. Wright
Senior Vice President Senior Vice President
and General Counsel and Chief Financial Officer
Consumers Energy Company Consumers Energy Company
212 W. Michigan Avenue 212 W. Michigan Avenue
Jackson, MI 49201 Jackson, MI 49201
(517) 788-2151 (517) 788-0351
(Name, address, including zip code, and telephone number,
including area code, of agents for service)
---------------
Copies to:
Michael D. Van Hemert Christopher J. Kell Dean E. Criddle
Assistant General Counsel Skadden, Arps, Slate, Orrick, Herrington
CMS Energy Corporation Meagher & Flom LLP & Sutcliffe LLP
Fairlane Plaza South, Four Times Square 400 Sansome Street
Suite 1100 New York, New York 10036 San Francisco, CA 94111
330 Town Center Drive (212) 735-2160 (415) 392-1122
Dearborn, MI 48126
(313) 436-9602
---------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box:|_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.|X|
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering.|_|
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.|_|
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box.|_|
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
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Securitization Bonds $ 1,000,000 ___% $___ $264
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(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this Registration Statement on any date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on a date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
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SUBJECT TO COMPLETION, DATED [ ], 2001.
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED [ ], 2001.
$________ Securitization Bonds, Series [ ]
Consumers Funding LLC
Issuer of the Securitization Bonds
Consumers Energy Company
Seller and Servicer
Initial Principal Underwriting Net Expected Final Final Maturity
Amount Interest Rate Price Discounts Proceeds Payment Date Date
---------------------------------------------------------------------------------------------------------------
Class A-1 $ % % % $
Class A-2 $ % % % $
Class A-3 $ % % % $
Class A-4 $ % % % $
The total price to the public is $_____. The total amount of the
underwriting discounts is $_____. The total amount of proceeds before
deduction of expenses is $_____.
THE SERIES [ ] SECURITIZATION BONDS ARE HIGHLY STRUCTURED.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE [S-20] OF THIS
PROSPECTUS SUPPLEMENT AND PAGE [6] OF THE ACCOMPANYING PROSPECTUS BEFORE
BUYING THE SECURITIZATION BONDS. THERE CURRENTLY IS NO SECONDARY MARKET FOR
THE SECURITIZATION BONDS, AND THERE IS NO ASSURANCE THAT ONE WILL DEVELOP.
The assets of the issuer consist principally of the securitization
property, which represents the irrevocable right to recover an amount
sufficient to recover a portion of Consumers' qualified costs, including an
amount sufficient to pay the principal of and interest on the series [ ]
securitization bonds and the expenses associated with the securitization
bonds. This amount is to be recovered through a non- bypassable
securitization charge, approved by the Michigan Public Service Commission,
referred to as the MPSC, payable by all of Consumers' electric customers
taking delivery from Consumers or its successor on its MPSC-approved rate
schedules and under special contracts, as described further in this
prospectus supplement and the accompanying prospectus. The securitization
bonds represent obligations of Consumers Funding LLC only, which is the
issuer, and are backed only by the assets of the issuer. The securitization
bonds do not represent obligations of any agency or instrumentality of the
State of Michigan.
We will apply to have the class [ ] securitization bonds, which
will pay interest at a floating rate, listed on the Luxembourg Stock
Exchange but we cannot assure that those securitization bonds will be
listed on the Luxembourg Stock Exchange or any other stock exchange. We
will not apply to have any other class of the series [ ] securitization
bonds listed on any stock exchange.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Morgan Stanley Dean Witter
___________, 2001
TABLE OF CONTENTS
Prospectus Supplement
Page
Introduction................................................................S-2
Parties to the Transaction..................................................S-5
The Collateral.........................................................S-6
Payment Sources........................................................S-6
The Series [ ] Securitization Bonds....................................S-7
Principal Payments.....................................................S-7
Distribution Following Acceleration...................................S-10
Optional Redemption...................................................S-10
Interest Payments.....................................................S-10
Interest Payments on Floating Rate Securitization Bonds...............S-11
Floating Rate Interest Determination..................................S-12
Interest Rate Swap Agreements.........................................S-13
Swap Counterparties...................................................S-20
Risk Factors Relating to Series [ ]
Floating Rate Securitization Bonds....................................S-20
Termination of Swap Could Cause a Loss................................S-20
Ratings Downgrade of Any Floating Rate Class of
Securitization Bonds Could Cause a Loss for Holders
of Those Securitization Bonds....................................S-20
Interest Payments on Series [ ] Securitization
Bonds at Floating Rates Are Dependent on
Swap Counterparties...............................................S-21
The Securitization Bonds May Not Be Listed On Any Stock Exchange......S-21
Credit Enhancement.........................................................S-21
Periodic Adjustment of the Securitization Charge......................S-21
Collection Account and Subaccounts....................................S-22
Description of Securitization Property................................S-25
The Securitization Charge.............................................S-26
Information Regarding Consumers Energy Company.............................S-27
Underwriting the Series [ ] Securitization Bonds......................S-28
The Underwriters' Sales Price for the Series
[ ] Securitization Bonds.................................S-28
No Assurance as to Resale Price or Resale Liquidity
for the Securitization Bonds......................................S-29
United Kingdom Offering...............................................S-29
Various Types of Underwriter Transactions Which
May Affect the Price of the Securitization Bonds..................S-29
Ratings for the Series [ ] Securitization Bonds.......................S-30
Listing and General Information
Related to Floating Rate Classes......................................S-30
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This prospectus supplement and the accompanying prospectus together
constitute the prospectus for the series [ ] securitization bonds and
together they provide information about the issuer and Consumers, including
terms and conditions that apply to the securitization bonds. The specific
terms of this series of securitization bonds are contained in this
prospectus supplement. The terms that apply to all series of securitization
bonds appear in the accompanying prospectus which follows this prospectus
supplement. You should read both this prospectus supplement and the
accompanying prospectus in full before buying the securitization bonds.
Sales of the securitization bonds may not be consummated unless you have
received both this prospectus supplement and the accompanying prospectus.
We have included cross-references to captions in these materials where
you can find further related discussions. Cross-references may be contained
in the introductory sections which will direct you elsewhere in this
prospectus supplement or the accompanying prospectus for more detailed
description of a particular topic. You can also find references to key
topics in the Table of Contents on the preceding page.
You should rely only on information on the securitization bonds
provided in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
INTRODUCTION
The Issuer:
Consumers Funding LLC, a Delaware
limited liability company
Issuer's Address: 212 W. Michigan Avenue, Suite [ ],
Jackson, MI 49201
Issuer's Telephone Number: [ ]
Seller of the Securitization
Property to the Issuer: Consumers Energy Company, referred to
as Consumers, an operating electric
and gas public utility incorporated
under the laws of the State of
Michigan, is the principal subsidiary
of CMS Energy Corporation. Consumers
is engaged in the generation,
purchase, transmission, distribution
and sale of electricity to
approximately 1.7 million customers in
61 of the 68 counties in Michigan.
Seller's Address: 212 West Michigan Avenue, Jackson, MI
49201
Seller's Telephone Number: (517) 788-0550
Servicer of the Securitization
Property: Consumers will act as servicer of the
securitization property.
Consumers will be entitled to a
monthly servicing fee of 1/12th of
0.25% of the outstanding principal
amount of the securitization bonds. If
Consumers is replaced by a successor
servicer, the successor servicer may
be paid a servicing fee of up to 1.5%
per year of the outstanding principal
amount of the securitization bonds.
Trustee: The Bank of New York
Transaction Overview: The Customer Choice and Electricity
Reliability Act (Acts 141 and 142),
enacted in the State of Michigan in
June 2000 (the "Customer Choice Act"),
authorizes electric utilities, such as
Consumers, to recover qualified costs.
Qualified costs are an electric
utility's regulatory assets as
determined by the Michigan Public
Service Commission, referred to as the
MPSC, plus any costs that the MPSC
determines that the electric utility
would be unlikely to collect in a
competitive market, together with the
costs of issuing, supporting and
servicing securitization bonds and any
costs of retiring and refunding the
electric utility's existing debt and
equity securities in connection with
the issuance of securitization bonds.
An electric utility may recover
qualified costs through irrevocable
non-bypassable charges called
securitization charges that are
collected from all of its electric
customers taking delivery on its
MPSC-approved rate schedules and under
special contracts. The Customer Choice
Act permits special purpose entities
formed by electric utilities to issue
debt securities secured by the right
to receive revenues arising from
securitization charges. The
securitization property includes this
right. See "The Securitization Bonds"
in the prospectus.
The following sets forth the primary
steps of the transaction underlying
the offering of the securitization
bonds:
o Consumers will sell the
securitization property to the
issuer in exchange for the
proceeds available from the sale
of the securitization bonds after
payment of the issuer's issuance
costs.
o The issuer, whose primary asset is
the securitization property, will
sell the securitization bonds to
the underwriters named in the
prospectus supplement.
o Consumers will act as the servicer
of the securitization property on
behalf of the issuer.
The securitization bonds and the
securitization property securing the
securitization bonds are not an
obligation of Consumers or any of its
affiliates, other than the issuer. The
securitization bonds are also not a
debt or obligation of the State of
Michigan and are not a charge on the
full faith and credit or taxing power
of the State.
Associated Risks: Material risks are associated with an
investment in the securitization
bonds. See "Risk Factors Relating to
Series [ ] Floating Rate
Securitization Bonds' in this
prospectus supplement and "Risk
Factors" in the prospectus.
Expected Ratings: It is a condition of any underwriter's
obligation to purchase the series [ ]
securitization bonds that each class
of the series [ ] securitization bonds
be rated "___" by S&P, "___" by
Moody's and "___" by Fitch. A security
rating is not a recommendation to buy,
sell or hold securities and may be
subject to revision or withdrawal at
any time by the rating agency. In
general, ratings address credit risk
and do not represent any assessment of
any particular rate of principal
payments on the securitization bonds
other than payment in full of each
class of the securitization bonds by
the applicable final maturity date, as
well as the timely payment of
interest.
Tax Status: Consumers has received a private
letter ruling from the Internal
Revenue Service to the effect that the
securitization bonds will be
classified as obligations of Consumers
for U.S. federal income tax purposes.
Skadden, Arps, Slate, Meagher & Flom
LLP, special federal income tax
counsel to Consumers and the issuer,
has rendered its opinion that for
federal income tax purposes (i) the
securitization bonds will constitute
debt of Consumers and (ii) the issuer
will not be subject to U.S. federal
income tax as an entity separate from
Consumers.
Minimum Denomination: $1,000, except for one securitization
bond of each class which may be of a
smaller denomination.
Listing: Application will be made to have the
class [ ] securitization bonds, which
will pay interest at a floating rate,
listed on the Luxembourg Stock
Exchange but we cannot assure that any
of those classes will be listed on the
Luxembourg Stock Exchange or any other
stock exchange. No other class of the
series [ ] securitization bonds will
be listed on any stock exchange.
PARTIES TO THE TRANSACTION
[GRAPHIC OMITTED]
THE SERIES [ ] SECURITIZATION BONDS
The securitization bonds will be issued under and secured pursuant
to the indenture between the issuer and the trustee, as supplemented for
each series of securitization bonds.
The series [ ] securitization bonds will be issued in minimum
denominations of $1,000 and in integral multiples of $1 above that amount,
with an exception for one securitization bond in each class which may have
a smaller denomination. The series [ ] securitization bonds will consist of
four classes, in the initial class principal balances, bearing the interest
rates and having the expected final payment dates and final maturity dates
set forth below:
Table 1
Initial Class Principal Balance Expected Final
Principal Balance Interest Rate Payment Date Final Maturity Date
- ----- ----------------- ----------------- --------------- ------------------
A-1 $[_______] [____]% [______] [______]
A-2 $[_______] [____]% [______] [______]
A-3 $[_______] [____]% [______] [______]
A-4 $[_______] [____]% [______] [______]
The expected final payment date for each class of the series [ ]
securitization bonds is the date on which there is expected to be no
further outstanding principal balance of that class in accordance with the
expected amortization schedule for that class. The final maturity date for
each class of the series [ ] securitization bonds is the date on which the
issuer is required to pay any outstanding principal balance of that class.
On each payment date, payments will be made to the persons that were the
holders of record as of the business day before that payment date, which is
referred to as the record date. However, if certificated securitization
bonds are issued to beneficial owners of the securitization bonds as
described in "The Securitization Bonds -- Certificated Securitization
Bonds" in the prospectus, the record date will be the last business day of
the calendar month preceding the payment date.
THE COLLATERAL
The securitization bonds will be secured by securitization
property, a property right created under Michigan state legislation. In
general terms, the securitization property represents the irrevocable right
to recover an amount sufficient to recover a portion of Consumers'
qualified costs, including an amount sufficient to pay:
o the principal of and interest on the securitization
bonds, and
o the expenses associated with the securitization bonds.
This amount is to be recovered through a non-bypassable
securitization charge approved by the MPSC, payable by all of Consumers'
electric customers taking delivery from Consumers or its successor on its
MPSC-approved rate schedules and under special contracts, referred to as
customers. Qualified costs include the electric utility's regulatory assets
as determined by the MPSC, plus any costs that the MPSC determines the
electric utility would be unlikely to collect in a competitive market.
Qualified costs are described in more detail under "The Customer Choice
Act" in the prospectus and securitization property is described in more
detail under "The Sale Agreement -- Consumers' Sale and Assignment of
Securitization Property" in the prospectus.
In connection with the issuance of the securitization bonds,
Consumers will sell its securitization property to the issuer. Consumers,
as servicer of the securitization property, will collect the securitization
charge from customers on behalf of the issuer. The securitization charge is
non-bypassable, as described in the prospectus. See "The Customer Choice
Act -- Consumers and Other Utilities May Securitize Qualified Costs" and
"The Servicing Agreement" in the prospectus.
Since the amount of securitization charge collections will depend in part
on the amount of electricity delivered by Consumers to its customers, the
amount of collections may vary substantially from period to period. See
"The Seller and Servicer of the Securitization Property" in the prospectus.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts scheduled to be
paid on the securitization bonds from amounts available for withdrawal from
a trust account held by the trustee, including collections received from
the servicer with respect to the securitization charge. All series of
securitization bonds, including the series [ ] securitization bonds, will
be payable from the same securitization property. If another series of
bonds is issued, the principal source of payment for that series will also
be the securitization charge collections received by the servicer. The
issuance of other series of securitization bonds is not expected to
adversely affect the sufficiency of securitization charge collections to
make payments on the series [ ] securitization bonds. This is because the
securitization charge and adjustments thereof are generally based on
amounts owed with respect to securitization bonds. Moreover, any additional
series of securitization bonds will be issued only if it will not result in
the downgrading or withdrawal of any rating by a rating agency on any
outstanding securitization bonds. See "The Indenture" in the prospectus.
PRINCIPAL PAYMENTS
On each payment date, the issuer will distribute principal of the
series [ ] securitization bonds to the series [ ] securitization
bondholders, in accordance with the expected amortization schedule and to
the extent funds are available, in the following order:
1. to the holders of the class A-1 series [ ] securitization
bonds, until the principal balance of that class has been
reduced to zero;
2. to the holders of the class A-2 series [ ] securitization
bonds, until the principal balance of that class has been
reduced to zero;
3. to the holders of the class A-3 series [ ] securitization
bonds, until the principal balance of that class has been
reduced to zero; and
4. to the holders of the class A-4 series [ ] securitization
bonds, until the principal balance of that class has been
reduced to zero.
The issuer will not, however, pay principal on a payment date of
any class of series [ ] securitization bonds if making that payment would
reduce the principal balance of a class to an amount lower than that
specified in the expected amortization schedule in Table 2 below, referred
to as the expected amortization schedule, for that class on that payment
date. The entire unpaid principal balance of each class of series [ ]
securitization bonds will be due and payable on the final maturity date for
the class. If an event of default under the indenture has occurred and is
continuing, the trustee may declare the unpaid principal balance of all
outstanding securitization bonds together with accrued interest to be due
and payable.
The expected amortization schedule in Table 2 sets forth the
principal balance from the issuance date to the expected final payment date
that is scheduled to remain outstanding for each class of the series [ ]
securitization bonds. The table reflects the principal balance for each
class at each payment date after taking into account principal payments
scheduled to be made on that date. In establishing the expected
amortization schedule, it has been assumed, among other things, that:
1. the series [ ] securitization bonds are issued on [ ];
2. principal and interest payments on the series [ ]
securitization bonds are made on each payment date,
commencing on [ ];
3. the total servicing fee per annum for the series [ ]
securitization bonds equals 0.25% of the outstanding
principal amount;
4. there are no net earnings on amounts on deposit in the
account where securitization charge collections are held,
referred to as the collection account;
5. monthly operating expenses, including all fees, costs and
charges of the issuer and the trustee, the administrator
and the independent managers are paid in the amount of $[ ]
in the aggregate for all series on or before each
payment date in arrears; and
6. all securitization charge collections are received in
accordance with Consumers' forecasts and deposited in the
collection account.
There can be no assurance that the principal balance of any class
of the series [ ] securitization bonds will be reduced at the rate
indicated in the expected amortization schedule. The actual rates of
reduction in class principal balances may be slower, except in the case of
optional redemption or acceleration due to the events of default specified
in the indenture, but not faster than those indicated in Table 2. The
series [ ] securitization bonds will not be in default if principal is not
paid as specified in Table 2 unless the principal of any class is not paid
in full on or before the final maturity date of that class.
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
Payment Class A-1 Class A-2 Class A-3 Class A-4
Date Balance Balance Balance Balance
------ ----------- ---------- ---------- ----------
DISTRIBUTION FOLLOWING ACCELERATION
Upon an acceleration of the maturity of the securitization bonds,
the total outstanding principal balance of and interest accrued on the
series [ ] securitization bonds will be payable without priority of
interest over principal or principal over interest and without regard to
series or class, in the proportion that the total outstanding principal
balance of, and accrued interest on, the series [ ] securitization bonds
bears to the total outstanding principal balances of and interest accrued
on all securitization bonds. For purposes of the preceding sentence,
interest includes net swap payments with respect to any class of series [ ]
floating rate securitization bonds.
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding series [ ]
securitization bonds, at its option, on any payment date if (1) the
outstanding principal balance of the series [ ] securitization bonds, after
giving effect to payments to be made on that payment date, is less than 5%
of the total initial principal balance of the series [ ] securitization
bonds, and (2) no interest rate swap agreement remains in effect. The
redemption price will equal the outstanding principal balance of the series
[ ] securitization bonds and interest accrued and unpaid up to the
redemption date. The trustee will give notice of the redemption to
securitization bondholders not less than five days nor more than 45 days
prior to the redemption date. If any class of series [ ] floating rate
securitization bonds remains listed on the Luxembourg Stock Exchange, this
notice also will be given by publication in a daily newspaper in
Luxembourg, which is expected to be the Luxemburger Wort, at least 10 days
prior to the redemption date.
The series [ ] securitization bonds will not be redeemed before
the expected final payment date in any other circumstances, except in the
case of acceleration due to the occurrence of any one or more of those
events of default specified in the indenture. Those events of default are
set forth in the prospectus under the heading "The Indenture --What
Constitutes an Event of Default on the Securitization Bonds".
INTEREST PAYMENTS
Holders of securitization bonds in each class of series [ ]
securitization bonds will receive interest at the rate for that class as
set forth in Table 1 above.
Interest on each class of series [ ] securitization bonds will
accrue from and including the date of issuance to but excluding the first
payment date, and thereafter from and including the previous payment date
to but excluding the applicable payment date until the securitization bonds
have been paid in full, at the interest rate indicated in Table 1. Each of
those periods is referred to as an interest accrual period. The issuer is
required to pay interest quarterly on [ , , and , ] for each year,
beginning [ ], or, if any such day is not a business day, the following
business day. Each such day is referred to as a payment date.
On each payment date, the issuer will pay interest on each class
of the series [ ] securitization bonds as follows:
o if there has been a payment default, any interest payable
but unpaid on any prior payment dates, together with any
accrued interest on that unpaid interest; and
o accrued interest on the principal balance of each class
of series [ ] securitization bonds from and including the
preceding payment date, or the date of issuance of series
[ ] securitization bonds, as applicable, after giving
effect to all payments of principal made on the preceding
payment date.
The issuer will pay interest on the series [ ] securitization
bonds prior to paying principal of the series [ ] securitization bonds. See
"The Securitization Bonds -- Payments of Interest on and Principal of the
Securitization Bonds" in the prospectus. If there is a shortfall in the
amount necessary to make interest payments from the amount available to pay
interest on the series [ ] securitization bonds, the trustee will
distribute interest to each class of the series [ ] securitization bonds in
the manner described in "The Indenture -- How Funds in the Collection
Account Will Be Allocated" in the prospectus.
Interest on all classes of series [ ] securitization bonds paying
interest at a fixed rate will be calculated by the servicer on the basis of
a 360-day year of twelve 30-day months.
INTEREST PAYMENTS ON FLOATING RATE SECURITIZATION BONDS
Interest on each class of series [ ] securitization bonds paying
interest at a floating rate, each referred to as a floating rate class,
will be paid, for all interest accrual periods other than the first
interest accrual period, at the rate equal to the London interbank offered
rate for three-month United States dollar deposits, referred to as LIBOR,
determined on the applicable floating rate interest determination date, as
described below, plus the percentage spread above LIBOR applicable to that
class. The spread above LIBOR for any floating rate class is referred to as
the floating rate spread. LIBOR plus the floating rate spread payable on
each floating rate class is referred to as the floating rate.
The floating rate spread for the series [ ] class A-[ ]
securitization bonds will be [ ] percent per annum and for the series [ ]
class A-[ ] securitization bonds will be [ ] percent per annum.
Interest on each floating rate class will be calculated on the
basis of the actual number of days from and including the preceding payment
date, or, for the first payment date, from and including the date of
issuance of that class, to but excluding the next payment date, divided by
360. The Luxembourg Stock Exchange will be advised of the floating rate and
the amount of the interest payment on any floating rate class listed on
that exchange for each payment date.
On or prior to each payment date, the trustee, using LIBOR, will
calculate the amount of interest payable on each floating rate class for
the relevant interest accrual period.
There will be no minimum or maximum interest rate on any floating
rate class.
With respect to any floating rate class, if the interest rate swap
agreement relating to that class is terminated for any reason, interest on
that class will be paid at the gross fixed rate for that class, as
described below, until alternate arrangements can be made to pay the
floating rate for that class. If the swap counterparty defaults in its
obligation to make floating rate payments due under an interest rate swap
agreement, the interest rate swap agreement may terminate under the
circumstances described below. See "-- Interest Rate Swap Agreements --
Amounts Payable Under Interest Rate Swap Agreements" and "Interest Rate
Swap Agreement Events of Default and Termination Events" below and "Risk
Factors Relating to Series [ ] Floating Rate Securitization Bonds" in this
prospectus supplement.
FLOATING RATE INTEREST DETERMINATION
The interest determination date for each floating rate class and
each payment date will be the day two London banking days prior to (1) the
preceding payment date or (2) in the case of the first payment date, the
date of issuance. A London banking day is a day on which commercial banks
in London are open for general business.
On each payment date, interest on each floating rate class will be
paid at the rate equal to LIBOR as determined on the related interest
determination date, plus the floating rate spread for that class.
The trustee will determine LIBOR for that class in accordance with
the following provisions:
1. On each interest determination date, the trustee will
determine LIBOR based on the offered rate for deposits in
United States dollars commencing on the first day of that
period that appears on page 3750 of the Telerate Services
as of 11:00 a.m., London time, on that interest
determination date. That display page is referred to as
the Telerate page. If no offered rate appears on that
Telerate page, LIBOR for that period will be determined
as described in clause 2. below.
2. With respect to an interest determination date on which
no offered rate appears on the Telerate page, the trustee
will request each of four major banks in the London
interbank market, selected by the trustee, to provide the
trustee with that bank's offered quotation for
three-month United States dollar deposits, commencing on
the second London banking day immediately following that
interest determination date, to prime banks in the London
interbank market at approximately 11:00 a.m., London
time, on that interest determination date and in a
principal amount that is representative for a single
transaction in United States dollars in that market at
that time. If at least two such quotations are provided,
LIBOR will be the arithmetic mean of those quotations. If
fewer than two quotations are provided, LIBOR for that
period will be the arithmetic mean of the rates quoted at
approximately 11:00 a.m. in the City of New York on that
interest determination date by major banks in the City of
New York selected by the trustee for loans in United
States dollars to leading European banks, for the period
commencing on the second London banking day immediately
following that interest determination date and in a
principal amount that is representative for a single
transaction in United States dollars in that market at
that time.
If LIBOR cannot be determined in accordance with clauses 1. or 2.
above, then that rate will be determined to be the same as the rate which
applied (a) during the previous period or (b) on the date of issuance in
the case of a failure to determine LIBOR for the first payment date.
On each interest determination date, the trustee will notify the
servicer, the issuer and the swap counterparty of LIBOR for the applicable
period as determined by the trustee, and the issuer will notify the
Luxembourg Stock Exchange of that rate to the extent any series [ ]
securitization bonds are listed on that exchange and the rules of that
exchange so require.
INTEREST RATE SWAP AGREEMENTS
The issuer will enter into an interest rate swap agreement with a
swap counterparty for each floating rate class, on or before the date of
issuance of that class. The purpose of each interest rate swap agreement is
to convert the cash flows allocable to each floating rate class, which for
purposes of the securitization charges, are determined based on the gross
fixed rate for each floating rate class, into cash flows that are based on
a floating rate of interest.
Amounts Payable Under Interest Rate Swap Agreements. Under each
interest rate swap agreement, for each interest accrual period the issuer
will be obligated to pay the related swap counterparty an amount equal to
interest on the related floating rate class at a fixed rate of interest,
referred to as the gross fixed rate for the related floating rate class,
and the swap counterparty will be obligated to pay the issuer an amount
equal to interest at the floating rate for that class. Those obligations
will then be netted on the business day before each payment date.
Therefore, for each interest accrual period, either the issuer will pay the
swap counterparty only the amount, if any, by which interest at the gross
fixed rate exceeds interest at the floating rate, referred to as the net
swap payment, or the swap counterparty will pay the issuer only the amount,
if any, by which interest at the floating rate exceeds interest at the
gross fixed rate, referred to as the net swap receipt, as discussed below.
With respect to any payment date, the notional amount in effect
under each interest rate swap agreement for the interest accrual period
prior to that payment date will equal the principal balance of the related
floating rate class as of the close of business on the preceding payment
date. With respect to the first payment date, the notional amount in effect
under each interest rate swap agreement prior to that payment date will be
equal to the initial principal balance of the related floating rate class.
For each payment date with respect to each floating rate class,
the trustee will allocate to the subaccount established for that class,
referred to as a class subaccount, an amount equal to interest at the gross
fixed rate for that class times the outstanding principal amount of that
class for the preceding interest accrual period, referred to as the gross
fixed amount for that class on that payment date. See "The Indenture -- How
Funds in the Collection Account Will be Allocated" in the prospectus. In
addition, any net swap receipt under the related interest rate swap
agreement will be deposited in that class subaccount, and will be
available, together with the gross fixed amount for that class, to pay
interest due on that class on that payment date. Any net swap payment will
be paid to the related swap counterparty only out of funds on deposit in
that class subaccount and the remaining amount in that class subaccount
will be available to pay interest due on that class.
For each payment date, the issuer will pay a net swap payment
equal to the amount, if positive, equal to (1) the interest calculated on
the outstanding principal amount for the related floating rate class at the
applicable gross fixed rate for the period from and including the previous
payment date, or, in the case of the initial payment date, from and
including the date of issuance of the securitization bonds, to but
excluding the following payment date minus (2) the interest calculated on
the notional amount of that class at the applicable floating rate for that
period. If this amount is a negative number, a net swap receipt in this
amount will be paid to the issuer by the swap counterparty.
With respect to any payment date, the notional amount in effect
under each interest rate swap agreement prior to that payment date will
equal the principal balance of the related floating rate class as of the
close of business on the preceding payment date. With respect to the first
payment date, the notional amount in effect under each interest rate swap
agreement prior to that payment date will be equal to the initial principal
balance of the related floating rate class.
The gross fixed rate for the floating rate class A-[ ]
securitization bonds will be [ ] percent per annum, and for the floating
rate class A-[ ] securitization bonds will be [ ] percent per annum.
Each interest rate swap agreement may terminate under the circumstances
described under " -- Interest Rate Swap Agreement Events of Default and
Termination Events" below. In the event an interest rate swap agreement
terminates without a replacement interest rate swap agreement being
established, the interest payable on the related floating rate class will
convert to the gross fixed rate for that class. The gross fixed rate will
be used to calculate interest payable on that class starting on the last
payment date at which interest has been paid at the floating rate. See
"Risk Factors Relating to Series [ ] Floating Rate Securitization Bonds" in
this prospectus supplement.
Swap Counterparty Ratings. The required long-term senior unsecured
or financial program ratings of each swap counterparty under each interest
rate swap agreement will be at least "Aa3" by Moody's Investors Service,
Inc., referred to as Moody's, either at least "A+" or, for short-term
obligations, "A-1" by Standard & Poor's Ratings Services, referred to as
S&P and, if a swap counterparty is rated by Fitch, Inc. referred to as
Fitch, "A+" or, for short-term obligations, "F1" for Fitch. These ratings
are referred to as the swap counterparty minimum ratings.
Swap Counterparty Downgrade Event. An event referred to as a swap
counterparty downgrade event will occur if the swap counterparty no longer
meets the swap counterparty minimum ratings.
If a swap counterparty downgrade event occurs, the swap
counterparty will be required, within 30 days following that event, to
either:
a. re-establish the swap counterparty minimum ratings, or
b. establish alternative arrangements to maintain or restore
the ratings of the affected floating rate class that were
in effect prior to the swap counterparty downgrade event.
These alternative arrangements by the swap counterparty
may include:
1. posting collateral, arranging for a guarantee or
taking similar action to maintain or restore the
ratings, or
2. assigning its rights and obligations under the
interest rate swap agreement to a replacement
swap counterparty that meets the swap
counterparty minimum ratings, or that has itself
made arrangements which will maintain or restore
the ratings.
Posting collateral, arranging for a guarantee and other
arrangements as described in clauses 1. or 2. above are referred to in this
prospectus supplement as satisfactory arrangements to maintain or restore
the ratings prior to the swap counterparty downgrade event.
At the end of that 30-day period, if the swap counterparty has
failed to make satisfactory arrangements to maintain or restore the ratings
of that floating rate class that were in effect prior to the swap
counterparty downgrade event, the issuer will appoint a recognized swap
dealer that is a member of the International Swaps and Derivatives
Association, Inc. with capital and surplus of at least $50 million,
referred to as the swap agent, to, within an additional 30 days, either:
1. find a replacement swap counterparty that meets the swap
counterparty minimum ratings or that has made
satisfactory arrangements to maintain or restore the
ratings of the related floating rate class, referred to
as a qualified replacement counterparty, or
2. if a qualified replacement counterparty cannot be found,
find the highest rated replacement swap counterparty
available, in terms of long-term senior unsecured or
financial program credit rating assigned by Moody's or
S&P that is higher than that of the existing swap
counterparty and that is approved by the holders of at
least 662/3% of the total outstanding principal amount of
the related floating rate class, referred to as an
approved replacement counterparty.
In the case of a qualified replacement counterparty or an approved
replacement counterparty, if there is more than one available replacement
swap counterparty with the same credit rating, the counterparty offering
the interest rate swap terms with the lowest overall cost to the issuer
will be selected by the issuer as the replacement swap counterparty. That
replacement swap counterparty must be willing to intermediate between the
issuer and the prior swap counterparty by entering into an interest rate
swap agreement with the prior swap counterparty that is substantially the
same as the prior interest rate swap agreement to hedge or offset the risk
that the replacement swap counterparty has to the issuer.
If a qualified replacement counterparty or an approved replacement
counterparty has been found, the prior swap counterparty will be required
to assign its rights and obligations under the interest rate swap agreement
to that replacement swap counterparty and the replacement swap counterparty
will enter into a new interest rate swap agreement with substantially the
same terms as the terminated agreement. If a replacement swap counterparty
satisfying the above criteria has not been found within that second 30 day
period, a termination event will occur under the interest rate swap
agreement and the interest rate swap agreement will terminate unless
holders representing 662/3% of the total outstanding principal amount of
the related floating rate class vote to continue the interest rate swap
agreement with the existing swap counterparty.
If the interest rate swap agreement is not terminated as described
above, the swap agent will be obligated every three months thereafter to
renew the search for a qualified replacement counterparty or an approved
replacement counterparty according to the above procedures. However, the
replacement counterparty will not be required to intermediate between the
prior swap counterparty and the issuer, as described above. At the end of
each of these three-month periods, if a swap counterparty meeting the above
criteria has not been found, the interest rate swap agreement will
terminate unless holders representing 662/3% of the total outstanding
principal amount of the related floating rate class vote to continue the
interest rate swap agreement with the existing swap counterparty.
All searches for replacement swap counterparties will be at the
reasonable cost of the swap counterparty being replaced.
Interest Rate Swap Agreement Events of Default and Termination
Events. The events referred to as swap events of default under each
interest rate swap agreement include:
o the failure of the issuer or the swap counterparty to pay
any amount when due under the interest rate swap
agreement if that failure is not remedied on or before
the fifth business day after that failure, unless, in the
case of a failure by the swap counterparty, the holders
of 662/3% of the total outstanding principal amount of
the related floating rate class vote to waive that
default within 30 days following notice of the default,
by the issuer or the trustee to the swap counterparty;
o certain events of bankruptcy of the issuer or the swap
counterparty or a credit support provider of the swap
counterparty, or
o a merger of the issuer or the swap counterparty without
an assumption of its obligations under the interest rate
swap agreement.
The events referred to as termination events under the interest
rate swap agreement are:
o illegality, as described below,
o an acceleration of the related floating rate class, or
o a swap counterparty downgrade event, as described above,
that is not cured within the applicable time periods.
Each interest rate swap agreement may be terminated by either the
issuer or the swap counterparty upon an illegality, as described below. In
addition, upon acceleration of the securitization bonds, other than as a
result of an uncured covenant default not involving a payment failure,
either party may elect to terminate. Any other swap event of default or a
termination event can lead to a termination of the interest rate swap
agreement by the party not responsible for that event. Moreover, as
described above, the interest rate swap agreement will terminate following
a swap counterparty downgrade event if that event is not cured, there is no
replacement swap counterparty and the requisite holders of the related
floating rate class do not vote to continue with the existing swap
counterparty. Except in the cases described above, the issuer may terminate
only at the direction of the holders of 66 2/3% of the total outstanding
principal amount of the related floating rate class.
The issuer will not be obligated to pay any termination payment or
any other breakage amounts to the swap counterparty under any interest rate
swap agreement as a result of any termination event, any swap event of
default, any swap counterparty downgrade event or for any other reason,
except following an acceleration of the securitization bonds and a
liquidation of the collateral as described under "The Indenture -- How
Funds in the Collection Account Will Be Allocated" in the prospectus. Any
payment made by a replacement swap counterparty to enter into a replacement
interest rate swap agreement will be paid to the terminated swap
counterparty.
Upon a termination of an interest rate swap agreement resulting
from a swap event of default, swap counterparty downgrade event or other
termination event, the swap counterparty may be liable to pay a termination
payment to the issuer, based on the market value of the interest rate swap
agreement determined in accordance with specified procedures set forth
therein. Any termination payment paid by the swap counterparty, including
interest thereon, will first be used to make any payment required to be
paid to any replacement swap counterparty and to the extent not so used
will be deposited in the related class subaccount and paid pursuant to the
indenture to the holders of the related floating rate class on the next
payment date, pro rata based on the principal amount held by each holder,
as described under "Credit Enhancement -- Collection Account and
Subaccounts -- The Class Subaccounts" in this prospectus supplement.
Illegality means that due to the adoption of, or any change in,
any applicable law after the date on which a swap transaction is entered
into, or due to the promulgation of, or any change in, the interpretation
by any court, tribunal or regulatory authority with competent jurisdiction
of any applicable law after that date, it becomes unlawful for the issuer
or the swap counterparty:
1. to perform any absolute or contingent obligation to make
a payment or delivery or to receive a payment or delivery
in respect of that swap transaction or to comply with any
other material provision of the interest rate swap
agreement; or
2. to perform, or for any credit support provider of that
party to perform, any contingent or other obligation
which the party or that credit support provider has under
any credit support document relating to that swap
transaction.
Replacement of Interest Rate Swap Counterparty. Upon a termination
or a swap event of default under an interest rate swap agreement, the
issuer is required to appoint a swap agent. Upon its appointment, the swap
agent will be required, for a period not exceeding 30 days, either:
1. find a replacement swap counterparty who meets the swap
counterparty minimum ratings or who has made such other
arrangements as will result in the related floating rate
class receiving ratings from the rating agencies not less
than the ratings that would be received if such
replacement swap counterparty met the swap counterparty
minimum ratings, or
2. if a replacement swap counterparty satisfying clause 1.
above cannot be found, find the available replacement
swap counterparty with the highest available long-term
senior unsecured or financial program credit rating which
is approved by the holders of at least 66 2/3% of the
total outstanding principal amount of the related
floating rate class.
In case of clause 1. or 2. above, if there is more than one
available replacement swap counterparty with the same credit rating, the
counterparty offering the interest rate swap terms with the lowest overall
cost to the issuer will be selected by the issuer as the replacement swap
counterparty. If a replacement swap counterparty satisfying the above
criteria has been found, upon the termination of the interest rate swap
agreement, the replacement swap counterparty will enter into an interest
rate swap agreement with the issuer having terms substantially the same as
the original interest rate swap agreement, effective as of the payment date
immediately following the date of the replacement agreement. If a
replacement swap counterparty has not been found, the swap agent will be
required to renew such search every three months until a replacement swap
counterparty satisfying the above criteria has been found and a replacement
interest rate swap agreement has been entered into.
Assignment of Interest Rate Swap Agreements. Any swap counterparty
may assign its obligations under any interest rate swap agreement with the
prior written consent of the issuer or, without that consent, either:
3. in a consolidation or amalgamation with or merger with or
into, or transfer of all or substantially all of its
assets to another entity which expressly assumes in a
written agreement the obligations of the swap
counterparty under the interest rate swap agreement,
although if upon that consolidation, amalgamation or
merger, a swap counterparty downgrade event has occurred,
it will be a termination event as described above, or
4. to a replacement swap counterparty following a swap
counterparty downgrade event as described above.
Enforcement, Amendment, Modification or Waiver of Interest Rate
Swap Agreements. If a swap event of default or termination event occurs and
is continuing, the trustee may, and at the direction of at least 66 2/3% of
the total outstanding principal amount of the related floating rate class
shall, exercise all rights, remedies, powers, privileges and claims of the
issuer against the related swap counterparty, and any right of the issuer
to take this action shall be suspended.
An interest rate swap agreement may be amended with the consent of
the trustee and the related swap counterparty, as long as each of Moody's,
S&P, and Fitch confirm that the amendment will not result in the reduction
or withdrawal of its then current rating of the related floating rate
class, which confirmation is referred to as satisfaction of the rating
agency condition, provided that, in some circumstances, so long as Moody's
has been notified of a proposed amendment, the rating agency condition may
be satisfied with respect to Moody's without such a confirmation. However,
this amendment may not adversely affect in any material respect the
interests of the securitization bondholders of the related floating rate
class unless the holders of at least 66 2/3% of the total outstanding
principal amount of that class direct the trustee to consent to the
amendment. Moreover, that amendment may not adversely affect in any
material respect the interests of any other securitization bondholders or
the counterparty to any interest rate swap agreement without the consent of
the holders of at least 662/3% of the total outstanding principal balance
of the securitization bonds of all of those other series or classes, and
each counterparty to any interest rate swap agreement, materially and
adversely affected thereby.
Except as set forth above under "-- Swap Counterparty Downgrade
Event" or "Interest Rate Swap Agreement Events of Default and Termination
Events," with respect to any action proposed by the issuer to amend,
modify, waive, supplement or surrender the terms of any interest rate swap
agreement, or waive timely performance or observance by the swap
counterparty under any interest rate swap agreement, in a way which would
materially and adversely affect the interests of securitization bondholders
of the related class, the issuer must satisfy the rating agency condition.
The trustee will consent to this proposed action only with the consent of
(1) 66 2/3% of the total outstanding principal amount of the securitization
bonds of the related class, and (2) the consent of the holders of at least
66 2/3% of the total outstanding principal balance of each other series or
class, and each counterparty to any interest rate swap agreement,
materially and adversely affected thereby.
SWAP COUNTERPARTIES
Each initial swap counterparty shall be required to have at least
the swap counterparty minimum ratings and will be selected by the issuer
upon the pricing by the underwriters of the series 2001-1 floating rate
securitization bonds and identified in the final prospectus supplement.
TAX CONSEQUENCES TO U.S. HOLDERS OF FLOATING RATE SECURITIZATION BONDS
Interest on Floating Rate Securitization Bonds. Consumers and the
issuer will treat floating rate securitization bonds as variable rate debt
instruments for federal income tax purposes. Moreover, each purchaser of
floating rate securitization bonds will agree by virtue of their purchase
of such securitization bonds to treat them as variable rate debt
instruments for federal income tax purposes. Assuming such treatment is
correct, interest on such securitization bonds will be includible in a U.S.
Holder's income when it is received, in the case of a U.S. Holder using the
cash receipts and disbursements method of tax accounting, or as it accrues,
in the case of a U.S. Holder using the accrual method of tax accounting.
If a swap termination event were to occur with respect to a swap
related to a class of floating rate securitization bonds, those bonds would
become fixed rate bonds calling for interest payments based on the gross
fixed rate. In addition, if a termination payment were to be made by the
counterparty, the termination payment would be credited to the subaccount
for the class and distributed to the holders of that class. Although no
such swap termination event is anticipated, if one were to occur, Consumers
and the issuer will treat it as a change in circumstances that will, for
purposes of computing taxable income on the securitization bonds, be
treated as a reissuance of the securitization bonds. Any termination
payment passed through to the securitization bond holders would reduce the
adjusted issue price on the securitization bonds, which could in turn
create original issue discount with respect to the bonds deemed to have
been reissued.
Characterization of the floating rate securitization bonds as
variable rate debt instruments is not free from doubt. Notwithstanding the
intent of Consumers, the issuer, and each purchaser of floating rate
securitization bonds to treat such securitization bonds as variable rate
debt instruments, alternative tax characterizations of such floating rate
securitization bonds are possible.
Potential Alternative Tax Characterizations of the Floating Rate
Securitization Bonds. As noted above, the proper characterization of the
floating rate securitization bonds is not clear. Accordingly, for example,
the Internal Revenue Service could assert on audit that the floating rate
securitization bonds are in fact investment units made up of two
components. The first component would be a fixed rate debt instrument
having a principal balance that would at all times equal the principal
balance of the floating rate securitization bonds and an interest rate
equal to the gross fixed rate for such securitization bonds. The second
component would be a undivided interest in the interest rate swap agreement
with the swap counterparty. If this alternative characterization of an
investment in floating rate securitization bonds were to prevail, then the
manner in which a holder of such a floating rate securitization bond would
recognize income would differ from that described above.
Under that alternative characterization, each holder of a floating
rate securitization bond would include in income the gross fixed rate
interest on the floating rate securitization bond in accordance with its
regular method of tax accounting. As the tax owner of an undivided interest
in the swap agreement related to that class, the holder would account for
net income and/or net expense with respect to the swap agreement.
In the case of a floating rate securitization bond, a holder would
be treated as though it made quarterly periodic payments based on the gross
fixed rate to the counterparty and as though it received quarterly periodic
payments based on the floating rate paid by the counterparty. For any
taxable year, a holder of a floating rate securitization bond would include
in, or deduct from, gross income the holder's net swap income or expense.
Net swap income or expense would be based on all periodic payments
recognized and attributable to the year.
Periodic payments made on any quarterly payment date would be
allocated ratably among the days in the quarter, and a holder of a floating
rate securitization bond would include or deduct its share of the net
periodic payments allocated to the year. Thus, if for a taxable year the
sum of periodic payments considered to have been made by a holder for the
year were to exceed the periodic payments considered to have been received
by the holder for the year, the holder would have net swap expense for the
year. Generally, such net swap expense would be deductible for the year as
an ordinary deduction.
If, however, a holder of a floating rate securitization bond were
to be an individual, any net swap expense for any year would be treated as
a miscellaneous itemized deduction. In computing taxable income, an
individual is allowed to deduct miscellaneous itemized deductions only to
the extent the sum of such deductions exceeds two percent of the
individual's adjusted gross income. Further, an individual is not allowed a
deduction for miscellaneous itemized deductions in computing alternative
minimum taxable income. Thus, for any period for which the gross fixed rate
on the floating rate securitization bonds exceeded the floating rate
payments made to the issuer by the counterparty under the swap agreement,
an individual would include in income interest at the gross fixed rate
payable, but could be precluded from deducting all or a part of the net
swap expense for the period due to the limitations imposed on miscellaneous
itemized deductions.
If the underlying swap terminated and a payment were made as a
result of the termination, the receipt of such payment by a holder would be
treated as capital gain. Moreover, if a holder were to sell its interest in
a floating rate securitization bond, it would be considered to have made or
to have received a termination payment with respect to its interest in the
swap agreement. The holder would recognize gain or loss in the year that it
terminated its interest in the swap agreement determined by reference to
the amount of the termination payment made or received and the holder's
basis, if any, in the swap agreement.
Other alternative characterizations of an investment in floating
rate bonds may be possible, such as the characterization of such bonds as
contingent payment debt obligations. Investors are encouraged to consult
their tax advisors concerning the tax implications of an investment in
floating rate securitization bonds.
RISK FACTORS RELATING TO SERIES [ ]
FLOATING RATE SECURITIZATION BONDS
In addition to the following risk factors applicable to the
floating rate classes, additional risk factors apply to all of the
securitization bonds of any series. See "Risk Factors" in the prospectus.
The following risk factors together with those risk factors outlined in the
prospectus describe the principal risk factors of an investment in the
Series [ ] securitization bonds.
TERMINATION OF SWAP COULD CAUSE A LOSS
Termination events, swap events of default or swap counterparty
downgrade events under any interest rate swap agreement may result in
termination of that interest rate swap agreement. Each interest rate swap
agreement will terminate if the related swap counterparty defaults in its
obligation to make payments under the interest rate swap agreement and the
holders representing 662/3% of the total outstanding principal amount of
the related floating rate class do not vote to waive that default. If any
interest rate swap agreement is terminated, the holders of the related
floating rate class will receive a fixed rate of interest equal to the
gross fixed rate for that class, which will take effect from the last
payment date to which interest has been paid at a floating rate. See "The
Series [ ] Securitization Bonds -- Interest Rate Swap Agreements" in this
prospectus supplement. This rate could be substantially less than the
floating rate for that class at the time of the termination, which could
adversely affect the yield to maturity, and holders of the related floating
rate class could suffer a loss on their investment.
RATINGS DOWNGRADE OF ANY FLOATING RATE CLASS OF SECURITIZATION BONDS COULD
CAUSE A LOSS FOR HOLDERS OF THOSE SECURITIZATION BONDS
If a swap counterparty downgrade event occurs, and (1) the swap
counterparty fails to make satisfactory arrangements to maintain or restore
the prior ratings and (2) holders representing 662/3% of the total
outstanding principal amount of the related floating rate class either
approve a replacement swap counterparty that does not maintain or restore
the prior ratings or such holders vote to continue the existing interest
rate swap agreement, that class of securitization bonds may be downgraded
by the rating agencies. See "The Series [ ] Securitization Bonds --
Interest Rate Swap Agreements" in this prospectus supplement. In that
event, the trading price of these securitization bonds may be reduced, and
holders of these securitization bonds could suffer a loss on their
investment.
INTEREST PAYMENTS ON SERIES [ ] SECURITIZATION BONDS AT FLOATING RATES ARE
DEPENDENT ON SWAP COUNTERPARTIES
If any swap counterparty defaults in its obligation to make any
net swap payment, the related interest rate swap agreement may terminate in
the absence of the required waiver by the holders of the related class, and
the holders of the related class of series [ ] floating rate securitization
bonds will receive interest at the gross fixed rate for that class. There
can be no assurance that any alternate arrangements will be made to obtain
a suitable replacement swap counterparty or otherwise to obtain payment of
the floating rate for that class. The gross fixed rate for that class could
be substantially less than the floating rate for that class at the time of
that failure to pay, and holders of that class of securitization bonds
could suffer a loss on their investment. See "The Series [ ] Securitization
Bonds -- Interest Rate Swap Agreements" in this prospectus supplement.
THERE MAY BE ALTERNATIVE TAX CHARACTERIZATIONS OF FLOATING RATE
SECURITIZATION BONDS.
Consumers and the issuer will treat floating rate securitization
bonds as variable rate debt instruments for federal income tax purposes. As
such, interest on the floating rate securitization bonds will be includible
in a U.S. Holder's income when it is received, in the case of a U.S. Holder
using the cash receipts and disbursements method of tax accounting, or as
it accrues, in the case of a U.S. Holder using the accrual method of tax
accounting. There are, however, potential alternative federal tax
characterizations of floating rate securitization bonds that could lead to
differing results. See "The Series [ ] Securitization Bonds - Tax
Consequences to U.S. Holders of Floating Rate Securitization Bonds -
Potential alternative tax characterizations of floating rate securitization
bonds" in this prospectus supplement.
THE SECURITIZATION BONDS MAY NOT BE LISTED ON ANY STOCK EXCHANGE.
Although application will be made to have the class [ ]
securitization bonds listed on the Luxembourg Stock Exchange, the issuer
cannot assure that those classes will be listed on the Luxembourg Stock
Exchange. The issuer will not apply to list those securitization bonds on
any other stock exchange. The other classes of the series [ ]
securitization bonds will not be listed on any stock exchange or any
automated quotation system. Securitization bonds which are not listed on a
stock exchange may have limited liquidity as trading will be limited to the
over-the- counter market.
CREDIT ENHANCEMENT
Credit enhancement for the series [ ] securitization bonds is
intended to protect you against losses or delays in scheduled payments on
your securitization bonds. See "Risk Factors -- Securitization Bondholders
May Experience Payment Delays or Losses as a Result of the Limited Sources
of Payment for the Securitization Bonds and Limited Credit Enhancement" in
the prospectus.
PERIODIC ADJUSTMENT OF THE SECURITIZATION CHARGE
Credit enhancement for the securitization bonds includes mandatory
periodic adjustments to the securitization charge to be billed to
customers, upon notification by Consumers, as servicer, to the MPSC. Under
the MPSC financing order, the servicer may adjust the securitization
charge. Consumers, as servicer, will notify the MPSC of its proposed
adjustment annually through January 2013 and quarterly commencing in
January 2014. The periodic adjustments will be designed to provide, among
other things, sufficient funds for timely payments of interest on and
principal of the securitization bonds in accordance with the expected
amortization schedule set forth in Table 2 above. See "The MPSC Financing
Order and the Securitization Charge -- The MPSC's Securitization Charge
Adjustment Process" in the prospectus. The adjustments will be made either
if there are excess remittances into the collection account or if the
securitization charge does not produce sufficient remittances into the
collection account:
1. to pay transaction fees and expenses;
2. to make scheduled payments of principal of and interest
on the securitization bonds, which in the case of
interest on any floating rate class will be calculated at
the applicable gross fixed rate; and
3. to fund or replenish any of the subaccounts, including
the capital subaccount and the overcollateralization
subaccount, to their required levels.
COLLECTION ACCOUNT AND SUBACCOUNTS
The trustee will establish a collection account to hold the
capital contribution from Consumers to the issuer and the securitization
charge revenue collections remitted by the servicer from time to time. The
collection account will contain the funds available to pay the
securitization bonds. The collection account will consist of subaccounts
including the following:
o the general subaccount;
o one or more series subaccounts;
o one or more class subaccounts;
o one or more series capital subaccounts, including the
capital reserve subaccount with respect to the series [ ]
securitization bonds, as discussed below;
o one or more series overcollateralization subaccounts; and
o the reserve subaccount.
Withdrawals from and deposits to all of these subaccounts will be
made as described under "The Indenture -- The Collection Account for the
Securitization Bonds" and "-- How Funds in the Collection Account Will Be
Allocated" in the prospectus.
The General Subaccount. Securitization charge revenue collections
remitted by the servicer to the trustee will be deposited into the general
subaccount. On each payment date, the trustee will allocate amounts in the
general subaccount as described under "The Indenture -- How Funds in the
Collection Account Will Be Allocated" in the prospectus.
The Series Subaccount. Upon the issuance of the series [ ]
securitization bonds, a series subaccount will be established with respect
to that series. On each payment date, or the day before the payment date in
the case of interest allocated to the applicable class subaccounts as
described below, the trustee will allocate from amounts on deposit in the
general subaccount to the series subaccount for each series an amount
sufficient to pay, to the extent available:
o interest payable on that series on that payment date to
each class on a pro rata basis based on the amount of
interest payable to that class, or in the case of any
floating rate class, based on the gross fixed amount for
that class, which gross fixed amount will in turn be
allocated to the related class subaccount;
o the principal of that series due on any class or series
on the final maturity date of that class or series, on a
redemption date or upon acceleration; and
o principal scheduled to be paid on that series on that
payment date, as set forth in the expected amortization
schedule, excluding amounts provided for in the
immediately preceding clause above.
On each payment date, allocations will be made to each series
subaccount as described under "The Indenture -- How Funds in the Collection
Account Will Be Allocated" in the prospectus. On each payment date, the
trustee will withdraw funds from each series subaccount to make payments on
the related series of securitization bonds.
The Series Capital Subaccount. Upon the issuance of the series [ ]
securitization bonds, a capital subaccount will be established for that
series, into which Consumers will deposit $[ ], which represents the
required capital amount for the series. Further, the trustee will establish
a subaccount within the capital subaccount, which will be referred to as
the capital reserve subaccount. The trustee will fund the capital reserve
subaccount with $[100,000] from the required capital amount for the series
[ ] securitization bonds. If depleted, the capital reserve subaccount will
not be replenished. The capital reserve subaccount will not be subject to
the lien of the indenture or included in the collateral securing any
securitization bonds. If amounts available in the general subaccount, the
series subaccount, the reserve subaccount and the series
overcollateralization subaccount are not sufficient on any payment date to
make scheduled payments of principal and interest to the series [ ]
securitization bondholders and to pay the expenses, fees and charges
specified in the indenture, the trustee will draw on amounts in the series
capital subaccount, other than the amounts in the capital reserve
subaccount, to make those payments. The required capital amount has been
set at a level sufficient to obtain the ratings on the series [ ]
securitization bonds described below under "Ratings for the Series [ ]
Securitization Bonds" in this prospectus supplement.
The Class Subaccounts. Upon the issuance of any floating rate
class, a subaccount, referred to as the class subaccount, will be
established for that floating rate class. On the business day preceding
each payment date, the trustee will allocate to each class subaccount from
the related series subaccount an amount equal to the gross fixed amount for
the related floating rate class and that payment date. On that day, any net
swap payment will be paid to the related swap counterparty from that class
subaccount, or any net swap receipt from the related swap counterparty will
be deposited into that class subaccount. On the related payment date,
amounts in each class subaccount will be paid as interest to the holders of
the related floating rate class. See "The Indenture -- How Funds in the
Collection Account Will Be Allocated" in the prospectus. In the event of a
shortfall of funds in a class subaccount to make a net swap payment due to
the related swap counterparty and to pay interest on the related floating
rate class of securitization bonds, those amounts will be paid on a pro
rata basis based on the relative amounts due in respect of the net swap
payment and the interest on the class of securitization bonds. Any balance
remaining in any class subaccount after payments have been made to the
holders of the related floating rate class on a payment date will be
transferred to the collection account for allocation in connection with the
next payment date.
The Series Overcollateralization Subaccount. Upon the issuance of
the series [ ] securitization bonds, an overcollateralization subaccount
will be established for the series [ ] securitization bonds. The required
overcollateralization amount for the series [ ] securitization bonds is $[
], which represents [0.5%] of the initial outstanding principal balance of
the series. On each payment date, the trustee will deposit in the series
overcollateralization subaccount securitization charge revenue collections,
together with any earnings on investments in the collection account, up to
a specified amount for that payment date which is referred to as the
scheduled overcollateralization level for that date. The scheduled
overcollateralization level for each payment date is set forth below. The
overcollateralization amount and the scheduled overcollateralization levels
have been set at amounts sufficient to obtain the ratings on the series [ ]
securitization bonds which are described below under "Ratings for the
Series [ ] Securitization Bonds" in this prospectus supplement. See also
"The Securitization Bonds -- Credit Enhancement for the Securitization
Bonds" in the prospectus.
If amounts available in the general subaccount, the series
subaccount and the reserve subaccount are not sufficient on any payment
date to make scheduled payments to the series [ ] securitization
bondholders and to pay the expenses, fees and charges specified in the
indenture, the trustee will draw on amounts in the series [ ]
overcollateralization subaccount to make those payments.
TABLE 3
SCHEDULED OVERCOLLATERALIZATION LEVELS
Scheduled Scheduled
Payment Overcollateralization Payment Overcollateralization
Date Level Date Level
- ------- --------------------- ------- ----------------------
The Reserve Subaccount. The reserve subaccount will be funded with
any securitization charge revenue collections and earnings on amounts in
the collection account, other than the capital subaccount, in excess of the
amount necessary to pay on any payment date:
1. fees and expenses of the trustee and the servicer and
other transaction fees, expenses, costs and charges,
2. scheduled principal of and interest on the securitization
bonds, which in the case of interest on any floating rate
class will be the gross fixed amount for that class and
that payment date, of each series payable on that payment
date,
3. any amount required to replenish the capital subaccount
for each series, and
4. the amounts required to fund or replenish the
overcollateralization subaccount for each series to the
specified levels for that payment date.
The securitization charge adjustments will be calculated to, among
other things, eliminate any amounts on deposit in the reserve subaccount.
See also "The Securitization Bonds-- Credit Enhancement for the
Securitization Bonds" and "The MPSC Financing Order and the Securitization
Charge -- The MPSC's Securitization Charge Adjustment Process" in the
prospectus.
On any payment date, if amounts available in the general
subaccount and the series subaccount are not sufficient to make scheduled
payments to the series [ ] securitization bondholders, and to pay the
expenses, fees and charges specified in the indenture, the trustee will
draw first on any amounts in the reserve subaccount to make those payments.
No amounts in the series overcollateralization subaccount, the
series capital subaccount or the reserve subaccount may be used to cover
any shortfalls in interest on a floating rate class to the extent that
shortfall is due to the swap counterparty's failure to pay any net swap
receipt due under the related interest rate swap agreement. However,
amounts in those subaccounts will be available to pay the applicable gross
fixed amount with respect to each floating rate class.
DESCRIPTION OF SECURITIZATION PROPERTY
Securitization property is a property right created by Michigan
state legislation. Securitization property represents the irrevocable right
of a Michigan electric utility to impose, collect and receive the
securitization charges, in an amount sufficient to provide full recovery of
qualified costs as approved by the MPSC under the MPSC financing order.
Qualified costs are described in more detail under "The Customer Choice
Act" in the prospectus. Securitization property also includes the right of
an electric utility to obtain periodic adjustments of securitization
charges and all revenues, collections, payments, money and proceeds with
respect to the above.
THE SECURITIZATION CHARGE
The qualified costs authorized in the MPSC financing order are to
be recovered from customers of Consumers through the securitization charge.
Consumers Will Assess the Securitization Charge on Customers.
Consumers, in its capacity as servicer of the securitization property under
the servicing agreement, will assess the securitization charge on the bills
of each customer. A customer is a person that is an electric customer
taking delivery of electricity from Consumers or its successor on its
MPSC-approved rate schedules or under special contracts. Each customer who
is physically connected to Consumers' facilities must pay the
securitization charge on all electricity delivered over those facilities,
even if that customer elects to purchase electricity from another supplier.
See "The Customer Choice Act -- Consumers and Other Utilities May
Securitize Qualified Costs -- Customers Cannot Avoid Paying the
Securitization Charge" in the prospectus. The securitization charge is
assessed as a uniform per kilowatt-hour charge against all customers of all
rate classes and under all special contracts, subject to the maximum lawful
energy charges which may be in effect from time to time for any of those
rate classes or special contracts. The amount of the securitization charge
billed to a customer depends on the amount of electricity delivered to the
customer through Consumers' facilities. The initial securitization charge
for the series [ ] securitization bonds is expected to represent less than
[ ]% of the system-wide average aggregate rate cap applied against all
related customers as of the issuance date of this series.
Consumers Will Calculate the Securitization Charge. Consumers, as
servicer, will calculate the securitization charge based on the total
amount required to be billed to customers to generate securitization charge
revenue collections sufficient to provide funds for the timely payment of
scheduled principal of and interest on the securitization bonds and the
other amounts required to be paid by the issuer. The securitization charge
will be reflected in each customer's bill. Securitization charge revenue
collections will vary from projections because total electricity deliveries
are affected by changes in usage, number of customers, rates of payment
delinquencies and write-offs or other factors. See Tables 1 through 7 under
"The Seller and Servicer of the Securitization Property" in the prospectus.
Consumers, as servicer, is required to seek adjustments to the
securitization charge on each calculation date as described under "The MPSC
Financing Order and the Securitization Charge" in the prospectus, in order
to adjust for these variations on each calculation date.
The initial securitization charge will be calculated on the basis
of:
o the issuance of $[ ] of series [ ] securitization bonds,
o the projected total payments required in relation to the
securitization bonds during the annual period commencing
immediately after the date of issuance of the series [ ]
securitization bonds and ending [ ], and
o the forecasted amount of kilowatt-hours of electricity to
be delivered, and for which Consumers bills and collects
during that period.
The MPSC's Securitization Charge Adjustment Process.
Securitization charge revenues remitted to the trustee are intended to be
neither more nor less than the amount necessary to pay the principal
balance of the securitization bonds of each series in accordance with the
expected amortization schedule, to pay interest on each series, which in
the case of interest on any floating rate class will be calculated at the
applicable gross fixed rate, to pay related fees, costs and expenses and to
fund or replenish the subaccounts. Furthermore, the servicer is obliged to
continue to make filings with the MPSC to adjust the securitization charge,
calculated in accordance with the formula, until there are no
securitization bonds outstanding and all fees, costs, and expenses of the
issuer have been paid. In order to enhance the likelihood of remittances of
a proper amount of securitization charge revenues, the servicing agreement
requires the servicer to implement periodic adjustments to the
securitization charge. Those adjustments will be made annually through
January 2013, and quarterly commencing in January 2014 for so long as the
series [ ] securitization bonds are outstanding. The adjustments to the
securitization charge are intended to produce sufficient revenues to pay
scheduled principal of and interest on the series [ ] securitization bonds
and to provide for the full recovery of qualified costs. See "The MPSC
Financing Order and the Securitization Charge -- The MPSC's Securitization
Charge Adjustment Process" in the prospectus.
Initially, the securitization charge will be an amount not in
excess of $0.00205 per kilowatt-hour for all customers, beginning with
Consumers' first billing cycle after the issuance date of the series [ ]
securitization bonds. See "The Customer Choice Act" and "The MPSC Financing
Order and the Securitization Charge" in the prospectus.
INFORMATION REGARDING CONSUMERS ENERGY COMPANY
For the year ended December 31, 1999, Consumers reported earnings
of $340 million on revenue of $3.874 billion as compared with earnings of
$349 million on revenue of $3.709 billion for the year ended December 31,
1998. For the year ended December 31, 1999, approximately 69% and 30% of
revenues were derived from electricity and gas, respectively. For the six
months ending June 30, 2000, approximately 67% and 32% of revenues were
derived from electricity and gas, respectively.
For the six months ending June 30, 2000, Consumers reported
earnings of $128 million on revenue of $1.934 billion as compared to
earnings of $191 million on revenues of $2.007 billion for the six months
ending June 30, 1999.
Consumers is a wholly owned subsidiary of CMS Energy Corporation.
As of June 30, 2000, Consumers' electric and gas assets comprised
approximately 61% of CMS Energy Corporation's consolidated assets.
UNDERWRITING THE SERIES [ ] SECURITIZATION BONDS
Subject to the terms and conditions set forth in the underwriting
agreement among the issuer, Consumers and the underwriters for whom Morgan
Stanley Dean Witter is acting as the representative, the issuer has agreed
to sell to the underwriters, and the underwriters have severally agreed to
purchase, the principal balance of series [ ] securitization bonds set
forth opposite each underwriter's name below:
Name
- ---- Class A-1 Class A-2 Class A-3 Class A-4 Total
------------ ---------- ----------- ---------- -----
Morgan Stanley & Co. $ $
Incorporated
Total $
====
Under the underwriting agreement, the underwriters will take and
pay for all of the series [ ] securitization bonds offered hereby, if any
are taken.
THE UNDERWRITERS' SALES PRICE FOR THE SERIES [ ] SECURITIZATION BONDS
Series [ ] securitization bonds sold by the underwriters to the
public will be initially offered at the prices set forth on the cover of
this prospectus supplement. The underwriters propose initially to offer the
securitization bonds to dealers at those prices, less a selling concession
not to exceed the percentage set forth below, and the underwriters may
allow and dealers may reallow a discount not to exceed the percentage set
forth below.
Class Selling Reallowance
- ----- Concession Discount
-------------------- ---------------------
Class A-1
Class A-2
Class A-3
Class A-4
After the initial public offering, the public offering prices,
selling concessions and reallowance discounts may change.
NO ASSURANCE AS TO RESALE PRICE OR RESALE LIQUIDITY FOR THE SECURITIZATION
BONDS
The series [ ] securitization bonds are a new issue of securities
with no established trading market. They will not be listed on any
securities exchange, with the exception of any floating rate class which
may be listed on the Luxembourg Stock Exchange. The issuer has been advised
by the underwriters that they intend to make a market in the securitization
bonds but they are not obligated to do so and may discontinue market making
at any time without notice. No assurance can be given as to the liquidity
of the trading market for the securitization bonds.
UNITED KINGDOM OFFERING
Each underwriter has represented and agreed that (a) it only
issued or passed on and will only issue or pass on in the United Kingdom
any document received by it in connection with the issue of any floating
rate class to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1996 or who is a person to whom the document may otherwise lawfully be
issued or passed on, (b) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 of Great Britain
with respect to anything done by it in relation to any floating rate class
in, from or otherwise involving the United Kingdom and (c) if that
underwriter is an authorized person under the Financial Services Act 1986,
it has only promoted and will only promote (as that term is defined in
Regulation 1.02 of the Financial Services (Promotion of Unregulated
Schemes) Regulations 1991) to any person in the United Kingdom the scheme
described herein if that person is of a kind described either in Section
76(2) of the Financial Services Act 1986 or in Regulation 1.04 of the
Financial Services (Promotion of Unregulated Schemes) Regulations 1991.
VARIOUS TYPES OF UNDERWRITER TRANSACTIONS WHICH MAY AFFECT THE PRICE OF THE
SECURITIZATION BONDS
The underwriters may engage in overallotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids
with respect to the securitization bonds in accordance with Regulation M
under the Securities Exchange Act of 1934. Overallotment transactions
involve syndicate sales in excess of the offering size, which create a
syndicate short position. Stabilizing transactions are bids to purchase the
securitization bonds which are permitted, so long as the stabilizing bids
do not exceed a specified maximum price. Syndicate covering transactions
involve purchases of the securitization bonds in the open market after the
distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the securitization bonds originally
sold by the syndicate member are purchased in a syndicate covering
transaction. These overallotment transactions, stabilizing transactions,
syndicate covering transactions and penalty bids may cause the prices of
the securitization bonds to be higher than they would otherwise be. None of
the seller, the issuer or the trustee or any of the underwriters represent
that the underwriters will engage in any of these transactions or that
these transactions, once commenced, will not be discontinued without notice
at any time.
In the ordinary course of business, each underwriter and its
affiliates have engaged and may engage in transactions with the issuer and
its affiliates, including Consumers. In addition, each underwriter may from
time to time take positions in the securitization bonds.
Under the terms of the underwriting agreement, the issuer and
Consumers have agreed to reimburse the underwriters for some expenses. The
issuer and Consumers have agreed to indemnify the underwriters against some
liabilities, including liabilities under the Securities Act of 1933.
RATINGS FOR THE SERIES [ ] SECURITIZATION BONDS
It is a condition of any underwriter's obligation to purchase the
series [ ] securitization bonds that each class of the series [ ]
securitization bonds be rated "___" by S&P, "___" by Moody's and "___" by
Fitch.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
rating agency. No person is obligated to maintain the rating on the
securitization bonds, and, accordingly, there can be no assurance that the
ratings assigned to any class of the securitization bonds upon initial
issuance will not be revised or withdrawn by a rating agency at any time
thereafter. If a rating of any class of the securitization bonds is revised
or withdrawn, the liquidity of that class may be adversely affected. In
general, ratings address credit risk and do not represent any assessment of
any particular rate of principal payments on the securitization bonds other
than payment in full of each class of the securitization bonds by the
applicable final maturity date, as well as the timely payment of interest.
For so long as any floating rate class is listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, the issuer will
notify the Luxembourg Stock Exchange if any rating assigned to those
securitization bonds is reduced or withdrawn and will cause this notice to
be published in a daily newspaper published in Luxembourg, which is
expected to be the Luxemburger Wort.
LISTING AND GENERAL INFORMATION
RELATED TO FLOATING RATE CLASSES
Application will be made to list each floating rate class on the
Luxembourg Stock Exchange. There can be no assurance that any floating rate
class will be listed on the Luxembourg Stock Exchange or any other stock
exchange. Purchasers of any class of series [ ] securitization bonds should
not rely on these securitization bonds being listed on the Luxembourg Stock
Exchange or any other stock exchange. You should consult with [ ], the
Luxembourg listing agent for each floating rate class, [ ], Luxembourg,
phone number [ ], referred to as the listing agent, to determine whether or
not a particular floating rate class is listed on the Luxembourg Stock
Exchange.
In connection with the listing application, the certificate of
incorporation and by-laws of Consumers, the amended and restated
certificate of formation and amended and restated limited liability company
agreement of the issuer, as well as legal notice relating to the issuance
of the series [ ] securitization bonds, will be deposited prior to listing
with the Chief Registrar of the District Court of Luxembourg, where copies
thereof may be obtained, free of charge, upon request. Once any floating
rate class has been so listed, trading of those securitization bonds may be
effected on the Luxembourg Stock Exchange. Each floating rate class will be
submitted for clearing through the facilities of DTC, Clearstream and
Euroclear. See "The Securitization Bonds -- Securitization Bonds Will Be
Issued in Book-Entry Form" in the prospectus.
The International Securities Identification Number (ISIN), Common
Code number and the CUSIP number for each floating rate class are as
follows:
Class ISIN Common Code CUSIP
- -----
------------------ ------------------------ ----------------------
The issuer represents that, as of the date of this prospectus
supplement, there has been no material adverse change in its financial
position since the date of its creation. The issuer is not involved in
litigation or arbitration proceedings relating to claims on amounts which
are material in relation to the issuance of any floating rate class nor, so
far as the issuer is aware, is any litigation or arbitration of this type
involving it pending or threatened. Except as disclosed in this prospectus
supplement or the prospectus, as of the date of this prospectus supplement,
the issuer has no outstanding loan capital, borrowings, indebtedness or
contingent liabilities, nor has the issuer created any mortgages, charges
or guarantees.
The transactions contemplated in this prospectus supplement will
be authorized by resolutions adopted by Consumers' Board of Directors and
by the issuer's managers on or about [ ].
If any floating rate class is listed on the Luxembourg Stock
Exchange, copies of the indenture, the series [ ] supplemental indenture,
the sale agreement, the servicing agreement, the administration agreement,
the reports of independent certified public accountants described in "The
Servicing Agreement -- Consumers, as Servicer, Will Provide Statements to
the Issuer and to the Trustee" and "-- Consumers to Provide Compliance
Reports Concerning the Servicing Agreement" in the prospectus, the
documents listed under "Consumers Energy Company" and "Information
Available to the Securitization Bondholders" and the reports to
securitization bondholders referred to under "Reports to Securitization
Bondholders" and "The Indenture -- Reports to Holders of the Securitization
Bonds" and "-- The Trustee Must Provide a Report to All Securitization
Bondholders" in the prospectus, will be available free of charge at the
offices of the trustee in the City of New York and the listing agent in
Luxembourg. Financial information regarding Consumers is included in its
annual report on Form 10-K for the fiscal year ended December 31, 1999, and
is also available at the offices of the trustee in the City of New York and
the listing agent in Luxembourg. For so long as any floating rate class is
outstanding and listed on the Luxembourg Stock Exchange, copies of each
annual report on Form 10-K for subsequent fiscal years will also be
available at the offices of the trustee in the City of New York and the
listing agent in Luxembourg.
In the event that any floating rate class is listed on the
Luxembourg Stock Exchange, certificated securitization bonds are issued and
the rules of the Luxembourg Stock Exchange require a Luxembourg transfer
agent, the Luxembourg paying agent will be appointed as a transfer agent.
The indenture provides that the trustee and the paying agent shall
pay to the issuer upon request any amounts held by them for the payment of
principal of and interest on any class of securitization bonds, including
without limitation, any floating rate class, which amounts remain unclaimed
for two years after they become due and payable. After payment to the
issuer, holders of any class of series [ ] securitization bonds entitled to
these funds must look to the issuer for payment as general creditors unless
an abandoned property law designates otherwise.
According to Chapter VI, Article 3, point A/II/2 of the Rules and
Regulations of the Luxembourg Stock Exchange, the floating rate
securitization bonds will be freely transferable and therefore no
transaction made on the Luxembourg Stock Exchange will be cancelled.
The indenture, the series [ ] supplemental indenture, the sale
agreement, the servicing agreement and the administration agreement are
governed by the laws of the State of Michigan. The amended and restated
certificate of formation and the amended and restated limited liability
company agreement are governed by the laws of the State of Delaware.
PROSPECTUS
SUBJECT TO COMPLETION, DATED [ ].
CONSUMERS FUNDING LLC
Issuer of the Securitization Bonds
Securitization Bonds
CONSUMERS ENERGY COMPANY
Seller and Servicer
of Securitization Property
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE [5] OF THIS PROSPECTUS
BEFORE BUYING THE SECURITIZATION BONDS.
The securitization bonds represent obligations of Consumers
Funding LLC only, which is the issuer, and are backed only by the assets of
the issuer. Neither Consumers, its parent, CMS Energy Corporation, nor any
of their respective affiliates, other than the issuer, is liable for
payments on the securitization bonds.
There currently is no secondary market for the securitization
bonds, and there is no assurance that one will develop.
This prospectus, together with the applicable prospectus
supplement, constitutes a summary of material terms of the offering of a
series of securitization bonds. Prospective investors are urged to read
both this prospectus and the prospectus supplement in full. Sales of the
securitization bonds may not be consummated unless the purchaser has
received both this prospectus and the prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
[ ]
TABLE OF CONTENTS
Page
Important Notice about Information Presented
in this Prospectus and the Prospectus Supplement.........................1
Summary of Terms..............................................................2
Risk Factors..................................................................5
Securitization Bondholders May Experience Payment Delays or
Losses as a Result of the Limited Sources of Payment
for the Securitization Bonds and Limited Credit
Enhancement..........................................................5
The Issuer May Not Impose Securitization Charges for
Electricity Delivered After 15 Years.................................5
In Some Periods the Amount of Securitization Charges May Not
Exceed Statutory Maximum Rates......................................5
Judicial, Legislative or Regulatory Action
That May Adversely Affect Your Investment................................6
The Law Which Underpins the Securitization Bonds
May Be Invalidated...................................................6
The Customer Choice Act May Be Overturned by the Federal
Government Without Full Compensation.................................7
Future Voter Initiatives, Referenda or Other State Legislative
Action May Invalidate the Securitization Bonds or Their
Underlying Assets....................................................7
The MPSC May Take Action Which Reduces the Value
of the Securitization Bonds..........................................9
Servicing Risks..............................................................10
Inaccurate Forecasting or Unanticipated Delinquencies or
Charge-Offs Could Result in Insufficient Funds to Make
Scheduled Payments on the Securitization Bonds .....................10
Initially, the Calculation of the Securitization Charge
May Be Affected by Limited Experience with the
Securitization Charge...............................................11
Consumers May Encounter Unexpected Problems in the Initial
Administration of the Securitization Charge.........................11
If the Servicer Defaults or Becomes Bankrupt, It May Be
Difficult to Find a Successor Servicer, and Payments on
the Securitization Bonds May Be Suspended...........................11
Billing and Collection Practices May Reduce the Amount of
Funds Available for Payments on the Securitization Bonds............12
It May Be Difficult to Collect the Securitization Charge
from Alternative Electric Suppliers Who Provide
Electricity to Consumers' Customers.................................12
Consumers' Customer Payments May Decline Initially Due
to Customer Confusion................................13
Inability to Terminate Service to Certain Delinquent
Customers During the Heating Season May Temporarily Reduce
Amounts Available for Payments on the Securitization Bonds..........13
The Risks Associated With Potential Bankruptcy Proceedings..............14
Consumers Will Commingle Securitization Charge Revenues
with Other Revenues Which May Obstruct Access to the
Issuer's Funds in Case of Bankruptcy of Consumers...................14
Bankruptcy of Consumers Could Result in Losses or Delays
in Payments on the Securitization Bonds.............................14
The Sale of the Securitization Property Could Be Construed
as a Financing and Not a Sale in a Case of
Consumers' Bankruptcy...............................................16
Consumers and the Issuer Could Be Substantively
Consolidated in a Case of Consumers' Bankruptcy.....................16
An MPSC Sequestration Order for Securitization Property
in Case of Default Might Not Be Enforceable in Bankruptcy...........17
Other Risks Associated With An Investment
In The Securitization Bonds.........................................17
The Proceeds from Foreclosure on the Securitization Property
May Be Insufficient to Pay the Securitization Bonds.................17
Consumers' Obligation to Indemnify the Issuer
for a Breach of a Representation or Warranty May
Not Be Sufficient to Protect Your Investment.......................17
You May Have to Reinvest the Principal Amount of Your
Securitization Bonds at a Lower Rate of Return
Because of Optional Redemption of the Securitization
Bonds...............................................................18
Risks Associated with the Use of Interest Rate Swap Transactions........18
Absence of Secondary Market for Securitization Bonds
Could Limit Your Ability to Resell
Securitization Bonds................................................18
The Issuer May Issue Additional Series of Securitization
Bonds Whose Holders Have Conflicting Interests......................18
The Ratings Have a Limited Function and They Are No
Indication of the Expected Rate of Payment of
Principal on the Securitization Bonds...............................19
Forward-looking Statements...................................................19
Consumers Energy Company.....................................................20
The Collateral...............................................................22
Payment Sources.........................................................23
Priority of Distributions...............................................23
Floating Rate Securitization Bonds......................................25
Credit Enhancement and Accounts.........................................25
State Pledge............................................................27
Payments of Interest and Principal...........................................30
Optional Redemption.....................................................30
Payment Dates and Record Dates..........................................30
Material Income Tax Considerations......................................30
ERISA Considerations....................................................31
Reports to Securitization Bondholders........................................31
Use of Proceeds..............................................................33
The Customer Choice Act......................................................33
Recovery of Qualified Costs Is Allowed for Consumers
and Other Michigan Utilities........................................34
Consumers and Other Utilities May Securitize Qualified Costs............35
The MPSC Financing Order and the Securitization Charge.......................38
The MPSC Financing Order................................................38
The MPSC's Securitization Charge Adjustment Process.....................39
The Seller and Servicer of the Securitization Property.......................41
Consumers...............................................................41
Consumers' Customer Classes, Electricity
Consumption and Revenues............................................41
Percentage Concentration Within Consumers'
Commercial and Industrial Classes...................................43
How Consumers Forecasts the Number of Customers
and the Amount of Electricity To Be Delivered
Over Its Facilities.................................................43
Actual Consumption Compared to Forecast.................................44
Credit Policy; Billing; Collections; Restoration of Service.............46
Credit Policy...........................................................46
Billing Process.........................................................47
Collection Process......................................................48
Write-Off Process.......................................................49
Restoration of Service..................................................49
Loss and Delinquency Experience.........................................50
How Consumers Will Apply Partial Payments by its Customers..............53
Consumers Funding LLC, the Issuer............................................53
Information Available to the Securitization Bondholders......................56
The Securitization Bonds.....................................................57
General Terms of the Securitization Bonds...............................57
Payments of Interest on and Principal of the Securitization Bonds.......58
Floating Rate Securitization Bonds......................................59
Redemption of the Securitization Bonds..................................59
Credit Enhancement for the Securitization Bonds.........................60
Securitization Bonds Will Be Issued in Book-Entry Form..................61
Certificated Securitization Bonds.......................................65
Weighted Average Life and Yield Considerations
for the Securitization Bonds............................................67
The Sale Agreement...........................................................68
Consumers' Sale and Assignment of Securitization Property...............68
Consumers' Representations and Warranties...............................69
Consumers' Covenants....................................................73
Consumers' Obligation to Indemnify the Issuer and the
Trustee and to Take Legal Action...................................76
Successors to Consumers.................................................77
The Servicing Agreement......................................................79
Consumers' Servicing Procedures.........................................79
Securitization Charge Revenue Remittances...............................80
The MPSC's Securitization Charge Adjustment Process.....................80
Consumers' Securitization Charge Revenue Collections....................81
Consumers' Compensation for its Role as Servicer and
its Release of Other Parties........................................81
Consumers' Duties as Servicer...........................................81
Consumers' Representations and Warranties as Servicer...................82
Consumers, as Servicer, Will Indemnify the Issuer
and Other Related Entities..........................................83
Consumers, as Servicer, Will Provide Statements
to the Issuer and to the Trustee....................................84
Consumers to Provide Compliance Reports
Concerning the Servicing Agreement..................................85
Matters Regarding Consumers as Servicer.................................85
Events Constituting a Default by Consumers
in Its Role as Servicer.............................................86
The Trustee's Rights if Consumers Defaults as Servicer..................87
The Obligations of a Servicer That Succeeds Consumers...................88
The Indenture................................................................88
The Security for the Securitization Bonds...............................88
Securitization Bonds May Be Issued in
Various Series or Classes...........................................89
Opinion of Independent Certified Public Accountants
Required for Each Series or Class...................................90
The Collection Account for the Securitization Bonds.....................91
How Funds in the Collection Account Will Be Allocated...................96
Reports to Holders of the Securitization Bonds.........................100
The Issuer and the Trustee May Modify the Indenture; the
Issuer Must Enforce the Sale Agreement, the
Servicing Agreement and any Interest Rate Swap
or Cap Agreement...................................................100
What Constitutes an Event of Default on the Securitization Bonds.......105
Covenants of the Issuer................................................109
Access to the List of Holders of the Securitization Bonds..............111
The Issuer Must File an Annual Compliance Statement....................111
The Trustee Must Provide a Report to All Securitization Bondholders....112
What Will Trigger Satisfaction and Discharge of the Indenture..........112
The Issuer's Legal Defeasance and Covenant Defeasance Options..........112
The Trustee............................................................115
Governing Law..........................................................115
How a Bankruptcy of the Seller or
Servicer May Affect Your Investment....................................115
Sale or Financing......................................................115
Consolidation of the Issuer and Consumers..............................117
Claims in Bankruptcy; Challenge to Indemnity Claims....................117
Status of Securitization Property as Current Property..................118
Enforcement of Rights by Trustee.......................................118
Bankruptcy of Servicer.................................................119
Material Income Tax Consequences for the Securitization Bonds...............120
Material Federal Income Tax Consequences...............................120
Income Tax Status of the Securitization Bonds..........................120
General................................................................120
Tax Consequences to U.S. Holders.......................................121
Tax Consequences to Non-U.S. Holders...................................124
Backup Withholding.....................................................125
Material State of Michigan Tax Consequences............................126
ERISA Considerations........................................................127
Plan Asset Issues for an Investment in the Securitization Bonds........128
Prohibited Transaction Exemptions......................................128
General Investment Considerations for Prospective
Plan Investors in the Securitization Bonds.........................129
Plan of Distribution for the Securitization Bonds...........................130
Ratings for the Securitization Bonds........................................131
Various Legal Matters Relating to the Securitization Bonds..................132
Index to Financial Statements of Consumers Funding LLC......................F-1
Report of Independent Accountants...........................................F-2
Index to Exhibits..........................................................II-7
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT
You should rely only on information related to the securitization
bonds provided in this prospectus and in the related prospectus supplement.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in
this prospectus and the prospectus supplement and, if given or made, the
information or representations must not be relied upon as having been
authorized by the issuer, Consumers, the underwriters or any dealer,
salesperson or other person.
This prospectus and the related prospectus supplement do not
constitute an offer to sell, or a solicitation of an offer to buy, any
security in any jurisdiction in which it is unlawful to make any similar
offer or solicitation.
We include cross-references to sections where you can find additional
information. Check the table of contents to locate these sections.
SUMMARY OF TERMS
This summary contains a brief description of the securitization bonds
that applies to all series of securitization bonds issued under this
prospectus. Information that relates to a specific series of securitization
bonds can be found in the prospectus supplement related to that series. You
will find a detailed description of the terms of the offering of the
securitization bonds in "The Securitization Bonds" in this prospectus.
Consider carefully the risk factors beginning on page [5] of this
prospectus.
The Issuer: Consumers Funding LLC, a Delaware
limited liability company, wholly owned
by Consumers Energy Company. The issuer
was formed solely to purchase
securitization property and to issue one
or more series of securitization bonds
secured by the securitization property.
Issuer's Address: 212 W. Michigan Avenue, Suite [ ]
Jackson, Michigan 49201
Issuer's Telephone Number: [ ]
Seller of the Securitization
Property to the Issuer: Consumers Energy Company, referred to as
Consumers, an operating electric and gas
public utility incorporated under the
laws of the State of Michigan, is the
principal subsidiary of CMS Energy
Corporation. Consumers is engaged in the
generation, purchase, transmission,
distribution and sale of electricity to
approximately 1.7 million customers in
61 of the 68 counties in Michigan.
Seller's Address: 212 West Michigan Avenue Jackson,
Michigan 49201
Seller's Telephone Number: (517) 788-0550
Servicer of the Securitization
Property:
Consumers, acting as servicer, and any
successor servicer, will service the
securitization property pursuant to a
servicing agreement with the issuer.
Consumers will be entitled to a monthly
servicing fee, in an amount specified in
the prospectus supplement.
Administrator: Consumers, acting as administrator, and
any successor administrator, will
administer the administrative affairs of
the issuer pursuant to an administration
agreement with the issuer.
Trustee: The Bank of New York
The Assets of the Issuer: The issuer will own:
o the securitization property
transferred to the issuer by the
seller (see "The Sale Agreement --
Consumers' Sale and Assignment of
Securitization Property" in this
prospectus);
o trust accounts held by the trustee;
o other credit enhancement acquired or
held to provide for the payment of
the securitization bonds; and
o rights under any interest rate swap
or cap agreements.
Transaction Overview: The Customer
Choice and Electricity Reliability Act
(Acts 141 and 142), enacted in the State
of Michigan in June 2000, referred to as
the "Customer Choice Act", authorizes
electric utilities, such as Consumers,
to recover qualified costs. Qualified
costs are an electric utility's
regulatory assets as determined by the
Michigan Public Service Commission,
referred to as the "MPSC", plus any
costs that the MPSC determines that the
electric utility would be unlikely to
collect in a competitive market,
together with the costs of issuing,
supporting and servicing securitization
bonds and any costs of retiring and
refunding the electric utility's
existing debt and equity securities in
connection with the issuance of
securitization bonds. Qualified costs
include taxes related to the recovery of
the securitization charge. An electric
utility may recover qualified costs
through an irrevocable non-bypassable
charge called the securitization charge
that is collected from all of its
electric customers taking delivery on
its MPSC-approved rate schedules and
under special contracts. The Customer
Choice Act permits special purpose
entities formed by electric utilities to
issue debt securities secured by the
right to receive revenues arising from
the securitization charge. The
securitization property includes this
right. See "The Securitization Bonds" in
this prospectus.
The following sets forth the primary
steps of the transaction underlying the
offering of the securitization bonds:
o Consumers will sell the
securitization property to the
issuer in exchange for the proceeds
available from the sale of the
securitization bonds after payment
of the issuer's issuance costs.
o The issuer, whose primary asset is
the securitization property, will
sell the securitization bonds to the
underwriters named in the prospectus
supplement.
o Consumers will act as the servicer
of the securitization property on
behalf of the issuer.
The securitization bonds and the
securitization property securing the
securitization bonds are not an
obligation of Consumers or any of its
affiliates, other than the issuer. The
securitization bonds are also not a debt
or obligation of the State of Michigan
and are not a charge on the full faith
and credit or taxing power of the State.
RISK FACTORS
You should consider the following risk factors in deciding whether
to purchase securitization bonds.
SECURITIZATION BONDHOLDERS MAY EXPERIENCE PAYMENT DELAYS OR LOSSES AS A
RESULT OF THE LIMITED SOURCES OF PAYMENT FOR THE SECURITIZATION BONDS AND
LIMITED CREDIT ENHANCEMENT
You may suffer payment delays or losses on your securitization
bonds if the assets of the issuer are insufficient to pay interest or the
scheduled principal amount of the securitization bonds in full. The only
source of funds for payments on the securitization bonds will be the assets
of the issuer. These assets are limited to:
o the securitization property, including the right to
collect the securitization charge and to adjust the
securitization charge annually;
o the funds on deposit in the collection account held by
the trustee; and
o contractual rights under various contracts.
The securitization bonds will not be insured or guaranteed by
Consumers, including in its capacity as servicer, or by its parent, CMS
Energy Corporation, any of its affiliates, the trustee or any other person
or entity. You must rely for payment of the securitization bonds solely
upon collections of securitization charges, funds on deposit in the
collection account held by the trustee, contractual rights under various
contracts and any other credit enhancement described in the related
prospectus supplement. See "Consumers Funding LLC, the Issuer" in this
prospectus.
THE ISSUER MAY NOT IMPOSE SECURITIZATION CHARGES FOR ELECTRICITY DELIVERED
AFTER 15 YEARS
Consumers may not bill securitization charges fifteen years after
the beginning of the first complete billing cycle during which the
securitization charges were initially billed after the initial issuance of
the securitization bonds. Amounts collected from securitization charges
billed up to that time, or from credit enhancement funds, may not be
sufficient to repay the securitization bonds in full. If that is the case,
no other funds will be available to pay the unpaid balance due on the
securitization bonds. See "The MPSC Financing Order and the Securitization
Charge--The MPSC Financing Order" in this prospectus.
THE AMOUNT OF SECURITIZATION CHARGES MAY NOT EXCEED MAXIMUM ENERGY RATES
Because of the rate freeze created by the Customer Choice Act, the
rate design for the securitization charge approved in the MPSC financing
order could reach the maximum energy rates that may be charged to
residential, commercial and industrial customers during the periods
specified in the Customer Choice Act for each rate class. However, the
maximum rates are substantially higher than the securitization charge
approved in the MPSC financing order. In the unlikely event of a severe or
persistent shortfall in securitization charge revenue collections, the
maximum rate applicable to a rate class may ultimately prevent the servicer
from adjusting the securitization charge for that rate class in excess of
that maximum rate. If this does occur, the securitization charge would be
increased for the remaining rate classes to make up the securitization
charge revenues in excess of the maximum rate applicable to the first rate
class. Those increases could in turn result in the assessment of
securitization charges on the remaining rate classes at levels that are
limited by maximum rates applicable at that time to those remaining rate
classes. This could reduce the amount or the rate of collections of
securitization charge revenues, which may materially and adversely affect
the value of your securitization bond investment. See "The MPSC Financing
Order and the Securitization Charge--The MPSC Financing Order--The MPSC
Authorizes Consumers to Impose the Securitization Charge and the Tax
Charge" in this prospectus.
JUDICIAL, LEGISLATIVE OR REGULATORY ACTION
THAT MAY ADVERSELY AFFECT YOUR INVESTMENT
THE LAW WHICH UNDERPINS THE SECURITIZATION BONDS MAY BE INVALIDATED
The securitization property is the creation of the Customer Choice
Act and the MPSC financing order issued by the MPSC pursuant to the
Customer Choice Act. The Customer Choice Act was enacted in June 2000.
Consumers is one of the first utilities to issue securitization bonds
pursuant to the Customer Choice Act. A court decision or a federal or state
law might seek to overturn or otherwise invalidate either the Customer
Choice Act or the MPSC financing order. If this occurs, you may lose some
or all of your investment or you may experience delays in recovering your
investment. Because the securitization property is a creation of statute,
any event affecting the validity of the relevant legislative provisions
would have an adverse effect on the securitization bonds because the
securitization bonds are secured primarily by the securitization property.
For example, if the provisions of the Customer Choice Act which create
securitization property were invalidated, the servicer could lose the right
to collect the securitization charge. As another example, if the provisions
of the Customer Choice Act which allow for periodic adjustment of the
securitization charge were invalidated, the servicer could be prevented
from obtaining the adjustments required to provide sufficient funds for the
scheduled payments on the securitization bonds.
There is uncertainty associated with investing in bonds payable
from an asset which depends for its existence on recently enacted
legislation because of an absence of any judicial or regulatory experience
implementing and interpreting the legislation. See "The MPSC Financing
Order and the Securitization Charge" in this prospectus.
If a court were to determine that the relevant provisions of the
Customer Choice Act or the MPSC financing order are unlawful, invalid or
unenforceable in whole or in part, it could adversely affect the validity
of the securitization bonds, the securitization property or the issuer's
ability to make payments on the securitization bonds. Although a judicial
determination of that kind may require Consumers to indemnify you,
Consumers might be unable to pay the indemnity. Moreover, the amount of any
indemnification may not be sufficient for you to recover all of your loss
on the securitization bonds.
The Michigan Attorney General has filed notices of appeals from
the MPSC financing order but has not as yet filed her brief describing the
grounds for the appeals. See "The MPSC Financing Order and the
Securitization Charge - Appeals from the MPSC Financing Order" in this
prospectus.
Legal activity in other states may indirectly affect the value of
your investment. Laws similar to the Customer Choice Act have been enacted
in other states, including Arkansas, California, Connecticut, Illinois,
Massachusetts, Montana, New Jersey, Pennsylvania and Texas. The validity of
similar legislation in other states has been upheld in those states where
court challenges have been made and the judicial process has been
completed. A court might yet overturn a similar statute in another state in
response to a pending or future claim. Such a decision would not
automatically invalidate the Customer Choice Act or the MPSC financing
order, but it might give rise to a challenge to the Customer Choice Act.
THE CUSTOMER CHOICE ACT MAY BE OVERTURNED BY THE FEDERAL GOVERNMENT WITHOUT
FULL COMPENSATION
In the past, bills have been introduced in Congress prohibiting
the recovery of qualified costs, and this prohibition could negate the
existence of securitization property. Although Congress has never passed
such a bill, no prediction can be made as to whether any future bills that
prohibit the recovery of qualified costs, or securitized financing for the
recovery of these costs, will become law, or, if they become law, what
their final form or effect will be. There is no assurance that the courts
would consider this preemption a "taking" from the securitization
bondholders. Moreover, even if this preemption of the Customer Choice Act
and/or the MPSC financing order by the federal government were considered a
"taking" under the U.S. Constitution for which the government had to pay
just compensation to securitization bondholders, there is no assurance that
this compensation would be sufficient to pay the full amount of principal
of and interest on the securitization bonds or to pay these amounts on a
timely basis.
Neither the issuer nor Consumers will indemnify you for any
changes in federal law that may affect the value of your securitization
bonds.
FUTURE VOTER INITIATIVES, REFERENDA OR OTHER STATE LEGISLATIVE ACTION MAY
INVALIDATE THE SECURITIZATION BONDS OR THEIR UNDERLYING ASSETS
Under the Michigan Constitution, the electorate has the powers of
initiative and referendum. The power of initiative gives the electorate the
ability to propose laws and to enact and repeal laws that the legislature
has the power to otherwise enact. The power of referendum gives the
electorate the ability to approve or reject laws previously enacted by the
legislature. The power of referendum does not extend to acts making
appropriations for state institutions or to meet deficiencies in state
funds. Among other requirements, qualifying an initiative or a
referendum for an election requires petitions signed by registered electors
constituting at least eight percent and five percent, respectively, of the
total votes cast at the immediately preceding gubernatorial election. In
the case of a referendum, the requisite number of signatures must be
obtained within 90 days after the adjournment of the legislative session in
which the law in question was enacted. Both an initiative and a referendum
must be approved by a majority of the electors voting at the next general
election. As of the date of this prospectus, neither a voter initiative nor
a referendum affecting the securitization bonds has been certified and
Consumers is unaware of any petition for action. Further, the Customer
Choice Act is currently in effect.
In the Customer Choice Act, the State of Michigan has pledged not
to impair the value of the securitization property. For a description of
this pledge, see "The Customer Choice Act -- Consumers and Other Utilities
May Securitize Qualified Costs" in this prospectus. Despite this pledge,
the State of Michigan, including the MPSC, or the electorate pursuant to
its power of initiative may attempt in the future to repeal or amend the
Michigan Constitution, the Customer Choice Act or the MPSC financing order
in a manner which might limit or alter the securitization property so as to
reduce its value or the value of the securitization bonds. Moreover, the
MPSC, or the Governor of the State of Michigan, exercising executive power,
might attempt to take action which is inconsistent with this pledge.
To date, no cases addressing these issues in the context of
securitization bonds have been decided. There have been cases in which
courts have applied the contract clause of the United States Constitution
and parallel state constitutional provisions to strike down legislation
reducing or eliminating taxes, public charges or other sources of revenues
servicing bonds issued by public instrumentalities or private issuers, or
otherwise reducing or eliminating the security for bonds. Based upon this
case law, in the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, under
the contract clause of the United States Constitution, the State of
Michigan, including the MPSC, could not constitutionally take any action of
a legislative character, including, but not limited to, the repeal or
amendment of the Customer Choice Act or the MPSC financing order (including
repeal or amendment by voter initiative and by the amendment of the
Michigan Constitution), that would substantially impair the value of the
securitization property or substantially reduce, alter or impair the
securitization charges to be imposed, collected and remitted to the issuer,
unless this action is a reasonable exercise of the State of Michigan's
sovereign powers and of a character reasonable and appropriate to the
public purpose justifying this action. Miller, Canfield, Paddock & Stone,
P.L.C., Michigan counsel to Consumers, will deliver an opinion
substantially to the same effect under the contract clause of the Michigan
Constitution.
Moreover, in the opinion of Skadden, Arps, Slate, Meagher & Flom
LLP, under the takings clause of the United States Constitution, the State
of Michigan, including the MPSC, could not repeal or amend the Customer
Choice Act or the MPSC financing order (including repeal or amendment by
voter initiative or by the amendment of the Michigan Constitution), or take
any other action in contravention of its pledge described above, without
paying just compensation to the securitization bondholders, as determined
by a court of competent jurisdiction, if this action would constitute a
permanent appropriation of a substantial property interest of
securitization bondholders in the securitization property and deprive the
securitization bondholders of their reasonable expectations arising from
their investments in the securitization bonds. Miller, Canfield, Paddock &
Stone, P.L.C., Michigan counsel to Consumers, will deliver an opinion
substantially to the same effect under the takings clause of the Michigan
Constitution. There is no assurance, however, that, even if a court were to
award just compensation, it would be sufficient to pay the full amount of
the principal of and interest on the securitization bonds.
There can be no assurance that a repeal of or amendment to the
Customer Choice Act, the MPSC financing order or the Michigan Constitution
will not be sought or adopted or that any action by the State of Michigan
may not occur, any of which might constitute a violation of the State of
Michigan's pledge and agreement with the securitization bondholders. In any
event, costly and time-consuming litigation might ensue. Any litigation
might adversely affect the price and liquidity of the securitization bonds
and the dates of payments of interest on and principal of and, accordingly,
the weighted average lives of the securitization bonds. Moreover, given the
lack of judicial precedent directly on point and the novelty of the
security for the securitization bondholders, the outcome of any litigation
cannot be predicted with certainty and, accordingly securitization
bondholders could incur a loss of their investment.
Neither the issuer nor Consumers will indemnify you for any
changes in the law that may affect the value of your securitization bonds.
THE MPSC MAY TAKE ACTION WHICH REDUCES THE VALUE OF THE SECURITIZATION BONDS
Pursuant to the Customer Choice Act, the MPSC financing order
issued to Consumers is irrevocable and not subject to reduction, impairment
or adjustment by further action of the MPSC, except pursuant to the
securitization charge adjustment provisions of that Act. The possibility
exists, however, that the MPSC might nevertheless attempt to revise or
rescind any of its regulations or orders in ways that ultimately have an
adverse impact upon the securitization property or the securitization
charge. Apart from the pledge of the State of Michigan and the terms of the
MPSC financing order, the MPSC retains the power to adopt, revise or
rescind rules or regulations affecting Consumers or a successor electric
utility. Any new or amended regulations or orders by the MPSC, for example,
could directly or indirectly affect the ability of the servicer to collect
the securitization charge on a full and timely basis. Consumers has agreed
to take legal or administrative actions, including instituting and
prosecuting legal actions, as may be reasonably necessary to block or
overturn any attempts to cause a repeal, modification or supplement to the
Customer Choice Act, the MPSC financing order or the rights of
securitization bondholders.
Consumers has also agreed to resist proceedings of third parties,
which, if successful, would result in a breach of its representations
concerning the securitization property, the MPSC financing order or the
Customer Choice Act. See "The Sale Agreement" in this prospectus. However,
there is no assurance that any action Consumers takes would be successful.
Future MPSC regulations or orders may affect the ratings of the
securitization bonds, their price or the rate of securitization charge
revenue collections and, accordingly, the amortization of securitization
bonds and their weighted average lives, and may not trigger any obligation
of Consumers to indemnify you. As a result, you could suffer a loss in
connection with your investment.
Consumers or any successor servicer is required to file for, on
behalf of the issuer, periodic adjustments to the securitization charge
with the MPSC. These adjustments are intended to provide, among other
things, for timely payment of the securitization bonds. The MPSC may
challenge the notice of a proposed periodic adjustment, which may cause
delay, or refuse to permit an adjustment to take effect, on the ground that
the notification contains an arithmetic error. Any such delay in the
implementation of the adjustment could cause a delay in the payments on the
securitization bonds.
SERVICING RISKS
INACCURATE FORECASTING OR UNANTICIPATED DELINQUENCIES OR CHARGE-OFFS COULD
RESULT IN INSUFFICIENT FUNDS TO MAKE SCHEDULED PAYMENTS ON THE
SECURITIZATION BONDS
Because the securitization charge is based on a forecast of future
deliveries of electricity by Consumers to its customers, a shortfall of
payments arising from the securitization charge could result if actual
deliveries are materially different. Differences between the forecast and
actual levels of customer delinquencies or charge-offs could also result in
reduced securitization charge revenue remittances. A shortfall in
securitization charge revenue collections could result in shortfalls in
payments of interest on the securitization bonds, or in principal of the
securitization bonds not being paid according to the expected amortization
schedule, thereby lengthening the weighted average lives of the
securitization bonds, or in payments of principal and interest not being
made at all.
Inaccurate forecasting of electricity deliveries could result
from, among other things:
o warmer winters or cooler summers, resulting in less
electricity consumption than in the forecast;
o general economic conditions being worse than expected,
causing customers to migrate from Consumers' service
territory or reduce their electricity consumption;
o the occurrence of a natural disaster, such as a hurricane
or blizzard, unexpectedly disrupting electrical service
and reducing consumption;
o problems with energy generation, transmission or
distribution resulting from a change in the market
structure of the electric industry;
o customers physically disconnecting from Consumers'
electric delivery facilities;
o customers ceasing business or departing Consumers'
service territory;
o customers consuming less electricity because of reduced
demand or increased conservation efforts; or
o customers switching to self-generation of electric power
without being required to pay the securitization charge
under the Customer Choice Act. See "The Customer Choice
Act" in this prospectus.
Inaccurate forecasting of delinquencies or charge-offs could
result from, among other things:
o unexpected deterioration of the economy or the occurrence
of a natural disaster or dramatic increases in the cost
of electricity, causing greater delinquencies and
charge-offs than expected or forcing Consumers or a
successor electric utility to grant additional payment
relief to more customers; or
o a change in law, rules or regulations that makes it more
difficult for Consumers or a successor electric utility
to disconnect nonpaying customers, or that requires
Consumers or a successor electric utility to apply more
lenient credit standards in accepting customers.
INITIALLY, THE CALCULATION OF THE SECURITIZATION CHARGE MAY BE AFFECTED BY
LIMITED EXPERIENCE WITH THE SECURITIZATION CHARGE
Consumers has not previously calculated the initial securitization
charge, adjusted securitization charges, billed securitization charges or
remitted securitization charges to the trustee. Because these activities
are new, there are potentially unforeseen factors in this new process which
may have an impact on payments to bondholders.
CONSUMERS MAY ENCOUNTER UNEXPECTED PROBLEMS IN THE INITIAL ADMINISTRATION
OF THE SECURITIZATION CHARGE
The servicer has not previously administered a securitization
charge on behalf of a third party such as the issuer. As a result, the
servicer may encounter unexpected problems in billing and remitting the
securitization charge revenues and in managing customer payments on behalf
of the issuer.
IF THE SERVICER DEFAULTS OR BECOMES BANKRUPT, IT MAY BE DIFFICULT TO FIND A
SUCCESSOR SERVICER, AND PAYMENTS ON THE SECURITIZATION BONDS MAY BE
SUSPENDED
Consumers, as servicer, will be responsible for billing and
remitting the securitization charge revenues and for filing with the MPSC
to adjust this charge. If it becomes a party in a bankruptcy proceeding,
Consumers might be excused from its contractual obligations as servicer of
the securitization property. If Consumers ceased servicing the
securitization property, it might be difficult to find a successor servicer
and fees required by a successor servicer might substantially exceed the
fees payable to Consumers as servicer. Upon a servicer default based upon
the commencement of a case by or against the servicer under the United
States Bankruptcy Code, referred to as the Bankruptcy Code, or similar
laws, the trustee and the issuer may be prevented from effecting a transfer
of servicing. Upon a servicer default because of a failure to make required
remittances, the issuer or the trustee would have the right to apply to the
MPSC for sequestration and payment of revenues arising from the
securitization property. However, federal bankruptcy law may prevent the
MPSC from issuing or enforcing this order. In either case of a servicer
default, payments on the securitization bonds may be suspended. See "-- The
Risks Associated With Potential Bankruptcy Proceedings" below.
BILLING AND COLLECTION PRACTICES MAY REDUCE THE AMOUNT OF FUNDS AVAILABLE
FOR PAYMENTS ON THE SECURITIZATION BONDS
The methodology of determining the amount of the securitization
charge the issuer may impose on each customer is specified in the MPSC
financing order. Consumers cannot change this methodology. However, billing
and collection practices will also have an impact on securitization charge
revenues collected. For example, to recover part of an outstanding
electricity bill, Consumers may agree to extend a customer's payment
schedule or to write off the remaining portion of the bill. Also,
Consumers, or a successor to Consumers as servicer, in its discretion, may
change billing and collection practices, subject to obtaining required
regulatory approvals and compliance with applicable laws and regulations.
Any change to billing and collection practices may have an adverse or
unforeseen impact on the timing and amount of customer payments and may
reduce the amount of securitization charge revenues collected. This could
limit the issuer's ability to make scheduled payments on the securitization
bonds. See "The Seller and Servicer of the Securitization Property -- How
Consumers Forecasts the Number of Customers and the Amount of Electricity
Consumption" in this prospectus. Similarly, the MPSC may require changes to
these practices. Any changes in billing and collection regulation might
make it more difficult for the servicer to collect the securitization
charge. These changes may adversely affect the value of the securitization
bonds and their amortization and, accordingly, their weighted average
lives. See "The MPSC Financing Order and the Securitization Charge" in this
prospectus.
IT MAY BE DIFFICULT TO COLLECT THE SECURITIZATION CHARGE FROM ALTERNATIVE
ELECTRIC SUPPLIERS WHO PROVIDE ELECTRICITY TO CONSUMERS' CUSTOMERS
Under the Customer Choice Act, Consumers is not required to allow
alternative electric suppliers to bill for Consumers' services and
Consumers has agreed with the issuer in the sale agreement that it will not
permit alternative electric suppliers to bill or collect securitization
charges. Notwithstanding that agreement, in the future, applicable law and
regulations may be changed to allow alternative electric suppliers of
electricity to Consumers' customers to collect the securitization charge
from customers on behalf of the issuer. Under this scenario, Consumers may
be required to enter into contracts with alternative electric suppliers,
and in that case may have only limited rights to collect the securitization
charge directly from those customers who receive their electricity bills
from an alternative electric supplier. If many customers within Consumers'
service territory elect to receive their electricity from alternative
electric suppliers and those suppliers are allowed to collect the
securitization charge from customers, the issuer may have to rely on a
number of different entities for the collection of the bulk of the
securitization charge. A default by an alternative electric supplier which
collects securitization charges from a large number of retail customers
would have a greater impact than a default by a single retail customer and
therefore have a greater impact on securitization charge revenue
collections and, in turn, on the issuer's ability to make timely payments
on the securitization bonds.
Neither Consumers nor any successor servicer will pay any
shortfalls resulting from the failure of any alternative electric supplier
to forward securitization charge revenue collections to the servicer.
Alternative electric suppliers might use more permissive standards in bill
collection and credit appraisal than Consumers uses towards its retail
customers or might be less effective in billing and collecting. As a
result, those entities may not be as successful in collecting the
securitization charge as Consumers anticipated when determining the level
of the securitization charge or adjusting it. There can be no assurance
that the servicer will be able to mitigate credit risks relating to these
alternative electric suppliers to the same extent to which it mitigates the
risks relating to Consumers' customers for generation services. The
adjustment mechanism, the deposits which may be required from alternative
electric suppliers and any other credit enhancement would be available to
compensate for a failure by an alternative electric supplier to remit the
billed securitization charge to the issuer. However, the amount of credit
enhancement funds may not be sufficient to prevent a delay in payments on
the securitization bonds.
CONSUMERS' CUSTOMER PAYMENTS MAY DECLINE INITIALLY DUE TO CUSTOMER CONFUSION
The securitization charge is being introduced to customers for the
first time. Any change in customer billing and payment arrangements may
result in initial customer confusion and the misdirection or delay of
payments, which could have the effect of causing delays in initial
securitization charge revenue collections. Any problems arising from new
and untested systems or any lack of experience with customer billing and
collections could also cause delays in billing and collecting the
securitization charge. These delays could result in shortfalls in
securitization charge revenue collections and, therefore, reduce the
ability of the issuer to make timely payments on the securitization bonds.
INABILITY TO TERMINATE SERVICE TO CERTAIN DELINQUENT CUSTOMERS DURING THE
HEATING SEASON MAY TEMPORARILY REDUCE AMOUNTS AVAILABLE FOR PAYMENTS ON THE
SECURITIZATION BONDS
Except in limited circumstances, the Customer Choice Act prevents
Consumers from terminating service to certain delinquent residential
customers who are low-income customers or senior citizens during the
heating season, currently from November of each year until at least March
of the following year. As a result, Consumers must provide service to those
residential customers during this period without being assured of
recovering the securitization charge from those customers. Consumers'
forecast of securitization charge revenues will take into account expected
unpaid accounts from such low-income and senior citizen customers. However,
an unexpected increase in unpaid accounts from such low-income and senior
citizen customers might reduce the amount of securitization charge revenue
collections available for payments on the securitization bonds, although
any associated reduction in payments will be factored into the
securitization charge adjustment. See "The Seller and Servicer of the
Securitization Property -- Credit Policy; Billing; Collections and
Write-Offs; Termination of Service" in this prospectus.
THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
CONSUMERS WILL COMMINGLE SECURITIZATION CHARGE REVENUES WITH OTHER REVENUES
WHICH MAY OBSTRUCT ACCESS TO THE ISSUER'S FUNDS IN CASE OF BANKRUPTCY OF
CONSUMERS
Consumers will not segregate the securitization charge revenue
collections from the other funds it collects from its customers. The
securitization charge revenue collections will only become segregated after
Consumers remits the revenues to the trustee. Consumers will remit
securitization charge revenue collections within two business days of the
collection date. Consumers will be permitted to remit revenue collections
on a monthly basis only if:
o at any time Consumers has the requisite credit ratings
from the rating agencies; or
o Consumers provides credit enhancement satisfactory to the
rating agencies or otherwise obtains rating agency
approval regarding how frequently it remits
securitization charge revenues.
Despite these requirements, Consumers might fail to pay the full amount of
the securitization charge revenues to the trustee or might fail to do so on
a timely basis. This failure could materially reduce the value of your
investment and cause material delays in payment.
In a bankruptcy of Consumers, a bankruptcy court might rule that
federal bankruptcy law does not recognize the right of the issuer to
collections of the securitization charge revenues that are commingled with
other funds of Consumers as of the date of bankruptcy. If so, the
collections of the securitization charge revenues held by Consumers as of
the date of bankruptcy would not be available to pay amounts owing on the
securitization bonds. In this case, the issuer would have a general
unsecured claim against Consumers for those amounts. This scenario could
cause material delays in payment or an inability of the issuer to gain
access to the funds required for scheduled payments on the securitization
bonds.
BANKRUPTCY OF CONSUMERS COULD RESULT IN LOSSES OR DELAYS IN PAYMENTS ON THE
SECURITIZATION BONDS
The Customer Choice Act provides that as a matter of Michigan
state law:
o securitization property constitutes presently existing
property of Consumers or its assignee;
o Consumers may sell, assign and otherwise transfer that
property and Consumers or the issuer may pledge or grant
a security interest in the property as collateral for
securitization bonds; and
o a transfer of the securitization property from Consumers
to the issuer is a true sale and not a secured
transaction and that title, legal and equitable, has
passed to the entity to which the securitization property
is transferred.
See "The Customer Choice Act" in this prospectus. These three provisions
are important to maintaining payments on the securitization bonds in
accordance with their terms during any bankruptcy of Consumers. In
addition, the transaction has been structured with the objective of keeping
the issuer legally separate from Consumers in the event of a bankruptcy of
Consumers.
A bankruptcy court generally follows state property law on issues
such as those addressed by the three provisions described above. However, a
bankruptcy court has authority not to follow state law if it determines
that the state law is contrary to a paramount federal bankruptcy policy or
interest. If a bankruptcy court in a Consumers bankruptcy refused to
enforce one or more of the state property law provisions described above
for this reason, the effect of this decision on you as a securitization
bondholder would be similar to the treatment you would receive in a
Consumers bankruptcy if the securitization bonds had been issued directly
by Consumers. A decision by the bankruptcy court that, despite the
separateness of Consumers and the issuer, the two companies should be
consolidated, would have a similar effect on you as a securitization
bondholder. That treatment could cause material delays in payment of, or
losses on, your securitization bonds and could materially reduce the value
of your investment. For example:
o the trustee could be prevented from exercising any
remedies against Consumers on your behalf, from
recovering funds to repay the securitization bonds or
from replacing Consumers as servicer, without permission
from the bankruptcy court;
o the bankruptcy court could order the trustee to exchange
the securitization property for other property, which
might be of lower value;
o tax or other government liens on Consumers' property that
arose after the transfer of the securitization property
to the issuer might nevertheless have priority over the
trustee's lien and might be paid from securitization
charge revenue collections before payments on the
securitization bonds;
o the trustee's lien might not be properly perfected in
securitization charge revenue collections that were
commingled with other funds Consumers collects from its
customers as of the date of Consumers' bankruptcy, or
might not be properly perfected in all of the
securitization property, and the lien could therefore be
set aside in the bankruptcy, with the result that the
securitization bonds would represent only general
unsecured claims against Consumers;
o a reorganization plan might permanently modify the amount
and timing of payments to securitization bondholders, as
well as any other terms of the securitization bonds;
o the bankruptcy court might rule that the securitization
charge revenues collected by the issuer should be used to
pay a portion of the cost of providing electric service;
or
o the bankruptcy court might rule that the remedy
provisions of the sale agreement are unenforceable,
leaving the issuer with a claim of actual damages against
Consumers, which may be difficult to prove.
THE SALE OF THE SECURITIZATION PROPERTY COULD BE CONSTRUED AS A FINANCING
AND NOT A SALE IN A CASE OF CONSUMERS' BANKRUPTCY
The Customer Choice Act provides that the characterization of a
transfer of securitization property as a sale or other absolute transfer
will not be affected or impaired in any manner by treatment of the transfer
as a financing for federal or state tax purposes or financial accounting
purposes. Consumers and the issuer will treat the transaction as a sale
under applicable law, although for financial reporting and federal and
state tax purposes the securitization will be treated as a financing and
not a sale. In the event of a bankruptcy of Consumers, a party in interest
in the bankruptcy may assert that the sale of the securitization property
to the issuer was a financing transaction and not a "sale or other absolute
transfer" and that the treatment of the transaction for financial reporting
and tax purposes as a financing and not a sale lends weight to that
position. If a court were to characterize the transaction as a financing,
the issuer would be treated as a secured creditor of Consumers in the
bankruptcy proceedings. Although the issuer would in that case have a
security interest in the securitization property, it would not likely be
entitled to access to the securitization charge revenue collections during
the bankruptcy. As a result, repayment on the securitization bonds could be
significantly delayed and a plan of reorganization in the bankruptcy might
permanently modify the amount and timing of payments to the issuer of
securitization charge revenue collections and therefore the amount and
timing of funds available to the issuer to pay securitization bondholders.
CONSUMERS AND THE ISSUER COULD BE SUBSTANTIVELY CONSOLIDATED IN A CASE OF
CONSUMERS' BANKRUPTCY
Consumers and the issuer have taken steps to minimize the risk
that in the event Consumers or an affiliate of Consumers were to become the
debtor in a bankruptcy case, a court would order that the assets and
liabilities of Consumers or such affiliate be substantively consolidated
with those of the issuer. The issuer is a separate, special purpose limited
liability company, the organizational documents of which provide that it
shall not commence a voluntary bankruptcy case without the unanimous
affirmative vote of all of its managers. Nevertheless, no assurance can be
given that if Consumers or an affiliate of Consumers were to become a
debtor in a bankruptcy case, a court would not order that the assets and
liabilities of the issuer be consolidated with those of the Consumers or
such affiliate, thus resulting in delays or reductions in payments on the
securitization bonds.
AN MPSC SEQUESTRATION ORDER FOR SECURITIZATION PROPERTY IN CASE OF DEFAULT
MIGHT NOT BE ENFORCEABLE IN BANKRUPTCY
If Consumers defaults on its obligations as servicer, the Customer
Choice Act provides that upon application by a financing party, the MPSC or
a court of appropriate jurisdiction shall
order the sequestration and payment of all securitization charge revenue
collections to the securitization bondholders. The Customer Choice Act
states that this MPSC or court order would be effective even if made while
Consumers or its successor is in bankruptcy. However, federal bankruptcy
law may prevent the MPSC or the court from issuing or enforcing this order.
Further, the indenture requires the trustee to request an order from the
bankruptcy court to permit the MPSC to issue and enforce the order.
However, the bankruptcy court may deny the request. If the bankruptcy court
refused to permit sequestration and payment to the securitization
bondholders, the issuer would lose access to the securitization charge
revenue collections and thereby lose its source of funds for scheduled
payments on the securitization bonds.
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIZATION BONDS THE
PROCEEDS FROM FORECLOSURE ON THE SECURITIZATION PROPERTY MAY BE
INSUFFICIENT TO PAY THE SECURITIZATION BONDS
If an event of default occurs under the indenture, the
securitization bonds are accelerated, and the trustee attempts to foreclose
on the securitization property, a sale of the securitization property may
not generate sufficient funds for payment of the securitization bonds. The
securitization property would be likely to have limited value in a sale
because there is likely to be a limited market, if any, for the
securitization property, and, because the securitization property may have
little or no value to any person other than the issuer or another issuer of
securitization bonds.
CONSUMERS' OBLIGATION TO INDEMNIFY THE ISSUER FOR A BREACH OF A
REPRESENTATION OR WARRANTY MAY NOT BE SUFFICIENT TO PROTECT YOUR INVESTMENT
If Consumers breaches a representation, warranty or covenant in
the sale agreement, it is obligated to indemnify the issuer and the trustee
for any liabilities, obligations, claims, actions, suits or payments
resulting from that breach, as well as any reasonable costs and expenses
incurred, but excluding consequential, exemplary or punitive damages. In
addition, Consumers is obligated to indemnify the issuer and the trustee,
for itself and on behalf of the securitization bondholders, for (1)
required payments of principal of and interest on the securitization bonds
in accordance with their terms and (2) required remittances of amounts to
the issuer, in each case, which are not made when so required as a result
of a breach by Consumers of a representation, warranty or covenant.
However, the amount of any indemnification paid by Consumers may not be
sufficient for you to recover all of your loss on the securitization bonds.
See "The Sale Agreement -- Consumers' Obligation to Indemnify the Issuer
and the Trustee and to Take Legal Action" in this prospectus. Consumers
will not be obligated to indemnify any party for any changes of law. In
addition, Consumers will not be obligated to repurchase the securitization
property in the event of a breach of any of its representations, warranties
or covenants, and neither the trustee nor the securitization bondholders
will have the right to accelerate payments on the securitization bonds as a
result of a breach of any of Consumers' representations, warranties or
covenants, absent an event of default under the indenture as described in
"The Indenture -- What Constitutes an Event of Default on the
Securitization Bonds." If Consumers becomes obligated to indemnify
securitization bondholders, the ratings on the securitization bonds will
likely be downgraded as a result of the circumstances causing the breach
and that the securitization bondholders will likely be unsecured creditors
of Consumers with respect to any of those indemnification amounts.
YOU MAY HAVE TO REINVEST THE PRINCIPAL AMOUNT OF YOUR SECURITIZATION BONDS
AT A LOWER RATE OF RETURN BECAUSE OF OPTIONAL REDEMPTION OF THE
SECURITIZATION BONDS
If the issuer redeems the securitization bonds and the prevailing
interest rates have fallen, the redemption price may not be readily
invested at a rate of return equivalent to that which would have been
generated by the securitization bonds, had they not been redeemed.
RISKS ASSOCIATED WITH THE USE OF INTEREST RATE SWAP TRANSACTIONS
The related prospectus supplement will contain the risk factors,
if any, associated with any interest rate swap or cap agreement that may be
entered into by the issuer with respect to a series or class of floating
rate securitization bonds.
CONSUMERS' RATINGS MAY AFFECT THE MARKET VALUE OF THE SECURITIZATION BONDS
A downgrading of the credit ratings on the debt of Consumers or
its affiliates could have an adverse effect on the market value of your
securitization bonds.
ABSENCE OF SECONDARY MARKET FOR SECURITIZATION BONDS COULD LIMIT YOUR
ABILITY TO RESELL SECURITIZATION BONDS
The underwriters for the securitization bonds may assist in
resales of the securitization bonds but they are not required to do so. A
secondary market for the securitization bonds may not develop. If it does
develop, it may not continue or it may not be sufficiently liquid to allow
you to resell any of your securitization bonds.
THE ISSUER MAY ISSUE ADDITIONAL SERIES OF SECURITIZATION BONDS WHOSE
HOLDERS HAVE CONFLICTING INTERESTS
The issuer may issue other series of securitization bonds without
your prior review or approval. These series may include terms and
provisions which would be unique to that particular series. A new series of
securitization bonds may not be issued if it would result in the credit
ratings on any outstanding series of securitization bonds being reduced or
withdrawn. There can be no assurance, however, that the issuance of
additional series of securitization bonds would not cause reductions or
delays in payments on your securitization bonds. Any additional series of
securitization bonds issued by the issuer will also be secured by, and
payable from, and will have the right to share equally in, all of the
securitization property and amounts in the collection account owned by the
issuer with all of the outstanding securitization bonds. The securitization
property will comprise the combined securitization charge collections
imposed with respect to all series.
Moreover, Consumers may sell securitization property to one or
more entities other than the issuer in connection with the issuance of a
new series of securitization bonds. In that case, Consumers will need to
obtain a separate financing order from the MPSC. That separate financing
order will specify an additional amount of securitization charge revenues
to be collected from customers for the additional series of securitization
bonds. Any additional series of securitization bonds issued by another
entity will have an equal right to share in securitization charge revenue
collections with the issuer. See "The Securitization Bonds" and "The
Indenture" in this prospectus.
In addition, some matters may require the vote of the holders of
all series and classes of securitization bonds. Your interests in these
votes may conflict with the interests of the securitization bondholders of
another series or of another class. Thus, these votes could result in an
outcome that is materially unfavorable to you.
THE RATINGS HAVE A LIMITED FUNCTION AND THEY ARE NO INDICATION OF THE
EXPECTED RATE OF PAYMENT OF PRINCIPAL ON THE SECURITIZATION BONDS
The securitization bonds will be rated by one or more established
rating agencies. The ratings merely analyze the probability that the issuer
will repay the total principal balance of each class of the securitization
bonds at its final maturity and will make timely interest payments. The
ratings do not otherwise assess the speed at which the issuer will repay
the principal of the securitization bonds. Thus, the issuer may repay the
principal of your securitization bonds earlier or later than you expect,
which may materially reduce the value of your investment. A rating is not a
recommendation to buy, sell or hold securitization bonds. The rating may
change at any time. A rating agency has the authority to revise or withdraw
its bond rating based solely upon its own judgment. See "Ratings for the
Securitization Bonds" in this prospectus.
FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus and the related
prospectus supplement concerning expectations, beliefs, plans, objectives,
goals, strategies, future events or performance and underlying assumptions
and other statements which are other than statements of historical facts,
are forward-looking statements within the meaning of the federal securities
laws. Although Consumers and the issuer believe that the expectations and
the underlying assumptions reflected in these statements are reasonable,
there can be no assurance that these expectations will prove to have been
correct. The forward-looking statements involve a number of risks and
uncertainties and actual results may differ materially from the results
discussed in the forward-looking statements. The following are among the
important factors that could cause actual results to differ materially from
the forward-looking statements:
o state and federal legal or regulatory developments;
o national or regional economic conditions;
o market demand and prices for energy;
o weather variations affecting customer energy usage;
o the effect of continued electric industry restructuring;
o operating performance of Consumers' facilities and any
alternative electric suppliers; and
o the payment patterns of customers including the rate of
delinquencies.
Any forward-looking statements should be considered in light of
these important factors and in conjunction with Consumers' other documents
on file with the SEC.
New factors that could cause actual results to differ materially
from those described in forward-looking statements emerge from time to
time. It is not possible for Consumers or the issuer to predict all of
these factors, or the extent to which any factor or combination of factors
may cause actual results to differ from those contained in any
forward-looking statement. Any forward-looking statement speaks only as of
the date on which the statement is made and neither Consumers nor the
issuer undertakes any obligation to update the information contained in the
statement to reflect subsequent developments or information.
CONSUMERS ENERGY COMPANY
Consumers, a wholly owned subsidiary of CMS Energy Corporation,
referred to as CMS Energy, is an electric and gas utility incorporated
under the laws of the State of Michigan in 1968. CMS Energy is an exempt
public utility holding company under the Public Utility Holding Company Act
of 1935. Among other sources of revenue, Consumers is engaged in the
generation, purchase, transmission, distribution and sale of electric
energy in 61 of 68 counties in Michigan. The principal cities to which
Consumers serves electricity include Battle Creek, Flint, Grand Rapids,
Jackson, Kalamazoo, Muskegon, Saginaw and Wyoming.
Under the Customer Choice Act, Consumers is permitted to retain
ownership of its electric generation facilities and Consumers has done so.
Consumers believes that it has sufficient generating capacity and contracts
or options to purchase electric energy to meet its obligations to its
customers.
In 1999, Consumers had operating revenues of $2.7 billion received
from the sale of 41 billion kilowatt hours of electricity to approximately
1.7 million customers. Consumers is CMS Energy's principal operating
subsidiary, with sales of electricity by Consumers alone representing
approximately 44 percent of CMS Energy's revenues, as of December 31, 1999.
As of December 31, 1999, Consumers' thirty-one electric generating plants
had an aggregate summer net generating capacity of 6,252 megawatts. These
generating plants represent primarily a mix of coal-fired and other
fossil-fueled plants, a hydroelectric pumped storage plant, and a
nuclear-fueled generating plant, Palisades, with a rated capacity of 760
megawatts. Consumers transmits electric energy in interstate commerce and
sells electric energy wholesale in interstate commerce and its facilities
are connected directly or indirectly to other systems that are involved in
such interstate activities. Consumers' service territory contains
residential areas and a diversified mix of commerce and industry, including
major facilities of many corporations of national prominence. While
Consumers believes that it has all the franchises and consents necessary
for its electric and gas transmission and distribution operations in the
territory it serves, such franchises are not exclusive.
Consumers presently provides retail electric service in Michigan
pursuant to franchises granted by approximately 967 local governments, and
183 of these franchises are irrevocable during their term, which is
typically 30 years in length. By 2013, all existing irrevocable electric
franchises will have expired and most likely been replaced by revocable
franchises. In addition, Consumers has 54 franchises granted by the State
of Michigan which are perpetual. All of these franchises are nonexclusive.
However, Michigan law contains provisions which prevent existing customers
of one utility from transferring to another utility and does not generally
allow other utilities to extend their electric distribution facilities
within one mile of Consumers' existing distribution facilities without
Consumers' consent.
Consumers' present local governmental franchises have remaining
terms ranging from 30 years to less than one year. However, unless the
franchises are irrevocable, they may be revoked by the local government
after prior notice to Consumers, but such revocation is very unusual.
Consumers expects all or substantially all of these franchises to be
renewed. If any franchise is not renewed, Consumers expects that the new
franchisee or franchisees will negotiate to purchase Consumers'
distribution facilities in order to continue providing service in the area
largely by means of Consumers' existing distribution facilities. The
Customer Choice Act authorizes the MPSC to issue financing orders that give
rise to an obligation of all customers of the applicant electric utility
and its assignees or successors to pay the securitization charge. The MPSC
financing order provides that the servicer will be entitled to collect the
securitization charge from all customers of Consumers or its successors on
MPSC-approved rate schedules and special contracts.
Michigan law authorizes certain local municipalities to seek to
acquire portions of Consumers' electric distribution facilities through the
power of eminent domain for use as part of municipally-owned utility
systems. Although the power of eminent domain has not been used by
municipalities in Michigan in recent decades to acquire electric
distribution systems, there can be no assurance that one or more
municipalities will not acquire some or all of Consumers' electric
distribution facilities while securitization bonds remain outstanding. In
the servicing agreement Consumers has covenanted to assert that any
municipality that acquires any portion of Consumers' electric distribution
facilities by eminent domain must be treated by the court ordering the
condemnation as a successor to Consumers under the Customer Choice Act and
the MPSC financing order. However, such municipality might assert that it
should not be treated as a successor to Consumers for these purposes
because municipally-owned utilities do not provide service pursuant to
MPSC-approved rate schedules. In any such cases, there can be no assurance
that the securitization charge will be collected from customers of
municipally-owned utilities who were formerly customers of Consumers.
CMS Energy, a holding company formed in 1987, is the holding
company for a number of operating companies engaged in energy-related
businesses, including Consumers, its principal subsidiary. The financial
condition and results of operation of Consumers are principal factors
affecting the financial condition and results of operations of CMS Energy.
Where to Find Information About Consumers. Consumers files
periodic reports with the SEC as required by the Exchange Act. Reports
filed with the SEC are available for inspection without charge at the
public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its regional offices located as
follows: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of
periodic reports and exhibits thereto may be obtained at the above
locations at prescribed rates and, for so long as any securitization bonds
are listed on the Luxembourg Stock Exchange and the rules of that exchange
so require, will be available for inspection by the holders of any listed
securitization bonds at the office of the listing agent in Luxembourg.
Information as to the operation of the public reference facilities is
available by calling the SEC at 1-800-SEC-0330. Information filed with the
SEC can also be inspected at the SEC site on the World Wide Web at
http://www.sec.gov. Consumers also provides information through CMS
Energy's website at http://www.consumersenergy.com.
THE COLLATERAL
The securitization bonds will be secured by securitization
property, a property right created under the Customer Choice Act and the
MPSC financing order. In July 2000, Consumers filed an application with the
Michigan Public Service Commission, referred to as the MPSC, for the
issuance of a financing order under the Customer Choice Act, together with
a proposed form of the financing order. On October 24, 2000, the MPSC
issued a financing order to Consumers. On January 4, 2001, the Commission
issued an order on rehearing in response to a request for rehearing by
Consumers. The financing order and the order on rehearing are together
referred to in this prospectus as the MPSC financing order. The MPSC
financing order provides, among other things, for the creation of the
securitization property and the issuance of the securitization bonds. In
general terms, the securitization property represents the irrevocable right
to recover an amount sufficient to recover Consumers' qualified costs,
including an amount sufficient to pay:
o the principal of and interest on the securitization
bonds, and
o the expenses, fees, charges, credit enhancement costs and
other amounts associated with the securitization bonds.
This amount is to be recovered through a non-bypassable securitization
charge payable by all electric customers who take delivery from Consumers
or its successor on Consumers' MPSC- approved rate schedules and under
special contracts, referred to as customers. Qualified costs are described
in more detail under "The Customer Choice Act" in this prospectus.
Consumers will sell securitization property to the issuer. The
securitization property is described in more detail under "The Sale
Agreement -- Consumers' Sale and Assignment of Securitization Property" in
this prospectus. Consumers, as servicer of the securitization property,
will collect the securitization charge from customers on behalf of the
issuer. See "The Servicing Agreement" and "The Seller and Servicer of the
Securitization Property" in this prospectus.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts due on the
securitization bonds from:
o securitization charge revenues remitted by the servicer
to the trustee;
o any third party credit enhancement;
o investment earnings on amounts held under the indenture;
o amounts payable to the trustee under any interest rate
swap or cap agreement;
o amounts received as payment of any indemnity obligation
by Consumers under the sale agreement or the servicing
agreement; and
o other amounts available in the collection account held by
the trustee. This account is described in greater detail
under "The Indenture -- The Collection Account for the
Securitization Bonds" in this prospectus.
PRIORITY OF DISTRIBUTIONS
The trustee will apply securitization charge revenues remitted by
the servicer, together with investment earnings on the collection account
and any other amounts referred to above, to the extent funds are available
in the general subaccount of the collection account, in the following order
of priority:
(a) Monthly, to the payment of the trustee fee for all
series, together with any legal fees and other expenses
and any indemnity amounts owed to the trustee for all
series to a maximum of $41,666 for any month and not in
excess of $500,000 for any one year.
(b) Monthly, to the payment of the servicing fee and any
unpaid monthly servicing fees for all series.
(c) Monthly, for all series to:
(1) payment of the administration fee to the
administrator in an amount specified in the
administration agreement and payment of the fees
of the independent managers of the issuer; and
(2) so long as no event of default has occurred and
is continuing or would be caused by this
payment, payment of any operating expenses of
the issuer, excluding items (a), (b) and (c)(1)
above, up to a total of $[ ] for that payment
date for all series.
(d) On each payment date or before, if so specified in the
related prospectus supplement, to:
(1) payment of the interest then due on the
securitization bonds or payment to the
counterparty under any interest rate swap
agreement, excluding any termination or similar
non-recurring payments;
(2) payment of the principal balance of the securitization
bonds then due:
o the outstanding principal balance of
all series of the securitization bonds
upon an acceleration following an event
of default;
o on the final maturity date of any
securitization bonds, the outstanding
principal balance of those
securitization bonds;
o on the redemption date of any
securitization bonds, the outstanding
principal balance of those
securitization bonds called for
redemption;
(3) payment of the principal then scheduled to be
paid on the securitization bonds according to
the expected amortization schedule and any
scheduled principal unpaid on prior payment
dates, other than principal paid under item
(d)(2) above;
(4) payment of any remaining unpaid operating
expenses, including indemnity amounts (other
than amounts paid pursuant to (a) above), any
amounts payable by the issuer under any hedging
arrangement and any termination or similar
non-recurring payments under any interest rate
swap or cap agreement;
(5) replenishment of each series capital subaccount,
pro rata, up to the required capital amount for
each series;
(6) replenishment and funding of each series
overcollateralization subaccount, pro rata, up
to the scheduled overcollateralization level for
each series as of that payment date;
(7) so long as no event of default has occurred and
is continuing, release to the issuer of an
amount equal to investment earnings since the
previous payment date (or in the case of the
first payment date, since the issuance date) on
amounts in each series capital subaccount; and
(8) allocation of the remainder, if any, to the
reserve subaccount.
See also "The Indenture -- How Funds in the Collection Account Will Be
Allocated" in this prospectus. A diagram depicting how the securitization
charge revenues remitted to the trustee will be allocated may be found on
page [ ] of this prospectus.
FLOATING RATE SECURITIZATION BONDS
If, in connection with the issuance of any class of securitization
bonds paying interest at a floating rate, referred to as a floating rate
class, the issuer arranges for any interest rate swap transactions, the
material terms of those transactions will be described in the related
prospectus supplement.
CREDIT ENHANCEMENT AND ACCOUNTS
Securitization Charge Periodic Adjustments. Unless otherwise
specified in any prospectus supplement, the primary form of credit
enhancement for the securitization bonds will be mandatory periodic
adjustments to the securitization charge. Consumers, as servicer, is
required to seek periodic adjustments to the securitization charge, on
behalf of the issuer, by filing a notice with the MPSC, in order to provide
revenues sufficient to cover all ongoing transaction costs, including:
o interest on the securitization bonds, which in the case
of interest on any floating rate class will be calculated
at the applicable gross fixed rate;
o for each series of securitization bonds, payment of the
principal of each class of that series according to the
expected amortization schedule;
o other ongoing transaction costs and expenses as specified
in items (a) through (d)(6) above;
o for each payment date, for each series of securitization
bonds, the amount to be deposited in the capital
subaccount for that series such that the amount in that
subaccount equals the required capital amount for that
series; and
o for each payment date, for each series of securitization
bonds, the amount to be deposited in the
overcollateralization subaccount for that series such
that the amount in that subaccount equals the scheduled
overcollateralization level for that series as of that
payment date;
and for the reserve subaccount to equal zero, all by the payment date
immediately preceding the next adjustment date.
Securitization charge adjustments will be calculated to include an
amount estimated to be sufficient to fully compensate for delays or losses
that would otherwise result from either the delinquent payment or
non-payment of the securitization charge. The servicer will notify the MPSC
of adjustments necessary to make up for any undercollections or
overcollections of securitization charge revenues. Under the MPSC financing
order, Consumers, as servicer, is required to submit a request for routine
adjustments once per year through the date twelve months prior to the
expected final payment date of the final class of the securitization bonds,
and once per quarter thereafter. The request for an adjustment must be
submitted at least 45 days before the adjustment may take place. The
adjustment will be reviewed by the MPSC for arithmetic error and placed in
effect at the beginning of the complete monthly billing cycle of Consumers
following the date of approval by the MPSC. Expressed generally, the most
likely causes of undercollections or overcollections of the securitization
charge revenues include the following situations:
o the actual electricity deliveries by Consumers to
customers vary from Consumers' forecasts; and
o the actual rate of collection of the securitization
charge revenues varies from Consumers' expected rate of
collection.
See "Risk Factors -- Servicing Risks" in this prospectus. The
securitization charge remittances to the trustee will fund the collection
account and various subaccounts as set forth below.
Collection Account. Under the indenture, the trustee will hold a
single collection account, divided into various subaccounts, some of which
may be series specific and some of which may be held for all series of
securitization bonds. The primary subaccounts for credit enhancement
purposes are:
o Capital Subaccount -- An amount specified in the
prospectus supplement for each series of securitization
bonds will be deposited into that series' capital
subaccount on the date of issuance of that series. Any
withdrawals from the capital subaccount for an existing
series not replaced prior to the following adjustment
date will be replenished by adjustments to the
securitization charge.
o Overcollateralization Subaccount -- The prospectus
supplement for each series of securitization bonds will
specify a funding level for that series'
overcollateralization subaccount. That amount will be
funded over the term of the securitization bonds.
o Reserve Subaccount -- Any excess amount of securitization
charge remittances, indemnity payments and investment
earnings, other than earnings on any series capital
subaccount, after payments have been made on a payment
date, will be held in the reserve subaccount for all
series of securitization bonds.
The capital subaccount and the overcollateralization subaccount
for each series will be available to make payments for that series on each
payment date and other amounts allocable to that series as described in
items (a) through (d)(4) above under "--Priority of Distributions" for that
series. The reserve subaccount will be available to make payments for all
series on each payment date and other amounts as described in items (a)
through (d)(6) above for all series. To the extent that amounts on deposit
in the reserve subaccount are required to be applied to make payments in
relation to more than one series, but are insufficient, the amounts on
deposit will be allocated to each series in proportion to the amounts then
payable with respect to that series.
Additional Credit Enhancement. Additional forms of credit
enhancement, if any, for each series will be specified in the related
prospectus supplement. However, the servicer may, but is not obligated to,
obtain insurance or a letter of credit in support of its obligation to
remit securitization charge revenues to the trustee. Credit enhancement for
the securitization bonds is intended to protect you against losses or
delays in scheduled payments on your securitization bonds.
STATE PLEDGE
Under the Customer Choice Act, the State of Michigan pledges, for
the benefit and protection of the holders of the securitization bonds and
the electric utility, that it will not take or permit any action that would
impair the value of securitization property, reduce or alter (except as
allowed under the securitization charge adjustment provisions), or impair
the securitization charges to be imposed, collected and remitted to
securitization bondholders or persons acting for the benefit of a holder,
until the principal, interest and premium, and any other charges incurred
and contracts to be performed in connection with the related securitization
bonds have been paid and performed in full.
The State of Michigan's pledge may be subject to subsequent
actions undertaken by the State which are a reasonable exercise of the
State's sovereign powers and of a character reasonable and appropriate to
the public purpose justifying such action. However, there is no existing
case law addressing such exercise of the State's sovereign powers with
respect to securitization bonds. In addition, the State may not take any
action in contravention of its pledge without paying just compensation to
the securitization bondholders, as determined by a court of competent
jurisdiction, if doing so would constitute a permanent appropriation of a
substantial property interest of the securitization bondholders in the
securitization property and deprive the securitization bondholders of their
reasonable expectations arising from their investments in the
securitization bonds. There is also no existing case law addressing the
issue of just compensation in the context of securitization bonds. See
"Risk Factors - Future Voter Initiatives, Referenda or Other State
Legislative Action May Invalidate the Securitization Bonds or Their
Underlying Assets."
ALLOCTIONS AND DISTRIBUTIONS
[GRAPHIC OMITTED]
PAYMENTS OF INTEREST AND PRINCIPAL
Interest on each class of securitization bonds will accrue at the
interest rate specified in the related prospectus supplement. On each
payment date, the trustee will distribute interest accrued on each class of
securitization bonds and will distribute the scheduled principal payment
for that class, if any, to the extent funds are available therefor until
the outstanding principal balance of that class has been reduced to zero.
Failure to pay the entire outstanding balance of the
securitization bonds of any class or series by the expected final payment
date will not result in a default with respect to that class or series
until the final maturity date for that class or series. The expected final
payment date and the final maturity date of each class and series of
securitization bonds are specified in the related prospectus supplement.
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding securitization bonds
of any series, at its option, on any payment date if (1) the outstanding
principal balance of that series of securitization bonds, after giving
effect to payments to be made on that payment date, is less than 5% of the
total initial principal balance of that series of securitization bonds, and
(2) no interest rate swap agreement remains in effect. The redemption price
will equal the outstanding principal balance of that series of
securitization bonds and interest accrued and unpaid up to the redemption
date. The redemption price must be paid in cash; the securitization bonds
may not be exchanged for new bonds. Bondholders will not be exposed to any
direct or indirect liability as sellers of the assets of the issuer as a
result of an optional redemption.
PAYMENT DATES AND RECORD DATES
The payment dates and record dates for each series of
securitization bonds are specified in the related prospectus supplement.
MATERIAL INCOME TAX CONSIDERATIONS
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, for
federal income tax purposes, and in the opinion of Miller, Canfield,
Paddock and Stone, P.L.C., for Michigan state income tax purposes, (i) the
securitization bonds will constitute debt of Consumers, and (ii) the issuer
will not be subject to income tax as an entity separate from Consumers.
The issuer and Consumers have received a private letter ruling
from the Internal Revenue Service to the effect that the securitization
bonds will be classified as obligations of Consumers for U.S. federal
income tax purposes. Tax counsel has relied on that ruling in rendering
their opinion that securitization bonds will be treated as debt of
Consumers. If you purchase a securitization bond, you agree to treat it as
debt of Consumers for tax purposes. See "Material Income Tax Consequences
for the Securitization Bonds" in this prospectus.
ERISA CONSIDERATIONS
Pension plans and other investors subject to ERISA may acquire the
securitization bonds subject to specified conditions. The acquisition and
holding of the securitization bonds could be treated as an indirect
prohibited transaction under ERISA. Accordingly, by purchasing the
securitization bonds, each investor purchasing on behalf of a pension plan
will be deemed to certify that the purchase and subsequent holding of the
securitization bonds by the investor would be exempt from the prohibited
transaction rules of ERISA. For further information regarding the
application of ERISA, see "ERISA Considerations" in this prospectus.
REPORTS TO SECURITIZATION BONDHOLDERS
With respect to each series and class of securitization bonds, on
or prior to each payment date, the trustee will deliver a statement to each
securitization bondholder of that series. This statement will include, to
the extent applicable, the following information, as well as any other
information so specified in the related supplemental indenture, as to the
securitization bonds of that series and class with respect to that payment
date or the period since the previous payment date, or in the case of the
first payment date, from the issuance date:
1. the amount to be paid to securitization bondholders of
that series and class as principal;
2. the amount to be paid to securitization bondholders of
that series and class as interest;
3. the projected securitization bond principal balance and
the actual securitization bond principal balance for that
series and class as of that payment date;
4. the amount on deposit in the overcollateralization
subaccount for that series and the scheduled
overcollateralization level for that series as of that
payment date;
5. the amount on deposit in the capital subaccount for that
series as of that payment date;
6. the amount, if any, on deposit in the reserve subaccount
as of that payment date;
7. the amount to be paid to any swap counterparty (on a
gross and a net basis, separately stated) under any
interest rate swap agreement on or before that payment
date; and
8. the amount of any other transfers and payments to be made
on that payment date pursuant to the indenture.
If any securitization bonds are listed on the Luxembourg Stock
Exchange, and the rules of that exchange so require, notice that this
report is available with the listing agent in Luxembourg will be given to
holders of those listed securitization bonds by publication in a daily
newspaper in Luxembourg, which is expected to be the Luxemburger Wort.
USE OF PROCEEDS
The issuer will use the cash available from the sale of the
securitization bonds after payment of issuer expenses to purchase
securitization property from Consumers. See "The Sale Agreement" in this
prospectus. As required by the Customer Choice Act and the MPSC financing
order, Consumers will apply the cash received from the issuer from the sale
of the securitization property after payment of Consumers' expenses to the
retirement of outstanding debt and equity securities. Consumers will make
the final decisions with respect to such retirements on the basis of market
conditions and other factors existing after the sale of the securitization
bonds.
THE CUSTOMER CHOICE ACT
The Customer Choice and Electricity Reliability Act, referred to
as the Customer Choice Act, signed into law in June 2000, provides, among
other things, for the restructuring of the electric utility industry in
Michigan. The Customer Choice Act allows alternative electric suppliers to
compete in the retail market for electric generation services in Michigan
without being subject to price regulation by the MPSC. On the other hand,
the incumbent electric utilities are required to remain under price
regulation by the MPSC for generation services under the Customer Choice
Act. To this end, under the Customer Choice Act, all customers will be able
to purchase their electricity from any of a number of MPSC-licensed
alternative electric suppliers not later than January 1, 2002.
To maintain the financial integrity of electric utilities during
the transition to a competitive electric generation retail market, the
Customer Choice Act provides Consumers and Detroit Edison Company the
opportunity to recover qualified costs through the securitization charge
and a separate tax charge that will be retained by Consumers and not be
transferred to the issuer, referred to as the tax charge. Qualified costs
are:
1. an electric utility's regulatory assets as determined by
the MPSC, adjusted by the applicable portion of related
investment tax credits;
2. any costs that the MPSC determines that the electric
utility would be unlikely to collect in a competitive
market, including retail open access implementation costs
and the costs of an MPSC-approved restructuring, buyout
or buy-down of a power purchase contract;
3. the costs of issuing, supporting and servicing
securitization bonds;
4. any costs of retiring and refunding the electric
utility's existing debt and equity securities in
connection with the issuance of securitization bonds; and
5. taxes related to the recovery of the securitization
charge.
While the Customer Choice Act does not alter the obligation of
electric utilities to provide generation services at regulated prices, the
Customer Choice Act authorizes alternative electric suppliers licensed by
the MPSC, referred to as alternative electric suppliers, to provide
electric generation services to retail customers. Under the Customer Choice
Act, alternative electric suppliers will be subject to financial,
managerial and technical requirements to ensure adequate service to
customers, but are generally not subject to price regulation and other
regulation by the MPSC as public utilities. Electric distribution and
transmission services will remain regulated and subject to the traditional
legal and regulatory requirements.
If a customer chooses an alternative electric supplier for
generation services, the customer may receive separate billings for those
generation services directly from the alternative electric supplier or it
may receive combined billings for all charges from Consumers. Under the
Customer Choice Act, Consumers is not required to allow alternative
electric suppliers to bill for Consumers' services and Consumers has agreed
with the issuer in the sale agreement that Consumers will not permit
alternative electric suppliers to bill or collect securitization charges
unless it is so required by law.
Pursuant to the Customer Choice Act, Consumers' rates for
electricity will be frozen through 2003, except for reductions resulting
from savings due to securitization. Residential rates were immediately
reduced by five percent from the rates that were authorized or in effect on
May 1, 2000. After 2003, rates can be reduced but cannot be increased until
the earlier of December 31, 2013 or until certain statutory tests are met,
except that, notwithstanding compliance with the statutory tests, rates for
small commercial customers (no more than 15 kilowatts) cannot be increased
until 2005 and rates for residential customers cannot be increased before
2006.
Under the Customer Choice Act, Consumers is permitted to retain
ownership of its electric generation facilities and Consumers has done so.
Consumers believes that it has sufficient generating capacity and contracts
or options to purchase electric energy to meet its obligations to its
customers.
RECOVERY OF QUALIFIED COSTS IS ALLOWED FOR CONSUMERS AND OTHER MICHIGAN
UTILITIES
If the MPSC finds that the net present value of the revenues to be
collected under a financing order is less than the amount that would be
recovered over the remaining life of the qualified costs using conventional
financing methods and that a financing order is consistent with the
standards in the statute, the MPSC is required under the Customer Choice
Act to issue that financing order to allow the utility to recover its
qualified costs. In issuing a financing order, the MPSC is required to
ensure all of the following:
o that the proceeds of the securitization bonds are used
solely for the purposes of the refinancing or retirement
of debt or equity;
o that the securitization provides tangible and
quantifiable benefits to customers of the electric
utility;
o that the expected structuring and expected pricing of the
securitization bonds will result in the lowest
securitization charge consistent with market conditions
and the terms of the financing order;
o that the amount securitized does not exceed the net
present value of the revenue requirement over the life of
the proposed securitization bonds associated with the
qualified costs sought to be securitized.
The Customer Choice Act allows electric public utilities an
opportunity to recover their qualified costs.
As a mechanism to recover qualified costs, the Customer Choice Act
provides for the imposition and collection of the securitization charge on
customers' bills. Because the securitization charge is a usage-based charge
based on access to the utility's transmission and distribution system, the
customers will be assessed regardless of whether the customers take
delivery of electricity supplied by the utility, by an alternative electric
supplier, or by the customer by means of Consumers' transmission and
distribution system.
CONSUMERS AND OTHER UTILITIES MAY SECURITIZE QUALIFIED COSTS
The Recovery of Qualified Costs May be Facilitated by the Issuance
of Securitization Bonds. The Customer Choice Act authorizes the MPSC to
issue "financing orders," such as the MPSC financing order, approving,
among other things, the issuance of securitization bonds to recover the
qualified costs of an electric utility. A subsidiary of a utility or a
third party assignee of a utility may issue securitization bonds. Under the
Customer Choice Act, proceeds of securitization bonds are required to be
used to refinance or retire an electric utility's debt or equity.
Securitization bonds are secured by and payable from securitization
property and may have a final maturity date of up to 15 years from the date
of issuance. It is expected that the securitization bonds will be paid in
full on the expected final payment date which will be at least three months
before the related final maturity date, although failure to pay principal
of the securitization bonds before the final maturity date will not
constitute an event of default under the indenture.
The Customer Choice Act contains a number of provisions designed
to facilitate the securitization of qualified costs and related expenses.
A Financing Order is Irrevocable. Under the Customer Choice Act,
securitization property is created by the issuance by the MPSC of a
financing order. The Customer Choice Act provides that each financing
order, including the MPSC financing order, and the securitization charges
authorized by the order, are irrevocable, subject to rehearing by the MPSC
only upon motion filed by the utility. Notwithstanding its irrevocability,
a party to the related MPSC proceeding may appeal the financing order to
the Michigan court of appeals within 30 days after issuance by the MPSC.
Under the Customer Choice Act, a financing order and the securitization
charges authorized in the MPSC financing order are also not subject to
reduction, impairment or adjustment by further action of the MPSC, other
than pursuant to the securitization charge adjustment provisions of that
Act.
In addition, under the Customer Choice Act, the State of Michigan
pledges for the benefit and protection of the financing parties, such as
the bondholders, and the electric utility, not to take or permit any action
that would impair the value of securitization property, reduce or alter,
except as contemplated by the periodic adjustments to the securitization
charge authorized by the Customer Choice Act, or impair the securitization
charges to be imposed, collected and remitted to the financing parties
until the principal, interest and premium, and any other charges incurred
and contracts to be performed in connection with the related securitization
bonds have been paid and performed in full. See "-- The Securitization
Charge and Tax Charges are Adjusted Periodically" below. See also "Risk
Factors -- Judicial, Legislative or Regulatory Action That May Adversely
Affect Your Investment" in this prospectus. Securitization bonds do not
constitute a debt or obligation of the State and are not a charge on the
full faith and credit or taxing power of the State.
The Securitization Charge and Tax Charge are Adjusted
Periodically. The Customer Choice Act requires each financing order to
include a mechanism requiring that securitization charges be reviewed and
adjusted by the MPSC at least annually. The MPSC financing order provides
for Consumers, as servicer, to request adjustments annually, and quarterly
beginning 12 months preceding the expected final payment date of the final
class of the securitization bonds. These adjustments are formula-based to
provide revenues sufficient to provide for timely payment of the principal
of and interest which, in the case of interest on any floating rate class,
will be calculated at the applicable gross fixed rate on the securitization
bonds in accordance with the expected amortization schedule and other
required amounts and charges in connection with the securitization bonds.
The tax charge described below will also be adjusted as necessary to
provide Consumers with an amount sufficient to recover federal and state
taxes in respect of the securitization charge revenue collections.
Consumers agrees in the servicing agreement to file with the MPSC a
requested adjustment calculated in accordance with the formula set forth in
the MPSC financing order. See "The MPSC Financing Order and the
Securitization Charge -- The MPSC's Securitization Charge Adjustment
Process" in this prospectus.
Customers Cannot Avoid Paying the Securitization Charge. The
Customer Choice Act provides that the securitization charge is
"non-bypassable" which means that the charge will be payable by electric
customers taking delivery from Consumers' or its successor on its MPSC-
approved rate schedules or under special contracts, even if those customers
elect to purchase electricity from an alternative electric supplier.
The Customer Choice Act Provides Procedures for Perfecting the
Transfer and Pledge of Securitization Property. The Customer Choice Act
specifies the procedures for perfecting that the transfer of the
securitization property from Consumers to the issuer under Michigan law and
perfecting the security interest granted by the issuer to the trustee in
the securitization property under Michigan law. The Customer Choice Act
provides that a transfer of securitization property will be perfected
against all third parties, including subsequent judicial and other lien
creditors when a financing statement with respect to the transfer has been
filed in accordance with the Michigan Uniform Commercial Code, referred to
as the Uniform Commercial Code.
The Customer Choice Act Provides That Security Interests in the
Securitization Property are Perfected by Means of a Filing Under the
Uniform Commercial Code. A security interest in securitization property may
be created only by a financing order and the execution of a security
agreement, such as the indenture. A security interest in securitization
property attaches automatically upon receipt of the purchase price of the
securitization bonds and is perfected upon the filing of a financing
statement under the Uniform Commercial Code, whether or not the revenues or
proceeds thereof have accrued and whether or not the value of the
securitization property is dependent on customers receiving service.
Perfection of the trustee's security interest in the securitization
property is necessary in order to establish the priority of the trustee's
security interest over claims of other parties to the securitization
property. The Customer Choice Act provides that priority of security
interests in securitization property will not be impaired by:
o commingling of securitization charge revenue collections
with other funds of the utility or its assignee (although
this provision may not be enforceable in a bankruptcy of
the utility), or
o later modification of the financing order.
The Customer Choice Act Characterizes the Transfer of
Securitization Property as a True Sale and not a Secured Transaction. The
Customer Choice Act provides that a transfer by the utility or an assignee
of securitization property will be treated as a true sale and not a secured
transaction and that legal and equitable title has passed to the assignee,
if the parties expressly state in governing documents that a transfer is to
be a sale or other absolute transfer. The characterization of the transfer
as a true sale is not affected by the fact that:
o the purchaser has any recourse against the assignor, or
any other term of the parties' agreement, including the
assignor retaining an equity interest in the
securitization property;
o the electric utility acts as collector of the related
securitization charge; or
o the transfer is treated as a financing for tax, financial
accounting or other purposes.
See "Risk Factors" " -- The Risks Associated With Potential Bankruptcy
Proceedings" and "-- The Sale of Securitization Property Could Be Construed
as a Financing" in this prospectus.
THE MPSC FINANCING ORDER AND THE SECURITIZATION CHARGE
THE MPSC FINANCING ORDER
Consumers' Application and the MPSC Financing Order. In July 2000,
Consumers filed an application with the MPSC requesting the issuance by the
MPSC of a financing order under the Customer Choice Act, together with a
proposed form of the financing order. On October 24, 2000 the MPSC issued a
financing order under the Customer Choice Act. On January 4, 2001, the
Commission issued an order on rehearing in response to a request for
rehearing by Consumers. Those two orders together are referred to in this
prospectus as the MPSC financing order. In its application, Consumers
requested that the MPSC allow the recovery of a gross amount of
$714,498,826 of generation-related regulatory assets, net of $2,040,741 of
certain regulatory liabilities, and a gross amount of $12,500,000 of
initial or up-front other qualified costs. Net of taxes and tax credits,
the MPSC approved $468,592,000 of qualified costs for recovery through
securitization. That amount represents a reduction from the amount
requested by $6,088,000. As a result, Consumers will be allowed to recover
a gross amount of $708,410,826 of generation-related regulatory assets. The
MPSC also authorizes Consumers to recover the state and federal taxes
related to the principal amount of securitization revenues through a
non-bypassable tax charge which Consumers may charge, collect and retain on
its own behalf, referred to as the tax charge.
The MPSC Authorizes Consumers to Sell Securitization Property to
the Issuer. Under the MPSC financing order, the MPSC authorizes Consumers
to assign, sell, transfer or pledge securitization property to the issuer.
The MPSC Authorizes Issuance of Securitization Bonds. The MPSC
financing order authorizes the issuance of securitization bonds with an
initial total principal balance not to exceed $468,592,000, secured by
securitization property. The securitization bonds may have a final stated
maturity not later than 15 years from the date of issuance. The MPSC
financing order also approves the structure and other key terms of the
securitization bonds.
The MPSC Authorizes Consumers to Impose the Securitization Charge
and the Tax Charge. Under the MPSC financing order, the MPSC authorizes
Consumers to impose and collect from customers the securitization charge in
amounts sufficient to provide for the timely payment of the principal of
and interest on the securitization bonds and all ongoing other qualified
costs, referred to together as the periodic payment requirement. Ongoing
other qualified costs are the actual costs which the issuer incurs in
connection with the securitization transaction in addition to the payment
of principal of and interest on the securitization bonds. These include the
servicing fee, the fees and expenses of the indenture trustee and of the
independent managers or trustees of the issuer, the administration fee,
rating agency fees, legal and accounting fees and expenses, indemnity
payments, if any, funding of the overcollateralization subaccount,
replenishment of amounts withdrawn from the overcollateralization
subaccount or the capital subaccount, the ongoing costs of any additional
credit enhancement, the periodic or termination amounts payable under any
interest rate swaps or cap agreements, and other similar operating expenses
of the issuer.
In addition, the MPSC financing order authorizes Consumers to
impose and collect the tax charge in an amount sufficient for Consumers to
recover federal, state and local taxes payable in connection with the
securitization charge revenue collections. Consumers will charge, collect
and retain the tax charge for its own account.
The securitization charge will be a uniform per kilowatt-hour
charge assessed against all customers of each rate class and under all
special contracts, on a monthly basis as part of each customer's regular
monthly billings. The securitization charge will be subject to the maximum
lawful energy charges which may be in effect from time to time for any of
those rate classes and special contracts. Consumers will set the initial
per kilowatt-hour securitization charge in an amount not to exceed $0.00205
per kWh and the initial tax charge in an amount not to exceed $0.00025 per
kWh, each based upon the formula approved in the MPSC financing order. In
comparison, the current average residential rate for generation service is
[ ] per kWh. In the unlikely event that adjustments to the securitization
charge would cause that charge to increase to the maximum lawful rate for
any rate class, any resulting shortfall in securitization charge revenue
collections would be borne by all remaining rate classes and special
contracts on a uniform per kWh basis. The securitization charge and the tax
charge will be reflected in each customer's bill as separate line items.
The securitization charge for each series of securitization bonds
will be assessed on all customer bills starting with the beginning of the
first billing cycle of Consumers after issuance of that series of
securitization bonds. Upon each adjustment of the securitization charge or
issuance of additional series of securitization bonds, the adjusted
securitization charge will be assessed in the same manner.
The periodic adjustments to the securitization charge are designed
to ensure that securitization charge revenue collections are not more or
less than the amount necessary to provide for the timely payment of the
periodic payment requirement. In requesting periodic adjustments,
subsequent forecasts will take into account updated projections of
electricity deliveries, the timing of revenue collections, projected
uncollectibles and expenses, any amounts held in the reserve subaccount,
any depletion of amounts in the capital subaccount or the
overcollateralization subaccount and the issuance of any additional series
of securitization bonds. Any additional series of securitization bonds will
also be secured by and payable from the securitization property which will
comprise the combined securitization charge collections imposed with
respect to all series.
APPEALS FROM THE MPSC FINANCING ORDER
The Michigan Attorney General has filed notices of appeals from
the MPSC orders of October 24, 2001 and January 4, 2001, which constitute
the MPSC financing order, but has not as yet filed her brief describing the
grounds for the appeals. See "Risk Factors - Judicial, Legislative or
Regulatory Action That May Adversely Affect Your Investment - The Law Which
Underpins the Securitization Bonds May Be Invalidated" in this prospectus.
THE MPSC'S SECURITIZATION CHARGE ADJUSTMENT PROCESS
The servicer will seek adjustments to the securitization charge in
order to enhance the likelihood that securitization charge revenue
collections, including any amounts on deposit in the reserve subaccount,
are neither more nor less than the amount necessary to provide for the
timely payment of the periodic payment requirement. These adjustments are
formula-based, incorporating actual securitization charge revenue
collections, as well as updated assumptions regarding projected future
deliveries of electricity to customers, expected delinquencies and
charge-offs and future expenses relating to securitization property and the
securitization bonds, and the issuance of any additional series of
securitization bonds. The adjustments are designed to achieve the required
level of revenue collections by the payment date immediately preceding the
next date on which the securitization charge is adjusted, taking into
account any amounts on deposit in the reserve subaccount. If at the time of
issuance of a series, the servicer determines any additional adjustments
are required, the dates for these adjustments will be specified in the
prospectus supplement for the series.
The Schedule for Making Adjustments to the Securitization Charge.
Under the Customer Choice Act, the securitization charge must be adjusted
at least annually. Under the MPSC financing order, Consumers, as servicer,
is required to submit a request to the MPSC for adjustments each year
through the date twelve months prior to the expected final payment date of
the final class of the securitization bonds, and quarterly thereafter.
Requests for adjustments must be submitted to the MPSC at least 45 days
before the adjustment may take place. The request must show the computation
of the proposed adjustments to the securitization charge and that the
proposed revision of the securitization charge will generate the recovery
of amounts sufficient to make on a timely basis all scheduled payments on
the securitization bonds and all other fees, charges and expenses of the
issuer. The adjustment will take effect at the beginning of the complete
monthly billing cycle of Consumers following the date of approval by the
MPSC of the proposed adjustment. The previous securitization charge remains
in effect until that time. The MPSC has not determined the procedures to be
applied in conducting its review of a requested adjustment, including
whether notice and an opportunity for a hearing or comment will be allowed.
However as required by the financing order, each review must be completed
within 45 days after the servicer files its request for an adjustment and
must be limited in scope to the arithmetic computation contained in the
proposed adjustment. In the case of notification by the MPSC of error, the
servicer will implement the corrected adjustment. The date on which the
servicer notifies the MPSC of a proposed adjustment is referred to as a
calculation date.
The MPSC Authorizes Consumers to Make "Non-Routine" Adjustments to
the Securitization Charge. The MPSC financing order also grants Consumers,
as servicer, the authority to make "non-routine" filings for adjustments in
the formula specified in the MPSC financing order for the mandatory
periodic adjustments in order to remedy a significant and recurring
variance between actual and expected securitization charge revenue
collections and to assure timely payment of the periodic payment
requirement. Any such filing is required to be made at least 90 days prior
to the proposed effective date and would be subject to MPSC hearing and
approval.
THE SELLER AND SERVICER OF THE SECURITIZATION PROPERTY
CONSUMERS
Consumers is both the seller and the servicer of the
securitization property. See "Consumers Energy Company" in this prospectus.
All tabular information regarding Consumers will be updated in any
prospectus supplement issued after the date of this prospectus.
CONSUMERS' CUSTOMER CLASSES, ELECTRICITY CONSUMPTION AND REVENUES
Customer Classes. Consumers' retail customer base is divided into
three general customer classes: residential, commercial and industrial.
Each customer class is defined by type of customer business and not by
voltage level. Several rate classes are included within each customer class
differentiated by type of service and other service characteristics.
The residential customer class consists of approximately 1,460,000
residents in the State of Michigan. The commercial customer class is
comprised of enterprises such as restaurants, grocery stores, shopping
malls, office and apartment buildings. Additionally, the commercial
customer class includes public street and highway lighting units. The
industrial customer class is comprised of diverse industries such as oil
and gas production, automotive assembly and supply, chemical,
pharmaceutical, airports, specialized steel manufacturing, foundries and
paper mills.
The following table shows the average number of Consumers'
electric customers in each customer class for the past six years and the
percentage each customer class bears to the total average number of
customers.
TABLE 1
AVERAGE NUMBER OF ELECTRIC CUSTOMERS (CUSTOMER METERS)
FOR THE YEAR ENDED
---------------------------------------------------------------
12/31/96 12/31/97
------------------------------ ------------------------------
Average Average
Number of Number of
Customers % of Total Customers % of Total
--------------- ------------- --------------- -------------
Residential 1,397,966 88.46% 1,417,168 88.38%
COMMERCIAL 173,190 10.96% 177,097 11.04%
INDUSTRIAL 9,191 0.58% 9,204 0.57%
--------------- ------------- --------------- -------------
TOTAL 1,580,347 100.00% 1,603,469 100.00%
FOR THE YEAR ENDED
------------------------------------------------------------------------------------------
12/31/98 12/31/99 12/31/00
----------------------------- ---------------------------------------------------------
AVERAGE Average Average
NUMBER OF Number of Number of
CUSTOMERS % of Total Customers % of Total Customers % of Total
--------------- ------------ -------------- -------------- ------------ ------------
Residential 1,437,678 88.32% 1,457,459 88.25% 1,489,024 88.19%
COMMERCIAL 180,916 11.11% 184,779 11.19% 191,797 11.25%
INDUSTRIAL 9,198 0.57% 9,198 0.56% 9,199 0.55%
--------------- ------------ -------------- -------------- ------------ ------------
TOTAL 1,627,792 100.00% 1,651,436 100.00% 1,690,020 100.00%
The following table shows the total billed electric consumption of
Consumers' customers in megawatt-hours (referred to as mWh) for the past
five years for each customer class and the percentage each customer class
bears to the total consumption.
TABLE 2
BILLED ELECTRIC CONSUMPTION
FOR THE YEAR ENDED
-----------------------------------------------------------------------------------
12/31/96 12/31/97
-----------------------------------------------------------------------------------
MWH % OF TOTAL MWH % OF TOTAL
RESIDENTIAL 10,792,821 32.10% 10,746,679 31.38%
COMMERCIAL 10,083,081 29.99% 10,280,472 30.02%
INDUSTRIAL 12,741,810 37.90% 13,222,932 38.61%
-------------------- ---------------------- --------------- -----------------
TOTAL 33,617,712 100.00% 34,250,083 100.00%
FOR THE YEAR ENDED FOR THE YEAR ENDED
---------------------------------------------------------------------------------------
12/31/98 12/31/99 12/31/00
---------------------------------------------------------------------------------------
% OF % OF
MWH % OF TOTAL MWH TOTAL MWH TOTAL
RESIDENTIAL 11,032,749 31.23% 11,390,478 31.42% 11,371,086 31.47%
COMMERCIAL 10,773,484 30.50% 11,141,859 30.74% 11,326,042 31.35%
INDUSTRIAL 13,517,251 38.27% 13,718,953 37.84% 13,436,076 37.18%
-------------------- -------------- ------------ -------------------------- ----------
TOTAL 35,323,484 100.00% 36,251,290 100.00% 36,133,204 100.00%
The following table shows the amount of Consumers' billed electric
revenue per customer class for the past six years and the percentage of
each customer class of the total billed revenue.
TABLE 3
BILLED ELECTRIC REVENUES ($000)
For the Year Ended
--------------------------------------------------------------
12/31/96 12/31/97
--------------------------------------------------------------
$ (000s) % of Total $ (000s) % of Total
---------------------------------------- -------------------
Residential 863,040 37.42% 910,433 38.12%
COMMERCIAL 749,887 32.52% 767,322 32.13%
INDUSTRIAL 693,234 30.06% 710,602 29.75%
---------------------------------------- -------------------
TOTAL 2,306,161 100.00% 2,388,357 100.00%
FOR THE YEAR ENDED YEAR ENDED
--------------------------------------------------------- -------------------------------
12/31/98 12/31/99 12/31/00
------------------------- ---------------------------- -------------------------------
$ (000S) % of Total $ (000s) % of Total $ (000s) % of Total
---------- ------------- ------------- ------------- ---------------- -------------
Residential 938,229 38.40% 978,765 38.92% 930,703 38.01%
COMMERCIAL 798,692 32.69% 825,693 32.84% 830,281 33.91%
INDUSTRIAL 706,468 28.91% 710,133 28.24% 687,597 28.08%
---------- ------------- ------------- ------------- ---------------- -------------
TOTAL 2,443,389 100.00% 2,514,591 100.00% 2,448,581 100.00%
PERCENTAGE CONCENTRATION WITHIN CONSUMERS' COMMERCIAL AND INDUSTRIAL
CLASSES
For the period ended December 31, 1999, the [ten] largest single
site electric customers represented approximately [ ]% of Consumers'
kilowatt-hour sales and the [ten] largest multi- site electric customers
represented approximately [ ]% of Consumers' kilowatt-hour sales. In both
cases, the customers are in the commercial or industrial customer classes.
There are no material concentrations in the residential class.
HOW CONSUMERS FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT OF
ELECTRICITY TO BE DELIVERED OVER ITS FACILITIES
Accurate projections of the number of customers, kWh deliveries
and retail electric revenues are important in setting, maintaining and
adjusting the securitization charge. The securitization charge must be
sufficient to pay interest on and principal of the securitization bonds as
well as the other periodic payment requirements. See "The MPSC Financing
Order and the Securitization Charge -- The MPSC's Securitization Charge
Adjustment Process" and "Risk Factors -- Servicing Risks" in this
prospectus.
Consumers has prepared annual forecasts of electric energy
(megawatt-hour) deliveries for the following year and several years
thereafter. The primary uses of the forecasts have been for capacity
planning, financial planning, and rate case support. Monthly energy
forecasts are derived from the annual forecasts based on allocation factors
that consider monthly consumption growth trends.
Electric energy forecast models for Consumers were last updated in
April, 2000. Econometric models were developed for use in forecasting
electric energy deliveries to the residential, commercial, and industrial
customer classes. Where appropriate, these classes are segmented into
further detail for purposes of analysis and forecast development. These
models forecast electric deliveries as a function of regional housing start
and personal income economic indicators, as well as national indicators of
industrial production and vehicle unit production by its largest industrial
customer, General Motors. The forecast also considers the effects of
planned industrial plant closings or expansions on total electric
deliveries as adjustments to the econometric model forecasts. The forecast
models are developed using historical data that has been adjusted for
abnormal weather conditions. As a result, the forecast reflects expected
usage under normal weather conditions. "Normal" weather conditions are
based on thirty year averages for heating and cooling degree days.
Consumers' forecasting process emphasizes the importance of high
quality analysis. When econometric forecast models are developed, they are
evaluated against specific logic and statistical tests. These tests form
the basis of making selections between alternative forecast models and
variables. Actual sales are compared to forecasted sales on a monthly basis
in order to determine if any significant condition exists that was not
anticipated at the time the forecast was made.
The econometric models forecast energy usage through 2005. Beyond
2005, it is assumed that consumption will grow at an annual average rate of
2.3%. This assumption is consistent with actual growth experienced by
Consumers over a long-term historical period.
Consumers Energy utilized the most current U.S. and Michigan
economic forecasts available at the time the forecast models were
developed.
ACTUAL CONSUMPTION COMPARED TO FORECAST
Consumers conducts sales forecast variance analysis on a regular
basis to monitor how well forecasts track actual consumption. This is
important for short-term resource procurement functions as well as for
budgeting and financial reporting.
The table below compares actual deliveries in gigawatt-hours
(referred to as gWh) for a particular year to the related forecast prepared
by Consumers Energy during the previous year. For example, the 1999 annual
variance is based on a forecast prepared in 1998. The annual variances for
all combined customer classes range from a low of 0.1% to 4.5% in absolute
terms. During the historical forecast periods, there are no discernable
trends established that can be used to predict future forecast variances.
Many factors can contribute to annual variances between actual
electricity consumption and the amount of sales forecast in the preceding
year, including unexpected weather conditions and unanticipated changes in
economic conditions. For example, the residential and commercial variances
in 1995 were primarily the result of unusually warm and humid summer
weather which created an unusually heavy demand for air conditioning and,
therefore, significantly increased electric consumption. Similarly, the
variance in 1997 can be attributed to a cooler than normal summer which
required less air conditioning and, therefore, reduced electric
consumption. The 1997 variance in the industrial class resulted in part
from a forecast assumption that demand side management programs would
result in decreased consumption to a degree greater than in fact occurred.
TABLE 4
NORMALIZED FORECAST COMPARED TO THE ACTUAL AMOUNT OF ELECTRICITY DELIVERED
1996 1997 1998 1999 2000
------------ ----------- ----------- --------- ---------
RESIDENTIAL
Forecast (gWh) 10,775 11,037 11,108 11,397 11,872
Actual (gWh) 10,793 10,747 11,033 11,391 11,371
Variance-% 0.2% -2.6% -0.7% -0.1% -4.22%
COMMERCIAL
Forecast (gWh) 10,190 10,375 10,619 10,934 11,313
Actual (gWh) 10,084 10,281 10,774 11,142 11,326
Variance-% -1.0% -0.9% 1.5% 1.9% -0.12%
INDUSTRIAL
Forecast (gWh) 13,035 12,826 13,626 13,805 13,467
Actual (gWh) 12,742 13,223 13,517 13,719 13,436
Variance-% -2.2% 3.1% -0.8% -0.6% -0.23%
Many factors can contribute to annual variances between actual
electricity consumption and the amount of sales forecasted in the preceding
year, including weather conditions (i.e. if actual weather is significantly
warmer or cooler than "normal" weather) and unanticipated changes in
economic conditions.
The table below compares the actual number of customers for a
particular year to the related forecast prepared during the previous year.
For example, the annual 1995 variance is based on a forecast prepared in
1994. There can be no assurance that the future variance between actual and
expected consumption will be similar to the historical experience set forth
below.
TABLE 5
FORECAST VARIANCE FOR THE NUMBER OF RETAIL CUSTOMERS
1996 1997 1998 1999 2000
RESIDENTIAL CUSTOMERS
Forecasted............ 1,404,916 1,423,481 1,441,880 1,460,347 1,487,323
Actual................ 1,397,966 1,417,168 1,437,678 1,457,459 1,489,024
Variance.............. -0.49% -0.44% -0.29% -0.20% 0.11%
COMMERCIAL CUSTOMERS
Forecasted............ 174,579 178,014 181,429 184,851 189,630
Actual................ 173,190 177,097 180,916 184,779 191,797
Variance.............. -0.80% -0.52% -0.28% -0.04% 1.14%
INDUSTRIAL CUSTOMERS
Forecasted............ 9,226 9,317 9,405 9,491 9,471
Actual................ 9,191 9,204 9,198 9,198 9,199
Variance.............. -0.38% -1.21% -2.20% -3.09% -2.87%
If actual kWh of electricity delivered is higher than the forecast
used to develop the securitization charge, then there will most likely be
more securitization charge revenues collected than assumed. Similarly, if
actual kWh of electricity delivered is lower than the forecast used to
develop the securitization charge, there will most likely be less
securitization charge revenues collected than assumed. Any variance will be
taken into account in the true-up mechanism approved in the MPSC financing
order.
CREDIT POLICY; BILLING; COLLECTIONS; RESTORATION OF SERVICE
Consumers' policies and procedures pertaining to credit (including
requirements for deposits from customers), billing, collections (including
procedures for disconnection of service for non-payment) and restoration of
service after disconnection, are governed by applicable laws and Consumers'
rules and regulations as approved by the MPSC. To the extent permitted by
applicable laws, Consumers may change its rules and regulations and seek
approval from the MPSC for new tariffs governing these activities to
enhance Consumers' ability to collect payment for services received by
customers and to recover amounts billed to customers for utility services.
Consumers will agree, in the servicing agreement, not to initiate any
changes that materially and adversely affect Consumers' ability to collect
payment for services incurred by customers or recover amounts billed to
customers for utility services, except for any changes required by
applicable law or MPSC orders. Under the servicing agreement, any such
changes initiated by Consumers will also apply to the servicing by
Consumers, as the servicer, of the securitization property.
CREDIT POLICY
Under applicable law, Consumers is generally required to provide
service to retail customers and potential customers within its service
area. Consumers' review of the credit history of applicants applying for
utility service generally consists of a review to determine if the
applicant has previously received service from Consumers and, if so,
whether there are any delinquent billed amounts outstanding. Within this
initial review process, Consumers identifies customers making applications
at premises which have demonstrated chronic uncollectible debt write-off
experience. In these instances, service applicants are requested to
physically apply for service at a Consumers office location. In general,
Consumers relies on the information provided by the applicant and
Consumers' customer information system, to determine whether Consumers has
previously served the applicant and whether any delinquent billed amounts
in the applicant's name remain outstanding. In accordance with Consumers'
tariffs, deposits may be required from applicants applying for service or
from existing customers to protect Consumers against losses. Customers from
whom deposits are most frequently obtained include residential customers
who have had their service disconnected for nonpayment of bills
outstanding, and from commercial and industrial customers with limited or
no credit history or exhibiting poor payment history as defined in
Consumers' tariffs. The typical maximum allowable amount of the deposit
following discontinuation of service for residential customers is twice the
average peak season monthly bill for the premises. The maximum allowable
amount of deposit for commercial and industrial accounts is typically three
times an average monthly bill for the customer. The deposit is refunded to
the residential customer upon satisfactory payment (as prescribed within
the regulations) by the customer for a period of 12 consecutive months. The
deposit is generally refunded to the commercial and industrial customer
after the customer has made 12 consecutive months of payments on or before
the due date.
BILLING PROCESS
Consumers bills its customers once every 27 to 33 days with
approximately an equal number of bills being distributed each servicer
business day, that is, five days a week except holidays and an occasional
Saturday. Customers receiving both electricity and gas service from
Consumers receive combined bills for the charges incurred for both types of
service during the billing period. As of December 1999, approximately 42%
of Consumers' customers received electric service only and 38% received gas
service only. The remaining 20% were combination accounts. For the year
ending December 31, 1999, Consumers mailed an average of 125,000 bills on
each servicer business day to customers in its various customer categories.
Customer bills with potential billing errors are retained for review. This
review involves accounts that have abnormally high or low bills and
possible meter reading errors or meter malfunctions. As of December 1999,
350,000 residential and small commercial and industrial customers, which
constitute approximately 13% of Consumers' electric and gas customers, were
billed on the equal monthly payment plan ("EMPP"). Customers on this plan
are billed equal monthly amounts based on twelve months of billing history
for each account. The EMPP year begins with the June bill month. The EMPP
customers' accounts are reconciled at the end of the plan year in May.
Overpayments or underpayments for the plan year are settled in May or for
underpayments spread over a 90-day period.
Consumers may change its billing policies and procedures from time to time.
It is expected that any such changes would be designed to enhance
Consumers' ability to make timely recovery of amounts billed to customers.
COLLECTION PROCESS
Consumers receives approximately 70% of its total bill payments,
by number of bills (both electric and gas), via United States mail through
its central mail remittance center. Approximately 13% of payments are
received through third-party collection agents (banks, grocery stores and
other similar entities which offer the processing of utility bill payments
as a convenience to their customers). Another 7% are received via
Consumers' local offices and the remaining 10% are received electronically.
Bills are processed and mailed to customers one day after the
customer's meter is read or estimated. Residential accounts are considered
past due if not paid within 17 days and within 21 days for commercial and
industrial accounts. Residential account payments are considered timely (no
late payment charge applied) if received by not more than five days after
the due date and if received on or before the due date for commercial and
industrial accounts.
For Residential Customers, the standard credit cycle begins with a
past due reminder notice being sent with the residential bill if payment
has not been received by the time of the second month's billing. If the
past due billing remains unpaid two weeks after the reminder
notice was sent to the customer, a final notice is mailed to the customer.
Approximately one week following the mailing of the final notice, a series
of collection calls are initiated by a third- party collection agency on
behalf of Consumers. At approximately 45 days past due, an intent to
discontinue service notice is mailed to the customer. Following mailing of
the intent to discontinue service notice, if the past due balance has not
been paid within three days, the account is scheduled for service
disconnection. If the account is being worked in the field for
disconnection, should the customer pay the past due balance at the time
that the service representative visits the premise, the service will be
continued. If the past due billing is not paid at that point, service is
disconnected.
For commercial and industrial customers, the standard credit cycle
aligns closely to the residential cycle as described above, with the
exception that past due mailings and telephone contact attempts are manual
in nature and completed within Consumers' credit operational areas.
Customers are entitled to enter into deferred settlement
agreements in accordance with applicable laws and Consumers' tariffs as
regulated by the MPSC. Such payment agreements allow the customer to make
partial payments, or to extend an arrearage, during periods of financial
hardship. Service disconnection is not implemented against a customer who
has entered into and is abiding by a settlement agreement. Consumers is
prohibited from disconnecting service under certain conditions, such as for
those customers who are enrolled and complying with the winter protection
program. Consumers is also subject to agreements with agencies
administering certain low-income programs which limits Consumers' ability
to disconnect service to customers receiving payment under such programs.
On a monthly basis, net write-offs are calculated from the gross
write-offs for the month, less recoveries (payments, adjustments, deposits,
etc) for that month. Although most write-offs are associated with final
accounts that have reached the 90-100 day past due threshold, recoveries
received during the month could be associated with accounts charged off
during any previous period.
If a customer declares bankruptcy, a final billing for the energy
amount is completed and claims are filed in the bankruptcy. In the majority
of commercial and industrial filings involving Chapter 11 bankruptcy
filings, an attempt is made to obtain a security deposit from the new
entity. These deposits are typically held until a formal reorganization
plan has been established or timely payments over a predetermined period
have been received from the customer.
WRITE-OFF PROCESS
Consumers sends final billed accounts to an external collection
agency approximately 30 days after the due date of an unpaid final bill.
Final bills are issued to customers in three circumstances:
o a customer requests discontinuation of energy service from
Consumers or voluntarily discontinues its receipt of energy
service during the credit cycle,
o a customer has had energy service physically disconnected for
nonpayment of a final bill for 10 days, and
o a customer has had energy service physically disconnected for
nonpayment of a final bill and at the same location a new customer
requests energy service.
Upon receipt of an unpaid final bill, the collection agency takes a number
of progressive collection steps to solicit payment from the customer. If
the past due amount remains unpaid approximately 100 days after a final
bill has been issued, which is approximately 210 to 225 days from the
beginning of the credit collection cycle, the account is written-off as
uncollectible. At the point of write-off, the uncollectible accounts are
distributed among three external collection agencies for a final attempt at
collection. On a monthly basis, net write-offs are calculated from the
gross write-offs for the month by subtracting recoveries which include
payments, deposits, transfers and adjustments for that month.
RESTORATION OF SERVICE
Prior to restoring service that has been disconnected, Consumers
has the right to require payment of all of the following charges: (1) the
total past due amount owing for which the service was disconnected, (2) a
security deposit in accordance with Consumers' tariffs, (3) a restoration
charge in accordance with Consumers' tariffs, (4) a meter relocation charge
in accordance with Consumers' tariffs, and (5) actual costs associated with
the theft of energy, stolen meters or fraudulent switched meters in
accordance with Consumers' tariffs.
Consumers may change its credit, billing, collections and
termination/restoration of service policies and procedures from time to
time. It is expected that any such changes would be designed to enhance
Consumers' ability to bill and collect customer charges on a timely basis.
Under the servicing agreement, any changes to customary billing and
practices instituted by Consumers will apply to collections of the
securitization charge so long as Consumers is the servicer.
Termination of Service for Certain Residential Customers in the
Winter. The winter protection program prevents discontinuance of service of
electric and gas service to qualified residential customers during the
heating season, currently from November 1 to March 31. Consumers cannot
shut off service to an eligible customer during the heating season for
nonpayment of a delinquent account if the customer is an eligible senior
citizen customer or if the customer pays to Consumers a monthly amount
equal to 7% of the estimated annual bill for the eligible customer and the
eligible customer demonstrates, within 14 days of requesting shutoff
protection, the he or she has made application for state or federal heating
assistance. If an arrearage exists at the time an eligible customer applies
for protection from shutoff of service during the heating season, Consumers
will permit the customer to pay the arrearage in equal monthly installments
until the subsequent winter protection program begins. Consumers may shut
off service to an eligible low-income customer who does not pay the monthly
amounts after giving proper notice. At the conclusion of the heating
season, Consumers reconciles the accounts of eligible customers and permits
customers to pay any amounts owing in equal monthly installments between
April 1 and November 1. Consumers may also shut off service to eligible
customers who fail to make these installments payments on a timely basis.
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth information relating to Consumers'
total billed revenues and delinquency and write-off experience for the past
several years. Such historical information is presented because Consumers'
actual experience with respect to delinquencies and write-offs may affect
the timing of securitization charge revenue collections. Consumers expects,
but cannot assure, that the delinquency and write-off experience with
respect to securitization charge revenue collections will not differ
substantially from the rates indicated.
Delinquency and write-off data is affected by factors such as the
overall economy, weather and changes in collection practices. While
delinquency ratios as a percentage of total retail billings have remained
largely consistent over the past three and one-half years, uncollectible
charge-off experience has improved significantly. Significant factors
influencing this positive trend include:
o increased emphasis on field collection and disconnection for
non-payment,
o improved recovery results at external collection agencies, o
internal system enhancements which have assisted in the
identification of potentially "high risk" accounts,
o final billed and uncollectible accounts have been placed on-line
to enable Consumers to transfer these debts to active energy
accounts more efficiently,
o initiation of a dedicated fraud section within the credit and
collection operation which specifically investigates situations
involving potential customer identification fraud, and o increased
use of additional and convenient payment options such as credit
cards, checks by telephone and automated pay agents for all
customers.
There can be no assurance, however, that this positive trend will continue
and changes in the retail electric market could result in delinquency and
write-off ratios that vary materially from those presented in the tables
below.
The following table shows Consumers total delinquencies as a percentage of
total billed revenues for the past six years for all electric customers.
TABLE 6
DELINQUENCIES AS A PERCENTAGE OF BILLED RETAIL
REVENUES
================================================
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
----------- ---------- ----------- ------------- ----------
RESIDENTIAL
0-30 days 2.34% 1.84% 1.82% 1.65% 2.03%
31-60 days 0.37% 0.36% 0.43% 0.46% 0.50%
61-90 days 0.17% 0.17% 0.22% 0.22% 0.24%
90 + days 0.29% 0.30% 0.31% 0.33% 0.35%
NON-RESIDENTIAL
0-30 days 1.30% 0.69% 0.81% 0.78% 0.91%
31-60 days 0.06% 0.05% 0.08% 0.06% 0.07%
61-90 days 0.03% 0.02% 0.03% 0.03% 0.08%
90 + days 0.06% 0.12% 0.04% 0.09% 0.23%
The following table shows Consumers' total write-offs as a percentage of
total billed revenues for the past five years for all electric customers.
TABLE 7
WRITE-OFFS AS A PERCENTAGE OF BILLED ELECTRIC REVENUES
FOR THE YEAR ENDED
---------------------------------------------- ----------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------- -------- -------- -------- --------
RESIDENTIAL...... 0.74% 0.60% 0.41% 0.35% 0.44%
NON-RESIDENTIAL.. 0.05% 0.05% 0.16% 0.04% 0.10%
TOTAL............ 0.31% 0.25% 0.26% 0.16% 0.23%
Write-offs reflect amounts recovered by Consumers from deposits,
bankruptcy proceedings and payments received once an account has been
either written-off by Consumers or transferred to one of its external
collection agencies.
HOW CONSUMERS WILL APPLY PARTIAL PAYMENTS BY ITS CUSTOMERS
The MPSC financing order requires that Consumers allocate partial
payments of electricity bills proportionately among the securitization
charge, the tax charge and other billed amounts, including any accrued
interest and late fees, based on the ratio of the amount of that component
of the bill to the amount of the total bill.
CONSUMERS FUNDING LLC, THE ISSUER
Consumers Funding LLC, the issuer of the securitization bonds, was
formed as a Delaware limited liability company on October 11, 2000 pursuant
to a limited liability company agreement of Consumers as sole member of the
issuer. The assets of the issuer are limited to the securitization property
which was sold to the issuer, the trust funds held by the trustee, the
rights of the issuer under the transaction documents, any third party
credit enhancement or rights under any interest rate swap agreement and any
money distributed to the issuer from the collection account in accordance
with the indenture and not distributed to Consumers. The MPSC financing
order and the indenture provide that the securitization property, as well
as the other collateral described in the MPSC financing order and the
indenture, will be pledged by the issuer to the trustee. Pursuant to the
indenture, the securitization charge revenue collections remitted to the
trustee by the servicer must be used to pay the securitization bonds and
other obligations of the issuer specified in the indenture. As of the date
of this prospectus, the issuer has not carried on any business activities
and has no operating history. Audited financial statements of the issuer as
of [ ], [ ] are included in this prospectus.
The Issuer's Purpose. The issuer has been created solely for the
purposes of:
o purchasing and owning the securitization property;
o issuing one or more series of securitization bonds, each
of which may be comprised of one or more classes, from
time to time;
o pledging its interest in the securitization property and
other collateral to the trustee under the indenture in
order to secure the securitization bonds; and
o performing activities that are necessary, suitable or
convenient to accomplish these purposes, including the
execution of any interest rate swap agreement or hedging
arrangement incident to the issuance of securitization
bonds.
The Interaction Between Consumers and the Issuer. On the issue
date for each series, Consumers will sell securitization property to the
issuer pursuant to the sale agreement between the issuer as buyer and
Consumers as seller. Consumers will service the securitization property
pursuant to a servicing agreement with the issuer. Consumers and any
successor in the capacity of servicer are referred to as the servicer.
The Issuer's Management. The issuer's business will be managed by
five managers, referred to as the managers, appointed from time to time by
Consumers or, in the event that Consumers transfers its interest in the
issuer, by the new owner or owners. The issuer will have at all times
following the initial issuance of the securitization bonds at least two
independent managers who, among other things, are not and have not been for
at least five years from the date of their appointment:
o a direct or indirect legal or beneficial owner of the
issuer or Consumers or any of their respective
affiliates,
o a relative, supplier, employee, officer, director,
manager, contractor or material creditor of the issuer or
Consumers or any of their respective affiliates, or
o a person who controls Consumers or its affiliates.
The remaining managers will be employees or officers of Consumers. The
managers will devote the time necessary to conduct the affairs of the
issuer.
The following are the managers as of the date of this prospectus:
NAME AGE POSITION AT CONSUMERS
Alan M. Wright 54 Senior Vice President and Chief Financial Officer
David A Mikelonis 51 Senior Vice President and General Counsel
Thomas A. McNish 63 Vice President and Secretary
Consumers, as the sole member of the issuer, will appoint the two
independent managers prior to the issuance of the initial series of
securitization bonds.
None of the managers has been involved in any legal proceedings
which are specified in Item 401(f) of the SEC's Regulation S-K.
The Managers' Compensation and Limitation on Liabilities. The
issuer has not paid any compensation to any manager since the issuer was
formed. The managers other than the independent managers will not be
compensated by the issuer for their services on behalf of the issuer. The
independent managers will be paid quarterly fees from the revenues of the
issuer and will be reimbursed for their reasonable expenses. These expenses
include, without limitation, the reasonable compensation, expenses and
disbursements of such agents, representatives, experts and counsel as the
independent managers may employ in connection with the exercise and
performance of their rights and duties under the issuer's limited liability
company agreement, the indenture, the sale agreement and the servicing
agreement. The limited liability company agreement provides that the
managers will not be personally liable under any circumstances except for:
o liabilities arising from their own willful misconduct or
gross negligence,
o liabilities arising from the failure by any of the
managers to perform obligations expressly undertaken in
the issuer's limited liability company agreement, or
o taxes, fees or other charges, based on or measured by any
fees, commissions or compensation received by the
managers in connection with the transactions described in
this prospectus.
The limited liability company agreement further provides that, to the
fullest extent permitted by law, the issuer shall indemnify the managers
against any liability incurred in connection with their services as
managers for the issuer except in the cases described above.
The Issuer is a Separate and Distinct Legal Entity. The issuer's
limited liability company agreement provides that the issuer may not file a
voluntary petition for relief under the Bankruptcy Code without the
unanimous vote of its managers, including the independent managers.
Consumers has agreed that it will not cause the issuer to file a voluntary
petition for relief under the Bankruptcy Code. The limited liability
company agreement requires the issuer:
o to take all reasonable steps to continue its identity as
a separate legal entity;
o to make it apparent to third persons that it is an entity
with assets and liabilities distinct from those of
Consumers, other affiliates of Consumers, the managers or
any other person; and
o to make it apparent to third persons that, except for
federal and state tax purposes, it is not a division of
Consumers or any of its affiliated entities or any other
person.
The principal place of business of the issuer is [ ], Jackson,
Michigan 49201, and its telephone number is [ ].
Administration Agreement. Consumers will provide administrative
services for the issuer pursuant to an administration agreement between the
issuer and Consumers. The issuer will pay Consumers a market rate fee for
performing these services.
INFORMATION AVAILABLE TO THE SECURITIZATION BONDHOLDERS
The issuer has filed with the SEC a registration statement under
the Securities Act, with respect to the securitization bonds. This
prospectus, which forms a part of the registration statement, and any
prospectus supplement describe the material terms of some documents filed
as exhibits to the registration statement. However, this prospectus and any
prospectus supplement do not contain all of the information contained in
the registration statement and its exhibits. Any statements contained in
this prospectus or any prospectus supplement concerning the provisions of
any document filed as an exhibit to the registration statement or otherwise
filed with the SEC are not necessarily complete, and in each instance
reference is made to the copy of the document so filed. For further
information, reference is made to the registration statement and the
exhibits thereto, which are available for inspection without charge at the
public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its regional offices located as
follows: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of the
registration statement and exhibits thereto may be obtained at the above
locations at prescribed rates and, for so long as any securitization bonds
are listed on the Luxembourg Stock Exchange and the rules of that exchange
so require, will be available for inspection by the holders of any listed
securitization bonds at the office of the listing agent in Luxembourg.
Information as to the operation of the public reference facilities is
available by calling the SEC at 1-800-SEC-0330. Information filed with the
SEC can also be inspected at the SEC site on the World Wide Web at
http://www.sec.gov. The issuer will file with the SEC all periodic reports
as are required by the Exchange Act and the rules, regulations or orders of
the SEC thereunder. The issuer may discontinue filing periodic reports
under the Exchange Act at the beginning of the fiscal year following the
issuance of the securitization bonds of any series if there are fewer than
300 holders of the securitization bonds.
All reports and other documents filed by the issuer pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of this prospectus and prior to the termination of the offering of the
securitization bonds will be deemed to be incorporated by reference into
this prospectus and to be a part hereof. Any statement contained in this
prospectus, in a prospectus supplement or in a document incorporated or
deemed to be incorporated by reference in this prospectus or in the
prospectus supplement will be deemed to be modified or superseded for
purposes of this prospectus and any prospectus supplement to the extent
that a statement contained in this prospectus, in a prospectus supplement
or in any separately filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes that statement. Any
statement so modified or superseded will not be deemed, except as so
modified or superseded, to constitute part of this prospectus or any
prospectus supplement. The issuer will provide without charge to each
person to whom a copy of this prospectus is delivered, on the written or
oral request of this person, a copy of any or all of the documents
incorporated herein by reference, except for the exhibits which are not
specifically incorporated by reference in the documents. Written requests
for these copies should be directed to the issuer, [Suite ], 212 West
Michigan Avenue, Jackson, Michigan 49201. Telephone requests for these
copies should be directed to the issuer at [ ]. In addition, for so long as
any securitization bonds are listed on the Luxembourg Stock Exchange and
the rules of that exchange so require, these documents will be available
for inspection by the holders of any listed securitization bonds at the
office of the listing agent in Luxembourg.
THE SECURITIZATION BONDS
The securitization bonds will be issued under and secured by the
indenture between the issuer and the trustee substantially in the form
filed as an exhibit to the registration statement of which this prospectus
forms a part. The terms of each series of securitization bonds will be
provided in the indenture and the related supplemental indenture. The
following summary, together with the terms of a particular series of
securitization bonds which are described in the prospectus supplement,
describes all material terms and provisions of the securitization bonds.
GENERAL TERMS OF THE SECURITIZATION BONDS
The securitization bonds may be issued in one or more series, each
made up of one or more classes. The terms of a series may differ from the
terms of another series, and the terms of a class may differ from the terms
of another class of the same series. The terms of each series will be
specified in the related prospectus supplement and supplemental indenture.
The indenture requires, as a condition to the issuance of each
series of securitization bonds, that such issuance will not result in any
rating agency reducing or withdrawing its then current rating of any
outstanding series or class of securitization bonds. The requirement of
confirmation by each of Moody's, S&P and Fitch, to the seller, the
servicer, the trustee and the issuer that any action will not result in a
reduction or withdrawal of its then current ratings is referred to as the
rating agency condition. In circumstances other than the original issuance
of a series of securitization bonds, however, so long as Moody's is
notified of the proposed action, the rating agency condition may be
satisfied with respect to Moody's by notice to Moody's without such
confirmation from Moody's.
PAYMENTS OF INTEREST ON AND PRINCIPAL OF THE SECURITIZATION BONDS
Interest will accrue on the outstanding principal balance of
securitization bonds of a series or class at the interest rate specified in
or determined in the manner specified in the related prospectus supplement.
Interest will be payable to the securitization bondholders of a series or
class on each payment date, commencing on the first payment date specified
in the related prospectus supplement. On any payment date with respect to
any series, the issuer will make principal payments on that series only
until the outstanding principal balance thereof has been reduced to the
principal balance specified for that payment date in the expected
amortization schedule for that series, but only to the extent funds are
available for that series as described in this prospectus. Accordingly,
principal of the series or class of securitization bonds may be paid later,
but not sooner, than reflected in the expected amortization schedule
therefor, except in a case of any applicable optional redemption or
acceleration. See "Risk Factors -- Other Risks Associated With An
Investment In The Securitization Bonds" and " -- Servicing Risks" in this
prospectus.
The indenture provides that failure to pay the entire outstanding
principal balance of the securitization bonds of any series or class by the
applicable expected final payment date will not result in an event of
default under the indenture until after the applicable final maturity date
for the series or class, as applicable.
On each payment date, the amount required to be paid as principal
of the securitization bonds of each series, from securitization charge
revenue collections allocable to that series, the capital subaccount and
overcollateralization subaccount for that series, and the reserve
subaccount for all series, will equal:
o the outstanding principal balance of any securitization
bonds of each class of that series due if that payment
date is the final payment date of that class; plus
o the outstanding principal balance of any securitization
bonds of each class of that series called for redemption;
plus
o the outstanding principal balance of any securitization
bonds of each class of that series upon acceleration
following those events of default specified in the
indenture; plus
o the principal scheduled to be paid on each class of that
series of securitization bonds on that payment date, plus
any scheduled principal not paid on prior payment dates.
The entire outstanding principal balance of a series of
securitization bonds will be due and payable if:
o an event of default as specified in the indenture occurs
and is continuing and
o the trustee or the holders of a majority in principal
amount of the securitization bonds of all series then
outstanding, voting as a group, have declared the
securitization bonds to be immediately due and payable.
See "The Indenture -- What Constitutes an Event of Default on the
Securitization Bonds" and "Weighted Average Life and Yield Considerations
for the Securitization Bonds" in this prospectus.
FLOATING RATE SECURITIZATION BONDS
In connection with the issuance of any class of floating rate
securitization bonds, the issuer may enter into or arrange for one or more
interest rate swap or cap transactions. The related prospectus supplement
will include a description of:
o the material terms of any interest rate swap or cap
transaction,
o the identity of any interest rate swap counterparty or
cap provider,
o any payments due to be paid by or to the issuer or the
trustee under any interest rate swap or cap transaction,
o scheduled deposits in and withdrawals from any class
subaccount of the collection account with respect to any
interest rate swap or cap transaction,
o the formula for calculating the floating rate of interest
of any floating interest rate class, and
o the rights of securitization bondholders with respect to
any interest rate swap or cap transaction, including any
right of termination of or amendment to the interest rate
swap or cap agreement.
Under the indenture, the issuer is obligated to perform all of its
obligations pursuant to any interest rate swap or cap agreement to which it
is a party.
REDEMPTION OF THE SECURITIZATION BONDS
If so specified in the related prospectus supplement, the issuer
may redeem at its option any series of securitization bonds on any payment
date if the outstanding principal balance of such series, after giving
effect to payments to be made on that payment date, is less than 5% of the
initial principal balance of that series of securitization bonds. If so
specified in the related prospectus supplement, additional optional
redemption provisions may apply to a series of securitization bonds. The
redemption price will, in each case, equal the outstanding principal amount
of the securitization bonds being redeemed plus accrued interest to the
date of redemption. Notice of redemption of any series of securitization
bonds will be given by the trustee to each registered holder of a
securitization bond by first-class mail, postage prepaid, mailed not less
than 15 days nor more than 45 days prior to the date of redemption or in
another manner or at another time as may be specified in the related
prospectus supplement. For so long as any securitization bonds are listed
on the Luxembourg Stock Exchange and the rules of that exchange so require,
notice of redemption also will be given by publication in a daily newspaper
in Luxembourg, expected to be the Luxemburger Wort, not less than 10 days
prior to the date of redemption.
All securitization bonds called for redemption will cease to bear
interest on or after the specified redemption date, if the redemption price
is on deposit with the trustee at that time, and will no longer be
considered "outstanding" under the indenture. The securitization
bondholders will have no further rights with respect thereto, except to
receive payment from the trustee of the redemption price thereof.
CREDIT ENHANCEMENT FOR THE SECURITIZATION BONDS
Credit enhancement with respect to the securitization bonds of
each series will be provided principally by adjustments to the
securitization charge and amounts on deposit in the reserve subaccount for
all series and the overcollateralization subaccount and capital subaccount
for that series. In addition, for any series of securitization bonds or one
or more classes thereof, additional credit enhancement, if any, may be
provided. The amounts and types of additional credit enhancement, if any,
and the provider of any such additional credit enhancement with respect to
each series of securitization bonds or one or more classes thereof will be
described in the related prospectus supplement. Additional credit
enhancement may be in the form of:
o an additional reserve subaccount,
o subordination of one series for the benefit of another,
o additional overcollateralization,
o a financial guaranty insurance policy,
o a letter of credit,
o a credit or liquidity facility,
o a repurchase obligation,
o a third party payment or other support obligation,
o a cash deposit or other similar credit enhancement, or
o any combination of the foregoing, as may be set forth in
the related prospectus supplement.
If specified in the related prospectus supplement, credit enhancement for a
series of securitization bonds may cover one or more other series of
securitization bonds. See "Risk Factors -- Securitization Bondholders May
Experience Payment Delays or Losses as a Result of the Limited Sources of
Payment for the Securitization Bonds and Limited Credit Enhancement" in
this prospectus.
SECURITIZATION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM
Unless otherwise specified in the related prospectus supplement,
all classes of securitization bonds will initially be represented by one or
more bonds registered in the name of DTC, or another securities depository.
The securitization bonds will be available to investors only in the form of
book-entry securitization bonds. Securitization bondholders may also hold
securitization bonds through Clearstream Banking, Luxembourg, S.A.,
referred to as Clearstream, or Euroclear in Europe, if they are
participants in one of those systems or indirectly through participants.
The Role of DTC, Clearstream and Euroclear. DTC will hold the
global bond or bonds representing the securitization bonds. Clearstream and
Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Clearstream's and Euroclear's
names on the books of their respective depositories. These depositories
will in turn hold these positions in customers' securities accounts in the
depositories' names on the books of DTC.
The Function of DTC. DTC is a limited purpose trust company
organized under the laws of the State of New York, and is a member of the
Federal Reserve System. DTC is a "clearing corporation" within the meaning
of the New York Uniform Commercial Code and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and
settlement of securities transactions between participants through
electronic book-entries, thereby eliminating the need for physical movement
of securities. Direct participants of DTC include securities brokers and
dealers, banks, trust companies, clearing corporations and some other
organizations. DTC is owned by a number of its direct participants and by
the New York Stock Exchange, Inc., the Nasdaq-Amex Market Group and the
National Association of Securities Dealers, Inc. Access to DTC's system is
also available to indirect participants.
The Function of Clearstream. Clearstream holds securities for its
customers and facilitates the clearance and settlement of securities
transactions between Clearstream customers through electronic book-entry
changes in accounts of Clearstream customers, thereby eliminating the need
for physical movement of securities. Transactions may be settled by
Clearstream in any of 36 currencies, including United States dollars.
Clearstream provides to its customers, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Clearstream also
deals with domestic securities markets in over 30 countries through
established depository and custodial relationships. Clearstream is
registered as a bank in Luxembourg, subject to regulation by the Commission
de Surveillance du Secteur Financier, which supervises Luxembourg banks.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream.
Clearstream has established an electronic bridge with Euroclear Bank
S.A./N.V. as the Operator of the Euroclear System, referred to as the
Euroclear Operator or Euroclear, to facilitate settlement of trades between
Clearstream and Euroclear. In November 2000, Clearstream and Euroclear
signed an agreement, effective in 2001, to establish a new daytime
transaction processing capability, to supplement the existing bridge
between Clearstream and Euroclear. The new daytime bridge will initially
operate manually, but it is expected to become automated by the end of
2001.
Clearstream and Euroclear customers are world-wide financial
institutions, including underwriters, securities brokers and dealers,
banks, custodians and other institutions professionally engaged in the
securities markets. Indirect access to Clearstream and Euroclear is
available to other institutions that clear through or maintain a custodial
relationship with an account holder of either system.
The Function of Euroclear. Euroclear was created in 1968 to hold
securities for Euroclear participants and to clear and settle transactions
between Euroclear participants through simultaneous electronic book-entry
delivery against payment. By performing these functions, Euroclear
eliminated the need for physical movement of securities and also eliminated
any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 27 currencies, including United
States dollars. The Euroclear System includes various other services,
including securities lending and borrowing, and arrangements with domestic
markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described below. The Euroclear System is
operated by the Euroclear Operator, under contract with the Euroclear
Clearance System S.C., a Belgian cooperative corporation, referred to as
the Cooperative. All operations are conducted by the Euroclear Operator,
and all Euroclear securities clearance accounts and Euroclear cash accounts
are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
participants. Euroclear participants include central banks, commercial
banks, securities brokers and dealers and other professional financial
intermediaries and may include any underwriters, agents or dealers with
respect to any class of securitization bonds offered in this prospectus or
in the related prospectus supplement. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear participant, either directly or indirectly.
Terms and Conditions of Euroclear. Securities clearance accounts
and cash accounts with the Euroclear Operator are governed by the Terms and
Conditions Governing Use of Euroclear and the related Operating Procedures
of Euroclear and applicable Belgian law which are referred to in this
prospectus as the Terms and Conditions. The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific securities to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear participants and has no record of or
relationship with persons holding through Euroclear participants.
The Rules for Transfers Among DTC, Clearstream or Euroclear
Participants. Transfers between participants will occur in accordance with
DTC rules. Transfers between Clearstream customers and Euroclear
participants will occur in accordance with their respective rules and
operating procedures. Cross-market transfers between persons holding
directly or indirectly through DTC, on the one hand, and directly or
indirectly through Clearstream customers or Euroclear participants, on the
other, will be effected in DTC in accordance with DTC rules on behalf of
the relevant European international clearing system by its depository.
Cross-market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in this
system in accordance with its rules and procedures and within its
established deadlines, in European time. The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its depository to take action to
effect final settlement on its behalf by delivering or receiving
securitization bonds in DTC, and making or receiving payments in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Clearstream customers and Euroclear participants may not deliver
instructions directly to the depositories.
DTC Will be the Holder of the Issuer's Securitization Bonds.
Unless and until definitive certificated securitization bonds are issued to
beneficial owners of the securitization bonds, which securitization bonds
are referred to as certificated securitization bonds, it is anticipated
that the only "holder" of securitization bonds of any series will be DTC.
Securitization bondholders will only be permitted to exercise their rights
as securitization bondholders indirectly through participants and DTC. All
references herein to actions by securitization bondholders thus refer to
actions taken by DTC upon instructions from its participants, unless
certificated securitization bonds are issued. In addition, all references
herein to payments, notices, reports and statements to securitization
bondholders refer to payments, notices, reports and statements to DTC, as
the registered holder of the securitization bonds, for subsequent payments
to the beneficial owners of the securitization bonds in accordance with DTC
procedures, unless certificated securitization bonds are issued.
Book-Entry Transfers and Transmission of Payments. Except under
the circumstances described below, while any book-entry securitization
bonds of a series are outstanding, under DTC's rules, DTC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the book-entry securitization bonds. In addition, DTC is
required to receive and transmit payments of principal of, and interest on,
the book-entry securitization bonds. Participants with whom securitization
bondholders have accounts with respect to book-entry securitization bonds
are similarly required to make book-entry transfers and receive and
transmit these payments on behalf of their respective securitization
bondholders. Accordingly, although securitization bondholders will not
possess certificated securitization bonds, DTC's rules provide a mechanism
by which securitization bondholders will receive payments and will be able
to transfer their interests.
DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and some banks. Thus, the ability of
holders of beneficial interests in the securitization bonds to pledge
securitization bonds to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of these securitization
bonds, may be limited due to the lack of certificated securitization bonds.
DTC has advised the trustee that it will take any action permitted
to be taken by a securitization bondholder under the indenture only at the
direction of one or more participants to whose account with DTC the
securitization bonds are credited.
How Securitization Bond Payments Will Be Credited by Clearstream
and Euroclear. Payments with respect to securitization bonds held through
Clearstream or Euroclear will be credited to the cash accounts of
Clearstream customers or Euroclear participants in accordance with the
relevant systems' rules and procedures, to the extent received by its
depository. These payments will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Material Income
Tax Matters for the Securitization Bonds" in this prospectus. Clearstream
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a securitization bondholder under the indenture on
behalf of a Clearstream customer or Euroclear participant only in
accordance with its relevant rules and procedures and subject to its
depository's ability to effect these actions on its behalf through DTC.
DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securitization bonds among
customers or participants of DTC, Clearstream and Euroclear. However, they
are under no obligation to perform or continue to perform these procedures
and these procedures may be changed or discontinued at any time.
CERTIFICATED SECURITIZATION BONDS
The Circumstances That Will Result in the Issuance of Certificated
Securitization Bonds. Unless otherwise specified in the related prospectus
supplement, each class of securitization bonds will be issued in fully
registered, certificated form to beneficial owners of securitization bonds
or other intermediaries, rather than to DTC, only if:
o the issuer advises the trustee in writing that DTC is no
longer willing or able to discharge properly its
responsibilities as depository with respect to that class
of securitization bonds and the issuer is unable to
locate a qualified successor;
o the issuer, at its option, elects to terminate the
book-entry system through DTC; or
o after the occurrence of an event of default under the
indenture, beneficial owners of securitization bonds
representing at least a majority of the outstanding
principal balance of the securitization bonds of all
series advise the trustee through DTC in writing that the
continuation of a book-entry system through DTC, or a
successor thereto, is no longer in the securitization
bondholders' best interest.
The Delivery of Certificated Securitization Bonds. Upon the
occurrence of any event described in the immediately preceding paragraph,
DTC will be required to notify the trustee and all affected beneficial
owners of securitization bonds through participants of the availability of
certificated securitization bonds. Upon surrender by DTC of the
securitization bonds in the possession of DTC that had represented the
applicable securitization bonds and receipt of instructions for
re-registration, the trustee will authenticate and deliver certificated
securitization bonds to the beneficial owners. Any certificated
securitization bonds listed on the Luxembourg Stock Exchange will be made
available to the beneficial owners of such securitization bonds through the
office of the transfer agent in Luxembourg. Thereafter, the trustee will
recognize the holders of any of these certificated securitization bonds as
the securitization bondholders under the indenture.
The Payment Mechanism for Certificated Securitization Bonds.
Payments of principal of, and interest on, certificated securitization
bonds will be made by the trustee, as paying agent, in accordance with the
procedures set forth in the indenture. These payments will be made directly
to holders of certificated securitization bonds in whose names the
certificated securitization bonds were registered at the close of business
on the related record date specified in each prospectus supplement. These
payments will be made by check mailed to the address of the holder as it
appears on the register maintained by the trustee.
The Transfer or Exchange of Certificated Securitization Bonds.
Certificated securitization bonds will be transferable and exchangeable at
the offices of the transfer agent and registrar, which will initially be
the trustee. No service charge will be imposed for any registration of
transfer or exchange, but the transfer agent and registrar may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
Final Payments on Securitization Bonds. The final payment on any
securitization bond, however, will be made only upon presentation and
surrender of the securitization bond at the office or agency specified in
the notice of final payment to securitization bondholders. The final
payment of any securitization bond listed on the Luxembourg Stock Exchange
may also be made upon presentation and surrender of the securitization bond
at the office of the paying agent in Luxembourg as specified in the notice
of final distribution. A notice of such final distribution will be
published in a daily newspaper in Luxembourg, which is expected to be the
Luxemburger Wort, not later than the fifth day of the month of such final
distribution. Certificated securitization bonds listed on the Luxembourg
Stock Exchange will also be transferable and exchangeable at the offices of
the transfer agent in Luxembourg. With respect to any transfer of these
listed certificated securitization bonds, the new certificated
securitization bonds registered in the names specified by the transferee
and the original transferor will be available at the offices of the
transfer agent in Luxembourg.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE SECURITIZATION BONDS
The rate of principal payments, the amount of each interest
payment and the actual final payment date for each series or class of
securitization bonds will be dependent on the rate and timing of receipt of
securitization charge revenue collections and the effectiveness of credit
enhancement. Accelerated receipts of securitization charge revenue
collections will not, however, result in payment of principal of the
securitization bonds earlier than the related expected final payment dates.
This is because receipts in excess of the amounts necessary to amortize the
securitization bonds in accordance with the applicable expected
amortization schedule, to pay interest on the securitization bonds and to
pay the remainder of the periodic payment requirement will be allocated to
the reserve subaccount. However, delayed receipts of securitization charge
revenue collections may result in principal payments on the securitization
bonds occurring more slowly than as reflected in the expected amortization
schedule or later than the related expected final payment dates. Optional
redemption of any class or series of securitization bonds or acceleration
of the final maturity date after an event of default will result in payment
of principal earlier than the related expected final payment dates.
The Effect of Securitization Charge Revenue Collections on the
Timing of Securitization Bond Payments. The actual payments on each payment
date for each series or class of securitization bonds and the weighted
average life thereof will be affected primarily by the rate and the timing
of receipt of securitization charge revenue collections. Amounts available
in the reserve subaccount, the series overcollateralization subaccount and
the series capital subaccount may also affect the weighted average life of
that series of securitization bonds. The securitization charge will be
calculated based on, among other things, estimates of kWh deliveries of
electricity to customers and estimates of expenses, rates of collections
and delinquencies and write-offs. However, the aggregate amount of
securitization charge revenue collections and the rate of principal
amortization of the securitization bonds will depend, in part, on actual
kWh deliveries to customers and rates of collections and delinquencies and
write-offs. There can be no assurance that the servicer will forecast
accurately actual electricity usage and the rate of collections or
implement adjustments to the securitization charge that will cause
securitization charge revenue collections to be received at the targeted
rate.
A payment on a date that is later than the expected final payment
date might result in a longer weighted average life. In addition, if
scheduled payments on the securitization bonds are received later than the
applicable scheduled payment dates, this will result in a longer weighted
average life of the securitization bonds. See "Risk Factors -- Servicing
Risks" and "The MPSC Financing Order and the Securitization Charge -- The
MPSC's Securitization Charge Adjustment Process" in this prospectus.
THE SALE AGREEMENT
The following summary describes all material terms of the sale
agreement pursuant to which Consumers is selling and the issuer is
purchasing the securitization property. The sale agreement may be amended
by the parties thereto, with the consent of the trustee, if notice of the
amendment is provided by the issuer to each rating agency and the rating
agency condition has been satisfied. The form of the sale agreement has
been filed as an exhibit to the registration statement of which this
prospectus is a part.
CONSUMERS' SALE AND ASSIGNMENT OF SECURITIZATION PROPERTY
On the initial transfer date, pursuant to the sale agreement, the
seller will sell and assign to the issuer, without recourse, except as
provided in the sale agreement, the initial securitization property. The
securitization property includes the irrevocable right to receive through
the securitization charge amounts sufficient to recover qualified costs
with respect to the related series of securitization bonds. The proceeds
received by the issuer from the sale of the securitization bonds after
payment of issuer's expenses will be applied to the purchase of the
securitization property. In addition, the seller may from time to time
offer to sell additional securitization property to the issuer, subject to
the satisfaction of the conditions specified in the sale agreement and the
indenture. Each subsequent sale will be financed through the issuance of an
additional series of securitization bonds. If this offer is accepted by the
issuer, the subsequent sale will be effective on a subsequent transfer
date.
In accordance with the Customer Choice Act, upon the issuance of
the MPSC financing order, the execution and delivery of the sale agreement
and the related bill of sale and the filing of a financing statement under
the Uniform Commercial Code, the transfer by the seller to the issuer of
the initial securitization property will be perfected as against all third
persons, including judicial and other lien creditors. In addition, upon the
execution of a subsequent bill of sale and the filing of a financing
statement under the Uniform Commercial Code, a transfer by the seller to
the issuer of subsequent securitization property will also be perfected
against all third persons, including judicial and other lien creditors. The
sale agreement provides that in the event that the transfer of the
securitization property is determined by a court not to be a true sale as
contemplated by the Customer Choice Act, then the transfer shall be treated
as a pledge of the securitization property and the seller shall be deemed
to have granted a security interest to the issuer in the securitization
property, which security interest will secure a payment obligation of the
seller to the issuer in an amount equal to the purchase price for the
securitization property.
The initial securitization property is the securitization
property, as identified in the related bill of sale, sold to the issuer on
the initial transfer date pursuant to the sale agreement in connection with
the issuance of the initial series of securitization bonds. The subsequent
securitization property is the securitization property, as identified in
the related bill of sale, sold to the issuer on any subsequent transfer
date pursuant to the sale agreement in connection with the subsequent
issuance of a series of securitization bonds.
CONSUMERS' REPRESENTATIONS AND WARRANTIES
In the sale agreement, the seller will make representations and
warranties to the issuer as of the initial transfer date and any subsequent
transfer date to the effect, among other things, that:
1. all information provided by the seller to the issuer with
respect to the securitization property is correct in all
material respects;
2. the transfers and assignments contemplated by the sale
agreement constitute sales of the initial securitization
property or the subsequent securitization property, as
the case may be, from the seller to the issuer, the
seller will have no right, title or interest in the
securitization property and the securitization property
would not be part of the estate of the seller as debtor
in the event of the filing of a bankruptcy petition by or
against the seller under any bankruptcy law;
3. a. the seller is the sole owner of the
securitization property being sold to the issuer
on the initial transfer date or subsequent
transfer date, as applicable,
b. the securitization property will be validly
transferred and sold to the issuer free and
clear of all liens other than liens created by
the issuer pursuant to the indenture, and
c. all filings (including filings with the Michigan
Secretary of State under the Uniform Commercial
Code) necessary in any jurisdiction to give the
issuer a valid perfected ownership interest in
the transferred securitization property, free
and clear of all liens of the seller or anyone
else claiming through the seller, have been
taken or made;
4. the MPSC financing order has been issued by the MPSC in
accordance with the Customer Choice Act, the MPSC
financing order and the process by which it was issued
comply with all applicable laws, rules and regulations
and the MPSC financing order is in full force and effect
and is final and non-appealable;
5. as of the date of issuance of any series of
securitization bonds, the securitization bonds are
entitled to the protections provided by the Customer
Choice Act and, in accordance with the Customer Choice
Act, the MPSC financing order and the securitization
charge, subject to the periodic adjustments to the
securitization charge provided for in the MPSC financing
order, have become irrevocable;
6. a. under the Customer Choice Act, the State of
Michigan may not impair the value of the
securitization property, reduce or alter (except
as allowed under the securitization charge
adjustment provisions), or impair the
securitization charge to be imposed, collected
and remitted to the issuer, until the principal,
interest and premium, and any other charges
incurred and contracts to be performed in
connection with the securitization bonds have
been paid and performed in full; and
b. under the contract clauses of the State of
Michigan and the United States constitutions,
the State of Michigan, including the MPSC, could
not constitutionally take any action of a
legislative character, including, but not
limited to, the repeal or amendment of the
Customer Choice Act or the MPSC financing order
(including repeal or amendment by voter
initiative and by the amendment of the Michigan
Constitution), that would substantially impair
the value of the securitization property or
substantially reduce, alter or impair the
securitization charges to be imposed, collected
and remitted to the issuer, unless this action
is a reasonable exercise of the State of
Michigan's sovereign powers and of a character
reasonable and appropriate to the public purpose
justifying this action and, under the takings
clauses of the Michigan and United States
constitutions, the State of Michigan, including
the MPSC, could not repeal or amend the Customer
Choice Act or the MPSC financing order
(including repeal or amendment by voter
initiative or by the amendment of the Michigan
Constitution), or take any other action in
contravention of its pledge described above,
without paying just compensation to the
securitization bondholders, as determined by a
court of competent jurisdiction, if this action
would constitute a permanent appropriation of a
substantial property interest of securitization
bondholders in the securitization property and
deprive the securitization bondholders of their
reasonable expectations arising from their
investments in the securitization bonds;
7. there is no order by any court providing for the
revocation, alteration, limitation or other impairment of
the Customer Choice Act, the MPSC financing order, the
securitization property or the securitization charge or
any rights arising under any of them or to enjoin the
performance of any obligations under the MPSC financing
order;
8. the assumptions used in calculating the initial
securitization charge are reasonable and made in good
faith;
9. a. securitization property constitutes a present
property right;
b. securitization property includes, without
limitation:
(1) the right under the Customer Choice Act
to impose, collect and receive
securitization charges authorized in
the MPSC financing order in an amount
necessary to provide the full recovery
of all qualified costs being
securitized;
(2) the right under the Customer Choice Act
and the MPSC financing order to obtain
periodic adjustments of securitization
charges pursuant to the Customer Choice
Act; and
(3) all revenue, collections, payments,
money and proceeds arising under, or
with respect to, all of the foregoing;
c. the initial securitization property is not
subject to any lien created by an existing
indenture; and
d. the MPSC financing order, together with the
securitization charges authorized therein, is
irrevocable and not subject to reduction,
impairment or adjustment by further action of
the MPSC, except pursuant to the periodic
adjustment provisions of the Customer Choice
Act;
10. the seller is a corporation duly organized and in good
standing under the laws of the State of Michigan, with
corporate power and authority to own its properties and
conduct its business as currently owned or conducted;
11. the seller has the corporate power and authority to
execute and deliver the sale agreement and to carry out
its terms; the seller has full corporate power and
authority to own the securitization property and sell and
assign the initial securitization property, in the case
of the initial transfer date, and the subsequent
securitization property, in the case of each subsequent
transfer date, as applicable, to the issuer; the seller
has duly authorized this sale and assignment to the
issuer by all necessary corporate action; and the
execution, delivery and performance of the sale agreement
have been duly authorized by the seller by all necessary
corporate action;
12. the sale agreement constitutes a legal, valid and binding
obligation of the seller, enforceable against the seller
in accordance with its terms, subject to customary
exceptions relating to bankruptcy and equitable
principles;
13. the consummation of the transactions contemplated by the
sale agreement and the fulfillment of the terms thereof
do not conflict with, result in any breach of any of the
terms and provisions of, or constitute (with or without
notice or lapse of time) a default under, the articles of
incorporation or by-laws of the seller, or any indenture,
agreement or other instrument to which the seller is a
party or by which it is bound; nor result in the creation
or imposition of any lien upon any of its properties
pursuant to the terms of any applicable indenture,
agreement or other instrument, except as contemplated by
the sale agreement, any bills of sale for securitization
property, the servicing agreement, the issuer's limited
liability company agreement and the certificate of
formation, the administration agreement, the indenture
and the related securities account control agreement and
any interest rate swap agreement, which are referred to
together as the basic documents; nor violate any law or
any order, rule or regulation applicable to the seller of
any court or of any federal or state regulatory body,
administrative agency or other governmental
instrumentality having jurisdiction over the seller or
the issuer or their respective properties;
14. except for the filing of financing statements and
continuation statements under the Uniform Commercial
Code, no approval, authorization, consent, order or other
action of, or filing with, any court, federal or state
regulatory body, administrative agency or other
governmental instrumentality is required in connection
with the execution and delivery by the seller of the sale
agreement, the performance by the seller of the
transactions contemplated by the sale agreement, the
fulfillment by the seller of the terms of the sale
agreement or the creation or transfer of the initial
securitization property, except those which have
previously been obtained or made;
15. except as disclosed in writing by the seller to the
issuer, there are no proceedings or investigations
pending or, to the seller's best knowledge, threatened,
before any court, federal or state regulatory body,
administrative agency or other governmental
instrumentality having jurisdiction over the seller, the
issuer or their respective properties:
a. asserting the invalidity of any of the basic
documents, the securitization bonds, the
Customer Choice Act or the MPSC financing order;
b. seeking to prevent the issuance of
securitization bonds or the consummation of the
transactions contemplated by the basic documents
or the securitization bonds;
c. seeking any determination or ruling that could
be reasonably expected to materially and
adversely affect the performance by the seller
of its obligations under, or the validity or
enforceability of, the basic documents or the
securitization bonds; or
d. challenging the seller's treatment of the
securitization bonds as debt of the seller for
federal and state tax purposes;
16. upon giving effect to the sale of any securitization
property under the sale agreement, the seller:
a. is solvent and expects to remain solvent;
b. is adequately capitalized to conduct its
business and affairs considering its size and
the nature of its business and intended
purposes;
c. is not engaged and does not expect to engage in
a business for which its remaining property
represents an unreasonably small capital;
d. reasonably believes that it will be able to pay
its debts as they become due; and
e. is able to pay its debts as they mature and does
not intend to incur, or believe that it will
incur, indebtedness that it will not be able to
repay at its maturity; and
17. the seller is duly qualified to do business as a foreign
corporation in good standing, and has obtained all
necessary licenses and approvals, in all jurisdictions in
which the ownership or lease of property or the conduct
of its business require any qualifications, licenses or
approvals, except where the failure to so qualify would
not be reasonably likely to have a material adverse
effect on the seller's business, operations, assets,
revenues, properties or prospects or the securitization
bonds.
The seller will make the above representations and warranties
under existing law as in effect as of the date of issuance of any series of
securitization bonds.
CONSUMERS' COVENANTS
In the sale agreement, the seller will covenant, among other
things, that so long as any of the securitization bonds are outstanding:
1. the seller will keep in full force and effect its
existence as a corporation and remain in good standing
under the laws of the jurisdiction of its organization,
and will obtain and preserve its qualification to do
business in each jurisdiction in which such qualification
is or will be necessary to protect the validity and
enforceability of the sale agreement and each other
instrument or agreement to which the seller is a party
necessary to the proper administration of the sale
agreement and the transactions contemplated thereby;
2. the seller will not sell, pledge, assign or transfer to
any other person, or grant, create, incur, assume or
suffer to exist any lien on, any of the securitization
property, nor assert any lien against or with respect to
any securitization property, and will defend the right,
title and interest of the issuer and the trustee, in, to
and under the securitization property;
3. the seller will use proceeds from the sale of the
securitization property in accordance with the MPSC
financing order and the Customer Choice Act;
4. the seller will pay the servicer any payments received in
its capacity as seller in respect of the securitization
property no later than 2 business days after receipt
thereof;
5. the seller will notify the issuer and the trustee
promptly after becoming aware of any purported lien on
any securitization property, other than the conveyances
under the sale agreement or the indenture;
6. the seller will comply with its organizational or
governing documents and all laws, treaties, rules,
regulations and determinations of any governmental
instrumentality applicable to the seller, except to the
extent that any failure to comply would not materially
adversely affect:
(i) the interests of the issuer or the trustee
in the securitization property or under any of the basic
documents; or
(ii) the seller's performance of its obligations
under the sale agreement or in its capacity as seller
under any of the other basic documents to which it is a
party;
7. the seller will:
(i) treat the securitization bonds as debt for
all purposes;
(ii) disclose in its financial statements that
on a non-consolidated basis it is not the owner of the
securitization property and that the assets of the issuer are not
available to pay creditors of the seller or any of its affiliates
(other than the issuer);
(iii) disclose the effects of all transactions
between the seller and the issuer in accordance with generally
accepted accounting principles; and
(iv) not own or purchase any securitization
bonds;
8. the seller agrees that upon the sale of the transferred
securitization property to the issuer:
(i) the issuer will have all of the rights
originally held by the seller with respect to the transferred
securitization property to the fullest extent permitted by law,
including the right to collect any amounts payable by any
customer, in respect of the transferred securitization property;
and
(ii) any payment of the securitization charge by
any customer to the issuer will discharge that customer's
obligations to pay the securitization charge by the amount paid;
9. so long as any of the securitization bonds are
outstanding, the seller will not make any statement or
reference in respect of the securitization property that
is inconsistent with the ownership thereof by the issuer
nor take any action in respect of the securitization
property except as contemplated by the basic documents;
10. the seller will not permit alternative electric suppliers
to bill or collect the securitization charge unless it is
so required by law;
11. the seller will deliver to the issuer and the trustee
written notice in a certificate, signed by authorized
officers of the seller, of the occurrence of any event
which currently requires or which would require the
seller to make an indemnification payment pursuant to the
sale agreement as soon as the seller obtains knowledge of
the occurrence of this event;
12. the seller will execute and file such filings, and take
all such actions as may be required by law fully to
preserve, maintain, and protect the interests of the
issuer and the trustee in the securitization property,
including all filings required under the Michigan UCC
relating to the transfer of the ownership of the
securitization property by the seller to the issuer and
the pledge of the securitization property by the issuer
to the trustee;
13. the seller will deliver to the issuer and the trustee
file-stamped copies of, or filing receipts for, any
document filed as provided above, as soon as available
after the filing of that document;
14. the seller will take any legal or administrative action
which may be reasonably necessary to:
(i) protect the issuer and the securitization
bondholders from claims, state actions or other actions or
proceedings of third parties which, if successfully pursued, would
result in a breach of any of its representations or warranties
which are listed in the sale agreement; or
(ii) block or overturn any attempts to cause a
repeal of, modification of or supplement to the Customer Choice
Act, the MPSC financing order or the rights of securitization
bondholders by legislative enactment or constitutional amendment
that would be adverse to the issuer, the trustee or the
securitization bondholders; and
15 . so long as any of the securitization bonds are
outstanding, the seller, and each of the seller's
subsidiaries, will pay all material taxes, assessments
and governmental charges imposed upon it, before any
penalty accrues on these taxes, assessments and
governmental charges, if the failure to pay these taxes,
assessments and governmental charges would, after any
applicable grace periods or other similar requirements,
result in a lien on the transferred securitization
property; provided that the seller or one of its
affiliates need not pay any tax if it is contesting this
tax in good faith by appropriate proceedings promptly
instituted and diligently conducted and if it has
established appropriate reserves which conform with
generally accepted accounting principles.
CONSUMERS' OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE AND TO TAKE
LEGAL ACTION
Under the sale agreement, the seller is obligated to indemnify the
issuer and the trustee, for itself and on behalf of the securitization
bondholders, and related parties specified therein, against:
1. any and all taxes, other than any taxes imposed on
securitization bondholders solely as a result of their
ownership of securitization bonds, that may at any time
be imposed on or asserted against any of those persons
under existing law as of the date of issuance of the
securitization bonds as a result of the sale and
assignment of the securitization property by the seller
to the issuer, the acquisition or holding of
securitization property by the issuer or the issuance and
sale by the issuer of securitization bonds, including any
sales, gross receipts, general corporation, personal
property, privilege, franchise or license taxes, but
excluding any taxes imposed as a result of a failure of
that person to properly withhold or remit taxes imposed
with respect to payments on any securitization bond; and
2. (a) any and all amounts of principal of and
interest on the securitization bonds not paid
when due or when scheduled to be paid in
accordance with their terms and the amount of
any deposits to the issuer required to have been
made in accordance with the terms of the basic
documents which are not made when so required,
as a result of the seller's breach of its
representations, warranties or covenants
contained in the sale agreement; and
(b) any and all liabilities, obligations, claims,
actions, suits or payments of any kind
whatsoever that may be imposed on or asserted
against any such person, other than any
liabilities, obligations or claims for or
payments of principal of or interest on the
securitization bonds, together with any
reasonable costs and expenses incurred by that
person, as a result of the seller's breach of
any of its representations, warranties or
covenants contained in the sale agreement.
These indemnification obligations will rank equally in right to
payment with other general unsecured obligations of the seller. The
indemnities described above will survive the termination of the sale
agreement and include reasonable fees and expenses of investigation and
litigation, including reasonable attorneys' fees and expenses. The above
representations and warranties are made under existing law as in effect as
of the date of issuance of any series of securitization bonds. The seller
will not indemnify any party for any changes of law after the issuance of
any series of securitization bonds. In addition, the seller will not be
liable for any consequential, exemplary or punitive damages.
Consumers' Limited Obligation to Undertake Legal Action. The
seller and the servicer are required to institute legal or administrative
actions as may be reasonably necessary to protect the rights of the holders
of the securitization property. The cost of any action reasonably allocated
by the servicer or the seller to the serviced securitization property would
be payable from amounts on deposit in the collection account as an
operating expense payable to the servicer and, in the case of the seller,
as reimbursed by the servicer to the seller. Except for the foregoing and
subject to the seller's further covenant to fully preserve, maintain and
protect the interests of the issuer in the securitization property, the
seller will not be under any obligation to appear in, prosecute or defend
any legal action that is not incidental to its obligations under the sale
agreement.
SUCCESSORS TO CONSUMERS
The sale agreement provides that any person who executes an
agreement of assumption to perform every obligation of the seller under the
sale agreement will be the successor to the seller if that person is a
person:
1. into which the seller may be merged or consolidated and
which succeeds to all or the major part of the electric
distribution business of the seller;
2. which results from the division of the seller into two or
more persons and which succeeds to all or the major part
of the electric distribution business of the seller;
3. which may result from any merger or consolidation to
which the seller shall be a party and which succeeds to
all or the major part of the electric distribution
business of the seller;
4. which may succeed to the properties and assets of the
seller substantially as a whole and which succeeds to all
or the major part of the electric distribution business
of the seller; or
5. which may otherwise succeed to all or the major part of
the electric distribution business of the seller.
The seller is not, however, permitted to enter into any of the
transactions contemplated by paragraphs 1. through 5. above, unless:
1. immediately after giving effect to that transaction, no
representation or warranty made in the sale agreement
will have been breached and no servicer default and no
event that, after notice or lapse of time, or both, would
become a servicer default, will have occurred and be
continuing;
2. the seller will have delivered to the issuer and the
trustee an officer's certificate and an opinion of
counsel each stating that the consolidation, merger or
succession and the agreement of assumption comply with
the sale agreement and that all conditions precedent, if
any, provided for in the sale agreement relating to that
transaction have been complied with;
3. the seller will have delivered to the issuer and the
trustee an opinion of counsel either:
a. stating that, in the opinion of counsel, all
filings to be made by the seller, including
Uniform Commercial Code filings, that are
necessary fully to preserve and protect the
respective interests of the issuer and the
trustee in the transferred securitization
property have been executed and filed, and
reciting the details of those filings; or
b. stating that, in the opinion of counsel, no such
action is necessary to preserve and protect
those interests;
4. the rating agencies will have received prior written
notice of that transaction; and
5. the seller will have delivered to the issuer and the
trustee an opinion of independent tax counsel (as
selected by, and in form and substance reasonably
satisfactory to, the issuer and the trustee, and which
may be based on a ruling from the IRS) to the effect
that, for federal income tax purposes, that consolidation
or merger will not result in a material adverse federal
income tax consequence to the seller, the issuer, the
trustee or the then existing securitization bondholders.
THE SERVICING AGREEMENT
The following summary describes all material terms of the
servicing agreement pursuant to which the servicer is undertaking to
service securitization property. The form of the servicing agreement has
been filed as an exhibit to the registration statement.
The servicing agreement may be amended by the parties thereto with
the consent of the trustee under the indenture, if the rating agency
condition has been satisfied.
CONSUMERS' SERVICING PROCEDURES
General. The servicer, as agent for the issuer, will manage,
service, administer and effect collections in respect of the securitization
charge. The servicer's duties will include:
1. obtaining meter reads, calculating and billing the
securitization charge and collecting the securitization
charge revenues from customers;
2. responding to inquiries by customers, the MPSC, or any
federal, local or other state governmental authority with
respect to the securitization charge;
3. delivering bills or arranging for delivery of bills,
accounting for securitization charge revenue collections,
investigating and resolving delinquencies, processing and
depositing collections, making periodic remittances and
furnishing periodic reports to the issuer, the trustee,
holders of securitization bonds, the SEC and the rating
agencies;
4. selling, as agent for the issuer, defaulted or
written-off accounts in accordance with the servicer's
usual and customary practices for accounts of its own
electric retail customers; and
5. taking action in connection with adjustments to the
securitization charge as described below.
The servicer is required to notify the issuer, the trustee and the
rating agencies in writing of any laws or MPSC regulations promulgated
after the execution of the servicing agreement that have a material adverse
effect on the servicer's ability to perform its duties under the servicing
agreement.
SECURITIZATION CHARGE REVENUE REMITTANCES
In the servicing agreement, the servicer agrees to remit
securitization charge revenue collections to the trustee on a daily basis.
However, if:
1. Consumers or any successor to Consumers' electric
distribution business remains the servicer;
2. no servicer default has occurred and is continuing; and
3. any additional conditions or limitations imposed by the
rating agencies are complied with;
then the servicer will be permitted to remit securitization charge revenue
collections to the trustee on a monthly basis.
The servicer will remit to the trustee an amount equal to the
amount of securitization charge revenue collections based on the ratio of
the total securitization charges billed by rate class to the total revenues
billed by rate class multiplied by the total amount of total collections
for electric only and combination of electric and gas accounts during the
preceding calendar month. This ratio will be used to remit on each monthly
remittance date or each daily remittance date, as applicable. Daily
remittance dates and monthly remittance dates are referred to collectively
in this prospectus as remittance dates.
A business day is any day other than a Saturday or Sunday or a day
on which banking institutions in Jackson, Michigan or New York, New York
or, with respect to payments to be made on any securitization bonds listed
on the Luxembourg Stock Exchange, in Luxembourg, are required or authorized
by law or executive order to close.
THE MPSC'S SECURITIZATION CHARGE ADJUSTMENT PROCESS
Among other things, the servicing agreement requires Consumers or
any successor servicer to request periodic securitization charge
adjustments from the MPSC. The request for an adjustment must be submitted
at least 45 days before the adjustment may take place. The adjustment will
take effect at the beginning of the next complete monthly billing cycle.
Adjustments will be made annually and quarterly beginning one year before
the expected final payment date of the last maturing class of
securitization bonds. Under the MPSC financing order the servicer is
permitted to make non-routine adjustments to the adjustment formula, as
discussed below. Adjustments to the securitization charge are based on
actual securitization charge revenue collections and updated assumptions by
the servicer as to projected future deliveries of electricity to customers,
expected delinquencies and write-offs, future payments and costs and
expenses relating to securitization property and the securitization bonds,
any deficiency in the capital subaccount or the overcollateralization
subaccount and any amounts on deposit in the reserve subaccount. Consumers
will calculate the proposed adjustments in accordance with the calculations
specified in "The MPSC Financing Order and the Securitization Charge -- The
MPSC's Securitization Charge Adjustment Process."
The servicer may also file for a non-routine adjustment to the
securitization charge in order to remedy a significant and recurring
variance between actual and expected securitization charge revenue
collections and to assure timely payment of the periodic payment
requirement. Any non-routine adjustment filing is subject to the MPSC
hearing and approval requirements for contested cases.
CONSUMERS' SECURITIZATION CHARGE REVENUE COLLECTIONS
The servicer is required to remit all securitization charge
revenue collections from whatever source to the trustee for deposit
pursuant to the indenture on each remittance date. Until securitization
charge revenue collections are remitted to the collection account, the
servicer will not segregate them from its general funds. Remittances of
securitization charge revenue collections will not include interest thereon
prior to the remittance date or late fees from customers, which the
servicer may retain. See "Risk Factors -- The Risks Associated With
Potential Bankruptcy Proceedings" in this prospectus.
CONSUMERS' COMPENSATION FOR ITS ROLE AS SERVICER AND ITS RELEASE OF OTHER
PARTIES
The issuer agrees to pay the servicer a monthly servicing fee, in
the amount specified in the related prospectus supplement. In the servicing
agreement, the servicer releases the issuer and the trustee from any and
all claims whatsoever relating to securitization property or the servicer's
servicing activities with respect thereto.
CONSUMERS' DUTIES AS SERVICER
In the servicing agreement, the servicer has agreed, among other
things, that, in servicing securitization property:
1. except where the failure to comply with any of the
following would not adversely affect the issuer's or the
trustee's respective interests in securitization
property:
a. it will manage, service, administer and make
collections in respect of securitization
property with reasonable care and in material
compliance with applicable law and regulations,
using the same degree of care and diligence that
the servicer exercises with respect to billing
and collection activities that the servicer
conducts for itself and others;
b. it will follow customary standards, policies and
procedures;
c. it will use all reasonable efforts, consistent
with its customary servicing procedures, to
enforce and maintain the issuer's and the
trustee's rights in respect of securitization
property; and
d. it will calculate the securitization charge in
compliance with the Customer Choice Act, the
MPSC financing order and any applicable tariffs;
2. it will keep on file, in accordance with customary
procedures, all documents related to securitization
property and will maintain accurate and complete accounts
pertaining to securitization property; and
3. it will use all reasonable efforts consistent with its
customary servicing procedures to collect all amounts
owed in respect of securitization property as they become
due.
CONSUMERS' REPRESENTATIONS AND WARRANTIES AS SERVICER
In the servicing agreement, the servicer will make representations
and warranties as of the date the seller sells or otherwise transfers
securitization property to the issuer to the effect, among other things,
that:
1. the servicer is a corporation duly organized and in good
standing under the laws of the state of its
incorporation, with the corporate power and authority to
own its properties and conduct its business as its
properties are currently owned and its business is
presently conducted and to execute, deliver and carry out
the terms of the servicing agreement and has the power,
authority and legal right to service the securitization
property;
2. the servicer is duly qualified to do business as a
foreign corporation in good standing in all jurisdictions
in which it is required to do so, except where the
failure to so qualify would not be reasonably likely to
have a material adverse effect;
3. the servicer's execution, delivery and performance of the
servicing agreement have been authorized by all necessary
corporate action;
4. the servicing agreement constitutes a binding obligation
of the servicer, enforceable against the servicer in
accordance with its terms, subject to customary
exceptions relating to bankruptcy and equitable
principles;
5. the consummation of the transactions contemplated by the
servicing agreement does not conflict with the servicer's
articles of incorporation or by-laws or any material
agreement by which the servicer is bound, nor result in
any lien upon the servicer's properties or violate any
law or regulation applicable to the servicer or its
properties;
6. except for filings with the MPSC for adjusting the
securitization charge and filings under the Uniform
Commercial Code, no governmental actions or filings are
required for the servicer to execute, deliver and perform
its obligations under the servicing agreement, except
those which have been taken or made; and
7. no proceeding is pending or, to the servicer's best
knowledge, threatened before any court or other
governmental instrumentality having jurisdiction over the
servicer or its properties:
a. seeking to prevent the issuance of the
securitization bonds or the consummation of any
of the transactions contemplated by the
servicing agreement or any of the other basic
documents;
b. except as disclosed by the servicer to the
issuer, seeking any determination or ruling that
might materially and adversely affect the
performance by the servicer of its obligations
under, or the enforceability against the
servicer of, the servicing agreement; or
c. relating to the servicer and which might
adversely affect the federal or state income,
gross receipts or franchise tax attributes of
the securitization bonds.
CONSUMERS, AS SERVICER, WILL INDEMNIFY THE ISSUER AND OTHER RELATED ENTITIES
Under the servicing agreement, the servicer agrees to indemnify
the issuer and the trustee, for itself and on behalf of the securitization
bondholders, and related parties specified in the servicing agreement,
against any liabilities of any kind that may be incurred by or asserted
against any of those persons as a result of:
1. the servicer's willful misconduct, bad faith or gross
negligence in the performance of its duties or observance
of its covenants under the servicing agreement or the
servicer's reckless disregard of its obligations and
duties under the servicing agreement;
2. the servicer's breach of any of its representations or
warranties under the servicing agreement; and
3. litigation and related expenses relating to its status
and obligations as servicer.
The servicer will not, however, be liable for any consequential,
exemplary or punitive damages, nor for any losses resulting from the
willful misconduct, bad faith or gross negligence of any person indemnified
by the servicer under the servicing agreement or resulting from a breach of
a representation or warranty made by an indemnified person in any of the
basic documents that gives rise to the servicer's breach.
CONSUMERS, AS SERVICER, WILL PROVIDE STATEMENTS TO THE ISSUER AND TO THE TRUSTEE
For each payment date, the servicer will provide to the issuer,
the trustee and the rating agencies [and, so long as any securitization
bonds are listed on the Luxembourg Stock Exchange, any listing agent in
Luxembourg] a statement indicating, with respect to the securitization
property, among other things:
1. the amount to be paid to securitization bondholders of
each series and class in respect of principal;
2. the amount to be paid to securitization bondholders of
each series and class in respect of interest;
3. the projected securitization bond principal balance and
the securitization bond principal balance for each series
and class as of that payment date;
4. the amount on deposit in the overcollateralization
subaccount for each series and the scheduled
overcollateralization level for each series, as of that
payment date;
5. the amount on deposit in the capital subaccount for each
series as of that payment date;
6. the amount, if any, on deposit in the reserve subaccount
as of that payment date;
7. the amount to be paid to any swap counterparty (on a
gross and a net basis, separately stated) under any
interest rate swap agreement on or before that payment
date; and
8. the amount of any other transfers and payments to be made
on that payment date pursuant to the indenture.
On the basis of this information, the trustee will furnish to the
securitization bondholders on each payment date the report described under
"The Indenture -- Reports to Holders of the Securitization Bonds." For so
long as any securitization bonds are listed on the Luxembourg Stock
Exchange and the rules of that exchange so require, notice that such report
is available with the listing agent in Luxembourg also will be published in
a daily newspaper in Luxembourg, which is expected to be the Luxemburger
Wort.
On or before each remittance date, but not more frequently than
monthly, the servicer will furnish to the issuer and the trustee a
statement setting forth the aggregate amount remitted or to be remitted by
the servicer to the trustee for deposit on the related remittance dates
pursuant to the indenture.
In addition, under the servicing agreement, the servicer is
required to give written notice to the issuer, the trustee and each rating
agency, promptly after having obtained knowledge thereof, but in no event
less than five business days thereafter, of any event which, with the
giving of notice or the passage of time or both, would become a servicer
default under the servicing agreement. For so long as any securitization
bonds are listed on the Luxembourg Stock Exchange and the rules of that
exchange so require, this notice also will be given by publication in a
daily newspaper in Luxembourg, which is expected to be the Luxemburger
Wort.
CONSUMERS TO PROVIDE COMPLIANCE REPORTS CONCERNING THE SERVICING AGREEMENT
A firm of independent public accountants will furnish to the
issuer, the trustee and the rating agencies, on or before March 31 of each
year, commencing March 31, 2002, a statement as to compliance by the
servicer during the preceding calendar year, or the relevant portion
thereof, with procedures relating to the servicing of securitization
property. This report, which is referred to as the annual accountant's
report, will state that the firm has performed the procedures in connection
with the servicer's compliance with the servicing obligations of the
servicing agreement, identifying the results of these procedures and
including any exceptions noted. The accounting firm providing the report
will be independent of the servicer within the meaning of the Code of
Professional Ethics of the American Institute of Certified Public
Accountants. The servicing agreement will also provide for delivery to the
issuer and the trustee, on or before March 31 of each year, commencing
March 31, 2002, a certificate signed by an officer of the servicer. This
certificate will state that the servicer has fulfilled its obligations
under the servicing agreement for the preceding calendar year, or the
relevant portion thereof, or, if there has been a default in the
fulfillment of any relevant obligation, describing each default. The
servicer will give the issuer, each rating agency and the trustee notice of
any servicer default under the servicing agreement, which notice also will
be given by publication in a daily newspaper in Luxembourg, which is
expected to be the Luxemburger Wort, so long as any securitization bonds
are listed on the Luxembourg Stock Exchange and the rules of that exchange
so require.
The servicer will deliver to the trustee the annual accountant's
report, compliance certificates and monthly reports regarding distributions
and other statements required by the servicing agreement. See "The
Servicing Agreement" in this prospectus.
MATTERS REGARDING CONSUMERS AS SERVICER
Under the Customer Choice Act, any successor to Consumers, whether
pursuant to any bankruptcy, reorganization, or other insolvency proceeding
or pursuant to any merger or acquisition, sale or transfer, by operation of
law, as a result of electric utility restructuring or otherwise, must
perform and satisfy all obligations of Consumers under that Act to the same
extent as Consumers, including, but not limited to, collecting and paying
to the issuer the revenues with respect to the securitization property.
Pursuant to the servicing agreement, Consumers may assign its
obligations under the servicing agreement to a successor provided the
rating agency condition and other conditions specified in the MPSC
financing order have been satisfied.
Under the servicing agreement, any person which succeeds to the
major part of the electric distribution business of the servicer, and which
assumes the obligations of the servicer, will be the successor of the
servicer under the servicing agreement. The servicing agreement further
requires that:
1. immediately after giving effect to the transaction
referred to in this paragraph, no representation or
warranty made by the servicer in the servicing agreement
will have been breached, and no servicer default, and no
event which, after notice or lapse of time, or both,
would become a servicer default, will have occurred and
be continuing;
2. officers' certificates and opinions of counsel will have
been delivered to the issuer, the trustee and the rating
agencies; and
3. prior written notice will have been received by the
rating agencies.
Subject to the foregoing provisions, Consumers may not resign from
the obligations and duties imposed on it as servicer. However, Consumers
may resign as servicer upon a determination communicated to the issuer, the
trustee and each rating agency and evidenced by an opinion of counsel to
the effect that the performance of Consumers' duties under the servicing
agreement is no longer legal. This resignation will not become effective
until a successor servicer has assumed the duties of Consumers under the
servicing agreement.
Except as expressly provided in the servicing agreement, the
servicer will not be liable to the issuer for any action taken or not taken
pursuant to the servicing agreement or for errors in judgment. However, the
servicer will be liable to the extent this liability is imposed by reason
of the servicer's willful misfeasance, bad faith or gross negligence or by
reason of reckless disregard of its duties under the servicing agreement.
EVENTS CONSTITUTING A DEFAULT BY CONSUMERS IN ITS ROLE AS SERVICER
Servicer defaults will include, among other things:
1. any failure by the servicer to deliver to the trustee, on
behalf of the issuer, any required remittance that
continues unremedied for a period of five business days
after written notice of this failure is received by the
servicer from the issuer or the trustee;
2. any failure by the servicer to perform in any material
respect any other agreement in the servicing agreement,
which failure materially and adversely affects
securitization property and which continues unremedied
for 60 days after notice of this failure has been given
to the servicer by the issuer or the trustee, or after
discovery of this failure by an officer of the servicer,
as the case may be;
3. any representation or warranty made by the servicer in
the servicing agreement proves to have been incorrect
when made, which has a material adverse effect on any of
the securitization bondholders or the issuer and which
continues unremedied for 60 days after notice of this
failure has been given to the servicer by the issuer or
the trustee or after discovery of this failure by an
officer of the servicer, as the case may be; or
4. an event of bankruptcy, readjustment of debt, marshalling
of assets and liabilities, or similar proceedings with
respect to the servicer or an action by the servicer
indicating its insolvency as specified in the servicing
agreement.
The trustee with the consent of the holders of the majority of the
total outstanding principal balance of the securitization bonds of all
series may waive any default by the servicer, except a default in making
any required remittances to the trustee.
THE TRUSTEE'S RIGHTS IF CONSUMERS DEFAULTS AS SERVICER
Under the terms of the servicing agreement, if the servicer fails
to fully perform its servicing obligations, the trustee may, with the
consent of the holders of a majority of the total outstanding principal
amount of the securitization bonds of all series, appoint an alternate
party to replace the defaulting servicer. The appointment of an alternate
party to replace the defaulting servicer will terminate all of the rights
and obligations of the defaulting servicer under the servicing agreement.
The defaulting servicer will be required to perform its obligations under
the servicing agreement until it is replaced by a successor servicer. A
potential successor servicer must be qualified to perform the duties of the
servicer under the MPSC financing order and the servicing agreement in
order to replace the defaulting servicer. The successor servicer must also
enter into an agreement with the issuer that is substantially similar to
the servicing agreement. In addition the appointment of a successor
servicer must not result in the downgrade or withdrawal of a rating on any
outstanding securitization bond. See "Risk Factors -- Servicing Risks -- If
the Servicer Defaults or Becomes Bankrupt, It May Be Difficult to Find a
Successor Servicer and Payments May Be Suspended" in this prospectus. The
trustee may make arrangements for compensation to be paid to any successor
servicer. Any successor servicer may bring an action against a customer for
nonpayment of the securitization charge, but only a successor servicer that
is an electric utility may terminate service for failure to pay the
securitization charge.
Upon a servicer default based upon the commencement of a case by
or against the servicer under the Bankruptcy Code or similar laws, the
trustee and the issuer may be prevented from effecting a transfer of
servicing. Upon a servicer default because of a failure to make required
remittances, the issuer or the trustee will have the right to apply to the
MPSC for sequestration and payment of revenues arising from the
securitization property. See "Risk Factors -- The Risks Associated With
Potential Bankruptcy Proceedings" in this prospectus.
THE OBLIGATIONS OF A SERVICER THAT SUCCEEDS CONSUMERS
In accordance with the MPSC financing order and the servicing
agreement, if a third party succeeds to the role of the servicer, the
servicer will cooperate with the issuer, the trustee and the successor
servicer in terminating the servicer's rights and responsibilities under
the servicing agreement. This procedure includes the transfer to the
successor servicer of all related documentation and cash. The servicer will
be liable for all reasonable costs and expenses incurred in transferring
servicing responsibilities. A successor servicer may not resign unless it
is prohibited from serving by law. The predecessor servicer is obligated,
on an ongoing basis, to cooperate with the successor servicer and provide
whatever information is, and take whatever actions are, reasonably
necessary to assist the successor servicer in performing its obligations
under the servicing agreement.
THE INDENTURE
The following summary describes all material terms of the
indenture pursuant to which securitization bonds will be issued. The form
of the indenture, including the form of the supplemental indenture, has
been filed as an exhibit to the registration statement of which this
prospectus forms a part.
THE SECURITY FOR THE SECURITIZATION BONDS
To secure the payment of principal of and interest on, and any
other amounts owing in respect of, the securitization bonds pursuant to the
indenture, all amounts owing to the trustee and, if and to the extent
provided in any prospectus supplement, any amounts owing to any swap
counterparty, the issuer will grant to the trustee for the benefit of the
securitization bondholders, the trustee and, if and to the extent provided
in any prospectus supplement, any swap counterparty, a security interest in
all of the issuer's right, title and interest in, to and under the
following collateral:
1. the securitization property sold by the seller to the
issuer pursuant to the sale agreement and all proceeds
thereof;
2. the sale agreement;
3. all bills of sale delivered by the seller pursuant to the
sale agreement;
4. the servicing agreement;
5. the administration agreement;
6. the collection account, each subaccount therein and all
amounts on deposit therein from time to time, with the
exception of up to $100,000 to be held in the capital
reserve subaccount free of the lien of the indenture to
ensure that the issuer has sufficient assets to pay its
fees, costs and expenses as they come due;
7. any other property of whatever kind owned from time to
time by the issuer, including rights under any interest
rate swap or cap agreement, other than:
a. cash released to the swap counterparty from any
class subaccount in accordance with the
indenture and any interest rate swap or cap
agreement;
b. cash or other property released to the issuer
from any capital subaccount in accordance with
the indenture, which other property is not
expected to be substantial;
c. proceeds from the sale of the securitization
bonds used to pay (1) the costs of issuance of
the securitization bonds, and any up-front other
qualified costs as permitted under the MPSC
financing order, and (2) the purchase price of
the securitization property pursuant to the sale
agreement;
8. all present and future claims, demands, causes and choses
in action in respect of any or all of the foregoing; and
9. all payments on or under and all proceeds of every kind
and nature whatsoever in respect of any or all of the
foregoing.
See "-- How Funds in the Collection Account Will Be Allocated" below.
SECURITIZATION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES
Securitization bonds may be issued under the indenture from time
to time in series, so long as the rating agency condition is satisfied, to
finance the purchase by the issuer of securitization property, which is
referred to as a financing issuance. The total principal balance of
securitization bonds outstanding at any time that may be authenticated and
delivered under the indenture may not exceed $[_________], plus the total
principal balance of any securitization bonds the proceeds of which are
used to refinance outstanding securitization bonds, any issuance of which
is referred to as a refunding issuance. Any series of securitization bonds
may include one or more classes which differ, among other things, as to
interest rate and amortization of principal. The terms of all
securitization bonds of the same series will be identical, unless a series
includes more than one class, in which case the terms of all securitization
bonds of the same class will be identical. The particular terms of the
securitization bonds of any series and class will be set forth in the
supplemental indenture and described in the related prospectus supplement.
The terms of any additional series and any classes thereof will not be
subject to prior review by, or consent of, the securitization bondholders
of any previously issued series. See "Risk Factors -- Other Risks
Associated With An Investment In The Securitization Bonds," and "The
Securitization Bonds" in this prospectus.
The principal source of repayment for all series of securitization
bonds will be the securitization charge collected by the servicer. The
issuance of additional series of securitization bonds is not expected to
adversely affect the sufficiency of securitization charge revenue
collections for payments on any particular series of securitization bonds.
This is because the securitization charge and adjustments thereof are
generally based on the total amounts owed with respect to the outstanding
securitization bonds. Moreover, any additional series of securitization
bonds will be issued only if the new issuance will not result in the
downgrading or withdrawal of any rating by a rating agency on any
outstanding securitization bonds.
Under the indenture, the trustee will authenticate and deliver an
additional series of securitization bonds only upon receipt by the trustee
of, among other things, a certificate of the issuer that no event of
default has occurred and is continuing, an opinion of counsel to the issuer
to the effect that the requirements under the indenture for the issuance,
authentication and delivery of an additional series of securitization bonds
have been satisfied, and evidence of satisfaction of the rating agency
condition.
OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REQUIRED FOR EACH SERIES
OR CLASS
In addition, in connection with the issuance of each new series,
the trustee will have to receive a certificate or opinion of a firm of
independent certified public accountants of recognized national reputation.
This certificate will be based on the assumptions used in calculating the
initial securitization charge with respect to the transferred
securitization property or, if applicable, the most recent revised
securitization charge with respect to the transferred securitization
property. The certificate will state to the effect that, after giving
effect to the issuance of the new series and the application of the
proceeds therefrom, the securitization charge will be sufficient:
1. to pay all fees, costs and other operating expenses of the
issuer,
2. to pay interest of each series of securitization bonds when
due,
3. to pay principal of each series of securitization bonds in
accordance with the expected amortization schedule for that
series,
4. to fund the overcollateralization subaccount for each series
to the overcollateralization amount and scheduled
overcollateralization level for that series, and
5. to pay amounts due by the issuer under any interest rate
swap or cap arrangement,
as of each payment date taking into account any amounts on deposit in the
reserve subaccount.
THE COLLECTION ACCOUNT FOR THE SECURITIZATION BONDS
Under the indenture, the trustee will establish the collection
account, with the trustee or at another eligible institution as described
below. Funds received from the securitization charge revenue collections,
any amounts paid by any swap counterparty or cap provider under any
interest rate swap or cap agreement and any providers of credit enhancement
will be deposited into the collection account. The collection account will
be divided into the following subaccounts, which need not be separate bank
accounts:
1. the general subaccount,
2. one or more series and/or class subaccounts,
3. the overcollateralization subaccount for each series,
4. the capital subaccount for each series (including the
capital reserve subaccount for the initial series, as
described below under "--Capital Subaccount"),
5. if required by the indenture, one or more defeasance
subaccounts, and
6. the reserve subaccount.
All amounts in the collection account not allocated to any other
subaccount will be allocated to the general subaccount. Unless the context
indicates otherwise, references to the collection account include all of
the subaccounts contained therein. All money deposited from time to time in
the collection account, all deposits therein pursuant to the indenture, and
all investments made in eligible investments will be held by the trustee in
the collection account as part of the collateral, with the exception of up
to $100,000 held in the capital reserve subaccount.
The following institutions are eligible institutions for the
establishment of the collection account:
1. the corporate trust department of the trustee; or
2. a depository institution organized under the laws of the
United States of America or any state or any domestic branch
of a foreign bank, which:
a. has either:
(1) a long-term unsecured debt rating of "AAA" by S&P
and Fitch and "Aaa" by Moody's; or
(2) a certificate of deposit rating of "A-1+" by S&P
and "P-1" by Moody's, or any other long-term,
short-term or certificate of deposit rating
acceptable to the rating agencies; and
b. whose deposits are insured by the Federal Deposit
Insurance Corporation.
Appropriate Investments for Funds in the Collection Account. All
funds in the collection account shall be invested in any of the following
eligible investments:
1. direct obligations of, and obligations fully and
unconditionally guaranteed as to the timely payment by, the
United States of America;
2. demand deposits, time deposits, certificates of deposit of
depository institutions or trust companies specified in the
indenture;
3. commercial paper having, at the time of investment, a rating
in the highest rating category from each rating agency;
4. demand deposits, time deposits and certificates of deposit
which are fully insured by the Federal Deposit Insurance
Corporation;
5. money market funds which have the highest rating from each
rating agency, including funds for which the trustee or any
of its affiliates is investment manager or advisor;
6. banker's acceptances issued by any depository institution or
trust company specified in the indenture;
7. repurchase obligations with respect to any security that is
a direct obligation of, or fully guaranteed by, the United
States of America or agencies or instrumentalities thereof,
entered into with depository institutions or trust
companies, in each case, as specified in the indenture;
8. repurchase obligations with respect to any security or whole
loan, as provided and with the ratings specified in the
indenture; or
9. any other investment permitted by each rating agency and
complying with such further rating requirements as provided
in the indenture.
Eligible investments may not:
1. be sold, liquidated or otherwise disposed of at a loss,
prior to the maturity thereof; or
2. mature later than the day the eligible investment must be
held in the collection account in order for the trustee to
make scheduled payments or deposits into subaccounts as
required under the indenture, if the eligible investment is
held by an affiliate of the trustee, or, if the eligible
investment is not held by an affiliate of the trustee, the
business day before that day.
In the case of a defeasance, the issuer will deposit U.S.
Government Obligations in the defeasance subaccount. U.S. Government
Obligations are direct obligations, or certificates representing an
ownership interest in those obligations, of the United States of America,
including any agency or instrumentality thereof, for the payment of which
the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option. No money held in the
collection account may be invested, and no investment held in the
collection account may be sold, unless the security interest in the
collection account will continue to be perfected in the investment or the
proceeds of the sale.
Remittances to the Collection Account. On each remittance date, as
described under "The Servicing Agreement -- Consumers' Servicing
Procedures" above, the servicer will remit securitization charge revenue
collections to the trustee for deposit in the collection account. In
addition, on each remittance date the servicer will remit any indemnity
amounts for deposit in the collection account. An indemnity amount includes
any amount paid by Consumers, as the seller or the servicer, to the
trustee, for the trustee itself or on behalf of the securitization
bondholders, in respect of indemnification obligations pursuant to the sale
agreement or the servicing agreement. See "The Sale Agreement" and "The
Servicing Agreement" in this prospectus.
Collection Account. Securitization charge revenue collections and
any indemnity amounts will be deposited by the trustee into the collection
account. On each payment date, the trustee will allocate amounts in the
collection account to the general subaccount as described under " -- How
Funds in the Collection Account Will Be Allocated" below.
General Subaccount. Securitization charge revenue collections and
any indemnity amounts will be deposited into the general subaccount. On
each payment date, the trustee will allocate amounts in the general
subaccount among the other subaccounts as described under " -- How Funds in
the Collection Account Will Be Allocated" below.
Series Subaccount. Upon the issuance of each series of
securitization bonds, a series subaccount will be established for that
series. On each payment date (or before each payment date to the extent
provided in any prospectus supplement), the trustee will allocate from
amounts on deposit in the general subaccount to each series subaccount an
amount sufficient to pay, to the extent available:
1. interest payable on each class of that series on that
payment date (or, to the extent provided in any prospectus
supplement, any amount required to be allocated to a class
subaccount with respect to any floating rate class);
2. the principal of each class of that series payable as a
result of an acceleration following the occurrence of an
event of default, the principal of each class of that series
if that payment date is the final maturity date for that
class, or the principal of each class of that series if that
payment date is the redemption date for that series; and
3. principal scheduled to be paid on each class of that series
on that payment date according to the expected amortization
schedule, plus any scheduled principal not paid on prior
payment dates, excluding amounts provided for in clause 2.
above.
Except as specified in any prospectus supplement with respect to
any deposits to any class subaccounts, on each payment date, allocations
will be made to each series subaccount, and the trustee will withdraw funds
from the series subaccount to make payments on the related series of
securitization bonds. See "-- How Funds in the Collection Account Will Be
Allocated" below.
Class Subaccount. If specified in the related prospectus
supplement, upon the issuance of a specified class of floating rate
securitization bonds, a class subaccount will be established with respect
to that class. On or before each payment date, a fixed amount specified in
the related prospectus supplement will be allocated to that class
subaccount from the related series subaccount and payments to and from any
swap counterparty pursuant to the related interest rate swap agreement will
be made from or allocated to, as applicable, that class subaccount as
described in the related prospectus supplement. On or before each payment
date, amounts on deposit in the class subaccount will be applied to make
payments with respect to the related class, as specified in the related
prospectus supplement. Any balance remaining in any class subaccount on any
payment date after payments of interest have been made to securitization
bondholders of the related class will be transferred to the general
subaccount for allocation in connection with the next payment date.
Capital Subaccount. Upon the issuance of each series of
securitization bonds, Consumers will make a capital contribution to the
issuer from Consumers' general funds in an amount equal to the required
capital amount. The issuer will pay this amount to the trustee for deposit
into the capital subaccount for that series. The trustee will draw on
amounts in the capital subaccount for that series (other than the amounts
in the capital reserve subaccount) to the extent that, in allocating funds
to that series in accordance with clauses (a) through (d)(4) in " -- How
Funds in the Collection Account Will Be Allocated" below, amounts on
deposit in the general subaccount, the series subaccount for such series,
the reserve subaccount and the overcollateralization subaccount for such
series are insufficient to make scheduled distributions and payments of
fees and expenses specified in those clauses. If any series of
securitization bonds has been retired as of any payment date, the amounts
on deposit in the capital subaccount for such series (other than the
amounts in the capital reserve subaccount if other series remain
outstanding) will be released to the issuer, free of the lien of the
indenture. The issuer is not contractually obligated to pay over to
Consumers any amounts released to the issuer from the capital subaccount
upon retirement of any series of securitization bonds.
The trustee also will establish within the capital subaccount for
the initial series of securitization bonds an additional subaccount to be
referred to as the capital reserve subaccount. The trustee will fund the
capital reserve subaccount with $100,000 from the required capital amount
for all series of securitization bonds. If depleted, the capital reserve
subaccount will not be replenished. The capital reserve subaccount will not
be subject to the lien of the indenture or included in the collateral
securing any securitization bonds. Amounts in the capital reserve
subaccount will be available to ensure that the issuer has sufficient
assets to pay any fees, costs and expenses of the issuer as they come due
free from the lien of the indenture.
Overcollateralization Subaccount. Securitization charge revenue
collections to the extent available as described in " -- How Funds in the
Collection Account Will Be Allocated" below will be allocated to the
overcollateralization subaccount for any series on each payment date. Each
prospectus supplement will specify the scheduled overcollateralization
level for each payment date for the related series of securitization bonds.
The total overcollateralization amount for any series will be funded over
the life of the securitization bonds of each series and in aggregate will
equal the amount stated in the related prospectus supplement for that
series, which is referred to as the overcollateralization amount.
On each payment date, the trustee will draw on the
overcollateralization subaccount for any series to the extent that, in
allocating funds to such series in accordance with clauses (a) through
(d)(4) in " -- How Funds in the Collection Account Will Be Allocated"
below, amounts on deposit in the general subaccount, the series subaccounts
and the reserve subaccount are insufficient to make scheduled distributions
and payments of fees and expenses specified in those clauses. If any series
of securitization bonds has been retired as of any payment date, the
amounts on deposit in the overcollateralization subaccount for such series
will be released to the issuer, free of the lien of the indenture. The
issuer is not contractually obligated to pay over to Consumers any amounts
released to the issuer from the overcollateralization subaccount upon
retirement of any series of securitization bonds.
Reserve Subaccount. Securitization charge revenue collections
available on any payment date that are not necessary to pay clauses (a)
through (d)(7) in " -- How Funds in the Collection Account Will Be
Allocated" below will be allocated to the reserve subaccount. Amounts in
the reserve subaccount will be invested in eligible investments. On each
payment date, except to the extent set forth in any prospectus supplement,
the trustee will draw on the reserve subaccount, if any, to the extent
that, in allocating funds for all series in accordance with clauses (a)
through (d)(7) in "How Funds in the Collection Account Will Be Allocated"
below, amounts on deposit in the general subaccount and the series
subaccounts are insufficient to make scheduled distributions and payments
of fees and expenses specified in those clauses.
Defeasance Subaccount. In the event funds are remitted to the
trustee in connection with the exercise of the legal defeasance option or
the covenant defeasance option, the trustee will establish a defeasance
subaccount for each series. If this occurs, funds set aside for future
payment of the securitization bonds will be deposited into the defeasance
subaccount. All amounts in a defeasance subaccount will be applied by the
trustee to the payment to the holders of the affected securitization bonds
until the securitization bonds have been paid in full. These amounts will
include all sums due for principal and interest. These amounts will be
applied in accordance with the provisions of the securitization bonds and
the indenture. See " -- The Issuer's Legal Defeasance and Covenant
Defeasance Options" below.
HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED
Amounts remitted from the servicer to the trustee, and all
investment earnings on the subaccounts in the collection account, will be
deposited into the general subaccount of the collection account. The
trustee will allocate all amounts in the general subaccount in the
following priority, on the payment date, or on any other date specified in
any prospectus supplement with respect to any class subaccount:
(a) The trustee fee will be paid to the trustee monthly,
together with any legal fees and other expenses and any
indemnity amounts owed to the trustee for all series to a
maximum of $41,666 for any month and not in excess of
$500,000 for any one year.
(b) The servicing fee will be paid to the servicer monthly,
together with any unpaid servicing fees for all series.
(c) On a monthly basis:
(1) the administration fee payable under the
administration agreement will be paid to Consumers as
the administrator of the issuer, and fees payable to
the independent managers of the issuer will be paid
to the independent managers; and
(2) so long as no event of default has occurred and is
continuing or would be caused by this payment, any
operating expenses of the issuer, other than those
specified in clauses (a), (b) and (c)(1) above, will
be paid to the persons entitled thereto, provided
that the amount paid on any payment date pursuant to
this clause may not exceed $[ ] in the aggregate for
all series.
(d) On each payment date specified in the related prospectus
supplement, or before each payment date to the extent
otherwise specified in any prospectus supplement with
respect to any class subaccount:
(1) an amount equal to interest payable on each class of
each series of securitization bonds for the payment
date will be allocated pro rata to the corresponding
series subaccount, which, in the case of interest on
any floating rate class of any series of
securitization bonds as specified in the prospectus
supplement for that series, will be an amount equal
to the applicable gross fixed amount of interest for
that class specified in that prospectus supplement
and which will be allocated pro rata to the
corresponding class subaccount;
(2) an amount equal to (a) principal of each class of any
series of securitization bonds payable as a result of
acceleration triggered by an event of default, (b)
principal of each class of any series of
securitization bonds payable on the final maturity
date for that class or series, or (c) principal of
each class of any series of securitization bonds
payable on a redemption date, will be allocated pro
rata to the corresponding series subaccount;
(3) an amount equal to the principal then scheduled to be
paid on each class of each series of securitization
bonds on that payment date according to the expected
amortization schedule, plus scheduled principal not
paid on any prior payment date, excluding amounts
provided for pursuant to clause (d)(2) above, will be
allocated pro rata to the corresponding series
subaccount;
(4) all remaining unpaid operating expenses, including
any indemnity amounts (excluding those paid pursuant
to (a) above) and any termination or similar
non-recurring payments under any interest rate swap
agreement, will be paid to the persons entitled
thereto;
(5) any amount necessary to replenish each series capital
subaccount will be allocated to those subaccounts,
pro rata, based on the outstanding principal balance
of each series, up to the required capital amount for
each series;
(6) an amount will be allocated to each series
overcollateralization subaccount to cause the amount
in the overcollateralization subaccount for each
series to equal the scheduled overcollateralization
level for each series as of that payment date, pro
rata, based on the outstanding principal balance of
each series;
(7) so long as no event of default has occurred and is
continuing, an amount equal to investment earnings
since the preceding payment date (or in the case of
the first payment date, since the series issuance
date) on amounts in each series capital subaccount
will be released to the issuer;
(8) the balance, if any, will be allocated to the reserve
subaccount; and
(9) following repayment of all outstanding series of
securitization bonds, the balance, if any, will be
released to the issuer free from the lien of the
indenture.
Amounts credited to any class subaccount will be paid from that
subaccount as specified in the related prospectus supplement. Overdue and
unpaid amounts due to a swap counterparty will be paid from that class
subaccount on the same priority as any overdue and unpaid interest due to
the holders of the related class of floating rate securitization bonds.
Interest means, for any payment date for any series or class of
securitization bonds, the sum, without duplication, of:
1. an amount equal to the amount of interest accrued at the
applicable interest rates from the prior payment date with
respect to that series or class;
2. any unpaid interest plus any interest accrued on this unpaid
interest;
3. if the securitization bonds have been declared due and
payable, all accrued and unpaid interest thereon; and
4. with respect to a series or class to be redeemed prior to
the next payment date, the amount of interest that will be
payable as interest on the series or class on that
redemption date.
Principal means, with respect to any payment date and any series
or class of securitization bonds:
1. the amount of principal scheduled to be paid on that payment
date;
2. the amount of principal due on the final maturity date of
any series or class if that payment date is the final
maturity date;
3. the amount of principal due as a result of the occurrence
and continuance of an event of default and acceleration of
the securitization bonds;
4. the amount of principal due as a result of a redemption of
securitization bonds on that payment date pursuant to the
indenture; and
5. any overdue payments of principal.
If on any payment date funds in the general subaccount are
insufficient to make the allocations contemplated by clauses (a) through
(d)(6) above for any series, the trustee will draw from amounts on deposit
in the following subaccounts in the following order up to the amount of the
shortfall for such series:
1. from the reserve subaccount pro rata among series based on
the total amounts payable with respect to each series for
the allocations contemplated by clauses (a) through (d)(6)
above,
2. from the overcollateralization subaccount for such series,
for the allocations contemplated by clauses (a) through
(d)(4) above, and
3. from the capital subaccount for such series, for the
allocations contemplated by clauses (a) through (d)(4)
above.
For the purpose of allocations among series prior to an
acceleration, pro rata has the following meaning, unless otherwise provided
in the prospectus supplement. With respect to a payment of interest, pro
rata means the proportion that the aggregate amount of interest payable on
each series bears to the aggregate amount of interest payable on all
series, in each case, immediately before that payment date. With respect to
a payment of principal, pro rata means the proportion that the aggregate
outstanding principal amount scheduled to be paid on that payment date for
that series bears to the aggregate outstanding principal amount scheduled
to be paid on that payment date for all series.
For the purpose of allocations among classes within a series prior
to an acceleration, pro rata has the following meaning, unless otherwise
provided in the prospectus supplement. With respect to a payment of
interest, pro rata means the proportion that the aggregate amount of
interest payable on each class, including, for any floating rate class, the
gross fixed amount for that class, bears to the aggregate amount of
interest payable on all classes within that series, in each case,
immediately before that payment date. With respect to a payment of
principal, pro rata means the proportion that the aggregate outstanding
principal amount of that class scheduled to be paid on that payment date
bears to the aggregate outstanding principal amount of all classes of that
series scheduled to be paid on that payment date.
Upon an acceleration of the maturity of the securitization bonds,
the aggregate amount of principal of and interest accrued on each series of
securitization bonds will be payable without priority of interest over
principal or principal over interest and without regard to series or class,
in the proportion that this aggregate amount of principal of and accrued
interest on that series bears to the aggregate amount of principal of and
accrued interest on all securitization bonds.
If the maturity of the securitization bonds is accelerated and the
collateral held under the indenture is liquidated in accordance with the
indenture and if any interest rate swap agreement so requires, the proceeds
of such liquidation allocated to the related class of floating rate
securitization bonds, will be deposited in the related class subaccount and
allocated between and paid to the holders of the related floating rate
class of securitization bonds, on the one hand, and the related swap
counterparty, on the other hand, based on the aggregate amount of principal
and interest due and payable on that class of securitization bonds and the
aggregate amount payable to the related swap counterparty in accordance
with that interest swap agreement.
THE ISSUER AND THE TRUSTEE MAY MODIFY THE INDENTURE; THE ISSUER MUST ENFORCE
THE SALE AGREEMENT, THE SERVICING AGREEMENT AND ANY INTEREST RATE SWAP OR
CAP AGREEMENT
Modifications of the Indenture that Do Not Require Consent of
Securitization Bondholders. Without the consent of any of the holders of
the outstanding securitization bonds or the counterparty to any cap or swap
transaction, but with prior notice to the rating agencies, the issuer and
the trustee may execute a supplemental indenture for any of the following
purposes:
1. to correct or amplify the description of the collateral, or
better to confirm to the trustee the collateral, or to
subject to the lien of the indenture additional property;
2. to evidence the succession, in compliance with the
indenture, of another person to the issuer, and the
assumption by the successor of the covenants of the issuer
in the indenture and in the securitization bonds;
3. to add to the covenants of the issuer, for the benefit of
the holders of the securitization bonds, or to surrender any
right or power conferred upon the issuer in the indenture;
4. to assign or pledge any property to or with the trustee;
5. to cure any ambiguity, to correct or supplement any
inconsistent provision of the indenture or any supplemental
indenture or to make any other provisions with respect to
matters arising under the indenture or in any supplemental
indenture; but:
a. this action shall not, as evidenced by an opinion of
counsel, adversely affect in any material respect the
interests of any securitization bondholder or any cap
or swap counterparty; and
b. the rating agency condition shall have been
satisfied;
6. to provide for a successor trustee and to facilitate the
administration of the trusts under the indenture by more
than one trustee, pursuant to the indenture;
7. to modify the indenture to effect the qualification of the
indenture under the Trust Indenture Act or any similar
federal statute hereafter enacted and to add to the
indenture any other provisions as may be expressly required
by the Trust Indenture Act;
8. to set forth the terms of any series that has not
theretofore been authorized by a supplemental indenture,
provided that the rating agency condition has been
satisfied;
9. to provide for any interest rate swap or cap transactions
with respect to any floating rate series or class of
securitization bonds or any series or class with specified
credit enhancement; but:
a. such action shall not, as evidenced by an opinion of
counsel, adversely affect in any material respect the
interests of any securitization bondholder or other
swap counterparty; and
b. the rating agency condition shall have been
satisfied; or
10. to authorize the appointment of any listing agent, transfer
agent or paying agent or additional registrar for any class
of securitization bonds required or advisable in connection
with the listing of any class of securitization bonds on the
Luxembourg Stock Exchange or any other stock exchange, and
otherwise to amend the indenture to incorporate any changes
requested or required by any governmental authority, stock
exchange authority, listing agent, transfer agent or paying
agent or additional registrar for any class of
securitization bonds in connection with that listing.
Modifications That Require the Approval of the Securitization
Bondholders. The issuer and the trustee also may, upon satisfaction of the
rating agency condition and with the consent of the holders of not less
than a majority of the total outstanding principal balance of the
securitization bonds of each series or class to be affected thereby,
execute a supplemental indenture to add any provisions to, or change in any
manner or eliminate any of the provisions of, the indenture or modify in
any manner the rights of the securitization bondholders under the
indenture. However, the supplemental indenture may not, without the consent
of the holder of each outstanding securitization bond of each series or
class affected thereby and each swap counterparty, if any, affected
thereby:
1. change the date of payment of any scheduled payment of
principal of or interest on any securitization bond, or
reduce the principal balance thereof, the interest rate
thereof or the redemption price with respect thereto, change
the provisions of any interest rate swap agreement relating
to the amount, calculation or timing of payments, change the
provisions of the indenture and the applicable supplemental
indenture relating to the application of collections on, or
the proceeds of the sale of, the collateral to payment of
principal of or interest on the securitization bonds, or
change the currency in which any securitization bond or any
interest thereon is payable;
2. impair the right to institute suit for the enforcement of
the provisions of the indenture regarding payment;
3. reduce the percentage of the total outstanding principal
balance of the securitization bonds, or of a series or class
thereof, the consent of the holders of which is required for
any supplemental indenture, or the consent of the holders of
which is required for any waiver of compliance with
specified provisions of the indenture or of defaults and
their consequences;
4. reduce the percentage of the total outstanding principal
balance of the securitization bonds required to direct the
trustee to direct the issuer to liquidate or preserve the
collateral;
5. reduce the percentage of the total outstanding principal
balance of the securitization bonds, or of a series or class
thereof, the consent of the holders of which is required for
any amendments to the sale agreement, the administration
agreement, the servicing agreement or any interest rate swap
entered into in connection with any series or class of
securitization bonds;
6. modify the indenture to affect the amount of any payment of
any interest or principal payable on any securitization bond
on any payment date or change the redemption dates, expected
amortization schedules or series final maturity dates or
class final maturity dates of any securitization bonds or
the method of calculation of interest on any floating rate
securitization bonds;
7. with respect to any series, decrease the required capital
amount, the overcollateralization amount or the scheduled
overcollateralization level with respect to any payment
date;
8. modify the indenture regarding the voting of securitization
bonds held by the issuer, the seller, an affiliate of either
of them or any obligor on the securitization bonds;
9. decrease the percentage of the total outstanding principal
balance of the securitization bonds required to amend the
sections of the indenture which specify the applicable
percentage of the total outstanding principal balance of the
securitization bonds necessary to amend the indenture or
other related agreements specified therein; or
10. permit the creation of any lien ranking prior to or on a
parity with the lien of the indenture with respect to any of
the collateral for the securitization bonds or, except as
otherwise contemplated in the indenture, terminate the lien
of the indenture on any property or deprive the holder of
any securitization bond of the security of the indenture.
Promptly following the execution of any amendment to the indenture
or supplemental indenture requiring the consent of any securitization
bondholders, the trustee will furnish written notice of the substance of
such amendment to each securitization bondholder. For so long as any of the
securitization bonds are listed on the Luxembourg Stock Exchange and the
rules of that exchange so require, this notice will be published in a daily
newspaper in Luxembourg, which is expected to be the Luxemburger Wort.
Enforcement of the Sale Agreement, the Servicing Agreement and any
Interest Rate Swap Agreement. The indenture will provide that the issuer
will take all lawful actions to enforce its rights under the sale
agreement, the servicing agreement and any interest rate swap agreement.
The indenture will also provide that the issuer will take all lawful
actions to compel or secure the performance and observance by the seller,
the servicer and any swap or cap counterparty of each of their respective
obligations to the issuer under the sale agreement, the servicing agreement
and any interest rate swap agreement. So long as no event of default occurs
and is continuing, except as otherwise directed by the trustee under the
circumstances described in the indenture or any supplemental indenture, as
described in any prospectus supplement, the issuer may exercise any and all
rights, remedies, powers and privileges lawfully available to the issuer
under or in connection with the sale agreement, the servicing agreement and
any interest rate swap agreement. However, if the issuer and Consumers or
the servicer propose to amend, modify, waive, supplement, terminate or
surrender, or agree to any amendment, modification, waiver, supplement,
termination or surrender of, the process for adjusting the securitization
charge, the issuer must notify the trustee and the trustee must notify
securitization bondholders of this proposal. In addition, the trustee may
consent to this proposal only with the consent of the holders of a majority
of the total outstanding principal balance of the securitization bonds of
each series or class materially and adversely affected thereby and only if
the rating agency condition is satisfied.
If an event of default occurs and is continuing, the trustee may,
and at the direction of (1) the holders of a majority of the total
outstanding principal balance of the securitization bonds of all series,
with respect to the sale agreement and the servicing agreement, and (2) the
holders of that percentage of the total outstanding principal balance of
the securitization bonds of the related class specified in the related
prospectus supplement, with respect to any interest rate swap or cap
agreement, shall, exercise all rights, remedies, powers, privileges and
claims of the issuer against the seller, the servicer or any swap
counterparty under or in connection with the sale agreement, the servicing
agreement and any interest rate swap agreement, and any right of the issuer
to take this action shall be suspended. In the event of a foreclosure,
there is likely to be a limited market, if any, for the securitization
property, and, therefore, foreclosure may not be a realistic or practical
remedy.
Modifications to the Sale Agreement, the Servicing Agreement and
any Interest Rate Swap or Cap Agreement. With the consent of the trustee,
the sale agreement and the servicing agreement may be amended, so long as
the rating agency condition is satisfied, at any time and from time to
time, without the consent of the securitization bondholders or the
counterparty to any cap or swap transaction. However, this amendment may
not adversely affect in any material respect the interest of any
securitization bondholder or the counterparty to any cap or swap agreement
without the consent of the holders of a majority of the total outstanding
principal balance of the securitization bonds of each series or class, and
each counterparty to any swap transaction, materially and adversely
affected thereby.
Also, an interest rate swap or cap agreement may be amended with
the consent of the trustee, as directed by the holders of the related
floating rate class to the extent described in the related prospectus
supplement, and the related swap counterparty, so long as the rating agency
condition is satisfied. However, this amendment may not adversely affect in
any material respect the interest of any other series or class of
securitization bondholders or the counterparty to any swap transaction
without the consent of the holders of a majority of the total outstanding
principal balance of the securitization bonds of each other series or
classes and each counterparty to any swap transaction materially and
adversely affected thereby.
Notification of the Rating Agencies, the Trustee and the
Securitization Bondholders of any Modification. If the issuer, Consumers or
the servicer proposes to:
1. amend, modify, waive, supplement, terminate or surrender, or
agree to any other amendment, modification, waiver,
supplement, termination or surrender of, the terms of the
sale agreement, the servicing agreement or any interest rate
swap agreement; or
2. waive timely performance or observance by Consumers, the
servicer or any swap counterparty under the sale agreement,
the servicing agreement or any interest rate swap agreement,
respectively;
in each case in a way which would materially and adversely affect the
interests of securitization bondholders or the counterparty to any swap
transaction, the issuer must first notify the rating agencies of the
proposed amendment, modification, waiver, supplement termination or
surrender. Upon receiving notification regarding whether the rating agency
condition will be satisfied with respect to such projected action, the
issuer must notify the trustee and the trustee must notify the
securitization bondholders and any swap counterparty of the proposed action
and whether the rating agency condition has been satisfied with respect to
the proposed action. With respect to any proposed action related to the
sale agreement or the servicing agreement, the trustee will consent to this
proposed action only with the consent of the holders of a majority of the
total outstanding principal amount of the securitization bonds of each
series or class, and each counterparty to any swap transaction, materially
and adversely affected thereby. With respect to any proposed action related
to any interest rate swap agreement, the trustee will consent to this
proposed action subject to and in accordance with any requirements
described in the related prospectus supplement. For so long as any of the
securitization bonds are listed on the Luxembourg Stock Exchange and the
rules of that exchange so require, notice of this proposed action will be
published in a daily newspaper in Luxembourg, which is expected to be the
Luxemburger Wort, promptly following its effectiveness.
Termination of an Interest Rate Swap Agreement. Upon the
occurrence of any event that permits the issuer to terminate any interest
rate swap agreement, the issuer may terminate that agreement only if so
directed by holders representing that percentage of the aggregate
outstanding principal amount of the related class and series of
securitization bonds specified in the related prospectus supplement, and if
so directed, the issuer must terminate that agreement.
WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE SECURITIZATION BONDS
An "event of default" is defined in the indenture as:
1. a default for five business days in the payment of any
interest on any securitization bond;
2. a default in the payment of the principal of any
securitization bond of any series on the final maturity date
for that series or, if applicable, any class on the final
maturity date for that class;
3. a default in the payment of the redemption price for any
securitization bond on the redemption date therefor;
4. a default in the observance or performance of any covenant
or agreement of the issuer made in the indenture (other than
those specifically dealt with in clauses 1., 2. or 3.
above), or any representation or warranty of the issuer made
in the indenture proving to have been incorrect in any
material respect as of the time when made, and the
continuation of that default for a period of 30 days after
the earliest of the date (a) notice is given to the issuer
by the trustee, (b) notice is given to the issuer and the
trustee by the holders of at least 25% of the total
outstanding principal balance of the securitization bonds of
any series or class, specifying such default or incorrect
representation or warranty or (c) the issuer has knowledge
of the default;
5. specified events of bankruptcy, receivership or liquidation
of the issuer; and
6. violation by the State of Michigan of its pledge with
respect to the Customer Choice Act and the securitization
bonds.
If an event of default occurs and is continuing, other than a
default described in clause 6. above, the trustee or holders of a majority
in the total outstanding principal balance of the securitization bonds of
all series may declare the entire principal balance of all series of the
securitization bonds to be immediately due and payable. This declaration of
acceleration may, under the circumstances specified in the indenture, be
rescinded by the holders of a majority in outstanding principal balance of
all series of the securitization bonds. If an event of default described in
clause 5. occurs, the entire principal balance of all series of the
securitization bonds will immediately become due and payable.
Remedies Available to the Trustee Following an Event of Default.
In addition to acceleration of the securitization bonds, the trustee may
exercise one or more of the following remedies upon an event of default:
1. institute proceedings in its own name and as trustee of an
express trust for the collection of all amounts then payable
on the securitization bonds or under the indenture with
respect to the securitization bonds, whether by declaration
or otherwise, enforce any judgment obtained, and collect
from the issuer and any other obligor upon the
securitization bonds moneys adjudged due;
2. institute proceedings from time to time for the complete or
partial foreclosure of the indenture with respect to the
collateral;
3. exercise any remedies of a secured party under the Uniform
Commercial Code or the Customer Choice Act or any other
applicable law and take any other appropriate action to
protect and enforce the rights and remedies of the trustee
and the holders of the securitization bonds of that series;
4. sell the collateral or any portion thereof or rights or
interest therein, at one or more public or private sales
called and conducted in any manner permitted by law;
5. exercise all rights, remedies, powers, privileges and claims
of the issuer against Consumers, the administrator, the
servicer or any swap counterparty under or in connection
with the sale agreement, the administration agreement, the
servicing agreement or any interest rate swap agreement; and
6. institute or participate in proceedings reasonably necessary
to compel performance of or to enforce the pledge of the
State of Michigan under the Customer Choice Act and collect
any monetary damages incurred by the holders of the
securitization bonds or the trustee.
The remedy described in clause 6. above is the only remedy that
the trustee may exercise upon an event of default caused solely by a
violation by the State of Michigan of its pledge with respect to the
Customer Choice Act and the securitization bonds. See "Risk Factors - The
Proceeds from Foreclosure on the Securitization Property May Be
Insufficient to Pay the Securitization Bonds".
When the Trustee Can Sell the Collateral. If the securitization
bonds of all series have been declared to be due and payable following an
event of default, the trustee may, in its discretion, either:
1. sell the collateral, or
2. elect to have the issuer maintain possession of the
collateral and continue to apply distributions on the
collateral as if there had been no declaration of
acceleration.
The trustee is prohibited from selling the collateral following an
event of default other than a default in the payment of any principal, a
default for five business days or more in the payment of any interest on
any securitization bond of any series or a default in the payment of the
redemption price for any securitization bond on the redemption date
therefor unless:
1. the holders of 100% of the total outstanding principal
balance of all series of securitization bonds consent to
this sale;
2. the proceeds of this sale, together with available amounts
in the collection account, are sufficient to pay in full the
principal of and accrued interest on the outstanding
securitization bonds; or
3. the trustee determines that funds provided by the collateral
would not be sufficient on an ongoing basis to make all
payments on the securitization bonds of all series as these
payments would have become due if the securitization bonds
had not been declared due and payable, and the trustee
obtains the consent of the holders of 662/3% of the total
outstanding principal balance of the securitization bonds of
all series.
Right of Securitization Bondholders to Direct Proceedings. Subject
to the provisions for indemnification and the limitations contained in the
indenture, and except as may be described in any prospectus supplement
regarding any floating rate class of securitization bonds, the holders of a
majority of the total outstanding principal balance of the securitization
bonds of all series (or, if less than all series or classes are affected,
the affected series or class or classes) will have the right to direct the
time, method and place of conducting any proceeding or any remedy
available to the trustee or exercising any trust or power conferred on the
trustee; provided that, among other things:
1. this direction shall not conflict with any rule of law or
with the indenture;
2. subject to the provisions specified in the indenture, any
direction to the trustee to sell or liquidate the collateral
shall be by the holders of 662/3% of the total outstanding
principal balance of all series of securitization bonds
specified in the preceding paragraph; and
3. the trustee may take any other action deemed proper by the
trustee that is not inconsistent with this direction.
In case an event of default occurs and is continuing, the trustee
will be under no obligation to exercise any of the rights or powers under
the indenture at the direction of any of the holders of securitization
bonds of any series if it reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be
incurred by it in complying with this request. The trustee does not need to
take any action pursuant to the direction of the securitization bondholders
if it determines that this action might materially adversely affect the
rights of any securitization bondholder not consenting to this action. Each
holder of securitization bonds also has the unconditional right to
institute suit for the enforcement of payment of interest and principal due
on the securitization bonds of that holder.
Waiver of Default. Except as may be described in any prospectus
supplement regarding any floating rate class of securitization bonds, the
holders of a majority in total outstanding principal balance of the
securitization bonds of all series may, in those cases specified in the
indenture, waive any default with respect thereto. However, these holders
may not waive a default in the payment of principal of or interest on any
of the securitization bonds or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or
consent by the holders of 100% of the outstanding securitization bonds of
all affected series and classes.
No securitization bondholder will have the right to institute any
proceeding, judicial or otherwise, or to avail itself of any remedies
provided in the Customer Choice Act, or to avail itself of the right to
foreclose on the securitization property or otherwise enforce the lien in
the securitization property, with respect to the indenture, unless:
1. the holder previously has given to the trustee written
notice of a continuing event of default;
2. the holders of not less than 25% of the total outstanding
principal balance of the securitization bonds of all series
have made written request of the trustee to institute the
proceeding in its own name as trustee;
3. the holder or holders have offered the trustee security or
indemnity reasonably satisfactory to the trustee against the
liabilities to be incurred in complying with the request;
4. the trustee for 60 days after its receipt of the notice,
request and offer has failed to institute the proceeding;
and
5. no direction inconsistent with this written request has been
given to the trustee during the 60-day period referred to
above by the holders of a majority of the total outstanding
principal balance of the securitization bonds of all series.
COVENANTS OF THE ISSUER
The issuer will keep in effect its existence as a limited
liability company under Delaware law, provided that the issuer may
consolidate with or merge into another entity or sell substantially all of
its assets to another entity and dissolve if:
1. the entity formed by or surviving the consolidation or
merger or to whom substantially all of its assets are sold
is organized and existing under the laws of the United
States or any state thereof and expressly assumes by a
supplemental indenture the due and punctual payment of the
principal of and interest on all securitization bonds and
the performance of the issuer's obligations under the
indenture;
2. the entity expressly assumes all obligations and succeeds to
all rights of the issuer under the sale agreement, the
administration agreement, the servicing agreement and any
interest rate swap agreement pursuant to an assignment and
assumption agreement executed and delivered to the trustee;
3. no default or event of default under the indenture will have
occurred and be continuing immediately after giving effect
to the merger, consolidation or sale;
4. the rating agency condition will have been satisfied;
5. the issuer has received an opinion of counsel to the effect
that this consolidation, merger or sale would have no
material adverse tax consequence to the issuer or any
securitization bondholder, the consolidation or merger or
sale complies with the indenture and all conditions
precedent provided in the indenture relating to the
consolidation, merger or sale and will result in the trustee
maintaining a continuing valid first priority security
interest in the collateral;
6. none of the securitization property, the MPSC financing
order or the seller's, the servicer's or the issuer's rights
under the Customer Choice Act or the MPSC financing order
are impaired thereby; and
7. any action that is necessary to maintain the lien and
security interest created by the indenture will have been
taken.
Additional Covenants of the Issuer. The issuer will take any
action necessary or advisable to, among other things, maintain and preserve
the lien and security interest, and priority thereof, of the indenture. The
issuer will not permit the validity of the indenture to be impaired, the
lien to be amended, subordinated or terminated or discharged, or any person
to be released from any covenants or obligations except as expressly
permitted by the indenture. The issuer will also not permit any lien,
charge, claim, security interest, mortgage or other encumbrance, other than
the lien and security interest created by the indenture, to be created on
or extend to or otherwise arise upon or burden the collateral or any part
thereof, any interest therein or the proceeds thereof. Finally, the issuer
will not permit the lien of the indenture not to constitute a continuing
valid first priority security interest in the collateral.
The issuer may not, among other things:
1. except as expressly permitted by the indenture, the sale
agreement, the servicing agreement, any interest rate swap
agreement or any other basic document, sell, transfer,
exchange or dispose of any of the collateral unless directed
to do so by the trustee in accordance with the indenture; or
2. claim any credit on, or make any deduction from, the
principal or interest payable in respect of, the
securitization bonds, other than amounts properly withheld
under the United States Internal Revenue Code, referred to
as the Code, or assert any claim against any present or
former securitization bondholder because of the payment of
taxes levied or assessed upon the issuer or any part of the
collateral.
The issuer may not engage in any business other than purchasing
and owning the securitization property, issuing securitization bonds from
time to time, pledging its interest in the collateral to the trustee to
secure the securitization bonds, entering into and performing under any
interest rate swap agreement, and performing activities that are necessary,
suitable or convenient to accomplish the foregoing.
The Issuer May Not Engage in Any Other Financial Transactions. The
issuer may not issue, incur, assume or guarantee any indebtedness except
for the securitization bonds and any other obligations or indebtedness
except as contemplated by the basic documents. Also, the issuer may not
guarantee or otherwise become contingently liable in connection with the
obligations, stocks or dividends of, or own, purchase, repurchase or
acquire, or agree contingently to acquire, any stock, obligations, assets
or securities of, or any other interest in, or make any capital
contribution to, any other person, other than the eligible investments. The
issuer may not make any loan or advance or credit to any person. The issuer
will not make any expenditure for capital assets or lease any capital asset
other than securitization property purchased from the seller pursuant to,
and in accordance with, the sale agreement. The issuer may not make any
payments, distributions or dividends to any member of the issuer in respect
of its membership interest in the issuer, other than any amount released to
the issuer by the trustee in accordance with the indenture and except as
otherwise provided in the indenture.
ACCESS TO THE LIST OF HOLDERS OF THE SECURITIZATION BONDS
Any securitization bondholder may, by written request to the
trustee, obtain access to the list of all securitization bondholders
maintained by the trustee for the purpose of communicating with other
securitization bondholders with respect to their rights under the indenture
or the securitization bonds. The trustee may elect not to afford a
requesting securitization bondholder access to the list of securitization
bondholders if it agrees to mail the desired communication or proxy, on
behalf and at the expense of the requesting securitization bondholder, to
all securitization bondholders.
THE ISSUER MUST FILE AN ANNUAL COMPLIANCE STATEMENT
The issuer will be required to file annually with the trustee a
written statement as to the fulfillment of its obligations under the
indenture. In addition, the issuer will furnish to the trustee an opinion
of counsel concerning filings made by the issuer on an annual basis and
before the effectiveness of any amendment to the sale agreement, the
servicing agreement or the indenture.
THE TRUSTEE MUST PROVIDE A REPORT TO ALL SECURITIZATION BONDHOLDERS
If required by the Trust Indenture Act, the trustee will be
required to mail each year to all securitization bondholders a brief
report. This report must state, among other items:
1. the trustee's eligibility and qualification to continue as
the trustee under the indenture,
2. any amounts advanced by it under the indenture,
3. the amount, interest rate and maturity date of specific
indebtedness owing by the issuer to the trustee in the
trustee's individual capacity,
4. the property and funds physically held by the trustee,
5. any additional issue of a series of securitization bonds not
previously reported, and
6. any action taken by it that materially affects the
securitization bonds of any series and that has not been
previously reported.
For so long as any of the securitization bonds are listed on the
Luxembourg Stock Exchange and the rules of that exchange so require, the
trustee will publish or will cause to be published following the
preparation of this annual report in a daily newspaper in Luxembourg,
expected to be the Luxemburger Wort, a notice to the effect that the
information set forth in the preceding paragraph will be available for
review at the main office of the listing agent in Luxembourg.
WHAT WILL TRIGGER SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged with respect to the
securitization bonds of any series upon the delivery to the trustee of
funds sufficient for the payment in full of all amounts owed under the
securitization bonds of that series. In addition, the issuer must deliver
to the trustee the officer's certificate and opinion of counsel specified
in the indenture. The deposited funds will be segregated and held apart
solely for paying the securitization bonds, and the securitization bonds
will not be entitled to any amounts on deposit in the collection account
other than amounts on deposit in the defeasance subaccount for the
securitization bonds.
THE ISSUER'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS
Subject to the conditions described below, the issuer may, at any
time, terminate:
1. all of its obligations under the indenture with respect to
the securitization bonds of any series; or
2. its obligations to comply with some of the covenants in the
indenture, including all of the covenants described under
"-- Covenants of the Issuer" above.
The legal defeasance option is the right of the issuer to
terminate at any time its obligations under the indenture with respect to
the securitization bonds of any series. The covenant defeasance option is
the right of the issuer at any time to terminate its obligations to comply
with the covenants in the indenture. The issuer may exercise the legal
defeasance option with respect to any series of securitization bonds
notwithstanding its prior exercise of the covenant defeasance option with
respect to that series. If the issuer exercises the legal defeasance option
with respect to any series, that series will be entitled to payment only
from the funds or other obligations set aside under the indenture for
payment thereof in accordance with the expected amortization schedule and
on the expected final payment date or redemption date therefor as described
below. That series will not be subject to payment through redemption or
acceleration prior to the expected final payment date or redemption date,
as applicable. If the issuer exercises the covenant defeasance option with
respect to any series, the final payment of the securitization bonds of
that series may not be accelerated because of an event of default relating
to a default in the observance or performance of any covenant or agreement
of the issuer made in the indenture.
The issuer may exercise the legal defeasance option or the
covenant defeasance option with respect to any series of securitization
bonds only if:
1. the issuer irrevocably deposits or causes to be deposited in
trust with the trustee cash or U.S. Government Obligations
for the payment of principal of and interest on that series
to the expected final payment date or redemption date
therefor, as applicable, the deposit to be made in the
defeasance subaccount for that series;
2. the issuer delivers to the trustee a certificate from a
nationally recognized firm of independent accountants
expressing its opinion that the payments of principal of and
interest on the U.S. Government Obligations when due and
without reinvestment plus any cash deposited in the
defeasance subaccount will provide cash at times and in
sufficient amounts to pay in respect of the securitization
bonds of that series:
a. principal in accordance with the expected
amortization schedule therefor, and/or if that series
is to be redeemed, the redemption price on the
redemption date therefor, and
b. interest when due;
3. in the case of the legal defeasance option, 95 days pass
after the deposit is made and during the 95-day period no
default by the seller or the issuer relating to events of
bankruptcy, insolvency, receivership or liquidation of the
issuer occurs during the period;
4. no default by the seller or the issuer has occurred and is
continuing on the day of this deposit and after giving
effect thereto;
5. in the case of the legal defeasance option, the issuer
delivers to the trustee an opinion of nationally recognized
tax counsel stating that:
a. the issuer has received from, or there has been
published by, the IRS a ruling; or
b. since the date of execution of the indenture, there
has been a change in the applicable federal income
tax law; and
in either case confirming that the holders of the
securitization bonds of that series will not recognize
income, gain or loss for federal income tax purposes as a
result of the exercise of the legal defeasance option and
will be subject to federal income tax on the same
amounts, in the same manner and at the same times as
would have been the case if the legal defeasance had not
occurred;
6. in the case of the covenant defeasance option, the issuer
delivers to the trustee an opinion of nationally recognized
tax counsel to the effect that the holders of the
securitization bonds of that series will not recognize
income, gain or loss for federal income tax purposes as a
result of the exercise of the covenant defeasance option and
will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been
the case if the covenant defeasance had not occurred; and
7. the issuer delivers to the trustee a certificate of an
authorized officer of the issuer and an opinion of counsel,
each stating that all conditions precedent to the
satisfaction and discharge of the securitization bonds of
that series have been complied with as required by the
indenture.
There will be no other conditions to the exercise by the issuer of
its legal defeasance option or its covenant defeasance option.
THE TRUSTEE
The Bank of New York will be the initial trustee under the
indenture. The trustee may resign at any time upon 30 days notice by so
notifying the issuer. The holders of a majority in total outstanding
principal balance of the securitization bonds of all series may remove the
trustee by so notifying the trustee and may appoint a successor trustee.
The indenture provides that the issuer will remove the trustee if the
trustee ceases to be eligible to continue in this capacity under the
indenture, the trustee becomes insolvent, a receiver or other public
officer takes charge of the trustee or its property or the trustee becomes
incapable of acting. If the trustee resigns or is removed or a vacancy
exists in the office of trustee for any reason, the issuer will be
obligated promptly to appoint a successor trustee eligible under the
indenture. No resignation or removal of the trustee will become effective
until acceptance of the appointment by a successor trustee. The trustee
must at all times satisfy the requirements of the Trust Indenture Act and
the Investment Company Act of 1940. The Trustee must also have a combined
capital and surplus of at least $50 million and a long-term debt rating of
at least "BBB-" by S&P, at least "Baa3" or better by Moody's and at least
"BBB-" by Fitch. If the trustee consolidates with, merges or converts into,
or transfers all or substantially all of its corporate trust business or
assets to, another entity, the resulting, surviving or transferee entity
will without any further action be the successor trustee.
For so long as any of the securitization bonds are listed on the
Luxembourg Stock Exchange, and to the extent the rules of that exchange so
require, the issuer will have a listing agent, a paying agent and a
transfer agent in Luxembourg.
GOVERNING LAW
The indenture will be governed by the laws of the State of
Michigan.
HOW A BANKRUPTCY OF THE SELLER OR
SERVICER MAY AFFECT YOUR INVESTMENT
SALE OR FINANCING
Consumers will represent and warrant in the sale agreement that
the transfer of the securitization property in accordance with that
agreement constitutes a valid sale and assignment by Consumers to the
issuer of the securitization property. Consumers will also represent and
warrant in the sale agreement, and it is a condition of closing the sale of
securitization property, that it will take the appropriate actions under
the Customer Choice Act and the Uniform Commercial Code, including filing a
financing statement, to perfect this sale. The Customer Choice Act provides
that a transfer of securitization property by an electric utility to an
assignee which the parties have in the governing documentation expressly
stated to be a sale or other absolute transfer, in a transaction approved
in a financing order, shall be treated as a true sale and not as a secured
transaction and that title, legal and equitable, in the securitization
property, has passed to the transferee. The Customer Choice Act also
provides that the characterization of a transfer as a sale or other
absolute transfer applies regardless of whether the purchaser has any
recourse against the seller, or any other term of the parties' agreement,
including the seller's retention of an equity interest in the
securitization property, the fact that the electric utility acts as a
collector of securitization charges relating to the securitization
property, or the treatment of the transfer as a financing for tax,
financial reporting, or other purposes. Consumers and the issuer will treat
the transaction as a sale under applicable law, although for financial
accounting and federal and state tax purposes the securitization bonds will
be treated as a financing and not a sale. See "The Customer Choice Act --
Consumers and Other Utilities May Securitize Qualified Costs" in this
prospectus.
In the event of a bankruptcy of Consumers, a party in interest in
the bankruptcy might take the position that the sale of the securitization
property to the issuer was a financing transaction and not a "sale or other
absolute transfer." The party in interest might argue that the treatment of
the transaction for financial accounting and tax purposes as a financing
and not a sale lends weight to the position that the transaction should be
treated as a financing and not a sale. As noted above, the Customer Choice
Act specifically provides for the treatment of the transaction as a sale as
a matter of state law and that treatment is not affected by treatment of
the transfer as a financing for federal or state tax purposes or financial
accounting purposes. However, a bankruptcy court has authority not to
follow state law if it determines that the state law is contrary to a
paramount federal bankruptcy policy or interest. If a court were to
characterize the transaction as a financing rather than a sale, the issuer
would be treated as a secured creditor of Consumers in the bankruptcy
proceedings. Although, as noted below, the issuer would in that case have a
security interest in the securitization property, it would not likely be
entitled to access to the securitization charge revenue collections during
the bankruptcy. As a result, repayment on the bonds could be significantly
delayed and a plan of reorganization in the bankruptcy might permanently
modify the amount and timing of payments of securitization charge revenue
collections to the issuer and therefore the amount and timing of funds
available to the issuer to pay securitization bondholders.
In order to mitigate the impact of the possible recharacterization
of a sale of securitization property as a financing transaction, the sale
agreement provides that in the event that the sale and transfer of the
securitization property is determined by a court not to be a true sale as
contemplated by the Customer Choice Act, then the sale and transfer shall
be treated as a pledge of the securitization property and the seller shall
be deemed to have granted a security interest to the issuer in the
securitization property, and to have incurred an obligation secured by this
security interest in an amount equal to the purchase price for the
securitization property. The sale agreement requires that financing
statements under the Uniform Commercial Code executed by the issuer be
filed in the appropriate offices in Michigan. The Customer Choice Act
further provides that any relevant filing in respect of securitization
bonds takes precedence over any other filings. As a result of these
filings, the issuer may take the position that it is a secured creditor of
Consumers, and as a result, that it is entitled to recover against the
security, which includes the securitization property. None of this,
however, mitigates the risk of payment delays and other adverse effects
caused by a seller bankruptcy. Further, if, for any reason, a
securitization property notice is not filed under the Customer Choice Act
or the issuer fails to otherwise perfect its interest in the securitization
property, and the transfer is thereafter deemed not to constitute a sale or
other absolute transfer, the issuer would be an unsecured creditor of
Consumers. In that event, the issuer's sole source of payment for the
securitization bonds would be whatever it recovered on its unsecured claim
in the Consumers bankruptcy case, which could differ materially from the
amount and timing of securitization charge revenue collections that were
intended to fund payments on the securitization bonds.
CONSOLIDATION OF THE ISSUER AND CONSUMERS
If Consumers were to become a debtor in a bankruptcy case, a party
in interest in the bankruptcy may attempt to substantively consolidate the
assets and liabilities of the issuer and Consumers. Consumers and the
issuer have taken steps to attempt to minimize this risk, as discussed in
"Consumers Funding LLC, the Issuer" in this prospectus. However, no
assurance can be given that if Consumers or an affiliate of Consumers other
than the issuer were to become a debtor in a bankruptcy case, a court would
not order that the assets and liabilities of the issuer be consolidated
with those of Consumers or its affiliate. If the assets and liabilities
were ordered consolidated, the claims of the securitization bondholders
against the issuer would be treated as secured claims against the
consolidated entities. Payment of those claims would be subject to
substantial delay and to adjustment in timing and amount under a plan of
reorganization in the bankruptcy case.
CLAIMS IN BANKRUPTCY; CHALLENGE TO INDEMNITY CLAIMS
If Consumers were to become a debtor in a bankruptcy case, claims
including indemnity claims by the issuer against Consumers under the sale
agreement and the other documents executed in connection therewith would be
unsecured claims and would be subject to being discharged in the bankruptcy
case. In addition, a party in interest in the bankruptcy may request that
the bankruptcy court estimate any contingent claims of the issuer against
Consumers. That party may then take the position that these claims should
be estimated at zero or at a low amount because the contingency giving rise
to these claims is unlikely to occur. If Consumers were to become a debtor
in a bankruptcy case and the indemnity provisions of the sale agreement
were triggered, a party in interest in the bankruptcy might challenge the
enforceability of the indemnity provisions. If a court were to hold that
the indemnity provisions were unenforceable, the issuer would be left with
a claim for actual damages against Consumers based on breach of contract
principles. The actual amount of these damages would be subject to
estimation and/or calculation by the court.
No assurances can be given as to the result of any of the
above-described actions or claims. Furthermore, no assurance can be given
as to what percentage of their claims, if any, unsecured creditors would
receive in any bankruptcy proceeding involving Consumers.
STATUS OF SECURITIZATION PROPERTY AS CURRENT PROPERTY
Consumers has represented in the sale agreement, and the Customer
Choice Act provides, that the securitization property constitutes an
existing property right and that it shall continue to exist until the
securitization bonds and related expenses have been paid in full.
Nevertheless, no assurance can be given that in the event of a bankruptcy
of Consumers a party in interest in the bankruptcy would not attempt to
take the position that the securitization property comes into existence
only as customers use electricity. If a court were to adopt this position,
no assurance can be given that a security interest in favor of the
securitization bondholders would attach to the securitization charge, in
respect of electricity consumed after the commencement of the bankruptcy
case. If it were determined that the securitization property had not been
sold to the issuer, and the security interest in favor of the
securitization bondholders did not attach to the securitization charge in
respect of electricity consumed after the commencement of the bankruptcy
case, then the issuer would be an unsecured creditor of Consumers. If so,
there would be delays and reductions in payments on the securitization
bonds. Whether or not a court determined that the securitization property
had been sold to the issuer, no assurances can be given that a court would
not rule that any securitization charge relating to electricity consumed
after the commencement of the bankruptcy cannot be transferred to the
issuer or the trustee.
In addition, in the event of a bankruptcy of Consumers, a party in
interest in the bankruptcy could assert that the issuer should pay a
portion of Consumers' costs associated with the generation, transmission or
distribution of the electricity, consumption of which gave rise to the
securitization charge revenue collections used to make payments on the
securitization bonds.
Regardless of whether Consumers is the debtor in a bankruptcy
case, if a court were to accept the argument that the securitization
property comes into existence only as customers use electricity, a tax or
government lien or other nonconsensual lien on property of Consumers
arising before the securitization property came into existence could have
priority over the issuer's interest in the securitization property.
ENFORCEMENT OF RIGHTS BY TRUSTEE
Upon an event of default under the indenture, the Customer Choice
Act permits the trustee to enforce the security interest in the
securitization property in accordance with the terms of the indenture. In
this capacity, the trustee is permitted to request the MPSC to order the
sequestration and payment to securitization bondholders of revenues arising
with respect to the securitization property. The Customer Choice Act
provides that this order will remain in full force and effect
notwithstanding any bankruptcy, reorganization or other insolvency
proceedings with respect to the utility or its assignee. There can be no
assurance, however, that the MPSC would issue this order after a Consumers
bankruptcy in light of the automatic stay provisions of Section 362 of the
Bankruptcy Code or, alternatively, that a bankruptcy court would lift the
automatic stay to permit this action by the MPSC. In that event, the
trustee may under the indenture seek an order from the bankruptcy court
lifting the automatic stay with respect to this action by the MPSC and an
order requiring an accounting and segregation of the revenues arising from
the securitization property. There can be no assurance that a court would
grant either order.
BANKRUPTCY OF SERVICER
The servicer is entitled to commingle securitization charge
revenue collections with its own funds until each remittance date. The
Customer Choice Act provides that the priority of a lien and security
interest created under the Customer Choice Act is not impaired by the
commingling of securitization charge revenue collections arising with
respect to the securitization property with funds of the electric utility.
However, in the event of a bankruptcy of the servicer, a party in interest
in the bankruptcy might assert, and a court might rule, that securitization
charge revenue collections commingled by the servicer with its own funds
and held by the servicer as of the date of bankruptcy were property of the
servicer as of that date and are therefore property of the servicer's
bankruptcy estate, rather than property of the issuer. If the court so
rules, then the court would likely rule that the trustee has only a general
unsecured claim against the servicer for the amount of commingled
securitization charge revenue collections held as of that date and could
not recover the commingled securitization charge revenue collections held
as of the date of bankruptcy.
However the court rules on the ownership of the commingled
securitization charge revenue collections, the automatic stay arising upon
the bankruptcy of the servicer could delay the trustee from receiving the
commingled securitization charge revenue collections held by the servicer
as of the date of the bankruptcy until the court grants relief from the
stay. A court ruling on any request for relief from the stay could be
delayed pending the court's resolution of whether the commingled
securitization charge revenue collections are property of the issuer or of
the servicer.
The servicing agreement provides that the trustee, as assignee of
the issuer, with the consent of a majority in principal amount of the
securitization bondholders, may vote to appoint a successor servicer that
satisfies the rating agency condition. However, the automatic stay might
delay a successor servicer's replacement of the servicer. Even if a
successor servicer may be appointed and may replace the servicer, a
successor may be difficult to obtain and may not be capable of performing
all of the duties that Consumers as servicer was capable of performing.
Moreover, if Consumers were to become a debtor in a bankruptcy proceeding,
Consumers might be excused from its contractual obligations as servicer of
the securitization property.
MATERIAL INCOME TAX CONSEQUENCES FOR THE SECURITIZATION BONDS
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
INCOME TAX STATUS OF THE SECURITIZATION BONDS
The issuer and Consumers have received a private letter ruling
from the Internal Revenue Service, referred to as the IRS, to the effect
that the securitization bonds will be classified as debt obligations of
Consumers. Based on that private letter ruling and the assumptions
contained therein, including a representation by Consumers that it will not
make, or allow there to be made, any election to the contrary, Skadden,
Arps, Slate, Meagher & Flom LLP, special federal income tax counsel to
Consumers and the issuer, has rendered its opinion that for federal income
tax purposes (i) the securitization bonds will constitute debt of Consumers
and (ii) the issuer will not be subject to United States federal income tax
as an entity separate from Consumers.
GENERAL
The following is a summary of the material United States federal
income tax consequences of the purchase, ownership and disposition of the
securitization bonds applicable to an initial purchaser of securitization
bonds that, for U.S. federal income tax purposes, is a Non-U.S. Holder as
defined below, and also summarizes the similar principal United States
federal income tax consequences to U.S. Holders, as defined below, who are
initial purchasers. This summary has been prepared by Skadden, Arps, Slate,
Meagher & Flom LLP, special federal income tax counsel to Consumers and the
issuer, which is referred to in this prospectus as the special tax counsel.
Special tax counsel is of the opinion that its summary, as it relates to
Non-U.S. Holders, is correct in all material respects. Apart from that
opinion and the opinions described in the preceding paragraph, special tax
counsel will render no other opinions to the issuer with respect to the
securitization bonds. This summary does not purport to furnish information
in the level of detail or with the attention to an investor's specific tax
circumstances that would be provided by an investor's tax adviser. This
summary also does not address the consequences to holders of the
securitization bonds under state, local or foreign tax laws. This summary
is based upon current provisions of the Code, Treasury Regulations
thereunder, current administrative rulings, judicial decisions and other
applicable authorities in effect as of the date hereof, all of which are
subject to change, possibly with retroactive effect. Legislative, judicial
or administrative changes may occur, perhaps with retroactive effect, which
could affect the accuracy of the statements and conclusions set forth
herein as well as the tax consequences to holders of the securitization
bonds.
THE ISSUER SUGGESTS THAT ALL PROSPECTIVE INVESTORS CONSULT THEIR TAX
ADVISERS REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF SECURITIZATION BONDS IN LIGHT OF THEIR
PARTICULAR CIRCUMSTANCES, AS WELL AS THE EFFECT OF ANY FOREIGN, STATE,
LOCAL OR OTHER LAWS.
As used herein, a U.S. Holder of a securitization bond means an
investor that is a U.S. Person and a Non-U.S. Holder of a securitization
bond means an investor that is not a U.S. Person. For purposes of this
discussion, a U.S. Person means:
1. an individual, who is a citizen or resident of the United
States for U.S. federal income tax purposes,
2. a corporation, partnership or other entity (treated as a
corporation or a partnership for federal income tax
purposes) created or organized in or under the laws of the
United States, or any state or the District of Columbia
(other than a partnership that is not treated as a U.S.
person under any applicable Treasury Regulations);
3. an estate, the net income of which is subject to United
States federal income taxation regardless of its source, or
4. a trust, if a court within the United States is able to
exercise primary supervision over the administration of each
trust and one or more United States persons have the
authority to control all substantial decisions of that
trust. Certain trusts in existence on or before August 20,
1996, that were treated as U.S. Persons under the law in
effect on such date that fail to qualify as U.S. Persons
under current law, may elect to continue to be treated as
U.S. Persons to the extent prescribed in the Treasury
Regulations.
TAX CONSEQUENCES TO U.S. HOLDERS
Interest. Subject to the discussion of alternative tax
characterizations with respect to any floating rate securitization bonds in
a related prospectus supplement, interest income on the securitization
bonds, payable at a fixed rate or at a floating rate, will be includible in
income by a U.S. Holder when it is received, in the case of a U.S. Holder
using the cash receipts and disbursements method of tax accounting, or as
it accrues, in the case of a U.S. Holder using the accrual method of tax
accounting. Consumers and the issuer expect that the securitization bonds
will not be issued with original issue discount. If any series of
securitization bonds is in fact issued with original issue discount, the
prospectus supplement for such series of securitization bonds will address
the tax consequences of the purchase of securitization bonds with original
issue discount.
Sale or Retirement of Securitization Bonds. On a sale, exchange or
retirement of a securitization bond, a U.S. Holder will have taxable gain
or loss equal to the difference between the amount received by the U.S.
Holder and the U.S. Holder's tax basis in the securitization bond. A U.S.
Holder's tax basis in its securitization bonds is the U.S. Holder's cost,
subject to adjustments. Gain or loss will generally be capital gain or
loss, and will be long-term capital gain or loss if the securitization bond
was held for more than one year at the time of disposition. If a U.S.
Holder sells the securitization bond between interest payment dates, a
portion of the amount received will reflect interest that has accrued on
the securitization bond but that has not yet been paid by the sale date. To
the extent that amount has not already been included in the U.S. Holder's
income, it is treated as ordinary interest income and not as sale proceeds.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Withholding Taxation on Interest. Payments of interest income on
the securitization bonds received by a Non-U.S. Holder that does not hold
its securitization bonds in connection with the conduct of a trade or
business in the United States will generally not be subject to United
States federal withholding tax provided that the Non-U.S. Holder does not
actually or constructively own 10% or more of the total combined voting
power of all classes of stock of Consumers entitled to vote, is not a
controlled foreign corporation that is related to Consumers through stock
ownership and, Consumers or its paying agent receives:
1. from a Non-U.S. Holder appropriate documentation to treat
the payment as made to a foreign beneficial owner under
Treasury Regulations issued under Section 1441 of the Code;
2. a withholding certificate from a person claiming to be a
foreign partnership and the foreign partnership has received
appropriate documentation to treat the payment as made to a
foreign beneficial owner in accordance with these Treasury
Regulations;
3. a withholding certificate from a person representing to be a
"qualified intermediary" that has assumed primary
withholding responsibility under these Treasury Regulations
and the qualified intermediary has received appropriate
documentation from a foreign beneficial owner in accordance
with its agreement with the IRS; or
4. a statement, under penalties of perjury from an authorized
representative of a Financial Institution, stating that the
Financial Institution has received from the beneficial owner
a withholding certificate described in these Treasury
Regulations or that it has received a similar statement from
another Financial Institution acting on behalf of the
foreign beneficial owner.
In general, it will not be necessary for a Non-U.S. Holder to
obtain or furnish to Consumers or its paying agent a United States taxpayer
identification number in order to claim any of the foregoing exemptions
from United States withholding tax on payments of interest. Interest paid
to a Non-U.S. Holder will be subject to a United States withholding tax of
30% upon the actual payment of interest income, except as described above
and except where an applicable tax treaty provides for the reduction or
elimination of this withholding tax. A Non-U.S. Holder generally will be
taxable in the same manner as a United States corporation or resident with
respect to interest income if the income is effectively connected with the
Non-U.S. Holder's conduct of a trade or business in the United States.
Effectively connected income received by a Non-U.S. Holder that is a
corporation may in some circumstances be subject to an additional "branch
profits tax" at a 30% rate, or if applicable, a lower rate provided by a
treaty.
Capital Gains Tax Issues. A Non-U.S. Holder generally will not be
subject to United States federal income or withholding tax on gain realized
on the sale or exchange of securitization bonds, unless:
1. the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more during the taxable year
and this gain is from United States sources or
2. the gain is effectively connected with the conduct by the
Non-U.S. Holder of a trade or business in the United States
and other requirements are satisfied.
BACKUP WITHHOLDING
Backup withholding of United States federal income tax at a rate
of 31% may apply to payments made in respect of the securitization bonds to
registered owners who are not "exempt recipients" and who fail to provide
certain identifying information (such as the registered owner's taxpayer
identification number) in the required manner. Generally, individuals are
not exempt recipients, whereas corporations and certain other entities
generally are exempt recipients. Payments made in respect of the
securitization bonds to a U.S. Holder must be reported to the IRS, unless
the U.S. Holder is an exempt recipient or establishes an exemption. A U.S.
Holder can obtain a complete exemption from the backup withholding tax by
filing Form W-9 (Payer's Request for Taxpayer Identification Number and
Certification). Compliance with the identification procedures described in
the preceding section entitled - - "Withholding Taxation on Interest" - -
would establish an exemption from backup withholding for those Non-U.S.
Holders who are not exempt recipients.
In addition, upon the sale of a securitization bond to (or
through) a broker, the broker must withhold 31% of the entire purchase
price, unless either (1) the broker determines that the seller is a
corporation or other exempt recipient or (2) the seller provides, in the
required manner, certain identifying information and, in the case of a
Non-U.S. Holder, certifies that the seller is a Non-U.S. Holder (and
certain other conditions are met). The sale must also be reported by the
broker to the IRS, unless either (a) the broker determines that the seller
is an exempt recipient or (b) the seller certifies its non-U.S. status (and
certain other conditions are met). Certification of the registered owner's
non-U.S. status would be made normally on an IRS Form W-8BEN under
penalties of perjury, although in certain cases it may be possible to
submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a
payment to a beneficial owner would be allowed as a refund or a credit
against such beneficial owner's United States federal income tax provided
the required information is furnished to the IRS.
MATERIAL STATE OF MICHIGAN TAX CONSEQUENCES
It is the opinion of Miller, Canfield, Paddock and Stone, P.L.C.,
special Michigan tax counsel to Consumers and the issuer, that interest
from securitization bonds, or gain from the disposition of such bonds,
received by a person who is not otherwise subject to any Michigan personal
income tax, single business tax, franchise tax, business activities tax,
intangible property tax, excise tax, stamp tax, or any other tax imposed by
the State of Michigan or any of its political subdivisions, will not cause
such person to become subject to these taxes. Persons otherwise subject to
such taxes, however, may be required to account for the interest from
securitization bonds, or gain from the disposition of such bonds, in their
Michigan tax liabilities. The Michigan Intangibles Tax was totally repealed
effective January 1, 1998; therefore, the interest from securitization
bonds, or gain from the disposition of such bonds, will not be subject to
that tax. Further, and relying upon the IRS letter ruling and the federal
tax opinion which have been obtained concerning this transaction, and
relying upon the Department's Revenue Administration Bulletins (RAB) 1999-9
and RAB 1989-34, and assuming that the issuer, which is a single member
limited liability company, is not treated as an entity separate from its
owner for federal income tax purposes, then it is the opinion of Miller,
Canfield, Paddock, and Stone, P.L.C. that for purposes of Michigan Single
Business Tax, (i) the securitization bonds will constitute a debt of
Consumers, and (ii) the issuer will be treated as a division of Consumers
and will not be subject to Michigan Single Business Tax as an entity
separate from Consumers.
ERISA CONSIDERATIONS
ERISA, and Section 4975 of the Code impose restrictions on:
1. employee benefit plans (as defined in Section 3(3) of ERISA)
that are subject to Title I of ERISA;
2. plans (as defined in Section 4975(e)(1) of the Code) that
are subject to Section 4975 of the Code, including
individual retirement accounts or Keogh plans;
3. any entities whose underlying assets include plan assets by
reason of a plan's investment in these entities, each of the
entities described in 1, 2 and 3, being referred to as a
Plan; and
4. persons who have specified relationships to Plans which are
"parties in interest" under ERISA and "disqualified persons"
under the Code, which collectively are referred to as
Parties in Interest.
Based on the reasoning of the United States Supreme Court in John
Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86 (1993), an
insurance company's general account may be deemed to include assets of the
Plans investing in the general account (e.g., through the purchase of an
annuity contract), and the insurance company might be treated as a Party in
Interest with respect to a Plan by virtue of that investment. Any purchaser
that is an insurance company using the assets of an insurance company
general account should note that the Small Business Job Protection Act of
1996 added new Section 401(c) of ERISA relating to the status of the assets
of insurance company general accounts under ERISA and Section 4975 of the
Code. Pursuant to Section 401(c), the United States Department of Labor
issued final regulations effective January 5, 2000 (the "General Account
Regulations") with respect to insurance policies issued on or before
December 31, 1998 that are supported by an insurer's general account.
As a result of these regulations, assets of an insurance company
general account will not be treated as "plan assets" for purposes of the
fiduciary responsibility provisions of ERISA and Section 4975 of the Code
to the extent such assets relate to contracts issued to employee benefit
plans on or before December 31, 1998, and the insurer satisfies various
conditions. Section 401(c) also provides that, except in the case of
avoidance of the General Account Regulation and actions brought by the
Secretary of Labor relating to certain breaches of fiduciary duties that
also constitute breaches of state or federal criminal law, until June 5,
2001, the date that is 18 months after the General Account Regulations
became final, no liability under the fiduciary responsibility and
prohibited transaction provisions of ERISA and Section 4975 of the Code may
result on the basis of a claim that the assets of the general account of an
insurance company constitute the "plan assets" of any such plan. The plan
asset status of insurance company separate accounts is unaffected by new
Section 401(c) of ERISA, and separate account assets continue to be treated
as the plan assets of any such plan invested in a separate account.
PLAN ASSET ISSUES FOR AN INVESTMENT IN THE SECURITIZATION BONDS
The Plan Asset Regulation is a regulation issued by the United
States Department of Labor, which states that if a Plan makes an "equity"
investment in a corporation, partnership, trust or other specified
entities, the underlying assets and properties of the entity will be deemed
for purposes of ERISA and Section 4975 of the Code to be assets of the
investing Plan unless those exceptions set forth in the regulation apply.
Pursuant to the Plan Asset Regulation, an equity interest is any interest
in an entity other than an instrument that is treated as indebtedness under
applicable law and which has no substantial equity features. Although there
is little statutory or regulatory guidance on this subject, and there can
be no assurances in this regard, it appears that the securitization bonds
should not be treated as an equity interest for purposes of the Plan Asset
Regulation. Those conclusions are based, in part, upon the traditional debt
features of the securitization bonds, including the reasonable expectation
of purchasers of the securitization bonds that the securitization bonds
will be repaid when due, as well as the absence of the conversion rights,
warrants and other typical equity features. Accordingly, the assets of the
issuer should not be treated as the assets of Plans investing in the
securitization bonds.
PROHIBITED TRANSACTION EXEMPTIONS
It should be noted, however, that without regard to the treatment
of the securitization bonds as equity interests under the Plan Asset
Regulation, Consumers and/or its affiliates, as a provider of services to
Plans, may be deemed to be Parties in Interest with respect to many Plans.
The purchase and holding of securitization bonds by or on behalf of one or
more of these Plans could result in a prohibited transaction within the
meaning of Section 406 or 407 of ERISA or Section 4975 of the Code.
However, the purchase and holding of securitization bonds may be subject to
one or more statutory or administrative exemptions from the prohibited
transaction rules of ERISA and Section 4975 of the Code.
Examples of Prohibited Transaction Class Exemptions. Potentially
applicable prohibited transaction class exemptions, which are referred to
as PTCEs, include the following:
1. PTCE 90-1, which exempts specific transactions involving
insurance company pooled separate accounts;
2. PTCE 95-60, which exempts specific transactions involving
insurance company general accounts;
3. PTCE 91-38, which exempts specific transactions involving
bank collective investment funds;
4. PTCE 84-14, which exempts specific transactions effected on
behalf of a Plan by a "qualified professional asset manager"
as that term is defined in ERISA, and which is referred to
as a QPAM; or
5. PTCE 96-23, which exempts specific transactions effected on
behalf of a Plan by specific "in-house" asset managers.
It should be noted, however, that even if the conditions specified
in one or more of these exemptions are met, the scope of relief provided by
these exemptions may not necessarily cover all acts that might be construed
as prohibited transactions.
Conditions That Would Allow the QPAM Exemption to Apply. Plan
fiduciaries intending to rely upon the QPAM exemption should consider the
following. As noted above, although the issuer believes that the
securitization bonds should not constitute "equity interests" for purposes
of the Plan Asset Regulation, it is nonetheless possible that
securitization charge revenue collections could be deemed, for purposes of
the prohibited transaction rules, to flow indirectly from customers to
Plans that own a class or series of securitization bonds. Thus, if one or
more customers were Parties in Interest with respect to a Plan that owned
that class or series of securitization bonds, such holding could be deemed
to constitute an indirect prohibited transfer of property between a Plan
and any Party in Interest with respect to the Plan. The QPAM exemption
requires, among other things, that at the time of the proposed transaction,
the Party in Interest, or its affiliate, does not have the authority to
appoint or terminate the QPAM as a manager of any of the Plan's assets.
This means, however, that if a Party in Interest with respect to a Plan
that holds such class or series is a customer that has the authority to
appoint or terminate the QPAM as a manager of the Plan's assets (for
example, the Plan's sponsor or a director of the Plan sponsor), the holding
of that class or series of securitization bonds by the Plan could be deemed
to constitute an indirect prohibited transaction to which the QPAM
exemption does not apply. Accordingly, fiduciaries intending to rely upon
the QPAM exemption should carefully discuss the effectiveness of the QPAM
exemption with their legal advisors before purchasing any class or series
of securitization bonds.
Prior to making an investment in the securitization bonds of any
series, a Plan investor must determine whether, and each fiduciary causing
the securitization bonds to be purchased by, on behalf of or using "plan
assets" of a Plan that is subject to the prohibited transaction rules of
ERISA or Section 4975 of the Code, including without limitation an
insurance company general account, shall be deemed to have represented and
warranted that, an exemption from the prohibited transaction rules applies,
so that the use of plan assets of the Plan to purchase and hold the
securitization bonds does not and will not constitute or otherwise result
in a non-exempt prohibited transaction in violation of Section 406 or 407
of ERISA or Section 4975 of the Code.
GENERAL INVESTMENT CONSIDERATIONS FOR PROSPECTIVE PLAN INVESTORS IN THE
SECURITIZATION BONDS
Prior to making an investment in the securitization bonds,
prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code and the potential consequences
of this investment with respect to their specific circumstances. Moreover,
each Plan fiduciary should take into account, among other considerations,
1. whether the fiduciary has the authority to make the
investment;
2. whether the investment constitutes a direct or indirect
transaction with a Party in Interest;
3. the composition of the Plan's portfolio with respect to
diversification by type of asset;
4. the Plan's funding objectives;
5. the tax effects of the investment; and
6. whether under the general fiduciary standards of investment
prudence and diversification an investment in the
securitization bonds is appropriate for the Plan, taking
into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
Governmental plans and some church plans are generally not subject
to the fiduciary responsibility provisions of ERISA or the provisions of
Section 4975 of the Code. However, these plans may be subject to
substantially similar rules under state or other federal law, and may also
be subject to the prohibited transaction rules of Section 503 of the Code.
The sale of securitization bonds to a Plan shall not be deemed a
representation by Consumers or the underwriters that this investment meets
all relevant legal requirements with respect to Plans generally or any
particular Plan.
PLAN OF DISTRIBUTION FOR THE SECURITIZATION BONDS
The securitization bonds of each series may be sold to or through
the underwriters by a negotiated firm commitment underwriting and public
reoffering by the underwriters. The securitization bonds may also be sold
to or through any other underwriting arrangement as may be specified in the
related prospectus supplement or may be offered or placed either directly
or through agents. The issuer and the trustee intend that securitization
bonds will be offered through various methods from time to time. The issuer
also intends that offerings may be made concurrently through more than one
of these methods or that an offering of a particular series of
securitization bonds may be made through a combination of these methods.
The distribution of securitization bonds may be effected from time
to time in one or more transactions at a fixed price or prices, which may
be changed, or at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or in negotiated transactions or
otherwise at varying prices to be determined at the time of sale.
The securitization bonds may be offered through one or more
different methods, including offerings through underwriters. Except as
otherwise disclosed in the related prospectus supplement, it is not
anticipated that any of the securitization bonds will be listed on any
securities exchange. There can be no assurance that a secondary market for
any series of securitization bonds will develop or, if one does develop,
that it will continue.
Compensation to Underwriters. In connection with the sale of the
securitization bonds, underwriters or agents may receive compensation in
the form of discounts, concessions or commissions. Underwriters may sell
securitization bonds to particular dealers at prices less a concession.
Underwriters may allow, and these dealers may reallow, a concession to
other dealers. Underwriters, dealers and agents that participate in the
distribution of the securitization bonds of a series may be deemed to be
underwriters. Any discounts or commissions received by the underwriters
from the issuer and any profit on the resale of the securitization bonds by
them may be deemed to be underwriting discounts and commissions under the
Securities Act. These underwriters or agents will be identified, and any
compensation received from the issuer will be described, in the related
prospectus supplement.
Other Distribution Issues. Under agreements which may be entered
into by Consumers, the issuer and the trustee, underwriters and agents who
participate in the distribution of the securitization bonds may be entitled
to indemnification by Consumers and the issuer against liabilities
specified therein, including under the Securities Act. The underwriters
may, from time to time, buy and sell the securitization bonds, but there
can be no assurance that an active secondary market will develop and there
is no assurance that this market, if established, will continue.
RATINGS FOR THE SECURITIZATION BONDS
It is a condition of each Underwriter's obligation to purchase the
securitization bonds that each series or class be rated investment grade,
that is, in one of the four highest rating categories, by each of S&P,
Moody's and Fitch.
Limitations of Security Ratings. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating agency. No
person is obligated to maintain the rating on any securitization bonds,
and, accordingly, there can be no assurance that the ratings assigned to
any series or class of securitization bonds upon initial issuance will not
be lowered or withdrawn by a rating agency at any time thereafter. If a
rating of any series or class of securitization bonds is revised or
withdrawn, the liquidity of this class of securitization bonds may be
adversely affected. In general, ratings address credit risk and do not
represent any assessment of any particular rate of principal payments on
the securitization bonds other than the payment in full of each series or
class of securitization bonds by the applicable final maturity date for
such series or class.
[If any of the securitization bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, the issuer will
notify the Luxembourg Stock Exchange if any rating assigned to any class of
securitization bonds listed on the Luxembourg Stock Exchange is reduced or
withdrawn and will cause such notice to be published in a daily newspaper
published in Luxembourg, which is expected to be the Luxemburger Wort.]
VARIOUS LEGAL MATTERS RELATING TO THE SECURITIZATION BONDS
Some legal matters relating to the issuer and the issuance of the
securitization bonds will be passed upon for the issuer by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York and for the underwriters by
Orrick, Herrington & Sutcliffe LLP, San Francisco, California. Some legal
matters relating to Consumers will be passed upon for Consumers by Miller,
Canfield, Paddock & Stone, P.L.C., Lansing and Detroit, Michigan and
Loomis, Ewert, Parsley, Davis and Gotting, PC, Lansing, Michigan. Some
legal matters relating to the federal tax consequences of the issuance of
the securitization bonds will be passed upon for the issuer by Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York. Some legal matters
relating to State of Michigan tax consequences of the issuance of the
securitization bonds will be passed upon for the issuer by Miller,
Canfield, Paddock & Stone, P.L.C., Lansing and Detroit, Michigan.
INDEX TO FINANCIAL STATEMENTS OF CONSUMERS FUNDING LLC
Page
Report of Independent Accountants....................................................F-2
Statement of Net Assets Available for Issuer Activities.....................F-3
Statement of Changes in Net Assets Available for Issuer Activities..........F-3
Notes to Financial Statements........................................................F-4
REPORT OF INDEPENDENT ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
CONSUMERS FUNDING LLC:
We have audited the accompanying balance sheet of Consumers
Funding LLC (the "Company") as of [ ]. These balance sheets are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these balance sheets based on our audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance
sheet. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, such balance sheets present fairly, in all
material respects, the financial position of the Company as of [ ]
in conformity with generally accepted accounting principles.
[ ]
[ ], Michigan
[ ]
CONSUMERS FUNDING LLC
BALANCE SHEET
AS OF _______________, 2000
-----------,
2000
-----------
Assets
Cash $
Debt Issuance Costs
------------
Total Assets $
============
Liabilities
Payable to Member $
-------------
Total Liabilities $
=============
Member's Equity
-------------
Total Liabilities and Member's Equity $
=============
See Notes to Balance Sheet.
CONSUMERS FUNDING LLC
NOTES TO BALANCE SHEET
o Nature of Operations
Consumers Funding LLC (the Company), a limited liability company
established by Consumers Energy Company (Consumers) under the laws of the
State of Delaware, was formed on October 11, 2000 pursuant to a limited
liability company agreement with Consumers, as sole member of the Company.
Consumers is an operating electric and gas utility and is a wholly owned
subsidiary of CMS Energy Corporation. The Company was organized for the
sole purpose of purchasing and owning securitization property (SP), issuing
securitization bonds (Bonds), pledging its interest in SP and other
collateral to the trustee to collateralize the Bonds, and performing
activities that are necessary, suitable or convenient to accomplish these
purposes.
SP represents the irrevocable right of Consumers, or its successor or
assignee, to collect a non-bypassable securitization charge
("Securitization Charge") from customers pursuant to a financing order
(MPSC Financing Order), which was issued on October 24, 2000 by the
Michigan Public Service Commission (MPSC) in accordance with the Customer
Choice and Electricity Reliability Act enacted in Michigan in June, 2000.
The MPSC Financing Order authorizes the Securitization Charge to be
sufficient to recover $468,592,000 aggregate principal amount of Bonds,
plus an amount sufficient to provide for any credit enhancement, to fund
any reserves and to pay interest, redemption premiums, if any, servicing
fees and other expenses relating to the Bonds.
The Company's organizational documents require it to operate in a manner so
that it should not be consolidated in the bankruptcy estate of Consumers in
the event Consumers becomes subject to a bankruptcy proceeding. Both
Consumers and the Company will treat the transfer of SP to the Company as a
sale under applicable law. The Bonds will be treated as debt obligations of
the Company. For financial reporting and federal income tax and State of
Michigan income [and franchise] tax purposes, the transfer of SP to the
Company will be treated as a financing arrangement and not as a sale.
Furthermore, the results of operations of the Company will be consolidated
with Consumers for financial and income tax reporting purposes.
o Significant Accounting Policies
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
revenues, expenses, assets, and liabilities and disclosure of
contingencies. Actual results could differ from these estimates.
DEBT ISSUANCE COSTS
The costs associated with the anticipated issuance of the Bonds are
capitalized and will be amortized over the life of the Bonds utilizing the
effective interest method.
INCOME TAXES
The Company has elected not to be taxed as a corporation for Federal income
tax purposes. The Company is treated as a division of Consumers, and
accordingly, will not be treated as a separate taxable entity.
o The Bonds
The purpose of the Company is to issue Bonds pursuant to authority granted
by the MPSC in the MPSC Financing Order. The Company intends to issue Bonds
in series (Series) from time to time, the maturities and interest rates of
which will depend upon market conditions at the time of issuance. The
proceeds will be used to fund the purchase of SP from Consumers. Under
applicable law, the Bonds will not be an obligation of Consumers or secured
by the assets of Consumers. Also under applicable law, the Bonds will be
recourse to the Company and will be collateralized on a pro rata basis by
the SP and the equity and assets of the Company. The source of repayment
will be the Securitization Charge authorized pursuant to the MPSC Financing
Order, which will be collected from Consumers customers by Consumers, as
servicer. Securitization charge revenue collections will be deposited at
least monthly by Consumers with the Company and used to pay the expenses of
the Company, to pay debt service on the Bonds and to fund any credit
enhancement for the Bonds. The Company will also pledge the capital
contributed by Consumers to secure the debt service requirements of the
Bonds. The debt service requirements will include an overcollateralization
subaccount, a capital subaccount and a reserve subaccount which will be
available to bond holders. Any amounts collateralizing the Bonds will be
released to Consumers upon payment of the Bonds.
o Significant Agreements and Related Party Transactions
Under the servicing agreement to be entered into by the Company and
Consumers concurrently with the issuance of the first Series of Bonds,
Consumers, as servicer, will be required to manage and administer the SP of
the Company and to collect the Securitization Charge on behalf of the
Company. The Company will pay an annual servicing fee to Consumers equal to
0.25% of the outstanding principal balance of Bonds. The servicing fee will
also be recovered through the Securitization Charge.
[All debt issuance costs will be paid by Consumers and reimbursed by the
Company upon issuance of the Bonds.]
o Subsequent Events
PART II
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder
other than underwriting discounts and commissions.
Registration Fee $ 264
----------
Printing and Engraving Expenses $ *
----------
Trustee's Fees and Expenses $ *
----------
Legal Fees and Expenses $ *
----------
Blue Sky Fees and Expenses $ *
----------
Accountants' Fees and Expenses $ *
----------
Rating Agency Fees $ *
----------
Miscellaneous Fees and Expenses $ *
----------
*
-------- ----------
Total $ *
======== ==========
- ---------------
* To be provided by amendment.
Item 15. Indemnification of Members and Managers
Section 18-108 of the Delaware Limited Liability Company Act provides that,
subject to specified standards and restrictions, if any, as are set forth
in the limited liability company agreement, a limited liability company
shall have the power to indemnify and hold harmless any member or manager
or other person from and against any and all claims and demands whatsoever.
The limited liability company agreement, referred to as the LLC Agreement,
of the Registrant provides that, to the fullest extent permitted by law,
the Registrant shall indemnify its members and managers against any
liability incurred in connection with any proceeding in which any member or
manager may be involved as a party or otherwise by reason of the fact that
the member or manager is or was serving in its capacity as a member or
manager, unless this liability is based on or arises in connection with the
member's or manager's own willful misconduct or gross negligence, the
failure to perform the obligations set forth in the LLC Agreement, or
taxes, fees or other charges on, based on or measured by any fees,
commissions or compensation received by the managers in connection with any
of the transactions contemplated by the LLC Agreement and related
agreements.
The underwriting agreement between the Registrant, Consumers and Morgan
Stanley & Co. Incorporated, for itself and the other underwriters named in
the underwriting agreement, referred to as the underwriters, provides that
the underwriters shall indemnify the Registrant, its officers, members,
employees and agents, and each person who controls the Registrant, to the
extent permitted by law, against any and all losses, claims, damages or
liabilities, together referred to as losses, to which they may become
subject under the Securities Act, insofar as such losses arise out of or
are based on any untrue statement or alleged untrue statement of a material
fact, or any omission or alleged omission to state a material fact required
to be stated, or necessary to make the statements in the Registration
Statement or the prospectus not misleading, to the extent that such
statement or omission is made by the Registrant in reliance on information
provided in writing to Consumers or the Registrant expressly for the
purpose of inclusion in the Registration Statement or the prospectus.
Item 16. Exhibits
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement.*
4.1 Limited Liability Company Agreement of Consumers Funding LLC.**
4.1.1 Amended and Restated Limited Liability Agreement of Consumers
Funding LLC.*
4.2 Certificate of Formation of Consumers Funding LLC.**
4.2.1 Amended and Restated Certificate of Formation of Consumers
Funding LLC.*
4.3 Form of Indenture.*
4.4 Form of Securitization Bonds.*
5.1 Opinion of Miller, Canfield, Paddock & Stone, P.L.C., relating to
legality of the Securitization Bonds.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect
to material federal income tax matters.
8.2 Opinion of Miller, Canfield, Paddock & Stone, P.L.C., with
respect to material State of Michigan tax matters.*
10.1 Form of Sale Agreement.*
10.2 Form of Servicing Agreement.*
10.3 Application of Consumers to the Michigan Public Service
Commission, dated July 5, 2000.*
10.4 MPSC Financing Order (including the Opinion and Order issued on
October 24, 2000 and the Order Granting Rehearing issued on
January 12, 2001 by the MPSC with respect to Consumers).*
23.1.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (for those
opinions consent for which is not included in its opinion filed
as Exhibit 8.1).
23.1.2 Consent of Miller, Canfield, Paddock & Stone, P.L.C., (for those
opinions consent for which is not included in its opinions filed
as Exhibits 5.1 and 8.2).
23.2 Consent of [Accountants].*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended, of [ ], as Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Internal Revenue Service Private Letter Ruling pertaining to
Securitization Bonds.*
- -------------
* To be filed by amendment.
** Previously filed.
Item 17. Undertakings
The undersigned Registrant on behalf of Consumers Funding LLC (the
"issuer") hereby undertakes as follows:
o To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as amended; (ii) to
reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; provided, however, that any increase or decrease
in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 424(b) of the Securities Act of 1933, as amended, if,
in the aggregate, the changes in volume and price represent
no more than a twenty percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and (iii) to include any material information
with respect to the plan of distribution not previously
disclosed in the registration statement or any material
change in this information in the registration statement;
provided, however, that (a)(1)(i) and (a)(1)(ii) will not
apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934, as amended,
that are incorporated by reference in this registration
statement.
o That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each relevant
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of these securities at that time
shall be deemed to be the initial bona fide offering hereof.
o To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
o That, for purposes of determining any liability under the
Securities Act of 1933, as amended, each filing of the
Registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended
(and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended) with respect to
the issuer that is incorporated by reference in the
registration statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of these securities at that time
shall be deemed to be the initial bona fide offering
thereof.
o That insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended, may be
permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under
Item 15 above, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange
Commission this indemnification is against public policy as
expressed in the Securities Act and is, theretofore,
unenforceable. In the event that a claim for indemnification
against these liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
asserted by the director, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether
this indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed
by the final adjudication of this issue.
o That, for purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted
from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act of 1933, as amended, shall be deemed to be
part of this registration statement as of the time it was
declared effective.
o That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective
amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the
securities offered therein, and the offering of these
securities at that time shall be deemed to be the initial
bona fide offering thereof.
o The undersigned Registrant hereby undertakes to file an
application for the purpose of determining the eligibility
of the trustee to act under subsection (a) of Section 310 of
the Trust Indenture Act of 1939, as amended, in accordance
with the rules and regulations prescribed by the Commission
under Section 305(b)(2) of the Trust Indenture Act of 1939,
as amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and that the security
rating requirement of Form S-3 will be met by the time of sale, and has
duly caused this amendment number 2 to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Jackson, State of Michigan, on February 15, 2001.
CONSUMERS FUNDING LLC
By: /s/ Alan M. Wright
-----------------------------
Name: Alan M. Wright
Title: Manager
Pursuant to the requirements of the Securities Act of 1933, this amendment
number 2 to the registration statement has been signed by the following
persons in the capacities and on the dates indicated.
February 15, 2001 /s/ Alan M. Wright
- ----------------- ------------------------------------
Date Name: Alan M. Wright
Title: Manager, Chief Executive Officer
and Chief Financial Officer
February 15, 2001 /s/ David A. Mikelonis
- ----------------- -------------------------------------
Date Name: David A. Mikelonis
Title: Manager
February 15, 2001 /s/ Thomas A. McNish
- ----------------- --------------------------------------
Date Name: Thomas A. McNish
Title: Manager
February 15, 2001 /s/ Denny DaPra
- ----------------- --------------------------------------
Date Name: Denny DaPra
Title: Controller
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement.*
4.1 Limited Liability Company Agreement of Consumers Funding LLC.**
4.1.1 Amended and Restated Limited Liability Agreement of Consumers
Funding LLC.*
4.2 Certificate of Formation of Consumers Funding LLC.**
4.2.1 Amended and Restated Certificate of Formation of Consumers Funding
LLC.*
4.3 Form of Indenture.*
4.4 Form of Securitization Bonds.*
5.1 Opinion of Miller, Canfield, Paddock & Stone, P.L.C., relating to
legality of the Securitization Bonds.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect
to material federal income tax matters.
8.2 Opinion of Miller, Canfield, Paddock & Stone, P.L.C., with respect
to material State of Michigan tax matters.*
10.1 Form of Sale Agreement.*
10.2 Form of Servicing Agreement.*
10.3 Application of Consumers to the Michigan Public Service
Commission, dated July 5, 2000.*
10.4 MPSC Financing Order (including the Opinion and Order issued on
October 24, 2000 and the Order Granting Rehearing issued on
January 12, 2001 by the MPSC with respect to Consumers).*
23.1.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (for those
opinions consent for which is not included in its opinion filed as
Exhibit 8.1).
23.1.2 Consent of Miller, Canfield, Paddock & Stone, P.L.C., (for those
opinions consent for which is not included in its opinions filed
as Exhibits 5.1 and 8.2).
23.2 Consent of [Accountants].*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of [ ], as Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Internal Revenue Service Private Letter Ruling pertaining to
Securitization Bonds.*
- ------------
* To be filed by amendment.
** Previously filed.