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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PjRcd8HT6gvOiqt7MmmbAOSg5Dmy1PiOP+98w3T63XKhSH07CdN5JRsd69BNRQMr 7FPxuE3tevOuGrmvTl9kMA== 0000950124-04-000867.txt : 20040312 0000950124-04-000867.hdr.sgml : 20040312 20040312133635 ACCESSION NUMBER: 0000950124-04-000867 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 37 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSUMERS ENERGY CO CENTRAL INDEX KEY: 0000201533 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 380442310 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05611 FILM NUMBER: 04665389 BUSINESS ADDRESS: STREET 1: 212 W MICHIGAN AVE CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 5177881030 MAIL ADDRESS: STREET 1: 212 W MICHIGAN AVE STREET 2: M 946 CITY: JACKSON STATE: MI ZIP: 49201 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS POWER CO DATE OF NAME CHANGE: 19920703 10-K 1 k82154ae10vk.txt ANNUAL REPORT FOR FISCAL YEAR ENDED 12/31/2003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Securities registered pursuant to Section 12(b) of the Act:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12 b-2). CMS ENERGY CORPORATION: Yes X No [ ] CONSUMERS ENERGY COMPANY: Yes [ ] No X The aggregate market value of CMS Energy voting and non-voting common equity held by non-affiliates was $1.167 billion for the 144,087,569 CMS Energy Common Stock shares outstanding on June 30, 2003 based on the closing sale price of $8.10 for CMS Energy Common Stock, as reported by the New York Stock Exchange on such date. There were 161,148,245 shares of CMS Energy Common Stock outstanding on March 8, 2004. On March 8, 2004, CMS Energy held all voting and non-voting common equity of Consumers Documents incorporated by reference: CMS Energy's proxy statement and Consumers' information statement relating to the 2004 annual meeting of shareholders to be held May 28, 2004, is incorporated by reference in Parts II and III, except for the organization and compensation committee report and audit committee report contained therein. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CMS Energy Corporation and Consumers Energy Company Annual Reports on Form 10-K to the Securities and Exchange Commission for the Year Ended December 31, 2003 This combined Form 10-K is separately filed by CMS Energy Corporation and Consumers Energy Company. Information in this combined Form 10-K relating to each individual registrant is filed by such registrant on its own behalf. Consumers Energy Company makes no representation regarding information relating to any other companies affiliated with CMS Energy Corporation other than its own subsidiaries. TABLE OF CONTENTS

2 GLOSSARY Certain terms used in the text and financial statements are defined below ABATE..................................... Association of Businesses Advocating Tariff Equity Accumulated Benefit Obligation............ The liabilities of a pension plan based on service and pay to date. This differs from the Projected Benefit Obligation that is typically disclosed in that it does not reflect expected future salary increases. AEP....................................... American Electric Power, a non-affiliated company AFUDC..................................... Allowance for Funds Used During Construction ALJ....................................... Administrative Law Judge Alliance RTO.............................. Alliance Regional Transmission Organization AMT....................................... Alternative minimum tax APB....................................... Accounting Principles Board APB Opinion No. 18........................ APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" APB Opinion No. 30........................ APB Opinion No. 30, "Reporting Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business" APT....................................... Australian Pipeline Trust ARO....................................... Asset retirement obligation Articles.................................. Articles of Incorporation Attorney General.......................... Michigan Attorney General bcf....................................... Billion cubic feet Big Rock.................................. Big Rock Point nuclear power plant, owned by Consumers Board of Directors........................ Board of Directors of CMS Energy Bookouts.................................. Unplanned netting of transactions from multiple contracts Brownfield credit......................... Provides for a tax incentive for the redevelopment or improvement of a facility (contaminated property), or functionally obsolete or blighted property, provided that certain conditions are met. Btu....................................... British thermal unit Centennial................................ Centennial Pipeline, LLC, in which Panhandle, formerly a wholly owned subsidiary of CMS Gas Transmission, owned a one-third interest CEO....................................... Chief Executive Officer CFO....................................... Chief Financial Officer CFTC...................................... Commodity Futures Trading Commission Clean Air Act............................. Federal Clean Air Act, as amended CMS Electric and Gas...................... CMS Electric and Gas Company, a subsidiary of Enterprises CMS Energy................................ CMS Energy Corporation, the parent of Consumers and Enterprises CMS Energy Common Stock or common stock... Common stock of CMS Energy, par value $.01 per share CMS ERM................................... CMS Energy Resource Management Company, formerly CMS MST, a subsidiary of Enterprises CMS Field Services........................ CMS Field Services, formerly a wholly owned subsidiary of CMS Gas Transmission. The sale of this subsidiary closed in July 2003. CMS Gas Transmission...................... CMS Gas Transmission Company, a subsidiary of Enterprises CMS Generation............................ CMS Generation Co., a subsidiary of Enterprises CMS Holdings.............................. CMS Midland Holdings Company, a subsidiary of Consumers CMS Land.................................. CMS Land Company, a subsidiary of Enterprises CMS Midland............................... CMS Midland Inc., a subsidiary of Consumers

3 CMS MST................................... CMS Marketing, Services and Trading Company, a wholly owned subsidiary of Enterprises, whose name was changed to CMS ERM effective January 2004 CMS Oil and Gas........................... CMS Oil and Gas Company, formerly a subsidiary of Enterprises CMS Pipeline Assets....................... CMS Enterprises pipeline assets in Michigan and Australia CMS Viron................................. CMS Viron Energy Services, formerly a wholly owned subsidiary of CMS MST. The sale of this subsidiary closed in June 2003. Common Stock.............................. All classes of Common Stock of CMS Energy and each of its subsidiaries, or any of them individually, at the time of an award or grant under the Performance Incentive Stock Plan Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy Consumers Funding......................... Consumers Funding LLC, a wholly-owned special purpose subsidiary of Consumers for the issuance of securitization bonds dated November 8, 2001 Consumers Receivables Funding II.......... Consumers Receivables Funding II LLC, a wholly-owned subsidiary of Consumers Court of Appeals.......................... Michigan Court of Appeals CPEE...................................... Companhia Paulista de Energia Eletrica, a subsidiary of Enterprises Customer Choice Act....................... Customer Choice and Electricity Reliability Act, a Michigan statute enacted in June 2000 that allows all retail customers choice of alternative electric suppliers as of January 1, 2002, provides for full recovery of net stranded costs and implementation costs, establishes a five percent reduction in residential rates, establishes rate freeze and rate cap, and allows for Securitization Detroit Edison............................ The Detroit Edison Company, a non-affiliated company DIG....................................... Dearborn Industrial Generation, LLC, a wholly owned subsidiary of CMS Generation DOE....................................... U.S. Department of Energy DOJ....................................... U.S. Department of Justice Dow....................................... The Dow Chemical Company, a non-affiliated company EISP...................................... Executive Incentive Separation Plan EITF...................................... Emerging Issues Task Force EITF Issue No. 02-03...................... Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities EITF Issue No. 97-04...................... Deregulation of the Pricing of Electricity -- Issues Related to the Application of FASB Statements No. 71 and 101 El Chocon................................. The 1,200 MW hydro power plant located in Argentina, in which CMS Generation holds a 17.23 percent ownership interest Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy EPA....................................... U.S. Environmental Protection Agency EPS....................................... Earnings per share ERISA..................................... Employee Retirement Income Security Act Ernst & Young............................. Ernst & Young LLP Exchange Act.............................. Securities Exchange Act of 1934, as amended FASB...................................... Financial Accounting Standards Board FERC...................................... Federal Energy Regulatory Commission FMB....................................... First Mortgage Bonds FMLP...................................... First Midland Limited Partnership, a partnership that holds a lessor interest in the MCV facility GCR....................................... Gas cost recovery

4 Guardian.................................. Guardian Pipeline, LLC, in which CMS Gas Transmission owned a one-third interest Health Care Plan.......................... The medical, dental, and prescription drug programs offered to eligible employees of Consumers and CMS Energy HL Power.................................. H.L. Power Company, a California Limited Partnership, owner of the Honey Lake generation project in Wendel, California Integrum.................................. Integrum Energy Ventures, LLC IPP....................................... Independent Power Production ITC....................................... Investment tax credit JOATT..................................... Joint Open Access Transmission Tariff Jorf Lasfar............................... The 1,356 MW coal-fueled power plant in Morocco, jointly owned by CMS Generation and ABB Energy Ventures, Inc. kWh....................................... Kilowatt-hour LIBOR..................................... London Inter-Bank Offered Rate Loy Yang.................................. The 2,000 MW brown coal fueled Loy Yang A power plant and an associated coal mine in Victoria, Australia, in which CMS Generation holds a 50 percent ownership interest LNG....................................... Liquefied natural gas Ludington................................. Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison MAPL...................................... Marathon Ashland Petroleum, LLC, partner in Centennial Marysville................................ CMS Marysville Gas Liquids Company, a Michigan corporation and a subsidiary of CMS Gas Transmission that held a 100 percent interest in Marysville Fractionation Partnership and a 51 percent interest in St. Clair Underground Storage Partnership mcf....................................... Thousand cubic feet MCV Expansion, LLC........................ An agreement entered into with General Electric Company to expand the MCV Facility MCV Facility.............................. A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership MCV Partnership........................... Midland Cogeneration Venture Limited Partnership in which Consumers has a 49 percent interest through CMS Midland MD&A...................................... Management's Discussion and Analysis METC...................................... Michigan Electric Transmission Company, formerly a subsidiary of Consumers Energy and now an indirect subsidiary of Trans-Elect Michigan Gas Storage...................... Michigan Gas Storage Company, a former subsidiary of Consumers that merged into Consumers in November 2002 Michigan Power............................ CMS Generation Michigan Power, LLC, owner of the Kalamazoo River Generating Station and the Livingston Generating Station MISO...................................... Midwest Independent System Operator Moody's................................... Moody's Investors Service, Inc. MPSC...................................... Michigan Public Service Commission MSBT...................................... Michigan Single Business Tax MTH....................................... Michigan Transco Holdings, Limited Partnership MW........................................ Megawatts NEIL...................................... Nuclear Electric Insurance Limited, an industry mutual insurance company owned by member utility companies NMC....................................... Nuclear Management Company, LLC, formed in 1999 by Northern States Power Company (now Xcel Energy Inc.), Alliant Energy, Wisconsin Electric Power Company, and Wisconsin Public Service Company to operate and manage nuclear generating facilities owned by the four utilities

5 NERC...................................... North American Electric Reliability Council NRC....................................... Nuclear Regulatory Commission NYMEX..................................... New York Mercantile Exchange OATT...................................... Open Access Transmission Tariff OPEB...................................... Postretirement benefit plans other than pensions for retired employees Palisades................................. Palisades nuclear power plant, which is owned by Consumers Panhandle Eastern Pipe Line or Panhandle............................... Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan Gas Storage, Panhandle Storage, and Panhandle Holdings. Panhandle was a wholly owned subsidiary of CMS Gas Transmission. The sale of this subsidiary closed in June 2003. Parmelia.................................. A business located in Australia comprised of a pipeline, processing facilities, and a gas storage facility, a subsidiary of CMS Gas Transmission PCB....................................... Polychlorinated biphenyl Pension Plan.............................. The trusteed, non-contributory, defined benefit pension plan of Panhandle, Consumers and CMS Energy Powder River.............................. CMS Oil & Gas previously owned a significant interest in coalbed methane fields or projects developed within the Powder River Basin which spans the border between Wyoming and Montana. The Powder River properties have been sold. PPA....................................... The Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year term commencing in March 1990 Price Anderson Act........................ Price Anderson Act, enacted in 1957 as an amendment to the Atomic Energy Act of 1954, as revised and extended over the years. This act stipulates between nuclear licensees and the U.S. government the insurance, financial responsibility, and legal liability for nuclear accidents. PSCR...................................... Power supply cost recovery PUHCA..................................... Public Utility Holding Company Act of 1935 PURPA..................................... Public Utility Regulatory Policies Act of 1978 ROA....................................... Retail Open Access SCP....................................... Southern Cross Pipeline in Australia, in which CMS Gas Transmission holds a 45 percent ownership interest SEC....................................... U.S. Securities and Exchange Commission Securitization............................ A financing method authorized by statute and approved by the MPSC which allows a utility to sell its right to receive a portion of the rate payments received from its customers for the repayment of Securitization bonds issued by a special purpose entity affiliated with such utility SENECA.................................... Sistema Electrico del Estado Nueva Esparta, C.A., a subsidiary of Enterprises SERP...................................... Supplemental Executive Retirement Plan SFAS...................................... Statement of Financial Accounting Standards SFAS No. 5................................ SFAS No. 5, "Accounting for Contingencies" SFAS No. 52............................... SFAS No. 52, "Foreign Currency Translation" SFAS No. 71............................... SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" SFAS No. 87............................... SFAS No. 87, "Employers' Accounting for Pensions"

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SFAS No. 88. SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" SFAS No. 106.............................. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" SFAS No. 109.............................. SFAS No. 109, "Accounting for Income Taxes" SFAS No. 115.............................. SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" SFAS No. 123.............................. SFAS No. 123, "Accounting for Stock-Based Compensation" SFAS No. 133.............................. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted" SFAS No. 143.............................. SFAS No. 143, "Accounting for Asset Retirement Obligations" SFAS No. 144.............................. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" SFAS No. 148.............................. SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure" SFAS No. 149.............................. SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities" SFAS No. 150.............................. SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" Southern Union............................ Southern Union Company, a non-affiliated company Special Committee......................... A special committee of independent directors, established by CMS Energy's Board of Directors, to investigate matters surrounding round-trip trading Stranded Costs............................ Costs incurred by utilities in order to serve their customers in a regulated monopoly environment, which may not be recoverable in a competitive environment because of customers leaving their systems and ceasing to pay for their costs. These costs could include owned and purchased generation and regulatory assets. Superfund................................. Comprehensive Environmental Response, Compensation and Liability Act Taweelah.................................. Al Taweelah A2, a power and desalination plant of Emirates CMS Power Company, in which CMS Generation holds a forty percent interest TEPPCO.................................... Texas Eastern Products Pipeline Company, LLC Toledo Power.............................. Toledo Power Company, the 135 MW coal and fuel oil power plant located on Cebu Island, Phillipines, in which CMS Generation held a 47.5 percent interest. Transition Costs.......................... Stranded Costs, as defined, plus the costs incurred in the transition to competition Trunkline................................. Trunkline Gas Company, LLC, formerly a subsidiary of CMS Panhandle Holdings, LLC Trunkline LNG............................. Trunkline LNG Company, LLC, formerly a subsidiary of LNG Holdings, LLC Trust Preferred Securities................ Securities representing an undivided beneficial interest in the assets of statutory business trusts, the interests of which have a preference with respect to certain trust distributions over the interests of either CMS Energy or Consumers, as applicable, as owner of the common beneficial interests of the trusts Union..................................... Utility Workers of America, AFL-CIO VEBA Trusts............................... VEBA (voluntary employees' beneficiary association) Trusts accounts established to specifically set aside employer contributed assets to pay for future expenses of the OPEB plan
7 (This page intentionally left blank) 8 PART I ITEM 1. BUSINESS GENERAL CMS ENERGY CMS Energy was formed in Michigan in 1987 and is an energy holding company operating through subsidiaries in the United States and in selected markets around the world. Its two principal subsidiaries are Consumers and Enterprises. Consumers is a public utility that provides natural gas and/or electricity to almost 6 million of Michigan's 10 million residents and serves customers in all 68 of the state's Lower Peninsula counties. Through various subsidiaries, Enterprises is engaged in energy businesses in the United States and in selected international markets. In 2003, CMS Energy's consolidated operating revenue was approximately $5.5 billion. See BUSINESS SEGMENTS later in this Item 1 for further discussion of each segment. CONSUMERS Consumers was formed in Michigan in 1968 and is the successor to a corporation organized in Maine in 1910 that conducted business in Michigan from 1915 to 1968. In 1997, Consumers changed its name from Consumers Power Company to Consumers Energy Company to better reflect its integrated electricity and gas businesses. Consumers' service areas include automotive, metal, chemical and food products as well as a diversified group of other industries. Consumers' consolidated operations account for a majority of CMS Energy's total assets and income, as well as a substantial portion of its operating revenue. At year-end 2003, Consumers' customer base and operating revenues were as follows:
CUSTOMERS OPERATING 2003 VS. 2002 SERVED REVENUE OPERATING REVENUE (MILLIONS) (MILLIONS) % INCREASE/(DECREASE) ---------- ---------- --------------------- Electric Utility Business.............................. 1.75 $2,590 (2.2) Gas Utility Business................................... 1.67 1,845 21.5 Total................................................ 2.85(a) $4,435 6.4
- ------------------------- (a) Reflects total number of customers, taking into account the approximately 0.6 million combination electric and gas customers that are included in each of the Electric Utility Business and Gas Utility Business numbers above. Consumers' rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and FERC, as described in CMS ENERGY AND CONSUMERS REGULATION later in this Item 1. CONSUMERS' PROPERTIES -- GENERAL: Consumers and its subsidiaries own their principal properties in fee, except that most electric lines and gas mains are located in public roads or on land owned by others pursuant to easements and other rights. Almost all of Consumers' properties are subject to the lien of its First Mortgage Bond Indenture. For additional information on Consumers' properties see BUSINESS SEGMENTS -- Consumers' Electric Utility Operations -- Electric Utility Properties, and -- Consumers' Gas Utility Operations -- Gas Utility Properties, below. BUSINESS SEGMENTS CMS ENERGY FINANCIAL INFORMATION For information with respect to operating revenue, net operating income, identifiable assets and liabilities attributable to all of CMS Energy's business segments and international and domestic operations, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- SELECTED FINANCIAL INFORMATION 9 AND CMS ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CONSUMERS' ELECTRIC UTILITY OPERATIONS Based on the average number of customers, Consumers' electric utility operations, if independent, would be the thirteenth largest electric utility company in the United States. Consumers' electric utility operations include the generation, purchase, distribution and sale of electricity. At year-end 2003, it served customers in 61 of the 68 counties of Michigan's Lower Peninsula. Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Midland, Muskegon and Saginaw. Consumers' electric utility customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Consumers' electric utility operations are not dependent upon a single customer, or even a few customers, and the loss of any one or even a few of such customers is not reasonably likely to have a material adverse effect on its financial condition. Consumers' electric utility operations are seasonal. The summer months usually increase demand for electric energy, principally due to the use of air conditioners and other cooling equipment, thereby affecting revenues. In 2003, Consumers' electric sales were 36 billion kWh and retail open access deliveries were 3 billion kWh, for total electric deliveries of 39 billion kWh. In 2002, Consumers' electric sales were 37 billion kWh and retail open access deliveries were 2 billion kWh, for total electric deliveries of 39 billion kWh. Consumers' 2003 summer peak demand was 7,721 MW (excluding retail open access loads) and 8,170 MW (including retail open access loads). For the 2002-03 winter period, Consumers' winter peak demand was 5,862 MW (excluding retail open access loads) and 6,140 MW (including retail open access loads). In December 2003, Consumers experienced peak demand of 5,657 MW (excluding retail open access loads) and 6,093 MW (including retail open access loads). Based on its summer 2003 forecast, Consumers carried an 11 percent reserve margin target. However, as a result of lower than forecasted peak loads, Consumers' ultimate reserve margin was 14.7 percent compared to 20.6 percent in 2002. Currently, Consumers has a reserve margin of 5.0 percent, or supply resources equal to 105 percent of projected summer peak load for summer 2004 and is in the process of securing the additional capacity needed to meet its summer 2004 reserve margin target of 11 percent (111 percent of projected summer peak load). The ultimate use of the reserve margin will depend primarily on summer weather conditions, the level of retail open access requirements being served by others during the summer, and any unscheduled plant outages. ELECTRIC UTILITY PROPERTIES GENERATION: At December 31, 2003, Consumers' electric generating system consists of the following:
2003 NET 2003 SUMMER NET GENERATION SIZE AND YEAR DEMONSTRATED (MILLIONS NAME AND LOCATION (MICHIGAN) ENTERING SERVICE CAPABILITY (MWS) OF KWHS) ---------------------------- ---------------- ---------------- ---------- COAL GENERATION J H Campbell 1 & 2 -- West Olive........... 2 Units, 1962-1967 615 4,253 J H Campbell 3 -- West Olive............... 1 Unit, 1980 765(a) 5,657 D E Karn -- Essexville..................... 2 Units, 1959-1961 511 3,429 B C Cobb -- Muskegon....................... 2 Units, 1956-1957 312 2,166 J R Whiting -- Erie........................ 3 Units, 1952-1953 326 2,256 J C Weadock -- Essexville.................. 2 Units, 1955-1958 302 2,330 ----- ------ Total coal generation........................ 2,831 20,091 ----- ------ OIL/GAS GENERATION B C Cobb -- Muskegon....................... 3 Units, 1999-2000(b) 183 6 D E Karn -- Essexville..................... 2 Units, 1975-1977 1,276 352 ----- ------ Total oil/gas generation..................... 1,459 358 ----- ------
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2003 NET 2003 SUMMER NET GENERATION SIZE AND YEAR DEMONSTRATED (MILLIONS NAME AND LOCATION (MICHIGAN) ENTERING SERVICE CAPABILITY (MWS) OF KWHS) ---------------------------- ---------------- ---------------- ---------- HYDROELECTRIC Conventional Hydro Generation.............. 13 Plants, 1906-1949 74 335 Ludington Pumped Storage................... 6 Units, 1973 955(c) (517)(d) ----- ------ Total Hydroelectric.......................... 1,029 (182) ----- ------ NUCLEAR GENERATION Palisades -- South Haven................... 1 Unit, 1971 767 6,151 ----- ------ GAS/OIL COMBUSTION TURBINE Generation................................. 7 Plants, 1966-1971 345 13 ----- ------ Total owned generation....................... 6,431 26,431 ===== ====== PURCHASED AND INTERCHANGE POWER Capacity................................... 1,991(e) ----- Total........................................ 8,422 =====
- ------------------------- (a) Represents Consumers' share of the capacity of the J H Campbell 3 unit, net of 6.69 percent (ownership interests of the Michigan Public Power Agency and Wolverine Power Supply Cooperative, Inc.). (b) Cobb 1-3 are retired coal fired units that were converted to gas fired. Units were placed back into service in the years indicated. (c) Represents Consumers' share of the capacity of Ludington. Consumers and Detroit Edison have 51 percent and 49 percent undivided ownership, respectively, in the plant. (d) Represents Consumers' share of net pumped storage generation. This facility electrically pumps water during off-peak hours for storage to later generate electricity during peak-demand hours. (e) Includes 1,240 MW of purchased contract capacity from the MCV Facility. In 2003, through long-term purchase contracts, options, spot market and other seasonal purchases, Consumers purchased up to 2,353 MW of net capacity from other power producers (the largest of which was the MCV Partnership), which amounted to 30.5 percent of Consumers' total system requirements. DISTRIBUTION: Consumers' distribution system includes: - 347 miles of high-voltage distribution radial lines operating at 120 kilovolts and above; - 4,164 miles of high-voltage distribution overhead lines operating at 23 kilovolts and 46 kilovolts; - 16 subsurface miles of high-voltage distribution underground lines operating at 23 kilovolts and 46 kilovolts; - 54,922 miles of electric distribution overhead lines; - 8,526 subsurface miles of underground distribution lines; and - substations having an aggregate transformer capacity of 20,605,680 kilovoltamperes. Consumers formerly owned a high-voltage transmission system that interconnects Consumers' electric generating plants at many locations with transmission facilities of unaffiliated systems, including those of other utilities in Michigan and Indiana. The interconnections permit a sharing of the reserve capacity of the connected systems. This allows mutual assistance during emergencies and substantially reduces investment in utility plant facilities. On May 1, 2002, Consumers transferred its investment in the high-voltage transmission system to a third party, Michigan Electric Transmission Company, LLC. Consequently, Consumers no longer owns or controls transmission facilities either directly or indirectly. For additional information on the sale of the 11 transmission assets, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 4 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- CONSUMERS' ELECTRIC UTILITY RESTRUCTURING MATTERS -- TRANSMISSION SALE and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- ELECTRIC RESTRUCTURING MATTERS -- TRANSMISSION SALE. FUEL SUPPLY: Consumers has four generating plant sites that burn coal. These plants constitute 76 percent of Consumers' baseload supply, the capacity used to serve a constant level of customer demand. In 2003, these plants produced a combined total of 20,091 million kWhs of electricity and burned 10.1 million tons of coal. On December 31, 2003, Consumers had on hand a 28-day supply of coal. For additional information on future sources of coal, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- OTHER ELECTRIC UNCERTAINTIES -- COMMITMENTS FOR FUTURE PURCHASES -- COAL SUPPLY. Consumers owns Palisades, an operating nuclear power plant located near South Haven, Michigan. In May 2001, with the approval of the NRC, Consumers transferred its authority to operate Palisades to the NMC. During 2003, Palisades' net generation was 6,151 million kWhs, constituting 23.3 percent of Consumers' baseload supply. Palisades' nuclear fuel supply responsibilities are under NMC's control as agent for Consumers. New fuel contracts are being written as NMC agreements. Consumers/NMC currently have sufficient contracts for uranium concentrates to provide up to 42 percent of its fuel supply requirements for the fall 2004 reload. A mix of spot and medium-term uranium concentrates contracts are currently being negotiated to provide for the remaining open requirements for the 2004 and 2006 reloads. Consumers/NMC also have contracts for conversion services with quantity flexibility to provide up to 100 percent of the requirements for the 2004 reload and approximately 10 percent of the requirements for the 2006 reload. Contracts to provide for the future Consumers/ NMC requirements are currently being pursued with all suppliers of conversion services. Enrichment services contracts with quantity flexibility ranging up to 100 percent of the requirements for the 2004 and 2006 reloads are in place. NMC is currently negotiating a contract for supply of enrichment services beyond 2006. NMC also has contracts for nuclear fuel services and for fabrication of nuclear fuel assemblies. The fuel contracts are with major private industrial suppliers of nuclear fuel and related services and with uranium producers, converters and enrichers who participate in the world nuclear fuel marketplace. The fabrication contract is effective for the 2004 reload with options to extend the contract for an additional two reloads in 2006 and 2007. As shown below, Consumers generates electricity principally from coal and nuclear fuel.
MILLIONS OF KWHS ------------------------------------------------ POWER GENERATED 2003 2002 2001 2000 1999 --------------- ---- ---- ---- ---- ---- Coal.............................................. 20,091 19,361 19,203 17,926 19,085 Nuclear........................................... 6,151 6,358 2,326(a) 5,724 5,105 Oil............................................... 242 347 331 645 809 Gas............................................... 129 354 670 400 441 Hydro............................................. 335 387 423 351 365 Net pumped storage................................ (517) (486) (553) (541) (476) ------ ------ ------ ------ ------ Total net generation.............................. 26,431 26,321 22,400 24,505 25,329 ====== ====== ====== ====== ======
- ------------------------- (a) On June 20, 2001, the Palisades reactor was shut down so technicians could inspect a small steam leak on a control rod drive assembly. The defective components were replaced and the plant returned to service on January 21, 2002. 12 The cost of all fuels consumed, shown below, fluctuates with the mix of fuel burned.
COST PER MILLION BTU ----------------------------------------- FUEL CONSUMED 2003 2002 2001 2000 1999 ------------- ---- ---- ---- ---- ---- Coal..................................................... $1.33 $1.34 $1.38 $1.34 $1.38 Oil...................................................... 3.92 3.49 4.02 3.30 2.69 Gas...................................................... 7.62 3.98 4.05 4.80 2.74 Nuclear.................................................. 0.34 0.35 0.39 0.45 0.52 All Fuels(a)............................................. 1.16 1.19 1.44 1.27 1.28
- ------------------------- (a) Weighted average fuel costs. The Nuclear Waste Policy Act of 1982 made the federal government responsible for the permanent disposal of spent nuclear fuel and high-level radioactive waste by 1998. The DOE has not arranged for storage facilities and it does not expect to receive spent nuclear fuel for storage in 2004. Palisades currently has spent nuclear fuel that exceeds its temporary on-site storage pool capacity. Therefore, Consumers is storing spent nuclear fuel in NRC-approved steel and concrete vaults known as "dry casks." For additional information on disposal of nuclear fuel and Consumers' use of dry casks, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 4 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES -- NUCLEAR MATTERS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- OTHER ELECTRIC UNCERTAINTIES -- NUCLEAR MATTERS. CONSUMERS' GAS UTILITY OPERATIONS Based on the average number of customers, Consumers' gas utility operations, if independent, would be the 10th largest gas utility company in the United States. Consumers' gas utility operations purchase, transport, store, distribute and sell natural gas. As of December 31, 2003, it was authorized to provide service in 54 of the 68 counties in Michigan's Lower Peninsula. Principal cities served include Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as well as the suburban Detroit area, where nearly 900,000 of the gas customers are located. Consumers' gas utility operations are not dependent upon a single customer, or even a few customers, and the loss of any one or even a few of such customers is not reasonably likely to have a material adverse effect on its financial condition. Consumers' gas utility operations are seasonal. Consumers injects natural gas into storage during the summer months for use during the winter months when the demand for natural gas is higher. Peak demand usually occurs in the winter due to colder temperatures and the resulting increased demand for heating fuels. In 2003, total deliveries of natural gas sold by Consumers and by other sellers who deliver natural gas to customers (including the MCV Partnership) through Consumers' pipeline and distribution network totaled 388 bcf. During the winter months of 2002-03, cold weather caused heavy withdrawals from Consumers' gas storage fields. As a result, water and other liquids entered certain of Consumers' pipelines. The existence of water and other liquids in the pipelines could cause pipe corrosion, which in turn may increase future maintenance problems and costs. GAS UTILITY PROPERTIES: Consumers' gas distribution and transmission system consists of: - 25,551 miles of distribution mains throughout Michigan's Lower Peninsula; - 1,624 miles of transmission lines throughout Michigan's Lower Peninsula; - 7 compressor stations with a total of 162,000 installed horsepower; and - 14 gas storage fields located across Michigan with an aggregate storage capacity of 331 bcf and a working storage capacity of 130 bcf. 13 GAS SUPPLY: In 2003, Consumers purchased 3 percent of its gas from Michigan producers, 66 percent from United States producers outside Michigan and 22 percent from Canadian producers. Authorized suppliers in the gas customer choice program supplied the remaining 9 percent of gas that Consumers delivered. Consumers' firm transportation agreements are with ANR Pipeline Company, Great Lakes Gas Transmission, L.P., Trunkline Gas Co. and Panhandle Eastern Pipe Line Company. Consumers uses these agreements to deliver gas to Michigan for ultimate deliveries to market. Consumers' firm transportation and city gate arrangements are capable of delivering over 95 percent of Consumers' total gas supply requirements. As of December 31, 2003, Consumers' portfolio of firm transportation from pipelines to Michigan is as follows:
VOLUME (DEKATHERMS/DAY) EXPIRATION ---------------- ---------- ANR Pipeline Company........................................ 84,054 March 2004 ANR Pipeline Company (starting 04/01/04).................... 50,000 March 2006 ANR Pipeline Company (starting 04/01/04).................... 40,000 October 2004 Great Lakes Gas Transmission, L.P. ......................... 85,092 April 2004 Great Lakes Gas Transmission, L.P. (starting 04/01/04)...... 50,000 March 2007 Great Lakes Gas Transmission, L.P. ......................... 90,000 March 2004 Great Lakes Gas Transmission, L.P. (starting 04/01/04)...... 100,000 March 2007 Trunkline Gas Co. .......................................... 336,375 October 2005 Trunkline Gas Co. .......................................... 40,106 March 2004 Panhandle Eastern Pipe Line Company (starting 04/01/04)..... 50,000 October 2004 Vector Pipeline............................................. 50,000 March 2007
Consumers purchases the balance of its required gas supply under firm city gate contracts and as needed, interruptible contracts. The amount of interruptible transportation service and its use varies primarily with the price for such service and the availability and price of the spot supplies being purchased and transported. Consumers' use of interruptible transportation is generally in off-peak summer months and after Consumers has fully utilized the services under the firm transportation agreements. NATURAL GAS TRANSMISSION CMS Gas Transmission was formed in 1988 and owns, develops and manages domestic and international natural gas facilities. In 2003, CMS Gas Transmission's operating revenue was $22 million. In 1999, CMS Gas Transmission acquired Panhandle, which was primarily engaged in the interstate transmission and storage of natural gas and also provided LNG terminalling and regasification services. Panhandle operated a large natural gas pipeline network, which provided customers in the Midwest and Southwest with a comprehensive array of transportation services. Panhandle's major customers included 25 utilities located primarily in the United States Midwest market area, which encompassed large portions of Illinois, Indiana, Michigan, Missouri, Ohio and Tennessee. In February 2003, Panhandle sold its one-third equity interest in Centennial for $40 million to Centennial's two other partners, MAPL and TE Products Pipeline Company, Limited Partnership, through its general partner, TEPPCO. In March 2003, Panhandle transferred $63 million previously committed to collateralize a letter of credit and its one-third ownership interest in Guardian to CMS Gas Transmission. CMS Gas Transmission sold its interest in Guardian to a subsidiary of WPS Resources Corporation in May 2003. Proceeds from the sale were $26 million and the $63 million of cash collateral was released. In June 2003, CMS Gas Transmission sold Panhandle to Southern Union Panhandle Corp., a newly formed entity owned by Southern Union. Southern Union Panhandle Corp. purchased all of Panhandle's outstanding capital stock for approximately $582 million in cash and 3 million shares of Southern Union common stock. Southern Union Panhandle Corp. also assumed approximately $1.166 billion in debt. In July 2003, Southern Union declared a five percent common stock dividend resulting in an additional 150,000 shares of common stock 14 for CMS Gas Transmission. In October 2003, CMS Gas Transmission sold its 3.15 million shares to a private investor for $17.77 per share. In July 2003, CMS Gas Transmission completed the sale of CMS Field Services to Cantera Natural Gas, Inc. for gross cash proceeds of approximately $113 million, subject to post closing adjustments, and a $50 million face value note of Cantera Natural Gas, Inc. The note is payable to CMS Energy for up to $50 million subject to the financial performance of the Fort Union and Bighorn natural gas gathering systems from 2004 through 2008. NATURAL GAS TRANSMISSION PROPERTIES: CMS Gas Transmission has a total of 288 miles of gathering and transmission pipelines located in the state of Michigan, with a daily capacity of 0.95 bcf. At December 31, 2003, CMS Gas Transmission had nominal processing capabilities of approximately 0.33 bcf per day of natural gas in Michigan. At December 31, 2003, CMS Gas Transmission has ownership interests in the following international pipelines:
LOCATION OWNERSHIP INTEREST (%) MILES OF PIPELINES - -------- ---------------------- ------------------ Argentina................................................. 29.42 3,362 Argentina to Brazil....................................... 20.00 262 Argentina to Chile........................................ 50.00 707 Australia (Western Australia)............................. 40.00(a) 927 Australia (Western Australia)............................. 100.00 259
- ------------------------- (a) CMS Gas Transmission has a 45 percent interest in a consortium that acquired an 88 percent interest in the pipeline. Properties of certain CMS Gas Transmission subsidiaries are subject to liens of creditors of the respective subsidiaries. INDEPENDENT POWER PRODUCTION CMS Generation was formed in 1986. It invests in, acquires, develops, constructs and operates non-utility power generation plants in the United States and abroad. In 2003, the independent power production business segment's operating revenue, which includes revenues from CMS Generation, CMS Operating, S.A., the MCV Facility and the MCV Partnership, was $204 million. INDEPENDENT POWER PRODUCTION PROPERTIES: As of December 31, 2003, CMS Generation had ownership interests in operating power plants totaling 8,766 gross MW (4,149 net MW). At December 31, 2003, additional plants totaling approximately 1,784 gross MW (420 net MW) were under construction or in advanced stages of development. These plants include the Shuweihat power plant, which is under construction in the United Arab Emirates, and the Saudi Petrochemical Company power plant, which is under advanced development and will be located in the Kingdom of Saudi Arabia. In 2004, CMS Generation plans to complete the restructuring of its operations by narrowing the scope of its existing operations and commitments from four to two regions: the U.S. and the Middle East/North Africa. In addition, it plans to sell designated assets and investments that are under-performing, non-region focused and non-synergistic with other CMS Energy business units. 15 The following table details CMS Generation's interest in independent power plants as of year-end 2003 (excluding the plants owned by CMS Operating, S.R.L. and CMS Electric and Gas and the MCV facility, discussed further below):
PERCENTAGE OF GROSS CAPACITY UNDER LONG-TERM OWNERSHIP INTEREST GROSS CAPACITY CONTRACT LOCATION FUEL TYPE (%) (MW) (%) - -------- --------- ------------------ -------------- --------------- California..................... Wood 37.8 36 100 Connecticut.................... Scrap tire 100 31 100 Michigan....................... Coal 50 70 100 Michigan....................... Natural gas 100 710 85 Michigan....................... Natural gas 100 224 0 Michigan....................... Wood 50 40 100 Michigan....................... Wood 50 38 100 New York....................... Hydro 0.3 14 100 North Carolina................. Wood 50 50 100 Oklahoma....................... Natural gas 8.8 124 100 ----- DOMESTIC TOTAL................. 1,337 Argentina...................... Hydro 17.2 1,320 20(a) Australia...................... Coal 49.6 2,000 55 Chile.......................... Natural gas 50 720 100(b) Ghana.......................... Crude oil 90 224 100 India.......................... Coal 50 250 100 India.......................... Natural gas 33.2 235 100 Jamaica........................ Diesel 42.3 63 100 Latin America.................. Various Various 484 51 Morocco........................ Coal 50 1,356 100 United Arab Emirates........... Natural gas 40 777 100 ----- INTERNATIONAL TOTAL............ 7,429 TOTAL DOMESTIC AND INTERNATIONAL................ 8,766 ===== PROJECTS UNDER CONSTRUCTION/ ADVANCED DEVELOPMENT......... 1,784
- ------------------------- (a) El Chocon is primarily on a spot market basis, however, it has a high dispatch rate due to low cost. (b) Atacama is not allowed to sell more than 440 MW to the grid. 100 percent of the 440 MW is under contract. Through a CMS International Ventures subsidiary called CMS Operating, S.R.L., CMS Enterprises, CMS Gas Transmission and CMS Generation have a 100 percent ownership interest in a 128 MW natural gas power plant and a 92.6 percent ownership interest in a 540 MW natural gas power plant, each in Argentina. Through CMS Electric and Gas, CMS Enterprises has an 86 percent ownership interest in 287 MW of gas turbine and diesel generating capacity in Venezuela. CMS Midland owns a 49 percent general partnership interest in the MCV Partnership, which was formed to construct and operate the MCV Facility. The MCV Facility was sold to five owner trusts and leased back to the MCV Partnership. CMS Holdings is a limited partner in the FMLP, which is a beneficiary of one of these trusts. Through FMLP, CMS Holdings has a 35 percent Lessor interest in the MCV Facility. The MCV Facility has a net electrical generating capacity of approximately 1,500 MW. CMS Generation has ownership interests in certain facilities such as Loy Yang, Jorf Lasfar and El Chocon. The Loy Yang assets are owned in fee, but are subject to the security interests of its lenders. CMS Energy is actively working to sell its interest in the Loy Yang facility. The Jorf Lasfar facility is held pursuant to a right of 16 possession agreement with the Moroccan state-owned Office National de l'Electricite. The El Chocon facility is held pursuant to a 30-year possession agreement. For information on capital expenditures, see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- CAPITAL RESOURCES AND LIQUIDITY AND ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (FINANCINGS AND CAPITALIZATION). OIL AND GAS EXPLORATION AND PRODUCTION CMS Energy used to own an oil and gas exploration and production company. In October 2002, CMS Energy completed its exit from the oil and gas exploration and production business. ENERGY RESOURCE MANAGEMENT In 2003, CMS ERM moved its headquarters from Houston, Texas to Jackson, Michigan. In February 2004, CMS ERM changed its name from CMS Marketing, Services and Trading Company to CMS Energy Resource Management Company. CMS ERM has reduced its business focus and in the future will concentrate on the purchase and sale of energy commodities in support of CMS Energy's generating facilities. CMS ERM previously provided gas, oil, and electric marketing, risk management and energy management services to industrial, commercial, utility and municipal energy users throughout the United States. In January 2003, CMS ERM closed the sale of a major portion of its wholesale natural gas trading book to Sempra Energy Trading. The cash proceeds were approximately $17 million. In April 2003, CMS ERM sold its wholesale electric power business to Constellation Power Source, Inc. Also in April 2003, CMS ERM sold the federal business of CMS Viron, its energy management service provider, to Pepco Energy Services, Inc. In July 2003, CMS ERM sold CMS Viron's non-federal business to Chevron Energy Solutions Company, a division of Chevron U.S.A. In 2003, CMS ERM marketed approximately 85 bcf of natural gas and 5,314 GWh of electricity and its 2003 operating revenue was $711 million. INTERNATIONAL ENERGY DISTRIBUTION In October 2001, CMS Energy discontinued the operations of its international energy distribution business. In 2002, CMS Energy discontinued all new development outside North America, which included closing all non-U.S. development offices. In 2003, CMS Energy reclassified to continuing operations SENECA, which is its energy distribution business in Venezuela, and CPEE, which is its energy distribution business in Brazil, due to its inability to sell these assets. CMS ENERGY AND CONSUMERS REGULATION CMS Energy is a public utility holding company that is exempt from registration under PUHCA. CMS Energy, Consumers and their subsidiaries are subject to regulation by various federal, state, local and foreign governmental agencies, including those described below. MICHIGAN PUBLIC SERVICE COMMISSION Consumers is subject to the MPSC's jurisdiction, which regulates public utilities in Michigan with respect to retail utility rates, accounting, utility services, certain facilities and various other matters. The MPSC also has rate jurisdiction over several limited liability companies in which CMS Gas Transmission has ownership interests. These companies own, or will own, and operate intrastate gas transmission pipelines. The Attorney General, ABATE, and the MPSC staff typically intervene in MPSC electric- and gas-related proceedings concerning Consumers. For many years, almost every significant MPSC order affecting Consumers has been appealed. Certain appeals from the MPSC orders are pending in the Court of Appeals. RATE PROCEEDINGS: In 1996, the MPSC issued an order that established the electric authorized rate of return on common equity at 12.25 percent. In 2002, the MPSC issued an order that established the gas authorized rate of return on common equity at 11.4 percent. 17 MPSC REGULATORY AND MICHIGAN LEGISLATIVE CHANGES: State regulation of the retail electric and gas utility businesses has undergone significant changes. In 2000, the Michigan Legislature enacted the Customer Choice Act. The Customer Choice Act provides that as of January 2002, all electric customers have the choice to buy generation service from an alternative electric supplier. The Customer Choice Act also imposes rate reductions, rate freezes and rate caps. For additional information regarding the Customer Choice Act, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 4 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- CONSUMERS' ELECTRIC UTILITY RESTRUCTURING MATTERS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- ELECTRIC RESTRUCTURING MATTERS. As a result of regulatory changes in the natural gas industry, Consumers transports the natural gas commodity that is sold to some customers by competitors like gas producers, marketers and others. Pursuant to a gas customer choice program that Consumers implemented, as of April 2003 all of Consumers' gas customers are eligible to select an alternative gas commodity supplier. Consumers' current GCR mechanism allows it to recover from its customers all prudently incurred costs to purchase natural gas commodity and transport it to Consumers' facilities. For additional information, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 4 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- CONSUMERS' GAS UTILITY RATE MATTERS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- GAS RATE MATTERS. FEDERAL ENERGY REGULATORY COMMISSION FERC has exercised limited jurisdiction over several independent power plants in which CMS Generation has ownership interests, as well as over CMS ERM. Among other things, FERC jurisdiction relates to the acquisition, operation and disposal of assets and facilities and to the service provided and rates charged. Some of Consumers' gas business is also subject to regulation by FERC, including a blanket transportation tariff pursuant to which Consumers can transport gas in interstate commerce. FERC also regulates certain aspects of Consumers' electric operations including compliance with FERC accounting rules, wholesale rates, operation of licensed hydro-electric generating plants, transfers of certain facilities, and corporate mergers and issuance of securities. FERC is currently soliciting comments on whether it should exercise jurisdiction over power marketers like CMS ERM, requiring them to follow FERC's uniform system of accounts and seek authorization for issuance of securities and assumption of liabilities. These issues are pending before the agency. NUCLEAR REGULATORY COMMISSION Under the Atomic Energy Act of 1954, as amended, and the Energy Reorganization Act of 1974, Consumers is subject to the jurisdiction of the NRC with respect to the design, construction, operation and decommissioning of its nuclear power plants. Consumers is also subject to NRC jurisdiction with respect to certain other uses of nuclear material. These and other matters concerning Consumers' nuclear plants are more fully discussed in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES 1 (CORPORATE STRUCTURE AND ACCOUNTING POLICIES) AND 4 (UNCERTAINTIES) OF CMS ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES 1 (CORPORATE STRUCTURE AND ACCOUNTING POLICIES) AND 2 (UNCERTAINTIES) OF CONSUMERS' CONSOLIDATED FINANCIAL STATEMENTS. OTHER REGULATION The Secretary of Energy regulates the importation and exportation of natural gas and has delegated various aspects of this jurisdiction to FERC and the DOE's Office of Fossil Fuels. 18 Pipelines owned by system companies are subject to the Natural Gas Pipeline Safety Act of 1968 and the Pipeline Safety Improvement Act of 2002, which regulates the safety of gas pipelines. Consumers is also subject to the Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and petroleum pipelines. CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE CMS Energy, Consumers and their subsidiaries are subject to various federal, state and local regulations for environmental quality, including air and water quality, waste management, zoning and other matters. Consumers has installed and is currently installing modern emission controls at its electric generating plants and has converted and is converting electric generating units to burn cleaner fuels. Consumers expects that the cost of future environmental compliance, especially compliance with clean air laws, will be significant because of EPA regulations regarding nitrogen oxide and particulate-related emissions. These regulations will require Consumers to make significant capital expenditures. Consumers is in the process of closing older ash disposal areas at two plants. Construction, operation, and closure of a modern solid waste disposal area for ash can be expensive, because of strict federal and state requirements. In order to significantly reduce ash field closure costs, Consumers has worked with others to use bottom ash and fly ash as part of temporary and final cover for ash disposal areas instead of native materials, in cases where such use of bottom ash and fly ash is compatible with environmental standards. To reduce disposal volumes, Consumers sells coal ash for use as a filler for asphalt, for incorporation into concrete products and for other environmentally compatible uses. The EPA has announced its intention to develop new nationwide standards for ash disposal areas. Consumers intends to work through industry groups to help ensure that any such regulations require only the minimum cost necessary to adhere to standards that are consistent with protection of the environment. Like most electric utilities, Consumers has PCB in some of its electrical equipment. During routine maintenance activities, Consumers identified PCB as a component in certain paint, grout and sealant materials at the Ludington Pumped Storage facility. Consumers removed and replaced part of the PCB material. Consumers has proposed a plan to the EPA to deal with the remaining materials and is waiting for a response from the EPA. Certain environmental regulations affecting CMS Energy and Consumers include, but are not limited to, the Clean Air Act Amendments of 1990 and Superfund. Superfund can require any individual or entity that may have owned or operated a disposal site, as well as transporters or generators of hazardous substances that were sent to such site, to share in remediation costs for the site. CMS Energy's and Consumers' current insurance coverage does not extend to certain environmental clean-up costs, such as claims for air pollution, some past PCB contamination and for some long-term storage or disposal of pollutants. For additional information concerning environmental matters, including estimated capital expenditures to reduce nitrogen oxide related emissions, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 4 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- CONSUMERS' ELECTRIC UTILITY CONTINGENCIES and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- ELECTRIC CONTINGENCIES. CMS ENERGY AND CONSUMERS COMPETITION ELECTRIC COMPETITION Consumers' electric utility business experiences actual and potential competition from many sources, both in the wholesale and retail markets, as well as in electric generation, electric delivery and retail services. In the wholesale electricity markets, Consumers competes with other wholesale suppliers, marketers and brokers. Electric competition in the wholesale markets increased significantly since 1996 due to FERC Order 888. While Consumers is still active in wholesale electricity markets, wholesale for resale transactions by Consumers 19 generated an immaterial amount of Consumers' 2003 revenues from electric utility operations. Consumers believes future loss of wholesale for resale transactions will be insignificant. A significant increase in retail electric competition has occurred because of the Customer Choice Act and the availability of retail open access. Price is the principal method of competition for generation services. The Customer Choice Act gives all electric customers the right to buy generation service from an alternative electric supplier. As of March 2004, alternative electric suppliers are providing 735 MW of generation supply to retail open access customers. This represents nine percent of Consumers' total generating load and an increase of approximately 42 percent in generation supply being purchased from alternative electric suppliers by retail open access customers. Consumers has applied for, but has not yet been granted, reimbursement for implementation costs incurred for the Electric Customer Choice program. The MPSC is supposed to adopt a mechanism pursuant to the Customer Choice Act to provide for recovery of stranded costs. In 2000 and 2001, the MPSC determined the stranded cost recovery was zero, contrary to Consumers' position. Consumers continues to work toward the adoption of a stranded cost recovery mechanism that will offset margin loss. Consumers cannot predict the total amount of electric supply load that may be lost to competitor suppliers, whether the stranded cost recovery method adopted by the MPSC will be applied in a manner that will fully offset any associated margin loss, or whether implementation costs will be fully recovered. In addition to retail electric customer choice, Consumers also has competition or potential competition from: - the threat of customers relocating outside Consumers' service territory; - the possibility of municipalities owning or operating competing electric delivery systems; - customer self-generation; and - adjacent municipal utilities that extend lines to customers near service territory boundaries. Consumers addresses this competition by offering special contracts, providing additional non-energy services, and monitoring and enforcing compliance with MPSC and FERC rules. Consumers offers non-energy revenue services to electric customers, municipalities and other utilities in an effort to offset costs. These services include engineering and consulting, construction of customer-owned distribution facilities, equipment sales (such as transformers), power quality analysis, fiber optic line construction, meter reading and joint construction for phone and cable. Consumers faces competition from many sources, including energy management services companies, other utilities, contractors, and retail merchandisers. CMS ERM, which is a non-utility electric subsidiary, has modified its focus toward optimization of CMS Energy's independent power production portfolio. CMS Energy's independent power production business segment, another non-utility electric subsidiary, faces competition from generators, marketers and brokers, as well as lower power prices on the wholesale market. For additional information concerning electric competition, see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC UTILITY BUSINESS UNCERTAINTIES and ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC BUSINESS UNCERTAINTIES. GAS COMPETITION Competition has existed for the past decade in various aspects of Consumers' gas utility business, and is likely to increase. Competition traditionally comes from alternate fuels and energy sources, such as propane, oil and electricity. INSURANCE CMS Energy and its subsidiaries, including Consumers, maintain insurance coverage similar to comparable companies in the same lines of business. The insurance policies are subject to terms, conditions, limitations and exclusions that might not fully compensate CMS Energy for all losses. As CMS Energy renews its policies it is 20 possible that full insurance coverage may not be obtainable on commercially reasonable terms due to restrictive insurance markets. EMPLOYEES CMS ENERGY As of December 31, 2003, CMS Energy and its subsidiaries, including Consumers, had 8,411 full-time equivalent employees, of whom 8,353 are full-time employees and 58 are full-time equivalent employees associated with the part-time work force. Included in the total are 3,800 employees who are covered by union contracts. CONSUMERS As of December 31, 2003, Consumers and its subsidiaries had 7,947 full-time equivalent employees, of whom 7,892 are full-time employees and 55 are full-time equivalent employees associated with the part-time work force. Included in the total are 3,483 full-time operating, maintenance and construction Consumers' employees and 293 full-time and part-time Consumers' call center employees who are represented by the Utility Workers Union of America. Consumers and the Union negotiated a collective bargaining agreement for the operating, maintenance and construction employees that became effective as of June 1, 2000 and will continue in full force and effect until June 1, 2005. Consumers and the Union negotiated a collective bargaining agreement for the call center employees that became effective as of April 1, 2003 and will continue in full force and effect until August 1, 2005. CMS ENERGY EXECUTIVE OFFICERS (as of March 1, 2004)
NAME AGE POSITION PERIOD ---- --- -------- ------ Kenneth Whipple...................... 69 Chairman of the Board, Chief Executive Officer of CMS Energy 2002-Present Chairman of the Board, Chief Executive Officer of Consumers 2002-Present Chairman of the Board of CMS Enterprises 2002-2003 Director of CMS Energy 1993-Present Director of Consumers 1993-Present Chairman, Chief Executive Officer of Ford Credit Company 1997-1999 Executive Vice President, President of Ford Financial Services Group 1989-1999 S. Kinnie Smith, Jr. ................ 73 Vice Chairman of the Board of CMS Enterprises 2003-Present Vice Chairman of the Board, General Counsel of CMS Energy 2002-Present Vice Chairman of the Board of Consumers 2002-Present Executive Vice President of CMS Enterprises 2002-2003 Director of CMS Energy 2002-Present Director of Consumers 2002-Present Director of Enterprises 2003-Present Vice Chairman of Trans-Elect, Inc. 2002 Senior Counsel at Skadden, Arps, Slate, Meagher, & Flom LLP 1996-2002
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NAME AGE POSITION PERIOD ---- --- -------- ------ David W. Joos........................ 50 Chairman of the Board, Chief Executive Officer of CMS Enterprises 2003-Present President, Chief Operating Officer of CMS Energy 2001-Present President, Chief Operating Officer of Consumers 2001-Present President, Chief Operating Officer of CMS Enterprises 2001-2003 Director of CMS Energy 2001-Present Director of Consumers 2001-Present Director of Enterprises 2000-Present Executive Vice President, Chief Operating Officer -- Electric of CMS Energy 2000-2001 Executive Vice President, Chief Operating Officer -- Electric of CMS Enterprises 2000-2001 Executive Vice President, President and Chief Executive Officer -- Electric of Consumers 1997-2001 Thomas J. Webb....................... 51 Executive Vice President, Chief Financial Officer of CMS Energy 2002-Present Executive Vice President, Chief Financial Officer of Consumers 2002-Present Executive Vice President, Chief Financial Officer of CMS Enterprises 2002-Present Director of Enterprises 2002-Present Executive Vice President, Chief Financial Officer of Panhandle Eastern Pipe Line Company 2002-2003 Executive Vice President, Chief Financial Officer of Kellogg Company 1999-2002 Vice President, Chief Financial Officer of Visteon, a division of Ford Motor Company 1996-1999 Thomas W. Elward..................... 55 President, Chief Operating Officer of CMS Enterprises 2003-Present President, Chief Executive Officer of CMS Generation Co. 2002-Present Director of Enterprises 2003-Present Senior Vice President of CMS Enterprises 2002-2003 Senior Vice President of CMS Generation Co. 1998-2001 Carl L. English...................... 57 Executive Vice President, President and Chief Executive Officer -- Gas of Consumers 1999-Present Vice President of Consumers 1990-1999 John G. Russell*..................... 46 Executive Vice President, President and Chief Executive Officer -- Electric of Consumers 2001-Present Senior Vice President of Consumers 2000-2001 Vice President of Consumers 1999-2000 David G. Mengebier**................. 46 Senior Vice President of CMS Enterprises 2003-Present Senior Vice President of CMS Energy 2001-Present Senior Vice President of Consumers 2001-Present Vice President of CMS Energy 1999-2001 Vice President of Consumers 1999-2001
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NAME AGE POSITION PERIOD ---- --- -------- ------ John F. Drake........................ 55 Senior Vice President of CMS Enterprises 2003-Present Senior Vice President of CMS Energy 2002-Present Senior Vice President of Consumers 2002-Present Vice President of CMS Energy 1997-2002 Vice President of Consumers 1998-2002 Glenn P. Barba....................... 38 Vice President, Chief Accounting Officer of CMS Enterprises 2003-Present Vice President, Controller and Chief Accounting Officer of CMS Energy 2003-Present Vice President, Controller and Chief Accounting Officer of Consumers 2003-Present Vice President and Controller of Consumers 2001-2003 Controller of CMS Generation 1997-2001
- ------------------------- * From July 1997 until October 1999, Mr. Russell served as Manager -- Electric Customer Operations of Consumers. ** From 1997 to 1999, Mr. Mengebier served as Executive Director of Federal Governmental Affairs for CMS Enterprises. There are no family relationships among executive officers and directors of CMS Energy. The present term of office of each of the executive officers extends to the first meeting of the Board of Directors after the next annual election of Directors of CMS Energy (scheduled to be held on May 28, 2004). 23 CONSUMERS EXECUTIVE OFFICERS (as of March 1, 2004)
NAME AGE POSITION PERIOD ---- --- -------- ------ Kenneth Whipple...................... 69 Chairman of the Board, Chief Executive Officer of CMS Energy 2002-Present Chairman of the Board, Chief Executive Officer of Consumers 2002-Present Chairman of the Board of CMS Enterprises 2002-2003 Director of CMS Energy 1993-Present Director of Consumers 1993-Present Chairman, Chief Executive Officer of Ford Credit Company 1997-1999 Executive Vice President, President of Ford Financial Services Group 1989-1999 S. Kinnie Smith, Jr. ................ 73 Vice Chairman of the Board of CMS Enterprises 2003-Present Vice Chairman of the Board, General Counsel of CMS Energy 2002-Present Vice Chairman of the Board of Consumers 2002-Present Executive Vice President of CMS Enterprises 2002-2003 Director of CMS Energy 2002-Present Director of Consumers 2002-Present Director of Enterprises 2003-Present Vice Chairman of Trans-Elect, Inc. 2002 Senior Counsel at Skadden, Arps, Slate, Meagher, & Flom LLP 1996-2002 David W. Joos........................ 50 Chairman of the Board, Chief Executive Officer of CMS Enterprises 2003-Present President, Chief Operating Officer of CMS Energy 2001-Present President, Chief Operating Officer of Consumers 2001-Present President, Chief Operating Officer of CMS Enterprises 2001-2003 Director of CMS Energy 2001-Present Director of Consumers 2001-Present Director of Enterprises 2000-Present Executive Vice President, Chief Operating Officer -- Electric of CMS Energy 2000-2001 Executive Vice President, Chief Operating Officer -- Electric of CMS Enterprises 2000-2001 Executive Vice President, President and Chief Executive Officer -- Electric of Consumers 1997-2001
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NAME AGE POSITION PERIOD ---- --- -------- ------ Thomas J. Webb....................... 51 Executive Vice President, Chief Financial Officer of CMS Energy 2002-Present Executive Vice President, Chief Financial Officer of Consumers 2002-Present Executive Vice President, Chief Financial Officer of CMS Enterprises 2002-Present Director of Enterprises 2002-Present Executive Vice President, Chief Financial Officer of Panhandle Eastern Pipe Line Company 2002-2003 Executive Vice President, Chief Financial Officer of Kellogg Company 1999-2002 Vice President, Chief Financial Officer of Visteon, a division of Ford Motor Company 1996-1999 Carl L. English...................... 57 Executive Vice President, President and Chief Executive Officer -- Gas of Consumers 1999-Present Vice President of Consumers 1990-1999 John G. Russell*..................... 46 Executive Vice President, President and Chief Executive Officer -- Electric of Consumers 2001-Present Senior Vice President of Consumers 2000-2001 Vice President of Consumers 1999-2000 John F. Drake........................ 55 Senior Vice President of CMS Enterprises 2003-Present Senior Vice President of CMS Energy 2002-Present Senior Vice President of Consumers 2002-Present Vice President of CMS Energy 1997-2002 Vice President of Consumers 1998-2002 Robert A. Fenech..................... 56 Senior Vice President of Consumers 1997-Present Vice President of Consumers 1994-1997 Preston D. Hopper.................... 53 Senior Vice President of CMS Enterprises 2003-Present Senior Vice President of CMS Energy 2003-Present Senior Vice President of Consumers 2003-Present Senior Vice President, Chief Accounting Officer of CMS Enterprises 1997-2003 Senior Vice President, Chief Accounting Officer and Controller of CMS Energy 1996-2003 Senior Vice President and Controller of CMS Enterprises 1996-1997 Frank Johnson........................ 56 Senior Vice President of Consumers 2001-Present President, Chief Executive Officer of CMS Electric and Gas 2000-2002 Vice President, Chief Operating Officer of CMS Electric and Gas 2000 Vice President of CMS Electric and Gas 1996-2000
25
NAME AGE POSITION PERIOD ---- --- -------- ------ David G. Mengebier**................. 46 Senior Vice President of CMS Enterprises 2003-Present Senior Vice President of CMS Energy 2001-Present Senior Vice President of Consumers 2001-Present Vice President of CMS Energy 1999-2001 Vice President of Consumers 1999-2001 David A. Mikelonis................... 55 Senior Vice President, General Counsel of Consumers 1988-Present Paul N. Preketes..................... 54 Senior Vice President of Consumers 1999-Present Vice President of Consumers 1994-1999 Glenn P. Barba....................... 38 Vice President, Chief Accounting Officer of CMS Enterprises 2003-Present Vice President, Controller and Chief Accounting Officer of CMS Energy 2003-Present Vice President, Controller and Chief Accounting Officer of Consumers 2003-Present Vice President and Controller of Consumers 2001-2003 Controller of CMS Generation 1997-2001
- ------------------------- * From July 1997 until October 1999, Mr. Russell served as Manager -- Electric Customer Operations of Consumers. ** From 1997 to 1999, Mr. Mengebier served as Executive Director of Federal Governmental Affairs for CMS Enterprises. There are no family relationships among executive officers and directors of Consumers. The present term of office of each of the executive officers extends to the first meeting of the Board of Directors after the next annual election of Directors of Consumers (scheduled to be held on May 28, 2004). AVAILABLE INFORMATION CMS Energy's internet address is http://www.cmsenergy.com. You can access free of charge on our website all of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act. Such reports are available as soon as practical after they are electronically filed with the SEC. Also on our website are our: - Corporate Governance Principles; - Code of Conduct (Code of Business Conduct and Ethics); - Board Committee Charters (including the Audit Committee and the Governance and Nominating Committee) We will provide this information in print to any shareholder who requests it. 26 ITEM 2. PROPERTIES. Descriptions of CMS Energy's and Consumers' properties are found in the following sections of Item 1, all of which are incorporated by reference herein: - BUSINESS -- GENERAL -- Consumers -- Consumers Properties -- General; - BUSINESS -- BUSINESS SEGMENTS -- Consumers Electric Utility Operations -- Electric Utility Properties; - BUSINESS -- BUSINESS SEGMENTS -- Consumers Gas Utility Operations -- Gas Utility Properties; - BUSINESS -- BUSINESS SEGMENTS -- Natural Gas Transmission -- Natural Gas Transmission Properties; - BUSINESS -- BUSINESS SEGMENTS -- Independent Power Production -- Independent Power Production Properties; and - BUSINESS -- BUSINESS SEGMENTS -- International Energy Distribution ITEM 3. LEGAL PROCEEDINGS. CMS Energy, Consumers and some of their subsidiaries and affiliates are parties to certain routine lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, various taxes, and rates and licensing. For additional information regarding various pending administrative and judicial proceedings involving regulatory, operating and environmental matters, see ITEM 1. BUSINESS -- CMS ENERGY AND CONSUMERS REGULATION, both CMS Energy's and Consumers' ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS and both CMS Energy's and Consumers' ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CMS ENERGY DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS In May 2002, the Board of Directors of CMS Energy received a demand on behalf of a shareholder of CMS Energy Common Stock, that it commence civil actions (i) to remedy alleged breaches of fiduciary duties by certain CMS Energy officers and directors in connection with round-trip trading by CMS MST, and (ii) to recover damages sustained by CMS Energy as a result of alleged insider trades alleged to have been made by certain current and former officers of CMS Energy and its subsidiaries. In December 2002, two new directors were appointed to the Board. The Board formed a special litigation committee in January 2003 to determine whether it is in the best interest of CMS Energy to bring the action demanded by the shareholder. The disinterested members of the Board appointed the two new directors to serve on the special litigation committee. In December 2003, during the continuing review by the special litigation committee, CMS Energy was served with a derivative complaint filed on behalf of the shareholder in the Circuit Court of Jackson County, Michigan in furtherance of his demands. The date for CMS Energy and other defendants to answer or otherwise respond to the complaint was extended to June 1, 2004, subject to such further extensions as may be mutually agreed upon by the parties and authorized by the Court. CMS Energy cannot predict the outcome of this matter. INTEGRUM LAWSUIT Integrum filed a complaint in Wayne County, Michigan Circuit Court in July 2003 against CMS Energy, CMS Enterprises and APT. Integrum alleges several causes of action against APT, CMS Energy and CMS Enterprises in connection with an offer by Integrum to purchase the CMS Pipeline Assets. In addition to seeking unspecified money damages, Integrum is seeking an order enjoining CMS Energy and CMS Enterprises from selling and APT from purchasing the CMS Pipeline Assets and an order of specific performance mandating that CMS Energy, CMS Enterprises and APT complete the sale of the CMS Pipeline Assets to APT and Integrum. A 27 certain officer and director of Integrum is a former officer and director of CMS Energy, Consumers and their subsidiaries. CMS Energy, Consumers or their subsidiaries did not employ the individual when Integrum made the offer to purchase the CMS Pipeline Assets. CMS Energy believes that Integrum's claims are without merit. CMS Energy will vigorously defend itself but cannot predict the outcome of this lawsuit. GAS INDEX PRICE REPORTING LITIGATION In August 2003, Cornerstone Propane Partners, L.P. ("Cornerstone") filed a putative class action complaint in the United States District Court for the Southern District of New York against CMS Energy and dozens of other energy companies. The court ordered the Cornerstone complaint to be consolidated with similar complaints filed by Dominick Viola and Roberto Calle Gracey. The plaintiffs filed a consolidated complaint on January 20, 2004. The consolidated complaint alleges that false natural gas price reporting by the defendants manipulated the prices of NYMEX natural gas futures and options. The complaint contains two counts under the Commodity Exchange Act, one for manipulation and one for aiding and abetting violations. CMS Energy is no longer a defendant, however, CMS MST and CMS Field Services are named as defendants. CMS Energy sold CMS Field Services to Cantera Natural Gas, Inc. in July 2003, but is required to indemnify Cantera Natural Gas, Inc. with respect to this action. In a similar but unrelated matter, Texas-Ohio Energy, Inc. filed a putative class action lawsuit in the United States District Court for the Eastern District of California against a number of energy companies engaged in the sale of natural gas in the United States. CMS Energy is named as a defendant. The complaint alleges defendants entered into a price-fixing conspiracy by engaging in activities to manipulate the price of natural gas in California. The complaint contains counts alleging violations of the Sherman Act, Cartwright Act (a California statute), and the California Business and Profession Code relating to unlawful, unfair and deceptive business practices. The plaintiff in the Texas-Ohio case has agreed to extend the time for all defendants to answer or otherwise respond to the complaint until after the multi-district court litigation ("MDL") panel decides whether to take the case. There is currently pending in the Nevada federal district court a MDL matter involving seven complaints originally filed in various state courts in California. These complaints make allegations similar to those in the Texas-Ohio case regarding price reporting, although none contain a Sherman Act claim. Some of the defendants in the MDL matter who are also defendants in the Texas-Ohio case are trying to have the Texas-Ohio case transferred to the MDL proceeding. Benscheidt v. AEP Energy Services, Inc., et al, a new class action complaint containing allegations similar to those made in the Texas-Ohio case (albeit limited to California state law claims), was filed in California state court in February 2004. CMS Energy and CMS MST are named as defendants. Defendants are likely to seek to remove this action to California federal district court and have it transferred to the MDL proceeding in Nevada. CMS Energy and its subsidiaries will vigorously defend themselves but cannot predict the outcome of these matters. SEC INVESTIGATION The SEC is conducting an investigation regarding round-trip trades at CMS MST. For additional details about this investigation, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 4 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNCERTAINTIES) -- SEC and Other Investigations. CMS ENERGY AND CONSUMERS EMPLOYMENT RETIREMENT INCOME SECURITY ACT CLASS ACTION LAWSUITS CMS Energy is a named defendant, along with Consumers, CMS MST and certain named and unnamed officers and directors, in two lawsuits brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings and Incentive Plan (the "Plan"). The trial judge consolidated the two cases that were originally filed in July 2002 in United States District Court for the Eastern District of Michigan, and plaintiffs filed an amended consolidated complaint. Plaintiffs allege breaches of fiduciary duties 28 under ERISA and seek restitution on behalf of the Plan with respect to a decline in value of the shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek other equitable relief and legal fees. CMS Energy and Consumers will vigorously defend themselves but cannot predict the outcome of this litigation. SECURITIES CLASS ACTION LAWSUITS Beginning on May 17, 2002, a number of securities class action complaints were filed against CMS Energy, Consumers, and certain officers and directors of CMS Energy and its affiliates. The complaints were filed as purported class actions in the United States District Court for the Eastern District of Michigan, by shareholders who allege that they purchased CMS Energy's securities during a purported class period. The cases were consolidated into a single lawsuit and an amended and consolidated class action complaint was filed on May 1, 2003. The consolidated complaint contains a purported class period beginning on May 1, 2000 and running through March 31, 2003. It generally seeks unspecified damages based on allegations that the defendants violated United States securities laws and regulations by making allegedly false and misleading statements about CMS Energy's business and financial condition, particularly with respect to revenues and expenses recorded in connection with round-trip trading by CMS MST. CMS Energy, Consumers and their affiliates will vigorously defend themselves but cannot predict the outcome of this litigation. ENVIRONMENTAL MATTERS CMS Energy and Consumers, as well as their subsidiaries and affiliates are subject to various federal, state and local laws and regulations relating to the environment. Several of these companies have been named parties to various actions involving environmental issues. Based on their present knowledge and subject to future legal and factual developments, they believe it is unlikely that these actions, individually or in total, will have a material adverse effect on their financial condition or future results of operations. For additional information, see both CMS Energy's and Consumers' ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS and both CMS Energy's and Consumers' ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. CMS ENERGY During the fourth quarter of 2003, CMS Energy did not submit any matters to a vote of security holders. CONSUMERS During the fourth quarter of 2003, Consumers did not submit any matters to a vote of security holders. 29 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. CMS ENERGY Market prices for CMS Energy's Common Stock and related security holder matters are contained in ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 19 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION), which is incorporated by reference herein. At March 8, 2004, the number of registered shareholders totaled 60,791. Information regarding securities authorized for issuance under equity compensation plans is included in our definitive proxy statement, which is incorporated by reference herein. Recent Sales of Unregistered Securities: On December 5, 2003, in a private placement to institutional investors pursuant to Rule 144A of the Securities Act of 1933, as amended, CMS Energy issued $250 million of 4.50 percent cumulative convertible preferred stock (par value $0.01 per share)(liquidation preference $50 per share) (the "Preferred Stock"). The Preferred Stock was initially sold to Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities, Inc., Wachovia Capital Markets LLC, and Banc One Capital Markets, Inc., as initial purchasers. CMS Energy received approximately $242 million in proceeds after the initial purchasers' discounts and commissions and offering expenses. Holders of the Preferred Stock may convert their stock into shares of CMS Energy Common Stock under certain circumstances. For each share of Preferred Stock surrendered for conversion, the holder will receive 5.0541 shares of CMS Energy Common Stock, which represents an initial conversion price of $9.893 per share (subject to adjustment in certain events). On or after December 5, 2008, under certain circumstances CMS Energy may have the right to cause the Preferred Stock to be automatically converted into shares of CMS Energy Common Stock at the then applicable conversion price. CMS Energy has agreed to file a shelf registration statement with the SEC by November 5, 2004 relating to the resale of the Preferred Stock and the CMS Energy Common Stock issuable upon conversion thereof. CONSUMERS Consumers' common stock is privately held by its parent, CMS Energy, and does not trade in the public market. In January, May, August and November 2003, Consumers paid $77.5 million, $31 million, $53 million and $56.5 million in cash dividends, respectively, on its common stock. In February, May, June, November and December 2002, Consumers paid $55 million, $43 million, $56 million, $52 million and $25 million in cash dividends, respectively, on its common stock. Pursuant to interim gas rate relief ordered by the MPSC, Consumers has agreed to limit dividend payments to CMS Energy to a maximum of $190 million annually during the period in which Consumers receives the interim relief. ITEM 6. SELECTED FINANCIAL DATA. CMS ENERGY Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CMS ENERGY'S SELECTED FINANCIAL INFORMATION, which is incorporated by reference herein. CONSUMERS Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CONSUMERS' SELECTED FINANCIAL INFORMATION, which is incorporated by reference herein. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CMS ENERGY Management's discussion and analysis of financial condition and results of operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated by reference herein. CONSUMERS Management's discussion and analysis of financial condition and results of operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated by reference herein. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. CMS ENERGY Quantitative and Qualitative Disclosures About Market Risk is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- CRITICAL ACCOUNTING POLICIES -- ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES, AND MARKET RISK INFORMATION, which is incorporated by reference herein. CONSUMERS Quantitative and Qualitative Disclosures About Market Risk is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS -- CRITICAL ACCOUNTING POLICIES -- ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION, which is incorporated by reference herein. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements:
PAGE ---- CMS ENERGY Selected Financial Information.............................. CMS-2 Management's Discussion and Analysis........................ CMS-4 Consolidated Statements of Income (Loss).................... CMS-38 Consolidated Statements of Cash Flows....................... CMS-40 Consolidated Balance Sheets................................. CMS-42 Consolidated Statements of Common Stockholders' Equity...... CMS-44 Notes to Consolidated Financial Statements.................. CMS-46 Report of Independent Auditors.............................. CMS-120 CONSUMERS ENERGY Selected Financial Information.............................. CE-2 Management's Discussion and Analysis........................ CE-3 Consolidated Statements of Income........................... CE-29 Consolidated Statements of Cash Flows....................... CE-30 Consolidated Balance Sheets................................. CE-32 Consolidated Statements of Common Stockholder's Equity...... CE-34 Notes to Consolidated Financial Statements.................. CE-36 Report of Independent Auditors.............................. CE-84
32 [CMS ENERGY LOGO] 2003 FINANCIAL STATEMENTS CMS-1 CMS ENERGY CORPORATION SELECTED FINANCIAL INFORMATION
CMS ENERGY CORPORATION ----------------------------------------------------------------------------- RESTATED RESTATED RESTATED 2003 2002(E) 2001(E) 2000(E) 1999 ---- -------- -------- -------- ---- Operating revenue (in millions)......... ($) 5,513 8,673 8,006 6,623 5,114 Earnings from equity method investees (in millions)......................... ($) 164 92 172 213 136 Income (loss) from continuing operations (in millions)......................... ($) (43) (394) (327) (85) 191 Cumulative effect of change in accounting (in millions).............. ($) (24) 18 (4) -- -- Consolidated net income (loss) (in millions)............................. ($) (44) (650) (459) 5 277 Average common shares outstanding (in thousands)............................ 150,434 139,047 130,758 113,128 110,140 Income (loss) from continuing operations per average common share CMS Energy -- Basic................... ($) (0.30) (2.84) (2.50) (0.76) 1.66(a) -- Diluted................. ($) (0.30) (2.84) (2.50) (0.76) 1.66(a) Class G -- Basic and Diluted....... ($) -- -- -- -- 4.21(a) Cumulative effect of change in accounting per average common share CMS Energy -- Basic................... ($) (0.16) 0.13 (0.03) -- --(a) -- Diluted................. ($) (0.16) 0.13 (0.03) -- --(a) Net income (loss) per average common share CMS Energy -- Basic................... ($) (0.30) (4.68) (3.51) 0.04 2.18(a) -- Diluted................. ($) (0.30) (4.68) (3.51) 0.04 2.17(a) Class G -- Basic and Diluted....... ($) -- -- -- -- 4.21(a) Cash from (used in) operations (in millions)............................. ($) (251) 614 372 600 917 Capital expenditures, excluding acquisitions, capital lease additions and DSM (in millions)................. ($) 535 747 1,239 1,032 1,124 Total assets (in millions)(f)........... ($) 13,838 14,781 17,633 17,801 16,336 Long-term debt, excluding current maturities (in millions).............. ($) 6,020 5,357 5,842 6,052 6,428 Long-term debt, related parties (in millions)(b).......................... ($) 684 -- -- -- -- Non-current portion of capital leases (in millions)......................... ($) 58 116 71 49 88 Total preferred stock (in millions)..... ($) 305 44 44 44 44 Total Trust Preferred Securities (in millions)............................. ($) --(b) 883 1,214 1,088 1,119 Cash dividends declared per common share CMS Energy............................ ($) -- 1.09 1.46 1.46 1.39 Class G............................... ($) -- -- -- -- 0.99 Market price of common stock at year-end CMS Energy............................ ($) 8.52 9.44 24.03 31.69 31.19 Class G............................... ($) -- -- -- -- 24.56(c) Book value per common share at year-end CMS Energy............................ ($) 9.84 7.48 14.98 19.62 21.17 Number of employees at year-end (full-time equivalents)............... 8,411 10,477 11,510 11,652 11,462
CMS-2
CMS ENERGY CORPORATION ----------------------------------------------------------------------------- RESTATED RESTATED RESTATED 2003 2002(E) 2001(E) 2000(E) 1999 ---- -------- -------- -------- ---- ELECTRIC UTILITY STATISTICS Sales (billions of kWh)............... 39 39 40 41 41 Customers (in thousands).............. 1,754 1,734 1,712 1,691 1,665 Average sales rate per kWh............ cents 6.91 6.88 6.65 6.56 6.54 GAS UTILITY STATISTICS Sales and transportation deliveries (bcf).............................. 380 376 367 410 389 Customers (in thousands)(d)........... 1,671 1,652 1,630 1,611 1,584 Average sales rate per mcf............ ($) 6.72 5.67 5.34 4.39 4.52
- ------------------------- (a) 1999 earnings per average common share includes allocation of the premium on redemption of Class G Common Stock of $(0.26) per CMS Energy basic share, $(0.25) per CMS Energy diluted share and $3.31 per Class G basic and diluted share. (b) Effective December 31, 2003, Trust Preferred Securities are classified on the balance sheet as Long term debt -- related parties. (c) Reflects closing price at the October 25, 1999 exchange date. (d) Excludes off-system transportation customers. (e) For additional details, see Note 18, Restatement and Reclassification. (f) For additional details on the reclassification of non-legal cost-of-removal, see Note 16, Asset Retirement Obligations, "Reclassification of Non-Legal Cost of Removal." Following is the amount of cost of removal reclassified from accumulated depreciation to a regulatory liability by year: $983 million in 2003; $907 million in 2002; $870 million in 2001; $896 million in 2000; and $874 million in 1999. CMS-3 CMS Energy Corporation Management's Discussion and Analysis This MD&A is a combined report of CMS Energy and Consumers. The terms "we" and "our" as used in this report refer to CMS Energy and its subsidiaries as a combined entity, except where it is made clear that such term means only CMS Energy. EXECUTIVE OVERVIEW CMS Energy is an integrated energy company with a business strategy focused primarily in Michigan. We are the parent holding company of Consumers and Enterprises. Consumers is a combination electric and gas utility company serving Michigan's Lower Peninsula. Enterprises, through subsidiaries, is engaged in domestic and international diversified energy businesses including: independent power production; natural gas transmission, storage and processing; and energy services. We manage our businesses by the nature of services each provides and operate principally in three business segments: electric utility, gas utility, and enterprises. We earn our revenue and generate cash from operations by providing electric and natural gas utility services, electric power generation, gas transmission, storage, and processing, and other energy-related services. Our businesses are affected by weather, especially during the key heating and cooling seasons, economic conditions, particularly in Michigan, regulation and regulatory issues that primarily affect our gas and electric utility operations, interest rates, our debt credit rating, and energy commodity prices. Our strategy involves rebuilding our balance sheet and refocusing on our core strength: superior utility operation. Over the next few years, we expect this strategy to reduce our parent company debt substantially, improve our debt ratings, grow earnings at a mid-single digit rate, restore a meaningful dividend, and position the company to make new investments consistent with our strengths. In the near term, our new investments will focus on the utility. In 2003, we continued to implement our "utility plus" strategy centered around growing a healthy utility in Michigan and optimizing the contribution from key Enterprises assets. We sold over $900 million worth of non-strategic assets, enabling us to reduce debt by $1.1 billion. We have taken advantage of historically low interest rates to extend maturities and refinance our debt at lower cost. We completed over $3 billion of financing and refinancing transactions to resolve short-term liquidity concerns at the start of 2003. In addition to improving our capital structure, we contributed $560 million to our defined benefit pension plan. This should result in lower pension costs in the future. At the foundation of our financial progress was exceptional operating performance. For the second consecutive year, our Michigan gas utility earned the J.D. Power and Associates award for highest residential customer satisfaction with natural gas services in the Midwest. Independent evaluators, like J.D. Power and Associates recognize value and our regulators do too. The MPSC authorized an annual increase in our gas utility rates of $56 million in late 2002, and an additional interim annualized $19 million rate increase in 2003. Despite strong financial and operational performance in 2003, we face important challenges in the future. We continue to lose industrial and commercial customers to other electric suppliers without receiving compensation for stranded costs caused by the lost sales. As of March 2004, we lost 735 MW or nine percent of our electric business to these alternative electric suppliers. We expect the loss to grow to over 1,000 MW in 2004. Existing state legislation encourages competition and provides for recovery of stranded costs, but the MPSC has not yet authorized stranded cost recovery. We continue to work cooperatively with the MPSC to resolve this issue. Further, higher natural gas prices have harmed the economics of the MCV and we are seeking approval from the MPSC to change the way in which the facility is used. Our proposal would reduce gas consumption by an estimated 30 to 40 bcf per year while improving the MCV's financial performance with no change to customer rates. A portion of the benefits from the proposal will support additional renewable resource development in Michigan. Resolving the issue is critical for our shareowners and customers, and we have asked the MPSC to approve it quickly. CMS-4 We also are focused on further reducing our business risk and leverage, while growing the equity base of our company. Much of our asset sales program is complete; we are focused on selling the remaining businesses that are not strategic to us. This creates volatility in earnings as we recognize foreign currency translation account losses at the time of sale, but it is the right strategic direction for our company. Finally, we are working to resolve outstanding litigation that stemmed from energy trading activities in 2001 and earlier. Doing so will permit us to devote more attention to improving business growth. Our business plan is targeted at predictable earnings growth along with reduction in our debt. We are a full year into our five-year plan to reduce by half the debt of the CMS Energy holding company. The result of these efforts will be a strong, reliable energy company that will be poised to take advantage of opportunities for further growth. RESTATEMENT Financial statements of prior years and quarterly data for all three periods presented have been restated for the following events: - International Energy Distribution, which includes SENECA and CPEE, is no longer considered "discontinued operations", - certain derivative accounting corrections, and - Loy Yang deferred tax accounting correction. For additional details on the effect of the restatements, see Note 18, Restatement and Reclassification, and Note 19, Quarterly Financial and Common Stock Information (Unaudited). FORWARD-LOOKING STATEMENTS AND RISK FACTORS This Form 10-K and other written and oral statements that we make contain forward-looking statements as defined in Rule 3b-6 of the Securities Exchange Act of 1934, as amended, Rule 175 of the Securities Act of 1933, as amended, and relevant legal decisions. Our intention with the use of such words as "may," "could," "anticipates," "believes," "estimates," "expects," "intends," "plans," and other similar words is to identify forward-looking statements that involve risk and uncertainty. We designed this discussion of potential risks and uncertainties to highlight important factors that may impact our business and financial outlook. We have no obligation to update or revise forward-looking statements regardless of whether new information, future events or any other factors affect the information contained in the statements. These forward-looking statements are subject to various factors that could cause our actual results to differ materially from the results anticipated in these statements. Such factors include our inability to predict and/or control: - the efficient sale of non-strategic or under-performing domestic or international assets and discontinuation of certain operations, - achievement of capital expenditure reductions and cost savings, - capital and financial market conditions, including the current price of CMS Energy Common Stock and the effect on the Pension Plan, interest rates and availability of financing to CMS Energy, Consumers, or any of their affiliates, and the energy industry, - market perception of the energy industry, CMS Energy, Consumers, or any of their affiliates, - security ratings of CMS Energy, Consumers', or any of their affiliates, - currency fluctuations, transfer restrictions, and exchange controls, - factors affecting utility and diversified energy operations such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission or gas pipeline system constraints, - ability to access the capital markets successfully, CMS-5 - international, national, regional, and local economic, competitive and regulatory policies, conditions and developments, - adverse regulatory or legal decisions, including environmental laws and regulations, - federal regulation of electric sales and transmission of electricity including re-examination by federal regulators of the market-based sales authorizations by which our subsidiaries participate in wholesale power markets without price restrictions, and proposals by FERC to change the way it currently lets our subsidiaries and other public utilities and natural gas companies interact with each other, - energy markets, including the timing and extent of unanticipated changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity, and certain related products due to lower or higher demand, shortages, transportation problems or other developments, - potential disruption, expropriation or interruption of facilities or operations due to accidents, war, terrorism, or changing political conditions and the ability to obtain or maintain insurance coverage for such events, - nuclear power plant performance, decommissioning, policies, procedures, incidents, and regulation, including the availability of spent nuclear fuel storage, - technological developments in energy production, delivery, and usage, - changes in financial or regulatory accounting principles or policies, - outcome, cost, and other effects of legal and administrative proceedings, settlements, investigations and claims, including particularly claims, damages, and fines resulting from round-trip trading and inaccurate commodity price reporting, - limitations on our ability to control the development or operation of projects in which our subsidiaries have a minority interest, - disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance and performance bonds, - other business or investment considerations that may be disclosed from time to time in CMS Energy's or Consumers' SEC filings or in other publicly issued written documents, and - other uncertainties that are difficult to predict, and many of which are beyond our control. RESULTS OF OPERATIONS CMS ENERGY CONSOLIDATED NET LOSS Our 2003 net loss was $44 million, an improvement of $606 million from 2002. We are continuing to restructure our business operations, and as our financial plan moves forward, we will maintain our strategy of CMS-6 selling under-performing or non-strategic assets in order to reduce our debt, to reduce business risk, and to provide for more predictable future earnings.
RESTATED RESTATED YEARS ENDED DECEMBER 31 2003 2002 2001 - ----------------------- ---- -------- -------- IN MILLIONS (EXCEPT FOR PER SHARE AMOUNTS) Net Loss.................................................... $ (44) $ (650) $ (459) Basic loss per share........................................ $(0.30) $(4.68) $(3.51) Diluted loss per share...................................... $(0.30) $(4.68) $(3.51)

RESTATED RESTATED RESTATED YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE - ----------------------- ---- -------- ------ -------- -------- ------ IN MILLIONS Electric Utility............................ $ 167 $ 264 $(97) $ 264 $ 120 $ 144 Gas Utility................................. 38 46 (8) 46 21 25 Enterprises................................. 8 (419) 427 (419) (272) (147) Corporate Interest and Other................ (256) (285) 29 (285) (196) (89) ----- ----- ---- ----- ----- ----- Loss from Continuing Operations............. (43) (394) 351 (394) (327) (67) ----- ----- ---- ----- ----- ----- Discontinued Operations..................... 23 (274) 297 (274) (128) (146) Accounting Changes.......................... (24) 18 (42) 18 (4) 22 ----- ----- ---- ----- ----- ----- Net Loss.................................... $ (44) $(650) $606 $(650) $(459) $(191) ===== ===== ==== ===== ===== =====
2003 COMPARED TO 2002: Our net loss was reduced significantly from: - absence of $379 million, net of tax, of goodwill write downs recorded in 2002 associated with discontinued operations, - an improvement of CMS Enterprises' earnings due to: - decrease of $313 million, net of tax, in asset write downs from planned and completed divestitures, - lower expropriation and devaluation losses at the Argentine facilities due to the stabilization of the Argentine Peso, - absence of tax charges recorded in 2002 resulting from the loss of indefinite tax deferral for several international investments, and - higher revenues and lower interest costs within IPP. - decrease in corporate interest and other. However, our progress was slowed by: - Electric Utility earnings: - higher electric operating costs resulting from higher pension expense, greater depreciation expense reflecting higher levels of plant in service, and increased amortization expense associated with securitized regulatory assets, - lower electric deliveries from milder weather during the summer, and - continuation of switching by commercial and industrial customers to alternative electric suppliers. - loss of $44 million, after-tax, on the sale of Panhandle, - employee benefit plans net settlement and curtailment loss of $48 million, after tax, related to a large number of employees retiring and exiting these plans, and CMS-7 - cumulative effect of a change of accounting resulting in a charge of $23 million, net of tax, due to energy trading contracts that did not meet the definition of a derivative. 2002 COMPARED TO 2001: Our net loss increased $191 million from: - after-tax charges in recognition of planned and completed divestitures and reduced asset valuations, - tax credit write-offs in 2002 at the parent level, and - restructuring and other costs in 2002. ELECTRIC UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE - ----------------------- ---- ---- ------ ---- ---- ------ IN MILLIONS Net income......................................... $167 $264 $(97) $264 $120 $144 ==== ==== ==== ==== ==== ==== REASONS FOR THE CHANGE: Electric deliveries................................ $(41) $ 41 Power supply costs and related revenue............. 26 149 Other operating expenses and non-commodity revenue.......................................... (80) (21) Gain on asset sales................................ (38) 38 General taxes...................................... 10 (3) Fixed charges...................................... (22) 9 Income taxes....................................... 48 (69) ---- ---- Total change....................................... $(97) $144 ==== ====
ELECTRIC DELIVERIES: In 2003, electric revenues decreased, reflecting lower deliveries. Most significantly, sales volumes to commercial and industrial customers were 5.6 percent lower than in 2002, a result of these sectors' continued switching to alternative electric suppliers as allowed by the Customer Choice Act. The decrease in revenue is also the result of reduced deliveries to higher-margin residential customers, from a milder summer's impact on air conditioning usage. Overall, electric deliveries, including transactions with other wholesale marketers and other electric utilities, decreased 0.4 billion kWh or 1.1 percent. In 2002, electric revenue increased by $41 million from the previous year, despite lower deliveries. This was due primarily to increased deliveries to higher-margin residential customers as a result of a significantly warmer summer's impact on air conditioning usage. Deliveries, including transactions with other wholesale marketers and other electric utilities, decreased 0.3 billion kWh or 0.7 percent. POWER SUPPLY COSTS AND RELATED REVENUE: In 2003, our recovery of power supply costs was fixed, as required under the Customer Choice Act. Therefore, power supply-related revenue in excess of actual power supply costs increased operating income. By contrast, if power supply-related revenues had been less than actual power supply costs, the impact would have decreased operating income. In 2003, this difference between power supply-related revenues and actual power supply costs benefited operating income by $26 million more than it had in 2002. This increase is primarily the result of increased intersystem revenues due to higher market prices and sales made from surplus capacity. The efficient operation of our generating plants and lower priced purchased power further decreased power supply costs. In 2002, as compared to 2001, power supply costs and related revenues increased operating income due primarily to reduced purchased power costs because the Palisades plant returned to service in 2002, following an extended 2001 shutdown. OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUE: In 2003, net operating expenses and non-commodity revenue decreased operating income by $80 million versus 2002. This decrease relates to increased pension and other benefit costs of $54 million, a scheduled refueling outage at Palisades, and higher transmission costs. More plant in service increased depreciation costs by $8 million, and $11 million of higher amortization CMS-8 expense from securitized assets further contributed to decreased operating income. Slightly offsetting the increased operating expenses were higher non-commodity revenues associated with other income. In 2002, net operating expenses and non-commodity revenue decreased operating income by $21 million compared with 2001. The decrease primarily related to higher transmission expenses and increased depreciation costs from more plant in service. ASSET SALES: The reduction in operating income from asset sales for 2003 versus 2002, and the increase in operating income from asset sales for 2002 versus 2001 reflect the $31 million pretax gain associated with the 2002 sale of our electric transmission system and the $7 million pretax gain associated with the 2002 sale of nuclear equipment from the cancelled Midland project. GENERAL TAXES: In 2003, general taxes decreased from 2002 due primarily to reductions in MSBT expense, resulting primarily from a tax credit received from the State of Michigan associated with construction of the new corporate headquarters on a qualifying Brownfield site. In 2002, general taxes increased over 2001 due to increases in MSBT and property tax accruals. FIXED CHARGES: In 2003, fixed charges increased versus 2002 due primarily to higher average debt levels, but also because of higher average interest rates. In 2002, fixed charges decreased versus 2001 because of a reduction in long-term debt. INCOME TAXES: In 2003, income tax decreased versus 2002 due primarily to lower earnings by the electric utility. In 2002, income tax expense increased versus 2001 due primarily to increased earnings. GAS UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE - ----------------------- ---- ---- ------ ---- ---- ------ IN MILLIONS Net income............................................ $38 $46 $ (8) $46 $21 $ 25 === === ==== === === ==== Reasons for the change: Gas deliveries........................................ $ (1) $ 21 Gas rate increase..................................... 39 25 Gas wholesale and retail services and other gas revenues............................................ 1 1 Operation and maintenance............................. (34) (14) General taxes, depreciation, and other income......... (6) (3) Fixed charges......................................... (5) 3 Income taxes.......................................... (2) (8) ---- ---- Total change.......................................... $ (8) $ 25 ==== ====
GAS DELIVERIES: In 2003, gas deliveries, including miscellaneous transportation, increased 4.1 bcf or 1.1 percent versus 2002. Despite increased system deliveries, gas revenues actually declined by $1 million. Colder weather during the first quarter of 2003 increased deliveries to the residential and commercial sectors. Increased deliveries resulted in a $6 million increase in gas revenues. However, the revenue increase was offset by a $7 million gas loss adjustment recorded as a reduction to gas revenues. In 2002, gas revenues increased by $21 million from the previous year. System deliveries, including miscellaneous transportation, increased 9.4 bcf or 2.6 percent. The increase was due primarily to colder weather that increased deliveries to the residential and commercial sectors. GAS RATE INCREASE: In November 2002, the MPSC issued a final gas rate order authorizing a $56 million annual increase to gas tariff rates. As a result of this order, 2003 gas revenues increased $39 million. In 2002, gas rate increases led to increased gas revenues of $25 million over 2001. GAS WHOLESALE AND RETAIL SERVICES AND OTHER GAS REVENUES: In 2003, gas wholesale and retail services and other gas revenues increased $1 million. The $1 million increase includes primarily the following two items. In 2003, we reversed a $4 million reserve, originally recorded in 2002, for non-physical gas title tracking services. CMS-9 In addition, in 2003, we reserved $11 million for the settlement agreement associated with the 2002-2003 GCR disallowance. For additional details regarding both of these issues, see the Gas Utility Business Uncertainties in the "Outlook" section of this MD&A. OPERATION AND MAINTENANCE: In 2003, operation and maintenance expenses increased versus 2002 due to increases in pension and other benefits costs of $27 million and additional expenditures on safety, reliability, and customer service. In 2002, operation and maintenance expenses increased versus 2001 due to the recognition of gas storage inventory losses and additional expenditures on customer reliability and service. GENERAL TAXES, DEPRECIATION, AND OTHER INCOME: In 2003, the net of general tax expense, depreciation expense, and other income decreased operating income primarily because of increases in depreciation expense from increased plant in service. In 2002, the net of general tax expense, depreciation expense, and other income decreased operating income primarily because of increases in MSBT and property tax expense accruals. FIXED CHARGES: In 2003, fixed charges increased versus 2002 due primarily to higher average debt levels, but also because of higher average interest rates. In 2002 versus 2001, fixed charges decreased due to lower long-term debt levels. INCOME TAXES: In 2003 versus 2002, income tax expense increased due to reduced income tax expense in 2002. The 2002 reduction was attributable to flow-through accounting on plant, property and equipment as required by past MPSC rulings. In 2002, income tax expense increased versus 2001 due primarily to increased earnings of the gas utility. ENTERPRISES RESULTS OF OPERATIONS
RESTATED RESTATED RESTATED YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE - ----------------------- ---- -------- ------ -------- -------- ------ IN MILLIONS Net Income (Loss).............. $8 $(419) $427 $(419) $(272) $(147) == ===== ==== ===== ===== =====
In 2003, Enterprises had earnings compared to a significant loss in 2002. This year over year improvement resulted from the: - elimination of $313 million of asset impairments, net of tax, in 2002 for divestitures and reduced asset valuations, - lower expropriation and devaluation losses at Argentine facilities, and - elimination of tax charges in 2002 from the loss of indefinite tax deferral for several international investments. 2002 losses increased by $147 million from 2001 resulting from the: - increased asset impairments for divestitures and reduced asset valuations, and - discontinuing and selling several businesses. OTHER RESULTS OF OPERATIONS CORPORATE INTEREST AND OTHER:
RESTATED RESTATED RESTATED YEARS ENDED DECEMBER 31 2003 2002 CHANGE 2002 2001 CHANGE - ----------------------- ---- -------- ------ -------- -------- ------ IN MILLIONS Net Loss...................... $(256) $(285) $29 $(285) $(196) $(89) ===== ===== === ===== ===== ====
Our 2003 corporate interest and other net expenses decreased $29 million from 2002 primarily due to reduced restructuring costs and reduced taxes, partially offset by increased interest allocation to continuing operations. CMS-10 Our 2002 corporate interest and other net expenses increased $89 million from 2001 primarily due to restructuring charges, including the relocation of corporate offices from Dearborn to Jackson, Michigan, and increased taxes resulting from the loss of certain AMT credit carryforwards. DISCONTINUED OPERATIONS: For the years ended December 31, 2003 and 2002, discontinued operations included Parmelia, and through their respective dates of sale, Panhandle, CMS Viron, CMS Field Services, and Marysville. For additional information, see Note 2, Discontinued Operations, Other Asset Sales, Impairments, and Restructuring. CRITICAL ACCOUNTING POLICIES The following accounting policies are important to an understanding of our results and financial condition and should be considered an integral part of our MD&A: - use of estimates in accounting for long-lived assets, equity method investments, and contingencies, - accounting for financial and derivative instruments, - accounting for international operations and foreign currency, - accounting for the effects of industry regulation, - accounting for pension and postretirement benefits, - accounting for asset retirement obligations, and - accounting for nuclear decommissioning costs. For additional accounting policies, see Note 1, Corporate Structure and Accounting Policies. USE OF ESTIMATES In preparing our financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. Accounting estimates are used for asset valuations, depreciation, amortization, financial and derivative instruments, employee benefits, and contingencies. For example, we estimate the rate of return on plan assets and the cost of future health-care benefits to determine our annual pension and other postretirement benefit costs. There are risks and uncertainties that may cause actual results to differ from estimated results, such as changes in the regulatory environment, competition, foreign exchange, regulatory decisions, and lawsuits. LONG-LIVED ASSETS AND EQUITY METHOD INVESTMENTS: Our assessment of the recoverability of long-lived assets and equity method investments involves critical accounting estimates. Tests of impairment are performed periodically if certain conditions that are other than temporary exist that may indicate the carrying value may not be recoverable. Of our total assets, recorded at $13.838 billion at December 31, 2003, 60 percent represent long-lived assets and equity method investments that are subject to this type of analysis. We base our evaluations of impairment on such indicators as: - the nature of the assets, - projected future economic benefits, - domestic and foreign regulatory and political environments, - state and federal regulatory and political environments, - historical and future cash flow and profitability measurements, and - other external market conditions or factors. If an event occurs or circumstances change in a manner that indicates the recoverability of a long-lived asset should be assessed, we evaluate the asset for impairment. An asset held-in-use is evaluated for impairment by calculating the undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. If the undiscounted future cash flows are less than the carrying amount, we recognize an impairment CMS-11 loss. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. We estimate the fair market value of the asset utilizing the best information available. This information includes quoted market prices, market prices of similar assets, and discounted future cash flow analyses. An asset considered held-for-sale is recorded at the lower of its carrying amount or fair value, less cost to sell. We also assess our ability to recover the carrying amounts of our equity method investments. This assessment requires us to determine the fair values of our equity method investments. The determination of fair value is based on valuation methodologies including discounted cash flows and the ability of the investee to sustain an earnings capacity that justifies the carrying amount of the investment. We also consider the existence of CMS Energy guarantees on obligations of the investee or other commitments to provide further financial support. If the fair value is less than the carrying value and the decline in value is considered to be other than temporary, an appropriate write-down is recorded. Our assessments of fair value using these valuation methodologies represent our best estimates at the time of the reviews and are consistent with our internal planning. The estimates we use can change over time. If fair values were estimated differently, they could have a material impact on the financial statements. In 2003, we analyzed impairment indicators related to our long-lived assets and equity method investments. Following our analysis, we reduced the carrying amount of our investment in Parmelia, our investment in SENECA, and an equity investment at CMS Generation to reflect their fair values. We are still pursuing the sale of our remaining non-strategic and under-performing assets, including some assets that were not determined to be impaired. Upon the sale of these assets, the proceeds realized may be materially different from the remaining carrying values. Even though these assets have been identified for sale, we cannot predict when, or make any assurances that, these asset sales will occur. Further, we cannot predict the amount of cash or the value of consideration that may be received. For additional details on asset sales, see Note 2, Discontinued Operations, Other Asset Sales, Impairments, and Restructuring. CONTINGENCIES: We are involved in various regulatory and legal proceedings that arise in the ordinary course of our business. We record accruals for such contingencies based upon our assessment that the occurrence is probable and an estimate of the liability amount. The recording of estimated liabilities for contingencies is guided by the principles in SFAS No. 5. We consider many factors in making these assessments, including history and the specifics of each matter. The most significant of these contingencies are our electric and gas environmental estimates, which are discussed in the "Outlook" section included in this MD&A, and the potential underrecoveries from our power purchase contract with the MCV Partnership. MCV UNDERRECOVERIES: The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to Dow. We hold a 49 percent partnership interest in the MCV Partnership, and a 35 percent lessor interest in the MCV Facility. Under our power purchase agreement with the MCV Partnership, we pay a capacity charge based on the availability of the MCV Facility whether or not electricity is actually delivered to us; a variable energy charge for kWh delivered to us; and a fixed energy charge based on availability up to 915 MW and based on delivery for the remaining contracted capacity. The cost that we incur under the MCV Partnership power purchase agreement exceeds the recovery amount allowed by the MPSC. As a result, we estimate cash underrecoveries of capacity availability payments will aggregate $206 million from 2004 through 2007. For capacity and fixed energy payments billed by the MCV Partnership after September 15, 2007, and not recovered from customers, we expect to claim a regulatory out provision under the MCV Partnership power purchase agreement. This provision obligates us to pay the MCV Partnership only those capacity and energy charges that the MPSC has authorized for recovery from electric customers. The effect of any such action would be to: - reduce cash flow to the MCV Partnership, which could have an adverse effect on our equity, and - eliminate our underrecoveries for capacity and energy payments. Further, under the PPA, variable energy payments to the MCV Partnership are based on the cost of coal burned in our coal plants and operations and maintenance expenses. However, the MCV Partnership's costs of CMS-12 producing electricity are tied to the cost of natural gas. Because natural gas prices have increased substantially in recent years, while the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been affected adversely. As a result of returning to the PSCR process on January 1, 2004, we returned to dispatching the MCV Facility on a fixed load basis, as permitted by the MPSC, in order to maximize recovery from electric customers of our capacity payments. This fixed load dispatch increases the MCV Facility's output and electricity production costs, such as natural gas. As the spread between the MCV Facility's variable electricity production costs and its energy payment revenue widens, the MCV's Partnership's financial performance and our equity interest in the MCV Partnership will be harmed. In February 2004, we filed a resource conservation plan with the MPSC that is intended to help conserve natural gas and thereby improve our equity investment in the MCV Partnership, without raising the costs paid by our electric customers. The plan's primary objective is to dispatch the MCV Facility on an economic basis depending on natural gas market prices, which will reduce the MCV Facility's annual natural gas consumption by an estimated 30 to 40 bcf. This decrease in the quantity of high-priced natural gas consumed by the MCV Facility will benefit Consumers' ownership interest in the MCV Partnership. We requested that the MPSC provide interim approval while it conducts a full review of the plan. The MPSC has scheduled a prehearing conference with respect to the MCV resource conservation plan for April 2004. We cannot predict if or when the MPSC will approve our request. The two most significant variables in the analysis of the MCV Partnership's future financial performance are the forward price of natural gas for the next 22 years and the MPSC's decision in 2007 or beyond related to our recovery of capacity payments. Natural gas prices have been historically volatile. Presently, there is no consensus in the marketplace on the price or range of prices of natural gas in the short term or beyond the next five years. Therefore, we cannot predict the impact of these issues on our future earnings, cash flows, or on the value of our equity interest in the MCV Partnership. For additional details, see Note 4, Uncertainties, "Other Consumers' Electric Utility Uncertainties -- The Midland Cogeneration Venture." ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES, AND MARKET RISK INFORMATION FINANCIAL INSTRUMENTS: We account for investments in debt and equity securities using SFAS No. 115. Debt and equity securities can be classified into one of three categories: held-to-maturity, trading, or available-for-sale securities. Our investments in equity securities are classified as available-for-sale securities. They are reported at fair value, with any unrealized gains or losses resulting from changes in fair value reported in equity as part of accumulated other comprehensive income and are excluded from earnings unless such changes in fair value are determined to be other than temporary. Unrealized gains or losses resulting from changes in the fair value of our nuclear decommissioning investments are reported as regulatory liabilities. The fair value of these investments is determined from quoted market prices. DERIVATIVE INSTRUMENTS: We use the criteria in SFAS No. 133, as amended and interpreted, to determine if certain contracts must be accounted for as derivative instruments. The rules for determining whether a contract meets the criteria for derivative accounting are numerous and complex. Moreover, significant judgment is required to determine whether a contract requires derivative accounting, and similar contracts can sometimes be accounted for differently. If a contract is accounted for as a derivative instrument, it is recorded in the financial statements as an asset or a liability, at the fair value of the contract. The recorded fair value of the contract is then adjusted quarterly to reflect any change in the market value of the contract, a practice known as marking the contract to market. The accounting for changes in the fair value of a derivative (that is, gains or losses) is reported either in earnings or accumulated other comprehensive income depending on whether the derivative qualifies for special hedge accounting treatment. For additional details on the accounting policies for derivative instruments, see Note 7, Financial and Derivative Instruments. CMS-13 The types of contracts we typically classify as derivative instruments are interest rate swaps, foreign currency exchange contracts, electric call options, gas fuel options, fixed priced weather-based gas supply call options, fixed price gas supply call and put options, gas futures, gas and power swaps, and forward purchases and sales. We generally do not account for electric capacity and energy contracts, gas supply contracts, coal and nuclear fuel supply contracts, or purchase orders for numerous supply items as derivatives. Certain of our electric capacity and energy contracts are not accounted for as derivatives due to the lack of an active energy market in the state of Michigan, as defined by SFAS No. 133, and the transportation costs that would be incurred to deliver the power under the contracts to the closest active energy market at the Cinergy hub in Ohio. If a market develops in the future, we may be required to account for these contracts as derivatives. The mark-to-market impact on earnings related to these contracts, particularly related to the PPA, could be material to our financial statements. To determine the fair value of contracts that are accounted for as derivative instruments, we use a combination of quoted market prices and mathematical valuation models. Valuation models require various inputs, including forward prices, volatilities, interest rates, and exercise periods. Changes in forward prices or volatilities could change significantly the calculated fair value of certain contracts. At December 31, 2003, we assumed a market-based interest rate of 1 percent (six-month U.S. Treasury rate) and volatility rates ranging between 65 percent and 120 percent to calculate the fair value of our electric and gas call options. TRADING ACTIVITIES: Our wholesale power and gas trading activities are also accounted for using the criteria in SFAS No. 133. Energy trading contracts that meet the definition of a derivative are recorded as assets or liabilities in the financial statements at the fair value of the contracts. Gains or losses arising from changes in fair value of these contracts are recognized into earnings in the period in which the changes occur. Energy trading contracts that do not meet the definition of a derivative are accounted for as executory contracts (i.e., on an accrual basis). The market prices we use to value our energy trading contracts reflect our consideration of, among other things, closing exchange and over-the-counter quotations. In certain contracts, long-term commitments may extend beyond the period in which market quotations for such contracts are available. Mathematical models are developed to determine various inputs into the fair value calculation including price and other variables that may be required to calculate fair value. Realized cash returns on these commitments may vary, either positively or negatively, from the results estimated through application of the mathematical model. We believe that our mathematical models utilize state-of-the-art technology, pertinent industry data, and prudent discounting in order to forecast certain elongated pricing curves. Market prices are adjusted to reflect the impact of liquidating our position in an orderly manner over a reasonable period of time under present market conditions. In connection with the market valuation of our energy trading contracts, we maintain reserves for credit risks based on the financial condition of counterparties. We also maintain credit policies that management believes will minimize its overall credit risk with regard to our counterparties. Determination of our counterparties' credit quality is based upon a number of factors, including credit ratings, disclosed financial condition, and collateral requirements. Where contractual terms permit, we employ standard agreements that allow for netting of positive and negative exposures associated with a single counterparty. Based on these policies, our current exposures, and our credit reserves, we do not anticipate a material adverse effect on our financial position or results of operations as a result of counterparty nonperformance. CMS-14 The following tables provide a summary of the fair value of our energy trading contracts as of December 31, 2003.
IN MILLIONS Fair value of contracts outstanding as of December 31, 2002...................................................... $ 81 Fair value of new contracts when entered into during the period.................................................... -- Implementation of EITF Issue No. 02-03(a)................... (36) Fair value of derivative contracts sold and received from asset sales(b)............................................ (30) Changes in fair value attributable to changes in valuation techniques and assumptions................................ -- Contracts realized or otherwise settled during the period... (10) Other changes in fair value(c).............................. 10 ---- Fair value of contracts outstanding as of December 31, 2003...................................................... $ 15 ====
- ------------------------- (a) Reflects the removal of contracts that do not qualify as derivatives under SFAS No. 133 as of January 1, 2003. See Note 17, Implementation of New Accounting Standards. (b) Reflects $60 million decrease for price risk management assets sold and $30 million increase for price risk management assets received related to the sales of the gas and power books. (c) Reflects changes in price and net increase/(decrease) of forward positions as well as changes to mark-to-market and credit reserves.
FAIR VALUE OF CONTRACTS AT DECEMBER 31, 2003 ------------------------------------------------- MATURITY (IN YEARS) TOTAL ------------------------------------------------- SOURCE OF FAIR VALUE FAIR VALUE LESS THAN 1 1 TO 3 4 TO 5 GREATER THAN 5 - -------------------- ---------- ----------- ------ ------ -------------- IN MILLIONS Prices actively quoted........................ $(23) $ 2 $(7) $(16) $(2) Prices based on models and other valuation methods..................................... 38 11 13 13 1 ---- --- --- ---- --- Total......................................... $ 15 $13 $ 6 $ (3) $(1) ==== === === ==== ===
MARKET RISK INFORMATION: We are exposed to market risks including, but not limited to, changes in interest rates, commodity prices, currency exchange rates, and equity security prices. We manage these risks using established policies and procedures, under the direction of both an executive oversight committee consisting of senior management representatives and a risk committee consisting of business-unit managers. We may use various contracts to manage these risks, including swaps, options, and forward contracts. Contracts used to manage market risks may be considered derivative instruments that are subject to derivative and hedge accounting pursuant to SFAS No. 133. We intend that any gains or losses on these contracts will be offset by an opposite movement in the value of the item at risk. We enter into all risk management contracts for purposes other than trading. These contracts contain credit risk if the counterparties, including financial institutions and energy marketers, fail to perform under the agreements. We minimize such risk by performing financial credit reviews using, among other things, publicly available credit ratings of such counterparties. We perform sensitivity analyses to assess the potential loss in fair value, cash flows, or future earnings based upon a hypothetical 10 percent adverse change in market rates or prices. We do not believe that sensitivity analyses alone provide an accurate or reliable method for monitoring and controlling risks. Therefore, we use our experience and judgment to revise strategies and modify assessments. Changes in excess of the amounts determined in sensitivity analyses could occur if market rates or prices exceed the 10 percent shift used for the analyses. These risk sensitivities are shown in "Interest Rate Risk," "Commodity Price Risk," "Trading Activity Commodity Price Risk," "Currency Exchange Risk," and "Equity Securities Price Risk" within this section. Interest Rate Risk: We are exposed to interest rate risk resulting from issuing fixed-rate and variable-rate financing instruments and from interest rate swap agreements. We use a combination of these instruments to CMS-15 manage this risk as deemed appropriate, based upon market conditions. These strategies are designed to provide and maintain a balance between risk and the lowest cost of capital. Interest Rate Risk Sensitivity Analysis (assuming a 10 percent adverse change in market interest rates):
AS OF DECEMBER 31 2003 2002 - ----------------- ---- ---- IN MILLIONS Variable-rate financing -- before tax annual earnings exposure.................................................. $ 1 $ 2 Fixed-rate financing -- potential loss in fair value(a)..... 242 293
- ------------------------- (a) Fair value exposure could only be realized if we repurchased all of our fixed-rate financing. As discussed in "Electric Utility Business Uncertainties -- Competition and Regulatory Restructuring -- Securitization" within this MD&A, we have filed an application with the MPSC to securitize certain expenditures. Upon final approval, we intend to use the proceeds from the securitization to retire higher-cost debt, which could include a portion of our current fixed-rate debt. We do not believe that any adverse change in debt price and interest rates would have a material adverse effect on either our consolidated financial position, results of operations or cash flows. Certain equity method investees have issued interest rate swaps. These instruments are not required to be included in the sensitivity analysis, but can have an impact on financial results. See discussion of these instruments in Note 18, Restatement and Reclassification. Commodity Price Risk: For purposes other than trading, we enter into electric call options, fixed-priced weather-based gas supply call options, and fixed-priced gas supply call and put options. The electric call options are used to protect against the risk of fluctuations in the market price of electricity, and to ensure a reliable source of capacity to meet our customers' electric needs. The weather-based gas supply call options, along with the gas supply call and put options, are used to purchase reasonably priced gas supply. Call options give us the right, but not the obligation, to purchase gas supply at predetermined fixed prices. Put options give third-party suppliers the right, but not the obligation, to sell gas supply to us at predetermined fixed prices. The commodity price risk sensitivity analysis was not material for the years ending December 31, 2003 and December 31, 2002. Trading Activity Commodity Price Risk: We are exposed to market fluctuations in the price of energy commodities. We employ established policies and procedures to manage these risks and may use various commodity derivatives, including futures, options, and swap contracts. The prices of these energy commodities can fluctuate because of, among other things, changes in the supply of and demand for those commodities. Trading Activity Commodity Price Risk Sensitivity Analysis (assuming a 10 percent adverse change in market prices):
AS OF DECEMBER 31 2003 - ----------------- ---- IN MILLIONS Potential reduction in fair value: Gas-related swaps and forward contracts..................... $3 Electricity-related forward contracts....................... 2 Electricity-related call option contracts................... 1
A sensitivity analysis was not performed for the year ended December 31, 2002. There has been a significant change in trading activity in 2003 from the prior year. As noted in "Trading Activities" within this section, the fair value of contracts outstanding has decreased from $81 million at December 31, 2002 to $15 million at December 31, 2003. For further information, see "Trading Activities" within this section. Currency Exchange Risk: We are exposed to currency exchange risk arising from investments in foreign operations as well as various international projects in which we have an equity interest and which have debt denominated in U.S. dollars. We typically use forward exchange contracts and other risk mitigating instruments CMS-16 to hedge currency exchange rates. The impact of hedges on our investments in foreign operations is reflected in accumulated other comprehensive income as a component of the foreign currency translation adjustment. Gains or losses from the settlement of these hedges are maintained in the foreign currency translation adjustment until we sell or liquidate the investments on which the hedges were taken. At December 31, 2003, we had no foreign exchange hedging contracts outstanding. As of December 31, 2003, the total foreign currency translation adjustment was a net loss of $419 million, which included a net hedging loss of $18 million related to settled contracts. Equity Securities Price Risk: We are exposed to price risk associated with investments in equity securities. As discussed in "Financial Instruments" within this section, our investments in equity securities are classified as available-for-sale securities. They are reported at fair value, with any unrealized gains or losses resulting from changes in fair value reported in equity as part of accumulated other comprehensive income and are excluded from earnings unless such changes in fair value are determined to be other than temporary. Unrealized gains or losses resulting from changes in the fair value of our nuclear decommissioning investments are reported as regulatory liabilities. Equity Securities Price Risk Sensitivity Analysis (assuming a 10 percent adverse change in market prices):
AS OF DECEMBER 31 2003 2002 - ----------------- ---- ---- IN MILLIONS ~~Potential reduction in fair value: Nuclear decommissioning investments....................... $57 $49 Equity investments........................................ 7 6~~
For additional details on market risk and derivative activities, see Note 7, Financial and Derivative Instruments. INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY We have investments in energy-related projects throughout the world. As a result of a change in business strategy, over the last two years we have been selling certain foreign investments. For additional details on the divestiture of foreign investments see Note 2, Discontinued Operations, Other Asset Sales, Impairments, and Restructuring. BALANCE SHEET: Our subsidiaries and affiliates whose functional currency is other than the U.S. dollar translate their assets and liabilities into U.S. dollars at the exchange rates in effect at the end of the fiscal period. Gains or losses that result from this translation and gains or losses on long-term intercompany foreign currency transactions are reflected as a component of stockholders' equity in the Consolidated Balance Sheets as "Foreign Currency Translation." As of December 31, 2003, cumulative foreign currency translation decreased stockholders' equity by $419 million. We translate the revenue and expense accounts of these subsidiaries and affiliates into U.S. dollars at the average exchange rate during the period. Australia: At December 31, 2003, the net foreign currency loss due to the exchange rate of the Australian dollar recorded in the Foreign Currency Translation component of stockholders' equity using an exchange rate of 1.335 Australian dollars per U.S. dollars was $95 million. This amount includes an unrealized loss related to our investment in Loy Yang. This unrealized loss, and the impact of certain deferred taxes associated with the Loy Yang investment, will be realized upon sale, full liquidation, or other disposition of our investment in Loy Yang for a total loss of approximately $110 million. In July 2003, we executed a conditional share sale agreement for our investment in Loy Yang. For additional details, see "Outlook -- Enterprises Outlook" section within this MD&A. Argentina: In January 2002, the Republic of Argentina enacted the Public Emergency and Foreign Exchange System Reform Act. This law repealed the fixed exchange rate of one U.S. dollar to one Argentina peso, converted all dollar-denominated utility tariffs and energy contract obligations into pesos at the same one-to-one exchange rate, and directed the President of Argentina to renegotiate such tariffs. Effective April 30, 2002, we adopted the Argentine peso as the functional currency for our Argentine investments. We had used previously the U.S. dollar as the functional currency. As a result, we translated the assets and liabilities of our Argentine entities into U.S. dollars using an exchange rate of 3.45 pesos per CMS-17 U.S. dollar, and recorded an initial charge to the Foreign Currency Translation component of stockholders' equity of $400 million. While we cannot predict future peso-to-U.S. dollar exchange rates, we do expect that these non-cash charges reduce substantially the risk of further material balance sheet impacts when combined with anticipated proceeds from international arbitration currently in progress, political risk insurance, and the eventual sale of these assets. At December 31, 2003, the net foreign currency loss due to the unfavorable exchange rate of the Argentine peso recorded in the Foreign Currency Translation component of stockholders' equity using an exchange rate of 2.94 pesos per U.S. dollar was $264 million. This amount also reflects the effect of recording, at December 31, 2002, U.S. income taxes on temporary differences between the book and tax bases of foreign investments, including the foreign currency translation associated with our Argentine investments that were no longer considered permanent. For additional details, see Note 8, Income Taxes. INCOME STATEMENT: We use the U.S. dollar as the functional currency of subsidiaries operating in highly inflationary economies and of subsidiaries that meet the U.S. dollar functional currency criteria outlined in SFAS No. 52. Gains and losses that arise from transactions denominated in a currency other than the U.S. dollar, except those that are hedged, are included in determining net income. HEDGING STRATEGY: We may use forward exchange and option contracts to hedge certain receivables, payables, long-term debt, and equity value relating to foreign investments. The purpose of our foreign currency hedging activities is to reduce risk associated with adverse changes in currency exchange rates that could affect cash flow materially. These contracts would not subject us to risk from exchange rate movements because gains and losses on such contracts are inversely correlated with the losses and gains, respectively, on the assets and liabilities being hedged. ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION Because we are involved in a regulated industry, regulatory decisions affect the timing and recognition of revenues and expenses. We use SFAS No. 71 to account for the effects of these regulatory decisions. As a result, we may defer or recognize revenues and expenses differently than a non-regulated entity. For example, items that a non-regulated entity normally would expense, we may record as regulatory assets if the actions of the regulator indicate such expenses will be recovered in future rates. Conversely, items that non- regulated entities may normally recognize as revenues, we may record as regulatory liabilities if the actions of the regulator indicate they will require such revenues be refunded to customers. Judgment is required to determine the recoverability of items recorded as regulatory assets and liabilities. As of December 31, 2003, we had $1.105 billion recorded as regulatory assets and $1.467 billion recorded as regulatory liabilities. For additional details on industry regulation, see Note 1, Corporate Structure and Accounting Policies, "Utility Regulation." ACCOUNTING FOR PENSION AND OPEB Pension: We have established external trust funds to provide retirement pension benefits to our employees under a non-contributory, defined benefit Pension Plan. We have implemented a cash balance plan for employees hired after June 30, 2003. We use SFAS No. 87 to account for pension costs. OPEB: We provide postretirement health and life benefits under our OPEB plan to substantially all our retired employees. We use SFAS No. 106 to account for other postretirement benefit costs. Liabilities for both pension and OPEB are recorded on the balance sheet at the present value of their future obligations, net of any plan assets. The calculation of the liabilities and associated expenses requires the expertise of actuaries. Many assumptions are made including: - life expectancies, - present-value discount rates, - expected long-term rate of return on plan assets, CMS-18 - rate of compensation increases, and - anticipated health care costs. Any change in these assumptions can change significantly the liability and associated expenses recognized in any given year. The following table provides an estimate of our pension expense, OPEB expense, and cash contributions for the next three years:
PENSION EXPENSE OPEB EXPENSE CONTRIBUTIONS --------------- ------------ ------------- IN MILLIONS 2004................................................. $21 $66 $ 98 2005................................................. 44 63 123 2006................................................. 67 61 131
Actual future pension expense and contributions will depend on future investment performance, changes in future discount rates, and various other factors related to the populations participating in the Pension Plan. Lowering the expected long-term rate of return on the Pension Plan assets by 0.25 percent (from 8.75 percent to 8.50 percent) would increase estimated pension expense for 2004 by $2 million. Lowering the discount rate by 0.25 percent (from 6.25 percent to 6.00 percent) would increase estimated pension expense for 2004 by $4 million. In August 2003, we made a planned contribution of $210 million to the Pension Plan. In December 2003, we made an additional contribution of $350 million. As a result of these contributions, we reversed the additional minimum liability and the resulting decrease in equity that we charged in 2002. As of December 31, 2003, we have a prepaid pension asset of $408 million recorded on our consolidated balance sheets. Market-Related Valuation: We determine pension expense based on a market-related valuation of assets, which reduces year-to-year volatility. The market-related valuation recognizes investment gains or losses over a five-year period from the year in which the gains or losses occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market value of assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recorded. Due to the unfavorable performance of the equity markets in the past few years, as of December 31, 2003, we had cumulative losses of approximately $239 million that remain to be recognized in the calculation of the market-related value of assets. These unrecognized net actuarial losses may result in increases in future pension expense in accordance with SFAS No. 87. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law in December 2003. This Act establishes a prescription drug benefit under Medicare (Medicare Part D), and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. We are deferring recognizing the effects of the Act in our 2003 financial statements, as permitted by FASB Staff Position No. 106-1. When accounting guidance is issued, our retiree health benefit obligation may be adjusted. For additional details on postretirement benefits, see Note 10, Retirement Benefits. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS SFAS No. 143, Accounting for Asset Retirement Obligations, became effective January 2003. It requires companies to record the fair value of the cost to remove assets at the end of their useful lives, if there is a legal obligation to remove them. We have legal obligations to remove some of our assets, including our nuclear plants, at the end of their useful lives. As required by SFAS No. 71, we accounted for the implementation of this standard by recording a regulatory asset and liability for regulated entities instead of a cumulative effect of a change in CMS-19 accounting principle. Accretion of $1 million related to the Big Rock and Palisades' profit component included in the estimated cost of removal was expensed for 2003. The fair value of ARO liabilities has been calculated using an expected present value technique. This technique reflects assumptions, such as costs, inflation, and profit margin that third parties would consider to assume the settlement of the obligation. Fair value, to the extent possible, should include a market risk premium for unforeseeable circumstances. No market risk premium was included in our ARO fair value estimate since a reasonable estimate could not be made. If a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, such as assets with indeterminate lives, the liability is to be recognized when a reasonable estimate of fair value can be made. Generally, transmission and distribution assets have indeterminate lives. Retirement cash flows cannot be determined. There is a low probability of a retirement date, so no liability has been recorded for these assets. No liability has been recorded for assets that have insignificant cumulative disposal costs, such as substation batteries. The measurement of the ARO liabilities for Palisades and Big Rock are based on decommissioning studies that are based largely on third-party cost estimates. Reclassification of Non-Legal Cost of Removal: Beginning in December 2003, the SEC requires the quantification and reclassification of the estimated cost of removal obligations arising from other than legal obligations. These obligations have been accrued through depreciation charges. We estimate that we had $983 million in 2003 and $907 million in 2002 of previously accrued asset removal costs related to our regulated operations, for other than legal obligations. These obligations, which were previously classified as a component of accumulated depreciation, were reclassified as regulatory liabilities in the accompanying consolidated balance sheets. For additional details on ARO, see Note 16, Asset Retirement Obligations. ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS The MPSC and FERC regulate the recovery of costs to decommission our Big Rock and Palisades nuclear plants. They require, and we have established, external trust funds to finance the decommissioning of both plants. Our electric customers pay a surcharge to fund these trusts. We record the trust fund balances as a non-current asset on our balance sheet. Our decommissioning cost estimates for the Big Rock and Palisades plants assume: - each plant site will be restored to conform to the adjacent landscape, - all contaminated equipment and material will be removed and disposed of in a licensed burial facility, and - the site will be released for unrestricted use. Independent contractors with expertise in decommissioning have helped us develop decommissioning cost estimates. Various inflation rates for labor, non-labor, and contaminated equipment disposal costs are used to escalate these cost estimates to the future decommissioning cost. A portion of future decommissioning cost will result from the failure of the DOE to remove fuel from the sites, as required by the Nuclear Waste Policy Act of 1982. Spent fuel storage costs would not be incurred if the DOE took possession of the spent fuel. There is litigation underway to recover these costs. The decommissioning trust funds include equities and fixed income investments. Equities will be converted to fixed income investments during decommissioning, and fixed income investments are converted to cash as needed. In December 2000, funding of the Big Rock trust fund was stopped since it was considered fully funded, subject to further MPSC review. The funds provided by the trusts, additional customer surcharges, and potential CMS-20 funds from DOE litigation are all required to cover fully the decommissioning costs, and we currently expect that to happen. The costs of decommissioning these sites and the adequacy of the trust funds could be affected by: - variances from expected trust earnings, - a lower recovery of costs from the DOE and lower rate recovery from customers, and - changes in decommissioning technology, regulations, estimates or assumptions. For additional details on nuclear decommissioning, see Note 1, Corporate Structure and Accounting Policies, "Nuclear Plant Decommissioning." CAPITAL RESOURCES AND LIQUIDITY Our liquidity and capital requirements are a function of our results of operations, capital expenditures, contractual obligations, debt maturities, working capital needs, and collateral requirements. During the summer months, we purchase natural gas and store it for resale primarily during the winter heating season. Recently, the market price for natural gas has increased. Although our natural gas purchases are recoverable from our customers, the amount paid for natural gas stored as inventory could require additional liquidity due to the timing of the cost recoveries. In addition, a few of our commodity suppliers have requested advance payment or other forms of assurances, including margin calls, in connection with maintenance of ongoing deliveries of gas and electricity. At the beginning of 2003, we had debt maturities and capital expenditures that required substantial amounts of cash. We were also subject to liquidity demands of various commercial commitments, such as guarantees, indemnities, and letters of credit. As a result, in 2003, we executed a financial improvement plan to address these critical liquidity issues. In January 2003, we suspended payment of the common stock dividend and increased our efforts to reduce operating expenses and capital expenditures. We continued to sell non-strategic assets and we used the proceeds to reduce debt. Gross proceeds from asset sales were $939 million in 2003. Finally, we explored financing opportunities, such as refinancing debt, issuing new debt and preferred equity, and negotiating private placement debt. Together, all of these steps enabled us to meet our liquidity demands. In 2004, we will continue to monitor our operating expenses and capital expenditures, evaluate market conditions for financing opportunities, and sell assets that are not consistent with our strategy. We do not anticipate paying dividends in the foreseeable future. The Board of Directors may reconsider or revise this policy from time to time based upon certain conditions, including our results of operations, financial condition, and capital requirements, as well as other relevant factors. We believe our current level of cash and borrowing capacity, along with anticipated cash flows from operating and investing activities, will be sufficient to meet our liquidity needs through 2005. CASH POSITION, INVESTING, AND FINANCING Consolidated cash needs are met by our operating, investing and financing activities. At December 31, 2003, $733 million consolidated cash was on hand which includes $201 million of restricted cash. For additional details on restricted cash, see Note 1, Corporate Structure and Accounting Policies. Our primary ongoing source of cash is dividends and other distributions from our subsidiaries, including proceeds from asset sales. In 2003, Consumers paid $218 million in common stock dividends and Enterprises paid $536 million in common stock dividends and other distributions to us. Enterprises' other distributions include a transfer of 1,967,640 shares of CMS Energy Common Stock, valued at $16 million, in the form of a stock dividend. There was no impact on shares outstanding or the consolidated income statement from this distribution. CMS-21 SELECTED MEASURES OF LIQUIDITY AND CAPITAL RESOURCES:
2003 ---- ~~Working capital (in millions)............................... $ 844 Current ratio............................................... 1.51:1~~
Working capital in 2003 was primarily driven by the following: - cash proceeds from long-term debt issuance -- $2.080 billion, - cash proceeds from asset sales -- $939 million, and - cash proceeds from preferred stock issuance/sale -- $272 million. partially offset by: - cash used for long-term debt retirements, excluding current portion -- $1.531 billion, - cash used for pension contributions -- $560 million, and - cash used for purchase of property, plant and equipment -- $535 million. SUMMARY OF CASH FLOWS:
RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS Net cash provided by (used in): Operating activities...................................... $(251) $ 614 $ 372 Investing activities...................................... 203 829 (1,349) Financing activities...................................... 230 (1,223) 967 Effect of exchange rates on cash............................ (1) 8 (10) ----- ------- ------- Net increase (decrease) in cash and temporary cash investments............................................... $ 181 $ 228 $ (20) ===== ======= =======
OPERATING ACTIVITIES: 2003: Net cash used in operating activities was $251 million in 2003 compared to net cash provided by operating activities of $614 million in 2002. The change of $865 million was primarily due to an increase in pension plan contributions of $496 million, an increase in inventories of $428 million due to higher gas purchases at higher prices by our gas utility operations, and a decrease in accounts payable and accrued expenses of $232 million due primarily to the sale of CMS MST's wholesale gas and power contracts. This change was partially offset by a decrease in accounts receivable and accrued revenue of $101 million due primarily to the sale of CMS MST's wholesale gas and power contracts. 2002: Net cash provided by operating activities increased $242 million in 2002 primarily due to a decrease in inventories of $479 million due to a lower volume of gas purchased at lower prices, combined with increased sales volumes at higher prices at our gas utility. This increase was partially offset by a smaller decrease in accounts receivable and accrued revenues of $238 million. INVESTING ACTIVITIES: 2003: Net cash provided by investing activities decreased $626 million in 2003 due primarily to a decrease in asset sale proceeds of $720 million, primarily from the sale of Equatorial Guinea, Powder River, and CMS Oil and Gas in 2002, offset by a decrease in 2003 versus 2002 capital expenditures of $212 million as a result of our strategic plan to reduce capital expenditures. 2002: Net cash provided by investing activities increased $2.178 billion in 2002 due primarily to a decrease in capital expenditures of $492 million as a result of our strategic plan to reduce capital expenditures, and an CMS-22 increase in asset sale proceeds of $1.525 billion, resulting primarily from the sales of Equatorial Guinea, Powder River, and CMS Oil and Gas. FINANCING ACTIVITIES: 2003: Net cash provided by financing activities increased $1.453 billion in 2003 due primarily to an increase in net proceeds from borrowings of $988 million and net proceeds from preferred securities issuances/ sale of $272 million. For additional details on long-term debt activity, see Note 5, Financings and Capitalization. 2002: Net cash used in financing activities increased $2.190 billion in 2002 due primarily to a decrease in net proceeds from borrowings of $1.733 billion and a decrease in net proceeds from common stock and preferred securities of $454 million. OBLIGATIONS AND COMMITMENTS The following information on our contractual obligations, off-balance sheet arrangements, and commercial commitments is provided to collect information in a single location so that a picture of liquidity and capital resources is readily available. For additional information on our obligations and commitments see Note 5, Financings and Capitalization.
PAYMENTS DUE ---------------------------------------------------------------- DECEMBER 31 TOTAL 2004 2005 2006 2007 2008 BEYOND - ----------- ----- ---- ---- ---- ---- ---- ------ IN MILLIONS CONTRACTUAL OBLIGATIONS On-balance sheet: Long-term debt....................... $ 6,529 $ 509 $ 696 $ 490 $516 $987 $ 3,331 Long-term debt -- related parties.... 684 -- -- -- -- -- 684 Capital lease obligations............ 68 10 11 10 10 8 19 ------- ------ ------ ------ ---- ---- ------- Total on-balance sheet................. $ 7,281 $ 519 $ 707 $ 500 $526 $995 $ 4,034 ------- ------ ------ ------ ---- ---- ------- Off-balance sheet: Non-recourse debt.................... $ 2,909 $ 233 $ 123 $ 170 $ 85 $101 $ 2,197 Capital lease obligation -- MCV...... 144 16 9 8 8 8 95 Operating leases..................... 78 12 10 10 9 7 30 Sale of accounts receivable.......... 297 297 -- -- -- -- -- Unconditional purchase obligations(a).................... 16,370 1,895 1,258 892 711 670 10,944 ------- ------ ------ ------ ---- ---- ------- Total off-balance sheet................ $19,798 $2,453 $1,400 $1,080 $813 $786 $13,266 ======= ====== ====== ====== ==== ==== =======
- ------------------------- (a) This excludes purchase obligations that Consumers has with Genesee, Grayling, and Filer City generating plants because these entities are consolidated under FASB Interpretation No. 46. Purchase obligations related to the MCV Facility PPA assume that the regulatory out provision is exercised in 2007. For additional details, see Note 4, Uncertainties, "Other Consumers' Electric Utility Uncertainties -- The Midland Cogeneration Venture." REGULATORY AUTHORIZATION FOR FINANCINGS: Consumers must obtain FERC authority to issue short and long-term securities. For additional details of Consumers' existing authority, see Note 5, Financings and Capitalization. LONG-TERM DEBT: Details on long-term debt and preferred securities issuances, retirements, and outstanding balances are presented in Note 5, Financings and Capitalization. SHORT-TERM FINANCINGS: CMS Energy has $190 million available and Consumers has $390 million available under revolving credit facilities. At December 31, 2003, the lines are available for general corporate purposes, working capital, and letters of credit. Additional details are in Note 5, Financings and Capitalization. CAPITAL LEASE OBLIGATIONS: Our capital leases are comprised mainly of leased service vehicles and office furniture. The full obligation of our leases could become due in the event of lease payment default. CMS-23 OFF-BALANCE SHEET ARRANGEMENTS: We use off-balance sheet arrangements in the normal course of business. Our off-balance sheet arrangements include: - operating leases, - non-recourse debt, - sale of accounts receivable, and - unconditional purchase obligations. Operating Leases: Our leases of railroad cars, certain vehicles, and miscellaneous office equipment are accounted for as operating leases. Non-recourse Debt: Our share of unconsolidated debt associated with partnerships and joint ventures in which we have a minority interest is non-recourse. Sale of Accounts Receivable: Under a revolving accounts receivable sales program, we currently sell up to $325 million of certain accounts receivable. For additional details, see Note 5, Financings and Capitalization. Unconditional Purchase Obligations: Long-term contracts for purchase of commodities and services are unconditional purchase obligations. These obligations represent operating contracts used to assure adequate supply with generating facilities that meet PURPA requirements. The commodities and services include: - natural gas, - electricity, - coal purchase contracts and their associated cost of transportation, and - electric transmission. Included in unconditional purchase obligations are long-term power purchase agreements with various generating plants including the MCV Facility. These contracts require us to make monthly capacity payments based on the plants' availability or deliverability. These payments will approximate $43 million per month during 2004, including $34 million related to the MCV Facility. If a plant is not available to deliver electricity, we are not obligated to make the capacity payments to the plant for that period of time. For additional details on power supply costs, see "Electric Utility Results of Operations" within this MD&A and Note 4, Uncertainties, "Consumers' Electric Utility Rate Matters -- Power Supply Costs," and "Other Consumers' Electric Utility Uncertainties -- The Midland Cogeneration Venture." COMMERCIAL COMMITMENTS: Our commercial commitments include indemnities and letters of credit. Indemnities are agreements to reimburse other companies, such as an insurance company, if those companies have to complete our contractual performance in a third party contract. Banks, on our behalf, issue letters of credit guaranteeing payment to a third party. Letters of credit substitute the bank's credit for ours and reduce credit risk for the third party beneficiary. We monitor and approve these obligations and believe it is unlikely that we would be required to perform or otherwise incur any material losses associated with these guarantees.
COMMITMENT EXPIRATION ------------------------------------------------------- DECEMBER 31 TOTAL 2004 2005 2006 2007 2008 BEYOND - ----------- ----- ---- ---- ---- ---- ---- ------ IN MILLIONS COMMERCIAL COMMITMENTS Off-balance sheet: Guarantees...................................... $239 $ 20 $36 $4 $-- $-- $179 Indemnities..................................... 28 8 -- -- -- -- 20 Letters of Credit(a)............................ 254 215 10 5 5 5 14 ---- ---- --- -- --- --- ---- Total............................................. $521 $243 $46 $9 $ 5 $ 5 $213 ==== ==== === == === === ====
- ------------------------- (a) At December 31, 2003, we had $175 million of cash collateralized letters of credit and the cash used to collateralize the letters of credit is included in Restricted Cash on the Consolidated Balance Sheets. CMS-24 DIVIDEND RESTRICTIONS: Under the provisions of its articles of incorporation, at December 31, 2003, Consumers had $373 million of unrestricted retained earnings available to pay common dividends. However, covenants in Consumers debt facilities cap common stock dividend payments at $300 million in a calendar year. Through December 31, 2003, we received the following common stock dividend payments from Consumers:
IN MILLIONS January..................................................... $ 78 May......................................................... 31 June........................................................ 53 November.................................................... 56 ---- Total common stock dividends paid to CMS Energy............. $218 ====
As of December 18, 2003, Consumers is also under an annual dividend cap of $190 million imposed by the MPSC during the current interim gas rate relief period. Because all of the $218 million of common stock dividends to CMS energy were paid prior to December 18, 2003, Consumers was not out of compliance with this new restriction for 2003. In February 2004, Consumers paid a $78 million common stock dividend. For additional details on the potential cap on common dividends payable included in the MPSC Securitization order see Note 4, Uncertainties, "Consumers' Electric Utility Rate Matters -- Securitization." Also, for additional details on the cap on common dividends payable during the current interim gas rate relief period, see Note 4, Uncertainties, "Consumers' Gas Utility Rate Matters -- 2003 Gas Rate Case." CAPITAL EXPENDITURES We estimate the following capital expenditures, including new lease commitments, by expenditure type and by business segments during 2004 through 2006. We prepare these estimates for planning purposes and may revise them.
YEARS ENDING DECEMBER 31 2004 2005 2006 - ------------------------ ---- ---- ---- IN MILLIONS Electric utility operations(a)(b)........................... $395 $370 $570 Gas utility operations(a)................................... 155 185 170 Enterprises................................................. 85 5 5 ---- ---- ---- $635 $560 $745 ==== ==== ====
- ------------------------- (a) These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. (b) These amounts include estimates for capital expenditures that may be required by recent revisions to the Clean Air Act's national air quality standards. OUTLOOK CORPORATE OUTLOOK During 2003, we continued to implement a back-to-basics strategy that focuses on growing a healthy utility and divesting under-performing or other non-strategic assets. The strategy is designed to generate cash to pay down debt, reduce business risk, and provide for more predictable future operating revenues and earnings. Consistent with our back-to-basics strategy, we are pursuing actively the sale of non-strategic and under-performing assets and have received $3.6 billion of cash from asset sales, securitization proceeds and proceeds from LNG monetization since 2001. For additional details, see Note 2, Discontinued Operations, Other Asset Sales, Impairments, and Restructuring. Some of these assets are recorded at estimates of their current fair value. Upon the sale of these assets, the proceeds realized may be different from the recorded values if market conditions have changed. Even though these assets have been identified for sale, we cannot predict when, nor CMS-25 make any assurance that, these sales will occur. We anticipate that the sales, if any, will result in additional cash proceeds that will be used to retire existing debt. As we continue to implement our back-to-basics strategy and further reduce our ownership of non-utility assets, the percentage of our future earnings relating to Jorf Lasfar and the MCV Partnership may increase and our total future earnings may depend more significantly upon the performance of Jorf Lasfar and the MCV Partnership. For the year ended December 31, 2003, earnings from our equity method investment in Jorf Lasfar were $61 million and earnings from our equity method investment in the MCV Partnership were $29 million. ELECTRIC UTILITY BUSINESS OUTLOOK GROWTH: Over the next five years, we expect electric deliveries to grow at an average rate of approximately two percent per year based primarily on a steadily growing customer base and economy. This growth rate includes both full service sales and delivery service to customers who choose to buy generation service from an alternative electric supplier, but excludes transactions with other wholesale market participants and other electric utilities. This growth rate reflects a long-range expected trend of growth. Growth from year to year may vary from this trend due to customer response to abnormal weather conditions and changes in economic conditions, including utilization and expansion of manufacturing facilities. For 2003, our electric deliveries, including delivery to customers who chose to buy generation service from an alternative electric supplier, declined 1.4 percent from 2002. This was due to a combination of warmer than normal summer weather in 2002, cooler than normal summer weather in 2003, and a decline in manufacturing activity during 2003. In 2004, we project electric deliveries to grow more than three percent. This short-term outlook for 2004 assumes higher levels of manufacturing activity than in 2003 and normal weather conditions throughout the year. ELECTRIC UTILITY BUSINESS UNCERTAINTIES Several electric business trends or uncertainties may affect our financial results and condition. These trends or uncertainties have, or we reasonably expect could have, a material impact on revenues or income from continuing electric operations. Such trends and uncertainties include: Environmental - increasing capital expenditures and operating expenses for Clean Air Act compliance, and - potential environmental liabilities arising from various environmental laws and regulations, including potential liability or expenses relating to the Michigan Natural Resources and Environmental Protection Acts and Superfund. Restructuring - response of the MPSC and Michigan legislature to electric industry restructuring issues, - ability to meet peak electric demand requirements at a reasonable cost, without market disruption, - ability to recover any of our net Stranded Costs under the regulatory policies being followed by the MPSC, - recovery of electric restructuring implementation costs, - effects of lost electric supply load to alternative electric suppliers, and - status as an electric transmission customer instead of an electric transmission owner-operator. Regulatory - effects of conclusions about the causes of the August 14, 2003 blackout, including exposure to liability, increased regulatory requirements, and new legislation, - successful implementation of initiatives to reduce exposure to purchased power price increases, CMS-26 - effects of potential performance standards payments, and - responses from regulators regarding the storage and ultimate disposal of spent nuclear fuel. Other - effects of commodity fuel prices such as natural gas and coal, - pending litigation filed by PURPA qualifying facilities, - potential rising pension costs due to market losses and lump sum payments. For additional details, see "Accounting for Pension and OPEB" section within this MD&A. - pending litigation and government investigations. For additional details about these trends or uncertainties, see Note 4, Uncertainties. ELECTRIC ENVIRONMENTAL ESTIMATES: Our operations are subject to environmental laws and regulations. Costs to operate our facilities in compliance with these laws and regulations generally have been recovered in customer rates. Compliance with the federal Clean Air Act and resulting regulations has been, and will continue to be, a significant focus for us. The Title I provisions of the Clean Air Act require significant reductions in nitrogen oxide emissions. To comply with the regulations, we expect to incur capital expenditures totaling $771 million. The key assumptions included in the capital expenditure estimate include: - construction commodity prices, especially construction material and labor, - project completion schedules, - cost escalation factor used to estimate future years' costs, and - allowance for funds used during construction (AFUDC) rate. Our current capital cost estimates include an escalation rate of 2.6 percent and an AFUDC capitalization rate of 8.1 percent. As of December 31, 2003, we have incurred $446 million in capital expenditures to comply with these regulations and anticipate that the remaining $325 million of capital expenditures will be made between 2004 and 2009. These expenditures include installing catalytic reduction technology on coal-fired electric plants. In addition to modifying the coal-fired electric plants, we expect to purchase nitrogen oxide emissions credits for years 2004 through 2008. The cost of these credits is estimated to average $8 million per year and is accounted for as inventory. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seek modification permits from the EPA. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of "routine maintenance." If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric plants. Future clean air regulations requiring emission controls for sulfur dioxide, nitrogen oxides, mercury, and nickel may require additional capital expenditures. Total expenditures will depend upon the final makeup of the new regulations. The EPA continues to make new rules. The EPA has proposed changes to the rules that govern generating plant cooling water intake systems. The proposed rules are scheduled to be final in the first quarter of 2004. We are studying the proposed rules to determine the most cost-effective solutions for compliance. For additional details on electric environmental matters, see Note 4, Uncertainties, "Consumers' Electric Utility Contingencies -- Electric Environmental Matters." COMPETITION AND REGULATORY RESTRUCTURING: Michigan's Customer Choice Act and other developments will continue to result in increased competition in the electric business. Generally, increased competition reduces profitability and threatens market share for generation services. As of January 1, 2002, the Customer Choice Act CMS-27 allowed all of our electric customers to buy electric generation service from us or from an alternative electric supplier. As a result, alternative electric suppliers for generation services have entered our market. As of March 2004, alternative electric suppliers are providing 735 MW of generation supply to ROA customers. This amount represents nine percent of our distribution load and an increase of 42 percent compared to March 2003. We anticipate this upward trend to continue and expect over 1,000 MW of generation supply to ROA customers in 2004. We cannot predict the total amount of electric supply load that may be lost to competitor suppliers. In February 2004, the MPSC issued an order on Detroit Edison's request for rate relief for costs associated with customers leaving under electric customer choice. The MPSC order allows Detroit Edison to charge a transition surcharge of approximately 0.4 cent per kWh to ROA customers and eliminates securitization offsets of 0.7 cents per kWh for primary service customers and 0.9 cents per kWh for secondary service customers. We are seeking similar recovery of Stranded Costs due to ROA customers leaving our system and are encouraged by this ruling. This ruling may change significantly the anticipated number of customers who choose ROA. Securitization: In March 2003, we filed an application with the MPSC seeking approval to issue Securitization bonds. In June 2003, the MPSC issued a financing order authorizing the issuance of Securitization bonds in the amount of approximately $554 million. In July 2003, we filed for rehearing and clarification on a number of features in the financing order. In December 2003, the MPSC issued its order on rehearing, which rejected our requests for clarification and modification to the dividend payment restriction, failed to rule directly on the accounting clarifications requested, and remanded the proceeding to the ALJ for additional proceedings to address rate design. We filed testimony regarding the remanded proceeding in February 2004. The financing order will become effective after acceptance by us and resolution of any appeals. Stranded Costs: To the extent we experience net Stranded Costs as determined by the MPSC, the Customer Choice Act allows us to recover such costs by collecting a transition surcharge from customers who switch to an alternative electric supplier. We cannot predict whether the Stranded Cost recovery method adopted by the MPSC will be applied in a manner that will fully offset any associated margin loss. In 2002 and 2001, the MPSC issued orders finding that we experienced zero net Stranded Costs from 1999 to 2001. The MPSC also declined to resolve numerous issues regarding the net Stranded Cost methodology in a way that would allow a reliable prediction of the level of Stranded Costs for future years. We currently are in the process of appealing these orders with the Michigan Court of Appeals and the Michigan Supreme Court. In March 2003, we filed an application with the MPSC seeking approval of net Stranded Costs incurred in 2002, and for approval of a net Stranded Cost recovery charge. Our net Stranded Costs incurred in 2002 are estimated to be $38 million with the issuance of Securitization bonds that include Clean Air Act investments, or $85 million without the issuance of Securitization bonds that include Clean Air Act investments. Once the MPSC issues a final financing order on Securitization, we will know the amount of our request for net Stranded Cost recovery for 2002. We cannot predict how the MPSC will rule on our request for the recoverability of Stranded Costs. Therefore, we have not recorded regulatory assets to recognize the future recovery of such costs. Implementation Costs: Since 1997, we have incurred significant costs to implement the Customer Choice Act. The Customer Choice Act allows electric utilities to recover the Act's implementation costs. The MPSC has reviewed and allowed certain of the implementation costs incurred through 2001, but has not authorized recovery. Depending upon the outcome of the remanded Securitization proceeding, a significant portion of the implementation costs could be recovered through the Securitization process. Our application for $2 million of implementation costs in 2002 is currently pending approval by the MPSC. We deferred these costs as a regulatory asset. In addition to the implementation costs filed with the MPSC, as of December 31, 2003, we recorded an additional $2 million for total implementation costs of $91 million. Included in total implementation costs is $19 million associated with the cost of money. We believe the implementation costs and the associated cost of money are fully recoverable in accordance with the Customer Choice Act. Cash recovery from customers is expected to begin after the rate cap period has expired. For additional information on CMS-28 rate caps, see "Rate Caps" within this section. Once a final financing order by the MPSC on Securitization is issued, the recoverability of the implementation costs requested will be known. We cannot predict the amounts the MPSC will approve as allowable costs. Also, we are pursuing authorization at the FERC for MISO to reimburse us for approximately $8 million in certain electric utility restructuring implementation costs related to our former participation in the development of the Alliance RTO, a portion of which has been expensed. In May 2003, the FERC issued an order denying MISO's request for authorization to reimburse us. We appealed the FERC ruling at the United States Court of Appeals for the District of Columbia. In addition, we continue to pursue other potential means of recovery with FERC. We cannot predict the outcome of the appeal process or the ultimate amount, if any, the FERC will allow us to collect for implementation costs. Rate Caps: The Customer Choice Act imposes certain limitations on electric rates that could result in us being unable to collect our full cost of conducting business from electric customers. Such limitations include: - a rate freeze effective through December 31, 2003, and - rate caps effective through December 31, 2004 for small commercial and industrial customers, and through December 31, 2005 for residential customers. As a result, we may be unable to maintain our profit margins in our electric utility business during the rate cap periods. In particular, if we needed to purchase power supply from wholesale suppliers while retail rates are capped, the rate restrictions may make it impossible for us to fully recover purchased power and associated transmission costs. PSCR: Prior to 1998, the PSCR process provided for the reconciliation of actual power supply costs with power supply revenues. This process assured recovery of all reasonable and prudent power supply costs actually incurred by us, including the actual cost for fuel, and purchased and interchange power. In 1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR process, effective through 2001. As a result of the rate freeze imposed by the Customer Choice Act, frozen rates remained in effect until December 31, 2003, and the PSCR process remained suspended. Therefore, changes in power supply costs due to fluctuating electricity prices were not reflected in rates charged to our customers during the rate freeze period. As a result of meeting the transmission capability expansion requirements and the market power test, we have met the requirements under the Customer Choice Act to return to the PSCR process. For additional details see Note 4, Uncertainties, "Consumers' Electric Utility Restructuring Matters -- Electric Restructuring Legislation." Accordingly, in September 2003, we submitted a PSCR filing to the MPSC that reinstates the PSCR process for customers whose rates are no longer frozen or capped as of January 1, 2004. The proposed PSCR charge allows us to recover a portion of our increased power supply costs from large commercial and industrial customers, and subject to the overall rate cap, from other customers. We estimate the recovery of increased power supply costs from large commercial and industrial customers to be approximately $30 million in 2004. As allowed under current regulation, we self-implemented the proposed PSCR charge on January 1, 2004. The revenues received from the PSCR charge are also subject to subsequent reconciliation at the end of the year after actual costs have been reviewed for reasonableness and prudence. We cannot predict the outcome of this filing. Decommissioning Surcharge: When our electric retail rates were frozen in June 2000, a nuclear decommissioning surcharge related to the decommissioning of Big Rock was included. We continued to collect the equivalent to the Big Rock nuclear decommissioning surcharge consistent with the Customer Choice Act rate freeze in effect through December 31, 2003. Collection of the surcharge stopped, effective January 1, 2004, when the electric rate freeze expired. As a result, our electric revenues will be reduced by $35 million in 2004. However, we expect a portion of this reduction to be offset with increased electric revenues from returning to the PSCR process. Industrial Contracts: We entered into multi-year electric supply contracts with certain large industrial customers. The contracts provide electricity at specially negotiated prices, usually at a discount from tariff prices. The MPSC approved these special contracts totaling approximately 685 MW of load. Unless terminated or CMS-29 restructured, the majority of these contracts are in effect through 2005. As of December 31, 2003, contracts for 301 MW of load have terminated. Of the contracts that have terminated, contracts for 64 MW have gone to an alternative electric supplier and contracts for 237 MW have returned to bundled tariff rates. In January 2004, new special contracts for 91 MW, with the State of Michigan and three universities, were approved by the MPSC. Other new special contracts for 101 MW received interim approval from the MPSC and are awaiting final approval. All new special contracts end by January 1, 2006. We cannot predict the ultimate financial impact of changes related to these power supply contracts, or whether additional special contracts will be necessary or advisable. Transmission Sale: In May 2002, we sold our electric transmission system for $290 million to MTH. We are currently in arbitration with MTH regarding property tax items used in establishing the selling price of our electric transmission system. We cannot predict whether the remaining open items will impact materially the sale proceeds previously recognized. There are multiple proceedings and a proposed rulemaking pending before the FERC regarding transmission pricing mechanisms and standard market design for electric bulk power markets and transmission. The results of these proceedings and proposed rulemakings could significantly affect: - transmission cost trends, - delivered power costs to us, and - delivered power costs to our retail electric customers. The financial impact of such proceedings, rulemaking and trends are not currently quantifiable. In addition, we are evaluating whether or not there may be impacts on electric reliability associated with the outcomes of these various transmission related proceedings. August 14, 2003 Blackout: On August 14, 2003, the electric transmission grid serving parts of the Midwest and the Northeast experienced a significant disturbance that impacted electric service to millions of homes and businesses. Approximately 100,000 of our 1.7 million electric customers were without power for approximately 24 hours as a result of the disturbance. We incurred $1 million of immediate expense as a result of the blackout. We continue to cooperate with investigations of the blackout by several federal and state agencies. We cannot predict the outcome of these investigations. In November 2003, the MPSC released its report on the blackout. The MPSC report found no evidence to suggest that the events in Michigan, or actions taken by the Michigan utilities or transmission operators, were factors contributing to the cause of the blackout. Also in November 2003, the United States and Canadian power system outage taskforce preliminarily reported that the primary cause of the blackout was due to transmission line contact with trees in areas outside of Consumers' operating territory. In December 2003, the MPSC issued an order requiring Consumers to report by April 1, 2004, the status of lines used to serve our customers, including details of vegetation trimming practices in calendar year 2003. Consumers intends to comply with the MPSC's request. In February 2004, the Board of Trustees of NERC approved recommendations to improve electric transmission reliability. The key recommendations are as follows: - strengthen the NERC compliance enforcement program, - evaluate vegetation management procedures, and - improve technology to prevent or mitigate future blackouts. These recommendations require transmission operators, which Consumers is not, to submit annual reports on vegetation management beginning March 2005 and improve technology over various milestones throughout 2004. These recommendations could result in increased transmission costs payable by transmission customers in the future. The financial impacts of these recommendations are not currently quantifiable. CMS-30 For additional details and material changes relating to the rate matters and restructuring of the electric utility industry, see Note 4, Uncertainties, "Consumers' Electric Utility Restructuring Matters," and "Consumers' Electric Utility Rate Matters." PERFORMANCE STANDARDS: Electric distribution performance standards developed by the MPSC became effective in February 2004. The performance standards establish standards related to restoration after an outage, safety, and customer relations. Financial incentives and penalties are contained within the performance standards. An incentive is possible if all of the established performance standards have been exceeded for a calendar year. However, the value of such incentive cannot be determined at this point as the performance standards do not contain an approved incentive mechanism. Financial penalties in the form of customer credits are also possible. These customer credits are based on duration and repetition of outages. We cannot predict the likely effects of the financial incentive or penalties, if any, on us. GAS UTILITY BUSINESS OUTLOOK GROWTH: Over the next five years, we expect gas deliveries to grow at an average rate of less than one percent per year. Actual gas deliveries in future periods may be affected by: - abnormal weather, - use by independent power producers, - competition in sales and delivery, - Michigan economic conditions, - gas consumption per customer, and - increases in gas commodity prices. GAS UTILITY BUSINESS UNCERTAINTIES Several gas business trends or uncertainties may affect our financial results and conditions. These trends or uncertainties could have a material impact on net sales, revenues, or income from gas operations. The trends and uncertainties include: Environmental - potential environmental cost at a number of sites, including sites formerly housing manufactured gas plant facilities. Regulatory - inadequate regulatory response to applications for requested rate increases, - potential adverse appliance service plan ruling or related legislation, and - response to increases in gas costs, including adverse regulatory response and reduced gas use by customers, Other - potential rising pension costs due to market losses and lump sum payments as discussed in the "Accounting for Pension and OPEB" section within this MD&A, and - pending litigation and government investigations. Consumers sells gas to retail customers under tariffs approved by the MPSC. These tariffs measure the gas delivered to customers based on the volume (i.e. mcf) of gas delivered. However, Consumers purchases gas for resale on a Btu basis. The Btu content of the gas available for purchase has increased and may result in customers using less gas for the same heating requirement. Consumers fully recovers what it spends to purchase the gas through the approved GCR. However, since the customer is using less gas on a volumetric basis, the revenue from CMS-31 the distribution charge (the non-gas cost portion of the customer bill) would be reduced. This could affect adversely Consumers' earnings from it gas utility. The amount of the earnings loss in future periods cannot be estimated at this time. In September 2002, the FERC issued an order rejecting our filing to assess certain rates for non-physical gas title tracking services we offered. In December 2003, the FERC ruled that no refunds were at issue and we reversed a $4 million reserve related to this matter. In January 2004, three companies filed with FERC for clarification or rehearing of FERC's December 2003 order. We cannot predict the outcome of this filing. GAS ENVIRONMENTAL ESTIMATES: We expect to incur investigation and remedial action costs at a number of sites, including 23 former manufactured gas plant sites. We expect our remaining remedial action costs to be between $37 million and $90 million. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination, and legal and regulatory requirements, could change the remedial action costs for the sites. For additional details, see Note 4, Uncertainties, "Consumers' Gas Utility Contingencies -- Gas Environmental Matters." GAS COST RECOVERY: The MPSC is required by law to allow us to charge customers for our actual cost of purchased natural gas. The GCR process is designed to allow us to recover all of our gas costs; however, the MPSC reviews these costs for prudency in an annual reconciliation proceeding. In January 2004, the MPSC staff and intervenors filed direct testimony in our 2002-2003 GCR case proposing GCR recovery disallowances. In February 2004, the parties in the case reached a tentative settlement agreement that would result in a GCR disallowance of $11 million for the GCR period plus $1 million accrued interest through February 2004. A reserve was recorded in December 2003. For additional details, see Note 4, Uncertainties, "Consumers' Gas Utility Rate Matters -- Gas Cost Recovery." 2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC for a $156 million annual increase in our gas delivery and transportation rates that included a 13.5 percent return on equity. In September 2003, we filed an update to our gas rate case that lowered the requested revenue increase from $156 million to $139 million and reduced the return on common equity from 13.5 percent to 12.75 percent. The MPSC authorized an interim gas rate increase of $19 million annually. The interim increase is under bond and subject to refund if the final rate relief is a lesser amount. The interim increase order includes a $34 million reduction in book depreciation expense and related income taxes effective only during the period that we receive the interim relief. The MPSC order allowed us to increase our rates beginning December 19, 2003. As part of the interim rate order, Consumers agreed to restrict its dividend payments to CMS Energy, to a maximum of $190 million annually during the period that Consumers receives the interim relief. On March 5, 2004, the ALJ issued a Proposal for Decision recommending that the MPSC not rely upon the projected test year data included in our filing and supported by the MPSC Staff and further recommended that the application be dismissed. The MPSC is not bound by these recommendations and will consider the issues anew after receipt of exceptions and replies to the exception filed by the parties in response to the Proposal for Decision. 2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas utility plant depreciation case originally filed in June 2001. This case is independent of the 2003 gas rate case. The original filing was based on December 2000 plant balances and historical data. The December 2003 filing updates the gas depreciation case to include December 2002 plant balances. The proposed depreciation rates, if approved, will result in an annual increase of $12 million in depreciation expense. OTHER CONSUMERS' OUTLOOK CODE OF CONDUCT: In December 2000, the MPSC issued a new code of conduct that applies to utilities and alternative electric suppliers. The code of conduct seeks to prevent financial support, information sharing, and preferential treatment between a utility's regulated and non-regulated services. The new code of conduct is broadly written and could affect our: - retail gas business energy related services, - retail electric business energy related services, CMS-32 - marketing of non-regulated services and equipment to Michigan customers, and - transfer pricing between our departments and affiliates. We appealed the MPSC orders related to the code of conduct and sought a deferral of the orders until the appeal was complete. We also sought waivers available under the code of conduct to continue utility activities that provide approximately $50 million in annual electric and gas revenues. In October 2002, the MPSC denied waivers for three programs including the appliance service plan offered by us, which generated $34 million in gas revenue in 2003. In March 2004, the Michigan Court of Appeals upheld the MPSC's implementation of the code of conduct without modification. We are in the process of filing an application for leave to appeal with the Michigan Supreme Court, but we cannot predict whether the Michigan Supreme Court will accept the case or the outcome of any appeal. The Michigan House of Representatives is scheduled to review the proposed legislation in 2004 that would allow us to remain in the appliance service business. In the interim, the legislature passed a bill to extend to July 1, 2004, the deadline for exiting this business. The full impact of the new code of conduct on our business will remain uncertain until the final judicial resolution of our appeal or the Michigan legislature enacts clarifying legislation. OTHER CONSUMERS' MATTERS 2001 GAS RATE CASE: In June 2001, we filed an application with the MPSC for a distribution service rate increase. In November 2002, the MPSC approved a $56 million annual distribution service rate increase, with an 11.4 percent authorized return on equity. ENTERPRISES OUTLOOK INDEPENDENT POWER PRODUCTION: We plan to complete the restructuring of our IPP business by narrowing the focus of our existing operations and commitments to North America and the Middle East/North Africa. Accordingly, we will continue to sell designated assets and investments that are under-performing or are not synergistic with our other business units. We will continue to operate and manage our remaining portfolio of assets in a manner that maximizes their contribution to our earnings and that maintains our reputation for solid performance in the construction and operation of power plants. CMS ERM: CMS ERM has continued to streamline its portfolio in order to reduce its business risk and outstanding credit guarantees. Our future activities will be centered around meeting contractual obligations, as well as purchasing fuel for and marketing the merchant power from DIG, Michigan Power, LLC, and other IPPs as their current power purchase agreements expire. CMS GAS TRANSMISSION: CMS Gas Transmission continues to narrow its scope of existing operations. We plan to continue to sell international assets and businesses. Future operations will be mainly in Michigan. UNCERTAINTIES: The results of operations and the financial position of our diversified energy businesses may be affected by a number of trends or uncertainties. Those that could have a material impact on our income, cash flows, or balance sheet and credit improvement include: - our ability to sell or to improve the performance of assets and businesses in accordance with our financial plan, - changes in exchange rates or local economic conditions, particularly in Argentina, Venezuela, Brazil, and Australia, - changes in foreign laws or in governmental or regulatory policies that could reduce significantly the tariffs charged and revenues recognized by certain foreign subsidiaries, or increase expenses, - imposition of stamp taxes on South American contracts that could increase substantially project expenses, - impact of any future rate cases, or FERC actions, or orders on regulated businesses, and - impact of ratings downgrades on our liquidity, operating costs, and cost of capital. CMS-33 PENDING ASSET SALE: Affiliates of CMS Generation and CMS Gas Transmission own a 49.6 percent interest in the Loy Yang Power Partnership ("LYPP"), which owns the 2,000 MW Loy Yang coal-fired power project in Victoria, Australia. Due to unfavorable power prices in the Australian market, the LYPP is not generating cash flow sufficient to meet its debt-service obligations. LYPP has A$500 million of term bank debt that, pursuant to extensions from the lenders, is scheduled to mature on March 31, 2004. The partners in LYPP (including affiliates of CMS Generation, CMS Gas Transmission, NRG Energy Inc. and Horizon Energy Australia Investments) have been exploring the possible sale of the project (or control of the project) and a restructuring of the finances of LYPP. In July 2003, a conditional share sale agreement was executed by the LYPP partners and partners of the Great Energy Alliance Corporation ("GEAC") to sell the project to GEAC for A$3.5 billion ($2.8 billion in U.S. dollars), including A$165 million for the project equity. The partners in GEAC are the Australian Gas Light Company, the Tokyo Electric Power Company, and a group of financial investors led by the Commonwealth Bank of Australia. A recent resolution of an Australian Competition and Consumer Commission objection to the sale has led to an extension of the exclusive arrangement with GEAC to allow enough time to complete the sale. The conditions to completion of the sale to GEAC include consents from LYPP's lenders to a restructuring of the debt and rulings on tax and stamp duty obligations. The project equity portion of the sale price has been reduced to A$155 million ($122 million in U.S. dollars) as a result of working capital and other adjustments, and closing is targeted for March 2004. The share sale agreement and subsequent extensions provide GEAC a period of exclusivity while the conditions of the purchase are satisfied. The ultimate net proceeds to CMS Energy for its equity share in LYPP may be subject to a reduction based on the ultimate resolution of many of the factors described above as conditions to completion of the sale, as well as closing adjustments and transaction costs, and could likely range between $20 million and a nominal amount. We cannot predict whether this sale to GEAC will be consummated or, if not, whether any of the other initiatives will be successful, and it is possible that CMS Generation may lose all or a substantial part of its remaining equity investment in the LYPP. We previously have written off our equity investment in the LYPP, and further write-offs would be limited to cumulative net foreign currency translation losses. The amount of such cumulative net foreign currency translation losses is approximately $110 million at December 31, 2003. Any such write-off would flow through our income statement but would not result in a reduction in shareholders' equity or cause us to be in noncompliance with our financing agreements. OTHER OUTLOOK LITIGATION AND REGULATORY INVESTIGATIONS: We are the subject of various investigations as a result of round-trip trading transactions by CMS MST, including investigations by the United States Department of Justice and the SEC. Additionally, we are a party to various litigation including a shareholder derivative lawsuit, a securities class action lawsuit, a class action lawsuit alleging ERISA violations, several lawsuits regarding alleged false natural gas price reporting, and a lawsuit surrounding the possible sale of CMS Pipeline Assets. For additional details regarding these investigations and litigation, see Note 4, Uncertainties. OTHER MATTERS CONTROL WEAKNESSES AT CMS MST In late 2001 and during 2002, we identified a number of deficiencies in CMS MST's systems of internal accounting controls. The internal control deficiencies related to, among other things, a lack of account reconciliations, unidentified differences between subsidiary ledgers and the general ledger, and procedures and processes surrounding our accounting for energy trading contracts, including mark-to-market accounting. Senior management, the Audit Committee of the Board of Directors, the Board of Directors, and the independent auditors were notified of these deficiencies as they were discovered, and we commenced a plan of remediation that included replacing certain key personnel and deploying additional internal and external accounting personnel to CMS MST. While a number of these control improvements and changes were implemented in late 2002, the most important ones occurred in the first quarter of 2003. CMS-34 We believe that the improvements to our system of internal accounting controls were appropriate and responsive to the internal control deficiencies that were identified. We monitored the operation of the improved internal controls throughout 2003 and have concluded that they were effective. NEW ACCOUNTING STANDARDS See Note 17, Implementation of New Accounting Standards, for discussion of new standards. ACCOUNTING STANDARDS NOT YET EFFECTIVE FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: FASB issued this interpretation in January 2003. The objective of the Interpretation is to assist in determining when one party controls another entity in circumstances where a controlling financial interest cannot be properly identified based on voting interests. Entities with this characteristic are considered variable interest entities. The Interpretation requires the party with the controlling financial interest to consolidate the entity. On December 24, 2003, the FASB issued Revised FASB Interpretation No. 46. For entities that have not previously adopted FASB Interpretation No. 46, Revised FASB Interpretation No. 46 provides an implementation deferral until the first quarter of 2004. Revised FASB Interpretation No. 46 is effective for the first quarter of 2004 for all entities other than special purpose entities. Special purpose entities must apply either FASB Interpretation No. 46 or Revised FASB Interpretation No. 46 for the first reporting period that ends after December 15, 2003. As of December 31, 2003, we have completed our analysis for and have adopted Revised FASB Interpretation No. 46 for all entities other than the MCV Partnership and FMLP. We continue to evaluate and gather information regarding those entities. We will adopt the provisions of Revised FASB Interpretation No. 46 for the MCV Partnership and FMLP in the first quarter of 2004. If our completed analysis shows we have the controlling financial interest in the MCV Partnership and FMLP, we would consolidate their assets, liabilities, and activities, including $700 million of non-recourse debt, into our financial statements. Financial covenants under our financing agreements could be impacted negatively after such a consolidation. As a result, it may become necessary to seek amendments to the relevant financing agreements to modify the terms of certain of these covenants to remove the effect of this consolidation, or to refinance the relevant debt. As of December 31, 2003, our investment in the MCV Partnership was $419 million and our investment in the FMLP was $224 million. We determined that we have the controlling financial interest in three entities that are determined to be variable interest entities. We have 50 percent partnership interest in T.E.S Filer City Station Limited Partnership, Grayling Generating Station Limited Partnership, and Genesee Power Station Limited Partnership. Additionally, we have operating and management contracts and are the primary purchaser of power from each partnership through long-term power purchase agreements. Collectively, these interests provide us with the controlling financial interest as defined by the Interpretation. Therefore, we have consolidated these partnerships into our consolidated financial statements for the first time as of December 31, 2003. At December 31, 2003, total assets consolidated for these entities are $227 million and total liabilities are $164 million, including $128 million of non-recourse debt. At December 31, 2003, CMS Energy has outstanding letters of credit and guarantees of $5 million relating to these entities. At December 31, 2003, minority interest recorded for these entities totaled $36 million. We also determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities have been deconsolidated as of December 31, 2003. Company obligated Trust Preferred Securities totaling $663 million that were previously included in mezzanine equity have been eliminated due to deconsolidation. As a result of the deconsolidation, we have reflected $684 million of long-term debt -- related parties and have reflected an investment in related parties of $21 million. We are not required to, and have not, restated prior periods for the impact of this accounting change. CMS-35 Additionally, we have non-controlling interests in four other variable interest entities. FASB Interpretation No. 46 requires us to disclose certain information about these entities. The chart below details our involvement in these entities at December 31, 2003:
INVESTMENT OPERATING TOTAL NATURE OF INVOLVEMENT BALANCE AGREEMENT WITH GENERATING NAME (OWNERSHIP INTEREST) THE ENTITY COUNTRY DATE (IN MILLIONS) CMS ENERGY CAPACITY - ------------------------- ---------- ------- ----------- ------------- -------------- ---------- Loy Yang Power (49%).... Power Generator Australia 1997 $ -- Yes 2,000 MW Taweelah (40%).......... Power Generator United Arab Emirates 1999 $ 83 Yes 777 MW Jubail (25%)............ Generator -- Under Construction Saudi Arabia 2001 $ -- Yes 250 MW Shuweihat (20%)......... Generator -- Under Construction United Arab Emirates 2001 $(24)(a) Yes 1,500 MW ------------- ---------- Total................... $ 59 4,527 MW ============= ==========
- ------------------------- (a) At December 31, 2003, we recorded a negative investment in Shuweihat. The balance is comprised of our investment of $3 million reduced by our proportionate share of the negative fair value of derivative instruments of $27 million. We are required to record the negative investment due to our future commitment to make an equity investment in Shuweihat. Our maximum exposure to loss through our interests in these variable interest entities is limited to our investment balance of $59 million, Loy Yang currency translation losses of $110 million, net of tax, and letters of credit, guarantees, and indemnities relating to Taweelah and Shuweihat totaling $146 million. Included in the $146 million is a letter of credit relating to our required initial investment in Shuweihat of $70 million. We plan to contribute our initial investment when the project becomes commercially operational in 2004. STATEMENT OF POSITION, ACCOUNTING FOR CERTAIN COSTS AND ACTIVITIES RELATED TO PROPERTY, PLANT, AND EQUIPMENT: At its September 9, 2003 meeting, the Accounting Standards Executive Committee, of the American Institute of Certified Public Accountants voted to approve the Statement of Position, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. The Statement of Position is expected to be presented for FASB clearance in 2004 and would be applicable for fiscal years beginning after December 15, 2004. An asset classified as property, plant, and equipment often comprises multiple parts and costs. A component accounting policy determines the level at which those parts are recorded. Capitalization of certain costs related to property, plant, and equipment are included in the total cost. The Statement of Position could impact our component and capitalization accounting for property, plant, and equipment. We continue to evaluate the impact, if any, this Statement of Position will have upon adoption. CMS-36 (This page intentionally left blank) CMS-37 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31 ------------------------------- RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS OPERATING REVENUE........................................... $ 5,513 $ 8,673 $ 8,006 EARNINGS FROM EQUITY METHOD INVESTEES....................... 164 92 172 OPERATING EXPENSES Fuel for electric generation.............................. 256 341 297 Purchased and interchange power........................... 689 2,677 1,834 Purchased power -- related parties........................ 455 564 555 Cost of gas sold.......................................... 1,791 2,745 3,233 Other operating expenses.................................. 951 915 932 Maintenance............................................... 226 212 225 Depreciation, depletion and amortization.................. 428 412 408 General taxes............................................. 191 222 220 Asset impairment charges.................................. 95 602 323 ------- ------- ------- 5,082 8,690 8,027 ------- ------- ------- OPERATING INCOME (LOSS)..................................... 595 75 151 OTHER INCOME (DEDUCTIONS) Accretion expense......................................... (29) (31) (37) Gain (loss) on asset sales, net........................... (3) 37 (2) Interest and dividends.................................... 28 15 23 Other, net................................................ 18 (21) 3 ------- ------- ------- 14 -- (13) ------- ------- ------- FIXED CHARGES Interest on long-term debt................................ 473 404 420 Interest on long-term debt -- related parties............. 58 -- -- Other interest............................................ 59 32 83 Capitalized interest...................................... (9) (16) (35) Preferred dividends....................................... 3 2 2 Preferred securities distributions........................ 10 86 96 ------- ------- ------- 594 508 566 ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS.... 15 (433) (428) INCOME TAX EXPENSE (BENEFIT)................................ 58 (41) (94) MINORITY INTERESTS.......................................... -- 2 (7) ------- ------- ------- LOSS FROM CONTINUING OPERATIONS............................. (43) (394) (327) INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF $50 TAX EXPENSE IN 2003, $118 TAX BENEFIT IN 2002 AND $92 TAX EXPENSE IN 2001........................................... 23 (274) (128) ------- ------- ------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................................................. (20) (668) (455) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING, NET OF $13 TAX BENEFIT IN 2003, $10 TAX EXPENSE IN 2002 AND $-- IN 2001 DERIVATIVES (NOTE 7 AND NOTE 15).......................... (23) 18 (4) ASSET RETIREMENT OBLIGATION, SFAS NO. 143 (NOTE 16)....... (1) -- -- ------- ------- ------- (24) 18 (4) ------- ------- ------- NET LOSS.................................................... $ (44) $ (650) $ (459) ======= ======= =======
CMS-38
YEARS ENDED DECEMBER 31 ------------------------------ RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS, EXCEPT PER SHARE AMOUNTS CMS ENERGY NET LOSS Net Loss Available to Common Stock..................... $ (44) $ (650) $ (459) ====== ====== ====== BASIC LOSS PER AVERAGE COMMON SHARE Loss from Continuing Operations........................ $(0.30) $(2.84) $(2.50) Income (Loss) from Discontinued Operations............. 0.16 (1.97) (0.98) Income (Loss) from Changes in Accounting............... (0.16) 0.13 (0.03) ------ ------ ------ Net Loss Attributable to Common Stock.................. $(0.30) $(4.68) $(3.51) ====== ====== ====== DILUTED LOSS PER AVERAGE COMMON SHARE Loss from Continuing Operations........................ $(0.30) $(2.84) $(2.50) Income (Loss) from Discontinued Operations............. 0.16 (1.97) (0.98) Income (Loss) from Changes in Accounting............... (0.16) 0.13 (0.03) ------ ------ ------ Net Loss Attributable to Common Stock.................. $(0.30) $(4.68) $(3.51) ====== ====== ====== DIVIDENDS DECLARED PER COMMON SHARE....................... $ -- $ 1.09 $ 1.46 ------ ------ ------
The accompanying notes are an integral part of these statements. CMS-39 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ------------------------------- RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................. $ (44) $ (650) $ (459) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $6, $6, and $6, respectively)....................................... 428 412 408 Depreciation and amortization of discontinued operations.......................................... 34 73 186 Loss (gain) on disposal of discontinued operations (Note 2)............................................ 46 237 (8) Asset writedowns (Note 2)............................ 95 602 323 Capital lease and debt discount amortization......... 25 18 11 Accretion expense.................................... 29 31 37 Bad debt expense..................................... 28 22 22 Distributions from related parties in excess of (less than) earnings...................................... (41) (39) 68 Loss (gain) on sale of assets........................ 3 (37) 2 Cumulative effect of accounting changes.............. 24 (18) 4 Pension contribution................................. (560) (64) (65) Changes in assets and liabilities: Decrease in accounts receivable and accrued revenue........................................ 200 99 337 Decrease (increase) in inventories................ (288) 140 (339) Decrease in accounts payable and accrued expenses....................................... (280) (48) (388) Deferred income taxes and investment tax credit... 242 (398) 228 Changes in other assets and liabilities........... (192) 234 5 ------- ------- ------- Net cash provided by (used in) operating activities.......................................... (251) 614 372 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease)................................................. (535) (747) (1,239) Investments in partnerships and unconsolidated subsidiaries........................................... -- (55) (111) Cost to retire property................................... (72) (66) (118) Restricted cash........................................... (163) (34) (4) Investments in Electric Restructuring Implementation Plan................................................... (8) (8) (13) Investments in nuclear decommissioning trust funds........ (6) (6) (6) Proceeds from nuclear decommissioning trust funds......... 34 30 29 Proceeds from sale of assets.............................. 939 1,659 134 Other investing........................................... 14 56 (21) ------- ------- ------- Net cash provided by (used in) investing activities.......................................... 203 829 (1,349) ------- ------- -------
CMS-40
YEARS ENDED DECEMBER 31 ------------------------------- RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes, bonds and other long-term debt....... 2,080 725 2,021 Proceeds from trust preferred securities.................. -- -- 125 Issuance of common stock.................................. -- -- 326 Issuance of preferred stock............................... 272 -- -- Retirement of bonds and other long-term debt.............. (1,656) (1,834) (1,343) Common stock repurchased.................................. -- (8) (5) Payment of common stock dividends......................... -- (149) (190) Payment of capital lease obligations...................... (13) (15) (20) Increase (decrease) in notes payable...................... (470) 75 21 Other financing........................................... 17 (17) 32 ------- ------- ------- Net cash provided by (used in) financing activities.......................................... 230 (1,223) 967 ------- ------- ------- EFFECT OF EXCHANGE RATES ON CASH............................ (1) 8 (10) NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS............................................... 181 228 (20) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD.... 351 123 143 ------- ------- ------- CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD.......... $ 532 $ 351 $ 123 ======= ======= ======= OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE: CASH TRANSACTIONS Interest paid (net of amounts capitalized)................ $ 564 $ 409 $ 447 Income taxes paid (net of refunds)........................ (33) (217) (60) OPEB cash contribution.................................... 76 84 57 NON-CASH TRANSACTIONS Nuclear fuel placed under capital leases.................. $ -- $ -- $ 13 Other assets placed under capital lease................... 19 62 37 ======= ======= =======
The accompanying notes are an integral part of these statements. CMS-41 CMS ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------- RESTATED 2003 2002 ---- -------- IN MILLIONS ASSETS PLANT AND PROPERTY (AT COST) Electric utility.......................................... $ 7,600 $ 7,523 Gas utility............................................... 2,875 2,719 Enterprises............................................... 895 644 Other..................................................... 32 45 ------- ------- 11,402 10,931 Less accumulated depreciation, depletion and amortization (Note 16).............................................. 4,846 5,385 ------- ------- 6,556 5,546 Construction work-in-progress............................. 388 557 ------- ------- 6,944 6,103 ------- ------- INVESTMENTS Enterprises Investments................................... 724 724 Midland Cogeneration Venture Limited Partnership.......... 419 388 First Midland Limited Partnership......................... 224 255 Other..................................................... 23 2 ------- ------- 1,390 1,369 ------- ------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market.................................... 532 351 Restricted cash........................................... 201 38 Accounts receivable, notes receivable and accrued revenue, less allowances of $29 in 2003 and $15 in 2002......... 367 349 Accounts receivable -- Marketing, services and trading, less allowances of $11 in 2003 and $8 in 2002.......... 36 248 Accounts receivable and notes receivable -- related parties................................................ 73 186 Inventories at average cost Gas in underground storage............................. 741 491 Materials and supplies................................. 110 96 Generating plant fuel stock............................ 41 37 Assets held for sale...................................... 24 595 Price risk management assets.............................. 102 115 Prepayments and other..................................... 267 233 ------- ------- 2,494 2,739 ------- ------- NON-CURRENT ASSETS Regulatory Assets Securitized costs...................................... 648 689 Postretirement benefits................................ 162 185 Abandoned Midland project.............................. 10 11 Other.................................................. 266 168 Assets held for sale...................................... 2 2,084 Price risk management assets.............................. 177 135 Nuclear decommissioning trust funds....................... 575 536 Prepaid pension costs..................................... 388 -- Goodwill.................................................. 25 31 Notes receivable -- related parties....................... 242 160 Notes receivable.......................................... 125 126 Other..................................................... 390 445 ------- ------- 3,010 4,570 ------- ------- TOTAL ASSETS................................................ $13,838 $14,781 ======= =======
The accompanying notes are an integral part of these statements. CMS-42 CMS ENERGY CORPORATION
DECEMBER 31 ------------------- RESTATED 2003 2002 ---- -------- IN MILLIONS STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholders' equity Common stock, authorized 250.0 shares; outstanding 161.1 shares in 2003 and 144.1 shares in 2002................ $ 2 $ 1 Other paid-in capital..................................... 3,846 3,605 Accumulated other comprehensive loss...................... (419) (728) Retained deficit.......................................... (1,844) (1,800) ------- ------- 1,585 1,078 Preferred stock of subsidiary (Note 5).................... 44 44 Preferred stock........................................... 261 -- Company-obligated convertible Trust Preferred Securities of subsidiaries (Note 5)............................... -- 393 Company-obligated mandatorily redeemable Trust Preferred Securities of Consumers' subsidiaries (Note 5)......... -- 490 Long-term debt............................................ 6,020 5,357 Long-term debt -- related parties (Note 5)................ 684 -- Non-current portion of capital leases..................... 58 116 ------- ------- 8,652 7,478 ------- ------- MINORITY INTERESTS.......................................... 73 38 ------- ------- CURRENT LIABILITIES Current portion of long-term debt and capital leases...... 519 646 Notes payable............................................. -- 458 Accounts payable.......................................... 296 377 Accounts payable -- Marketing, services and trading....... 21 119 Accounts payable -- related parties....................... 40 53 Accrued interest.......................................... 130 131 Accrued taxes............................................. 285 291 Liabilities held for sale................................. 2 427 Price risk management liabilities......................... 89 96 Current portion of purchase power contracts............... 27 26 Current portion of gas supply contract obligations........ 29 25 Deferred income taxes..................................... 27 15 Other..................................................... 185 225 ------- ------- 1,650 2,889 ------- ------- NON-CURRENT LIABILITIES Postretirement benefits................................... 265 725 Deferred income taxes..................................... 615 438 Deferred investment tax credit............................ 85 91 Regulatory liabilities for income taxes, net.............. 312 297 Regulatory liabilities for cost of removal (Note 16)...... 983 907 Other regulatory liabilities.............................. 172 4 Asset retirement obligation............................... 359 -- Liabilities held for sale................................. -- 1,218 Price risk management liabilities......................... 175 135 Gas supply contract obligations........................... 208 241 Power purchase agreement -- MCV Partnership............... -- 27 Other..................................................... 289 293 ------- ------- 3,463 4,376 ------- ------- Commitments and Contingencies (Notes 2, 4, 5, 8, 10, 11) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES.............. $13,838 $14,781 ======= =======
CMS-43 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31 ---------------------------------------------------------------- RESTATED RESTATED 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- -------- -------- NUMBER OF SHARES IN THOUSANDS IN MILLIONS COMMON STOCK At beginning and end of period........ $ 2 $ 1 $ 1 OTHER PAID-IN CAPITAL At beginning of period................ 144,088 132,989 121,201 3,605 3,257 2,936 Common stock repurchased.............. (14) (39) (232) -- (8) (5) Common stock reacquired............... (217) (220) (11) (5) (1) (1) Common stock issued................... 17,273 11,358 11,681 234 357 320 Common stock reissued................. -- -- 350 1 -- 7 Issuance cost of preferred stock...... -- -- -- (8) -- -- Deferred gain (Note 5)................ -- -- -- 19 -- -- ------- ------- ------- ------- ------- ------- At end of period................. 161,130 144,088 132,989 3,846 3,605 3,257 ------- ------- ------- ------- ------- ------- ACCUMULATED OTHER COMPREHENSIVE LOSS Minimum Pension Liability At beginning of period............. (241) -- -- Minimum pension liability adjustments(a)................... 241 (241) -- ------- ------- ------- At end of period................. -- (241) -- ------- ------- ------- Investments At beginning of period............. 2 (5) (2) Unrealized gain (loss) on investments(a)................... 6 -- (3) Realized gain on investments(a).... -- 7 -- ------- ------- ------- At end of period................. 8 2 (5) ------- ------- ------- Derivative Instruments At beginning of period(b).......... (31) (28) 10 Unrealized gain (loss) on derivative instruments(a)........ 4 (7) (31) Reclassification adjustments included in consolidated net income (loss)(a)................. 19 4 (7) ------- ------- ------- At end of period................. (8) (31) (28) ------- ------- ------- FOREIGN CURRENCY TRANSLATION At beginning of period................ (458) (233) (206) Change in foreign currency translation(a)..................... 39 (225) (27) ------- ------- ------- At end of period................. (419) (458) (233) ------- ------- ------- At end of period.............. (419) (728) (266) ------- ------- ------- RETAINED DEFICIT At beginning of period(c)............. (1,800) (1,001) (352) Consolidated net loss(a).............. (44) (650) (459) Common stock dividends declared....... -- (149) (190) ------- ------- ------- At end of period................. (1,844) (1,800) (1,001) ------- ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY....... $ 1,585 $ 1,078 $ 1,991 ======= ======= =======
CMS-44
YEARS ENDED DECEMBER 31 ----------------------------- RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS (a) DISCLOSURE OF OTHER COMPREHENSIVE INCOME (LOSS): Minimum pension liability Minimum pension liability adjustments, net of tax (tax benefit) of $132, $(132), and $--, respectively...................................... $ 241 $ (241) $ -- Investments Unrealized gain (loss) on investments, net of tax (tax benefit) of $3, $--, and $(2), respectively...................................... 6 -- (3) Realized gain on investments, net of tax of $--, $--, and $--, respectively............................. -- 7 -- Derivative Instruments Unrealized gain (loss) on derivative instruments, net of tax (tax benefit) of $--, $(4), and $(13), respectively............................. 4 (7) (31) Reclassification adjustments included in net loss, net of tax (tax benefit) of $11, $2, and $(3), respectively.................................... 19 4 (7) Foreign currency translation, net...................... 39 (225) (27) Consolidated net loss.................................. (44) (650) (459) ------- ------- ------- Total Other Comprehensive Income (Loss).............. $ 265 $(1,112) $ (527) ======= ======= ======= (b) YEAR ENDED DECEMBER 31, 2001 REFLECTS THE CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE, NET OF $7 TAX (NOTE 7.) (c) BEGINNING BALANCE FOR YEAR ENDED DECEMBER 31, 2001 WAS DECREASED BY $38 MILLION DUE TO AN ADJUSTMENT TO DEFERRED TAXES RELATED TO LOY YANG (NOTE 8.)
The accompanying notes are an integral part of these statements. CMS-45 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We have determined the need to make certain adjustments to our consolidated financial statements for the fiscal years ended December 31, 2002, December 31, 2001, and December 31, 2000. Therefore, the consolidated financial statements for 2002 and 2001 have been restated from amounts previously reported. See Note 18, Restatement and Reclassification. 1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES CORPORATE STRUCTURE: CMS Energy is the parent holding company of Consumers and Enterprises. Consumers is a combination electric and gas utility company serving Michigan's Lower Peninsula. Enterprises, through subsidiaries, is engaged in domestic and international diversified energy businesses including independent power production, natural gas transmission, storage and processing, and energy services. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of CMS Energy, Consumers and Enterprises and all other entities in which we have a controlling financial interest, in accordance with Revised FASB Interpretation No. 46. Intercompany transactions and balances have been eliminated. We use the equity method of accounting for investments in companies and partnerships that are not consolidated where we have significant influence over operations and financial policies, but not a controlling financial interest. USE OF ESTIMATES: We prepare our financial statements in conformity with accounting principles generally accepted in the United States. Management is required to make estimates using assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. We are required to record estimated liabilities in the financial statements when it is probable that a loss will be incurred in the future as a result of a current event, and when an amount can be reasonably estimated. We have used this accounting principle to record estimated liabilities as discussed in Note 4, Uncertainties. REVENUE RECOGNITION POLICY: We recognize revenues from deliveries of electricity and natural gas, and the transportation, processing, and storage of natural gas when services are provided. Sales taxes are recorded as liabilities and are not included in revenues. Revenues on sales of marketed electricity, natural gas, and other energy products are recognized at delivery. Mark-to-market changes in the fair values of energy trading contracts that qualify as derivatives are recognized as revenues in the periods in which the changes occur. CAPITALIZED INTEREST: We are required to capitalize interest on certain qualifying assets that are undergoing activities to prepare them for their intended use. Capitalization of interest for the period is limited to the actual interest cost that is incurred, and our non-regulated businesses are prohibited from imputing interest costs on any equity funds. Our regulated businesses are permitted to capitalize an allowance for funds used during construction on regulated construction projects and to include such amounts in plant in service. CASH EQUIVALENTS AND RESTRICTED CASH: All highly liquid investments with an original maturity of three months or less are considered cash equivalents. At December 31, 2003, our restricted cash on hand was $201 million. Restricted cash primarily includes cash collateral for letters of credit to satisfy certain debt agreements and cash dedicated for repayment of securitization bonds. It is classified as a current asset as the related letters of credit mature within one year and the payments on the related securitization bonds occur within one year. COAL INVENTORY: We use the weighted average cost method for valuing coal inventory. EARNINGS PER SHARE: Basic and diluted earnings per share are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for purposes of determining diluted earnings per share, includes the effects of dilutive stock options and convertible securities. The effect on number of shares of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable. For earnings per share computation, see Note 6, Earnings Per Share and Dividends. CMS-46 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FINANCIAL INSTRUMENTS: We account for investments in debt and equity securities in accordance with SFAS No. 115. These debt and equity securities are classified into three categories: held-to-maturity, trading, or available-for-sale. Our investments in equity securities are classified as available-for-sale. They are reported at fair value, with any unrealized gains or losses resulting from changes in fair value reported in equity as part of accumulated other comprehensive income, and are excluded from earnings unless such changes in fair value are determined to be other than temporary. Unrealized gains or losses from changes in the fair value of our nuclear decommissioning investments are reported as regulatory liabilities. The fair value of these investments is determined from quoted market prices. For additional details regarding financial instruments, see Note 7, Financial and Derivative Instruments. FOREIGN CURRENCY TRANSLATION: Our subsidiaries and affiliates whose functional currency is not the U.S. dollar translate their assets and liabilities into U.S. dollars at the exchange rates in effect at the end of the fiscal period. We translate revenue and expense accounts of such subsidiaries and affiliates into U.S. dollars at the average exchange rates that prevailed during the period. The gains or losses that result from this process, and gains and losses on intercompany foreign currency transactions that are long-term in nature that we do not intend to settle in the foreseeable future, are shown in the stockholders' equity section of the balance sheet. For subsidiaries operating in highly inflationary economies, the U.S. dollar is considered to be the functional currency, and transaction gains and losses are included in determining net income. Gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those that are hedged, are included in determining net income. The change in the foreign currency translation adjustment increased equity by $39 million for the year ended December 31, 2003. The change in the foreign currency translation adjustment decreased equity by $225 million for the year ended December 31, 2002. GAS INVENTORY: Consumers uses the weighted average cost method for valuing working gas and recoverable cushion gas in underground storage facilities. GOODWILL: Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. Goodwill is not amortized, but is tested annually for impairment. For additional information, see Note 3, Goodwill. IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: We evaluate potential impairments of our investments in long-lived assets other than goodwill based on various analyses, including the projection of undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment loss is recognized and the asset is written down to its estimated fair value. MAINTENANCE AND DEPRECIATION: We charge property repairs and minor property replacements to maintenance expense. We also charge planned major maintenance activities to operating expense unless the cost represents the acquisition of additional components or the replacement of an existing component. We capitalize the cost of plant additions and replacements. We depreciate utility property on straight-line and units-of-production rates approved by the MPSC. The composite depreciation rates for our properties are:
YEARS ENDED DECEMBER 31 --------------------- 2003 2002 2001 ---- ---- ---- Electric utility property................................... 3.1% 3.1% 3.1% Gas utility property........................................ 4.6% 4.5% 4.4% Other property.............................................. 8.1% 7.2% 11.2%
NUCLEAR FUEL COST: We amortize nuclear fuel cost to fuel expense based on the quantity of heat produced for electric generation. For nuclear fuel used after April 6, 1983, we charge disposal costs to nuclear fuel expense, recover these costs through electric rates, and remit them to the DOE quarterly. We elected to defer payment for CMS-47 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) disposal of spent nuclear fuel burned before April 7, 1983. As of December 31, 2003, we have recorded a liability to the DOE for $139 million, including interest, which is payable upon the first delivery of spent nuclear fuel to the DOE. The amount of this liability, excluding a portion of interest, was recovered through electric rates. For additional details on disposal of spent nuclear fuel, see Note 4, Uncertainties, "Other Consumers' Electric Utility Uncertainties -- Nuclear Matters." NUCLEAR PLANT DECOMMISSIONING: Our site-specific decommissioning cost estimates for Big Rock and Palisades assume that each plant site will eventually be restored to conform to the adjacent landscape and all contaminated equipment will be disassembled and disposed of in a licensed burial facility. Trust Funds: MPSC orders, received in March 1999 for Big Rock and December 1999 for Palisades, provided for fully funding the decommissioning trust funds for both sites. The December 1999 order set the annual decommissioning surcharge for Palisades at $6 million. In 2003, we collected $6 million from our electric customers for the decommissioning of our Palisades nuclear plant. Amounts collected from electric retail customers and deposited in trusts, including trust earnings, are credited to a regulatory liability. In December 2000, we stopped depositing funds in the Big Rock trust fund based on its funding status at that time. However, the current level of funds provided by the trust may not be adequate to fully fund the decommissioning of Big Rock. This is due in part to the DOE's failure to accept spent nuclear fuel and lower returns on the trust fund. We are attempting to recover our additional costs for storing spent nuclear fuel through litigation, as discussed in Note 4, Uncertainties, "Other Consumers' Electric Utility Uncertainties -- Nuclear Matters." To the extent the funds are not sufficient, we would seek additional relief from the MPSC. We can make no assurance that the MPSC would grant this request. In March 2001, we filed with the MPSC a "Report on the Adequacy of the Existing Provision for Nuclear Plant Decommissioning" for each plant reflecting decommissioning cost estimates of $349 million for Big Rock, excluding spent nuclear fuel storage costs, and $739 million for Palisades, in 2000 dollars. We are required to file the next such reports with the MPSC by March 31, 2004 for Big Rock and Palisades and we are in the process of preparing updated cost estimates. Big Rock: In 1997, Big Rock closed permanently and plant decommissioning began. We estimate that the Big Rock site will be returned to a natural state by the end of 2012 if the DOE begins removing the spent nuclear fuel by 2010. The following table shows our Big Rock decommissioning activities:
YEAR-TO-DATE ACCUMULATIVE DECEMBER 31, 2003 TOTAL-TO-DATE ----------------- ------------- IN MILLIONS ~~Decommissioning expenditures................................ $45 $263 Withdrawals from trust funds................................ 34 243~~
These activities had no material impact on net income. At December 31, 2003, we have an investment in nuclear decommissioning trust funds of $88 million for Big Rock. In addition, at December 31, 2003, we have charged $7 million to our FERC jurisdictional depreciation reserve for the decommissioning of Big Rock. Palisades: In December 2000, the NRC extended the Palisades operating license to March 2011 and the impact of this extension was included as part of our March 2001 filing with the MPSC. At December 31, 2003, we have an investment in the MPSC nuclear decommissioning trust funds of $477 million for Palisades. In addition, at December 31, 2003, we have a FERC decommissioning trust fund with a balance of $10 million. For additional details on decommissioning costs accounted for as asset retirement obligations, see Note 16, Asset Retirement Obligations. PROPERTY, PLANT, AND EQUIPMENT: We record property, plant and equipment at original cost when placed into service. When regulated assets are retired, or otherwise disposed of in the ordinary course of business, the CMS-48 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) original cost is charged to accumulated depreciation and cost of removal, less salvage is recorded as a regulatory liability. For additional details, see Note 16, Asset Retirement Obligations. An allowance for funds used during construction is capitalized on regulated construction projects. With respect to the retirement or disposal of non-regulated assets, the resulting gains or losses are recognized in income. Property, plant, and equipment at December 31, 2003 and 2002, was as follows:
ESTIMATED DEPRECIABLE YEARS ENDED DECEMBER 31 LIFE IN YEARS(E) 2003 2002 - ----------------------- ---------------- ---- ---- IN MILLIONS Electric: Generation................................................ 13-75 $3,332 $3,489 Distribution.............................................. 12-85 3,799 3,619 Other..................................................... 5-50 388 300 Capital leases(a)......................................... 81 115 Gas: Underground storage facilities(b)......................... 30-75 232 217 Transmission.............................................. 15-75 342 310 Distribution.............................................. 35-75 1,976 1,899 Other..................................................... 5-48 300 237 Capital leases(a)......................................... 25 56 Enterprises: IPP....................................................... 3-40 511 250 CMS Gas Transmission...................................... 5-40 119 120 CMS Electric and Gas...................................... 2-30 241 227 Other..................................................... 4-25 24 47 Other:...................................................... 7-71 32 45 Construction work-in-progress(c)............................ 388 557 Less accumulated depreciation, depletion, and amortization.............................................. 4,846 5,385 ------ ------ Net property, plant, and equipment(d)....................... $6,944 $6,103 ====== ======
- ------------------------- (a) Capital leases presented in this table are gross amounts. Amortization of capital leases was $38 million in 2003 and $96 million in 2002. (b) Includes unrecoverable base natural gas in underground storage of $23 million at December 31, 2003 and $23 million at December 31, 2002, which is not subject to depreciation. (c) Included in construction costs at December 31, 2002 was $54 million, relating to the capital lease of our main headquarters. We purchased the main headquarters in November 2003. (d) Included in net property, plant and equipment are intangible assets primarily related to software development costs, consents, and rights of way. The estimated amortization life for software development costs is seven years and other intangible amortization lives range from 50 to 75 years. Intangible assets at December 31, 2003 and 2002 were as follows: CMS-49 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31 2003 2002 - ----------------------- ---- ---- IN MILLIONS ------------ Intangible assets at cost................................... $419 $479 Less accumulated amortization............................... 211 236 ---- ---- Net intangible assets....................................... $208 $243 ==== ====
(e) The following table illustrates the depreciable life for electric and gas structures and improvements.
ESTIMATED ESTIMATED DEPRECIABLE DEPRECIABLE ELECTRIC LIFE IN YEARS GAS LIFE IN YEARS - -------- ------------- --- ------------- Generation: Underground storage facilities 45 Coal 39-43 Transmission 60 Nuclear 25 Distribution 60 Hydroelectric 55-71 Other 42-48 Other 32 Distribution 50-60 Other 40-42
RECLASSIFICATIONS: Certain prior year amounts have been reclassified for comparative purposes. These reclassifications did not affect consolidated net income for the years presented. RELATED-PARTY TRANSACTIONS: Consumers paid $64 million in 2003, $67 million in 2002, and $71 million in 2001 for electric generating capacity and energy from affiliates of Enterprises. CMS Energy recorded interest charges on long-term debt to related parties of $58 million in 2003. Affiliates of CMS Energy sold, stored and transported natural gas and provided other services to the MCV Partnership totaling $17 million in 2003, $41 million in 2002, and $35 million in 2001. We expensed purchases of capacity and energy from the MCV Partnership totaling $455 million in 2003, $497 million in 2002, and $488 million in 2001. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Note 4, Uncertainties and Note 15, Summarized Financial Information of Significant Related Energy Supplier. Other related-party transactions are immaterial. TRADE RECEIVABLES: We record our accounts receivable at fair value. Accounts deemed uncollectable are charged to operating expense. UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: We amortize premiums, discounts and expenses incurred in connection with the issuance of outstanding long-term debt over the terms of the issues. For the regulated portions of our businesses, if debt is refinanced, we amortize any unamortized premiums, discounts and expenses over the term of the new debt. UTILITY REGULATION: We account for the effects of regulation based on the regulated utility accounting standard SFAS No. 71. As a result, the actions of regulators affect when we recognize revenues, expenses, assets, and liabilities. In 1999, we received MPSC electric restructuring orders, which, among other things, identified the terms and timing for implementing electric restructuring in Michigan. Consistent with these orders and EITF No. 97-4, we discontinued the application of SFAS No. 71 for the energy supply portion of our business because we expected to implement ROA at competitive market based rates for our electric customers. CMS-50 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Since 1999, there have been significant legislative and regulatory changes in Michigan that has resulted in: - electric supply customers of utilities remaining on cost-based rates, and - utilities being provided the opportunity to recover Stranded Costs associated with electric restructuring, from customers who choose an alternative electric supplier. During 2002, we re-evaluated the criteria used to determine if an entity or a segment of an entity meets the requirements to apply regulated utility accounting, and determined that the energy supply portion of our business could meet the criteria if certain regulatory events occurred. In December 2002, we received a MPSC Stranded Cost order that allowed us to re-apply regulatory accounting standard SFAS No. 71 to the energy supply portion of our business. Re-application of SFAS No. 71 had no effect on the prior discontinuation accounting, but allowed us to apply regulatory accounting treatment to the energy supply portion of our business beginning in the fourth quarter of 2002, including regulatory accounting treatment of costs required to be recognized in accordance with SFAS No. 143. For additional details, see Note 12, Asset Retirement Obligations. SFAS No. 144 imposes strict criteria for retention of regulatory-created assets by requiring that such assets be probable of future recovery at each balance sheet date. Management believes these assets are probable of future recovery. The following regulatory assets and liabilities, which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets. We expect to recover these costs through rates over periods of up to 14 years. We recognized an OPEB transition obligation in accordance with SFAS No. 106 and established a regulatory asset for this amount that we expect to recover in rates over the next nine years.
DECEMBER 31 ---------------- 2003 2002 ---- ---- IN MILLIONS Securitized costs (Note 4).................................. $ 648 $ 689 Postretirement benefits (Note 10)........................... 181 204 Electric Restructuring Implementation Plan (Note 4)......... 91 83 Manufactured gas plant sites (Note 4)....................... 67 69 Abandoned Midland project................................... 10 11 Unamortized debt............................................ 51 14 Asset retirement obligation (Note 16)....................... 49 -- Other....................................................... 8 2 ------ ------ Total regulatory assets..................................... $1,105 $1,072 ====== ====== Cost of removal (Note 16)................................... $ 983 $ 907 Income taxes (Note 8)....................................... 312 297 Asset retirement obligation (Note 16)....................... 168 -- Other....................................................... 4 4 ------ ------ Total regulatory liabilities................................ $1,467 $1,208 ====== ======
In October 2000, we received an MPSC order authorizing us to securitize certain regulatory assets up to $469 million, net of tax, see Note 4, Uncertainties, "Consumers' Electric Utility Restructuring Matters -- Securitization." Accordingly, in December 2000, we established a regulatory asset for securitized costs of $709 million, before tax, that had previously been recorded in other regulatory asset accounts. To prepare for the financing of the securitized assets and the subsequent retirement of debt with Securitization proceeds, issuance CMS-51 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) fees were capitalized as a part of Securitization costs. These issuance costs are amortized each month for up to fourteen years. The components of the unamortized securitized costs are illustrated below.
DECEMBER 31 ------------ 2003 2002 ---- ---- IN MILLIONS Unamortized nuclear costs................................... $405 $405 Postretirement benefits..................................... 84 84 Income taxes................................................ 203 203 Uranium enrichment facility................................. 16 16 Other....................................................... 12 12 Accumulated Securitization cost amortization................ (72) (31) ---- ---- Total unamortized securitized costs......................... $648 $689 ==== ====
2: DISCONTINUED OPERATIONS, OTHER ASSET SALES, IMPAIRMENTS, AND RESTRUCTURING Our continued focus on financial improvement has led to discontinuing operations, completing many asset sales, impairing some assets, and incurring costs to restructure our business. Gross cash proceeds received from the sale of assets totaled $939 million in 2003 and $1.659 billion in 2002. DISCONTINUED OPERATIONS We have discontinued the following operations:
PRETAX AFTER-TAX BUSINESS/PROJECT DISCONTINUED GAIN(LOSS) GAIN(LOSS) STATUS ---------------- ------------ ---------- ---------- ------ IN MILLIONS Equatorial Guinea(a)................ December 2001 $ 497 $310 Sold January 2002 Powder River........................ March 2002 17 11 Sold May 2002 Zirconium Recovery.................. June 2002 (47) (31) Abandoned CMS Viron........................... June 2002 (14) (9) Sold June 2003 Oil and Gas(b)...................... September 2002 (126) (82) Sold September 2002 Panhandle(c)........................ December 2002 (39) (44) Sold June 2003 Field Services...................... December 2002 (5) (1) Sold July 2003 Marysville.......................... June 2003 2 1 Sold November 2003 Parmelia(d)......................... December 2003 -- -- Held for sale
(a) In the first quarter of 2003, we settled a liability with the purchaser of Equatorial Guinea and reversed the remaining excess reserve. This settlement resulted in a gain of $6 million after-tax, which is included in discontinued operations. (b) As a result of the sale of CMS Oil and Gas, we recorded liabilities for certain sale indemnification obligations and other matters. In September 2003, we re-evaluated our exposure to the obligations and reduced the carrying value of these liabilities by $8 million after-tax. This adjustment is reported in discontinued operations. (c) The Pension Plan retained pension payment obligations for Panhandle employees who were vested under the Pension Plan. Panhandle employees are no longer eligible to accrue additional benefits. Because of the significant change in the makeup of the plan, a remeasurement of the obligation at the date of sale was required. The remeasurement resulted in a $4 million increase in our 2003 OPEB expense, as well as an additional charge to accumulated other comprehensive income of approximately $34 million ($22 million after-tax) as a result of the increase in the additional minimum pension liability. Additionally, a significant CMS-52 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) number of Panhandle employees elected to retire as of July 1, 2003 under the CMS Energy Employee Pension Plan. As a result, we have recorded a $25 million ($16 million after-tax) settlement loss, and a $10 million ($7 million after-tax) curtailment gain, pursuant to the provisions of SFAS No. 88, which is reflected in discontinued operations. (d) In December 2003, we began reporting the operations of our Parmelia business in discontinued operations and reduced the carrying amount of our Parmelia business to reflect fair value. The $26 million after-tax adjustment is reported in discontinued operations. We expect the sale of Parmelia to occur in 2004. Due to lack of progress on the sale, we reclassified our international energy distribution business, which includes CPEE and SENECA, from discontinued operations to continuing operations for the years 2003, 2002, and 2001. When we initially reported the international energy distribution business as a discontinued operation in 2001, we applied APB Opinion No. 30, which allowed us to record a provision for anticipated operating losses. We currently apply FASB No. 144, which does not allow us to record a provision for future operating losses. Therefore, in the process of reclassifying the international energy distribution business to continuing operations and reversing such provisions, we increased our net loss by $3 million in 2002 and decreased our net loss by $3 million in 2001. In 2003, there was an increase to net income of $75 million as a result of reversing the previously recognized impairment loss in discontinued operations. At December 31, 2003, "Assets held for sale" includes Parmelia, Bluewater Pipeline, and our investment in the American Gas Index fund. Although Bluewater Pipeline and the American Gas Index fund are considered held for sale, they did not meet the criteria for discontinued operations. At December 31, 2002, "Assets held for sale" includes Panhandle, CMS Viron, CMS Field Services, Marysville, and Parmelia. The major classes of assets and liabilities held for sale are as follows:
AS OF DECEMBER 31 ---------------- RESTATED 2003 2002 ---- -------- IN MILLIONS Assets Cash...................................................... $ 7 $ 82 Accounts receivable....................................... 2 133 Property, plant and equipment -- net...................... 2 2,003 Goodwill.................................................. -- 117 Other..................................................... 15 344 --- ------ Total assets held for sale.................................. $26 $2,679 === ====== Liabilities Accounts payable.......................................... $ 2 $ 74 Long-term debt............................................ -- 1,150 Minority interest......................................... -- 45 Other..................................................... -- 376 --- ------ Total liabilities held for sale............................. $ 2 $1,645 === ======
CMS-53 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following amounts are reflected in the Consolidated Statements of Income (Loss) for discontinued operations:
YEARS ENDED DECEMBER 31 ---------------------------- RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS Revenues.................................................... $504 $ 891 $1,453 ==== ===== ====== Discontinued operations: Pretax gain (loss) from discontinued operations........... $115 $ (38) $ (53) Income tax expense (benefit).............................. 46 (1) 83 ---- ----- ------ Income (loss) from discontinued operations................ 69 (37) (136) ==== ===== ====== Pretax gain (loss) on disposal of discontinued operations............................................. (42) (354) 17 Income tax expense (benefit).............................. 4 (117) 9 ---- ----- ------ Gain (loss) on disposal of discontinued operations........ (46) (237) 8 ---- ----- ------ Income (loss) from discontinued operations.................. $ 23 $(274) $ (128) ==== ===== ======
The income (loss) from discontinued operations includes a reduction in asset values, a provision for anticipated closing costs, and a portion of the Parent Company's interest expense. Interest expense of $22 million for 2003, $71 million for 2002 and $86 million for 2001 has been allocated based on a ratio of the expected proceeds for the asset to be sold divided by the Parent Company's total capitalization of each discontinued operation times the Parent Company's interest expense. OTHER ASSET SALES Our other asset sales include the following non-strategic and under-performing assets. The impacts of these sales are included in "Gain (loss) on asset sales, net" in the Consolidated Statements of Income (Loss). In 2003, we sold the following assets that did not meet the definition of, and therefore were not reported as, discontinued operations:
PRETAX AFTER-TAX DATE SOLD BUSINESS/PROJECT GAIN (LOSS) GAIN (LOSS) - --------- ---------------- ----------- ----------- IN MILLIONS January CMS MST Wholesale Gas....................................... $(6) $(4) March CMS MST Wholesale Power..................................... 2 1 June Guardian Pipeline........................................... (4) (3) December CMS Land -- Arcadia......................................... 3 2 Various Other....................................................... 2 1 --- --- Total loss on asset sales................................... $(3) $(3) === ===
In June 2003, we received three million shares of Southern Union common stock worth $49 million from the sale of Panhandle, a discontinued operation. In July 2003, Southern Union declared a five percent common stock dividend payable July 31, 2003, to shareholders of record as of July 17, 2003. As a result of the stock dividend, on September 30, 2003, we held 3.15 million shares of Southern Union common stock worth $54 million based on the closing price of $17.00 per share. The $2 million increase in value was recorded in dividend income. In October 2003, we sold our 3.15 million shares of Southern Union common stock to a private investor for $17.77 per share. The additional $5 million gain was recorded in other income in 2003. CMS-54 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In 2002, we sold the following assets that did not meet the definition of, and therefore were not reported as, discontinued operations:
PRETAX AFTER-TAX DATE SOLD BUSINESS/PROJECT GAIN (LOSS) GAIN (LOSS) - --------- ---------------- ----------- ----------- IN MILLIONS January Equatorial Guinea -- methanol plant......................... $ 19 $ 12 April Toledo Power................................................ (11) (5) May Electric Transmission System................................ 38 31 August National Power Supply....................................... 15 30 October Vasavi Power Plant.......................................... (25) (24) Various Other....................................................... 1 -- ---- ---- Total gain on asset sales................................... $ 37 $ 44 ==== ====
In 2001, we sold miscellaneous assets for a pretax loss of $2 million. In February 2004, we sold Bluewater Pipeline, a 24.9 mile pipeline that extends from Marysville, Michigan to Armada, Michigan to Bluewater Gas Storage, LLC, a subsidiary of Sempra Energy Trading Corporation. We do not expect the gain or loss on the sale to be significant. ASSET IMPAIRMENTS We record an asset impairment when we determine that the expected future cash flows from an asset would be insufficient to provide for recovery of the asset's carrying value. An asset held-in-use is evaluated for impairment by calculating the undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. If the undiscounted future cash flows are less than the carrying amount, we recognize an impairment loss. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. We estimate the fair market value of the asset utilizing the best information available. This information includes quoted market prices, market prices of similar assets, and discounted future cash flow analyses. The assets written down include both domestic and foreign electric power plants, gas processing facilities, and certain equity method and other investments. In addition, we have written off the carrying value of projects under development that will no longer be pursued. CMS-55 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The table below summarizes our asset impairments:
YEARS ENDED DECEMBER 31 ----------------------------------------------------------------- RESTATED RESTATED ------------------- ------------------- PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX 2003 2003 2002 2002 2001 2001 ------ --------- ------ --------- ------ --------- IN MILLIONS Asset impairments: Consumers.................................. $-- $-- $ -- $ -- $ 3 $ 2 Enterprises: International Energy Distribution(a).... 72 53 4 3 95 62 CMS Generation DIG(b)................................ -- -- 460 299 -- -- Michigan Power........................ -- -- 62 40 -- -- Craven................................ -- -- 23 15 -- -- National Power Supply................. -- -- -- -- 89 88 El Chocon............................. -- -- -- -- 45 42 HL Power.............................. -- -- -- -- 30 18 Other(c).............................. 16 11 20 13 16 11 Natural Gas Transmission................ -- -- -- -- 31 20 Marketing, Services and Trading......... -- -- 18 11 -- -- Other(d)................................ 7 4 15 10 14 9 --- --- ---- ---- ---- ---- Total asset impairments...................... $95 $68 $602 $391 $323 $252 === === ==== ==== ==== ====
- ------------------------- (a) In September 2003, we wrote down our investment in CMS Electric and Gas' Venezuelan electric distribution utility and an associated equipment lease to reflect fair value. The impairment was based on estimates of the utility's future cash flows, incorporating certain assumptions about Venezuela's regulatory, political, and economic environment. (b) DIG's reduced valuation was primarily a reflection of the unfavorable terms of its power purchase agreement. (c) At CMS Generation, we determined that the fair value of our equity investments was lower than its carrying amount, and that this decline in value was other than temporary. Therefore, in accordance with APB No. 18, we recognized an impairment charge of $16 million ($11 million, net of tax). (d) Includes development projects of $7 million ($4 million, net of tax) in 2003 that would no longer be pursued. RESTRUCTURING AND OTHER COSTS In June 2002, we announced a series of initiatives to reduce our annual operating costs by an estimated $50 million. As such, we: - relocated CMS Energy's corporate headquarters from Dearborn, Michigan to a new combined CMS Energy and Consumers headquarters in Jackson, Michigan in July 2003, - implemented changes to our 401(k) savings program, - implemented changes to our health care plan, and - terminated 64 employees, including five officers. Prior to December 31, 2002, 123 employees elected severance arrangements. Of these 187 officers and employees, 65 had been terminated as of December 31, 2002. All remaining terminations were completed in 2003. CMS-56 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table shows the amount charged to expense for restructuring costs, the payments made, and the unpaid balance of accrued costs at December 31, 2002 and December 31, 2003.
INVOLUNTARY LEASE TERMINATION TERMINATION TOTAL ----------- ----------- ----- IN MILLIONS Beginning accrual balance, January 1, 2002.................. $ -- $-- $ -- Expense..................................................... 22 11 33 Payments.................................................... (10) (3) (13) ---- --- ---- Ending accrual balance at December 31, 2002................. $ 12 $ 8 $ 20 ---- --- ---- Expense..................................................... 3 -- 3 Payments.................................................... (12) (2) (14) ---- --- ---- Ending accrual balance at December 31, 2003................. $ 3 $ 6 $ 9 ==== === ====
Restructuring costs for the year ended December 31, 2003, which are included in operating expenses, include $3 million of involuntary employee termination benefits. 3: GOODWILL Our goodwill balance was $25 million at December 31, 2003 and $31 million at December 31, 2002. CMS GAS TRANSMISSION: We recorded goodwill as an asset when we purchased Panhandle and began, over time, to expense a portion of goodwill. Effective January 1, 2002, a new accounting standard went into effect that required us to stop expensing goodwill and to test for impairment. We tested the value of the goodwill related to Panhandle for impairment by comparing the fair value of goodwill, as determined by independent appraisers, to the value on our books. The test results showed that the goodwill was impaired. We recorded a loss of $601 million ($369 million, after-tax), that was the amount by which the value on our books exceeded the fair value. In 2002, we also discontinued the operations of Panhandle; therefore, the $369 million after-tax goodwill impairment is reflected in discontinued operations. In 2003, we sold Panhandle. CMS MST: During the third quarter of 1999, we purchased a 100 percent interest in CMS Viron and recorded goodwill. In 2002, we performed an impairment test, which determined our goodwill related to CMS Viron was impaired. In the first quarter of 2002, we recorded a loss of $15 million ($10 million, after-tax) for goodwill impairment. In 2002, we also discontinued the operations of CMS Viron; therefore, the $10 million after-tax goodwill impairment is reflected in discontinued operations. In 2003, we sold CMS Viron. CMS-57 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Additionally, the following table represents net loss for the year 2001 without goodwill amortization expense.
RESTATED 2001 -------- IN MILLIONS Reported net loss........................................... $ (459) Add: goodwill amortization expense(a)....................... 13 ------ Adjusted net loss........................................... $ (446) Adjusted basic and diluted loss per share................... $(3.41) ======
- ------------------------- (a) Net of tax of $7 million. 4: UNCERTAINTIES Several business trends or uncertainties may affect our financial results. These trends or uncertainties have, or we reasonably expect could have, a material impact on net sales, revenues, or income from continuing operations. Such trends and uncertainties are discussed in detail below. SEC AND OTHER INVESTIGATIONS: As a result of round-trip trading transactions by CMS MST, CMS Energy's Board of Directors established a Special Committee to investigate matters surrounding the transactions and retained outside counsel to assist in the investigation. The Special Committee completed its investigation and reported its findings to the Board of Directors in October 2002. The Special Committee concluded, based on an extensive investigation, that the round-trip trades were undertaken to raise CMS MST's profile as an energy marketer with the goal of enhancing its ability to promote its services to new customers. The Special Committee found no effort to manipulate the price of CMS Energy Common Stock or affect energy prices. The Special Committee also made recommendations designed to prevent any recurrence of this practice. Previously, CMS Energy terminated its speculative trading business and revised its risk management policy. The Board of Directors adopted, and CMS Energy has implemented the recommendations of the Special Committee. CMS Energy is cooperating with other investigations concerning round-trip trading, including an investigation by the SEC regarding round-trip trades and CMS Energy's financial statements, accounting policies and controls, and an investigation by the DOJ. CMS Energy is unable to predict the outcome of these matters, and what effect, if any, these investigations will have on its business. SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of securities class action complaints were filed against CMS Energy, Consumers, and certain officers and directors of CMS Energy and its affiliates. The complaints were filed as purported class actions in the United States District Court for the Eastern District of Michigan, by shareholders who allege that they purchased CMS Energy's securities during a purported class period. The cases were consolidated into a single lawsuit and an amended and consolidated class action complaint was filed on May 1, 2003. The consolidated complaint contains a purported class period beginning on May 1, 2000 and running through March 31, 2003. It generally seeks unspecified damages based on allegations that the defendants violated United States securities laws and regulations by making allegedly false and misleading statements about CMS Energy's business and financial condition, particularly with respect to revenues and expenses recorded in connection with round-trip trading by CMS MST. CMS Energy, Consumers, and their affiliates will defend themselves vigorously but cannot predict the outcome of this litigation. DEMAND FOR ACTIONS AGAINST OFFICERS AND DIRECTORS: In May 2002, the Board of Directors of CMS Energy received a demand, on behalf of a shareholder of CMS Energy Common Stock, that it commence civil actions (i) to remedy alleged breaches of fiduciary duties by certain CMS Energy officers and directors in connection with round-trip trading by CMS MST, and (ii) to recover damages sustained by CMS Energy as a result of alleged insider trades alleged to have been made by certain current and former officers of CMS Energy CMS-58 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and its subsidiaries. In December 2002, two new directors were appointed to the Board. The Board formed a special litigation committee in January 2003 to determine whether it is in the best interest of CMS Energy to bring the action demanded by the shareholder. The disinterested members of the Board appointed the two new directors to serve on the special litigation committee. In December 2003, during the continuing review by the special litigation committee, CMS Energy was served with a derivative complaint filed on behalf of the shareholder in the Circuit Court of Jackson County, Michigan in furtherance of his demands. The date for CMS Energy and other defendants to answer or otherwise respond to the complaint was extended to June 1, 2004, subject to such further extensions as may be mutually agreed upon by the parties and authorized by the Court. CMS Energy cannot predict the outcome of this matter. ERISA LAWSUITS: CMS Energy is a named defendant, along with Consumers, CMS MST, and certain named and unnamed officers and directors, in two lawsuits brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings and Incentive Plan (the "Plan"). The two cases, filed in July 2002 in United States District Court for the Eastern District of Michigan, were consolidated by the trial judge and an amended consolidated complaint was filed. Plaintiffs allege breaches of fiduciary duties under ERISA and seek restitution on behalf of the Plan with respect to a decline in value of the shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek other equitable relief and legal fees. CMS Energy and Consumers will defend themselves vigorously but cannot predict the outcome of this litigation. GAS INDEX PRICE REPORTING INVESTIGATION: CMS Energy has notified appropriate regulatory and governmental agencies that some employees at CMS MST and CMS Field Services appeared to have provided inaccurate information regarding natural gas trades to various energy industry publications which compile and report index prices. CMS Energy is cooperating with an investigation by the DOJ regarding this matter. In November 2003, CMS MST and CMS Field Services (now Cantera Gas Company) entered into a settlement with the CFTC pursuant to which they paid a $16 million civil monetary penalty in connection with the inaccurate reporting of natural gas trading data to publications that compile and publish price indices. The settlement resolves all matters investigated by the CFTC involving CMS Energy, including round-trip trading. CMS Energy neither admits nor denies the CFTC's findings in the settlement order. CMS Energy is unable to predict the outcome of the DOJ investigation and what effect, if any, this investigation will have on its business. GAS INDEX PRICE REPORTING LITIGATION: In August 2003, Cornerstone Propane Partners, L.P. ("Cornerstone") filed a putative class action complaint in the United States District Court for the Southern District of New York against CMS Energy and dozens of other energy companies. The court ordered the Cornerstone complaint to be consolidated with similar complaints filed by Dominick Viola and Roberto Calle Gracey. The plaintiffs filed a consolidated complaint on January 20, 2004. The consolidated complaint alleges that false natural gas price reporting by the defendants manipulated the prices of NYMEX natural gas futures and options. The complaint contains two counts under the Commodity Exchange Act, one for manipulation and one for aiding and abetting violations. CMS Energy is no longer a defendant, however, CMS MST and CMS Field Services are named as defendants. (CMS Energy sold CMS Field Services to Cantera Natural Gas, Inc. but is required to indemnify Cantera Natural Gas, Inc. with respect to this action.) In a similar but unrelated matter, Texas-Ohio Energy, Inc. filed a putative class action lawsuit in the United States District Court for the Eastern District of California against a number of energy companies engaged in the sale of natural gas in the United States. CMS Energy is named as a defendant. The complaint alleges defendants entered into a price-fixing conspiracy by engaging in activities to manipulate the price of natural gas in California. The complaint contains counts alleging violations of the Sherman Act, Cartwright Act (a California Statute), and the California Business and Profession Code relating to unlawful, unfair and deceptive business practices. The plaintiff in the Texas-Ohio case has agreed to extend the time for all defendants to answer or otherwise respond until after the multi district court litigation ("MDL") panel decides whether to take the case. There is currently pending in the Nevada federal district court a MDL matter involving seven complaints originally filed in various state courts in California. These complaints make allegations similar to those in the CMS-59 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Texas-Ohio case regarding price reporting, although none contain a Sherman Act claim. Some of the defendants in the MDL matter who are also defendants in the Texas-Ohio case are trying to have the Texas-Ohio case transferred to the MDL proceeding. Benscheidt v. AEP Energy Services, Inc., et al., a new class action complaint containing allegations similar to those made in the Texas-Ohio case, albeit limited to California state law claims, was filed in California state court in February 2004. CMS Energy and CMS MST are named as defendants. Defendants are likely to seek to remove this action from the California federal district court and have it transferred to the MDL proceeding in Nevada. CMS Energy and the other CMS defendants will defend themselves vigorously, but cannot predict the outcome of these matters. CONSUMERS' UNCERTAINTIES Several business trends or uncertainties may affect Consumers' financial results and condition. These trends or uncertainties have, or we expect could have, a material impact on revenues or income from continuing electric and gas operations. Such trends and uncertainties include: Environmental - increased capital expenditures and operating expenses for Clean Air Act compliance, and - potential environmental liabilities arising from various environmental laws and regulations, including potential liability or expenses relating to the Michigan Natural Resources and Environmental Protection Acts, Superfund, and at former manufactured gas plant facilities. Restructuring - response of the MPSC and Michigan legislature to electric industry restructuring issues, - ability to meet peak electric demand requirements at a reasonable cost, without market disruption, - ability to recover any of our net Stranded Costs under the regulatory policies being followed by the MPSC, - recovery of electric restructuring implementation costs, - effects of lost electric supply load to alternative electric suppliers, and - status as an electric transmission customer, instead of an electric transmission owner-operator. Regulatory - effects of conclusions about the causes of the August 14, 2003 blackout, including exposure to liability, increased regulatory requirements, and new legislation, - effects of potential performance standards payments, - successful implementation of initiatives to reduce exposure to purchased power price increases, - responses from regulators regarding the storage and ultimate disposal of spent nuclear fuel, - potential adverse appliance service plan ruling or related legislation, - inadequate regulatory response to applications for requested rate increases, and - response to increases in gas costs, including adverse regulatory response and reduced gas use by customers. CMS-60 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other - pending litigation regarding PURPA qualifying facilities, and - pending litigation and government investigations. CONSUMERS' ELECTRIC UTILITY CONTINGENCIES ELECTRIC ENVIRONMENTAL MATTERS: Our operations are subject to environmental laws and regulations. Costs to operate our facilities in compliance with these laws and regulations generally have been recovered in customer rates. Clean Air: In 1998, the EPA issued regulations requiring the state of Michigan to further limit nitrogen oxide emissions at our coal-fired electric plants. The Michigan Department of Environmental Quality finalized its rules to comply with the EPA regulations in December 2002. It submitted these rules to the EPA for approval in the first quarter of 2003. The EPA has yet to approve the Michigan rules. If the EPA does not approve the Michigan rules, similar federal regulations will take effect. The EPA and the state regulations require us to make significant capital expenditures estimated to be $771 million. As of December 31, 2003, we have incurred $446 million in capital expenditures to comply with the EPA regulations and anticipate that the remaining $325 million of capital expenditures will be incurred between 2004 and 2009. These expenditures include installing catalytic reduction technology on some of our coal-fired electric plants. Based on the Customer Choice Act, beginning January 2004, an annual return of and on these types of capital expenditures, to the extent they are above depreciation levels, is expected to be recoverable from customers, subject to a MPSC prudency hearing. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seek modification permits from the EPA. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of "routine maintenance." If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric plants. In addition to modifying the coal-fired electric plants, we expect to purchase nitrogen oxide emissions credits for years 2004 through 2008. The cost of these credits is estimated to average $8 million per year and is accounted for as inventory. The credit inventory is expensed as the coal-fired electric plants generate electricity. The price for nitrogen oxide emissions credits is volatile and could change substantially. Future clean air regulations requiring emission controls for sulfur dioxide, nitrogen oxides, mercury, and nickel may require additional capital expenditures. Total expenditures will depend upon the final makeup of the new regulations. Water: The EPA has proposed changes to the rules that govern generating plant cooling water intake systems. The proposed rules will require significant reduction in fish killed by operating equipment. The proposed rules are scheduled to become final in the first quarter of 2004 and some of our facilities would be required to comply by 2006. We are studying the proposed rules to determine the most cost-effective solutions for compliance. Cleanup and Solid Waste: Under the Michigan Natural Resources and Environmental Protection Act, we expect that we will ultimately incur investigation and remedial action costs at a number of sites. We believe that these costs will be recoverable in rates under current ratemaking policies. We are a potentially responsible party at several contaminated sites administered under Superfund. Superfund liability is joint and several, meaning that many other creditworthy parties with substantial assets are potentially responsible with respect to the individual sites. Based on past experience, we estimate that our share of CMS-61 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the total liability for the known Superfund sites will be between $1 million and $9 million. As of December 31, 2003, we have recorded a liability for the minimum amount of our estimated Superfund liability. In October 1998, during routine maintenance activities, we identified PCB as a component in certain paint, grout, and sealant materials at the Ludington Pumped Storage facility. We removed and replaced part of the PCB material. We have proposed a plan to deal with the remaining materials and are awaiting a response from the EPA. LITIGATION: In October 2003, a group of eight PURPA qualifying facilities selling power to us filed a lawsuit in Ingham County Circuit Court. The lawsuit alleges that we incorrectly calculated the energy charge payments made pursuant to power purchase agreements with qualifying facilities. More specifically, the lawsuit alleges that we should be basing the energy charge calculation on the cost of more expensive eastern coal, rather than on the cost of the coal actually burned by us for use in our coal-fired generating plants. We believe we have been performing the calculation in the manner prescribed by the power purchase agreements, and have filed a request with the MPSC (as a supplement to the PSCR plan) that asks the MPSC to review this issue and to confirm that our method of performing the calculation is correct. We filed a motion to dismiss the lawsuit in the Ingham County Circuit Court due to the pending request at the MPSC in regard to the PSCR plan case. In February 2004, the judge ruled on the motion and deferred to the primary jurisdiction of the MPSC. This ruling effectively suspends the lawsuit until the MPSC rules. Although only eight qualifying facilities have raised the issue, the same energy charge methodology is used in the PPA with the MCV Partnership and in approximately 20 additional power purchase agreements with us, representing a total of 1,670 MW of electric capacity. We cannot predict the outcome of this matter. CONSUMERS' ELECTRIC UTILITY RESTRUCTURING MATTERS ELECTRIC RESTRUCTURING LEGISLATION: In June 2000, the Michigan legislature passed electric utility restructuring legislation known as the Customer Choice Act. This act: - allows all customers to choose their electric generation supplier effective January 1, 2002, - provides a one-time five percent residential electric rate reduction, - froze all electric rates through December 31, 2003, and established a rate cap for residential customers through at least December 31, 2005, and a rate cap for small commercial and industrial customers through at least December 31, 2004, - allows deferred recovery of an annual return of and on capital expenditures in excess of depreciation levels incurred during and before the rate freeze-cap period, - allows for the use of Securitization bonds to refinance qualified costs, - allows recovery of net Stranded Costs and implementation costs incurred as a result of the passage of the act, - requires Michigan utilities to join a FERC-approved RTO or sell their interest in transmission facilities to an independent transmission owner, - requires Consumers, Detroit Edison, and AEP to jointly expand their available transmission capability by at least 2,000 MW, and - establishes a market power supply test that, if not met, may require transferring control of generation resources in excess of that required to serve retail sales requirements. The following summarizes our status under the last three provisions of the Customer Choice Act. First, we chose to sell our interest in our transmission facilities to an independent transmission owner in order to comply with the Customer Choice Act; for additional details regarding the sale of the transmission facility, see "Transmission Sale" within this section. Second, in July 2002, the MPSC issued an order approving our plan to CMS-62 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) achieve the increased transmission capacity required under the Customer Choice Act. The MPSC found that once the planned projects were completed and verification was submitted, a utility was in technical compliance. We have completed the transmission capacity projects identified in the plan and have submitted verification of this fact to the MPSC. We believe we are in full compliance. Lastly, in September 2003, the MPSC issued an order finding that we are in compliance with the market power supply test set forth in the Customer Choice Act. ELECTRIC ROA PLAN: In 1998, we submitted a plan for electric ROA to the MPSC. In March 1999, the MPSC issued orders generally supporting the plan. The Customer Choice Act states that the MPSC orders issued before June 2000 are in compliance with this act and enforceable by the MPSC. Those MPSC orders: - allow electric customers to choose their supplier, - authorize recovery of net Stranded Costs from ROA customers and implementation costs from all customer classes, and - confirm any voluntary commitments of electric utilities. The MPSC approved revised tariffs that establish the rates, terms, and conditions under which retail customers are permitted to choose an electric supplier. These revised tariffs allow ROA customers, upon as little as 30 days notice to us, to return to our generation service at current tariff rates. If any class of customers' (residential, commercial, or industrial) ROA load reaches ten percent of our total load for that class of customers, then returning ROA customers for that class must give 60 days notice to return to our generation service at current tariff rates. However, we may not have capacity available to serve returning ROA customers that is sufficient or reasonably priced. As a result, we may be forced to purchase electricity on the spot market at higher prices than we can recover from our customers during the rate cap periods. We cannot predict the total amount of electric supply load that may be lost to competitor suppliers. As of March 2004, alternative electric suppliers are providing 735 MW of load. This amount represents nine percent of the total distribution load and an increase of 42 percent compared to March 2003. We cannot predict whether the Stranded Cost recovery method adopted by the MPSC will be applied in a manner that will fully offset any associated margin loss from ROA. In February 2004, the MPSC issued an order on Detroit Edison's request for rate relief for costs associated with customers leaving under electric customer choice. The MPSC order allows Detroit Edison to charge a transition surcharge of approximately 0.4 cent per kWh to ROA customers and eliminates securitization offsets of 0.7 cents per kWh for primary service customers and 0.9 cents per kWh for secondary service customers. We are seeking similar recovery of Stranded Costs due to ROA customers leaving our system and are encouraged by this ruling. ELECTRIC RESTRUCTURING PROCEEDINGS: Below is a discussion of our electric restructuring proceedings. They are: - Securitization, - Stranded Costs, - implementation costs, and - transmission. Securitization: The Customer Choice Act allows for the use of Securitization bonds to refinance certain qualified costs. Since Securitization involves issuing bonds secured by a revenue stream from rates collected directly from customers to service the bonds, Securitization bonds typically have a higher credit rating than CMS-63 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) conventional utility corporate financing. In 2000 and 2001, the MPSC issued orders authorizing us to issue Securitization bonds. We issued our first Securitization bonds in late 2001. Securitization resulted in: - lower interest costs, and - longer amortization periods for the securitized assets. We will recover the repayment of principal, interest, and other expenses relating to the bond issuance through a Securitization charge and a tax charge that began in December 2001. These charges are subject to an annual true up until one year prior to the last scheduled bond maturity date, and no more than quarterly thereafter. The December 2003 true up modified the total Securitization and related tax charges from 1.746 mills per kWh to 1.718 mills per kWh. There will be no impact on customer bills from Securitization for most of our electric customers until the Customer Choice Act cap period expires, and an electric rate case is processed. Securitization charge collections, $50 million for the twelve months ended December 31, 2003, and $52 million for the twelve months ended December 31, 2002, are remitted to a trustee. Securitization charge collections are restricted to the repayment of the principal and interest on the Securitization bonds and payment of the ongoing expenses of Consumers Funding. Consumers Funding is legally separate from Consumers. The assets and income of Consumers Funding, including the securitized property, are not available to creditors of Consumers or CMS Energy. In March 2003, we filed an application with the MPSC seeking approval to issue additional Securitization bonds. In June 2003, the MPSC issued a financing order authorizing the issuance of Securitization bonds in the amount of $554 million. This amount relates to Clean Air Act expenditures and associated return on those expenditures through December 31, 2002; ROA implementation costs, and previously authorized return on those expenditures through December 31, 2000; and other up front qualified costs related to issuance of the Securitization bonds. The MPSC rejected the portion of the application related to pension costs. The MPSC based its decision on the reasoning that a rebounding economy and stock market could potentially reverse recent Pension Plan losses. Also, the MPSC rejected Palisades expenditures previously not securitized as eligible securitized costs; therefore, these costs will be included in a future electric rate case proceeding with the MPSC and as a component of the 2002 net Stranded Cost calculation. In July 2003, we filed for rehearing and clarification on a number of features in the financing order. In December 2003, the MPSC issued its order on rehearing, which rejected our requests for clarification and modification to the dividend payment restriction, failed to rule directly on the accounting clarifications requested, and remanded the proceeding to the ALJ for additional proceedings to address rate design. We filed testimony regarding the remanded proceeding in February 2004. The financing order will become effective after acceptance by us and resolution of any appeals. Stranded Costs: The Customer Choice Act allows electric utilities to recover their net Stranded Costs, without defining the term. The Act directs the MPSC to establish a method of calculating net Stranded Costs and of conducting related true-up adjustments. In December 2001, the MPSC Staff recommended a methodology, which calculated net Stranded Costs as the shortfall between: - the revenue required to cover the costs associated with fixed generation assets and capacity payments associated with purchase power agreements, and - the revenues received from customers under existing rates available to cover the revenue requirement. We are authorized by the MPSC to use deferred accounting to recognize the future recovery of costs determined to be stranded. According to the MPSC, net Stranded Costs are to be recovered from ROA customers through a Stranded Cost transition charge. However, the MPSC has not yet allowed such a transition charge and we have not recorded regulatory assets to recognize the future recovery of such costs. CMS-64 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In 2002 and 2001, the MPSC issued orders finding that we experienced zero net Stranded Costs from 1999 to 2001. The MPSC also declined to resolve numerous issues regarding the net Stranded Cost methodology in a way that would allow a reliable prediction of the level of Stranded Costs for future years. We are currently in the process of appealing these orders with the Michigan Court of Appeals and the Michigan Supreme Court. In March 2003, we filed an application with the MPSC seeking approval of net Stranded Costs incurred in 2002, and for approval of a net Stranded Cost recovery charge. Our net Stranded Costs incurred in 2002 are estimated to be $38 million with the issuance of Securitization bonds that include Clean Air Act investments, or $85 million without the issuance of Securitization bonds that include Clean Air Act investments. The MPSC scheduled hearings for our 2002 Stranded Cost application to take place during the second quarter of 2004. Once a final financing order on Securitization is reached, we will know the amount of our request for net Stranded Cost recovery for 2002. We cannot predict how the MPSC will rule on our request for the recoverability of Stranded Costs. Implementation Costs: Since 1997, we have incurred significant electric utility restructuring implementation costs. The Customer Choice Act allows electric utilities to recover their implementation costs. The following table outlines the applications filed by us with the MPSC and the status of recovery for these costs.
YEAR FILED YEAR INCURRED REQUESTED PENDING ALLOWED DISALLOWED ---------- ------------- --------- ------- ------- ---------- IN MILLIONS 1999...................................... 1997 & 1998 $20 $ -- $15 $5 2000...................................... 1999 30 -- 25 5 2001...................................... 2000 25 -- 20 5 2002...................................... 2001 8 -- 8 -- 2003...................................... 2002 2 2 Pending Pending
The MPSC disallowed certain costs, determining that these amounts did not represent costs incremental to costs already reflected in electric rates. In the order received for the year 2001, the MPSC also reserved the right to reevaluate the implementation costs depending upon the progress and success of the ROA program, and ruled that due to the rate freeze imposed by the Customer Choice Act, it was premature to establish a cost recovery method for the allowable implementation costs. In addition to the amounts shown above, we incurred and deferred as a regulatory asset, as of December 31, 2003, $2 million of additional implementation costs and $19 million for the cost of money associated with total implementation costs. We believe the implementation costs and associated cost of money are fully recoverable in accordance with the Customer Choice Act. Cash recovery from customers is expected to begin after the rate cap period expires. The rate cap expired for large commercial and industrial customers on December 31, 2003. We have asked to include implementation costs through December 31, 2000 in the pending Securitization case. If approved, the sale of Securitization bonds will allow for the recovery of a significant portion of these costs. We cannot predict the amount the MPSC will approve as allowable costs. Also, we are pursuing authorization at the FERC for MISO to reimburse us for $8 million in certain electric utility restructuring implementation costs related to our former participation in the development of the Alliance RTO, a portion of which has been expensed. In May 2003, the FERC issued an order denying MISO's request for authorization to reimburse us. In June 2003, we filed a joint petition with MISO for rehearing with the FERC, which the FERC denied in September 2003. We appealed the FERC ruling at the United States Court of Appeals for the District of Columbia and are pursuing other potential means of recovery at the FERC. In conjunction with our appeal of the September order denying recovery, MISO agreed to file a request with the FERC seeking authority to reimburse METC. As part of the contract for the sale of our former transmission system, should the FERC approve the new MISO filing, METC is contractually obligated to flow-through to us the full amount of any Alliance RTO start-up costs that it is authorized to recover by FERC. We cannot predict the outcome of the CMS-65 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) appeal process, the MISO request, or the ultimate amount, if any, FERC will allow us to collect for implementation costs. Transmission Rates: Our application of JOATT transmission rates to customers during past periods is under FERC review. The rates included in these tariffs were applied to certain transmission transactions affecting both Detroit Edison's and our transmission systems between 1997 and 2002. We believe our reserve is sufficient to satisfy our refund obligation to any of our former transmission customers under our former JOATT. TRANSMISSION SALE: In May 2002, we sold our electric transmission system for $290 million to MTH, a non-affiliated limited partnership whose general partner is a subsidiary of Trans-Elect, Inc. The pretax gain was $31 million ($26 million, net of tax). We are currently in arbitration with MTH regarding property tax items used in establishing the selling price of our electric transmission system. We cannot predict whether the remaining open items will impact materially the recorded gain on the sale. As a result of the sale, after-tax earnings have decreased due to a loss of revenue from wholesale and ROA customers who will buy services directly from MTH. METC has completed the capital program to expand the transmission system's capability to import electricity into Michigan, as required by the Customer Choice Act. We will continue to maintain the system until May 1, 2007 under a contract with METC. Under an agreement with MTH, transmission rates charged to us are fixed by contract at current levels through December 31, 2005, and are subject to FERC ratemaking thereafter. However, we are subject to certain additional MISO surcharges, which are estimated to be $15 million in 2004. CONSUMERS' ELECTRIC UTILITY RATE MATTERS AUGUST 14, 2003 BLACKOUT: On August 14, 2003, the electric transmission grid serving parts of the Midwest and the Northeast experienced a significant disturbance that impacted electric service to millions of homes and businesses. Approximately 100,000 of our 1.7 million electric customers were without power for approximately 24 hours as a result of the disturbance. We incurred $1 million of immediate expense as a result of the blackout. We continue to cooperate with investigations of the blackout by several federal and state agencies. We cannot predict the outcome of these investigations. In November 2003, the MPSC released its report on the blackout. The MPSC report found no evidence to suggest that the events in Michigan or actions taken by the Michigan utilities or transmission operators were factors contributing to the cause of the blackout. Also in November 2003, the United States and Canadian power system outage task force preliminarily reported that the primary cause of the blackout was due to transmission line contact with trees in areas outside of Consumers' operating territory. In December 2003, the MPSC issued an order requiring Michigan investor-owned utilities to file reports by April 1, 2004, on the status of the transmission and distribution lines used to serve their customers, including details on vegetation trimming practices in calendar year 2003. Consumers intends to comply with the MPSC's request. In February 2004, the Board of Trustees of NERC approved recommendations to improve electric transmission reliability. The key recommendations are as follows: - strengthen the NERC compliance enforcement program, - evaluate vegetation management procedures, and - improve technology to prevent or mitigate future blackouts. These recommendations require transmission operators, which Consumers is not, to submit annual reports on vegetation management beginning March 2005 and improve technology over various milestones throughout CMS-66 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2004. These recommendations could result in increased transmission costs payable by transmission customers in the future. The financial impacts of these recommendations are not currently quantifiable. PERFORMANCE STANDARDS: Electric distribution performance standards developed by the MPSC were in proposal status during 2002 and 2003. The performance standards were placed into Michigan law in January 2004 and became effective on February 9, 2004. They relate to restoration after an outage, safety, and customer relations. During 2002 and 2003, Consumers monitored and reported to the MPSC its performance relative to the performance standards. Year-end results for both 2002 and 2003 resulted in compliance with the acceptable level of performance as established by the approved standards. Financial incentives and penalties are contained within the performance standards. An incentive is possible if all of the established performance standards have been exceeded for a calendar year. However, the value of such incentive cannot be determined at this point as the performance standards do not contain an approved incentive mechanism. Financial penalties in the form of customer credits are also possible. These customer credits are based on duration and repetition of outages. We cannot predict the likely effects of the financial incentive or penalties, if any, on us. POWER SUPPLY COSTS: We were required to provide backup service to ROA customers on a best efforts basis. In October 2003, we provided notice to the MPSC that we would terminate the provision of backup service in accordance with the Customer Choice Act, effective January 1, 2004. To reduce the risk of high electric prices during peak demand periods and to achieve our reserve margin target, we employ a strategy of purchasing electric call option and capacity and energy contracts for the physical delivery of electricity primarily in the summer months and to a lesser degree in the winter months. As of December 31, 2003, we purchased capacity and energy contracts partially covering the estimated reserve margin requirements for 2004 through 2007. As a result, we have recognized an asset of $20 million for unexpired capacity and energy contracts. Currently, we have a reserve margin of 5 percent, or supply resources equal to 105 percent of projected summer peak load for summer 2004. We are in the process of securing the additional capacity needed to meet our summer 2004 reserve margin target of 11 percent (111 percent of projected summer peak load). The total premium costs of electricity call option and capacity and energy contracts for 2003 were approximately $10 million. As a result of meeting the transmission capability expansion requirements and the market power test, as discussed in this note, we have met the requirements under the Customer Choice Act to return to the PSCR process. The PSCR process provides for the reconciliation of actual power supply costs with power supply revenues. This process assures recovery of all reasonable and prudent power supply costs actually incurred by us. In September 2003, we submitted a PSCR filing to the MPSC that reinstates the PSCR process for customers whose rates are no longer frozen or capped as of January 1, 2004. The proposed PSCR charge allows us to recover a portion of our increased power supply costs from large commercial and industrial customers, and subject to the overall rate cap, from other customers. We estimate the recovery of increased power supply costs from large commercial and industrial customers to be approximately $30 million in 2004. As allowed under current regulation, we self-implemented the proposed PSCR charge on January 1, 2004. The revenues received from the PSCR charge are also subject to subsequent reconciliation at the end of the year after actual costs have been reviewed for reasonableness and prudence. We cannot predict the outcome of this filing. OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and CMS-67 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) steam to Dow. We hold, through two wholly owned subsidiaries, the following assets related to the MCV Partnership and MCV Facility: - CMS Midland owns a 49 percent general partnership interest in the MCV Partnership, and - CMS Holdings holds, through FMLP, a 35 percent lessor interest in the MCV Facility. Our consolidated retained earnings include undistributed earnings from the MCV Partnership, which at December 31, 2003 are $245 million and at December 31, 2002 are $226 million. Summarized Statements of Income for CMS Midland and CMS Holdings
YEARS ENDED DECEMBER 31 -------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS Earnings from equity method investees....................... $42 $52 $38 Operating expenses, taxes and other......................... 22 18 13 --- --- --- Income before cumulative effect of accounting change........ $20 $34 $25 Cumulative effect of change in method of accounting for derivatives, net of $10 million tax expense in 2002 (Note 15)....................................................... -- 18 -- --- --- --- Net income.................................................. $20 $52 $25 === === ===
Power Supply Purchases from the MCV Partnership: Our annual obligation to purchase capacity from the MCV Partnership is 1,240 MW through the term of the PPA ending in 2025. The PPA requires us to pay, based on the MCV Facility's availability, a levelized average capacity charge of 3.77 cents per kWh and a fixed energy charge. We also pay a variable energy charge based on our average cost of coal consumed for all kWh delivered. Effective January 1999, we reached a settlement agreement with the MCV Partnership that capped payments made on the basis of availability that may be billed by the MCV Partnership at a maximum 98.5 percent availability level. Since January 1993, the MPSC has permitted us to recover capacity charges averaging 3.62 cents per kWh for 915 MW, plus fixed and variable energy charges. Since January 1996, the MPSC has also permitted us to recover capacity charges for the remaining 325 MW of contract capacity with an initial average charge of 2.86 cents per kWh increasing periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However, due to the frozen retail rates required by the Customer Choice Act, the capacity charge for the 325 MW was frozen at 3.17 cents per kWh until December 31, 2003. Recovery of both the 915 MW and 325 MW portions of the PPA are subject to certain limitations discussed below. In 1992, we recognized a loss and established a liability for the present value of the estimated future underrecoveries of power supply costs under the PPA based on MPSC cost-recovery orders. The remaining liability associated with the loss totaled $27 million at December 31, 2003, $53 million at December 31, 2002, and $77 million at December 31, 2001. We expect the PPA liability to be depleted in late 2004. We estimate that 51 percent of the actual cash underrecoveries for 2004 will be charged to the PPA liability, with the remaining portion charged to operating expense as a result of our 49 percent ownership in the MCV Partnership. We will expense all cash underrecoveries directly to income once the PPA liability is depleted. If the CMS-68 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MCV Facility's generating availability remains at the maximum 98.5 percent level, our cash underrecoveries associated with the PPA could be as follows:
2004 2005 2006 2007 ---- ---- ---- ---- IN MILLIONS Estimated cash underrecoveries at 98.5%..................... $56 $56 $55 $39 Amount to be charged to operating expense................... 29 56 55 39 Amount to be charged to PPA liability....................... 27 -- -- --
Beginning January 1, 2004, the rate freeze for large industrial customers was no longer in effect and we returned to the PSCR process. Under the PSCR process, we will recover from our customers the capacity and fixed energy charges based on availability, up to an availability cap of 88.7 percent as established in previous MPSC orders. Effects on Our Ownership Interest in the MCV Partnership and MCV Facility: As a result of returning to the PSCR process, we returned to dispatching the MCV Facility on a fixed load basis, as permitted by the MPSC, in order to maximize recovery of our capacity payments. This fixed load dispatch increases the MCV Facility's output and electricity production costs, such as natural gas. As the spread between the MCV Facility's variable electricity production costs and its energy payment revenue widens, the MCV's Partnership's financial performance and our equity interest in the MCV Partnership may be affected negatively. Under the PPA, variable energy payments to the MCV Partnership are based on the cost of coal burned at our coal plants and operation and maintenance expenses. However, the MCV Partnership's costs of producing electricity are tied to the cost of natural gas. Because natural gas prices have increased substantially in recent years, while the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been impacted negatively. Until September 2007, the PPA and settlement require us to pay capacity and fixed energy charges based on the MCV Facility's actual availability up to the 98.5 percent cap. After September 2007, we expect to exercise the regulatory out provision in the PPA, limiting our capacity and fixed energy payments to the MCV Partnership to the amount collected from our customers. The MPSC's future actions on the capacity and fixed energy payments recoverable from customers subsequent to September 2007 may affect negatively the earnings of the MCV Partnership and the value of our equity interest in the MCV Partnership. In February 2004, we filed a resource conservation plan with the MPSC that is intended to help conserve natural gas and thereby improve our equity investment in the MCV Partnership. This plan seeks approval to: - dispatch the MCV Facility on an economic basis depending on natural gas market prices without increased costs to electric customers, - give Consumers a priority right to buy excess natural gas as a result of the reduced dispatch of the MCV Facility, and - fund $5 million annually for renewable energy sources such as wind power projects. The resource conservation plan will reduce the MCV Facility's annual natural gas consumption by an estimated 30 to 40 billion cubic feet. This decrease in the quantity of high-priced natural gas consumed by the MCV Facility will benefit Consumers' ownership interest in the MCV Partnership. The amount of PPA capacity and fixed energy payments recovered from retail electric customers would remain capped at 88.7 percent. Therefore, customers will not be charged for any increased power supply costs, if they occur. Consumers and the MCV Partnership have reached an agreement that the MCV Partnership will reimburse Consumers for any incremental power costs incurred to replace the reduction in power dispatched from the MCV Facility. We requested that the MPSC provide interim approval while it conducts a full review of the plan. The MPSC has CMS-69 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) scheduled a prehearing conference with respect to the MCV resource conservation plan for April 2004. We cannot predict if or when the MPSC will approve our request. The two most significant variables in the analysis of the MCV Partnership's future financial performance are the forward price of natural gas for the next 22 years and the MPSC's decision in 2007 or beyond on our recovery of capacity payments. Natural gas prices have been historically volatile. Presently, there is no consensus in the marketplace on the price or range of prices of natural gas in the short term or beyond the next five years. Therefore, we cannot predict the impact of these issues on our future earnings, cash flows, or on the value of our equity interest in the MCV Partnership. NUCLEAR MATTERS: Big Rock: Significant progress continues to be made in the decommissioning of Big Rock. We submitted the License Termination Plan to the NRC staff for review in April 2003. System dismantlement and building demolition are on schedule to return the 560-acre site to a natural setting for unrestricted use in early 2006. The NRC and Michigan Department of Environmental Quality continue to find that all decommissioning activities at Big Rock are being performed in accordance with applicable regulatory and license requirements. Seven transportable dry casks have been loaded with spent nuclear fuel and an eighth cask has been loaded with high-level radioactive waste material. These dry casks will remain onsite until the DOE moves the material to a national spent nuclear fuel repository. Palisades: In July 2003, the NRC completed its mid-cycle plant performance assessment of Palisades. The mid-cycle assessment for Palisades covered the period from January 1, 2003 through the end of July 2003. The NRC determined that Palisades was operated in a manner that preserved public health and safety and fully met all cornerstone objectives. Based on the plant's performance, only regularly scheduled inspections are planned through September 2004. The amount of spent nuclear fuel exceeds Palisades' temporary onsite storage pool capacity. We are using dry casks for temporary onsite storage. As of December 31, 2003, we have loaded 18 dry casks with spent nuclear fuel and we will need to load additional dry casks by the fall of 2004 in order to continue operation. Palisades currently has three empty dry casks onsite, with storage pad capacity for up to seven additional loaded dry casks. We anticipate that transportable dry casks, along with more storage pad capacity, will be available by fall 2004. DOE Litigation: In 1997, a U.S. Court of Appeals decision confirmed that the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by January 1998. Subsequent U.S. Court of Appeals litigation, in which we and other utilities participated, has not been successful in producing more specific relief for the DOE's failure to accept the spent nuclear fuel. There are two court decisions that support the right of utilities to pursue damage claims in the United States Court of Claims against the DOE for failure to take delivery of spent nuclear fuel. A number of utilities have initiated litigation in the United States Court of Claims; we filed our complaint in December 2002. If our litigation against the DOE is successful, we anticipate future recoveries from the DOE. The recoveries will be used to pay the cost of spent nuclear fuel storage until the DOE takes possession as required by law. We can make no assurance that the litigation against the DOE will be successful. In July 2002, Congress approved and the President signed a bill designating the site at Yucca Mountain, Nevada, for the development of a repository for the disposal of high-level radioactive waste and spent nuclear fuel. The next step will be for the DOE to submit an application to the NRC for a license to begin construction of the repository. The application and review process is estimated to take several years. Spent nuclear fuel complaint: In March 2003, the Michigan Environmental Council, the Public Interest Research Group in Michigan, and the Michigan Consumer Federation filed a complaint with the MPSC, which was served on us by the MPSC in April 2003. The complaint asks the MPSC to initiate a generic investigation CMS-70 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and contested case to review all facts and issues concerning costs associated with spent nuclear fuel storage and disposal. The complaint seeks a variety of relief with respect to Consumers, Detroit Edison, Indiana & Michigan Electric Company, Wisconsin Electric Power Company, and Wisconsin Public Service Corporation. The complaint states that amounts collected from customers for spent nuclear storage and disposal should be placed in an independent trust. The complaint also asks the MPSC to take additional actions. In May 2003, Consumers and other named utilities each filed motions to dismiss the complaint. We are unable to predict the outcome of this matter. Insurance: We maintain nuclear insurance coverage on our nuclear plants. At Palisades, we maintain nuclear property insurance from NEIL, totaling $2.750 billion and insurance that would partially cover the cost of replacement power during certain prolonged accidental outages. Because NEIL is a mutual insurance company, we could be subject to assessments of up to $26 million in any policy year if insured losses in excess of NEIL's maximum policyholders surplus occur at our, or any other member's, nuclear facility. NEIL's policies include coverage for acts of terrorism. At Palisades, we maintain nuclear liability insurance for third-party bodily injury and off-site property damage resulting from a nuclear hazard for up to approximately $10.862 billion, the maximum insurance liability limits established by the Price-Anderson Act. The United States Congress enacted the Price-Anderson Act to provide financial liability protection for those parties who may be liable for a nuclear accident or incident. Part of the Price-Anderson Act's financial protection is a mandatory industry-wide program where owners of nuclear generating facilities could be assessed if a nuclear incident occurs at any nuclear generating facility. The maximum assessment against us could be $101 million per occurrence, limited to maximum annual installment payments of $10 million. We also maintain insurance under a program that covers tort claims for bodily injury to nuclear workers caused by nuclear hazards. The policy contains a $300 million nuclear industry aggregate limit. Under a previous insurance program providing coverage for claims brought by nuclear workers, we remain responsible for a maximum assessment of up to $6 million. Big Rock remains insured for nuclear liability by a combination of insurance and a NRC indemnity totaling $544 million and a nuclear property insurance policy from NEIL. Insurance policy terms, limits, and conditions are subject to change during the year as we renew our policies. COMMITMENTS FOR FUTURE PURCHASES: We enter into a number of unconditional purchase obligations that represent normal business operating contracts. These contracts are used to assure an adequate supply of goods and services necessary for the operation of our business and to minimize exposure to market price fluctuations. We believe that these future costs are prudent and reasonably assured of recovery in future rates. Coal Supply and Transportation: We have entered into coal supply contracts with various suppliers for our coal-fired generating stations. Under the terms of these agreements, we are obligated to take physical delivery of the coal and make payment based upon the contract terms. Our coal supply contracts expire from 2004 to 2005, and total an estimated $177 million. Our coal transportation contracts expire from 2004 to 2007, and total an estimated $139 million. Long-term coal supply contracts account for approximately 60 to 90 percent of our annual coal requirements. In 2003, coal purchases totaled $265 million of which $207 million (78 percent of the tonnage requirement) was under long-term contract. We supplement our long-term contracts with spot-market purchases. Power Supply, Capacity, and Transmission: As of December 31, 2003, we had future unrecognized commitments to purchase power transmission services under fixed price forward contracts for 2004 and 2005 totaling $8 million. We also had commitments to purchase capacity and energy under long-term power purchase agreements with various generating plants including the MCV Facility. These contracts require monthly capacity payments based on the plants' availability or deliverability. These payments for 2004 through 2030 total an CMS-71 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) estimated $14.483 billion, undiscounted, which includes $11.381 billion related to the MCV Facility. These payments exclude the obligations that Consumers has with the Genesee, Grayling, and Filer City generating plants because these entities are consolidated for CMS Energy under FASB Interpretation No. 46. This amount may vary depending upon plant availability and fuel costs. If a plant was not available to deliver electricity to us, then we would not be obligated to make the capacity payment until the plant could deliver. CONSUMERS' GAS UTILITY CONTINGENCIES GAS ENVIRONMENTAL MATTERS: We expect to have investigation and remedial costs at a number of sites under the Michigan Natural Resources and Environmental Protection Act, a Michigan statute that covers environmental activities including remediation. These sites include 23 former manufactured gas plant facilities. We operated the facilities on these sites for some part of their operating lives. For some of these sites, we have no current ownership or may own only a portion of the original site. We have completed initial investigations at the 23 sites. We will continue to implement remediation plans for sites where we have received MDEQ remediation plan approval. We will also work toward resolving environmental issues at sites as studies are completed. We have estimated our costs for investigation and remedial action at all 23 sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic Cost Model. We expect our remaining costs to be between $37 million and $90 million. The range reflects multiple alternatives with various assumptions for resolving the environmental issues at each site. The estimates are based on discounted 2003 costs using a discount rate of three percent. The discount rate represents a ten-year average of U.S. Treasury bond rates reduced for increases in the consumer price index. We expect to fund most of these costs through insurance proceeds and through MPSC approved rates charged to our customers. As of December 31, 2003, we have recorded a liability of $44 million, net of $38 million of expenditures incurred to date, and a regulatory asset of $67 million. Any significant change in assumptions, such as an increase in the number of sites, different remediation techniques, nature and extent of contamination, and legal and regulatory requirements, could affect our estimate of remedial action costs. In its November 2002 gas distribution rate order, the MPSC authorized us to continue to recover approximately $1 million of manufactured gas plant facilities environmental clean-up costs annually. This amount will continue to be offset by $2 million to reflect amounts recovered from all other sources. We defer and amortize, over a period of 10 years, manufactured gas plant facilities environmental clean-up costs above the amount currently included in rates. Additional amortization of the expense in our rates cannot begin until after a prudency review in a gas rate case. CONSUMERS' GAS UTILITY RATE MATTERS GAS COST RECOVERY: The MPSC is required by law to allow us to charge customers for our actual cost of purchased natural gas. The GCR process is designed to allow us to recover all of our gas costs; however, the MPSC reviews these costs for prudency in an annual reconciliation proceeding. In June 2003, we filed a reconciliation of GCR costs and revenues for the 12-months ended March 2003. We proposed to recover from our customers approximately $6 million of under-recovered gas costs using a roll-in methodology. The roll-in methodology incorporates the GCR under-recovery in the next GCR plan year. The approach was approved by the MPSC in a November 2002 order. In January 2004, intervenors filed their positions in our 2003 GCR case. Their positions were that not all of our gas purchasing decisions were prudent during April 2002 through March 2003 and they proposed disallowances. In February 2004, the parties in the case reached a tentative settlement agreement that would result in a GCR disallowance of $11 million for the GCR period. Interest on the disallowed amount from April 1, 2003 through February 2004, at the Consumers' authorized rate of return, adds $1 million to the cost of the settlement. We believe this settlement agreement will be executed by the parties in the case in the near future and approved by the MPSC. A reserve was recorded in December 2003. CMS-72 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In July 2003, the MPSC approved a settlement agreement authorizing us to increase our gas cost recovery for the remainder of the current GCR plan year (August 2003 through March 2004) and to apply a quarterly ceiling price adjustment, based on a formula that tracks changes in NYMEX natural gas prices. The terms of the settlement allow a GCR ceiling price of $6.11 per mcf. Our GCR is $5.36 per mcf for March 2004 bills. 2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC for a $156 million annual increase in our gas delivery and transportation rates that included a 13.5 percent return on equity. In September 2003, we filed an update to our gas rate case that lowered the requested revenue increase from $156 million to $139 million and reduced the return on common equity from 13.5 percent to 12.75 percent. The MPSC authorized an interim gas rate increase of $19 million annually. The interim increase is under bond and subject to refund if the final rate relief is a lesser amount. The interim increase order includes a $34 million reduction in book depreciation expense and related income taxes effective only during the period that we receive the interim relief. The MPSC order allowed us to increase our rates beginning December 19, 2003. As part of the interim order, Consumers agreed to restrict its dividend payments to CMS Energy, to a maximum of $190 million annually during the period that Consumers receives the interim relief. On March 5, 2004, the ALJ issued a Proposal for Decision recommending that the MPSC not rely upon the projected test year data included in our filing and supported by the MPSC Staff and further recommended that the application be dismissed. The MPSC is not bound by these recommendations and will consider the issues anew after receipt of exceptions and replies to the exception filed by the parties in response to the Proposal for Decision. 2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas utility plant depreciation case originally filed in June 2001. This case is independent of the 2003 gas rate case. The original filing was based on December 2000 plant balances and historical data. The December 2003 filing updates the gas depreciation case to include December 2002 plant balances. The proposed depreciation rates, if approved, will result in an annual increase of $12 million in depreciation expense. OTHER CONSUMERS' GAS UTILITY UNCERTAINTIES COMMITMENTS FOR GAS SUPPLIES: We enter into contracts to purchase gas and gas transportation from various suppliers for our natural gas business. These contracts have expiration dates that range from 2004 to 2007. Our 2003 gas purchases totaled 248 bcf at a cost of $1.379 billion. At the end of 2003, we estimate our gas purchases for 2004 to be 235 bcf, of which 22 percent is covered by existing fixed price contracts and 37 percent is covered by indexed price contracts that are subject to price variations. The remaining 2004 gas purchases will be made at market prices at the time of purchase. OTHER CONSUMERS' UNCERTAINTIES In addition to the matters disclosed in this note, we are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business. These lawsuits and proceedings may involve personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing, and other matters. We have accrued estimated losses for certain contingencies discussed in this note. Resolution of these contingencies is not expected to have a material adverse impact on our financial position, liquidity, or results of operations. OTHER UNCERTAINTIES INTEGRUM LAWSUIT: Integrum filed a complaint in Wayne County, Michigan Circuit Court in July 2003 against CMS Energy, Enterprises and APT. Integrum alleges several causes of action against APT, CMS Energy, and Enterprises in connection with an offer by Integrum to purchase the CMS Pipeline Assets. In addition to seeking unspecified money damages, Integrum is seeking an order enjoining CMS Energy and Enterprises from CMS-73 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) selling and APT from purchasing the CMS Pipeline Assets and an order of specific performance mandating that CMS Energy, Enterprises, and APT complete the sale of the CMS Pipeline Assets to APT and Integrum. A certain officer and director of Integrum is a former officer and director of CMS Energy, Consumers, and their subsidiaries. The individual was not employed by CMS Energy, Consumers or their subsidiaries when Integrum made the offer to purchase the CMS Pipeline Assets. CMS Energy believes that Integrum's claims are without merit. CMS Energy will defend itself vigorously but cannot predict the outcome of this lawsuit. CMS GENERATION-OXFORD TIRE RECYCLING: In an administrative order, the California Regional Water Control Board of the state of California named CMS Generation as a potentially responsible party for the clean up of the waste from the fire that occurred in September 1999 at the Filbin Tire Pile, which the State claims was owned by Oxford Tire Recycling of North Carolina, Inc. CMS Generation reached a settlement with the state, which the court approved, pursuant to which CMS Generation paid the state $5.5 million, $1.6 million of which it had paid the state prior to the settlement. CMS Generation continues to negotiate to have the insurance company pay a portion of the settlement amount, as well as a portion of its attorney fees. At the request of the DOJ in San Francisco, CMS Energy and other parties contacted by the DOJ in San Francisco entered into separate Tolling Agreements with the DOJ in San Francisco in September 2002. The Tolling Agreement stops the running of any statute of limitations during the ninety-day period between September 13, 2002 and (through several extensions of the tolling period) March 30, 2004, to facilitate settlement discussions between all the parties in connection with federal claims arising from the fire at the Filbin Tire Pile. On September 23, 2002, CMS Energy received a written demand from the U.S. Coast Guard for reimbursement of approximately $3.5 million in costs incurred by the U.S. Coast Guard in fighting the fire. It is CMS Energy's understanding that these costs, together with any accrued interest, are the sole basis of any federal claims. CMS Energy has reached an agreement in principle with the U.S. Coast Guard to settle this matter for $475,000. DEARBORN INDUSTRIAL GENERATION: In October 2001, Duke/Fluor Daniel (DFD) presented DIG with a change order to their construction contract and filed an action in Michigan state court claiming damages in the amount of $110 million, plus interest and costs, which DFD states represents the cumulative amount owed by DIG for delays DFD believes DIG caused and for prior change orders that DIG previously rejected. DFD also filed a construction lien for the $110 million. DIG, in addition to drawing down on three letters of credit totaling $30 million that it obtained from DFD, has filed an arbitration claim against DFD asserting in excess of an additional $75 million in claims against DFD. The judge in the Michigan state court case entered an order staying DFD's prosecution of its claims in the court case and permitting the arbitration to proceed. DFD has appealed the decision by the judge in the Michigan state court case to stay the litigation. DIG will continue to defend itself vigorously and pursue its claims. DIG cannot predict the outcome of this matter. DIG CUSTOMER DISPUTES: As a result of the continued delays in the DIG project becoming fully operational, DIG's customers, Ford Motor Company, and Rouge Industries, asserted claims that the continued delays relieve them of certain contractual obligations, totaling $43 million. In addition, Ford and/or Rouge asserted several other commercial claims against DIG relating to operation of the DIG plant. In February 2003, Rouge filed an Arbitration Demand against DIG and CMS MST Michigan L.L.C. with the American Arbitration Association. Rouge was seeking a total of approximately $27 million, plus additional accrued damages at the time of any award, plus interest. More specifically, Rouge was seeking at least $20 million under a Blast Furnace Gas Delivery Agreement in connection with DIG's purported failure to declare a Blast Furnace Gas Delivery Date within a reasonable time period, plus approximately $7 million for assorted damage claims under several legal theories. As part of this arbitration, DIG filed claims against Rouge and Ford, and Ford filed claims for unspecified amounts against DIG. In October 2003, Rouge filed bankruptcy under Chapter 11 of the United States Bankruptcy Code and as a result, the arbitration was subject to the automatic stay imposed by the Bankruptcy Code. OAO Severstal, which has acquired substantially all of Rouge's assets, has indicated it will continue operations at the Rouge site and will honor the contractual obligations to pay for the steam and electricity DIG and CMS MST Michigan L.L.C. provide. In January 2004, DIG and CMS MST Michigan L.L.C. entered into a CMS-74 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) settlement agreement with Ford and Rouge to resolve all outstanding claims between the parties, including the arbitration claims and DIG and CMS MST Michigan L.L.C.'s claims in the Rouge bankruptcy. The settlement was approved by the bankruptcy court. Under the settlement, Ford paid DIG $12 million cash and Rouge and Ford paid DIG and CMS MST Michigan L.L.C. a total of $3.8 million owed by Rouge for steam and electricity supplied to Rouge prior to the filing of the bankruptcy petition. DIG NOISE ABATEMENT LAWSUIT: In February 2003, DIG was served with a three-count first amended complaint filed in Wayne County Circuit Court in the matter of Ahmed, et al v. Dearborn Industrial Generation, LLC. The complaint seeks damages "in excess of $25,000" and injunctive relief based upon allegations of excessive noise and vibration created by operation of the power plant. The first amended complaint was filed on behalf of six named plaintiffs, all alleged to be adjacent or nearby resident or property owners. The damages alleged are injury to persons and property of the landowners. Certification of a class of "potentially thousands" who have been similarly affected is requested. DIG intends to defend this action aggressively but cannot predict the outcome of this matter. MCV EXPANSION, LLC: Under an agreement entered into with General Electric Company ("GE") in October 2002, MCV Expansion, LLC has a remaining contingent obligation to GE in the amount of $2.2 million that may become payable in the fourth quarter of 2004. The agreement provides that this contingent obligation is subject to a pro rata reduction under a formula based upon certain purchase orders being entered into with GE by June 30, 2003. MCV Expansion, LLC anticipates but cannot assure that purchase orders will be executed with GE sufficient to eliminate contingent obligations of $2.2 million. FORMER CMS OIL AND GAS OPERATIONS: A Michigan trial judge granted Star Energy, Inc. and White Pine Enterprises, LLC a declaratory judgment in an action filed in 1999 that claimed Terra Energy Ltd., a former CMS Oil and Gas subsidiary, violated an oil and gas lease and other arrangements by failing to drill wells it had committed to drill. A jury then awarded the plaintiffs a $7.6 million award. Terra appealed this matter to the Michigan Court of Appeals. The Michigan Court of Appeals reversed the trial court judgment with respect to the appropriate measure of damages and remanded the case for a new trial on damages. The trial judge reinstated the judgment against Terra and awarded Terra title to the minerals. CMS Energy will appeal this judgment. ARGENTINA ECONOMIC SITUATION: In January 2002, the Republic of Argentina enacted the Public Emergency and Foreign Exchange System Reform Act. This law repealed the fixed exchange rate of one U.S. dollar to one Argentine peso, converted all dollar-denominated utility tariffs and energy contract obligations into pesos at the same one-to-one exchange rate, and directed the President of Argentina to renegotiate such tariffs. Effective April 30, 2002, we adopted the Argentine peso as the functional currency for our Argentine investments. We had previously used the U.S. dollar as the functional currency for these investments. As a result, on April 30, 2002, we translated the assets and liabilities of our Argentine entities into U.S. dollars, in accordance with SFAS No. 52, using an exchange rate of 3.45 pesos per U.S. dollar, and recorded an initial charge to the Foreign Currency Translation component of Common Stockholders' Equity of approximately $400 million. While we cannot predict future peso-to-U.S. dollar exchange rates, we do expect that these non-cash charges reduce substantially the risk of further material balance sheet impacts when combined with anticipated proceeds from international arbitration currently in progress, political risk insurance, and the eventual sale of these assets. At December 31, 2003, the net foreign currency loss due to the unfavorable exchange rate of the Argentine peso recorded in the Foreign Currency Translation component of Common Stockholders' Equity using an exchange rate of 2.94 pesos per U.S. dollar was $264 million. This amount also reflects the effect of recording U.S. income taxes with respect to temporary differences between the book and tax basis of foreign investments, including the foreign currency translation associated with our Argentine investments, that were determined to no longer be essentially permanent in duration. OTHER: Certain CMS Gas Transmission and CMS Generation affiliates in Argentina received notice from various Argentine provinces claiming stamp taxes and associated penalties and interest arising from various gas CMS-75 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) transportation transactions. Although these claims total approximately $24 million, we believe the claims are without merit and will continue to contest them vigorously. CMS Generation does not currently expect to incur significant capital costs at its power facilities for compliance with current U.S. environmental regulatory standards. In addition to the matters disclosed in this Note, Consumers and certain other subsidiaries of CMS Energy are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business. These lawsuits and proceedings may involve personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing, and other matters. We have accrued estimated losses for certain contingencies discussed in this Note. Resolution of these contingencies is not expected to have a material adverse impact on our financial position, liquidity, or results of operations. CMS-76 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5: FINANCINGS AND CAPITALIZATION CMS Energy's Long-term debt as of December 31 follows:
INTEREST RATE (%) MATURITY 2003 2002 ----------------- -------- ---- ---- IN MILLIONS CMS ENERGY CORPORATION Senior notes..................................... 6.750 2004 $ -- $ 287 7.625 2004 176 176 9.875 2007 468 468 8.900 2008 260 260 7.500 2009 409 409 7.750 2010 300 -- 8.500 2011 300 300 8.375 2013 -- 150 3.375(a) 2023 150 -- ------ ------ 2,063 2,050 ------ ------ General term notes: Series D....................................... 6.938(b)(c) 2004-2008 65 94 Series E....................................... 7.788(b)(c) 2004-2009 139 227 Series F....................................... 7.487(b)(c) 2004-2016 292 298 ------ ------ 496 619 ------ ------ Extendible tenor rate adjusted securities........ 7.000 2005 180 180 Revolving credit facilities and other............ 7 320 ------ ------ Total -- CMS Energy Corporation............. 2,746 3,169 ------ ------ CONSUMERS ENERGY COMPANY First mortgage bonds............................. 4.250 2008 250 -- 4.800 2009 200 -- 4.000 2010 250 -- 5.375 2013 375 -- 6.000 2014 200 -- 7.375 2023 208 208 ------ ------ 1,483 208 ------ ------ Senior notes..................................... 6.000 2005 300 300 6.250 2006 332 332 6.375 2008 159 159 6.200 2008 -- 250 6.875 2018 180 180 6.500(d) 2018 141 141 6.500(e) 2028 142 142 ------ ------ 1,254 1,504 ------ ------ Securitization bonds............................. 5.097(c) 2005-2015 426 453 Long-term bank debt.............................. Variable 2006-2009 200 328 Nuclear fuel disposal liability.................. (f) 139 138 Pollution control revenue bonds.................. Various 2010-2018 126 126 Other............................................ 4 8 ------ ------ Total -- Consumers Energy Company........... 3,632 2,765 ------ ------ OTHER SUBSIDIARIES................................. 191 84 ------ ------ Total principal amount outstanding................. 6,569 6,018 Current amounts.................................. (509) (633) Net unamortized discount......................... (40) (28) ------ ------ Total consolidated long-term debt.................. $6,020 $5,357 ====== ======
- ------------------------- (a) These notes are putable to CMS Energy by the note holders at par on July 15, 2008, July 15, 2013 and July 15, 2018, and are convertible at the holder's option into CMS Energy Common Stock at $10.671 per share under certain circumstances, none of which currently are probable to occur. CMS Energy intends to file a registration statement with the SEC by October 16, 2004, relating to the resale of the notes and the convertibility into common stock. CMS-77 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (b) $29 million Series D, $112 million Series E, and $104 million Series F have been called and redeemed through February 15, 2004. (c) Represents the weighted average interest rate at December 31, 2003. (d) 2018 maturity is subject to successful remarketing by Consumers after June 15, 2005. (e) Callable at par. (f) Maturity date uncertain. LONG-TERM DEBT -- RELATED PARTIES: Long-term debt -- related parties as of December 31, 2003 follows:
DEBENTURE AND RELATED PARTY INTEREST RATE MATURITY 2003 --------------------------- ------------- -------- ---- IN MILLIONS Convertible subordinated debentures, CMS Energy Trust I..... 7.75% 2027 $178 Subordinated deferrable interest notes, Consumers Power Company Financing I....................................... 8.36% 2015 73 Subordinated deferrable interest notes, Consumers Energy Company Financing II...................................... 8.20% 2027 124 Subordinated debentures, Consumers Energy Company Financing III....................................................... 9.25% 2029 180 Subordinated debentures, Consumers Energy Company Financing IV........................................................ 9.00% 2031 129 ---- Total amount outstanding.................................... $684 ====
DEBT ISSUANCES: The following is a summary of long-term debt issuances during 2003:
PRINCIPAL USE OF FACILITY TYPE (IN MILLIONS) ISSUE RATE ISSUE DATE MATURITY DATE PROCEEDS COLLATERAL ------------- ------------- ---------- ---------- ------------- -------- ---------- CMS ENERGY Senior notes(a)...... $ 150 3.375% July 2003 July 2023 (c) Unsecured Senior notes(b)...... 300 7.750% July 2003 August 2010 (c) Unsecured CONSUMERS ENERGY Term loan............ 140 LIBOR + March 2003 March 2009 GCP FMB(h) 475 bps Term loan............ 150 LIBOR + March 2003 March 2006 GCP FMB(h) 450 bps (paid off)(f) FMB(i)............... 375 5.375% April 2003 April 2013 (d) -- FMB(i)............... 250 4.250% April 2003 April 2008 (d) -- FMB(i)............... 250 4.000% May 2003 May 2010 (e) -- FMB(i)............... 200 4.800% August 2003 February 2009 (f) -- FMB(i)............... 200 6.000% August 2003 February 2014 (f) -- Term loan............ 60 LIBOR + November 2003 November 2006 (g) FMB(h) 135 bps ------ Total......... $2,075 ======
- ------------------------- (bps -- basis points), (GCP -- General corporate purposes) (a) These notes are putable to CMS Energy by the note holders at par on July 15, 2008, July 15, 2013 and July 15, 2018, and are convertible at the holder's option into CMS Energy Common Stock at $10.671 per share under certain circumstances, none of which currently are probable to occur. CMS Energy intends to file a registration statement with the SEC by October 16, 2004, relating to the resale of the notes and the convertibility into common stock. CMS-78 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (b) CMS Energy intends to file a registration statement with the SEC by March 14, 2004, to permit note holders to exchange their securities for ones that will be registered under the Securities Act of 1933. (c) CMS Energy used the net proceeds to retire revolving debt and redeem a portion of a 6.75 percent Senior note due January 2004. (d) Consumers used the net proceeds to fund the maturity of a $250 million bond, to fund a $32 million option call payment, and for general corporate purposes. (e) Consumers used the net proceeds to prepay a portion of a term loan that was due to mature in July 2004. (f) Consumers used the net proceeds to pay off a $150 million term loan, to pay off $50 million balance on a term loan that was due to mature in July 2004, and for general corporate purposes. (g) Consumers used the net proceeds to purchase its headquarters building and pay off the capital lease. (h) Refer to "Regulatory Authorization for Financings" below for details about Consumers' FERC debt authorization. (i) Consumers filed a registration statement with the SEC in December 2003 to permit holders of these FMBs to exchange their bonds for FMBs that are registered under the Securities Act of 1933. The exchange offer was completed on February 13, 2004. DEBT MATURITIES: The aggregate annual maturities for long-term debt for the next five years are:
PAYMENTS DUE DECEMBER 31 ------------------------------------ 2004 2005 2006 2007 2008 ---- ---- ---- ---- ---- IN MILLIONS ~~Long-term debt.............................................. $509 $696 $490 $516 $987~~
DEBT COVENANT RESTRICTIONS: The indenture pursuant to our GTNs contains certain provisions that can trigger a limitation on our consolidated indebtedness. The limitation can be activated when our consolidated leverage ratio, as defined in the indenture (essentially the ratio of consolidated debt to consolidated capital), exceeds 0.75 to 1.0. At June 30 and September 30, 2003, our consolidated leverage ratio was 0.76 to 1.0. As a result, we were subject to certain debt limitations. At December 31, 2003, the ratio was 0.72 to 1, and we were no longer subject to the debt limitations. The indenture under which Senior notes are issued and certain other debt agreements contain provisions requiring us to maintain interest coverage ratios, and debt to earnings ratios. We were in compliance with these ratios, as defined, at December 31, 2003. CMS ENERGY CREDIT FACILITY: CMS Energy has a $185 million revolving credit facility with banks. This facility matures on May 21, 2005. This facility provides letter of credit support for Enterprises' subsidiary activities, principally credit support for project debt. Enterprises provides funds to cash collateralize the letters of credit issued through this facility. As of December 31, 2003, approximately $165 million of letters of credit were issued under this facility and the cash used to collateralize the letters of credit is included on the Consolidated Balance Sheet as Restricted cash. REGULATORY AUTHORIZATION FOR FINANCINGS: At December 31, 2003, Consumers had remaining FERC authorization to issue or guarantee up to $500 million of short-term securities and up to $700 million of short-term first mortgage bonds as collateral for such short-term securities. At December 31, 2003, Consumers had remaining FERC authorization to issue up to $740 million of long-term securities for refinancing or refunding purposes, $560 million of long-term securities for general corporate purposes, and $2 billion of long-term first mortgage bonds to be issued solely as collateral for other long-term securities. CMS-79 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) With the granting of authorization, FERC waived its competitive bid/negotiated placement requirements applicable to the long-term securities authorization. The authorizations expire on June 30, 2004. SHORT-TERM FINANCINGS: CMS Energy has a $190 million revolving credit facility with banks. The facility is secured by our investment in Enterprises and Consumers. The interest rate of the facility is LIBOR plus 325 basis points. This facility expires in November 2004. At December 31, 2003, all of the $190 million is available. Consumers has a $400 million revolving credit facility with banks. The facility is secured with first mortgage bonds. The interest rate of the facility is LIBOR plus 175 basis points. This facility expires in March 2004 with two annual extensions at Consumers' option, which would extend the maturity to March 2006. At December 31, 2003, $390 million is available for general corporate purposes, working capital, and letters of credit. At December 31, 2002, Consumers had $457 million of bank notes outstanding at a weighted average interest rate of 4.50 percent. FIRST MORTGAGE BONDS: Consumers secures its first mortgage bonds by a mortgage and lien on substantially all of its property. Its ability to issue and sell securities is restricted by certain provisions in the first mortgage bond indenture, its articles of incorporation, and the need for regulatory approvals under federal law. POLLUTION CONTROL REVENUE BONDS: In January 2004, Consumers amended the PCRB indentures to add an auction rate interest mode and switched to that mode for the two floating rate bonds. Under the auction rate mode, the bonds' interest rate will be reset every 35 days. While in the auction rate mode, no letter of credit liquidity facility is required and investors do not have a put right. PREFERRED STOCK ISSUANCE: In December 2003, CMS Energy issued 5 million shares of 4.50 percent cumulative convertible preferred stock. Each share has a liquidation value of $50.00 and is convertible into CMS Energy common stock at the option of the holder under certain circumstances. The initial conversion price is $9.893 per share, which translates into 5.0541 shares of common stock for each share of preferred stock converted. The annual dividend of $2.25 per share is payable quarterly, in cash, in arrears commencing March 1, 2004. We used the net proceeds of $242 million to retire other long-term debt in January 2004 and February 2004. We have agreed to file a shelf registration with the SEC by November 5, 2004, covering resales of the preferred stock and of common stock issuable upon conversion of the preferred stock. SALE OF SUBSIDIARY INTEREST: In December 2003, we sold, in a private placement, a non-voting preferred interest in an indirect subsidiary of CMS Enterprises that owns certain gas pipeline and power generation assets. CMS Energy received $30 million for the preferred interest, of which $19 million has been recorded as an addition to other paid-in capital (deferred gain) and $11 million has been recorded as a preferred stock issuance. WARRANTS: We granted warrants to purchase 204,000 shares of our common stock to a third party and expensed $1 million in 2003. The warrants which are fully vested are exercisable for seven years at an exercise price of $8.25 per share. CAPITALIZATION: The authorized capital stock of CMS Energy consists of 250 million shares of CMS Energy Common Stock and 10 million shares of CMS Energy Preferred Stock, $.01 par value. CMS-80 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PREFERRED STOCK OF SUBSIDIARY: The follow table describes Consumers' Preferred Stock outstanding:
OPTIONAL NUMBER OF SHARES REDEMPTION ----------------- DECEMBER 31 SERIES PRICE 2003 2002 2003 2002 ----------- ------ ---------- ---- ---- ---- ---- IN MILLIONS PREFERRED STOCK Cumulative, $100 par value, authorized 7,500,000 shares, with no mandatory redemption.............................. $4.16 $103.25 68,451 68,451 $ 7 $ 7 4.50 110.00 373,148 373,148 37 37 --- --- TOTAL PREFERRED STOCK........................ $44 $44 === ===
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES: CMS Energy and Consumers each formed various statutory wholly owned business trusts for the sole purpose of issuing preferred securities and lending the gross proceeds to the parent companies. The sole assets of the trusts are debentures of the parent company with terms similar to those of the preferred security. Summarized information for company-obligated mandatorily redeemable preferred securities is as follows:
AMOUNT OUTSTANDING EARLIEST TRUST AND SECURITIES --------------- OPTIONAL DECEMBER 31 RATE 2003 2002 MATURITY REDEMPTION(B) - -------------------- ---- ---- ---- -------- ------------- IN MILLIONS CMS Energy Trust I(c)............................. 7.75% $ --(a) $173 2027 2001 CMS Energy Trust III.............................. 7.25% --(d) 220 2004 2003 Consumers Power Company Financing I, Trust Originated Preferred Securities................. 8.36% --(a) 70 2015 2000 Consumers Energy Company Financing II, Trust Originated Preferred Securities................. 8.20% --(a) 120 2027 2002 Consumers Energy Company Financing III, Trust Originated Preferred Securities................. 9.25% --(a) 175 2029 2004 Consumers Energy Company Financing IV, Trust Preferred Securities............................ 9.00% --(a) 125 2031 2006 ----- ---- Total amount outstanding.......................... $ -- $883 ===== ====
- ------------------------- (a) We determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities have been deconsolidated as of December 31, 2003. Company obligated Trust Preferred Securities totaling $663 million that were previously included in mezzanine equity, have been eliminated due to deconsolidation and are reflected in Long-term debt -- related parties. For additional details, see "Long-Term Debt -- Related Parties" within this Note and Note 17, Implementation of New Accounting Standards. (b) The trusts must redeem the securities at a liquidation value of $25 per share ($50 per share for QUIPS (c)), which is equivalent to the carrying cost, plus accrued but unpaid distributions when the securities are paid at maturity or upon any earlier redemption. Prior to an early redemption date, the securities could be redeemed at market value. (c) Represents 3,450,000 shares of Quarterly Income Preferred Securities (QUIPS) that are convertible into 1.2255 shares of CMS Energy Common Stock (equivalent to a conversion price of $40.80). Conversion is unlikely as of December 31, 2003, based on the market price of CMS Energy's Common Stock of $8.52. If conversion were to occur in the future, the securities would be converted into 4,227,975 shares of CMS Energy Common Stock. Effective July 2001, we can revoke the conversion rights if certain conditions are met. CMS-81 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (d) In August 2003, 8,800,000 units of outstanding 7.25 percent Premium Equity Participating Security Units (CMS Energy Trust III) were converted to 16,643,440 newly issued shares of CMS Energy Common Stock. Each trust receives payments on the debenture it holds. Those receipts are used to make cash distributions on the preferred securities the trust has issued. The securities allow CMS Energy and Consumers the right to defer interest payment on the debentures, and, as a consequence, the trusts would defer dividend payments on the preferred securities. Should the parent companies exercise this right, they cannot declare or pay dividends on, or redeem, purchase or acquire, any of their capital stock during the deferral period until all deferred dividends are paid in full. In the event of default, holders of the preferred securities would be entitled to exercise and enforce the trusts' creditor rights against CMS Energy and Consumers, which may include acceleration of the principal amount due on the debentures. The parent companies have issued certain guarantees with respect to payments on the preferred securities. These guarantees, when taken together with each parent company's obligations under the debentures, related indenture and trust documents, provide full and unconditional guarantees for the trust's obligations under the preferred securities. SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales program, we currently sell certain accounts receivable to a wholly owned, consolidated, bankruptcy remote special purpose entity. In turn, the special purpose entity may sell an undivided interest in up to $325 million of the receivables. The amounts sold were $297 million at December 31, 2003 and $325 million at December 31, 2002. The Consolidated Balance Sheets exclude these amounts from accounts receivable. We continue to service the receivables sold. The purchaser of the receivables has no recourse against our other assets for failure of a debtor to pay when due and the purchaser has no right to any receivables not sold. No gain or loss has been recorded on the receivables sold and we retain no interest in the receivables sold. Certain cash flows received from and paid to us under our accounts receivable sales program are shown below:
YEARS ENDED DECEMBER 31 ---------------- 2003 2002 ---- ---- IN MILLIONS Proceeds from sales (remittance of collections) under the program................................................... $ (28) $ (9) Collections reinvested under the program.................... 4,361 4,080
DIVIDEND RESTRICTIONS: Under the provisions of its articles of incorporation, at December 31, 2003, Consumers had $373 million of unrestricted retained earnings available to pay common dividends. However, covenants in Consumers' debt facilities cap common stock dividend payments at $300 million in a calendar year. Through December 31, 2003, we received the following common stock dividend payments from Consumers:
IN MILLIONS January..................................................... $ 78 May......................................................... 31 June........................................................ 53 November.................................................... 56 ---- Total common stock dividends paid to CMS Energy............. $218 ====
As of December 18, 2003, Consumers is also under an annual dividend cap of $190 million imposed by the MPSC during the current interim gas rate relief period. Because all of the $218 million of common stock dividends to CMS Energy were paid prior to December 18, 2003, Consumers was not out of compliance with this new restriction for 2003. In February 2004, Consumers paid a $78 million common stock dividend. CMS-82 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For additional details on the potential cap on common dividends payable included in the MPSC Securitization order, see Note 4, Uncertainties, "Consumers' Electric Utility Rate Matters -- Securitization." Also, for additional details on the cap on common dividends payable during the current interim gas rate relief period, see Note 4, Uncertainties, "Consumers' Gas Utility Rate Matters -- 2003 Gas Rate Case." FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: This interpretation became effective January 2003. It describes the disclosure to be made by a guarantor about its obligations under certain guarantees that it has issued. At the beginning of a guarantee, it requires a guarantor to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provision of this interpretation does not apply to some guarantee contracts, such as warranties, derivatives, or guarantees between either parent and subsidiaries or corporations under common control, although disclosure of these guarantees is required. For contracts that are within the recognition and measurement provision of this interpretation, the provisions were to be applied to guarantees issued or modified after December 31, 2002. The following table describe our guarantees at December 31, 2003:
ISSUE EXPIRATION MAXIMUM CARRYING RECOURSE GUARANTEE DESCRIPTION DATE DATE OBLIGATION AMOUNT(B) PROVISION(C) - --------------------- ----- ---------- ---------- --------- ------------ IN MILLIONS Indemnifications from asset sales and other agreements(a)............................ Various Various $1,955 $ 3 $-- Letters of credit.......................... Various Various 254 -- -- Surety bonds and other indemnifications.... Various Various 28 -- -- Other guarantees........................... Various Various 239 -- -- Nuclear insurance retrospective premiums... Various Various 133 -- --
- ------------------------- (a) The majority of this amount arises from routine provisions in stock and asset sales agreements under which we indemnify the purchaser for losses resulting from events such as failure of title to the assets or stock sold by us to the purchaser. Included in this amount is a $739 million indemnification obligation related to the sale of CMS Oil and Gas facilities in Equatorial Guinea which expired January 3, 2004, and for which no loss occurred. We believe the likelihood of a loss for any remaining indemnifications to be remote. (b) The carrying amount represents the fair market value of guarantees and indemnities on our balance sheet that are entered into subsequent to January 1, 2003. In addition, $25 million has been recorded prior to 2003 in accordance with SFAS No. 5. (c) Recourse provision indicates the approximate recovery from third parties including assets held as collateral. The following table provides additional information regarding our guarantees at December 31, 2003:
EVENTS THAT WOULD GUARANTEE DESCRIPTION HOW GUARANTEE AROSE REQUIRE PERFORMANCE --------------------- ------------------- ------------------- Indemnifications from asset Stock and asset sales Findings of sales and other agreements agreements misrepresentation, breach of warranties, and other specific events or circumstances Standby letters of credit Normal operations of coal Noncompliance with power plants environmental regulations Self-insurance requirement Nonperformance Surety bonds Normal operating activity, Nonperformance permits and license Nuclear insurance Normal operations of nuclear Call by NEIL and Price retrospective premiums plants Anderson Act for nuclear incident
CMS-83 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) We have entered into typical tax indemnity agreements in connection with a variety of transactions including transactions for the sale of subsidiaries and assets, equipment leasing, and financing agreements. These indemnity agreements generally are not limited in amount and, while a maximum amount of exposure cannot be identified, the amount and probability of liability is considered remote. We have guaranteed payment of obligations through letters of credit, indemnities, surety bonds, and other guarantees of unconsolidated affiliates and related parties of $521 million as of December 31, 2003. We monitor and approve these obligations and believe it is unlikely that we would be required to perform or otherwise incur any material losses associated with the above obligations. The off-balance sheet commitments expire as follows:
COMMITMENT EXPIRATION ------------------------------------------------------- DECEMBER 31 TOTAL 2004 2005 2006 2007 2008 BEYOND - ----------- ----- ---- ---- ---- ---- ---- ------ IN MILLIONS COMMERCIAL COMMITMENTS Off-balance sheet: Guarantees..................................... $239 $ 20 $36 $4 $-- $-- $179 Indemnities.................................... 28 8 -- -- -- -- 20 Letters of Credit(a)........................... 254 215 10 5 5 5 14 ---- ---- --- -- --- --- ---- Total..................................... $521 $243 $46 $9 $ 5 $ 5 $213 ==== ==== === == === === ====
- ------------------------- (a) At December 31, 2003, we had $175 million of cash collateralized letters of credit and the cash used to collateralize the letters of credit is included in Restricted cash on the Consolidated Balance Sheets. 6: EARNINGS PER SHARE AND DIVIDENDS The following table presents the basic and diluted earnings per share computations.
YEAR ENDED DECEMBER 31 ------------------------------ RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS, EXCEPT PER SHARE AMOUNTS NET LOSS ATTRIBUTABLE TO COMMON STOCK: CMS Energy -- Basic....................................... $ (44) $ (650) $ (459) Add conversion of Trust Preferred Securities (net of tax)................................................... --(a) --(a) --(a) ------ ------ ------ CMS Energy -- Diluted..................................... $ (44) $ (650) $ (459) ====== ====== ====== AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND DILUTED EPS CMS Energy: Average Shares -- Basic................................ 150.4 139.0 130.7 Add conversion of Trust Preferred Securities........... --(a) --(a) --(a) Stock Options and Warrants............................. --(b) -- --(b) ------ ------ ------ Average Shares -- Diluted.............................. 150.4 139.0 130.7 ====== ====== ====== LOSS PER AVERAGE COMMON SHARE Basic..................................................... $(0.30) $(4.68) $(3.51) Diluted................................................... $(0.30) $(4.68) $(3.51)
- ------------------------- (a) Due to antidilution, the computation of diluted earnings per share excluded the conversion of Trust Preferred Securities. (b) Due to antidilution, the computation of diluted earnings per share excluded shares of outstanding stock options and warrants of 0.3 million for the year ended 2003 and 0.2 million for the year ended 2001. CMS-84 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In January 2003, the Board of Directors suspended the payment of common stock dividends. However, in 2002, we paid the following dividends per share:
CMS ENERGY COMMON STOCK DIVIDENDS PER SHARE PAYOUT -------------------------- February.................................................... $0.365 April....................................................... $0.365 August...................................................... $0.180 November.................................................... $0.180
7: FINANCIAL AND DERIVATIVE INSTRUMENTS FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments, and current liabilities approximate their fair values because of their short-term nature. We estimate the fair values of long-term investments based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amount of all long-term financial instruments, except as shown below, approximate fair value. For additional details, see Note 1, Corporate Structure and Accounting Policies.
DECEMBER 31 ----------------------------------------------------------------- 2003 2002 ------------------------------- ------------------------------ FAIR UNREALIZED FAIR UNREALIZED COST VALUE GAIN (LOSS) COST VALUE GAIN ---- ----- ----------- ---- ----- ---------- IN MILLIONS Long-term debt(a)....................... $6,020 $6,225 $(205) $5,357 $5,027 $330 Long-term debt -- related parties(b).... 684 648 36 -- -- -- Trust Preferred Securities(b)........... -- -- -- 883 704 179 Available for sale securities: Nuclear decommissioning(c).............. 442 575 133 458 536 78 SERP.................................... 54 66 12 54 57 3
- ------------------------- (a) Settlement of long-term debt is generally not expected until maturity. (b) We determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities have been deconsolidated as of December 31, 2003. Company obligated Trust Preferred Securities totaling $663 million that were previously included in mezzanine equity, have been eliminated due to deconsolidation and are reflected in Long-term debt -- related parties on the Consolidated Balance Sheets. For additional details, refer to Note 5, Financings and Capitalization, "Long-Term Debt -- Related Parties" and Note 17, Implementation of New Accounting Standards. In addition, company obligated Trust Preferred Securities totaling $220 million have been converted to Common Stock as of August 2003. (c) On January 1, 2003, we adopted SFAS No. 143 and began classifying our unrealized gains and losses on nuclear decommissioning investments as regulatory liabilities. We previously classified the unrealized gains and losses on these investments in accumulated depreciation. DERIVATIVE INSTRUMENTS: We are exposed to market risks including, but not limited to, changes in interest rates, commodity prices, currency exchange rates, and equity security prices. We manage these risks using established policies and procedures, under the direction of both an executive oversight committee consisting of senior management representatives and a risk committee consisting of business-unit managers. We may use various contracts to manage these risks including swaps, options, and forward contracts. CMS-85 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) We intend that any gains or losses on these contracts will be offset by an opposite movement in the value of the item at risk. We enter into all risk management contracts for purposes other than trading. These contracts contain credit risk if the counterparties, including financial institutions and energy marketers, fail to perform under the agreements. We minimize such risk by performing financial credit reviews using, among other things, publicly available credit ratings of such counterparties. Contracts used to manage interest rate, foreign currency, and commodity price risk may be considered derivative instruments that are subject to derivative and hedge accounting pursuant to SFAS No. 133. If a contract is accounted for as a derivative instrument, it is recorded in the financial statements as an asset or a liability, at the fair value of the contract. The recorded fair value of the contract is then adjusted quarterly to reflect any change in the market value of the contract, a practice known as marking the contract to market. The accounting for changes in the fair value of a derivative (that is, gains or losses) is reported either in earnings or accumulated other comprehensive income depending on whether the derivative qualifies for special hedge accounting treatment. For derivative instruments to qualify for hedge accounting under SFAS No. 133, the hedging relationship must be formally documented at inception and be highly effective in achieving offsetting cash flows or offsetting changes in fair value attributable to the risk being hedged. If hedging a forecasted transaction, the forecasted transaction must be probable. If a derivative instrument, used as a cash flow hedge, is terminated early because it is probable that a forecasted transaction will not occur, any gain or loss as of such date is immediately recognized in earnings. If a derivative instrument, used as a cash flow hedge, is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and recorded when the forecasted transaction affects earnings. We use a combination of quoted market prices and mathematical valuation models to determine fair value of those contracts requiring derivative accounting. The ineffective portion, if any, of all hedges is recognized in earnings. The majority of our contracts are not subject to derivative accounting because they qualify for the normal purchases and sales exception of SFAS No. 133 or are not derivatives because there is not an active market for the commodity. Derivative accounting is required for certain contracts used to limit our exposure to electricity and gas commodity price risk and interest rate risk. The following table reflects the fair value of all contracts requiring derivative accounting:
DECEMBER 31 ------------------------------------------------------------ 2003 2002 ---------------------------- ---------------------------- FAIR UNREALIZED FAIR UNREALIZED DERIVATIVE INSTRUMENTS COST VALUE GAIN (LOSS) COST VALUE GAIN (LOSS) ---------------------- ---- ----- ----------- ---- ----- ----------- IN MILLIONS Other than trading Electric -- related contracts................ $-- $ -- $ -- $ 8 $ 1 $ (7) Gas contracts................................ 3 2 (1) -- 1 1 Interest rate risk contracts................. -- (3) (3) -- (28) (28) Derivative contracts associated with equity investments in: Shuweihat.................................... -- (27) (27) -- (30) (30) Taweelah..................................... -- (26) (26) -- (33) (33) MCV Partnership.............................. -- 15 15 -- 13 13 Jorf Lasfar.................................. -- (11) (11) -- (11) (11) Other........................................ -- 1 1 -- (2) (2) Trading Electric -- related contracts................ (2) -- 2 -- 43 43 Gas contracts................................ -- 15 15 -- 38 38
CMS-86 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The fair value of other than trading derivative contracts is included in either Other Assets or Other Liabilities on the Consolidated Balance Sheets. The fair value of trading derivative contracts is included in either Price Risk Management Assets or Price Risk Management Liabilities on the Consolidated Balance Sheets. The fair value of derivative contracts associated with our equity investment in the MCV Partnership is included in Investments -- Midland Cogeneration Venture Limited Partnership on the Consolidated Balance Sheets. Effective April 1, 2002, the MCV Partnership changed its accounting for derivatives. For additional details see Note 15, Summarized Financial Information of Significant Related Energy Supplier. The fair value of derivative contracts associated with other equity investments is included in Enterprises Investments on the Consolidated Balance Sheets. Cumulative Effect of Change in Accounting Principle: On January 1, 2001, upon initial adoption of the derivatives standard, we recorded a $10 million, net of tax, cumulative effect adjustment as an increase in accumulated other comprehensive income. This adjustment relates to the difference between the fair value and recorded book value of contracts related to gas call options, gas fuel for generation swap contracts, and interest rate swap contracts that qualified for hedge accounting prior to the initial adoption of SFAS No. 133 and our proportionate share of the effects of adopting SFAS No. 133 related to our equity investments in the MCV Partnership and Taweelah. Based on the initial transition adjustment of $21 million, net of tax, recorded in accumulated other comprehensive income at January 1, 2001, Consumers reclassified to earnings $12 million as a reduction to the cost of gas, $1 million as a reduction to the cost of power supply, $2 million as an increase in interest expense, and $8 million as an increase in other revenues for the twelve months ended December 31, 2001. CMS Energy recorded $12 million as an increase in interest expense during 2001, which includes the $2 million of additional interest expense at Consumers. The difference between the initial transition adjustment and the amounts reclassified to earnings represents an unrealized loss in the fair value of the derivative instruments since January 1, 2001, resulting in a decrease of accumulated other comprehensive income. We also recorded a $7 million, net of tax, cumulative effect adjustment as an increase to earnings. This adjustment relates to our proportionate share of the difference between the fair value and the recorded book value of interest rate swaps at Taweelah, and financial gas and supply contracts that were required to be accounted for as derivatives as of January 1, 2001. In June and December 2001, the FASB issued guidance that resolved the accounting for certain utility industry contracts. As a result, we recorded a $3 million, net of tax, cumulative effect adjustment as an unrealized loss, decreasing accumulated other comprehensive income, and on December 31, 2001, recorded an $11 million, net of tax, cumulative effect adjustment as a decrease to earnings. These adjustments relate to the difference between the fair value and the recorded book value of certain electric call option contracts. Effective, January 1, 2003, EITF Issue No. 98-10 was rescinded by EITF Issue No. 02-03 and as a result, only energy contracts that meet the definition of a derivative in SFAS No. 133 can be carried at fair value. The impact of this change was recognized as a cumulative effect of a change in accounting principle loss of $23 million, net of tax. For additional details regarding this loss see Note 17, Implementation of New Accounting Standards. ELECTRIC CONTRACTS: Our electric utility business uses purchased electric call option contracts to meet, in part, our regulatory obligation to serve. This obligation requires us to provide a physical supply of electricity to customers, to manage electric costs and to ensure a reliable source of capacity during peak demand periods. Certain of our electric capacity and energy contracts are not accounted for as derivatives due to the lack of an active energy market in the state of Michigan, as defined by SFAS No. 133, and the transportation costs that would be incurred to deliver the power under the contracts to the closest active energy market at the Cinergy hub in Ohio. If a market develops in the future, we may be required to account for these contracts as derivatives. The mark-to-market impact on earnings related to these contracts, particularly related to the PPA, could be material to the financial statements. CMS-87 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Our electric business also uses gas option and swap contracts to protect against price risk due to the fluctuations in the market price of gas used as fuel for generation of electricity. These contracts are financial contracts that are used to offset increases in the price of potential gas purchases. These contracts do not qualify for hedge accounting. Therefore, we record any change in the fair value of these contracts directly in earnings as part of power supply costs. For the year ended December 31, 2003, the unrealized gain in accumulated other comprehensive income related to our proportionate share of the effects of derivative accounting related to our equity investment in the MCV Partnership is $10 million, net of tax. We expect to reclassify this gain, if this value remains, as an increase to earnings from equity method investees during the next 12 months. GAS CONTRACTS: Our gas utility business uses fixed price gas supply contracts, fixed price weather-based gas supply call options, fixed price gas supply call and put options, and other types of contracts, to meet our regulatory obligation to provide gas to our customers at a reasonable and prudent cost. Unrealized gains and losses associated with these options are reported directly in earnings as part of other income, and then directly offset in earnings and recorded on the balance sheet as a regulatory asset or liability. ENERGY TRADING ACTIVITIES: Through December 31, 2002, CMS MST's wholesale power and gas trading activities were accounted for under the mark-to-market method of accounting. Under mark-to-market accounting, energy-trading contracts are reflected at fair market value, net of reserves, with unrealized gains and losses recorded as an asset or liability in the Consolidated Balance Sheets. These assets and liabilities are affected by the timing of settlements related to these contracts, current-period changes from newly originated transactions and the impact of price movements. Changes in fair value are recognized as revenues in the Consolidated Statements of Income in the period in which the changes occur. The market prices we use to value our energy trading contracts reflect our consideration of, among other things, closing exchange and over-the-counter quotations. In certain contracts, long-term commitments may extend beyond the period in which market quotations for such contracts are available. Mathematical models are developed to determine various inputs into the fair value calculation including price and other variables that may be required to calculate fair value. Realized cash returns on these commitments may vary, either positively or negatively, from the results estimated through application of the mathematical model. We believe that our mathematical models use state-of-the-art technology, pertinent industry data, and prudent discounting in order to forecast certain elongated pricing curves. Market prices are adjusted to reflect the impact of liquidating our position in an orderly manner over a reasonable period of time under present market conditions. In connection with the market valuation of our energy trading contracts, we maintain reserves for credit risks based on the financial condition of counterparties. We also maintain credit policies that management believes minimize overall credit risk with regard to our counterparties. Determination of our counterparties' credit quality is based upon a number of factors, including credit ratings, disclosed financial condition, and collateral requirements. Where contractual terms permit, we employ standard agreements that allow for netting of positive and negative exposures associated with a single counterparty. Based on these policies, our current exposures, and our credit reserves, we do not anticipate a material adverse effect on our financial position or results of operations as a result of counterparty nonperformance. INTEREST RATE RISK CONTRACTS: We use interest rate swaps to hedge the risk associated with forecasted interest payments on variable-rate debt. Most of our interest rate swaps are designated as cash flow hedges. As such, we record any change in the fair value of these contracts in accumulated other comprehensive income unless the swaps are sold. For interest rate swaps that did not qualify for hedge accounting treatment, we record any change in the fair value of these contracts in earnings. We have entered into floating-to-fixed interest rate swap agreements to reduce the impact of interest rate fluctuations. The difference between the amounts paid and received under the swaps is accrued and recorded as an adjustment to interest expense over the term of the agreement. We were able to apply the shortcut method to all CMS-88 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) interest rate swaps that qualified for hedge accounting treatment; therefore, there was no ineffectiveness associated with these hedges. The following table reflects the outstanding floating-to-fixed interest rates swaps at year end:
FLOATING TO FIXED NOTIONAL MATURITY FAIR INTEREST RATE SWAPS AMOUNT DATE VALUE ------------------- -------- -------- ----- IN MILLIONS ~~December 31, 2003........................................... $ 28 2005-2006 $ (3) December 31, 2002........................................... 493 2003-2007 (28)~~
Notional amounts reflect the volume of transactions but do not represent the amount exchanged by the parties to the financial instruments. Accordingly, notional amounts do not necessarily reflect our exposure to credit or market risks. The weighted average interest rate associated with outstanding swaps was approximately 7.4 percent at December 31, 2003 and 4.0 percent at December 31, 2002. Certain equity method investees have issued interest rate swaps. These instruments are not included in this analysis, but can have an impact on financial results. See discussion of these instruments in Note 18, Restatement and Reclassification. FOREIGN EXCHANGE DERIVATIVES: We may use forward exchange and option contracts to hedge certain receivables, payables, long-term debt, and equity value relating to foreign investments. The purpose of our foreign currency hedging activities is to protect the company from the risk associated with adverse changes in currency exchange rates that could affect cash flow materially. These contracts would not subject us to risk from exchange rate movements because gains and losses on such contracts offset losses and gains, respectively, on assets and liabilities being hedged. There were no outstanding foreign exchange contracts at December 31, 2003. The notional amount of the outstanding foreign exchange contracts at December 31, 2002 was $1 million Canadian. The estimated fair value of the foreign exchange and option contracts at December 31, 2002 was zero. 8: INCOME TAXES CMS Energy and its subsidiaries file a consolidated federal income tax return. Income taxes generally are allocated based on each company's separate taxable income. We practice deferred tax accounting for temporary differences in accordance with SFAS No. 109, Accounting for Income Taxes. U.S. income taxes are not recorded on the undistributed earnings of foreign subsidiaries that have been or are intended to be reinvested indefinitely. Upon distribution, those earnings may be subject to both U.S. income taxes (adjusted for foreign tax credits or deductions) and withholding taxes payable to various foreign countries. We annually determine the amount of undistributed foreign earnings that we expect will remain invested indefinitely in foreign subsidiaries. Cumulative undistributed earnings of foreign subsidiaries for which income taxes have not been provided totaled approximately $106 million at December 31, 2003. It is impractical to estimate the amount of unrecognized deferred income taxes or withholding taxes on these undistributed earnings. Also, at December 31, 2003 and 2002, we recorded U.S. income taxes with respect to temporary differences between the book and tax bases of foreign investments that were determined to be no longer essentially permanent in duration. The Job Creation and Worker Assistance Act of 2002 provided corporate taxpayers a 5-year carryback of tax losses incurred in 2001 and 2002. As a result of this legislation, we carried back consolidated 2001 and 2002 tax losses to tax years 1996 through 1999 to obtain refunds totaling $250 million. The tax loss carryback, however, resulted in a reduction in AMT credit carryforwards that previously had been recorded as deferred tax assets in the amount of $47 million. This non-cash reduction in AMT credit carryforwards was reflected in our tax provision in 2002. CMS-89 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) We use ITC to reduce current income taxes payable, and amortize ITC over the life of the related property. AMT paid generally becomes a tax credit that we can carry forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT. At December 31, 2003, we had AMT credit carryforwards in the amount of $214 million that do not expire, tax loss carryforwards in the amount of $1.151 billion that expire from 2021 through 2023. In addition, we had capital loss carryforwards in the amount of $29 million that expire in 2007, and general business credit carryforwards in the amount of $42 million that primarily expire in 2005, for which valuation allowances have been provided. During the fourth quarter of 2000, we wrote down the value of our investment in Loy Yang by $329 million ($268 million after-tax). We have now concluded the tax benefit associated with the write-down should have been reduced by $38 million. Accordingly, retained earnings as of January 1, 2001 have been reduced by this amount. For additional details, see Note 18, Restatement and Reclassification. The significant components of income tax expense (benefit) on continuing operations consisted of:
YEARS ENDED DECEMBER 31 ----------------------------- RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS Current income taxes: Federal................................................... $ (17) $(171) $(209) State and local........................................... 1 (8) 6 Foreign................................................... 17 28 8 ----- ----- ----- $ 1 $(151) $(195) Deferred income taxes Federal................................................... $ 54 $ 107 $ 97 State..................................................... 4 7 3 Foreign................................................... 5 2 8 ----- ----- ----- $ 63 $ 116 $ 108 Deferred ITC, net........................................... (6) (6) (7) ----- ----- ----- Tax expense (benefit)....................................... $ 58 $ (41) $ (94) ===== ===== =====
CMS-90 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The principal components of deferred tax assets (liabilities) recognized in the consolidated balance sheet are as follows:
DECEMBER 31 ------------------- RESTATED 2003 2002 ---- -------- IN MILLIONS Property.................................................... $ (842) $ (814) Securitization costs........................................ (186) (192) Prepaid pension............................................. (136) -- Unconsolidated investments.................................. (254) 55 Postretirement benefits..................................... (70) (72) Gas inventories............................................. (100) (74) Employee benefit obligations................................ 130 265 Tax credit carryforwards.................................... 255 247 Tax loss carryforwards...................................... 413 190 Valuation allowances........................................ (54) (4) Regulatory liabilities...................................... 120 115 Other, net.................................................. 82 (169) ------- ------- Net deferred tax liabilities.............................. $ (642) $ (453) ======= ======= Deferred tax liabilities.................................... $(1,581) $(1,339) Deferred tax assets, net of valuation reserves.............. 939 886 ------- ------- Net deferred tax liabilities.............................. $ (642) $ (453) ======= =======
CMS-91 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The actual income tax expense (benefit) on continuing operations differs from the amount computed by applying the statutory federal tax rate of 35 percent to income before income taxes as follows:
YEARS ENDED DECEMBER 31 ---------------------------- RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS Income (loss) from continuing operations before income taxes and minority interests Domestic.................................................. $(73) $(527) $(320) Foreign................................................... 88 94 (108) ---- ----- ----- Total................................................ 15 (433) (428) Statutory federal income tax rate........................... x 35% x 35% x 35% ---- ----- ----- Expected income tax expense (benefit)....................... 5 (152) (150) Increase (decrease) in taxes from: Property differences...................................... 18 18 23 Income tax effect of foreign investments.................. (18) 47 52 Tax credits............................................... (6) 51 (8) State and local income taxes, net of federal benefit...... -- (7) 3 Tax return accrual adjustments............................ (1) (7) (4) Minority interests........................................ -- (5) (9) Valuation allowance provision (reversal).................. 50 -- (1) Other, net................................................ 10 14 -- ---- ----- ----- Recorded income tax expense (benefit)(a).................... $ 58 $ (41) $ (94) ---- ----- ----- Effective tax rate(b)....................................... (b) 9.5% 22.0% ==== ===== =====
- ------------------------- (a) The increased income tax expense for 2003 is primarily attributable to the valuation reserve provisions for the possible loss of general business credit, capital loss, and charitable contributions carryforwards. (b) Because of the small size of the net income in 2003, the effective tax rate is not meaningful. Changes in the effective tax rate in 2002 from 2001 resulted principally from the reduction in AMT credit carryforwards and the recording of U.S. taxes on undistributed earnings and basis differences of foreign subsidiaries. 9: EXECUTIVE INCENTIVE COMPENSATION We provide a Performance Incentive Stock Plan to key management employees based on their contributions to the successful management of the Company. The Plan includes the following type of awards for common stock: - restricted shares of common stock, - stock options, and - stock appreciation rights. Restricted shares of common stock are outstanding shares with full voting and dividend rights. These awards vest over five years at the rate of 25 percent per year after two years. Some restricted shares are subject to achievement of specified levels of total shareholder return and are subject to forfeiture if employment terminates before vesting. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. Stock options give the holder the right to purchase common stock at a given price over an extended period of time. Stock appreciation rights give the holder the right to receive common stock appreciation, which is defined CMS-92 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) as the excess of the market price of the stock at the date of exercise over the grant date price. Our stock options and stock appreciation rights are valued at market price when granted. All options and rights may be exercised upon grant and they expire up to ten years and one month from the date of grant. Our Performance Incentive Stock Plan was amended in January 1999. It uses the following formula to grant awards: - Up to five percent of our common stock outstanding at January 1 each year less: + the number of shares of restricted common stock awarded, and + common stock subject to options granted under the plan during the immediately preceding four calendar years. - the number of shares of restricted common stock awarded under this plan cannot exceed 20 percent of the aggregate number of shares reserved for awards, and - forfeiture of shares previously awarded will increase the number of shares available to be awarded under the plan. Awards of up to 2,240,247 shares of CMS Energy Common Stock may be issued as of December 31, 2003. The following table summarizes the restricted stock and stock options granted to our key employees under the Performance Incentive Stock Plan:
RESTRICTED STOCK OPTIONS ---------- ----------------------------- NUMBER OF NUMBER OF WEIGHTED AVERAGE SHARES SHARES EXERCISE PRICE --------- --------- ---------------- CMS ENERGY COMMON STOCK Outstanding at January 1, 2001.......................... 786,427 3,058,186 $31.47 Granted............................................... 266,500 1,036,000 $30.21 Exercised or Issued................................... (82,765) (150,174) $19.11 Forfeited or Expired.................................. (182,177) (31,832) $35.10 --------- --------- ------ Outstanding at December 31, 2001........................ 787,985 3,912,180 $31.58 Granted............................................... 512,726 1,492,200 $15.64 Exercised or Issued................................... (116,562) (39,600) $17.07 Forfeited or Expired.................................. (225,823) (243,160) $28.91 --------- --------- ------ Outstanding at December 31, 2002........................ 958,326 5,121,620 $27.18 Granted............................................... 600,000 1,593,000 $ 6.35 Exercised or Issued................................... (80,425) (8,000) $ 8.12 Forfeited or Expired.................................. (213,873) (885,044) $28.66 --------- --------- ------ Outstanding at December 31, 2003........................ 1,264,028 5,821,576 $21.27 ========= ========= ======
At December 31, 2003, 186,522 of the 1,264,028 shares of restricted common stock outstanding are subject to performance objectives. Compensation expense included in income for restricted stock was $2 million for 2003, less than $1 million in 2002, and $1 million in 2001. CMS-93 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes our stock options outstanding at December 31, 2003:
NUMBER OF SHARES WEIGHTED AVERAGE WEIGHTED AVERAGE OUTSTANDING REMAINING LIFE EXERCISE PRICE ----------- ---------------- ---------------- Range of Exercise Prices CMS ENERGY COMMON STOCK: $6.35 -- $6.35..................................... 1,593,000 9.72 years $ 6.35 $8.12 -- $22.00.................................... 1,184,300 6.94 years $13.43 $22.20 -- $31.04................................... 1,785,772 6.65 years $27.06 $34.80 -- $43.38................................... 1,255,504 4.92 years $39.31 $44.06 -- $44.06................................... 3,000 4.91 years $44.06 --------- ---------- ------ $6.35 -- $44.06.................................... 5,821,576 7.17 years $21.27
The number of stock options exercisable was 5,795,145 at December 31, 2003, 5,007,329 at December 31, 2002 and 3,760,883 at December 31, 2001. In December 2002, we adopted the fair value based method of accounting for stock-based employee compensation, under SFAS No. 123, as amended by SFAS No. 148. We elected to adopt the prospective method recognition provisions of this Statement, which applies the recognition provisions to all awards granted, modified, or settled after the beginning of the fiscal year that the recognition provisions are first applied. The following table summarizes the weighted average fair value of stock options granted:
OPTIONS GRANT DATE 2003 2002(A) 2001 ------------------ ---- ------- ---- ~~Fair value at grant date.................................... $2.96 $3.84, $1.44 $6.43~~
- ------------------------- (a) For 2002, there were two stock option grants. The stock options fair value is estimated using the Black-Scholes model, a mathematical formula used to value options traded on securities exchanges. The following assumptions were used in the Black-Scholes model:
YEARS ENDED DECEMBER 31 2003 2002(A) 2001 ----------------------- ---- ------- ---- CMS ENERGY COMMON STOCK OPTIONS Risk-free interest rate.............................. 3.02% 3.95%, 3.16% 4.77% Expected stock price volatility...................... 55.46% 32.44%, 40.81% 30.59% Expected dividend rate............................... -- $0.365, $0.1825 $0.365 Expected option life (years)......................... 4.2 4.2 4.2 4.2
- ------------------------- (a) For 2002, there were two stock option grants. CMS-94 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) We recorded $5 million as stock-based employee compensation cost for 2003 and $4 million for 2002. All stock options vest at date of grant. If stock-based compensation costs had been determined under SFAS No. 123 for the year ended December 31, 2001, consolidated net loss and pro forma net loss would have been as follows:
YEARS ENDED DECEMBER 31 ----------------------------- RESTATED 2001 ----------------------------- NET LOSS BASIC DILUTED -------- ----- ------- IN MILLIONS, EXCEPT PER SHARE AMOUNTS Net loss, as reported....................................... $(459) $(3.51) $(3.51) Add: Stock-based employee compensation expense included in reported net loss, net of related taxes................ -- -- -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes........................... (4) (0.03) (0.03) ----- ------ ------ Pro forma net loss.......................................... $(463) $(3.54) $(3.54) ===== ====== ======
10: RETIREMENT BENEFITS We provide retirement benefits to our employees under a number of different plans, including: - non-contributory, defined benefit Pension Plan, - a cash balance pension plan for certain employees hired after June 30, 2003, - benefits to certain management employees under SERP, - health care and life insurance benefits under OPEB, - benefits to a select group of management under EISP, and - a defined contribution 401(k) plan. Pension Plan: The Pension Plan includes funds for all of our employees, and the employees of our subsidiaries, including Panhandle. The Pension Plan's assets are not distinguishable by company. In June 2003, we sold Panhandle to Southern Union Panhandle Corp. No portion of the Pension Plan assets were transferred with the sale and Panhandle employees are no longer eligible to accrue additional benefits. The Pension Plan retained pension payment obligations for Panhandle employees that were vested under the Pension Plan. The sale of Panhandle resulted in a significant change in the makeup of the Pension Plan. A remeasurement of the obligation was required at the date of sale. The remeasurement further resulted in the following: - an increase in OPEB expense of $4 million for 2003, and - an additional charge to accumulated other comprehensive income of $34 million ($22 million after-tax) as a result of the increase in the additional minimum pension liability. Due to large contributions, the additional minimum pension liability was eliminated as of December 31, 2003. Additionally, a significant number of Panhandle employees elected to retire as of July 1, 2003 under the CMS Energy Employee Pension Plan. As a result, we have recorded a $25 million ($16 million after-tax) settlement loss, and a $10 million ($7 million after-tax) curtailment gain, pursuant to the provisions of SFAS No. 88, which is reflected in discontinued operations. In 2003, a substantial number of non-Panhandle retiring employees also elected a lump sum payment instead of receiving pension benefits as an annuity over time. Lump sum payments constitute a settlement under SFAS CMS-95 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) No. 88. A settlement loss must be recognized when the cost of all settlements paid during the year exceeds the sum of the service and interest costs for that year. We recorded settlement loss of $59 million ($39 million after-tax) in December 2003. SERP: SERP benefits are paid from a trust established in 1988. SERP is not a qualified plan under the Internal Revenue Code; SERP trust earnings are taxable and trust assets are included in consolidated assets. Trust assets were $66 million at December 31, 2003, and $57 million at December 31, 2002. The assets are classified as other non-current assets. The Accumulated Benefit Obligation for SERP was $62 million at December 31, 2003 and $54 million at December 31, 2002. OPEB: Retiree health care costs at December 31, 2003 are based on the assumption that costs would increase 8.5 percent in 2003. The rate of increase is expected to be 7.5 percent for 2004. The rate of increase is expected to slow to an estimated 5.5 percent by 2010 and thereafter. The health care cost trend rate assumption significantly affects the estimated costs recorded. A one-percentage point change in the assumed health care cost trend assumption would have the following effects:
ONE PERCENTAGE ONE PERCENTAGE POINT INCREASE POINT DECREASE -------------- -------------- IN MILLIONS ~~Effect on total service and interest cost component......... $ 15 $ (12) Effect on postretirement benefit obligation................. $149 $(129)~~
We adopted SFAS No. 106, effective as of the beginning of 1992. Consumers recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated recovery in utility rates (see Note 1, Corporate Structure and Accounting Policies, "Utility Regulation.") The MPSC authorized recovery of the electric utility portion of these costs in 1994 over 18 years and the gas utility portion in 1996 over 16 years. EISP: We implemented an EISP in 2002 to provide flexibility in separation of employment by officers, a select group of management, or other highly compensated employees. Terms of the plan may include payment of a lump sum, payment of monthly benefits for life, payment of premium for continuation of health care, or any other legally permissible term deemed to be in our best interest to offer. EISP expense was $1 million in 2003 and $2 million in 2002. As of December 31, 2003, the Accumulated Benefit Obligation of the EISP was $3 million. The measurement date for all plans is December 31. Assumptions: The following table recaps the weighted-average assumptions used in our retirement benefits plans to determine benefit obligations and net periodic benefit cost:
YEARS ENDED DECEMBER 31 -------------------------------------------------- PENSION & SERP OPEB ----------------------- ----------------------- 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- Discount rate................................. 6.25% 6.75% 7.25% 6.25% 6.75% 7.25% Expected long-term rate of return on plan assets(a)................................... 8.75% 8.75% 9.75% Union....................................... 8.75% 8.75% 9.75% Non-Union................................... 6.00% 6.00% 6.00% Rate of compensation increase: Pension..................................... 3.25% 3.50% 5.25% SERP........................................ 5.50% 5.50% 5.50%
- ------------------------- (a) We determine our long-term rate of return by considering historical market returns, the current and future economic environment, the capital market principles of risk and return, and the expertise of individuals and firms with financial market knowledge. We use the asset allocation of the portfolio to forecast the future CMS-96 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) expected total return of the portfolio. The goal is to determine a long-term rate of return that can be incorporated into the planning of future cash flow requirements in conjunction with the change in the liability. The use of forecasted returns for various classes of assets used to construct an expected return model is reviewed periodically for reasonability and appropriateness. Costs: The following table recaps the costs incurred in our retirement benefits plans:
YEARS ENDED DECEMBER 31 --------------------------------------------- PENSION & SERP OPEB --------------------- -------------------- 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- IN MILLIONS Service cost.......................................... $ 40 $ 44 $ 39 $ 21 $ 20 $ 16 Interest expense...................................... 79 89 88 66 69 62 Expected return on plan assets........................ (81) (103) (98) (42) (43) (41) Plan amendments....................................... -- 4 -- -- -- -- Curtailment credit.................................... (2) -- -- (8) -- -- Settlement charge..................................... 84 -- -- -- -- -- Amortization of: Net transition (asset).............................. -- -- (5) -- -- -- Prior service cost.................................. 7 8 8 (7) (1) (1) Other............................................... 9 (1) (1) 19 10 1 ---- ----- ---- ---- ---- ---- Net periodic pension and postretirement benefit cost................................................ $136 $ 41 $ 31 $ 49 $ 55 $ 37 ==== ===== ==== ==== ==== ====
Plan Assets: The following table recaps the categories of plan assets in our retirement benefits plans:
YEARS ENDED DECEMBER 31 ------------------------------- PENSION OPEB ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ---- Asset Category: Fixed Income.............................................. 52% 32%(b) 51% 55% Equity Securities......................................... 44% 60% 48% 44% CMS Energy Common Stock(a)............................. 4% 8% 1% 1%
- ------------------------- (a) At December 31, 2003, there were 4,970,000 shares of CMS Energy Common Stock in the Pension Plan assets with a fair value of $42 million, and 414,000 shares in the OPEB plan assets with a fair value of $4 million. At December 31, 2002, there were 5,099,000 shares of CMS Energy Common Stock in the Pension Plan assets with a fair value of $48 million, and 284,000 shares in the OPEB plan assets with a fair value of $3 million. (b) At February 29, 2004, the Pension Plan assets were 66 percent equity, 34 percent fixed income. We plan to contribute $72 million to our OPEB plan in 2004. We estimate a contribution of $26 million to our Pension Plan in 2004. We have established a target asset allocation for our Pension Plan assets of 65 percent equity and 35 percent fixed income investments to maximize the long-term return on plan assets, while maintaining a prudent level of risk. The level of acceptable risk is a function of the liabilities of the plan. Equity investments are diversified mostly across the Standard & Poor's 500 Index, with a lesser allocation to the Standard & Poor's Mid Cap and Small Cap Indexes and a Foreign Equity Index Fund. Fixed income investments are diversified across investment grade instruments of both government and corporate issuers. Annual liability measurements, quarterly portfolio reviews, and periodic asset/liability studies are used to evaluate the need for adjustments to the portfolio allocation. CMS-97 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) We have established union and non-union VEBA trusts to fund our future retiree health and life insurance benefits. These trusts are funded through the rate making process for Consumers, and through direct contributions from the non-utility subsidiaries. The equity portions of the union and non-union health care VEBA trusts are invested in an Standard & Poor's 500 Index fund. The fixed income portion of the union health care VEBA trust is invested in domestic investment grade taxable instruments. The fixed income portion of the non-union health care VEBA trust is invested in a diversified mix of domestic tax-exempt securities. The investment selections of each VEBA are influenced by the tax consequences, as well as the objective of generating asset returns that will meet the medical and life insurance costs of retirees. Reconciliations: The following table reconciles the funding of our retirement benefit plans with our retirement benefit plans' liability:
YEARS ENDED DECEMBER 31 --------------------------------------------------- PENSION PLAN SERP OPEB ---------------- ------------ --------------- 2003 2002 2003 2002 2003 2002 ---- ---- ---- ---- ---- ---- IN MILLIONS Benefit obligation January 1..................... $1,256 $1,195 $ 81 $ 73 $ 982 $ 956 Service cost..................................... 38 40 2 4 21 20 Interest cost.................................... 74 84 5 5 66 69 Plan amendment................................... (19) 3 -- -- (47) (64) Actuarial loss (gain)............................ 55 72 (10) 1 91 41 Business combinations............................ -- -- -- -- (42) -- Benefits paid.................................... (215) (138) (2) (2) (42) (40) ------ ------ ---- ---- ------ ----- Benefit obligation December 31(a)................ 1,189 1,256 76 81 1,029 982 ------ ------ ---- ---- ------ ----- Plan assets at fair value at January 1........... 607 845 -- -- 508 508 Actual return on plan assets..................... 115 (164) -- -- 75 (43) Company contribution............................. 560 64 2 2 76 83 Actual benefits paid............................. (215) (138) (2) (2) (41) (40) ------ ------ ---- ---- ------ ----- Plan assets at fair value at December 31......... 1,067 607 -- -- 618 508 ------ ------ ---- ---- ------ ----- Benefit obligation in excess of plan assets...... (122) (649) (76) (81) (411) (474) Unrecognized net loss from experience different than assumed................................... 501 573 3 13 313 313 Unrecognized prior service cost (benefit)........ 29 60 1 1 (112) (77) Panhandle adjustment............................. -- (7) -- -- -- -- ------ ------ ---- ---- ------ ----- Net Balance Sheet Asset (Liability).............. 408 (23) (72) (67) (210) (238) Additional minimum liability adjustment(b)....... -- (426) -- -- -- -- ------ ------ ---- ---- ------ ----- Total Net Balance Sheet Asset (Liability)...... $ 408 $ (449) $(72) $(67) $ (210) $(238) ====== ====== ==== ==== ====== =====
- ------------------------- (a) The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law in December 2003. This Act establishes a prescription drug benefit under Medicare (Medicare Part D), and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. Accounting guidance for the subsidy is not yet available, therefore, we have decided to defer recognizing the effects of the Act in our 2003 financial statements, as permitted by FASB Staff Position No. 106-1. When accounting guidance is issued, our retiree health benefit obligation may be adjusted. (b) The Pension Plan's Accumulated Benefit Obligation of $1.055 billion exceeded the value of the Pension Plan assets and net balance sheet liability at December 31, 2002. As a result, we recorded an additional minimum liability, including an intangible asset of $53 million, and $373 million of accumulated other CMS-98 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) comprehensive income. In August 2003, we made our planned contribution of $210 million to the Pension Plan. In December 2003, we made an additional contribution of $350 million to the Pension Plan that eliminated the additional minimum liability. The Accumulated Benefit Obligation for the pension plan was $1.019 billion at December 31, 2003. 11: LEASES We lease various assets including vehicles, railcars, construction equipment, an airplane, computer equipment, and buildings. We have both full-service and net leases. A net lease requires us to pay for taxes, maintenance, operating costs, and insurance. Most of our leases contain options at the end of the initial lease term to: - purchase the asset at the then fair value of the asset, or - renew the lease at the then fair rental value. Minimum annual rental commitments under our non-cancelable leases at December 31, 2003 were:
CAPITAL LEASES OPERATING LEASES -------------- ---------------- IN MILLIONS 2004........................................................ $13 $12 2005........................................................ 12 10 2006........................................................ 12 10 2007........................................................ 11 9 2008........................................................ 9 7 2009 and thereafter......................................... 21 30 --- --- Total minimum lease payments................................ 78 $78 === Less imputed interest....................................... 10 --- Present value of net minimum lease payments................. 68 Less current portion........................................ 10 --- Non-current portion......................................... $58 ===
Consumers is authorized by the MPSC to record both capital and operating lease payments as operating expense and recover the total cost from our customers. Operating lease charges were $14 million in 2003, $13 million in 2002, and $15 million in 2001. Capital lease expenses were $17 million in 2003, $20 million, in 2002 and $26 million in 2001. Included in the $26 million for 2001 is $7 million of nuclear fuel lease expense. In November 2001, our nuclear fuel capital leasing arrangement expired. At termination of the lease, we paid the lessor $48 million, which was the lessor's remaining investment at that time. In April 2001, we entered into a lease agreement for the construction of an office building to be used as the main headquarters for CMS Energy and Consumers in Jackson, Michigan. In November 2003, we exercised our purchase option under the lease agreement and bought the office building with proceeds from a $60 million term loan. CMS-99 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12: JOINTLY OWNED REGULATED UTILITY FACILITIES We are required to provide only our share of financing for the jointly owned utility facilities. The direct expenses of the jointly owned plants are included in operating expenses. Operation, maintenance, and other expenses of these jointly owned utility facilities are shared in proportion to each participant's undivided ownership interest. The following table indicates the extent of our investment in jointly owned regulated utility facilities:
DECEMBER 31 ---------------------------- NET ACCUMULATED INVESTMENT DEPRECIATION ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ---- IN MILLIONS Campbell Unit 3 -- 93.3 percent............................. $299 $298 $328 $313 Ludington -- 51 percent..................................... 84 83 87 85 Distribution -- various..................................... 74 77 32 31
13: EQUITY METHOD INVESTMENTS Where ownership is more than 20 percent but less than a majority, we account for certain investments in other companies, partnerships and joint ventures by the equity method of accounting in accordance with APB Opinion No. 18. The most significant of these investments is our 50 percent interest in Jorf Lasfar, and our 49 percent interest in the MCV Partnership (Note 15). Our investment in Jorf Lasfar is $256 million at December 31, 2003 and $240 million at December 31, 2002. Net income from these investments included undistributed earnings of $41 million in 2003 and $39 million in 2002 and distributions in excess of earnings of $68 million in 2001. Summarized financial information of the MCV Partnership is disclosed separately in CMS-100 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 15, Summarized Financial Information of Significant Related Energy Supplier. Listed below is the summarized income and balance sheet information for these investments. Income Statement Data
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2003 ------------------------------------------------------------- JORF SCP ALL LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL ------ ---- -------- ----------- ------ ----- IN MILLIONS Operating revenue.......................... $369 $79 $99 $74 $1,135 $1,756 Operating expenses......................... 191 4 38 18 1,006 1,257 ---- --- --- --- ------ ------ Operating income........................... 178 75 61 56 129 499 Other expense, net......................... 58 43 18 25 35 179 ---- --- --- --- ------ ------ Net income (loss).......................... $120 $32 $43 $31 $ 94 $ 320 ==== === === === ====== ======

YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2002 ------------------------------------------------------------- JORF SCP ALL LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL ------ ---- -------- ----------- ------ ----- IN MILLIONS Operating revenue.......................... $364 $91 $101 $43 $3,376 $3,975 Operating expenses......................... 176 4 33 13 3,209 3,435 ---- --- ---- --- ------ ------ Operating income........................... 188 87 68 30 167 540 Other expense, net......................... 56 49 86 16 206 413 ---- --- ---- --- ------ ------ Net income (loss).......................... $132 $38 $(18) $14 $ (39) $ 127 ==== === ==== === ====== ======

YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2001 ------------------------------------------------------------- JORF SCP ALL LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL ------ ---- -------- ----------- ------ ----- IN MILLIONS Operating revenue.......................... $357 $99 $ 44 $39 $3,814 $4,353 Operating expenses......................... 151 6 17 12 3,459 3,645 ---- --- ---- --- ------ ------ Operating income........................... 206 93 27 27 355 708 Other expense, net......................... 45 63 42 16 237 403 ---- --- ---- --- ------ ------ Net income................................. $161 $30 $(15) $11 $ 118 $ 305 ==== === ==== === ====== ======
CMS-101 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Balance Sheet Data
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2003 -------------------------------------------------------------- JORF SCP ALL LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL ------ ---- -------- ----------- ------ ----- IN MILLIONS Assets Current assets.......................... $ 277 $ -- $ 93 $ 60 $ 434 $ 864 Property, plant and equipment, net...... 10 -- 638 383 2,475 3,506 Other assets............................ 1,152 893 10 -- 1,159 3,214 ------ ---- ---- ---- ------ ------ $1,439 $893 $741 $443 $4,068 $7,584 ====== ==== ==== ==== ====== ====== Liabilities Current liabilities..................... $ 314 $ 21 $ 81 $ 19 $ 425 $ 860 Long-term debt and other non-current liabilities.......................... 612 411 509 225 3,121 4,878 Equity.................................... 513 461 151 199 522 1,846 ------ ---- ---- ---- ------ ------ $1,439 $893 $741 $443 $4,068 $7,584 ====== ==== ==== ==== ====== ======

YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2002 -------------------------------------------------------------- JORF SCP ALL LASFAR FMLP TAWEELAH INVESTMENTS OTHERS TOTAL ------ ---- -------- ----------- ------ ----- Assets Current assets.......................... $ 225 $ -- $ 91 $ 36 $ 676 $1,028 Property, plant and equipment, net...... 7 -- 656 291 2,695 3,649 Other assets............................ 1,118 998 10 -- 1,076 3,202 ------ ---- ---- ---- ------ ------ $1,350 $998 $757 $327 $4,447 $7,879 ====== ==== ==== ==== ====== ====== Liabilities Current liabilities..................... $ 249 $ 22 $ 95 $ 18 $ 692 $1,076 Long-term debt and other non-current liabilities.......................... 622 428 530 172 2,896 4,648 Equity.................................... 479 548 132 137 859 2,155 ------ ---- ---- ---- ------ ------ $1,350 $998 $757 $327 $4,447 $7,879 ====== ==== ==== ==== ====== ======
14: REPORTABLE SEGMENTS Our reportable segments consist of business units organized and managed by their products and services. We evaluate performance based upon the net income of each segment. We operate principally in three reportable segments: electric utility, gas utility, and enterprises. The electric utility segment consists of the generation and distribution of electricity in the state of Michigan through its subsidiary, Consumers. The gas utility segment consists of regulated activities like transportation, storage, and distribution of natural gas in the state of Michigan through its subsidiary, Consumers. The enterprises segment consists of: - investing in, acquiring, developing, constructing, managing, and operating non-utility power generation plants and natural gas facilities in the United States and abroad, and - providing gas, oil, and electric marketing services to energy users. CMS-102 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tables below show financial information by reportable segment. The "Other" net income segment includes corporate interest and other, discontinued operations, and the cumulative effect of accounting changes. We restated 2002 and 2001 information due to the management reorganization and the change in our business strategy in 2003 from five to three operating segments. Reportable Segments
YEARS ENDED DECEMBER 31 ------------------------------- RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS Revenues Electric utility.......................................... $ 2,583 $ 2,644 $ 2,630 Gas utility............................................... 1,845 1,519 1,338 Enterprises............................................... 1,085 4,508 4,034 Other..................................................... -- 2 4 ------- ------- ------- $ 5,513 $ 8,673 $ 8,006 ======= ======= ======= Earnings from Equity Method Investees Enterprises............................................... $ 164 $ 92 $ 172 ------- ------- ------- $ 164 $ 92 $ 172 ======= ======= ======= Depreciation, Depletion, and Amortization Electric utility.......................................... $ 247 $ 228 $ 219 Gas utility............................................... 128 118 118 Enterprises............................................... 52 64 70 Other..................................................... 1 2 1 ------- ------- ------- $ 428 $ 412 $ 408 ======= ======= ======= Income Taxes Electric utility.......................................... $ 90 $ 138 $ 69 Gas utility............................................... 35 33 25 Enterprises............................................... 14 (155) (83) Other..................................................... (81) (57) (105) ------- ------- ------- $ 58 $ (41) $ (94) ======= ======= ======= Net Income (Loss) Electric utility.......................................... $ 167 $ 264 $ 120 Gas utility............................................... 38 46 21 Enterprises............................................... 8 (419) (272) Other..................................................... (257) (541) (328) ------- ------- ------- $ (44) $ (650) $ (459) ======= ======= ======= Investments in Equity Method Investees Enterprises............................................... $ 1,366 $ 1,367 $ 1,912 Other..................................................... 24 2 36 ------- ------- ------- $ 1,390 $ 1,369 $ 1,948 ======= ======= =======
CMS-103 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31 ------------------------------- RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS Identifiable Assets Electric utility(a)....................................... $ 6,831 $ 6,058 $ 5,784 Gas utility(a)............................................ 2,983 2,586 2,734 Enterprises............................................... 3,670 5,724 8,891 Other..................................................... 354 413 224 ------- ------- ------- $13,838 $14,781 $17,633 ======= ======= ======= Capital Expenditures(b) Electric utility.......................................... $ 310 $ 437 $ 623 Gas utility............................................... 135 181 145 Enterprises............................................... 49 235 427 Other..................................................... -- 8 263 ------- ------- ------- $ 494 $ 861 $ 1,458 ======= ======= =======
Geographic Areas(c)
RESTATED RESTATED 2003 2002 2001 ---- -------- -------- IN MILLIONS United States Operating Revenue......................................... $ 5,222 $ 8,361 $ 7,639 Operating Income (Loss)................................... 511 (36) 189 Identifiable Assets....................................... 12,372 13,355 14,770 International Operating Revenue......................................... $ 291 $ 312 $ 367 Operating Income (Loss)................................... 84 111 (38) Identifiable Assets....................................... 1,466 1,426 2,863
- ------------------------- (a) Amounts includes a portion of Consumers' assets for both the Electric and Gas utility units. (b) Amounts include electric restructuring implementation plan, capital leases for nuclear fuel, purchase of nuclear fuel and other assets and electric DSM costs. Amounts also include a portion of Consumers' capital expenditures for plant and equipment that both the electric and gas utility units use. (c) Revenues are based on the country location of customers. CMS-104 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER Under the PPA with the MCV Partnership discussed in Note 4, Uncertainties, our 2003 obligation to purchase electric capacity from the MCV Partnership provided 15 percent of our owned and contracted electric generating capacity. Summarized financial information of the MCV Partnership follows: Statements of Income
YEARS ENDED DECEMBER 31 -------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS Operating revenue(a)........................................ $584 $597 $611 Operating expenses.......................................... 416 409 453 ---- ---- ---- Operating income............................................ 168 188 158 Other expense, net.......................................... 108 114 110 ---- ---- ---- Income before cumulative effect of accounting change........ 60 74 48 Cumulative effect of change in method of accounting for derivative options contracts(b)........................... -- 58 -- ---- ---- ---- Net Income.................................................. $ 60 $132 $ 48 ==== ==== ====
Balance Sheets
DECEMBER 31 --------------- 2003 2002 ---- ---- IN MILLIONS ASSETS Current assets(c)........ $ 389 $ 358 Plant, net............... 1,494 1,550 Other assets............. 187 190 ------ ------ $2,070 $2,098 ====== ======

DECEMBER 31 --------------- 2003 2002 ---- ---- IN MILLIONS LIABILITIES AND EQUITY Current liabilities...... $ 250 $ 209 Non-current liabilities(d)......... 1,021 1,155 Partners' equity(e)...... 799 734 ------ ------ $2,070 $2,098 ====== ======
- ------------------------- (a) Revenue from Consumers totaled $514 million in 2003, $557 million in 2002, and $550 million in 2001. (b) On April 1, 2002, the MCV Partnership implemented a new accounting standard for derivatives. As a result, the MCV Partnership began accounting for several natural gas contracts containing an option component at fair value. The MCV Partnership recorded a $58 million cumulative effect adjustment for the change in accounting principle as an increase to earnings. CMS Midland's 49 percent ownership share was $28 million ($18 million after-tax), which is reflected as a change in accounting principle on our Consolidated Statements of Income (Loss). (c) Receivables from Consumers totaled $40 million for December 31, 2003 and $44 million for December 31, 2002. (d) FMLP is the sole beneficiary of a trust that is the lessor in a long-term direct finance lease with the MCV Partnership. CMS Holdings holds a 46.4 percent ownership interest in FMLP. The MCV Partnership's CMS-105 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) lease obligations, assets, and operating revenues secure FMLP's debt. The following table summarizes obligation and payment information regarding the direct finance lease.
DECEMBER 31 ------------ 2003 2002 ---- ---- IN MILLIONS Balance Sheet: MCV Partnership: Lease obligation........................................ $894 $975 FMLP: Non-recourse debt....................................... 431 449 Lease payment to service non-recourse debt (including interest)............................................... 158 370 CMS Holdings: Share of interest portion of lease payment.............. 37 34 Share of principle portion of lease payment............. 36 65

YEARS ENDED DECEMBER 31 -------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS ~~Income Statement: FMLP: Earnings............................................. $32 $38 $30~~
(e) CMS Midland's recorded investment in the MCV Partnership includes capitalized interest, which we are expensing over the life of our investment in the MCV Partnership. The financing agreements prohibit the MCV Partnership from distributing any cash to its owners until it meets certain financial test requirements. We do not anticipate receiving a cash distribution in the near future. 16: ASSET RETIREMENT OBLIGATIONS SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: This standard became effective January 2003. It requires companies to record the fair value of the cost to remove assets at the end of their useful life, if there is a legal obligation to do so. We have legal obligations to remove some of our assets, including our nuclear plants, at the end of their useful lives. Before adopting this standard, we classified the removal cost of assets included in the scope of SFAS No. 143 as part of the reserve for accumulated depreciation. For these assets, the removal cost of $448 million that was classified as part of the reserve at December 31, 2002, was reclassified in January 2003, in part, as: - $364 million ARO liability, - $134 million regulatory liability, - $42 million regulatory asset, and - $7 million net increase to property, plant, and equipment as prescribed by SFAS No. 143. We are reflecting a regulatory asset and liability as required by SFAS No. 71 for regulated entities instead of a cumulative effect of a change in accounting principle. Accretion of $1 million related to the Big Rock and Palisades' profit component included in the estimated cost of removal was expensed for 2003. The fair value of ARO liabilities has been calculated using an expected present value technique. This technique reflects assumptions, such as costs, inflation, and profit margin that third parties would consider to assume the settlement of the obligation. Fair value, to the extent possible, should include a market risk premium for unforeseeable circumstances. No market risk premium was included in our ARO fair value estimate since a CMS-106 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) reasonable estimate could not be made. If a five percent market risk premium were assumed, our ARO liability would be $381 million. If a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, such as assets with indeterminate lives, the liability is to be recognized when a reasonable estimate of fair value can be made. Generally, transmission and distribution assets have indeterminate lives. Retirement cash flows cannot be determined. There is a low probability of a retirement date, so no liability has been recorded for these assets. No liability has been recorded for assets that have insignificant cumulative disposal costs, such as substation batteries. The measurement of the ARO liabilities for Palisades and Big Rock are based on decommissioning studies that are based largely on third-party cost estimates. In addition, in 2003, we recorded an ARO liability for certain pipelines and non-utility generating plants and a $1 million, net of tax, cumulative effect of change in accounting for accretion and depreciation expense for ARO liabilities incurred prior to 2003. The pro forma effect on results of operations would not have been material for the year ended December 31, 2002. The following tables describe our assets that have legal obligations to be removed at the end of their useful life.
IN SERVICE TRUST ARO DESCRIPTION DATE LONG LIVED ASSETS FUND --------------- ---------- ----------------- ----- IN MILLIONS December 31, 2003 Palisades-decommission plant site..... 1972 Palisades nuclear plant $487 Big Rock-decommission plant site...... 1962 Big Rock nuclear plant 88 JHCampbell intake/discharge water line............................... 1980 Plant intake/discharge water line -- Closure of coal ash disposal areas.... Various Generating plants coal ash areas -- Closure of wells at gas storage fields............................. Various Gas storage fields -- Indoor gas services equipment relocations........................ Various Gas meters located inside structures -- Closure of gas pipelines.............. Various Gas transmission pipelines -- Dismantle natural gas-fired power plant.............................. 1997 Gas fueled power plant --

PRO FORMA ARO LIABILITY ARO ARO LIABILITY ----------------------------- CASH FLOW LIABILITY ARO DESCRIPTION 1/1/02 1/1/03 INCURRED SETTLED ACCRETION REVISIONS 12/31/03 --------------- ------------- ------ -------- ------- --------- --------- --------- IN MILLIONS December 31, 2003 Palisades-decommission...... $232 $249 $-- $ -- $19 $-- $268 Big Rock-decommission....... 94 61 -- (39) 13 -- 35 JHCampbell intake line...... -- -- -- -- -- -- -- Coal ash disposal areas..... 46 51 -- (4) 5 -- 52 Wells at gas storage fields................... 2 2 -- -- -- -- 2 Indoor gas services relocations.............. 1 1 -- -- -- -- 1 Closure of gas pipelines(a)............. 7 8 -- (8) -- -- -- Dismantle natural gas-fired power plant.............. 1 1 -- -- -- -- 1 ---- ---- --- ---- --- --- ---- Total.................. $383 $373 $-- $(51) $37 $-- $359 ==== ==== === ==== === === ====
- ------------------------- (a) ARO Liability was settled in 2003 as a result of the sales of Panhandle and CMS Field Services. Reclassification of Non-Legal Cost of Removal: Beginning in December 2003, the SEC requires the quantification and reclassification of the estimated cost of removal obligations arising from other than legal obligations. These obligations have been accrued through depreciation charges. We estimate that we had $983 million in 2003 and $907 million in 2002 of previously accrued asset removal costs related to our regulated operations, for other than legal obligations. These obligations, which were previously classified as a component of CMS-107 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) accumulated depreciation, were reclassified as regulatory liabilities in the accompanying consolidated balance sheets. 17: IMPLEMENTATION OF NEW ACCOUNTING STANDARDS SFAS NO. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: Amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003. Implementation of this statement has not impacted our Consolidated Financial Statements. SFAS NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY: Establishes standards for how we classify and measure certain financial instruments with characteristics of both liabilities and equity. The statement requires us to classify financial instruments within its scope as liabilities rather than mezzanine equity, the area between liabilities and equity. SFAS No. 150 became effective July 1, 2003. We have five Trust Preferred Securities outstanding as of December 31, 2003 that are issued by our affiliated trusts. Each trust holds a subordinated debenture from the parent company. The terms of the debentures are identical to those of the trust-preferred securities, except that the debenture has an explicit maturity date. The trust documents, in turn, require that the trust be liquidated upon the repayment of the debenture. The preferred securities are redeemable upon the liquidation of the subsidiary; therefore, are considered equity in the financial statements of the subsidiary. At their October 29, 2003 Board meeting, the FASB deferred the implementation of the portion of SFAS No. 150 relating to mandatorily redeemable noncontrolling interests in subsidiaries when the noncontrolling interests are classified as equity in the financial statements of the subsidiary. Our Trust Preferred Securities are included in the deferral action. Upon adoption of FASB Interpretation No. 46, we determined that our trusts that issue Trust Preferred Securities should be deconsolidated and reported as long-term debt -- related parties. Refer to further discussion under FASB Interpretation No. 46, Consolidation of Variable Interest Entities. EITF ISSUE NO. 02-03, RECOGNITION AND REPORTING OF GAINS AND LOSSES ON ENERGY TRADING CONTRACTS UNDER EITF ISSUES NO. 98-10 AND 00-17: At the October 25, 2002 meeting, the EITF reached a consensus to rescind EITF Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. As a result, only energy contracts that meet the definition of a derivative in SFAS No. 133 will be carried at fair value. Energy trading contracts that do not meet the definition of a derivative must be accounted for as executory contracts. We recognized a cumulative effect of change in accounting principle loss of $23 million, net of tax, for the year ended December 31, 2003. EITF ISSUE NO. 01-08, DETERMINING WHETHER AN ARRANGEMENT CONTAINS A LEASE: In May 2003, the EITF reached consensus in EITF Issue No. 01-08 requiring both parties to a transaction, such as power purchase agreements, to determine whether a service contract or similar arrangement is or includes a lease within the scope of SFAS No. 13, Accounting for Leases. The consensus is to be applied prospectively to arrangements agreed to, modified, or acquired in business combinations in fiscal periods beginning July 1, 2003. Prospective accounting under EITF Issue No. 01-08, could affect the timing and classification of revenue and expense recognition. Certain product sales and service revenue and expenses may be required to be reported as rental or leasing income and/or expenses. Transactions deemed to be capital lease arrangements would be included on our balance sheet. The adoption of EITF Issue No. 01-08 has not impacted our results of operations, cash flows, or financial position. CMS-108 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EITF ISSUE NO. 03-04, ACCOUNTING FOR CASH BALANCE PENSION PLANS: In May 2003, the EITF reached consensus in EITF Issue No. 03-04 to specifically address the accounting for certain cash balance pension plans. EITF Issue No. 03-04 concluded that certain cash balance plans be accounted for as defined benefit plans under SFAS No. 87, Employers' Accounting for Pensions. The EITF requirements must be applied as of our next plan measurement date after issuance, which is December 31, 2003. In 2003, we started a cash balance pension plan that covers employees hired after June 30, 2003. We do account for this plan as a defined benefit plan under SFAS No. 87 and comply with EITF Issue No. 03-04. For further information, see Note 10, Retirement Benefits. ACCOUNTING STANDARDS NOT YET EFFECTIVE FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: FASB issued this interpretation in January 2003. The objective of the Interpretation is to assist in determining when one party controls another entity in circumstances where a controlling financial interest cannot be properly identified based on voting interests. Entities with this characteristic are considered variable interest entities. The Interpretation requires the party with the controlling financial interest to consolidate the entity. On December 24, 2003, the FASB issued Revised FASB Interpretation No. 46. For entities that have not previously adopted FASB Interpretation No. 46, Revised FASB Interpretation No. 46 provides an implementation deferral, until the first quarter of 2004. Revised FASB Interpretation No. 46 is effective for the first quarter of 2004 for all entities other than special purpose entities. Special-purpose entities must apply either FASB Interpretation No. 46 or Revised FASB Interpretation No. 46 for the first reporting period that ends after December 15, 2003. As of December 31, 2003, we have completed our analysis for and have adopted Revised FASB Interpretation No. 46 for all entities other than the MCV Partnership and FMLP. We continue to evaluate and gather information regarding those entities. We will adopt the provisions of Revised FASB Interpretation No. 46 for the MCV Partnership and FMLP in the first quarter of 2004. If our completed analysis shows we have the controlling financial interest in the MCV Partnership and FMLP, we would consolidate their assets, liabilities, and activities, including $700 million of non-recourse debt, into our financial statements. Financial covenants under our financing agreements could be impacted negatively after such a consolidation. As a result, it may become necessary to seek amendments to the relevant financing agreements to modify the terms of certain of these covenants to remove the effect of this consolidation, or to refinance the relevant debt. As of December 31, 2003, our investment in the MCV Partnership was $419 million and our investment in the FMLP was $224 million. We determined that we have the controlling financial interest in three entities that are determined to be variable interest entities. We have 50-percent partnership interest in T.E.S Filer City Station Limited Partnership, Grayling Generating Station Limited Partnership, and Genesee Power Station Limited Partnership. Additionally, we have operating and management contracts and are the primary purchaser of power from each partnership through long-term power purchase agreements. Collectively, these interests provide us with the controlling financial interest as defined by the Interpretation. Therefore, we have consolidated these partnerships into our consolidated financial statements for the first time as of December 31, 2003. At December 31, 2003, total assets consolidated for these entities are $227 million and total liabilities are $164 million, including $128 million of non-recourse debt. At December 31, 2003, CMS Energy has outstanding letters of credit and guarantees of $5 million relating to these entities. At December 31, 2003, minority interest recorded for these entities totaled $36 million. We also determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities have been deconsolidated as of December 31, 2003. Company obligated Trust Preferred Securities totaling $663 million that were previously included in mezzanine equity, have been CMS-109 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) eliminated due to deconsolidation. As a result of the deconsolidation, we have reflected $684 million of long-term debt -- related parties and have reflected an investment in related parties of $21 million. We are not required to, and have not, restated prior periods for the impact of this accounting change. Additionally, we have non-controlling interests in four other variable interest entities. FASB Interpretation No. 46 requires us to disclose certain information about these entities. The chart below details our involvement in these entities at December 31, 2003:
INVESTMENT OPERATING NAME INVOLVEMENT BALANCE AGREEMENT WITH (OWNERSHIP INTEREST) NATURE OF THE ENTITY COUNTRY DATE (IN MILLIONS) CMS ENERGY - -------------------- -------------------- ------- ----------- ------------- -------------- Loy Yang Power (49%) Power Generator Australia 1997 $ -- Yes Taweelah (40%) Power Generator United Arab Emirates 1999 $ 83 Yes Jubail (25%) Generator -- Saudi Arabia 2001 $ -- Yes Under Construction Shuweihat (20%) Generator -- United Arab Emirates 2001 $(24)(a) Yes Under Construction ---- Total $ 59 ==== TOTAL NAME GENERATING (OWNERSHIP INTEREST) CAPACITY - -------------------- ---------- Loy Yang Power (49%) 2,000 MW Taweelah (40%) 777 MW Jubail (25%) 250 MW Shuweihat (20%) 1,500 MW -------- Total 4,527 MW ========
- ------------------------- (a) At December 31, 2003, we recorded a negative investment in Shuweihat. The balance is comprised of our investment of $3 million reduced by our proportionate share of the negative fair value of derivative instruments of $27 million. We are required to record the negative investment due to our future commitment to make an equity investment in Shuweihat. Our maximum exposure to loss through our interests in these variable interest entities is limited to our investment balance of $59 million, Loy Yang currency translation losses of $110 million, net of tax, and letters of credit, guarantees, and indemnities relating to Taweelah and Shuweihat totaling $146 million. Included in the $146 million is a letter of credit relating to our required initial investment in Shuweihat of $70 million. We plan to contribute our initial investment when the project becomes commercially operational in 2004. STATEMENT OF POSITION, ACCOUNTING FOR CERTAIN COSTS AND ACTIVITIES RELATED TO PROPERTY, PLANT, AND EQUIPMENT: At its September 9, 2003 meeting, the Accounting Standards Executive Committee, of the American Institute of Certified Public Accountants voted to approve the Statement of Position, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. The Statement of Position is expected to be presented for FASB clearance in 2004 and would be applicable for fiscal years beginning after December 15, 2004. An asset classified as property, plant, and equipment asset often comprises multiple parts and costs. A component accounting policy determines the level at which those parts are recorded. Capitalization of certain costs related to property, plant, and equipment are included in the total cost. The Statement of Position could impact our component and capitalization accounting for property, plant, and equipment. We continue to evaluate the impact, if any, this Statement of Position will have upon adoption. CMS-110 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18: RESTATEMENT AND RECLASSIFICATION We have determined the need to make certain adjustments to our consolidated financial statements for the fiscal years ended December 31, 2002, December 31, 2001, and December 31, 2000. Therefore, the consolidated financial statements for 2002 and 2001 have been restated from amounts previously reported. The table below summarizes the significant adjustments and the effects on our consolidated net loss.
NET LOSS (INCREASE) DECREASE 2002 2001 TOTAL ---------------------------- ---- ---- ----- IN MILLIONS Interest allocation reclassification for International Energy Distribution....................................... $ (3) $ 3 $ -- Derivatives related to the equity method investments........ (27) (14) (41) ---- ---- ---- Total....................................................... $(30) $(11) $(41) ==== ==== ====
INTEREST ALLOCATION RECLASSIFICATION FOR INTERNATIONAL ENERGY DISTRIBUTION: Due to lack of progress on the sale, we reclassified our international energy distribution business, which includes CPEE and SENECA, from discontinued operations to continuing operations for the years 2003, 2002, and 2001. When we initially reported the international energy distribution business as a discontinued operation in 2001, we applied APB Opinion No. 30, which allowed us to record a provision for anticipated operating losses. We currently apply FASB No. 144 which does not allow us to record a provision for future operating losses. Therefore, in the process of reclassifying the international energy distribution business to continuing operations and reversing such provisions, we increased our net loss by $3 million in 2002 and decreased our net loss by $3 million in 2001. DERIVATIVES RELATED TO THE EQUITY METHOD INVESTMENTS: Some of our equity affiliates hold derivative instruments, including interest rate swaps and other similar instruments. Some of these instruments have been accounted for as cash flow hedges, with changes in the fair value of the hedges reported in accumulated other comprehensive income in 2003, 2002 and 2001. However, in late 2003 it was determined that certain of our equity affiliates did not formally designate their instruments as hedges, or did not do so in a timely manner, in accordance with SFAS No. 133. Therefore, the changes in the fair value of the hedges should have been reported in earnings in 2003, 2002, and 2001. As a result, the effects of the changes in the fair value of the hedges require restatement. Our proportionate share of the adjustments increased our net loss by $27 million in 2002 and increased our net loss by $14 million in 2001. BALANCE SHEET IMPACTS: The most significant effects on our consolidated balance sheets include the reclassification of International Energy Distribution from "held for sale" to continuing operations and the change in our investments due to the correction of the derivatives discussed above. During the fourth quarter of 2000, we wrote down the value of our investment in Loy Yang by $329 million ($268 million after-tax). We have now concluded that the tax benefit associated with the write-down should have been reduced by $38 million. Accordingly, our retained deficit as of January 1, 2001 increased by this amount. CMS-111 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables present the effects of the adjustments we made to our consolidated financial statements for the fiscal years ended December 31, 2002 and December 31, 2001, as well as effects of reclassifying Marysville and Parmelia into discontinued operations. CONSOLIDATED STATEMENTS OF INCOME
2002 2001 -------------------------- -------------------------- AS REPORTED AS RESTATED AS REPORTED AS RESTATED ----------- ----------- ----------- ----------- IN MILLIONS Operating Revenue............................... $8,561 $8,673 $7,878 $8,006 Earnings from Equity Method Investees........... 126 92 185 172 Operating expenses Operation..................................... 7,177 7,242 6,762 6,851 Maintenance................................... 211 212 224 225 Depreciation, depletion and amortization...... 403 412 398 408 General taxes................................. 199 222 196 220 Asset impairment charges...................... 598 602 240 323 ------ ------ ------ ------ Total Operating Expenses...................... 8,588 8,690 7,820 8,027 ------ ------ ------ ------ Operating Income................................ 99 75 243 151 ------ ------ ------ ------ Other Income (Deductions): Accretion expense............................. (31) (31) (37) (37) Gain (loss) on asset sales, net............... 37 37 - (2) Other, net.................................... (4) (6) 25 26 ------ ------ ------ ------ Total Other Income (Deductions)............... 2 -- (12) (13) ------ ------ ------ ------ Fixed Charges................................... 504 508 562 566 Loss From Continuing Operations Before Income Taxes and Minority Interests.................. (403) (433) (331) (428) ------ ------ ------ ------ Income Tax Expense (Benefit).................... 13 (41) (98) (94) Minority Interests.............................. -- 2 3 (7) ------ ------ ------ ------ Loss From Continuing Operations................. (416) (394) (236) (327) ------ ------ ------ ------ Loss From Discontinued Operations............... (222) (274) (210) (128) ------ ------ ------ ------ Loss Before Cumulative Effect of Change in Accounting Principle.......................... (638) (668) (446) (455) ------ ------ ------ ------ Cumulative Effect of Change in Accounting....... 18 18 (2) (4) ------ ------ ------ ------ Consolidated Net Loss........................... $ (620) $ (650) $ (448) $ (459) ====== ====== ====== ====== Basic and Diluted Loss Per Share................ $(4.46) $(4.68) $(3.42) $(3.51) ====== ====== ====== ======
CMS-112 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED STATEMENTS OF CASH FLOWS
2002 2001 -------------------------- -------------------------- AS REPORTED AS RESTATED AS REPORTED AS RESTATED ----------- ----------- ----------- ----------- IN MILLIONS Consolidated net loss........................... $ (620) $ (650) $ (448) $ (459) Net cash provided by operating activities....... 624 614 366 372 Net cash provided by (used in) investing activities.................................... 863 829 (1,348) (1,349) Net cash provided by (used in) financing activities.................................... (1,237) (1,223) 968 967 Effect of Exchange Rate on Cash................. -- 8 -- (10) Net Increase (Decrease) in Cash and Temporary Cash Investments.............................. 250 228 (14) (20) ------- ------- ------- ------- Cash and Cash Investments, End of Period........ $ 377 $ 351 $ 127 $ 123 ======= ======= ======= =======
CONSOLIDATED BALANCE SHEETS
2002 2001 -------------------------- -------------------------- AS REPORTED AS RESTATED AS REPORTED AS RESTATED ----------- ----------- ----------- ----------- IN MILLIONS ASSETS Plant and Property (at cost).................... $ 5,234 $ 6,103 $ 5,848 $ 6,703 ------- ------- ------- ------- Investments..................................... 1,398 1,369 1,961 1,960 ------- ------- ------- ------- Current Assets: Cash and temporary cash investments........... 377 351 127 123 Restricted cash............................... -- 38 -- 4 Accounts receivable, notes receivable, and accrued revenue............................ 757 783 704 743 Assets held for sale.......................... 644 595 471 412 Price risk management assets.................. 115 115 327 327 Prepayments, inventories, and other........... 855 857 931 951 ------- ------- ------- ------- Total Current Assets............................ 2,748 2,739 2,560 2,560 ------- ------- ------- ------- Non-current Assets: Regulatory assets............................. 1,053 1,053 1,105 1,105 Assets held for sale.......................... 2,081 2,084 3,480 3,438 Price risk management assets.................. 135 135 368 368 Other......................................... 1,266 1,298 1,453 1,499 ------- ------- ------- ------- Total Non-current Assets........................ 4,535 4,570 6,406 6,410 ------- ------- ------- ------- Total Assets.................................... $13,915 $14,781 $16,775 $17,633 ======= ======= ======= =======
CMS-113 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2002 2001 -------------------------- -------------------------- AS REPORTED AS RESTATED AS REPORTED AS RESTATED ----------- ----------- ----------- ----------- IN MILLIONS STOCKHOLDERS' INVESTMENT AND LIABILITIES Capitalization: Common stockholders' equity..................... $ 1,133 $ 1,078 $ 2,038 $ 1,991 Long-term debt.................................. 5,356 5,357 5,840 5,842 Non-current portion of capital leases........... 116 116 71 71 Other........................................... 927 927 1,258 1,258 ------- ------- ------- ------- Total Capitalization............................ 7,532 7,478 9,207 9,162 ------- ------- ------- ------- Minority Interests.............................. 21 38 24 43 ------- ------- ------- ------- Current Liabilities: Current portion of long-term debt and capital leases..................................... 640 646 1,016 1,016 Notes payable................................. 458 458 416 416 Accounts payable.............................. 482 496 595 614 Accrued taxes................................. 291 291 111 111 Liabilities held for sale..................... 465 427 639 605 Price risk management liabilities............. 96 96 367 367 Deferred income taxes......................... 15 15 49 49 Other......................................... 451 460 478 494 ------- ------- ------- ------- Total Current Liabilities....................... 2,898 2,889 3,671 3,672 ------- ------- ------- ------- Non-current Liabilities: Deferred income taxes......................... 414 438 824 864 Regulatory liabilities for cost of removal.... -- 907 -- 870 Liabilities held for sale..................... 1,243 1,218 1,376 1,354 Price risk management liabilities............. 135 135 287 287 Other......................................... 1,672 1,678 1,386 1,381 ------- ------- ------- ------- Total Non-current Liabilities................... 3,464 4,376 3,873 4,756 ------- ------- ------- ------- Total Stockholders' Investment and Liabilities................................... $13,915 $14,781 $16,775 $17,633 ======= ======= ======= =======
CMS-114 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
2002 2001 -------------------------- -------------------------- AS REPORTED AS RESTATED AS REPORTED AS RESTATED ----------- ----------- ----------- ----------- IN MILLIONS Retained Deficit At beginning of period........................ $ (951) $(1,001) $ (313) $ (352) Consolidated net loss......................... (620) (650) (448) (459) Common stock dividends declared............... (149) (149) (190) (190) ------- ------- ------ ------- At end of period........................... (1,720) (1,800) (951) (1,001) ------- ------- ------ ------- Accumulated Other Comprehensive Loss At beginning of period........................ (269) (266) (201) (198) Minimum pension liability..................... (241) (241) -- -- Investments................................... 7 7 (3) (3) Derivative instruments........................ (25) (3) (38) (38) Foreign currency translation.................. (225) (225) (27) (27) ------- ------- ------ ------- At end of period........................... (753) (728) (269) (266) ------- ------- ------ ------- Common stock.................................... 1 1 1 1 Other paid-in capital........................... 3,605 3,605 3,257 3,257 ------- ------- ------ ------- Total Common Stockholders' Equity............... $ 1,133 $ 1,078 $2,038 $ 1,991 ======= ======= ====== ======= Total Other Comprehensive Loss.................. $(1,104) $(1,112) $ (516) $ (527) ======= ======= ====== =======
CMS-115 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19: QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED) We have determined the need to make certain adjustments to our consolidated financial statements for the quarterly periods of 2003 and 2002. Therefore, the consolidated financial statements for the quarterly periods of 2003 and 2002 have been restated from amounts previously reported.
2003 (RESTATED) ------------------------------------------ QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------------- -------- ------- -------- ------- IN MILLIONS, EXCEPT PER SHARE AMOUNTS Operating revenue.......................................... $1,968 $1,126 $1,047 $1,372 Operating income........................................... 236 176 78 105 Income (loss) from continuing operations................... 75 (12) (71) (35) Discontinued operations(a)................................. 31 (53) 2 43 Cumulative effect of change in accounting principles(a).... (24) -- -- -- Consolidated net income (loss)............................. 82 (65) (69) 8 Income (loss) from continuing operations per average common share -- basic........................................... 0.52 (0.08) (0.47) (0.22) Income (loss) from continuing operations per average common share -- diluted......................................... 0.47 (0.08) (0.47) (0.22) Basic earnings (loss) per average common share(b).......... 0.57 (0.45) (0.46) 0.05 Diluted earnings (loss) per average common share(b)........ 0.52 (0.45) (0.46) 0.05 Dividends declared per common share........................ -- -- -- -- Common stock prices(c) High..................................................... 10.59 8.50 7.99 8.63 ====== ====== ====== ====== Low...................................................... 3.49 4.58 6.11 7.44 ====== ====== ====== ======

2002 (RESTATED) ------------------------------------------ QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------------- -------- ------- -------- ------- IN MILLIONS, EXCEPT PER SHARE AMOUNTS Operating revenue.......................................... $2,248 $2,123 $2,566 $1,736 Operating income (loss).................................... 283 136 178 (522) Income (loss) from continuing operations................... 103 17 (1) (513) Discontinued operations(a)................................. (52) (128) 26 (120) Cumulative effect of change in accounting principles(a).... -- 17 1 -- Consolidated net income (loss)............................. 51 (94) 26 (633) Income (loss) from continuing operations per average common share -- basic........................................... 0.77 0.14 -- (3.57) Income (loss) from continuing operations per average common share -- diluted......................................... 0.77 0.14 -- (3.57) Basic earnings (loss) per average common share(b).......... 0.38 (0.69) 0.18 (4.40) Diluted earnings (loss) per average common share(b)........ 0.38 (0.69) 0.18 (4.40) Dividends declared per common share........................ 0.365 0.365 0.18 0.18 Common stock prices(c) High..................................................... 24.62 22.24 11.28 10.48 ====== ====== ====== ====== Low...................................................... 21.27 10.46 7.49 5.79 ====== ====== ====== ======
- ------------------------- (a) Net of tax (b) Sum of the quarters may not equal the annual earnings per share due to changes in shares outstanding (c) Based on New York Stock Exchange -- Composite transactions CMS-116 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables present the effects of the adjustments we made to our consolidated financial statements for the quarterly periods of 2003 and 2002, as well as the effects of reclassifying Marysville and Parmelia into discontinued operations.
2003 ----------------------------------------- QUARTERS ENDED -- REPORTED VS. RESTATED MARCH 31 JUNE 30 SEPT. 30 --------------------------------------- -------- ------- -------- IN MILLIONS, EXCEPT PER SHARE AMOUNTS Operating revenue as reported............................... $1,992 $1,154 $1,016 Operating revenue as restated............................... 1,968 1,126 1,047 Operating income as reported................................ 239 183 129 Operating income as restated................................ 236 176 78 Income (loss) from continuing operations as reported........ 76 (5) (34) Income (loss) from continuing operations as restated........ 75 (12) (71) Discontinued operations as reported......................... 27 (40) (43) Discontinued operations as restated......................... 31 (53) 2 Consolidated net income (loss) as reported.................. 79 (45) (77) Consolidated net income (loss) as restated.................. 82 (65) (69) Basic earnings (loss) per average common share as reported.................................................. 0.55 (0.31) (0.51) Basic earnings (loss) per average common share as restated.................................................. 0.57 (0.45) (0.46) Diluted earnings (loss) per average common share as reported.................................................. 0.51 (0.31) (0.51) Diluted earnings (loss) per average common share as restated.................................................. 0.52 (0.45) (0.46)

2002 ------------------------------------------ QUARTERS ENDED -- REPORTED VS. RESTATED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 --------------------------------------- -------- ------- -------- ------- IN MILLIONS, EXCEPT PER SHARE AMOUNTS Operating revenue as reported.............................. $2,263 $2,135 $2,534 $1,708 Operating revenue as restated.............................. 2,248 2,123 2,566 1,736 Operating income (loss) as reported........................ 275 152 190 (520) Operating income (loss) as restated........................ 283 136 178 (522) Income (loss) from continuing operations as reported....... 93 36 11 (557) Income (loss) from continuing operations as restated....... 103 17 (1) (513) Discontinued operations as reported........................ (51) (127) 25 (68) Discontinued operations as restated........................ (52) (128) 26 (120) Consolidated net income (loss) as reported................. 42 (74) 37 (625) Consolidated net income (loss) as restated................. 51 (94) 26 (633) Basic earnings (loss) per average common share as reported................................................. 0.32 (0.55) 0.26 (4.34) Basic earnings (loss) per average common share as restated................................................. 0.38 (0.69) 0.18 (4.40) Diluted earnings (loss) per average common share as reported................................................. 0.32 (0.55) 0.26 (4.34) Diluted earnings (loss) per average common share as restated................................................. 0.38 (0.69) 0.18 (4.40)
CMS-117 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The table below summarizes the significant adjustments and the effect on consolidated net income (loss) by quarter.
2003 2002 ------------------------------ ----------------------------------------- QUARTERS ENDED MAR. 31 JUNE 30 SEPT. 30 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 -------------- ------- ------- -------- ------- ------- -------- ------- IN MILLIONS Consolidated net income (loss) as reported............................... $79 $(45) $(77) $42 $(74) $37 $(625) Discontinued operations reclass(a)....... -- -- -- (1) (1) (1) -- Derivative accounting changes(b)......... 3 (6) 8 10 (19) (10) (8) Panhandle sale adjustment(c)............. -- (14) -- -- -- -- -- --- ---- ---- --- ---- --- ----- Consolidated net income (loss) as restated............................... $82 $(65) $(69) $51 $(94) $26 $(633) === ==== ==== === ==== === =====
- ------------------------- (a) We continue to pursue the sale of International Energy Distribution, which includes CPEE and SENECA, but due to the slow progress on the sale, we have reclassified this entity from discontinued operations to continuing operations for the years 2003, 2002, and 2001. When we initially reported the international energy distribution business as a discontinued operation in 2001, we applied APB Opinion No. 30, which allowed us to record a provision for anticipated closing costs and operating losses. We currently apply FASB No. 144 which does not allow us to record a provision for future operating losses. Therefore, in the process of reclassifying the international energy distribution business to continuing operations and reversing such provisions, we increased our net loss by $3 million in 2002 and decreased our net loss by $3 million in 2001. In 2003, there was an increase to net income of $75 million as a result of reversing the previously recognized impairment loss in discontinued operations. (b) We determined that certain equity method investees inappropriately accounted for interest rate swaps as hedges. For additional details, see Note 18, Restatement and Reclassification. (c) We determined the net loss recorded in the second quarter of 2003 relating to the sale of Panhandle, reflected as Discontinued Operations, was understated by approximately $14 million, net of tax. The understatement occurred because we did not recognize through our second quarter 2003 earnings an unrealized loss related to certain Panhandle interest rate hedging derivative instruments. Pursuant to SFAS No. 133, the unrealized loss was accounted for in Other Comprehensive Income, but needed to be recognized through earnings upon the sale of Panhandle. CMS-118 (This page intentionally left blank) CMS-119 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders CMS Energy Corporation We have audited the accompanying consolidated balance sheets of CMS Energy Corporation (a Michigan corporation) and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income (loss), common stockholders' equity and cash flows for each of three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of Midland Cogeneration Venture Limited Partnership and Jorf Lasfar Energy Company S.C.A., which represent investments accounted for under the equity method of accounting, have been audited by other auditors (the other auditors for 2001 for Midland Cogeneration Venture Limited Partnership have ceased operations) whose reports have been furnished to us; insofar as our opinion on the consolidated financial statements relates to the amounts included for Midland Cogeneration Venture Limited Partnership and Jorf Lasfar Energy Company S.C.A., respectively, it is based solely on their reports. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CMS Energy Corporation and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Notes 16 and 17 to the consolidated financial statements, in 2003, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations", EITF Issue No. 02-03, "Recognition and Reporting of Gains and Losses on Energy Trading Contracts" and of Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities". As discussed in Notes 3, 9 and 15 to the consolidated financial statements, in 2002, the Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangibles", SFAS No. 148, "Accounting for Stock-Based Compensation" and Midland Cogeneration Venture Limited Partnership adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended and interpreted. As discussed in Note 18 to the consolidated financial statements, the Company restated its 2002 and 2001 financial statements. /s/ ERNST & YOUNG LLP Detroit, Michigan February 27, 2004 CMS-120 REPORT OF INDEPENDENT AUDITORS We have audited the accompanying balance sheets of Jorf Lasfar Energy Company S.C.A (the "Company") as of December 31, 2003, 2002 and 2001, and the related statements of income, of stockholders' equity and of cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jorf Lasfar Energy Company S.C.A at December 31, 2003, 2002 and 2001, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Price Waterhouse Casablanca, Morocco, February 10, 2004 CMS-121 REPORT OF INDEPENDENT AUDITORS To the Partners and the Management Committee of Midland Cogeneration Venture Limited Partnership: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, partners' equity and cash flows present fairly, in all material respects, the financial position of the Midland Cogeneration Limited Partnership (a Michigan limited partnership) and its subsidiaries (MCV) at December 31, 2003 and 2002, and the results of their operations and their cash flows for the each of the two years ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of MCV's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements of MCV for the year ended December 31, 2001, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 18, 2002. As explained in Note 2 to the financial statements, effective April 1, 2002, Midland Cogeneration Venture Limited Partnership changed its method of accounting for derivative and hedging activities in accordance with Derivative Implementation Group ("DIG") Issue C-16. /s/ PricewaterhouseCoopers LLP Detroit, Michigan February 18, 2004 CMS-122 THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED ARTHUR ANDERSEN REPORT AND THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners and the Management Committee of the Midland Cogeneration Venture Limited Partnership: We have audited the accompanying consolidated balance sheets of the MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and subsidiaries (MCV) as of December 31, 2001 and 2000, and the related consolidated statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of MCV's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Midland Cogeneration Venture Limited Partnership and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 2 to the financial statements, effective January 1, 2001, Midland Cogeneration Venture Limited Partnership changed its method of accounting related to derivatives and hedging activities. /s/Arthur Andersen LLP Detroit, Michigan, January 18, 2002 CMS-123 [CONSUMERS ENERGY LOGO] 2003 FINANCIAL STATEMENTS CE-1 CONSUMERS ENERGY COMPANY SELECTED FINANCIAL INFORMATION
2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Operating revenue (in millions).................... ($) 4,435 4,169 3,976 3,878 3,824 Earnings from equity method investees.............. ($) 42 53 38 57 50 Income before cumulative effect of change in accounting principle (in millions)............... ($) 196 363 199 284 340 Net income (in millions) (a)....................... ($) 196 381 188 284 340 Net income available to common stockholder (in millions)........................................ ($) 194 335 145 248 313 Cash from operations (in millions)................. ($) 5 760 518 515 791 Capital expenditures, excluding capital lease additions (in millions).......................... ($) 486 559 745 498 444 Total assets (in millions) (e)..................... ($) 10,745 9,598 9,191 8,672 8,044 Long-term debt, excluding current maturities (in millions)........................................ ($) 3,583 2,442 2,472 2,110 2,006 Long-term debt -- related parties (in millions) (b).............................................. ($) 506 -- -- -- -- Non-current portion of capital leases (in millions)........................................ ($) 58 116 72 49 85 Total preferred stock (in millions)................ ($) 44 44 44 44 44 Total Trust Preferred Securities (in millions) (b).............................................. ($) -- 490 520 395 395 Number of preferred shareholders at year-end....... 2,032 2,132 2,220 2,365 2,534 Book value per common share at year-end............ ($) 24.51 22.46 22.81 23.85 23.87 Return on average common equity.................... (%) 9.8 17.6 7.4 12.4 16.2 Return on average assets........................... (%) 3.6 5.3 3.5 4.8 6.0 Number of full-time equivalent employees at year-end Consumers..................................... 7,947 8,311 8,405 8,698 8,736 Michigan Gas Storage (c)...................... -- -- 62 57 63 ELECTRIC STATISTICS Sales (billions of kWh).......................... 39 39 40 41 41 Customers (in thousands)......................... 1,754 1,734 1,712 1,691 1,665 Average sales rate per kWh....................... (c) 6.91 6.88 6.65 6.56 6.54 GAS UTILITY STATISTICS Sales and transportation deliveries (bcf)........ 380 376 367 410 389 Customers (in thousands) (d)..................... 1,671 1,652 1,630 1,611 1,584 Average sales rate per mcf....................... ($) 6.72 5.67 5.34 4.39 4.52
- ------------------------- (a) See Notes 1 and 2 in the notes to the consolidated financial statements. (b) Effective December 31, 2003, Trust Preferred Securities are classified on the balance sheets as Long-term debt -- related parties. (c) Effective November 2002, Michigan Gas Storage Company was merged into Consumers. (d) Excludes off-system transportation customers. (e) For additional details on the reclassification of non-legal cost of removal, see Note 12, Asset Retirement Obligation, "Reclassification of Non-Legal Cost of Removal." Following is the amount of cost of removal reclassified from accumulated depreciation to a regulatory liability by year: $983 million in 2003; $907 million in 2002; $870 million in 2001; $896 million in 2000; and $874 million in 1999. CE-2 CONSUMERS ENERGY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS In this MD&A, Consumers Energy, which includes Consumers Energy Company and all of its subsidiaries, is at times referred to in the first person as "we", "our" or "us". EXECUTIVE OVERVIEW Consumers, a subsidiary of CMS Energy, a holding company, is a combination electric and gas utility company that provides service to customers in Michigan's Lower Peninsula. Our customer base includes a mix of residential, commercial, and diversified industrial customers, the largest segment of which is the automotive industry. We manage our business by the nature and services each provides and operate principally in two business segments: electric utility and gas utility. Our electric utility operations include the generation, purchase, distribution, and sale of electricity. Our gas utility operations purchase, transport, store, distribute, and sell natural gas. We earn our revenue and generate cash from operations by providing electric and natural gas services, electric power generation, gas transmission and storage, and other energy related services. Our businesses are affected by weather, especially during the traditional heating and cooling seasons, economic conditions, regulation and regulatory issues, interest rates, our debt credit rating, and energy commodity prices. Our strategy involves rebuilding our balance sheet and refocusing on our core strength: superior utility operation. Over the next few years, we expect this strategy to improve our debt ratings, grow earnings at a mid-single digit rate, and position the company to make new investments. In 2003, we continued to implement our strategy centered around growing a healthy utility in Michigan. We have taken advantage of historically low interest rates to extend maturities and refinance our debt at lower cost. We completed financing and refinancing transactions to resolve liquidity concerns at the start of 2003. In addition, we contributed $501 million to our defined benefit pension plan. This should result in lower pension costs in the future. At the foundation of our financial progress was exceptional operating performance. For the second consecutive year, our Michigan gas utility earned the J.D. Power and Associates award for highest residential customer satisfaction with natural gas services in the Midwest. Independent evaluators, like J.D. Power and Associates recognize value and our regulators do too. The MPSC authorized an annual increase in our gas utility rates of $56 million in late 2002, and an additional interim annualized $19 million rate increase in 2003. Despite strong financial and operational performance in 2003, we face important challenges in the future. We continue to lose industrial and commercial customers to other electric suppliers without receiving compensation for stranded costs caused by the lost sales. As of March 2004, we lost 735 MW or nine percent of our electric business to these alternative electric suppliers. We expect the loss to grow to over 1,000 MW in 2004. Existing state legislation encourages competition and provides for recovery of stranded costs, but the MPSC has not yet authorized stranded cost recovery. We continue to work cooperatively with the MPSC to resolve this issue. Further, higher natural gas prices have harmed the economics of the MCV and we are seeking approval from the MPSC to change the way in which the facility is used. Our proposal would reduce gas consumption by an estimated 30 to 40 bcf per year while improving the MCV's financial performance with no change to customer rates. A portion of the benefits from the proposal will support additional renewable resource development in Michigan. Resolving the issue is critical for our shareowners and customers, and we have asked the MPSC to approve it quickly. We also are focused on further reducing our business risk and leverage, while growing the equity base of our company. Finally, we are planning to devote more attention to improving business growth. Our business plan is targeted at predictable earnings growth. The result of these efforts will be a strong, reliable utility company that will be poised to take advantage of opportunities for further growth. CE-3 FORWARD-LOOKING STATEMENTS AND RISK FACTORS This Form 10-K and other written and oral statements that we make contain forward-looking statements as defined in Rule 3b-6 of the Securities Exchange Act of 1934, as amended, Rule 175 of the Securities Act of 1933, as amended, and relevant legal decisions. Our intention with the use of words such as "may," "could," "anticipates," "believes," "estimates," "expects," "intends," "plans," and other similar words is to identify forward-looking statements that involve risk and uncertainty. We designed this discussion of potential risks and uncertainties to highlight important factors that may impact our business and financial outlook. We have no obligation to update or revise forward-looking statements regardless of whether new information, future events, or any other factors affect the information contained in the statements. These forward-looking statements are subject to various factors that could cause our actual results to differ materially from the results anticipated in these statements. Such factors include our inability to predict and/or control: - achievement of capital expenditure reductions and cost savings, - capital and financial market conditions, including the current price of CMS Energy Common Stock and the effect on the Pension Plan, interest rates and availability of financing to Consumers, CMS Energy, or any of their affiliates and the energy industry, - market perception of the energy industry, Consumers, CMS Energy, or any of their affiliates, - securities ratings of Consumers, CMS Energy, or any of their affiliates, - factors affecting utility and diversified energy operations such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission or gas pipeline system constraints, - ability to access the capital markets successfully, - international, national, regional, and local economic, competitive, and regulatory policies, conditions and developments, - adverse regulatory or legal decisions, including environmental laws and regulations, - federal regulation of electric sales and transmission of electricity including re-examination by federal regulators of our market-based sales authorizations in wholesale power markets, and proposals by FERC to change the way public utilities and natural gas companies, and their subsidiaries and affiliates, interact with each other, - energy markets, including the timing and extent of unanticipated changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity, and certain related products due to lower or higher demand, shortages, transportation problems, or other developments, - potential disruption or interruption of facilities or operations due to accidents or terrorism, and the ability to obtain or maintain insurance coverage for such events, - nuclear power plant performance, decommissioning, policies, procedures, incidents, and regulation, including the availability of spent nuclear fuel storage, - technological developments in energy production, delivery, and usage, - changes in financial or regulatory accounting principles or policies, - outcome, cost, and other effects of legal and administrative proceedings, settlements, investigations and claims, - limitations on our ability to control the development or operation of projects in which our subsidiaries have a minority interest, - disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance and performance bonds, CE-4 - other business or investment considerations that may be disclosed from time to time in CMS Energy's or our SEC filings or in other publicly issued written documents, and - other uncertainties that are difficult to predict, and many of which are beyond our control. RESULTS OF OPERATIONS NET INCOME AVAILABLE TO COMMON STOCKHOLDER
YEARS ENDED DECEMBER 31 ------------------------------------------------ 2003 2002 CHANGE 2002 2001 CHANGE ---- ---- ------ ---- ---- ------ IN MILLIONS Net income available to common stockholder......... $194 $335 $(141) $335 $145 $190 ==== ==== ===== ==== ==== ====
2003 COMPARED TO 2002: Net income in 2003 was reduced $141 million as compared to 2002 for several reasons. Higher electric and gas operating costs in 2003 were responsible for $80 million of the reduction in net income. Increased operating costs include $53 million in higher pension and other benefit costs, see Note 7, Retirement Benefits, $12 million of increased depreciation expense reflecting higher levels of plant in service, and $7 million of increased amortization expense associated with securitized regulatory assets. Amortization expense is recognized as principal is repaid to the Securitization bondholders. A significant reduction in 2003 electric deliveries also contributed to reduced net income. Milder weather during the summer air conditioning season, and a continuation of the trend of commercial and industrial customers switching from us to other electric suppliers, impacted net income negatively by $27 million in 2003 versus 2002. Increased costs of borrowing reduced 2003 net income by $23 million, reflecting higher levels of debt, and higher average interest rates. Our ownership interest in the MCV Partnership reflects a $27 million reduction, as compared to 2002, in the fair value of certain gas contracts held by the MCV Partnership. The fair value of these contracts is adjusted through earnings in accordance with SFAS No. 133. For additional details on SFAS No. 133, see Note 4, Financial and Derivative Instruments. The 2003 decrease in net income also reflects a $7 million charge at CMS Holdings to reflect the loss of certain tax credits. Finally, contrary to 2002, net income in 2003 did not reflect any gains or losses associated with asset sales. In 2002, gains primarily associated with the sale of the electric transmission system contributed $31 million to net income. On the positive side, 2003 net income increased $25 million as compared to 2002 due to a full year of higher gas tariff rates, as authorized by the MPSC in late 2002. Lower general taxes in 2003 contributed an additional $8 million to net income during the year. The reduction in general taxes primarily reflects a MSBT credit received from the State of Michigan associated with the construction of our headquarters on a qualifying Brownfield site. Our ability to manage our electric power supply costs also provided additional net income in 2003. Lower average fuel costs and the availability of higher market prices for our excess capacity increased net income by $17 million as compared to 2002. 2002 COMPARED TO 2001: Net income increased $190 million as compared to 2001. This increase was the result of several factors. Reduced electric power costs in 2002 were responsible for $85 million of the increase in net income. This reduction in power costs was due primarily to higher cost replacement power purchased in 2001 because of a refueling outage and an unscheduled forced outage at Palisades. Lower prices for power options and dispatchable capacity contracts purchased in 2002 also contributed to the reduction in power costs. In 2002, gains primarily associated with the sale of the electric transmission system contributed $31 million to net income. Net income in 2001 did not reflect any gains or losses associated with asset sales. Under SFAS No. 133, certain MCV gas contracts are adjusted, through earnings, to reflect fair value. Earnings received by our ownership interest in the MCV Partnership reflect a $25 million increase, compared to 2001, in the fair value of these contracts held by the MCV Partnership. Net income also increased as a result of an CE-5 $11 million adjustment to electric call option and option-like contracts booked in 2001, due to SFAS No. 133 implementation. Increased electric deliveries to the higher margin residential and commercial customers contributed $27 million to net income in 2002. The interim and final gas rate orders issued in 2001 and 2002 increased net income by $16 million. Offsetting these increases to net income is a $9 million decrease resulting from the recognition of a historic gas inventory adjustment in the cumulative amount of 4 bcf. For additional details, see "Electric Results of Operations" and "Gas Results of Operations" within this section and Note 2, Uncertainties. ELECTRIC UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 ------------------------------------------------ 2003 2002 CHANGE 2002 2001 CHANGE ---- ---- ------ ---- ---- ------ IN MILLIONS Net income available to common stockholder......... $167 $264 $(97) $264 $109 $155 ==== ==== ==== ==== ==== ==== Reasons for the change: Electric deliveries................................ $(41) $ 41 Power supply costs and related revenue............. 26 149 Other operating expenses and non-commodity revenue.......................................... (80) (21) Implementation of accounting standards (SFAS No. 133)............................................. -- 17 Gain on asset sales................................ (38) 38 General taxes...................................... 10 (3) Fixed charges...................................... (22) 9 Income taxes....................................... 48 (75) ---- ---- Total change....................................... $(97) $155 ==== ====
ELECTRIC DELIVERIES: In 2003, electric revenues decreased, reflecting lower deliveries. Most significantly, sales volumes to commercial and industrial customers were 5.6 percent lower than in 2002, a result of these sectors' continued switching to alternative electric suppliers as allowed by the Customer Choice Act. The decrease in revenue is also the result of reduced deliveries to higher-margin residential customers, from a milder summer's impact on air conditioning usage. Overall, electric deliveries, including transactions with other wholesale marketers and other electric utilities, decreased 0.4 billion kWh or 1.1 percent. In 2002, electric revenue increased by $41 million from the previous year, despite lower deliveries. This was due primarily to increased deliveries to higher-margin residential customers as a result of a significantly warmer summer's impact on air conditioning usage. Deliveries, including transactions with other wholesale marketers and other electric utilities, decreased 0.3 billion kWh or 0.7 percent. POWER SUPPLY COSTS AND RELATED REVENUE: In 2003, our recovery of power supply costs was fixed, as required under the Customer Choice Act. Therefore, power supply-related revenue in excess of actual power supply costs increased operating income. By contrast, if power supply-related revenues had been less than actual power supply costs, the impact would have decreased operating income. In 2003, this difference between power supply-related revenues and actual power supply costs benefited operating income by $26 million more than it had in 2002. This increase is primarily the result of increased intersystem revenues due to higher market prices and sales made from surplus capacity. The efficient operation of our generating plants and lower priced purchased power further decreased power supply costs. In 2002, as compared to 2001, power supply costs and related revenues increased operating income due primarily to reduced purchased power costs because the Palisades plant returned to service in 2002, following an extended 2001 shutdown. OTHER OPERATING EXPENSES AND NON-COMMODITY REVENUE: In 2003, net operating expenses and non-commodity revenue decreased operating income by $80 million versus 2002. This decrease relates to increased CE-6 pension and other benefit costs of $54 million, a scheduled refueling outage at Palisades, and higher transmission costs. More plant in service increased depreciation costs by $8 million, and $11 million of higher amortization expense from securitized assets further contributed to decreased operating income. Slightly offsetting the increased operating expenses were higher non-commodity revenues associated with other income. In 2002, net operating expenses and non-commodity revenue decreased operating income by $21 million compared with 2001. The decrease primarily related to higher transmission expenses and increased depreciation costs from more plant in service. ASSET SALES: The reduction in operating income from asset sales for 2003 versus 2002, and the increase in operating income from asset sales for 2002 versus 2001 reflect the $31 million pretax gain associated with the 2002 sale of our electric transmission system and the $7 million pretax gain associated with the 2002 sale of nuclear equipment from the cancelled Midland project. GENERAL TAXES: In 2003, general taxes decreased from 2002 due primarily to reductions in MSBT expense, resulting primarily from a tax credit received from the State of Michigan associated with construction of the new corporate headquarters on a qualifying Brownfield site. In 2002, general taxes increased over 2001 due to increases in MSBT and property tax accruals. FIXED CHARGES: In 2003, fixed charges increased versus 2002 due primarily to higher average debt levels, but also because of higher average interest rates. In 2002, fixed charges decreased versus 2001 because of a reduction in long-term debt. INCOME TAXES: In 2003, income tax decreased versus 2002 due primarily to lower earnings by the electric utility. In 2002, income tax expense increased versus 2001 due primarily to increased earnings. GAS UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 ------------------------------------------------ 2003 2002 CHANGE 2002 2001 CHANGE ---- ---- ------ ---- ---- ------ IN MILLIONS Net income available to common stockholder............ $38 $46 $ (8) $46 $21 $ 25 === === ==== === === ==== Reasons for the change: Gas deliveries........................................ $ (1) $ 21 Gas rate increase..................................... 39 25 Gas wholesale and retail services and other gas revenues............................................ 1 1 Operation and maintenance............................. (34) (14) General taxes, depreciation, and other income......... (6) (3) Fixed charges......................................... (5) 3 Income taxes.......................................... (2) (8) ------ ------ Total change.......................................... $ (8) $ 25 ====== ======
GAS DELIVERIES: In 2003, gas deliveries, including miscellaneous transportation, increased 4.1 bcf or 1.1 percent versus 2002. Despite increased system deliveries, gas revenues actually declined by $1 million. Colder weather during the first quarter of 2003 increased deliveries to the residential and commercial sectors. Increased deliveries resulted in a $6 million increase in gas revenues. However, the revenue increase was offset by a $7 million gas loss adjustment recorded as a reduction to gas revenues. In 2002, gas revenues increased by $21 million from the previous year. System deliveries, including miscellaneous transportation, increased 9.4 bcf or 2.6 percent. The increase was due primarily to colder weather that increased deliveries to the residential and commercial sectors. GAS RATE INCREASE: In November 2002, the MPSC issued a final gas rate order authorizing a $56 million annual increase to gas tariff rates. As a result of this order, 2003 gas revenues increased $39 million. In 2002, gas rate increases led to increased gas revenues of $25 million over 2001. CE-7 GAS WHOLESALE AND RETAIL SERVICES AND OTHER GAS REVENUES: In 2003, gas wholesale and retail services and other gas revenues increased $1 million. The $1 million increase includes primarily the following two items. In 2003, we reversed a $4 million reserve, originally recorded in 2002, for non-physical gas title tracking services. In addition, in 2003, we reserved $11 million for the settlement agreement associated with the 2002-2003 GCR disallowance. For additional details regarding both of these issues, see the Gas Utility Business Uncertainties in the "Outlook" section of this MD&A. OPERATION AND MAINTENANCE: In 2003, operation and maintenance expenses increased versus 2002 due to increases in pension and other benefits costs of $27 million and additional expenditures on safety, reliability, and customer service. In 2002, operation and maintenance expenses increased versus 2001 due to the recognition of gas storage inventory losses and additional expenditures on customer reliability and service. GENERAL TAXES, DEPRECIATION, AND OTHER INCOME: In 2003, the net of general tax expense, depreciation expense, and other income decreased operating income primarily because of increases in depreciation expense from increased plant in service. In 2002, the net of general tax expense, depreciation expense, and other income decreased operating income primarily because of increases in MSBT and property tax expense accruals. FIXED CHARGES: In 2003, fixed charges increased versus 2002 due primarily to higher average debt levels, but also because of higher average interest rates. In 2002 versus 2001, fixed charges decreased due to lower long-term debt levels. INCOME TAXES: In 2003 versus 2002, income tax expense increased due to reduced income tax expense in 2002. The 2002 reduction was attributable to flow-through accounting on plant, property and equipment as required by past MPSC rulings. In 2002, income tax expense increased versus 2001 due primarily to increased earnings of the gas utility. CRITICAL ACCOUNTING POLICIES The following accounting policies are important to an understanding of our results and financial condition and should be considered an integral part of our MD&A: - use of estimates in accounting for contingencies and equity method investments, - accounting for the effects of regulatory accounting, - accounting for financial and derivative instruments, - accounting for pension and postretirement benefits, - accounting for asset retirement obligations, - accounting for nuclear decommissioning costs, and - accounting for related party transactions. For additional accounting policies, see Note 1, Corporate Structure and Accounting Policies. USE OF ESTIMATES AND ASSUMPTIONS In preparing our financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. Accounting estimates are used for asset valuations, depreciation, amortization, financial and derivative instruments, employee benefits, and contingencies. For example, we estimate the rate of return on plan assets and the cost of future health-care benefits to determine our annual pension and other postretirement benefit costs. There are risks and uncertainties that may cause actual results to differ from estimated results, such as changes in the regulatory environment, competition, regulatory decisions, and lawsuits. CONTINGENCIES: We are involved in various regulatory and legal proceedings that arise in the ordinary course of our business. We record a liability for contingencies based upon our assessment that the occurrence is probable and, where determinable, an estimate of the liability amount. The recording of estimated liabilities for contingencies is guided by the principles in SFAS No. 5. We consider many factors in making these assessments, CE-8 including past history and the specifics of each matter. The most significant of these contingencies are our electric and gas environmental estimates, which are discussed in the "Outlook" section included in this MD&A, and the potential underrecoveries from our power purchase contract with the MCV Partnership. MCV UNDERRECOVERIES: The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to Dow. We hold a 49 percent partnership interest in the MCV Partnership, and a 35 percent lessor interest in the MCV Facility. Under our power purchase agreement with the MCV Partnership, we pay a capacity charge based on the availability of the MCV Facility whether or not electricity is actually delivered to us; a variable energy charge for kWh delivered to us; and a fixed energy charge based on availability up to 915 MW and based on delivery for the remaining contracted capacity. The cost that we incur under the MCV Partnership power purchase agreement exceeds the recovery amount allowed by the MPSC. As a result, we estimate cash underrecoveries of capacity availability payments will aggregate $206 million from 2004 through 2007. For capacity and fixed energy payments billed by the MCV Partnership after September 15, 2007, and not recovered from customers, we expect to claim a regulatory out provision under the MCV Partnership power purchase agreement. This provision obligates us to pay the MCV Partnership only those capacity and energy charges that the MPSC has authorized for recovery from electric customers. The effect of any such action would be to: - reduce cash flow to the MCV Partnership, which could have an adverse effect on our equity, and - eliminate our underrecoveries for capacity and energy payments. Further, under the PPA, variable energy payments to the MCV Partnership are based on the cost of coal burned in our coal plants and operations and maintenance expenses. However, the MCV Partnership's costs of producing electricity are tied to the cost of natural gas. Because natural gas prices have increased substantially in recent years, while the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been affected adversely. As a result of returning to the PSCR process on January 1, 2004, we returned to dispatching the MCV Facility on a fixed load basis, as permitted by the MPSC, in order to maximize recovery from electric customers of our capacity payments. This fixed load dispatch increases the MCV Facility's output and electricity production costs, such as natural gas. As the spread between the MCV Facility's variable electricity production costs and its energy payment revenue widens, the MCV's Partnership's financial performance and our equity interest in the MCV Partnership will be harmed. In February 2004, we filed a resource conservation plan with the MPSC that is intended to help conserve natural gas and thereby improve our equity investment in the MCV Partnership, without raising the costs paid by our electric customers. The plan's primary objective is to dispatch the MCV Facility on an economic basis depending on natural gas market prices, which will reduce the MCV Facility's annual natural gas consumption by an estimated 30 to 40 bcf. This decrease in the quantity of high-priced natural gas consumed by the MCV Facility will benefit Consumers' ownership interest in the MCV Partnership. We requested that the MPSC provide interim approval while it conducts a full review of the plan. The MPSC has scheduled a prehearing conference with respect to the MCV resource conservation plan for April 2004. We cannot predict if or when the MPSC will approve our request. The two most significant variables in the analysis of the MCV Partnership's future financial performance are the forward price of natural gas for the next 22 years and the MPSC's decision in 2007 or beyond related to our recovery of capacity payments. Natural gas prices have been historically volatile. Presently, there is no consensus in the marketplace on the price or range of prices of natural gas in the short term or beyond the next five years. Therefore, we cannot predict the impact of these issues on our future earnings, cash flows, or on the value of our equity interest in the MCV Partnership. For additional details, see Note 2, Uncertainties, "Other Electric Uncertainties -- The Midland Cogeneration Venture." CE-9 ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION Because we are involved in a regulated industry, regulatory decisions affect the timing and recognition of revenues and expenses. We use SFAS No. 71 to account for the effects of these regulatory decisions. As a result, we may defer or recognize revenues and expenses differently than a non-regulated entity. For example, items that a non-regulated entity normally would expense, we may record as regulatory assets if the actions of the regulator indicate such expenses will be recovered in future rates. Conversely, items that non- regulated entities may normally recognize as revenues, we may record as regulatory liabilities if the actions of the regulator indicate they will require such revenues be refunded to customers. Judgment is required to determine the recoverability of items recorded as regulatory assets and liabilities. As of December 31, 2003, we had $1.105 billion recorded as regulatory assets and $1.467 billion recorded as regulatory liabilities. For additional details on industry regulation, see Note 1, Corporate Structure and Accounting Policies, "Utility Regulation." ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION FINANCIAL INSTRUMENTS: We account for investments in debt and equity securities using SFAS No. 115. Debt and equity securities can be classified into one of three categories: held-to-maturity, trading, or available-for-sale securities. Our investments in equity securities, including our investment in CMS Energy Common Stock, are classified as available-for-sale securities. They are reported at fair value, with any unrealized gains or losses resulting from changes in fair value reported in equity as part of accumulated other comprehensive income and are excluded from earnings unless such changes in fair value are determined to be other than temporary. Unrealized gains or losses resulting from changes in the fair value of our nuclear decommissioning investments are reported as regulatory liabilities. The fair value of these investments is determined from quoted market prices. DERIVATIVE INSTRUMENTS: We use the criteria in SFAS No. 133, as amended and interpreted, to determine if certain contracts must be accounted for as derivative instruments. The rules for determining whether a contract meets the criteria for derivative accounting are numerous and complex. Moreover, significant judgment is required to determine whether a contract requires derivative accounting, and similar contracts can sometimes be accounted for differently. If a contract is accounted for as a derivative instrument, it is recorded in the financial statements as an asset or a liability, at the fair value of the contract. The recorded fair value of the contract is then adjusted quarterly to reflect any change in the market value of the contract, a practice known as marking the contract to market. The accounting for changes in the fair value of a derivative (that is, gains or losses) is reported either in earnings or accumulated other comprehensive income depending on whether the derivative qualifies for special hedge accounting treatment. For additional details on the accounting policies for derivative instruments, see Note 4, Financial and Derivative Instruments. The types of contracts we typically classify as derivative instruments are interest rate swaps, electric call options, gas fuel options, fixed priced weather-based gas supply call options, and fixed price gas supply call and put options. We generally do not account for electric capacity and energy contracts, gas supply contracts, coal and nuclear fuel supply contracts, or purchase orders for numerous supply items as derivatives. Certain of our electric capacity and energy contracts are not accounted for as derivatives due to the lack of an active energy market in the state of Michigan, as defined by SFAS No. 133, and the transportation costs that would be incurred to deliver the power under the contracts to the closest active energy market at the Cinergy hub in Ohio. If a market develops in the future, we may be required to account for these contracts as derivatives. The mark-to-market impact on earnings related to these contracts, particularly related to the PPA, could be material to our financial statements. To determine the fair value of contracts that are accounted for as derivative instruments, we use a combination of quoted market prices and mathematical valuation models. Valuation models require various inputs, including forward prices, volatilities, interest rates, and exercise periods. Changes in forward prices or volatilities could change significantly the calculated fair value of certain contracts. At December 31, 2003, we CE-10 assumed a market-based interest rate of 1 percent (six-month U.S. Treasury rate) and an average volatility rate of 79 percent to calculate the fair value of our gas call options. MARKET RISK INFORMATION: We are exposed to market risks including, but not limited to, changes in interest rates, commodity prices, and equity security prices. We manage these risks using established policies and procedures, under the direction of both an executive oversight committee consisting of senior management representatives and a risk committee consisting of business-unit managers. We may use various contracts to manage these risks, including swaps, options, and forward contracts. Contracts used to manage market risks may be considered derivative instruments that are subject to derivative and hedge accounting pursuant to SFAS No. 133. We intend that any gains or losses on these contracts will be offset by an opposite movement in the value of the item at risk. We enter into all risk management contracts for purposes other than trading. These contracts contain credit risk if the counterparties, including financial institutions and energy marketers, fail to perform under the agreements. We minimize such risk by performing financial credit reviews using, among other things, publicly available credit ratings of such counterparties. We perform sensitivity analyses to assess the potential loss in fair value, cash flows, or future earnings based upon a hypothetical 10 percent adverse change in market rates or prices. We do not believe that sensitivity analyses alone provide an accurate or reliable method for monitoring and controlling risks. Therefore, we use our experience and judgment to revise strategies and modify assessments. Changes in excess of the amounts determined in sensitivity analyses could occur if market rates or prices exceed the 10 percent shift used for the analyses. These risk sensitivities are shown in "Interest Rate Risk," "Commodity Price Risk," and "Equity Securities Price Risk" within this section. Interest Rate Risk: We are exposed to interest rate risk resulting from issuing fixed-rate and variable-rate financing instruments, and from interest rate swap agreements. We use a combination of these instruments to manage this risk as deemed appropriate, based upon market conditions. These strategies are designed to provide and maintain a balance between risk and the lowest cost of capital. Interest Rate Risk Sensitivity Analysis (assuming a 10 percent adverse change in market interest rates):
AS OF DECEMBER 31 ------------ 2003 2002 ---- ---- IN MILLIONS Variable-rate financing -- before tax annual earnings exposure.................................................. $ 1 $ 2 Fixed-rate financing -- potential loss in fair value(a)..... 154 137
- ------------------------- (a) Fair value exposure could only be realized if we repurchased all of our fixed-rate financing. As discussed in "Electric Business Uncertainties -- Competition and Regulatory Restructuring -- Securitization" within this MD&A, we have filed an application with the MPSC to securitize certain expenditures. Upon final approval, we intend to use the proceeds from the securitization to retire higher-cost debt, which could include a portion of our current fixed-rate debt. We do not believe that any adverse change in debt price and interest rates would have a material adverse effect on either our consolidated financial position, results of operations or cash flows. Commodity Price Risk: For purposes other than trading, we enter into electric call options, fixed-priced weather-based gas supply call options, and fixed-priced gas supply call and put options. The electric call options are used to protect against the risk of fluctuations in the market price of electricity, and to ensure a reliable source of capacity to meet our customers' electric needs. The weather-based gas supply call options, along with the gas supply call and put options, are used to purchase reasonably priced gas supply. Call options give us the right, but not the obligation, to purchase gas supply at predetermined fixed prices. Put options give third-party suppliers the right, but not the obligation, to sell gas supply to us at predetermined fixed prices. CE-11 The commodity price risk sensitivity analysis was not material for the years ending December 31, 2003 and December 31, 2002. Equity Securities Price Risk: We are exposed to price risk associated with investments in equity securities. As discussed in "Financial Instruments" within this section, our investments in equity securities are classified as available-for-sale securities. They are reported at fair value, with any unrealized gains or losses resulting from changes in fair value reported in equity as part of accumulated other comprehensive income and are excluded from earnings unless such changes in fair value are determined to be other than temporary. Unrealized gains or losses resulting from changes in the fair value of our nuclear decommissioning investments are reported as regulatory liabilities. Equity Securities Price Risk Sensitivity Analysis (assuming a 10 percent adverse change in market prices):
AS OF DECEMBER 31 -------------- 2003 2002 ---- ---- IN MILLIONS ~~Potential reduction in fair value: Nuclear decommissioning investments....................... $57 $49 Equity investments........................................ 4 4~~
For additional details on market risk and derivative activities, see Note 4, Financial and Derivative Instruments. ACCOUNTING FOR PENSION AND OPEB Pension: We have established external trust funds to provide retirement pension benefits to our employees under a non-contributory, defined benefit Pension Plan. We implemented a cash balance plan for employees hired after June 30, 2003. We use SFAS No. 87 to account for pension costs. OPEB: We provide postretirement health and life benefits under our OPEB plan to substantially all our retired employees. We use SFAS No. 106 to account for other postretirement benefit costs. Liabilities for both pension and OPEB are recorded on the balance sheet at the present value of their future obligations, net of any plan assets. The calculation of the liabilities and associated expenses requires the expertise of actuaries. Many assumptions are made including: - life expectancies, - present value discount rates, - expected long-term rate of return on plan assets, - rate of compensation increases, and - anticipated health care costs. Any change in these assumptions can change significantly the liability and associated expenses recognized in any given year. The following table provides an estimate of our pension expense, OPEB expense, and cash contributions for the next three years:
EXPECTED COSTS ------------------------------------------------ PENSION EXPENSE OPEB EXPENSE CONTRIBUTIONS --------------- ------------ ------------- IN MILLIONS 2004................................................. $20 $62 $ 94 2005................................................. 41 60 117 2006................................................. 63 58 124
Actual future pension expense and contributions will depend on future investment performance, changes in future discount rates, and various other factors related to the populations participating in the Pension Plan. CE-12 Lowering the expected long-term rate of return on the Pension Plan assets by 0.25 percent (from 8.75 percent to 8.50 percent) would increase estimated pension expense for 2004 by $2 million. Lowering the discount rate by 0.25 percent (from 6.25 percent to 6.00 percent) would increase estimated pension expense for 2004 by $4 million. In August 2003, we made a planned contribution of $172 million to the Pension Plan. In December 2003, we made an additional contribution of $329 million. As a result of these contributions, we reversed the additional minimum liability and the resulting decrease in equity that we charged in 2002. As of December 31, 2003, we have a prepaid pension asset of $384 million recorded on our consolidated balance sheets. Market-Related Valuation: We determine pension expense on a market-related valuation of assets, which reduces year-to-year volatility. The market-related valuation includes investment gains or losses over a five-year period from the year in which the gains or losses occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market value of assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recorded. The Pension Plan includes funds for our employees and our non-utility affiliates. The Pension Plan assets are not distinguishable by company. Due to the unfavorable performance of the equity markets in the past few years, as of December 31, 2003, we had cumulative losses of approximately $239 million that remain to be included in the calculation of the market-related value of assets. These unrecognized net actuarial losses may result in increases in future pension expense in accordance with SFAS No. 87. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law in December 2003. This Act establishes a prescription drug benefit under Medicare (Medicare Part D), and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. We are deferring recognizing the effects of the Act in our 2003 financial statements, as permitted by FASB Staff Position No. 106-1. When accounting guidance is issued, our retiree health benefit obligation may be adjusted. For additional details on postretirement benefits, see Note 7, Retirement Benefits. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS SFAS No. 143, Accounting for Asset Retirement Obligations, became effective January 2003. It requires companies to record the fair value of the cost to remove assets at the end of their useful lives, if there is a legal obligation to remove them. We have legal obligations to remove some of our assets, including our nuclear plants, at the end of their useful lives. As required by SFAS No. 71, we accounted for the implementation of this standard by recording a regulatory asset and liability instead of a cumulative effect of a change in accounting principle. Accretion of $1 million related to the Big Rock and Palisades' profit component included in the estimated cost of removal was expensed in 2003. The fair value of ARO liabilities has been calculated using an expected present value technique. This technique reflects assumptions, such as costs, inflation, and profit margin that third parties would consider to assume the settlement of the obligation. Fair value, to the extent possible, should include a market risk premium for unforeseeable circumstances. No market risk premium was included in our ARO fair value estimate since a reasonable estimate could not be made. If a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, such as assets with indeterminate lives, the liability is to be recognized when a reasonable estimate of fair value can be made. Generally, transmission and distribution assets have indeterminate lives. Retirement cash flows cannot be determined. There is a low probability of a retirement date, so no liability has been recorded for these assets. No liability has been recorded for assets that have insignificant cumulative disposal costs, such as substation batteries. The measurement of the ARO liabilities for Palisades and Big Rock are based on decommissioning studies that are based largely on third-party cost estimates. CE-13 Reclassification of Non-Legal Cost of Removal: Beginning in December 2003, the SEC requires the quantification and reclassification of the estimated cost of removal obligations arising from other than legal obligations. These obligations have been accrued through depreciation charges. We estimate that we had $983 million in 2003 and $907 million in 2002 of previously accrued asset removal costs related to our regulated operations, for other than legal obligations. These obligations, which were previously classified as a component of accumulated depreciation, were reclassified as regulatory liabilities in the accompanying consolidated balance sheets. For additional details on ARO, see Note 12, Asset Retirement Obligations. ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS The MPSC and FERC regulate the recovery of costs to decommission our Big Rock and Palisades nuclear plants. They require, and we have established, external trust funds to finance the decommissioning of both plants. Our electric customers pay a surcharge to fund these trusts. We record the trust fund balances as a non-current asset on our balance sheet. Our decommissioning cost estimates for the Big Rock and Palisades plants assume: - each plant site will be restored to conform to the adjacent landscape, - all contaminated equipment and material will be removed and disposed of in a licensed burial facility, and - the site will be released for unrestricted use. Independent contractors with expertise in decommissioning have helped us develop decommissioning cost estimates. Various inflation rates for labor, non-labor, and contaminated equipment disposal costs are used to escalate these cost estimates to the future decommissioning cost. A portion of future decommissioning cost will result from the failure of the DOE to remove fuel from the sites, as required by the Nuclear Waste Policy Act of 1982. Spent fuel storage costs would not be incurred if the DOE took possession of the spent fuel. There is litigation underway to recover these costs. The decommissioning trust funds include equities and fixed income investments. Equities will be converted to fixed income investments during decommissioning, and fixed income investments are converted to cash as needed. In December 2000, funding of the Big Rock trust fund was stopped since it was considered fully funded, subject to further MPSC review. The funds provided by the trusts, additional customer surcharges, and potential funds from DOE litigation are all required to cover fully the decommissioning costs and we currently expect that to happen. The costs of decommissioning these sites and the adequacy of the trust funds could be affected by: - variances from expected trust earnings, - a lower recovery of costs from the DOE and lower rate recovery from customers, and - changes in decommissioning technology, regulations, estimates or assumptions. For additional details on nuclear decommissioning, see Note 1, Corporate Structure and Accounting Policies, "Nuclear Plant Decommissioning." RELATED PARTY TRANSACTIONS We enter into a number of significant transactions with related parties. These transactions include: - purchases of capacity and energy from the MCV Partnership and from affiliates of Enterprises, - sale of storage and transportation of natural gas and other services to the MCV Partnership, - issuance of Trust Preferred Securities with Consumers' affiliated companies, - purchases and sales of electricity and gas for generation from CMS ERM, - purchase of gas transportation from CMS Bay Area Pipeline, L.L.C., CE-14 - payment of parent company overhead costs to CMS Energy, and - investment in CMS Energy Common Stock. Transactions involving CMS Energy and its affiliates, and the sale of storage and transportation of natural gas and other services to the MCV Partnership are generally based on regulated prices, market prices or competitive bidding. Transactions involving the power supply purchases from the MCV Partnership, and certain affiliates of Enterprises, are based upon avoided costs under PURPA and competitive bidding. The payment of parent company overhead costs is based on use of accepted industry allocation methodologies. In 2002, MTH purchased our transmission facilities. MTH is a non-affiliated limited partnership whose general partner is a subsidiary of Trans-Elect, Inc., an independent company, whose management includes former executive employees of CMS Energy. The sale was based on competitive bidding. We continue to use the transmission facilities now owned by MTH, and one of our directors is currently a stockholder of Trans-Elect, Inc. For additional details on related party transactions, see Note 1, Corporate Structure and Accounting Policies, "Related Party Transactions," Note 2, Uncertainties, "Electric Restructuring Matters - Transmission Sales," and "Other Electric Uncertainties -- The Midland Cogeneration Venture." CAPITAL RESOURCES AND LIQUIDITY Our liquidity and capital requirements are a function of our results of operations, capital expenditures, contractual obligations, debt maturities, working capital needs, and collateral requirements. During the summer months, we purchase natural gas and store it for resale primarily during the winter heating season. Recently, the market price for natural gas has increased. Although our natural gas purchases are recoverable from our customers, the amount paid for natural gas stored as inventory could require additional liquidity due to the timing of the cost recoveries. In addition, a few of our commodity suppliers have requested advance payment or other forms of assurances, including margin calls, in connection with maintenance of ongoing deliveries of gas and electricity. In 2003, we had debt maturities and capital expenditures that required substantial amounts of cash. As a result, in 2003, we executed a financial improvement plan to address these critical liquidity issues. We explored financing opportunities, such as refinancing debt and issuing new debt. We also implemented our strategic plan, including reducing capital expenditures. In 2004, we will continue to monitor our operating expenses and capital expenditures and evaluate market conditions for financing opportunities. We believe that our current level of cash and borrowing capacity, along with anticipated cash flows from operating activities, and reduced capital expenditures, will be sufficient to meet our liquidity needs through 2005. CASH POSITION, INVESTING, AND FINANCING SELECTED MEASURES OF LIQUIDITY AND CAPITAL RESOURCES:
2003 ---- ~~Working capital (in millions)............................... $450 Current ratio............................................... 1.47:1~~
In 2003, working capital was driven primarily by the following: - cash proceeds from long-term debt issuance -- $1,603 million partially offset by: - cash used for long-term debt retirements, excluding current portion -- $483 million, - cash used for pension contributions, excluding notes payable to related party -- $301 million, and - cash used for capital expenditures -- $486 million. CE-15 SUMMARY OF CASH FLOWS:
2003 2002 2001 ---- ---- ---- IN MILLIONS Net cash provided by (used in): Operating activities...................................... $ 5 $ 760 $ 518 Investing activities...................................... (528) (325) (807) Financing activities...................................... 325 (204) 281 ----- ----- ----- Net Increase (Decrease) in Cash and Cash Equivalents........ $(198) $ 231 $ (8) ===== ===== =====
OPERATING ACTIVITIES: 2003: Net cash provided by operating activities decreased $755 million in 2003 primarily due to an increase in pension plan contributions of $454 million and an increase in gas inventory of $346 million due to higher gas purchases at higher prices. 2002: Net cash provided by operating activities increased $242 million in 2002 primarily due to a decrease in gas inventory of $397 million due to a lower volume of gas purchased at lower prices, combined with increased sales volume at higher prices. This increase was partially offset by an increase in accounts receivable and accrued revenue of $247 million due to a gas rate increase, colder weather in the fourth quarter of 2002, and increased electric deliveries to higher margin customer sectors. INVESTING ACTIVITIES: 2003: Net cash used in investing activities increased $203 million in 2003 primarily due to a decrease in asset sale proceeds of $288 million resulting from the sale of METC in 2002, offset by a decrease in 2003 versus 2002 capital expenditures of $73 million as a result of our strategic plan to reduce capital expenditures. 2002: Net cash used in investing activities decreased $482 million in 2002 primarily due to a decrease in capital expenditures of $186 million as a result of our strategic plan to reduce capital expenditures, and an increase in asset sale proceeds of $298 million resulting from the sale of METC. FINANCING ACTIVITIES: 2003: Net cash provided by financing activities increased $529 million in 2003 primarily due to an increase in net proceeds from borrowings of $490 million. For additional details on long-term debt activity, see Note 3, Financings and Capitalization. 2002: Net cash used in financing activities increased $485 million in 2002 primarily due to a decrease in proceeds from securitization bonds of $459 million and a decrease in proceeds from preferred securities of $121 million. The decrease in proceeds was partially offset by an increase in net proceeds from borrowings of $101 million. For additional details on long-term debt activity, see Note 3, Financings and Capitalization. CE-16 OBLIGATIONS AND COMMITMENTS The following schedule is a summary of our contractual obligations and commercial commitments. We aggregate this information into a single location so that a picture of our obligations and commitments is readily available. For additional details, see Note 2, Uncertainties, and Note 3, Financings and Capitalization.
DECEMBER 31 ---------------------------------------------------- PAYMENTS DUE ---------------------------------------------------- 2009 AND TOTAL 2004 2005 2006 2007 2008 BEYOND ----- ---- ---- ---- ---- ---- -------- IN MILLIONS CONTRACTUAL OBLIGATIONS On-balance sheet: Long-term debt....................... $ 3,611 $ 28 $ 328 $422 $ 31 $441 $ 2,361 Long-term debt -- related parties.... 506 -- -- -- -- -- 506 Notes payable -- related parties..... 200 200 -- -- -- -- -- Capital lease obligations............ 68 10 11 10 10 8 19 ------- ------ ------ ---- ---- ---- ------- Total on-balance sheet............ $ 4,385 $ 238 $ 339 $432 $ 41 $449 $ 2,886 ------- ------ ------ ---- ---- ---- ------- Off-balance sheet: Operating leases..................... $ 64 $ 9 $ 8 $ 7 $ 6 $ 5 $ 29 Non-recourse debt.................... 200 63 41 26 13 29 28 Capital lease obligation - MCV....... 144 16 9 8 8 8 95 Sale of accounts receivable.......... 297 297 -- -- -- -- -- Unconditional purchase obligations (a)............................... 17,903 1,961 1,323 958 776 736 12,149 ------- ------ ------ ---- ---- ---- ------- Total off-balance sheet........... $18,608 $2,346 $1,381 $999 $803 $778 $12,301 ======= ====== ====== ==== ==== ==== =======
- ------------------------- (a) Purchase obligations related to the MCV Facility PPA assume that the regulatory out provision is exercised in 2007. For additional details, see Note 2, Uncertainties, "Other Electric Uncertainties - The Midland Cogeneration Venture," "Commitments for Future Purchases," and "Gas Contingencies - Other Gas Uncertainties." REGULATORY AUTHORIZATION FOR FINANCINGS: Consumers must obtain FERC authority to issue short and long-term securities. For additional details of Consumers' existing authority, see Note 3, Financings and Capitalization. LONG-TERM DEBT: Details on our long-term debt issuances, retirements, and outstanding balances are presented in Note 3, Financings and Capitalization. SHORT-TERM FINANCINGS: We have $390 million available under a revolving credit facility. At December 31, 2003, the line is available for general corporate purposes, working capital, and letters of credit. For additional details, see Note 3, Financings and Capitalization. CAPITAL LEASE OBLIGATIONS: Our capital leases are comprised mainly of leased service vehicles and office furniture. The full obligation of our leases could become due in the event of lease payment default. OFF-BALANCE SHEET ARRANGEMENTS: We use off-balance sheet arrangements in the normal course of business. Our off-balance sheet arrangements include: - operating leases, - non-recourse debt, - sale of accounts receivable, and - unconditional purchase obligations. Operating Leases: Leases of railroad cars are accounted for as operating leases. CE-17 Non-recourse Debt: Our share of unconsolidated debt associated with partnerships and joint ventures in which we have a minority interest is non-recourse. Sale of Accounts Receivable: Under a revolving accounts receivable sales program, we currently sell up to $325 million of certain accounts receivable. For additional details, see Note 3, Financings and Capitalization. Unconditional Purchase Obligations: Long-term contracts for purchase of commodities and services are unconditional purchase obligations. These obligations represent operating contracts used to assure adequate supply with generating facilities that meet PURPA requirements. The commodities and services include: - natural gas, - electricity, - coal purchase contracts and their associated cost of transportation, and - electric transmission. Included in unconditional purchase obligations are long-term power purchase agreements with various generating plants including the MCV Facility. These contracts require us to make monthly capacity payments based on the plants' availability or deliverability. These payments will approximate $47 million per month during 2004, including $34 million related to the MCV Facility. If a plant is not available to deliver electricity, we are not obligated to make the capacity payments to the plant for that period of time. For additional details on power supply costs, see "Electric Utility Results of Operations" within this MD&A and Note 2, Uncertainties, "Electric Rate Matters -- Power Supply Costs," and "Other Electric Uncertainties -- The Midland Cogeneration Venture." COMMERCIAL COMMITMENTS: Our commercial commitments include indemnities and letters of credit. Indemnities are agreements to reimburse other companies, such as an insurance company, if those companies have to complete our contractual performance in a third party contract. Banks, on our behalf, issue letters of credit guaranteeing payment to a third party. Letters of credit substitute the bank's credit for ours and reduce credit risk for the third party beneficiary.
DECEMBER 31 ------------------------------------------------------------- COMMITMENT EXPIRATION ------------------------------------------------------------- 2009 AND TOTAL 2004 2005 2006 2007 2008 BEYOND ----- ---- ---- ---- ---- ---- -------- IN MILLIONS COMMERCIAL COMMITMENTS Off-balance sheet: Indemnities.................................... $ 8 $8 $ -- $ -- $ -- $ -- $ -- Letters of credit.............................. 10 5 5 -- -- -- --
DIVIDEND RESTRICTIONS: Under the provisions of our articles of incorporation, at December 31, 2003, we had $373 million of unrestricted retained earnings available to pay common dividends. However, covenants in our debt facilities cap common stock dividend payments at $300 million in a calendar year. Through December 31, 2003, we made the following common stock dividend payments:
IN MILLIONS ----------- January..................................................... $ 78 May......................................................... 31 June........................................................ 53 November.................................................... 56 ---- Total common stock dividends paid to CMS Energy............. $218 ====
As of December 18, 2003, we are also under an annual dividend cap of $190 million imposed by the MPSC during the current interim gas rate relief period. Because all of the $218 million of common stock dividends to CE-18 CMS Energy were paid prior to December 18, 2003, we were not out of compliance with this new restriction for 2003. In February 2004, we paid a $78 million common stock dividend. For additional details on the potential cap on common dividends payable included in the MPSC Securitization order, see Note 2, Uncertainties, "Electric Restructuring Matters -- Securitization." Also, for additional details on the cap on common dividends payable during the current interim gas rate relief period, see Note 2, Uncertainties, "Gas Rate Matters -- 2003 Gas Rate Case." CAPITAL EXPENDITURES: We estimate the following capital expenditures, including new lease commitments, by expenditure type and by business segments during 2004 through 2006. We prepare these estimates for planning purposes and may revise them.
YEARS ENDING DECEMBER 31 -------------------- 2004 2005 2006 ---- ---- ---- IN MILLIONS Construction................................................ $505 $541 $687 Nuclear fuel................................................ 36 -- 32 Other capital leases........................................ 9 14 21 ---- ---- ---- $550 $555 $740 ==== ==== ==== Electric utility operations(a)(b)........................... $395 $370 $570 Gas utility operations(a)................................... 155 185 170 ---- ---- ---- $550 $555 $740 ==== ==== ====
- ------------------------- (a) These amounts include a portion of our anticipated capital expenditures for plant and equipment attributable to both the electric and gas utility businesses. (b) These amounts include estimates for capital expenditures that may be required by revisions to the Clean Air Act's national air quality standards. OUTLOOK ELECTRIC BUSINESS OUTLOOK GROWTH: Over the next five years, we expect electric deliveries to grow at an average rate of approximately two percent per year based primarily on a steadily growing customer base and economy. This growth rate includes both full service sales and delivery service to customers who choose to buy generation service from an alternative electric supplier, but excludes transactions with other wholesale market participants and other electric utilities. This growth rate reflects a long-range expected trend of growth. Growth from year to year may vary from this trend due to customer response to abnormal weather conditions and changes in economic conditions, including utilization and expansion of manufacturing facilities. For 2003, our electric deliveries, including delivery to customers who chose to buy generation service from an alternative electric supplier, declined 1.4 percent from 2002. This was due to a combination of warmer than normal summer weather in 2002, cooler than normal summer weather in 2003, and a decline in manufacturing activity during 2003. In 2004, we project electric deliveries to grow more than three percent. This short-term outlook for 2004 assumes higher levels of manufacturing activity than in 2003 and normal weather conditions throughout the year. CE-19 ELECTRIC BUSINESS UNCERTAINTIES Several electric business trends or uncertainties may affect our financial results and condition. These trends or uncertainties have, or we reasonably expect could have, a material impact on revenues or income from continuing electric operations. Such trends and uncertainties include: Environmental - increasing capital expenditures and operating expenses for Clean Air Act compliance, and - potential environmental liabilities arising from various environmental laws and regulations, including potential liability or expenses relating to the Michigan Natural Resources and Environmental Protection Acts and Superfund. Restructuring - response of the MPSC and Michigan legislature to electric industry restructuring issues, - ability to meet peak electric demand requirements at a reasonable cost, without market disruption, - ability to recover any of our net Stranded Costs under the regulatory policies being followed by the MPSC, - recovery of electric restructuring implementation costs, - effects of lost electric supply load to alternative electric suppliers, and - status as an electric transmission customer instead of an electric transmission owner-operator. Regulatory - effects of conclusions about the causes of the August 14, 2003 blackout, including exposure to liability, increased regulatory requirements, and new legislation, - successful implementation of initiatives to reduce exposure to purchased power price increases, - effects of potential performance standards payments, and - responses from regulators regarding the storage and ultimate disposal of spent nuclear fuel. Other - effects of commodity fuel prices such as natural gas and coal, - pending litigation filed by PURPA qualifying facilities, - potential rising pension costs due to market losses and lump sum payments. For additional details, see "Accounting for Pension and OPEB" section within this MD&A. - pending litigation and government investigations. For additional details about these trends or uncertainties, see Note 2, Uncertainties. ELECTRIC ENVIRONMENTAL ESTIMATES: Our operations are subject to environmental laws and regulations. Costs to operate our facilities in compliance with these laws and regulations generally have been recovered in customer rates. Compliance with the federal Clean Air Act and resulting regulations has been, and will continue to be, a significant focus for us. The Title I provisions of the Clean Air Act require significant reductions in nitrogen oxide emissions. To comply with the regulations, we expect to incur capital expenditures totaling $771 million. The key assumptions included in the capital expenditure estimate include: - construction commodity prices, especially construction material and labor, - project completion schedules, CE-20 - cost escalation factor used to estimate future years' costs, and - allowance for funds used during construction (AFUDC) rate. Our current capital cost estimates include an escalation rate of 2.6 percent and an AFUDC capitalization rate of 8.1 percent. As of December 31, 2003, we have incurred $446 million in capital expenditures to comply with these regulations and anticipate that the remaining $325 million of capital expenditures will be made between 2004 and 2009. These expenditures include installing catalytic reduction technology on coal-fired electric plants. In addition to modifying the coal-fired electric plants, we expect to purchase nitrogen oxide emissions credits for years 2004 through 2008. The cost of these credits is estimated to average $8 million per year and is accounted for as inventory. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seek modification permits from the EPA. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of "routine maintenance." If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric plants. Future clean air regulations requiring emission controls for sulfur dioxide, nitrogen oxides, mercury, and nickel may require additional capital expenditures. Total expenditures will depend upon the final makeup of the new regulations. The EPA continues to make new rules. The EPA has proposed changes to the rules that govern generating plant cooling water intake systems. The proposed rules are scheduled to be final in the first quarter of 2004. We are studying the proposed rules to determine the most cost-effective solutions for compliance. For additional details on electric environmental matters, see Note 2, Uncertainties, "Electric Contingencies -- Electric Environmental Matters." COMPETITION AND REGULATORY RESTRUCTURING: Michigan's Customer Choice Act and other developments will continue to result in increased competition in the electric business. Generally, increased competition reduces profitability and threatens market share for generation services. As of January 1, 2002, the Customer Choice Act allowed all of our electric customers to buy electric generation service from us or from an alternative electric supplier. As a result, alternative electric suppliers for generation services have entered our market. As of March 2004, alternative electric suppliers are providing 735 MW of generation supply to ROA customers. This amount represents nine percent of our distribution load and an increase of 42 percent compared to March 2003. We anticipate this upward trend to continue and expect over 1,000 MW of generation supply to ROA customers in 2004. We cannot predict the total amount of electric supply load that may be lost to competitor suppliers. In February 2004, the MPSC issued an order on Detroit Edison's request for rate relief for costs associated with customers leaving under electric customer choice. The MPSC order allows Detroit Edison to charge a transition surcharge of approximately 0.4 cent per kWh to ROA customers and eliminates securitization offsets of 0.7 cents per kWh for primary service customers and 0.9 cents per kWh for secondary service customers. We are seeking similar recovery of Stranded Costs due to ROA customers leaving our system and are encouraged by this ruling. This ruling may change significantly the anticipated number of customers who choose ROA. Securitization: In March 2003, we filed an application with the MPSC seeking approval to issue Securitization bonds. In June 2003, the MPSC issued a financing order authorizing the issuance of Securitization bonds in the amount of approximately $554 million. In July 2003, we filed for rehearing and clarification on a number of features in the financing order. In December 2003, the MPSC issued its order on rehearing, which rejected our requests for clarification and modification to the dividend payment restriction, failed to rule directly on the accounting clarifications requested, and remanded the proceeding to the ALJ for additional proceedings to address rate design. We filed testimony regarding the remanded proceeding in February 2004. The financing order will become effective after acceptance by us and resolution of any appeals. CE-21 Stranded Costs: To the extent we experience net Stranded Costs as determined by the MPSC, the Customer Choice Act allows us to recover such costs by collecting a transition surcharge from customers who switch to an alternative electric supplier. We cannot predict whether the Stranded Cost recovery method adopted by the MPSC will be applied in a manner that will fully offset any associated margin loss. In 2002 and 2001, the MPSC issued orders finding that we experienced zero net Stranded Costs from 1999 to 2001. The MPSC also declined to resolve numerous issues regarding the net Stranded Cost methodology in a way that would allow a reliable prediction of the level of Stranded Costs for future years. We currently are in the process of appealing these orders with the Michigan Court of Appeals and the Michigan Supreme Court. In March 2003, we filed an application with the MPSC seeking approval of net Stranded Costs incurred in 2002, and for approval of a net Stranded Cost recovery charge. Our net Stranded Costs incurred in 2002 are estimated to be $38 million with the issuance of Securitization bonds that include Clean Air Act investments, or $85 million without the issuance of Securitization bonds that include Clean Air Act investments. Once the MPSC issues a final financing order on Securitization, we will know the amount of our request for net Stranded Cost recovery for 2002. We cannot predict how the MPSC will rule on our request for the recoverability of Stranded Costs. Therefore, we have not recorded regulatory assets to recognize the future recovery of such costs. Implementation Costs: Since 1997, we have incurred significant costs to implement the Customer Choice Act. The Customer Choice Act allows electric utilities to recover the Act's implementation costs. The MPSC has reviewed and allowed certain of the implementation costs incurred through 2001, but has not authorized recovery. Depending upon the outcome of the remanded Securitization proceeding, a significant portion of the implementation costs could be recovered through the Securitization process. Our application for $2 million of implementation costs in 2002 is currently pending approval by the MPSC. We deferred these costs as a regulatory asset. In addition to the implementation costs filed with the MPSC in 2003, we recorded an additional $2 million for total implementation costs of $91 million. Included in total implementation costs is $19 million associated with the cost of money. We believe the implementation costs and the associated cost of money are fully recoverable in accordance with the Customer Choice Act. Cash recovery from customers is expected to begin after the rate cap period has expired. For additional information on rate caps, see "Rate Caps" within this section. Once a final financing order by the MPSC on Securitization is issued, the recoverability of the implementation costs requested will be known. We cannot predict the amounts the MPSC will approve as allowable costs. Also, we are pursuing authorization at the FERC for MISO to reimburse us for approximately $8 million in certain electric utility restructuring implementation costs related to our former participation in the development of the Alliance RTO, a portion of which has been expensed. In May 2003, the FERC issued an order denying MISO's request for authorization to reimburse us. We appealed the FERC ruling at the United States Court of Appeals for the District of Columbia. In addition, we continue to pursue other potential means of recovery with FERC. We cannot predict the outcome of the appeal process or the ultimate amount, if any, the FERC will allow us to collect for implementation costs. Rate Caps: The Customer Choice Act imposes certain limitations on electric rates that could result in us being unable to collect our full cost of conducting business from electric customers. Such limitations include: - a rate freeze effective through December 31, 2003, and - rate caps effective through December 31, 2004 for small commercial and industrial customers, and through December 31, 2005 for residential customers. As a result, we may be unable to maintain our profit margins in our electric utility business during the rate cap periods. In particular, if we needed to purchase power supply from wholesale suppliers while retail rates are capped, the rate restrictions may make it impossible for us to fully recover purchased power and associated transmission costs. PSCR: Prior to 1998, the PSCR process provided for the reconciliation of actual power supply costs with power supply revenues. This process assured recovery of all reasonable and prudent power supply costs actually incurred by us, including the actual cost for fuel, and purchased and interchange power. In 1998, as part of the CE-22 electric restructuring efforts, the MPSC suspended the PSCR process, effective through 2001. As a result of the rate freeze imposed by the Customer Choice Act, frozen rates remained in effect until December 31, 2003, and the PSCR process remained suspended. Therefore, changes in power supply costs due to fluctuating electricity prices were not reflected in rates charged to our customers during the rate freeze period. As a result of meeting the transmission capability expansion requirements and the market power test, we have met the requirements under the Customer Choice Act to return to the PSCR process. For additional details see Note 2, Uncertainties, "Electric Restructuring Matters -- Electric Restructuring Legislation." Accordingly, in September 2003, we submitted a PSCR filing to the MPSC that reinstates the PSCR process for customers whose rates are no longer frozen or capped as of January 1, 2004. The proposed PSCR charge allows us to recover a portion of our increased power supply costs from large commercial and industrial customers, and subject to the overall rate cap, from other customers. We estimate the recovery of increased power supply costs from large commercial and industrial customers to be approximately $30 million in 2004. As allowed under current regulation, we self-implemented the proposed PSCR charge on January 1, 2004. The revenues received from the PSCR charge are also subject to subsequent reconciliation at the end of the year after actual costs have been reviewed for reasonableness and prudence. We cannot predict the outcome of this filing. Decommissioning Surcharge: When our electric retail rates were frozen in June 2000, a nuclear decommissioning surcharge related to the decommissioning of Big Rock was included. We continued to collect the equivalent to the Big Rock nuclear decommissioning surcharge consistent with the Customer Choice Act rate freeze in effect through December 31, 2003. Collection of the surcharge stopped, effective January 1, 2004, when the electric rate freeze expired. As a result, our electric revenues will be reduced by $35 million in 2004. However, we expect a portion of this reduction to be offset with increased electric revenues from returning to the PSCR process. Industrial Contracts: We entered into multi-year electric supply contracts with certain large industrial customers. The contracts provide electricity at specially negotiated prices, usually at a discount from tariff prices. The MPSC approved these special contracts totaling approximately 685 MW of load. Unless terminated or restructured, the majority of these contracts are in effect through 2005. As of December 31, 2003, contracts for 301 MW of load have terminated. Of the contracts that have terminated, contracts for 64 MW have gone to an alternative electric supplier and contracts for 237 MW have returned to bundled tariff rates. In January 2004, new special contracts for 91 MW, with the State of Michigan and three universities, were approved by the MPSC. Other new special contracts for 101 MW received interim approval from the MPSC and are awaiting final approval. All new special contracts end by January 1, 2006. We cannot predict the ultimate financial impact of changes related to these power supply contracts, or whether additional special contracts will be necessary or advisable. Transmission Sale: In May 2002, we sold our electric transmission system for $290 million to MTH. We are currently in arbitration with MTH regarding property tax items used in establishing the selling price of our electric transmission system. We cannot predict whether the remaining open items will impact materially the sale proceeds previously recognized. There are multiple proceedings and a proposed rulemaking pending before the FERC regarding transmission pricing mechanisms and standard market design for electric bulk power markets and transmission. The results of these proceedings and proposed rulemakings could significantly affect: - transmission cost trends, - delivered power costs to us, and - delivered power costs to our retail electric customers. The financial impact of such proceedings, rulemaking and trends are not currently quantifiable. In addition, we are evaluating whether or not there may be impacts on electric reliability associated with the outcomes of these various transmission related proceedings. CE-23 August 14, 2003 Blackout: On August 14, 2003, the electric transmission grid serving parts of the Midwest and the Northeast experienced a significant disturbance that impacted electric service to millions of homes and businesses. Approximately 100,000 of our 1.7 million electric customers were without power for approximately 24 hours as a result of the disturbance. We incurred $1 million of immediate expense as a result of the blackout. We continue to cooperate with investigations of the blackout by several federal and state agencies. We cannot predict the outcome of these investigations. In November 2003, the MPSC released its report on the blackout. The MPSC report found no evidence to suggest that the events in Michigan, or actions taken by the Michigan utilities or transmission operators, were factors contributing to the cause of the blackout. Also in November 2003, the United States and Canadian power system outage taskforce preliminarily reported that the primary cause of the blackout was due to transmission line contact with trees in areas outside of Consumers' operating territory. In December 2003, the MPSC issued an order requiring Consumers to report by April 1, 2004, the status of lines used to serve our customers, including details of vegetation trimming practices in calendar year 2003. Consumers intends to comply with the MPSC's request. In February 2004, the Board of Trustees of NERC approved recommendations to improve electric transmission reliability. The key recommendations are as follows: - strengthen the NERC compliance enforcement program, - evaluate vegetation management procedures, and - improve technology to prevent or mitigate future blackouts. These recommendations require transmission operators, which Consumers is not, to submit annual reports on vegetation management beginning March 2005 and improve technology over various milestones throughout 2004. These recommendations could result in increased transmission costs payable by transmission customers in the future. The financial impacts of these recommendations are not currently quantifiable. For additional details and material changes relating to the rate matters and restructuring of the electric utility industry, see Note 2, Uncertainties, "Electric Restructuring Matters," and "Electric Rate Matters." PERFORMANCE STANDARDS: Electric distribution performance standards developed by the MPSC became effective in February 2004. The performance standards establish standards related to restoration after an outage, safety, and customer relations. Financial incentives and penalties are contained within the performance standards. An incentive is possible if all of the established performance standards have been exceeded for a calendar year. However, the value of such incentive cannot be determined at this point as the performance standards do not contain an approved incentive mechanism. Financial penalties in the form of customer credits are also possible. These customer credits are based on duration and repetition of outages. We cannot predict the likely effects of the financial incentive or penalties, if any, on us. GAS BUSINESS OUTLOOK GROWTH: Over the next five years, we expect gas deliveries to grow at an average rate of less than one percent per year. Actual gas deliveries in future periods may be affected by: - abnormal weather, - use by independent power producers, - competition in sales and delivery, - Michigan economic conditions, - gas consumption per customer, and - increases in gas commodity prices. CE-24 GAS BUSINESS UNCERTAINTIES Several gas business trends or uncertainties may affect our financial results and conditions. These trends or uncertainties could have a material impact on net sales, revenues, or income from gas operations. The trends and uncertainties include: Environmental - potential environmental cost at a number of sites, including sites formerly housing manufactured gas plant facilities. Regulatory - inadequate regulatory response to applications for requested rate increases, - potential adverse appliance service plan ruling or related legislation, and - response to increases in gas costs, including adverse regulatory response and reduced gas use by customers, Other - potential rising pension costs due to market losses and lump sum payments as discussed in the "Accounting for Pension and OPEB" section within this MD&A, and - pending litigation and government investigations. Consumers sells gas to retail customers under tariffs approved by the MPSC. These tariffs measure the gas delivered to customers based on the volume (i.e. mcf) of gas delivered. However, Consumers purchases gas for resale on a Btu basis. The Btu content of the gas available for purchase has increased and may result in customers using less gas for the same heating requirement. Consumers fully recovers what it spends to purchase the gas through the approved GCR. However, since the customer is using less gas on a volumetric basis, the revenue from the distribution charge (the non-gas cost portion of the customer bill) would be reduced. This could affect adversely Consumers' earnings from its gas utility. The amount of the earnings loss in future periods cannot be estimated at this time. In September 2002, the FERC issued an order rejecting our filing to assess certain rates for non-physical gas title tracking services we offered. In December 2003, the FERC ruled that no refunds were at issue and we reversed a $4 million reserve related to this matter. In January 2004, three companies filed with FERC for clarification or rehearing of FERC's December 2003 order. We cannot predict the outcome of this filing. GAS ENVIRONMENTAL ESTIMATES: We expect to incur investigation and remedial action costs at a number of sites, including 23 former manufactured gas plant sites. We expect our remaining remedial action costs to be between $37 million and $90 million. Any significant change in assumptions, such as remediation techniques, nature and extent of contamination, and legal and regulatory requirements, could change the remedial action costs for the sites. For additional details, see Note 2, Uncertainties, "Gas Contingencies -- Gas Environmental Matters." GAS COST RECOVERY: The MPSC is required by law to allow us to charge customers for our actual cost of purchased natural gas. The GCR process is designed to allow us to recover all of our gas costs; however, the MPSC reviews these costs for prudency in an annual reconciliation proceeding. In January 2004, the MPSC staff and intervenors filed direct testimony in our 2002-2003 GCR case proposing GCR recovery disallowances. In February 2004, the parties in the case reached a tentative settlement agreement that would result in a GCR disallowance of $11 million for the GCR period plus $1 million accrued interest through February 2004. A reserve was recorded in December 2003. For additional details, see Note 2, Uncertainties, "Gas Rate Matters -- Gas Cost Recovery." 2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC for a $156 million annual increase in our gas delivery and transportation rates that included a 13.5 percent return on equity. In September 2003, we filed an update to our gas rate case that lowered the requested revenue increase from CE-25 $156 million to $139 million and reduced the return on common equity from 13.5 percent to 12.75 percent. The MPSC authorized an interim gas rate increase of $19 million annually. The interim increase is under bond and subject to refund if the final rate relief is a lesser amount. The interim increase order includes a $34 million reduction in book depreciation expense and related income taxes effective only during the period that we receive the interim relief. The MPSC order allowed us to increase our rates beginning December 19, 2003. As part of the interim rate order, we agreed to restrict dividend payments to our parent company, CMS Energy, to a maximum of $190 million annually during the period that we receive the interim relief. On March 5, 2004, the ALJ issued a Proposal for Decision recommending that the MPSC not rely upon the projected test year data included in our filing and supported by the MPSC Staff and further recommended that the application be dismissed. The MPSC is not bound by these recommendations and will consider the issues anew after receipt of exceptions and replies to the exception filed by the parties in response to the Proposal for Decision. 2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas utility plant depreciation case originally filed in June 2001. This case is independent of the 2003 gas rate case. The original filing was based on December 2000 plant balances and historical data. The December 2003 filing updates the gas depreciation case to include December 2002 plant balances. The proposed depreciation rates, if approved, will result in an annual increase of $12 million in depreciation expense. OTHER OUTLOOK CODE OF CONDUCT: In December 2000, the MPSC issued a new code of conduct that applies to utilities and alternative electric suppliers. The code of conduct seeks to prevent financial support, information sharing, and preferential treatment between a utility's regulated and non-regulated services. The new code of conduct is broadly written and could affect our: - retail gas business energy related services, - retail electric business energy related services, - marketing of non-regulated services and equipment to Michigan customers, and - transfer pricing between our departments and affiliates. We appealed the MPSC orders related to the code of conduct and sought a deferral of the orders until the appeal was complete. We also sought waivers available under the code of conduct to continue utility activities that provide approximately $50 million in annual electric and gas revenues. In October 2002, the MPSC denied waivers for three programs including the appliance service plan offered by us, which generated $34 million in gas revenue in 2003. In March 2004, the Michigan Court of Appeals upheld the MPSC's implementation of the code of conduct without modification. We are in the process of filing an application for leave to appeal with the Michigan Supreme Court, but we cannot predict whether the Michigan Supreme Court will accept the case or the outcome of any appeal. The Michigan House of Representatives is scheduled to review the proposed legislation in 2004 that would allow us to remain in the appliance service business. In the interim, the legislature passed a bill to extend to July 1, 2004, the deadline for exiting this business. The full impact of the new code of conduct on our business will remain uncertain until the final judicial resolution of our appeal or the Michigan legislature enacts clarifying legislation. LITIGATION AND REGULATORY INVESTIGATIONS: CMS Energy is the subject of various investigations as a result of round-trip trading transactions by CMS MST, including investigations by the United States Department of Justice and the SEC. Additionally, CMS Energy and Consumers are parties to various litigation including a shareholder derivative lawsuit, a securities class action lawsuit, and a class action lawsuit alleging ERISA violations. For additional details regarding these investigations and litigation, see Note 2, Uncertainties. CE-26 OTHER MATTERS 2001 GAS RATE CASE: In June 2001, we filed an application with the MPSC for a distribution service rate increase. In November 2002, the MPSC approved a $56 million annual distribution service rate increase, with an 11.4 percent authorized return on equity. NEW ACCOUNTING STANDARDS See Note 13, Implementation of New Accounting Standards, for discussion of new standards. FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: FASB issued this interpretation in January 2003. The objective of the Interpretation is to assist in determining when one party controls another entity in circumstances where a controlling financial interest cannot be properly identified based on voting interests. Entities with this characteristic are considered variable interest entities. The Interpretation requires the party with the controlling financial interest to consolidate the entity. On December 24, 2003, the FASB issued Revised FASB Interpretation No. 46. For entities that have not previously adopted FASB Interpretation No. 46, Revised FASB Interpretation No. 46 provides an implementation deferral until the first quarter of 2004. Revised FASB Interpretation No. 46 is effective for the first quarter of 2004 for all entities other than special purpose entities. Special purpose entities must apply either FASB Interpretation No. 46 or Revised FASB Interpretation No. 46 for the first reporting period that ends after December 15, 2003. As of December 31, 2003, we have completed our analysis for and have adopted Revised FASB Interpretation No. 46 for all entities other than the MCV Partnership and FMLP. We continue to evaluate and gather information regarding those entities. We will adopt the provisions of Revised FASB Interpretation No. 46 for the MCV Partnership and FMLP in the first quarter of 2004. If our completed analysis shows we have the controlling financial interest in the MCV Partnership and FMLP, we would consolidate their assets, liabilities, and activities, including $700 million of non-recourse debt, into our financial statements. Financial covenants under our financing agreements could be impacted negatively after such a consolidation. As a result, it may become necessary to seek amendments to the relevant financing agreements to modify the terms of certain of these covenants to remove the effect of this consolidation, or to refinance the relevant debt. As of December 31, 2003, our investment in the MCV Partnership was $419 million and our investment in the FMLP was $224 million. We also determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities have been deconsolidated as of December 31, 2003. Company obligated Trust Preferred Securities totaling $490 million that were previously included in mezzanine equity, have been eliminated due to deconsolidation. As a result of the deconsolidation, we have reflected $506 million of long-term debt -- related parties and have reflected an investment in related parties of $16 million. We are not required to, and have not, restated prior periods for the impact of this accounting change. STATEMENT OF POSITION, ACCOUNTING FOR CERTAIN COSTS AND ACTIVITIES RELATED TO PROPERTY, PLANT, AND EQUIPMENT: At its September 9, 2003 meeting, the Accounting Standards Executive Committee, of the American Institute of Certified Public Accountants voted to approve the Statement of Position, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. The Statement of Position is expected to be presented for FASB clearance in 2004 and would be applicable for fiscal years beginning after December 15, 2004. An asset classified as property, plant, and equipment often comprises multiple parts and costs. A component accounting policy determines the level at which those parts are recorded. Capitalization of certain costs related to property, plant, and equipment are included in the total cost. The Statement of Position could impact our component and capitalization accounting for property, plant, and equipment. We continue to evaluate the impact, if any, this Statement of Position will have upon adoption. CE-27 (This page intentionally left blank) CE-28 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 -------------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS OPERATING REVENUE........................................... $4,435 $4,169 $3,976 EARNINGS FROM EQUITY METHOD INVESTEES....................... 42 53 38 OPERATING EXPENSES Fuel for electric generation.............................. 320 320 330 Purchased power -- related parties........................ 519 564 559 Purchased and interchange power........................... 310 296 460 Cost of gas sold.......................................... 1,221 831 707 Cost of gas sold -- related parties....................... 28 131 123 Other..................................................... 739 660 625 ------ ------ ------ 3,137 2,802 2,804 Maintenance............................................... 199 190 203 Depreciation.............................................. 316 300 309 Amortization.............................................. 61 48 30 General taxes............................................. 181 193 187 ------ ------ ------ 3,894 3,533 3,533 ------ ------ ------ OPERATING INCOME (LOSS)..................................... 583 689 481 OTHER INCOME (DEDUCTIONS) Dividends and interest from affiliates.................... 2 3 6 Accretion expense......................................... (7) (6) (11) Other, net................................................ -- 25 6 ------ ------ ------ (5) 22 1 ------ ------ ------ INTEREST CHARGES Interest on long-term debt................................ 196 153 151 Interest on long-term debt -- related parties............. 45 -- -- Other interest............................................ 13 27 41 Capitalized interest...................................... (9) (12) (6) ------ ------ ------ 245 168 186 ------ ------ ------ INCOME BEFORE INCOME TAXES.................................. 333 543 296 INCOME TAXES................................................ 137 180 97 ------ ------ ------ INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................................................. 196 363 199 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR DERIVATIVE INSTRUMENTS, NET OF $10 TAX IN 2002 (NOTE 11) AND $6 TAX BENEFIT IN 2001 (NOTE 4).................................. -- 18 (11) ------ ------ ------ NET INCOME.................................................. 196 381 188 PREFERRED STOCK DIVIDENDS................................... 2 2 2 PREFERRED SECURITIES DISTRIBUTIONS.......................... -- 44 41 ------ ------ ------ NET INCOME AVAILABLE TO COMMON STOCKHOLDER.................. $ 194 $ 335 $ 145 ====== ====== ======
The accompanying notes are an integral part of these statements. CE-29 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ---------------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 196 $ 381 $ 188 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $6, $6, and $6, respectively)....................................... 377 348 339 Deferred income taxes and investment tax credit...... 195 277 136 Capital lease and other amortization................. 28 15 20 Gain on sale of METC and other assets................ (1) (38) -- Loss on CMS Energy stock............................. 12 12 -- Cumulative effect of change in accounting............ -- (18) 11 Distributions from related parties in excess of (less than) earnings (net of dividends, $45, $15, and $8, respectively)....................................... 3 (38) (30) Pension contribution................................. (501) (47) (49) Changes in assets and liabilities: Decrease (increase) in accounts receivable and accrued revenue................................. (12) (98) 149 Increase (decrease) in accounts payable........... (61) (39) 53 Decrease (increase) in inventories................ (256) 90 (307) Changes in other assets and liabilities........... 25 (85) 8 ------ ----- ----- Net cash provided by operating activities....... 5 760 518 ------ ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease)................................................. (486) (559) (745) Cost to retire property................................... (72) (66) (118) Restricted cash on hand(a)................................ -- (14) (4) Investments in Electric Restructuring Implementation Plan................................................... (8) (8) (13) Investments in nuclear decommissioning trust funds........ (6) (6) (6) Associated company preferred stock redemption............. -- -- 50 Proceeds from nuclear decommissioning trust funds......... 34 30 29 Cash proceeds from sale of assets......................... 10 298 -- ------ ----- ----- Net cash used in investing activities.................. (528) (325) (807) ------ ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long term debt.................. 1,603 601 355 Retirement of long-term debt.............................. (788) (574) (401) Payment of common stock dividends......................... (218) (231) (190) Preferred securities distributions........................ -- (44) (41) Redemption of preferred securities........................ -- (30) -- Payment of capital lease obligations...................... (13) (15) (20) Contribution from (return of equity to) stockholder, net.................................................... -- 50 (14) Payment of preferred stock dividends...................... (2) (2) (1) Increase (decrease) in notes payable, net................. (257) 41 13 Proceeds from preferred securities........................ -- -- 121 Proceeds from securitization bonds........................ -- -- 459 ------ ----- ----- Net cash provided by (used in) financing activities.... 325 (204) 281 ------ ----- ----- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (198) 231 (8) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 244 13 21 ------ ----- ----- CASH AND CASH EQUIVALENTS, END OF PERIOD(A)................. $ 46 $ 244 $ 13 ====== ===== =====
CE-30
YEARS ENDED DECEMBER 31 ---------------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE: CASH TRANSACTIONS Interest paid (net of amounts capitalized)................ $ 227 $ 147 $ 169 Income taxes paid (net of refunds, $91, $205, and $53, respectively).......................................... (56) (78) 3 OPEB cash contribution.................................... 71 73 47 NON-CASH TRANSACTIONS Nuclear fuel placed under capital leases.................. $ -- $ -- $ 13 Other assets placed under capital lease................... 19 62 37
- ------------------------- (a) Cash and Cash Equivalents decreased $18 million for 2002 and $4 million for 2001 due to reflecting restricted cash as an investing activity rather than classifying as a cash equivalent. The accompanying notes are an integral part of these statements. CE-31 CONSUMERS ENERGY COMPANY CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ----------- 2003 2002 ---- ---- IN MILLIONS ASSETS PLANT AND PROPERTY (AT COST) Electric.................................................. $ 7,600 $ 7,523 Gas....................................................... 2,875 2,719 Other..................................................... 15 23 ------- ------- 10,490 10,265 Less accumulated depreciation, depletion, and amortization (Note 12).............................................. 4,417 4,993 ------- ------- 6,073 5,272 Construction work-in-progress............................. 375 548 ------- ------- 6,448 5,820 ------- ------- INVESTMENTS Stock of affiliates....................................... 20 22 First Midland Limited Partnership......................... 224 255 Midland Cogeneration Venture Limited Partnership.......... 419 388 Other..................................................... 18 2 ------- ------- 681 667 ------- ------- CURRENT ASSETS Cash and cash equivalents at cost, which approximates market................................................. 46 244 Restricted cash........................................... 18 18 Accounts receivable, notes receivable and accrued revenue, less allowances of $8 in 2003 and $5 in 2002........... 257 236 Accounts receivable -- related parties.................... 4 13 Inventories at average cost Gas in underground storage............................. 739 486 Materials and supplies................................. 70 71 Generating plant fuel stock............................ 41 37 Deferred property taxes................................... 143 142 Regulatory assets -- postretirement benefits.............. 19 19 Other..................................................... 80 38 ------- ------- 1,417 1,304 ------- ------- NON-CURRENT ASSETS Regulatory Assets Securitized costs...................................... 648 689 Postretirement benefits................................ 162 185 Abandoned Midland project.............................. 10 11 Other.................................................. 266 168 Nuclear decommissioning trust funds....................... 575 536 Prepaid pension costs..................................... 364 -- Other..................................................... 174 218 ------- ------- 2,199 1,807 ------- ------- TOTAL ASSETS................................................ $10,745 $ 9,598 ======= =======
CE-32
DECEMBER 31 ----------------- 2003 2002 ---- ---- IN MILLIONS STOCKHOLDER'S INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholder's equity Common stock, authorized 125.0 shares; outstanding 84.1 shares for all periods................................ $ 841 $ 841 Paid-in capital........................................ 682 682 Accumulated other comprehensive income (loss).......... 17 (179) Retained earnings since December 31, 1992.............. 521 545 ------- ------ 2,061 1,889 Preferred stock (Note 3).................................. 44 44 Company-obligated mandatorily redeemable Trust Preferred Securities of subsidiaries (Note 3).................... -- 490 Long-term debt............................................ 3,583 2,442 Long-term debt -- related parties (Note 3)................ 506 -- Non-current portion of capital leases..................... 58 116 ------- ------ 6,252 4,981 ------- ------ CURRENT LIABILITIES Current portion of long-term debt and capital leases...... 38 318 Notes payable............................................. -- 457 Note payable -- related parties........................... 200 -- Accounts payable.......................................... 200 252 Accrued taxes............................................. 209 214 Accounts payable -- related parties....................... 75 84 Current portion of purchase power contracts............... 27 26 Deferred income taxes..................................... 33 25 Other..................................................... 185 200 ------- ------ 967 1,576 ------- ------ NON-CURRENT LIABILITIES Deferred income taxes..................................... 1,233 949 Regulatory liabilities for cost of removal (Note 12)...... 983 907 Postretirement benefits................................... 190 563 Regulatory liabilities for income taxes, net.............. 312 297 Asset retirement obligations.............................. 358 -- Other regulatory liabilities.............................. 172 4 Power purchase agreement -- MCV Partnership............... -- 27 Deferred investment tax credit............................ 85 91 Other..................................................... 193 203 ------- ------ 3,526 3,041 ------- ------ Commitments and Contingencies (Notes 1, 2, 5, 7, 8, and 11) TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES.............. $10,745 $9,598 ======= ======
The accompanying notes are an integral part of these statements. CE-33 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31 -------------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS COMMON STOCK At beginning and end of period (a)........................ $ 841 $ 841 $ 841 OTHER PAID-IN CAPITAL At beginning of period.................................... 682 632 646 Stockholder's contribution................................ -- 150 150 Return of stockholder's contribution...................... -- (100) (164) ------ ------ ------ At end of period.......................................... 682 682 632 ------ ------ ------ ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Minimum Pension Liability At beginning of period................................. (185) -- -- Minimum pension liability adjustments (b).............. 185 (185) -- ------ ------ ------ At end of period..................................... -- (185) -- ------ ------ ------ Investments At beginning of period................................. 1 16 33 Unrealized gain (loss) on investments (b).............. 8 (16) (16) Reclassification adjustments included in net income (b)................................................... -- 1 (1) ------ ------ ------ At end of period..................................... 9 1 16 ------ ------ ------ Derivative Instruments At beginning of period (c)............................. 5 (12) 18 Unrealized gain (loss) on derivative instruments (b)... 13 10 (30) Reclassification adjustments included in net income (b)................................................... (10) 7 -- ------ ------ ------ At end of period..................................... 8 5 (12) ------ ------ ------ Total Accumulated Other Comprehensive Income (Loss)......... 17 (179) 4 ------ ------ ------ RETAINED EARNINGS At beginning of period.................................... 545 441 486 Net income (b)............................................ 196 381 188 Cash dividends declared -- Common Stock................... (218) (231) (190) Cash dividends declared -- Preferred Stock................ (2) (2) (2) Preferred securities distributions........................ -- (44) (41) ------ ------ ------ At end of period.......................................... 521 545 441 ------ ------ ------ TOTAL COMMON STOCKHOLDER'S EQUITY........................... $2,061 $1,889 $1,918 ====== ====== ======
- ------------------------- (a) Number of shares of common stock outstanding was 84,108,789 for all periods presented. CE-34 (b) Disclosure of Comprehensive Income: Other comprehensive income (loss)
2003 2002 2001 ---- ---- ---- IN MILLIONS Minimum pension liability adjustments, net of tax (tax benefit) of $100, $(100), and $--, respectively........... $185 $(185) -- Investments Unrealized loss on investments, net of tax (tax benefit) of $4, $(9), and $(9), respectively.................... 8 (16) (16) Reclassification adjustments included in net income, net of tax (tax benefit) of $--, $1, and $(1), respectively........................................... -- 1 (1) Derivative Instruments Unrealized gain (loss) on derivative instruments, net of tax (tax benefit) of $7, $6, and $(15), respectively... 13 10 (30) Reclassification adjustments included in net income, net of tax (tax benefit) of $(5), $4, and $--, respectively........................................... (10) 7 -- Net income.................................................. 196 381 188 ---- ----- ---- Total Comprehensive Income.................................. $392 $ 198 $141 ==== ===== ====
(c) Cumulative effect of change in accounting principle, as of 1/1/01 and 7/1/01, net of tax of $9 (Note 4). The accompanying notes are an integral part of these statements. CE-35 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES CORPORATE STRUCTURE: Consumers is a subsidiary of CMS Energy, a holding company. We are an electric and gas utility company that provides service to customers in Michigan's Lower Peninsula. Our customers include a mix of residential, commercial, and diversified industrial customers. The largest customer segment is the automotive industry. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include Consumers, and all other entities in which we have a controlling financial interest, in accordance with Revised FASB Interpretation No. 46. Intercompany transactions and balances have been eliminated. We use the equity method of accounting for investments in companies and partnerships that are not consolidated where we have significant influence over operations and financial policies, but not a controlling financial interest. USE OF ESTIMATES: We prepare our financial statements in conformity with accounting principles generally accepted in the United States. We are required to make estimates using assumptions that may affect the reported amounts and disclosures. Actual results could differ from those estimates. We are required to record estimated liabilities in the financial statements when it is probable that a loss will be incurred in the future as a result of a current event, and when the amount can be reasonably estimated. We have used this accounting principle to record estimated liabilities as discussed in Note 2, Uncertainties. REVENUE RECOGNITION POLICY: Revenues from deliveries of electricity and natural gas, and the storage of natural gas are recognized when services are provided. Sales taxes are recorded as liabilities and are not included in revenues. CASH EQUIVALENTS AND RESTRICTED CASH: All highly liquid investments with an original maturity of three months or less are considered cash equivalents. At December 31, 2003, our restricted cash on hand was $18 million. Restricted cash primarily consists of cash dedicated for repayment of securitization bonds. It is classified as a current asset as the payments on the related securitization bonds occur within one year. COAL INVENTORY: We use the weighted average cost method for valuing coal inventory. FINANCIAL INSTRUMENTS: We account for investments in debt and equity securities in accordance with SFAS No. 115. Debt and equity securities can be classified into one of three categories: held-to-maturity, trading, or available-for-sale. Our investments in equity securities, including our investment in CMS Energy Common Stock, are classified as available-for-sale. They are reported at fair value, with any unrealized gains or losses resulting from changes in fair value reported in equity as part of accumulated other comprehensive income and are excluded from earnings unless such changes in fair value are determined to be other than temporary. Unrealized gains or losses from changes in the fair value of our nuclear decommissioning investments are reported as regulatory liabilities. The fair value of these investments is determined from quoted market prices. For additional details regarding financial instruments, see Note 4, Financial and Derivative Instruments, "Financial Instruments." GAS INVENTORY: We use the weighted average cost method for valuing working gas and recoverable cushion gas in underground storage facilities. IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: We evaluate the potential impairment of our investments in projects and other long-lived assets, other than goodwill, based on various analyses, including the projection of undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of the investment or asset exceeds the amount of the expected future undiscounted cash flows, an impairment loss is recognized, and the investment or asset is written down to its estimated fair value. MAINTENANCE AND DEPRECIATION: We charge property repairs and minor property replacements to maintenance expense. We also charge planned major maintenance activities to operating expense unless the cost CE-36 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) represents the acquisition of additional components or the replacement of an existing component. We capitalize the cost of plant additions and replacements. We depreciate utility property on straight-line and units-of-production rates approved by the MPSC. The composite depreciation rates for our properties are:
YEARS ENDED DECEMBER 31 --------------------- 2003 2002 2001 ---- ---- ---- Electric utility property................................... 3.1% 3.1% 3.1% Gas utility property........................................ 4.6% 4.5% 4.4% Other property.............................................. 8.1% 7.2% 11.2%
NUCLEAR FUEL COST: We amortize nuclear fuel cost to fuel expense based on the quantity of heat produced for electric generation. For nuclear fuel used after April 6, 1983, we charge disposal costs to nuclear fuel expense, recover these costs through electric rates, and remit them to the DOE quarterly. We elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983. As of December 31, 2003, we have recorded a liability to the DOE for $139 million, including interest, which is payable upon the first delivery of spent nuclear fuel to the DOE. The amount of this liability, excluding a portion of interest, was recovered through electric rates. For additional details on disposal of spent nuclear fuel, see Note 2, Uncertainties, "Other Electric Uncertainties -- Nuclear Matters." NUCLEAR PLANT DECOMMISSIONING: Our site-specific decommissioning cost estimates for Big Rock and Palisades assume that each plant site will eventually be restored to conform to the adjacent landscape and all contaminated equipment will be disassembled and disposed of in a licensed burial facility. Trust Funds: MPSC orders, received in March 1999 for Big Rock and December 1999 for Palisades, provided for fully funding the decommissioning trust funds for both sites. The December 1999 order set the annual decommissioning surcharge for Palisades at $6 million. In 2003, we collected $6 million from our electric customers for the decommissioning of our Palisades nuclear plant. Amounts collected from electric retail customers and deposited in trusts, including trust earnings, are credited to a regulatory liability. In December 2000, we stopped depositing funds in the Big Rock trust fund based on its funding status at that time. However, the current level of funds provided by the trust may not be adequate to fully fund the decommissioning of Big Rock. This is due in part to the DOE's failure to accept spent nuclear fuel and lower returns on the trust fund. We are attempting to recover our additional costs for storing spent nuclear fuel through litigation, as discussed in Note 2, Uncertainties, "Other Electric Uncertainties -- Nuclear Matters." To the extent the funds are not sufficient, we would seek additional relief from the MPSC. We can make no assurance that the MPSC would grant this request. In March 2001, we filed with the MPSC a "Report on the Adequacy of the Existing Provision for Nuclear Plant Decommissioning" for each plant reflecting decommissioning cost estimates of $349 million for Big Rock, excluding spent nuclear fuel storage costs, and $739 million for Palisades, in 2000 dollars. We are required to file the next such reports with the MPSC by March 31, 2004 for Big Rock and Palisades and are in the process of preparing updated cost estimates. CE-37 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Big Rock: In 1997, Big Rock closed permanently and plant decommissioning began. We estimate that the Big Rock site will be returned to a natural state by the end of 2012 if the DOE begins removing the spent nuclear fuel by 2010. The following table shows our Big Rock decommissioning activities:
YEAR-TO-DATE ACCUMULATIVE DECEMBER 31, 2003 TOTAL-TO-DATE ----------------- ------------- IN MILLIONS ~~Decommissioning expenditures................................ $45 $263 Withdrawals from trust funds................................ 34 243~~
These activities had no material impact on net income. At December 31, 2003, we have an investment in nuclear decommissioning trust funds of $88 million for Big Rock. In addition, at December 31, 2003, we have charged $7 million to our FERC jurisdictional depreciation reserve for the decommissioning of Big Rock. Palisades: In December 2000, the NRC extended the Palisades operating license to March 2011 and the impact of this extension was included as part of our March 2001 filing with the MPSC. At December 31, 2003, we have an investment in the MPSC nuclear decommissioning trust funds of $477 million for Palisades. In addition, at December 31, 2003, we have a FERC decommissioning trust fund with a balance of $10 million. For additional details on decommissioning costs accounted for as asset retirement obligations, see Note 12, Asset Retirement Obligations. PROPERTY, PLANT, AND EQUIPMENT: We record property, plant, and equipment at original cost when placed into service. When regulated assets are retired, or otherwise disposed of in the ordinary course of business, the original cost is charged to accumulated depreciation and cost of removal, less salvage is recorded as a regulatory liability. For additional details, see Note 12, Asset Retirement Obligation. An allowance for funds used during construction is capitalized on regulated construction projects. With respect to the retirement or disposal of non-regulated assets, the resulting gains or losses are recognized in income. CE-38 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Property, plant, and equipment at December 31, 2003 and 2002, was as follows:
YEARS ENDED DECEMBER 31 ------------------------------------ ESTIMATED DEPRECIABLE LIFE IN YEARS(E) 2003 2002 ---------------- ---- ---- IN MILLIONS Electric: Generation................................................ 13-75 $3,332 $3,489 Distribution.............................................. 12-85 3,799 3,619 Other..................................................... 5-50 388 300 Capital leases(a)......................................... 81 115 Gas: Underground storage facilities(b)......................... 30-75 232 217 Transmission.............................................. 15-75 342 310 Distribution.............................................. 35-75 1,976 1,899 Other..................................................... 5-48 300 237 Capital leases(a)......................................... 25 56 Other: Non-utility property...................................... 7-71 15 23 Construction work-in-progress(c).......................... 375 548 Less accumulated depreciation, depletion, and amortization.............................................. 4,417 4,993 ------ ------ Net property, plant, and equipment(d)....................... $6,448 $5,820 ====== ======
- ------------------------- (a) Capital leases presented in this table are gross amounts. Amortization of capital leases was $38 million in 2003 and $96 million in 2002. (b) Includes unrecoverable base natural gas in underground storage of $23 million at December 31, 2003 and $23 million at December 31, 2002, which is not subject to depreciation. (c) Included in construction costs at December 31, 2002 was $54 million, relating to the capital lease of our main headquarters. We purchased the main headquarters in November 2003. (d) Included in net property, plant and equipment are intangible assets primarily related to software development costs, consents, and rights of way. The estimated amortization life for software development costs is seven years and other intangible amortization lives range from 50 to 75 years. Intangible assets at December 31, 2003 and 2002, were as follows:
YEARS ENDED DECEMBER 31 ------------ 2003 2002 ---- ---- IN MILLIONS Intangible assets at cost................................... $336 $304 Less accumulated amortization............................... 184 167 ---- ---- Net intangible assets....................................... $152 $137 ==== ====
CE-39 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (e) The following table illustrates the depreciable life for electric and gas structures and improvements.
ESTIMATED ESTIMATED DEPRECIABLE DEPRECIABLE ELECTRIC LIFE IN YEARS GAS LIFE IN YEARS - -------- ------------- --- ------------- Generation: Coal............................ 39-43 Underground storage facilities 45 Nuclear......................... 25 Transmission 60 Hydroelectric................... 55-71 Distribution 60 Other........................... 32 Other 42-48 Distribution...................... 50-60 Other............................. 40-42
RECLASSIFICATIONS: Certain prior year amounts have been reclassified for comparative purposes. These reclassifications did not affect consolidated net income for the years presented. RELATED PARTY TRANSACTIONS: We received income from related parties as follows:
TYPE OF INCOME RELATED PARTY 2003 2002 2001 -------------- ------------- ---- ---- ---- IN MILLIONS Gas sales, storage, transportation and other services............................................. MCV Partnership $17 $27 $27 Dividend income........................................ Consumers' affiliated Trust Preferred Securities companies 2 -- -- Dividend income........................................ CMS Energy parent company -- 3 6
We sell, store, and transport natural gas, as well as provide various other services to the MCV Partnership. For additional details on transactions with the MCV Partnership and the FMLP, see Note 2, Uncertainties, "Other Electric Uncertainties -- The Midland Cogeneration Venture," and Note 11, Summarized Financial Information of Significant Related Energy Supplier. We issued Trust Preferred Securities through several Consumers' affiliated companies. As of December 31, 2003, we deconsolidated the trusts that hold the mandatorily redeemable Trust Preferred Securities. As a result of the deconsolidation, we now record on the Consolidated Statements of Income interest on long-term debt -- related parties to the trusts holding the Trust Preferred Securities. For additional information on Consumers' affiliated Trust Preferred Securities companies, see Note 3, Financings and Capitalization, "Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries" and Note 13, Implementation of New Accounting Standards. We own 2.4 million shares of CMS Energy Common Stock with a fair value of $20 million at December 31, 2003. For additional details on our investment in CMS Energy Common Stock, see Note 4, Financial and Derivative Instruments. CE-40 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) We recorded expense from related parties as follows:
TYPE OF COST RELATED PARTY 2003 2002 2001 ------------ ------------- ---- ---- ---- IN MILLIONS Electric generating capacity and energy..... MCV Partnership $455 $497 $488 Electric generating capacity and energy..... Affiliates of Enterprises 64 67 71 Interest expense on long-term debt.......... Consumers' affiliated Trust Preferred Securities companies 45 -- -- Gas purchases............................... CMS MST 27 127 120 Overhead expense............................ CMS Energy parent company 8 18 11 Gas transportation.......................... CMS Bay Area Pipeline, L.L.C 4 4 4 Gas transportation.......................... Panhandle/Trunkline 1 22 21
We pay overhead costs to CMS Energy based on accepted industry allocation methodologies, such as the Massachusetts Formula. We base our other related party transactions on regulated prices, market prices, or competitive bidding. TRADE RECEIVABLES: We record our accounts receivable at fair value. Accounts deemed uncollectable are charged to operating expense. UNAMORTIZED DEBT PREMIUM, DISCOUNT, AND EXPENSE: We amortize premiums, discounts, and expenses incurred in connection with the issuance of outstanding long-term debt over the terms of the issues. For the regulated portions of our businesses, if debt is refinanced, we amortize any unamortized premiums, discounts, and expenses over the term of the new debt. UTILITY REGULATION: We account for the effects of regulation based on the regulated utility accounting standard SFAS No. 71. As a result, the actions of regulators affect when we recognize revenues, expenses, assets, and liabilities. In 1999, we received MPSC electric restructuring orders, which, among other things, identified the terms and timing for implementing electric restructuring in Michigan. Consistent with these orders and EITF No. 97-4, we discontinued the application of SFAS No. 71 for the energy supply portion of our business because we expected to implement ROA at competitive market based rates for our electric customers. Since 1999, there have been significant legislative and regulatory changes in Michigan that has resulted in: - electric supply customers of utilities remaining on cost-based rates, and - utilities being provided the opportunity to recover Stranded Costs associated with electric restructuring, from customers who choose an alternative electric supplier. During 2002, we re-evaluated the criteria used to determine if an entity or a segment of an entity meets the requirements to apply regulated utility accounting, and determined that the energy supply portion of our business could meet the criteria if certain regulatory events occurred. In December 2002, we received a MPSC Stranded Cost order that allowed us to re-apply regulatory accounting standard SFAS No. 71 to the energy supply portion of our business. Re-application of SFAS No. 71 had no effect on the prior discontinuation accounting, but allowed us to apply regulatory accounting treatment to the energy supply portion of our business beginning in the fourth quarter of 2002, including regulatory accounting treatment of costs required to be recognized in accordance with SFAS No. 143. For additional details, see Note 12, Asset Retirement Obligations. SFAS No. 144 imposes strict criteria for retention of regulatory-created assets by requiring that such assets be probable of future recovery at each balance sheet date. Management believes these assets are probable of future recovery. CE-41 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following regulatory assets and liabilities, which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets. We expect to recover these costs through rates over periods of up to 14 years. We recognized an OPEB transition obligation in accordance with SFAS No. 106 and established a regulatory asset for this amount that we expect to recover in rates over the next nine years.
DECEMBER 31 ---------------- 2003 2002 ---- ---- IN MILLIONS Securitized costs (Note 2).................................. $ 648 $ 689 Postretirement benefits (Note 7)............................ 181 204 Electric Restructuring Implementation Plan (Note 2)......... 91 83 Manufactured gas plant sites (Note 2)....................... 67 69 Abandoned Midland project................................... 10 11 Unamortized debt............................................ 51 14 Asset retirement obligation (Note 12)....................... 49 -- Other....................................................... 8 2 ------ ------ Total regulatory assets..................................... $1,105 $1,072 ====== ====== Cost of removal (Note 12)................................... $ 983 $ 907 Income taxes (Note 5)....................................... 312 297 Asset retirement obligation (Note 12)....................... 168 -- Other....................................................... 4 4 ------ ------ Total regulatory liabilities................................ $1,467 $1,208 ====== ======
In October 2000, we received an MPSC order authorizing us to securitize certain regulatory assets up to $469 million, net of tax, see Note 2, Uncertainties, "Electric Restructuring Matters-Securitization." Accordingly, in December 2000, we established a regulatory asset for securitized costs of $709 million, before tax, that had previously been recorded in other regulatory asset accounts. To prepare for the financing of the securitized assets and the subsequent retirement of debt with Securitization proceeds, issuance fees were capitalized as a part of Securitization costs. These issuance costs are amortized each month for up to fourteen years. The components of the unamortized securitized costs are illustrated below.
DECEMBER 31 ------------ 2003 2002 ---- ---- IN MILLIONS Unamortized nuclear costs................................... $405 $405 Postretirement benefits..................................... 84 84 Income taxes................................................ 203 203 Uranium enrichment facility................................. 16 16 Other....................................................... 12 12 Accumulated Securitization cost amortization................ (72) (31) ---- ---- Total unamortized securitized costs......................... $648 $689 ==== ====
CE-42 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2: UNCERTAINTIES Several business trends or uncertainties may affect our financial results and condition. These trends or uncertainties have, or we expect could have, a material impact on revenues or income from continuing electric and gas operations. Such trends and uncertainties include: Environmental - increased capital expenditures and operating expenses for Clean Air Act compliance, and - potential environmental liabilities arising from various environmental laws and regulations, including potential liability or expenses relating to the Michigan Natural Resources and Environmental Protection Acts, Superfund, and at former manufactured gas plant facilities. Restructuring - response of the MPSC and Michigan legislature to electric industry restructuring issues, - ability to meet peak electric demand requirements at a reasonable cost, without market disruption, - ability to recover any of our net Stranded Costs under the regulatory policies being followed by the MPSC, - recovery of electric restructuring implementation costs, - effects of lost electric supply load to alternative electric suppliers, and - status as an electric transmission customer, instead of an electric transmission owner-operator. Regulatory - effects of conclusions about the causes of the August 14, 2003 blackout, including exposure to liability, increased regulatory requirements, and new legislation, - effects of potential performance standards payments, - successful implementation of initiatives to reduce exposure to purchased power price increases, - responses from regulators regarding the storage and ultimate disposal of spent nuclear fuel, - potential adverse appliance service plan ruling or related legislation, - inadequate regulatory response to applications for requested rate increases, and - response to increases in gas costs, including adverse regulatory response and reduced gas use by customers. Other - pending litigation regarding PURPA qualifying facilities, and - pending litigation and government investigations. SEC AND OTHER INVESTIGATIONS: As a result of round-trip trading transactions by CMS MST, CMS Energy's Board of Directors established a Special Committee to investigate matters surrounding the transactions and retained outside counsel to assist in the investigation. The Special Committee completed its investigation and reported its findings to the Board of Directors in October 2002. The Special Committee concluded, based on an extensive investigation, that the round-trip trades were undertaken to raise CMS MST's profile as an energy marketer with the goal of enhancing its ability to promote its services to new customers. The Special Committee found no effort to manipulate the price of CMS Energy Common Stock or affect energy prices. The Special Committee also made recommendations designed to prevent any recurrence of this practice. Previously, CMS CE-43 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Energy terminated its speculative trading business and revised its risk management policy. The Board of Directors adopted, and CMS Energy has implemented the recommendations of the Special Committee. CMS Energy is cooperating with other investigations concerning round-trip trading, including an investigation by the SEC regarding round-trip trades and CMS Energy's financial statements, accounting policies and controls, and an investigation by the United States Department of Justice. CMS Energy is unable to predict the outcome of these matters, and what effect, if any, these investigations will have on its business. SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of securities class action complaints were filed against CMS Energy, Consumers, and certain officers and directors of CMS Energy and its affiliates. The complaints were filed as purported class actions in the United States District Court for the Eastern District of Michigan, by shareholders who allege that they purchased CMS Energy's securities during a purported class period. The cases were consolidated into a single lawsuit and an amended and consolidated class action complaint was filed on May 1, 2003. The consolidated complaint contains a purported class period beginning on May 1, 2000 and running through March 31, 2003. It generally seeks unspecified damages based on allegations that the defendants violated United States securities laws and regulations by making allegedly false and misleading statements about CMS Energy's business and financial condition, particularly with respect to revenues and expenses recorded in connection with round-trip trading by CMS MST. CMS Energy, Consumers, and their affiliates will defend themselves vigorously but cannot predict the outcome of this litigation. ERISA LAWSUITS: CMS Energy is a named defendant, along with Consumers, CMS MST and certain named and unnamed officers and directors, in two lawsuits brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings and Incentive Plan (the "Plan"). The two cases, filed in July 2002 in United States District Court for the Eastern District of Michigan, were consolidated by the trial judge and an amended consolidated complaint was filed. Plaintiffs allege breaches of fiduciary duties under ERISA and seek restitution on behalf of the Plan with respect to a decline in value of the shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek other equitable relief and legal fees. CMS Energy and Consumers will defend themselves vigorously but cannot predict the outcome of this litigation. ELECTRIC CONTINGENCIES ELECTRIC ENVIRONMENTAL MATTERS: Our operations are subject to environmental laws and regulations. Costs to operate our facilities in compliance with these laws and regulations generally have been recovered in customer rates. Clean Air: In 1998, the EPA issued regulations requiring the state of Michigan to further limit nitrogen oxide emissions at our coal-fired electric plants. The Michigan Department of Environmental Quality finalized its rules to comply with the EPA regulations in December 2002. It submitted these rules to the EPA for approval in the first quarter of 2003. The EPA has yet to approve the Michigan rules. If the EPA does not approve the Michigan rules, similar federal regulations will take effect. The EPA and the state regulations require us to make significant capital expenditures estimated to be $771 million. As of December 31, 2003, we have incurred $446 million in capital expenditures to comply with the EPA regulations and anticipate that the remaining $325 million of capital expenditures will be incurred between 2004 and 2009. These expenditures include installing catalytic reduction technology on some of our coal-fired electric plants. Based on the Customer Choice Act, beginning January 2004, an annual return of and on these types of capital expenditures, to the extent they are above depreciation levels, is expected to be recoverable from customers, subject to a MPSC prudency hearing. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seek modification permits from the EPA. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements CE-44 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of "routine maintenance." If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric plants. In addition to modifying the coal-fired electric plants, we expect to purchase nitrogen oxide emissions credits for years 2004 through 2008. The cost of these credits is estimated to average $8 million per year and is accounted for as inventory. The credit inventory is expensed as the coal-fired electric plants generate electricity. The price for nitrogen oxide emissions credits is volatile and could change substantially. Future clean air regulations requiring emission controls for sulfur dioxide, nitrogen oxides, mercury, and nickel may require additional capital expenditures. Total expenditures will depend upon the final makeup of the new regulations. Water: The EPA has proposed changes to the rules that govern generating plant cooling water intake systems. The proposed rules will require significant reduction in fish killed by operating equipment. The proposed rules are scheduled to become final in the first quarter of 2004 and some of our facilities would be required to comply by 2006. We are studying the proposed rules to determine the most cost-effective solutions for compliance. Cleanup and Solid Waste: Under the Michigan Natural Resources and Environmental Protection Act, we expect that we will ultimately incur investigation and remedial action costs at a number of sites. We believe that these costs will be recoverable in rates under current ratemaking policies. We are a potentially responsible party at several contaminated sites administered under Superfund. Superfund liability is joint and several, meaning that many other creditworthy parties with substantial assets are potentially responsible with respect to the individual sites. Based on past experience, we estimate that our share of the total liability for the known Superfund sites will be between $1 million and $9 million. As of December 31, 2003, we have recorded a liability for the minimum amount of our estimated Superfund liability. In October 1998, during routine maintenance activities, we identified PCB as a component in certain paint, grout, and sealant materials at the Ludington Pumped Storage facility. We removed and replaced part of the PCB material. We have proposed a plan to deal with the remaining materials and are awaiting a response from the EPA. LITIGATION: In October 2003, a group of eight PURPA qualifying facilities selling power to us filed a lawsuit in Ingham County Circuit Court. The lawsuit alleges that we incorrectly calculated the energy charge payments made pursuant to power purchase agreements with qualifying facilities. More specifically, the lawsuit alleges that we should be basing the energy charge calculation on the cost of more expensive eastern coal, rather than on the cost of the coal actually burned by us for use in our coal-fired generating plants. We believe we have been performing the calculation in the manner prescribed by the power purchase agreements, and have filed a request with the MPSC (as a supplement to the PSCR plan) that asks the MPSC to review this issue and to confirm that our method of performing the calculation is correct. We filed a motion to dismiss the lawsuit in the Ingham County Circuit Court due to the pending request at the MPSC in regard to the PSCR plan case. In February 2004, the judge ruled on the motion and deferred to the primary jurisdiction of the MPSC. This ruling effectively suspends the lawsuit until the MPSC rules. Although only eight qualifying facilities have raised the issue, the same energy charge methodology is used in the PPA with the MCV Partnership and in approximately 20 additional power purchase agreements with us, representing a total of 1,670 MW of electric capacity. We cannot predict the outcome of this matter. CE-45 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ELECTRIC RESTRUCTURING MATTERS ELECTRIC RESTRUCTURING LEGISLATION: In June 2000, the Michigan legislature passed electric utility restructuring legislation known as the Customer Choice Act. This act: - allows all customers to choose their electric generation supplier effective January 1, 2002, - provides a one-time five percent residential electric rate reduction, - froze all electric rates through December 31, 2003, and established a rate cap for residential customers through at least December 31, 2005, and a rate cap for small commercial and industrial customers through at least December 31, 2004, - allows deferred recovery of an annual return of and on capital expenditures in excess of depreciation levels incurred during and before the rate freeze-cap period, - allows for the use of Securitization bonds to refinance qualified costs, - allows recovery of net Stranded Costs and implementation costs incurred as a result of the passage of the act, - requires Michigan utilities to join a FERC-approved RTO or sell their interest in transmission facilities to an independent transmission owner, - requires Consumers, Detroit Edison, and AEP to jointly expand their available transmission capability by at least 2,000 MW, and - establishes a market power supply test that, if not met, may require transferring control of generation resources in excess of that required to serve retail sales requirements. The following summarizes our status under the last three provisions of the Customer Choice Act. First, we chose to sell our interest in our transmission facilities to an independent transmission owner in order to comply with the Customer Choice Act; for additional details regarding the sale of the transmission facility, see "Transmission Sale" within this section. Second, in July 2002, the MPSC issued an order approving our plan to achieve the increased transmission capacity required under the Customer Choice Act. The MPSC found that once the planned projects were completed and verification was submitted, a utility was in technical compliance. We have completed the transmission capacity projects identified in the plan and have submitted verification of this fact to the MPSC. We believe we are in full compliance. Lastly, in September 2003, the MPSC issued an order finding that we are in compliance with the market power supply test set forth in the Customer Choice Act. ELECTRIC ROA PLAN: In 1998, we submitted a plan for electric ROA to the MPSC. In March 1999, the MPSC issued orders generally supporting the plan. The Customer Choice Act states that the MPSC orders issued before June 2000 are in compliance with this act and enforceable by the MPSC. Those MPSC orders: - allow electric customers to choose their supplier, - authorize recovery of net Stranded Costs from ROA customers and implementation costs from all customer classes, and - confirm any voluntary commitments of electric utilities. The MPSC approved revised tariffs that establish the rates, terms, and conditions under which retail customers are permitted to choose an electric supplier. These revised tariffs allow ROA customers, upon as little as 30 days notice to us, to return to our generation service at current tariff rates. If any class of customers' (residential, commercial, or industrial) ROA load reaches ten percent of our total load for that class of customers, then returning ROA customers for that class must give 60 days notice to return to our generation service at current tariff rates. However, we may not have capacity available to serve returning ROA customers that is CE-46 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) sufficient or reasonably priced. As a result, we may be forced to purchase electricity on the spot market at higher prices than we can recover from our customers during the rate cap periods. We cannot predict the total amount of electric supply load that may be lost to competitor suppliers. As of March 2004, alternative electric suppliers are providing 735 MW of load. This amount represents nine percent of the total distribution load and an increase of 42 percent compared to March 2003. We cannot predict whether the Stranded Cost recovery method adopted by the MPSC will be applied in a manner that will fully offset any associated margin loss from ROA. In February 2004, the MPSC issued an order on Detroit Edison's request for rate relief for costs associated with customers leaving under electric customer choice. The MPSC order allows Detroit Edison to charge a transition surcharge of approximately 0.4 cent per kWh to ROA customers and eliminates securitization offsets of 0.7 cents per kWh for primary service customers and 0.9 cents per kWh for secondary service customers. We are seeking similar recovery of Stranded Costs due to ROA customers leaving our system and are encouraged by this ruling. ELECTRIC RESTRUCTURING PROCEEDINGS: Below is a discussion of our electric restructuring proceedings. They are: - Securitization, - Stranded Costs, - implementation costs, and - transmission. Securitization: The Customer Choice Act allows for the use of Securitization bonds to refinance certain qualified costs. Since Securitization involves issuing bonds secured by a revenue stream from rates collected directly from customers to service the bonds, Securitization bonds typically have a higher credit rating than conventional utility corporate financing. In 2000 and 2001, the MPSC issued orders authorizing us to issue Securitization bonds. We issued our first Securitization bonds in late 2001. Securitization resulted in: - lower interest costs, and - longer amortization periods for the securitized assets. We will recover the repayment of principal, interest, and other expenses relating to the bond issuance through a Securitization charge and a tax charge that began in December 2001. These charges are subject to an annual true up until one year prior to the last scheduled bond maturity date, and no more than quarterly thereafter. The December 2003 true up modified the total Securitization and related tax charges from 1.746 mills per kWh to 1.718 mills per kWh. There will be no impact on customer bills from Securitization for most of our electric customers until the Customer Choice Act cap period expires, and an electric rate case is processed. Securitization charge collections, $50 million for the twelve months ended December 31, 2003, and $52 million for the twelve months ended December 31, 2002, are remitted to a trustee. Securitization charge collections are restricted to the repayment of the principal and interest on the Securitization bonds and payment of the ongoing expenses of Consumers Funding. Consumers Funding is legally separate from Consumers. The assets and income of Consumers Funding, including the securitized property, are not available to creditors of Consumers or CMS Energy. In March 2003, we filed an application with the MPSC seeking approval to issue additional Securitization bonds. In June 2003, the MPSC issued a financing order authorizing the issuance of Securitization bonds in the amount of $554 million. This amount relates to Clean Air Act expenditures and associated return on those expenditures through December 31, 2002; ROA implementation costs, and previously authorized return on those expenditures through December 31, 2000; and other up front qualified costs related to issuance of the Securitization bonds. The MPSC rejected the portion of the application related to pension costs. The MPSC based CE-47 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) its decision on the reasoning that a rebounding economy and stock market could potentially reverse recent Pension Plan losses. Also, the MPSC rejected Palisades expenditures previously not securitized as eligible securitized costs; therefore, these costs will be included in a future electric rate case proceeding with the MPSC and as a component of the 2002 net Stranded Cost calculation. In July 2003, we filed for rehearing and clarification on a number of features in the financing order. In December 2003, the MPSC issued its order on rehearing, which rejected our requests for clarification and modification to the dividend payment restriction, failed to rule directly on the accounting clarifications requested, and remanded the proceeding to the ALJ for additional proceedings to address rate design. We filed testimony regarding the remanded proceeding in February 2004. The financing order will become effective after acceptance by us and resolution of any appeals. Stranded Costs: The Customer Choice Act allows electric utilities to recover their net Stranded Costs, without defining the term. The Act directs the MPSC to establish a method of calculating net Stranded Costs and of conducting related true-up adjustments. In December 2001, the MPSC Staff recommended a methodology, which calculated net Stranded Costs as the shortfall between: - the revenue required to cover the costs associated with fixed generation assets and capacity payments associated with purchase power agreements, and - the revenues received from customers under existing rates available to cover the revenue requirement. We are authorized by the MPSC to use deferred accounting to recognize the future recovery of costs determined to be stranded. According to the MPSC, net Stranded Costs are to be recovered from ROA customers through a Stranded Cost transition charge. However, the MPSC has not yet allowed such a transition charge and we have not recorded regulatory assets to recognize the future recovery of such costs. In 2002 and 2001, the MPSC issued orders finding that we experienced zero net Stranded Costs from 1999 to 2001. The MPSC also declined to resolve numerous issues regarding the net Stranded Cost methodology in a way that would allow a reliable prediction of the level of Stranded Costs for future years. We are currently in the process of appealing these orders with the Michigan Court of Appeals and the Michigan Supreme Court. In March 2003, we filed an application with the MPSC seeking approval of net Stranded Costs incurred in 2002, and for approval of a net Stranded Cost recovery charge. Our net Stranded Costs incurred in 2002 are estimated to be $38 million with the issuance of Securitization bonds that include Clean Air Act investments, or $85 million without the issuance of Securitization bonds that include Clean Air Act investments. The MPSC scheduled hearings for our 2002 Stranded Cost application to take place during the second quarter of 2004. Once a final financing order on Securitization is reached, we will know the amount of our request for net Stranded Cost recovery for 2002. We cannot predict how the MPSC will rule on our request for the recoverability of Stranded Costs. Implementation Costs: Since 1997, we have incurred significant electric utility restructuring implementation costs. The Customer Choice Act allows electric utilities to recover their implementation costs. The following table outlines the applications filed by us with the MPSC and the status of recovery for these costs.
YEAR FILED YEAR INCURRED REQUESTED PENDING ALLOWED DISALLOWED ---------- ------------- --------- ------- ------- ---------- IN MILLIONS 1999............................. 1997 & 1998 $20 $ -- $15 $5 2000............................. 1999 30 -- 25 5 2001............................. 2000 25 -- 20 5 2002............................. 2001 8 -- 8 -- 2003............................. 2002 2 2 Pending Pending
CE-48 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The MPSC disallowed certain costs, determining that these amounts did not represent costs incremental to costs already reflected in electric rates. In the order received for the year 2001, the MPSC also reserved the right to reevaluate the implementation costs depending upon the progress and success of the ROA program, and ruled that due to the rate freeze imposed by the Customer Choice Act, it was premature to establish a cost recovery method for the allowable implementation costs. In addition to the amounts shown above, we incurred and deferred as a regulatory asset, as of December 31, 2003, $2 million of additional implementation costs and $19 million for the cost of money associated with total implementation costs. We believe the implementation costs and associated cost of money are fully recoverable in accordance with the Customer Choice Act. Cash recovery from customers is expected to begin after the rate cap period expires. The rate cap expired for large commercial and industrial customers on December 31, 2003. We have asked to include implementation costs through December 31, 2000 in the pending Securitization case. If approved, the sale of Securitization bonds will allow for the recovery of a significant portion of these costs. We cannot predict the amount the MPSC will approve as allowable costs. Also, we are pursuing authorization at the FERC for MISO to reimburse us for $8 million in certain electric utility restructuring implementation costs related to our former participation in the development of the Alliance RTO, a portion of which has been expensed. In May 2003, the FERC issued an order denying MISO's request for authorization to reimburse us. In June 2003, we filed a joint petition with MISO for rehearing with the FERC, which the FERC denied in September 2003. We appealed the FERC ruling at the United States Court of Appeals for the District of Columbia and are pursuing other potential means of recovery at the FERC. In conjunction with our appeal of the September order denying recovery, MISO agreed to file a request with the FERC seeking authority to reimburse METC. As part of the contract for the sale of our former transmission system, should the FERC approve the new MISO filing, METC is contractually obligated to flow-through to us the full amount of any Alliance RTO start-up costs that it is authorized to recover by FERC. We cannot predict the outcome of the appeal process, the MISO request, or the ultimate amount, if any, FERC will allow us to collect for implementation costs. Transmission Rates: Our application of JOATT transmission rates to customers during past periods is under FERC review. The rates included in these tariffs were applied to certain transmission transactions affecting both Detroit Edison's and our transmission systems between 1997 and 2002. We believe our reserve is sufficient to satisfy our refund obligation to any of our former transmission customers under our former JOATT. TRANSMISSION SALE: In May 2002, we sold our electric transmission system for $290 million to MTH, a non-affiliated limited partnership whose general partner is a subsidiary of Trans-Elect, Inc. The pretax gain was $31 million ($26 million, net of tax). We are currently in arbitration with MTH regarding property tax items used in establishing the selling price of our electric transmission system. We cannot predict whether remaining open items will impact materially the recorded gain on the sale. As a result of the sale, after-tax earnings have decreased due to a loss of revenue from wholesale and ROA customers who will buy services directly from MTH. METC has completed the capital program to expand the transmission system's capability to import electricity into Michigan, as required by the Customer Choice Act. We will continue to maintain the system until May 1, 2007 under a contract with METC. Under an agreement with MTH, transmission rates charged to us are fixed by contract at current levels through December 31, 2005, and are subject to FERC ratemaking thereafter. However, we are subject to certain additional MISO surcharges, which are estimated to be $15 million in 2004. ELECTRIC RATE MATTERS AUGUST 14, 2003 BLACKOUT: On August 14, 2003, the electric transmission grid serving parts of the Midwest and the Northeast experienced a significant disturbance that impacted electric service to millions of homes and CE-49 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) businesses. Approximately 100,000 of our 1.7 million electric customers were without power for approximately 24 hours as a result of the disturbance. We incurred $1 million of immediate expense as a result of the blackout. We continue to cooperate with investigations of the blackout by several federal and state agencies. We cannot predict the outcome of these investigations. In November 2003, the MPSC released its report on the blackout. The MPSC report found no evidence to suggest that the events in Michigan or actions taken by the Michigan utilities or transmission operators were factors contributing to the cause of the blackout. Also in November 2003, the United States and Canadian power system outage task force preliminarily reported that the primary cause of the blackout was due to transmission line contact with trees in areas outside of Consumers' operating territory. In December 2003, the MPSC issued an order requiring Michigan investor-owned utilities to file reports by April 1, 2004, on the status of the transmission and distribution lines used to serve their customers, including details on vegetation trimming practices in calendar year 2003. Consumers intends to comply with the MPSC's request. In February 2004, the Board of Trustees of NERC approved recommendations to improve electric transmission reliability. The key recommendations are as follows: - strengthen the NERC compliance enforcement program, - evaluate vegetation management procedures, and - improve technology to prevent or mitigate future blackouts. These recommendations require transmission operators, which Consumers is not, to submit annual reports on vegetation management beginning March 2005 and improve technology over various milestones throughout 2004. These recommendations could result in increased transmission costs payable by transmission customers in the future. The financial impacts of these recommendations are not currently quantifiable. PERFORMANCE STANDARDS: Electric distribution performance standards developed by the MPSC were in proposal status during 2002 and 2003. The performance standards were placed into Michigan law in January 2004 and became effective on February 9, 2004. They relate to restoration after an outage, safety, and customer relations. During 2002 and 2003, Consumers monitored and reported to the MPSC its performance relative to the performance standards. Year-end results for both 2002 and 2003 resulted in compliance with the acceptable level of performance as established by the approved standards. Financial incentives and penalties are contained within the performance standards. An incentive is possible if all of the established performance standards have been exceeded for a calendar year. However, the value of such incentive cannot be determined at this point as the performance standards do not contain an approved incentive mechanism. Financial penalties in the form of customer credits are also possible. These customer credits are based on duration and repetition of outages. We cannot predict the likely effects of the financial incentive or penalties, if any, on us. POWER SUPPLY COSTS: We were required to provide backup service to ROA customers on a best efforts basis. In October 2003, we provided notice to the MPSC that we would terminate the provision of backup service in accordance with the Customer Choice Act, effective January 1, 2004. To reduce the risk of high electric prices during peak demand periods and to achieve our reserve margin target, we employ a strategy of purchasing electric call option and capacity and energy contracts for the physical delivery of electricity primarily in the summer months and to a lesser degree in the winter months. As of December 31, 2003, we purchased capacity and energy contracts partially covering the estimated reserve margin requirements for 2004 through 2007. As a result, we have recognized an asset of $20 million for unexpired capacity and energy contracts. Currently, we have a reserve margin of 5 percent, or supply resources equal to 105 percent of projected summer peak load for summer 2004. We are in the process of securing the additional capacity needed to meet our summer 2004 reserve margin target of 11 percent (111 percent of projected summer CE-50 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) peak load). The total premium costs of electricity call option and capacity and energy contracts for 2003 were approximately $10 million. As a result of meeting the transmission capability expansion requirements and the market power test, as discussed in this note, we have met the requirements under the Customer Choice Act to return to the PSCR process. The PSCR process provides for the reconciliation of actual power supply costs with power supply revenues. This process assures recovery of all reasonable and prudent power supply costs actually incurred by us. In September 2003, we submitted a PSCR filing to the MPSC that reinstates the PSCR process for customers whose rates are no longer frozen or capped as of January 1, 2004. The proposed PSCR charge allows us to recover a portion of our increased power supply costs from large commercial and industrial customers, and subject to the overall rate cap, from other customers. We estimate the recovery of increased power supply costs from large commercial and industrial customers to be approximately $30 million in 2004. As allowed under current regulation, we self-implemented the proposed PSCR charge on January 1, 2004. The revenues received from the PSCR charge are also subject to subsequent reconciliation at the end of the year after actual costs have been reviewed for reasonableness and prudence. We cannot predict the outcome of this filing. OTHER ELECTRIC UNCERTAINTIES THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to Dow. We hold, through two wholly owned subsidiaries, the following assets related to the MCV Partnership and MCV Facility: - CMS Midland owns a 49 percent general partnership interest in the MCV Partnership, and - CMS Holdings holds, through FMLP, a 35 percent lessor interest in the MCV Facility. Our consolidated retained earnings include undistributed earnings from the MCV Partnership, which at December 31, 2003 are $245 million and at December 31, 2002 are $226 million. Summarized Statements of Income for CMS Midland and CMS Holdings
YEARS ENDED DECEMBER 31 -------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS Earnings from equity method investees....................... $42 $52 $38 Operating expenses, taxes and other......................... 22 18 13 --- --- --- Income before cumulative effect of accounting change........ $20 $34 $25 Cumulative effect of change in method of accounting for derivatives, net of $10 million tax expense in 2002 (Note 11)....................................................... -- 18 -- --- --- --- Net income.................................................. $20 $52 $25 === === ===
Power Supply Purchases from the MCV Partnership: Our annual obligation to purchase capacity from the MCV Partnership is 1,240 MW through the term of the PPA ending in 2025. The PPA requires us to pay, based on the MCV Facility's availability, a levelized average capacity charge of 3.77 cents per kWh and a fixed energy charge. We also pay a variable energy charge based on our average cost of coal consumed for all kWh delivered. Effective January 1999, we reached a settlement agreement with the MCV Partnership that capped payments made on the basis of availability that may be billed by the MCV Partnership at a maximum 98.5 percent availability level. CE-51 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Since January 1993, the MPSC has permitted us to recover capacity charges averaging 3.62 cents per kWh for 915 MW, plus fixed and variable energy charges. Since January 1996, the MPSC has also permitted us to recover capacity charges for the remaining 325 MW of contract capacity with an initial average charge of 2.86 cents per kWh increasing periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However, due to the frozen retail rates required by the Customer Choice Act, the capacity charge for the 325 MW was frozen at 3.17 cents per kWh until December 31, 2003. Recovery of both the 915 MW and 325 MW portions of the PPA are subject to certain limitations discussed below. In 1992, we recognized a loss and established a liability for the present value of the estimated future underrecoveries of power supply costs under the PPA based on MPSC cost-recovery orders. The remaining liability associated with the loss totaled $27 million at December 31, 2003, $53 million at December 31, 2002, and $77 million at December 31, 2001. We expect the PPA liability to be depleted in late 2004. We estimate that 51 percent of the actual cash underrecoveries for 2004 will be charged to the PPA liability, with the remaining portion charged to operating expense as a result of our 49 percent ownership in the MCV Partnership. We will expense all cash underrecoveries directly to income once the PPA liability is depleted. If the MCV Facility's generating availability remains at the maximum 98.5 percent level, our cash underrecoveries associated with the PPA could be as follows:
2004 2005 2006 2007 ---- ---- ---- ---- IN MILLIONS Estimated cash underrecoveries at 98.5%..................... $56 $56 $55 $39 Amount to be charged to operating expense................... 29 56 55 39 Amount to be charged to PPA liability....................... 27 -- -- --
Beginning January 1, 2004, the rate freeze for large industrial customers was no longer in effect and we returned to the PSCR process. Under the PSCR process, we will recover from our customers the capacity and fixed energy charges based on availability, up to an availability cap of 88.7 percent as established in previous MPSC orders. Effects on Our Ownership Interest in the MCV Partnership and MCV Facility: As a result of returning to the PSCR process, we returned to dispatching the MCV Facility on a fixed load basis, as permitted by the MPSC, in order to maximize recovery of our capacity payments. This fixed load dispatch increases the MCV Facility's output and electricity production costs, such as natural gas. As the spread between the MCV Facility's variable electricity production costs and its energy payment revenue widens, the MCV's Partnership's financial performance and our equity interest in the MCV Partnership may be affected negatively. Under the PPA, variable energy payments to the MCV Partnership are based on the cost of coal burned at our coal plants and operation and maintenance expenses. However, the MCV Partnership's costs of producing electricity are tied to the cost of natural gas. Because natural gas prices have increased substantially in recent years, while the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been impacted negatively. Until September 2007, the PPA and settlement require us to pay capacity and fixed energy charges based on the MCV Facility's actual availability up to the 98.5 percent cap. After September 2007, we expect to exercise the regulatory out provision in the PPA, limiting our capacity and fixed energy payments to the MCV Partnership to the amount collected from our customers. The MPSC's future actions on the capacity and fixed energy payments recoverable from customers subsequent to September 2007 may affect negatively the earnings of the MCV Partnership and the value of our equity interest in the MCV Partnership. CE-52 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In February 2004, we filed a resource conservation plan with the MPSC that is intended to help conserve natural gas and thereby improve our equity investment in the MCV Partnership. This plan seeks approval to: - dispatch the MCV Facility on an economic basis depending on natural gas market prices without increased costs to electric customers, - give Consumers a priority right to buy excess natural gas as a result of the reduced dispatch of the MCV Facility, and - fund $5 million annually for renewable energy sources such as wind power projects. The resource conservation plan will reduce the MCV Facility's annual natural gas consumption by an estimated 30 to 40 billion cubic feet. This decrease in the quantity of high-priced natural gas consumed by the MCV Facility will benefit Consumers' ownership interest in the MCV Partnership. The amount of PPA capacity and fixed energy payments recovered from retail electric customers would remain capped at 88.7 percent. Therefore, customers will not be charged for any increased power supply costs, if they occur. Consumers and the MCV Partnership have reached an agreement that the MCV Partnership will reimburse Consumers for any incremental power costs incurred to replace the reduction in power dispatched from the MCV Facility. We requested that the MPSC provide interim approval while it conducts a full review of the plan. The MPSC has scheduled a prehearing conference with respect to the MCV resource conservation plan for April 2004. We cannot predict if or when the MPSC will approve our request. The two most significant variables in the analysis of the MCV Partnership's future financial performance are the forward price of natural gas for the next 22 years and the MPSC's decision in 2007 or beyond on our recovery of capacity payments. Natural gas prices have been historically volatile. Presently, there is no consensus in the marketplace on the price or range of prices of natural gas in the short term or beyond the next five years. Therefore, we cannot predict the impact of these issues on our future earnings, cash flows, or on the value of our equity interest in the MCV Partnership. NUCLEAR MATTERS: Big Rock: Significant progress continues to be made in the decommissioning of Big Rock. We submitted the License Termination Plan to the NRC staff for review in April 2003. System dismantlement and building demolition are on schedule to return the 560-acre site to a natural setting for unrestricted use in early 2006. The NRC and Michigan Department of Environmental Quality continue to find that all decommissioning activities at Big Rock are being performed in accordance with applicable regulatory and license requirements. Seven transportable dry casks have been loaded with spent nuclear fuel and an eighth cask has been loaded with high-level radioactive waste material. These dry casks will remain onsite until the DOE moves the material to a national spent nuclear fuel repository. Palisades: In July 2003, the NRC completed its mid-cycle plant performance assessment of Palisades. The mid-cycle assessment for Palisades covered the period from January 1, 2003 through the end of July 2003. The NRC determined that Palisades was operated in a manner that preserved public health and safety and fully met all cornerstone objectives. Based on the plant's performance, only regularly scheduled inspections are planned through September 2004. The amount of spent nuclear fuel exceeds Palisades' temporary onsite storage pool capacity. We are using dry casks for temporary onsite storage. As of December 31, 2003, we have loaded 18 dry casks with spent nuclear fuel and we will need to load additional dry casks by the fall of 2004 in order to continue operation. Palisades currently has three empty dry casks onsite, with storage pad capacity for up to seven additional loaded dry casks. We anticipate that transportable dry casks, along with more storage pad capacity, will be available by fall 2004. CE-53 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DOE Litigation: In 1997, a U.S. Court of Appeals decision confirmed that the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by January 1998. Subsequent U.S. Court of Appeals litigation, in which we and other utilities participated, has not been successful in producing more specific relief for the DOE's failure to accept the spent nuclear fuel. There are two court decisions that support the right of utilities to pursue damage claims in the United States Court of Claims against the DOE for failure to take delivery of spent nuclear fuel. A number of utilities have initiated litigation in the United States Court of Claims; we filed our complaint in December 2002. If our litigation against the DOE is successful, we anticipate future recoveries from the DOE. The recoveries will be used to pay the cost of spent nuclear fuel storage until the DOE takes possession as required by law. We can make no assurance that the litigation against the DOE will be successful. In July 2002, Congress approved and the President signed a bill designating the site at Yucca Mountain, Nevada, for the development of a repository for the disposal of high-level radioactive waste and spent nuclear fuel. The next step will be for the DOE to submit an application to the NRC for a license to begin construction of the repository. The application and review process is estimated to take several years. Spent nuclear fuel complaint: In March 2003, the Michigan Environmental Council, the Public Interest Research Group in Michigan, and the Michigan Consumer Federation filed a complaint with the MPSC, which was served on us by the MPSC in April 2003. The complaint asks the MPSC to initiate a generic investigation and contested case to review all facts and issues concerning costs associated with spent nuclear fuel storage and disposal. The complaint seeks a variety of relief with respect to Consumers, Detroit Edison, Indiana & Michigan Electric Company, Wisconsin Electric Power Company, and Wisconsin Public Service Corporation. The complaint states that amounts collected from customers for spent nuclear storage and disposal should be placed in an independent trust. The complaint also asks the MPSC to take additional actions. In May 2003, Consumers and other named utilities each filed motions to dismiss the complaint. We are unable to predict the outcome of this matter. Insurance: We maintain nuclear insurance coverage on our nuclear plants. At Palisades, we maintain nuclear property insurance from NEIL, totaling $2.750 billion and insurance that would partially cover the cost of replacement power during certain prolonged accidental outages. Because NEIL is a mutual insurance company, we could be subject to assessments of up to $26 million in any policy year if insured losses in excess of NEIL's maximum policyholders surplus occur at our, or any other member's, nuclear facility. NEIL's policies include coverage for acts of terrorism. At Palisades, we maintain nuclear liability insurance for third-party bodily injury and off-site property damage resulting from a nuclear hazard for up to approximately $10.862 billion, the maximum insurance liability limits established by the Price-Anderson Act. The United States Congress enacted the Price-Anderson Act to provide financial liability protection for those parties who may be liable for a nuclear accident or incident. Part of the Price-Anderson Act's financial protection is a mandatory industry-wide program where owners of nuclear generating facilities could be assessed if a nuclear incident occurs at any nuclear generating facility. The maximum assessment against us could be $101 million per occurrence, limited to maximum annual installment payments of $10 million. We also maintain insurance under a program that covers tort claims for bodily injury to nuclear workers caused by nuclear hazards. The policy contains a $300 million nuclear industry aggregate limit. Under a previous insurance program providing coverage for claims brought by nuclear workers, we remain responsible for a maximum assessment of up to $6 million. Big Rock remains insured for nuclear liability by a combination of insurance and a NRC indemnity totaling $544 million and a nuclear property insurance policy from NEIL. Insurance policy terms, limits, and conditions are subject to change during the year as we renew our policies. CE-54 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMITMENTS FOR FUTURE PURCHASES: We enter into a number of unconditional purchase obligations that represent normal business operating contracts. These contracts are used to assure an adequate supply of goods and services necessary for the operation of our business and to minimize exposure to market price fluctuations. We believe that these future costs are prudent and reasonably assured of recovery in future rates. Coal Supply and Transportation: We have entered into coal supply contracts with various suppliers for our coal-fired generating stations. Under the terms of these agreements, we are obligated to take physical delivery of the coal and make payment based upon the contract terms. Our coal supply contracts expire from 2004 to 2005, and total an estimated $177 million. Our coal transportation contracts expire from 2004 to 2007, and total an estimated $139 million. Long-term coal supply contracts account for approximately 60 to 90 percent of our annual coal requirements. In 2003, coal purchases totaled $265 million of which $207 million (78 percent of the tonnage requirement) was under long-term contract. We supplement our long-term contracts with spot-market purchases. Power Supply, Capacity, and Transmission: As of December 31, 2003, we had future unrecognized commitments to purchase power transmission services under fixed price forward contracts for 2004 and 2005 totaling $8 million. We also had commitments to purchase capacity and energy under long-term power purchase agreements with various generating plants including the MCV Facility. These contracts require monthly capacity payments based on the plants' availability or deliverability. These payments for 2004 through 2030 total an estimated $16.016 billion, undiscounted, which includes $11.381 billion related to the MCV Facility. This amount may vary depending upon plant availability and fuel costs. If a plant was not available to deliver electricity to us, then we would not be obligated to make the capacity payment until the plant could deliver. GAS CONTINGENCIES GAS ENVIRONMENTAL MATTERS: We expect to have investigation and remedial costs at a number of sites under the Michigan Natural Resources and Environmental Protection Act, a Michigan statute that covers environmental activities including remediation. These sites include 23 former manufactured gas plant facilities. We operated the facilities on these sites for some part of their operating lives. For some of these sites, we have no current ownership or may own only a portion of the original site. We have completed initial investigations at the 23 sites. We will continue to implement remediation plans for sites where we have received MDEQ remediation plan approval. We will also work toward resolving environmental issues at sites as studies are completed. We have estimated our costs for investigation and remedial action at all 23 sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic Cost Model. We expect our remaining costs to be between $37 million and $90 million. The range reflects multiple alternatives with various assumptions for resolving the environmental issues at each site. The estimates are based on discounted 2003 costs using a discount rate of three percent. The discount rate represents a ten-year average of U.S. Treasury bond rates reduced for increases in the consumer price index. We expect to fund most of these costs through insurance proceeds and through MPSC approved rates charged to our customers. As of December 31, 2003, we have recorded a liability of $44 million, net of $38 million of expenditures incurred to date, and a regulatory asset of $67 million. Any significant change in assumptions, such as an increase in the number of sites, different remediation techniques, nature and extent of contamination, and legal and regulatory requirements, could affect our estimate of remedial action costs. In its November 2002 gas distribution rate order, the MPSC authorized us to continue to recover approximately $1 million of manufactured gas plant facilities environmental clean-up costs annually. This amount will continue to be offset by $2 million to reflect amounts recovered from all other sources. We defer and amortize, over a period of 10 years, manufactured gas plant facilities environmental clean-up costs above the amount currently included in rates. Additional amortization of the expense in our rates cannot begin until after a prudency review in a gas rate case. CE-55 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GAS RATE MATTERS GAS COST RECOVERY: The MPSC is required by law to allow us to charge customers for our actual cost of purchased natural gas. The GCR process is designed to allow us to recover all of our gas costs; however, the MPSC reviews these costs for prudency in an annual reconciliation proceeding. In June 2003, we filed a reconciliation of GCR costs and revenues for the 12-months ended March 2003. We proposed to recover from our customers approximately $6 million of under-recovered gas costs using a roll-in methodology. The roll-in methodology incorporates the GCR under-recovery in the next GCR plan year. The approach was approved by the MPSC in a November 2002 order. In January 2004, intervenors filed their positions in our 2003 GCR case. Their positions were that not all of our gas purchasing decisions were prudent during April 2002 through March 2003 and they proposed disallowances. In February 2004, the parties in the case reached a tentative settlement agreement that would result in a GCR disallowance of $11 million for the GCR period. Interest on the disallowed amount from April 1, 2003 through February 2004, at the Consumers' authorized rate of return, adds $1 million to the cost of the settlement. We believe this settlement agreement will be executed by the parties in the case in the near future and approved by the MPSC. A reserve was recorded in December 2003. In July 2003, the MPSC approved a settlement agreement authorizing us to increase our gas cost recovery for the remainder of the current GCR plan year (August 2003 through March 2004) and to apply a quarterly ceiling price adjustment, based on a formula that tracks changes in NYMEX natural gas prices. The terms of the settlement allow a GCR ceiling price of $6.11 per mcf. Our GCR is $5.36 per mcf for March 2004 bills. 2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC for a $156 million annual increase in our gas delivery and transportation rates that included a 13.5 percent return on equity. In September 2003, we filed an update to our gas rate case that lowered the requested revenue increase from $156 million to $139 million and reduced the return on common equity from 13.5 percent to 12.75 percent. The MPSC authorized an interim gas rate increase of $19 million annually. The interim increase is under bond and subject to refund if the final rate relief is a lesser amount. The interim increase order includes a $34 million reduction in book depreciation expense and related income taxes effective only during the period that we receive the interim relief. The MPSC order allowed us to increase our rates beginning December 19, 2003. As part of the interim order, we agreed to restrict dividend payments to our parent company, CMS Energy, to a maximum of $190 million annually during the period that we receive the interim relief. On March 5, 2004, the ALJ issued a Proposal for Decision recommending that the MPSC not rely upon the projected test year data included in our filing and supported by the MPSC Staff and further recommended that the application be dismissed. The MPSC is not bound by these recommendations and will consider the issues anew after receipt of exceptions and replies to the exception filed by the parties in response to the Proposal for Decision. 2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas utility plant depreciation case originally filed in June 2001. This case is independent of the 2003 gas rate case. The original filing was based on December 2000 plant balances and historical data. The December 2003 filing updates the gas depreciation case to include December 2002 plant balances. The proposed depreciation rates, if approved, will result in an annual increase of $12 million in depreciation expense. OTHER GAS UNCERTAINTIES COMMITMENTS FOR GAS SUPPLIES: We enter into contracts to purchase gas and gas transportation from various suppliers for our natural gas business. These contracts have expiration dates that range from 2004 to 2007. Our 2003 gas purchases totaled 248 bcf at a cost of $1.379 billion. At the end of 2003, we estimate our gas purchases for 2004 to be 235 bcf, of which 22 percent is covered by existing fixed price contracts and 37 percent is covered by indexed price contracts that are subject to price variations. The remaining 2004 gas purchases will be made at market prices at the time of purchase. CE-56 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER UNCERTAINTIES In addition to the matters disclosed in this note, we are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business. These lawsuits and proceedings may involve personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing, and other matters. We have accrued estimated losses for certain contingencies discussed in this note. Resolution of these contingencies is not expected to have a material adverse impact on our financial position, liquidity, or results of operations. 3: FINANCINGS AND CAPITALIZATION LONG-TERM DEBT: Long-term debt as of December 31 follows:
INTEREST RATE (%) MATURITY 2003 2002 ----------------- -------- ---- ---- IN MILLIONS First mortgage bonds............................ 4.250 2008 $ 250 $ -- 4.800 2009 200 -- 4.000 2010 250 -- 5.375 2013 375 -- 6.000 2014 200 -- 7.375 2023 208 208 ------ ------ 1,483 208 ------ ------ Senior notes.................................... 6.000 2005 300 300 6.250 2006 332 332 6.375 2008 159 159 6.200 2008 -- 250 6.875 2018 180 180 6.500(a) 2018 141 141 6.500(b) 2028 142 142 ------ ------ 1,254 1,504 ------ ------ Securitization bonds............................ 5.097(c) 2005-2015 426 453 Long-term bank debt............................. Variable 2006-2009 200 328 Nuclear fuel disposal liability................. (d) 139 138 Pollution control revenue bonds................. Various 2010-2018 126 126 Other........................................... 4 8 ------ ------ 895 1,053 ------ ------ Principal amount outstanding...................... 3,632 2,765 Current amounts................................. (28) (305) Net unamortized discount........................ (21) (18) ------ ------ Total Long-term debt.............................. $3,583 $2,442 ====== ======
- ------------------------- (a) 2018 maturity is subject to successful remarketing after June 15, 2005. (b) Callable at par. (c) Represents the weighted average interest rate at December 31, 2003. (d) Maturity date uncertain. CE-57 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LONG-TERM DEBT -- RELATED PARTIES: Long-term debt -- related parties as of December 31, 2003 follows:
DEBENTURE AND RELATED PARTY INTEREST RATE MATURITY 2003 --------------------------- ------------- -------- ---- IN MILLIONS Subordinated deferrable interest notes, Consumers Power Company Financing I....................................... 8.36% 2015 $ 73 Subordinated deferrable interest notes, Consumers Energy Company Financing II...................................... 8.20% 2027 124 Subordinated debentures, Consumers Energy Company Financing III....................................................... 9.25% 2029 180 Subordinated debentures, Consumers Energy Company Financing IV........................................................ 9.00% 2031 129 ---- Total amount outstanding.................................... $506 ====
NOTES PAYABLE -- RELATED PARTIES: Consumers issued a $200 million unsecured promissory note to CMS Energy on December 30, 2003. The proceeds were used to pay a portion of Consumers' Pension Plan contribution of $329 million in December 2003. This note matures on December 29, 2004 and is payable on three business days' notice by CMS Energy. DEBT ISSUANCES: The following is a summary of our long-term debt issuances during 2003:
FACILITY PRINCIPAL USE OF TYPE (IN MILLIONS) ISSUE RATE ISSUE DATE MATURITY DATE PROCEEDS COLLATERAL -------- ------------- ---------- ---------- ------------- -------- ---------- Term loan............. $ 140 LIBOR + March 2003 March 2009 GCP FMB(f) 475 bps Term loan............. 150 LIBOR + March 2003 March 2006 GCP FMB(f) 450 bps (paid off)(b) FMB(a)................ 375 5.375% April 2003 April 2013 (c) -- FMB(a)................ 250 4.250% April 2003 April 2008 (c) -- FMB(a)................ 250 4.000% May 2003 May 2010 (d) -- FMB(a)................ 200 4.800% August 2003 February 2009 (b) -- FMB(a)................ 200 6.000% August 2003 February 2014 (b) -- Term loan............. 60 LIBOR + November 2003 November 2006 (e) FMB(f) 135 bps ------------- Total................. $1,625 =============
- ------------------------- (bps -- basis points), (GCP -- General corporate purposes) (a) We filed a registration statement with the SEC in December 2003 to permit holders of these FMBs to exchange their bonds for FMBs that are registered under the Securities Act of 1933. The exchange offer was completed on February 13, 2004. (b) We used the net proceeds to pay off a $150 million term loan, to pay off a $50 million balance on a term loan that was due to mature in July 2004, and for general corporate purposes. (c) We used the net proceeds to fund the maturity of a $250 million bond, to fund a $32 million option call payment, and for general corporate purposes. (d) We used the net proceeds to prepay a portion of a term loan that was due to mature in July 2004. (e) We used the net proceeds to purchase the headquarters building and pay off the capital lease. (f) Refer to "Regulatory Authorization for Financings" within this note for details about our remaining FERC debt authorization. CE-58 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEBT MATURITIES: The aggregate annual maturities for long-term debt for the next five years are:
DECEMBER 31 ------------------------------------ PAYMENTS DUE ------------------------------------ 2004 2005 2006 2007 2008 ---- ---- ---- ---- ---- IN MILLIONS ~~Long-term debt.............................................. $28 $328 $422 $31 $441~~
PREFERRED STOCK: The following table describes our Preferred Stock outstanding:
DECEMBER 31 ------------------------------------ OPTIONAL NUMBER OF SHARES REDEMPTION -------------------- SERIES PRICE 2003 2002 2003 2002 ------ ---------- ---- ---- ---- ---- IN MILLIONS Preferred Stock Cumulative, $100 par value, authorized 7,500,000 shares, with no mandatory redemption............................ $4.16 $103.25 68,451 68,451 $ 7 $ 7 4.50 110.00 373,148 373,148 37 37 --- --- Total Preferred Stock...................... $44 $44 === ===
REGULATORY AUTHORIZATION FOR FINANCINGS: At December 31, 2003, we had remaining FERC authorization to issue or guarantee up to $500 million of short-term securities and up to $700 million of short-term first mortgage bonds as collateral for such short-term securities. At December 31, 2003, we had remaining FERC authorization to issue up to $740 million of long-term securities for refinancing or refunding purposes, $560 million of long-term securities for general corporate purposes, and $2 billion of long-term first mortgage bonds to be issued solely as collateral for other long-term securities. With the granting of authorization, FERC waived its competitive bid/negotiated placement requirements applicable to the long-term securities authorization. The authorizations expire on June 30, 2004. SHORT-TERM FINANCINGS: We have a $400 million revolving credit facility with banks. The facility is secured with first mortgage bonds. The interest rate of the facility is LIBOR plus 175 basis points. This facility expires in March 2004 with two annual extensions at our option, which would extend the maturity to March 2006. At December 31, 2003, $390 million is available for general corporate purposes, working capital, and letters of credit. At December 31, 2002, $457 million of bank notes were outstanding at a weighted average interest rate of 4.50 percent. FIRST MORTGAGE BONDS: We secure our first mortgage bonds by a mortgage and lien on substantially all of our property. Our ability to issue and sell securities is restricted by certain provisions in the first mortgage bond indenture, our articles of incorporation, and the need for regulatory approvals under federal law. POLLUTION CONTROL REVENUE BONDS: In January 2004, we amended the PCRB indentures to add an auction rate interest mode and switched to that mode for the two floating rate bonds. Under the auction rate mode, the bonds' interest rate will be reset every 35 days. While in the auction rate mode, no letter of credit liquidity facility is required and investors do not have a put right. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES: We formed various statutory wholly owned business trusts for the sole purpose of issuing preferred securities and lending the gross CE-59 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) proceeds to ourselves. The sole assets of the trusts are debentures with terms similar to those of the preferred security. Summarized information for mandatorily redeemable preferred securities is as follows:
AMOUNT OUTSTANDING(A) EARLIEST TRUST AND SECURITIES --------------- OPTIONAL DECEMBER 31 RATE 2003 2002 MATURITY REDEMPTION(B) -------------------- ---- ---- ---- -------- ------------- IN MILLIONS Consumers Power Company Financing I, Trust Originated Preferred Securities................. 8.36% $ -- $ 70 2015 2000 Consumers Energy Company Financing II, Trust Originated Preferred Securities................. 8.20% -- 120 2027 2002 Consumers Energy Company Financing III, Trust Originated Preferred Securities................. 9.25% -- 175 2029 2004 Consumers Energy Company Financing IV, Trust Preferred Securities............................ 9.00% -- 125 2031 2006 ----- ---- Total amount outstanding.......................... $ -- $490 ===== ====
- ------------------------- (a) We determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities have been deconsolidated as of December 31, 2003. Company obligated Trust Preferred Securities totaling $490 million that were previously included in mezzanine equity, have been eliminated due to deconsolidation and are reflected in Long-term debt -- related parties. For additional details, refer to "Long-Term Debt -- Related Parties" within this Note and Note 13, Implementation of New Accounting Standards. (b) The trusts must redeem the securities at a liquidation value of $25 per share, which is equivalent to the carrying cost plus accrued but unpaid distributions, when the securities are paid at maturity or upon any earlier redemption. Prior to an early redemption date, the securities could be redeemed at market value. Each trust receives payments on the debenture it holds. Those receipts are used to make cash distributions on the preferred securities the trust has issued. The securities allow us the right to defer interest payments on the debentures, and, as a consequence, the trusts will defer dividend payments on the preferred securities. Should we exercise this right, we cannot declare or pay dividends on, or redeem, purchase or acquire, any of our capital stock during the deferral period until all deferred dividends are paid in full. In the event of default, holders of the preferred securities will be entitled to exercise and enforce the trusts' creditor rights against us, which may include acceleration of the principal amount due on the debentures. We have issued certain guarantees with respect to payments on the preferred securities. These guarantees, when taken together with our obligations under the debentures, related indenture and trust documents, provide full and unconditional guarantees for the trusts' obligations under the preferred securities. SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales program, we currently sell certain accounts receivable to a wholly owned, consolidated, bankruptcy remote special purpose entity. In turn, the special purpose entity may sell an undivided interest in up to $325 million of the receivables. The amounts sold were $297 million at December 31, 2003 and $325 million at December 31, 2002. The Consolidated Balance Sheets exclude these amounts from accounts receivable. We continue to service the receivables sold. The purchaser of the receivables has no recourse against our other assets for failure of a debtor to pay when due and the purchaser has no right to any receivables not sold. No gain or loss has been recorded on the receivables sold and we retain no interest in the receivables sold. CE-60 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Certain cash flows received from and paid to us under our accounts receivable sales program are shown below:
YEARS ENDED DECEMBER 31 ---------------- 2003 2002 ---- ---- IN MILLIONS Proceeds from sales (remittance of collections) under the program................................................... $ (28) $ (9) Collections reinvested under the program.................... 4,361 4,080
DIVIDEND RESTRICTIONS: Under the provisions of our articles of incorporation, at December 31, 2003, we had $373 million of unrestricted retained earnings available to pay common dividends. However, covenants in our debt facilities cap common stock dividend payments at $300 million in a calendar year. Through December 31, 2003, we made the following common stock dividend payments:
IN MILLIONS ----------- January..................................................... $ 78 May......................................................... 31 June........................................................ 53 November.................................................... 56 ---- Total common stock dividends paid to CMS Energy............. $218 ====
As of December 18, 2003, we are also under an annual dividend cap of $190 million imposed by the MPSC during the current interim gas rate relief period. Because all of the $218 million of common stock dividends to CMS Energy were paid prior to December 18, 2003, we were not out of compliance with this new restriction for 2003. In February 2004, we paid a $78 million common stock dividend. For additional details on the potential cap on common dividends payable included in the MPSC Securitization order, see Note 2, Uncertainties, "Electric Restructuring Matters -- Securitization." Also, for additional details on the cap on common dividends payable during the current interim gas rate relief period, see Note 2, Uncertainties, "Gas Rate Matters -- 2003 Gas Rate Case." FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENT FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: This interpretation became effective January 2003. It describes the disclosure to be made by a guarantor about its obligations under certain guarantees that it has issued. At the beginning of a guarantee, it requires a guarantor to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provision of this interpretation does not apply to some guarantee contracts, such as warranties, derivatives, or guarantees between either parent and subsidiaries or corporations under common control, although disclosure of these guarantees is required. For contracts that are within the recognition and measurement provision of this interpretation, the provisions were to be applied to guarantees issued or modified after December 31, 2002. CE-61 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables describe our guarantees at December 31, 2003:
EXPIRATION MAXIMUM CARRYING RECOURSE GUARANTEE DESCRIPTION ISSUE DATE DATE OBLIGATION AMOUNT PROVISION(a) --------------------- ---------- ---------- ---------- -------- ------------ IN MILLIONS Standby letters of credit.................. Various Various $ 10 $ -- $ -- Surety bonds............................... Various Various 8 -- -- Nuclear insurance retrospective premiums... Various Various 133 -- --
- ------------------------- (a) Recourse provision indicates the approximate recovery from third parties including assets held as collateral.
EVENTS THAT WOULD GUARANTEE DESCRIPTION HOW GUARANTEE AROSE REQUIRE PERFORMANCE --------------------- ------------------- ------------------- Standby letters of credit Normal operations of coal Noncompliance with power plants environmental regulations Self-insurance requirement Nonperformance Surety bonds Normal operating activity, Nonperformance permits and license Nuclear insurance Normal operations of nuclear Call by NEIL and Price retrospective premiums plants Anderson Act for nuclear incident
4: FINANCIAL AND DERIVATIVE INSTRUMENTS FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments, and current liabilities approximate their fair values because of their short-term nature. We estimate the fair values of long-term investments based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amount of all long-term financial instruments, except as shown below, approximate fair value. For additional details, see Note 1, Corporate Structure and Accounting Policies.
DECEMBER 31 ----------------------------------------------------------------- 2003 2002 ------------------------------- ------------------------------ FAIR UNREALIZED FAIR UNREALIZED COST VALUE GAIN (LOSS) COST VALUE GAIN ---- ----- ----------- ---- ----- ---------- IN MILLIONS Long-term debt(a)....................... $3,583 $3,666 $(83) $2,442 $2,404 $38 Long-term debt-related parties(b)....... 506 518 (12) -- -- -- Trust Preferred Securities(b)........... -- -- -- 490 447 43 Available for sale securities: Common stock of CMS Energy(c)........... 10 20 10 22 22 -- SERP.................................... 17 21 4 18 19 1 Nuclear decommissioning investments(d)........................ 442 575 133 458 536 78
- ------------------------- (a) Settlement of long-term debt is generally not expected until maturity. (b) We determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities have been deconsolidated as of December 31, 2003. Company obligated Trust Preferred Securities totaling $490 million that were previously included in mezzanine equity, have been eliminated due to deconsolidation and are reflected in Long-term debt -- related parties on the Consolidated Balance Sheets. For additional details, see Note 3, Financings and Capitalization, "Long-Term Debt -- Related Parties" and Note 13, Implementation of New Accounting Standards. CE-62 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (c) We recognized a $12 million loss on this investment in 2002 and an additional $12 million loss in the first quarter of 2003 because the loss was other than temporary, as the fair value was below the cost basis for more than six months. As of December 31, 2003, we held 2.4 million shares of CMS Energy Common Stock. (d) On January 1, 2003, we adopted SFAS No. 143 and began classifying our unrealized gains and losses on nuclear decommissioning investments as regulatory liabilities. We previously classified the unrealized gains and losses on these investments in accumulated depreciation. DERIVATIVE INSTRUMENTS: We are exposed to market risks including, but not limited to, changes in interest rates, commodity prices, and equity security prices. We manage these risks using established policies and procedures, under the direction of both an executive oversight committee consisting of senior management representatives and a risk committee consisting of business-unit managers. We may use various contracts to manage these risks including swaps, options, and forward contracts. We intend that any gains or losses on these contracts will be offset by an opposite movement in the value of the item at risk. We enter into all risk management contracts for purposes other than trading. These contracts contain credit risk if the counterparties, including financial institutions and energy marketers, fail to perform under the agreements. We minimize such risk by performing financial credit reviews using, among other things, publicly available credit ratings of such counterparties. Contracts used to manage interest rate and commodity price risk may be considered derivative instruments that are subject to derivative and hedge accounting pursuant to SFAS No. 133. If a contract is accounted for as a derivative instrument, it is recorded in the financial statements as an asset or a liability, at the fair value of the contract. The recorded fair value of the contract is then adjusted quarterly to reflect any change in the market value of the contract, a practice known as marking the contract to market. The accounting for changes in the fair value of a derivative (that is, gains or losses) are reported either in earnings or accumulated other comprehensive income depending on whether the derivative qualifies for special hedge accounting treatment. For derivative instruments to qualify for hedge accounting under SFAS No. 133, the hedging relationship must be formally documented at inception and be highly effective in achieving offsetting cash flows or offsetting changes in fair value attributable to the risk being hedged. If hedging a forecasted transaction, the forecasted transaction must be probable. If a derivative instrument, used as a cash flow hedge, is terminated early because it is probable that a forecasted transaction will not occur, any gain or loss as of such date is immediately recognized in earnings. If a derivative instrument, used as a cash flow hedge, is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and recorded when the forecasted transaction affects earnings. We use a combination of quoted market prices and mathematical valuation models to determine fair value of those contracts requiring derivative accounting. The ineffective portion, if any, of all hedges is recognized in earnings. The majority of our contracts are not subject to derivative accounting because they qualify for the normal purchases and sales exception of SFAS No. 133 or are not derivatives because there is not an active market for the commodity. Derivative accounting is required for certain contracts used to limit our exposure to electricity and gas commodity price risk and interest rate risk. CE-63 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table reflects the fair value of all contracts requiring derivative accounting:
DECEMBER 31 ------------------------------------------------------------- 2003 2002 ----------------------------- ---------------------------- FAIR UNREALIZED FAIR UNREALIZED COST VALUE GAIN (LOSS) COST VALUE GAIN (LOSS) ---- ----- ----------- ---- ----- ----------- IN MILLIONS Electric -- related contracts.................. $ -- $ -- $ -- $8 $ 1 $(7) Gas contracts.................................. 3 2 (1) -- 1 1 Interest rate risk contracts................... -- -- -- -- (1) (1) Derivative contracts associated with Consumers' equity investment in the MCV Partnership..... -- 15 15 -- 13 13
The fair value of all derivative contracts, except the fair value of derivative contracts associated with our equity investment in the MCV Partnership, is included in either Other Assets or Other Liabilities on the Consolidated Balance Sheets. The fair value of derivative contracts associated with our equity investment in the MCV Partnership is included in Investments -- Midland Cogeneration Venture Limited Partnership on the Consolidated Balance Sheets. Effective April 1, 2002, the MCV Partnership changed its accounting for derivatives. For additional details see Note 11, Summarized Financial Information of Significant Related Energy Supplier. Cumulative Effect of Change in Accounting Principle: On January 1, 2001, upon initial adoption of the derivatives standard, we recorded a $21 million, net of tax, cumulative effect transition adjustment as an unrealized gain increasing accumulated other comprehensive income. In June and December 2001, the FASB issued guidance that resolved the accounting for certain utility industry contracts. As a result, we recorded a $3 million, net of tax, cumulative effect adjustment as an unrealized loss, decreasing accumulated other comprehensive income, and on December 31, 2001, recorded an $11 million, net of tax, cumulative effect adjustment as a decrease to earnings. These adjustments relate to the difference between the fair value and the recorded book value of certain electric call option contracts. ELECTRIC CONTRACTS: Our electric business uses purchased electric call option contracts to meet, in part, our regulatory obligation to serve. This obligation requires us to provide a physical supply of electricity to customers, to manage electric costs and to ensure a reliable source of capacity during peak demand periods. Certain of our electric capacity and energy contracts are not accounted for as derivatives due to the lack of an active energy market in the state of Michigan, as defined by SFAS No. 133, and the transportation costs that would be incurred to deliver the power under the contracts to the closest active energy market at the Cinergy hub in Ohio. If a market develops in the future, we may be required to account for these contracts as derivatives. The mark-to-market impact on earnings related to these contracts, particularly related to the PPA, could be material to the financial statements. Our electric business also uses gas option and swap contracts to protect against price risk due to the fluctuations in the market price of gas used as fuel for generation of electricity. These contracts are financial contracts that are used to offset increases in the price of potential gas purchases. These contracts do not qualify for hedge accounting. Therefore, we record any change in the fair value of these contracts directly in earnings as part of power supply costs. For the year ended December 31, 2003, the unrealized gain in accumulated other comprehensive income related to our proportionate share of the effects of derivative accounting related to our equity investment in the MCV Partnership is $10 million, net of tax. We expect to reclassify this gain, if this value remains, as an increase to earnings from equity method investees during the next 12 months. CE-64 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GAS CONTRACTS: Our gas utility business uses fixed price gas supply contracts, fixed price weather-based gas supply call options, fixed price gas supply call and put options, and other types of contracts, to meet our regulatory obligation to provide gas to our customers at a reasonable and prudent cost. Unrealized gains and losses associated with these options are reported directly in earnings as part of other income, and then directly offset in earnings and recorded on the balance sheet as a regulatory asset or liability. INTEREST RATE RISK CONTRACTS: We use interest rate swaps to hedge the risk associated with forecasted interest payments on variable-rate debt. These interest rate swaps are designated as cash flow hedges. As such, we record any change in the fair value of these contracts in accumulated other comprehensive income unless the swaps are sold. As of December 31, 2003, we did not have any interest rate swaps outstanding. As of December 31, 2002, we had entered into a swap to fix the interest rate on $75 million of variable-rate debt. This swap expired in June 2003. We were able to apply the shortcut method to all interest rate hedges; therefore, there was no ineffectiveness associated with these hedges. 5: INCOME TAXES We file a consolidated federal income tax return with CMS Energy. Income taxes are generally allocated based on each company's separate taxable income. We had tax related receivables from CMS Energy of $46 million in 2003 and $44 million in 2002. The Job Creation and Worker Assistance Act of 2002 provided corporate taxpayers a 5-year carryback of tax losses incurred in 2001 and 2002. As a result of this legislation, CMS Energy was able to carry back consolidated 2001 and 2002 tax losses to tax years 1996 through 1999 to obtain refunds of prior years tax payments totaling $250 million. The tax loss carryback, however, resulted in a reduction in AMT credit carryforwards that previously had been recorded by CMS Energy as deferred tax assets in the amount of $47 million. This non-cash reduction in AMT credit carryforwards was reflected in the 2002 tax provision of CMS Energy and allocated to each of its consolidated subsidiaries under the CMS Energy tax sharing agreement. Consumers' allocable share, $25 million, was reflected in 2002 as a dividend paid by us to CMS Energy. We practice deferred tax accounting for temporary differences in accordance with SFAS No. 109. We use ITC to reduce current income taxes payable, and defer and amortize ITC over the life of the related property. AMT paid generally becomes a tax credit that we can carry forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT. At December 31, 2003, we had AMT credit carryforwards in the amount of $11 million that do not expire, and tax loss carryforwards in the amount of $71 million that expire in 2021 and 2022. The significant components of income tax expense (benefit) consisted of:
YEARS ENDED DECEMBER 31 -------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS Current federal income taxes................................ $(58) $(97) $(39) Deferred income taxes....................................... 201 283 143 Deferred ITC, net........................................... (6) (6) (7) ---- ---- ---- Income tax expense.......................................... $137 $180 $ 97 ==== ==== ====
CE-65 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The principal components of our deferred tax assets (liabilities) recognized in the balance sheet are as follows:
DECEMBER 31 ------------------ 2003 2002 ---- ---- IN MILLIONS Property.................................................... $ (826) $ (789) Unconsolidated investments.................................. (226) (223) Securitization costs........................................ (186) (192) Prepaid pension............................................. (134) -- Gas inventories............................................. (100) (74) Postretirement benefits..................................... (70) (72) Employee benefit obligations................................ 114 208 SFAS No. 109 regulatory liability........................... 120 115 Nuclear decommissioning..................................... 59 55 Tax loss carryforwards...................................... 25 15 AMT credit carryforwards.................................... 11 7 Other, net.................................................. (53) (24) ------- ------- Net deferred tax liabilities................................ $(1,266) $ (974) ======= ======= Deferred tax liabilities.................................... $(1,967) $(1,528) Deferred tax assets......................................... 701 554 ------- ------- Net deferred tax liabilities................................ $(1,266) $ (974) ======= =======
The actual income tax expense differs from the amount computed by applying the statutory federal tax rate of 35 percent to income before income taxes as follows:
YEARS ENDED DECEMBER 31 ------------------------ 2003 2002 2001 ---- ---- ---- IN MILLIONS Income before cumulative effect of change in accounting principle................................................. $196 $363 $199 Income taxes................................................ 137 180 97 Preferred securities distributions (Note 3)................. -- (44) (41) ---- ---- ---- Pretax income............................................... 333 499 255 Statutory federal income tax rate........................... x35% x35% x35% ---- ---- ---- Expected income tax expense................................. 117 174 89 Increase (decrease) in taxes from: Property differences not previously deferred.............. 16 14 17 Reserve for tax credits previously claimed................ 8 -- -- Loss on investment in CMS Energy Common Stock............. 4 4 -- Sale of METC.............................................. -- (5) -- ITC amortization/adjustments.............................. (6) (6) (7) Affiliated companies' dividends........................... -- (1) (2) Other, net................................................ (2) -- -- ---- ---- ---- Actual income tax expense................................... $137 $180 $ 97 ==== ==== ==== Effective tax rate.......................................... 41.1% 36.0% 38.0% ==== ==== ====
CE-66 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6: EXECUTIVE INCENTIVE COMPENSATION We provide a Performance Incentive Stock Plan to key management employees based on their contributions to the successful management of the company. The Plan includes the following type of awards for common stock: - restricted shares of common stock, - stock options, and - stock appreciation rights. Restricted shares of CMS Energy Common Stock are outstanding shares with full voting and dividend rights. These awards vest over five years at the rate of 25 percent per year after two years. Some restricted shares are subject to achievement of specified levels of total shareholder return and are subject to forfeiture if employment terminates before vesting. Restricted shares vest fully if control of CMS Energy changes. Stock options give the holder the right to purchase common stock at a given price over an extended period of time. Stock appreciation rights give the holder the right to receive common stock appreciation, which is defined as the excess of the market price of the stock at the date of exercise over the grant date price. CMS Energy stock options and stock appreciation rights are valued at market price when granted. All options and rights may be exercised upon grant and they expire up to ten years and one month from the date of grant. Our Performance Incentive Stock Plan was amended in January 1999. It uses the following formula to grant awards: - up to five percent of CMS Energy Common Stock outstanding at January 1 each year less: - the number of shares of restricted common stock awarded, and - Common Stock subject to options granted under the plan during the immediately preceding four calendar years. - the number of shares of restricted CMS Energy Common Stock awarded under this plan cannot exceed 20 percent of the aggregate number of shares reserved for award, and - forfeiture of shares previously awarded will increase the number of shares available to be awarded under the plan. Awards of up to 2,240,247 shares of CMS Energy Common Stock may be issued as of December 31, 2003. CE-67 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes the restricted stock and stock options granted to our key employees under the Performance Incentive Stock Plan:
RESTRICTED STOCK OPTIONS ---------- ----------------------------- NUMBER NUMBER WEIGHTED AVERAGE CMS ENERGY COMMON STOCK OF SHARES OF SHARES EXERCISE PRICE - ----------------------- --------- --------- ---------------- Outstanding at January 1, 2001........................... 259,377 842,119 $30.75 Granted.................................................. 71,930 294,150 $30.04 Exercised or Issued...................................... (34,704) (35,317) $19.34 Forfeited or Expired..................................... (56,938) -- -- Outstanding at December 31, 2001......................... 239,665 1,100,952 $30.93 Granted.................................................. 163,890 490,600 $14.32 Exercised or Issued...................................... (26,663) (6,083) $17.13 Forfeited or Expired..................................... (56,172) (65,080) $32.03 Outstanding at December 31, 2002......................... 320,720 1,520,389 $25.58 Granted.................................................. 434,011 1,105,490 $ 6.35 Exercised or Issued...................................... (22,812) -- -- Forfeited or Expired..................................... (69,372) (31,667) $26.25 Outstanding at December 31, 2003......................... 662,547 2,594,212 $17.37
At December 31, 2003, 70,567 of the 662,547 shares of CMS Energy restricted common stock outstanding are subject to performance objectives. Compensation expense for restricted stock was $4 million in 2003, less than $1 million in 2002, and $3 million in 2001. The following table summarizes our stock options outstanding at December 31, 2003:
NUMBER OF SHARES OUTSTANDING AND WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF EXERCISE PRICES EXERCISABLE REMAINING LIFE EXERCISE PRICE ------------------------ ---------------- ---------------- ---------------- CMS Energy Common Stock: $6.35 -- $6.35............................... 1,105,490 9.70 years $ 6.35 $8.12 -- $31.04............................... 1,074,441 6.96 years $20.36 $34.80 -- $43.38............................... 414,281 4.89 years $39.05 --------- ---------- ------ $6.35 -- $43.38............................... 2,594,212 7.80 years $17.37 ========= ========== ======
In December 2002, we adopted the fair value based method of accounting for stock-based employee compensation, under SFAS No. 123, as amended by SFAS No. 148. We elected to adopt the prospective method recognition provisions of this Statement, which applies the recognition provisions to all awards granted, modified, or settled after the beginning of the fiscal year that the recognition provisions are first applied. The following table summarizes the weighted average fair value of stock options granted:
OPTIONS GRANT DATE 2003 2002(a) 2001 ------------------ ---- ------- ---- ~~Fair value at grant date.................................... $3.04 $3.79, $1.40 $6.37~~
- ------------------------- (a) For 2002, there were two stock option grants. CE-68 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The stock options fair value is estimated using the Black-Scholes model, a mathematical formula used to value options traded on securities exchanges. The following assumptions were used in the Black-Scholes model:
YEARS ENDED DECEMBER 31 --------------------------------- 2003 2002(a) 2001 ---- ------- ---- CMS Energy Common Stock Options Risk-free interest rate................................... 3.23% 4.02%, 3.28% 4.80% Expected stock price volatility........................... 53.10% 31.64%, 39.67% 29.48% Expected dividend rate.................................... -- $.365, $.1825 $.365 Expected option life (years).............................. 4.7 4.5 4.6
- ------------------------- (a) For 2002, there were two stock option grants. We recorded $3 million as stock-based employee compensation cost for 2003, and $1 million for 2002. If stock-based compensation costs had been determined under SFAS No. 123 for the year ended December 31, 2001, consolidated net income and pro forma net income would have been as follows:
YEAR ENDED DECEMBER 31 ----------- 2001 ---- IN MILLIONS Net income, as reported..................................... $188 Add: Stock-based employee compensation expense included in reported net income, net of related taxes................. -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes...................................... (1) ---- Pro forma net income........................................ $187 ====
7: RETIREMENT BENEFITS We provide retirement benefits to our employees under a number of different plans, including: - non-contributory, defined benefit Pension Plan, - a cash balance pension plan for certain employees hired after June 30, 2003, - benefits to certain management employees under SERP, - health care and life insurance benefits under OPEB, - benefits to a select group of management under EISP, and - a defined contribution 401(k) plan. Pension Plan: The Pension Plan includes funds for our employees and our non-utility affiliates, including Panhandle. The Pension Plan's assets are not distinguishable by company. In June 2003, CMS Energy sold Panhandle to Southern Union Panhandle Corp. No portion of the Pension Plan assets were transferred with the sale and Panhandle employees are no longer eligible to accrue additional benefits. The Pension Plan retained pension payment obligations for Panhandle employees that were vested under the Pension Plan. CE-69 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The sale of Panhandle resulted in a significant change in the makeup of the Pension Plan. A remeasurement of the obligation was required at the date of sale. The remeasurement further resulted in the following: - an increase in OPEB expense of $4 million for 2003, and - an additional charge to accumulated other comprehensive income of $31 million ($20 million after-tax) because of the increase in the additional minimum pension liability. Due to large contributions, the additional minimum pension liability was eliminated as of December 31, 2003. In 2003, a substantial number of retiring employees elected a lump sum payment instead of receiving pension benefits as an annuity over time. Lump sum payments constitute a settlement under SFAS No. 88. A settlement loss must be recognized when the cost of all settlements paid during the year exceeds the sum of the service and interest costs for that year. We recorded a settlement loss of $48 million ($31 million after-tax) in December 2003. SERP: SERP benefits are paid from a trust established in 1988. SERP is not a qualified plan under the Internal Revenue Code; SERP trust earnings are taxable and trust assets are included in consolidated assets. Trust assets were $22 million at December 31, 2003, and $19 million at December 31, 2002. The assets are classified as other non-current assets. The Accumulated Benefit Obligation for SERP was $19 million at December 31, 2003 and $17 million at December 31, 2002. OPEB: Retiree health care costs at December 31, 2003 are based on the assumption that costs would increase 8.5 percent in 2003. The rate of increase is expected to be 7.5 percent for 2004. The rate of increase is expected to slow to an estimated 5.5 percent by 2010 and thereafter. The health care cost trend rate assumption significantly affects the estimated costs recorded. A one-percentage point change in the assumed health care cost trend assumption would have the following effects:
ONE PERCENTAGE ONE PERCENTAGE POINT INCREASE POINT DECREASE -------------- -------------- IN MILLIONS ~~Effect on total service and interest cost component......... $ 13 $ (11) Effect on postretirement benefit obligation................. $136 $(119)~~
We adopted SFAS No. 106, effective as of the beginning of 1992. We recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated recovery in utility rates. For additional details, see Note 1, Corporate Structure and Accounting Policies, "Utility Regulation." The MPSC authorized recovery of the electric utility portion of these costs in 1994 over 18 years and the gas utility portion in 1996 over 16 years. EISP: We implemented an EISP in 2002 to provide flexibility in separation of employment by officers, a select group of management, or other highly compensated employees. Terms of the plan may include payment of a lump sum, payment of monthly benefits for life, payment of premium for continuation of health care, or any other legally permissible term deemed to be in our best interest to offer. As of December 31, 2003, the Accumulated Benefit Obligation of the EISP was $3 million. Consumers' portion of the EISP was $300,000. The measurement date for all plans is December 31. CE-70 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Assumptions: The following table recaps the weighted-average assumptions used in our retirement benefits plans to determine the benefit obligation and net periodic benefit cost:
PENSION & SERP OPEB ----------------------- ----------------------- YEARS ENDED DECEMBER 31 -------------------------------------------------- 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- Discount rate................................. 6.25% 6.75% 7.25% 6.25% 6.75% 7.25% Expected long-term rate of return on plan assets(a)................................... 8.75% 8.75% 9.75% Union....................................... 8.75% 8.75% 9.75% Non-Union................................... 6.00% 6.00% 6.00% Rate of compensation increase: Pension..................................... 3.25% 3.50% 5.25% SERP........................................ 5.50% 5.50% 5.50%
- ------------------------- (a) We determine our long-term rate of return by considering historical market returns, the current and future economic environment, the capital market principals of risk and return, and the expertise of individuals and firms with financial market knowledge. We use the asset allocation of the portfolio to forecast the future expected total return of the portfolio. The goal is to determine a long-term rate of return that can be incorporated into the planning of future cash flow requirements in conjunction with the change in the liability. The use of forecasted returns for various classes of assets used to construct an expected return model is reviewed periodically for reasonability and appropriateness. Costs: The following table recaps the costs incurred in our retirement benefits plans:
PENSION & SERP OPEB --------------------- -------------------- YEARS ENDED DECEMBER 31 --------------------------------------------- 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- IN MILLIONS Service cost.......................................... $ 39 $ 40 $ 37 $ 17 $ 16 $ 13 Interest expense...................................... 75 86 84 61 63 57 Expected return on plan assets........................ (80) (103) (99) (39) (40) (40) Amortization of unrecognized transition (asset)....... -- -- (5) -- -- -- Plan amendments....................................... -- 4 -- -- -- -- Settlement charge..................................... 48 -- -- -- -- -- Amortization of: Net loss............................................ 9 -- -- 18 8 -- Prior service cost.................................. 7 8 8 (6) (1) (1) ---- ----- ---- ---- ---- ---- Net periodic pension and postretirement benefit cost................................................ $ 98 $ 35 $ 25 $ 51 $ 46 $ 29 ==== ===== ==== ==== ==== ====
Plan Assets: The following table recaps the categories of plan assets in our retirement benefits plans:
PENSION OPEB ------------ ------------ YEARS ENDED DECEMBER 31 ------------------------------ 2003 2002 2003 2002 ---- ---- ---- ---- Asset Category: Fixed Income.............................................. 52% 32%(b) 51% 55% Equity Securities......................................... 44% 60% 48% 44% CMS Energy Common Stock(a)............................. 4% 8% 1% 1%
- ------------------------- (a) At December 31, 2003, there were 4,970,000 shares of CMS Energy Common Stock in the Pension Plan assets with a fair value of $42 million, and 414,000 shares in the OPEB plan assets, with a fair value of CE-71 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $4 million. At December 31, 2002, there were 5,099,000 shares of CMS Energy Common Stock in the Pension Plan assets with a fair value of $48 million, and 284,000 shares in the OPEB plan assets, with a fair value of $3 million. (b) At February 29, 2004, the Pension Plan assets were 66 percent equity and 34 percent fixed income. We plan to contribute $71 million to our OPEB plan in 2004. We estimate a contribution of $23 million to our Pension Plan in 2004. We have established a target asset allocation for our Pension Plan assets of 65 percent equity and 35 percent fixed income investments to maximize the long-term return on plan assets, while maintaining a prudent level of risk. The level of acceptable risk is a function of the liabilities of the plan. Equity investments are diversified mostly across the Standard & Poor's 500 Index, with a lesser allocation to the Standard & Poor's Mid Cap and Small Cap Indexes and a Foreign Equity Index Fund. Fixed income investments are diversified across investment grade instruments of both government and corporate issuers. Annual liability measurements, quarterly portfolio reviews, and periodic asset/liability studies are used to evaluate the need for adjustments to the portfolio allocation. We have established union and non-union VEBA trusts to fund our future retiree health and life insurance benefits. These trusts are funded through the rate making process for Consumers, and through direct contributions from the non-utility subsidiaries. The equity portions of the union and non-union health care VEBA trusts are invested in an Standard & Poor's 500 Index fund. The fixed income portion of the union health care VEBA trust is invested in domestic investment grade taxable instruments. The fixed income portion of the non-union health care VEBA trust is invested in a diversified mix of domestic tax-exempt securities. The investment selections of each VEBA are influenced by the tax consequences, as well as the objective of generating asset returns that will meet the medical and life insurance costs of retirees. CE-72 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Reconciliations: The following table reconciles the funding of our retirement benefit plans with our retirement benefit plans liability:
YEARS ENDED DECEMBER 31 -------------------------------------------------- PENSION PLAN SERP OPEB ---------------- ------------ -------------- 2003 2002 2003 2002 2003 2002 ---- ---- ---- ---- ---- ---- IN MILLIONS Benefit obligation January 1...................... $1,256 $1,195 $ 21 $ 19 $ 890 $ 876 Service cost...................................... 38 40 1 1 17 16 Interest cost..................................... 74 84 1 2 61 63 Plan amendment.................................... (19) 3 -- -- (44) (57) Actuarial loss.................................... 55 72 -- -- 76 31 Benefits paid..................................... (215) (138) (1) (1) (40) (39) ------ ------ ---- ---- ----- ----- Benefit obligation December 31(a)................. 1,189 1,256 22 21 960 890 ------ ------ ---- ---- ----- ----- Plan assets at fair value at January 1............ 607 845 -- -- 465 475 Actual return on plan assets...................... 115 (164) -- -- 68 (44) Company contribution.............................. 560 64 -- -- 71 73 Actual benefits paid.............................. (215) (138) -- -- (40) (39) ------ ------ ---- ---- ----- ----- Plan assets at fair value at December 31.......... 1,067 607 -- -- 564 465 ------ ------ ---- ---- ----- ----- Benefit obligation in excess of plan assets....... (122) (649) (22) (21) (396) (425) Unrecognized net loss from experience different than assumed.................................... 501 573 3 3 312 282 Unrecognized prior service cost (benefit)......... 29 60 -- -- (107) (70) Panhandle adjustment.............................. -- (7) -- -- -- -- ------ ------ ---- ---- ----- ----- Net Balance Sheet Asset (Liability)............... 408 (23) (19) (18) (191) (213) Additional minimum liability adjustment(b)........ -- (426) -- -- -- -- ------ ------ ---- ---- ----- ----- Total Net Balance Sheet Asset (Liability)(c)...... $ 408 $ (449) $(19) $(18) $(191) $(213) ====== ====== ==== ==== ===== =====
- ------------------------- (a) The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law in December 2003. This Act establishes a prescription drug benefit under Medicare (Medicare Part D), and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. Accounting guidance for the subsidy is not yet available, therefore, we have decided to defer recognizing the effects of the Act in our 2003 financial statements, as permitted by FASB Staff Position No. 106-1. When accounting guidance is issued, our retiree health benefit obligation may be adjusted. (b) The Pension Plan's Accumulated Benefit Obligation of $1.055 billion exceeded the value of the Pension Plan assets and net balance sheet liability at December 31, 2002. As a result, we recorded an additional minimum liability, including an intangible asset of $40 million, and $285 million of accumulated other comprehensive income. In August 2003, we made our planned contribution of $172 million to the Pension Plan. In December 2003, we made an additional contribution of $329 million to the Pension Plan that eliminated the additional minimum liability. The Accumulated Benefit Obligation for the Pension Plan was $1.019 billion at December 31, 2003. (c) As of December 31, 2003, we have recorded a prepaid pension asset of $384 million, $20 million of which is in other current assets on our consolidated balance sheets. CE-73 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8: LEASES We lease various assets, including vehicles, railcars, construction equipment, furniture, and buildings. We have both full-service and net leases. A net lease requires us to pay for taxes, maintenance, operating costs, and insurance. Most of our leases contain options at the end of the initial lease term to: - purchase the asset at the then fair value of the asset, or - renew the lease at the then fair rental value. Minimum annual rental commitments under our non-cancelable leases at December 31, 2003, were:
CAPITAL LEASES OPERATING LEASES -------------- ---------------- IN MILLIONS 2004........................................................ $13 $ 9 2005........................................................ 12 8 2006........................................................ 12 7 2007........................................................ 11 6 2008........................................................ 9 5 2009 and thereafter......................................... 21 29 --- --- Total minimum lease payments................................ 78 $64 === Less imputed interest....................................... 10 --- Present value of net minimum lease payments................. 68 Less current portion........................................ 10 --- Non-current portion......................................... $58 ===
We are authorized by the MPSC to record both capital and operating lease payments as operating expense and recover the total cost from our customers. Operating lease charges were $13 million in 2003, $13 million in 2002, and $15 million in 2001. Capital lease expenses were $17 million in 2003, $20 million in 2002, and $26 million in 2001. Included in the $26 million for 2001, is $7 million of nuclear fuel lease expense. In November 2001, our nuclear fuel capital leasing arrangement expired. At termination of the lease, we paid the lessor $48 million, which was the lessor's remaining investment at that time. In April 2001, we entered into a lease agreement for the construction of an office building to be used as the main headquarters for CMS Energy in Jackson, Michigan. In November 2003, we exercised our purchase option under the lease agreement and bought the office building with proceeds from a $60 million term loan. 9: JOINTLY OWNED REGULATED UTILITY FACILITIES We are required to provide only our share of financing for the jointly owned utility facilities. The direct expenses of the jointly owned plants are included in operating expenses. Operation, maintenance, and other expenses of these jointly owned utility facilities are shared in proportion to each participant's undivided CE-74 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ownership interest. The following table indicates the extent of our investment in jointly owned regulated utility facilities:
DECEMBER 31 ---------------------------- NET ACCUMULATED INVESTMENT DEPRECIATION ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ---- IN MILLIONS Campbell Unit 3 -- 93.3 percent............................. $299 $298 $328 $313 Ludington -- 51 percent..................................... 84 83 87 85 Distribution -- various..................................... 74 77 32 31
10: REPORTABLE SEGMENTS Our reportable segments are strategic business units organized and managed by the nature of the products and services each provides. We evaluate performance based upon the net income available to the common stockholder of each segment. We operate principally in two segments: electric utility and gas utility. The electric utility segment consists of regulated activities associated with the generation and distribution of electricity in the state of Michigan. The gas utility segment consists of regulated activities associated with the transportation, storage, and distribution of natural gas in the state of Michigan. Accounting policies of the segments are the same as we describe in the summary of significant accounting policies. Our financial statements reflect the assets, liabilities, revenues, and expenses directly related to the electric and gas segment where it is appropriate. We allocate accounts between the electric and gas segments where common accounts are attributable to both segments. The allocations are based on certain measures of business activities, such as revenue, labor dollars, customers, other operation and maintenance and construction expense, leased property, taxes or functional surveys. For example, customer receivables are allocated based on revenue. Pension provisions are allocated based on labor dollars. The following tables show our financial information by reportable segment. We account for inter-segment sales and transfers at current market prices and eliminate them in consolidated net income available to common stockholder by segment. The "Other" segment includes our consolidated special purpose entity for the sale of trade receivables.
YEARS ENDED DECEMBER 31 --------------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS Operating Revenues Electric.................................................. $ 2,590 $2,648 $2,633 Gas....................................................... 1,845 1,519 1,338 Other..................................................... -- 2 5 ------- ------ ------ $ 4,435 $4,169 $3,976 ======= ====== ====== Earnings from Equity Method Investees Other (a)................................................. $ 42 $ 53 $ 38 ======= ====== ====== Depreciation, Depletion and Amortization Electric.................................................. $ 247 228 $ 219 Gas....................................................... 128 118 118 Other..................................................... 2 2 2 ------- ------ ------ $ 377 $ 348 $ 339 ======= ====== ======
CE-75 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31 --------------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS Interest Charges Electric.................................................. $ 166 $ 144 $ 153 Gas....................................................... 52 47 50 Other..................................................... 30 21 21 ------- ------ ------ Subtotal.................................................. 248 212 224 Eliminations.............................................. (3) (44) (38) ------- ------ ------ $ 245 $ 168 $ 186 ======= ====== ====== Income Taxes Electric.................................................. $ 90 $ 138 $ 69 Gas....................................................... 35 33 25 Other (b)................................................. 12 9 3 ------- ------ ------ $ 137 $ 180 $ 97 ======= ====== ====== Net Income Available to Common Stockholder Electric.................................................. $ 167 $ 264 $ 109 Gas....................................................... 38 46 21 Other..................................................... (11) 25 15 ------- ------ ------ $ 194 $ 335 $ 145 ======= ====== ====== Investments in Equity Method Investees Electric.................................................. $ 2 $ 2 $ 2 Other (c)................................................. 659 643 553 ------- ------ ------ $ 661 $ 645 $ 555 ======= ====== ====== Total Assets Electric (d).............................................. $ 6,831 $6,058 $5,784 Gas (d)................................................... 2,983 2,586 2,734 Other..................................................... 931 1,398 1,142 ------- ------ ------ Subtotal.................................................. 10,745 10,042 9,660 Eliminations.............................................. -- (444) (469) ------- ------ ------ $10,745 $9,598 $9,191 ======= ====== ====== Capital Expenditures (e) Electric.................................................. $ 310 $ 437 $ 623 Gas....................................................... 135 181 145 ------- ------ ------ $ 445 $ 618 $ 768 ======= ====== ======
- ------------------------- (a) 2002 excludes $28 million benefit and 2001 excludes $17 million expense due to the change in accounting for derivative instruments. (b) 2002 excludes $10 million tax expense and 2001 excludes $6 million tax benefit due to the change in accounting for derivative instruments. (c) As of December 31, 2003, the trusts that hold the mandatorily redeemable Trust Preferred Securities were deconsolidated. The trusts are now included on the Consolidated Balance Sheets as Investments -- Other. (d) Amounts include a portion of our other common assets attributable to both the electric and gas utility businesses. CE-76 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (e) Amounts include electric restructuring implementation plan, capital leases for nuclear fuel, purchase of nuclear fuel, and other assets. Amounts also include a portion of capital expenditures for plant and equipment attributable to both the electric and gas utility businesses. 11: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER Under the PPA with the MCV Partnership discussed in Note 2, Uncertainties, our 2003 obligation to purchase electric capacity from the MCV Partnership provided 15 percent of our owned and contracted electric generating capacity. Summarized financial information of the MCV Partnership follows: STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 ------------------------ 2003 2002 2001 ---- ---- ---- IN MILLIONS Operating revenue(a)........................................ $584 $597 $611 Operating expenses.......................................... 416 409 453 ---- ---- ---- Operating income............................................ 168 188 158 Other expense, net.......................................... 108 114 110 ---- ---- ---- Income before cumulative effect of accounting change........ 60 74 48 Cumulative effect of change in method of accounting for derivative options contracts(b)........................... -- 58 -- ---- ---- ---- Net Income.................................................. $ 60 $132 $ 48 ==== ==== ====
CE-77 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) BALANCE SHEETS
DECEMBER 31 ---------------- 2003 2002 ---- ---- IN MILLIONS Assets Current assets(c)...... $ 389 $ 358 Plant, net............. 1,494 1,550 Other assets........... 187 190 ------ ------ $2,070 $2,098 ====== ======

DECEMBER 31 ---------------- 2003 2002 ---- ---- IN MILLIONS Liabilities and Equity Current liabilities.... $ 250 $ 209 Non-current liabilities(d)...... 1,021 1,155 Partners' equity(e).... 799 734 ------ ------ $2,070 $2,098 ====== ======
- ------------------------- (a) Revenue from Consumers totaled $514 million in 2003, $557 million in 2002, and $550 million in 2001. (b) On April 1, 2002, the MCV Partnership implemented a new accounting standard for derivatives. As a result, the MCV Partnership began accounting for several natural gas contracts containing an option component at fair value. The MCV Partnership recorded a $58 million cumulative effect adjustment for the change in accounting principle as an increase to earnings. CMS Midland's 49 percent ownership share was $28 million ($18 million after-tax), which is reflected as a change in accounting principle on our Consolidated Statements of Income. (c) Receivables from Consumers totaled $40 million for December 31, 2003 and $44 million for December 31, 2002. (d) FMLP is the sole beneficiary of a trust that is the lessor in a long-term direct finance lease with the MCV Partnership. CMS Holdings holds a 46.4 percent ownership interest in FMLP. The MCV Partnership's lease obligations, assets, and operating revenues secure FMLP's debt. The following table summarizes obligation and payment information regarding the direct finance lease.
DECEMBER 31 ------------ 2003 2002 ---- ---- IN MILLIONS Balance Sheet: MCV Partnership: Lease obligation......................................... $894 $975 FMLP: Non-recourse debt........................................ 431 449 Lease payment to service non-recourse debt (including interest)................................................ 158 370 CMS Holdings: Share of interest portion of lease payment............... 37 34 Share of principle portion of lease payment.............. 36 65

YEARS ENDED DECEMBER 31 -------------------- 2003 2002 2001 ---- ---- ---- IN MILLIONS ~~Income Statement: FMLP: Earnings.............................................. $32 $38 $30~~
- ------------------------- (e) CMS Midland's recorded investment in the MCV Partnership includes capitalized interest, which we are expensing over the life of our investment in the MCV Partnership. The financing agreements prohibit the MCV Partnership from distributing any cash to its owners until it meets certain financial test requirements. We do not anticipate receiving a cash distribution in the near future. CE-78 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12: ASSET RETIREMENT OBLIGATIONS SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: This standard became effective January 2003. It requires companies to record the fair value of the cost to remove assets at the end of their useful life, if there is a legal obligation to do so. We have legal obligations to remove some of our assets, including our nuclear plants, at the end of their useful lives. Before adopting this standard, we classified the removal cost of assets included in the scope of SFAS No. 143 as part of the reserve for accumulated depreciation. For these assets, the removal cost of $448 million that was classified as part of the reserve at December 31, 2002, was reclassified in January 2003, in part, as: - $364 million ARO liability, - $134 million regulatory liability, - $42 million regulatory asset, and - $7 million net increase to property, plant, and equipment as prescribed by SFAS No. 143. We are reflecting a regulatory asset and liability as required by SFAS No. 71 for regulated entities instead of a cumulative effect of a change in accounting principle. Accretion of $1 million related to the Big Rock and Palisades' profit component included in the estimated cost of removal was expensed for 2003. The fair value of ARO liabilities has been calculated using an expected present value technique. This technique reflects assumptions, such as costs, inflation, and profit margin that third parties would consider to assume the settlement of the obligation. Fair value, to the extent possible, should include a market risk premium for unforeseeable circumstances. No market risk premium was included in our ARO fair value estimate since a reasonable estimate could not be made. If a five percent market risk premium were assumed, our ARO liability would be $381 million. If a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, such as assets with indeterminate lives, the liability is to be recognized when a reasonable estimate of fair value can be made. Generally, transmission and distribution assets have indeterminate lives. Retirement cash flows cannot be determined. There is a low probability of a retirement date, so no liability has been recorded for these assets. No liability has been recorded for assets that have insignificant cumulative disposal costs, such as substation batteries. The measurement of the ARO liabilities for Palisades and Big Rock are based on decommissioning studies that are based largely on third-party cost estimates. CE-79 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables describe our assets that have legal obligations to be removed at the end of their useful life.
IN SERVICE TRUST ARO DESCRIPTION DATE LONG LIVED ASSETS FUND --------------- ---------- ----------------- ----- IN MILLIONS December 31, 2003 Palisades -- decommission plant site............................... 1972 Palisades nuclear plant $487 Big Rock -- decommission plant site... 1962 Big Rock nuclear plant 88 JHCampbell intake/discharge water line............................... 1980 Plant intake/discharge water line Closure of coal ash disposal areas.... Various Generating plants coal ash areas Closure of wells at gas storage fields............................. Various Gas storage fields Indoor gas services equipment relocations........................ Various Gas meters located inside structures

PRO FORMA ARO LIABILITY ARO ARO LIABILITY ----------------------------- CASH FLOW LIABILITY ARO DESCRIPTION 1/1/02 1/1/03 INCURRED SETTLED ACCRETION REVISIONS 12/31/03 --------------- ------------- ------ -------- ------- --------- --------- --------- IN MILLIONS December 31, 2003 Palisades -- decommission... $232 $249 $-- $ -- $19 $-- $268 Big Rock -- decommission.... 94 61 -- (39) 13 -- 35 JHCampbell intake line...... -- -- -- -- -- -- -- Coal ash disposal areas..... 46 51 -- (4) 5 -- 52 Wells at gas storage fields................... 2 2 -- -- -- -- 2 Indoor gas services relocations.............. 1 1 -- -- -- -- 1 ---- ---- --- ---- --- --- ---- Total.................. $375 $364 $-- $(43) $37 $-- $358 ==== ==== === ==== === === ====
Reclassification of Non-Legal Cost of Removal: Beginning in December 2003, the SEC requires the quantification and reclassification of the estimated cost of removal obligations arising from other than legal obligations. These obligations have been accrued through depreciation charges. We estimate that we had $983 million in 2003 and $907 million in 2002 of previously accrued asset removal costs related to our regulated operations, for other than legal obligations. These obligations, which were previously classified as a component of accumulated depreciation were reclassified as regulatory liabilities in the accompanying consolidated balance sheets. 13: IMPLEMENTATION OF NEW ACCOUNTING STANDARDS SFAS NO. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: Amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003. Implementation of this statement has not impacted our Consolidated Financial Statements. SFAS NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY: Establishes standards for how we classify and measure certain financial instruments with characteristics of both liabilities and equity. The statement requires us to classify financial instruments within its scope as liabilities rather than mezzanine equity, the area between liabilities and equity. SFAS No. 150 became effective July 1, 2003. We have four Trust Preferred Securities outstanding as of December 31, 2003 that are issued by our affiliated trusts. Each trust holds a subordinated debenture from the parent company. The terms of the debentures are identical to those of the trust-preferred securities, except that the debenture has an explicit maturity date. The CE-80 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) trust documents, in turn, require that the trust be liquidated upon the repayment of the debenture. The preferred securities are redeemable upon the liquidation of the subsidiary; therefore, they are considered equity in the financial statements of the subsidiary. At their October 29, 2003 Board meeting, the FASB deferred the implementation of the portion of SFAS No. 150 relating to mandatorily redeemable noncontrolling interests in subsidiaries when the noncontrolling interests are classified as equity in the financial statements of the subsidiary. Our Trust Preferred Securities are included in the deferral action. Upon adoption of FASB Interpretation No. 46, we determined that our trusts that issue Trust Preferred Securities should be deconsolidated and reported as long-term debt -- related parties. Refer to further discussion under "Accounting Standards Not Yet Effective -- FASB Interpretation No. 46, Consolidation of Variable Interest Entities." EITF ISSUE NO. 01-08, DETERMINING WHETHER AN ARRANGEMENT CONTAINS A LEASE: In May 2003, the EITF reached consensus in EITF Issue No. 01-08 requiring both parties to a transaction, such as power purchase agreements, to determine whether a service contract or similar arrangement is or includes a lease within the scope of SFAS No. 13, Accounting for Leases. The consensus is to be applied prospectively to arrangements agreed to, modified, or acquired in business combinations in fiscal periods beginning July 1, 2003. Prospective accounting under EITF Issue No. 01-08, could affect the timing and classification of revenue and expense recognition. Certain product sales and service revenue and expenses may be required to be reported as rental or leasing income and/or expenses. Transactions deemed to be capital lease arrangements would be included on our balance sheet. The adoption of EITF Issue No. 01-08 has not impacted our results of operations, cash flows, or financial position. EITF ISSUE NO. 03-04, ACCOUNTING FOR CASH BALANCE PENSION PLANS: In May 2003, the EITF reached consensus in EITF Issue No. 03-04 to specifically address the accounting for certain cash balance pension plans. EITF Issue No. 03-04 concluded that certain cash balance plans be accounted for as defined benefit plans under SFAS No. 87, Employers' Accounting for Pensions. The EITF requirements must be applied as of our next plan measurement date after issuance, which is December 31, 2003. In 2003, we started a cash balance pension plan that covers employees hired after June 30, 2003. We account for this plan as a defined benefit plan under SFAS No. 87 and comply with EITF Issue No. 03-04. For further information, see Note 7, Retirement Benefits. ACCOUNTING STANDARDS NOT YET EFFECTIVE FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: FASB issued this interpretation in January 2003. The objective of the Interpretation is to assist in determining when one party controls another entity in circumstances where a controlling financial interest cannot be properly identified based on voting interests. Entities with this characteristic are considered variable interest entities. The Interpretation requires the party with the controlling financial interest to consolidate the entity. On December 24, 2003, the FASB issued Revised FASB Interpretation No. 46. For entities that have not previously adopted FASB Interpretation No. 46, Revised FASB Interpretation No. 46 provides an implementation deferral, until the first quarter of 2004. Revised FASB Interpretation No. 46 is effective for the first quarter of 2004 for all entities other than special purpose entities. Special-purpose entities must apply either FASB Interpretation No. 46 or Revised FASB Interpretation No. 46 for the first reporting period that ends after December 15, 2003. As of December 31, 2003, we have completed our analysis for and have adopted Revised FASB Interpretation No. 46 for all entities other than the MCV Partnership and FMLP. We continue to evaluate and gather information regarding those entities. We will adopt the provisions of Revised FASB Interpretation No. 46 for the MCV Partnership and FMLP in the first quarter of 2004. CE-81 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) If our completed analysis shows we have the controlling financial interest in the MCV Partnership and FMLP, we would consolidate their assets, liabilities, and activities, including $700 million of non-recourse debt, into our financial statements. Financial covenants under our financing agreements could be impacted negatively after such a consolidation. As a result, it may become necessary to seek amendments to the relevant financing agreements to modify the terms of certain of these covenants to remove the effect of this consolidation, or to refinance the relevant debt. As of December 31, 2003, our investment in the MCV Partnership was $419 million and our investment in the FMLP was $224 million. We also determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities have been deconsolidated as of December 31, 2003. Company obligated Trust Preferred Securities totaling $490 million that were previously included in mezzanine equity, have been eliminated due to deconsolidation. As a result of the deconsolidation, we have reflected $506 million of long-term debt -- related parties and have reflected an investment in related parties of $16 million. We are not required to, and have not, restated prior periods for the impact of this accounting change. STATEMENT OF POSITION, ACCOUNTING FOR CERTAIN COSTS AND ACTIVITIES RELATED TO PROPERTY, PLANT, AND EQUIPMENT: At its September 9, 2003 meeting, the Accounting Standards Executive Committee, of the American Institute of Certified Public Accountants voted to approve the Statement of Position, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. The Statement of Position is expected to be presented for FASB clearance in 2004 and would be applicable for fiscal years beginning after December 15, 2004. An asset classified as property, plant, and equipment asset often comprises multiple parts and costs. A component accounting policy determines the level at which those parts are recorded. Capitalization of certain costs related to property, plant, and equipment are included in the total cost. The Statement of Position could impact our component and capitalization accounting for property, plant, and equipment. We continue to evaluate the impact, if any, this Statement of Position will have upon adoption. 14: QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED)
2003 ------------------------------------------ QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------------- -------- ------- -------- ------- IN MILLIONS Operating revenue.......................................... $1,442 $902 $879 $1,212 Earnings from equity method investees...................... 16 18 (3) 11 Operating income........................................... 233 139 115 96 Income (loss) before cumulative effect of change in accounting principle (a)................................. 110 52 44 (10) Net income (loss) (a)...................................... 110 52 44 (10) Preferred stock dividends.................................. -- 1 -- 1 Preferred securities distributions (a)..................... 11 11 11 (33) Net income available to common stockholder................. 99 40 33 22
- ------------------------- (a) As of December 31, 2003, we deconsolidated the trusts that hold the mandatorily redeemable Trust Preferred Securities. As a result of the deconsolidation, we now record on the Consolidated Statements of Income interest on long-term debt -- related parties to the trusts holding the Trust Preferred Securities. CE-82 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2002 ------------------------------------------ QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------------- -------- ------- -------- ------- IN MILLIONS Operating revenue (b)...................................... $1,226 $883 $911 $1,149 Earnings from equity method investees...................... 10 18 8 17 Operating income (b)....................................... 188 152 168 181 Income before cumulative effect of change in accounting principle (b)............................................ 92 107 84 80 Cumulative effect of change in accounting for derivative instruments, net of $10 tax expense in 2002 (b).......... -- 17 1 -- Net income................................................. 92 124 85 80 Preferred stock dividends.................................. -- -- -- 2 Preferred securities distributions......................... 11 11 11 11 Net income available to common stockholder................. 81 113 74 67
- ------------------------- (b) We reclassified $28 million ($18 million after taxes) reducing June and September 2002 operating amounts to reflect the MCV Partnership's change in accounting for derivative instruments as a separate item. For additional details see Note 11, Summarized Financial Information of Significant Related Energy Supplier. CE-83 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholder Consumers Energy Company We have audited the accompanying consolidated balance sheets of Consumers Energy Company (a Michigan corporation and wholly-owned subsidiary of CMS Energy Corporation) and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of Midland Cogeneration Venture Limited Partnership (a limited partnership in which Consumers Energy Company and subsidiaries has a 49% interest), have been audited by other auditors (the other auditors for 2001 for Midland Cogeneration Venture Limited Partnership have ceased operations) whose reports have been furnished to us; insofar as our opinion on the consolidated financial statements relates to the amounts included for Midland Cogeneration Venture Limited Partnership, it is based solely on their reports. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Consumers Energy Company and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Notes 12 and 13 to the consolidated financial statements, in 2003, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations" and of Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities". As discussed in Notes 6 and 11 to the consolidated financial statements, in 2002, the Company adopted the provisions SFAS No. 148, "Accounting for Stock-Based Compensation" and Midland Cogeneration Venture Limited Partnership adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended and interpreted. /s/ ERNST & YOUNG LLP Detroit, Michigan February 27, 2004 CE-84 REPORT OF INDEPENDENT AUDITORS To the Partners and the Management Committee of Midland Cogeneration Venture Limited Partnership: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, partners' equity and cash flows present fairly, in all material respects, the financial position of the Midland Cogeneration Limited Partnership (a Michigan limited partnership) and its subsidiaries (MCV) at December 31, 2003 and 2002, and the results of their operations and their cash flows for the each of the two years ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of MCV's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements of MCV for the year ended December 31, 2001, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 18, 2002. As explained in Note 2 to the financial statements, effective April 1, 2002, Midland Cogeneration Venture Limited Partnership changed its method of accounting for derivative and hedging activities in accordance with Derivative Implementation Group ("DIG") Issue C-16. /s/ PricewaterhouseCoopers LLP Detroit, Michigan February 18, 2004 CE-85 THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED ARTHUR ANDERSEN REPORT AND THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners and the Management Committee of the Midland Cogeneration Venture Limited Partnership: We have audited the accompanying consolidated balance sheets of the MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and subsidiaries (MCV) as of December 31, 2001 and 2000, and the related consolidated statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of MCV's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Midland Cogeneration Venture Limited Partnership and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 2 to the financial statements, effective January 1, 2001, Midland Cogeneration Venture Limited Partnership changed its method of accounting related to derivatives and hedging activities. /s/Arthur Andersen LLP Detroit, Michigan, January 18, 2002 CE-86 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CMS ENERGY In April 2002, CMS Energy's Board of Directors, upon the recommendation of the Audit Committee of the Board, voted to discontinue using Arthur Andersen LLP to audit CMS Energy's financial statements for the year ending December 31, 2002. CMS Energy had previously retained Arthur Andersen LLP to review its financial statements for the quarter ended March 31, 2002. In May 2002, CMS Energy's Board of Directors engaged Ernst & Young LLP to audit its financial statements for the year ending December 31, 2002. Ernst & Young LLP audited 2000, 2001, and 2002. As a result, CMS Energy restated its 2000 and 2001 financial statements. The restated 2001 financial statements are contained herein. CONSUMERS In April 2002, Consumers' Board of Directors, upon the recommendation of the Audit Committee of the Board, voted to discontinue using Arthur Andersen LLP to audit Consumers' financial statements for the year ending December 31, 2002. Consumers had previously retained Arthur Andersen LLP to review its financial statements for the quarter ended March 31, 2002. In May 2002, Consumers' Board of Directors engaged Ernst & Young LLP to audit its financial statements for the year ending December 31, 2002. Ernst & Young LLP audited 2000, 2001, and 2002. As a result, Consumers restated its 2000 and 2001 financial statements. The restated 2001 financial statements are contained herein. ITEM 9A. CONTROLS AND PROCEDURES. CMS ENERGY Disclosure Controls and Procedures: CMS Energy's management, with the participation of its CEO and CFO, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, CMS Energy's CEO and CFO have concluded that, as of the end of such period, its disclosure controls and procedures are effective. Internal Control Over Financial Reporting: There have not been any changes in CMS Energy's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. CONSUMERS Disclosure Controls and Procedures: Consumers' management, with the participation of its CEO and CFO, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, Consumers' CEO and CFO have concluded that, as of the end of such period, its disclosure controls and procedures are effective. Internal Control Over Financial Reporting: There have not been any changes in Consumers' internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. CO-1 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS. CMS ENERGY Information that is required in Item 10 regarding directors and executive officers is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. CONSUMERS Information that is required in Item 10 regarding Consumers' directors and executive officers is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION. CMS ENERGY Information that is required in Item 11 regarding executive compensation is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. CONSUMERS Information that is required in Item 11 regarding executive compensation of Consumers' executive officers is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS. CMS ENERGY Information that is required in Item 12 regarding securities authorized for issuance under equity compensation plans and security ownership of certain beneficial owners and management is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. CONSUMERS Information that is required in Item 12 regarding securities authorized for issuance under equity compensation plans and security ownership of certain beneficial owners and management of Consumers is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CMS ENERGY Information that is required in Item 13 regarding certain relationships and related transactions is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. CONSUMERS Information that is required in Item 13 regarding certain relationships and related transactions regarding Consumers is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. CO-2 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. CMS ENERGY Information that is required in Item 14 regarding principal accountant fees and services is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. CONSUMERS Information that is required in Item 14 regarding Consumers' principal accountant fees and services is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements and Reports of Independent Public Accountants for CMS Energy and Consumers are included in each company's ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA and are incorporated by reference herein. (a)(2) Financial Statement Schedules and Reports of Independent Public Accountants for CMS Energy and Consumers are included after the Exhibits to the Index to Financial Statement Schedules and are incorporated by reference herein. (a)(3) Exhibits for CMS Energy and Consumers are listed after Item 15(c) below and are incorporated by reference herein. (b) Reports on Form 8-K CMS ENERGY During the fourth quarter of 2003, CMS Energy filed or furnished the following Current Reports on Form 8-K: - 8-K filed on October 17, 2003 covering matters pursuant to Item 5, Other Events; - 8-K filed on October 24, 2003 covering matters pursuant to Item 5, Other Events; - 8-K furnished on November 12, 2003 covering matters pursuant to Item 12, Results of Operations and Financial Condition (including a Summary of Consolidated Earnings, Summarized Comparative Balance Sheets, Summarized Statements of Cash Flows, and a Summary of Consolidated Earnings); - 8-K filed on November 26, 2003 covering matters pursuant to Item 5, Other Events; - 8-K filed on December 5, 2003 covering matters pursuant to Item 5, Other Events; and - 8-K filed on December 19, 2003 covering matters pursuant to Item 5, Other Events. CONSUMERS During the fourth quarter of 2003, Consumers filed or furnished the following Current Reports on Form 8-K: - 8-K filed on October 24, 2003 covering matters pursuant to Item 5, Other Events; - 8-K furnished on November 12, 2003 covering matters pursuant to Item 12, Results of Operations and Financial Condition (including a Summary of Consolidated Earnings, Summarized Comparative Balance Sheets, Summarized Statements of Cash Flows, and a Summary of Consolidated Earnings); - 8-K filed on November 26, 2003 covering matters pursuant to Item 5, Other Events; CO-3 - 8-K filed on December 5, 2003 covering matters pursuant to Item 5, Other Events; and - 8-K filed on December 19, 2003 covering matters pursuant to Item 5, Other Events. (c) Exhibits, including those incorporated by reference (see also Exhibit volume). CO-4 CMS ENERGY'S AND CONSUMERS' EXHIBITS
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- (3)(a) 333-51932 (3)(a) -- Restated Articles of Incorporation of CMS Energy (Form S-3 filed December 15, 2000) (3)(b) 333-45556 (3)(b) -- By-Laws of CMS Energy (Form S-3 filed September 11, 2000) (3)(c) 1-5611 3(c) -- Restated Articles of Incorporation dated May 26, 2000, of Consumers (2000 Form 10-K) (3)(d) 1-5611 (3)(d) -- By-Laws of Consumers (1st qtr. 2003 Form 10-Q) (4)(a) 2-65973 (b)(1)-4 -- Indenture dated as of September 1, 1945, between Consumers and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Trustee, including therein indentures supplemental thereto through the Forty-third Supplemental Indenture dated as of May 1, 1979 -- Indentures Supplemental thereto: 33-41126 (4)(c) -- 68th dated as of 06/15/93 1-5611 (4) -- 69th dated as of 09/15/93 (Form 8-K dated Sep. 21, 1993) 1-5611 (4)(a) -- 70th dated as of 02/01/98 (1997 Form 10-K) 1-5611 (4)(a) -- 71st dated as of 03/06/98 (1997 Form 10-K) 333-58943 (4)(d) -- 73rd dated as of 06/15/98 (Form S-4 dated July 13, 1998) 1-5611 (4)(b) -- 74th dated as of 10/29/98 (3rd qtr. 1998 Form 10-Q) 1-5611 (4)(b) -- 75th dated as of 10/1/99 (1999 Form 10-K) 1-5611 (4)(d) -- 77th dated as of 10/1/99 (1999 Form 10-K) 1-5611 4(b) -- 79th dated as of 9/26/01 (3rd qtr. 2001 10-Q) 1-5611 4(a)(i) -- 80th dated as of 3/22/02 (2001 Form 10-K) 1-5611 (4)(a) -- 87th dated as of 3/26/03 (1st qtr. 2003 Form 10-Q) 1-5611 (4)(d) -- 90th dated as of 3/30/03 (1st qtr. 2003 Form 10-Q) 1-5611 (4)(a) -- 91st dated as of 5/23/03 (3rd qtr. 2003 Form 10-Q) 1-5611 (4)(b) -- 92nd dated as of 8/26/03 (3rd qtr. 2003 Form 10-Q) 1-5611 (4)(c) -- 93rd dated as of 9/17/03 (3rd qtr. 2003 Form 10-Q) 333-111220 (4)(a)(i) -- 94th dated as of 11/7/03 (Consumers Form S-4 dated December 16, 2003) (4)(b) 1-5611 (4)(b) -- Indenture dated as of January 1, 1996 between Consumers and The Bank of New York, as Trustee (1995 Form 10-K) -- Indentures Supplemental thereto: 1-5611 (4)(b) -- 1st dated as of 01/18/96 (1995 Form 10-K) 1-5611 (4)(a) -- 2nd dated as of 09/04/97 (3rd qtr. 1997 Form 10-Q) 1-9513 (4)(a) -- 3rd 11/04/99 (3rd qtr. 1999 Form 10-Q) (4)(c) 1-5611 (4)(c) -- Indenture dated as of February 1, 1998 between Consumers and JPMorgan Chase (formerly "The Chase Manhattan Bank"), as Trustee (1997 Form 10-K) 1-5611 (4)(a) -- 1st dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q) 333-58943 (4)(b) -- 2nd dated as of 06/15/98 1-5611 (4)(a) -- 3rd 10/29/98 (3rd qtr. 1998 Form 10-Q) 4(d) 1-5611 (4)(e) -- $140 million Term Loan Agreement dated March 26, 2003 between Consumers Energy Company and the Bank/Agent, as defined therein (1st qtr. 2003 Form 10-Q) (4)(e) 33-47629 (4)(a) -- Indenture dated as of September 15, 1992 between CMS Energy and NBD Bank, as Trustee (Form S-3 filed May 1, 1992) -- Indentures Supplemental thereto: 333-37241 (4)(a) -- 4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
CO-5
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- 1-9513 (4)(d) -- 6th dated as of 01/13/98 (1997 Form 10-K) 1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K) 333-48276 (4) -- 10th dated as of 10/12/00 (Form S-3 filed October 19, 2000) 333-58686 (4) -- 11th dated as of 03/29/01 (Form S-8 filed April 11, 2001) 333-51932 (4)(a) -- 12th dated as of 07/02/01 (Form POS AM filed August 8, 2001) 4(e)(i) -- 13th dated as of 07/16/03 4(e)(ii) -- 14th dated as of 07/17/03 (4)(f) 1-9513 (4)(b) -- Indenture between CMS Energy and JPMorgan Chase (formerly "The Chase Manhattan Bank"), as Trustee, dated as of January 15, 1994 (Form 8-K dated March 29, 1994) -- Indentures Supplemental thereto: 1-9513 (4b) -- 1st dated as of 01/20/94 (Form 8-K dated March 29, 1994) 1-9513 (4) -- 2nd dated as of 03/19/96 (1st qtr. 1996 Form 10-Q) 1-9513 (4)(a)(iv) -- 3rd dated as of 03/17/97 (Form 8-K dated May 1, 1997) 333-36115 (4)(d) -- 4th dated as of 09/17/97 (Form S-3 filed September 22, 1997) 333-63229 (4)(c) -- 5th dated as of 08/26/98 (Form S-4 filed September 10, 1998) 1-9513 (4) -- 6th dated as of 11/9/00 (3rd qtr. 2000 Form 10-Q) 333-74958 (4)(a)(viii) -- Form of Seventh Indenture (Form S-3 filed December 12, 2001) (4)(g) 1-9513 (4a) -- Indenture dated as of June 1, 1997, between CMS Energy and The Bank of New York, as trustee (Form 8-K filed July 1, 1997) Indentures Supplemental thereto: 1-9513 (4)(b) -- 1st dated as of 06/20/97 (Form 8-K filed July 1, 1997) 333-45556 (4)(e) -- 4th dated as of 08/22/00 (Form S-3 filed September 11, 2000) (4)(h) -- $185 million Credit Agreement, as amended, dated May 22, 2003 among CMS Energy and the Financial Institutions, Documentation Agent and Administrative Agent, as defined therein (4)(i) -- Certificate of Designation of 4.50% Cumulative Convertible Preferred Stock dated as of December 2, 2003 (4)(j) -- Registration Rights Agreement dated as of July 16, 2003 between CMS Energy and the Initial Purchasers, all as defined therein (4)(k) -- Registration Rights Agreement dated as of July 17, 2003 between CMS Energy and the Initial Purchasers, all as defined therein (4)(l) -- Registration Rights Agreement dated as of December 5, 2003 between CMS Energy and the Initial Purchasers, all as defined therein (4)(m) -- $190 million Fourth Amended and Restated Credit Agreement dated as of December 8, 2003 among CMS Energy, CMS Enterprises, the Banks, and the Administrative Agent and Collection Agent, all defined therein (4)(n) 1-9513 4.9 -- Pledge and Security Agreement dated as of July 12, 2002 among CMS Energy, Grantors and the Collateral Agent, all as defined therein (Form 8-K filed July 30, 2002) (4)(o) -- Third Amended and Restated Pledge and Security Agreement dated as of December 8, 2003 among CMS Energy and the Collateral Agent, as defined therein (4)(p) -- Amended and Restated Guaranty dated as of December 8, 2003 by the Guarantor in favor of the Lenders, all as defined therein (10)(a) 1-9513 (10)(b) -- Form of Employment Agreement entered into by CMS Energy's and Consumers' executive officers (1999 Form 10-K)
CO-6
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- (10)(b) 1-9513 (10)(a) -- Acknowledgement of Resignation between Tamela W. Pallas and CMS Energy Corporation (3rd qtr. 2002 Form 10-Q) (10)(c) 1-5611 (10)(g) -- Consumers' Executive Stock Option and Stock Appreciation Rights Plan effective December 1, 1989 (1990 Form 10-K) (10)(d) 1-9513 (10)(b) -- Employment, Separation and General Release Agreement between William T. McCormick and CMS Energy Corporation (3rd qtr. 2002 Form 10-Q) (10)(e) 1-9513 (10)(d) -- CMS Energy's Performance Incentive Stock Plan effective February 3, 1988, as amended December 3, 1999 (1999 Form 10-K) (10)(f) 1-9513 (10)(c) -- Employment, Separation and General Release Agreement between Alan M. Wright and CMS Energy Corporation (3rd qtr. 2002 Form 10-Q) (10)(g) -- CMS Energy's Salaried Employees Merit Program for 2003 effective January 1, 2003 (10)(h) 1-9513 (10)(m) -- CMS Deferred Salary Savings Plan effective January 1, 1994 (1993 Form 10-K) (10)(i) -- Annual Officer Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2003 (10)(j) 1-9513 (10)(h) -- Supplemental Executive Retirement Plan for Employees of CMS Energy/Consumers Energy Company effective January 1, 1982, as amended December 3, 1999 (1999 Form 10-K) (10)(k) 33-37977 4.1 -- Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between The Connecticut National Bank and United States Trust Company of New York (MCV Partnership) Indenture Supplemental thereto: 33-37977 4.2 -- Supplement No. 1 dated as of June 1, 1990 (MCV Partnership) (10)(l) 1-9513 (28)(b) -- Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, MCV Partnership and United States Trust Company of New York, Trustee (3rd qtr. 1990 Form 10-Q) Indenture Supplemental thereto: 33-37977 4.4 -- Supplement No. 1 dated as of June 1, 1990 (MCV Partnership) (10)(m) 1-9513 (10)(v) -- Amended and Restated Investor Partner Tax Indemnification Agreement dated as of June 1, 1990 among Investor Partners, CMS Midland as Indemnitor and CMS Energy as Guarantor (1990 Form 10-K) (10)(n) 1-9513 (19)(d)* -- Environmental Agreement dated as of June 1, 1990 made by CMS Energy to The Connecticut National Bank and Others (1990 Form 10-K) (10)(o) 1-9513 (10)(z)* -- Indemnity Agreement dated as of June 1, 1990 made by CMS Energy to Midland Cogeneration Venture Limited Partnership (1990 Form 10-K) (10)(p) 1-9513 (10)(aa)* -- Environmental Agreement dated as of June 1, 1990 made by CMS Energy to United States Trust Company of New York, Meridian Trust Company, each Subordinated Collateral Trust Trustee and Holders from time to time of Senior Bonds and Subordinated Bonds and Participants from time to time in Senior Bonds and Subordinated Bonds (1990 Form 10-K)
CO-7
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- (10)(q) 33-37977 10.4 -- Amended and Restated Participation Agreement dated as of June 1, 1990 among MCV Partnership, Owner Participant, The Connecticut National Bank, United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding Corporation II, MEC Development Corporation and Institutional Senior Bond Purchasers (MCV Partnership) (10)(r) 33-3797 10.4 -- Power Purchase Agreement dated as of July 17, 1986 between MCV Partnership and Consumers (MCV Partnership) Amendments thereto: 33-37977 10.5 -- Amendment No. 1 dated September 10, 1987 (MCV Partnership) 33-37977 10.6 -- Amendment No. 2 dated March 18, 1988 (MCV Partnership) 33-37977 10.7 -- Amendment No. 3 dated August 28, 1989 (MCV Partnership) 33-37977 10.8 -- Amendment No. 4A dated May 25, 1989 (MCV Partnership) (10)(s) 1-5611 (10)(y) -- Unwind Agreement dated as of December 10, 1991 by and among CMS Energy, Midland Group, Ltd., Consumers, CMS Midland, Inc., MEC Development Corp. and CMS Midland Holdings Company (1991 Form 10-K) (10)(t) 1-5611 (10)(z) -- Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990, among CMS Energy, Consumers and The Dow Chemical Company (1991 Form 10-K) (10)(u) 1-5611 (10)(aa)* -- Parent Guaranty dated as of June 14, 1990 from CMS Energy to MCV, each of the Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC Development (1991 Form 10-K) (10)(v) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between Consumers Power Company and Trunkline Gas Company, dated November 1, 1989, and Amendment, dated November 1, 1989 (1989 Form 10-K of PanEnergy Corp.) (10)(w) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between Consumers Power Company and Trunkline Gas Company, dated November 1, 1989 (1991 Form 10-K of PanEnergy Corp.) (10)(x) 1-2921 10.03 -- Contract for Firm Transportation of Natural Gas between Consumers Power Company and Trunkline Gas Company, dated September 1, 1993 (1993 Form 10-K) (10)(y) -- Purchase Agreement dated July 9, 2003 between CMS Energy and the Initial Purchasers, as defined therein (10)(z) -- Purchase Agreement dated July 9, 2003 between CMS Energy and the Initial Purchasers, as defined therein (10)(aa) -- Purchase Agreement dated December 1, 2003 between CMS Energy and the Initial Purchasers, as defined therein (10)(bb) 1-5611 10 -- First Amended and Restated Employment Agreement between Kenneth Whipple and CMS Energy Corporation effective as of September 1, 2003 (8-K dated October 24, 2003) (10)(cc) -- Annual Management Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2003 (10)(dd) -- Annual Employee Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2003 (12)(a) -- Statement regarding computation of CMS Energy's Ratio of Earnings to Fixed Charges
CO-8
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- (12)(b) -- Statement regarding computation of Consumers' Ratio of Earnings to Fixed Charges and Preferred Securities Dividends and Distributions (16) 1-5611 16.1 -- Letter from Arthur Andersen LLP to the Securities and Exchange Commission dated April 29, 2002 regarding change in certifying accountant (Form 8-K filed April 29, 2002) (21) 1-9513 -- Subsidiaries of CMS Energy (Form U-3A-2 filed February 27, 2004) (23)(a) -- Consent of Ernst & Young LLP for CMS Energy (23)(b) -- Consent of PricewaterhouseCoopers LLP for CMS Energy re: MCV (23)(c) -- Consent of Pricewaterhouse for CMS Energy re: Jorf Lasfar (23)(d) -- Consent of Ernst & Young LLP for Consumers (23)(e) Consent of PricewaterhouseCoopers LLP for Consumers re: MCV (24)(a) -- Power of Attorney for CMS Energy (24)(b) -- Power of Attorney for Consumers (31)(a) -- CMS Energy's certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(b) -- CMS Energy's certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(c) -- Consumers' certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(d) -- Consumers' certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32)(a) -- CMS Energy's certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32)(b) -- Consumers' certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (99)(a) -- Financial Statements for Midland Cogeneration Venture Limited Partnership for the years ended December 31, 2001, 2002, and 2003 (99)(b) -- Financial Statements for Jorf Lasfar for the years ended December 31, 2001, 2002, and 2003 (99)(c) -- Representation regarding Emirates CMS Power Company financial statements for the years ended December 31, 2001, 2002 and 2003 (99)(d) -- Representation regarding SCP Investments (1) PTY. LTD. financial statements for the years ended June 30, 2002, 2003 and 2004
- ------------------------- * Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of Consumers, and of CMS Energy but not of Consumers. Exhibits listed above that have heretofore been filed with the Securities and Exchange Commission pursuant to various acts administered by the Commission, and which were designated as noted above, are hereby incorporated herein by reference and made a part hereof with the same effect as if filed herewith. CO-9 INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE ---- Schedule II Valuation and Qualifying Accounts and Reserves 2003, 2002 and 2001: CMS Energy Corporation................................. CO-11 Consumers Energy Company............................... CO-12 Report of Independent Auditors CMS Energy Corporation................................. CMS-120 Consumers Energy Company............................... CE-84
Schedules other than those listed above are omitted because they are either not required, not applicable or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable. CO-10 CMS ENERGY CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
CHARGED/ BALANCE AT ACCRUED BALANCE BEGINNING CHARGED TO OTHER AT END DESCRIPTION OF PERIOD TO EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD ----------- ---------- ---------- -------- ---------- --------- (IN MILLIONS) Accumulated provision for uncollectible accounts: 2003...................................... $23 $28 $ 4 $15 $40 2002...................................... $23 $22 (3) $19 $23 2001...................................... $16 $22 (1) $14 $23
CO-11 CONSUMERS ENERGY COMPANY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
CHARGED/ BALANCE AT ACCRUED BALANCE BEGINNING CHARGED TO OTHER AT END DESCRIPTION OF PERIOD TO EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD ----------- ---------- ---------- -------- ---------- --------- (IN MILLIONS) Accumulated provision for uncollectible accounts: 2003...................................... $5 $16 -- $13 $8 2002...................................... $4 $17 -- $16 $5 2001...................................... $3 $13 -- $12 $4
CO-12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 11th day of March 2004. CMS ENERGY CORPORATION By /s/ KENNETH WHIPPLE ------------------------------------ Kenneth Whipple Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of CMS Energy Corporation and in the capacities and on the 11th day of March 2004.
SIGNATURE TITLE --------- ----- (i) Principal executive officer: /s/ KENNETH WHIPPLE Chairman of the Board and --------------------------------------------------- Chief Executive Officer Kenneth Whipple (ii) Principal financial officer: /s/ THOMAS J. WEBB Executive Vice President and --------------------------------------------------- Chief Financial Officer Thomas J. Webb (iii) Controller or principal accounting officer: /s/ GLENN P. BARBA Vice President, Controller and --------------------------------------------------- Chief Accounting Officer Glenn P. Barba (iv) A majority of the Directors including those named above: /s/ JAMES J. DUDERSTADT Director --------------------------------------------------- James J. Duderstadt /s/ KATHLEEN R. FLAHERTY Director --------------------------------------------------- Kathleen R. Flaherty /s/ EARL D. HOLTON Director --------------------------------------------------- Earl D. Holton /s/ DAVID W. JOOS Director --------------------------------------------------- David W. Joos /s/ MICHAEL T. MONAHAN Director --------------------------------------------------- Michael T. Monahan /s/ JOSEPH F. PAQUETTE, JR. Director --------------------------------------------------- Joseph F. Paquette, Jr.
CO-13
SIGNATURE TITLE --------- ----- /s/ WILLIAM U. PARFET Director --------------------------------------------------- William U. Parfet /s/ PERCY A. PIERRE Director --------------------------------------------------- Percy A. Pierre /s/ S. KINNIE SMITH, JR. Director --------------------------------------------------- S. Kinnie Smith, Jr. /s/ KENNETH L. WAY Director --------------------------------------------------- Kenneth L. Way /s/ KENNETH WHIPPLE Director --------------------------------------------------- Kenneth Whipple /s/ JOHN B. YASINSKY Director --------------------------------------------------- John B. Yasinsky By: /s/ THOMAS J. WEBB --------------------------------------------------- Thomas J. Webb, Attorney-in-Fact
CO-14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Consumers Energy Company has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 11th day of March 2004. CONSUMERS ENERGY COMPANY By /s/ KENNETH WHIPPLE ------------------------------------ Kenneth Whipple Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of Consumers Energy Company and in the capacities and on the 11th day of March 2004.
SIGNATURE TITLE --------- ----- (i) Principal executive officer: /s/ KENNETH WHIPPLE Chairman of the Board and --------------------------------------------------- Chief Executive Officer Kenneth Whipple (ii) Principal financial officer: /s/ THOMAS J. WEBB Executive Vice President and --------------------------------------------------- Chief Financial Officer Thomas J. Webb (iii) Controller or principal accounting officer: /s/ GLENN P. BARBA Vice President, Controller and --------------------------------------------------- Chief Accounting Officer Glenn P. Barba (iv) A majority of the Directors including those named above: /s/ JAMES J. DUDERSTADT Director --------------------------------------------------- James J. Duderstadt /s/ KATHLEEN R. FLAHERTY Director --------------------------------------------------- Kathleen R. Flaherty /s/ EARL D. HOLTON Director --------------------------------------------------- Earl D. Holton /s/ DAVID W. JOOS Director --------------------------------------------------- David W. Joos /s/ MICHAEL T. MONAHAN Director --------------------------------------------------- Michael T. Monahan /s/ JOSEPH F. PAQUETTE, JR. Director --------------------------------------------------- Joseph F. Paquette, Jr.
CO-15
SIGNATURE TITLE --------- ----- /s/ WILLIAM U. PARFET Director --------------------------------------------------- William U. Parfet /s/ PERCY A. PIERRE Director --------------------------------------------------- Percy A. Pierre /s/ S. KINNIE SMITH, JR. Director --------------------------------------------------- S. Kinnie Smith, Jr. /s/ KENNETH L. WAY Director --------------------------------------------------- Kenneth L. Way /s/ KENNETH WHIPPLE Director --------------------------------------------------- Kenneth Whipple /s/ JOHN B. YASINSKY Director --------------------------------------------------- John B. Yasinsky By: /s/ THOMAS J. WEBB --------------------------------------------------- Thomas J. Webb, Attorney-in-Fact
CO-16 CMS ENERGY'S AND CONSUMERS' EXHIBITS
EXHIBITS DESCRIPTION - -------- ----------- Indenture dated as of September 15, 1992 between CMS Energy and NBD Bank, as Trustee -- Indentures Supplemental thereto: 4(e)(i) -- 13th dated as of 07/16/03 4(e)(ii) -- 14th dated as of 07/17/03 (4)(h) -- $185 million Credit Agreement, as amended, dated May 22, 2003 among CMS Energy and the Financial Institutions, Documentation Agent and Administrative Agent, as defined therein (4)(i) -- Certificate of Designation of 4.50% Cumulative Convertible Preferred Stock dated as of December 2, 2003 (4)(j) -- Registration Rights Agreement dated as of July 16, 2003 between CMS Energy and the Initial Purchasers, all as defined therein (4)(k) -- Registration Rights Agreement dated as of July 17, 2003 between CMS Energy and the Initial Purchasers, all as defined therein (4)(l) -- Registration Rights Agreement dated as of December 5, 2003 between CMS Energy and the Initial Purchasers, all as defined therein (4)(m) -- $190 million Fourth Amended and Restated Credit Agreement dated as of December 8, 2003 among CMS Energy, CMS Enterprises, the Banks, and the Administrative Agent and Collection Agent, all defined therein (4)(o) -- Third Amended and Restated Pledge and Security Agreement dated as of December 8, 2003 among CMS Energy and the Collateral Agent, as defined therein (4)(p) -- Amended and Restated Guaranty dated as of December 8, 2003 by the Guarantor in favor of the Lenders, all as defined therein (10)(g) -- CMS Energy's Salaried Employees Merit Program for 2003 effective January 1, 2003 (10)(i) -- Annual Officer Incentive Compensation Plan for CMS Energy and its Subsidiaries effective January 1, 2003 (10)(y) -- Purchase Agreement dated July 9, 2003 between CMS Energy and the Initial Purchasers, as defined therein (10)(z) -- Purchase Agreement dated July 9, 2003 between CMS Energy and the Initial Purchasers, as defined therein (10)(aa) -- Purchase Agreement dated December 1, 2003 between CMS Energy and the Initial Purchasers, as defined therein (10)(cc) -- Annual Management Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2003 (10)(dd) -- Annual Employee Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2003 (12)(a) -- Statement regarding computation of CMS Energy's Ratio of Earnings to Fixed Charges (12)(b) -- Statement regarding computation of Consumers' Ratio of Earnings to Fixed Charges and Preferred Securities Dividends and Distributions (23)(a) -- Consent of Ernst & Young LLP for CMS Energy (23)(b) -- Consent of PricewaterhouseCoopers LLP (23)(c) -- Consent of Pricewaterhouse for CMS Energy re: Jorf Lasfar (23)(d) -- Consent of Ernst & Young LLP for Consumers (23)(e) -- Consent of PricewaterhouseCoopers LLP for Consumers re: MCV (24)(a) -- Power of Attorney for CMS Energy (24)(b) -- Power of Attorney for Consumers (31)(a) -- CMS Energy's certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(b) -- CMS Energy's certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(c) -- Consumers' certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

EXHIBITS DESCRIPTION - -------- ----------- (31)(d) -- Consumers' certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32)(a) -- CMS Energy's certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32)(b) -- Consumers' certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (99)(a) -- Financial Statements for Midland Cogeneration Venture Limited Partnership for the years ended December 31, 2001, 2002, and 2003 (99)(b) -- Financial Statements for Jorf Lasfar for the years ended December 31, 2001, 2002, and 2003 (99)(c) -- Representation regarding Emirates CMS Power Company financial statements for the years ended December 31, 2001, 2002 and 2003 (99)(d) -- Representation regarding SCP Investments(1) PTY. LTD. financial statements for the years ended June 30, 2002, 2003 and 2004
EX-4.(E)(I) 3 k82154aexv4wxeyxiy.txt INDENTURES SUPPLEMENTAL-13TH DATED 07/16/03 EXHIBIT 4(e)(i) THIRTEENTH SUPPLEMENTAL INDENTURE DATED AS OF JULY 16, 2003 ____________________ This Thirteenth Supplemental Indenture, dated as of the 16th day of July, 2003 between CMS Energy Corporation, a corporation duly organized and existing under the laws of the State of Michigan (hereinafter called the "Issuer") and having its principal office at One Energy Plaza, Jackson, Michigan 49201, and Bank One Trust Company, N.A., a national banking association (hereinafter called the "Trustee") and having its Corporate Trust Office at 1 BankOne Plaza, Mail Code ILI-0823, Chicago, IL 60670. WITNESSETH: WHEREAS, the Issuer and the Trustee (successor to NBD Bank, National Association) entered into an Indenture, dated as of September 15, 1992 (the "Original Indenture"), pursuant to which one or more series of debt securities of the Issuer (the "Securities") may be issued from time to time; and WHEREAS, Section 2.3 of the Original Indenture permits the terms of any series of Securities to be established in an indenture supplemental to the Original Indenture; and WHEREAS, Section 8.1(e) of the Original Indenture provides that a supplemental indenture may be entered into by the Issuer and the Trustee without the consent of any Holders (as defined in the Original Indenture) of the Securities to establish the form and terms of the Securities of any series; and WHEREAS, the Issuer has requested the Trustee to join with it in the execution and delivery of this Thirteenth Supplemental Indenture in order to supplement and amend the Original Indenture by, among other things, establishing the form and terms of a series of Securities to be known as the Issuer's "3.375% Convertible Senior Notes due 2023" (the "2023 Notes"), providing for the issuance of the 2023 Notes and amending and adding certain provisions thereof for the benefit of the Holders of the 2023 Notes; and WHEREAS, the Issuer and the Trustee desire to enter into this Thirteenth Supplemental Indenture for the purposes set forth in Sections 2.3 and 8.1(e) of the Original Indenture as referred to above; and WHEREAS, the Issuer has furnished the Trustee with a copy of the resolutions of its Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of this Thirteenth Supplemental Indenture; and 1 WHEREAS, all things necessary to make this Thirteenth Supplemental Indenture a valid agreement of the Issuer and the Trustee and a valid supplement to the Original Indenture have been done; NOW, THEREFORE, for and in consideration of the premises and the purchase of the 2023 Notes to be issued hereunder by holders thereof, the Issuer and the Trustee mutually covenant and agree, for the equal and proportionate benefit of the respective holders from time to time of the 2023 Notes, as follows: ARTICLE I STANDARD PROVISIONS; DEFINITIONS SECTION 1.01. Standard Provisions. The Original Indenture together with this Thirteenth Supplemental Indenture and all previous indentures supplemental thereto entered into pursuant to the applicable terms thereof are hereinafter sometimes collectively referred to as the "Indenture." All capitalized terms which are used herein and not otherwise defined herein are defined in the Indenture and are used herein with the same meanings as in the Indenture. SECTION 1.02. Definitions. (a) The following terms have the meanings set forth in the Sections hereof set forth below:
Term Section - ------------------------------------- -------------- Additional Amounts 2.04 Application Period 7.06 Asset Sale 7.06 Company 2.03 Conversion Date 6.02 Conversion Rate 6.01 Depositary Article IX Distributed Assets or Securities 6.06(c) DTC 2.03 Events of Default 8.01 ex date 1.01(b); 2.04 Excess Proceeds 7.06 Fundamental Change Purchase Date 3.01 Fundamental Change Purchase Notice 3.03 Fundamental Change Purchase Price 3.01 Global Note Article IX Indenture 1.01; 2.04 Interest Payment Date 2.03 Issue 7.04(a) Issuer Preamble; 2.03 Issuer Notice 5.01
2
Term Section - ------------------------------------- -------------- Issuer Notice Date 5.01 Lien 7.02(a) Maturity 2.03 Maximum Conversion Rate 6.06(h) Original Indenture Recitals Original Issue Date 2.03 Place of Payment 2.03 Purchase Date 2.04; 4.01(a) Purchase Notice 4.01(a)(i) Purchase Price 2.04 Record Date 2.03 Redemption Price 2.04 Restricted Payment 7.05(a) Rule 144A 2.03 Securities Recitals Securities Act 2.03 Trading Exception 2.04 Trustee Preamble; 2.04 2023 Notes Recitals; 2.04
(b) Section 1.1 of the Original Indenture is amended to insert the new definitions applicable to the 2023 Notes, in the appropriate alphabetical sequence, as follows: "Amortization Expense" means, for any period, amounts recognized during such period as amortization of capital leases, depletion, nuclear fuel, goodwill and assets classified as intangible assets in accordance with generally accepted accounting principles. "Average Life" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of (x) the number of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness and (y) the amount of such principal payment by (ii) the sum of all such principal payments. "Capital Lease Obligation" of a Person means any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such Person prepared in accordance with generally accepted accounting principles; the amount of such obligation shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles; the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty; and such obligation shall be deemed secured by a Lien on any property or assets to which such lease relates. "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, 3 including any Preferred Stock or Letter Stock; provided that Hybrid Preferred Securities shall not be considered Capital Stock for purposes of this definition. "CMS Electric and Gas" means CMS Electric and Gas Company, a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS Gas Transmission" means CMS Gas Transmission Company (formerly known as CMS Gas Transmission and Storage Company), a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS Generation" means CMS Generation Co., a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS MST" means CMS Marketing, Services and Trading Company, a Michigan corporation and wholly-owned subsidiary of Enterprises. "Common Equity" of any Person means capital stock of such Person that is generally entitled to (i) vote in the election of directors of such Person or (ii) if such Person is not a corporation, vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management or policies of such Person. "Consolidated Assets" means, at any date of determination, the aggregate assets of the Issuer and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Coverage Ratio" with respect to any period means the ratio of (i) the aggregate amount of Operating Cash Flow for such period to (ii) the aggregate amount of Consolidated Interest Expense for such period. "Consolidated Current Liabilities" means, for any period, the aggregate amount of liabilities of the Issuer and its Consolidated Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), after (i) eliminating all inter-company items between the Issuer and any Consolidated Subsidiary and (ii) deducting all current maturities of long-term Indebtedness, all as determined in accordance with generally accepted accounting principles. "Consolidated Indebtedness" means, at any date of determination, the aggregate Indebtedness of the Issuer and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles; provided that Consolidated Indebtedness shall not include any subordinated debt owned by any Hybrid Preferred Securities Subsidiary. "Consolidated Interest Expense" means, for any period, the total interest expense in respect of Consolidated Indebtedness of the Issuer and its Consolidated Subsidiaries, including, without duplication, (i) interest expense attributable to capital leases, (ii) amortization of debt 4 discount, (iii) capitalized interest, (iv) cash and noncash interest payments, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs under Interest Rate Protection Agreements (including amortization of discount) and (vii) interest expense in respect of obligations of other Persons deemed to be Indebtedness of the Issuer or any Consolidated Subsidiaries under clause (v) or (vi) of the definition of Indebtedness, provided, however, that Consolidated Interest Expense shall exclude (A) any costs otherwise included in interest expense recognized on early retirement of debt and (B) any interest expense in respect of any Indebtedness of any Subsidiary of Consumers, CMS Generation, CMS Electric and Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises Subsidiary, provided that such Indebtedness is without recourse to any assets of the Issuer, Consumers, Enterprises, CMS Generation, CMS Electric and Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises Subsidiary. "Consolidated Net Income" means, for any period, the net income of the Issuer and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that there shall not be included in such Consolidated Net Income: (i) any net income of any Person if such Person is not a Subsidiary, except that (A) the Issuer's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Issuer or a Consolidated Subsidiary as a dividend or other distribution and (B) the Issuer's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (ii) any net income of any Person acquired by the Issuer or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any gain or loss realized upon the sale or other disposition of any property, plant or equipment of the Issuer or its Consolidated Subsidiaries which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; and (iv) any net income of any Subsidiary of Consumers, CMS Generation, CMS Electric and Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises Subsidiary whose interest expense is excluded from Consolidated Interest Expense, provided, however, that for purposes of this subsection (iv), any cash, dividends or distributions of any such Subsidiary to the Issuer shall be included in calculating Consolidated Net Income. "Consolidated Net Tangible Assets" means, for any period, the total amount of assets (less accumulated depreciation or amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) as set forth on the most recently available quarterly or annual consolidated balance sheet of the Issuer and its Consolidated Subsidiaries, determined on a consolidated basis in accordance with generally accepted 5 accounting principles, and after giving effect to purchase accounting and after deducting therefrom, to the extent otherwise included, the amounts of: (i) Consolidated Current Liabilities; (ii) minority interests in Consolidated Subsidiaries held by Persons other than the Issuer or a Restricted Subsidiary; (iii) excess of cost over fair value of assets of businesses acquired, as determined in good faith by the Board of Directors as evidenced by Board of Directors resolutions; (iv) any revaluation or other write-up in value of assets subsequent to December 31, 1996, as a result of a change in the method of valuation in accordance with generally accepted accounting principles; (v) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items; (vi) treasury stock; and (vii) any cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities. "Consolidated Net Worth" of any Person means the total of the amounts shown on the consolidated balance sheet of such Person and its consolidated subsidiaries, determined on a consolidated basis in accordance with generally accepted accounting principles, as of any date selected by such Person not more than 90 days prior to the taking of any action for the purpose of which the determination is being made (and adjusted for any material events since such date), as (i) the par or stated value of all outstanding Capital Stock plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit, (B) any amounts attributable to Redeemable Stock and (C) any amounts attributable to Exchangeable Stock. "Consolidated Subsidiary" means any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Issuer in accordance with generally accepted accounting principles. "Consumers" means Consumers Energy Company, a Michigan corporation, all of whose common stock is on the date hereof owned by the Issuer. "Continuing Director" means a director who either was a member of the Board of Directors on July 10, 2003 or who becomes a member of the Board of Directors subsequent to that date and whose appointment, election or nomination for election by the Issuer's shareholders is duly approved by a majority of the Continuing Directors on the Board of Directors at the time of such approval, either by a specific vote or by approval of the proxy statement issued by the Issuer on behalf of the Board of Directors in which such individual is named as nominee for director. "Conversion Agent" means the office or agency designated by the Issuer where 2023 Notes may be presented for conversion. Initially, the Conversion Agent shall be the Trustee. "Conversion Price" means $1,000 divided by the Conversion Rate. 6 "Designated Enterprises Subsidiary" means any wholly-owned subsidiary of Enterprises formed after the date of this Thirteenth Supplemental Indenture which is designated a Designated Enterprises Subsidiary by the Board of Directors. "Enterprises" means CMS Enterprises Company, a Michigan corporation and wholly-owned subsidiary of the Issuer. "Equity Interests" means any capital stock, partnership, joint venture, member or limited liability or unlimited liability company interest, beneficial interest in a trust or similar entity or other equity interest or investment of whatever nature. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchangeable Stock" means any Capital Stock of a corporation that is exchangeable or convertible into another security (other than Capital Stock of such corporation that is neither Exchangeable Stock or Redeemable Stock). "Fair Market Value" means the amount which a willing buyer would pay a willing seller in an arm's length transaction. A "Fundamental Change" shall be deemed to have occurred at such time after the original issuance of the 2023 Notes as any of the following occurs: (i) the Common Stock or other common stock into which the 2023 Notes are convertible is neither listed for trading on a United States national securities exchange nor approved for trading on the Nasdaq National Market or another established automated over-the-counter trading market in the United States; (ii) a "person" or "group" within the meaning of Section 13(d) of the Exchange Act, other than the Issuer, any Subsidiary of the Issuer or any employee benefit plan of the Issuer or any such Subsidiary, files a Schedule TO (or any other schedule, form or report under the Exchange Act) disclosing that such person or group has become the direct or indirect ultimate "beneficial owner" (as such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have "beneficial ownership" of all shares that such person or group has the right to acquire whether such right is exercisable immediately or only after the passage of time) of Common Equity of the Issuer representing more than 50% of the voting power of the Issuer's Common Equity; (iii) consummation of any share exchange, consolidation or merger of the Issuer pursuant to which the Common Stock will be converted into cash, securities or other property or any sale, lease or other transfer (in one transaction or a series of transactions) of all or substantially all of the consolidated assets of the Issuer and its Subsidiaries, taken as a whole, to any Person (other than the Issuer or one or more of the Issuer's Subsidiaries); provided, however, that a transaction where the holders of the Issuer's Common Equity immediately prior to such transaction own, directly or indirectly, more than 50% of the aggregate voting power of all classes of Common Equity of the continuing or surviving corporation or transferee immediately after such event shall not be a Fundamental Change; or (iv) Continuing Directors cease to constitute at least a majority of the Board of Directors; provided, however, that a Fundamental Change shall not be deemed to have occurred in respect of any of the foregoing if either (A) the Last Reported Sale Price per share of Common Stock for 7 any five Trading Days within the period of 10 consecutive Trading Days ending immediately before the later of the Fundamental Change or the public announcement thereof shall equal or exceed 105% of the Conversion Price of the 2023 Notes in effect immediately before the Fundamental Change or the public announcement thereof or (B) at least 90% of the consideration (excluding cash payments for fractional shares) in the transaction or transactions constituting the Fundamental Change consists of shares of capital stock traded on a national securities exchange or quoted on the Nasdaq National Market (or which shall be so traded or quoted when issued or exchanged in connection with such Fundamental Change) (such securities being referred to as "Publicly Traded Securities") and as a result of such transaction or transactions the 2023 Notes become convertible into such Publicly Traded Securities (excluding cash payments for fractional shares). "Hybrid Preferred Securities" means any preferred securities issued by a Hybrid Preferred Securities Subsidiary, where such preferred securities have the following characteristics: (i) such Hybrid Preferred Securities Subsidiary lends substantially all of the proceeds from the issuance of such preferred securities to the Issuer or Consumers in exchange for subordinated debt issued by the Issuer or Consumers, respectively; (ii) such preferred securities contain terms providing for the deferral of distributions corresponding to provisions providing for the deferral of interest payments on such subordinated debt; and (iii) the Issuer or Consumers (as the case may be) makes periodic interest payments on such subordinated debt, which interest payments are in turn used by the Hybrid Preferred Securities Subsidiary to make corresponding payments to the holders of the Hybrid Preferred Securities. "Hybrid Preferred Securities Subsidiary" means any business trust (or similar entity) (i) all of the common equity interest of which is owned (either directly or indirectly through one or more wholly-owned Subsidiaries of the Issuer or Consumers) at all times by the Issuer or Consumers, (ii) that has been formed for the purpose of issuing Hybrid Preferred Securities and (iii) substantially all of the assets of which consist at all times solely of subordinated debt issued by the Issuer or Consumers (as the case may be) and payments made from time to time on such subordinated debt. "Indebtedness" of any Person means, without duplication: (i) the principal of and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (ii) all Capital Lease Obligations of such Person; 8 (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all obligations under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured. "Initial Purchasers" has the meaning ascribed to such term in the Purchase Agreement. "Interest Rate Protection Agreement" means any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect the Issuer or any Subsidiary against fluctuations in interest rates. "Last Reported Sale Price" of Common Stock on any date means the closing sale price per share (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on that date as reported in composite transactions for the principal U.S. securities exchange on which Common Stock is traded or, if the Common Stock is not listed on a U.S. national or regional securities exchange, as reported by the Nasdaq National Market. If the Common Stock is not listed for trading on a U.S. national or regional securities exchange and not reported by the Nasdaq National Market on the relevant date, the Last Reported Sale Price shall be the last quoted bid price for Common Stock in the over-the-counter market on the relevant date as reported by the National Quotation Bureau or similar organization. If the Common Stock is not so quoted, the Last Reported Sale Price will be the average of the mid-point of the last bid and ask prices for the Common Stock on the relevant date from each of at least three nationally recognized independent investment banking firms selected by the Issuer for this purpose. 9 "Letter Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is intended to reflect the separate performance of certain of the businesses or operations conducted by such corporation or any of its subsidiaries. "Market Price" means the average of the Last Reported Sale Prices of Common Stock for the 20 Trading Day period ending on the applicable date of determination (if the applicable date of determination is a Trading Day or, if not, then on the last Trading Day prior to such applicable date of determination), appropriately adjusted to take into account the occurrence, during the period commencing on the first of the Trading Days during such 20 Trading Day period and ending on the applicable date of determination, of any event that would result in an adjustment of the Conversion Rate under this Thirteenth Supplemental Indenture. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the aggregate proceeds of such Asset Sale including the fair market value (as determined by the Board of Directors and net of any associated debt and of any consideration other than Capital Stock received in return) of property other than cash, received by the Issuer, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Issuer and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Issuer or any Restricted Subsidiary of the Issuer as a reserve against any liabilities associated with such Asset Sale including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with generally accepted accounting principles and (b) with respect to any issuance or sale or contribution in respect of Capital Stock, the aggregate proceeds of such issuance, sale or contribution, including the fair market value (as determined by the Board of Directors and net of any associated debt and of any consideration other than Capital Stock received in return) of property other than cash, received by the Issuer, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof, provided, however, that if such fair market value as determined by the Board of Directors of property other than cash is greater than $25 million, the value thereof shall be based upon an opinion from an independent nationally recognized firm experienced in the appraisal or similar review of similar types of transactions. "Non-Convertible Capital Stock" means, with respect to any corporation, any non-convertible Capital Stock of such corporation and any Capital Stock of such corporation convertible solely into non-convertible Capital Stock other than Preferred Stock of such corporation; provided, however, that Non-Convertible Capital Stock shall not include any Redeemable Stock or Exchangeable Stock. 10 "Operating Cash Flow" means, for any period, with respect to the Issuer and its Consolidated Subsidiaries, the aggregate amount of Consolidated Net Income after adding thereto Consolidated Interest Expense (adjusted to include costs recognized on early retirement of debt), income taxes, depreciation expense, Amortization Expense and any noncash amortization of debt issuance costs, any nonrecurring, noncash charges to earnings and any negative accretion recognition. "Other Rating Agency" means any one of Fitch, Inc. or Moody's Investors Service, Inc., and any successor to any of these organizations which is a nationally recognized statistical rating organization. "Paying Agent" means any Person authorized by the Issuer to pay the principal of (and premium, if any) or interest on any of the 2023 Notes on behalf of the Issuer. Initially, the Paying Agent shall be the Trustee. "Predecessor 2023 Note" of any particular 2023 Note means every previous 2023 Note evidencing all or a portion of the same debt as that evidenced by such particular 2023 Note; and, for the purposes of the definition, any 2023 Note authenticated and delivered under Section 2.9 of the Indenture in exchange for or in lieu of a mutilated, destroyed, lost or stolen 2023 Note shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen 2023 Note. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation; provided that Hybrid Preferred Securities shall not be considered Preferred Stock for purposes of this definition. "Publicly Traded Securities" has the meaning provided in the definition of Fundamental Change. "Purchase Agreement" means that certain Purchase Agreement dated July 9, 2003 among the Issuer and the Initial Purchasers which provides for the sale by the Issuer to the Initial Purchasers of the 2023 Notes. "Redeemable Stock" means any Capital Stock that by its terms or otherwise is required to be redeemed prior to the first anniversary of the Stated Maturity of the outstanding 2023 Notes or is redeemable at the option of the holder thereof at any time prior to the first anniversary of the Stated Maturity of the outstanding 2023 Notes. "Registrable Securities" has the meaning ascribed to such term in the Registration Rights Agreement. "Registration Default" has the meaning ascribed to such term in the Registration Rights Agreement. 11 "Registration Rights Agreement" means that certain Registration Rights Agreement, dated as of July 16, 2003, by and among the Issuer and the Initial Purchasers. "Regulation S" means Regulation S under the Securities Act. "Restricted Subsidiary" means any Subsidiary (other than Consumers and its Subsidiaries) of the Issuer which, as of the date of the Issuer's most recent quarterly consolidated balance sheet, constituted at least 10% of the total Consolidated Assets of the Issuer and its Consolidated Subsidiaries and any other Subsidiary which from time to time is designated a Restricted Subsidiary by the Board of Directors; provided that no Subsidiary may be designated a Restricted Subsidiary if, immediately after giving effect thereto, an Event of Default or event that, with the lapse of time or giving of notice or both, would constitute an Event of Default would exist or the Issuer and its Restricted Subsidiaries could not incur at least one dollar of additional Indebtedness under Section 7.04 hereof, and (i) any such Subsidiary so designated as a Restricted Subsidiary must be organized under the laws of the United States or any State thereof, (ii) more than 80% of the Voting Stock of such Subsidiary must be owned of record and beneficially by the Issuer or a Restricted Subsidiary and (iii) such Restricted Subsidiary must be a Consolidated Subsidiary. "Spin-off Market Price" per share of Common Stock of the Issuer or the Equity Interests in a Subsidiary or other business unit of the Issuer on any day means the average of the daily Last Reported Sale Price for the 10 consecutive Trading Days commencing on and including the fifth Trading Day after the ex date with respect to the issuance or distribution requiring such computations. As used herein, the term "ex date," when used with respect to any issuance or distribution, shall mean the first date on which the security trades regular way on the New York Stock Exchange or such other national regional exchange or market in which the security trades without the right to receive such issuance or distribution. "Standard & Poor's" means Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc., and any successor thereto which is a nationally recognized statistical rating organization, or if such entity shall cease to rate the 2023 Notes or shall cease to exist and there shall be no such successor thereto, any other nationally recognized statistical rating organization selected by the Issuer which is acceptable to the Trustee. "Subordinated Indebtedness" means any Indebtedness of the Issuer (whether outstanding on the date of this Thirteenth Supplemental Indenture or thereafter incurred) which is contractually subordinated or junior in right of payment to the 2023 Notes. "Support Obligations" means, for any Person, without duplication, any financial obligation, contingent or otherwise, of such Person guaranteeing or otherwise supporting any debt or other obligation of any other Person in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such debt, (ii) to purchase property, securities or services for the purpose of assuring the owner of such debt of the 12 payment of such debt, (iii) to maintain working capital, equity capital, available cash or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such debt, (iv) to provide equity capital under or in respect of equity subscription arrangements (to the extent that such obligation to provide equity capital does not otherwise constitute debt) or (v) to perform, or arrange for the performance of, any non-monetary obligations or non-funded debt payment obligations of the primary obligor. "Tax Sharing Agreement" means the Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as amended or supplemented from time to time, by and among Issuer, each of the members of the Consolidated Group (as defined therein), and each of the corporations that become members of the Consolidated Group. "Trading Day" means (i) if the applicable security is listed, admitted for trading or quoted on the New York Stock Exchange, the Nasdaq National Market or another national security exchange, a day on which the New York Stock Exchange, the Nasdaq National Market or another national security exchange is open for business or (ii) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law, regulation or executive order to close. "Trading Price" of the 2023 Notes on any date of determination means the average of the secondary market bid quotations per $1,000 principal amount of 2023 Notes obtained by the Trustee for $5,000,000 principal amount of 2023 Notes at approximately 3:30 p.m., New York City time, on such determination date from three independent nationally recognized securities dealers the Issuer selects, provided that if three such bids cannot reasonably be obtained by the Trustee, but two such bids are obtained, then the average of the two bids shall be used, and if only one such bid can reasonably be obtained by the Trustee, this one bid shall be used. If the Trustee cannot reasonably obtain at least one bid for $5,000,000 principal amount of the 2023 Notes from a nationally recognized securities dealer, then the Trading Price will be deemed to be less than 95% of the product of the sale price of Common Stock and the then applicable Conversion Rate. "Voting Stock" means securities of any class or classes the holders of which are ordinarily, in the absence of contingencies, entitled to vote for corporate directors (or persons performing similar functions). ARTICLE II DESIGNATION AND TERMS OF THE 2023 NOTES; FORMS SECTION 2.01. Establishment of Series. (a) There is hereby created a series of Securities to be known and designated as the "3.375% Convertible Senior Notes due 2023" to be issued in an initial aggregate principal 13 amount of $150,000,000 (except that such amount shall be increased to an amount up to $200,000,000 to the extent of any exercise by the Initial Purchasers of their option to purchase additional 2023 Notes). Additional Securities, without limitation as to amount, having substantially the same terms as the 2023 Notes (except a different issue date, issue price and bearing interest from the last Interest Payment Date to which interest has been paid or duly provided for on the 2023 Notes, and, if no interest has been paid, from July 16, 2003), may also be issued by the Issuer pursuant to the Indenture without the consent of the existing Holders of the 2023 Notes. Such additional Securities shall be part of the same series as the 2023 Notes. The Stated Maturity of the 2023 Notes is July 15, 2023; the principal amount of the 2023 Notes shall be payable on such date unless the 2023 Notes are earlier redeemed, purchased or converted in accordance with the terms of the Indenture. (b) The 2023 Notes will bear interest from the Original Issue Date, or from the most recent date to which interest has been paid or duly provided for, at the rate of 3.375% per annum stated therein until the principal thereof is paid or made available for payment. Interest will be payable semiannually on each Interest Payment Date and at Maturity, as provided in the form of the 2023 Note in Section 2.03 hereof. (c) The Record Date referred to in Section 2.3(f)(4) of the Indenture for the payment of the interest on any 2023 Note payable on any Interest Payment Date (other than at Maturity) shall be the 1st day of the calendar month in which such Interest Payment Date occurs (whether or not a Business Day) except that the Record Date for interest payable at Maturity shall be the date of Maturity. (d) The payment of the principal of, premium (if any) and interest on the 2023 Notes shall not be secured by a security interest in any property. (e) The 2023 Notes shall be purchased by the Issuer at the option of the Holders thereof as provided in Article III, Article IV and Article V hereof. (f) The 2023 Notes shall be convertible in accordance with the terms of this Thirteenth Supplemental Indenture. (g) The 2023 Notes will not be subordinated to the payment of Senior Debt. (h) The Issuer will not pay any additional amounts on the 2023 Notes held by a Person who is not a U.S. person (as defined in Regulation S) in respect of any tax, assessment or government charge withheld or deducted. (i) The events specified in Events of Default with respect to the 2023 Notes shall include the events specified in Article VIII of this Thirteenth Supplemental Indenture. In addition to the covenants set forth in Article III of the Original Indenture, the Holders of the 2023 Notes shall have the benefit of the covenants of the Issuer set forth in this Thirteenth Supplemental Indenture. 14 SECTION 2.02. Forms Generally. The 2023 Notes and Trustee's certificates of authentication shall be in substantially the form set forth in this Article II, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by the Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such 2023 Notes, as evidenced by their execution thereof. The definitive 2023 Notes shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such 2023 Notes, as evidenced by their execution thereof. SECTION 2.03. Form of Face of 2023 Note. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY. Unless this Global 2023 Note is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to CMS Energy Corporation or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of a nominee of DTC or in such other name as is requested by an authorized representative of DTC (and any payment is made to such nominee of DTC or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof has an interest herein. CMS ENERGY CORPORATION 3.375% CONVERTIBLE SENIOR NOTES DUE 2023 No. 1 $150,000,000 CUSIP No.: 125896AS9 ISIN No.: US12589AS91 CMS Energy Corporation, a corporation duly organized and existing under the laws of the State of Michigan (herein called the "Issuer" or "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & Co., or registered assigns, the principal sum of One Hundred Fifty Million Dollars on July 15, 2023 ("Maturity") and to pay interest thereon from July 16, 2003 (the "Original Issue Date") or from the most recent Interest Payment Date to which interest has been 15 paid or duly provided for, semi-annually in arrears on January 15 and July 15, in each year, commencing on January 15, 2004 (each an "Interest Payment Date") to the Persons in whose names the 2023 Notes are registered at the close of business on January 1 and July 1 (each a "Record Date"), and at Maturity, at the rate of 3.375% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this 2023 Note (or one or more Predecessor 2023 Notes) is registered at the close of business on the Record Date for such interest, which shall be the 1st day of the calendar month in which such Interest Payment Date occurs (whether or not a Business Day) except that the Record Date for interest payable at Maturity shall be the date of Maturity. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Record Date and may either be paid to the Person in whose name this 2023 Note (or one or more Predecessor 2023 Notes) is registered at the close of business on a subsequent Record Date (which shall be not less than five Business Days prior to the date of payment of such defaulted interest) for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to Holders of 2023 Notes not less than 15 days preceding such subsequent Record Date. This 2023 Note is convertible and is subject to redemption at the option of the Issuer and to purchase by the Issuer at the option of the Holder as specified on the reverse of this 2023 Note. Payment of the principal of (and premium, if any) and interest, if any, on this 2023 Note will be made at the office or agency of the Issuer maintained for that purpose in New York, New York (the "Place of Payment"), in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Issuer payment of interest (other than interest payable at Maturity) may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register or by wire transfer to an account designated by such Person not later than ten days prior to the date of such payment. Reference is hereby made to the further provisions of this 2023 Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS 16 SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (IV) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, (V) TO CMS ENERGY CORPORATION OR (VI) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (VI) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN CLAUSE (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES THAT SUCH HOLDER WILL NOT ENGAGE IN HEDGING TRANSACTIONS INVOLVING THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THIS SECURITY AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS SECURITY TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS SECURITY SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT. THE HOLDER OF THIS SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS OF, A REGISTRATION RIGHTS AGREEMENT, DATED AS OF JULY 16, 2003 ENTERED INTO BY THE COMPANY FOR THE BENEFIT OF CERTAIN HOLDERS OF SECURITIES FROM TIME TO TIME. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this 2023 Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. 17 IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed under its corporate seal. Dated: CMS ENERGY CORPORATION By____________________________ Its: By____________________________ Its: SECTION 2.04. Form of Reverse of 2023 Note. This 3.375% Convertible Senior Note due 2023 is one of a duly authorized issue of securities of the Issuer (herein called the "2023 Notes"), issued and to be issued under an Indenture, dated as of September 15, 1992, as supplemented by certain supplemental indentures, including the Thirteenth Supplemental Indenture, dated as of July 16, 2003 (herein collectively referred to as the "Indenture"), between the Issuer and Bank One Trust Company, N.A., a national banking association (successor to NBD Bank, National Association), as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Issuer, the Trustee, and the Holders of the 2023 Notes and of the terms upon which the 2023 Notes are, and are to be, authenticated and delivered. This 2023 Note is one of the series designated on the face hereof, issued in an initial aggregate principal amount of $150,000,000 (except that such amount shall be increased to an amount up to $200,000,000 to the extent of any exercise by the Initial Purchasers of their option to purchase additional 2023 Notes). Additional Securities, without limitation as to amount, having substantially the same terms as the 2023 Notes (except a different issue date, issue price and bearing interest from the last Interest Payment Date to which interest has been paid or duly provided for on the 2023 Notes, and, if no interest has been paid, from July 16, 2003), may also be issued by the Issuer pursuant to the Indenture without the consent of the existing Holders of the 2023 Notes. Such additional Securities shall be part of the same series as the 2023 Notes. Holders of 2023 Notes at the close of business on a Record Date will receive payment of interest, payable on the corresponding Interest Payment Date notwithstanding the conversion of such 2023 Notes at any time after the close of business on such Record Date. 2023 Notes surrendered for conversion by a Holder during the period from the close of business on any Record Date to the opening of business on the immediately following Interest Payment Date must be accompanied by payment of an amount equal to the interest that the Holder is to receive 18 on the 2023 Notes; provided, however, that no such payment need be made if (1) the Issuer has specified a redemption date that is after a Record Date and on or prior to the immediately following Interest Payment Date, (2) the Issuer has specified a Purchase Date following a Fundamental Change that is during such period or (3) any overdue interest exists at the time of conversion with respect to such 2023 Notes to the extent of such overdue interest. The Holders of the 2023 Notes and any Common Stock issuable upon conversion thereof will continue to be entitled to receive Additional Amounts in accordance with the Registration Rights Agreement. If the principal hereof or any portion of such principal is not paid when due (whether upon acceleration, upon the date set for payment of the Redemption Price, upon the date set for payment of a Purchase Price or Fundamental Change Purchase Price or upon the Stated Maturity of this 2023 Note) or if interest due hereon or any portion of such interest is not paid when due in accordance with the terms of this 2023 Note, then in each such case the overdue amount shall bear interest at the rate of 3.375% per annum, compounded semiannually (to the extent that the payment of such interest shall be legally enforceable), which interest shall accrue from the date such overdue amount was due to the date payment of such amount, including interest thereon, has been made or duly provided for, all such interest shall be payable on demand. The interest rate borne by the Registrable Securities will be increased by 0.25% per annum upon the occurrence of a Registration Default, which rate will increase by an additional 0.25% per annum if such Registration Default has not been cured within 90 days after the occurrence thereof and will continue to increase by 0.25% at the beginning of each subsequent 90-day period until all Registration Defaults have been cured ("Additional Amounts"); provided, that the aggregate amount of any such increase in the interest rate on the Registrable Securities shall in no event exceed 0.50% per annum. All accrued Additional Amounts shall be paid to Holders of Registrable Securities in the same manner and at the same time as regular payments of interest on the Registrable Securities. Following the cure of all Registration Defaults, the accrual of Additional Amounts shall cease and the interest rate on the Registrable Securities will revert to 3.375% per annum. In the event of redemption of this 2023 Note in part only, a new 2023 Note for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. No sinking fund is provided for the 2023 Notes. The 2023 Notes are redeemable for cash or check in whole, or in part, at any time on or after July 15, 2008 at the option of the Issuer at a redemption price ("Redemption Price") equal to 100% of the principal amount of the 2023 Notes to be redeemed plus any accrued and unpaid interest (including Additional Amounts, if any) to the redemption date. Notice of redemption at the option of the Issuer shall be mailed at least 30 days but not more than 60 days before a redemption date to the Trustee, the Paying Agent and each Holder of 2023 Notes to be redeemed at the Holder's registered address. If money sufficient to pay the Redemption Price of all 2023 Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent prior to or on the redemption date, on and after the redemption date interest (including Additional Amounts, if any), if any, shall cease to accrue on such 2023 Notes or portions thereof. 2023 Notes in denominations larger than $1,000 principal amount may be redeemed in part but only in integral multiples of $1,000 principal amount. 19 Subject to the terms and conditions of the Indenture, a Holder shall have the option to require the Issuer to purchase the 2023 Notes held by such Holder on July 15, 2008, July 15, 2013 and July 15, 2018 (each, a "Purchase Date") at a purchase price (the "Purchase Price") equal to 100% of the principal amount of the 2023 Notes to be purchased plus any accrued and unpaid interest (including Additional Amounts, if any) to but excluding such Purchase Date, upon delivery of a Purchase Notice containing the information set forth in the Indenture, from the opening of business on the date that is 20 Business Days prior to such Purchase Date until the close of business on the fifth Business Day prior to such Purchase Date and upon delivery of the 2023 Notes to the Paying Agent by the Holder as set forth in the Indenture. The Issuer will pay the Purchase Price in cash or by check. 2023 Notes in denominations larger than $1,000 principal amount may be purchased in part, but only in integral multiples of $1,000 principal amount. If a Fundamental Change shall occur at any time prior to July 15, 2008, each Holder shall have the right, at such Holder's option and subject to the terms and conditions of the Indenture, to require the Issuer to purchase any or all of such Holder's 2023 Notes or any portion of the principal amount thereof that is equal to $1,000 or an integral multiple of $1,000 on the day that is no earlier than 60 days nor later than 90 days after the date of the Issuer Notice of the occurrence of the Fundamental Change (subject to extension to comply with applicable law) for a Fundamental Change Purchase Price equal to 100% of the principal amount of 2023 Notes purchased plus accrued and unpaid interest (including Additional Amounts, if any) to the Fundamental Change Purchase Date, which Fundamental Change Purchase Price shall be paid by the Issuer in cash or by check, as set forth in the Indenture. Holders have the right to withdraw any Purchase Notice or Fundamental Change Purchase Notice, as the case may be, by delivery to the Paying Agent of a written notice of withdrawal in accordance with the provisions of the Indenture. If cash sufficient to pay a Fundamental Change Purchase Price or Purchase Price, as the case may be, of all 2023 Notes or portions thereof to be purchased as of the Purchase Date or the Fundamental Change Purchase Date, as the case may be, is on deposit with the Paying Agent on the Business Day following the Purchase Date or the Fundamental Change Purchase Date, as the case may be, interest (including Additional Amounts, if any) shall cease to accrue on such 2023 Notes (or portions thereof) on and after such date, and the Holder thereof shall have no other rights as such (other than the right to receive the Purchase Price or Fundamental Change Purchase Price, as the case may be, upon surrender of such Note). Subject to the procedures set forth in the Indenture, a Holder may convert 2023 Notes into Common Stock on or before the close of business on July 15, 2023 during the periods and upon satisfaction of at least one of the conditions set forth below: (a) in any calendar quarter (and only during such calendar quarter) if the Last Reported Sale Price for Common Stock for at least 20 Trading Days during the period of 30 consecutive Trading Days ending on the last Trading Day of the previous calendar quarter is greater than or equal to 120% of the Conversion Price per share of Common Stock on such last Trading Day; 20 (b) prior to Maturity during the five Business Days immediately following any ten consecutive Trading Day period in which the Trading Price per $1,000 principal amount of 2023 Notes (as determined following a request by a Holder of the 2023 Notes in accordance with the procedures described in the Indenture) for each day of that period was less than 95% of the product of the sale price of Common Stock and the then applicable Conversion Rate (the "Trading Exception"); provided, however, that a Holder may not convert its 2023 Notes if the average closing sale price of Common Stock for such ten consecutive Trading Day period is between the then current Conversion Price and 120% of the then applicable Conversion Price; in connection with any conversion upon satisfaction of such Trading Price condition, the Trustee shall have no obligation to determine the Trading Price unless the Issuer has requested such determination; and the Issuer shall have no obligation to make such request unless the Holder provides reasonable evidence that the Trading Price would be less than 95% of the product of the sale price of Common Stock and the then applicable Conversion Rate; at which time, the Issuer shall instruct the Trustee to determine the Trading Price beginning on the next Trading Day and on each successive Trading Day until the Trading Price is greater than or equal to 95% of the product of the sale price of Common Stock and the then applicable Conversion Rate; (c) in the event that the Issuer calls the 2023 Notes for redemption, at any time prior to the close of business on the second Business Day immediately preceding the redemption date; (d) the Issuer becomes a party to a consolidation, merger or binding share exchange pursuant to which the Common Stock would be converted into cash or property (other than securities), in which case a Holder may surrender 2023 Notes for conversion at any time from and after the date which is 15 days prior to the anticipated effective date for the transaction until 15 days after the actual effective date of such transaction; or (e) the Issuer elects to (i) distribute to all holders of Common Stock assets, debt securities or rights to purchase securities of the Issuer, which distribution has a per share value as determined by the Board of Directors exceeding 15% of the Last Reported Sale Price of a share of Common Stock on the Trading Day immediately preceding the declaration date for such distribution, or (ii) distribute to all holders of Common Stock rights entitling them to purchase, for a period expiring within 60 days after the date of such distribution, shares of Common Stock at less than the Last Reported Sale Price of Common Stock on the Trading Day immediately preceding the declaration date of the distribution. In the case of the foregoing clauses (i) and (ii), the Issuer must notify the Holders at least 20 Business Days immediately prior to the ex date for such distribution. Once the Issuer has given such notice, Holders may surrender their 2023 Notes for conversion at any time thereafter until the earlier of the close of business on the Business Day immediately prior to the ex date or the Issuer's announcement that such distribution will not take place; provided, however, that a Holder may not exercise this right to convert if the Holder may participate in the distribution without conversion. As used herein, the term "ex date," when used with respect to any issuance or distribution, shall 21 mean the first date on which the Common Stock trades regular way on such exchange or in such market without the right to receive such issuance or distribution. If the Issuer engages in certain reclassifications of its Common Stock or is a party to a consolidation, merger, binding share exchange or transfer of all or substantially all of its assets pursuant to which Common Stock is converted into cash, securities or other property, then, at the effective time of the transaction, the right to convert a 2023 Note into Common Stock will be changed into a right to convert a 2023 Note into the kind and amount of cash, securities or other property which the Holder would have received if the Holder had converted its 2023 Notes immediately prior to the transaction. If the Issuer engages in any transaction described in the preceding sentence, the Conversion Rate will not be adjusted. If the transaction also constitutes a Fundamental Change, a Holder can require the Issuer to purchase all or a portion of its 2023 Notes as described in the Indenture. 2023 Notes in respect of which a Holder has delivered a notice of exercise of the option to require the Issuer to purchase such 2023 Notes pursuant to Article VII or Article XIII of the Indenture may be converted only if the notice of exercise is withdrawn in accordance with the terms of the Indenture. The initial Conversion Rate is 93.7137 shares of Common Stock per $1,000 principal amount, subject to adjustment in certain events described in the Indenture. The Issuer shall deliver cash or a check in lieu of any fractional share of Common Stock. Holders of 2023 Notes at the close of business on a Record Date will receive payment of interest, payable on the corresponding Interest Payment Date notwithstanding the conversion of such 2023 Notes at any time after the close of business on such Record Date. 2023 Notes surrendered for conversion by a Holder during the period from the close of business on any Record Date to the opening of business on the immediately following Interest Payment Date must be accompanied by payment of an amount equal to the interest that the Holder is to receive on the 2023 Notes; provided, however, that no such payment need be made if (1) the Issuer has specified a redemption date that is after a Record Date and on or prior to the immediately following Interest Payment Date, (2) the Issuer has specified a Purchase Date following a Fundamental Change that is during such period or (3) any overdue interest exists at the time of conversion with respect to such 2023 Notes to the extent of such overdue interest. The Holders of the 2023 Notes and any Common Stock issuable upon conversion thereof will continue to be entitled to receive Additional Amounts in accordance with the Registration Rights Agreement. To convert the 2023 Notes a Holder must (i) complete and manually sign the irrevocable conversion notice on the back of the 2023 Notes (or complete and manually sign a facsimile of such notice) and deliver such notice to the Conversion Agent at the office maintained by the Conversion Agent for such purpose, (ii) surrender the 2023 Notes to the Conversion Agent, (iii) furnish appropriate endorsements and transfer documents if required by the Conversion Agent, the Issuer or the Trustee and (iv) pay any transfer or similar tax, if required. A Holder may convert a portion of the 2023 Notes only if the principal amount of such portion is $1,000 or a multiple of $1,000. No payment or adjustment shall be made for dividends 22 on the Common Stock except as provided in the Indenture. On conversion of the 2023 Notes, that portion of accrued and unpaid interest attributable to the period from the Original Issue Date to the Conversion Date shall be deemed canceled, extinguished or forfeited rather than paid in full to the Holder thereof through the delivery of the Common Stock (together with any cash payment in lieu of fractional shares) in exchange for the portion of the 2023 Notes being converted pursuant to the terms hereof; and the Fair Market Value of such shares of Common Stock (together with any such cash payment in lieu of fractional shares) shall be treated as issued, to the extent thereof, first in exchange for interest accrued and unpaid through the Conversion Date, and the balance, if any, of such Fair Market Value of such Common Stock (and any such cash payment) shall be treated as issued in exchange for the principal amount of the 2023 Notes being converted pursuant to the provisions hereof. Notwithstanding the conversion of any 2023 Notes, the Holders of the 2023 Notes and any Common Stock issuable upon conversion thereof will continue to be entitled to receive Additional Amounts in accordance with the Registration Rights Agreement. If an Event of Default with respect to this 2023 Note shall occur and be continuing, the principal of this 2023 Note may be declared due and payable in the manner and with the effect provided in the Indenture. In any case where any Interest Payment Date, redemption date, repurchase date, Stated Maturity or Maturity of any 2023 Note shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of the Indenture or this 2023 Note) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date, repurchase date or at the Stated Maturity or Maturity; provided that no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, redemption date, repurchase date, Stated Maturity or Maturity, as the case may be, to such Business Day. The Trustee and the Paying Agent shall return to the Issuer upon written request any money or property held by them for the payment of any amount with respect to the 2023 Notes that remains unclaimed for two years, provided, however, that the Trustee or such Paying Agent, before being required to make any such return, shall at the expense of the Issuer cause to be published once in a newspaper of general circulation in The City of New York or mail to each such Holder notice that such money or property remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication or mailing, any unclaimed money or property then remaining shall be returned to the Issuer. After return to the Issuer, Holders entitled to the money or property must look to the Issuer for payment as general creditors unless an applicable abandoned property law designates another Person. The Indenture contains provisions for defeasance at any time of (i) the entire indebtedness of this 2023 Note or (ii) certain restrictive covenants and Events of Default with respect to this 2023 Note, in each case upon compliance with certain conditions set forth therein. 23 The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the rights of the Holders of all outstanding 2023 Notes under the Indenture at any time by the Issuer and the Trustee with the consent of the Holders of not less than a majority in principal amount of Securities of all series then outstanding and affected (voting as one class). The Indenture permits the Holders of not less than a majority in principal amount of Securities of all series at the time outstanding with respect to which a default shall have occurred and be continuing (voting as one class) to waive on behalf of the Holders of all outstanding Securities of such series any past default by the Issuer, provided that no such waiver may be made with respect to a default in the payment of the principal of or the interest on any Security of such series or the default by the Issuer in respect of certain covenants or provisions of the Indenture, the modification or amendment of which must be consented to by the Holder of each outstanding Security of each series affected. As set forth in, and subject to, the provisions of the Indenture, no Holder of any 2023 Note will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless such Holder shall have previously given to the Trustee written notice of a continuing Event of Default, the Holders of not less than 25% in principal amount of the outstanding Securities of each affected series (voting as one class) shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as trustee, and the Trustee shall not have received from the Holders of a majority in principal amount of the outstanding Securities of each affected series (voting as one class) a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days; provided, however, that such limitations do not apply to a suit instituted by the Holder hereof for the enforcement of payment of the principal of (and premium, if any) or any interest on this 2023 Note on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this 2023 Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and any premium and interest on this 2023 Note at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this 2023 Note is registrable in the Security Register, upon surrender of this 2023 Note for registration of transfer at the office or agency of the Issuer in any place where the principal of and any premium and interest on this 2023 Note are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new 2023 Notes of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The 2023 Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain 24 limitations therein set forth, 2023 Notes are exchangeable for a like aggregate principal amount of 2023 Notes and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. In the event of any redemption or purchase in part, the Issuer shall not be required to (i) issue, exchange or register the transfer of this 2023 Note for a period of 15 days next preceding the mailing of the notice of redemption of 2023 Notes or (ii) exchange or register the transfer of any 2023 Note or any portion thereof selected, called or being called for redemption, except in the case of any 2023 Note to be redeemed in part, the portion thereof not so to be redeemed. Prior to due presentment of this 2023 Note for registration of transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Person in whose name this 2023 Note is registered as the owner hereof for all purposes, whether or not this 2023 Note be overdue, and neither the Issuer, the Trustee nor any such agent shall be affected by notice to the contrary. The Issuer will be responsible for making all calculations called for under the 2023 Notes. These calculations include, but are not limited to, determination of the market prices for the Common Stock, accrued interest payable on the 2023 Notes and Conversion Price of the 2023 Notes. The Issuer will make these calculations in good faith and, absent manifest error, these calculations will be final and binding on the Holders. The Issuer will provide to each of the Trustee and the Conversion Agent a schedule of its calculations, and each of the Trustee and the Conversion Agent is entitled to rely upon the accuracy of such calculations without independent verification. The Trustee will forward the Issuer's calculations to any Holder upon the request of such Holder. All terms used in this 2023 Note without definition which are defined in the Indenture shall have the meanings assigned to them in the Indenture. FORM OF CONVERSION NOTICE To: CMS Energy Corporation The undersigned registered holder of this 2023 Note hereby exercises the option to convert this 2023 Note, or portion hereof (which is $1,000 principal amount or an integral multiple thereof) designated below, for shares of Common Stock of CMS Energy Corporation in accordance with the terms of the Indenture referred to in this 2023 Note, and directs that the shares, if any, issuable and deliverable upon such conversion, together with any check for cash deliverable upon such conversion, and any 2023 Notes representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of this 2023 Note not converted are to be 25 issued in the name of a Person other than the undersigned, the undersigned shall pay all transfer taxes payable with respect thereto. This notice shall be deemed to be an irrevocable exercise of the option to convert this 2023 Note. Dated: _______________________________ _______________________________ Signature(s) Signature(s) must be guaranteed by a commercial bank or trust company or a member firm of a major stock exchange if shares of Common Stock are to be issued, or 2023 Notes to be delivered, other than to or in the name of the registered holder. _______________________________ Signature Guarantee Fill in for registration of shares if to be delivered, and 2023 Notes if to be issued other than to and in the name of registered holder: __________________________ Principal amount to be purchased (Name) (if less than all): __________________________ (Street Address) $______,000 __________________________ (City, state and zip code) Social Security or other taxpayer number Please print name and address SECTION 2.05. Form of Trustee's Certificate of Authentication. The Trustee's certificates of authentication shall be in substantially the following form: This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture. BANK ONE TRUST COMPANY, N.A., as Trustee By__________________________ Authorized Officer 26 ARTICLE III PURCHASE UPON A FUNDAMENTAL CHANGE SECTION 3.01. Purchase at the Option of the Holder Upon a Fundamental Change. If a Fundamental Change shall occur at any time prior to July 15, 2008, each Holder shall have the right, at such Holder's option, to require the Issuer to purchase any or all of such Holder's 2023 Notes for cash or a check on the date that is no earlier than 60 days nor later than 90 days after the date of the Issuer Notice of the occurrence of such Fundamental Change (subject to extension to comply with applicable law, as provided in Section 5.04) (the "Fundamental Change Purchase Date"). The 2023 Notes shall be repurchased in integral multiples of $1,000 of the principal amount. The Issuer shall purchase such 2023 Notes at a price (the "Fundamental Change Purchase Price") equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, including Additional Amounts, if any, to the Fundamental Change Purchase Date. No 2023 Notes may be purchased at the option of the Holders upon a Fundamental Change if there has occurred and is continuing an Event of Default (other than an Event of Default that is cured by the payment of the Fundamental Change Purchase Price of the 2023 Notes). SECTION 3.02. Notice of Fundamental Change. The Issuer, or at its request (which must be received by the Paying Agent at least three Business Days (or such lesser period as agreed to by the Paying Agent) prior to the date the Paying Agent is requested to give such notice as described below), the Paying Agent, in the name of and at the expense of the Issuer, shall mail to all Holders and the Trustee and the Paying Agent an Issuer Notice of the occurrence of a Fundamental Change and of the purchase right arising as a result thereof, including the information required by Section 5.01 hereof, on or before the 30th day after the occurrence of such Fundamental Change. SECTION 3.03. Exercise of Option. For a 2023 Note to be so purchased at the option of the Holder, the Paying Agent must receive such 2023 Note duly endorsed for transfer, together with a written notice of purchase in the form attached hereto as Exhibit A (a "Fundamental Change Purchase Notice") and the form entitled "Form of Fundamental Change Purchase Notice" on the reverse thereof duly completed, on or before the 30th day prior to the occurrence of such Fundamental Change, subject to extension to comply with applicable law. The Fundamental Change Purchase Notice shall state: (a) if certificated, the certificate numbers of the 2023 Notes which the Holder shall deliver to be purchased, or, if not certificated, the Fundamental Change Purchase Notice must comply with appropriate Depositary procedures; (b) the portion of the principal amount of the 2023 Notes which the Holder shall deliver to be purchased, which portion must be $1,000 in principal amount or an integral multiple thereof; and 27 (c) that such 2023 Notes shall be purchased as of the Fundamental Change Purchase Date pursuant to the terms and conditions specified in the 2023 Notes and in this Thirteenth Supplemental Indenture. SECTION 3.04. Procedures. The Issuer shall purchase from a Holder, pursuant to this Article III, 2023 Notes if the principal amount of such 2023 Notes is $1,000 or a multiple of $1,000 if so requested by such Holder. Any purchase by the Issuer contemplated pursuant to the provisions of this Article III shall be consummated by the delivery of the Fundamental Change Purchase Price to be received by the Holder promptly following the later of the Fundamental Change Purchase Date or the time of book-entry transfer or delivery of the 2023 Notes. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Fundamental Change Purchase Notice contemplated by Section 3.03 hereof shall have the right at any time prior to the close of business on the Business Day prior to the Fundamental Change Purchase Date to withdraw such Fundamental Change Purchase Notice (in whole or in part) by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 5.02 hereof. The Paying Agent shall promptly notify the Issuer of the receipt by it of any Fundamental Change Purchase Notice or written notice of withdrawal thereof. On or before 10:00 a.m. (New York City time) on the Fundamental Change Purchase Date, the Issuer shall deposit with the Paying Agent (or if the Issuer or an Affiliate of the Issuer is acting as the Paying Agent, shall segregate and hold in trust) money sufficient to pay the aggregate Fundamental Change Purchase Price of the 2023 Notes to be purchased pursuant to this Article III. Payment by the Paying Agent of the Fundamental Change Purchase Price for such 2023 Notes shall be made promptly following the later of the Fundamental Change Purchase Date or the time of book-entry transfer or delivery of such 2023 Notes. If the Paying Agent holds, in accordance with the terms of the Indenture, money sufficient to pay the Fundamental Change Purchase Price of such 2023 Notes on the Business Day following the Fundamental Change Purchase Date, then, on and after such date, such 2023 Notes shall cease to be outstanding and interest (including Additional Amounts, if any) on such 2023 Notes shall cease to accrue, whether or not book-entry transfer of such 2023 Notes is made or such 2023 Notes are delivered to the Paying Agent, and all other rights of the Holder shall terminate (other than the right to receive the Fundamental Change Purchase Price upon delivery or transfer of the 2023 Notes). Nothing herein shall preclude any withholding tax required by law. The Issuer shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of the Fundamental Change Purchase Price and shall notify the Trustee of any default by the Issuer in making any such payment. If the Issuer or an Affiliate of the Issuer acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Issuer at any time may require a Paying Agent to deliver all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. 28 Upon doing so, the Paying Agent shall have no further liability for the cash delivered to the Trustee. All questions as to the validity, eligibility (including time of receipt) and acceptance of any 2023 Notes for redemption shall be determined by the Issuer, whose determination shall be final and binding. ARTICLE IV OPTIONAL PURCHASE SECTION 4.01 Purchase of 2023 Notes by the Issuer at the Option of the Holder. (a) On each of July 15, 2008, July 15, 2013 and July 15, 2018 (each, a "Purchase Date"), Holders shall have the option to require the Issuer to purchase any 2023 Notes at the Purchase Price specified in the 2023 Notes, upon: (i) delivery to the Paying Agent by the Holder of a written notice of purchase in the form attached hereto as Exhibit B (a "Purchase Notice") at any time from the opening of business on the date that is 20 Business Days prior to a Purchase Date until the close of business on the fifth Business Day prior to such Purchase Date, stating: (A) if certificated, the certificate numbers of the 2023 Notes which the Holder will deliver to be purchased, or, if not certificated, the Purchase Notice must comply with appropriate Depositary procedures; (B) the portion of the principal amount of the 2023 Notes which the Holder will deliver to be purchased, which portion must be $1,000 in principal amount or an integral multiple thereof; and (C) that such 2023 Notes shall be purchased as of the Purchase Date pursuant to the terms and conditions specified in the 2023 Notes and in this Thirteenth Supplemental Indenture; and (ii) delivery or book-entry transfer of such 2023 Notes to the Paying Agent prior to, on or after the Purchase Date (together with all necessary endorsements) at the offices of the Paying Agent, such delivery or transfer being a condition to receipt by the Holder of the Purchase Price therefor; provided, however, that such Purchase Price shall be so paid pursuant to this Section 4.01 only if the 2023 Notes so delivered or transferred to the Paying Agent shall conform in all respects to the description thereof in the related Purchase Notice. (b) The Issuer shall purchase from a Holder, pursuant to the terms of this Section 4.01, 2023 Notes if the principal amount of such 2023 Notes is $1,000 or a multiple of $1,000 if so requested by such Holder. 29 (c) Any purchase by the Issuer contemplated pursuant to the provisions of this Section 4.01 shall be consummated by the delivery of the Purchase Price to be received by the Holder promptly following the later of the Purchase Date or the time of book-entry transfer or delivery of the 2023 Notes. (d) Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Purchase Notice contemplated by this Section 4.01 shall have the right at any time prior to the close of business on the Business Day prior to the Purchase Date to withdraw such Purchase Notice (in whole or in part) by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 5.02 hereof. (e) The Paying Agent shall promptly notify the Issuer of the receipt by it of any Purchase Notice or written notice of withdrawal thereof. (f) On or before 10:00 a.m. (New York City time) on the Purchase Date, the Issuer shall deposit with the Paying Agent (or if the Issuer or an Affiliate of the Issuer is acting as the Paying Agent, shall segregate and hold in trust) money sufficient to pay the aggregate Purchase Price of the 2023 Notes to be purchased pursuant to this Section 4.01. Payment by the Paying Agent of the Purchase Price for such Notes shall be made promptly following the later of the Purchase Date or the time of book-entry transfer or delivery of such 2023 Notes. If the Paying Agent holds, in accordance with the terms of the Indenture, money sufficient to pay the Purchase Price of such 2023 Notes on the Business Day following the Purchase Date, then, on and after such date, such 2023 Notes shall cease to be outstanding and interest (including Additional Amounts, if any) on such 2023 Notes shall cease to accrue, whether or not book-entry transfer of such 2023 Notes is made or such 2023 Notes are delivered to the Paying Agent, and all other rights of the Holder shall terminate (other than the right to receive the Purchase Price upon delivery or transfer of the 2023 Notes). (g) The Issuer shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of the Purchase Price and shall notify the Trustee of any default by the Issuer in making any such payment. If the Issuer or an Affiliate of the Issuer acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Issuer at any time may require a Paying Agent to deliver all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon doing so, the Paying Agent shall have no further liability for the cash delivered to the Trustee. ARTICLE V CONDITIONS AND PROCEDURES FOR PURCHASES AT OPTION OF HOLDERS SECTION 5.01. Notice of Purchase Date or Fundamental Change. The Issuer shall send notices (each, an "Issuer Notice") to the Holders (and to beneficial owners as required by applicable law) at their addresses shown in the Security Register maintained by the Security 30 Registrar, and delivered to the Trustee and Paying Agent, not less than 20 Business Days prior to each Purchase Date, or on or before the 30th day after the occurrence of the Fundamental Change, as the case may be (each such date of delivery, an "Issuer Notice Date"). Each Issuer Notice shall include a form of Purchase Notice or Fundamental Change Purchase Notice to be completed by a Holder and shall state: (a) the applicable Purchase Price or Fundamental Change Purchase Price, excluding accrued and unpaid interest, Conversion Rate at the time of such notice (and any adjustments to the Conversion Rate) and, to the extent known at the time of such notice, the amount of interest (including Additional Amounts, if any), if any, that will be payable with respect to the 2023 Notes on the applicable Purchase Date or Fundamental Change Purchase Date; (b) if the notice relates to a Fundamental Change, the events causing the Fundamental Change and the date of the Fundamental Change; (c) the Purchase Date or Fundamental Change Purchase Date; (d) the last date on which a Holder may exercise its purchase right; (e) the name and address of the Paying Agent and the Conversion Agent; (f) that 2023 Notes must be surrendered to the Paying Agent to collect payment of the Purchase Price or Fundamental Change Purchase Price; (g) that 2023 Notes as to which a Purchase Notice or Fundamental Change Purchase Notice has been given may be converted only if the applicable Purchase Notice or Fundamental Change Purchase Notice has been withdrawn in accordance with the terms of this Thirteenth Supplemental Indenture; (h) that the Purchase Price or Fundamental Change Purchase Price for any 2023 Notes as to which a Purchase Notice or a Fundamental Change Purchase Notice, as applicable, has been given and not withdrawn shall be paid by the Paying Agent promptly following the later of the Purchase Date or Fundamental Change Purchase Date, as applicable, or the time of book-entry transfer or delivery of such 2023 Notes; (i) the procedures the Holder must follow under Article III or Article IV hereof, as applicable, and Article V hereof; (j) briefly, the conversion rights of the 2023 Notes; (k) that, unless the Issuer defaults in making payment of such Purchase Price or Fundamental Change Purchase Price on 2023 Notes covered by any Purchase Notice or Fundamental Change Purchase Notice, as applicable, interest (including Additional Amounts, if any) will cease to accrue on and after the Purchase Date or Fundamental Change Purchase Date, as applicable; 31 (l) the CUSIP or ISIN number of the 2023 Notes; and (m) the procedures for withdrawing a Purchase Notice or Fundamental Change Purchase Notice. In connection with providing such Issuer Notice, the Issuer will issue a press release and publish a notice containing the information in such Issuer Notice in a newspaper of general circulation in The City of New York or publish such information on the Issuer's then existing Web site or through such other public medium as the Issuer may use at the time. At the Issuer's request, made at least five Business Days prior to the date upon which such notice is to be mailed, and at the Issuer's expense, the Paying Agent shall give the Issuer Notice in the Issuer's name; provided, however, that, in all cases, the text of the Issuer Notice shall be prepared by the Issuer. SECTION 5.02. Effect of Purchase Notice or Fundamental Change Purchase Notice; Effect of Event of Default. Upon receipt by the Issuer of the Purchase Notice or Fundamental Change Purchase Notice specified in Section 4.01 or Section 3.03 hereof, as applicable, the Holder of the 2023 Notes in respect of which such Purchase Notice or Fundamental Change Purchase Notice, as the case may be, was given shall (unless such Purchase Notice or Fundamental Change Purchase Notice is withdrawn as specified in the following two paragraphs) thereafter be entitled to receive solely the Purchase Price or Fundamental Change Purchase Price with respect to such 2023 Notes. Such Purchase Price or Fundamental Change Purchase Price shall be paid by the Paying Agent to such Holder promptly following the later of (x) the Purchase Date or the Fundamental Change Purchase Date, as the case may be, with respect to such 2023 Notes (provided the conditions in Section 4.01 or Section 3.03 hereof, as applicable, have been satisfied) and (y) the time of delivery or book-entry transfer of such 2023 Notes to the Paying Agent by the Holder thereof in the manner required by Section 4.01 or Section 3.03 hereof, as applicable. 2023 Notes in respect of which a Purchase Notice or Fundamental Change Purchase Notice, as the case may be, has been given by the Holder thereof may not be converted for shares of Common Stock on or after the date of the delivery of such Purchase Notice or Fundamental Change Purchase Notice, as the case may be, unless such Purchase Notice or Fundamental Change Purchase Notice, as the case may be, has first been validly withdrawn as specified in the following two paragraphs. A Purchase Notice or Fundamental Change Purchase Notice, as the case may be, may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent at any time prior to 5:00 p.m. New York City time on the Business Day prior to the Purchase Date or the Fundamental Change Purchase Date, as the case may be, to which it relates specifying: (a) if certificated, the certificate number of the 2023 Notes in respect of which such notice of withdrawal is being submitted, or, if not certificated, the written notice of withdrawal must comply with appropriate Depositary procedures; 32 (b) the principal amount of the 2023 Notes with respect to which such notice of withdrawal is being submitted; and (c) the principal amount, if any, of such 2023 Notes which remains subject to the original Purchase Notice or Fundamental Change Purchase Notice, as the case may be, and which has been or shall be delivered for purchase by the Issuer. There shall be no purchase of any 2023 Notes pursuant to Article III or Article IV hereof if an Event of Default has occurred and is continuing (other than a default that is cured by the payment of the Purchase Price or Fundamental Change Purchase Price, as the case may be). The Paying Agent shall promptly return to the respective Holders thereof any 2023 Notes (x) with respect to which a Purchase Notice or Fundamental Change Purchase Notice, as the case may be, has been withdrawn in compliance with this Thirteenth Supplemental Indenture, or (y) held by it during the continuance of an Event of Default (other than a default that is cured by the payment of the Purchase Price or Fundamental Change Purchase Price, as the case may be) in which case, upon such return, the Purchase Notice or Fundamental Change Purchase Notice with respect thereto shall be deemed to have been withdrawn. SECTION 5.03. 2023 Notes Purchased in Part. Any 2023 Notes that are to be purchased only in part shall be surrendered at the office of the Paying Agent (with, if the Issuer or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Issuer and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Issuer shall execute and the Trustee or the Authenticating Agent shall authenticate and deliver to the Holder of such 2023 Notes, without service charge, a new 2023 Note or 2023 Notes, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the 2023 Notes so surrendered which is not purchased or redeemed. SECTION 5.04. Covenant to Comply with Securities Laws Upon Purchase of 2023 Notes. In connection with any offer to purchase 2023 Notes under Article III or Article IV hereof, the Issuer shall, to the extent applicable: (a) comply with Rules 13e-4 and 14e-1 (and any successor provisions thereto) under the Exchange Act, if applicable; (b) file the related Schedule TO (or any successor schedule, form or report) under the Exchange Act, if applicable; and (c) otherwise comply with all applicable federal and state securities laws so as to permit the rights and obligations under Article III or Article IV hereof to be exercised in the time and in the manner specified in Article III or Article IV hereof. SECTION 5.05. Repayment to the Issuer. The Trustee and the Paying Agent shall return to the Issuer any cash or property that remains unclaimed as provided in the 2023 Notes, together with interest that the Trustee or Paying Agent, as the case may be, has agreed to pay, if any, held by them for the payment of a Purchase Price or Fundamental Change Purchase Price, as the case may be; provided, however, that to the extent that the aggregate amount of cash or property deposited by the Issuer pursuant to Section 4.01(f) or Section 3.04 hereof, as applicable, exceeds the aggregate Purchase Price or Fundamental Change Purchase Price, as the case may be, of the 2023 Notes or portions thereof which the Issuer is obligated to purchase as of the Purchase Date or Fundamental Change Purchase Date, as the case may be, then promptly on and after the 33 Business Day following the Purchase Date or Fundamental Change Purchase Date, as the case may be, the Trustee and the Paying Agent shall return any such excess to the Issuer together with interest that the Trustee or Paying Agent, as the case may be, has agreed to pay, if any. SECTION 5.06. Officers' Certificate. At least five Business Days before the Issuer Notice Date, the Issuer shall deliver an Officers' Certificate to the Trustee (provided, that, at the Issuer's option, the matters to be addressed in such Officers' Certificate may be divided among two such certificates) specifying: (a) the manner of payment selected by the Issuer; and (b) whether the Issuer desires the Trustee to give the Issuer Notice required by Section 5.01 hereof. ARTICLE VI CONVERSION OF 2023 NOTES SECTION 6.01. Right to Convert. A Holder may convert its 2023 Notes for Common Stock at any time during which the conditions stated in the 2023 Notes are met. The number of shares of Common Stock issuable upon conversion of a 2023 Note per $1,000 principal amount (the "Conversion Rate") shall be that set forth in the 2023 Notes, subject to adjustment as herein set forth. The initial Conversion Rate is 93.7137 shares of Common Stock issuable upon conversion of a 2023 Note per $1,000 principal amount. A Holder may convert a portion of the principal amount of 2023 Notes if the portion is $1,000 or a multiple of $1,000. SECTION 6.02. Conversion Procedures. To convert 2023 Notes, a Holder must satisfy the requirements in this Section 6.02 and in the 2023 Notes. The date on which the Holder satisfies all those requirements is the conversion date (the "Conversion Date"). As soon as practicable, but in no event later than the fifth Business Day following the Conversion Date, the Issuer shall deliver to the Holder, through the Conversion Agent, a certificate for the number of full shares of Common Stock issuable upon the conversion and cash or a check in lieu of any fractional share determined pursuant to Section 6.03 hereof. The Person in whose name the certificate is registered shall be treated as a stockholder of record on and after the Conversion Date; provided, however, that no surrender of 2023 Notes on any date when the stock transfer books of the Issuer shall be closed shall be effective to constitute the Person or Persons entitled to receive the shares of Common Stock upon such conversion as the record holder or holders of such shares of Common Stock on such date, but such surrender shall be effective to constitute the Person or Persons entitled to receive such shares of Common Stock as the record holder or holders thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open; such conversion shall be at the Conversion Rate in effect on the date that such 2023 Notes shall have been surrendered for conversion, as if the stock transfer books of the Issuer had not been closed. Upon conversion of 2023 Notes, such Person shall no longer be a Holder of such 2023 Notes. 34 No payment or adjustment shall be made for dividends on or other distributions with respect to any Common Stock except as provided in Section 6.06 hereof or as otherwise provided in this Indenture. On conversion of 2023 Notes, that portion of accrued interest with respect to the converted 2023 Notes shall not be canceled, extinguished or forfeited, but rather shall be deemed to be paid in full to the Holder thereof through delivery of the Common Stock (together with the cash or check payment, if any, in lieu of fractional shares) in exchange for the 2023 Notes being converted pursuant to the provisions hereof, and the Fair Market Value of such shares of Common Stock (together with any such cash or check payment in lieu of fractional shares) shall be treated as issued, to the extent thereof, first in exchange for interest accrued and unpaid through the Conversion Date, and the balance, if any, of such Fair Market Value of such Common Stock (and any such cash or check payment) shall be treated as issued in exchange for the principal amount of the 2023 Notes being converted pursuant to the provisions hereof. Notwithstanding conversion of any 2023 Notes, the Holders of the 2023 Notes and any Common Stock issuable upon conversion thereof will continue to be entitled to receive Additional Amounts in accordance with the Registration Rights Agreement. If a Holder converts more than one 2023 Note at the same time, the number of shares of Common Stock issuable upon the conversion shall be based on the total principal amount of the 2023 Notes converted. Upon surrender of a 2023 Note that is converted in part, the Issuer shall execute, and the Trustee or the Authenticating Agent shall authenticate and deliver to the Holder, a new 2023 Note in an authorized denomination equal in principal amount to the unconverted portion of the 2023 Note surrendered. If the last day on which 2023 Notes may be converted is a legal holiday in a place where a Conversion Agent is located, the 2023 Notes may be surrendered to that Conversion Agent on the next succeeding day that it is not a legal holiday. SECTION 6.03. Cash or Check Payments in Lieu of Fractional Shares. The Issuer shall not issue a fractional share of Common Stock upon conversion of 2023 Notes. Instead the Issuer shall deliver cash (or Issuer's check) for the current market value of the fractional share. The current market value of a fractional share shall be determined to the nearest 1/10,000th of a share by multiplying the Last Reported Sale Price of a full share of Common Stock on the Trading Day immediately preceding the Conversion Date by the fractional amount and rounding the product to the nearest whole cent. SECTION 6.04. Taxes on Conversion. If a Holder converts 2023 Notes, the Issuer shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the Holder shall pay any such tax which is due because the Holder requests the shares to be issued in a name other than the Holder's name. The Conversion Agent may refuse to deliver the certificates representing the Common Stock being issued in a name other than the Holder's name until the Conversion Agent receives a sum 35 sufficient to pay any tax which shall be due because the shares are to be issued in a name other than the Holder's name. Nothing herein shall preclude any withholding tax required by law. SECTION 6.05. Covenants of the Issuer. The Issuer shall, prior to issuance of any 2023 Notes hereunder, and from time to time as may be necessary, reserve out of its authorized but unissued Common Stock a sufficient number of shares of Common Stock to permit the conversion of the 2023 Notes. All shares of Common Stock delivered upon conversion of the 2023 Notes shall be newly issued shares or treasury shares, shall be duly and validly issued and fully paid and nonassessable and shall be free from preemptive rights and free of any lien or adverse claim. The Issuer shall endeavor promptly to comply with all federal and state securities laws regulating the order and delivery of shares of Common Stock upon the conversion of 2023 Notes, if any, and shall cause to have listed or quoted all such shares of Common Stock on each United States national securities exchange or over-the-counter or other domestic market on which the Common Stock is then listed or quoted. SECTION 6.06. Adjustments to Conversion Rate. The Conversion Rate shall be adjusted from time to time, without duplication, as follows: (a) In case the Issuer shall: (i) pay a dividend, or make a distribution, exclusively in shares of its capital stock, on the Common Stock; (ii) subdivide its outstanding Common Stock into a greater number of shares; (iii) combine its outstanding Common Stock into a smaller number of shares; or (iv) reclassify its Common Stock, the Conversion Rate in effect immediately prior to the record date or effective date, as the case may be, for the adjustment pursuant to this Section 6.06(a) as described below, shall be adjusted so that the Holder of any 2023 Notes thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock of the Issuer which such Holder would have owned or have been entitled to receive after the happening of any of the events described above had such 2023 Notes been converted immediately prior to such record date or effective date, as the case may be. An adjustment made pursuant to this Section 6.06(a) shall become effective immediately after the applicable record date in the case of a dividend or distribution and shall become effective immediately after the applicable effective date in the case of subdivision, combination or reclassification of the Issuer's Common Stock. If any dividend or distribution of the type described in clause (i) above is not so paid or made, the Conversion Rate shall again be adjusted to the Conversion Rate which would then be in effect if such dividend or distribution had not been declared. (b) In case the Issuer shall issue rights or warrants to all holders of the Common Stock entitling them (for a period expiring within 60 days after the date of issuance of such rights or warrants) to subscribe for or purchase Common Stock at a price per share less than the Market Price per share of Common Stock on the record date fixed for determination of shareholders entitled to receive such rights or warrants, the Conversion Rate in effect 36 immediately after such record date shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately after such record date by a fraction of which (i) the numerator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered for subscription or purchase, and (ii) the denominator shall be the number of shares of Common Stock outstanding on such record date plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at the Market Price per share of Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex date for such issuance of rights or warrants. Such adjustment shall be made successively whenever any such rights or warrants are issued, and shall become effective immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Rate shall be readjusted to the Conversion Rate which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. If such rights or warrants are not so issued, the Conversion Rate shall again be adjusted to be the Conversion Rate which would then be in effect if such record date for the determination of shareholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Issuer for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (c) In case the Issuer shall, by dividend or otherwise, distribute to all holders of Common Stock any assets, debt securities or rights or warrants to purchase any of its securities (excluding (i) any dividend, distribution or issuance covered by those referred to in Section 6.06(a) or Section 6.06(b) hereof and (ii) any dividend or distribution paid exclusively in cash) (any of the foregoing hereinafter in this Section 6.06(c) called the "Distributed Assets or Securities") in an aggregate amount per share of Common Stock that, combined together with the aggregate amount of any other such distributions to all holders of its Common Stock made within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 6.06(c) has been made, exceeds 15% of the Market Price on the Trading Day immediately preceding the declaration of such distribution, then the Conversion Rate shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately prior to the close of business on the record date mentioned below by a fraction of which (A) the numerator shall be the Market Price per share of the Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex date for such dividend or distribution, and (B) the denominator shall be (1) the Market Price per share of the Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex date for such dividend or distribution less (2) the Fair Market Value on the earlier of such record date or the Trading Day immediately preceding the ex date for such dividend or distribution (as determined by the Board of Directors, whose determination shall be conclusive, and described in a certificate filed with the Trustee and the Paying Agent) of the Distributed 37 Assets or Securities so distributed applicable to one share of Common Stock. Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution; provided, however, that, if (i) the Fair Market Value of the portion of the Distributed Assets or Securities so distributed applicable to one share of Common Stock is equal to or greater than the Market Price of the Common Stock on the record date for the determination of shareholders entitled to receive such distribution or (ii) the Market Price of the Common Stock on the record date for the determination of shareholders entitled to receive such distribution is greater than the Fair Market Value per share of such Distributed Assets or Securities by less than $1.00, then, in lieu of the foregoing adjustment, adequate provision shall be made so that each Holder shall have the right to receive upon conversion, in addition to the shares of Common Stock, the kind and amount of assets, debt securities, or rights or warrants comprising the Distributed Assets or Securities the Holder would have received had such Holder converted such 2023 Notes immediately prior to the record date for the determination of shareholders entitled to receive such distribution. In the event that such distribution is not so paid or made, the Conversion Rate shall again be adjusted to the Conversion Rate which would then be in effect if such distribution had not been declared. (d) In case the Issuer shall make (i) any distributions, by dividend or otherwise, during any quarterly fiscal periods consisting exclusively of cash to all holders of outstanding shares of Common Stock in an aggregate amount that, together with (ii) other all-cash or all-check distributions made to all holders of outstanding shares of Common Stock during such quarterly fiscal period, and (iii) any cash and the Fair Market Value, as of the expiration of any tender or exchange offer (other than consideration payable in respect of any odd-lot tender offer) of consideration payable in respect of any tender or exchange offer by the Issuer or any of the Issuer's Subsidiaries for all or any portion of shares of Common Stock concluded during such quarterly fiscal period, exceed the product of $0 multiplied by the number of shares of Common Stock outstanding on the record date for such distribution, then, and in each such case, the Conversion Rate shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive such distribution by a fraction of which (A) the numerator shall be the Market Price per share of the Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex date for such dividend or distribution and (B) the denominator shall be (1) the Market Price per share of Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex date for such dividend or distribution plus (2) $0 less (3) an amount equal to the quotient of (x) the combined amount distributed or payable in the transactions described in clauses (i), (ii) and (iii) above during such quarterly fiscal period and (y) the number of shares of Common Stock outstanding on such record date, such adjustment to become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. (e) With respect to Section 6.06(c) hereof, in the event that the Issuer makes any distribution to all holders of Common Stock consisting of Equity Interests in a Subsidiary or other business unit of the Issuer, the Conversion Rate shall be adjusted so that the 38 same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive such distribution by a fraction of which (i) the numerator shall be (x) the Spin-off Market Price per share of the Common Stock on such record date plus (y) the Spin-off Market Price per Equity Interest of the Subsidiary or other business unit of the Issuer on such record date and (ii) the denominator shall be the Spin-off Market Price per share of the Common Stock on such record date, such adjustment to become effective 10 Trading Days after the effective date of such distribution of Equity Interests in a Subsidiary or other business unit of the Issuer. (f) Upon conversion of the 2023 Notes, the Holders shall receive, in addition to the Common Stock issuable upon such conversion, the rights issued under any future shareholder rights plan the Issuer implements (notwithstanding the occurrence of an event causing such rights to separate from the Common Stock at or prior to the time of conversion) unless, prior to conversion, the rights have expired, terminated or been redeemed or exchanged in accordance with such rights plan. If, and only if, the Holders of 2023 Notes receive rights under such shareholder rights plans as described in the preceding sentence upon conversion of their 2023 Notes, then no other adjustment pursuant to this Section 6.06 shall be made in connection with such shareholder rights plans. (g) For purposes of this Section 6.06, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Issuer but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Issuer shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Issuer. (h) Notwithstanding the foregoing, in no event shall the Conversion Rate exceed the maximum conversion rate specified under this Section 6.06(h) (the "Maximum Conversion Rate") as a result of an adjustment pursuant to Section 6.06(c) and Section 6.06(d) hereof. The Maximum Conversion Rate shall initially be 138.6963 and shall be appropriately adjusted from time to time for any stock dividends on or subdivisions or combinations of the Common Stock. The Maximum Conversion Rate shall not apply to any adjustments made pursuant to any of the events in Section 6.06(a) or Section 6.06(b) hereof. SECTION 6.07. Calculation Methodology. No adjustment in the Conversion Price need be made unless the adjustment would require an increase or decrease of at least 1% in the Conversion Price then in effect, provided that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. Except as stated in this Article VI, the Conversion Rate will not be adjusted for the issuance of Common Stock or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing. Any adjustments that are made shall be carried forward and taken into account in any subsequent adjustment. All calculations under Article V and Section 6.06 hereof and this Section 6.07 shall be made to the nearest cent or to the nearest 1/10,000th of a share, as the case may be. 39 SECTION 6.08. When No Adjustment Required. No adjustment to the Conversion Rate need be made: (a) upon the issuance of any shares of Common Stock pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on securities of the Issuer and the investment of additional optional amounts in shares of Common Stock under any plan; (b) upon the issuance of any shares of Common Stock or options or rights to purchase those shares pursuant to any present or future employee, director or consultant benefit plan or program of or assumed by the Issuer or any of its Subsidiaries; (c) upon the issuance of any shares of Common Stock pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security not described in clause (b) above and outstanding as of the date of this Thirteenth Supplemental Indenture; (d) for a change in the par value or no par value of the Common Stock; (e) for accrued and unpaid interest (including Additional Amounts, if any); or (f) if Holders are to participate in a merger or consolidation on a basis and with notice that the Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction; provided that the basis on which the Holders are to participate in the transaction shall not be deemed to be fair if it would require the conversion of Securities at any time prior to the expiration of the conversion period specified for such Securities. To the extent the 2023 Notes become convertible into cash, assets, or property (other than capital stock of the Issuer or securities to which Section 6.12 hereof applies), no adjustment shall be made thereafter as to the cash, assets or property. Interest shall not accrue on such cash. SECTION 6.09. Notice of Adjustment. Whenever the Conversion Rate is adjusted, the Issuer shall promptly mail to Holders a notice of the adjustment. The Issuer shall file with the Trustee and the Conversion Agent such notice. The certificate shall, absent manifest error, be conclusive evidence that the adjustment is correct. Neither the Trustee nor any Conversion Agent shall be under any duty or responsibility with respect to any such certificate except to exhibit the same to any Holder desiring inspection thereof. SECTION 6.10. Voluntary Increase. The Issuer may make such increases in the Conversion Rate, in addition to those required by Section 6.06 hereof, as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Issuer may from time to time increase the Conversion Rate by any amount, temporarily or otherwise, for any period of at least 20 days if the increase is irrevocable during the period and the Board of Directors shall have made a determination that 40 such increase would be in the best interests of the Issuer, which determination shall be conclusive. Whenever the Conversion Rate is so increased, the Issuer shall mail to Holders and file with the Trustee and the Conversion Agent a notice of such increase. Neither the Trustee nor any Conversion Agent shall be under any duty or responsibility with respect to any such notice except to exhibit the same to any holder desiring inspection thereof. The Issuer shall mail the notice at least 15 days before the date the increased Conversion Rate takes effect. The notice shall state the increased Conversion Rate and the period it shall be in effect. SECTION 6.11. Notice to Holders Prior to Certain Actions. In case: (a) the Issuer shall declare a dividend (or any other distribution) on its Common Stock that would require an adjustment in the Conversion Rate pursuant to Section 6.06 hereof; (b) the Issuer shall authorize the granting to all or substantially all the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; (c) of any reclassification or reorganization of the Common Stock of the Issuer (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Issuer is a party and for which approval of any shareholders of the Issuer is required, or of the sale or transfer of all or substantially all of the assets of the Issuer; or (d) of the voluntary or involuntary dissolution, liquidation or winding-up of the Issuer, the Issuer shall cause to be filed with the Trustee and to be mailed to each Holder at its address appearing on the Security Register, as promptly as possible but in any event at least 15 days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, or rights or warrants are to be determined or (y) the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. SECTION 6.12. Effect of Reclassification, Consolidation, Merger, Binding Share Exchange or Sale. If any of the following events occur, namely: (a) any reclassification or 41 change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); (b) any consolidation, merger, combination or binding share exchange of the Issuer with another Person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock; or (c) any sale or conveyance of the properties and assets of the Issuer as, or substantially as, an entirety to any other Person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Issuer or the successor or purchasing Person, as the case may be, shall execute with the Trustee a supplemental indenture to the Indenture, providing that each 2023 Note shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, binding share exchange, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such 2023 Note immediately prior to such reclassification, change, consolidation, merger, combination, binding share exchange, sale or conveyance. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6.12. The Issuer shall cause notice of the execution of such supplemental indenture to be mailed to each Holder, at its address appearing on the Security Register, within 20 days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section 6.12 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, binding share exchanges, sales and conveyances. If this Section 6.12 applies to any event or occurrence, Section 6.06 hereof shall not apply. SECTION 6.13. Responsibility of Trustee. The Trustee and any other Conversion Agent shall not at any time be under any duty or responsibility to any Holder to either calculate the Conversion Rate or determine whether any facts exist which may require any adjustment of the Conversion Rate, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same and shall be protected in relying upon an Officers' Certificate with respect to the same. The Trustee and any other Conversion Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any 2023 Notes and the Trustee and any other Conversion Agent make no representations with respect thereto. Subject to the provisions of Article Six of the Original Indenture, neither the Trustee nor any Conversion Agent shall be responsible for any failure of the Issuer to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any 2023 Notes for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Issuer contained in this 42 Section 6.13. Without limiting the generality of the foregoing, neither the Trustee nor any Conversion Agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Article VI hereof relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by Holders upon the conversion of their 2023 Notes after any event referred to in such Section 6.12 or to any adjustment to be made with respect thereto, but, subject to the provisions of Article Six of the Original Indenture, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers' Certificate (which the Issuer shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto. SECTION 6.14. Simultaneous Adjustments. In the event that Section 6.06 hereof requires adjustments to the Conversion Rate under more than one of Section 6.06(a), Section 6.06(b), Section 6.06(c) or Section 6.06(d) hereof, and the Record Dates for the distributions giving rise to such adjustments shall occur on the same date, then such adjustments shall be made by applying, first, the provisions of Section 6.06(c) hereof, second, the provisions of Section 6.06(a) hereof and third, the provisions of Section 6.06(b) hereof; provided, however, that nothing in this Section 6.14 shall be done to evade the principle set forth in Section 6.06(h) hereof that the Maximum Conversion Rate shall not apply to any adjustments made with respect to any of the events in Section 6.06(a) or Section 6.06(b) hereof. SECTION 6.15. Successive Adjustments. After an adjustment to the Conversion Rate under Section 6.06 hereof, any subsequent event requiring an adjustment under Section 6.06 shall cause an adjustment to the Conversion Rate as so adjusted. SECTION 6.16. General Considerations. Whenever successive adjustments to the Conversion Rate are called for pursuant to this Article VI, such adjustments shall be made to the Market Price as may be necessary or appropriate to effectuate the intent of this Article VI and to avoid unjust or inequitable results as determined in good faith by the Board of Directors. SECTION 6.17. Issuer Determination Final. Any determination which the Board of Directors must make pursuant to this Article VI shall be conclusive and binding on the Holders. SECTION 6.18. Conversion Provisions. Pursuant to Section 2.3(f)(10) of the Original Indenture, the obligation of the Issuer to permit the conversion of the 2023 Notes into Common Stock and the terms and conditions upon which such conversion shall be effected set forth in this Thirteenth Supplemental Indenture are in addition to and in lieu of those provisions set forth in Article Thirteen of the Original Indenture relative to such obligation. 43 ARTICLE VII ADDITIONAL COVENANTS OF THE ISSUER WITH RESPECT TO THE 2023 NOTES SECTION 7.01. Existence. So long as any of the 2023 Notes are outstanding, subject to Article 9 of the Original Indenture, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. SECTION 7.02. Limitation on Certain Liens. (a) So long as any of the 2023 Notes are outstanding, the Issuer shall not create, incur, assume or suffer to exist any lien, mortgage, pledge, security interest, conditional sale, title retention agreement or other charge or encumbrance of any kind, or any other type of arrangement intended or having the effect of conferring upon a creditor of the Issuer or any Subsidiary a preferential interest (hereinafter in this Section 7.02 referred to as a "Lien") upon or with respect to any of its property of any character, including without limitation any shares of Capital Stock of Consumers or Enterprises, without making effective provision whereby the 2023 Notes shall (so long as any such other creditor shall be so secured) be equally and ratably secured (along with any other creditor similarly entitled to be secured) by a direct Lien on all property subject to such Lien, provided, however, that the foregoing restrictions shall not apply to: (i) Liens for taxes, assessments or governmental charges or levies to the extent not past due; (ii) pledges or deposits to secure (A) obligations under workmen's compensation laws or similar legislation, (B) statutory obligations of the Issuer or (C) Support Obligations; (iii) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's Liens and other similar Liens arising in the ordinary course of business securing obligations which are not overdue or which have been fully bonded and are being contested in good faith; (iv) purchase money Liens upon or in property acquired and held by the Issuer in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness incurred solely for the purpose of financing the acquisition of any such property to be subject to such Liens, or Liens existing on any such property at the time of acquisition, or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided that no such Lien shall extend to or cover any property other than the property being acquired and no such extension, renewal or replacement shall extend to or cover property not theretofore subject to the Lien being extended, renewed or replaced, and provided, further, that the aggregate principal amount of the Indebtedness at any one time outstanding secured by Liens permitted by this clause (iv) shall not exceed $10,000,000; and 44 (v) Liens not otherwise permitted by clauses (i) through (iv) of this Section 7.02 securing Indebtedness of the Issuer; provided that on the date such Liens are created, and after giving effect to such Indebtedness, the aggregate principal amount at maturity of all of the secured Indebtedness of the Issuer at such date shall not exceed 5% of Consolidated Net Tangible Assets at such date. SECTION 7.03. Limitation on Consolidation, Merger, Sale or Conveyance. So long as any of the 2023 Notes are outstanding and until the 2023 Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization), at which time the Issuer will be permanently released from the provisions of this Section 7.03, and subject also to Article Nine of the Original Indenture, the Issuer shall not consolidate with or merge into any other Person or sell, lease or convey the property of the Issuer in the entirety or substantially as an entirety, unless (a) immediately after giving effect to such transaction the Consolidated Net Worth of the surviving entity is at least equal to the Consolidated Net Worth of the Issuer immediately prior to the transaction and (b) after giving effect to such transaction, the surviving entity would be entitled to incur at least one dollar of additional Indebtedness (other than revolving Indebtedness to banks) without violation of the limitations in Section 7.04 hereof. SECTION 7.04. Limitation on Consolidated Indebtedness. (a) So long as any of the 2023 Notes are outstanding and until the 2023 Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization), at which time the Issuer will be permanently released from the provisions of this Section 7.04, the Issuer shall not, and shall not permit any Consolidated Subsidiary of the Issuer to, issue, create, assume, guarantee, incur or otherwise become liable for (collectively, "issue"), directly or indirectly, any Indebtedness unless the Consolidated Coverage Ratio of the Issuer and its Consolidated Subsidiaries for the four consecutive fiscal quarters immediately preceding the issuance of such Indebtedness (as shown by a pro forma consolidated income statement of the Issuer and its Consolidated Subsidiaries for the four most recent fiscal quarters ending at least 30 days prior to the issuance of such Indebtedness after giving effect to (i) the issuance of such Indebtedness and (if applicable) the application of the net proceeds thereof to refinance other Indebtedness as if such Indebtedness was issued at the beginning of the period, (ii) the issuance and retirement of any other Indebtedness since the first day of the period as if such Indebtedness was issued or retired at the beginning of the period and (iii) the acquisition of any company or business acquired by the Issuer or any Subsidiary since the first day of the period (including giving effect to the pro forma historical earnings of such company or business), including any acquisition which will be consummated contemporaneously with the issuance of such Indebtedness, as if in each case such acquisition occurred at the beginning of the period) exceeds a ratio of 1.6 to 1.0. (b) Notwithstanding the foregoing paragraph, the Issuer or any Restricted Subsidiary may issue, directly or indirectly, the following Indebtedness: 45 (1) Indebtedness of the Issuer to banks not to exceed $1,000,000,000 in aggregate outstanding principal amount at any time; (2) Indebtedness (other than Indebtedness described in Section 7.04(b)(1) hereof) outstanding on the date of this Thirteenth Supplemental Indenture, as set forth on Schedule 7.04(b)(2) attached hereto and made a part hereof, and Indebtedness issued in exchange for, or the proceeds of which are used to refund or refinance, any Indebtedness permitted by this clause (2); provided, however, that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced, (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced and (C) if the Indebtedness to be exchanged, refunded or refinanced is subordinated to the 2023 Notes, the Indebtedness is subordinated to the 2023 Notes in right of payment; (3) Indebtedness of the Issuer owed to and held by a Subsidiary and Indebtedness of a Subsidiary owed to and held by the Issuer; provided, however, that, in the case of Indebtedness of the Issuer owed to and held by a Subsidiary, (i) any subsequent issuance or transfer of any Capital Stock that results in any such Subsidiary ceasing to be a Subsidiary or (ii) any transfer of such Indebtedness (except to the Issuer or a Subsidiary) shall be deemed for the purposes of this Section 7.04(b) to constitute the issuance of such Indebtedness by the Issuer; (4) Indebtedness of the Issuer issued in exchange for, or the proceeds of which are used to refund or refinance, Indebtedness of the Issuer issued in accordance with Section 7.04(a) hereof, provided that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced, (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced and (C) if the Indebtedness to be exchanged, refunded or refinanced is subordinated to the 2023 Notes, the Indebtedness so issued is subordinated to the 2023 Notes in right of payment; (5) Indebtedness of a Restricted Subsidiary issued in exchange for, or the proceeds of which are used to refund or refinance, Indebtedness of a Restricted Subsidiary issued in accordance with Section 7.04(a) hereof, provided that (i) the principal amount (or accreted value in the case of Indebtedness issued at a 46 discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced and (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced. (6) Indebtedness of a Consolidated Subsidiary issued to acquire, develop, improve, construct or to provide working capital for a gas, oil or electric generation, exploration, production, distribution, storage or transmission facility and related assets, provided that such Indebtedness is without recourse to any assets of the Issuer, Consumers, Enterprises, CMS Generation, CMS Electric and Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises Subsidiary; (7) Indebtedness of a Person existing at the time at which such Person became a Subsidiary and not incurred in connection with, or in contemplation of, such Person becoming a Subsidiary. Such Indebtedness shall be deemed to be incurred on the date the acquired Person becomes a Consolidated Subsidiary; (8) Indebtedness issued by the Issuer not to exceed $150,000,000 in aggregate principal amount at any time; and (9) Indebtedness of a Consolidated Subsidiary in respect of rate reduction bonds issued to recover electric restructuring transition costs of Consumers ,provided that such Indebtedness is without recourse to the assets of Consumers. SECTION 7.05. Limitation on Restricted Payments. (a) So long as the 2023 Notes are outstanding and until the 2023 Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization), at which time the Issuer will be permanently released from the provisions of this Section 7.05, the Issuer shall not, and shall not permit any Restricted Subsidiary of the Issuer, directly or indirectly, to (i) declare or pay any dividend or make any distribution on the Capital Stock of the Issuer to the direct or indirect holders of its Capital Stock (except dividends or distributions payable solely in its Non-Convertible Capital Stock or in options, warrants or other rights to purchase such Non-Convertible Capital Stock and except dividends or distributions payable to the Issuer or a Subsidiary), (ii) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Issuer or (iii) purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity or scheduled repayment thereof, any Subordinated Indebtedness (any such dividend, distribution, purchase, redemption, repurchase, defeasing, other acquisition or retirement being herein referred to as a "Restricted Payment") if at the time the Issuer or such Subsidiary makes such Restricted Payment: 47 (1) an Event of Default, or an event that with the lapse of time or the giving of notice or both would constitute an Event of Default, shall have occurred and be continuing (or would result therefrom); or (2) the aggregate amount of such Restricted Payment and all other Restricted Payments made since May 6, 1997 would exceed the sum of: (A) $100,000,000; (B) 100% of Consolidated Net Income, accrued during the period (treated as one accounting period) from May 6, 1997 to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such sum shall be a deficit, minus 100% of the deficit); and (C) the aggregate Net Cash Proceeds received by the Issuer from the issue or sale of or contribution with respect to its Capital Stock subsequent to May 6, 1997. For the purpose of determining the amount of any Restricted Payment not in the form of cash, the amount shall be the fair value of such Restricted Payment as determined in good faith by the Board of Directors, provided that if the value of the non-cash portion of such Restricted Payment as determined by the Board of Directors is in excess of $25 million, such value shall be based on the opinion from a nationally recognized firm experienced in the appraisal of similar types of transactions. (b) The provisions of Section 7.05(a) hereof shall not prohibit: (i) any purchase or redemption of Capital Stock of the Issuer made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Issuer (other than Redeemable Stock or Exchangeable Stock); provided, however, that such purchase or redemption shall be excluded from the calculation of the amount of Restricted Payments; (ii) dividends or other distributions paid in respect of any class of the Issuer's Capital Stock issued in respect of the acquisition of any business or assets by the Issuer or a Restricted Subsidiary if the dividends or other distributions with respect to such Capital Stock are payable solely from the net earnings of such business or assets; (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this Section 7.05; provided, however, that at the time of payment of such dividend, no Event of Default shall have occurred and be continuing (or result therefrom), and 48 provided, further, however, that such dividends shall be included (without duplication) in the calculation of the amount of Restricted Payments; or (iv) payments pursuant to the Tax Sharing Agreement. SECTION 7.06. Limitation on Asset Sales. So long as any of the 2023 Notes are outstanding, the Issuer may not sell, transfer or otherwise dispose of any property or assets of the Issuer, including Capital Stock of any Consolidated Subsidiary, in one transaction or a series of transactions in an amount which exceeds $50,000,000 (an "Asset Sale") unless the Issuer shall (i) apply an amount equal to such excess Net Cash Proceeds to permanently repay Indebtedness of a Consolidated Subsidiary or Indebtedness of the Issuer which is pari passu with the 2023 Notes, (ii) invest an equal amount not so used in clause (i) in property or assets of related business within 24 months after the date of the Asset Sale (the "Application Period") or (iii) apply such excess Net Cash Proceeds not so used in clause (i) or (ii) (the "Excess Proceeds") to make an offer, within 30 days after the end of the Application Period, to purchase from the Holders on a pro rata basis an aggregate principal amount of 2023 Notes on the relevant purchase date equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the 2023 Notes on the relevant purchase date and unpaid interest, if any, to the purchase date. The Issuer shall only be required to make an offer to purchase 2023 Notes from Holders pursuant to clause (iii) if the Excess Proceeds equal or exceed $25,000,000 at any given time. The procedures to be followed by the Issuer in making an offer to purchase 2023 Notes from the Holders with Excess Proceeds, and for the acceptance of such offer by the Holders, shall be the same as those set forth in Section 5.01 herein with respect to a Fundamental Change. ARTICLE VIII ADDITIONAL EVENTS OF DEFAULT WITH RESPECT TO THE 2023 NOTES SECTION 8.01. Definition. All of the events specified in clauses (a) through (h) of Section 5.1 of the Original Indenture shall be Events of Default with respect to the 2023 Notes. SECTION 8.02. Amendments to Section 5.1 of the Original Indenture. Solely for the purpose of determining Events of Default with respect to the 2023 Notes, paragraphs Section 5.1(e), Section 5.1(f) and Section 5.1(h) of the Original Indenture shall be amended such that each and every reference therein to the Issuer shall be deemed to mean either the Issuer or Consumers. SECTION 8.03. Additional Events of Default. Solely for the purpose of determining Events of Default with respect to the 2023 Notes, an Event of Default shall also include the following: (i) default in the payment of any interest upon any 2023 Note, including Additional Amounts, if any, when it becomes due and payable, and continuance of such default for 30 days; 49 (ii) default in the Issuer's obligation to redeem the 2023 Notes after exercising its redemption option pursuant to Article XIII hereof; (iii) default in the Issuer's obligation to convert the 2023 Notes upon exercise of a Holder's conversion right in accordance with the terms of the 2023 Notes and Article VI hereof; and (iv) default in the Issuer's obligation to purchase 2023 Notes upon the occurrence of a Fundamental Change or the exercise by a Holder of its option to require the Issuer to repurchase such Holder's 2023 Notes in accordance with the terms of Article III or Article IV hereof, as applicable. ARTICLE IX GLOBAL NOTES The 2023 Notes will be issued initially in the form of Global Notes. "Global Note" means a registered 2023 Note evidencing one or more 2023 Notes issued to a depositary (the "Depositary") or its nominee, in accordance with this Article IX and bearing the legend prescribed in this Article IX. One or more Global Notes will represent all 2023 Notes. The Issuer shall execute and the Trustee shall, in accordance with this Article IX and the Issuer Order with respect to the 2023 Notes, authenticate and deliver one or more Global Notes in temporary or permanent form that (i) shall represent and shall be denominated in an aggregate amount equal to the aggregate principal amount of the 2023 Notes to be represented by such Global Note or Global Notes, (ii) shall be registered in the name of the Depositary for such Global Note or Global Notes or the nominee of such Depositary, (iii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions and (iv) shall bear a legend substantially to the following effect: "Unless the Global 2023 Note is presented by an authorized representative of the Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of a nominee of the Depositary or in such other name as is requested by an authorized representative of the Depositary (and any payment is made to such nominee of the Depositary or to such other entity as is requested by an authorized representative of the Depositary), any transfer, pledge or other use hereof for value or otherwise by or to any Person is wrongful inasmuch as the registered owner hereof has an interest herein." Notwithstanding Section 2.8 of the Original Indenture, unless and until it is exchanged in whole or in part for 2023 Notes in definitive form, a Global Note representing one or more 2023 Notes may not be transferred except as a whole by the Depositary, to a nominee of such Depository or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary for 2023 Notes or a nominee of such successor Depositary. If at any time the Depositary for the 2023 Notes is unwilling or unable to continue as Depositary for the 2023 Notes, the Issuer shall appoint a successor Depositary with respect to the 2023 Notes. If a successor Depositary for the 2023 Notes is not appointed by the Issuer by the earlier of (i) 90 days from the date the Issuer receives notice to the effect that the Depositary is 50 unwilling or unable to act, or the Issuer determines that the Depositary is unable to act or (ii) the effectiveness of the Depositary's resignation or failure to fulfill its duties as Depositary, the Issuer will execute, and the Trustee, upon receipt of a Issuer Order for the authentication and delivery of definitive 2023 Notes, will authenticate and deliver 2023 Notes in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Global Notes representing such 2023 Notes in exchange for such Global Note or Global Notes. The Issuer may at any time and in its sole discretion determine that the 2023 Notes issued in the form of one or more Global Notes shall no longer be represented by such Global Note or Global Notes. In such event the Issuer will execute, and the Trustee, upon receipt of an Issuer Order for the authentication and delivery of definitive 2023 Notes, will authenticate and deliver 2023 Notes in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Global Notes representing such 2023 Notes in exchange for such Global Note or Global Notes. The Depositary for such 2023 Notes may surrender a Global Note or Global Notes for such 2023 Notes in exchange in whole or in part for 2023 Notes in definitive form on such terms as are acceptable to the Issuer and such Depositary. Thereupon, the Issuer shall execute, and the Trustee shall authenticate and deliver, without service charge: (i) to each Person specified by such Depositary a new 2023 Note or 2023 Notes, of any authorized denomination as requested by such Person in aggregate principal amount equal to and in exchange for such Person's beneficial interest in the Global Note; and (ii) to such Depositary a new Global Note in a denomination equal to the difference, if any, between the principal amount of the surrendered Global Note and the aggregate principal amount of 2023 Notes in definitive form delivered to Holders thereof. In any exchange provided for in this Article IX, the Issuer will execute and the Trustee will authenticate and deliver 2023 Notes in definitive registered form in authorized denominations. Upon the exchange of a Global Note for 2023 Notes in definitive form, such Global Note shall be cancelled by the Trustee. 2023 Notes in definitive form issued in exchange for a Global Note pursuant to this Article IX shall be registered in such names and in such authorized denominations as the Depositary for such Global Note, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee or Security Registrar. The Trustee shall deliver such 2023 Notes to the Persons in whose names such 2023 Notes are so registered. 51 ARTICLE X DEFEASANCE All of the provisions of Article Ten of the Original Indenture shall be applicable to the 2023 Notes. Upon satisfaction by the Issuer of the requirements of Section 10.1(C) of the Indenture, in connection with any covenant defeasance (as provided in Section 10.1(C) of the Indenture), the Issuer shall be released from its obligations under Article Nine of the Original Indenture and under Article VII and Article XIII of this Thirteenth Supplemental Indenture with respect to the 2023 Notes. ARTICLE XI SUPPLEMENTAL INDENTURES This Thirteenth Supplemental Indenture is a supplement to the Original Indenture. As supplemented by this Thirteenth Supplemental Indenture, the Original Indenture is in all respects ratified, approved and confirmed, and the Original Indenture and this Thirteenth Supplemental Indenture shall together constitute one and the same instrument. ARTICLE XII MODIFICATION AND WAIVER In addition to those matters set forth in Section 8.2 of the Original Indenture (including the terms and conditions of the 2023 Notes set forth herein), with respect to the 2023 Notes, no amendment or supplemental indenture to the Indenture shall, without the consent of the Holder of each 2023 Note affected thereby: (a) reduce the Redemption Price, Purchase Price or Fundamental Change Purchase Price of the 2023 Notes; (b) change the terms applicable to redemption or purchase of the 2023 Notes in a manner adverse to the Holder; or (c) alter the manner of calculation or rate of Additional Amounts payable on any 2023 Note or extend the time for payment of any such amount. In addition, with respect to the 2023 Notes, notwithstanding Section 5.10 of the Original Indenture, approval of the Holders of each outstanding 2023 Note shall be required to: (a) waive any default by the Issuer in any payment of the Redemption Price, Purchase Price or Fundamental Change Purchase Price with respect to any 2023 Notes; or (b) waive any default which constitutes a failure to convert any 2023 Note in accordance with its terms and the terms of Article VI hereof. 52 The reference to "interest" in Section 5.10(i) of the Original Indenture shall include Additional Amounts, if any. ARTICLE XIII OPTIONAL REDEMPTION OF THE 2023 NOTES SECTION 13.01. Right to Redeem; Notice to Trustee, Paying Agent and Holders. On or after July 15, 2008, the Issuer may, at its option, redeem the 2023 Notes in whole, or in part, at any time in accordance with the provisions of the 2023 Notes. If the Issuer elects to redeem 2023 Notes pursuant to the provisions of the 2023 Notes, it shall notify in writing the Trustee, the Paying Agent and each Holder of 2023 Notes to be redeemed, as provided in Section 11.2 of the Indenture and Section 13.04 hereof. SECTION 13.02. Fewer Than All Outstanding 2023 Notes to Be Redeemed. If fewer than all of the outstanding 2023 Notes are to be redeemed, the Trustee shall select the 2023 Notes to be redeemed in principal amounts of $1,000 or integral multiples thereof. In the case that the Trustee shall select the 2023 Notes to be redeemed, the Trustee may effectuate such selection by lot, pro rata, or by any other method that the Trustee considers fair and appropriate. The Trustee will make such selection promptly following receipt of the notice of redemption from the Issuer provided pursuant to Section 13.04 hereof. SECTION 13.03. Selection of 2023 Notes to Be Redeemed. If any 2023 Notes selected for partial redemption are thereafter surrendered for conversion in part before termination of the conversion right with respect to the portion of the 2023 Notes so selected, the converted portion of such 2023 Notes shall be deemed (so far as may be), solely for purposes of determining the aggregate principal amount of 2023 Notes to be redeemed by the Issuer, to be the portion selected for redemption. 2023 Notes which have been converted during a selection of 2023 Notes to be redeemed may be treated by the Trustee as outstanding for the purpose of such selection. Nothing in this Section 13.03 shall affect the right of any Holder to convert any 2023 Notes pursuant to Article VI hereof before the termination of the conversion right with respect thereto. SECTION 13.04. Notice of Redemption. In addition to those matters set forth in Section 11.2 of the Indenture, a notice of redemption sent to Holders of 2023 Notes shall state: (a) the then current Conversion Rate; (b) the name and address of the Paying Agent and the Conversion Agent; (c) that the 2023 Notes called for redemption may be converted at any time before the close of business on the Business Day immediately preceding the redemption date; and (d) that Holders who wish to convert 2023 Notes must comply with the procedures provided in the 2023 Notes. 53 SECTION 13.05. Effect of Notice of Redemption. Once notice of redemption is mailed, 2023 Notes called for redemption become due and payable on the redemption date and at the Redemption Price, except for 2023 Notes that are converted in accordance with the provisions of Article VI hereof and the provisions of the 2023 Notes. Upon presentation and surrender to the Paying Agent, 2023 Notes called for redemption shall be paid at the Redemption Price. SECTION 13.06. Deposit of Redemption Price. On or before 10:00 a.m. (New York City time) on the redemption date, the Issuer shall deposit with the Paying Agent (or if the Issuer or an Affiliate of the Issuer is acting as the Paying Agent, shall segregate and hold in trust) an amount of money sufficient to pay the aggregate Redemption Price of all the 2023 Notes to be redeemed on that date other than the 2023 Notes or portions thereof called for redemption which on or prior thereto have been delivered by the Issuer to the Security Registrar for cancellation or have been converted. The Trustee and Paying Agent shall, as promptly as practicable, return to the Issuer any money not required for that purpose because of conversion of the 2023 Notes in accordance with the provisions of Article VI hereof. If such money is then held by the Issuer or a Subsidiary in trust and is not required for such purpose, it shall be discharged from such trust. TESTIMONIUM This Thirteenth Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 54 IN WITNESS WHEREOF, the parties hereto have caused this Thirteenth Supplemental Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first written above. CMS ENERGY CORPORATION /s/ Thomas J. Webb ---------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer Attest: /s/ Laura Mountcastle ----------------------- BANK ONE TRUST COMPANY, N.A., as Trustee /s/ Mietka Collins ---------------------------------- Mietka Collins Account Representative Attest: /s/ Steven E. Charles ----------------------- Schedule 7.04(b)(2) - See Attached - EXHIBIT A FORM OF FUNDAMENTAL CHANGE PURCHASE NOTICE To: CMS Energy Corporation The undersigned registered holder of this 2023 Note hereby acknowledges receipt of a notice from CMS Energy Corporation (the "Company") as to the occurrence of a Fundamental Change with respect to the Company and requests and instructs the Company to repurchase this 2023 Note, or the portion hereof (which is $1,000 principal amount or a integral multiple thereof) designated below, in accordance with the terms of the Thirteenth Supplemental Indenture referred to in this 2023 Note and directs that the check of the Company, in payment for this 2023 Note or the portion thereof and any 2023 Notes representing any un-repurchased principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If any portion of this 2023 Note not repurchased is to be issued in the name of a Person other than the undersigned, the undersigned shall pay all transfer taxes payable with respect thereto. Dated: __________________________________ Signature(s) Signature(s) must be guaranteed by a commercial bank or trust company or a member firm of a major stock exchange if 2023 Notes are to be delivered, other than to or in the name of the registered holder. __________________________________ Signature Guarantee Fill in for registration of 2023 Notes if to be issued other than to and in the name of registered holder: ______________________________ (Name) ______________________________ (Street Address) ______________________________ (City, state and zip code) Please print name and address Principal amount to be purchased (if less than all): $______,000 Social Security or other taxpayer number EXHIBIT B FORM OF PURCHASE NOTICE To: CMS Energy Corporation The undersigned registered holder of this 2023 Note hereby acknowledges receipt of a notice from CMS Energy Corporation (the "Company") as to the holder's option to require the Company to repurchase this 2023 Note and requests and instructs the Company to repurchase this 2023 Note, or the portion hereof (which is $1,000 principal amount or an integral multiple thereof) designated below, in accordance with the terms of the Thirteenth Supplemental Indenture referred to in this 2023 Note and directs that the check of the Company in payment for this 2023 Note or the portion thereof and any 2023 Notes representing any un-repurchased principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If any portion of this 2023 Note not repurchased is to be issued in the name of a Person other than the undersigned, the undersigned shall pay all transfer taxes payable with respect thereto. Dated: __________________________________ Signature(s) Signature(s) must be guaranteed by a commercial bank or trust company or a member firm of a major stock exchange if 2023 Notes are to be delivered, other than to or in the name of the registered holder. __________________________________ Signature Guarantee Fill in for registration of 2023 Notes if to be issued other than to and in the name of registered holder: ___________________________________ (Name) ___________________________________ (Street Address) ___________________________________ (City, state and zip code) Please print name and address Principal amount to be purchased (if less than all): $______,000 Social Security or other taxpayer number CMS ENERGY INDEBTEDNESS SCHEDULE AS OF 7/16/03
- ------------------------------------------------------------------------------------------------------------------------------------ PRIMARY SECONDARY FACILITY ENTITY ENTITY DESCRIPTION LENDER (BANK) - ------------------------------------------------------------------------------------------------------------------------------------ CMS Energy CMS Energy $185MM Credit Agmt 5/22/03 Bank One, NA CMS Viron Letter of Credit Jamaica Private Power Co Letter of Credit CMS Enterprises (Enporion) Letter of Credit Hydra-Co Ent. (Salt City) Letter of Credit CMS Generation (Shuweihat) Letter of Credit CMS Generation (Shuweihat) Letter of Credit CMS MS&T Letter of Credit CMS MS&T Letter of Credit CMS MS&T MI LLC Letter of Credit Jorf Lasfar Letter of Credit Jorf Lasfar Letter of Credit Jorf Lasfar Letter of Credit Jorf Lasfar Letter of Credit CMS Viron Letter of Credit Panhandle Letter of Credit CMS Viron Letter of Credit Jorf Lasfar Energy Co. Letter of Credit Jorf Lasfar Energy Co. Letter of Credit Grayling Letter of Credit CMS Energy $409MM Second A & R Credit Agmt. Citicorp CMS Energy Term Loan CMS Methanol Co. CMS Energy General Term Notes Series D Series E Series F CMS Energy Sr. Unsecured Notes @ 7 5/8% CMS Energy Convert. Sub. Debentures CMS Energy Extend. Tenor Rate Adj. Sec. CMS Energy Sr. Unsecured Notes @ 7.5% CMS Energy Sr. Unsecured Notes @ 6.75% CMS Energy Sr. Notes @ 8.9% CMS Energy Sr. Notes @ 9.875% CMS Energy Premium Equity Participating Security Units @ 7.25% CMS Energy Sr. Notes @ 8.5% CMS Energy St. Clair Undergrnd Stor. Indemnity CMS Energy CMS MS&T Guaranty CMS Energy CMS Generation Guaranty CMS Energy Emirates CMS Power Co. Letter of Credit Barclays Bank PLC UK CMS Energy CMS Viron & CMS Enterprises Indemnity CMS Energy Genesee Power Station Svc Fee Support Agreement US Bank CMS ENTERPRISES CMS Enterprises CMS GT Indemnity CMS Enterprises CMS MS&T Guaranties CMS Enterprises CMS MS&T Indemnity CMS Enterprises CMS MS&T Indemnity CMS Enterprises CMS MS&T Indemnity CMS Enterprises CMS MS&T MI LLC Guaranty CMS Enterprises CMS Viron, CMS MS&T Indemnity - --------------------- ------------------------------------------------------------------- PRIMARY MAXIMUM AMOUNT ISSUE EXPIRATION LATEST AMEND ENTITY AMOUNT OUTSTANDING DATE DATE DATE # - --------------------- ------------------------------------------------------------------- CMS Energy CMS Energy 185,000,000 0 5/23/2003 5/21/2004 320,507 12/21/2001 9/24/2003 3/11/2002 1 7,000,000 10/29/2001 12/31/2003 1,919,470 10/26/2001 5/14/2004 1,250,000 12/3/2001 5/14/2004 12/4/2002 1 2,500,000 12/5/2001 5/14/2004 70,300,000 12/5/2001 5/14/2004 5,000,000 10/17/2001 12/1/2003 6/6/2002 3 1,000,000 1/18/2002 5/14/2004 1,200,000 1/18/2002 5/14/2004 3,000,000 3/18/2002 5/14/2004 10/2/2002 1 39,086,700 5/15/2002 5/14/2004 10/2/2002 1 11,300,000 5/15/2002 5/14/2004 10/2/2002 1 17,272,500 5/15/2002 5/14/2004 10/2/2002 1 136,272 5/24/2002 7/24/2003 350,000 3/16/2003 11/30/2003 228,516 3/26/2003 11/30/2003 4,800,000 11/15/2002 5/14/2004 2,500,000 11/15/2002 5/14/2004 2,026,689 3/11/2003 6/9/2004 CMS Energy 409,000,000 5,000,000.00 3/30/2003 3/30/2006 CMS Energy 14,000,000 14,000,000 1/28/2002 12/15/2004 CMS Energy 200,000,000 65,772,000 400,000,000 183,055,000 300,000,000 296,726,000 CMS Energy 180,000,000 175,815,000 9/26/1997 11/15/2004 CMS Energy 172,500,000 172,500,000 6/20/1997 7/15/2027 CMS Energy 180,000,000 180,000,000 1/13/1998 1/15/2005 CMS Energy 480,000,000 408,845,000 1/25/1999 1/15/2009 CMS Energy 300,000,000 287,025,000 2/3/1999 1/15/2004 CMS Energy 269,000,000 260,475,000 7/2/2001 7/15/2008 CMS Energy 500,000,000 467,558,000 10/10/2000 10/15/2007 CMS Energy 220,000,000 220,000,000 8/22/2000 8/18/2004 CMS Energy 350,000,000 300,375,000 3/29/2001 4/15/2011 CMS Energy 200,000 200,000 54,000 54,000 CMS Energy 1,000,000 1,000,000 11/1/2000 CMS Energy 24,155,500 24,155,500 9/4/1997 CMS Energy 17,500,000 17,500,000 4/27/1999 4/27/2004 CMS Energy 305,220 305,220 CMS Energy 3,000,000 3,000,000 3/1/1994 2021 CMS ENTERPRISES CMS Enterprises 20,000 20,000 9/20/1994 9/20/2002 CMS Enterprises 30,100,000 30,100,000 CMS Enterprises 168,484,895 168,484,895 4/28/1999 6/1/2009 CMS Enterprises 78,581,671 78,581,671 12/14/1999 11/25/2011 CMS Enterprises 26,315,263 26,315,263 11/15/2000 2/25/2011 CMS Enterprises 10,000,000 10,000,000 8/22/2000 11/28/2000 1 CMS Enterprises 9,992,448 9,992,448 - --------------------------------------------------------------------------------------------------------------- PRIMARY ADDITIONAL ENTITY DESCRIPTION BENEFICIARY - --------------------------------------------------------------------------------------------------------------- CMS Energy CMS Energy Used to support Letters of Credit County of Los Angeles SLT751236 Bank of Tokyo - Mitsubishi Trust Co. SLT751239 TCF Leasing Inc. SLT751227 Honeywell International SLT751226 Barclays Bank PLC SLT751237 Barclays Bank PLC SLT751238 Constellation Power Source Inc SLT751224 Midwest Independent System Operator SLT751231 Midwest Independent System Operator SLT751232 Deutsche Bank Trust Co. Americas SLT751230 Deutsche Bank Trust Co. Americas SLT751225 Deutsche Bank Trust Co. Americas SLT751234 Deutsche Bank Trust Co. Americas SLT751233 County of Los Angeles 00332014 Federal Insurance Co. SLT751229 Seaboard Surety Co. & others SLT751228 Deutsche Bank Trust Collateral reserve . LC#SLT751271 Deutsche Bank Trust Collateral reserve . LC#SLT751270 Consumers Energy LC#00331042 CMS Energy Facilities A & B combined. CMS Energy CMS Energy CMS Energy CMS Energy Issued for QUIPS * CMS Energy X-TRAS * CMS Energy CMS Energy CMS Energy CMS Energy CMS Energy PEPS CMS Energy CMS Energy Surety & Operations bonds Surety bond to state of Michigan Insurance company Surety Bond to US EPA Insurance company CMS Energy 7/1/99 Natural Gas Agreement MCV CMS Energy Jorf Lasfar Capital Contribution Agmt. CMS Energy Taweelah A2 Barclays Abu Dhabi CMS Energy Surety Bond to outside party Insurance company CMS Energy Tax exempt bond financing US Bank (Trustee) CMS ENTERPRISES CMS Enterprise Kalkaska 30 Project Underground Gas Storage Lease an State of MI CMS Enterprises $342.1MM reciprocal taken Various counterparties CMS Enterprises Performance based Surety bond to Tennergy Corp. St. Paul Insurance Co. CMS Enterprises Performance based Surety bond to OH Schools Council St. Paul Insurance Co. CMS Enterprises Performance base surety bond to CCAC St. Paul Insurance Co. CMS Enterprises Detroit Edison CMS Enterprises Surety bonds to outside parties Insurance companies
1 CMS ENERGY INDEBTEDNESS SCHEDULE AS OF 7/16/03
- ------------------------------------------------------------------------------------------------------------------------------------ PRIMARY SECONDARY FACILITY ENTITY ENTITY DESCRIPTION LENDER (BANK) - ------------------------------------------------------------------------------------------------------------------------------------ CMS Enterprises CMS Viron Indemnity CMS Enterprises CMS Viron Indemnity CMS Enterprises CMS Oil and Gas Co. Indemnity CMS Enterprises CMS Oil and Gas Co. Indemnity CMS Enterprises Terra Energy Ltd. Indemnity CMS Enterprises CMS Viron Guaranty CMS Enterprises CMS Viron Guaranty CMS Enterprises CMS Viron Guaranty CMS Enterprises CMS Viron Guaranty CMS Enterprises CMS Viron Guaranty CMS Enterprises CMS Viron Guaranty CMS Enterprises CMS Viron Guaranty CMS Enterprises CMS Viron Guaranty CMS Enterprises CTM Guaranty CMS Enterprises Western Australia Gas Trans. Co. Guaranty CMS Enterprises CMS Ensenada S.A. Guaranty CMS Enterprises CMS Ensenada S.A. Guaranty CMS Enterprises CMS Ensenada S.A. Guaranty CMS Enterprises Jegrupadu O&M Guaranty CMS Enterprises CMS Morocco Op Co Guaranty CMS Enterprises DIG Guaranty - ------------------------------------------------------------------------------------------ PRIMARY MAXIMUM AMOUNT ISSUE EXPIRATION LATEST AMEND ENTITY AMOUNT OUTSTANDING DATE DATE DATE # - ------------------------------------------------------------------------------------------ CMS Enterprises - - CMS Enterprises 17,311,248 17,311,248 CMS Enterprises 75,000 75,000 CMS Enterprises 300,000 300,000 CMS Enterprises 9,649,954 9,649,954 CMS Enterprises 4,300,000 4,300,000 3/24/2000 CMS Enterprises 37,500,000 37,500,000 3/31/2000 CMS Enterprises 34,020,044 34,020,044 12/14/2000 CMS Enterprises 4,235,747 4,235,747 12/20/2001 CMS Enterprises 430,023 430,023 7/1/2001 CMS Enterprises 1,248,000 1,248,000 1/1/2002 CMS Enterprises 6,720,000 6,720,000 4/1/2001 CMS Enterprises 1,168,144 1,168,144 3/1/2001 CMS Enterprises 3,780,000 3,780,000 6/25/1996 12/31/2006 CMS Enterprises 20,000,000 20,000,000 10/9/2000 10/15/2002 10/19/2000 1 CMS Enterprises 135,000 135,000 5/5/1997 CMS Enterprises 800,000 800,000 5/7/1997 2009 CMS Enterprises 11,697,519 11,697,519 5/7/1997 2009 CMS Enterprises 750,000 750,000 12/23/1996 CMS Enterprises 45,000,000 45,000,000 CMS Enterprises 650,000 650,000 4/1/2002 - ----------------------------------------------------------------------------------------------------------------- PRIMARY ADDITIONAL ENTITY DESCRIPTION BENEFICIARY - ----------------------------------------------------------------------------------------------------------------- CMS Enterprises Covers York gty for Viron York International CMS Enterprises Surety Bonds to outside parties Insurance companies CMS Enterprises Surety Bonds to outside parties Insurance companies CMS Enterprises Surety Bonds to outside parties Insurance companies CMS Enterprises Appeal bonds to Michigan Court Insurance companies CMS Enterprises Performance based energy savings contract GE Capital Public Finance CMS Enterprises Supports CMS Viron in MDW contract ABB Energy Capital CMS Enterprises Performance based energy savings contract University of Utah CMS Enterprises Trigen Development Corp CMS Enterprises BT Broad Street - Philadephia CMS Enterprises Opus Corporation (Lease) CMS Enterprises Opus Corporation (Lease) CMS Enterprises PPL Spectrum (Sacred Hearl Hospital) CMS Enterprises CTM's Maintenance Agmt. Siemens CMS Enterprises Centrales Termicas Mendoza S.A. CMS Enterprises La Plata gas transportation Transportadora de Gas Del Sur S.A. CMS Enterprises Project Support & Guaranty Agmt. YPF CMS Enterprises Project Support & Guaranty Agmt. OPIC CMS Enterprises O&M Agreement GVK Industries Ltd CMS Enterprises Jorf Lasfar O&M JLEC CMS Enterprises Settlement Agmt: Interconnection Detroit Edison
2 EX-4.(E)(II) 4 k82154aexv4wxeyxiiy.txt INDENTURES SUPPLEMENTAL-14TH DATED 07/17/03 EXHIBIT 4(e)(ii) FOURTEENTH SUPPLEMENTAL INDENTURE DATED AS OF JULY 17, 2003 This Fourteenth Supplemental Indenture, dated as of the 17th day of July, 2003 between CMS Energy Corporation, a corporation duly organized and existing under the laws of the State of Michigan (hereinafter called the "Issuer") and having its principal office at One Energy Plaza, Jackson, Michigan 49201, and Bank One Trust Company, N.A., a national banking association (hereinafter called the "Trustee") and having its Corporate Trust Office at 1 BankOne Plaza, Mail Code ILI-0823, Chicago, IL 60670. WITNESSETH: WHEREAS, the Issuer and the Trustee (successor to NBD Bank, National Association) entered into an Indenture, dated as of September 15, 1992 (the "Original Indenture"), pursuant to which one or more series of debt securities of the Issuer (the "Securities") may be issued from time to time; and WHEREAS, Section 2.3 of the Original Indenture permits the terms of any series of Securities to be established in an indenture supplemental to the Original Indenture; and WHEREAS, Section 8.1(e) of the Original Indenture provides that a supplemental indenture may be entered into by the Issuer and the Trustee without the consent of any Holders (as defined in the Original Indenture) of the Securities to establish the form and terms of the Securities of any series; and WHEREAS, the Issuer has requested the Trustee to join with it in the execution and delivery of this Fourteenth Supplemental Indenture in order to supplement and amend the Original Indenture by, among other things, establishing the form and terms of a series of Securities to be known as the Issuer's "7.75% Senior Notes due 2010" (the "2010 Notes"), providing for the issuance of the 2010 Notes and amending and adding certain provisions thereof for the benefit of the Holders of the 2010 Notes; and WHEREAS, the Issuer and the Trustee desire to enter into this Fourteenth Supplemental Indenture for the purposes set forth in Sections 2.3 and 8.1(e) of the Original Indenture as referred to above; and WHEREAS, the Issuer has furnished the Trustee with a copy of the resolutions of its Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of this Fourteenth Supplemental Indenture; and WHEREAS, all things necessary to make this Fourteenth Supplemental Indenture a valid agreement of the Issuer and the Trustee and a valid supplement to the Original Indenture have been done; 1 NOW, THEREFORE, for and in consideration of the premises and the purchase of the 2010 Notes to be issued hereunder by holders thereof, the Issuer and the Trustee mutually covenant and agree, for the equal and proportionate benefit of the respective holders from time to time of the 2010 Notes, as follows: ARTICLE I STANDARD PROVISIONS; DEFINITIONS SECTION 1.01. Standard Provisions. The Original Indenture together with this Fourteenth Supplemental Indenture and all previous indentures supplemental thereto entered into pursuant to the applicable terms thereof are hereinafter sometimes collectively referred to as the "Indenture." All capitalized terms which are used herein and not otherwise defined herein are defined in the Indenture and are used herein with the same meanings as in the Indenture. SECTION 1.02. Definitions. (a) The following terms have the meanings set forth in the Sections hereof set forth below:
Term Section - --------------------------------- -------------- Additional Amounts 2.04 Applicable Premium 2.04 Application Period 4.06 Asset Sale 4.06 Change in Control Date 3.01 Change in Control Purchase Notice 3.01(b) Change in Control Purchase Price 3.01 Company 2.03 Depositary Article VI DTC 2.03 Events of Default 5.01 Excess Proceeds 4.06 Global Note Article VI Indenture 1.01; 2.04 Interest Payment Date 2.03 issue 4.04(a) Issuer Preamble; 2.03 Lien 4.02(a) Maturity 2.03 Original Indenture Recitals Original Issue Date 2.03 Place of Payment 2.03 Purchase Date 3.01(a)(iii) Record Date 2.03 Required Repurchase 3.01 Required Repurchase Notice 3.01(a)
2
Term Section - --------------------------------- -------------- Restricted Payment 4.05(a) Rule 144A 2.03 Securities Recitals Securities Act 2.03 Treasury Rate 2.04 Trustee Preamble; 2.04 2010 Notes Recitals; 2.04
(b) Section 1.1 of the Original Indenture is amended to insert the new definitions applicable to the 2010 Notes, in the appropriate alphabetical sequence, as follows: "Amortization Expense" means, for any period, amounts recognized during such period as amortization of capital leases, depletion, nuclear fuel, goodwill and assets classified as intangible assets in accordance with generally accepted accounting principles. "Average Life" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of (x) the number of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness and (y) the amount of such principal payment by (ii) the sum of all such principal payments. "Capital Lease Obligation" of a Person means any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such Person prepared in accordance with generally accepted accounting principles; the amount of such obligation shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles; the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty; and such obligation shall be deemed secured by a Lien on any property or assets to which such lease relates. "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any Preferred Stock or Letter Stock; provided that Hybrid Preferred Securities shall not be considered Capital Stock for purposes of this definition. "Change in Control" means an event or series of events by which: (i) the Issuer ceases to own beneficially, directly or indirectly, at least 80% of the total voting power of all classes of Capital Stock then outstanding of Consumers (whether arising from issuance of securities of the Issuer or Consumers, any direct or indirect transfer of securities by the Issuer or Consumers, any merger, consolidation, liquidation or dissolution of the Issuer or Consumers or otherwise); (ii) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) becomes the 3 "beneficial owner" (as such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have "beneficial ownership" of all shares that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the Voting Stock of the Issuer; or (iii) the Issuer consolidates with or merges into another corporation or directly or indirectly conveys, transfers or leases all or substantially all of its assets to any Person, or any corporation consolidates with or merges into the Issuer, in either event pursuant to a transaction in which the outstanding Voting Stock of the Issuer is changed into or exchanged for cash, securities, or other property, other than any such transaction in which (A) the outstanding Voting Stock of the Issuer is changed into or exchanged for Voting Stock of the surviving corporation and (B) the holders of the Voting Stock of the Issuer immediately prior to such transaction retain, directly or indirectly, substantially proportionate ownership of the Voting Stock of the surviving corporation immediately after such transaction. "CMS Electric and Gas" means CMS Electric and Gas Company, a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS Gas Transmission" means CMS Gas Transmission Company (formerly known as CMS Gas Transmission and Storage Company), a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS Generation" means CMS Generation Co., a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS MST" means CMS Marketing, Services and Trading Company, a Michigan corporation and wholly-owned subsidiary of Enterprises. "Consolidated Assets" means, at any date of determination, the aggregate assets of the Issuer and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Coverage Ratio" with respect to any period means the ratio of (i) the aggregate amount of Operating Cash Flow for such period to (ii) the aggregate amount of Consolidated Interest Expense for such period. "Consolidated Current Liabilities" means, for any period, the aggregate amount of liabilities of the Issuer and its Consolidated Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), after (i) eliminating all inter-company items between the Issuer and any Consolidated Subsidiary and (ii) deducting all current maturities of long-term Indebtedness, all as determined in accordance with generally accepted accounting principles. "Consolidated Indebtedness" means, at any date of determination, the aggregate Indebtedness of the Issuer and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles; provided that 4 Consolidated Indebtedness shall not include any subordinated debt owned by any Hybrid Preferred Securities Subsidiary. "Consolidated Interest Expense" means, for any period, the total interest expense in respect of Consolidated Indebtedness of the Issuer and its Consolidated Subsidiaries, including, without duplication, (i) interest expense attributable to capital leases, (ii) amortization of debt discount, (iii) capitalized interest, (iv) cash and noncash interest payments, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs under Interest Rate Protection Agreements (including amortization of discount) and (vii) interest expense in respect of obligations of other Persons deemed to be Indebtedness of the Issuer or any Consolidated Subsidiaries under clause (v) or (vi) of the definition of Indebtedness, provided, however, that Consolidated Interest Expense shall exclude (A) any costs otherwise included in interest expense recognized on early retirement of debt and (B) any interest expense in respect of any Indebtedness of any Subsidiary of Consumers, CMS Generation, CMS Electric and Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises Subsidiary, provided that such Indebtedness is without recourse to any assets of the Issuer, Consumers, Enterprises, CMS Generation, CMS Electric and Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises Subsidiary. "Consolidated Net Income" means, for any period, the net income of the Issuer and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that there shall not be included in such Consolidated Net Income: (i) any net income of any Person if such Person is not a Subsidiary, except that (A) the Issuer's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Issuer or a Consolidated Subsidiary as a dividend or other distribution and (B) the Issuer's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (ii) any net income of any Person acquired by the Issuer or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any gain or loss realized upon the sale or other disposition of any property, plant or equipment of the Issuer or its Consolidated Subsidiaries which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; and (iv) any net income of any Subsidiary of Consumers, CMS Generation, CMS Electric and Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises Subsidiary whose interest expense is excluded from Consolidated Interest Expense, provided, however, that for purposes of this subsection (iv), any cash, dividends or distributions of any such Subsidiary to the Issuer shall be included in calculating Consolidated Net Income. 5 "Consolidated Net Tangible Assets" means, for any period, the total amount of assets (less accumulated depreciation or amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) as set forth on the most recently available quarterly or annual consolidated balance sheet of the Issuer and its Consolidated Subsidiaries, determined on a consolidated basis in accordance with generally accepted accounting principles, and after giving effect to purchase accounting and after deducting therefrom, to the extent otherwise included, the amounts of: (i) Consolidated Current Liabilities; (ii) minority interests in Consolidated Subsidiaries held by Persons other than the Issuer or a Restricted Subsidiary; (iii) excess of cost over fair value of assets of businesses acquired, as determined in good faith by the Board of Directors as evidenced by Board of Directors resolutions; (iv) any revaluation or other write-up in value of assets subsequent to December 31, 1996, as a result of a change in the method of valuation in accordance with generally accepted accounting principles; (v) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items; (vi) treasury stock; and (vii) any cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities. "Consolidated Net Worth" of any Person means the total of the amounts shown on the consolidated balance sheet of such Person and its consolidated subsidiaries, determined on a consolidated basis in accordance with generally accepted accounting principles, as of any date selected by such Person not more than 90 days prior to the taking of any action for the purpose of which the determination is being made (and adjusted for any material events since such date), as (i) the par or stated value of all outstanding Capital Stock plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit, (B) any amounts attributable to Redeemable Stock and (C) any amounts attributable to Exchangeable Stock. "Consolidated Subsidiary" means any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Issuer in accordance with generally accepted accounting principles. "Consumers" means Consumers Energy Company, a Michigan corporation, all of whose common stock is on the date hereof owned by the Issuer. "Designated Enterprises Subsidiary" means any wholly-owned subsidiary of Enterprises formed after the date of this Fourteenth Supplemental Indenture which is designated a Designated Enterprises Subsidiary by the Board of Directors. "Enterprises" means CMS Enterprises Company, a Michigan corporation and wholly-owned subsidiary of the Issuer. 6 "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchangeable Stock" means any Capital Stock of a corporation that is exchangeable or convertible into another security (other than Capital Stock of such corporation that is neither Exchangeable Stock or Redeemable Stock). "Hybrid Preferred Securities" means any preferred securities issued by a Hybrid Preferred Securities Subsidiary, where such preferred securities have the following characteristics: (i) such Hybrid Preferred Securities Subsidiary lends substantially all of the proceeds from the issuance of such preferred securities to the Issuer or Consumers in exchange for subordinated debt issued by the Issuer or Consumers respectively; (ii) such preferred securities contain terms providing for the deferral of distributions corresponding to provisions providing for the deferral of interest payments on such subordinated debt; and (iii) the Issuer or Consumers (as the case may be) makes periodic interest payments on such subordinated debt, which interest payments are in turn used by the Hybrid Preferred Securities Subsidiary to make corresponding payments to the holders of the Hybrid Preferred Securities. "Hybrid Preferred Securities Subsidiary" means any business trust (or similar entity) (i) all of the common equity interest of which is owned (either directly or indirectly through one or more wholly-owned Subsidiaries of the Issuer or Consumers) at all times by the Issuer or Consumers, (ii) that has been formed for the purpose of issuing Hybrid Preferred Securities and (iii) substantially all of the assets of which consist at all times solely of subordinated debt issued by the Issuer or Consumers (as the case may be) and payments made from time to time on such subordinated debt. "Indebtedness" of any Person means, without duplication: (i) the principal of and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (ii) all Capital Lease Obligations of such Person; (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all obligations under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); 7 (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured. "Initial Purchasers" has the meaning ascribed to such term in the Purchase Agreement. "Interest Rate Protection Agreement" means any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect the Issuer or any Subsidiary against fluctuations in interest rates. "Letter Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is intended to reflect the separate performance of certain of the businesses or operations conducted by such corporation or any of its subsidiaries. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the aggregate proceeds of such Asset Sale including the fair market value (as determined by the Board of Directors and net of any associated debt and of any consideration other than Capital Stock received in return) of property other than cash, received by the Issuer, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Issuer and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Issuer or any Restricted Subsidiary of the Issuer as a reserve against any liabilities associated with such Asset Sale including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification 8 obligations associated with such Asset Sale, all as determined in conformity with generally accepted accounting principles and (b) with respect to any issuance or sale or contribution in respect of Capital Stock, the aggregate proceeds of such issuance, sale or contribution, including the fair market value (as determined by the Board of Directors and net of any associated debt and of any consideration other than Capital Stock received in return) of property other than cash, received by the Issuer, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof, provided, however, that if such fair market value as determined by the Board of Directors of property other than cash is greater than $25 million, the value thereof shall be based upon an opinion from an independent nationally recognized firm experienced in the appraisal or similar review of similar types of transactions. "Non-Convertible Capital Stock" means, with respect to any corporation, any non-convertible Capital Stock of such corporation and any Capital Stock of such corporation convertible solely into non-convertible Capital Stock other than Preferred Stock of such corporation; provided, however, that Non-Convertible Capital Stock shall not include any Redeemable Stock or Exchangeable Stock. "Operating Cash Flow" means, for any period, with respect to the Issuer and its Consolidated Subsidiaries, the aggregate amount of Consolidated Net Income after adding thereto Consolidated Interest Expense (adjusted to include costs recognized on early retirement of debt), income taxes, depreciation expense, Amortization Expense and any noncash amortization of debt issuance costs, any nonrecurring, noncash charges to earnings and any negative accretion recognition. "Other Rating Agency" means any one of Fitch, Inc. or Moody's Investors Service, Inc., and any successor to any of these organizations which is a nationally recognized statistical rating organization. "Paying Agent" means any Person authorized by the Issuer to pay the principal of (and premium, if any) or interest on any of the 2010 Notes on behalf of the Issuer. Initially, the Paying Agent shall be the Trustee. "Predecessor 2010 Note" of any particular 2010 Note means every previous 2010 Note evidencing all or a portion of the same debt as that evidenced by such particular 2010 Note; and, for the purposes of the definition, any 2010 Note authenticated and delivered under Section 2.9 of the Indenture in exchange for or in lieu of a mutilated, destroyed, lost or stolen 2010 Note shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen 2010 Note. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of 9 any other class of such corporation; provided that Hybrid Preferred Securities shall not be considered Preferred Stock for purposes of this definition. "Purchase Agreement" means that certain Purchase Agreement dated July 9, 2003 among the Issuer and the Initial Purchasers which provides for the sale by the Issuer to the Initial Purchasers of the 2010 Notes. "Redeemable Stock" means any Capital Stock that by its terms or otherwise is required to be redeemed prior to the first anniversary of the Stated Maturity of the outstanding 2010 Notes or is redeemable at the option of the holder thereof at any time prior to the first anniversary of the Stated Maturity of the outstanding 2010 Notes. "Registrable Securities" has the meaning ascribed to such term in the Registration Rights Agreement. "Registration Default" has the meaning ascribed to such term in the Registration Rights Agreement. "Registration Rights Agreement" means that certain Registration Rights Agreement, dated as of July 17, 2003, by and among the Issuer and the Initial Purchasers. "Regulation S" means Regulation S under the Securities Act. "Restricted Subsidiary" means any Subsidiary (other than Consumers and its Subsidiaries) of the Issuer which, as of the date of the Issuer's most recent quarterly consolidated balance sheet, constituted at least 10% of the total Consolidated Assets of the Issuer and its Consolidated Subsidiaries and any other Subsidiary which from time to time is designated a Restricted Subsidiary by the Board of Directors; provided that no Subsidiary may be designated a Restricted Subsidiary if, immediately after giving effect thereto, an Event of Default or event that, with the lapse of time or giving of notice or both, would constitute an Event of Default would exist or the Issuer and its Restricted Subsidiaries could not incur at least one dollar of additional Indebtedness under Section 4.04 hereof, and (i) any such Subsidiary so designated as a Restricted Subsidiary must be organized under the laws of the United States or any State thereof, (ii) more than 80% of the Voting Stock of such Subsidiary must be owned of record and beneficially by the Issuer or a Restricted Subsidiary and (iii) such Restricted Subsidiary must be a Consolidated Subsidiary. "Standard & Poor's" means Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc., and any successor thereto which is a nationally recognized statistical rating organization, or if such entity shall cease to rate the 2010 Notes or shall cease to exist and there shall be no such successor thereto, any other nationally recognized statistical rating organization selected by the Issuer which is acceptable to the Trustee. 10 "Subordinated Indebtedness" means any Indebtedness of the Issuer (whether outstanding on the date of this Fourteenth Supplemental Indenture or thereafter incurred) which is contractually subordinated or junior in right of payment to the 2010 Notes. "Support Obligations" means, for any Person, without duplication, any financial obligation, contingent or otherwise, of such Person guaranteeing or otherwise supporting any debt or other obligation of any other Person in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such debt, (ii) to purchase property, securities or services for the purpose of assuring the owner of such debt of the payment of such debt, (iii) to maintain working capital, equity capital, available cash or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such debt, (iv) to provide equity capital under or in respect of equity subscription arrangements (to the extent that such obligation to provide equity capital does not otherwise constitute debt), or (v) to perform, or arrange for the performance of, any non-monetary obligations or non-funded debt payment obligations of the primary obligor. "Tax Sharing Agreement" means the Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as amended or supplemented from time to time, by and among Issuer, each of the members of the Consolidated Group (as defined therein), and each of the corporations that become members of the Consolidated Group. "Voting Stock" means securities of any class or classes the holders of which are ordinarily, in the absence of contingencies, entitled to vote for corporate directors (or persons performing similar functions). 11 ARTICLE II DESIGNATION AND TERMS OF THE 2010 NOTES; FORMS SECTION 2.01. Establishment of Series. (a) There is hereby created a series of Securities to be known and designated as the "7.75% Senior Notes due 2010" to be issued in aggregate principal amount of $300,000,000. Additional Securities, without limitation as to amount, having substantially the same terms as the 2010 Notes (except a different issue date, issue price and bearing interest from the last Interest Payment Date to which interest has been paid or duly provided for on the 2010 Notes, and, if no interest has been paid, from July 17, 2003), may also be issued by the Issuer pursuant to the Indenture without the consent of the existing Holders of the 2010 Notes. Such additional Securities shall be part of the same series as the 2010 Notes. The Stated Maturity of the 2010 Notes is August 1, 2010; the principal amount of the 2010 Notes shall be payable on such date unless the 2010 Notes are earlier redeemed or purchased in accordance with the terms of the Indenture. (b) The 2010 Notes will bear interest from the Original Issue Date, or from the most recent date to which interest has been paid or duly provided for, at the rate of 7.75% per annum stated therein until the principal thereof is paid or made available for payment. Interest will be payable semiannually on each Interest Payment Date and at Maturity, as provided in the form of the 2010 Note in Section 2.03 hereof. (c) The Record Date referred to in Section 2.3(f)(4) of the Indenture for the payment of the interest on any 2010 Note payable on any Interest Payment Date (other than at Maturity) shall be the 15th day preceding the relevant Interest Payment Date (whether or not a Business Day) except that the Record Date for interest payable at Maturity shall be the date of Maturity. (d) The payment of the principal of, premium (if any) and interest on the 2010 Notes shall not be secured by a security interest in any property. (e) The 2010 Notes shall be redeemable at the option of the Issuer, in whole or in part, at any time and from time to time, or not less than 30 days notice at a redemption price equal to 100% of the principal amount of such 2010 Notes being redeemed plus the Applicable Premium, if any, thereon at the time of redemption, together with accrued interest, if any, thereon to the redemption date. In no event will the redemption price ever be less than 100% of the principal amount of the 2010 Notes plus accrued interest to the redemption date. The 2010 Notes shall be purchased by the Issuer at the option of the Holders thereof as provided in Article III hereof. (f) The 2010 Notes shall not be convertible. (g) The 2010 Notes will not be subordinated to the payment of Senior Debt. 12 (h) The Issuer will not pay any additional amounts on the 2010 Notes held by a Person who is not a U.S. person (as defined in Regulation S) in respect of any tax, assessment or government charge withheld or deducted. (i) The events specified in Events of Default with respect to the 2010 Notes shall include the events specified in Article V of this Fourteenth Supplemental Indenture. In addition to the covenants set forth in Article Three of the Original Indenture, the Holders of the 2010 Notes shall have the benefit of the covenants of the Issuer set forth in this Fourteenth Supplemental Indenture. SECTION 2.02. Forms Generally. The 2010 Notes and Trustee's certificates of authentication shall be in substantially the form set forth in this Article II, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by the Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such 2010 Notes, as evidenced by their execution thereof. The definitive 2010 Notes shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such 2010 Notes, as evidenced by their execution thereof. SECTION 2.03. Form of Face of 2010 Note. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY. Unless this Global 2010 Note is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to CMS Energy Corporation or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of a nominee of DTC or in such other name as is requested by an authorized representative of DTC (and any payment is made to such nominee of DTC or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof has an interest herein. 13 CMS ENERGY CORPORATION 7.75% SENIOR NOTES DUE 2010 No. ________ $300,000,000 CUSIP No.: [125896AU4/U12660AC7] ISIN No.: [US125896AU48/USU12660AC70] CMS Energy Corporation, a corporation duly organized and existing under the laws of the State of Michigan (herein called the "Issuer" or "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & Co., or registered assigns, the principal sum of Three Hundred Million Dollars on August 1, 2010 ("Maturity") and to pay interest thereon from July 17, 2003 (the "Original Issue Date") or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on February 1 and August 1 in each year, commencing on February 1, 2004 (each an "Interest Payment Date") to the Persons in whose names the 2010 Notes are registered at the close of business on the 15th day preceding the relevant Interest Payment Date (each a "Record Date"), and at Maturity, at the rate of 7.75% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this 2010 Note (or one or more Predecessor 2010 Notes) is registered at the close of business on the Record Date for such interest, which shall be the 15th day preceding the relevant Interest Payment Date (whether or not a Business Day) except that the Record Date for interest payable at Maturity shall be the date of Maturity. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Record Date and may either be paid to the Person in whose name this 2010 Note (or one or more Predecessor 2010 Notes) is registered at the close of business on a subsequent Record Date (which shall be not less than five Business Days prior to the date of payment of such defaulted interest) for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to Holders of 2010 Notes not less than 15 days preceding such subsequent Record Date. This 2010 Note is subject to redemption at the option of the Issuer and to purchase by the Issuer at the option of the Holder as specified on the reverse of this 2010 Note. Payment of the principal of (and premium, if any) and interest, if any, on this 2010 Note will be made at the office or agency of the Issuer maintained for that purpose in New York, New York (the "Place of Payment"), in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Issuer payment of interest (other than interest payable at Maturity) may be made by check mailed to the address of 14 the Person entitled thereto as such address shall appear in the Security Register or by wire transfer to an account designated by such Person not later than ten days prior to the date of such payment. Reference is hereby made to the further provisions of this 2010 Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (IV) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, (V) TO CMS ENERGY CORPORATION OR (VI) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (VI) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN CLAUSE (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES THAT SUCH HOLDER WILL NOT ENGAGE IN HEDGING TRANSACTIONS INVOLVING THIS SECURITY UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THIS SECURITY AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS SECURITY TO REFLECT ANY CHANGE IN APPLICABLE 15 LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS SECURITY SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT. THE HOLDER OF THIS SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS OF, A REGISTRATION RIGHTS AGREEMENT, DATED AS OF JULY 17, 2003 ENTERED INTO BY THE COMPANY FOR THE BENEFIT OF CERTAIN HOLDERS OF SECURITIES FROM TIME TO TIME. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this 2010 Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed under its corporate seal. Dated: CMS ENERGY CORPORATION By____________________________ Its: By____________________________ Its: SECTION 2.04. Form of Reverse of 2010 Note. This 7.75% Senior Note due 2010 is one of a duly authorized issue of securities of the Issuer (herein called the "2010 Notes"), issued and to be issued under an Indenture, dated as of September 15, 1992, as supplemented by certain supplemental indentures, including the Fourteenth Supplemental Indenture, dated as of July 17, 2003 (herein collectively referred to as the "Indenture"), between the Issuer and Bank One Trust Company, N.A., a national banking association (successor to NBD Bank, National Association), as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Issuer, the Trustee, and the Holders of the 2010 Notes and of the terms upon which the 2010 Notes are, and are to be, authenticated and delivered. This 2010 Note is one of the series designated on the face hereof, issued in an initial aggregate principal amount of $300,000,000. Additional Securities, without limitation as to amount, having substantially the same terms as the 2010 Notes (except a different issue date, issue price and bearing interest from the last Interest Payment Date to 16 which interest has been paid or duly provided for on the 2010 Notes, and, if no interest has been paid, from July 17, 2003), may also be issued by the Issuer pursuant to the Indenture without the consent of the existing Holders of the 2010 Notes. Such additional Securities shall be part of the same series as the 2010 Notes. The 2010 Notes are subject to redemption at the option of the Issuer, in whole or in part, upon not more than 60 nor less than 30 days' notice as provided in the Indenture at any time and from time to time, at a redemption price equal to 100% of the principal amount of such 2010 Notes being redeemed plus the Applicable Premium, if any, thereon at the time of redemption, together with accrued interest, if any, thereon to the redemption date, but interest installments whose Stated Maturity is on or prior to such redemption date will be payable to the Holder of record at the close of business on the relevant Record Date referred to on the face hereof, all as provided in the Indenture. In no event will the redemption price ever be less than 100% of the principal amount of the 2010 Notes plus accrued interest to the redemption date. The following definitions are used to determine the Applicable Premium: "Applicable Premium" means, with respect to a 2010 Note (or portion thereof) being redeemed at any time, the excess of (A) the present value at such time of the principal amount of such 2010 Note (or portion thereof) being redeemed plus all interest payments due on such 2010 Note (or portion thereof), which present value shall be computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the principal amount of such 2010 Note (or portion thereof) being redeemed at such time. For purposes of this definition, the present values of the interest and principal payments will be determined in accordance with generally accepted principles of financial analysis. "Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two business days prior to the redemption date or, in the case of defeasance, prior to the date of deposit (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining average life to stated maturity of the 2010 Notes; provided, however, that if the average life to stated maturity of the 2010 Notes is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given. The interest rate borne by the Registrable Securities will be increased by 0.25% per annum upon the occurrence of a Registration Default, which rate will increase by an additional 0.25% per annum if such Registration Default has not been cured within 90 days after the occurrence thereof and will continue to increase by 0.25% at the beginning of each subsequent 90-day period until all Registration Defaults have been cured 17 ("Additional Amounts"); provided, that the aggregate amount of any such increase in the interest rate on the Registrable Securities shall in no event exceed 0.50% per annum. All accrued Additional Amounts shall be paid to Holders of Registrable Securities in the same manner and at the same time as regular payments of interest on the Registrable Securities. Following the cure of all Registration Defaults, the accrual of Additional Amounts shall cease and the interest rate on the Registrable Securities will revert to 7.75% per annum. In the event of redemption of this 2010 Note in part only, a new 2010 Note for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If a Change in Control occurs, the Issuer shall notify the Holder of this 2010 Note of such occurrence and such Holder shall have the right to require the Issuer to make a Required Repurchase of all or any part of this 2010 Note at a Change in Control Purchase Price equal to 101% of the principal amount of this 2010 Note to be so purchased as more fully provided in the Indenture and subject to the terms and conditions set forth therein. In the event of a Required Repurchase of only a portion of this 2010 Note, a new 2010 Note or 2010 Notes for the unrepurchased portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default with respect to this 2010 Note shall occur and be continuing, the principal of this 2010 Note may be declared due and payable in the manner and with the effect provided in the Indenture. In any case where any Interest Payment Date, redemption date, repurchase date, Stated Maturity or Maturity of any 2010 Note shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of the Indenture or this 2010 Note) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date, repurchase date or at the Stated Maturity or Maturity; provided that no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, redemption date, repurchase date, Stated Maturity or Maturity, as the case may be, to such Business Day. The Trustee and the Paying Agent shall return to the Issuer upon written request any money or property held by them for the payment of any amount with respect to the 2010 Notes that remains unclaimed for two years, provided, however, that the Trustee or such Paying Agent, before being required to make any such return, shall at the expense of the Issuer cause to be published once in a newspaper of general circulation in The City of New York or mail to each such Holder notice that such money or property remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication or mailing, any unclaimed money or property then remaining shall be returned to the Issuer. After return to the Issuer, Holders entitled to 18 the money or property must look to the Issuer for payment as general creditors unless an applicable abandoned property law designates another Person. The Indenture contains provisions for defeasance at any time of (i) the entire indebtedness of this 2010 Note or (ii) certain restrictive covenants and Events of Default with respect to this 2010 Note, in each case upon compliance with certain conditions set forth therein. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the rights of the Holders of all outstanding 2010 Notes under the Indenture at any time by the Issuer and the Trustee with the consent of the Holders of not less than a majority in principal amount of Securities of all series then outstanding and affected (voting as one class). The Indenture permits the Holders of not less than a majority in principal amount of Securities of all series at the time outstanding with respect to which a default shall have occurred and be continuing (voting as one class) to waive on behalf of the Holders of all outstanding Securities of such series any past default by the Issuer, provided that no such waiver may be made with respect to a default in the payment of the principal of or the interest on any Security of such series or the default by the Issuer in respect of certain covenants or provisions of the Indenture, the modification or amendment of which must be consented to by the Holder of each outstanding Security of each series affected. As set forth in, and subject to, the provisions of the Indenture, no Holder of any 2010 Note will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless such Holder shall have previously given to the Trustee written notice of a continuing Event of Default, the Holders of not less than 25% in principal amount of the outstanding Securities of each affected series (voting as one class) shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as trustee, and the Trustee shall not have received from the Holders of a majority in principal amount of the outstanding Securities of each affected series (voting as one class) a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days; provided, however, that such limitations do not apply to a suit instituted by the Holder hereof for the enforcement of payment of the principal of (and premium, if any) or any interest on this 2010 Note on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this 2010 Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and any premium and interest on this 2010 Note at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this 2010 Note is registrable in the Security Register, upon surrender of this 2010 Note for registration of transfer at the office or agency of the Issuer in any place 19 where the principal of and any premium and interest on this 2010 Note are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new 2010 Notes of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The 2010 Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, 2010 Notes are exchangeable for a like aggregate principal amount of 2010 Notes and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Issuer shall not be required to (i) issue, exchange or register the transfer of this 2010 Note for a period of 15 days next preceding the mailing of the notice of redemption of 2010 Notes or (ii) exchange or register the transfer of any 2010 Note or any portion thereof selected, called or being called for redemption, except in the case of any 2010 Note to be redeemed in part, the portion thereof not so to be redeemed. Prior to due presentment of this 2010 Note for registration of transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Person in whose name this 2010 Note is registered as the owner hereof for all purposes, whether or not this 2010 Note be overdue, and neither the Issuer, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this 2010 Note without definition which are defined in the Indenture shall have the meanings assigned to them in the Indenture. SECTION 2.05. Form of Trustee's Certificate of Authentication. The Trustee's certificates of authentication shall be in substantially the following form: This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture. BANK ONE TRUST COMPANY, N.A., as Trustee By__________________________ Authorized Officer 20 ARTICLE III CHANGE IN CONTROL SECTION 3.01. Change in Control. Upon the occurrence of a Change in Control (the effective date of such Change in Control being the "Change in Control Date"), each Holder of a 2010 Note shall have the right to require that the Issuer repurchase (a "Required Repurchase") all or any part of such Holder's 2010 Note at a repurchase price payable in cash equal to 101% of the principal amount of such 2010 Note plus accrued interest to the Purchase Date (the "Change in Control Purchase Price"). (a) Within 30 days following the Change in Control Date, the Issuer shall mail a notice (the "Required Repurchase Notice") to each Holder with a copy to the Trustee stating: (i) that a Change in Control has occurred and that such Holder has the right to require the Issuer to repurchase all or any part of such Holder's 2010 Notes at the Change in Control Purchase Price; (ii) the Change in Control Purchase Price; (iii) the date on which any Required Repurchase shall be made (which shall be no earlier than 60 days nor later than 90 days from the date such notice is mailed) (the "Purchase Date"); (iv) the name and address of the Paying Agent; and (v) the procedures that Holders must follow to cause the 2010 Notes to be repurchased, which shall be consistent with this Section 3.01 and the Indenture. (b) Holders electing to have a 2010 Note repurchased must deliver a written notice (the "Change in Control Purchase Notice") to the Paying Agent (initially the Trustee) at its corporate trust office in Chicago, Illinois, or any other office of the Paying Agent maintained for such purposes, not later than 30 days prior to the Purchase Date. The Change in Control Purchase Notice shall state: (i) the portion of the principal amount of any 2010 Notes to be repurchased, which portion must be $1,000 or an integral multiple thereof; (ii) that such 2010 Notes are to be repurchased by the Issuer pursuant to the change in control provisions of the Indenture; and (iii) unless the 2010 Notes are represented by one or more Global Notes, the certificate numbers of the 2010 Notes to be delivered by the Holder thereof for repurchase by the Issuer. Any Change in Control Purchase Notice may be withdrawn by the Holder by a written notice of withdrawal delivered to the Paying Agent not later than three Business Days prior to the Purchase Date. The notice of withdrawal shall state the principal amount and, if applicable, the certificate numbers of the 2010 Notes as to which the withdrawal notice relates and the 21 principal amount of such 2010 Notes, if any, which remains subject to a Change in Control Purchase Notice. If a 2010 Note is represented by a Global Note (as described in Article VI hereof), the Depositary or its nominee will be the Holder of such 2010 Note and therefore will be the only entity that can elect a Required Repurchase of such 2010 Note. To obtain repayment pursuant to this Section 3.01 with respect to such 2010 Note, the beneficial owner of such 2010 Note must provide to the broker or other entity through which it holds the beneficial interest in such 2010 Note (i) the Change in Control Purchase Notice signed by such beneficial owner, and such signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, and (ii) instructions to such broker or other entity to notify the Depositary of such beneficial owner's desire to obtain repayment pursuant to this Section 3.01. Such broker or other entity will provide to the Paying Agent (i) the Change in Control Purchase Notice received from such beneficial owner and (ii) a certificate satisfactory to the Paying Agent from such broker or other entity stating that it represents such beneficial owner. Such broker or other entity will be responsible for disbursing any payments it receives pursuant to this Section 3.01 to such beneficial owner. (c) Payment of the Change in Control Purchase Price for a 2010 Note for which a Change in Control Purchase Notice has been delivered and not withdrawn is conditioned (except in the case of a 2010 Note represented by one or more Global Notes) upon delivery of such 2010 Note (together with necessary endorsements) to the Paying Agent at its office in Chicago, Illinois, or any other office of the Paying Agent maintained for such purpose, at any time (whether prior to, on or after the Purchase Date) after the delivery of such Change in Control Purchase Notice. Payment of the Change in Control Purchase Price for such 2010 Note will be made promptly following the later of the Purchase Date or the time of delivery of such 2010 Note. If the Paying Agent holds, in accordance with the terms of the Indenture, money sufficient to pay the Change in Control Purchase Price of such 2010 Note on the Business Day following the Purchase Date, then, on and after such date, interest will cease accruing, and all other rights of the Holder shall terminate (other than the right to receive the Change in Control Purchase Price upon delivery of the 2010 Note). (d) The Issuer shall comply with the provisions of Regulation 14E and any other tender offer rules under the Exchange Act, which may then be applicable in connection with any offer by the Issuer to repurchase 2010 Notes at the option of Holders upon a Change in Control. (e) No 2010 Note may be repurchased by the Issuer as a result of a Change in Control if there has occurred and is continuing an Event of Default (other than a default in the payment of the Change in Control Purchase Price with respect to the 2010 Notes). 22 ARTICLE IV ADDITIONAL COVENANTS OF THE ISSUER WITH RESPECT TO THE 2010 NOTES SECTION 4.01. Existence. So long as any of the 2010 Notes are outstanding, subject to Article Nine of the Original Indenture, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. SECTION 4.02. Limitation on Certain Liens. (a) So long as any of the 2010 Notes are outstanding, the Issuer shall not create, incur, assume or suffer to exist any lien, mortgage, pledge, security interest, conditional sale, title retention agreement or other charge or encumbrance of any kind, or any other type of arrangement intended or having the effect of conferring upon a creditor of the Issuer or any Subsidiary a preferential interest (hereinafter in this Section 4.02 referred to as a "Lien") upon or with respect to any of its property of any character, including without limitation any shares of Capital Stock of Consumers or Enterprises, without making effective provision whereby the 2010 Notes shall (so long as any such other creditor shall be so secured) be equally and ratably secured (along with any other creditor similarly entitled to be secured) by a direct Lien on all property subject to such Lien, provided, however, that the foregoing restrictions shall not apply to: (i) Liens for taxes, assessments or governmental charges or levies to the extent not past due; (ii) pledges or deposits to secure (A) obligations under workmen's compensation laws or similar legislation, (B) statutory obligations of the Issuer or (C) Support Obligations; (iii) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's Liens and other similar Liens arising in the ordinary course of business securing obligations which are not overdue or which have been fully bonded and are being contested in good faith; (iv) purchase money Liens upon or in property acquired and held by the Issuer in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness incurred solely for the purpose of financing the acquisition of any such property to be subject to such Liens, or Liens existing on any such property at the time of acquisition, or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided that no such Lien shall extend to or cover any property other than the property being acquired and no such extension, renewal or replacement shall extend to or cover property not theretofore subject to the Lien being extended, renewed or replaced, and provided, further, that the aggregate principal amount of the Indebtedness at any one time outstanding secured by Liens permitted by this clause (iv) shall not exceed $10,000,000; and 23 (v) Liens not otherwise permitted by clauses (i) through (iv) of this Section 4.02 securing Indebtedness of the Issuer; provided that on the date such Liens are created, and after giving effect to such Indebtedness, the aggregate principal amount at maturity of all of the secured Indebtedness of the Issuer at such date shall not exceed 5% of Consolidated Net Tangible Assets at such date. SECTION 4.03. Limitation on Consolidation, Merger, Sale or Conveyance. So long as any of the 2010 Notes are outstanding and until the 2010 Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization), at which time the Issuer will be permanently released from the provisions of this Section 4.03, and subject also to Article Nine of the Original Indenture, the Issuer shall not consolidate with or merge into any other Person or sell, lease or convey the property of the Issuer in the entirety or substantially as an entirety, unless (a) immediately after giving effect to such transaction the Consolidated Net Worth of the surviving entity is at least equal to the Consolidated Net Worth of the Issuer immediately prior to the transaction and (b) after giving effect to such transaction, the surviving entity would be entitled to incur at least one dollar of additional Indebtedness (other than revolving Indebtedness to banks) without violation of the limitations in Section 4.04 hereof. SECTION 4.04. Limitation on Consolidated Indebtedness. (a) So long as any of the 2010 Notes are outstanding and until the 2010 Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization), at which time the Issuer will be permanently released from the provisions of this Section 4.04, the Issuer shall not, and shall not permit any Consolidated Subsidiary of the Issuer to, issue, create, assume, guarantee, incur or otherwise become liable for (collectively, "issue"), directly or indirectly, any Indebtedness unless the Consolidated Coverage Ratio of the Issuer and its Consolidated Subsidiaries for the four consecutive fiscal quarters immediately preceding the issuance of such Indebtedness (as shown by a pro forma consolidated income statement of the Issuer and its Consolidated Subsidiaries for the four most recent fiscal quarters ending at least 30 days prior to the issuance of such Indebtedness after giving effect to (i) the issuance of such Indebtedness and (if applicable) the application of the net proceeds thereof to refinance other Indebtedness as if such Indebtedness was issued at the beginning of the period, (ii) the issuance and retirement of any other Indebtedness since the first day of the period as if such Indebtedness was issued or retired at the beginning of the period and (iii) the acquisition of any company or business acquired by the Issuer or any Subsidiary since the first day of the period (including giving effect to the pro forma historical earnings of such company or business), including any acquisition which will be consummated contemporaneously with the issuance of such Indebtedness, as if in each case such acquisition occurred at the beginning of the period) exceeds a ratio of 1.6 to 1.0. 24 (b) Notwithstanding the foregoing paragraph, the Issuer or any Restricted Subsidiary may issue, directly or indirectly, the following Indebtedness: (1) Indebtedness of the Issuer to banks not to exceed $1,000,000,000 in aggregate outstanding principal amount at any time; (2) Indebtedness (other than Indebtedness described in Section 4.04(b)(1) hereof) outstanding on the date of this Fourteenth Supplemental Indenture, as set forth on Schedule 4.04(b)(2) attached hereto and made a part hereof, and Indebtedness issued in exchange for, or the proceeds of which are used to refund or refinance, any Indebtedness permitted by this clause (2); provided, however, that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced, (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced and (C) if the Indebtedness to be exchanged, refunded or refinanced is subordinated to the 2010 Notes, the Indebtedness is subordinated to the 2010 Notes in right of payment; (3) Indebtedness of the Issuer owed to and held by a Subsidiary and Indebtedness of a Subsidiary owed to and held by the Issuer; provided, however, that, in the case of Indebtedness of the Issuer owed to and held by a Subsidiary, (i) any subsequent issuance or transfer of any Capital Stock that results in any such Subsidiary ceasing to be a Subsidiary or (ii) any transfer of such Indebtedness (except to the Issuer or a Subsidiary) shall be deemed for the purposes of this Section 4.04(b) to constitute the issuance of such Indebtedness by the Issuer; (4) Indebtedness of the Issuer issued in exchange for, or the proceeds of which are used to refund or refinance, Indebtedness of the Issuer issued in accordance with Section 4.04(a) hereof, provided that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced, (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced and (C) if the Indebtedness to be exchanged, refunded or refinanced is subordinated to the 2010 Notes, the Indebtedness so issued is subordinated to the 2010 Notes in right of payment; 25 (5) Indebtedness of a Restricted Subsidiary issued in exchange for, or the proceeds of which are used to refund or refinance, Indebtedness of a Restricted Subsidiary issued in accordance with Section 4.04(a) hereof, provided that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced and (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced. (6) Indebtedness of a Consolidated Subsidiary issued to acquire, develop, improve, construct or to provide working capital for a gas, oil or electric generation, exploration, production, distribution, storage or transmission facility and related assets, provided that such Indebtedness is without recourse to any assets of the Issuer, Consumers, Enterprises, CMS Generation, CMS Electric and Gas, CMS Gas Transmission, CMS MST or any other Designated Enterprises Subsidiary; (7) Indebtedness of a Person existing at the time at which such Person became a Subsidiary and not incurred in connection with, or in contemplation of, such Person becoming a Subsidiary. Such Indebtedness shall be deemed to be incurred on the date the acquired Person becomes a Consolidated Subsidiary; (8) Indebtedness issued by the Issuer not to exceed $150,000,000 in aggregate principal amount at any time; and (9) Indebtedness of a Consolidated Subsidiary in respect of rate reduction bonds issued to recover electric restructuring transition costs of Consumers, provided that such Indebtedness is without recourse to the assets of Consumers. SECTION 4.05. Limitation on Restricted Payments. (a) So long as the 2010 Notes are outstanding and until the 2010 Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization), at which time the Issuer will be permanently released from the provisions of this Section 4.05, the Issuer shall not, and shall not permit any Restricted Subsidiary of the Issuer, directly or indirectly, to (i) declare or pay any dividend or make any distribution on the Capital Stock of the Issuer to the direct or indirect holders of its Capital Stock (except dividends or distributions payable solely in its Non-Convertible Capital Stock or in options, warrants or other rights to purchase such Non-Convertible Capital Stock and except dividends or distributions payable to the Issuer or a Subsidiary), (ii) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Issuer or (iii) purchase, repurchase, redeem, defease or otherwise acquire or 26 retire for value, prior to scheduled maturity or scheduled repayment thereof, any Subordinated Indebtedness (any such dividend, distribution, purchase, redemption, repurchase, defeasing, other acquisition or retirement being herein referred to as a "Restricted Payment") if at the time the Issuer or such Subsidiary makes such Restricted Payment: (1) an Event of Default, or an event that with the lapse of time or the giving of notice or both would constitute an Event of Default, shall have occurred and be continuing (or would result therefrom); or (2) the aggregate amount of such Restricted Payment and all other Restricted Payments made since May 6, 1997 would exceed the sum of: (A) $100,000,000; (B) 100% of Consolidated Net Income, accrued during the period (treated as one accounting period) from May 6, 1997 to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such sum shall be a deficit, minus 100% of the deficit); and (C) the aggregate Net Cash Proceeds received by the Issuer from the issue or sale of or contribution with respect to its Capital Stock subsequent to May 6, 1997. For the purpose of determining the amount of any Restricted Payment not in the form of cash, the amount shall be the fair value of such Restricted Payment as determined in good faith by the Board of Directors, provided that if the value of the non-cash portion of such Restricted Payment as determined by the Board of Directors is in excess of $25 million, such value shall be based on the opinion from a nationally recognized firm experienced in the appraisal of similar types of transactions. (b) The provisions of Section 4.05(a) hereof shall not prohibit: (i) any purchase or redemption of Capital Stock of the Issuer made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Issuer (other than Redeemable Stock or Exchangeable Stock); provided, however, that such purchase or redemption shall be excluded from the calculation of the amount of Restricted Payments; (ii) dividends or other distributions paid in respect of any class of the Issuer's Capital Stock issued in respect of the acquisition of any business or assets by the Issuer or a Restricted Subsidiary if the dividends or other distributions with respect to such Capital Stock are payable solely from the net earnings of such business or assets; 27 (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this Section 4.05; provided, however, that at the time of payment of such dividend, no Event of Default shall have occurred and be continuing (or result therefrom), and provided further, however, that such dividends shall be included (without duplication) in the calculation of the amount of Restricted Payments; or (iv) payments pursuant to the Tax Sharing Agreement. SECTION 4.06. Limitation on Asset Sales. So long as any of the 2010 Notes are outstanding, the Issuer may not sell, transfer or otherwise dispose of any property or assets of the Issuer, including Capital Stock of any Consolidated Subsidiary, in one transaction or a series of transactions in an amount which exceeds $50,000,000 (an "Asset Sale") unless the Issuer shall (i) apply an amount equal to such excess Net Cash Proceeds to permanently repay Indebtedness of a Consolidated Subsidiary or Indebtedness of the Issuer which is pari passu with the 2010 Notes, (ii) invest an equal amount not so used in clause (i) in property or assets of related business within 24 months after the date of the Asset Sale (the "Application Period") or (iii) apply such excess Net Cash Proceeds not so used in clause (i) or (ii) (the "Excess Proceeds") to make an offer, within 30 days after the end of the Application Period, to purchase from the Holders on a pro rata basis an aggregate principal amount of 2010 Notes on the relevant purchase date equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the 2010 Notes on the relevant purchase date and unpaid interest, if any, to the purchase date. The Issuer shall only be required to make an offer to purchase 2010 Notes from Holders pursuant to clause (iii) if the Excess Proceeds equal or exceed $25,000,000 at any given time. The procedures to be followed by the Issuer in making an offer to purchase 2010 Notes from the Holders with Excess Proceeds, and for the acceptance of such offer by the Holders, shall be the same as those set forth in Section 3.01 herein with respect to a Change in Control. ARTICLE V ADDITIONAL EVENTS OF DEFAULT WITH RESPECT TO THE 2010 NOTES SECTION 5.01. Definition. All of the events specified in clauses (a) through (h) of Section 5.1 of the Original Indenture shall be Events of Default with respect to the 2010 Notes. SECTION 5.02. Amendments to Section 5.1 of the Original Indenture. Solely for the purpose of determining Events of Default with respect to the 2010 Notes, paragraphs Section 5.1(e), Section 5.1(f) and Section 5.1(h) of the Original Indenture shall be amended such that each and every reference therein to the Issuer shall be deemed to mean either the Issuer or Consumers. 28 SECTION 5.03. Additional Events of Default. Solely for the purpose of determining Events of Default with respect to the 2010 Notes, an Event of Default shall also include the following: (i) default in the payment of any interest upon any 2010 Note, including Additional Amounts, if any, when it becomes due and payable, and continuance of such default for 30 days; (ii) default in the Issuer's obligation to redeem the 2010 Notes after exercising its redemption option pursuant to this Fourteenth Supplemental Indenture; and (iii) default in the Issuer's obligation to purchase 2010 Notes upon the occurrence of a Change in Control in accordance with the terms of Article III hereof. ARTICLE VI GLOBAL NOTES The 2010 Notes will be issued initially in the form of Global Notes. "Global Note" means a registered 2010 Note evidencing one or more 2010 Notes issued to a depositary (the "Depositary") or its nominee, in accordance with this Article VI and bearing the legend prescribed in this Article VI. One or more Global Notes will represent all 2010 Notes. The Issuer shall execute and the Trustee shall, in accordance with this Article VI and the Issuer Order with respect to the 2010 Notes, authenticate and deliver one or more Global Notes in temporary or permanent form that (i) shall represent and shall be denominated in an aggregate amount equal to the aggregate principal amount of the 2010 Notes to be represented by such Global Note or Global Notes, (ii) shall be registered in the name of the Depositary for such Global Note or Global Notes or the nominee of such Depositary, (iii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions and (iv) shall bear a legend substantially to the following effect: "Unless the Global 2010 Note is presented by an authorized representative of the Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of a nominee of the Depositary or in such other name as is requested by an authorized representative of the Depositary (and any payment is made to such nominee of the Depositary or to such other entity as is requested by an authorized representative of the Depositary), any transfer, pledge or other use hereof for value or otherwise by or to any Person is wrongful inasmuch as the registered owner hereof has an interest herein." Notwithstanding Section 2.8 of the Original Indenture, unless and until it is exchanged in whole or in part for 2010 Notes in definitive form, a Global Note representing one or more 2010 Notes may not be transferred except as a whole by the Depositary, to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such 29 nominee to a successor Depositary for 2010 Notes or a nominee of such successor Depositary. If at any time the Depositary for the 2010 Notes is unwilling or unable to continue as Depositary for the 2010 Notes, the Issuer shall appoint a successor Depositary with respect to the 2010 Notes. If a successor Depositary for the 2010 Notes is not appointed by the Issuer by the earlier of (i) 90 days from the date the Issuer receives notice to the effect that the Depositary is unwilling or unable to act, or the Issuer determines that the Depositary is unable to act or (ii) the effectiveness of the Depositary's resignation or failure to fulfill its duties as Depositary, the Issuer will execute, and the Trustee, upon receipt of a Issuer Order for the authentication and delivery of definitive 2010 Notes, will authenticate and deliver 2010 Notes in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Global Notes representing such 2010 Notes in exchange for such Global Note or Global Notes. The Issuer may at any time and in its sole discretion determine that the 2010 Notes issued in the form of one or more Global Notes shall no longer be represented by such Global Note or Global Notes. In such event the Issuer will execute, and the Trustee, upon receipt of an Issuer Order for the authentication and delivery of definitive 2010 Notes, will authenticate and deliver 2010 Notes in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Global Notes representing such 2010 Notes in exchange for such Global Note or Global Notes. The Depositary for such 2010 Notes may surrender a Global Note or Global Notes for such 2010 Notes in exchange in whole or in part for 2010 Notes in definitive form on such terms as are acceptable to the Issuer and such Depositary. Thereupon, the Issuer shall execute, and the Trustee shall authenticate and deliver, without service charge: (i) to each Person specified by such Depositary a new 2010 Note or 2010 Notes, of any authorized denomination as requested by such Person in aggregate principal amount equal to and in exchange for such Person's beneficial interest in the Global Note; and (ii) to such Depositary a new Global Note in a denomination equal to the difference, if any, between the principal amount of the surrendered Global Note and the aggregate principal amount of 2010 Notes in definitive form delivered to Holders thereof. In any exchange provided for in this Article VI, the Issuer will execute and the Trustee will authenticate and deliver 2010 Notes in definitive registered form in authorized denominations. Upon the exchange of a Global Note for 2010 Notes in definitive form, such Global Note shall be cancelled by the Trustee. 2010 Notes in definitive form issued in exchange for a Global Note pursuant to this Article VI shall be registered in such names 30 and in such authorized denominations as the Depositary for such Global Note, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee or Security Registrar. The Trustee shall deliver such 2010 Notes to the Persons in whose names such 2010 Notes are so registered. ARTICLE VII DEFEASANCE All of the provisions of Article Ten of the Original Indenture shall be applicable to the 2010 Notes. Upon satisfaction by the Issuer of the requirements of Section 10.1(C) of the Indenture, in connection with any covenant defeasance (as provided in Section 10.1(C) of the Indenture), the Issuer shall be released from its obligations under Article Nine of the Original Indenture and under Article IV of this Fourteenth Supplemental Indenture with respect to the 2010 Notes. ARTICLE VIII SUPPLEMENTAL INDENTURES This Fourteenth Supplemental Indenture is a supplement to the Original Indenture. As supplemented by this Fourteenth Supplemental Indenture, the Original Indenture is in all respects ratified, approved and confirmed, and the Original Indenture and this Fourteenth Supplemental Indenture shall together constitute one and the same instrument. ARTICLE IX MODIFICATION AND WAIVER In addition to those matters set forth in Section 8.2 of the Original Indenture (including the terms and conditions of the 2010 Notes set forth herein), with respect to the 2010 Notes, no amendment or supplemental indenture to the Indenture shall, without the consent of the Holder of each 2010 Note affected thereby: (a) reduce the redemption price or Change in Control Purchase Price of the 2010 Notes; (b) change the terms applicable to redemption or purchase of the 2010 Notes in a manner adverse to the Holder; or (c) alter the manner of calculation or rate of Additional Amounts payable on any 2010 Note or extend the time for payment of any such amount. In addition, with respect to the 2010 Notes, notwithstanding Section 5.10 of the Original Indenture, approval of the Holders of each outstanding 2010 Note shall be required to waive any default by the Issuer in any payment of the redemption price or Change in Control Purchase Price with respect to any 2010 Notes. 31 The reference to "interest" in Section 5.10(i) of the Original Indenture shall include Additional Amounts, if any. TESTIMONIUM This Fourteenth Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 32 IN WITNESS WHEREOF, the parties hereto have caused this Fourteenth Supplemental Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first written above. CMS ENERGY CORPORATION /s/ Thomas J. Webb ---------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer Attest: /s/ Laura Mountcastle ----------------------- BANK ONE TRUST COMPANY, N.A., as Trustee /s/ Mietka Collins ---------------------------------- Mietka Collins Account Representative Attest: /s/ Steven E. Charles ----------------------- 33 Schedule 4.04(b)(2) - See Attached - 34 CMS ENERGY INDEBTEDNESS SCHEDULE AS OF 7/17/03
PRIMARY SECONDARY FACILITY MAXIMUM ENTITY ENTITY DESCRIPTION LENDER (BANK) AMOUNT - ------------------ -------------------------------- -------------------------------- -------------------- --------------- CMS ENERGY CMS Energy $185MM Credit Agmt 5/22/03 Bank One, NA 185,000,000 CMS Viron Letter of Credit Jamaica Private Power Co Letter of Credit CMS Enterprises (Enporion) Letter of Credit Hydra-Co Ent. (Salt City) Letter of Credit CMS Generation (Shuweihat) Letter of Credit CMS Generation (Shuweihat) Letter of Credit CMS MS&T Letter of Credit CMS MS&T Letter of Credit CMS MS&T MI LLC Letter of Credit Jorf Lasfar Letter of Credit Jorf Lasfar Letter of Credit Jorf Lasfar Letter of Credit Jorf Lasfar Letter of Credit CMS Viron Letter of Credit Panhandle Letter of Credit CMS Viron Letter of Credit Jorf Lasfar Energy Co. Letter of Credit Jorf Lasfar Energy Co. Letter of Credit Grayling Letter of Credit CMS Energy $409MM Second A & R Credit Agmt. Citicorp 409,000,000 CMS Energy Term Loan CMS Methanol Co. 14,000,000 CMS Energy General Term Notes Series D 200,000,000 Series E 400,000,000 Series F 300,000,000 CMS Energy Sr Unsecured Convertible Senior Notes @ 3.375% due 2023 150,000,000 CMS Energy Sr. Unsecured Notes @ 7 5/8% 180,000,000 CMS Energy Convert. Sub. Debentures 172,500,000 CMS Energy Extend. Tenor Rate Adj. Sec. 180,000,000 CMS Energy Sr. Unsecured Notes @ 7.5% 480,000,000 CMS Energy Sr. Unsecured Notes @ 6.75% 300,000,000 CMS Energy Sr. Notes @ 8.9% 269,000,000 CMS Energy Sr. Notes @ 9.875% 500,000,000 CMS Energy Premium Equity Participating Security Units @ 7.25% 220,000,000 CMS Energy Sr. Notes @ 8.5% 350,000,000 CMS Energy St. Clair Undergrnd Stor. Indemnity 200,000 54,000 CMS Energy CMS MS&T Guaranty 1,000,000 CMS Energy CMS Generation Guaranty 24,155,500 CMS Energy Emirates CMS Power Co. Letter of Credit Barclays Bank PLC UK 17,500,000 CMS Energy CMS Viron & CMS Enterprises Indemnity 305,220 CMS Energy Genesee Power Station Svc Fee Support Agreement US Bank 3,000,000 CMS ENTERPRISES CMS Enterprises CMS GT Indemnity 20,000 CMS Enterprises CMS MS&T Guaranties 30,100,000 CMS Enterprises CMS MS&T Indemnity 168,484,895 CMS Enterprises CMS MS&T Indemnity 78,581,671 CMS Enterprises CMS MS&T Indemnity 26,315,263 CMS Enterprises CMS MS&T MI LLC Guaranty 10,000,000 CMS Enterprises CMS Viron, CMS MS&T Indemnity 9,992,448 CMS Enterprises CMS Viron Indemnity - CMS Enterprises CMS Viron Indemnity 17,311,248

PRIMARY SECONDARY AMOUNT ISSUE EXPIRATION LATEST AMEND ENTITY ENTITY OUTSTANDING DATE DATE DATE # - ------------------ -------------------------------- ------------ ---------- ---------- ------------ --- CMS ENERGY CMS Energy 0 5/23/2003 5/21/2004 CMS Viron 320,507 12/21/2001 9/24/2003 3/11/2002 1 Jamaica Private Power Co 7,000,000 10/29/2001 12/31/2003 CMS Enterprises (Enporion) 1,919,470 10/26/2001 5/14/2004 Hydra-Co Ent. (Salt City) 1,250,000 12/3/2001 5/14/2004 12/4/2002 1 CMS Generation (Shuweihat) 2,500,000 12/5/2001 5/14/2004 CMS Generation (Shuweihat) 70,300,000 12/5/2001 5/14/2004 CMS MS&T 5,000,000 10/17/2001 12/1/2003 6/6/2002 3 CMS MS&T 1,000,000 1/18/2002 5/14/2004 CMS MS&T MI LLC 1,200,000 1/18/2002 5/14/2004 Jorf Lasfar 3,000,000 3/18/2002 5/14/2004 10/2/2002 1 Jorf Lasfar 39,086,700 5/15/2002 5/14/2004 10/2/2002 1 Jorf Lasfar 11,300,000 5/15/2002 5/14/2004 10/2/2002 1 Jorf Lasfar 17,272,500 5/15/2002 5/14/2004 10/2/2002 1 CMS Viron 136,272 5/24/2002 7/24/2003 Panhandle 350,000 3/16/2003 11/30/2003 CMS Viron 228,516 3/26/2003 11/30/2003 Jorf Lasfar Energy Co. 4,800,000 11/15/2002 5/14/2004 Jorf Lasfar Energy Co. 2,500,000 11/15/2002 5/14/2004 Grayling 2,026,689 3/11/2003 6/9/2004 CMS Energy 5,000,000.00 3/30/2003 3/30/2006 CMS Energy 14,000,000 1/28/2002 12/15/2004 CMS Energy 65,772,000 183,055,000 296,726,000 CMS Energy 150,000,000 7/16/2003 7/15/2023 CMS Energy 175,815,000 9/26/1997 11/15/2004 CMS Energy 172,500,000 6/20/1997 7/15/2027 CMS Energy 180,000,000 1/13/1998 1/15/2005 CMS Energy 408,845,000 1/25/1999 1/15/2009 CMS Energy 287,025,000 2/3/1999 1/15/2004 CMS Energy 260,475,000 7/2/2001 7/15/2008 CMS Energy 467,558,000 10/10/2000 10/15/2007 CMS Energy 220,000,000 8/22/2000 8/18/2004 CMS Energy 300,375,000 3/29/2001 4/15/2011 CMS Energy St. Clair Undergrnd Stor. 200,000 54,000 CMS Energy CMS MS&T 1,000,000 11/1/2000 CMS Energy CMS Generation 24,155,500 9/4/1997 CMS Energy Emirates CMS Power Co. 17,500,000 4/27/1999 4/27/2004 CMS Energy CMS Viron & CMS Enterprises 305,220 CMS Energy Genesee Power Station 3,000,000 3/1/1994 2021 CMS ENTERPRISES CMS Enterprises CMS GT 20,000 9/20/1994 9/20/2002 CMS Enterprises CMS MS&T 30,100,000 CMS Enterprises CMS MS&T 168,484,895 4/28/1999 6/1/2009 CMS Enterprises CMS MS&T 78,581,671 12/14/1999 11/25/2011 CMS Enterprises CMS MS&T 26,315,263 11/15/2000 2/25/2011 CMS Enterprises CMS MS&T MI LLC 10,000,000 8/22/2000 11/28/2000 1 CMS Enterprises CMS Viron, CMS MS&T 9,992,448 CMS Enterprises CMS Viron - CMS Enterprises CMS Viron 17,311,248 PRIMARY ADDITIONAL ENTITY DESCRIPTION BENEFICIARY - ------------------ ----------------------------------------- ------------------------------------ CMS ENERGY CMS Energy Used to support Letters of Credit SLT751236 County of Los Angeles SLT751239 Bank of Tokyo - Mitsubishi Trust Co. SLT751227 TCF Leasing Inc. SLT751226 Honeywell International SLT751237 Barclays Bank PLC SLT751238 Barclays Bank PLC SLT751224 Constellation Power Source Inc SLT751231 Midwest Independent System Operator SLT751232 Midwest Independent System Operator SLT751230 Deutsche Bank Trust Co. Americas SLT751225 Deutsche Bank Trust Co. Americas SLT751234 Deutsche Bank Trust Co. Americas SLT751233 Deutsche Bank Trust Co. Americas 00332014 County of Los Angeles SLT751229 Federal Insurance Co. SLT751228 Seaboard Surety Co. & others Collateral reserve . LC#SLT751271 Deutsche Bank Trust Collateral reserve . LC#SLT751270 Deutsche Bank Trust LC#00331042 Consumers Energy CMS Energy Facilities A & B combined. CMS Energy CMS Energy CMS Energy CMS Energy CMS Energy Issued for QUIPS * CMS Energy X-TRAS * CMS Energy CMS Energy CMS Energy CMS Energy CMS Energy PEPS CMS Energy CMS Energy Surety & Operations bonds Surety bond to state of Michigan Insurance company Surety Bond to US EPA Insurance company CMS Energy 7/1/99 Natural Gas Agreement MCV CMS Energy Jorf Lasfar Capital Contribution Agmt. CMS Energy Taweelah A2 Barclays Abu Dhabi CMS Energy Surety Bond to outside party Insurance company CMS Energy Tax exempt bond financing US Bank (Trustee) CMS ENTERPRISES CMS Enterprises Kalkaska 30 Project Underground Gas Storage Lease and Surety Bond w/State of MI State of MI CMS Enterprises $342.1MM reciprocal taken Various counterparties CMS Enterprises Performance based Surety bond to Tennergy Corp. St. Paul Insurance Co. CMS Enterprises Performance based Surety bond to OH Schools Council St. Paul Insurance Co. CMS Enterprises Performance base surety bond to CCAC St. Paul Insurance Co. CMS Enterprises Detroit Edison CMS Enterprises Surety bonds to outside parties Insurance companies CMS Enterprises Covers York gty for Viron York International CMS Enterprises Surety Bonds to outside parties Insurance companies
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PRIMARY SECONDARY FACILITY MAXIMUM ENTITY ENTITY DESCRIPTION LENDER (BANK) AMOUNT - ------------------ -------------------------------- -------------------------------- -------------------- --------------- CMS Enterprises CMS Oil and Gas Co. Indemnity 75,000 CMS Enterprises CMS Oil and Gas Co. Indemnity 300,000 CMS Enterprises Terra Energy Ltd. Indemnity 9,649,954 CMS Enterprises CMS Viron Guaranty 4,300,000 CMS Enterprises CMS Viron Guaranty 37,500,000 CMS Enterprises CMS Viron Guaranty 34,020,044 CMS Enterprises CMS Viron Guaranty 4,235,747 CMS Enterprises CMS Viron Guaranty 430,023 CMS Enterprises CMS Viron Guaranty 1,248,000 CMS Enterprises CMS Viron Guaranty 6,720,000 CMS Enterprises CMS Viron Guaranty 1,168,144 CMS Enterprises CTM Guaranty 3,780,000 CMS Enterprises Western Australia Gas Trans. Co. Guaranty 20,000,000 CMS Enterprises CMS Ensenada S.A. Guaranty 135,000 CMS Enterprises CMS Ensenada S.A. Guaranty 800,000 CMS Enterprises CMS Ensenada S.A. Guaranty 11,697,519 CMS Enterprises Jegrupadu O&M Guaranty 750,000 CMS Enterprises CMS Morocco Op Co Guaranty 45,000,000 CMS Enterprises DIG Guaranty 650,000 PRIMARY SECONDARY AMOUNT ISSUE EXPIRATION LATEST AMEND ENTITY ENTITY OUTSTANDING DATE DATE DATE # - ------------------ -------------------------------- ------------ ---------- ---------- ------------ --- CMS Enterprises CMS Oil and Gas Co. 75,000 CMS Enterprises CMS Oil and Gas Co. 300,000 CMS Enterprises Terra Energy Ltd. 9,649,954 CMS Enterprises CMS Viron 4,300,000 3/24/2000 CMS Enterprises CMS Viron 37,500,000 3/31/2000 CMS Enterprises CMS Viron 34,020,044 12/14/2000 CMS Enterprises CMS Viron 4,235,747 12/20/2001 CMS Enterprises CMS Viron 430,023 7/1/2001 CMS Enterprises CMS Viron 1,248,000 1/1/2002 CMS Enterprises CMS Viron 6,720,000 4/1/2001 CMS Enterprises CMS Viron 1,168,144 3/1/2001 CMS Enterprises CTM 3,780,000 6/25/1996 12/31/2006 CMS Enterprises Western Australia Gas Trans. Co. 20,000,000 10/9/2000 10/15/2002 10/19/2000 1 CMS Enterprises CMS Ensenada S.A. 135,000 5/5/1997 CMS Enterprises CMS Ensenada S.A. 800,000 5/7/1997 2009 CMS Enterprises CMS Ensenada S.A. 11,697,519 5/7/1997 2009 CMS Enterprises Jegrupadu O&M 750,000 12/23/1996 CMS Enterprises CMS Morocco Op Co 45,000,000 CMS Enterprises DIG 650,000 4/1/2002 PRIMARY SECONDARY ADDITIONAL ENTITY ENTITY DESCRIPTION BENEFICIARY - ------------------ -------------------------------- ----------------------------------------- ----------------------------------- CMS Enterprises CMS Oil and Gas Co. Surety Bonds to outside parties Insurance companies CMS Enterprises CMS Oil and Gas Co. Surety Bonds to outside parties Insurance companies CMS Enterprises Terra Energy Ltd. Appeal bonds to Michigan Court Insurance companies CMS Enterprises CMS Viron Performance based energy savings contract GE Capital Public Finance CMS Enterprises CMS Viron Supports CMS Viron in MDW contract ABB Energy Capital CMS Enterprises CMS Viron Performance based energy savings contract University of Utah CMS Enterprises CMS Viron Trigen Development Corp CMS Enterprises CMS Viron BT Broad Street - Philadephia CMS Enterprises CMS Viron Opus Corporation (Lease) CMS Enterprises CMS Viron Opus Corporation (Lease) CMS Enterprises CMS Viron PPL Spectrum(Sacred Hearl Hospital) CMS Enterprises CTM CTM's Maintenance Agmt. Siemens CMS Enterprises Western Australia Gas Trans. Co. Centrales Termicas Mendoza S.A. CMS Enterprises CMS Ensenada S.A. La Plata gas transportation Transportadora de Gas Del Sur S.A. CMS Enterprises CMS Ensenada S.A. Project Support & Guaranty Agmt. YPF CMS Enterprises CMS Ensenada S.A. Project Support & Guaranty Agmt. OPIC CMS Enterprises Jegrupadu O&M O&M Agreement GVK Industries Ltd CMS Enterprises CMS Morocco Op Co Jorf Lasfar O&M JLEC CMS Enterprises DIG Settlement Agmt: Interconnection Detroit Edison
* Direct Obligation does not include "Common Contribution to Trust" of approx. 3% Page 2 of 2 EX-4.(H) 5 k82154aexv4wxhy.txt CREDIT AGREEMENT, AS AMENDED, DATED MAY 22, 2003 EXHIBIT 4(h) EXECUTION COPY ================================================================= CREDIT AGREEMENT Dated as of May 22, 2003 among CMS ENERGY CORPORATION, THE FINANCIAL INSTITUTIONS NAMED HEREIN, UNION BANK OF CALIFORNIA, N.A. as Documentation Agent, and BANK ONE, NA, as Administrative Agent ================================================================= BANC ONE CAPITAL MARKETS, INC. Lead Arranger and Book Runner ================================================================= TABLE OF CONTENTS ARTICLE I DEFINITIONS..................................................................................................... 2 1.1 Definitions................................................................................... 2 1.2 Other Interpretive Provisions................................................................. 17 1.3 Accounting Terms.............................................................................. 17 ARTICLE II THE ADVANCES.................................................................................................... 17 2.1 Commitment.................................................................................... 17 2.2 Required Payments............................................................................. 18 2.3 Ratable Loans................................................................................. 18 2.4 Types of Advances............................................................................. 18 2.5 Commitment Fee and Reductions of Commitment................................................... 18 2.6 Minimum Amount of Advances.................................................................... 18 2.7 Optional Principal Payments................................................................... 18 2.8 Method of Selecting Types and Interest Periods for New Advances............................... 19 2.9 Conversion and Continuation of Outstanding Advances........................................... 19 2.10 Interest Rates, Interest Payment Dates........................................................ 20 2.11 Rate after Maturity........................................................................... 20 2.12 Method of Payment............................................................................. 20 2.13 Record-keeping; Noteless Agreement; Telephonic Notices........................................ 21 2.14 Lending Installations......................................................................... 22 2.15 Non-Receipt of Funds by the Agent............................................................. 22 ARTICLE III LETTER OF CREDIT FACILITY....................................................................................... 22 3.1 Issuance...................................................................................... 22 3.2 Participations................................................................................ 22 3.3 Notice........................................................................................ 23 3.4 LC Fees....................................................................................... 23 3.5 Administration; Reimbursement by Banks........................................................ 23 3.6 Reimbursement by Company...................................................................... 24 3.7 Obligations Absolute.......................................................................... 24

-i- 3.8 Actions of LC Issuer.......................................................................... 25 3.9 Indemnification............................................................................... 25 3.10 Banks' Indemnification........................................................................ 25 3.11 Rights as a Bank.............................................................................. 26 ARTICLE IV CHANGE IN CIRCUMSTANCES......................................................................................... 26 4.1 Yield Protection.............................................................................. 26 4.2 Replacement Bank.............................................................................. 27 4.3 Availability of Eurodollar Rate Loans......................................................... 27 4.4 Funding Indemnification....................................................................... 28 4.5 Taxes......................................................................................... 28 4.6 Bank Certificates, Survival of Indemnity...................................................... 30 ARTICLE V REPRESENTATIONS AND WARRANTIES.................................................................................. 30 5.1 Incorporation and Good Standing............................................................... 30 5.2 Corporate Power and Authority: No Conflicts................................................... 30 5.3 Governmental Approvals........................................................................ 31 5.4 Legally Enforceable Agreements................................................................ 31 5.5 Financial Statements.......................................................................... 31 5.6 Litigation.................................................................................... 31 5.7 Insurance..................................................................................... 32 5.8 ERISA......................................................................................... 32 5.9 Casualty...................................................................................... 32 5.10 Taxes......................................................................................... 32 5.11 Consumers Dividends........................................................................... 32 5.12 Ownership..................................................................................... 32 5.13 Solvency...................................................................................... 32 5.14 Investment Company Act........................................................................ 32 5.15 Use of Proceeds............................................................................... 32 5.16 Public Utility Holding Company Act............................................................ 33 5.17 Material Adverse Change....................................................................... 33

-ii- ARTICLE VI AFFIRMATIVE COVENANTS........................................................................................... 33 6.1 Payment of Taxes, Etc......................................................................... 33 6.2 Maintenance of Insurance...................................................................... 33 6.3 Preservation of Existence, Etc................................................................ 33 6.4 Compliance with Laws, Etc..................................................................... 33 6.5 Inspection Rights............................................................................. 34 6.6 Keeping of Books.............................................................................. 34 6.7 Maintenance of Properties, Etc................................................................ 34 6.8 Use of Proceeds............................................................................... 34 6.9 Consolidated Leverage Ratio................................................................... 34 6.10 Cash Dividend Coverage Ratio.................................................................. 34 6.11 Pledged Collateral; Further Assurances........................................................ 35 ARTICLE VII NEGATIVE COVENANTS.............................................................................................. 35 7.1 Liens......................................................................................... 35 7.2 Enterprises Debt.............................................................................. 37 7.3 Lease Obligations............................................................................. 38 7.4 Investments in Other Persons.................................................................. 38 7.5 Compliance with ERISA......................................................................... 39 7.6 Transactions With Affiliates.................................................................. 39 7.7 Restricted Payments........................................................................... 39 7.8 Mergers, Etc.................................................................................. 40 7.9 Sales, Etc., of Assets........................................................................ 40 7.10 Maintenance of Ownership of Subsidiaries...................................................... 41 7.11 Amendment of Tax Sharing Agreement............................................................ 41 7.12 Prepayments of Indebtedness................................................................... 41 7.13 Conduct of Business........................................................................... 42 7.14 Organizational Documents...................................................................... 42 7.15 Off-Balance Sheet Liabilities................................................................. 42 ARTICLE VIII REPORTING REQUIREMENTS.......................................................................................... 42

-iii- ARTICLE IX EVENTS OF DEFAULT............................................................................................... 45 9.1 Events of Default............................................................................. 45 9.2 Remedies...................................................................................... 47 ARTICLE X WAIVERS, AMENDMENTS AND REMEDIES................................................................................ 48 10.1 Amendments.................................................................................... 48 10.2 Preservation of Rights........................................................................ 48 ARTICLE XI CONDITIONS PRECEDENT............................................................................................ 49 11.1 Initial Credit Extension...................................................................... 49 11.2 Each Credit Extension......................................................................... 50 ARTICLE XII GENERAL PROVISIONS.............................................................................................. 50 12.1 Successors and Assigns........................................................................ 50 12.2 Survival of Representations................................................................... 52 12.3 Governmental Regulation....................................................................... 52 12.4 Taxes......................................................................................... 52 12.5 Choice of Law................................................................................. 52 12.6 Headings...................................................................................... 52 12.7 Entire Agreement.............................................................................. 52 12.8 Expenses; Indemnification..................................................................... 53 12.9 Severability of Provisions.................................................................... 53 12.10 Setoff........................................................................................ 53 12.11 Ratable Payments.............................................................................. 53 12.12 Nonliability of Bank.......................................................................... 54 12.13 Investment of Pledged Collateral.............................................................. 54 ARTICLE XIII THE AGENT....................................................................................................... 54 13.1 Appointment................................................................................... 54 13.2 Powers........................................................................................ 54 13.3 General Immunity.............................................................................. 55 13.4 No Responsibility for Loans, Recitals, Etc.................................................... 55 13.5 Action on Instructions of Banks............................................................... 55 13.6 Employment of Agents and Counsel.............................................................. 55 13.7 Reliance on Documents; Counsel................................................................ 55

-iv- 13.8 Agent's Reimbursement and Indemnification..................................................... 55 13.9 Rights as a Bank.............................................................................. 56 13.10 Bank Credit Decision.......................................................................... 56 13.11 Successor Agent............................................................................... 56 13.12 Agent and Arranger Fees....................................................................... 56 ARTICLE XIV NOTICES..................................................................................................... 57 14.1 Giving Notice................................................................................. 57 14.2 Change of Address............................................................................. 57 ARTICLE XV COUNTERPARTS.................................................................................................... 57

-v- SCHEDULES Schedule I Commitments Schedule II Material Liabilities Schedule III Existing Letters of Credit EXHIBITS Exhibit A Form of Note Exhibit B Required Opinion from Michael D. VanHemert Exhibit C Form of Compliance Certificate Exhibit D Form of Assignment and Assumption Agreement Exhibit E Form of Pledge Agreement Exhibit F Form of Issuance/Modification Request

-vi- CREDIT AGREEMENT This Credit Agreement, dated as of May 22, 2003, is among CMS Energy Corporation, a Michigan corporation (the "Company"), the financial institutions listed on the signature pages hereof (together with their respective successors and assigns, the "Banks"), Union Bank of California, N.A., as Documentation Agent, and Bank One, NA, a national banking association having its principal office in Chicago, Illinois, as Administrative Agent and LC Issuer. W I T N E S S E T H: WHEREAS, the Company has requested, and the Banks have agreed to enter into, a credit facility in an aggregate amount of $185,000,000; NOW THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Agreement: "Accounting Changes" - see Section 1.3. "Advance" means a group of Loans made by the Banks hereunder of the same Type, made, converted or continued on the same day and, in the case of Eurodollar Rate Loans, having the same Interest Period. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling (including all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control another entity if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities, by contract, or otherwise. "Agent" means Bank One in its capacity as administrative agent for the Banks pursuant to Article XIII, and not in its individual capacity as a Bank, and any successor Agent appointed pursuant to Article XIII. "Aggregate Commitment" means the aggregate amount of the Commitments of all Banks. "Aggregate Outstanding Credit Exposure" means, at any time, the aggregate of the Outstanding Credit Exposure of all the Banks. "Agreement" means this Credit Agreement. 2 "AIG Pledge Agreement" means the Pledge and Security Agreement, dated as of January 8, 2003, by and among Enterprises and other grantors parties thereto in favor of American Home Assurance Company, as collateral agent. "Alternate Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum. "Arranger" - see Section 13.12. "Assignment Agreement" - see Section 12.1(e). "Available Aggregate Commitment" means, at any time, the Aggregate Commitment then in effect minus the Aggregate Outstanding Credit Exposure at such time. "Banks" - see the preamble. "Bank One" means Bank One, NA (Main Office - Chicago), in its individual capacity, and its successors and assigns. "Base Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the per annum interest rate determined by the offered rate per annum at which deposits in U.S. dollars, for a period equal or comparable to such Interest Period, appears on Telerate page 3750 (or any successor page) as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or in the event such offered rate is not available from the Telerate page, the rate offered on deposits in U.S. dollars, for a period equal or comparable to such Interest Period, by Bank One's London Office to prime banks in the London interbank market at approximately 11:00 a.m. (London time), two Business Days prior to the first day of such Interest Period, and in an amount substantially equal to the amount of Bank One's relevant Eurodollar Rate Loan for such Interest Period. "Borrowing Date" means a date on which Loans are made hereunder. "Borrower Interest Expense" means at any date, the total interest expense in respect of Debt of the Company for the four calendar quarters immediately preceding such date, including, without duplication, (i) interest expense attributable to Capital Leases, (ii) amortization of debt discount, (iii) capitalized interest, (iv) cash and noncash payments, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs under interest rate swap, "cap", "collar" or other hedging agreements (including amortization of discount) and (vii) interest expense in respect of obligations of Persons deemed to be Debt of the Company under clause (ix) of the definition of Debt, provided that Borrower Interest Expense shall exclude any costs otherwise included in interest expense recognized on early retirement of debt. "Borrowing Notice" - see Section 2.8. "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are 3 open in Chicago, Illinois and New York, New York for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago, Illinois and New York, New York for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system. "Capital Lease" means any lease which has been or would be capitalized on the books of the lessee in accordance with GAAP. "Cash Dividend Income" means, for any period, the amount of all cash dividends received by the Company from its Subsidiaries during such period that are paid out of the net income or loss (without giving effect to: any extraordinary gains in excess of $25,000,000, the amount of any write-off or write-down of assets, including write-offs or write-downs related to the sale of assets, impairment of assets and loss on contracts, in each case in accordance with GAAP consistently applied, and up to $200,000,000 of other non-cash write-offs) of such Subsidiaries during such period. "Closing Date" means May 22, 2003. "CMS 2003 Credit Agreement" means the Second Amended and Restated Credit Agreement, dated as of March 30, 2003, by and among the Company, as borrower, the lenders from time to time parties thereto, and CUSA, as administrative agent. "Code" means the Internal Revenue Code of 1986. "Commitment" means, for each Bank, the obligation of such Bank to make Loans to, and participate in Facility LCs issued upon the application of, the Company in an aggregate amount not exceeding the amount set forth on Schedule I or as set forth in any Assignment Agreement that has become effective pursuant to Section 12.1, as such amount may be modified from time to time. "Commitment Fee" - see Section 2.5. "Commitment Fee Rate" means, for any period for which such rate is to be calculated, (a) if the average daily Unused Commitment during such period was $20,000,000 or less, 0.15% per annum, and (b) otherwise, 0.30% per annum. "Company" - see the preamble. "Consolidated Debt" means, without duplication, as determined on a consolidated basis in accordance with GAAP, at any date of determination, the sum of the aggregate Debt of the Company plus the aggregate debt (as such term is construed in accordance with GAAP) of the Consolidated Subsidiaries; provided that: (a) Consolidated Debt shall not include any Support Obligation described in clause (iv) or (v) of the definition thereof if such Support Obligation or the primary obligation so 4 supported is not fixed or conclusively determined or is not otherwise reasonably quantifiable as of the date of determination; (b) Consolidated Debt shall not include (i) any Junior Subordinated Debt owned by any Hybrid Preferred Securities Subsidiary or (ii) any guaranty by the Company of payments with respect to any Hybrid Preferred Securities, provided that such guaranty is subordinated to the rights of the Banks hereunder and under the other Credit Documents pursuant to terms of subordination substantially similar to those set forth in Exhibit H to the CMS 2003 Credit Agreement, or pursuant to other terms and conditions satisfactory to the Majority Banks; (c) for purposes of this definition only, the percentage of the Net Proceeds from any issuance of hybrid debt/equity securities (other than Junior Subordinated Debt and Hybrid Preferred Securities) by the Company or any Consolidated Subsidiary that shall be considered Consolidated Debt shall be agreed by the Agent and the Company (and consented to by the Majority Banks) and shall be based on, among other things, the treatment (if any) given to such hybrid securities by the rating agencies; (d) with respect to any Support Obligations provided by the Company in connection with a purchase or sale by MS&T or its Subsidiaries of natural gas, natural gas liquids, gas condensates, electricity, oil, propane, coal, any other commodity, weather derivatives or any derivative instrument with respect to any commodity with any other Person (a "Counterparty"), Consolidated Debt shall include only the excess, if any, of (A) the aggregate amount of any Support Obligations provided by the Company in respect of MS&T's or any of its Subsidiary's obligations under any such purchase or sale transaction (a "Covering Transaction") entered into by MS&T or any of its Subsidiaries in connection with such purchase or sale over (B) the aggregate amount of (i) any Support Obligations provided by the direct or indirect parent company of such Counterparty (the "Counterparty Guarantor") and (ii) any irrevocable letter of credit provided by any financial institution for the account of such Counterparty or Counterparty Guarantor, in each case for the benefit of MS&T or any of its Subsidiaries in support of such Counterparty's payment obligations to MS&T or such Subsidiary arising from such purchase or sale, provided that (x) the senior, unsecured, non-credit enhanced indebtedness of such Counterparty Guarantor or such financial institution (as the case may be) is rated BBB- (or its equivalent) or higher by any two of S&P, Fitch and Moody's, provided that in the event that such Counterparty Guarantor has no such rated indebtedness, Dun & Bradstreet Inc. has rated such Counterparty Guarantor at least investment grade, (y) no default by such Counterparty Guarantor in respect of any such Support Obligations provided by such Counterparty Guarantor has occurred and is continuing and (z) such Counterparty Guarantor is not the Company or any Affiliate of the Company or any of its Subsidiaries; (e) Consolidated Debt shall not include any Project Finance Debt of the Company or any Consolidated Subsidiary; and (f) Consolidated Debt shall not include the principal amount of any Securitized Bonds. "Consolidated EBITDA" means, with reference to any period, the pretax operating income of the Company and its Subsidiaries ("Pretax Operating Income") for such period plus, 5 to the extent deducted in determining Pretax Operating Income (without duplication), (i) depreciation, depletion and amortization, and (ii) any non-cash write-offs and write-downs contained in the Company's Pretax Operating Income, including write-offs or write-downs related to the sale of assets, impairment of assets and loss on contracts, in each case in accordance with GAAP consistently applied, all calculated for the Company and its Subsidiaries on a consolidate basis for such period; provided that Consolidated EBITDA shall not include any operating income attributable to that portion of the revenues of Consumers dedicated to the repayment of the Securitized Bonds. "Consolidated Subsidiary" means any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Company in accordance with GAAP. "Credit Documents" means this Agreement, the Facility LC Applications, any Note, the Pledge Agreement and any account control agreement or similar document issued in connection with the Pledge Agreement. "Credit Extension" means the making of an Advance or the issuance or Modification (other than a reduction in the amount) of a Facility LC. "Consumers" means Consumers Energy Company, a Michigan corporation, all of whose common stock is on the Closing Date owned by the Company. "Consumers Credit Facility" means, collectively, Consumers' existing (i) $300,000,000 term loan facility, (ii) $150,000,000 term loan B facility, (iii) $140,000,000 term loan facility and (iv) $250,000,000 revolving loan facility, as in effect on the date hereof. "Consumers Dividend Restriction" means any restriction enacted or imposed after October 1, 1992 upon the ability of Consumers to pay cash dividends to the Company in respect of Consumers' capital stock, whether such restriction is imposed by statute, regulation, decisions or rulings by the Michigan Public Service Commission or the Federal Energy Regulatory Commission (or any successor agency or agencies), final judgments of any court of competent jurisdiction, indentures, agreements, contracts or ,restrictions to which Consumers is a party or by which it is bound or otherwise; provided that no restriction on such dividends existing on October 1, 1992 shall be a Consumers Dividend Restriction at any time. "CUSA" means Citicorp USA, Inc. "Debt" means, for any Person, without duplication, any and all indebtedness, liabilities and other monetary obligations of such Person (whether for principal, interest, fees, costs, expenses or otherwise, and whether contingent or otherwise) (i) for borrowed money or evidenced by bonds, debentures, notes or other similar instruments, (ii) to pay the deferred purchase price of property or services (except trade accounts payable arising in the ordinary course of business which are not overdue), (iii) as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (iv) under reimbursement or similar agreements with respect to letters of credit issued thereunder (except reimbursement obligations and letters of credit that are cash collateralized), (v) under any interest rate swap, "cap", "collar" or other hedging agreements; provided that for purposes of the calculation of Debt for this clause (v) only, the actual amount of Debt of such Person shall be determined on a 6 net basis to the extent such agreements permit such amounts to be calculated on a net basis, (vi) to pay rent or other amounts under leases entered into in connection with sale and leaseback transactions involving assets of such Person being sold in connection therewith, (vii) arising from any accumulated funding deficiency (as defined in Section 412(a) of the Code) for a Plan, (viii) arising in connection with any withdrawal liability under ERISA to any Multiemployer Plan and (ix) arising from (A) direct or indirect guaranties in respect of, and obligations to purchase or otherwise acquire, or otherwise to warrant or hold harmless, pursuant to a legally binding agreement, a creditor against loss in respect of, Debt of others referred to in clauses (i) through (viii) above and (B) other guaranty or similar financial obligations in respect of the performance of others, including Support Obligations. Notwithstanding the foregoing, solely for purposes of the calculation required under Section 6.10, Debt shall not include any Junior Subordinated Debt issued by the Company and owned by any Hybrid Preferred Securities Subsidiary. "Default" means an event which but for the giving of notice or lapse of time, or both, would constitute an Event of Default. "Designated Officer" means the Chief Financial Officer, the Treasurer, an Assistant Treasurer, any Vice President in charge of financial or accounting matters or the principal accounting officer of the Company. "Dividend Coverage Ratio" means, at any date, the ratio of (i) Pro Forma Dividend Amounts to (ii) Borrower Interest Expense. "Effective Date" means the date on which all conditions precedent to the initial Credit Extension have been satisfied. "Enterprises" means CMS Enterprises Company, a Michigan corporation, all of whose common stock is on the Closing Date owned by the Company. "Enterprises 2003 Credit Agreement" means, collectively, (i) the revolving Credit Agreement, dated as of March 30, 2003, by and among Enterprises, as borrower, the Company, the lenders from time to time parties thereto and CUSA, as administrative agent, and (ii) the revolving Credit Agreement, dated as of April 21, 2003, by and among Enterprises, as borrower, the Company, the lenders from time to time parties thereto and CUSA, as administrative agent. "Equity Distributions" means, for any period, the aggregate amount of cash received by the Company from its Subsidiaries during such period that are paid out of proceeds from the sale of common equity of Subsidiaries of the Company. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA Affiliate" means, with respect to any Person, any trade or business (whether or not incorporated) that is a member of a commonly controlled trade or business under Sections 414(b), (c), (m) and (o) of the Code. "Eurodollar Advance" means an Advance consisting of Eurodollar Rate Loans. 7 "Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, an interest rate per annum equal to the sum of (i) the quotient obtained by dividing (a) the Base Eurodollar Rate applicable to such Interest Period by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) 1.50%. "Eurodollar Rate Loan" means a Loan which bears interest by reference to the Eurodollar Rate. "Event of Default" means an event described in Article IX. "Exchange Act" means the Securities Exchange Act of 1934. "Excluded Taxes" means, in the case of each Bank, the LC Issuer or applicable Lending Installation and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the jurisdiction under the laws of which such Bank, the LC Issuer or the Agent is incorporated or organized or (ii) the jurisdiction in which the Agent's, the LC Issuer's or such Bank's principal executive office or such Bank's or the LC Issuer's applicable Lending Installation is located. "Existing Letters of Credit" means the letters of credit listed on Schedule III. "Facility LC" - see Section 3.1. "Facility LC Application" - see Section 3.3. "Fair Market Value" means, with respect to any asset, the value of the consideration obtainable in a sale of such asset in the open market, assuming a sale by a willing seller to a willing purchaser dealing at arm's length and arranged in an orderly manner over a reasonable period of time, each having reasonable knowledge of the nature and characteristics of such asset, neither being under any compulsion to act, and, if in excess of $50,000,000, as determined in good faith by the Board of Directors of the Company. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "Fitch" means Fitch, Inc. or any successor thereto. "Floating Rate" means a rate per annum equal to (i) the Alternate Base Rate plus (ii) the 0.50%, changing when and as the Alternate Base Rate changes. "Floating Rate Advance" means an Advance consisting of Floating Rate Loans. 8 "Floating Rate Loan" means a Loan which bears interest at the Floating Rate. "FRB" means the Board of Governors of the Federal Reserve System or any successor thereto. "GAAP" - see Section 1.3. "Governmental Approval" means any authorization, consent, approval, license, permit, certificate, exemption of, or filing or registration with, any governmental authority or other legal or regulatory body, required in connection with (i) the execution, delivery, or performance of any Credit Document by the Company, (ii) the grant and perfection of any Lien in favor of the Agent contemplated by the Credit Documents, or (iii) the exercise by any Agent (on behalf of the Banks) of any right or remedy provided for under the Credit Documents. "Hazardous Substance" means any waste, substance, or material identified as hazardous, dangerous or toxic by any office, agency, department, commission, board, bureau, or instrumentality of the United States or of the State or locality in which the same is located having or exercising jurisdiction over such waste, substance or material. "Hybrid Preferred Securities" means any preferred securities issued by a Hybrid Preferred Securities Subsidiary, where such preferred securities have the following characteristics: (i) such Hybrid Preferred Securities Subsidiary lends substantially all of the proceeds from the issuance of such preferred securities to the Company or a wholly-owned direct or indirect Subsidiary of the Company in exchange for Junior Subordinated Debt issued by the Company or such wholly-owned direct or indirect Subsidiary, respectively; (ii) such preferred securities contain terms providing for the deferral of interest payments corresponding to provisions providing for the deferral of interest payments on the Junior Subordinated Debt; and (iii) the Company or a wholly-owned direct or indirect Subsidiary of the Company (as the case may be) makes periodic interest payments on the Junior Subordinated Debt, which interest payments are in turn used by the Hybrid Preferred Securities Subsidiary to make corresponding payments to the holders of the preferred securities. "Hybrid Preferred Securities Subsidiary" means any Delaware business trust (or similar entity) (i) all of the common equity interest of which is owned (either directly or indirectly through one or more wholly-owned Subsidiaries of the Company) at all times by the Company or a wholly-owned direct or indirect Subsidiary of the Company, (ii) that has been formed for the purpose of issuing Hybrid Preferred Securities and (iii) substantially all of the assets of which consist at all times solely of Junior Subordinated Debt issued by the Company or a wholly-owned direct or indirect Subsidiary of the Company (as the case may be) and payments made from time to time on such Junior Subordinated Debt. "Indenture" means the Indenture, dated as of September 15, 1992, between the Company and the Trustee (as such term is defined in the Indenture). 9 "Interest Period" means, with respect to a Eurodollar Advance, a period of one, two, three or six months, or such shorter period agreed to by the Company and the Banks, commencing on a Business Day selected by the Company pursuant to this Agreement. Such Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter (or such shorter period agreed to by the Company and the Banks), provided that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month (or such shorter period, as applicable), such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month (or such shorter period, as applicable). If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. The Company may not select any Interest Period that ends after the scheduled Termination Date. "Issuance/Modification Request" - see Section 3.3. "Junior Subordinated Debt" means any unsecured Debt of the Company or a Subsidiary of the Company (i) issued in exchange for the proceeds of Hybrid Preferred Securities and (ii) subordinated to the rights of the Banks hereunder and under the other Credit Documents pursuant to terms of subordination substantially similar to those set forth in Exhibit G to the CMS 2003 Credit Agreement, or pursuant to other terms and conditions satisfactory to the Majority Banks. "LC Fee" - see Section 3.4. "LC Issuer" means Bank One (or any subsidiary or affiliate of Bank One designated by Bank One) in its capacity as issuer of Facility LCs hereunder. "LC Obligations" means, at any time, the sum, without duplication, of (i) the aggregate undrawn stated amount under all Facility LCs outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations. "LC Payment Date" - see Section 3.5. "Lending Installation" means any office, branch, subsidiary or affiliate of a Bank. "Lien" is defined in Section 7.1. "Loan" - see Section 2.1. "Loan Party" has the meaning assigned thereto in the CMS 2003 Credit Agreement as in effect on the date hereof and without giving effect to any amendment thereto (unless the same shall be consented to in a writing signed by the Majority Banks) or termination thereof. "Majority Banks" means, as of any date of determination, Banks in the aggregate having more than 50% of the Aggregate Commitment as of such date or, if the Aggregate Commitment has been terminated, Banks in the aggregate holding more than 50% of the aggregate unpaid principal amount of the Aggregate Outstanding Credit Exposure as of such date. Any 10 determination of those Banks constituting Majority Banks shall be made by the Agent and shall be conclusive and binding on all parties absent manifest error. "Material Adverse Change" means any event, development or circumstance that has had or could reasonably be expected to have a material adverse effect on (a) the business, assets, property, financial condition, results of operations or prospects of the Company and its Subsidiaries, considered as a whole, (b) the Company's ability to perform its obligations under this Agreement or any other Credit Document to which it is or will be a party or (c) the validity or enforceability of any Credit Document or the rights or remedies of any Agent or the Banks hereunder. "Material Subsidiary" means Consumers and each Restricted Subsidiary. "Measurement Quarter" - see Section 6.9. "Modify" and "Modification" - see Section 3.1. "Moody's" means Moody's Investors Service, Inc. or any successor thereto. "MS&T" means CMS Marketing, Services and Trading Company, a Michigan corporation, all of whose capital stock is on the Closing Date owned by Enterprises. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Net Proceeds" means, with respect to any sale, assignment or other disposition of (but not a lease or license of) any property, or with respect to any sale or issuance of securities or incurrence of Debt, by any Person, gross cash proceeds received by such Person or any Subsidiary of such Person from such sale, assignment, disposition, issuance or incurrence (including cash received as consideration for the assumption or incurrence of liabilities incurred in connection with or in anticipation of such transaction) after (i) provision for all income or other taxes measured by or resulting from such transaction, (ii) payment of all customary underwriting commissions, auditing and legal fees, printing costs, rating agency fees and other customary and reasonable fees and expenses incurred by such Person in connection with such transaction, (iii) all amounts used to repay Debt (and any premium or penalty thereon) secured by a Lien on any asset disposed of in such sale, assignment or other disposition or which is or may be required (by the express terms of the instrument governing such Debt or by applicable law) to be repaid in connection with such sale, assignment, or other disposition, and (iv) deduction of appropriate amounts to be provided by such Person or a Subsidiary of such Person as a reserve, in accordance with GAAP consistently applied, against any liabilities associated with the assets sold, transferred or disposed of in such transaction and retained by such Person or Subsidiary of such Person after such transaction, provided that "Net Proceeds" shall include on a dollar-for-dollar basis all amounts remaining in such reserve after such liability shall have been satisfied in full or terminated; and provided, further, that notwithstanding the foregoing, "Net Proceeds" shall exclude (a) any amounts received or deemed to be received by the Company for the purchase of the Company's capital stock in connection with the Company's dividend reinvestment program and (b) amounts received by the Company or any Subsidiary of the 11 Company pursuant to any transaction with the Company or any Subsidiary of the Company otherwise permitted hereunder. "Net Worth" means, with respect to any Person, the excess of such Person's total assets over its total liabilities, total assets and total liabilities each to be determined in accordance with GAAP consistently applied, excluding, however, from the determination of total assets (i) goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, licenses and rights in any thereof, and other similar intangibles, (ii) cash held in a sinking or other analogous fund established for the purpose of redemption, retirement or prepayment of capital stock or Debt, and (iii) any items not included in clauses (i) or (ii) above, that are treated as intangibles in conformity with GAAP. "Non-U.S. Bank" - see Section 4.5(d). "Note" means any promissory note issued at the request of a Bank pursuant to Section 2.13 to evidence its Loans. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Loans, all Reimbursement Obligations, all accrued and unpaid commitment fees and all other obligations of the Company to the Banks or to any Bank, the LC Issuer or the Agent arising under the Credit Documents. "OECD" means the Organization for Economic Cooperation and Development. "Off-Balance Sheet Liability" of a Person shall mean any of the following obligations of appearing on such Person's consolidated balance sheet: (i) all lease obligations, leveraged leases, sale and leasebacks and other similar lease arrangements of such Person (ii) any liability under any so called "synthetic lease" or "tax ownership operating lease" transaction entered into by such Person, and (iii) any obligation arising with respect to any other transaction if and to the extent that such obligation is the functional equivalent of borrowing but that does not constitute a liability on the consolidated balance sheet of such Person. "Operating Lease" of a Person means any lease of Property (other than a Capital Lease) by such Person as lessee. "Other Taxes" - see Section 4.5(b). "Outstanding Credit Exposure" means, as to any Bank at any time, the sum of (i) the aggregate principal amount of its Loans outstanding at such time, plus (ii) an amount equal to its Pro Rata Share of the LC Obligations at such time. "Ownership Interest" of the Company in any Consolidated Subsidiary means, at any date of determination, the percentage determined by dividing (i) the aggregate amount of Project Finance Equity in such Consolidated Subsidiary owned or controlled, directly or indirectly, by the Company and any other Consolidated Subsidiary on such date, by (ii) the aggregate amount of Project Finance Equity in such Consolidated Subsidiary owned or controlled, directly or indirectly, by all Persons (including the Company and the Consolidated Subsidiaries) on such 12 date. Notwithstanding anything to the contrary set forth above, if the "Ownership Interest," calculated as set forth above, is 50% or less, such percentage shall be deemed to equal 0%. "Panhandle" means Panhandle Eastern Pipe Line Company, a Delaware corporation, all of whose capital stock is on the Closing Date owned indirectly by Enterprises. "Payment Date" means the second Business Day of each calendar quarter. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Permitted Investments" means each of the following so long as no such Permitted Investment shall have a final maturity later than six months from the date of investment therein: (i) direct obligations of the United States, or of any agency thereof, or obligations guaranteed as to principal and interest by the United States or any agency thereof; (ii) certificates of deposit or bankers' acceptances issued, or time deposits held, or investment contracts guaranteed, by any Bank, any nationally-recognized securities dealer or any other commercial bank, trust company, savings and loan association or savings bank organized under the laws of the United States, or any State thereof, or of any other country which is a member of the OECD, or a political subdivision of any such country, and in each case having outstanding unsecured indebtedness that (on the date of acquisition thereof) is rated AA- or better by S&P or Aa3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured bank indebtedness); (iii) obligations with any Bank, any other bank or trust company described in clause (ii), above, or any nationally-recognized securities dealer, in respect of the repurchase of obligations of the type described in clause (i), above, provided that such repurchase obligations shall be fully secured by obligations of the type described in said clause (i) and the possession of such obligations shall be transferred to, and segregated from other obligations owned by, such Bank, such other bank or trust company or such securities dealer; (iv) commercial paper rated (on the date of acquisition thereof) A-1 or P-1 or better by S&P or Moody's, respectively (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating commercial paper); (v) any eurodollar certificate of deposit issued by any Bank or any other commercial bank, trust company, savings and loan association or savings bank organized under the laws of the United States, or any State thereof, or of any county which is a member of the OECD, or a political subdivision of any such county, and in each case having outstanding unsecured indebtedness that (on the date of acquisition thereof) is rated AA- or better by S&P or Aa3 or better by Moody's (or an equivalent rating by 13 another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured bank indebtedness); and (vi) interests in any money market mutual fund which at the date of investment in such fund has the highest fund rating by each of Moody's and S&P which has issued a rating for such fund (which, for S&P, shall mean a rating of AAAm or AAAmg). "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Plan" means, with respect to any Person, an "employee benefit plan" as defined in Section 3(3) of ERISA (other than a Multiemployer Plan) maintained for employees of such Person or any ERISA Affiliate of such Person that is subject to Title IV of ERISA and has "unfunded benefit liabilities" as determined under Section 4001(a)(18) of ERISA. "Plan Termination Event" means, (i) with respect to any Plan, a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder (other than a "reportable event" not subject to the provision for 30-day notice to the PBGC under such regulations or a "reportable event" for which the provision for the 30-day notice to the PBGC under such regulations has been waived), or (ii) the withdrawal by the Company or any of its ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA resulting in liability to the Company or any of its ERISA Affiliates under Section 4063 or 4064 of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the termination of a Plan under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the PBGC, or (v) any other event or condition which is reasonably likely to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Pledge Agreement" means a Pledge Agreement executed by Enterprises in favor of the Agent on behalf of the Banks, substantially in the form of Exhibit E. "Pledged Collateral" means cash and other investment property in which a security interest has been granted to the Agent pursuant to the Pledge Agreement. "Prime Rate" means a rate per annum equal to the prime rate of interest announced from time to time by Bank One or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes. "Pro Forma Dividend Amount" means, from and after any date of any Consumers Dividend Restriction, the sum of (a) the aggregate amount which Consumers could have paid to the Company during the four calendar quarters immediately preceding such date had such Consumers Dividend Restriction been in effect during such quarters plus (b) cash dividends received by the Company from any other Subsidiary during such quarters. "Project Finance Debt" means Debt of any Person that is non-recourse to such Person (unless such Person is a special-purpose entity) and each Affiliate of such Person, other than with respect to the interest of the holder of such Debt in the collateral, if any, securing such Debt. 14 "Project Finance Equity" means, at any date of determination, consolidated equity of the common, preference and preferred stockholders of the Company and the Consolidated Subsidiaries relating to any obligor with respect to Project Finance Debt. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Pro Rata Share" means, with respect to a Bank, a portion equal to a fraction the numerator of which is such Bank's Commitment and the denominator of which is the Aggregate Commitment. "Reimbursement Obligations" means, at any time, the aggregate of all obligations of the Company then outstanding under Article III to reimburse the LC Issuer for amounts paid by the LC Issuer in respect of any one or more drawings under Facility LCs. "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D of the FRB on Eurocurrency liabilities. "Restricted Subsidiary" means (i) Enterprises and (ii) any other Subsidiary of the Company (other than Consumers and its Subsidiaries) that, on a consolidated basis with any of its Subsidiaries as of any date of determination, accounts for more than 10% of the consolidated assets of the Company and its Consolidated Subsidiaries. "S&P" means Standard and Poor's Rating Services, a division of The McGraw Hill Companies, Inc. or any successor thereto. "SEC" means the Securities and Exchange Commission or any governmental authority which may be substituted therefor. "Securitized Bonds" means any nonrecourse bonds or similar asset-backed securities issued by a special-purpose subsidiary of Consumers which are payable solely from specialized charges authorized by the utility commission of the relevant state in connection with the recovery of regulatory assets or other qualified costs. "Single Employer Plan" means a Plan maintained by the Company or any ERISA Affiliate for employees of the Company or any ERISA Affiliate. "6.75% Senior Notes" means the Company's 6.75% Senior Notes due January 2004, the aggregate outstanding principal amount of which was equal to $287,025,000 as of February 8, 2003. "Solvent" means, when used with respect to any Person, that at the time of determination: (i) the fair market value of its assets is in excess of the total amount of its liabilities (including net contingent liabilities); and 15 (ii) it is then able and expects to be able to pay its debts (including contingent debts and other commitments) as they mature; and (iii) it has capital sufficient to carry on its business as conducted and as proposed to be conducted. For purposes of this definition, the amount of contingent liabilities at any time shall be computed as amount that, in light of all the facts and circumstances known to such Person at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one or more other Subsidiaries). In the case of an unincorporated entity, a Person shall be deemed to have more than 50% of interests having ordinary voting power only if such Person's vote in respect of such interests comprises more than 50% of the total voting power of all such interests in the unincorporated entity. "Support Obligations" means, for any Person, without duplication, any financial obligation, contingent or otherwise, of such Person guaranteeing or otherwise supporting any Debt or other obligation of any other Person in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect (including letters of credit and surety bonds in connection therewith), (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or advance or supply funds for the purchase of) any security for the payment of such Debt, (ii) to purchase property, securities or services for the purpose of assuring the owner of such Debt of the payment of such Debt, (iii) to maintain working capital, equity capital, available cash or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such Debt, (iv) to provide equity capital under or in respect of equity subscription arrangements (to the extent that such obligation to provide equity capital does not otherwise constitute Debt), or (v) to perform, or arrange for the performance of, any non-monetary obligations or non-funded debt payment obligations of the primary obligor. "Tax Sharing Agreement" means the Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits, dated as of January 1, 1994, by and among the Company, each of the members of the Consolidated Group (as defined therein), and each of the corporations that become members of the Consolidated Group. "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes and Other Taxes. "Termination Date" means the earlier of (i) May 21, 2004 or (ii) the date on which the Commitments are terminated. "Type" - see Section 2.4. 16 "Unused Commitment" means, at any time, the Aggregate Commitment then in effect minus the Aggregate Outstanding Credit Exposure at such time. 1.2 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of such terms. (b) Article, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) The term "including" is not limiting and means "including without limitation." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Credit Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such statute or regulation. 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 5.5 ("GAAP"). If any changes in generally accepted accounting principles are hereafter required or permitted and are adopted by the Company or any of its Subsidiaries, or the Company or any of its Subsidiaries shall change its application of generally accepted accounting principles with respect to any Off-Balance Sheet Liabilities, in each case, with the agreement of its independent certified public accountants, and such changes result in a change in the method of calculation of any of the financial covenants, tests, restrictions or standards herein or in the related definitions or terms used therein ("Accounting Changes"), the parties hereto agree, at the Company's request, to enter into negotiations, in good faith, in order to amend such provisions in a credit neutral manner so as to reflect equitably such changes with the desired result that the criteria for evaluating the Company's and its Subsidiaries' financial condition shall be the same after such changes as if such changes had not been made; provided that until such provisions are amended in a manner reasonably satisfactory to the Agent and the Majority Banks, no Accounting Change shall be given effect in such calculations. In the event such amendment is entered into, all references in this Agreement to GAAP shall mean generally accepted accounting principles as of the date of such amendment. Notwithstanding the foregoing, all financial statements to be delivered by the Company pursuant to Article VIII shall be prepared in accordance with generally accepted accounting principles in effect at such time. ARTICLE II THE ADVANCES 2.1 Commitment. From and including the Effective Date and prior to the Termination Date, each Bank severally agrees, on the terms and conditions set forth in this Agreement, (a) to make loans to the Company from time to time (the "Loans"), and (b) to participate in Facility LCs issued upon the request of the Company from time to time, provided 17 that, after giving effect to the making of each such Loan and the issuance of each such Facility LC, such Bank's Outstanding Credit Exposure shall not exceed its Commitment. In no event may the Aggregate Outstanding Credit Exposure exceed the Aggregate Commitment. Subject to the terms and conditions of this Agreement, the Company may borrow, repay and reborrow at any time prior to the Termination Date. The Commitments shall expire on the Termination Date. 2.2 Required Payments. The Aggregate Outstanding Credit Exposure and all other unpaid obligations of the Company hereunder shall be paid in full on the Termination Date. 2.3 Ratable Loans. Each Advance shall consist of Loans made by the several Banks ratably according to their Pro Rata Shares. 2.4 Types of Advances. The Advances may be Floating Rate Advances or Eurodollar Advances (each a "Type" of Advance), or a combination thereof, as selected by the Company in accordance with Sections 2.8 and 2.9. 2.5 Commitment Fee and Reductions of Commitment. (a) The Company agrees to pay to the Agent, for the account of each Bank according to its Pro Rata Share, a commitment fee (the "Commitment Fee") at the Commitment Fee Rate on the daily Unused Commitment from the Closing Date to but not including the date on which this Agreement is terminated in full and all of the Obligations hereunder have been paid in full. The Commitment Fee shall be payable quarterly in arrears on each Payment Date (for the quarter then most recently ended) and on the Termination Date (for the period then ended for which such fee has not previously been paid). The Commitment Fee shall be calculated for actual days elapsed on the basis of a 360 day year. (b) The Company may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Banks in a minimum amount of $5,000,000 (or any higher integral multiple of $1,000,000), upon at least five Business Days' written notice to the Agent, which shall specify the amount of any such reduction, provided that the Aggregate Commitment may not be reduced below the Aggregate Outstanding Credit Exposure. All accrued Commitment Fees shall be payable on the effective date of any termination of the obligation of the Banks to make Credit Extensions hereunder. 2.6 Minimum Amount of Advances. Each Advance shall be in the amount of $5,000,000 (or a higher integral multiple of $1,000,000), provided that any Floating Rate Advance may be in the amount of the Available Aggregate Commitment (rounded down, if necessary, to an integral multiple of $1,000,000). 2.7 Optional Principal Payments. The Company may from time to time prepay, without penalty or premium, all outstanding Floating Rate Advances or, in an aggregate amount of $5,000,000 or a higher integral multiple of $1,000,000, any portion of the outstanding Floating Rate Advances upon one Business Day's prior notice to the Agent. The Company may from time to time pay, subject to the payment of any funding indemnification amounts required by Section 4.4 but without penalty or premium, all outstanding Eurodollar Advances or, in an aggregate amount of $5,000,000 or a higher integral multiple of $1,000,000, any portion of any outstanding Eurodollar Advance upon three Business Days' prior notice to the Agent; provided 18 that if after giving effect to any such prepayment the principal amount of any Eurodollar Advance is less than $5,000,000, such Eurodollar Advance shall automatically convert into a Floating Rate Advance. 2.8 Method of Selecting Types and Interest Periods for New Advances. The Company shall select the Type of Advance and, in the case of each Eurodollar Advance, the Interest Period applicable thereto from time to time. The Company shall give the Agent irrevocable notice (a "Borrowing Notice") not later than 11:00 a.m. (Chicago time) on the Borrowing Date for each Floating Rate Advance and not later than 11:00 a.m. (Chicago time) three Business Days before the Borrowing Date for each Eurodollar Advance, specifying: (i) the Borrowing Date, which shall be a Business Day, (ii) the aggregate amount of such Advance, (iii) the Type of Advance selected, and (iv) in the case of each Eurodollar Advance, the initial Interest Period applicable thereto. Promptly after receipt thereof, the Agent will notify each Bank of the contents of each Borrowing Notice. Not later than noon (Chicago time) on each Borrowing Date, each Bank shall make available its Loan in funds immediately available in Chicago to the Agent at its address specified pursuant to Section 14. To the extent funds are received from the Banks, the Agent will make such funds available to the Company at the Agent's aforesaid address. No Bank's obligation to make any Loan shall be affected by any other Bank's failure to make any Loan. 2.9 Conversion and Continuation of Outstanding Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Advances pursuant to this Section 2.9 or are repaid in accordance with Section 2.2 or 2.7. Each Eurodollar Advance shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor, at which time such Eurodollar Advance shall be automatically converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or was repaid in accordance with Section 2.2 or 2.7 or (y) the Company shall have given the Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or another Interest Period. Subject to the terms of Section 2.6, the Company may elect from time to time to convert all or any part of a Floating Rate Advance into a Eurodollar Advance. The Company shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Floating Rate Advance into a Eurodollar Advance or continuation of a Eurodollar Advance not later than 11:00 a.m. (Chicago time) at least three Business Days prior to the date of the requested conversion or continuation, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation; (ii) the aggregate amount and Type of the Advance which is to be converted or continued; and 19 (iii) the amount of the Advance which is to be converted into or continued as a Eurodollar Advance and the duration of the Interest Period applicable thereto. provided that no Advance may be continued as, or converted into, a Eurodollar Advance if (x) such continuation or conversion would violate any provision of this Agreement or (y) a Default or Event of Default exists. 2.10 Interest Rates, Interest Payment Dates. (a) Subject to Section 2.11, each Advance shall bear interest as follows: (i) at any time such Advance is a Floating Rate Advance, at a rate per annum equal to the Floating Rate from time to time in effect; and (ii) at any time such Advance is a Eurodollar Advance, at a rate per annum equal to the Eurodollar Rate for each applicable Interest Period therein. Changes in the rate of interest on that portion or any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Floating Rate. (b) Interest accrued on each Floating Rate Advance shall be payable on each Payment Date and at maturity. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which such Eurodollar Advance is prepaid and at maturity. Interest accrued on each Eurodollar Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on Eurodollar Advances, interest on Floating Rate Advances based on the Federal Funds Effective Rate and the LC Fee shall be calculated for actual days elapsed on the basis of a 360-day year. Interest on Floating Rate Advances based on the Prime Rate shall be calculated for actual days elapsed on the basis of a 365- or 366-day year, as appropriate. Interest on each Advance shall accrue from and including the date such Advance is made to but excluding the date payment thereof is received in accordance with Section 2.12. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day (unless, in the case of a Eurodollar Advance, such next succeeding Business Day falls in a new calendar month, in which case such payment shall be due on the immediately preceding Business Day) and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.11 Rate after Maturity. Any Advance not paid by the Company at maturity, whether by acceleration or otherwise, shall bear interest until paid in full at a rate per annum equal to the higher of the rate otherwise applicable thereto plus 1% or the Floating Rate plus 1%. 2.12 Method of Payment. All payments of principal, interest and fees hereunder shall be made in immediately available funds to the Agent at its address specified on its signature page to this Agreement (or at any other Lending Installation of the Agent specified in writing by the Agent to the Company) not later than noon (Chicago time) on the date when due and shall (except in the case of Reimbursement Obligations for which the LC Issuer has not been fully indemnified by the Banks, or as otherwise specifically required hereunder) be applied ratably by the Agent among the Banks. Funds received after such time shall be deemed received on the 20 following Business Day unless the Agent shall have received from, or on behalf of, the Company a Federal Reserve reference number with respect to such payment before 3:00 p.m. (Chicago time) on the date of such payment. Each payment delivered to the Agent for the account of any Bank shall be delivered promptly by the Agent in the same type of funds received by the Agent to such Bank at the address specified for such Bank on its signature page to this Agreement or at any Lending Installation specified in a notice received by the Agent from such Bank. The Agent is hereby authorized to charge the account of the Company maintained with Bank One, if any, for each payment of principal, interest, Reimbursement Obligation and fees as such payment becomes due hereunder. Each reference to the Agent in this Section 2.12 shall also be deemed to refer, and shall apply equally, to the LC Issuer, in the case of payments required to be made by the Company to the LC Issuer pursuant to Section 3.6. 2.13 Record-keeping; Noteless Agreement; Telephonic Notices. (a) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Company to such Bank resulting from each Loan made by such Bank from time to time, including the amounts of principal and interest payable and paid to such Bank from time to time hereunder. (b) The Agent shall also maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period with respect thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Bank hereunder, (iii) the original stated amount of each Facility LC and the amount of LC Obligations outstanding at any time, and (iv) the amount of any sum received by the Agent hereunder from the Company and each Bank's share thereof. (c) The entries maintained in the accounts maintained pursuant to paragraphs (b) and (c) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided that the failure of the Agent or any Bank to maintain such accounts or any error therein shall not in any manner affect the obligation of the Company to repay the Obligations in accordance with their terms. (d) Any Bank may request that its Loans be evidenced by a Note. In such event, the Company shall prepare, execute and deliver to such Bank a Note, payable to the order of such Bank, substantially in the form of Exhibit A. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after any assignment pursuant to Section 12.1) be represented by a Note payable to the order of the payee named therein or any assignee pursuant to Section 12.1, except to the extent that any such Bank or assignee subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in paragraphs (a) and (b) above. (e) The Company hereby authorizes the Banks and the Agent to make Advances based on telephonic notices made by any person or persons the Agent or any Bank in good faith believes to be acting on behalf of the Company. The Company agrees to deliver promptly to the Agent a written confirmation of each telephonic notice signed by a Designated Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Banks, the records of the Agent and the Banks shall govern absent manifest error. 21 2.14 Lending Installations. Subject to the provisions of Section 4.6, each Bank may book its Loans and its participation in any LC Obligations and the LC Issuer may book the Facility LCs at any Lending Installation selected by such Bank or the LC Issuer, as the case may be, and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans shall be deemed held by the applicable Bank for the benefit of such Lending Installation. Each Bank may, by written or facsimile notice to the Company, designate a Lending Installation through which Loans will be made by it or Facility LC's will be issued by it and for whose account payments on the Loans or payments with respect to Facility LCs are to be made. 2.15 Non-Receipt of Funds by the Agent. Unless a Bank or the Company, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Bank, the proceeds of a Loan or (ii) in the case of the Company, a payment of principal, interest or fees to the Agent for the account of the Banks, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Bank or the Company, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) in the case of payment by a Bank, the Federal Funds Rate for such day or (ii) in the case of payment by the Company, the interest rate applicable to the relevant Loan. ARTICLE III LETTER OF CREDIT FACILITY 3.1 Issuance. The LC Issuer hereby agrees, on the terms and conditions set forth in this Agreement, to issue standby and commercial letters of credit (together with the Existing Letters of Credit, collectively the "Facility LCs" and individually each a "Facility LC") and to renew, extend, increase, decrease or otherwise modify each Facility LC ("Modify," and each such action a "Modification"), from time to time from and including the Closing Date and prior to the Termination Date upon the request of the Company; provided that (a) unless otherwise agreed by all Banks, each Facility LC shall be issued to support obligations of Enterprises or a Subsidiary of Enterprises; and (b) immediately after each Facility LC is issued or Modified, the Aggregate Outstanding Credit Exposure shall not exceed the Aggregate Commitment. Unless otherwise agreed by all Banks in writing, no Facility LC shall have an expiry date later than the fifth Business Day prior to the scheduled Termination Date (and the Banks hereby agree that Irrevocable Standby Letter of Credit No. 331042 dated March 11, 2003 in the face amount of $2,026,689 issued by Bank One in favor of Consumers Energy Company shall qualify as a Facility LC notwithstanding the June 9, 2004 expiry date thereof). All Existing Letters of Credit shall be deemed to have been issued pursuant hereto and, from and after the Closing Date, shall be subject to and governed by the terms and conditions hereof. 3.2 Participations. Upon the issuance or Modification by the LC Issuer of a Facility LC in accordance with this Article III, the LC Issuer shall be deemed, without further action by 22 any party hereto, to have unconditionally and irrevocably sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably purchased from the LC Issuer, a participation in such Facility LC (and each Modification thereof) and the related LC Obligations in proportion to its Pro Rata Share. 3.3 Notice. Subject to Section 3.1, the Company shall give the LC Issuer a notice substantially in the form of Exhibit F (an "Issuance/Modification Request") prior to 11:00 a.m. (Chicago time) at least three Business Days prior to the proposed date of issuance or Modification of any Facility LC, specifying (a) in the case of the issuance of a Facility LC, the beneficiary, the stated amount, the proposed date of issuance and the expiry date of such Facility LC, and describing conditions under which such Facility LC may be drawn; (b) in the case of the Modification of a Facility LC, the requested date of modification, the Facility LC to be modified and the terms of such Modification; and (c) in each case, such other information as the LC Issuer may reasonably request. Upon receipt of such notice, the LC Issuer shall promptly notify the Agent, and the Agent shall promptly notify each Bank, of the contents thereof and of the amount of such Bank's participation in such proposed Facility LC. The issuance or Modification by the LC Issuer of any Facility LC shall, in addition to the conditions precedent set forth in Article XI (the satisfaction of which the LC Issuer shall have no duty to ascertain), be subject to the conditions precedent that such Facility LC shall be satisfactory to the LC Issuer and that the Company shall have executed and delivered such application agreement and/or such other instruments and agreements relating to such Facility LC as the LC Issuer shall have reasonably requested (each, a "Facility LC Application"). In the event of any conflict between the terms of this Agreement and the terms of any Facility LC Application, the terms of this Agreement shall control. 3.4 LC Fees. The Company shall pay to the Agent, for the account of the Banks ratably in accordance with their respective Pro Rata Shares, a letter of credit fee (the "LC Fee") at 0.30% per annum on the average daily undrawn stated amount under each Facility LC, such fee to be payable in arrears on each Payment Date and the Termination Date (and, if applicable, thereafter on demand). The Company shall also pay to the LC Issuer for its own account the fees and charges set forth in the fee letter referred to in Section 13.12. 3.5 Administration; Reimbursement by Banks. Upon receipt from the beneficiary of any Facility LC of any demand for payment under such Facility LC, the LC Issuer shall notify the Agent and the Agent shall promptly notify the Company and each other Bank as to the amount to be paid by the LC Issuer as a result of such demand and the proposed payment date (the "LC Payment Date"). The responsibility of the LC Issuer to the Company and each Bank shall be only to determine that the documents (including each demand for payment) delivered under each Facility LC in connection with such presentment shall be in conformity in all material respects with such Facility LC. The LC Issuer shall endeavor to exercise the same care in the issuance and administration of the Facility LCs as it does with respect to letters of credit in which no participations are granted, it being understood that in the absence of any gross negligence or willful misconduct by the LC Issuer, each Bank shall be unconditionally and irrevocably liable without regard to the occurrence of any Default or any condition precedent whatsoever, to reimburse the LC Issuer on demand for (i) such Bank's Pro Rata Share of the amount of each payment made by the LC Issuer under each Facility LC to the extent such amount is not reimbursed by the Company pursuant to Section 3.6 below, plus (ii) interest on the 23 foregoing amount to be reimbursed by such Bank, for each day from the date of the LC Issuer's demand for such Reimbursement (or, if such demand is made after 11:00 a.m. (Chicago time) on such date, from the next succeeding Business Day) to the date on which such Bank pays the amount to be reimbursed by it, at a rate of interest per annum equal to the Federal Funds Effective Rate for the first three days and, thereafter, at a rate of interest equal to the rate applicable to Floating Rate Advances. 3.6 Reimbursement by Company. The Company shall be irrevocably and unconditionally obligated to reimburse the LC Issuer on the applicable LC Payment Date for any amounts to be paid by the LC Issuer upon any drawing under any Facility LC, without presentment, demand, protest or other formalities of any kind; provided that neither the Company nor any Bank shall hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Company or such Bank to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the LC Issuer in determining whether a request presented under any Facility LC issued by it complied with the terms of such Facility LC or (ii) the LC Issuer's failure to pay under any Facility LC issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. All such amounts paid by the LC Issuer and remaining unpaid by the Company shall bear interest, payable on demand, for each day until paid at a rate per annum equal to (x) the rate applicable to Floating Rate Advances for such day if such day falls on or before the applicable LC Payment Date and (y) the sum of 1% plus the rate applicable to Floating Rate Advances for such day if such day falls after such LC Payment Date. The LC Issuer will pay to each Bank ratably in accordance with its Pro Rata Share all amounts received by it from the Company for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Facility LC issued by the LC Issuer, but only to the extent such Bank has made payment to the LC Issuer in respect of such Facility LC pursuant to Section 3.5. Subject to the terms and conditions of this Agreement (including the submission of a Borrowing Notice in compliance with Section 2.8 and the satisfaction of the applicable conditions precedent set forth in Article XI), the Company may request an Advance hereunder for the purpose of satisfying any Reimbursement Obligation. 3.7 Obligations Absolute. The Company's obligations under this Article III shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Company may have or have had against the LC Issuer, any Bank or any beneficiary of a Facility LC. The Company further agrees with the LC Issuer and the Banks that the LC Issuer and the Banks shall not be responsible for, and the Company's Reimbursement Obligation in respect of any Facility LC shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Company, any of its affiliates, the beneficiary of any Facility LC or any financing institution or other party to whom any Facility LC may be transferred or any claims or defenses whatsoever of the Company or of any of its affiliates against the beneficiary of any Facility LC or any such transferee. The LC Issuer shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Facility LC. The Company agrees that any action taken or omitted by the LC Issuer or any Bank under or in connection with each Facility LC and the related drafts and documents, if done without gross negligence or 24 willful misconduct, shall be binding upon the Company and shall not put the LC Issuer or any Bank under any liability to the Company. Nothing in this Section 3.7 is intended to limit the right of the Company to make a claim against the LC Issuer for damages as contemplated by the proviso to the first sentence of Section 3.6. 3.8 Actions of LC Issuer. The LC Issuer shall be entitled to rely, and shall be fully protected in relying, upon any Facility LC, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the LC Issuer. The LC Issuer shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first have received such advice or concurrence of the Majority Banks as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Notwithstanding any other provision of this Article III, the LC Issuer shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Majority Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Banks and any future holders of a participation in any Facility LC. 3.9 Indemnification. The Company hereby agrees to indemnify and hold harmless each Bank, the LC Issuer and the Agent, and their respective directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, reasonable costs or expenses which such Bank, the LC Issuer or the Agent may incur (or which may be claimed against such Bank, the LC Issuer or the Agent by any Person whatsoever) by reason of or in connection with the issuance, execution and delivery or transfer of or payment or failure to pay under any Facility LC or any actual or proposed use of any Facility LC, including any claims, damages, losses, liabilities, costs or expenses which the LC Issuer may incur by reason of or in connection with (i) the failure of any other Bank to fulfill or comply with its obligations to the LC Issuer hereunder (but nothing herein contained shall affect any rights the Company may have against any defaulting Bank) or (ii) by reason of or on account of the LC Issuer issuing any Facility LC which specifies that the term "Beneficiary" included therein includes any successor by operation of law of the named Beneficiary, but which Facility LC does not require that any drawing by any such successor Beneficiary be accompanied by a copy of a legal document, satisfactory to the LC Issuer, evidencing the appointment of such successor Beneficiary; provided that the Company shall not be required to indemnify any Bank, the LC Issuer or the Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of the LC Issuer in determining whether a request presented under any Facility LC complied with the terms of such Facility LC or (y) the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. Nothing in this Section 3.9 is intended to limit the obligations of the Company under any other provision of this Agreement. 3.10 Banks' Indemnification. Each Bank shall, ratably in accordance with its Pro Rata Share, indemnify the LC Issuer, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Company) against any cost, expense (including 25 reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct or the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of the Facility LC) that such indemnitees may suffer or incur in connection with this Article III or any action taken or omitted by such indemnitees hereunder. 3.11 Rights as a Bank. In its capacity as a Bank, the LC Issuer shall have the same rights and obligations as any other Bank. ARTICLE IV CHANGE IN CIRCUMSTANCES 4.1 Yield Protection. (a) If any change in law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof by any agency or authority having jurisdiction over any Bank or the LC Issuer, (i) subjects any Bank or any applicable Lending Installation or the LC Issuer to any increased tax, duty, charge or withholding on or from payments due from the Company (excluding taxation measured by or attributable to the overall net income of such Bank or applicable Lending Installation, whether overall or in any geographic area), or changes the rate of taxation of payments to any Bank or LC Issuer in respect of its Credit Extensions (including any participations in Facility LCs) or other amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by any Bank, the LC Issuer or any applicable Lending Installation (including any reserve costs under Regulation D of the FRB with respect to Eurocurrency liabilities (as defined in such Regulation D)), or (iii) imposes any other condition the result of which is to increase the cost to any Bank, the LC Issuer or any applicable Lending Installation of making, funding or maintaining Credit Extensions (including any participations in Facility LCs), or reduces any amount receivable by any Bank, the LC Issuer or any applicable Lending Installation in connection with Credit Extensions (including any participations in Facility LCs) or requires any Bank, the LC Issuer or any applicable Lending Installation to make any payment calculated by reference to its Outstanding Credit Exposure or interest received by it, by an amount deemed material by such Bank or the LC Issuer, or (iv) affects the amount of capital required or expected to be maintained by any Bank, the LC Issuer or Lending Installation or any corporation controlling any Bank or LC Issuer and such Bank or the LC Issuer, as applicable, determines the amount of capital required is increased by or based upon the existence of this Agreement or its obligation to make Credit Extensions (including any participations in Facility LCs) hereunder or of commitments of this type, then, upon presentation by such Bank or the LC Issuer to the Company of a certificate (as referred to in the immediately succeeding sentence of this Section 4.1) setting forth the basis for such determination and the additional amounts reasonably determined by such Bank or the LC 26 Issuer for the period of up to 90 days prior to the date on which such certificate is delivered to the Company and the Agent, to be sufficient to compensate such Bank or the LC Issuer, as applicable, in light of such circumstances, the Company shall within 30 days of such delivery of such certificate pay to the Agent for the account of such Bank or the LC Issuer, as applicable, the specified amounts set forth on such certificate. The affected Bank or the LC Issuer, as applicable, shall deliver to the Company and the Agent a certificate setting forth the basis of the claim and specifying in reasonable detail the calculation of such increased expense, which certificate shall be prima facie evidence as to such increase and such amounts. An affected Bank or the LC Issuer, as applicable, may deliver more than one certificate to the Company during the term of this Agreement. In making the determinations contemplated by the above-referenced certificate, any Bank and the LC Issuer may make such reasonable estimates, assumptions, allocations and the like that such Bank or the LC Issuer, as applicable, in good faith determines to be appropriate, and such Bank's or the LC Issuer's selection thereof in accordance with this Section 4.1 shall be conclusive and binding on the Company, absent manifest error. (b) Neither the LC Issuer nor any Bank shall be entitled to demand compensation or be compensated hereunder to the extent that such compensation relates to any period of time more than 90 days prior to the date upon which such Bank or the LC Issuer, as applicable, first notified the Company of the occurrence of the event entitling such Bank or the LC Issuer, as applicable, to such compensation (unless, and to the extent, that any such compensation so demanded shall relate to the retroactive application of any event so notified to the Company). 4.2 Replacement Bank. (a) If any Bank shall make a demand for payment under Section 4.1, then within 30 days after such demand, the Company may, with the approval of the Agent (which approval shall not be unreasonably withheld) and provided that no Default or Event of Default shall then have occurred and be continuing, demand that such Bank assign to one or more financial institutions designated by the Company and approved by the Agent all (but not less than all) of such Bank's Commitment and Outstanding Credit Exposure within the period ending on the later of such 30th day and the last day of the longest of the then current Interest Periods or maturity dates for such Outstanding Credit Exposure. It is understood that such assignment shall be consummated on terms satisfactory to the assigning Bank, provided that such Bank's consent to such an assignment shall not be unreasonably withheld. (a) If the Company shall elect to replace a Bank pursuant to clause (a) above, the Company shall prepay the Outstanding Credit Exposure of such Bank, and the bank or banks selected by the Company shall replace such Bank as a Bank hereunder pursuant to an instrument satisfactory to the Company, the Agent and the Bank being replaced by making Credit Extensions to the Company in the amount of the Outstanding Credit Exposure of such assigning Bank and assuming all the same rights and responsibilities hereunder as such assigning Bank and having the same Commitment as such assigning Bank. 4.3 Availability of Eurodollar Rate Loans. If (a) any Bank determines that maintenance of a Eurodollar Rate Loan at a suitable Lending Installation would violate any applicable law, rule, regulation or directive, whether or not having the force of law, or 27 (b) the Majority Banks determine that (i) deposits of a type and maturity appropriate to match fund Eurodollar Rate Loans are not available or (ii) the Base Eurodollar Rate does not accurately reflect the cost of making or maintaining a Eurodollar Rate Loan, then the Agent shall suspend the availability of Eurodollar Rate Loans and, in the case of clause (a), require any Eurodollar Rate Loans to be converted to Floating Rate Loans on such date as is required by the applicable law, rule, regulation or directive. 4.4 Funding Indemnification. If any payment of a Eurodollar Rate Loan occurs on a date which is not the last day of an applicable Interest Period, whether because of prepayment or otherwise, or a Eurodollar Rate Loan is not made on the date specified by the Company for any reason other than default by the Banks, the Company will indemnify each Bank for any loss or cost (but not lost profits) incurred by it resulting therefrom, including any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Rate Loan; provided that the Company shall not be liable for any of the foregoing to the extent they arise because of acceleration by any Bank. 4.5 Taxes. (a) All payments by the Company to or for the account of any Bank, the LC Issuer or the Agent hereunder or under any Note or any Facility LC Application shall be made free and clear of and without deduction for any and all Taxes. If the Company shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Bank, the LC Issuer or the Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.5) such Bank, the LC Issuer or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions, (iii) the Company shall pay the full amount deducted to the relevant authority in accordance with applicable law and (iv) the Company shall furnish to the Agent the original copy of a receipt evidencing payment thereof within 30 days after such payment is made. (b) In addition, the Company hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Note or any Facility LC Application or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note or Facility LC Application ("Other Taxes"). (c) The Company hereby agrees to indemnify the Agent, the LC Issuer and each Bank for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by the Agent, the LC Issuer or such Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within 30 days of the date the Agent, the LC Issuer or such Bank makes demand therefor pursuant to Section 4.6. (d) Each Bank that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Bank") agrees that it will, not more than ten Business Days after the Closing Date, or, if later, not more than ten Business Days after becoming a Bank 28 hereunder, (i) deliver to each of the Company and the Agent two duly completed copies of United States Internal Revenue Service Form W8BEN or W8ECI, certifying in either case that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to each of the Company and the Agent a United States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Bank further undertakes to deliver to each of the Company and the Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Company or the Agent. All forms or amendments described in the preceding sentence shall certify that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form or amendment with respect to it and such Bank advises the Company and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. (e) For any period during which a Non-U.S. Bank has failed to provide the Company with an appropriate form pursuant to clause (d), above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Bank shall not be entitled to indemnification under this Section 4.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Bank which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (d) above, the Company shall take such steps as such Non-U.S. Bank shall reasonably request to assist such Non-U.S. Bank to recover such Taxes. (f) Any Bank that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Company (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. (g) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or properly completed, because such Bank failed to notify the Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Agent under this subsection, together with all costs and expenses related thereto 29 (including attorneys fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent). The obligations of the Banks under this Section 4.5(g) shall survive the payment of the Obligations and termination of this Agreement. 4.6 Bank Certificates, Survival of Indemnity. To the extent reasonably possible, each Bank shall designate an alternate Lending Installation with respect to Eurodollar Rate Loans to reduce any liability of the Company to such Bank under Section 4.1 or to avoid the unavailability of Eurodollar Rate Loan under Section 4.3, so long as such designation is not disadvantageous to such Bank. A certificate of such Bank as to the amount due under Section 4.1, 4.4 or 4.5 shall be final, conclusive and binding on the Company in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Rate Loan shall be calculated as though each Bank funded each Eurodollar Rate Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Base Eurodollar Rate applicable to such Loan whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in any certificate shall be payable on demand after receipt by the Company of such certificate. The obligations of the Company under Sections 4.1, 4.4 and 4.5 shall survive payment of the Obligations and termination of this Agreement, provided that no Bank shall be entitled to compensation to the extent that such compensation relates to any period of time more than 90 days after the termination of this Agreement. ARTICLE V REPRESENTATIONS AND WARRANTIES The Company hereby represents and warrants that: 5.1 Incorporation and Good Standing. Each of the Company and each Material Subsidiary is duly organized, validly existing and in good standing under the laws of the state of its organization and is duly qualified to do business in, and is in good standing in, all other jurisdictions where the nature of its business or the nature of property owned or used by it makes such qualification necessary. 5.2 Corporate Power and Authority: No Conflicts. The execution, delivery and performance by the Company and Enterprises of each Credit Document to which it is or will be a party (i) are within the corporate powers of the Company and Enterprises, (ii) have been duly authorized by all necessary corporate or other organizational action or proceedings on the part of the Company and Enterprises and (iii) do not and will not (A) require any consent or approval of the stockholders (or other applicable holder of equity) of the Company or Enterprises (other than such consents and approvals which have been obtained and are in full force and effect), (B) violate any provision of the charter or by-laws of the Company or Enterprises or of law, (C) violate any legal restriction binding on or affecting the Company or Enterprises, (D) result in a breach of, or constitute a default under, any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Company or Enterprises is a party or by which it is or its properties may be bound or affected, or (E) result in or require the creation of any Lien (other than any Lien in favor of the Agent) upon or with respect to any of the properties of the Company or Enterprises. 30 5.3 Governmental Approvals. No Governmental Approval is required for the due execution, delivery and performance by the Company or Enterprises of any Credit Document to which it is or will be a party, other than filings necessary to perfect security interests in the Pledged Collateral. 5.4 Legally Enforceable Agreements. Each Credit Document to which the Company or Enterprises is a party constitutes a legal, valid and binding obligation of such entity, enforceable against such entity in accordance with its terms, subject to (a) the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (b) the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). 5.5 Financial Statements. (i) The consolidated balance sheet of the Company and its Consolidated Subsidiaries as at December 31, 2002, and the related consolidated statements of income, retained earnings and cash flows of the Company and its Consolidated Subsidiaries for the fiscal year then ended, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, copies of which have been furnished to each Bank, fairly present the financial condition of the Company and its Consolidated Subsidiaries as at such date and the results of operations of the Company and its Consolidated Subsidiaries for the fiscal year ended on such date, all in accordance with generally accepted accounting principles consistently applied; (ii) the consolidated balance sheet of Consumers and its consolidated Subsidiaries as at December 31, 2002, and the related consolidated statements of income, retained earnings and cash flows of Consumers and its consolidated Subsidiaries for the fiscal year then ended, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, copies of each of which have been furnished to each Bank, fairly present the financial condition of Consumers and its consolidated Subsidiaries as at such date and the results of operations of Consumers and its consolidated Subsidiaries for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied; (iii) since December 31, 2002, there has been no Material Adverse Change; and (iv) the Company has no material liabilities or obligations except as reflected in the foregoing financial statements and in Schedule II, as evidenced by the Credit Documents and as may be incurred, in accordance with the terms of this Agreement, in the ordinary course of business (as presently conducted) following the Closing Date. 5.6 Litigation. Except (i) as disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and (ii) such other similar actions, suits and proceedings predicated on the occurrence of the same events giving rise to any actions, suits and proceedings described in the Annual Report filed with the SEC set forth in clause (i) above (all such matters in clauses (i) and (ii), the "Disclosed Matters"), there are no pending or threatened actions, suits or proceedings against or, to the knowledge of the Company, affecting the Company or any of its Subsidiaries or the properties of the Company or any of its Subsidiaries before any court, governmental agency or arbitrator, that would, if adversely determined, reasonably be expected to materially adversely affect the financial condition, properties, business or operations of the Company and its Subsidiaries, considered as a whole, or affect the legality, validity or enforceability of this Agreement or any other Credit Document. There have been no adverse developments with respect to the Disclosed Matters that have had or could reasonably be expected to result in a Material Adverse Change. 31 5.7 Insurance. All insurance required by Section 6.2 is in full force and effect. 5.8 ERISA. No Plan Termination Event has occurred or is reasonably expected to occur with respect to any Plan of the Company or any of its ERISA Affiliates which would result in a material liability to the Company, except as disclosed and consented to by the Majority Banks in writing from time to time. Except as disclosed in the Company's Annual Report on Form 10-K for the period ended December 31, 2002, since the date of the most recent Schedule B (Actuarial Information) to the annual report of the Company (Form 5500 Series), if any, there has been no material adverse change in the funding status of the Plans referred therein and no "prohibited transaction" has occurred with respect thereto which is reasonably expected to result in a material liability to the Company. Neither the Company nor any of its ERISA Affiliates has incurred nor reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan, except as disclosed and consented to by the Majority Banks in writing from time to time. 5.9 Casualty. No fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (except for any such circumstance, if any, which is covered by insurance which coverage has been confirmed and not disputed by the relevant insurer) affecting the properties, business or operations of the Company or any Material Subsidiary has occurred that could reasonably be expected to have a material adverse effect on the business, assets, property, financial condition, results of operations or prospects of (A) the Company and its Subsidiaries, considered as a whole, or (B) Consumers and its Subsidiaries, considered as a whole. 5.10 Taxes. The Company and its Subsidiaries have filed all tax returns (Federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, or, to the extent the Company or any of its Subsidiaries is contesting in good faith an assertion of liability based on such returns, has provided adequate reserves for payment thereof in accordance with GAAP. 5.11 Consumers Dividends. No extraordinary judicial, regulatory or other legal constraints exist which limit or restrict Consumers' ability to declare or pay cash dividends with respect to its capital stock, other than pursuant to the Consumers Credit Facility. 5.12 Ownership. The Company owns not less than 80% of the outstanding shares of common stock of (i) Enterprises and (ii) Consumers. 5.13 Solvency. After giving effect to each Credit Extension (and, in the case of Loans, the disbursement of the proceeds of such Loans pursuant to the Company's instructions), the Company and its Subsidiaries, taken as a whole, are Solvent. 5.14 Investment Company Act. The Company is not an investment company (within the meaning of the Investment Company Act of 1940). 5.15 Use of Proceeds. (a) No proceeds of any Credit Extension will be used to acquire any security in any transaction without the approval of the board of directors of the Person issuing such security if (i) the acquisition of such security would cause the Company to 32 own, directly or indirectly, 5.0% or more of any outstanding class of securities issued by such Person, or (ii) such security is being acquired in connection with a tender offer. (a) After giving effect to each Credit Extension, not more than 25% of the value of the assets of the Company and its Subsidiaries on a consolidated basis will be margin stock (as defined in Regulation U of the FRB). 5.16 Public Utility Holding Company Act. The Company is not a registered "holding company" or a "subsidiary" or an "affiliate" of a registered "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935. 5.17 Material Adverse Change. The Company has not withheld any fact from the Agent or the Banks in regard to the occurrence of any Material Adverse Change. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Obligations shall remain unpaid or any Bank shall have any Commitment under this Agreement, the Company shall: 6.1 Payment of Taxes, Etc. Pay and discharge, and each of its Subsidiaries shall pay and discharge, before the same shall become delinquent, all taxes, assessments and governmental charges, royalties or levies imposed upon it or upon its property except, in the case of taxes, to the extent the Company or any Subsidiary, as the case may be, is contesting the same in good faith and by appropriate proceedings and has set aside adequate reserves for the payment thereof in accordance with GAAP. 6.2 Maintenance of Insurance. Maintain, and each of its Material Subsidiaries shall maintain, insurance covering their respective properties in effect at all times in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general geographical area in which the Company and its Material Subsidiaries operates, either with reputable insurance companies or, in whole or in part, by establishing reserves of one or more insurance funds, either alone or with other corporations or associations. 6.3 Preservation of Existence, Etc. Except as otherwise permitted by Article VII, the Company shall preserve and maintain, and each Material Subsidiary shall preserve and maintain, its corporate or limited liability company existence, material rights (statutory and otherwise) and franchises, and take such other action as may be necessary or advisable to preserve and maintain its right to conduct its business in the states where it shall be conducting its business. 6.4 Compliance with Laws, Etc. Comply, and each Material Subsidiary shall comply, in all material respects with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including any such laws, rules, regulations and orders relating to zoning, environmental protection, use and disposal of Hazardous Substances, land use, construction and building restrictions, and employee safety and health matters relating to business operations. 33 6.5 Inspection Rights. Subject to the requirements of laws or regulations applicable to the Company or its Subsidiaries, as the case may be, and in effect at the time, at any time and from time to time upon reasonable notice, the Company shall permit (i) the Agent and its agents and representatives to examine and make copies of and abstracts from the records and books of account of and the properties of, the Company or any of its Subsidiaries and (ii) the Agent, each of the Banks, and their respective agents and representatives to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company and its Subsidiaries and their respective officers, directors and accountants. Each such visitation and inspection described in the preceding sentence by or on behalf of any Bank shall, unless occurring at a time when a Default or Event of Default shall be continuing, be at such Bank's expense; all other such inspections and visitations shall be at the Company's expense. 6.6 Keeping of Books. From and after December 31, 2002, the Company shall keep, and each of its Subsidiaries shall keep, proper records and books of account, in which full and correct entries shall be made of all financial transactions of, and of the assets and business of the Company and its Subsidiaries, in each case sufficient to prepare financial statements in accordance with GAAP. 6.7 Maintenance of Properties, Etc. The Company shall maintain, and each of its Restricted Subsidiaries shall maintain, in substantial conformity with all laws and material contractual obligations, good and marketable title to all of its properties which are used or useful in the conduct of its business; provided that the foregoing shall not restrict the sale of any asset of the Company or any Restricted Subsidiary to the extent not prohibited by Section 7.9. In addition, the Company shall preserve, maintain, develop and operate, in substantial conformity with all laws and material contractual obligations, all of its material properties which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. 6.8 Use of Proceeds. The Company shall use each Loan solely for purposes of making loans or advances to, or capital contributions in, or otherwise for the benefit of, Enterprises or any Subsidiary thereof; and the Company shall request the issuance of Facility LCs solely for purposes of supporting obligations of Enterprises or any Subsidiary thereof. 6.9 Consolidated Leverage Ratio. The Company shall maintain, as of the last day of each fiscal quarter (in each case, the "Measurement Quarter"), a maximum ratio of (i) Consolidated Debt for the immediately preceding four-fiscal-quarter period ending on the last day of such Measurement Quarter (calculated exclusive of Panhandle and its Subsidiaries), to (ii) Consolidated EBITDA for such period (calculated exclusive of Panhandle and its Subsidiaries), of not more than 7.00 to 1.00, commencing with the period ending June 30, 2003. 6.10 Cash Dividend Coverage Ratio. The Company shall maintain, as of the last day of each Measurement Quarter, a minimum ratio of (i) the sum of (A) Cash Dividend Income for the four-fiscal-quarter period ending on such day, plus (B) 25% of the amount of Equity Distributions received by the Company during such period but in no event in excess of $10,000,000 to (ii) an amount equal to (A) interest expense (excluding all arrangement, underwriting and other similar fees payable in connection with this Agreement, the CMS 2003 Credit Agreement and each of the Enterprises 2003 Credit Agreements) accrued by the Company 34 in respect of all Debt during such period, minus (B) cash interest income received by the Company and its Subsidiaries from Persons other than the Company or any of its Subsidiaries, minus (C) all amounts received by the Company from its Subsidiaries and Affiliates during such period constituting reimbursement of interest expense and commitment, guaranty and letter of credit charges of the Company to such Subsidiary or Affiliate, of not less than 1.20 to 1.00, commencing with the Measurement Quarter ending on June 30, 2003; provided that the Company shall be deemed not to be in breach of the foregoing covenant if, during the Measurement Quarter, it has permanently reduced the principal amount outstanding under this Agreement and the Notes, such that the amount determined pursuant to clause (ii) above, when recalculated on a pro forma basis assuming that the amount of such reduced principal amount outstanding under such agreements and promissory notes were in effect at all times during such four-fiscal-quarter period, would result in the Company being in compliance with such ratio. 6.11 Pledged Collateral; Further Assurances. Beginning on the Effective Date and continuing until the Commitments have terminated and all Obligations have been paid in full, cause Enterprises: (a) to maintain at all times Pledged Collateral in an amount equal to or greater than 100.5% of the Aggregate Outstanding Credit Exposure; (b) to execute and deliver any instrument or document, and take any further action, as may be necessary or as any Bank through the Agent may reasonably request in order to establish and maintain in favor of the Agent a perfected, first-priority security interest in all Pledged Collateral; and (c) to keep all Pledged Collateral free and clear of any Lien other than the security interest of the Agent. ARTICLE VII NEGATIVE COVENANTS So long as any Obligations shall remain unpaid or any Bank shall have any Commitment under this Agreement, the Company shall not: 7.1 Liens. (1) Create, incur, assume or suffer to exist, or permit any other Loan Party to create, incur, assume or suffer to exist, any lien, security interest, or other charge or encumbrance (including the lien or retained security title of a conditional vendor) of any kind, or any other type of arrangement intended or having the effect of conferring upon a creditor a preferential interest upon or with respect to any of its properties of any character (including capital stock and other ownership interests of the Company's directly-owned Subsidiaries, intercompany obligations and accounts) (any of the foregoing being referred to herein as a "Lien"), whether now owned or hereafter acquired, or (2) file, or permit any other Loan Party to file, under the Uniform Commercial Code of any jurisdiction a financing statement which names the Company or any other Loan Party as debtor (other than financing statements that do not evidence a Lien), or (3) sign, or permit any other Loan Party to sign, any security agreement authorizing any secured party thereunder to file any such financing statement, or (4) assign, or permit any other Loan Party to assign, accounts, excluding, however, from the operation of the foregoing restrictions Liens created under the Credit Documents and the following: (a) Liens for taxes, assessments or governmental charges or levies to the extent not past due; 35 (b) cash pledges or deposits to secure (i) obligations under workmen's compensation laws or similar legislation, (ii) public or statutory obligations of the Company or any other Loan Party, (iii) Support Obligations of the Company or any other Loan Party, or (iv) obligations of Enterprises or MS&T in respect of hedging arrangements and commodity purchases and sales (including any cash margins with respect thereto); provided that with respect to clauses (iii) and (iv) above the aggregate amount of cash pledges or deposits securing such Support Obligations and such obligations of Enterprises or MS&T shall not exceed $400,000,000 at any one time outstanding; (c) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's liens and other similar Liens arising in the ordinary course of business securing obligations which are not overdue or which have been fully bonded and are being contested in good faith; (d) Liens securing the obligations under the "Loan Documents" as defined in the CMS 2003 Credit Agreement or the Enterprises 2003 Credit Agreements and any refinancing of either of the foregoing; (e) Liens securing Off-Balance Sheet Liabilities (and all refinancings and recharacterizations thereof permitted under Section 7.2(d)) in an aggregate amount not to exceed $775,000,000; (f) purchase money Liens or purchase money security interests upon or in property acquired or held by the Company or any other Loan Party in the ordinary course of business to secure the purchase price of such property or to secure indebtedness incurred solely for the purpose of financing the acquisition of any such property to be subject to such Liens or security interests, or Liens or security interests existing on any such property at the time of acquisition, or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided that no such Lien or security interest shall extend to or cover any property other than the property being acquired and no such extension, renewal or replacement shall extend to or cover property not theretofore subject to the Lien or security interest being extended, renewed or replaced, and provided, further, that the aggregate principal amount of the Debt at any one time outstanding secured by Liens permitted by this clause (f) shall not exceed $15,000,000; (g) Utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Company or any other Loan Party; (h) Liens existing on any capital asset of any Person at the time such Person is merged or consolidated with or into, or otherwise acquired by, the Company or any other Loan Party and not created in contemplation of such event, provided that such Liens do not encumber any other property or assets and such merger, consolidation or acquisition is otherwise permitted under this Agreement; 36 (i) Liens existing on any capital asset prior to the acquisition thereof by the Company or any other Loan Party and not created in contemplation thereof; provided that such Liens do not encumber any other property or assets; (j) Liens existing as of the Closing Date; (k) Liens securing Project Finance Debt otherwise permitted under this Agreement; (l) Liens arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses (g), (h), (i), (j) or (k); provided that (a) such Debt is not secured by any additional assets and (b) the amount of Debt secured by any such Lien is otherwise permitted under this Agreement; (m) Liens on accounts receivable (other than intercompany receivables) and other contract rights of MS&T and its Subsidiaries arising on or after the Closing Date in favor of any Person (other than an Affiliate of the Company or any of its Subsidiaries) that facilitates the origination of such accounts receivable or other contract rights; (n) Liens granted pursuant to the terms of the AIG Pledge Agreement; and (o) Liens arising out of the refinancing, extension, renewal or refunding of the 6.75% Senior Notes, the Company's reset put securities due July 1, 2003 and the Company's general term notes due in 2003. 7.2 Enterprises Debt. Permit Enterprises or any Subsidiary of Enterprises (other than Panhandle and its Subsidiaries) to create, incur, assume or suffer to exist any debt (as such term is construed in accordance with GAAP) other than: (a) debt arising by reason of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Enterprises' or its Subsidiaries' business; (b) in the form of indemnities in respect of unfiled mechanics' liens and Liens affecting Enterprises' or its Subsidiaries' properties permitted under Section 7.1(c); (c) debt arising under (i) the "Loan Documents" as defined in the CMS 2003 Credit Agreement, (ii) the "Loan Documents" as defined in the Enterprises 2003 Credit Agreement described in clause (i) of the definition thereof in a principal amount not to exceed $441,000,000 minus any principal payments (but with respect to principal payments of revolving loans prior to the "Conversion Date" thereunder, only to the extent of any concurrent reduction or termination of the "Commitments" as defined therein) made from time to time thereunder, and (iii) the "Loan Documents" as defined in the Enterprises 2003 Credit Agreement described in clause (ii) of the definition thereof in a principal amount not to exceed $75,000,000 minus any principal payments (but with respect to principal payments of revolving loans prior to the "Conversion Date" thereunder, only to the extent of any concurrent reduction or termination of the "Commitments" as defined therein) made from time to time thereunder; 37 (d) debt constituting Off-Balance Sheet Liabilities (including any recharacterization thereof as debt pursuant to any changes in generally accepted accounting principles hereafter required or permitted and which are adopted by the Company or any of its Subsidiaries with the agreement of its independent certified public accountants) to the extent permitted by Section 7.15, and any extensions, renewals, refundings or replacements thereof, provided that any such extension, renewal, refunding or replacement is in an aggregate principal amount not greater than the principal amount of, is an obligation of the same Person that is the obligor in respect of, and has a weighted average life to maturity not less than the weighted average life to maturity of, the debt so extended, renewed, refunded or replaced; (e) other debt of Enterprises and its Subsidiaries outstanding as of March 31, 2003 (including the debt of the Loan Parties as of February 28, 2003 as set forth on Schedule II), and any extensions, renewals, refundings or replacements thereof, provided that any such extension, renewal, refunding or replacement is in an aggregate principal amount not greater than the principal amount of, is an obligation of the same Person that is the obligor in respect of, and has a weighted average life to maturity not less than the weighted average life to maturity of, the debt so extended, renewed, refunded or replaced; (f) (i) unsecured, subordinated debt owed (A) to the Company by Enterprises, (B) to Enterprises or CMS Capital, L.L.C. (or any successor by merger to CMS Capital, L.L.C.) and (C) to any Grantor (as such term is defined in the CMS 2003 Credit Agreement) by any Loan Party, and (ii) unsecured debt owed to any Subsidiary of Enterprises (other than a Grantor) by CMS Capital, L.L.C. (or any successor by merger to CMS Capital, L.L.C.), and (iii) unsecured debt of any Foreign Subsidiary (as such term is defined in the CMS 2003 Credit Agreement) of Enterprises owed to another Foreign Subsidiary of Enterprises provided that the proceeds of any repayment of such debt are remitted to a Loan Party; (g) Project Finance Debt of any Loan Party or any of its Subsidiaries incurred on or after the Closing Date; and (h) capital lease obligations and other Debt secured by purchase money Liens to the extent such Liens shall be permitted under Section 7.1(f). 7.3 Lease Obligations. Create, incur, assume or suffer to exist, any obligations as lessee for the rental or hire of real or personal property of any kind under leases or agreements to lease (other than leases which constitute Debt) having an original term of one year or more which would cause the aggregate direct or contingent liabilities of the Company and the other Loan Parties in respect of all such obligations payable in any period of 12 consecutive calendar months to exceed $50,000,000. 7.4 Investments in Other Persons. Make, or permit any of the other Loan Parties to make, any loan or advance to any Person, or purchase or otherwise acquire any capital stock, obligations or other securities of, make any capital contribution to, or otherwise invest in, any Person, other than (i) Permitted Investments, (ii) pursuant to the contractual or contingent obligations of the Company or any other Loan Party as in effect as of the Closing Date and in amounts not to exceed the estimated amounts as set forth on Schedule II (whether such obligation is conditioned upon a change in the ratings of the securities issued by such Person or 38 otherwise) and, in each case, in an amount not to exceed such contractual or contingent obligation as in effect on the Closing Date, (iii) investments, directly or indirectly, by any Loan Party (x) in the capital of any Subsidiary of the Company that is a Loan Party and (y) in assets contributed to such Loan Party, (iv) investments in the capital stock or other ownership interests of any of the Company's Subsidiaries arising from the conversion of intercompany indebtedness to equity, (v) intercompany loans and advances to the extent the corresponding debt is permitted under Section 7.2(f), (vi) investments constituting non-cash consideration received in connection with the sale of any asset permitted under Section 7.9 and (vii) additional loans, advances, purchases, contributions and other investments in an amount not to exceed $340,000,000 in the aggregate at any time; provided that investments described in clauses (iv) (solely with respect to investments made in any Subsidiary that is not a Loan Party) and (vii) above shall not be permitted to be made at a time when either a Default or an Event of Default shall be continuing or would result therefrom; provided, further, that, notwithstanding the foregoing, neither the Company nor any other Loan Party shall make any loans or advances to any of the Company's Subsidiaries other than, to the extent otherwise permitted hereunder, Enterprises or any Subsidiary of Enterprises. 7.5 Compliance with ERISA. (i) Permit to exist any "accumulated funding deficiency" (as defined in Section 412(a) of the Code), (ii) terminate, or permit any ERISA Affiliate to terminate, any Plan or withdraw from, or permit any ERISA Affiliate to withdraw from, any Multiemployer Plan, so as to result in any material (in the opinion of the Majority Banks) liability of the Company, any other Loan Party or Consumers to such Plan, Multiemployer Plan or the PBGC, or (iii) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, which presents a material (in the opinion of the Majority Banks) risk of such a termination by the PBGC of any Plan or withdrawal from any Multiemployer Plan so as to result in a material liability to the Company, any other Loan Party or Consumers. 7.6 Transactions With Affiliates. Enter into, or permit any of its Subsidiaries to enter into, any transaction with any of its Affiliates unless such transaction is on terms no less favorable to the Company or such Subsidiary than if the transaction had been negotiated in good faith on an arm's-length basis with a non-Affiliate; provided that (x) the purchase by, or other transfer to, Trunkline Field Services Company of certain assets of CMS Field Services, Inc. as described to the Agent and the Banks prior to the date hereof shall be permitted hereunder and (y) any transactions permitted under Sections 7.6 and 7.7 shall be permitted hereunder. 7.7 Restricted Payments. Declare or pay, directly or indirectly, any dividend, payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any share of any class of capital stock or other ownership interests of the Company or any of the other Loan Parties (other than (1) stock splits and dividends payable solely in nonconvertible equity securities of the Company (other than Redeemable Stock or Exchangeable Stock (as such terms are defined in the Indenture on the Closing Date)) and (2) dividends and distributions made to the Company or any other Loan Party), or purchase, redeem, retire, or otherwise acquire for value, any shares of any class of capital stock or other ownership interests of the Company or any warrants, rights, or options to acquire any such shares, now or hereafter outstanding, any distribution of assets to any of its shareholders (other than distributions to the Company) (any such dividend, payment, distribution, purchase, redemption, retirement or 39 acquisition being hereinafter referred to as a "Restricted Payment") other than (i) pursuant to the terms of any class of capital stock of the Company issued and outstanding (and as in effect on) the Closing Date, any purchase or redemption of capital stock of the Company made by exchange for, or out of the proceeds of the substantially concurrent sale of, capital stock of the Company (other than Redeemable Stock or Exchangeable Stock (as such terms are defined in the Indenture on the Closing Date)); and (ii) payments made by the Company pursuant to the Tax Sharing Agreement. 7.8 Mergers, Etc. Merge with or into or consolidate with or into, or permit any of the other Loan Parties or Consumers to merge with or into or consolidate with or into, any other Person, except that (i) (x) any Loan Party may merge with or into any other Loan Party, (y) any Subsidiary of a Loan Party that is not a Loan Party may merge into such Loan Party or with or into any other Subsidiary of any Loan Party, provided that (a) in any such merger with or into the Company, the Company is the surviving corporation, (b) in any such merger into a Loan Party under clause (y) above, the Loan Party is the survivor thereof, (c) no Default or Event of Default shall be continuing or result therefrom and (d) such Loan Party shall not be liable with respect to any Debt or allow its property to be subject to any Lien which it could not become liable with respect to or allow its property to become subject to under this Agreement or any other Credit Document on the date of such transaction, and (ii) any Loan Party may merge with or into any other Person, provided that (a) the Loan Party is the survivor thereof, or, in the case of any Loan Party that is a corporation reconstituting itself as limited liability company, such limited liability company shall be the survivor thereof and shall be thereafter deemed to be a Loan Party hereunder, (b) no Default or Event of Default shall be continuing or result therefrom, (c) such Loan Party shall not be liable with respect to any Debt or allow its property to be subject to any Lien which it could not become liable with respect to or allow its property to become subject to under this Agreement or any other Credit Document on the date of such transaction, and (d) immediately after giving effect to such merger, the Net Worth of such Loan Party shall be equal to or greater than the Net Worth of such Loan Party as of the last day of the fiscal quarter immediately preceding the date of such merger. 7.9 Sales, Etc., of Assets. Sell, lease, transfer, assign, or otherwise dispose of all or any substantial part of its assets, or permit any of the other Loan Parties (other than MS&T) to sell, lease, transfer, or otherwise dispose of all or any substantial part of its assets, except (i) to give effect to a transaction permitted by Section 7.8 above or Section 7.10 below, and (ii) with respect to Enterprises or any of its Subsidiaries, as permitted under the Enterprises 2003 Credit Agreements; provided, further, that neither the Company nor any of the other Loan Parties (other than MS&T) shall sell, assign, transfer, lease, convey or otherwise dispose of any property, whether now owned or hereafter acquired, or any income or profits therefrom, or enter into any agreement to do so, except: (a) the sale of property for consideration not less than the Fair Market Value thereof; (b) the transfer of property from a Loan Party to any other Loan Party; (c) the transfer of property constituting an investment otherwise permitted under Section 7.4; 40 (d) the sale of electricity and natural gas and other property in the ordinary course of Company's and its Subsidiaries respective businesses consistent with past practice; (e) any transfer of an interest in receivables and related security, accounts or notes receivable on a limited recourse basis in connection with the incurrence of Off-Balance Sheet Liabilities, provided that such transfer qualifies as a legal sale and as a sale under GAAP and the incurrence of such Off-Balance Sheet Liabilities is permitted under Section 7.15; (f) the transfer of property constituting not more than two percent (2%) of the ownership interests held by the Company and its Subsidiaries as of the Closing Date in CMS International Ventures, L.L.C. to CMS Energy Foundation and/or Consumers Foundation and/or any other third-party 501(c)(3) charitable organization; (g) the disposition of equipment if such equipment is obsolete or no longer useful in the ordinary course of the Company's or such Subsidiary's business; (h) the sale of substantially all of the capital stock and assets of Panhandle; provided that such sale shall be consummated substantially in accordance with, and on terms not materially more adverse to the interests of the Agent and the Banks than the terms and conditions set forth in, the Stock Purchase Agreement, dated as of December 21, 2002, by and among CMS Gas Transmission Company, AIG Highstar Capital, L.P., AIG Highstar II Funding Corp., Southern Union Company and Southern Union Panhandle Corp. (the "Panhandle Sale Agreement"); provided that any modifications to the Panhandle Sale Agreement to reflect purchase price adjustments in the aggregate not to exceed $50,000,000 and otherwise on terms and conditions reasonably acceptable to the Agent shall be deemed to be permitted hereunder. 7.10 Maintenance of Ownership of Subsidiaries. Sell, transfer, assign or otherwise dispose of any shares of capital stock or other ownership interests of any of the other Loan Parties or Consumers (other than preferred or preference stock of Consumers) or any warrants, rights or options to acquire such capital stock or other ownership interests, or permit any other Loan Party or Consumers to issue, sell, transfer, assign or otherwise dispose of any shares of its capital stock (other than preferred or preference stock of Consumers) or other ownership interests or the capital stock or other ownership interests of any other Loan Party or any warrants, rights or options to acquire such capital stock or other ownership interests, except (i) to give effect to a transaction permitted by Section 7.8 and 7.9 above, and (ii) in connection with foreclosure of any Liens permitted under Section 7.1(c). 7.11 Amendment of Tax Sharing Agreement. Directly or indirectly, amend, modify supplement, waive compliance with, seek a waiver under, or assent to noncompliance with, any term, provision or condition of the Tax Sharing Agreement if the effect of such amendment, modification, supplement, waiver or assent is to (i) reduce materially any amounts otherwise payable to, or increase materially any amounts otherwise owing or payable by, the Company thereunder, or (ii) change materially the timing of any payments made by or to the Company thereunder. 7.12 Prepayments of Indebtedness. Make or agree to pay or make, or permit any of the other Loan Parties to make or agree to pay or make, directly or indirectly, any payment or other 41 distribution (whether in cash, securities or other property) of or in respect of principal of or interest on any Debt, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Debt (other than the obligations of the Loan Parties under the Credit Documents), other than (i) any payments on account of (a) any Debt when and as such payment was due (including at the maturity thereof if the initial stated maturity thereof is on or prior to May 21, 2004) pursuant to the mandatory payment provisions applicable to such Debt at the time it was incurred (including regularly scheduled payment dates for principal, interest, fees and other amounts due thereon) or any extension thereof thereafter granted by the holder of such Debt, (b) refinancings of Debt otherwise permitted under this Agreement, (c) any Debt owed to the Company or any of its Subsidiaries, (d) Debt secured by a Lien on assets subject to an asset sale permitted by Section 7.6 and (e) the extinguishment of any intercompany Debt in connection with a dividend or distributions permitted under Section 7.7, (ii) payments constituting the exchange of the Company's common stock (other than Redeemable Stock or Exchangeable Stock (as such terms are defined in the Indenture on the Closing Date)) for the Company's outstanding Debt (and any cash payments made in lieu of the issuance of fractional shares) to the extent such exchange is permitted under the Securities and Exchange Act of 1934 and (iii) prepayments of (x) the Company's reset put securities due July 1, 2003 and the Company's general term notes due in 2003, (y) if the aggregate principal amount of the Loans shall be less than $250,000,000 any securities with maturities on or after January 1, 2004 but prior to April 1, 2004, and (z) if the aggregate principal amount of the Loans shall be less than $175,000,000, any securities with maturities on or after January 1, 2004. 7.13 Conduct of Business. Engage, or permit any Restricted Subsidiary to engage, in any business other than (a) the business engaged in by the Company and its Subsidiaries on the date hereof, and (b) any business or activities which are substantially similar, related or incidental thereto. 7.14 Organizational Documents. Amend, modify or otherwise change, or permit any Restricted Subsidiary to amend, modify or otherwise change any of the terms or provisions, in any of their respective certificate of incorporation and by-laws (or comparable constitutive documents) as in effect on the Closing Date in any manner adverse to the interests of the Banks. 7.15 Off-Balance Sheet Liabilities. Create, incur, assume or suffer to exist, or permit any Subsidiary (other than Consumers and its Subsidiaries) to create, incur, assume or suffer to exist, Off-Balance Sheet Liabilities (exclusive of lease obligations otherwise permitted under Section 7.3) in the aggregate in excess of $775,000,000 at any time. ARTICLE VIII REPORTING REQUIREMENTS So long as any of the Obligations shall remain unpaid or any Bank shall have any Commitment, the Company will, unless the Majority Banks shall otherwise consent in writing, furnish to the Agent (with sufficient copies for each Bank), the following: 42 (a) as soon as possible and in any event within five days after the Company knows or should have reason to know of the occurrence of each Default or Event of Default continuing on the date of such statement, a statement of the chief financial officer or chief accounting officer of the Company setting forth details of such Default or Event of Default and the action that the Company proposes to take with respect thereto; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Company, commencing with the fiscal quarter ending on March 31, 2003, a consolidated balance sheet and consolidated statements of income and retained earnings and of cash flows of the Company and its Subsidiaries as at the end of such quarter and for the period commencing at the end of the previous fiscal year and ending with the end of such quarter (which requirement shall be deemed satisfied by the delivery of the Company's quarterly report on Form 10-Q for such quarter), all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer or chief accounting officer of the Company as having been prepared in accordance with GAAP, together with (A) a compliance certificate (substantially in the form of Exhibit C appropriately completed) of (1) the computations used by the Company for the periods ending June 30, 2003 and thereafter in determining compliance with the covenants contained in Sections 6.9 and 6.10 and the ratio set forth in Section 9.1(j), (2) all Project Finance Debt of the Consolidated Subsidiaries, together with the Company's Ownership Interest in each such Consolidated Subsidiary and (3) all Support Obligations of the Company of the types described in clauses (iv) and (v) of the definition of Support Obligations (whether or not each such Support Obligation or the primary obligation so supported is fixed, conclusively determined or reasonably quantifiable) to the extent such Support Obligations have not been previously disclosed as "Consolidated Debt" pursuant to clause (1) above, and (B) a certificate of said officer stating that no Default or Event of Default has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action that the Company proposes to take with respect thereto; (c) as soon as available and in any event within 120 days after the end of each fiscal year of the Company and its Subsidiaries, commencing with the fiscal year ending on December 31, 2003, a copy of the Annual Report on Form 10-K (or any successor form) for the Company and its Subsidiaries for such year, including therein a consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year and consolidated statements of income and retained earnings and of cash flows of the Company and its Subsidiaries for such fiscal year, accompanied by a report thereon of a nationally-recognized independent public accounting firm, together with (1) a schedule in form satisfactory to the Majority Banks of (A) the computations used by such accounting firm in determining, as of the end of such fiscal year, compliance with the covenants contained in Sections 6.9 and 6.10 and the ratio set forth in Section 9.1(j), (B) all Project Finance Debt of the Consolidated Subsidiaries, together with the Company's Ownership Interest in each such Consolidated Subsidiary and (C) all Support Obligations of the Company of the types described in clauses (iv) and (v) of the definition of Support Obligations (whether or not each such Support Obligation or the primary obligation so supported is fixed, conclusively determined or reasonably quantifiable) to the extent such Support Obligations have not been previously disclosed as "Consolidated Debt" pursuant to clause (A) above, and (2) a certificate of the chief financial officer or chief accounting officer of the Company stating that no Default or Event of Default has occurred and is continuing or, if a Default or Event of Default has 43 occurred and is continuing, a statement as to the nature thereof and the action that the Company proposes to take with respect thereto; (d) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Company, commencing with the fiscal quarter ending on March 31, 2003, a balance sheet and statements of income and retained earnings and of cash flows of the Company as at the end of such quarter and for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer or chief accounting officer of the Company as having been prepared in accordance with GAAP; (e) as soon as available and in any event within 120 days after the end of each fiscal year of the Company, commencing with the fiscal year ending on December 31, 2003, a balance sheet of the Company as at the end of such fiscal year and statements of income and retained earnings and of cash flows of the Company for such fiscal year, all in reasonable detail and duly certified (subject to year end audit adjustments) by the chief financial officer or chief accounting officer of the Company as having been prepared in accordance with GAAP; (f) as soon as possible and in any event (A) within 30 days after the Company knows or has reason to know that any Plan Termination Event described in clause (i) of the definition of Plan Termination Event with respect to any Plan of the Company or any ERISA Affiliate of the Company has occurred and could reasonably be expected to result in a material liability to the Company, (B) within 10 days after the Company knows or has reason to know that any other Plan Termination Event with respect to any Plan of the Company or any ERISA Affiliate of the Company has occurred and could reasonably be expected to result in a material liability to the Company, a statement of the chief financial officer or chief accounting officer of the Company describing such Plan Termination Event and the action, if any, which the Company proposes to take with respect thereto; (g) except as may arise in connection with the sale of Panhandle, promptly after receipt thereof by the Company or any of its ERISA Affiliates from the PBGC copies of each notice received by the Company or any such ERISA Affiliate of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; (h) except as may arise in connection with the sale of Panhandle, promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan (if any) to which the Company is a contributing employer; (i) promptly after receipt thereof by the Company or any of its ERISA Affiliates from a Multiemployer Plan sponsor, a copy of each notice received by the Company or any of its ERISA Affiliates concerning the imposition or amount of withdrawal liability in an aggregate principal amount of at least $250,000 pursuant to Section 4202 of ERISA in respect of which the Company is reasonably expected to be liable; (j) promptly after the Company becomes aware of the occurrence thereof, notice of all actions, suits, proceedings or other events of the type described in Section 5.6; 44 (k) promptly after the sending or filing thereof, notice to the Agent and each Bank of any sending or filing of all proxy statements, financial statements and reports which the Company sends to its public security holders (if any), all regular, periodic and special reports which the Company files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange, pursuant to the Exchange Act, and all final prospectuses with respect to any securities issued or to be issued by the Company or any of its Subsidiaries; (l) as soon as possible and in any event within five days after the occurrence of any material default under any material agreement to which the Company or any of its Subsidiaries is a party, which default would materially adversely affect the business, assets, property, financial condition, results of operations or prospects of the Company and its Subsidiaries, considered as a whole, any of which is continuing on the date of such certificate, a certificate of the chief financial officer of the Company setting forth the details of such material default and the action which the Company or any such Subsidiary proposes to take with respect thereto; and (m) promptly after requested, such other information respecting the business, properties, condition or operations, financial or otherwise, of the Company and its Subsidiaries as any Agent or the Majority Banks may from time to time reasonably request in writing. The Company shall be deemed to have fulfilled its obligations pursuant to clauses (b), (c), (d), (e) and (k) above to the extent the Agent (and the Banks, if applicable) receives an electronic copy of the requisite document or documents in a format reasonably acceptable to the Agent, provided that (1) an executed, tangible copy of any report required pursuant to clause (e) above is delivered to the Agent at the time of any such electronic delivery, and (2) a tangible copy of each requisite document delivered electronically is made available by the Company promptly upon request by any Agent or Bank. ARTICLE IX EVENTS OF DEFAULT 9.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default": (a) The Company shall fail to pay (i) any principal of any Loan when due, or (ii) any Reimbursement Obligation within one Business Day after the same becomes due, or (iii) any interest on any Advance or any fee or other Obligations payable hereunder within two Business Days after such interest, fees or other amounts shall have become due; or (b) Any representation or warranty made by or on behalf of the Company in any Credit Document or certificate or other writing delivered pursuant thereto shall prove to have been incorrect in any material respect when made or deemed made; or (c) The Company or any of its Subsidiaries shall fail to perform or observe any term or covenant on its part to be performed or observed contained in Section 6.3, 6.8, 6.9 or 6.10, or in Article VII hereof (and the Company, each Bank and each Agent hereby agrees that an Event 45 of Default under this subsection (c) shall be given effect as if the defaulting Subsidiary were a party to this Agreement); or (d) The Company or any of its Subsidiaries shall fail to perform or observe any other term or covenant on its part to be performed or observed contained in any Credit Document and any such failure shall remain unremedied, after written notice thereof shall have been given to the Company by the Agent, for a period of 10 Business Days (and the Company, each Bank and each Agent hereby agrees that an Event of Default under this subsection (d) shall be given effect as if the defaulting Subsidiary were a party to this Agreement); or (e) The Company or any Material Subsidiary shall fail to pay any of its Debt (including any interest or premium thereon but excluding Debt incurred under this Agreement) (i) under the CMS 2003 Credit Agreement, (ii) under either of the Enterprises 2003 Credit Agreements, or (iii) otherwise aggregating, in the case of the Company and each Restricted Subsidiary, $6,000,000 or more or, in the case of Consumers, $25,000,000 or more, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in any agreement or instrument relating to such Debt; or any other default under any agreement or instrument relating to any such Debt (including any "amortization event" or event of like import in connection with any Off-Balance Sheet Liabilities), or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is (i) to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof; unless in each such case the obligee under or holder of such Debt shall have waived in writing such circumstance so that such circumstance is no longer continuing, or (ii) with respect to any such event occurring in connection with any Off-Balance Sheet Liabilities aggregating $6,000,000 or more, to terminate the reinvestment of collections or proceeds of receivables and related security under any agreements or instruments related thereto (other than a termination resulting solely from the request of the Company or its Subsidiaries); or (f) (i) The Company or any Material Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make an assignment for the benefit of creditors; or (ii) any proceeding shall be instituted by or against the Company or any Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of its debts under any law relating to bankruptcy, insolvency, or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, in the case of a proceeding instituted against the Company, either such proceeding shall remain undismissed or unstayed for a period of 60 days or any of the actions sought in such proceeding (including the entry of an order for relief against the Company or any Material Subsidiary or the appointment of a receiver, trustee, custodian or other similar official for the Company, such Material Subsidiary or any of its property) shall occur; or (iii) the Company or any Material Subsidiary shall take any corporate or other action to authorize any of the actions set forth above in this subsection (f); or 46 (g) Any judgment or order for the payment of money in excess of $6,000,000 shall be rendered against the Company or Enterprises and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (h) Any material provision of any Credit Document, after execution hereof or delivery thereof under Article XI, shall for any reason other than the express terms hereof or thereof cease to be valid and binding on any party thereto; or any Loan Party shall so assert in writing; or (i) Any "Event of Default" shall occur under and as defined in the AIG Pledge Agreement as in effect on January 8, 2003 (and without giving effect to any amendment or other modification thereto); or (j) There shall be imposed or enacted any Consumers Dividend Restriction, the result of which is that the Dividend Coverage Ratio shall be less than 1.15 to 1.0 at any time after the imposition of such Consumers Dividend Restriction; or (k) At any time, for any reason (except due to any failure by the Agent to take any action on its part to be performed under applicable law in order to maintain the perfection or priority of its security interest under the Pledge Agreement), (i) the Agent shall fail to have, for the benefit of the Banks, a perfected, first-priority security interest in Pledged Collateral, free and clear of all other Liens, in an amount equal to or greater than 100.5% of the Aggregate Outstanding Credit Exposure or (ii) the Company or Enterprises seeks to render the Agent's security interest invalid, unenforceable or unperfected. 9.2 Remedies. If any Event of Default has occurred and is continuing, then the Agent shall at the request, or may with the consent, of the Majority Banks, upon notice to the Company (i) declare the Commitments and the obligation and power of the LC Issuer to issue Facility LCs to be terminated or suspended, whereupon the same shall forthwith terminate or be suspended, as the case may be, (ii) declare the Obligations to be forthwith due and payable, whereupon the Aggregate Outstanding Credit Exposure and all other Obligations shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company, and/or (iii) in addition to the continuing right to demand payment of all amounts payable under this agreement, exercise in respect of any and all Pledged Collateral all of the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of New York and in effect in any other jurisdiction in which collateral is located at that time; provided that in the event of an actual or deemed entry of an order for relief with respect to the Company or Enterprises under the Federal Bankruptcy Code, (A) the Commitments and the obligation and power of the LC Issuer to issue Facility LCs shall automatically be terminated and (B) the Obligations shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Company. 47 ARTICLE X WAIVERS, AMENDMENTS AND REMEDIES 10.1 Amendments. Subject to the provisions of this Article X, the Majority Banks (or the Agent with the consent in writing of the Majority Banks) and the Company may enter into written agreements supplemental hereto for the purpose of adding or modifying any provisions to the Credit Documents or changing in any manner the rights of the Banks or the Company hereunder or waiving any Event of Default hereunder, provided that no such supplemental agreement shall, without the consent of all of the Banks: (a) Extend the maturity of any Loan or reduce the principal amount thereof, or extend the expiry date of any Facility LC to a date after the Termination Date, or reduce the rate or extend the time of payment of interest thereon or fees thereon or Reimbursement Obligations related thereto. (b) Modify the percentage specified in the definition of Majority Banks. (c) Extend the Termination Date or increase the amount of the Commitment of any Bank hereunder or the commitment to issue Facility LCs, or permit the Company to assign its rights under this Agreement. (d) Amend this Section 10.1. (e) Make any change in an express right in this Agreement of a single Bank to give its consent, make a request or give a notice. No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent, and no amendment of any provision relating to the LC Issuer shall be effective without the written consent of the LC Issuer. 10.2 Preservation of Rights. No delay or omission of the Banks, the LC Issuer or the Agent to exercise any right under the Credit Documents shall impair such right or be construed to be a waiver of any Default or Event of Default or an acquiescence therein, and the making of a Credit Extension notwithstanding the existence of a Default or Event of Default or the inability of the Company to satisfy the conditions precedent to such Credit Extension shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Credit Documents whatsoever shall be valid unless in writing signed by the Banks required pursuant to Section 10.1, and then only to the extent in such writing specifically set forth. All remedies contained in the Credit Documents or by law afforded shall be cumulative and all shall be available to the Agent, the LC Issuer and the Banks until the Obligations have been paid in full. 48 ARTICLE XI CONDITIONS PRECEDENT 11.1 Initial Credit Extension. The Banks shall not be required to make the initial Credit Extension hereunder unless the Company has furnished to the Agent with sufficient copies for the Banks: (a) Copies of the Restated Articles of Incorporation of each of the Company and Enterprises, together with all amendments, certified by the Secretary or an Assistant Secretary of the applicable entity, and a certificate of good standing, certified by the appropriate governmental officer in its jurisdiction of incorporation. (b) Copies, certified by the Secretary or an Assistant Secretary of the applicable entity, of bylaws of each of the Company and Enterprises and of Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Bank) of each of the Company and Enterprises authorizing the execution, delivery and performance of the Credit Documents to which such entity is a party. (c) An incumbency certificate from each of the Company and Enterprises, executed by the Secretary or an Assistant Secretary of the applicable entity, which shall identify by name and title and bear the original or facsimile signature of the officers of such entity authorized to sign the Credit Documents to which such entity is a party and, in the case of the Company, the officers or other employees authorized to make borrowings and request Facility LCs hereunder, upon which certificates the Banks shall be entitled to rely until informed of any change in writing by the Company or Enterprises, as applicable. (d) A certificate, signed by a Designated Officer of the Company, stating that on the Closing Date no Default or Event of Default has occurred and is continuing. (e) The Pledge Agreement signed by Enterprises, together with such account control agreements and other agreements and documents as the Agent or any Bank may reasonably request to create and perfect the security interest of the Agent in all Pledged Collateral. (f) Any Note requested by a Bank pursuant to Section 2.13 payable to the order of each such requesting Bank. (g) A favorable legal opinion of Michael D. VanHemert, Esq., Deputy General Counsel of the Company, as to the matters set forth in Exhibit B and as to such other matters as the Agent may reasonably request. Such opinion shall be addressed to the Agent and the Banks and shall be satisfactory in form and substance to the Agent. (h) Evidence satisfactory to the Agent that prior to or concurrently with the initial Credit Extension, all non-contingent amounts owed to Bank One in connection with the Existing Letters of Credit have been or will be paid in full. 49 (i) Evidence, in form and substance satisfactory to the Agent, that each of the Company and Enterprises has obtained all governmental approvals, if any, necessary for it to enter into the Credit Documents to which it is a party. (j) Such other documents as any Bank or its counsel may have reasonably requested. It shall be a further condition precedent to the making of the initial Credit Extension hereunder that the Company shall have paid (i) to the Agent for the account of the Banks the fees required to be paid on the Effective Date and (ii) to the Agent and the Arranger the fees required to be paid to them pursuant to the fee letter described in Section 13.12. 11.2 Each Credit Extension. The Banks shall not be required to make any Credit Extension unless on the date of such Credit Extension (i) no Default or Event of Default exists, (ii) the representations and warranties contained in Article V are true and correct as of such date, (iii) after giving effect to such Credit Extension, the value of the Pledged Collateral will be equal to or greater than 100.5% of the Aggregate Outstanding Credit Exposure and (iv) all legal matters incident to the making of such Credit Extension are satisfactory to the Banks and their counsel. Each Borrowing Notice and each Issuance/Modification Request shall constitute a representation and warranty by the Company that the conditions contained in subsections (i), (ii) and (iii) above will be satisfied on the date of the requested Credit Extension. For the avoidance of doubt, the conversion or continuation of an Advance shall not be considered the making of a Credit Extension. ARTICLE XII GENERAL PROVISIONS 12.1 Successors and Assigns. (a) The terms and provisions of the Credit Documents shall be binding upon and inure to the benefit of the Company and the Banks and their respective successors and assigns, except that the Company shall not have the right to assign its rights under the Credit Documents. Any Bank may sell participations in all or a portion of its rights and obligations under this Agreement pursuant to subsection (b) below and any Bank may assign all or any part of its rights and obligations under this Agreement pursuant to subsection (c) below. (b) Any Bank may sell participations to one or more banks or other entities (each a "Participant") in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and its Outstanding Credit Exposure), provided that (i) such Bank's obligations under this Agreement (including its Commitment to the Company hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of the Outstanding Credit Exposure of such Bank for all purposes of this Agreement and (iv) the Company shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Each Bank shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Credit Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which would require consent of all of the Banks pursuant to the terms of Section 10.1 or of any other Credit 50 Document. The Company agrees that each Participant shall be deemed to have the right of setoff provided in Section 12.10 in respect of its participating interest in amounts owing under the Credit Documents to the same extent as if the amount of its participating interest were owing directly to it as a Bank under the Credit Documents, provided that each Bank shall retain the right of setoff provided in Section 12.10 with respect to the amount of participating interests sold to each Participant. The Banks agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 12.10, agrees to share with each Bank, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 12.10 as if each Participant were a Bank. The Company further agrees that each Participant shall be entitled to the benefits of Sections 4.1, 4.3, 4.4 and 4.5 to the same extent as if it were a Bank and had acquired its interest by assignment pursuant to Section 12.1(c), provided that (i) a Participant shall not be entitled to receive any greater payment under Section 4.1, 4.3, 4.4 or 4.5 than the Bank who sold the participating interest to such Participant would have received had it retained such interest for its own account, unless the sale of such interest to such Participant is made with the prior written consent of the Company, and (ii) any Participant not incorporated under the laws of the United States of America or any State thereof agrees to comply with the provisions of Section 4.5 to the same extent as if it were a Bank. (c) Any Bank may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more financial institutions all or any part of its rights and obligations under this Agreement, provided that (i) such Bank has received the Agent's and, so long as no Event of Default exists, the Company's prior written consent to such assignment, which consent shall not be unreasonably withheld, and (ii) the minimum principal amount of any such assignment (other than assignments to a Federal Reserve Bank, or to any other Bank or affiliate of such assigning Bank, or to any direct or indirect contractual counterparties in swap agreements relating to the Loans to the extent required in connection with the physical settlement of any Bank's obligations pursuant thereto) shall be $5,000,000 (or such lesser amount consented to by the Agent and, so long as no Event of Default shall be continuing, the Company); provided that after giving effect to such assignment the assigning Bank shall have a Commitment of not less than $5,000,000 (unless otherwise consented to by the Agent and, so long as no Event of Default shall be continuing, the Company). Notwithstanding the foregoing sentence, any Bank may at any time, without the consent of the Company or the Agent, assign all or any portion of its rights under this Agreement and any Note to (i) a Federal Reserve Bank, provided that no such assignment shall release the transferor Bank from its obligations hereunder; and (ii) any Bank or any affiliate of such assigning Bank, provided that the creditworthiness of such affiliate (as determined in accordance with customary standards of the banking industry) is no less than that of the assigning Bank; and (iii) any direct or indirect contractual counterparties in swap agreements relating to the Loans to the extent required in connection with the physical settlement of any Bank's obligations pursuant thereto. (d) Any Bank may, in connection with any sale or participation or proposed sale or participation pursuant to this Section 12.1, disclose to the purchaser or participant or proposed purchaser or participant any information relating to the Company furnished to such Bank by or on behalf of the Company, provided that prior to any such disclosure of non-public information, the purchaser or participant or proposed purchaser or participant (which purchaser or participant is not an affiliate of a Bank) shall agree to preserve the confidentiality of any confidential 51 information (except any such disclosure as may be required by law or regulatory process) relating to the Company received by it from such Bank. (e) Assignments under this Section 12.1 shall be made pursuant to an agreement ("Assignment Agreement") substantially in the form of Exhibit D or in such other form as may be agreed to by the parties thereto and shall not be effective until a $3,500 fee has been paid to the Agent by the assignee, which fee shall cover the cost of processing such assignment, provided that such fee shall not be incurred in the event of an assignment by any Bank of all or a portion of its rights under this Agreement and any Note to (i) a Federal Reserve Bank or (ii) a Bank or an affiliate of the assigning Bank or (iii) to any direct or indirect contractual counterparties in swap agreements relating to the Loans to the extent required in connection with the physical settlement of any Bank's obligations pursuant thereto. 12.2 Survival of Representations. All representations and warranties of the Company contained in this Agreement shall survive the making of the Credit Extensions herein contemplated. 12.3 Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, neither the LC Issuer nor any Bank shall be obligated to extend credit to the Company in violation of any limitation or prohibition provided by any applicable statute or regulation. 12.4 Taxes. Any taxes (excluding income taxes) payable or ruled payable by any Federal or State authority in respect of the execution of the Credit Documents shall be paid by the Company, together with interest and penalties, if any. 12.5 Choice of Law. THE CREDIT DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING, WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO THE LAW OF CONFLICTS) OF THE STATE OF NEW YORK, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY CREDIT DOCUMENT AND THE COMPANY HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE COMPANY HEREBY WAIVES ANY RIGHT TO A JURY TRIAL IN ANY ACTION OR ARISING HEREUNDER OR UNDER ANY CREDIT DOCUMENT. 12.6 Headings. Section headings in the Credit Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Credit Documents. 12.7 Entire Agreement. The Credit Documents embody the entire agreement and understanding between the Company, the LC Issuer, the Agent and the Banks and supersede all 52 prior agreements and understandings between the Company, the LC Issuer, the Agent and the Banks relating to the subject matter thereof (other than those contained in the fee letter described in Section 13.12 which shall survive and remain in full force and effect during the term of this Agreement). 12.8 Expenses; Indemnification. The Company shall reimburse the Agent and the Arranger for (a) any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent) paid or incurred by the Agent or the Arranger in connection with the preparation, review, execution, delivery, syndication, distribution (including via the internet), amendment and modification of the Credit Documents and (b) any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent) paid or incurred by the Agent or the Arranger on its own behalf or on behalf of the LC Issuer or any Bank in connection with the collection and enforcement of the Credit Documents. The Company further agrees to indemnify the Agent, the Arranger, the LC Issuer and each Bank and their respective directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and reasonable expenses (including all material expenses of litigation or preparation therefor whether or not the Agent, the Arranger, the LC Issuer or any Bank is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Credit Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Credit Extension hereunder, provided that the Company shall not be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent, the Arranger, the LC Issuer or any Bank. The obligations of the Company under this Section shall survive the termination of this Agreement. 12.9 Severability of Provisions. Any provision in any Credit Document that is held to be inoperative, unenforceable or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of that provision in any other jurisdiction, and to this end the provisions of all Credit Documents are declared to be severable. 12.10 Setoff. In addition to, and without limitation of, any rights of the Banks under applicable law, if the Company becomes insolvent, however evidenced, or any Default or Event of Default occurs, any indebtedness from any Bank to the Company (including all account balances, whether provisional or final and whether or not collected or available) may be offset and applied toward the payment of the Obligations owing to such Bank, whether or not the Obligations, or any part hereof, shall then be due. The Company agrees that any purchaser or participant under Section 12.1 may, to the fullest extent permitted by law, exercise all its rights of payment with respect to such purchase or participation as if it were the direct creditor of the Company in the amount of such purchase or participation. 12.11 Ratable Payments. If any Bank, whether by setoff or otherwise, has payment made to it upon its Outstanding Credit Exposure in a greater proportion than that received by any other Bank, such Bank agrees, promptly upon demand, to purchase a portion of the Aggregate Outstanding Credit Exposure held by the other Banks so that after such purchase each Bank will hold its Pro Rata Share of the Aggregate Outstanding Credit Exposure. If any Bank, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives 53 collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Bank agrees, promptly upon demand, to take such action necessary such that all Banks share in the benefits of such collateral ratably in proportion to their respective Pro Rata Share of the Aggregate Outstanding Credit Exposure. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. 12.12 Nonliability of Bank. The relationship between the Company, on the one hand, and the Banks, the LC Issuer and the Agent, on the other hand, shall be solely that of borrower and lender. Neither the Agent, the Arranger, the LC Issuer nor any Bank shall have any fiduciary responsibilities to the Company. Neither the Agent, the Arranger, the LC Issuer nor any Bank undertakes any responsibility to the Company to review or inform the Company of any matter in connection with any phase of the Company's business or operations. The Company shall rely entirely upon its own judgment with respect to its business, and any review, inspection, supervision or information supplied to the Company by the Banks is for the protection of the Banks and neither the Company nor any third party is entitled to rely thereon. The Company agrees that neither the Agent, the Arranger, the LC Issuer nor any Bank shall have liability to the Company (whether sounding in tort, contract or otherwise) for losses suffered by the Company in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Credit Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. Neither the Agent, the Arranger, the LC Issuer nor any Bank shall have any liability with respect to, and the Company hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by the Company in connection with, arising out of, or in any way related to the Credit Documents or the transactions contemplated thereby. 12.13 Investment of Pledged Collateral. The Agent shall invest the Pledged Collateral from time to time in such investments as Enterprises shall reasonably request and are reasonably satisfactory to the Agent. Unless otherwise agreed among the Company, Union Bank of California, N.A., Bank One and the Agent, approximately 50% of such investments shall be maintained with Bank One and approximately 50% of such investments shall be maintained with Union Bank of California, N.A. ARTICLE XIII THE AGENT 13.1 Appointment. Bank One, NA (Main Office - Chicago) is hereby appointed Agent hereunder, and each of the Banks irrevocably authorizes the Agent to act as the contractual representative on behalf of such Bank. The Agent agrees to act as such upon the express conditions contained in this Article XIII. The Agent shall not have a fiduciary relationship in respect of any Bank by reason of this Agreement. 13.2 Powers. The Agent shall have and may exercise such powers hereunder as are specifically delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. The Agent shall not have any implied duties to the Banks or any 54 obligation to the Banks to take any action hereunder except any action specifically provided by this Agreement to be taken by the Agent. 13.3 General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Banks or any Bank for any action taken or omitted to be taken by it or them hereunder or in connection herewith except for its or their own gross negligence or willful misconduct. 13.4 No Responsibility for Loans, Recitals, Etc. The Agent shall not be responsible to the Banks for any recitals, reports, statements, warranties or representations herein or in any Credit Document or be bound to ascertain or inquire as to the performance or observance of any of the terms of this Agreement. 13.5 Action on Instructions of Banks. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Credit Document in accordance with written instructions signed by the Majority Banks (or all of the Banks if required by Section 10.1), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. The Banks hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Credit Document unless it shall be requested in writing to do so by the Majority Banks. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Credit Document unless it shall first be indemnified to its satisfaction by the Banks pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 13.6 Employment of Agents and Counsel. The Agent may execute any of its duties as Agent hereunder by or through employees, agents and attorneys-in-fact and shall not be answerable to the Banks, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder. 13.7 Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 13.8 Agent's Reimbursement and Indemnification. The Banks agree to reimburse and indemnify the Agent ratably in proportion to their respective Commitments (i) for any amounts not reimbursed by the Company for which the Agent is entitled to reimbursement by the Company under the Credit Documents, (ii) for any other expenses reasonably incurred by the Agent on behalf of the Banks, in connection with the preparation, execution, delivery, administration and enforcement of the Credit Documents, and for which the Agent is not entitled to reimbursement by the Company under the Credit Documents, and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or 55 asserted against the Agent in any way relating to or arising out of this Agreement or any other document delivered in connection with this Agreement or the transactions contemplated hereby or the enforcement of any of the terms hereof or of any such other documents, and for which the Agent is not entitled to reimbursement by the Company under the Credit Documents, provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. 13.9 Rights as a Bank. With respect to its Commitment and any Credit Extension made by it, the Agent shall have the same rights and powers hereunder as any Bank and may exercise the same as though it were not the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include Bank One in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of banking or trust business with the Company or any Subsidiary as if it were not the Agent. 13.10 Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on the financial statements prepared by the Company and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. 13.11 Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Company, and the Agent may be removed at any time with or without cause by written notice received by the Agent from the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint, on behalf of the Banks, a successor Agent. If no successor Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within thirty days after the retiring Agent's giving notice of resignation, then the retiring Agent may appoint, on behalf of the Banks, a successor Agent. Such successor Agent shall be a commercial bank having capital and retained earnings of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article XIII shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder. 13.12 Agent and Arranger Fees. The Company agrees to pay to the Agent, the LC Issuer and Banc One Capital Markets, Inc. (the "Arranger"), for their respective accounts, the fees agreed to by the Company, the Agent, the LC Issuer and the Arranger pursuant to the letter agreement dated May 21, 2003, or as otherwise agreed from time to time. 56 ARTICLE XIV NOTICES 14.1 Giving Notice. Except as otherwise permitted by Section 2.8 with respect to Borrowing Notices, all notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Company or the Agent or the LC Issuer, at its address or facsimile number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or facsimile number set forth below its signature hereto or (z) in the case of any party, at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Company in accordance with the provisions of this Section 14.1. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered (or, in the case of electronic transmission, received) at the address specified in this Section; provided that notices to the Agent under Article II shall not be effective until received. 14.2 Change of Address. The Company, the Agent and any Bank may each change the address for service of notice upon it by a notice in writing to the other parties hereto. ARTICLE XV COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Company, the Agent, the LC Issuer and the Banks and each party has notified the Agent by facsimile or telephone that it has taken such action. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 57 IN WITNESS WHEREOF, the Company, the Banks, the LC Issuer and the Agent have executed this Agreement as of the date first above written. CMS ENERGY CORPORATION By: /s/ Paul Stadnikia ----------------------------------- Name: Paul Stadnikia Title: Assistant Treasurer One Energy Plaza, EP11-291 Jackson, Michigan 49201 Attention: Treasurer Facsimile No.: (517) 788-1409 Confirmation (Phone) No: (517) 788-7090 E-Mail Address: bsburger@cmsenergy.com Signature Page to Credit Agreement 58 BANK ONE, NA (MAIN OFFICE - CHICAGO), Individually and as Agent and as LC Issuer By: /s/ Jane Beck ------------------------------- Name: Jane Beck Title: Director ADDRESS: Bank One Plaza Chicago, Illinois 60670 Attention: Facsimile No.: (312) 732- Confirmation (Phone) No: (312) 732- E-Mail Address: Signature Page to Credit Agreement 59 UNION BANK OF CALIFORNIA, N.A. Individually and as Documentation Agent By: /s/ Dennis G. Blank ----------------------------------- Name: Dennis G. Blank Title: Vice President ADDRESS: 445 South Figueroa Street 15th Floor Los Angeles, California 90071 Attention: Kevin M. Zitar Facsimile No.: ( ) - Confirmation (Phone) No: (213) 236-5503 E-Mail Address: Kevin.Zitar@uboc.com Signature Page to Credit Agreement 60 EXHIBIT A NOTE [Date] CMS Energy Corporation, a Michigan corporation (the "Company"), promises to pay to the order of ____________________________________ (the "Bank") the aggregate unpaid principal amount of all Loans made by the Bank to the Company pursuant to Section 2.1 of the Agreement (as hereinafter defined), in immediately available funds at the main office of Bank One, NA in Chicago, Illinois, as Agent, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Company shall pay the principal of and accrued and unpaid interest on the Loans in full on the Termination Date. The Bank shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment hereunder. This Note is one of the Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement dated as of May 19, 2003 (which, as it may be amended or modified and in effect from time to time, is herein called the "Agreement"), among the Company, the lenders party thereto, including the Bank, and Bank One, NA, as Agent, to which Agreement reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. CMS ENERGY CORPORATION By:_____________________________________ Print Name:_____________________________ Title:__________________________________ SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL TO NOTE OF CMS ENERGY CORPORATION, DATED MAY __, 2003,
Principal Maturity Principal Amount of of Interest Amount Unpaid Date Loan Period Paid Balance - ---- ---- ------ ---- -------
EXHIBIT B REQUIRED OPINIONS FROM DEPUTY GENERAL COUNSEL OF THE COMPANY 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Michigan. 2. The execution and delivery of the Company and Enterprises of the Credit Documents to which it is a party and the performance by the Company and Enterprises of their respective obligations thereunder have been duly authorized by all necessary corporate action and proceedings on the part of the Company and Enterprises and will not: (a) contravene Restated Articles of Incorporation, as amended, or bylaws of the Company or the Restated Articles of Incorporation, as amended, or bylaws of Enterprises; (b) contravene any law or any contractual restriction imposed by any indenture or any other agreement or instrument evidencing or governing indebtedness for borrowed money of the Company or Enterprises; or (c) result in or require the creation of any Lien upon or with respect to any of the properties of the Company or Enterprises, except the security interest in favor of the Agent under the Pledge Agreement. 3. Each Credit Document to which the Company or Enterprises is a party constitutes a legal, valid and binding obligation of the Company or Enterprises, as applicable, enforceable against the Company or Enterprises, as applicable, in accordance with its terms, subject to (a) the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (b) the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). 4. Each of the Company and Enterprises has duly executed and delivered each Credit Document to which it is a party. 5. To the best of my knowledge, there is no pending or threatened action or proceeding against the Company or any of its Consolidated Subsidiaries before any court, governmental agency or arbitrator (except (i) to the extent described in the Company's annual report on Form 10-K/A for the year ended December 31, 2002 as filed with the SEC, and (ii) such other similar actions, suits and proceedings predicated on the occurrence of the same events giving rise to any actions, suits and proceedings described in the reports referred to in clause (i) of this paragraph 4) which might reasonably be expected to materially adversely affect the financial condition or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole, or that would materially adversely affect the ability of the Company or Enterprises to perform its obligations under any Credit Document to which it is a party. To the best of my knowledge, there is no litigation challenging the validity or the enforceability of any of the Credit Documents. 6. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company or Enterprises of any Credit Document. 7. The Company is not an "investment company" or a company "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. 8. The Company is not a registered "holding company" or a "subsidiary" or an "affiliate" of a registered "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935. 9. In a properly presented case, a Michigan court or a federal court applying Michigan choice of law rules should give effect to the choice of law provisions of the Agreement and should hold that the Agreement is to be governed by the laws of the State of New York rather than the laws of the State of Michigan, except in the case of those provisions set forth in the Agreement the enforcement of which would contravene a fundamental policy of the State of Michigan. In the course of our review of the Agreement, nothing has come to my attention to indicate that any of such provisions would do so. Notwithstanding the foregoing, even if a Michigan court or a federal court holds that the Agreement is to be governed by the laws of the State of Michigan, the Agreement constitutes a legal, valid and binding obligation of the Company, enforceable under Michigan law (including usury provisions) against the Company in accordance with its terms, subject to (a) the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (b) the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). EXHIBIT C FORM OF COMPLIANCE CERTIFICATE I, _________________, ______________ of CMS Energy Corporation, a Michigan corporation (the "Company"), DO HEREBY CERTIFY in connection with the Credit Agreement dated as of May 19, 2003 (the "Credit Agreement"; the terms defined therein being used herein as so defined) among the Company, various financial institutions and Bank One, NA (Main Office - Chicago), as Agent, that: I. Section 6.9 of the Credit Agreement provides that the Company shall maintain a consolidated leverage ratio of not greater than 7.00 to 1.0. The following calculations are made in accordance with Section 6.9 and are correct and accurate as of _____________, 200__: A. CONSOLIDATED DEBT: (a) Debt of Company and Consolidated Subsidiaries $ (excluding Panhandle and Subsidiaries) minus (b) Support Obligations described in clause (iv) or (v) $ of the definition of Support Obligations minus (c) Junior Subordinated Debt owned by Hybrid Preferred $ Securities Subsidiaries minus (d) Subordinated guarantees provided by the Company with $ respect to Hybrid Preferred Securities minus (e) Agreed upon percentage of Net Proceeds from issuance $ of hybrid debt/equity securities (other than Junior Subordinated Debt and Hybrid Preferred Securities) plus (f) Specified Support Obligations provided by the $ Company in respect of obligations of MS&T minus (g) Project Finance Debt of the Company or any $ Consolidated Subsidiary minus (h) Principal amount of any Securitized Bonds $ TOTAL $ B. CONSOLIDATED EBITDA: (a) Pretax Operating Income of the Company and its $ Subsidiaries plus (b) Depreciation, depletion and amortization $ plus (c) Non-cash write-offs and write-downs contained in $ the Company's Pretax Operating Income, including write-offs or write-downs related to the sale of assets, impairment of assets and loss on contracts minus (d) Revenues of Consumers dedicated to repayment of $ Securitized Bonds TOTAL $ C. CONSOLIDATED LEVERAGE RATIO: ___ TO 1.00 (TOTAL OF A DIVIDED BY TOTAL OF B) II. Section 6.10 of the Credit Agreement provides that the Company shall maintain a cash dividend coverage ratio of not less than 1.20 to 1.0. The following calculations are made in accordance with Section 6.10 and are correct and accurate as of _____________, 200__: A. DIVIDEND INCOME: (a) Cash Dividend Income $ plus (b) 25% of Equity Distributions received by the Company $ (up to $10,000,000) TOTAL $ B. INTEREST EXPENSE: (a) Interest expense (excluding arrangement, $ underwriting and similar fees payable in connection with the Agreement, CMS 2003 Credit Agreement and Enterprises 2003 Credit Agreements) minus (b) Cash interest income received by the Company and $ its Subsidiaries from Persons other than the Company or any of its Subsidiaries minus (c) Amounts received by the Company from Subsidiaries $ and Affiliates as reimbursement of interest expense and commitment, guaranty and letter of credit charges of the Company to such Subsidiary or Affiliate TOTAL $ C. CASH DIVIDEND COVERAGE RATIO: _____ TO 1.00 (TOTAL OF A DIVIDED BY TOTAL OF B) IN WITNESS WHEREOF, I have signed this Certificate this ___ day of _________, ___. EXHIBIT D ASSIGNMENT AND ASSUMPTION AGREEMENT This Assignment and Assumption (the "Assignment and Assumption") is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the "Assignor") and [Insert name of Assignee] (the "Assignee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by the Assignee. The Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full. For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Agent as contemplated below, the interest in and to all of the Assignor's rights and obligations in its capacity as a Bank under the Credit Agreement and any other documents or instruments delivered pursuant thereto that represents the amount and percentage interest identified below of all of the Assignor's outstanding rights and obligations under the respective facilities identified below (including any letters of credit, guaranties and swingline loans included in such facilities and, to the extent permitted to be assigned under applicable law, all claims (including contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity), suits, causes of action and any other right of the Assignor against any Person whether known or unknown arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby) (the "Assigned Interest"). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor. 1. Assignor:________________________________________________ 2. Assignee: _______________________________________________ [and is an affiliate of Assignor] 3. Borrower: CMS ENERGY CORPORATION 4. Agent: Bank One, NA, as the Agent under the Credit Agreement. 5. Credit Agreement: The Credit Agreement dated as of May 19, 2003 among CMS Energy Corporation, the Banks party thereto, and Bank One, NA, as Agent. D-1 6. Assigned Interest:
Aggregate Amount of Commitment/ Outstanding Amount of Commitment/ Percentage Assigned of Credit Exposure for all Outstanding Credit Exposure Commitment/ Outstanding Credit Facility Assigned Banks* Assigned* Exposure(2) - ------------------------------------------------------------------------------------------------------- ____________ $ $ _______% - ------------------------------------------------------------------------------------------------------- ____________ $ $ _______% - ------------------------------------------------------------------------------------------------------- ____________ $ $ _______% - -------------------------------------------------------------------------------------------------------
7. Trade Date:________________________________________ (3) Effective Date: ____________________, 20__ TO BE INSERTED BY AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER BY THE AGENT.] The terms set forth in this Assignment and Assumption are hereby agreed to: ASSIGNOR [NAME OF ASSIGNOR] By:_________________________________ Title: ASSIGNEE [NAME OF ASSIGNEE] By:_________________________________ Title: [Consented to and](4) Accepted: BANK ONE, NA, as Agent By:_________________________________________ Title: [Consented to:](5) [NAME OF RELEVANT PARTY] By:_________________________________________ Title: - ------------------- *Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. (2) Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Banks thereunder. (3) Insert if satisfaction of minimum amounts is to be determined as of the Trade Date. (4) To be added only if the consent of the Agent is required by the terms of the Credit Agreement. (5) To be added only if the consent of the Company and/or other parties (e.g. LC Issuer) is required by the terms of the Credit Agreement. ANNEX 1 TERMS AND CONDITIONS FOR ASSIGNMENT AND ASSUMPTION 1. Representations and Warranties. 1.1 Assignor. The Assignor represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Credit Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency, perfection, priority, collectibility, or value of the Credit Documents or any collateral thereunder, (iii) the financial condition of the Company, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Credit Document, (iv) the performance or observance by the Company, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Credit Document, (v) inspecting any of the property, books or records of the Company, or (vi) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Credit Extensions or the Credit Documents. 1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Bank under the Credit Agreement, (ii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Bank thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Bank thereunder, (iii) agrees that its payment instructions and notice instructions are as set forth in Schedule 1 to this Assignment and Assumption, (iv) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Credit Documents will not be "plan assets" under ERISA, (v) agrees to indemnify and hold the Assignor harmless against all losses, costs and expenses (including reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment and Assumption, (vi) it has received a copy of the Credit Agreement, together with copies of financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Agent or any other Bank, and (vii) attached as Schedule 1 to this Assignment and Assumption is any documentation required to be delivered by the Assignee with respect to its tax status pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee and (b) agrees that (i) it will, independently and without reliance on the Agent, the Assignor or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Documents, and (ii) it will Annex 1-1 perform in accordance with their terms all of the obligations which by the terms of the Credit Documents are required to be performed by it as a Bank. 2. Payments. The Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the Assignor and the Assignee. From and after the Effective Date, the Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, Reimbursement Obligations, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date. 3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of Illinois. Annex 1-2 EXHIBIT E FORM OF PLEDGE AGREEMENT PLEDGE AGREEMENT This Pledge Agreement (this "Pledge Agreement") dated as of May __, 2003 is made by CMS Enterprises Company (the "Pledgor"), in favor of Bank One, NA, as agent under the Credit Agreement referred to below (in such capacity, the "Administrative Agent"). W I T N E S S E T H: WHEREAS, CMS Energy Corporation (the "Company"), various financial institutions and the Administrative Agent have entered into a Credit Agreement dated as of May __, 2003 (the "Credit Agreement"; capitalized terms used but not defined here have the respective meanings ascribed to such terms in the Credit Agreement); WHEREAS, pursuant to the Credit Agreement, the Company may obtain funds to make loans or advances to, or obtain letters of credit to support obligations of, the Pledgor and/or one or more of the Pledgor's Subsidiaries; WHEREAS, to secure payment by the Company of all Obligations, the Pledgor has agreed to pledge certain collateral to the Administrative Agent, including certain investments previously pledged to Bank One, NA, in its individual capacity pursuant to an Amended and Restated Pledge Agreement between the Pledgor and Bank One, NA dated as of April 30, 2003; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor and the Administrative Agent agree as follows: 1. The term "Collateral" means (a) all shares of the One Group Institutional Prime Money Market Fund, Account #701121622 (the "Bank One Account") held at State Street Bank and Trust Company, (b) Account #4430001049, titled "Bank One, NA, as Administrative Agent, f/b/o CMS Enterprises Company" and maintained with Union Bank of California, N.A. (the "UBOC Account" and, together with the Bank One Account, each an "Account" and collectively the "Accounts") and all funds deposited therein and interest thereon and (c) all investment property, securities entitlements, commodity accounts, commodities, instruments, investments, cash, other funds and other assets of any nature and description at any time held in or credited to either Account, together with all substitutions, replacements, additions, proceeds, products and supporting obligations of or related to the foregoing. The foregoing grant also includes any stock rights, stock dividends, liquidating dividends, new securities and other property to which the Pledgor may become entitled because it owns any of the property described above. Any securities, investment property or other property of the Pledgor at any time in the custody, possession or control of the Administrative Agent or any Bank shall also constitute Collateral unless the Administrative Agent or such Bank holds such property solely in a fiduciary capacity. 2. To secure the prompt and complete payment of all Obligations, the Pledgor hereby pledges, assigns, delivers and sets over to the Administrative Agent, and hereby grants to the Administrative Agent a security interest in, all of the Collateral and all proceeds thereof. 3. The Pledgor agrees to execute and deliver from time to time such documents and instruments, and take such other actions, as are necessary or appropriate to ensure that the Administrative Agent has a first perfected security interest in the Collateral to secure the Obligations (and, without limiting the foregoing, the Pledgor hereby authorizes the Administrative Agent to file, at the Pledgor's expense, financing statements, continuations thereof and similar documents in any public office reasonably deemed appropriate by the Administrative Agent). 4. (a) If any Event of Default has occurred and is continuing, the Administrative Agent may: (i) require all interest and dividends on, and other cash proceeds of, the Collateral to be deposited in a special non-interest bearing cash collateral account with the Administrative Agent or any designee thereof and/or (ii) at its option, apply any of the collected balances in such cash collateral account to the payment of the Obligations, whether or not the Obligations shall then be due, or hold such cash collateral account as further security for the Obligations. The Pledgor shall have no control whatsoever over any such cash collateral account and hereby grants to the Administrative Agent a security interest in each such cash collateral account if and when created. (b) If the Pledgor shall become entitled to receive or shall receive any instrument or deposit (whether certificated or uncertificated) in substitution or exchange for any of the Collateral, the Pledgor agrees to accept the same as the Administrative Agent's agent and to hold the same in trust for the Administrative Agent and to deliver the same forthwith to the Administrative Agent in the exact form received, with the endorsement of the Pledgor when necessary, to be held by the Administrative Agent, subject to the terms hereof, as further security for the Obligations. 5. If any amount payable by the Company under or in connection with the Credit Agreement is not paid when due (by acceleration or otherwise), then the Administrative Agent shall have the right, without any notice, to forthwith appropriate and realize upon the Collateral, or any part thereof. Such realization may include (a) the redemption of shares in the Bank One Account and/or (b) the withdrawal of funds from the UBOC Account, and the net proceeds of any such redemption and/or withdrawal (which, in the aggregate, shall not exceed the total amount of the Obligations) shall be forwarded directly to the Administrative Agent for application to the Obligations as provided below. If, for any reason, the Administrative Agent is unable or elects not to effect such a redemption or withdrawal, the Administrative Agent may avail itself of any and all other rights and remedies provided by any law or this Pledge Agreement, including but not limited to the rights and remedies of a secured party under the Uniform Commercial Code as in effect from time to time in the State of New York. The Pledgor agrees and acknowledges that, as a result of applicable securities laws, the Administrative Agent may not be able to effect a public sale of the Collateral, and sales at a private sale may be on terms and at a price less favorable than if the Collateral were sold at a public sale. The Pledgor agrees that all private sales made under these circumstances shall be construed to have been made in a commercially reasonable manner. The Administrative Agent's compliance with any applicable state or federal law requirement in connection with the disposition of the Collateral will not adversely affect the commercial reasonableness of any sale or other disposition of the Collateral. If the Pledgor is entitled to any notice, that requirement will be met if the Administrative Agent sends notice at least ten (10) days prior to the date of the sale, disposition or other event requiring notice, and such notice shall be deemed commercially reasonable. The proceeds of any appropriation of or realization upon the Collateral shall be applied first, to the costs and expenses of every kind (including, without limitation, the fees and expenses of outside and in-house counsel to the Administrative Agent) incurred by the Administrative Agent in connection with the safekeeping or liquidation of the Collateral and the collection and enforcement of the Obligations, second, to payment of any accrued and unpaid interest and fees on the Obligations, third, to payment of the principal of the Obligations and, then, to the Pledgor or any other party entitled thereto under applicable law. 6. The Pledgor represents and warrants that (a) as of the date hereof it is the direct and beneficial owner of all of the Collateral, free and clear of any Lien except for the security interest granted to the Administrative Agent hereunder, (b) this Pledge Agreement creates a valid security interest in favor of the Administrative Agent in all of the Collateral and (c) the Administrative Agent has a perfected first-priority security interest in all Collateral in the Bank One Account and, upon the deposit of funds therein as contemplated by the Credit Agreement, the Administrative Agent will have a perfected first-priority security interest in all Collateral in the UBOC Account, in each case subject to no other Liens. 7. (a) The Pledgor covenants and agrees that so long as any Obligations are unpaid, any Facility LC is outstanding or any Bank has any Commitment, the Pledgor will not (i) liquidate, withdraw or otherwise dispose of any of the Collateral (except as permitted pursuant to clause (c) below) or (ii) create, incur or permit to exist any Lien on any of the Collateral other than the security interest in favor of the Administrative Agent created hereby. (b) The Pledgor warrants and will defend the right, title and security interest of the Administrative Agent in and to the Collateral against the claims of any other Person. (c) The Pledgor covenants and agrees that so long as any Obligations are unpaid, any Facility LC is outstanding or any Bank has any Commitment, the amount of the Collateral shall at all times be equal to or exceed 100.5% of the stated amount of the undrawn and unexpired Facility LCs (the "Required Amount"). The Administrative Agent shall at all times have the right to require that the Pledgor deliver to the Administrative Agent (for deposit in the Accounts) additional Collateral so that the amount of the Collateral shall not be less than the Required Amount. The Administrative Agent agrees that, so long as no Default or Event of Default exists, it will from time to time, upon written request of the Pledgor, release to the Pledgor any of the Collateral in excess of the Required Amount. 8. No course of dealing between the Pledgor and the Administrative Agent or any Bank, nor any failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Bank, any right, power or privilege hereunder or under the Credit Agreement or any other Credit Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided and provided in the other Credit Documents and in all other agreements, instruments and documents delivered, or to be delivered, in connection therewith are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law, including, without limitation, the rights and remedies of a secured party under the Uniform Commercial Code. The provisions of this Pledge Agreement are severable and if any clause or provision hereof shall be held invalid or unenforceable in whole or in part then such invalidity or unenforceability shall attach only to such clause or provision, or part thereof, and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision in this Pledge Agreement in any jurisdiction. 9. This Pledge Agreement shall inure to the benefit of the Pledgor and the Administrative Agent and their respective successors and assigns, except that the Pledgor shall not assign this Pledge Agreement without the prior written consent of the Administrative Agent. 10. The Pledgor agrees to reimburse the Administrative Agent promptly upon demand for any and all costs and out-of-pocket expenses (including attorneys' fees) paid or incurred by the Administrative Agent in connection with the amendment, modification, collection and enforcement of this Pledge Agreement. The obligations of the Pledgor under this Section 10 shall survive the termination of this Pledge Agreement. 11. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF NEW YORK. 12. THE PLEDGOR HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED WITHIN THE CITY OF NEW YORK, NEW YORK AND WAIVES ANY OBJECTION WHICH THE PLEDGOR MAY HAVE BASED ON IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY PROCEEDING IN ANY SUCH COURT AND CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY MAIL OR MESSENGER DIRECTED TO IT AT THE ADDRESS SET FORTH BELOW ITS SIGNATURE HERETO. NOTHING CONTAINED IN THIS SECTION SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT TO BRING ANY ACTION OR PROCEEDING AGAINST THE PLEDGOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. THE PLEDGOR AND THE ADMINISTRATIVE AGENT WAIVE THEIR RIGHT TO TRIAL BY JURY IN ANY JUDICIAL PROCEEDING RELATING TO OR IN ANY WAY ARISING OUT OF THIS PLEDGE AGREEMENT. 13. All notices and other communications provided to any party hereto under this Pledge Agreement shall be in writing or by telex or by facsimile and addressed or delivered to such party at its address set forth below its signature hereto or at such other address as may be designated by such party in a notice to the other party. Any notice, if mailed and properly addressed with postage prepaid, shall be deemed given when received; any notice, if transmitted by telex or facsimile, shall be deemed given when transmitted (answerback confirmed in the case of telexes and electronic or telephonic confirmation in the case of facsimiles). Either party hereto may each change its address for notices by a written notice to the other party. 14. The Administrative Agent or any Bank may, from time to time, at its sole discretion and without notice to the Pledgor, take any or all of the following actions without affecting the obligations of the Pledgor hereunder: (a) retain or obtain a security interest in any property to secure any of the Obligations, (b) retain or obtain the primary or secondary obligation of any obligor or obligors, in addition to the Pledgor, with respect to any of the Obligations, (c) extend or renew any of the Obligations for one or more periods (whether or not longer than the original period), alter or exchange any of the Obligations, or release or compromise any obligation of any obligor with respect to any of the Obligations, (d) release its security interest in, or surrender, release or permit any substitution or exchange for, all or any part of any property of any other person or entity securing any of the Obligations, or extend or renew for one or more periods (whether or not longer than the original period) or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property, and (e) resort to the Pledgor for payment of any of the Obligations when due, whether or not the Administrative Agent or such Bank shall have resorted to any property securing any of the Obligations or shall have proceeded against any other obligor primarily or secondarily obligated with respect to any of the Obligations. The Pledgor hereby expressly waives: (a) notice of the existence or creation or non-payment of all or any of the Obligations, (b) presentment, demand, notice of dishonor, protest and all other notices whatsoever and (c) all diligence in collection or protection of or realization upon any Obligations or any security for or guaranty of any Obligations. Notwithstanding any application of any Collateral to the payment of any of the Obligations, the Pledgor shall not be subrogated to any right of the Administrative Agent or any Bank until such time as the Administrative Agent and the Banks shall have received final payment in cash of the full amount of all Obligations. 15. This Pledge Agreement shall remain in full force effect until all Facility LCs have expired, been fully drawn or otherwise been terminated, all Obligations have been paid in full in cash and all Commitments have terminated. Thereafter, the Administrative Agent shall, promptly upon request by the Pledgor, execute and deliver (at the Pledgor's expense) such documents and instruments as the Pledgor may reasonably request to release the Administrative Agent's security interest in the remaining Collateral, to cause such release to be evidenced on all appropriate public records and to cause all remaining Collateral to be returned to the Pledgor (or such other Person as may be entitled thereto under applicable law). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Pledgor has executed this Pledge Agreement in favor of the Administrative Agent as of the date first above written. CMS ENTERPRISES COMPANY By:__________________________________ Title:_______________________________ One Energy Plaza Jackson, MI 49201 Attention: Treasurer Accepted: BANK ONE, NA, as Administrative Agent By:___________________________________ Title:________________________________ 1 Bank One Plaza Suite 0363 Chicago, Illinois 60670 Attention: Jane Bek EXHIBIT F FORM OF ISSUANCE/MODIFICATION REQUEST Bank One, NA, as LC Issuer under the Credit Agreement referred to below Attention:__________________ Ladies and Gentlemen: Please refer to the Credit Agreement dated as of May 19, 2003 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"; capitalized terms used but not defined herein have the respective meanings ascribed thereto in the Credit Agreement) among CMS Energy Corporation (the "Company"), various financial institutions and Bank One, NA as LC Issuer and as Agent. Pursuant to Section 3.3 of the Credit Agreement, the Company hereby requests the [issuance/Modification] of a Facility LC (the "Specified LC") [in substantially the form attached hereto][in accordance with the following terms]: INSERT THESE ITEMS FOR ISSUANCE (i) The requested date of issuance of the Specified LC is_______________.(1) (ii) The expiration date of the Specified LC is _________.(2) (iii) The proposed stated amount of the Specified LC is _______________. (iv) The beneficiary of the Specified LC is: [insert name and address of beneficiary]. (v) The conditions under which a drawing may be made under the Specified LC are as follows: ______________. INSERT THESE ITEMS FOR MODIFICATION (i) The requested date of [extension] [increase] [decrease] [modification] of the Specified LC is ______________.(1) (ii) The [expiration date for the] [stated amount of the] Specified LC is to be [extended to ___________] [increased to ___________] [decreased to ___________] [modified as follows: ________________]. (iii) Attached hereto as Annex A is a consent to the requested [decrease] [modification] executed by the beneficiary of the Specified LC.(3) - --------------------------- (1) Must be a Business Day. (2) Not later than the fifth Business Day preceding the Termination Date. (3) Include only if required. INSERT INFORMATION REGARDING SPECIAL CONDITIONS / INSTRUCTIONS (IF ANY) (i) _____________________________________________________________. (ii) _____________________________________________________________. CMS ENERGY CORPORATION By:__________________________________ Name: Title: SCHEDULE I
BANK COMMITMENT ---- ---------- ~~Bank One, NA $ 92,500,000 Union Bank of California, N.A. $ 92,500,000 AGGREGATE COMMITMENT $185,000,000~~
SCHEDULE II MATERIAL LIABILITIES CMS ENERGY CORPORATION OFF-BALANCE SHEET LIABILITIES AS OF FEBRUARY 28, 2003
TYPE BENEFICIARY AMOUNT CMS ENERGY Letter of Credit County of Los Angeles $ 320,507 ------------------------------------------------------------------------------------- Letter of Credit Bank of Tokyo Mitsubishi 7,000,000 ------------------------------------------------------------------------------------- Letter of Credit TCF Leasing Inc. 1,919,470 ------------------------------------------------------------------------------------- Letter of Credit Honeywell International 1,250,000 ------------------------------------------------------------------------------------- Letter of Credit Barclays Bank PLC 2,500,000 ------------------------------------------------------------------------------------- Letter of Credit Barclays Bank PLC 70,300,000 ------------------------------------------------------------------------------------- Letter of Credit Royal Bank of Canada 4,715,075 ------------------------------------------------------------------------------------- Letter of Credit Constellation Power Source 5,000,000 ------------------------------------------------------------------------------------- Letter of Credit Midwest Independent System 3,500,000 ------------------------------------------------------------------------------------- Letter of Credit Midwest Independent System 1,900,000 ------------------------------------------------------------------------------------- Letter of Credit Consumers Energy 1,979,556 ------------------------------------------------------------------------------------- Letter of Credit Federal Insurance Company 350,000 ------------------------------------------------------------------------------------- Letter of Credit St. Paul Insurance Company 228,516 ------------------------------------------------------------------------------------- Letter of Credit Bankers Trust Company 1,600,000 ------------------------------------------------------------------------------------- Letter of Credit American Electric Power 5,000,000 ------------------------------------------------------------------------------------- Letter of Credit County of Los Angeles 136,272 ------------------------------------------------------------------------------------- Letter of Credit Morgan Stanley Capital Group 4,000,000 ------------------------------------------------------------------------------------- Letter of Credit Barclays Bank Abu Dhabi 17,500,000 ------------------------------------------------------------------------------------- Letter of Credit Deutsche Bank Trust Co 4,800,000 ------------------------------------------------------------------------------------- Letter of Credit Deutsche Bank Trust Co 2,500,000 ------------------------------------------------------------------------------------- Letter of Credit Deutsche Bank Trust Co 12,400,000 ------------------------------------------------------------------------------------- Letter of Credit Deutsche Bank Trust Co 2,086,700 ------------------------------------------------------------------------------------- Support Obligation Comerica (Genesse Power) 3,000,000 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- CMS GENERATION ------------------------------------------------------------------------------------- Letter of Credit Prudential Insurance 1,338,973 ------------------------------------------------------------------------------------- Letter of Credit Prudential Insurance 546,915 ------------------------------------------------------------------------------------- Letter of Credit ICICI Bank Ltd. 2,966,247 ------------------------------------------------------------------------------------- Letter of Credit ICICI Bank Ltd. 1,165,000 ------------------------------------------------------------------------------------- Letter of Credit ICICI Bank Ltd. 1,605,000 ------------------------------------------------------------------------------------- Letter of Credit ICICI Bank Ltd. 2,551,290 ------------------------------------------------------------------------------------- Letter of Credit Bankers Trust Company 3,000,000 -------------------------------------------------------------------------------------
Letter of Credit Bankers Trust Company 23,000,000 ------------------------------------------------------------------------------------- Letter of Credit Bankers Trust Company 11,300,000 ------------------------------------------------------------------------------------- Letter of Credit Bankers Trust Company 15,745,500 ------------------------------------------------------------------------------------- Letter of Credit Bank One 2,086,700 ------------------------------------------------------------------------------------- Letter of Credit Bank One 1,600,000 ------------------------------------------------------------------------------------- Letter of Credit Bank One 4,800,000 ------------------------------------------------------------------------------------- Letter of Credit Bank One 2,500,000 ------------------------------------------------------------------------------------- Letter of Credit Bank One 12,400,000 ------------------------------------------------------------------------------------- Support Obligation ICICI Bank Ltd. 3,671,072 ------------------------------------------------------------------------------------- Support Obligation AFCO Credit Corporation 2,475,656 ------------------------------------------------------------------------------------- Surety Bond State of Michigan 200,000 ------------------------------------------------------------------------------------- Surety Bond United States EPA 54,000 ------------------------------------------------------------------------------------- Surety Bond State of Kansas 305,220 ------------------------------------------------------------------------------------- Surety Bond City of Flint 100,000 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- CMS ELECTRIC & GAS ------------------------------------------------------------------------------------- Service Contract General Electric 1,351,866 ------------------------------------------------------------------------------------- Service Contract General Electric 1,803,340 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- CMS GAS TRANSMISSION ------------------------------------------------------------------------------------- Surety Bond State of Michigan 270,000 ------------------------------------------------------------------------------------- Surety Bond Twp of Addison 250,000 ------------------------------------------------------------------------------------- Surety Bond Oklahoma Tax Commission 77,691 ------------------------------------------------------------------------------------- Surety Bond Oklahoma Tax Commission 10,000 ------------------------------------------------------------------------------------- Surety Bond Railroad Commission of TX 25,000 ------------------------------------------------------------------------------------- Surety Bond Railroad Commission of TX 25,000 ------------------------------------------------------------------------------------- Surety Bond Railroad Commission of TX 25,000 ------------------------------------------------------------------------------------- Surety Bond Walworth County 208,500 ------------------------------------------------------------------------------------- Surety Bond McHenry City Hwy Dept. 260,000 ------------------------------------------------------------------------------------- Surety Bond Lisbon Twp 10,000 ------------------------------------------------------------------------------------- Surety Bond Town of Ixonia 10,000 ------------------------------------------------------------------------------------- Surety Bond Town of Walworth 30,000 ------------------------------------------------------------------------------------- Surety Bond Town of Concord 40,000 ------------------------------------------------------------------------------------- Surety Bond Town of Sullivan 100,000 ------------------------------------------------------------------------------------- Surety Bond Town of Richmond 250,000 ------------------------------------------------------------------------------------- Surety Bond Town of Whitewater 40,000 ------------------------------------------------------------------------------------- Surety Bond Town of Darien 300,000 ------------------------------------------------------------------------------------- Surety Bond US Corps of Engineers 200,000 -------------------------------------------------------------------------------------

CMS MARKETING SERVICES & TRADING ------------------------------------------------------------------------------------- Surety Bond St. Paul Insurance Company 175,035,391 ------------------------------------------------------------------------------------- Surety Bond St. Paul Insurance Company 81,182,179 ------------------------------------------------------------------------------------- Surety Bond St. Paul Insurance Company 27,385,899 ------------------------------------------------------------------------------------- Surety Bond State of Texas 30,000 ------------------------------------------------------------------------------------- Surety Bond United States of America 9,201,987 ------------------------------------------------------------------------------------- Surety Bond State of Maryland 13,603,456 ------------------------------------------------------------------------------------- Surety Bond State of Arizona 40,000 ------------------------------------------------------------------------------------- Lease Obligation Rent 1,640,257 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- CMS ENTERPRISES ------------------------------------------------------------------------------------- Lease Obligation-Viron Oakland, CA 151,145 ------------------------------------------------------------------------------------- Lease Obligation-Viron Pasadena, CA 1,036,571 ------------------------------------------------------------------------------------- Lease Obligation-Viron Salt Lake City, UT 127,094 ------------------------------------------------------------------------------------- Lease Obligation-Viron Ft. Lauderdale, FL 133,981 ------------------------------------------------------------------------------------- Lease Obligation-Viron Nashville, TN 61,710 ------------------------------------------------------------------------------------- Lease Obligation-Viron Troy, MI 178,841 ------------------------------------------------------------------------------------- Surety Bond State of Kansas 365,208 ------------------------------------------------------------------------------------- Surety Bond Chambersburg Schools 4,833,460 ------------------------------------------------------------------------------------- Surety Bond City of Garden Grove 5,556,848 ------------------------------------------------------------------------------------- Surety Bond St. Louis Symphony 4,435,600 ------------------------------------------------------------------------------------- Surety Bond City of Manteca 7,491,530 ------------------------------------------------------------------------------------- Surety Bond U.S. Postal Service 2,374,918 ------------------------------------------------------------------------------------- Surety Bond State of Arkansas 10,000 ------------------------------------------------------------------------------------- Surety Bond Mt San Antonio College 356,319 ------------------------------------------------------------------------------------- Surety Bond University of SA Oklahoma 6,949,396 ------------------------------------------------------------------------------------- Surety Bond Metro Govt of Nashville, TN 40,000 ------------------------------------------------------------------------------------- Surety Bond County of Los Angeles 1,329,972 ------------------------------------------------------------------------------------- Surety Bond L.A. Community College 302,227 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- DEARBORN INDUSTRIAL GENERATION LLC ------------------------------------------------------------------------------------- None ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- DEARBORN INDUSTRIAL ENERGY LLC ------------------------------------------------------------------------------------- None ------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------

CMS INTERNATIONAL VENTURES LLC ------------------------------------------------------------------------------------- None ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- CMS CAPITAL LLC ------------------------------------------------------------------------------------- Surety Bond State of Michigan 87,000 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- CMS GENERATION MICHIGAN POWER LLC ------------------------------------------------------------------------------------- None ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- CMS GAS PROCESSING LLC ------------------------------------------------------------------------------------- Lease Obligation PW, LM, J and MM Barby 500 ------------------------------------------------------------------------------------- Lease Obligation LD & Winona Robins 600 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- CMS NATURAL GAS GATHERING LLC ------------------------------------------------------------------------------------- Lease Obligation Nannie Kirk 8,000 ------------------------------------------------------------------------------------- Lease Obligation A.D. Reed 1,000 ------------------------------------------------------------------------------------- Lease Obligation Eddie and Janet Wiley 500 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- PANHANDLE PIPE LINE COMPANY ------------------------------------------------------------------------------------- Letter of Credit Prudential Insurance Co 62,500,000 ------------------------------------------------------------------------------------- Surety Bond State of Indiana 50,000 ------------------------------------------------------------------------------------- Surety Bond State of Oklahoma 25,000 ------------------------------------------------------------------------------------- Surety Bond Lenawee County 1,000 ------------------------------------------------------------------------------------- Surety Bond State of Michigan 51,000 ------------------------------------------------------------------------------------- Surety Bond Illinois Dept of Transp. 25,000 ------------------------------------------------------------------------------------- Surety Bond City of Fort Wayne 5,000 ------------------------------------------------------------------------------------- Surety Bond United States of America 300,000 ------------------------------------------------------------------------------------- Surety Bond Harris County, Texas 5,000 ------------------------------------------------------------------------------------- Surety Bond Texas Dept of Transp. 10,000 ------------------------------------------------------------------------------------- Surety Bond State of Texas 25,000 ------------------------------------------------------------------------------------- Surety Bond People of the State of Illinois 50,000 ------------------------------------------------------------------------------------- Surety Bond State of Arkansas 1,000 ------------------------------------------------------------------------------------- Surety Bond State of Louisiana 2,000 ------------------------------------------------------------------------------------- Surety Bond United States of America 350,000 ------------------------------------------------------------------------------------- Surety Bond Commonwealth of Kentucky 50,000 ------------------------------------------------------------------------------------- Surety Bond State of Michigan 250,000 -------------------------------------------------------------------------------------

Surety Bond United States of America 300,000 ------------------------------------------------------------------------------------- Lease Obligations Various 49,328,000 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- CMS FIELD SERVICES, INC. ------------------------------------------------------------------------------------- Lease Obligation K/B Fund IV 650,000 ------------------------------------------------------------------------------------- Lease Obligation Canon 6,000 ------------------------------------------------------------------------------------- Lease Obligation Ricoh 10,000 ------------------------------------------------------------------------------------- Lease Obligation Ascom Hasler 3,600 ------------------------------------------------------------------------------------- Lease Obligation Prairie Land Company 12,500 ------------------------------------------------------------------------------------- Surety Bond Oklahoma Tax Commission 1,533,322 ------------------------------------------------------------------------------------- Surety Bond United States of America 300,000 ------------------------------------------------------------------------------------- Surety Bond State of Wyoming 33,000 ------------------------------------------------------------------------------------- TOTAL OFF-BALANCE SHEET DEBT $712,512,077 Surety Bonds 350,100,000 Indebt Sched. Indemnities 369,700,000

SCHEDULE II MATERIAL LIABILITIES (CONT.) CMS ENERGY CORPORATION GAAP DEBT BREAKDOWN AS OF FEBRUARY 28, 2003
BORROWER FACILITY CURRENT BALANCE CMS ENERGY $295.8MM Credit Agreement $ 123,819,866 $300MM Credit Agreement 133,800,000 General Term Notes Series D 79,922,000 Series E 215,955,000 Series F 297,686,000 Sr. Unsecured Notes @ 7 5/8% 175,815,000 Convert. Sub. Debentures 172,500,000 Extend. Tenor Rate Adj. Sec. 180,000,000 Sr. Unsecured Notes @ 7.5% 408,845,000 Sr. Unsecured Notes @ 6.75% 287,025,000 Sr. Notes @ 8.9% 260,475,000 Sr. Notes @ 8 3/8% 150,000,000 Sr. Notes @ 9.875% 467,558,000 Premium Equity Participating Security Units 220,000,000 Sr. Notes @ 8.5% 300,375,000 CMS Methanol Company 14,000,000 PANHANDLE EASTERN PIPE LINE Sr. Notes @ 6.125% 292,500,000 Sr. Notes @ 6.5% 158,980,000 Sr. Notes @ 7.0% 135,890,000 Sr. Notes @ 8.25% 60,000,000 Notes @ 7.785% 100,000,000 Debentures @ 7.2% 58,000,000 Debentures @ 7.95% 76,500,000 Citibank Bridge Loan 40,000,000
CMS ENTERPRISES None CMS GENERATION COMPANY CMS Capital LLC 4,957,214 CMS GAS TRANSMISSION CMS Capital LLC 11,394,197 Antrim Gas Term Loan with BOM 22,625,000 Jackson Pipeline RCF with Tor Dom 2,687,000 CMS ELECTRIC & GAS None CMS MARKETING SERVICES & TRADING CMS Capital LLC 127,353,473 CMS INTERNATIONAL VENTURES LLC None DEARBORN INDUSTRIAL ENERGY LLC None CMS GENERATION MICHIGAN POWER LLC None DEARBORN INDUSTRIAL GENERATION CMS Capital LLC 13,337,242 CMS FIELD SERVICES The CIT Group 731,204 CMS GAS PROCESSING LLC CMS Capital LLC 6,036,529 CMS NATURAL GAS GATHERING LLC CMS Capital LLC 3,346,852

PANHANDLE PIPE LINE COMPANY Trunkline Gas Company S-T 100,000,000 Trunkline Gas Company L-T 100,000,000 CMS CAPITAL LLC CMS Enterprises Company 11,197,420 CMSG Filer City Operating Company 413,815 CMSG Honey Lake Company 462,258 CMS Jackson Pipeline Company 91,705 CMS Bay Area Pipeline Company 1,054,924 CMSG Graying Holdings Company 1,164,325 CMSG Operating Company 1,323,669 CMSG Mon Valley Company 11,563 CMS Saginaw Bay Lateral Company 276,140 CMS Antrim Gas LLC 1,370,523 CMSG Holdings Company 1,206,958 CMSG Altoona Company 182,228 CMSG Genesee Company 1,513,182 CMS Resource Development 2,855,881 CMSG Recycling Company 371,025 CMSG Lyonsdale Company 20,160 Mon Valley Energy 113 CMSG Chateaugay Company 35,096 CMS Grands Lacs LLC 1,400,457 HYDRA-CO Enterprises, Inc. 1,696,027 CMSG Operating Company II 1,055,368 HCE Appomattox, Inc. 341,816 HCE Jamaica Development, Inc. 5,780 HCO Jamaica, Inc. 164,957 CMS Electric & Gas Company 4,036,096 CMS Texon Company 632,042 CMS Marysville Gas Liquids Company 670,134 CMSG Stratton Company 72,258 CMS Field Services, Inc. 34,262,090 CMS Laverne Gas Processing, LLC 64,085 Panhandle Eastern Pipeline Company 308,744,037 Taweeelah A2 Operating Company 810,173 Dearborn Generation Operating, LLC 3,955,220 CMS Capital Financial Services, Inc. 602,157

CMSG Michigan Power, LLC 804,292 CMS Enterprises Data Mart 243,398 CMS MS&T Michigan, LLC 15,991,117 CMS Energy UK Limited 1,879,798 CMS MicroPower Systems, LLC 3,422,229 CMSG Investment Company I 808,707 CMS Business Development, LLC 3,266,068 CMS Enterprises Development, LLC 232,701 CMS International Ventures, LLC 3,436,843 CMS Enterprise Oil & Gas Company 108,856,818 CMSG Investment Company V 1,553,780 Total Gaap Debt $5,324,674,009

SCHEDULE II MATERIAL LIABILITIES (CONT.) CMS ENERGY CORPORATION INVESTMENTS IN SUBSIDIARIES AND OTHER PERSONS (INCLUDING INTERCOMPANY INVESTMENTS AND PLANNED CAPITAL EXPENDITURE / EQUITY CONTRIBUTIONS TO SUCH SUBS) CMS FIELD SERVICES Investee - 18 month Capex Bighorn Gas Gathering, L.L.C. (50% of "Common Membership Interests" and all of Preferred B Units) (1% of the Common Membership Interests are owned by CMS Field Services Holdings Company) $8,000,000 Bradshaw Energy, L.L.C. (97.5%) 0 CBC/Leon Limited Partnership (89%) 0 CMS Cherokee Gas Processing, L.L.C. (100%) 500,000 CMS Gas Processing, L.L.C. (100%) 700,000 CMS Field Services Holdings Company (100%) 0 CMS Gulf Coast Field Services, L.L.C. (100%) 0 CMS Hydrocarbons, L.L.C. (100%) 0 CMS Laverne Gas Processing, L.L.C. (100%) 0 CMS Natural Gas Gathering, L.L.C. (100%) 900,000 CMS Oklahoma Natural Gas Gathering, L.L.C. (100%) 200,000 CMS Taurus Holdings Company, L.L.C. (100%) 0 CMS Taurus Field Services, L.P. (99% limited partnership interest) (the remaining 1% general partnership interest is owned by CMS Field Services Holdings Company) 750,000 Fort Union Gas Gathering, L.L.C. (33.33%) 1,000,000 Leon Limited Partnership (50%) 0 CMS GENERATION Investee Benton Falls 4,330,000 Salt Lake City 3,000,000 Lake Wood 4,000,000 Filbman Tire Sale 6,000,000 Shuweihat 70,300,000 Shuweihat L/C fees 1,724,000 Development Offices 1,500,000 Overheads Jackson/Dearbon 2,150,000 PANHANDLE HOLDINGS Partnership contributions to Guardian 1,533,000 TOTAL INVESTMENTS $106,587,000

SCHEDULE III EXISTING LETTERS OF CREDIT
LC NUMBER BENEFICIARY AMOUNT FACILITY LC # - --------- ----------- ------ ------------- 330024 Deutsche Bank Trust Co. of Americas $ 4,800,000 330025 Deutsche Bank Trust Co. of Americas $ 2,500,000 330026 Deutsche Bank Trust Co. of Americas $ 12,400,000 330911 Deutsche Bank Trust Co. of Americas $ 2,086,700 331042 Consumers Energy Company $ 2,026,689 SB00122 TCF Leasing $ 1,919,470 751207 SB00118 Bank of Tokyo/Mitsubishi Trust $ 7,000,000 751219 SB00117 Constellation Power Source $ 5,000,000 751204 SB00130 Honeywell $ 1,250,000 751206 SB00131 Shuweihat $ 70,300,000 751218 SB00132 Shuweihat $ 2,500,000 751217 SB00136 City of Los Angeles $ 320,507.39 751216 SB00138 Midwest Independent System Operator, Inc. $ 3,500,000 751211 SB00139 Midwest Independent System Operator, Inc. $ 1,900,000 751212 SB00147 Bankers Trust $ 3,000,000 751210 SB00184 Jorf Lasfar $ 1,600,000 751205 SB00148 Jorf Lasfar $ 23,000,000 751215 SB00149 Jorf Lasfar $ 11,300,000 751214 SB00150 Jorf Lasfar $ 16,209,000 751213 SB00188 County of Los Angeles $ 136,271.81 332014 SB00226 Federal Insurance Company $ 350,000 751209 SB00228 St.Paul Insurance Company $ 228,516 751208 TOTAL $173,327,154.20 Bank One Share $ 86,663,577.10 Union Bank Share $ 86,663,577.10
EX-4.(I) 6 k82154aexv4wxiy.txt CERTIFICATE OF DESIGNATION EXHIBIT 4(i) CERTIFICATE OF DESIGNATION OF 4.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK OF CMS ENERGY CORPORATION Pursuant to Section 302(4) of the Michigan Business Corporation Act, MCLA Section 450.1302(4): CMS ENERGY CORPORATION, a Michigan corporation (the "Corporation"), does hereby certify that the following resolution was duly adopted pursuant to the authority of the Board of Directors of the Corporation, with the provisions thereof fixing the number of shares of the series and the dividend rate being set through a Special Financing Committee of the Board of Directors: RESOLVED: That, pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation by the provisions of Article III of the Restated Articles of Incorporation of the Corporation , as amended from time to time (the "Articles of Incorporation"), and pursuant to Section 302(4) of the Michigan Business Corporation Act, the Board of Directors hereby establishes a series of the preferred stock of the Corporation and hereby states that the series' voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof (in addition to the provisions set forth in the Articles of Incorporation which are applicable to the preferred stock of all series), shall be as follows: 1. Designation and Amount; Ranking. (a) There shall be created from the 10,000,000 shares of preferred stock, par value $0.01 per share, of the Corporation authorized to be issued pursuant to the Articles of Incorporation, a series of preferred stock, designated as the "4.50% Cumulative Convertible Preferred Stock," par value $0.01 per share (the "Preferred Stock"), and the number of shares of such series shall be 5,000,000. Such number of shares may be decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Preferred Stock to a number less than that of the shares of Preferred Stock then outstanding plus the number of shares issuable upon exercise of options or rights then outstanding. (b) The Preferred Stock will, with respect to both dividend rights and rights upon the liquidation, winding-up or dissolution of the Corporation, rank (i) senior to all Junior Stock and (ii) on a parity with all other Parity Stock. 2. Definitions. As used herein, the following terms shall have the following meanings: "Accumulated Dividends" shall mean, with respect to any share of Preferred Stock, as of any date, the aggregate accumulated and unpaid dividends on such share from and including the most recent Dividend Payment Date to which dividends have been paid (or the Issue Date, if such date is prior to the first Dividend Payment Date) to but not including such date. "Additional Dividends" shall have the meaning given to it in Section 3(b). "Affiliate" shall have the meaning ascribed to it, on the date hereof, under Rule 405 of the Securities Act.. "Agent Members" shall have the meaning given to it in Section 11(a)(ii). "Board of Directors" shall mean the Board of Directors of the Corporation or, with respect to any action to be taken by the Board of Directors, any committee (special or otherwise) of the Board of Directors duly authorized to take such action. 1 "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law or executive order to close. "Certificate of Designation" means this certificate of designation designating the Preferred Stock. "Certificated Preferred Stock" shall have the meaning given to it in Section 4(f). "Common Equity" of any Person means capital stock of such Person that is generally entitled to (i) vote in the election of directors of such Person or (ii) if such Person is not a corporation, vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management or policies of such Person. "Common Stock" shall mean the common stock, par value $0.01 per share, of the Corporation, or any other class of stock resulting from successive changes or reclassifications of such common stock consisting solely of changes in par value, or from par value to no par value, or as a result of a subdivision, combination or merger, consolidation or similar transaction in which the Corporation is a constituent corporation. "Continuing Director" means a director who either was a member of the Board of Directors on December 5, 2003 or who becomes a member of the Board of Directors subsequent to that date and whose appointment, election or nomination for election by the Corporation's shareholders is duly approved by a majority of the Continuing Directors on the Board of Directors at the time of such approval, either by a specific vote or by approval of the proxy statement issued by the Corporation on behalf of the Board of Directors in which such individual is named as nominee for director. "Conversion Agent" means the office or agency designated by the Corporation where Preferred Stock may be presented for conversion. Initially, the Conversion Agent shall be the Corporation located at One Energy Plaza, Jackson, Michigan 49201. "Conversion Date" shall have the meaning given to it in Section 7(b). "Conversion Notice" shall have the meaning given to it in Section 7(a). "Conversion Price" shall mean $9.893 per share of Common Stock. "Conversion Rate" shall mean the number of shares of Common Stock issuable upon conversion of a share of Preferred Stock per Liquidation Preference. The initial Conversion Rate is 5.0541 shares of Common Stock issuable upon conversion of a share of Preferred Stock per Liquidation Preference. "Corporation Notice" shall have the meaning given to it in Section 4(e). "Corporation Notice Date" shall have the meaning given to it in Section 4(e). "Distributed Assets or Securities" shall have the meaning given to it in Section 7(f)(iii). "Dividend Payment Date" shall mean March 1, June 1, September 1 and December 1 of each year, commencing March 1, 2004. "Dividend Rate" shall have the meaning given to it in Section 3(a). "Dividend Record Date" shall mean February 15, May 15, August 15 and November 15 of each year. "DTC" or "Depository" means The Depository Trust Company. 2 "Equity Interests" means any capital stock, partnership, joint venture, member or limited liability or unlimited liability company interest, beneficial interest in a trust or similar entity or other equity interest or investment of whatever nature. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Fair Market Value" means the amount which a willing buyer would pay a willing seller in an arm's length transaction. A "Fundamental Change" shall be deemed to have occurred at such time after the original issuance of the Preferred Stock that any of the following occurs: (i) the Common Stock or other capital stock into which the Preferred Stock is convertible is neither listed for trading on a United States national securities exchange nor approved for trading on the NASDAQ National Market or another established automated over-the-counter trading market in the United States; (ii) a "person" or "group" within the meaning of Section 13(d) of the Exchange Act, other than the Corporation, any subsidiary of the Corporation or any employee benefit plan of the Corporation or any such subsidiary, files a Schedule TO (or any other schedule, form or report under the Exchange Act) disclosing that such person or group has become the direct or indirect ultimate "beneficial owner" (as such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have "beneficial ownership" of all shares that such Person or group has the right to acquire whether such right is exercisable immediately or only after the passage of time) of Common Equity of the Corporation representing more than 50% of the voting power of the Corporation's Common Equity; (iii) consummation of any share exchange, consolidation or merger of the Corporation pursuant to which the Common Stock will be converted into cash, securities or other property or any sale, lease or other transfer (in one transaction or a series of transactions) of all or substantially all of the consolidated assets of the Corporation and its subsidiaries, taken as a whole, to any Person (other than the Corporation or one or more of the Corporation's subsidiaries); provided, however, that a transaction where the holders of the Corporation's Common Equity immediately prior to such transaction own, directly or indirectly, more than 50% of the aggregate voting power of all classes of Common Equity of the continuing or surviving corporation or transferee immediately after such event shall not be a Fundamental Change; or (iv) Continuing Directors cease to constitute at least a majority of the Board of Directors; provided, however, that a Fundamental Change shall not be deemed to have occurred in respect of any of the foregoing if either (A) the Last Reported Sale Price per share of Common Stock for any five Trading Days within the period of 10 consecutive Trading Days ending immediately before the later of the Fundamental Change or the public announcement thereof shall equal or exceed 105% of the Conversion Price in effect immediately before the Fundamental Change or the public announcement thereof or (B) at least 90% of the consideration (excluding cash payments for fractional shares) in the transaction or transactions constituting the Fundamental Change consists of shares of capital stock traded on a national securities exchange or quoted on the NASDAQ National Market (or which shall be so traded or quoted when issued or exchanged in connection with such Fundamental Change) (such securities being referred to as "Publicly Traded Securities") and as a result of such transaction or transactions the Preferred Stock becomes convertible into such Publicly Traded Securities (excluding cash payments for fractional shares). "Fundamental Change Purchase Date" shall have the meaning given to it in Section 4(a). "Fundamental Change Purchase Notice" shall have the meaning given to it in Section 4(c). "Fundamental Change Purchase Price" shall have the meaning given to it in Section 4(a). "Global Preferred Stock" shall have the meaning given to it in Section 11(a)(i). "Holder" or "holder" shall mean a holder of record of the Preferred Stock. "Issue Date" shall mean December 5, 2003, the original date of issuance of the Preferred Stock. 3 "Junior Stock" shall mean all classes of common stock of the Corporation and each other class of capital stock or series of preferred stock established after the Issue Date, by the Board of Directors, the terms of which do not expressly provide that such class or series ranks senior to or on parity with the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Corporation. "Last Reported Sale Price" of Common Stock on any date means the closing sale price per share (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on that date as reported in composite transactions for the principal U.S. securities exchange on which Common Stock is traded or, if the Common Stock is not listed on a U.S. national or regional securities exchange, as reported by the NASDAQ National Market. If the Common Stock is not listed for trading on a U.S. national or regional securities exchange and not reported by the NASDAQ National Market on the relevant date, the Last Reported Sale Price shall be the last quoted bid price for Common Stock in the over-the-counter market on the relevant date as reported by the National Quotation Bureau or similar organization. If the Common Stock is not so quoted, the Last Reported Sale Price will be the average of the mid-point of the last bid and ask prices for the Common Stock on the relevant date from each of at least three nationally recognized independent investment banking firms selected by the Corporation for this purpose. "Liquidation Preference" shall mean, with respect to each share of Preferred Stock, $50. "Mandatory Conversion Date" shall have the meaning given to it in Section 8(b). "Market Price" means the average of the Last Reported Sales Price per share of Common Stock for the 20 Trading Day period ending on the applicable date of determination (if the applicable date of determination is a Trading Day or, if not, then on the last Trading Day prior to such applicable date of determination), appropriately adjusted to take into account the occurrence, during the period commencing on the first of the Trading Days during such 20 Trading Day period and ending on the applicable date of determination, of any event that would result in an adjustment of the Conversion Rate under this Certificate of Designation. "Market Value" shall mean the average closing price of the Common Stock for a five consecutive Trading Day period on the NYSE (or such other national securities exchange or automated quotation system on which the Common Stock is then listed or authorized for quotation or, if the Common Stock is not so listed or authorized for quotation, an amount determined in good faith by the Board of Directors to be the fair value of the Common Stock). "Maximum Conversion Rate" shall have the meaning given to it in Section 7(f)(viii). "NYSE" shall mean the New York Stock Exchange, Inc. "Officer" means the Chairman of the Board of Directors, the President, any Vice President, the Treasurer, the Secretary or any Assistant Secretary of the Corporation. "Officers' Certificate" means a certificate signed by two Officers. "Opinion of Counsel' means a written opinion from legal counsel who is acceptable to the Transfer Agent. The counsel may be an employee of or counsel to the Corporation or the Transfer Agent. "Parity Stock" shall mean any class of capital stock or series of preferred stock established as of or after the Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank on parity with the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Corporation. "Paying Agent" means any Person authorized by the Corporation to pay the dividends or Fundamental 4 Change Purchase Price on any of the shares of Preferred Stock on behalf of the Corporation. Initially, the Paying Agent shall be the Corporation. "Person" shall mean any individual, corporation, general partnership, limited partnership, limited liability partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof. "Registration Default" shall have the meaning given to it in Section 3(b). "Registration Rights Agreement" means the Registration Rights Agreement dated as of December 5, 2003, among the Corporation, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and the certain other initial purchasers of the Preferred Stock. "SEC" or "Commission" shall mean the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Security Register" means the security register recording the holders of Preferred Stock kept at the offices of the Corporation. "Security Registrar" shall be the Person holding the Security Register, and the Corporation will initially be designated as the Security Registrar. "Senior Stock" shall mean each class of capital stock or series of preferred stock established after the Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank senior to the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Corporation. "Shelf Registration Statement" shall mean a shelf registration statement filed with the SEC to cover resales of Transfer Restricted Securities by holders thereof, as required by the Registration Rights Agreement. "Spin-Off Market Price" per share of Common Stock of the Corporation or the Equity Interests in a Subsidiary or other business unit of the Corporation on any day means the average of the daily Last Reported Sale Prices for the 10 consecutive Trading Days commencing on and including the fifth Trading Day after the ex date with respect to the issuance or distribution requiring such computations. As used herein, the term "ex date," when used with respect to any issuance or distribution, shall mean the first date on which the security trades regular way on the NYSE or such other national regional exchange or market in which the security trades without the right to receive such issuance or distribution. "Subsidiary" means a Person more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Corporation or by one or more other Subsidiaries, or by the Corporation and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power of the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trading Day" means (i) if the applicable security is listed, admitted for trading or quoted on the NYSE, the NASDAQ National Market or another national security exchange, a day on which the NYSE, the NASDAQ National Market or another national security exchange is open for business or (ii) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law, regulation or executive order to close. "Trading Exception" shall have the meaning given to it in Section 7(a)(ii). 5 "Trading Price" of the Preferred Stock on any date of determination means the average of the secondary market bid quotations per share of Preferred Stock obtained by the Conversion Agent for $5,000,000 Liquidation Preference of the Preferred Stock at approximately 3:30 p.m., New York City time, on such determination date from three independent nationally recognized securities dealers the Corporation selects, provided that if three such bids cannot reasonably be obtained by the Conversion Agent, but two such bids are obtained, then the average of the two bids shall be used, and if only one such bid can reasonably be obtained by the Conversion Agent, this one bid shall be used. If the Conversion Agent cannot reasonably obtain at least one bid for $5,000,000 Liquidation Preference of the Preferred Stock from a nationally recognized securities dealer, then the Trading Price will be deemed to be less than 95% of the product of the sale price of Common Stock and the then applicable Conversion Rate. "Transfer Agent" shall mean the Corporation's duly appointed transfer agent for the Preferred Stock. Initially, the Corporation will be the Transfer Agent. "Transfer Restricted Securities" shall mean each share of Preferred Stock (or the shares of Common Stock into which such share of Preferred Stock is convertible) until (i) the date on which such security or its predecessor has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement, (ii) the date on which such security or predecessor is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act or (iii) the date that such Preferred Stock ceases to be outstanding. "Voting Rights Class" shall have the meaning given to it in Section 5(a)(i). "Voting Rights Triggering Event" shall mean the failure of the Corporation to pay dividends on the Preferred Stock with respect to six or more quarterly periods (whether or not consecutive). "Voting Stock" shall mean, with respect to any Person, securities of any class or classes of Capital Stock in such Person entitling the holders thereof (whether at all times or only so long as no senior class of stock has voting power by reason of contingency) generally to vote in the election of members of the Board of Directors or other governing body of such Person. For purposes of this definition, "Capital Stock" shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of corporate stock or partnership interests and any and all warrants, options and rights with respect thereto (whether or not currently exercisable), including each class of common stock and preferred stock of such Person. 3. Dividends. (a) The holders of shares of the outstanding Preferred Stock shall be entitled, when, as and if declared by the Board of Directors out of funds of the Corporation legally available therefor, to receive cumulative cash dividends at the rate per annum of 4.50% per share on the Liquidation Preference (equivalent to $2.25 per annum per share), payable quarterly in arrears (the "Dividend Rate"). The Dividend Rate may be increased in the circumstances described in Section 3(b) below. Dividends payable for each full dividend period will be computed by dividing the Dividend Rate by four and shall be payable in arrears on each Dividend Payment Date (commencing March 1, 2004) for the quarterly period ending immediately prior to such Dividend Payment Date, to the holders of record of Preferred Stock at the close of business on the Dividend Record Date applicable to such Dividend Payment Date. Such dividends shall be cumulative from the most recent date as to which dividends shall have been paid or, if no dividends have been paid, from the Issue Date (whether or not in any dividend period or periods the Board of Directors shall have declared such dividends or there shall be funds of the Corporation legally available for the payment of such dividends) and shall accumulate on a day-to-day basis, whether or not earned or declared, from and after the Issue Date. Dividends payable for any partial dividend period shall be computed on the basis of days elapsed over a 360-day year consisting of twelve 30-day months. Accumulated unpaid dividends accrue and cumulate dividends at the annual rate of 4.50% and are payable in the manner provided in this Section 3. 6 (b) If (i) by November 5, 2004, the Shelf Registration Statement has not been filed with the Commission, (ii) by March 5, 2005, the Shelf Registration Statement has not been declared effective by the Commission, (iii) after the Shelf Registration Statement has been declared effective the Corporation fails to file a post-effective amendment, prospectus supplement, amendment or supplement to any document incorporated by reference into such prospectus or document if required by applicable law with the SEC within five business days after a Holder provides the Corporation with certain required information, if such filing is necessary to enable the Holder to deliver the prospectus to purchasers of such Holder's Transfer Restricted Securities, (iv) the Shelf Registration Statement ceases to be effective or fails to be usable without being succeeded within 30 days by a post-effective amendment or an additional registration statement filed and declared effective (other than as permitted in (iii) above) pursuant to the Exchange Act that cures the failure of the registration statement to be effective or usable, and (v) the aggregate duration of any suspension periods in any period exceeds certain limits described in the Registration Rights Agreement (each such event referred to in clauses (i), (ii), (iii), (iv) and (v) a "Registration Default"), additional dividends shall accumulate on the Preferred Stock, from and including the date on which any such Registration Default shall occur to, but excluding, the date on which the Registration Default has been cured, at the rate of 0.25% per year for the first 90 days following such date and at a rate of 0.50% per year thereafter ("Additional Dividends"). With respect to shares of Common Stock issued upon conversion of the Preferred Stock, Additional Dividends will accumulate on the then applicable conversion price from and including the date on which any such Registration Default shall occur to, but excluding, the date on which the Registration Default has been cured, at the rate of 0.25% per year for the first 90 days following such date and at a rate of 0.50% per year thereafter. Except as mentioned above, the Corporation will have no other liabilities for monetary damages with respect to its registration obligations. The receipt of Additional Dividends will be the sole monetary remedy available to a Holder if the Corporation fails to meet these obligations. (c) No dividend will be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid or declared and a sufficient sum set apart for the payment of such dividend upon all outstanding shares of Preferred Stock. (d) No dividends or other distributions (other than a dividend or distribution payable solely in shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock) and other than cash paid in lieu of fractional shares) may be declared, made or paid, or set apart for payment upon, any Parity Stock or Junior Stock, nor may any Parity Stock or Junior Stock be redeemed, purchased or otherwise acquired for any consideration (or any money paid to or made available for a sinking fund for the redemption of any Parity Stock or Junior Stock) by or on behalf of the Corporation (except by conversion into or exchange for shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock)), unless full Accumulated Dividends shall have been or contemporaneously are declared and paid, or are declared and a sum sufficient for the payment thereof is set apart for such payment, on the Preferred Stock and any Parity Stock for all dividend payment periods terminating on or prior to the date of such declaration, payment, redemption, purchase or acquisition. Notwithstanding the foregoing, if full dividends have not been paid on the Preferred Stock and any Parity Stock, dividends may be declared and paid on the Preferred Stock and such Parity Stock so long as the dividends are declared and paid pro rata so that the amounts of dividends declared per share on the Preferred Stock and such Parity Stock will in all cases bear to each other the same ratio that accumulated and unpaid dividends per share on the shares of Preferred Stock and such other Parity Stock bear to each other. (e) Holders of shares of Preferred Stock shall not be entitled to any dividends on the Preferred Stock, whether payable in cash, property or stock, in excess of full cumulative dividends and Additional Dividends (if any). (f) The holders of shares of Preferred Stock at the close of business on a Dividend Record Date will be entitled to receive the dividend payment on those shares on the corresponding Dividend Payment Date notwithstanding the subsequent conversion thereof or the Corporation's default in payment of the dividend due on that Dividend Payment Date. However, shares of Preferred Stock surrendered for conversion during the period between the close of business on any Dividend Record Date and the close of business on the Business Day 7 immediately preceding the applicable Dividend Payment Date must be accompanied by payment of an amount equal to the dividend payable on the shares on that Dividend Payment Date; provided, however, that no such payment need be made if (1) the Corporation has specified a Mandatory Conversion Date that is after a Dividend Record Date and on or prior to the immediately following Dividend Payment Date or (2) any accumulated and unpaid dividends exist at the time of conversion with respect to such shares of Preferred Stock to the extent of such accumulated and unpaid dividends. A holder of shares of Preferred Stock on a Dividend Record Date who (or whose transferee) tenders any shares for conversion on the corresponding Dividend Payment Date will receive the dividend payable by the Corporation on the Preferred Stock on that date, and the converting holder need not include payment in the amount of such dividend upon surrender of shares of Preferred Stock for conversion. Except as provided above with respect to a voluntary conversion pursuant to Section 7, the Corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the shares of Common Stock issued upon conversion. (g) In any case where any Dividend Payment Date or Conversion Date (including upon the occurrence of a Fundamental Change) of any Preferred Stock shall not be a Business Day, at any place of payment, then payment of dividends (and Additional Dividends, if any) need not be made on such date, but may be made on the next succeeding Business Day at such place of payment with the same force and effect as if made on the dividend payment date or Conversion Date (including upon the occurrence of a Fundamental Change); and no interest shall accumulate on the amount so payable for the period from and after such Dividend Payment Date or Conversion Date, as the case may be, to such Business Day. (h) The Paying Agent shall return to the Corporation upon written request any money or property held by it for the payment of any amount with respect to the Preferred Stock that remains unclaimed for two years, provided, however, that the Paying Agent, before being required to make any such return, shall at the expense of the Corporation cause to be published once in a newspaper of general circulation in The City of New York or mail to each such Holder notice that such money or property remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication or mailing, any unclaimed money or property then remaining shall be returned to the Corporation. After return to the Corporation, Holders entitled to the money or property must look to the Corporation for payment as general creditors unless an applicable abandoned property law designates another Person. 4. Fundamental Change. (a) Purchase at the Option of the Holder Upon a Fundamental Change. Each Holder shall have the right, at such Holder's option, to require the Corporation to purchase any or all of such Holder's Preferred Stock for cash or a check on the date that is no earlier than 60 days nor later than 90 days after the date of the Corporation Notice of the occurrence of such Fundamental Change (subject to extension to comply with applicable law, as provided in Section 4(h) (the "Fundamental Change Purchase Date"). The Preferred Stock shall be repurchased in integral multiples of $50.00 (representing the Liquidation Preference). The Corporation shall purchase such Preferred Stock at a price (the "Fundamental Change Purchase Price") equal to 100% of the Liquidation Price of the number of shares of Preferred Stock to be purchased plus accumulated and unpaid dividends, including Additional Dividends, if any, to the Fundamental Change Purchase Date. (b) Notice of Fundamental Change. The Corporation, or at its request (which must be received by the Paying Agent at least three Business Days (or such lesser period as agreed to by the Paying Agent) prior to the date the Paying Agent is requested to give such notice as described below), the Paying Agent, in the name of and at the expense of the Corporation, shall mail to all Holders a Corporation Notice of the occurrence of a Fundamental Change and of the purchase right arising as a result thereof, including the information required by Section 4(e) hereof, on or before the 30th day after the occurrence of such Fundamental Change. (c) Exercise of Option. For Preferred Stock to be so purchased at the option of the Holder, the Paying Agent must receive at its office in Jackson, Michigan, or any other offices of the Paying Agent maintained for such 8 purposes, such shares of Preferred Stock duly endorsed for transfer, together with a written notice of purchase in the form attached hereto as Exhibit A (a "Fundamental Change Purchase Notice") duly completed, on or before the 30th day prior to the Fundamental Change Purchase Date, subject to extension to comply with applicable law. The Fundamental Change Purchase Notice shall state: (i) if certificated, the certificate numbers of the shares of Preferred Stock which the Holder shall deliver to be purchased, or, if not certificated, the Fundamental Change Purchase Notice must comply with appropriate Depository procedures; (ii) the number of shares of Preferred Stock which the Holder shall deliver to be purchased, which portion must be $50.00 or an integral multiple thereof; and (iii) that such Preferred Stock shall be purchased as of the Fundamental Change Purchase Date pursuant to the terms and conditions specified in the Preferred Stock and in this Certificate of Designation. (d) Procedures. The Corporation shall purchase from a Holder, pursuant to this Section 4, shares of Preferred Stock or multiples of $50.00 if so requested by such Holder. Any purchase by the Corporation contemplated pursuant to the provisions of this Section 4 shall be consummated by the delivery of the Fundamental Change Purchase Price to be received by the Holder promptly following the later of the Fundamental Change Purchase Date or the time of book-entry transfer or delivery of the Preferred Stock. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Fundamental Change Purchase Notice contemplated by Section 4(c) hereof shall have the right at any time prior to the close of business on the Business Day prior to the Fundamental Change Purchase Date to withdraw such Fundamental Change Purchase Notice (in whole or in part) by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 4(f) hereof. The Paying Agent shall promptly notify the Corporation of the receipt by it of any Fundamental Change Purchase Notice or written notice of withdrawal thereof. On or before 10:00 a.m. (New York City time) on the Fundamental Change Purchase Date, the Corporation shall deposit with the Paying Agent (or if the Corporation or an Affiliate of the Corporation is acting as the Paying Agent, shall segregate and hold in trust) money sufficient to pay the aggregate Fundamental Change Purchase Price of the Preferred Stock to be purchased pursuant to this Section 4. Payment by the Paying Agent of the Fundamental Change Purchase Price for such Preferred Stock shall be made promptly following the later of the Fundamental Change Purchase Date or the time of book-entry transfer or delivery of such Preferred Stock. If the Paying Agent holds, in accordance with the terms of this Certificate of Designation, money sufficient to pay the Fundamental Change Purchase Price of such Preferred Stock on the Business Day following the Fundamental Change Purchase Date, then, on and after such date, such Preferred Stock shall cease to be outstanding and dividends (including Additional Dividends, if any) on such Preferred Stock shall cease to accumulate, whether or not book-entry transfer of such Preferred Stock is made or such Preferred Stock is delivered to the Paying Agent, and all other rights of the Holder shall terminate (other than the right to receive the Fundamental Change Purchase Price upon delivery or transfer of the Preferred Stock). Nothing herein shall preclude any withholding tax required by law. The Corporation shall require each Paying Agent to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders all money held by the Paying Agent for the payment of the Fundamental Change Purchase Price. If the Corporation or an Affiliate of the Corporation acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. All questions as to the validity, eligibility (including time of receipt) and acceptance of any Preferred Stock pursuant to a Fundamental Change shall be determined by the Corporation, whose determination shall be final and binding. 9 (e) Notice of Fundamental Change. The Corporation shall send notices (each, a "Corporation Notice") to the Holders (and to beneficial owners as required by applicable law) at their addresses shown in the Security Register maintained by the Security Registrar, and delivered to the Paying Agent on or before the 30th day after the occurrence of the Fundamental Change ("Corporation Notice Date"). Each Corporation Notice shall include a form of Fundamental Change Purchase Notice to be completed by a Holder and shall state: (i) the applicable Fundamental Change Purchase Price, excluding accumulated and unpaid dividends, Conversion Rate at the time of such notice (and any adjustments to the Conversion Rate) and, to the extent known at the time of such notice, the amount of dividends (including Additional Dividends, if any), if any, that will be payable with respect to the Preferred Stock on the applicable Fundamental Change Purchase Date; (ii) the events causing the Fundamental Change and the date of the Fundamental Change; (iii) the Fundamental Change Purchase Date; (iv) the last date on which a Holder may exercise its purchase right; (v) the name and address of the Paying Agent and the Conversion Agent; (vi) that the Preferred Stock must be surrendered to the Paying Agent to collect payment of the Fundamental Change Purchase Price; (vii) that the Preferred Stock as to which a Fundamental Change Purchase Notice has been given may be converted only if the applicable Fundamental Change Purchase Notice has been withdrawn in accordance with the terms of this Certificate of Designation; (viii) that the Fundamental Change Purchase Price for any of the Preferred Stock as to which a Fundamental Change Purchase Notice has been given and not withdrawn shall be paid by the Paying Agent promptly following the later of the Fundamental Change Purchase Date or the time of book-entry transfer or delivery of such Preferred Stock; (ix) the procedures the Holder must follow under this Section 4; (x) briefly, the conversion rights of the Preferred Stock; (xi) that, unless the Corporation defaults in making payment of such Fundamental Change Purchase Price on the Preferred Stock covered by any Fundamental Change Purchase Notice, dividends (including Additional Dividends, if any) will cease to accumulate on and after the Fundamental Change Purchase Date; (xii) the CUSIP or ISIN number of the Preferred Stock; and (xiii) the procedures for withdrawing a Fundamental Change Purchase Notice. In connection with providing such Corporation Notice, the Corporation will issue a press release and publish a notice containing the information in such Corporation Notice in a newspaper of general circulation in The City of New York or publish such information on the Corporation's then existing Web site or through such other public medium as the Corporation may use at the time. At the Corporation's request, made at least five Business Days prior to the date upon which such notice is to be mailed, and at the Corporation's expense, the Paying Agent shall give the Corporation Notice in the Corporation's name; provided, however, that, in all cases, the text of the Corporation Notice shall be prepared by the Corporation. 10 (f) Effect of Fundamental Change Purchase Notice. Upon receipt by the Corporation of the Fundamental Change Purchase Notice specified in this Section 4, the Holder of the Preferred Stock in respect of which such Fundamental Change Purchase Notice was given shall (unless such Fundamental Change Purchase Notice is withdrawn as specified in this Section 4(f)) thereafter be entitled to receive solely the Fundamental Change Purchase Price with respect to such Preferred Stock. Such Fundamental Change Purchase Price shall be paid by the Paying Agent to such Holder promptly following the later of (x) the Fundamental Change Purchase Date with respect to such Preferred Stock (provided the conditions in this Section 4 have been satisfied) and (y) the time of delivery or book-entry transfer of such Preferred Stock to the Paying Agent by the Holder thereof in the manner required by this Section 4. Preferred Stock in respect of which a Fundamental Change Purchase Notice has been given by the Holder thereof may not be converted for shares of Common Stock on or after the date of the delivery of such Fundamental Change Purchase Notice unless such Fundamental Change Purchase Notice has first been validly withdrawn as specified in this Section 4(f). Payment of the Fundamental Change Purchase Price for shares of Preferred Stock in registered, certificated form ("Certificated Preferred Stock") for which a Fundamental Change Purchase Notice has been delivered and not withdrawn is conditioned upon delivery of such Certificated Preferred Stock (together with necessary endorsements) to the Paying Agent at its office in Jackson, Michigan, or any other office of the Paying Agent maintained for such purpose, at any time (whether prior to, on or after the Fundamental Change Purchase Date) after the delivery of such Fundamental Change Purchase Notice. Payment of the Fundamental Change Purchase Price for such Certificated Preferred Stock will be made promptly following the later of the Fundamental Change Purchase Date or the time of delivery of such Certificated Preferred Stock. If the Paying Agent holds, in accordance with the terms of this Certificate of Designation, money sufficient to pay the Fundamental Change Purchase Price of shares of Preferred Stock on the Business Day following the Fundamental Change Purchase Date for such Preferred Stock, then, on and after such date, dividends on such Preferred Stock will cease to accumulate, whether or not such Preferred Stock is delivered to the Paying Agent, and all other rights of the Holder shall terminate (other than the right to receive the Fundamental Change Purchase Price upon delivery of the Preferred Stock). A Fundamental Change Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent at any time prior to 5:00 p.m. New York City time on the Business Day prior to the Fundamental Change Purchase Date to which it relates specifying: (i) if certificated, the certificate number of Preferred Stock in respect of which such notice of withdrawal is being submitted, or, if not certificated, the written notice of withdrawal must comply with appropriate Depository procedures; (ii) the number of shares of Preferred Stock with respect to which such notice of withdrawal is being submitted; and (iii) the number of shares of Preferred Stock, if any, which remains subject to the original Fundamental Change Purchase Notice and which have been or shall be delivered for purchase by the Corporation. (g) Preferred Stock Purchased in Part. Any shares of Preferred Stock that are to be purchased only in part shall be surrendered (in physical or book-entry form) at the office of the Paying Agent (with, if the Corporation so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Corporation duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Corporation shall execute and the Transfer Agent shall authenticate and deliver to the Holder of such Preferred Stock, without service charge, new shares of Preferred Stock, as requested by such Holder in an amount equal to, and in exchange for, the portion of the Liquidation Preference of the Preferred Stock so surrendered which is not purchased. (h) Covenant to Comply with Securities Laws Upon Purchase of the Preferred Stock. In connection with any offer to purchase Preferred Stock under this Section 4, the Corporation shall, to the extent applicable: (i) comply with Rules 13e-4 and 14e-1 (and any successor provisions thereto) under the Exchange Act, if applicable; (ii) file the related Schedule TO (or any successor schedule, form or report) under the Exchange Act, if applicable; and (iii) otherwise comply with all applicable federal and state securities laws so as to permit the rights and obligations under this Section 4 hereof to be exercised in the time and in the manner specified in this Section 4. 11 (i) Repayment to the Corporation. The Paying Agent shall return to the Corporation any cash or property that remains unclaimed as provided in the Preferred Stock, together with interest that the Paying Agent has agreed to pay, if any, held by it for the payment of a Fundamental Change Purchase Price; provided, however, that to the extent that the aggregate amount of cash or property deposited by the Corporation pursuant to this Section 4 exceeds the aggregate Fundamental Change Purchase Price of the Preferred Stock or portions thereof which the Corporation is obligated to purchase as of the Fundamental Change Purchase Date, then promptly on and after the Business Day following the Fundamental Change Purchase Date, the Paying Agent shall return any such excess to the Corporation together with interest that the Paying Agent has agreed to pay, if any. (j) Officers' Certificate. At least five Business Days before the Corporation Notice Date, the Corporation shall deliver an Officers' Certificate to the Paying Agent (provided, that, at the Corporation's option, the matters to be addressed in such Officers' Certificate may be divided among two such certificates) specifying: (i) the manner of payment selected by the Corporation; and (ii) whether the Corporation desires the Paying Agent to give the Corporation Notice required by Section 4(e) hereof. 5. Voting. (a) The shares of Preferred Stock shall have no voting rights except as set forth below or as otherwise required by Michigan law from time to time: (i) If and whenever at any time or times a Voting Rights Triggering Event occurs, then the holders of shares of Preferred Stock, voting as a single class with any other preferred stock or preference securities having similar voting rights that are exercisable (the "Voting Rights Class"), will be entitled at the next regular or special meeting of shareholders of the Corporation to elect two additional directors of the Corporation, unless the Board of Directors is comprised of fewer than six directors at such time, in which case the Voting Rights Class shall be entitled to elect one additional director. Upon the election of any such additional directors, the number of directors that comprise the Board of Directors shall be increased by such number of additional directors. (ii) Such voting rights may be exercised at a special meeting of the holders of the shares of the Voting Rights Class, called as hereinafter provided, or at any annual meeting of shareholders held for the purpose of electing directors, and thereafter at each such annual meeting until such time as all dividends in arrears on the shares of Preferred Stock shall have been paid in full, at which time or times such voting rights and the term of the directors elected pursuant to Section 5(a)(i) shall terminate. (iii) At any time when such voting rights shall have vested in holders of shares of the Voting Rights Class, an Officer of the Corporation may call, and, upon written request of the record holders of shares representing at least twenty-five percent (25%) of the voting power of the shares then outstanding of the Voting Rights Class, addressed to the Secretary of the Corporation, shall call a special meeting of the holders of shares of the Voting Rights Class. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of shareholders at the place for holding annual meetings of shareholders of the Corporation, or, if none, at a place designated by the Board of Directors. Notwithstanding the provisions of this Section 5(a)(iii), no such special meeting shall be called during a period within the 60 days immediately preceding the date fixed for the next annual meeting of shareholders, in which such case the election of directors pursuant to Section 5(a)(i) shall be held at such annual meeting of shareholders. (iv) At any meeting held for the purpose of electing directors at which the holders of the Voting Rights Class shall have the right to elect directors as provided herein, the presence in person or by proxy of the holders of shares representing more than fifty percent (50%) in voting power of the then outstanding shares of the Voting Rights Class shall be required and shall be sufficient to constitute a quorum of such class for the election of directors by such class. The affirmative vote of the holders of shares of Preferred 12 Stock constituting a majority of the shares of Preferred Stock present at such meeting, in person or by proxy shall be sufficient to elect any such director. (v) Any director elected pursuant to the voting rights created under this Section 5(a) shall hold office until the next annual meeting of shareholders (unless such term has previously terminated pursuant to Section 5(a)(ii)) and any vacancy in respect of any such director shall be filled only by vote of the remaining director so elected by holders of the Voting Rights Class, or, if there be no such remaining director, by the holders of shares of the Voting Rights Class at a special meeting called in accordance with the procedures set forth in this Section 5, or, if no such special meeting is called, at the next annual meeting of shareholders. Upon any termination of such voting rights, the term of office of all directors elected pursuant to this Section 5 shall terminate. (vi) So long as any shares of Preferred Stock remain outstanding, unless a greater percentage shall then be required by law, the Corporation shall not, without the affirmative vote or consent of the holders of all of the outstanding Preferred Stock voting or consenting, as the case may be, separately as one class, (i) create, authorize or issue any class or series of Senior Stock (or any security convertible into Senior Stock) or (ii) amend the Articles of Incorporation so as to affect adversely the specified rights, preferences, privileges or voting rights of holders of shares of Preferred Stock. (vii) In exercising the voting rights set forth in this Section 5(a), each share of Preferred Stock shall be entitled to one vote. (b) The Corporation may authorize, increase the authorized amount of, or issue any class or series of Parity Stock or Junior Stock, without the consent of the holders of Preferred Stock, and in taking such actions the Corporation shall not be deemed to have affected adversely the rights, preferences, privileges or voting rights of holders of shares of Preferred Stock. 6. Liquidation Rights. (a) In the event of any liquidation, winding-up or dissolution of the Corporation, whether voluntary of involuntary, each holder of shares of Preferred Stock shall be entitled to receive and to be paid out of the assets of the Corporation available for distribution to its shareholders the Liquidation Preference plus Accumulated Dividends and Additional Dividends thereon in preference to the holders of, and before any payment or distribution is made on, any Junior Stock, including, without limitation, on any Common Stock. (b) Neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all the assets or business of the Corporation (other than in connection with the liquidation, winding-up or dissolution of its business) nor the merger or consolidation of the Corporation into or with any other Person shall be deemed to be a liquidation, winding-up or dissolution, voluntary or involuntary, for the purposes of this Section 6. (c) After the payment to the holders of the shares of Preferred Stock of full preferential amounts provided for in this Section 6, the holders of Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation. (d) In the event the assets of the Corporation available for distribution to the holders of shares of Preferred Stock upon any liquidation, winding-up or dissolution of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 6(a), no such distribution shall be made on account of any shares of Parity Stock upon such liquidation, dissolution or winding-up unless proportionate distributable amounts shall be paid on account of the shares of Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all Preferred Stock and of any Parity Stock are entitled upon such liquidation, winding-up or dissolution. 13 7. Conversion. (a) Conversion Rights. A Holder may convert Preferred Stock into Common Stock during the periods and upon satisfaction of at least one of the conditions set forth below: (i) in any calendar quarter (and only during such calendar quarter) if the Last Reported Sale Price for Common Stock for at least 20 Trading Days during the period of 30 consecutive Trading Days ending on the last Trading Day of the previous calendar quarter is greater than or equal to 120% of the Conversion Price per share of Common Stock on such last Trading Day; (ii) during the five Business Days immediately following any ten consecutive Trading Day period in which the Trading Price per Liquidation Preference of Preferred Stock (as determined following a request by a Holder of Preferred Stock in accordance with the procedures described herein) for each day of that period was less than 95% of the product of the sale price of Common Stock and the then applicable Conversion Rate (the "Trading Exception"); provided, however, that a Holder may not convert its Preferred Stock if the average closing sale price of Common Stock for such ten consecutive Trading Day period is between the then current Conversion Price and 120% of the then applicable Conversion Price; in connection with any conversion upon satisfaction of such Trading Price condition, the Conversion Agent shall have no obligation to determine the Trading Price unless the Corporation has requested such determination; and the Corporation shall have no obligation to make such request unless the Holder provides reasonable evidence that the Trading Price would be less than 95% of the product of the sale price of Common Stock and the then applicable Conversion Rate; at which time, the Corporation shall instruct the Conversion Agent to determine the Trading Price beginning on the next Trading Day and on each successive Trading Day until the Trading Price is greater than or equal to 95% of the product of the sale price of Common Stock and the then applicable Conversion Rate; (iii) the Corporation becomes a party to a consolidation, merger or binding share exchange pursuant to which the Common Stock would be converted into cash or property (other than securities), in which case a Holder may surrender Preferred Stock for conversion at any time from and after the date which is 15 days prior to the anticipated effective date for the transaction until 15 days after the actual effective date of such transaction; or (iv) the Corporation elects to (i) distribute to all holders of Common Stock assets, debt securities or rights to purchase securities of the Corporation, which distribution has a per share value as determined by the Board of Directors exceeding 15% of the Last Reported Sale Price of a share of Common Stock on the Trading Day immediately preceding the declaration date for such distribution, or (ii) distribute to all holders of Common Stock rights entitling them to purchase, for a period expiring within 60 days after the date of such distribution, shares of Common Stock at less than the Last Reported Sale Price of Common Stock on the Trading Day immediately preceding the declaration date of the distribution. In the case of the foregoing clauses (i) and (ii), the Corporation must notify the Holders at least 20 Business Days immediately prior to the ex-dividend date for such distribution. Once the Corporation has given such notice, Holders may surrender their Preferred Stock for conversion at any time thereafter until the earlier of the close of business on the Business Day immediately prior to the ex-dividend date or the Corporation's announcement that such distribution will not take place; provided, however, that a Holder may not exercise this right to convert if the Holder may participate in the distribution without conversion. As used herein, the term "ex dividend date," when used with respect to any issuance or distribution, shall mean the first date on which the Common Stock trades regular way on such exchange or in such market without the right to receive such issuance or distribution. The initial Conversion Rate is 5.0541 shares of Common Stock per share of Preferred Stock, subject to adjustment in certain events as described herein. The Corporation shall deliver cash or a check in lieu of any fractional share of Common Stock. A Holder may convert fewer than all of its Preferred Stock so long as the Preferred Stock converted is an integral multiple of the Liquidation Preference. Holders of Preferred Stock at the close of business on a Dividend Record Date will receive payment of 14 dividends, payable on the corresponding Dividend Payment Date notwithstanding the conversion of such Preferred Stock at any time after the close of business on such Dividend Record Date. Preferred Stock surrendered for conversion by a Holder during the period from the close of business on any Dividend Record Date to the opening of business on the immediately following Dividend Payment Date must be accompanied by payment of an amount equal to the dividend that the Holder is to receive on such Preferred Stock; provided, however, that no such payment need be made if (1) the Corporation has specified a Mandatory Conversion Date that is after a Dividend Record Date and on or prior to the immediately following Dividend Payment Date or (2) any accumulated and unpaid dividends exist at the time of conversion with respect to such shares of Preferred Stock to the extent of such accumulated and unpaid dividends. To convert Preferred Stock a Holder must (i) complete and manually sign the irrevocable conversion notice in the form attached hereto as Exhibit B (a "Conversion Notice") (or complete and manually sign a facsimile of such notice) and deliver such notice to the Conversion Agent at its office in Jackson, Michigan or any other offices of the Conversion Agent maintained by the Conversion Agent for such purpose, (ii) surrender the shares of Preferred Stock to the Conversion Agent, (iii) furnish appropriate endorsements and transfer documents if required by the Conversion Agent or the Corporation and (iv) pay any transfer or similar tax, if required. (b) Conversion Procedures. To convert Preferred Stock, a Holder must satisfy the requirements in this Section 7 and in the Preferred Stock. The date on which the Holder satisfies all those requirements is the conversion date (the "Conversion Date"). As soon as practicable, but in no event later than the fifth Business Day following the Conversion Date, the Corporation shall update the global security representing the shares of Common Stock to record the Holder's interest in the Common Stock, or deliver to the Holder, through the Conversion Agent, a certificate for the number of full shares of Common Stock issuable upon the conversion and cash or a check in lieu of any fractional share determined pursuant to Section 7(c) hereof. The Person in whose name the certificate is registered shall be treated as a shareholder of record on and after the Conversion Date; provided, however, that no surrender of Preferred Stock on any date when the stock transfer books of the Corporation shall be closed shall be effective to constitute the Person or Persons entitled to receive the shares of Common Stock upon such conversion as the record holder or holders of such shares of Common Stock on such date, but such surrender shall be effective to constitute the Person or Persons entitled to receive such shares of Common Stock as the record holder or holders thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open; such conversion shall be at the Conversion Rate in effect on the date that such shares of Preferred Stock shall have been surrendered for conversion, as if the stock transfer books of the Corporation had not been closed. Upon conversion of Preferred Stock, such Person shall no longer be a Holder of such Preferred Stock. No payment or adjustment shall be made for dividends on or other distributions with respect to any Common Stock except as provided in Section 7(f) hereof or as otherwise provided in this Certificate of Designation. On conversion of Preferred Stock, that portion of Accumulated Dividends with respect to the converted Preferred Stock will be deemed canceled, extinguished or forfeited, rather than paid in full to the Holder thereof through delivery of the Common Stock (together with the cash or check payment, if any, in lieu of fractional shares) in exchange for the shares of Preferred Stock being converted pursuant to the provisions hereof, and the Fair Market Value of such shares of Common Stock (together with any such cash or check payment in lieu of fractional shares) shall be treated as issued, to the extent thereof, first in exchange for Accumulated Dividends through the Conversion Date, and the balance, if any, of such Fair Market Value of such Common Stock (and any such cash or check payment) shall be treated as issued in exchange for the Liquidation Preference of the Preferred Stock being converted pursuant to the provisions hereof. Upon surrender of Preferred Stock that is converted in part, the Corporation shall execute, and the Transfer Agent shall authenticate and deliver to the Holder, new shares of Preferred Stock in a number equal to the unconverted portion of the shares of Preferred Stock surrendered. If the last day on which Preferred Stock may be converted is a legal holiday in a place where a Conversion Agent is located, the Preferred Stock may be surrendered to that Conversion Agent on the next succeeding day that it is not a legal holiday. 15 (c) Cash or Check Payments in Lieu of Fractional Shares. The Corporation shall not issue a fractional share of Common Stock upon conversion of Preferred Stock. Instead the Corporation shall deliver cash (or Corporation's check) for the current market value of the fractional share. The current market value of a fractional share shall be determined to the nearest 1/10,000th of a share by multiplying the Last Reported Sale Price of a full share of Common Stock on the Trading Day immediately preceding the Conversion Date by the fractional amount and rounding the product to the nearest whole cent. (d) Taxes on Conversion. If a Holder converts Preferred Stock, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the Holder shall pay any such tax which is due because the Holder requests the shares to be issued in a name other than the Holder's name. The Conversion Agent may refuse to deliver the certificates representing the Common Stock being issued in a name other than the Holder's name until the Conversion Agent receives a sum sufficient to pay any tax which shall be due because the shares are to be issued in a name other than the Holder's name. Nothing herein shall preclude any withholding tax required by law. (e) Covenants of the Corporation. The Corporation shall, prior to issuance of any Preferred Stock hereunder, and from time to time as may be necessary, reserve out of its authorized but unissued Common Stock a sufficient number of shares of Common Stock to permit the conversion of the Preferred Stock. All shares of Common Stock delivered upon conversion of the Preferred Stock shall be newly issued shares or treasury shares, shall be duly and validly issued and fully paid and nonassessable and shall be free from preemptive rights and free of any lien or adverse claim. The Corporation shall endeavor promptly to comply with all federal and state securities laws regulating the order and delivery of shares of Common Stock upon the conversion of Preferred Stock, if any, and shall cause to have listed or quoted all such shares of Common Stock on each United States national securities exchange or over-the-counter or other domestic market on which the Common Stock is then listed or quoted. (f) Adjustments to Conversion Rate. The Conversion Rate shall be adjusted from time to time, without duplication, as follows: (i) In case the Corporation shall: (a) pay a dividend, or make a distribution, exclusively in shares of its capital stock, on the Common Stock; (b) subdivide its outstanding Common Stock into a greater number of shares; (c) combine its outstanding Common Stock into a smaller number of shares; or (d) reclassify its Common Stock, the Conversion Rate in effect immediately prior to the record date or effective date, as the case may be, for the adjustment pursuant to this Section 7(f) as described below, shall be adjusted so that the Holder of any Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock of the Corporation which such Holder would have owned or have been entitled to receive after the happening of any of the events described above had such Preferred Stock been converted immediately prior to such record date or effective date, as the case may be. An adjustment made pursuant to this Section 7(f) shall become effective immediately after the applicable record date in the case of a dividend or distribution and shall become effective immediately after the applicable effective date in the case of subdivision, combination or reclassification of the Corporation's Common Stock. If any dividend or distribution of the type described in clause (a) above is not so paid or made, the Conversion Rate shall again be adjusted to the Conversion Rate which would then be in effect if such dividend or distribution had not been declared. (ii) In case the Corporation shall issue rights or warrants to all holders of the Common Stock entitling them (for a period expiring within 60 days after the date of issuance of such rights or warrants) to subscribe for or purchase Common Stock at a price per share less than the Market Price per share of Common Stock on the record date fixed for determination of shareholders entitled to receive such rights or warrants, the Conversion Rate in effect immediately after such record date shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately after such record date by a fraction of which (a) the numerator shall be the number 16 of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered for subscription or purchase, and (b) the denominator shall be the number of shares of Common Stock outstanding on such record date plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at the Market Price per share of Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex-dividend date for such issuance of rights or warrants. Such adjustment shall be made successively whenever any such rights or warrants are issued, and shall become effective immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Rate shall be readjusted to the Conversion Rate which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. If such rights or warrants are not so issued, the Conversion Rate shall again be adjusted to be the Conversion Rate which would then be in effect if such record date for the determination of shareholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Corporation for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (iii) In case the Corporation shall, by dividend or otherwise, distribute to all holders of Common Stock any assets, debt securities or rights or warrants to purchase any of its securities (excluding (a) any dividend, distribution or issuance covered by those referred to in Section 7(f)(i) or Section 7(f)(ii) hereof and (b) any dividend or distribution paid exclusively in cash) (any of the foregoing hereinafter in this Section 7(f)(iii) called the "Distributed Assets or Securities") in an aggregate amount per share of Common Stock that, combined together with the aggregate amount of any other such distributions to all holders of its Common Stock made within the 12 months preceding the date of payment of such distribution, and in respect of which no adjustment pursuant to this Section 7(f)(iii) has been made, exceeds 15% of the Market Price on the Trading Day immediately preceding the declaration of such distribution, then the Conversion Rate shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately prior to the close of business on the record date mentioned below by a fraction of which (A) the numerator shall be the Market Price per share of the Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex-dividend date for such dividend or distribution, and (B) the denominator shall be (1) the Market Price per share of the Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex-dividend date for such dividend or distribution less (2) the Fair Market Value on the earlier of such record date or the Trading Day immediately preceding the ex-dividend date for such dividend or distribution (as determined by the Board of Directors, whose determination shall be conclusive, and described in a certificate filed with the Paying Agent) of the Distributed Assets or Securities so distributed applicable to one share of Common Stock. Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution; provided, however, that, if (a) the Fair Market Value of the portion of the Distributed Assets or Securities so distributed applicable to one share of Common Stock is equal to or greater than the Market Price of the Common Stock on the record date for the determination of shareholders entitled to receive such distribution or (b) the Market Price of the Common Stock on the record date for the determination of shareholders entitled to receive such distribution is greater than the Fair Market Value per share of such Distributed Assets or Securities by less than $1.00, then, in lieu of the foregoing adjustment, adequate provision shall be made so that each Holder shall have the right to receive upon conversion, in addition to the shares of Common Stock, the kind and amount of assets, debt securities, or rights or warrants comprising the Distributed Assets or Securities the Holder would have received had such Holder converted such Preferred Stock immediately prior to the record date for the determination of shareholders entitled to receive such distribution. In the event that such distribution is not so paid or made, the Conversion Rate shall again 17 be adjusted to the Conversion Rate which would then be in effect if such distribution had not been declared. (iv) In case the Corporation shall make (a) any distributions, by dividend or otherwise, during any quarterly fiscal periods consisting exclusively of cash to all holders of outstanding shares of Common Stock in an aggregate amount that, together with (b) other all-cash or all-check distributions made to all holders of outstanding shares of Common Stock during such quarterly fiscal period, and (c) any cash and the Fair Market Value, as of the expiration of any tender or exchange offer (other than consideration payable in respect of any odd-lot tender offer) of consideration payable in respect of any tender or exchange offer by the Corporation or any of the Corporation's Subsidiaries for all or any portion of shares of Common Stock concluded during such quarterly fiscal period, exceed the product of $0 multiplied by the number of shares of Common Stock outstanding on the record date for such distribution, then, and in each such case, the Conversion Rate shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive such distribution by a fraction of which (A) the numerator shall be the Market Price per share of the Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex-dividend date for such dividend or distribution and (B) the denominator shall be (1) the Market Price per share of Common Stock on the earlier of such record date or the Trading Day immediately preceding the ex-dividend date for such dividend or distribution plus (2) $0 less (3) an amount equal to the quotient of (x) the combined amount distributed or payable in the transactions described in clauses (a), (b) and (c) above during such quarterly fiscal period and (y) the number of shares of Common Stock outstanding on such record date, such adjustment to become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. (v) With respect to Section 7(f)(iii) hereof, in the event that the Corporation makes any distribution to all holders of Common Stock consisting of Equity Interests in a Subsidiary or other business unit of the Corporation, the Conversion Rate shall be adjusted so that the same shall equal the Conversion Rate determined by multiplying the Conversion Rate in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive such distribution by a fraction of which (i) the numerator shall be (x) the Spin-off Market Price per share of the Common Stock on such record date plus (y) the Spin-off Market Price per Equity Interest of the Subsidiary or other business unit of the Corporation on such record date and (ii) the denominator shall be the Spin-off Market Price per share of the Common Stock on such record date, such adjustment to become effective 10 Trading Days after the effective date of such distribution of Equity Interests in a Subsidiary or other business unit of the Corporation. (vi) Upon conversion of the Preferred Stock, the Holders shall receive, in addition to the Common Stock issuable upon such conversion, the rights issued under any future shareholder rights plan the Corporation implements (notwithstanding the occurrence of an event causing such rights to separate from the Common Stock at or prior to the time of conversion) unless, prior to conversion, the rights have expired, terminated or been redeemed or exchanged in accordance with such rights plan. If, and only if, the Holders of Preferred Stock receive rights under such shareholder rights plans as described in the preceding sentence upon conversion of their Preferred Stock, then no other adjustment pursuant to this Section 7(f) shall be made in connection with such shareholder rights plans. (vii) For purposes of this Section 7(f), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Corporation shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Corporation. 18 (viii) Notwithstanding the foregoing, in no event shall the Conversion Rate exceed the maximum conversion rate specified under this Section 7(f)(viii) (the "Maximum Conversion Rate") as a result of an adjustment pursuant to Section 7(f)(iii) or Section 7(f)(iv) hereof. The Maximum Conversion Rate shall initially be 6.5703 and shall be appropriately adjusted from time to time for any stock dividends on or subdivisions or combinations of the Common Stock. The Maximum Conversion Rate shall not apply to any adjustments made pursuant to any of the events in Section 7(f)(i) or Section 7(f)(ii) hereof. (g) Calculation Methodology. No adjustment in the Conversion Price need be made unless the adjustment would require an increase or decrease of at least 1% in the Conversion Price then in effect, provided that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. Except as stated in this Section 7, the Conversion Rate will not be adjusted for the issuance of Common Stock or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing. Any adjustments that are made shall be carried forward and taken into account in any subsequent adjustment. All calculations under Section 4 and Section 7(f) hereof and this Section 7(g) shall be made to the nearest cent or to the nearest 1/10,000th of a share, as the case may be. (h) When No Adjustment Required. No adjustment to the Conversion Rate need be made: (i) upon the issuance of any shares of Common Stock pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on securities of the Corporation and the investment of additional optional amounts in shares of Common Stock under any plan; (ii) upon the issuance of any shares of Common Stock or options or rights to purchase those shares pursuant to any present or future employee, director or consultant benefit plan or program of or assumed by the Corporation or any of its Subsidiaries; (iii) upon the issuance of any shares of Common Stock pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security not described in clause (ii) above and outstanding as of the date of this Certificate of Designation; (iv) for a change in the par value or no par value of the Common Stock; (v) for accumulated and unpaid dividends (including Additional Dividends, if any); or (vi) if Holders are to participate in a merger or consolidation on a basis and with notice that the Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction; provided that the basis on which the Holders are to participate in the transaction shall not be deemed to be fair if it would require the conversion of securities at any time prior to the expiration of the conversion period specified for such securities. To the extent the Preferred Stock becomes convertible into cash, assets or property (other than capital stock of the Corporation or securities to which Section 7(l) hereof applies), no adjustment shall be made thereafter as to the cash, assets or property. Interest shall not accumulate on such cash. (i) Notice of Adjustment. Whenever the Conversion Rate is adjusted, the Corporation shall promptly mail to Holders a notice of the adjustment. The Corporation shall file with the Conversion Agent such notice. The certificate shall, absent manifest error, be conclusive evidence that the adjustment is correct. No Conversion Agent shall be under any duty or responsibility with respect to any such certificate except to exhibit the same to any Holder desiring inspection thereof. (j) Voluntary Increase. The Corporation may make such increases in the Conversion Rate, in addition to those required by Section 7(f) hereof, as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the 19 extent permitted by applicable law, the Corporation may from time to time increase the Conversion Rate by any amount, temporarily or otherwise, for any period of at least 20 days if the increase is irrevocable during the period and the Board of Directors shall have made a determination that such increase would be in the best interests of the Corporation, which determination shall be conclusive. Whenever the Conversion Rate is so increased, the Corporation shall mail to Holders and file with the Conversion Agent a notice of such increase. The Conversion Agent shall not be under any duty or responsibility with respect to any such notice except to exhibit the same to any holder desiring inspection thereof. The Corporation shall mail the notice at least 15 days before the date the increased Conversion Rate takes effect. The notice shall state the increased Conversion Rate and the period it shall be in effect. (k) Notice to Holders Prior to Certain Actions. In case: (i) the Corporation shall declare a dividend (or any other distribution) on its Common Stock that would require an adjustment in the Conversion Rate pursuant to Section 7(f) hereof; (ii) the Corporation shall authorize the granting to all or substantially all the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; (iii) of any reclassification or reorganization of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Corporation is a party and for which approval of any shareholders of the Corporation is required, or of the sale or transfer of all or substantially all of the assets of the Corporation; or (iv) of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, the Corporation shall cause to be filed with the Conversion Agent and to be mailed to each Holder at its address appearing on the Security Register, as promptly as possible but in any event at least 15 days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, or rights or warrants are to be determined or (y) the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. (l) Effect of Reclassification, Consolidation, Merger, Binding Share Exchange or Sale. If any of the following events occur, namely: (i) any reclassification or change of outstanding shares of Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); (ii) any consolidation, merger, combination or binding share exchange of the Corporation with another Person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock; or (iii) any sale or conveyance of the properties and assets of the Corporation as, or substantially as, an entirety to any other Person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Corporation or the successor or purchasing Person, as the case may be, shall cause an amendment to this Certificate of Designation to be executed and filed in accordance with Michigan law, providing that each share of Preferred Stock shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, binding share exchange, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such Preferred Stock 20 immediately prior to such reclassification, change, consolidation, merger, combination, binding share exchange, sale or conveyance. Such amended Certificate of Designation shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7(l). The Corporation shall cause notice of the execution of such amended Certificate of Designation to be mailed to each Holder, at its address appearing on the Security Register, within 20 days after filing thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section 7(l) shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, binding share exchanges, sales and conveyances. If this Section 7(l) applies to any event or occurrence, Section 7(f) hereof shall not apply. (m) Responsibility of Conversion Agent. The Conversion Agent shall not at any time be under any duty or responsibility to any Holder to either calculate the Conversion Rate or determine whether any facts exist which may require any adjustment of the Conversion Rate, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any amended Certificate of Designation provided to be employed, in making the same and shall be protected in relying upon an Officers' Certificate with respect to the same. The Conversion Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Preferred Stock and the Conversion Agent makes no representations with respect thereto. The Conversion Agent shall not be responsible for any failure of the Corporation to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any Preferred Stock for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Corporation contained in this Section 7(m). Without limiting the generality of the foregoing, the Conversion Agent shall not be under any responsibility to determine the correctness of any provisions contained in any amended Certificate of Designation entered into pursuant to this Section 7 relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by Holders upon the conversion of their Preferred Stock after any event referred to in this Section 7 or to any adjustment to be made with respect thereto, but may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers' Certificate (which the Corporation shall be obligated to file with the Conversion Agent prior to the execution of any such amended Certificate of Designation) with respect thereto. (n) Simultaneous Adjustments. In the event that Section 7(f) hereof requires adjustments to the Conversion Rate under more than one of Section 7(f)(i), Section 7(f)(ii), Section 7(f)(iii) or Section 7(f)(iv) hereof, and the Dividend Record Dates for the distributions giving rise to such adjustments shall occur on the same date, then such adjustments shall be made by applying, first, the provisions of Section 7(f)(iii) hereof, second, the provisions of Section 7(f)(i) hereof and third, the provisions of Section 7(f)(ii) hereof; provided, however, that nothing in this Section 7(n) shall be done to evade the principle set forth in Section 7(f)(viii) hereof that the Maximum Conversion Rate shall not apply to any adjustments made with respect to any of the events in Section 7(f)(i) or Section 7(f)(ii) hereof. (o) Successive Adjustments. After an adjustment to the Conversion Rate under Section 7(f) hereof, any subsequent event requiring an adjustment under Section 7(f) shall cause an adjustment to the Conversion Rate as so adjusted. (p) General Considerations. Whenever successive adjustments to the Conversion Rate are called for pursuant to this Section 7, such adjustments shall be made to the Market Price as may be necessary or appropriate to effectuate the intent of this Section 7 and to avoid unjust or inequitable results as determined in good faith by the Board of Directors. (q) Corporation Determination Final. Any determination which the Board of Directors must make pursuant to this Section 7 shall be conclusive and binding on the Holders. 21 8. Mandatory Conversion. (a) At any time on or after December 5, 2008, the Corporation shall have the right, at its option, to cause the Preferred Stock, in whole but not in part, to be automatically converted into that number of whole shares of Common Stock for each share of Preferred Stock equal to the quotient of (i) the Liquidation Preference divided by (ii) the Conversion Price then in effect, with any resulting fractional shares of Common Stock to be settled in accordance with Section 7(c). The Corporation may exercise its right to cause a mandatory conversion pursuant to this Section 8(a) only if the Last Reported Sale Price of the Common Stock equals or exceeds 130% of the Conversion Price then in effect for at least 20 Trading Days in any consecutive 30-day trading period on the NYSE (or such other national securities exchange or automated quotation system on which the Common Stock is then listed or authorized for quotation), including the last Trading Day of such 30-day period, ending on the Trading Day prior to the Corporation's issuance of a press release announcing the mandatory conversion as described in Section 8(b). (b) To exercise the mandatory conversion right described in Section 8(a), the Corporation must issue a press release for publication on the Dow Jones News Service prior to the opening of business on the first trading day following any date on which the conditions described in Section 8(a) are met, announcing such a mandatory conversion. The Corporation shall also give notice by mail or by publication (with subsequent prompt notice by mail) to the holders of Preferred Stock (not more than four Business Days after the date of the press release) of the mandatory conversion announcing the Corporation's intention to convert the Preferred Stock. The conversion date will be a date selected by the Corporation (the "Mandatory Conversion Date") and will be no more than five days after the date on which the Corporation issues the press release described in this Section 8(b). (c) In addition to any information required by applicable law or regulation, the press release and notice of a mandatory conversion described in Section 8(b) shall state, as appropriate: (i) the Mandatory Conversion Date; (ii) the number of shares of Common Stock to be issued upon conversion of each share of Preferred Stock; (iii) the number of shares of Preferred Stock to be converted; and (iv) that dividends on the Preferred Stock to be converted will cease to accumulate on the Mandatory Conversion Date. (d) On and after the Mandatory Conversion Date, dividends will cease to accumulate on the Preferred Stock called for a mandatory conversion pursuant to Section 8(a) and all rights of holders of such Preferred Stock will terminate except for the right to receive the whole shares of Common Stock issuable upon conversion thereof and cash, in lieu of any fractional shares of Common Stock in accordance with Section 7(c). The dividend payment with respect to the Preferred Stock called for a mandatory conversion pursuant to Section 8(a) on a date during the period between the close of business on any Dividend Record Date to the close of business on the corresponding Dividend Payment Date will be payable on such Dividend Payment Date to the record holder of such share on such Dividend Record Date if such share has been converted after such Dividend Record Date and prior to such Dividend Payment Date. Except as provided in the immediately preceding sentence with respect to a mandatory conversion pursuant to Section 8(a), no payment or adjustment will be made upon conversion of Preferred Stock for Accumulated Dividends or for dividends with respect to the Common Stock issued upon such conversion. (e) The Corporation may not authorize, issue a press release or give notice of any mandatory conversion pursuant to Section 8(a) unless, prior to giving the mandatory conversion notice, all Accumulated Dividends on the Preferred Stock for periods ended prior to the date of such mandatory conversion notice shall have been paid in cash. (f) In addition to the mandatory conversion right described in Section 8(a), if there are less than 250,000 shares of Preferred Stock outstanding, the Corporation shall have the right, at any time on or after December 5, 2008, at its option, to cause the Preferred Stock to be automatically converted into that number of whole shares of Common Stock equal to the quotient of (i) the Liquidation Preference divided by (ii) the lesser of (A) the Conversion Price then in effect and (B) the Market Value for the period ending on the second Trading Day immediately prior to the Mandatory Conversion Date, with any resulting fractional shares of Common Stock to be 22 settled in cash in accordance with Section 7(c). The provisions of clauses (b), (c), (d) and (e) of this Section 8 shall apply to any mandatory conversion pursuant to this clause (f); provided, that (i) the Mandatory Conversion Date described in Section 8(b) shall not be less than 15 days nor more than 30 days after the date on which the Corporation issues a press release pursuant to Section 8(b) announcing such mandatory conversion and (ii) the press release and notice of mandatory conversion described in Section 8(c) will not state the number of shares of Common Stock to be issued upon conversion of each share of Preferred Stock. 9. Consolidation, Merger and Sale of Assets. (a) The Corporation, without the consent of the Holders of any of the outstanding Preferred Stock, may consolidate with or merge into any other Person or convey, transfer or lease all or substantially all its assets to any Person or may permit any Person to consolidate with or merge into, or transfer or lease all or substantially all its properties to, the Corporation; provided, however, that: (a) the successor, transferee or lessee is organized under the laws of the United States or any political subdivision thereof; (b) the shares of Preferred Stock will become shares of such successor, transferee or lessee, having in respect of such successor, transferee or lessee the same powers, designations, preferences and relative, participating, optional or other rights on which, and the qualification, limitations or restrictions thereon, the Preferred Stock had immediately prior to such transaction; and (c) the Corporation delivers to the Transfer Agent an Officers' Certificate and an Opinion of Counsel stating that such transaction complies with this Certificate of Designation (including without limitation the requirements of Section 7(l). (b) Upon any consolidation by the Corporation with, or merger by the Corporation into, any other Person or any conveyance, transfer or lease of all or substantially all the assets of the Corporation as described in Section 9(a), the successor resulting from such consolidation or into which the Corporation is merged or the transferee or lessee to which such conveyance, transfer or lease is made will succeed to, and be substituted for, and may exercise every right and power of, the Corporation under the shares of Preferred Stock, and, thereafter, except in the case of a lease, the predecessor (if still in existence) will be released from its obligations and covenants with respect to the Preferred Stock. 10. SEC Reports. Whether or not the Corporation is required to file reports with the Commission, if any shares of Preferred Stock are outstanding, the Corporation shall file with the Commission all such reports and other information as it would be required to file with the Commission by Section l3(a) or 15(d) under the Exchange Act. The Corporation shall supply each holder of Preferred Stock, upon request, without cost to such holder, copies of such reports or other information. 11. Certificates. (a) Form and Dating. The Preferred Stock and the Transfer Agent's certificate of authentication shall be substantially in the form of Exhibit C, which is hereby incorporated in and expressly made a part of this Certificate of Designation. The Preferred Stock certificate may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Corporation is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Corporation). Each Preferred Stock certificate shall be dated the date of its authentication. The terms of the Preferred Stock certificate set forth in Exhibit C are part of the terms of this Certificate of Designation. 23 (i) Global Preferred Stock. The Preferred Stock shall be issued initially in the form of one or more fully registered global certificates with the global securities legend and restricted securities legend set forth in Exhibit C hereto (the "Global Preferred Stock"), which shall be deposited on behalf of the purchasers represented thereby with DTC (or with such custodian as DTC may direct), and registered in the name of DTC or a nominee of DTC, duly executed by the Corporation and authenticated by the Transfer Agent as hereinafter provided. The number of shares of Preferred Stock represented by Global Preferred Stock may from time to time be increased or decreased by adjustments made on the records of the Transfer Agent and DTC or its nominee as hereinafter provided. With respect to shares of Preferred Stock that are not "restricted securities" as defined in Rule 144 under the Securities Act on a Conversion Date, all shares of Common Stock distributed on such Conversion Date will be freely transferable without restriction under the Securities Act (other than by affiliates), and such shares will be eligible for receipt in global form through the facilities of DTC. (ii) Book-Entry Provisions. In the event Global Preferred Stock is deposited with or on behalf of DTC, the Corporation shall execute and the Transfer Agent shall authenticate and deliver initially one or more Global Preferred Stock certificates that (a) shall be registered in the name of DTC as depository for such Global Preferred Stock or the nominee of DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC's instructions or held by the Transfer Agent as custodian for DTC. Members of, or participants in, DTC ("Agent Members") shall have no rights under this Certificate of Designation with respect to any Global Preferred Stock held on their behalf by DTC or by the Transfer Agent as the custodian of DTC or under such Global Preferred Stock, and DTC may be treated by the Corporation, the Transfer Agent and any agent of the Corporation or the Transfer Agent as the absolute owner of such Global Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Corporation, the Transfer Agent or any agent of the Corporation or the Transfer Agent from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of a holder of a beneficial interest in any Global Preferred Stock. (iii) Certificated Preferred Stock. Except as provided in Section 11(c), owners of beneficial interests in Global Preferred Stock will not be entitled to receive Certificated Preferred Stock. (b) Execution and Authentication. Two Officers shall sign the Preferred Stock certificate for the Corporation by manual or facsimile signature. If an Officer whose signature is on a Preferred Stock certificate no longer holds that office at the time the Transfer Agent authenticates the Preferred Stock certificate, the Preferred Stock certificate shall be valid nevertheless. A Preferred Stock certificate shall not be valid until an authorized signatory of the Transfer Agent and the Security Registrar manually signs the certificate of authentication on the Preferred Stock certificate. The signature shall be conclusive evidence that the Preferred Stock certificate has been authenticated under this Certificate of Designation. The Transfer Agent shall authenticate and deliver certificates for up to 5,000,000 shares of Preferred Stock for original issue upon a written order of the Corporation signed by two Officers or by an Officer and an Assistant Treasurer of the Corporation. Such order shall specify the number of shares of Preferred Stock to be authenticated and the date on which the original issue of Preferred Stock is to be authenticated. The Transfer Agent may appoint an authenticating agent reasonably acceptable to the Corporation to authenticate the certificates for Preferred Stock. Unless limited by the terms of such appointment, an authenticating 24 agent may authenticate certificates for Preferred Stock whenever the Transfer Agent may do so. Each reference in this Certificate of Designation to authentication by the Transfer Agent includes authentication by such agent. An authenticating agent has the same rights as the Transfer Agent or agent for service of notices and demands. (c) Transfer and Exchange of Global Preferred Stock. The transfer and exchange of Global Preferred Stock or beneficial interests therein shall be effected through DTC, in accordance with this Certificate of Designation (including applicable restrictions on transfer set forth herein, if any) and the procedures of DTC therefor. (i) Restrictions on Transfer and Exchange of Global Preferred Stock. (1) Notwithstanding any other provisions of this Certificate of Designation (other than the provisions set forth in Section 11(c)(ii)), Global Preferred Stock may not be transferred as a whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor depository or a nominee of such successor depository. (2) In the event that the Global Preferred Stock is exchanged for Preferred Stock in definitive registered form pursuant to Section 11(c)(ii) prior to the effectiveness of a Shelf Registration Statement with respect to such securities, such Preferred Stock may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 11(c) (including the certification requirements set forth in the Exhibits to this Certificate of Designation intended to ensure that such transfers comply with Rule 144A or such other applicable exemption from registration under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Corporation. (3) The Preferred Stock, and any shares of Common Stock distributed pursuant to the conversion of the Preferred Stock, may not be sold or otherwise transferred until the expiration of two years following the date of payment for and delivery of the Preferred Stock, except (a) pursuant to registration under the Securities Act, (b) in accordance with Rule 144 (if available) or Rule 144A under the Securities Act (if available) or (c) in offshore transactions in reliance on Regulation S, and will bear a legend to this effect. (ii) Authentication of Certificated Preferred Stock. If at any time: (1) DTC notifies the Corporation that DTC is unwilling or unable to continue as depository for the Global Preferred Stock and a successor depository for the Global Preferred Stock is not appointed by the Corporation within 90 days after delivery of such notice; (2) DTC ceases to be a clearing agency registered under the Exchange Act and a successor depository for the Global Preferred Stock is not appointed by the Corporation within 90 days; or (3) the Corporation, in its sole discretion, notifies the Transfer Agent in writing that it elects to cause the issuance of Certificated Preferred Stock under this Certificate of Designation, then the Corporation will execute, and the Transfer Agent, upon receipt of a written order of the Corporation signed by two Officers or by an Officer and an Assistant Treasurer of the Corporation requesting the authentication and delivery of Certificated Preferred Stock to the Persons designated by the Corporation, will authenticate and deliver Certificated Preferred Stock equal to the number of shares of Preferred Stock represented by the Global Preferred Stock, in exchange for such Global Preferred Stock. (iii) Cancellation or Adjustment of Global Preferred Stock. At such time as all beneficial interests in Global Preferred Stock have either been exchanged for Certificated Preferred Stock, converted or canceled, such Global Preferred Stock shall be returned to DTC for cancellation or retained and 25 canceled by the Transfer Agent. At any time prior to such cancellation, if any beneficial interest in Global Preferred Stock is exchanged for Certificated Preferred Stock, converted or canceled, the number of shares of Preferred Stock represented by such Global Preferred Stock shall be reduced and an adjustment shall be made on the books and records of the Transfer Agent with respect to such Global Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction. (iv) Obligations with Respect to Transfers and Exchanges of Preferred Stock. (1) To permit registrations of transfers and exchanges, the Corporation shall execute and the Transfer Agent shall authenticate Certificated Preferred Stock and Global Preferred Stock as required pursuant to the provisions of this Section 11(c). (2) All Certificated Preferred Stock and Global Preferred Stock issued upon any registration of transfer or exchange of Certificated Preferred Stock or Global Preferred Stock shall be the valid obligations of the Corporation, entitled to the same benefits under this Certificate of Designation as the Certificated Preferred Stock or Global Preferred Stock surrendered upon such registration of transfer or exchange. (3) Prior to due presentment for registration of transfer of any shares of Preferred Stock, the Transfer Agent and the Corporation may deem and treat the Person in whose name such shares of Preferred Stock are registered as the absolute owner of such Preferred Stock and neither the Transfer Agent nor the Corporation shall be affected by notice to the contrary. (4) No service charge shall be made to a Holder for any registration of transfer or exchange upon surrender of any Preferred Stock certificate or Common Stock certificate at the office of the Transfer Agent maintained for that purpose. However, the Corporation may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Preferred Stock certificates or Common Stock certificates. (5) Upon any sale or transfer of shares of Preferred Stock (including any Preferred Stock represented by a Global Preferred Stock certificate) or of certificated Common Stock pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 or another exemption from registration under the Securities Act (and based upon an Opinion of Counsel reasonably satisfactory to the Corporation if it so requests): (A) in the case of any Certificated Preferred Stock or certificated Common Stock, the Corporation and the Transfer Agent shall permit the holder thereof to exchange such Preferred Stock or certificated Common Stock for Certificated Preferred Stock or certificated Common Stock, as the case may be, that does not bear the restrictive legend set forth on Exhibit C and rescind any restriction on the transfer of such Preferred Stock or Common Stock issuable in respect of the conversion of the Preferred Stock; and (B) in the case of any Global Preferred Stock, such Preferred Stock shall not be required to bear the restrictive legend set forth on Exhibit C; provided, however, that with respect to any request for an exchange of Preferred Stock that is represented by Global Preferred Stock for Certificated Preferred Stock that does not bear a restrictive as set forth on Exhibit C in connection with a sale or transfer thereof pursuant to Rule 144 or another exemption from registration under the Securities Act (and based upon an Opinion of Counsel if the Corporation so requests), the Holder thereof shall certify in writing to the Transfer Agent that such request is being made pursuant to such exemption (such certification to be substantially in the form of Exhibit D hereto). (v) No Obligation of the Transfer Agent. (1) The Transfer Agent shall have no responsibility or obligation to any beneficial owner of Global 26 Preferred Stock, a member of, or a participant in, DTC or any other Person with respect to the accuracy of the records of DTC or its nominee or of any participant or member thereof, with respect to any ownership interest in the Preferred Stock or with respect to the delivery to any participant, member, beneficial owner or other Person (other than DTC) of any notice or the payment of any amount, under or with respect to such Global Preferred Stock. All notices and communications to be given to the Holders and all payments to be made to Holders under the Preferred Stock shall be given or made only to the Holders (which shall be DTC or its nominee in the case of the Global Preferred Stock). The rights of beneficial owners in any Global Preferred Stock shall be exercised only through DTC subject to the applicable rules and procedures of DTC. The Transfer Agent may rely and shall be fully protected in relying upon information furnished by DTC with respect to its members, participants and any beneficial owners. (2) The Transfer Agent shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Certificate of Designation or under applicable law with respect to any transfer of any interest in any Preferred Stock (including any transfers between or among DTC participants, members or beneficial owners in any Global Preferred Stock) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Certificate of Designation, and to examine the same to determine substantial compliance as to form with the express requirements hereof. (d) Replacement Certificates. If a mutilated Preferred Stock certificate is surrendered to the Transfer Agent or if the Holder of a Preferred Stock certificate claims that the Preferred Stock certificate has been lost, destroyed or wrongfully taken, the Corporation shall issue and the Transfer Agent shall countersign a replacement Preferred Stock certificate if the reasonable requirements of the Transfer Agent are met. If required by the Transfer Agent or the Corporation, such Holder shall furnish an indemnity bond sufficient in the judgment of the Corporation and the Transfer Agent to protect the Corporation and the Transfer Agent from any loss which either of them may suffer if a Preferred Stock certificate is replaced. The Corporation and the Transfer Agent may charge the Holder for their expenses in replacing a Preferred Stock certificate. 12. Additional Rights of Holders. In addition to the rights provided to Holders under this Certificate of Designation, Holders shall have the rights set forth in the Registration Rights Agreement. 13. Other Provisions. (a) With respect to any notice to a Holder of shares of Preferred Stock required to be provided hereunder, neither failure to mail such notice, nor any defect therein or in the mailing thereof, to any particular Holder shall affect the sufficiency of the notice or the validity of the proceedings referred to in such notice with respect to the other Holders or affect the legality or validity of any distribution, rights, warrant, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up, or the vote upon any such action. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives the notice. (b) Shares of Preferred Stock issued and reacquired will be retired and canceled promptly after reacquisition thereof and, upon compliance with the applicable requirements of Michigan law, have the status of authorized but unissued shares of preferred stock of the Corporation undesignated as to series and may with any and all other authorized but unissued shares of preferred stock of the Corporation be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Corporation, except that any issuance or reissuance of shares of Preferred Stock must be in compliance with this Certificate of Designation. (c) The shares of Preferred Stock shall be issuable only in whole shares. (d) All notice periods referred to herein shall commence on the date of the mailing of the applicable notice. 27 IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed and attested this 4th day of December, 2003. CMS ENERGY CORPORATION By: /S/ Michael D. VanHemert -------------------------- Name: Michael D. VanHemert Title: Vice President and Secretary Attest: /S/ Joyce H. Norkey ------------------- Joyce H. Norkey 28 EXHIBIT A FORM OF FUNDAMENTAL CHANGE PURCHASE NOTICE To: CMS Energy Corporation The undersigned registered holder of shares of Preferred Stock hereby acknowledges receipt of a notice from CMS Energy Corporation (the "Corporation") as to the occurrence of a Fundamental Change with respect to the Corporation and requests and instructs the Corporation to repurchase the shares of Preferred Stock ($50.00 liquidation preference or an integral multiple thereof) designated below, in accordance with the terms of the Certificate of Designation referred to in such Preferred Stock and directs that the check of the Corporation, in payment for these shares of Preferred Stock, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If any portion of these shares of Preferred Stock are not repurchased and are to be issued in the name of a Person other than the undersigned, the undersigned shall pay all transfer taxes payable with respect thereto. Dated: _____________________________ Signature(s) Signature(s) must be guaranteed by a commercial bank or trust company or a member firm of a major stock exchange if shares of Preferred Stock are to be delivered other than to or in the name of the registered holder. _____________________________ Signature Guarantee Fill in for registration of Preferred Stock if to be issued other than to and in the name of registered holder: _________________________ Number of shares of Preferred Stock to be (Name) purchased (if less than all are to be be purchased): _________________________ (Street Address) _____________________ _________________________ Certificate Number (if shares of Preferred (City, state and zip code) Stock are Certificated): Please print name and address _____________________ Social Security or other taxpayer number: _____________________ 29 EXHIBIT B FORM OF CONVERSION NOTICE To: CMS Energy Corporation The undersigned registered holder of these shares of Preferred Stock hereby exercises the option to convert these shares of Preferred Stock, or portion hereof (which is $50.00 liquidation preference or an integral multiple thereof) designated below, for shares of Common Stock of CMS Energy Corporation in accordance with the terms of the Certificate of Designation referred to in the Preferred Stock, and directs that the shares, if any, issuable and deliverable upon such conversion, together with any check for cash deliverable upon such conversion, and any shares of Preferred Stock representing any unconverted shares hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of the Preferred Stock not converted are to be issued in the name of a Person other than the undersigned, the undersigned shall pay all transfer taxes payable with respect thereto. This notice shall be deemed to be an irrevocable exercise of the option to convert these shares of Preferred Stock. Dated: _____________________________ Signature(s) Signature(s) must be guaranteed by a commercial bank or trust company or a member firm of a major stock exchange if shares of Common Stock are to be issued, or shares of Preferred Stock to be delivered, other than to or in the name of the registered holder. _____________________________ Signature Guarantee Fill in for registration of shares if to be delivered, and shares of Preferred Stock if to be issued other than to and in the name of registered holder: _________________________ Number of shares of Preferred Stock to be (Name) converted (if less than all): _________________________ _____________________ (Street Address) Certificate Number (if shares of Preferred _________________________ Stock are Certificated): (City, state and zip code) Please print name and address _____________________ Social Security or other taxpayer number: _____________________ 30 EXHIBIT C FORM OF PREFERRED STOCK FACE OF SECURITY THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (IV) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, (V) TO CMS ENERGY CORPORATION OR (VI) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (VI) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN CLAUSE (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES THAT SUCH HOLDER WILL NOT ENGAGE IN HEDGING TRANSACTIONS INVOLVING THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THIS SECURITY AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS SECURITY TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS SECURITY SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT. THE HOLDER OF THIS SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS OF, A REGISTRATION RIGHTS AGREEMENT, DATED AS OF DECEMBER 5, 2003 ENTERED INTO BY THE COMPANY FOR THE BENEFIT OF CERTAIN HOLDERS OF SECURITIES FROM TIME TO TIME. 31 Certificate Number Number of Shares [ ] [ ] CUSIP NO.: ______ 4.50% Cumulative Convertible Preferred Stock (par value $0.01) (liquidation preference $50 per share) of CMS Energy Corporation CMS Energy Corporation, a Michigan corporation (the `Corporation"), hereby certifies that [______] (the "Holder") is the registered owner of [______] fully paid and non-assessable preferred securities of the Corporation designated the 4.50% Cumulative Convertible Preferred Stock (par value $0.01) (liquidation preference $50 per share) (the "Preferred Stock"). The shares of Preferred Stock are transferable on the books and records of the Transfer Agent, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Stock represented hereby are issued and shall in all respects be subject to the provisions of the Certificate of Designation dated December 4, 2003, as the same may be amended from time to time (the "Certificate of Designation"). Capitalized terms used herein but not defined shall have the meaning given them in the Certificate of Designation. The Corporation will provide a copy of the Certificate of Designation to a Holder without charge upon written request to the Corporation at its principal place of business. Reference is hereby made to select provisions of the Preferred Stock set forth on the reverse hereof, and to the Certificate of Designation, which select provisions and the Certificate of Designation shall for all purposes have the same effect as if set forth at this place. Upon receipt of this certificate, the Holder is bound by the Certificate of Designation and is entitled to the benefits thereunder. Unless the Transfer Agent's Certificate of Authentication hereon has been properly executed, these shares of Preferred Stock shall not be entitled to any benefit under the Certificate of Designation or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Corporation has executed this certificate this ____ day of __________, 2003. CMS ENERGY CORPORATION By: __________________________________ Name: Title: By: __________________________________ Name: Title: 32 TRANSFER AGENT'S AND SECURITY REGISTRAR'S CERTIFICATE OF AUTHENTICATION These are shares of the Preferred Stock referred to in the within-mentioned Certificate of Designation. Dated: ______________, 2003 CMS Energy Corporation, as Transfer Agent and Security Registrar By: __________________________________ Authorized Signatory REVERSE OF SECURITY Cash dividends on each share of Preferred Stock shall be payable at a rate per annum set forth on the face hereof or as provided in the Certificate of Designation. The shares of Preferred Stock shall be convertible into the Corporation's Common Stock in the manner and according to the terms set forth in the Certificate of Designation. The Corporation will furnish without charge to each holder who so requests the powers, designations, preferences and relative, participating, optional or other rights of each class of stock and the qualifications, limitations or restrictions of such preferences and/or rights. ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of Preferred Stock evidenced hereby to: (Insert assignee's social security or tax identification number) (Insert address and zip code of assignee) and irrevocably appoints ____________ agent to transfer the shares of Preferred Stock evidenced hereby on the books of the Transfer Agent. The agent may substitute another to act for him or her. Date: _____________________________________________________________ Signature: ________________________________________________________ (Sign exactly as your name appears on the other side of this Preferred Stock certificate) Signature Guarantee: (1) __________________________________________ (1) (Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Transfer Agent, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Transfer Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) 33 EXHIBIT D CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF PREFERRED STOCK Re: 4.50% Cumulative Convertible Preferred Stock (the "Preferred Stock") of CMS Energy Corporation (the "Corporation") This Certificate relates to ____ shares of Preferred Stock held in [ ] */ book-entry or [ ] */ definitive form by __________________ (the "Transferor"). The Transferor*: [ ] has requested the Transfer Agent by written order to deliver in exchange for its beneficial interest in the Preferred Stock held by the Depository shares of Preferred Stock in definitive, registered form equal to its beneficial interest in such Preferred Stock (or the portion thereof indicated above); or [ ] has requested the Transfer Agent by written order to exchange or register the transfer of Preferred Stock. In connection with such request and in respect of such Preferred Stock, the Transferor does hereby certify that the Transferor is familiar with the Certificate of Designation relating to the above-captioned Preferred Stock and that the transfer of this Preferred Stock does not require registration under the Securities Act of 1933, as amended (the "Securities Act") because */: [ ] Such Preferred Stock is being acquired for the Transferor's own account without transfer. [ ] Such Preferred Stock is being transferred to the Corporation. [ ] Such Preferred Stock is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Securities Act), in reliance on Rule 144A. [ ] Such Preferred Stock is being transferred in reliance on and in compliance with another exemption from the registration requirements of the Securities Act (and based on an Opinion of Counsel if the Corporation so requests). - -------- * /Please check applicable box. [NAME OF TRANFEROR] ____________________________________ By: Its: Date: ________________ 34 EX-4.(J) 7 k82154aexv4wxjy.txt REGISTRATION RIGHTS AGREEMENT DATED JULY 16, 2003 EXHIBIT 4(j) REGISTRATION RIGHTS AGREEMENT Dated as of July 16, 2003 by CMS Energy Corporation and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc. This Registration Rights Agreement (this "Agreement") is made and entered into this 16th day of July, 2003 among CMS Energy Corporation, a Michigan corporation (the "Company"), and Citigroup Global Markets Inc., as representative (the "Representative") of the Initial Purchasers (the "Initial Purchasers") listed on Schedule I to the Purchase Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement dated July 9, 2003, among the Company and the Representative on behalf of the Initial Purchasers (the "Purchase Agreement"), which provides for the sale by the Company to the Initial Purchasers of an aggregate of $150,000,000 principal amount of the Company's 3.375% Convertible Senior Notes due 2023 (the "Firm Notes") and the granting by the Company to the Initial Purchasers of the option to purchase $50,000,000 additional principal amount of such Convertible Senior Notes (the "Option Notes" and, together with the Firm Notes, the "Notes"). The Notes are convertible into shares of common stock, par value $0.01 per share, of the Company at the initial conversion price set forth in the Offering Memorandum dated July 10, 2003, subject to adjustment in accordance with the Indenture (as defined below). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Additional Amounts" shall have the meaning set forth in Section 2(c)(i) hereof. "Additional Amounts Payment Date" shall have the meaning set forth in Section 2(c)(ii) hereof. "Agreement" shall have the meaning set forth in the preamble. "Applicable Conversion Price" shall mean, as of any date of determination, $1,000 principal amount of Notes as of such date of determination divided by the Conversion Rate (as defined below) in effect as of such date of determination or, if no Notes are then outstanding, the Conversion Rate that would be in effect were Notes then outstanding. "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. "Closing Date" shall mean the later of (i) the date on which the Firm Notes are issued and (ii) the date on which the Option Notes are issued. "Company" shall have the meaning set forth in the preamble and shall also include the Company's successors. 1 "Conversion Rate" shall have the meaning assigned to such term in the Supplemental Indenture. "Depositary" shall mean The Depository Trust Company, or any other depositary for the Securities (as defined below) appointed by the Company; provided, however, that such depositary must have an address in the Borough of Manhattan, in The City of New York. "Firm Closing Date" shall mean the date on which the Firm Notes are issued. "Firm Notes" shall have the meaning set forth in the preamble. "Holder" shall mean an Initial Purchaser, for so long as it owns any Registrable Securities (as defined below), and each of its successors, assigns and direct and indirect transferees who become owners of Registrable Securities. "Indemnified Holder" shall have the meaning set forth in Section 4(a) hereof. "Indemnified Person" shall have the meaning set forth in Section 4(c) hereof. "Indemnifying Person" shall have the meaning set forth in Section 4(c) hereof. "Initial Purchasers" shall have the meaning set forth in the preamble. "Majority Holders" shall mean, on any date, Holders of a majority of the outstanding Shares (as defined below) constituting Registrable Securities; provided, that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company and other obligors on the Securities or any Affiliate (as defined in the Indenture) of the Company or other obligor shall be disregarded in determining whether such consent or approval was given by the Holders of such required percentage amount. For the purposes of this definition, Holders of Notes constituting Registrable Securities shall be deemed to be Holders of the number of Shares into which such Notes are or would be convertible as of such date. "Material Event" shall have the meaning set forth in Section 3(f) hereof. "Notes" shall have the meaning set forth in the preamble. "Notice and Questionnaire" shall mean a written notice delivered to the Company substantially in the form attached as Appendix I to the Offering Memorandum. "Notice Holder" shall mean, on any date, any Holder that has delivered a Notice and Questionnaire to the Company on or prior to such date. "Option Notes" shall have the meaning set forth in the preamble. "Person" shall mean any individual, corporation, partnership, joint venture, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof. 2 "Prospectus" shall mean the prospectus included in the Shelf Registration Statement (as defined below), including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble. "Registrable Securities" shall mean the Securities; provided, however, that Securities shall cease to be Registrable Securities when (i) a Shelf Registration Statement with respect to such Securities shall have been declared effective under the Act and such Securities shall have been disposed of pursuant to such Shelf Registration Statement, (ii) such Securities have been sold to the public pursuant to Rule 144 under the Act or may be sold pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the Act or (iii) such Securities shall have ceased to be outstanding. "Registration Default" shall have the meaning set forth in Section 2(c)(i) hereof. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including, without limitation: (i) all Commission, stock exchange or NASD registration and filing fees, including, if applicable, the reasonable fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained by any Holder of Registrable Securities in accordance with the rules and regulations of the NASD; (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of one counsel for the placement agent or underwriters, if any, in connection with blue sky qualification of any of the Registrable Securities and any filings with the NASD); (iii) all expenses of any Persons in preparing or assisting in preparing word processing, printing and distributing any Shelf Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, any securities sales agreements and any other documents relating to the performance of and compliance with this Agreement; (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges; (v) all rating agency fees; (vi) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance; (vii) the fees and expenses of the Trustee, and any escrow agent or custodian; (viii) the reasonable fees and disbursements of one firm, at any one time, of legal counsel selected by the Representative (subject to the reasonable approval of the Company) to represent the Holders of Registrable Securities, which firm shall be PW unless otherwise requested in writing by the Majority Holders; and (ix) any reasonable fees and disbursements of the underwriters customarily required to be paid by issuers or sellers of securities and the fees and expenses of any special experts retained by the Company in connection with any Shelf Registration Statement, but excluding underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. 3 "Representative" shall have the meaning set forth in the preamble. "Securities" shall mean collectively the Notes and the Shares. "Shares" shall mean the shares of common stock of the Company, par value $0.01 per share, into which the Notes are convertible or that have been issued upon any conversion of the Notes into common stock of the Company. "Shelf Registration" shall mean a registration effected pursuant to Section 2(a) hereof. "Shelf Registration Filing Date" shall have the meaning set forth in Section 2(a)(i) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(a) hereof which covers all of the Registrable Securities on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Suspension Period" shall have the meaning set forth in Section 2(a)(i) hereof. 2. Registration Under the Act. (a) Shelf Registration. (i) The Company agrees to use reasonable commercial efforts to file under the Act as promptly as practicable after the time that the Company becomes eligible to file registration statements on Form S-3 under the Act but in any event within 15 months after the Firm Closing Date (the "Shelf Registration Filing Date") a Shelf Registration Statement providing for the registration of, and the sale on a continuous or delayed basis by the Holders of, all of the Registrable Securities, pursuant to Rule 415 under the Act or any similar rule that may be adopted by the Commission. If the Company is not eligible to file registration statements on Form S-3 under the Act before the Shelf Registration Filing Date, then the Company shall file a Shelf Registration Statement on whatever form is then available for the Company to use. The Company agrees to use its reasonable commercial efforts to cause the Shelf Registration Statement to become or be declared effective within 120 days after the Shelf Registration Filing Date and to keep such Shelf Registration Statement continuously effective until the earliest of (i) the date on which all Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to such Shelf Registration Statement, (ii) the date on which all Registrable Securities have been sold pursuant to Rule 144 under the Act, (iii) such time as there are no longer any Registrable Securities outstanding and (iv) the second anniversary of the Closing Date (plus, in each case, the number of days in any Suspension Period); provided, however, that upon the occurrence of any event or the discovery of any facts as contemplated by Section 3(f)(iv) hereof, the Company shall not be obligated to keep the Shelf Registration Statement effective or to permit the use of any 4 Prospectus forming a part of the Shelf Registration Statement if the Company promptly thereafter complies with the requirements of Section 3(k) hereof; provided, further, that the failure to keep the Shelf Registration Statement effective and usable for offers and sales of Registrable Securities for such reason shall last no longer than 45 consecutive calendar days or no more than an aggregate of 90 calendar days during any consecutive twelve-month period (whereafter a Registration Default shall occur and Additional Amounts shall accrue as set forth in Section 2.4(A)(v) hereof); any such period during which the Company is so excused from keeping the Shelf Registration Statement effective and usable for offers and sales of Registrable Securities is referred to herein as a "Suspension Period"; a Suspension Period shall commence on and include the date that the Company gives notice to the Holders that the Shelf Registration Statement is no longer effective or the Prospectus included therein is no longer usable for offers and sales of Registrable Securities as a result of the application of the proviso of the foregoing sentence, stating the reason therefor, and shall end on the earlier to occur of the date on which each seller of Registrable Securities covered by the Shelf Registration Statement either receives the copies of the supplemented or amended Prospectus or is advised in writing by the Company that use of the Prospectus may be resumed. (ii) Each Holder of Registrable Securities agrees that if such Holder wishes to sell Registrable Securities pursuant to the Shelf Registration Statement and related Prospectus, it will do so only in accordance with this Section 2(a)(ii) and the last paragraph of Section 3 hereof. To be named a selling holder in the Shelf Registration Statement when it first becomes effective, Holders must deliver a Notice and Questionnaire to the Company at least five (5) Business Days prior to the effectiveness of the Shelf Registration Statement. From and after the date the Shelf Registration Statement is declared effective, the Company shall, as promptly as is practicable after the date a Notice and Questionnaire is delivered, and in any event within five (5) Business Days after such date, (1) if required by applicable law, file with the Commission a post-effective amendment to the Shelf Registration Statement or prepare and, if required by applicable law, file a supplement to the related Prospectus or an amendment or supplement to any document incorporated therein by reference or file any other required document (including, if required, a new or amended Shelf Registration Statement) so that the Holder delivering such Notice and Questionnaire is named as a selling holder in the Shelf Registration Statement and the related Prospectus and so that such Holder is permitted to deliver such Prospectus to purchasers of the Registrable Securities in accordance with applicable law and, if the Company shall file a post-effective amendment to the Shelf Registration Statement, use commercially reasonable efforts to cause such post-effective amendment to be declared effective under the Act as promptly as is practicable, (2) provide such Holder copies of any documents filed pursuant to Section 2(a)(ii)(1) hereof and (3) notify such Holder as promptly as practicable after the effectiveness under the Act of any post-effective amendment filed pursuant to Section 2(a)(ii)(1) hereof; provided, that if such Notice and Questionnaire is delivered during a Suspension Period, the Company shall so inform the Holder delivering such Notice and Questionnaire and shall take the actions set forth in clauses (1), (2) and (3) above upon expiration of the Suspension Period. Notwithstanding anything contained herein to the contrary, the Company shall be under no obligation to name any Holder that is not a Notice Holder as a selling holder in the Shelf Registration Statement or related 5 Prospectus; provided, however, that any Holder that becomes a Notice Holder pursuant to the provisions of this Section 2(a)(ii) (whether or not such Holder was a Notice Holder at the time the Shelf Registration Statement was declared effective) shall be named as a selling holder in the Shelf Registration Statement or related Prospectus in accordance with the requirements of this Section 2(a)(ii). (iii) The Company shall not permit any securities other than Registrable Securities to be included in the Shelf Registration Statement. The Company further agrees, if necessary, to supplement or amend the Shelf Registration Statement, as required by Section 3(b) hereof, and to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the Commission. (b) Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) hereof and the performance of its obligations under Section 2(a) and Section 3 hereof. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. (c) Interest. (i) If any of the following events (any such event a "Registration Default") shall occur, then additional amounts (the "Additional Amounts") shall become payable to Holders in respect of the Securities as follows: (1) if the Shelf Registration Statement is not filed with the Commission by the Shelf Registration Filing Date, then commencing on the day immediately after the Shelf Registration Filing Date, Additional Amounts shall accrue on the principal amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such day immediately after the Shelf Registration Filing Date and at a rate of 0.50% per annum thereafter; (2) if the Shelf Registration Statement is not declared effective by the Commission within 120 days following the Shelf Registration Filing Date, then commencing on the 121st day after the Shelf Registration Filing Date, Additional Amounts shall accrue on the principal amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such 121st day after the Shelf Registration Filing Date and at a rate of 0.50% per annum thereafter; (3) if the Company has failed to perform its obligations set forth in Section 2(a)(ii) hereof within the time periods required therein, then commencing on the first day after the date by which the Company was required to perform such obligations, Additional Amounts shall accrue on the principal 6 amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days and at a rate of 0.50% per annum thereafter; (4) if the Shelf Registration Statement has been declared effective but such Shelf Registration Statement ceases to be effective at any time (other than as specifically permitted in Section 2(a)(i) hereof) without being succeeded within 30 days by an amendment thereto or an additional registration statement filed and declared effective, then commencing on the day such Shelf Registration Statement ceases to be effective, Additional Amounts shall accrue on the principal amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such date on which the Shelf Registration Statement ceases to be effective and at a rate of 0.50% per annum thereafter; or (5) if the aggregate duration of Suspension Periods in any period exceeds the number of days permitted in respect of such period pursuant to Section 2(a)(i) hereof, then commencing on the day the aggregate duration of Suspension Periods in any period exceeds the number of days permitted in respect of such period, Additional Amounts shall accrue on the principal amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days and at a rate of 0.50% per annum thereafter; provided, however, that the Additional Amounts on the Securities shall not exceed in the aggregate 0.50% per annum and shall not be payable under more than one clause above for any given period of time, except that if Additional Amounts would be payable under more than one clause above, but at a rate of 0.25% per annum under one clause and at a rate of 0.50% per annum under the other, then the Additional Amounts rate shall be the higher rate of 0.50% per annum; provided, further, however, that (1) upon the filing of the Shelf Registration Statement (in the case of Section 2(c)(i)(1) hereof), (2) upon the effectiveness of the Shelf Registration Statement (in the case of Section 2(c)(i)(2) hereof), (3) upon the Company's performing its obligations set forth in Section 2(a)(ii) hereof (in the case of Section 2(c)(i)(3) hereof), (4) upon the effectiveness of the Shelf Registration Statement which had ceased to remain effective (in the case of Section 2(c)(i)(4) hereof) or (5) upon the termination of the Suspension Period that caused the limit on the aggregate duration of Suspension Periods in a period set forth in Section 2(a)(i) hereof to be exceeded (in the case of Section 2(c)(i)(5) hereof), Additional Amounts on the Securities as a result of such Section, as the case may be, shall cease to accrue. (ii) Additional Amounts on the Securities, if any, will be payable in cash on January 15 and July 15 of each year (the "Additional Amounts Payment Date") to holders of record of outstanding Registrable Securities on each preceding January 1 and 7 July 1, respectively. The date of determination of the Applicable Conversion Price of any outstanding Shares that are Registrable Securities shall be the Business Day immediately preceding the Additional Amounts Payment Date; provided, that in the case of an event of the type described in Section 2(c)(i)(3) hereof, such Additional Amounts shall be paid only to the Holders that have delivered Notice and Questionnaires that caused the Company to incur the obligations set forth in Section 2(a)(ii) hereof, the non-performance of which is the basis of such Registration Default; provided, further, that any Additional Amounts accrued with respect to any Notes or portion thereof called for redemption on a redemption date or purchased on a purchase date or converted into Shares on a conversion date prior to the Registration Default shall, in any such event, be paid instead to the Holder who submitted such Notes or portion thereof for redemption, purchase or conversion on the applicable redemption date, purchase date or conversion date, as the case may be, on such date (or promptly following the conversion date, in the case of conversion), and shall continue to accrue on the Shares issuable upon conversion of any Notes to the extent any Registration Default has not yet been cured. Following the cure of all Registration Defaults requiring the payment of Additional Amounts by the Company to the Holders of Registrable Securities pursuant to Section 2(c)(i) hereof, the accrual of Additional Amounts will cease without in any way limiting the effect of any subsequent Registration Default requiring the payment of Additional Amounts by the Company. The Trustee shall be entitled, on behalf of Holders of Securities, to seek any available remedy for the enforcement of this Agreement, including for the payment of any Additional Amounts. Notwithstanding the foregoing, the parties agree that the sole monetary damages payable for a violation of the terms of this Agreement with respect to which Additional Amounts are expressly provided shall be as set forth in this Section 2(c) in addition to any remedies available to the Holders of the Securities under the Indenture. Nothing shall preclude a Notice Holder or Holder of Registrable Securities from pursuing or obtaining specific performance or other equitable relief with respect to this Agreement. 3. Registration Procedures. In connection with the obligations of the Company with respect to Shelf Registration Statements pursuant to Section 2(a) hereof, the Company shall: (a) use reasonable commercial efforts to prepare and file with the Commission a Shelf Registration Statement, within the relevant time period specified in Section 2 hereof, on the appropriate form under the Act, which form shall (i) be selected by the Company, (ii) be available for the sale of the Registrable Securities by the selling Holders thereof and (iii) comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the Commission to be filed therewith or incorporated by reference therein, and use its reasonable commercial efforts to cause such Shelf Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) use reasonable commercial efforts to cause (i) any Shelf Registration Statement and any amendment thereto, when it becomes effective, not to contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) subject to Section 2(a)(iii) 8 hereof, any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (as amended or supplemented from time to time), not to include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (c) use reasonable commercial efforts to prepare and file with the Commission such amendments and post-effective amendments to the Shelf Registration Statement as may be necessary under applicable law to keep such Shelf Registration Statement effective for the applicable period; and cause each Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Act and comply with the provisions of the Act, the Exchange Act and the rules and regulations thereunder applicable to them with respect to the disposition of all securities covered by the Shelf Registration Statement during the applicable period in accordance with the intended method or methods of distribution reasonably requested by the selling Holders thereof; (d) (i) notify each Holder of Registrable Securities, at least fifteen (15) calendar days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holders that the distribution of Registrable Securities will be made in accordance with the methods reasonably requested by the Majority Holders participating in the Shelf Registration and as set forth in the Notices and Questionnaires, (ii) furnish to each Notice Holder of Registrable Securities and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto, and such other documents as such Notice Holder or underwriter may reasonably request, including financial statements and schedules and, if the Notice Holder so requests, all exhibits in order to facilitate the public sale or other disposition of the Registrable Securities and (iii) hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Notice Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto, save and except during any Suspension Period; (e) use its reasonable commercial efforts to register or qualify the Registrable Securities under such state securities or blue sky laws of such jurisdictions as any Notice Holder of Registrable Securities covered by a Shelf Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request in writing (which request shall be included in the Notice and Questionnaire) by the time such Shelf Registration Statement is declared effective by the Commission, and do any and all other acts and things which may be reasonably necessary or advisable to enable each such Notice Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Notice Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(e) or (ii) take any action which would require it to file general consent to service of process or taxation or file annual reports or comply with any other requirement deemed by the Company in its reasonable judgment to be unduly burdensome; 9 (f) notify promptly each Notice Holder of Registrable Securities under a Shelf Registration and, if requested by such Notice Holder, confirm such advice in writing promptly (i) when such Shelf Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the Commission or any state securities authority for post-effective amendments and supplements to such Shelf Registration Statement and Prospectus or for additional information after such Shelf Registration Statement has become effective, (iii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of such Shelf Registration Statement or the initiation of any proceedings for that purpose, (iv) of the happening of any event (but not the nature of the details concerning the same) or the discovery of any facts during the period the Shelf Registration Statement is effective which makes any statement made in such Shelf Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Shelf Registration Statement or Prospectus in order to make the statements therein not misleading (a "Material Event"); provided, however, that no notice by the Company shall be required pursuant to this clause (iv) in the event that the Company either promptly files a Prospectus supplement to update the Prospectus or a Form 8-K or other appropriate Exchange Act report that is incorporated by reference into the Shelf Registration Statement, which, in either case, contains the requisite information with respect to such Material Event that results in such Shelf Registration Statement no longer containing any untrue statement of material fact or omitting to state a material fact necessary to make the statements contained therein not misleading, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities, as the case may be, for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (vi) of any determination by the Company that a post-effective amendment to the Shelf Registration Statement would be appropriate other than post-effective amendments prepared and filed in accordance with Section 2(a)(ii) hereof; (g) furnish counsel for the Holders of Registrable Securities copies of any comment letters received from the Commission or any other request by the Commission or any state securities authority for amendments or supplements to a Shelf Registration Statement and Prospectus or for additional information; (h) use its reasonable commercial efforts to obtain the withdrawal of any order suspending the effectiveness of the Shelf Registration Statement as soon as practicable and provide prompt notice to legal counsel for the Holders of the withdrawal of any such order; (i) furnish to each Notice Holder of Registrable Securities, and each underwriter, if any, without charge, at least one conformed copy of each Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules (without documents incorporated therein by reference or all exhibits thereto, unless requested); (j) use its reasonable commercial efforts to cooperate with the selling Notice Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold to the extent not held with the Depositary through Cede & Co., to remove any restrictive legends, and to enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such 10 names as the selling Notice Holders or the underwriters, if any, may reasonably request at least three (3) Business Days prior to the closing of any sale of Registrable Securities; (k) upon the occurrence of any event or the discovery of any facts, each as contemplated by Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) and Section 3(f)(vi) hereof and subject to the provisions of the first paragraph immediately following Section 3(t) hereof, as promptly as practicable after the occurrence of such an event, use its reasonable commercial efforts to prepare a supplement or post-effective amendment to the Shelf Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain at the time of such delivery any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. At such time as such public disclosure is otherwise made or the Company determines that such disclosure is not necessary, in each case to correct any misstatement of a material fact or to include any omitted material fact, the Company agrees promptly to notify each Notice Holder of such determination and to furnish each Notice Holder such number of copies of the Prospectus, as amended or supplemented, as such Notice Holder may reasonably request; (l) obtain a CUSIP number for all Registrable Securities covered by the Shelf Registration Statement not later than the effective date of such Shelf Registration Statement, and provide the Trustee for the Notes and the transfer agent for the Shares with printed certificates for the Registrable Securities that are in a form eligible for deposit with the Depositary; (m) unless the Indenture, as its relates to the Registrable Securities, has already been so qualified, use its reasonable commercial efforts to (i) cause the Indenture to be qualified under the Trust Indenture Act in connection with the registration of the Registrable Securities, as the case may be, (ii) cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the Trust Indenture Act and (iii) execute, and use its reasonable commercial efforts to cause the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the Commission to enable the Indenture to be so qualified in a timely manner; (n) enter into such customary agreements (including an underwriting or similar agreement) and make such representations and warranties and take all such other actions in connection therewith (including, without limitation, furnishing customary comfort letters and legal opinions pursuant to the terms of such agreement) in order to expedite or facilitate the disposition of the Registrable Securities pursuant to any Shelf Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder of Registrable Securities or underwriter in connection with any sale or resale pursuant to any Shelf Registration Statement contemplated by this Agreement; (o) upon reasonable notice, for a reasonable period prior to the filing of the Shelf Registration Statement and until the time at which there are no Registrable Securities, make available at reasonable times at the Company's principal place of business or such other reasonable place for inspection by a representative appointed by the Notice Holders in 11 connection with an underwritten offering (or any underwriter, placement agent or counsel acting on their behalf), who shall certify to the Company that they have a current intention to sell their Registrable Securities pursuant to the Shelf Registration Statement, such financial and other information and books and records of the Company, and cause the officers, directors, employees and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the counsel to such Notice Holders, to conduct a reasonable "due diligence" investigation; provided, however, that such persons shall first agree in writing with the Company that any information that is reasonably and in good faith designated by the Company in writing as confidential at the time of delivery of such information shall be kept confidential by such persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, (ii) disclosure of such information is required by law (including any disclosure requirements pursuant to federal securities laws in connection with the filing of the Shelf Registration Statement or the use of any Prospectus), (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard such information by such persons or (iv) such information becomes available to such persons from a source other than the Company and its subsidiaries and such source is not known by such persons to be bound by a confidentiality agreement; provided, further, that the foregoing inspection and information gathering shall be coordinated by (x) the managing underwriter in connection with any underwritten offering pursuant to a Shelf Registration and (y) the Holder or Holders designated by the participating Majority Holders in connection with any non-underwritten offering pursuant to a Shelf Registration, together with one counsel designated by and on behalf of such persons; (p) if reasonably requested by the Initial Purchasers or any Notice Holder, promptly incorporate in a Prospectus supplement or post-effective amendment to the Shelf Registration Statement such information as the Initial Purchasers or such Notice Holder shall, on the basis of a written opinion of nationally-recognized counsel experienced in such matters, determine to be required to be included therein by applicable law and make any required filings of such Prospectus supplement or such post-effective amendment; provided, that the Company shall not be required to take any actions under this Section 3(p) that are not, in the reasonable opinion of counsel for the Company, in compliance with applicable law; (q) use its reasonable commercial efforts to (i) confirm that the ratings of the Notes will apply to the Notes covered by the Shelf Registration Statement or (ii) if the Notes were not previously rated, cause the Notes covered by the Shelf Registration Statement to be rated with the appropriate rating agencies, if so requested by the Majority Holders of Securities covered by such Shelf Registration Statement, or by the managing underwriters, if any; (r) otherwise comply with all applicable rules and regulations of the Commission and make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least 12 months which shall satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder; (s) use its reasonable commercial efforts to cause the Shares to remain listed on the New York Stock Exchange; and 12 (t) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter and its counsel (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD). Each Holder agrees that upon receipt of any notice from the Company of the happening of any event or the discovery of any facts, each of the kind described in Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) or Section 3(f)(vi) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to such Shelf Registration Statement or Prospectus until the receipt by such Holder of either copies of the supplemented or amended Prospectus contemplated by Section 3(k) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in its possession of the Prospectus covering such Registrable Securities current at the time of receipt of such notice, or notice in writing from the Company that such Holder may resume disposition of Registrable Securities pursuant to such Shelf Registration Statement or Prospectus. If the Company shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Shelf Registration Statement as a result of the happening of any event or the discovery of any facts, each of the kind described in Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) or Section 3(f)(vi) hereof, the Company shall be deemed to have used its reasonable commercial efforts to keep such Shelf Registration Statement effective during such Suspension Period; provided, that the Company shall use its reasonable commercial efforts to file and have declared effective (if an amendment) as soon as practicable an amendment or supplement to such Shelf Registration Statement. The Company shall extend the period during which such Shelf Registration Statement shall be maintained effective or the Prospectus shall be used pursuant to this Agreement by the number of days during the period from and including the date of the giving of the notice described above to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions or notification that they may resume such disposition under an existing Prospectus. If any of the Registrable Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the underwriter or underwriters and manager or managers that will manage such offering will be selected by the Majority Holders of such Registrable Securities included in such offering and shall be reasonably acceptable to the Company. No Holder of Registrable Securities may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. The Company may require each Holder of Registrable Securities as to which any registration pursuant to Section 2(a) is being effected to furnish to the Company such information regarding such Holder and such Holder's intended method of distribution of such Registrable Securities as the Company may from time to time reasonably request in writing, but only to the extent that such information is required in order to comply with the Act. Each such Holder agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such Holder to the Company or of the occurrence of any event in either case as a result of which any Prospectus relating to such registration contains or 13 would contain an untrue statement of a material fact regarding such Holder or such Holder's intended method of disposition of such Registrable Securities or omits to state any material fact regarding such Holder or such Holder's intended method of disposition of such Registrable Securities required to be stated therein or necessary to make the statements therein not misleading, and promptly to furnish to the Company any additional information required to correct and update any previously furnished information or required so that such Prospectus shall not contain, with respect to such Holder or the disposition of such Registrable Securities, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Each Holder agrees, by acquisition of the Registrable Securities, that such Holder shall not be entitled to sell any of such Registrable Securities pursuant to the Shelf Registration Statement or to receive a Prospectus related thereto, unless such Holder has furnished the Company with a Notice and Questionnaire. Each Notice Holder agrees to furnish to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not misleading and any other information regarding such Notice Holder and the distribution of such Registrable Securities as may be required to be disclosed in the Shelf Registration Statement under applicable law or pursuant to the Commission's comments. Each Holder further agrees not to sell any Registrable Securities pursuant to the Shelf Registration Statement without delivering or causing to be delivered a Prospectus to the purchaser thereof and, following the time at which there are no Registrable Securities, to notify the Company, within 10 business days of a request by the Company of the amount of Registrable Securities sold pursuant to the Shelf Registration Statement and, in the absence of a response, the Company may assume that all of the Holder's Registrable Securities were so sold. 4. Indemnification; Contribution. (a) The Company agrees, to the extent permitted by law, to indemnify and hold harmless each Holder and each Person, if any, who controls any Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or otherwise ("Indemnified Holder"), and to reimburse the Holders and such controlling Person or Persons, if any, for any legal or other expenses incurred by them in connection with defending any action, suit or proceeding (including governmental investigations) as provided in Section 4(c) hereof, insofar as such losses, claims, damages, liabilities or actions, suits or proceedings (including governmental investigations) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Shelf Registration Statement, or, if any Shelf Registration Statement shall be amended or supplemented, in the Shelf Registration Statement as so amended or supplemented, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any such untrue statement or alleged untrue statement or omission or alleged omission which was made in the Shelf Registration Statement or in the Shelf Registration Statement as so amended or supplemented, in reliance upon and in conformity with information furnished in writing to the Company by any Holder expressly for use therein. 14 The Company's indemnity agreement contained in this Section 4(a), and the covenants, representations and warranties of the Company contained in this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any Person, and the indemnity agreement contained in this Section 4 shall survive any termination of this Agreement. The liabilities of the Company in this Section 4 are in addition to any other liabilities of the Company under this Agreement or otherwise. (b) Each Holder agrees, severally and not jointly, to the extent permitted by law, to indemnify, hold harmless and reimburse the Company and each Person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent and upon the same terms as the indemnity agreement of the Company set forth in Section 4(a) hereof, but only with respect to alleged untrue statements or omissions made in the Shelf Registration Statement or in the Shelf Registration Statement, as amended or supplemented (if applicable), in reliance upon and in conformity with information furnished in writing to the Company by such Holder expressly for use therein. The indemnity agreement on the part of each Holder contained in this Section 4(b) shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other Person, and the indemnity agreement contained in this Section 4(b) shall survive any termination of this Agreement. (c) If a claim is made or an action, suit or proceeding (including governmental investigations) is commenced or threatened against any person as to which indemnity may be sought under Section 4(a) or 4(b) hereof, such Person (the "Indemnified Person") shall notify the Person against whom such indemnity may be sought (the "Indemnifying Person") promptly after any assertion of such claim threatening to institute an action, suit or proceeding or, if such an action, suit or proceeding is commenced against such Indemnified Person, promptly after such Indemnified Person shall have been served with a summons or other first legal process, giving information as to the nature and basis of the claim. Failure to so notify the Indemnifying Person shall not, however, relieve the Indemnifying Person from any liability which it may have on account of the indemnity under Section 4(a) or 4(b) hereof if the Indemnifying Person has not been prejudiced in any material respect by such failure. Subject to the immediately succeeding sentence, the Indemnifying Person shall assume the defense of any such litigation or proceeding, including the employment of counsel and the payment of all expenses, with such counsel being designated, subject to the immediately succeeding sentence, in writing by a majority in principal amount of the Holders in the case of parties indemnified pursuant to Section 4(b) hereof and by the Company in the case of parties indemnified pursuant to Section 4(a) hereof. Any Indemnified Person shall have the right to participate in such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include (x) the Indemnifying Person and (y) the Indemnified Person and, in the written opinion of counsel to such Indemnified Person, representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and expenses of counsel (including disbursements) for such Indemnified Person shall be reimbursed by the Indemnifying Person to the Indemnified Person. If there is a conflict as described in clause (ii) above, and the 15 Indemnified Persons have participated in the litigation or proceeding utilizing separate counsel whose fees and expenses have been reimbursed by the Indemnifying Person, and the Indemnified Persons, or any of them, are found to be solely liable, such Indemnified Person shall repay to the Indemnifying Parties such fees and expenses of such separate counsel as the Indemnifying Person shall have reimbursed. It is understood that the Indemnifying Person shall not, in connection with any litigation or proceeding or related litigation or proceedings in the same jurisdiction as to which the Indemnified Persons are entitled to such separate representation, be liable under this Agreement for the reasonable fees and out-of-pocket expenses of more than one separate firm (together with not more than one appropriate local counsel) for all such Indemnified Persons. Subject to the next paragraph, all such fees and expenses shall be reimbursed by payment to the Indemnified Persons of such reasonable fees and expenses of counsel promptly after payment thereof by the Indemnified Persons. In furtherance of the requirement above that fees and expenses of any separate counsel for the Indemnified Persons shall be reasonable, the Holders and the Company agree that the Indemnifying Person's obligations to pay such fees and expenses shall be conditioned upon the following: (1) in case separate counsel is proposed to be retained by the Indemnified Persons pursuant to clause (ii) of the preceding paragraph, the Indemnified Persons shall in good faith fully consult with the Indemnifying Person in advance as to the selection of such counsel; (2) reimbursable fees and expenses of such separate counsel shall be detailed and supported in a manner reasonably acceptable to the Indemnifying Person (but nothing herein shall be deemed to require the furnishing to the Indemnifying Person of any information, including, without limitation, computer print-outs of lawyers' daily time entries, to the extent that, in the judgment of such counsel, furnishing such information might reasonably be expected to result in a waiver of any attorney-client privilege); and (3) the Company and the Holders shall cooperate in monitoring and controlling the fees and expenses of separate counsel for Indemnified Persons for which the Indemnifying Person is liable hereunder, and the Indemnified Person shall use every reasonable effort to cause such separate counsel to minimize the duplication of activities as between themselves and counsel to the Indemnifying Person. The Indemnifying Person shall not be liable for any settlement of any litigation or proceeding effected without the written consent of the Indemnifying Person, but if settled with such consent or if there be a final judgment against the Indemnified Person, the Indemnifying Person agrees, subject to the provisions of this Section 4, to indemnify the Indemnified Person from and against any loss, damage, liability or expenses by reason of such settlement or judgment. The Indemnifying Person shall not, without the prior written consent of the Indemnified Persons, effect any settlement of any pending or threatened litigation, proceeding or claim in respect of which indemnity has been properly sought by the Indemnified Persons hereunder, unless such settlement includes an unconditional release by the claimant of all 16 Indemnified Persons from all liability with respect to claims which are the subject matter of such litigation, proceeding or claim. (d) If the indemnification provided for in this Section 4 is unavailable to or insufficient to hold harmless an Indemnified Person under this Section 4 in respect of any losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof) referred to therein, then each Indemnifying Person under this Section 4 shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other from the sale of the Registrable Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each Indemnifying Person shall contribute to such amount paid or payable by such Indemnified Person in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of each Indemnifying Person, if any, on the one hand and the Indemnified Person on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Holders on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 4. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental proceedings) in respect thereof) referred to in this Section 4 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such actions, suits or proceedings (including governmental proceedings) or claims, provided that the provisions of this Section 4 have been complied with (in all material respects) in respect of any separate counsel for such Indemnified Person. Notwithstanding the provisions of this Section 4, no Holder shall be required to contribute any amount greater than the excess of the amount by which the total received by such Holder with respect to the sale of its Registrable Securities pursuant to a Shelf Registration Statement exceeds the sum of (A) the amount paid by such Holder for such Registrable Securities plus (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations in this Section 4 to contribute are several in proportion to their respective obligations and not joint. The agreement with respect to contribution contained in this Section 4 shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any Holder, and shall survive any termination of this Agreement. 17 5. Miscellaneous. (a) Rule 144 and Rule 144A. For so long as the Company is subject to the reporting requirements of Section 13 or 15 of the Exchange Act, the Company covenants that it will file the reports required to be filed by it under the Act and Section 13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the Commission thereunder. If the Company ceases to be so required to file such reports, the Company covenants that it will, upon the request of any Holder of Registrable Securities, (i) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the Act, (ii) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the Act and (iii) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the Act within the limitation of the exemptions provided by (A) Rule 144 under the Act, as such Rule may be amended from time to time, (B) Rule 144A under the Act, as such Rule may be amended from time to time or (C) any similar rules or regulations hereafter adopted by the Commission. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. (b) No Inconsistent Agreements. The Company has not entered into and the Company will not after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not and will not for the term of this Agreement in any way conflict with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Majority Holders of the Registrable Securities affected by such amendment, modification, supplement, waiver or departure. Without the consent of the Holder of each Security, however, no modification may change the provisions relating to the payment of Additional Amounts. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first-class mail, telecopier or any courier guaranteeing overnight delivery: (a) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 5(d), which address initially is the address set forth in the Purchase Agreement with respect to the Initial Purchasers; and (b) if to the Company, initially at the Company's address set forth in the Purchase Agreement, and thereafter at such other address of which notice is given in accordance with the provisions of this Section 5(d). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; two (2) Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. 18 Copies of all such notices, demands or other communications shall be concurrently delivered by the person giving the same to the Trustee under the Indenture, at the address specified in the Indenture. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such person shall be entitled to receive the benefits hereof. (f) Third Party Beneficiaries. The Initial Purchasers (even if the Initial Purchasers are not Holders of Registrable Securities) shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent they deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. Each Holder of Registrable Securities shall be a third party beneficiary to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights hereunder. (g) Specific Performance. Without limiting the remedies available to the Initial Purchasers and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under Section 2 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Section 2 hereof. (h) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (i) Headings. The headings in this Agreement are for the convenience of reference only and shall not limit or otherwise affect the meaning hereof. (j) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 19 (k) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (l) Entire Agreement. This Agreement and other writings referred to herein (including the Indenture and the Purchase Agreement) represent the entire agreement among the parties hereto with respect to the subject matter hereof and supercedes and replaces any and all prior agreements and understandings, whether oral or written, with respect thereto. 20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CMS ENERGY CORPORATION By:/s/ Thomas J. Webb ------------------------------- Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: CITIGROUP GLOBAL MARKETS INC., for itself and as Representative of the Initial Purchasers By:/s/ Jane Sadowsky -------------------------------- Name: Jane Sadowsky Title: Managing Director EX-4.(K) 8 k82154aexv4wxky.txt REGISTRATION RIGHTS AGREEMENT DATED JULY 17, 2003 EXHIBIT 4(k) REGISTRATION RIGHTS AGREEMENT Dated as of July 17, 2003 by CMS Energy Corporation and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc. This Registration Rights Agreement (this "Agreement") is made and entered into as of July 17, 2003, by CMS Energy Corporation, a Michigan corporation (the "Company"), and Citigroup Global Markets Inc., as representative of the Initial Purchasers (the "Initial Purchasers") listed on Schedule I to the Purchase Agreement (as defined below), pursuant to which the Initial Purchasers have agreed to purchase the Company's $300,000,000 7.75% Senior Notes due 2010 (the "Restricted Notes"). This Agreement is made pursuant to the Purchase Agreement, dated July 9, 2003 (the "Purchase Agreement"), between the Company and Citigroup Global Markets Inc., as representative of the Initial Purchasers. In order to induce the Initial Purchasers to purchase the Restricted Notes, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchasers set forth in Section 5(f) of the Purchase Agreement. The parties hereby agree as follows: SECTION 1. DEFINITIONS Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Purchase Agreement. As used in this Agreement, the following capitalized terms shall have the following meanings: Act: The Securities Act of 1933, as amended. Advice: As defined in Section 6(d) hereof. Agreement: As defined in the first paragraph hereof. Broker-Dealer: Any broker or dealer registered under the Exchange Act. Broker-Dealer Transfer Restricted Securities: Exchange Notes that are acquired by a Broker-Dealer in the Exchange Offer in exchange for Restricted Notes that such Broker-Dealer acquired for its own account as a result of market-making activities or other trading activities (other than Restricted Notes acquired directly from the Company or any of its affiliates). Business Day: Any day except a Saturday, Sunday or other day in the City of New York, or in the city of the primary corporate trust office of the Trustee, on which banks are authorized to close. Certificated Securities: Notes that are not in Global Note form. Closing Date: The date hereof. Commission: The Securities and Exchange Commission. Company: As defined in the first paragraph hereof. 1 Consummate: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Exchange Notes to be issued in the Exchange Offer, (b) the maintenance of such Exchange Offer Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the minimum period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Security Registrar of the Exchange Notes in the same aggregate principal amount as the aggregate principal amount of the Restricted Notes tendered by Holders thereof pursuant to the Exchange Offer. Damages Payment Date: With respect to the Restricted Notes, each Interest Payment Date. Exchange Act: The Securities Exchange Act of 1934, as amended. Exchange Notes: The Company's 7.75% Senior Notes due 2010, to be issued pursuant to the Indenture (i) in the Exchange Offer or (ii) upon the request of any Holder of Restricted Notes covered by a Shelf Registration Statement, in exchange for such Restricted Notes. Exchange Offer: The registration by the Company under the Act of the Exchange Notes pursuant to the Exchange Offer Registration Statement pursuant to which the Company shall offer the Holders of all outstanding Transfer Restricted Securities relating to Restricted Notes the opportunity to exchange all such outstanding Transfer Restricted Securities relating to Restricted Notes for Exchange Notes in an aggregate principal amount equal to the aggregate principal amount of the Transfer Restricted Securities relating to Restricted Notes tendered in such exchange offer by such Holders. Exchange Offer Registration Statement: The Registration Statement relating to the Exchange Offer, including the related Prospectus. Exempt Resales: The transactions in which the Initial Purchasers propose to sell the Restricted Notes to certain "qualified institutional buyers", as such term is defined in Rule 144A under the Act, or to persons who are not "U.S. persons", as such term is defined in Regulation S under the Act. Global Note: As defined in the Notes. Holder: As defined in Section 2 hereof. Indemnified Holder: As defined in Section 8(a) hereof. Indemnified Person: As defined in Section 8(c) hereof. Indemnifying Person: As defined in Section 8(c) hereof. Indenture: Indenture dated as of September 15, 1992, between the Company and the Trustee, as supplemented by various supplemental indentures. Initial Purchasers: As defined in the first paragraph hereof. 2 Interest Payment Date: As defined in the Notes. NASD: National Association of Securities Dealers, Inc. Notes: The Restricted Notes and the Exchange Notes. Person: An individual, partnership, corporation, trust, limited liability company, unincorporated organization, or a government or agency or political subdivision thereof. Prospectus: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. Purchase Agreement: As defined in the second paragraph hereof. Record Holder: With respect to any Damages Payment Date, each Person who is a Holder of Notes on the record date with respect to the Interest Payment Date on which such Damages Payment Date shall occur. Registration Default: As defined in Section 5 hereof. Registration Statement: Any registration statement of the Company relating to (a) an offering of Exchange Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, in each case, (i) which is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. Restricted Broker-Dealer: Any Broker-Dealer which holds Broker-Dealer Transfer Restricted Securities. Restricted Notes: As defined in the first paragraph hereof. S-3 Ineligibility Date: As defined in Section 12(l) hereof. Security Registrar: As defined in the Indenture. Shelf Registration Statement: As defined in Section 4(a) hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture. Transfer Restricted Securities: Each Note, until the earliest to occur of (a) the date on which such Restricted Note is exchanged in the Exchange Offer and entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Restricted Note has been disposed of in accordance with a Shelf Registration Statement, (c) the date on which such Restricted Note is disposed of by a Broker- 3 Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the Prospectus contained therein) or (d) the date on which such Restricted Note is distributed to the public pursuant to Rule 144 under the Act. Trustee: Bank One Trust Company, N.A. (ultimate successor to NBD Bank, National Association), as trustee under the Indenture. Underwritten Offering or Underwritten Registration: An offering or registration in which securities of the Company are sold to an underwriter for reoffering to the public. SECTION 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Securities (each, a "Holder") whenever such Person owns Transfer Restricted Securities. SECTION 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) hereof have been complied with), the Company shall (i) cause to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 240 days after the Closing Date, the Exchange Offer Registration Statement, (ii) use its reasonable best efforts to cause such Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 330 days after the Closing Date, (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause such Exchange Offer Registration Statement to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Exchange Notes to be made under the blue sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting registration of the Exchange Notes to be offered in exchange for the Restricted Notes that are Transfer Restricted Securities and to permit sales of Broker-Dealer Transfer Restricted Securities by Restricted Broker-Dealers as contemplated by Section 3(c) hereof. (b) The Company shall use its reasonable best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Company shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Notes shall be included in the Exchange Offer Registration Statement. The Company shall use its best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 days thereafter. 4 (c) The Company shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Restricted Broker-Dealer who holds Restricted Notes that are Transfer Restricted Securities and that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities, may exchange such Restricted Notes (other than Transfer Restricted Securities acquired directly from the Company or any affiliate of the Company) pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of each Exchange Note received by such Broker-Dealer in the Exchange Offer, which prospectus delivery requirement may be satisfied by the delivery by such Broker-Dealer of the Prospectus contained in the Exchange Offer Registration Statement. Such "Plan of Distribution" section shall also contain all other information with respect to such sales of Broker-Dealer Transfer Restricted Securities by Restricted Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Notes held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy after the date of this Agreement. The Company shall use its best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented and amended as required by the provisions of Section 6(c) hereof to the extent necessary to ensure that it is available for sales of Broker-Dealer Transfer Restricted Securities by Restricted Broker-Dealers, and to ensure that such Registration Statement conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of one year from the date on which the Exchange Offer is Consummated. The Company shall promptly provide sufficient copies of the latest version of such Prospectus to such Restricted Broker-Dealers promptly upon request, and in no event later than one day after such request, at any time during such one-year period in order to facilitate such sales. SECTION 4. SHELF REGISTRATION (a) Shelf Registration. If (i) the Company is not required to file an Exchange Offer Registration Statement with respect to the Exchange Notes because the Exchange Offer is not permitted by applicable law or Commission policy (after the procedures set forth in Section 6(a)(i) hereof have been complied with) or (ii) any Holder of Transfer Restricted Securities shall notify the Company within 20 Business Days following the Consummation of the Exchange Offer that (A) such Holder was prohibited by law or Commission policy from participating in the Exchange Offer or (B) such Holder may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder, the Company shall, if, and when, the Company is eligible to use Act Form S-3, (x) cause to be filed on or prior to 180 days after the date on which the Company determines that it is not required to file the Exchange Offer Registration Statement pursuant to clause (i) above or 180 days after the date on which the Company receives the notice specified in clause (ii) above a shelf registration statement pursuant to Rule 415 under the Act (which may be an amendment to 5 the Exchange Offer Registration Statement (in either event, the "Shelf Registration Statement")), relating to all Transfer Restricted Securities the Holders of which shall have provided the information required pursuant to Section 4(b) hereof, and (y) use its best efforts to cause such Shelf Registration Statement to become effective on or prior to 270 days after the date on which the Company becomes obligated to file such Shelf Registration Statement. If, after the Company has filed an Exchange Offer Registration Statement which satisfies the requirements of Section 3(a) hereof, the Company is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer shall not be permitted under applicable federal law, then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above. Such an event shall have no effect on the requirements of clause (y) above. The Company shall use its reasonable best efforts to keep the Shelf Registration Statement discussed in this Section 4(a) continuously effective, supplemented and amended as required by and subject to the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a), and to ensure that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least two years (as extended pursuant to Section 6(c)(i) hereof) following the date on which such Shelf Registration Statement first becomes effective under the Act. (b) Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 20 days after receipt of a request therefor, such information specified in Item 507 of Regulation S-K for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to liquidated damages pursuant to Section 5 hereof unless and until such Holder shall have used its best efforts to provide all such information. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. SECTION 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the date specified for such filing in this Agreement, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the date specified for such effectiveness in this Agreement, (iii) the Exchange Offer has not been Consummated within 30 calendar days after the Exchange Offer Registration Statement is first declared effective by the Commission or (iv) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded within 15 Business Days by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective within five Business Days (each such event referred to in clauses (i) through (iv), a "Registration Default"), then the Company agrees to pay liquidated damages in the form of additional interest on the Transfer Restricted 6 Securities to each Holder of Transfer Restricted Securities, from and including the date on which any Registration Default shall occur to, but excluding, the date on which such Registration Default has been cured, at a rate of 0.25% per annum during the 90-day period immediately following the occurrence of such Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall such rate exceed 0.50% per annum. Notwithstanding anything to the contrary set forth herein, (1) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of clause (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of clause (ii) above, (3) upon Consummation of the Exchange Offer, in the case of clause (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable, in the case of clause (iv) above, the liquidated damages payable with respect to the Transfer Restricted Securities as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All additional interest shall be paid on each payment date to the Holder of Global Notes by wire transfer of immediately available funds or by federal funds check and to Holders of Certificated Securities by mailing checks to their registered addresses on the books of the Company or the Trustee for such payment. All obligations of the Company set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Security at the time such security ceases to be a Transfer Restricted Security shall survive until such time as all such obligations with respect to such security shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) Exchange Offer Registration Statement. In connection with the Exchange Offer, the Company shall comply with all applicable provisions of Section 6(c) hereof, shall use its reasonable best efforts to effect such exchange and to permit the sale of Broker-Dealer Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof, and shall comply with all of the following provisions: (i) If, following the date hereof, there has been published a change in Commission policy with respect to exchange offers such as the Exchange Offer, such that in the reasonable opinion of counsel to the Company there is a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company hereby agrees to seek a no-action letter or other favorable decision from the Commission allowing the Company to Consummate an Exchange Offer for the Restricted Notes. The Company hereby agrees to pursue the issuance of such a decision to the Commission staff level. In connection with the foregoing, the Company hereby agrees to take all such other actions as are reasonably requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that such an 7 Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff of such submission. (ii) As a condition to its participation in the Exchange Offer pursuant to the terms of this Agreement, each Holder of Transfer Restricted Securities shall furnish upon the request of the Company, prior to the Consummation of the Exchange Offer, a written representation to the Company (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any Person to participate in, a distribution of the Exchange Notes to be issued in the Exchange Offer and (C) it is acquiring the Exchange Notes in its ordinary course of business. Each Holder hereby acknowledges and agrees that any Broker-Dealer and any such Holder using the Exchange Offer to participate in a distribution of the securities to be acquired in the Exchange Offer (1) could not under Commission policy as in effect on the date of this Agreement rely on the position of the Commission enunciated in Morgan Stanley and Co. Inc. (available June 5, 1991) and Exxon Capital Holdings Corp. (available May 13, 1988), as interpreted in the Commission's letter to Shearman & Sterling (available July 2, 1993), and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K if the resales are of Exchange Notes obtained by such Holder in exchange for Restricted Notes acquired by such Holder directly from the Company or an affiliate thereof. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company shall provide a supplemental letter to the Commission (A) stating that the Company is registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corp. (available May 13, 1988), Morgan Stanley and Co. Inc. (available June 5, 1991) and, if applicable, any no-action letter obtained pursuant to clause (i) above, (B) including a representation that the Company has not entered into any arrangement or understanding with any Person to distribute the Exchange Notes to be received in the Exchange Offer and that, to the best of the Company's information and belief, each Holder participating in the Exchange Offer is acquiring the Exchange Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Exchange Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above. (b) Shelf Registration Statement. In connection with the Shelf Registration Statement, the Company shall comply with all the provisions of Section 6(c) hereof and shall use its best 8 efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof. (c) General Provisions. In connection with any Registration Statement and any related Prospectus required by this Agreement to permit the sale or resale of Transfer Restricted Securities (including, without limitation, any Exchange Offer Registration Statement and the related Prospectus, to the extent that the same are required to be available to permit sales of Broker-Dealer Transfer Restricted Securities by Restricted Broker-Dealers), the Company shall: (i) use its best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 hereof, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain a material misstatement or omission or (B) not to be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement, (1) in the case of clause (A), correcting any such misstatement or omission, and (2) in the case of clauses (A) and (B), using its best efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter; (ii) prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise the underwriter(s), if any, and selling Holders promptly and, if requested by such Persons, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or 9 supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or blue sky laws, the Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) furnish to the Initial Purchaser(s), each selling Holder named in any Registration Statement or Prospectus and each of the underwriter(s) in connection with such sale, if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review and comment of such Holders and underwriter(s) in connection with such sale, if any, for a period of at least five Business Days, and the Company will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which the selling Holders of the Transfer Restricted Securities covered by such Registration Statement or the underwriter(s) in connection with such sale, if any, shall reasonably object within five Business Days after the receipt thereof; (v) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide copies of such document to the selling Holders and to the underwriter(s) in connection with such sale, if any, make the Company's representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such selling Holders or underwriter(s), if any, reasonably may request; (vi) make available at reasonable times for inspection by the selling Holders, any managing underwriter participating in any disposition pursuant to such Registration Statement and any attorney or accountant retained by such 10 selling Holders or any of such underwriter(s), all financial and other records, material corporate documents and properties of the Company and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Holder, underwriter, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; (vii) if requested by any selling Holders or the underwriter(s) in connection with such sale, if any, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such selling Holders and underwriter(s), if any, may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities, information with respect to the principal amount of Transfer Restricted Securities being sold to such underwriter(s), the purchase price being paid therefor and any other terms of the offering of the Transfer Restricted Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment; (viii) if requested in writing by any selling Holder and each of the underwriter(s) in connection with such sale, if any, furnish, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (ix) if requested in writing by any selling Holder and each of the underwriter(s), if any, deliver, without charge, as many copies of the Prospectus (including each preliminary Prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company hereby consents to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each of the selling Holders and each of the underwriter(s), if any, in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto; (x) enter into such agreements (including an underwriting or similar agreement) and make such representations and warranties and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder of Transfer Restricted Securities or underwriter in connection with any sale or resale pursuant to any Registration Statement contemplated by this Agreement, and in such connection, whether or not an underwriting or similar agreement is entered into and whether or not the registration is an Underwritten Registration, the Company shall: 11 (A) furnish (or in the case of clauses (2) and (3) below, use its best efforts to furnish) to each selling Holder and each underwriter, if any, upon the effectiveness of the Shelf Registration Statement and to each Restricted Broker-Dealer upon Consummation of the Exchange Offer: (1) a certificate, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, signed on behalf of the Company by (x) the President or any Vice President and (y) a principal financial or accounting officer of the Company, confirming, as of the date thereof, the matters set forth in Sections 5(d) and 5(e) of the Purchase Agreement and such other similar matters as the Holders, underwriter(s) and/or Restricted Broker-Dealers may reasonably request; (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Company covering matters similar to those set forth in Section 5(b)(i) of the Purchase Agreement and such other matters as the Holders, underwriter(s) and/or Restricted Broker-Dealers may reasonably request, and in any event including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company and have considered the matters required to be stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing (relying as to materiality to a large extent upon facts provided to such counsel by officers and other representatives of the Company and without independent check or verification), no facts came to such counsel's attention that caused such counsel to believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment thereto became effective and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, 12 contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements, Notes and schedules and other financial data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated as of the date of effectiveness of the Shelf Registration Statement or the date of Consummation of the Exchange Offer, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with primary underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 5(c)(i) and Section 5(c)(ii) of the Purchase Agreement, without exception; (B) set forth in full or incorporate by reference in the underwriting or similar agreement, if any, in connection with any sale or resale pursuant to any Shelf Registration Statement, the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section 8; and (C) deliver such other documents and certificates as may be reasonably requested by the selling Holders, the underwriter(s), if any, and Restricted Broker-Dealers, if any, to evidence compliance with clause (A) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company pursuant to this clause (C); the above shall be done at each closing under such underwriting or similar agreement, as and to the extent required thereunder, and if at any time the representations and warranties of the Company contemplated in clause (A)(1) above cease to be true and correct, the Company shall so advise the underwriter(s), if any, the selling Holders and each Restricted Broker-Dealer promptly and, if requested by such Persons, shall confirm such advice in writing; (xi) prior to any public offering of Transfer Restricted Securities, cooperate with the selling Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or blue sky laws of such jurisdictions as the selling Holders or underwriter(s), if any, may request and do any and all other 13 acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; provided, however, that the Company shall not be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xii) issue, upon the request of any Holder of Restricted Notes covered by any Shelf Registration Statement contemplated by this Agreement, Exchange Notes having an aggregate principal amount equal to the aggregate principal amount of Restricted Notes surrendered to the Company by such Holder in exchange therefor or being sold by such Holder; such Exchange Notes to be registered in the name of such Holder or in the name of the purchaser(s) of such Notes, as the case may be; in return, the Restricted Notes held by such Holder shall be surrendered to the Company for cancellation; (xiii) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the selling Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and to register such Transfer Restricted Securities in such denominations and such names as the Holders or the underwriter(s), if any, may request at least two Business Days prior to such sale of Transfer Restricted Securities; (xiv) use its best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter(s), if any, to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (xi) above; (xv) subject to clause (i) above, if any fact or event contemplated by clause (iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (xvi) provide CUSIP numbers for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with The Depository Trust Company; 14 (xvii) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD, and use its best efforts to cause such Registration Statement to become effective and approved by such governmental agencies or authorities as may be necessary to enable the Holders selling Transfer Restricted Securities to consummate the disposition of such Transfer Restricted Securities; (xviii) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earning statement meeting the requirements of Rule 158 under the Act (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xix) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders of Notes to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its best efforts to cause the Trustee to execute all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and (xx) provide promptly to each Holder upon request each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) Restrictions on Holders. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of a notice of actions to be taken as referred to in Section 6(c)(i) hereof or any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof, or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (the "Advice"). If so directed by the Company, each Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of either such notice. In the event the Company shall give any such notice, the time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(i) or Section 6(c)(iii)(D) hereof to and including the date when each selling Holder 15 covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof or shall have received the Advice. SECTION 7. REGISTRATION EXPENSES (a) All expenses incident to the Company's performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees; (ii) all fees and expenses of compliance with federal securities and state blue sky or securities laws; (iii) all expenses of printing (including printing certificates for the Exchange Notes to be issued in the Exchange Offer and printing of Prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company and (other than in connection with the Exchange Offer) the Holders of Transfer Restricted Securities; (v) all application and filing fees, if any, in connection with listing the Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with the Shelf Registration Statement, the Company will reimburse the Holders of Transfer Restricted Securities registered pursuant to the Shelf Registration Statement for the reasonable fees and disbursements of not more than one counsel, who shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit the Shelf Registration Statement is being prepared in consultation with the Company. SECTION 8. INDEMNIFICATION AND CONTRIBUTION (a) The Company agrees, to the extent permitted by law, to indemnify and hold harmless each Holder and each Person, if any, who controls any Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or otherwise ("Indemnified Holder"), and to reimburse the Holders and such controlling Person or Persons, if any, for any legal or other expenses incurred by them in connection with defending any action, suit or proceeding (including governmental investigations) as provided in Section 8(c) hereof, insofar as such losses, claims, damages, liabilities or actions, suits or proceedings (including governmental investigations) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, or, if any Registration Statement shall be amended or supplemented, in the Registration Statement as so amended or supplemented, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any such untrue statement or alleged untrue statement or 16 omission or alleged omission which was made in the Registration Statement or in the Registration Statement as so amended or supplemented, in reliance upon and in conformity with information furnished in writing to the Company by any Holder expressly for use therein. The Company's indemnity agreement contained in this Section 8(a), and the covenants, representations and warranties of the Company contained in this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any Person, and the indemnity agreement contained in this Section 8 shall survive any termination of this Agreement. The liabilities of the Company in this Section 8 are in addition to any other liabilities of the Company under this Agreement or otherwise. (b) Each Holder agrees, severally and not jointly, to the extent permitted by law, to indemnify, hold harmless and reimburse the Company and each Person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent and upon the same terms as the indemnity agreement of the Company set forth in Section 8(a) hereof, but only with respect to alleged untrue statements or omissions made in the Registration Statement or in the Registration Statement, as amended or supplemented (if applicable), in reliance upon and in conformity with information furnished in writing to the Company by such Holder expressly for use therein. The indemnity agreement on the part of each Holder contained in this Section 8(b) shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other Person, and the indemnity agreement contained in this Section 8(b) shall survive any termination of this Agreement. (c) If a claim is made or an action, suit or proceeding (including governmental investigations) is commenced or threatened against any person as to which indemnity may be sought under Section 8(a) or 8(b) hereof, such Person (the "Indemnified Person") shall notify the Person against whom such indemnity may be sought (the "Indemnifying Person") promptly after any assertion of such claim threatening to institute an action, suit or proceeding or, if such an action, suit or proceeding is commenced against such Indemnified Person, promptly after such Indemnified Person shall have been served with a summons or other first legal process, giving information as to the nature and basis of the claim. Failure to so notify the Indemnifying Person shall not, however, relieve the Indemnifying Person from any liability which it may have on account of the indemnity under Section 8(a) or 8(b) hereof if the Indemnifying Person has not been prejudiced in any material respect by such failure. Subject to the immediately succeeding sentence, the Indemnifying Person shall assume the defense of any such litigation or proceeding, including the employment of counsel and the payment of all expenses, with such counsel being designated, subject to the immediately succeeding sentence, in writing by a majority in principal amount of the Holders in the case of parties indemnified pursuant to Section 8(b) hereof and by the Company in the case of parties indemnified pursuant to Section 8(a) hereof. Any Indemnified Person shall have the right to participate in such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include (x) the Indemnifying Person and (y) the Indemnified Person and, in the written opinion of counsel to such Indemnified Person, representation of both 17 parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and expenses of counsel (including disbursements) for such Indemnified Person shall be reimbursed by the Indemnifying Person to the Indemnified Person. If there is a conflict as described in clause (ii) above, and the Indemnified Persons have participated in the litigation or proceeding utilizing separate counsel whose fees and expenses have been reimbursed by the Indemnifying Person, and the Indemnified Persons, or any of them, are found to be solely liable, such Indemnified Person shall repay to the Indemnifying Parties such fees and expenses of such separate counsel as the Indemnifying Person shall have reimbursed. It is understood that the Indemnifying Person shall not, in connection with any litigation or proceeding or related litigation or proceedings in the same jurisdiction as to which the Indemnified Persons are entitled to such separate representation, be liable under this Agreement for the reasonable fees and out-of-pocket expenses of more than one separate firm (together with not more than one appropriate local counsel) for all such Indemnified Persons. Subject to the next paragraph, all such fees and expenses shall be reimbursed by payment to the Indemnified Persons of such reasonable fees and expenses of counsel promptly after payment thereof by the Indemnified Persons. In furtherance of the requirement above that fees and expenses of any separate counsel for the Indemnified Persons shall be reasonable, the Holders and the Company agree that the Indemnifying Person's obligations to pay such fees and expenses shall be conditioned upon the following: in case separate counsel is proposed to be retained by the Indemnified Persons pursuant to clause (ii) of the preceding paragraph, the Indemnified Persons shall in good faith fully consult with the Indemnifying Person in advance as to the selection of such counsel; reimbursable fees and expenses of such separate counsel shall be detailed and supported in a manner reasonably acceptable to the Indemnifying Person (but nothing herein shall be deemed to require the furnishing to the Indemnifying Person of any information, including, without limitation, computer print-outs of lawyers' daily time entries, to the extent that, in the judgment of such counsel, furnishing such information might reasonably be expected to result in a waiver of any attorney-client privilege); and the Company and the Holders shall cooperate in monitoring and controlling the fees and expenses of separate counsel for Indemnified Persons for which the Indemnifying Person is liable hereunder, and the Indemnified Person shall use every reasonable effort to cause such separate counsel to minimize the duplication of activities as between themselves and counsel to the Indemnifying Person. The Indemnifying Person shall not be liable for any settlement of any litigation or proceeding effected without the written consent of the Indemnifying Person, but if settled with such consent or if there be a final judgment against the Indemnified Person, the Indemnifying Person agrees, subject to the provisions of this Section 8, to indemnify the Indemnified Person from and against any loss, damage, liability or expenses by reason of such settlement or judgment. The Indemnifying Person shall not, without the prior written consent of the Indemnified Persons, effect any settlement of any pending or threatened litigation, proceeding or 18 claim in respect of which indemnity has been properly sought by the Indemnified Persons hereunder, unless such settlement includes an unconditional release by the claimant of all Indemnified Persons from all liability with respect to claims which are the subject matter of such litigation, proceeding or claim. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an Indemnified Person under this Section 8 in respect of any losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof) referred to therein, then each Indemnifying Person under this Section 8 shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other from the sale of the Transfer Restricted Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each Indemnifying Person shall contribute to such amount paid or payable by such Indemnified Person in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of each Indemnifying Person, if any, on the one hand and the Indemnified Person on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Holders on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 8. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental proceedings) in respect thereof) referred to in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such actions, suits or proceedings (including governmental proceedings) or claims, provided that the provisions of this Section 8 have been complied with (in all material respects) in respect of any separate counsel for such Indemnified Person. Notwithstanding the provisions of this Section 8, no Holder shall be required to contribute any amount greater than the excess of the amount by which the total received by such Holder with respect to the sale of its Transfer Restricted Securities pursuant to a Registration Statement exceeds the sum of (A) the amount paid by such Holder for such Transfer Restricted Securities plus (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations in this Section 8 to contribute are several in proportion to their respective obligations and not joint. 19 The agreement with respect to contribution contained in this Section 8 shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any Holder, and shall survive any termination of this Agreement. SECTION 9. RULE 144A The Company hereby agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder of Transfer Restricted Securities, to any Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A. SECTION 10. UNDERWRITTEN REGISTRATIONS No Holder may participate in any Underwritten Registration hereunder unless such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on the basis provided in customary underwriting arrangements entered into in connection therewith and (b) completes and executes all reasonable questionnaires, powers of attorney, and other documents required under the terms of such underwriting arrangements. SECTION 11. SELECTION OF UNDERWRITERS For any Underwritten Offering, the investment banker or investment bankers and manager or managers for any Underwritten Offering that will administer such offering will be selected by the Holders of a majority in aggregate principal amount of the Transfer Restricted Securities included in such offering; provided, that such investment bankers and managers must be reasonably satisfactory to the Company. The Holders of Transfer Restricted Securities included in any such Underwritten Offering shall be responsible for paying all underwriting or placement fees charged, or costs or expenses incurred, by such investment bankers and managers in connection with such Underwritten Offering. Such investment bankers and managers are referred to herein as the "underwriters". SECTION 12. MISCELLANEOUS (a) Remedies. Each Holder, in addition to being entitled to exercise all rights provided herein, in the Indenture, in the Purchase Agreement or granted by law, including recovery of liquidated or other damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by the Company of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. 20 The Company has not previously entered into any agreement granting any registration rights with respect to its securities to any Person. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. (c) Adjustments Affecting the Notes. The Company will not take any action, or voluntarily permit any change to occur, with respect to the Notes that would materially and adversely affect the ability of the Holders to Consummate any Exchange Offer. (d) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given, unless (i) in the case of Section 5 hereof and this Section 12(d)(i), the Company has obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities. Notwithstanding the foregoing, a waiver or consent to or departure from the provisions hereof that relates exclusively to the rights of Holders whose securities are being tendered pursuant to the Exchange Offer and that does not affect directly or indirectly the rights of other Holders whose securities are not being tendered pursuant to such Exchange Offer may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities subject to such Exchange Offer. (e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Security Registrar under the Indenture, with a copy to the Security Registrar; and (ii) if to the Company: CMS Energy Corporation One Energy Plaza Jackson, Michigan 49201 Telecopier No.: (517) 788-2186, Attention: Executive Vice President and Chief Financial Officer With a copy at the same address to: Robert C. Shrosbree, Esq. Telecopier No.: (313) 436-9225 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. 21 Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. (f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders of Transfer Restricted Securities; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign acquired Transfer Restricted Securities directly from such Holder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein, with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (l) S-3 Ineligibility. If the Company is not eligible to use Act Form S-3 by the 270th day after the date on which it determines that it is not required to file the Exchange Offer Registration Statement pursuant to Section 4(a)(i) hereof or the 270th day after the date on which it receives the notice specified in Section 4(a)(ii) hereof (either, the "S-3 Ineligibility Date"), the Company shall (A) cause to be filed as soon as practicable after the S-3 Ineligibility Date a registration statement containing a resale prospectus on whatever Act form the Company is then eligible to use relating to all Transfer Restricted Securities the Holders of which shall have provided the information required pursuant to Section 4(b) hereof and (B) use its best efforts to cause such shelf registration statement to become effective as soon as practicable. 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CMS ENERGY CORPORATION By: /s/ Thomas J. Webb ---------------------------- Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: CITIGROUP GLOBAL MARKETS INC., for itself and as Representative of the Initial Purchasers By:/s/ Jane Sadowsky ---------------------------------- Name: Jane Sadowsky Title: Managing Director EX-4.(L) 9 k82154aexv4wxly.txt REGISTRATION RIGHTS AGREEMENT DATED 12/05/2003 EXHIBIT 4(L) ================================================================================ REGISTRATION RIGHTS AGREEMENT Dated as of December 5, 2003 by CMS Energy Corporation and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities, Inc., Deutsche Bank Securities Inc., Wachovia Capital Markets, LLC and Banc One Capital Markets, Inc. ================================================================================ This Registration Rights Agreement (this "Agreement") is made and entered into this 5th day of December, 2003 among CMS Energy Corporation, a Michigan corporation (the "Company"), and Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives (the "Representatives") of the Initial Purchasers (the "Initial Purchasers") listed on Schedule I to the Purchase Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement dated December 1, 2003, among the Company and the Representatives on behalf of the Initial Purchasers (the "Purchase Agreement"), which provides for the sale by the Company to the Initial Purchasers of an aggregate of 4,500,000 shares of the Company's 4.50% Cumulative Convertible Preferred Stock (the "Firm Shares") and the granting by the Company to the Initial Purchasers of the option to purchase an additional 500,000 shares of such Cumulative Convertible Preferred Stock to cover over-allotments, if any (the "Option Shares" and, together with the Firm Shares, the "Shares"). The Shares are convertible into shares of common stock, par value $0.01 per share, of the Company at the initial conversion price set forth in the Offering Memorandum dated December 1, 2003. In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Additional Dividends" shall have the meaning set forth in Section 2(c)(i) hereof. "Additional Dividends Payment Date" shall have the meaning set forth in Section 2(c)(ii) hereof. "Affiliate" of any specified Person shall mean any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any specified Person shall mean the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" shall have meanings correlative to the foregoing. "Agreement" shall have the meaning set forth in the preamble. "Applicable Conversion Price" shall mean, as of any date of determination, the number of Shares as of such date of determination divided by the Conversion Rate (as defined below) in effect as of such date of determination or, if no Shares are then outstanding, the Conversion Rate that would be in effect were Shares then outstanding. "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. 1 "Closing Date" shall mean the later of (i) the date on which the Firm Shares are issued and (ii) the date on which the Option Shares are issued. "Company" shall have the meaning set forth in the preamble and shall also include the Company's successors. "Conversion Rate" shall mean 5.0541 shares of common stock, par value $0.01 per share, of the Company per share of Preferred Stock. "Depositary" shall mean The Depository Trust Company, or any other depositary for the Securities (as defined below) appointed by the Company; provided, however, that such depositary must have an address in the Borough of Manhattan, in The City of New York. "Firm Closing Date" shall mean the date on which the Firm Shares are issued. "Firm Shares" shall have the meaning set forth in the preamble. "Holder" shall mean an Initial Purchaser, for so long as it owns any Registrable Securities (as defined below), and each of its successors, assigns and direct and indirect transferees who become owners of Registrable Securities. "Indemnified Holder" shall have the meaning set forth in Section 4(a) hereof. "Indemnified Person" shall have the meaning set forth in Section 4(c) hereof. "Indemnifying Person" shall have the meaning set forth in Section 4(c) hereof. "Initial Purchasers" shall have the meaning set forth in the preamble. "Majority Holders" shall mean, on any date, Holders of a majority of the outstanding shares of Stock (as defined below) constituting Registrable Securities; provided, that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company and other obligors on the Securities or any Affiliate of the Company or other obligor shall be disregarded in determining whether such consent or approval was given by the Holders of such required percentage amount. For the purposes of this definition, Holders of Shares constituting Registrable Securities shall be deemed to be Holders of the number of shares of Stock into which such Shares are or would be convertible as of such date. "Material Event" shall have the meaning set forth in Section 3(f) hereof. "Notice and Questionnaire" shall mean a written notice delivered to the Company substantially in the form attached as Appendix I to the Offering Memorandum. "Notice Holder" shall mean, on any date, any Holder that has delivered a Notice and Questionnaire to the Company on or prior to such date. "Option Shares" shall have the meaning set forth in the preamble. 2 "Person" shall mean any individual, corporation, partnership, joint venture, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof. "Prospectus" shall mean the prospectus included in the Shelf Registration Statement (as defined below), including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble. "Registrable Securities" shall mean the Securities; provided, however, that Securities shall cease to be Registrable Securities when (i) a Shelf Registration Statement with respect to such Securities shall have been declared effective under the Act and such Securities shall have been disposed of pursuant to such Shelf Registration Statement, (ii) such Securities have been sold to the public pursuant to Rule 144 under the Act or may be sold pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the Act or (iii) such Securities shall have ceased to be outstanding. "Registration Default" shall have the meaning set forth in Section 2(c)(i) hereof. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including, without limitation: (i) all Commission, stock exchange or NASD registration and filing fees, including, if applicable, the reasonable fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained by any Holder of Registrable Securities in accordance with the rules and regulations of the NASD; (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of one counsel for the placement agent or underwriters, if any, in connection with blue sky qualification of any of the Registrable Securities and any filings with the NASD); (iii) all expenses of any Persons in preparing or assisting in preparing word processing, printing and distributing any Shelf Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, any securities sales agreements and any other documents relating to the performance of and compliance with this Agreement; (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges; (v) all rating agency fees; (vi) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance; (vii) the fees and expenses of the transfer agent (if not the Company) and any escrow agent or custodian; (viii) the reasonable fees and disbursements of one firm, at any one time, of legal counsel selected by the Representatives (subject to the reasonable approval of the Company) to represent the Holders of Registrable Securities, which firm shall be PW unless otherwise requested in writing by the Majority Holders; and (ix) any reasonable fees and disbursements of the underwriters 3 customarily required to be paid by issuers or sellers of securities and the fees and expenses of any special experts retained by the Company in connection with any Shelf Registration Statement, but excluding underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. "Representatives" shall have the meaning set forth in the preamble. "Securities" shall mean collectively the Shares and the Stock. "Shares" shall have the meaning set forth in the preamble. "Shelf Registration" shall mean a registration effected pursuant to Section 2(a) hereof. "Shelf Registration Filing Date" shall have the meaning set forth in Section 2(a)(i) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(a) hereof which covers all of the Registrable Securities on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Stock" shall mean the shares of common stock of the Company, par value $0.01 per share, into which the Shares are convertible or that have been issued upon any conversion of the Shares into common stock of the Company. "Suspension Period" shall have the meaning set forth in Section 2(a)(i) hereof. 2. Registration Under the Act. (a) Shelf Registration. (i) The Company agrees to use reasonable commercial efforts to file under the Act as promptly as practicable after the time that the Company becomes eligible to file registration statements on Form S-3 under the Act but in any event within 11 months after the Firm Closing Date (the "Shelf Registration Filing Date") a Shelf Registration Statement providing for the registration of, and the sale on a continuous or delayed basis by the Holders of, all of the Registrable Securities, pursuant to Rule 415 under the Act or any similar rule that may be adopted by the Commission. If the Company is not eligible to file registration statements on Form S-3 under the Act before the Shelf Registration Filing Date, then the Company shall file a Shelf Registration Statement on whatever form is then available for the Company to use. The Company agrees to use its reasonable commercial efforts to cause the Shelf Registration Statement to become or be declared effective within 120 days after the Shelf Registration Filing Date and to keep such Shelf Registration Statement continuously effective until the earliest of (i) the date on which all Registrable Securities covered by the Shelf 4 Registration Statement have been sold pursuant to such Shelf Registration Statement, (ii) the date on which all Registrable Securities have been sold pursuant to Rule 144 under the Act, (iii) such time as there are no longer any Registrable Securities outstanding and (iv) the second anniversary of the Closing Date (plus, in each case, the number of days in any Suspension Period); provided, however, that upon the occurrence of any event or the discovery of any facts as contemplated by Section 3(f)(iv) hereof, the Company shall not be obligated to keep the Shelf Registration Statement effective or to permit the use of any Prospectus forming a part of the Shelf Registration Statement if the Company promptly thereafter complies with the requirements of Section 3(k) hereof; provided, further, that the failure to keep the Shelf Registration Statement effective and usable for offers and sales of Registrable Securities for such reason shall last no longer than 45 consecutive calendar days or no more than an aggregate of 90 calendar days during any consecutive twelve-month period (whereafter a Registration Default shall occur and Additional Dividends shall accumulate as set forth in Section 2.4(A)(v) hereof); any such period during which the Company is so excused from keeping the Shelf Registration Statement effective and usable for offers and sales of Registrable Securities is referred to herein as a "Suspension Period"; a Suspension Period shall commence on and include the date that the Company gives notice to the Holders that the Shelf Registration Statement is no longer effective or the Prospectus included therein is no longer usable for offers and sales of Registrable Securities as a result of the application of the proviso of the foregoing sentence, stating the reason therefor, and shall end on the earlier to occur of the date on which each seller of Registrable Securities covered by the Shelf Registration Statement either receives the copies of the supplemented or amended Prospectus or is advised in writing by the Company that use of the Prospectus may be resumed. (ii) Each Holder of Registrable Securities agrees that if such Holder wishes to sell Registrable Securities pursuant to the Shelf Registration Statement and related Prospectus, it will do so only in accordance with this Section 2(a)(ii) and the last paragraph of Section 3 hereof. To be named a selling holder in the Shelf Registration Statement when it first becomes effective, Holders must deliver a Notice and Questionnaire to the Company at least five (5) Business Days prior to the effectiveness of the Shelf Registration Statement. From and after the date the Shelf Registration Statement is declared effective, the Company shall, as promptly as is practicable after the date a Notice and Questionnaire is delivered, and in any event within five (5) Business Days after such date, (1) if required by applicable law, file with the Commission a post-effective amendment to the Shelf Registration Statement or prepare and, if required by applicable law, file a supplement to the related Prospectus or an amendment or supplement to any document incorporated therein by reference or file any other required document (including, if required, a new or amended Shelf Registration Statement) so that the Holder delivering such Notice and Questionnaire is named as a selling holder in the Shelf Registration Statement and the related Prospectus and so that such Holder is permitted to deliver such Prospectus to purchasers of the Registrable Securities in accordance with applicable law and, if the Company shall file a post-effective amendment to the Shelf Registration Statement, use commercially reasonable efforts to cause such post-effective amendment to be declared effective under the Act as promptly as is practicable, (2) provide such Holder copies of any documents filed pursuant to Section 2(a)(ii)(1) hereof and (3) notify such Holder as promptly as practicable after the 5 effectiveness under the Act of any post-effective amendment filed pursuant to Section 2(a)(ii)(1) hereof; provided, that if such Notice and Questionnaire is delivered during a Suspension Period, the Company shall so inform the Holder delivering such Notice and Questionnaire and shall take the actions set forth in clauses (1), (2) and (3) above upon expiration of the Suspension Period. Notwithstanding anything contained herein to the contrary, the Company shall be under no obligation to name any Holder that is not a Notice Holder as a selling holder in the Shelf Registration Statement or related Prospectus; provided, however, that any Holder that becomes a Notice Holder pursuant to the provisions of this Section 2(a)(ii) (whether or not such Holder was a Notice Holder at the time the Shelf Registration Statement was declared effective) shall be named as a selling holder in the Shelf Registration Statement or related Prospectus in accordance with the requirements of this Section 2(a)(ii). (iii) The Company shall not permit any securities other than Registrable Securities to be included in the Shelf Registration Statement. The Company further agrees, if necessary, to supplement or amend the Shelf Registration Statement, as required by Section 3(b) hereof, and to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the Commission. (b) Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) hereof and the performance of its obligations under Section 2(a) and Section 3 hereof. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. (c) Interest. (i) If any of the following events (any such event a "Registration Default") shall occur, then additional dividends (the "Additional Dividends") shall become payable to Holders in respect of the Securities as follows: (1) if the Shelf Registration Statement is not filed with the Commission by the Shelf Registration Filing Date, then commencing on the day immediately after the Shelf Registration Filing Date, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such day immediately after the Shelf Registration Filing Date and at a rate of 0.50% per annum thereafter; (2) if the Shelf Registration Statement is not declared effective by the Commission within 120 days following the Shelf Registration Filing Date, then commencing on the 121st day after the Shelf Registration Filing Date, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 6 days following such 121st day after the Shelf Registration Filing Date and at a rate of 0.50% per annum thereafter; (3) if the Company has failed to perform its obligations set forth in Section 2(a)(ii) hereof within the time periods required therein, then commencing on the first day after the date by which the Company was required to perform such obligations, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 days and at a rate of 0.50% per annum thereafter; (4) if the Shelf Registration Statement has been declared effective but such Shelf Registration Statement ceases to be effective at any time (other than as specifically permitted in Section 2(a)(i) hereof) without being succeeded within 30 days by an amendment thereto or an additional registration statement filed and declared effective, then commencing on the day such Shelf Registration Statement ceases to be effective, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such date on which the Shelf Registration Statement ceases to be effective and at a rate of 0.50% per annum thereafter; or (5) if the aggregate duration of Suspension Periods in any period exceeds the number of days permitted in respect of such period pursuant to Section 2(a)(i) hereof, then commencing on the day the aggregate duration of Suspension Periods in any period exceeds the number of days permitted in respect of such period, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 days and at a rate of 0.50% per annum thereafter; provided, however, that the Additional Dividends on the Securities shall not exceed in the aggregate 0.50% per annum and shall not be payable under more than one clause above for any given period of time, except that if Additional Dividends would be payable under more than one clause above, but at a rate of 0.25% per annum under one clause and at a rate of 0.50% per annum under the other, then the Additional Dividends rate shall be the higher rate of 0.50% per annum; provided, further, however, that (1) upon the filing of the Shelf Registration Statement (in the case of Section 2(c)(i)(1) hereof), (2) upon the effectiveness of the Shelf Registration Statement (in the case of Section 2(c)(i)(2) hereof), (3) upon the Company's performing its obligations set forth in Section 2(a)(ii) hereof (in the case of Section 2(c)(i)(3) hereof), (4) upon the effectiveness of the Shelf Registration Statement which had ceased to remain effective (in the case of Section 2(c)(i)(4) hereof) or (5) upon the termination of the Suspension Period that caused the limit on the aggregate duration of Suspension Periods in a period set forth in Section 2(a)(i) hereof to be exceeded (in the case of Section 2(c)(i)(5) hereof), Additional 7 Dividends on the Securities as a result of such Section, as the case may be, shall cease to accumulate. (ii) Additional Dividends on the Securities, if any, will be payable in cash on March 1, June 1, September 1 and December 1 of each year (the "Additional Dividends Payment Date") to holders of record of outstanding Registrable Securities on each preceding February 15, May 15, August 15 and November 15, respectively. The date of determination of the Applicable Conversion Price of any outstanding Stock that are Registrable Securities shall be the Business Day immediately preceding the Additional Dividends Payment Date; provided, that in the case of an event of the type described in Section 2(c)(i)(3) hereof, such Additional Dividends shall be paid only to the Holders that have delivered Notice and Questionnaires that caused the Company to incur the obligations set forth in Section 2(a)(ii) hereof, the non-performance of which is the basis of such Registration Default; provided, further, that any Additional Dividends accumulated with respect to any Shares or portion thereof called for redemption on a redemption date or purchased on a purchase date or converted into Stock on a conversion date prior to the Registration Default shall, in any such event, be paid instead to the Holder who submitted such Shares or portion thereof for redemption, purchase or conversion on the applicable redemption date, purchase date or conversion date, as the case may be, on such date (or promptly following the conversion date, in the case of conversion), and shall continue to accumulate on the Stock issuable upon conversion of any Shares to the extent any Registration Default has not yet been cured. Following the cure of all Registration Defaults requiring the payment of Additional Dividends by the Company to the Holders of Registrable Securities pursuant to Section 2(c)(i) hereof, the accumulation of Additional Dividends will cease without in any way limiting the effect of any subsequent Registration Default requiring the payment of Additional Dividends by the Company. Notwithstanding the foregoing, the parties agree that the sole monetary damages payable for a violation of the terms of this Agreement with respect to which Additional Dividends are expressly provided shall be as set forth in this Section 2(c). Nothing shall preclude a Notice Holder or Holder of Registrable Securities from pursuing or obtaining specific performance or other equitable relief with respect to this Agreement. 3. Registration Procedures. In connection with the obligations of the Company with respect to Shelf Registration Statements pursuant to Section 2(a) hereof, the Company shall: (a) use reasonable commercial efforts to prepare and file with the Commission a Shelf Registration Statement, within the relevant time period specified in Section 2 hereof, on the appropriate form under the Act, which form shall (i) be selected by the Company, (ii) be available for the sale of the Registrable Securities by the selling Holders thereof and (iii) comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the Commission to be filed therewith or incorporated by reference therein, and use its reasonable commercial efforts to cause such Shelf Registration Statement to become effective and remain effective in accordance with Section 2 hereof; 8 (b) use reasonable commercial efforts to cause (i) any Shelf Registration Statement and any amendment thereto, when it becomes effective, not to contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) subject to Section 2(a)(iii) hereof, any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (as amended or supplemented from time to time), not to include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (c) use reasonable commercial efforts to prepare and file with the Commission such amendments and post-effective amendments to the Shelf Registration Statement as may be necessary under applicable law to keep such Shelf Registration Statement effective for the applicable period; and cause each Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Act and comply with the provisions of the Act, the Exchange Act and the rules and regulations thereunder applicable to them with respect to the disposition of all securities covered by the Shelf Registration Statement during the applicable period in accordance with the intended method or methods of distribution reasonably requested by the selling Holders thereof; (d) (i) notify each Holder of Registrable Securities, at least fifteen (15) calendar days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holders that the distribution of Registrable Securities will be made in accordance with the methods reasonably requested by the Majority Holders participating in the Shelf Registration and as set forth in the Notices and Questionnaires, (ii) furnish to each Notice Holder of Registrable Securities and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto, and such other documents as such Notice Holder or underwriter may reasonably request, including financial statements and schedules and, if the Notice Holder so requests, all exhibits in order to facilitate the public sale or other disposition of the Registrable Securities and (iii) hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Notice Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto, save and except during any Suspension Period; (e) use its reasonable commercial efforts to register or qualify the Registrable Securities under such state securities or blue sky laws of such jurisdictions as any Notice Holder of Registrable Securities covered by a Shelf Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request in writing (which request shall be included in the Notice and Questionnaire) by the time such Shelf Registration Statement is declared effective by the Commission, and do any and all other acts and things which may be reasonably necessary or advisable to enable each such Notice Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Notice Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be 9 required to qualify but for this Section 3(e) or (ii) take any action which would require it to file general consent to service of process or taxation or file annual reports or comply with any other requirement deemed by the Company in its reasonable judgment to be unduly burdensome; (f) notify promptly each Notice Holder of Registrable Securities under a Shelf Registration and, if requested by such Notice Holder, confirm such advice in writing promptly (i) when such Shelf Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the Commission or any state securities authority for post-effective amendments and supplements to such Shelf Registration Statement and Prospectus or for additional information after such Shelf Registration Statement has become effective, (iii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of such Shelf Registration Statement or the initiation of any proceedings for that purpose, (iv) of the happening of any event (but not the nature of the details concerning the same) or the discovery of any facts during the period the Shelf Registration Statement is effective which makes any statement made in such Shelf Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Shelf Registration Statement or Prospectus in order to make the statements therein not misleading (a "Material Event"); provided, however, that no notice by the Company shall be required pursuant to this clause (iv) in the event that the Company either promptly files a Prospectus supplement to update the Prospectus or a Form 8-K or other appropriate Exchange Act report that is incorporated by reference into the Shelf Registration Statement, which, in either case, contains the requisite information with respect to such Material Event that results in such Shelf Registration Statement no longer containing any untrue statement of material fact or omitting to state a material fact necessary to make the statements contained therein not misleading, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities, as the case may be, for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (vi) of any determination by the Company that a post-effective amendment to the Shelf Registration Statement would be appropriate other than post-effective amendments prepared and filed in accordance with Section 2(a)(ii) hereof; (g) furnish counsel for the Holders of Registrable Securities copies of any comment letters received from the Commission or any other request by the Commission or any state securities authority for amendments or supplements to a Shelf Registration Statement and Prospectus or for additional information; (h) use its reasonable commercial efforts to obtain the withdrawal of any order suspending the effectiveness of the Shelf Registration Statement as soon as practicable and provide prompt notice to legal counsel for the Holders of the withdrawal of any such order; (i) furnish to each Notice Holder of Registrable Securities, and each underwriter, if any, without charge, at least one conformed copy of each Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules (without documents incorporated therein by reference or all exhibits thereto, unless requested); 10 (j) use its reasonable commercial efforts to cooperate with the selling Notice Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold to the extent not held with the Depositary through Cede & Co., to remove any restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as the selling Notice Holders or the underwriters, if any, may reasonably request at least three (3) Business Days prior to the closing of any sale of Registrable Securities; (k) upon the occurrence of any event or the discovery of any facts, each as contemplated by Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) and Section 3(f)(vi) hereof and subject to the provisions of the first paragraph immediately following Section 3(s) hereof, as promptly as practicable after the occurrence of such an event, use its reasonable commercial efforts to prepare a supplement or post-effective amendment to the Shelf Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain at the time of such delivery any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. At such time as such public disclosure is otherwise made or the Company determines that such disclosure is not necessary, in each case to correct any misstatement of a material fact or to include any omitted material fact, the Company agrees promptly to notify each Notice Holder of such determination and to furnish each Notice Holder such number of copies of the Prospectus, as amended or supplemented, as such Notice Holder may reasonably request; (l) obtain a CUSIP number for all Registrable Securities covered by the Shelf Registration Statement not later than the effective date of such Shelf Registration Statement, and provide the transfer agent for the Shares and the Stock with printed certificates for the Registrable Securities that are in a form eligible for deposit with the Depositary; (m) enter into such customary agreements (including an underwriting or similar agreement) and make such representations and warranties and take all such other actions in connection therewith (including, without limitation, furnishing customary comfort letters and legal opinions pursuant to the terms of such agreement) in order to expedite or facilitate the disposition of the Registrable Securities pursuant to any Shelf Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder of Registrable Securities or underwriter in connection with any sale or resale pursuant to any Shelf Registration Statement contemplated by this Agreement; (n) upon reasonable notice, for a reasonable period prior to the filing of the Shelf Registration Statement and until the time at which there are no Registrable Securities, make available at reasonable times at the Company's principal place of business or such other reasonable place for inspection by a representative appointed by the Notice Holders in connection with an underwritten offering (or any underwriter, placement agent or counsel acting on their behalf), who shall certify to the Company that they have a current intention to sell their Registrable Securities pursuant to the Shelf Registration Statement, such financial and other information and books and records of the Company, and cause the officers, directors, employees and independent certified public accountants of the Company to respond to such inquiries, as 11 shall be reasonably necessary, in the judgment of the counsel to such Notice Holders, to conduct a reasonable "due diligence" investigation; provided, however, that such persons shall first agree in writing with the Company that any information that is reasonably and in good faith designated by the Company in writing as confidential at the time of delivery of such information shall be kept confidential by such persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, (ii) disclosure of such information is required by law (including any disclosure requirements pursuant to federal securities laws in connection with the filing of the Shelf Registration Statement or the use of any Prospectus), (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard such information by such persons or (iv) such information becomes available to such persons from a source other than the Company and its subsidiaries and such source is not known by such persons to be bound by a confidentiality agreement; provided, further, that the foregoing inspection and information gathering shall be coordinated by (x) the managing underwriter in connection with any underwritten offering pursuant to a Shelf Registration and (y) the Holder or Holders designated by the participating Majority Holders in connection with any non-underwritten offering pursuant to a Shelf Registration, together with one counsel designated by and on behalf of such persons; (o) if reasonably requested by the Initial Purchasers or any Notice Holder, promptly incorporate in a Prospectus supplement or post-effective amendment to the Shelf Registration Statement such information as the Initial Purchasers or such Notice Holder shall, on the basis of a written opinion of nationally-recognized counsel experienced in such matters, determine to be required to be included therein by applicable law and make any required filings of such Prospectus supplement or such post-effective amendment; provided, that the Company shall not be required to take any actions under this Section 3(o) that are not, in the reasonable opinion of counsel for the Company, in compliance with applicable law; (p) use its reasonable commercial efforts to (i) confirm that the ratings of the Shares will apply to the Shares covered by the Shelf Registration Statement or (ii) if the Shares were not previously rated, cause the Shares covered by the Shelf Registration Statement to be rated with the appropriate rating agencies, if so requested by the Majority Holders of Securities covered by such Shelf Registration Statement, or by the managing underwriters, if any; (q) otherwise comply with all applicable rules and regulations of the Commission and make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least 12 months which shall satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder; (r) use its reasonable commercial efforts to cause the Stock to remain listed on the New York Stock Exchange; and (s) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter and its counsel (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD). 12 Each Holder agrees that upon receipt of any notice from the Company of the happening of any event or the discovery of any facts, each of the kind described in Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) or Section 3(f)(vi) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to such Shelf Registration Statement or Prospectus until the receipt by such Holder of either copies of the supplemented or amended Prospectus contemplated by Section 3(k) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in its possession of the Prospectus covering such Registrable Securities current at the time of receipt of such notice, or notice in writing from the Company that such Holder may resume disposition of Registrable Securities pursuant to such Shelf Registration Statement or Prospectus. If the Company shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Shelf Registration Statement as a result of the happening of any event or the discovery of any facts, each of the kind described in Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) or Section 3(f)(vi) hereof, the Company shall be deemed to have used its reasonable commercial efforts to keep such Shelf Registration Statement effective during such Suspension Period; provided, that the Company shall use its reasonable commercial efforts to file and have declared effective (if an amendment) as soon as practicable an amendment or supplement to such Shelf Registration Statement. The Company shall extend the period during which such Shelf Registration Statement shall be maintained effective or the Prospectus shall be used pursuant to this Agreement by the number of days during the period from and including the date of the giving of the notice described above to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions or notification that they may resume such disposition under an existing Prospectus. If any of the Registrable Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the underwriter or underwriters and manager or managers that will manage such offering will be selected by the Majority Holders of such Registrable Securities included in such offering and shall be reasonably acceptable to the Company. No Holder of Registrable Securities may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. The Company may require each Holder of Registrable Securities as to which any registration pursuant to Section 2(a) is being effected to furnish to the Company such information regarding such Holder and such Holder's intended method of distribution of such Registrable Securities as the Company may from time to time reasonably request in writing, but only to the extent that such information is required in order to comply with the Act. Each such Holder agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such Holder to the Company or of the occurrence of any event in either case as a result of which any Prospectus relating to such registration contains or would contain an untrue statement of a material fact regarding such Holder or such Holder's intended method of disposition of such Registrable Securities or omits to state any material fact regarding such Holder or such Holder's intended method of disposition of such Registrable Securities required to be stated therein or necessary to make the statements therein not misleading, and promptly to furnish to the Company any additional information required to 13 correct and update any previously furnished information or required so that such Prospectus shall not contain, with respect to such Holder or the disposition of such Registrable Securities, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Each Holder agrees, by acquisition of the Registrable Securities, that such Holder shall not be entitled to sell any of such Registrable Securities pursuant to the Shelf Registration Statement or to receive a Prospectus related thereto, unless such Holder has furnished the Company with a Notice and Questionnaire. Each Notice Holder agrees to furnish to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not misleading and any other information regarding such Notice Holder and the distribution of such Registrable Securities as may be required to be disclosed in the Shelf Registration Statement under applicable law or pursuant to the Commission's comments. Each Holder further agrees not to sell any Registrable Securities pursuant to the Shelf Registration Statement without delivering or causing to be delivered a Prospectus to the purchaser thereof and, following the time at which there are no Registrable Securities, to notify the Company, within 10 business days of a request by the Company of the amount of Registrable Securities sold pursuant to the Shelf Registration Statement and, in the absence of a response, the Company may assume that all of the Holder's Registrable Securities were so sold. 4. Indemnification; Contribution. (a) The Company agrees, to the extent permitted by law, to indemnify and hold harmless each Holder and each Person, if any, who controls any Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or otherwise ("Indemnified Holder"), and to reimburse the Holders and such controlling Person or Persons, if any, for any legal or other expenses incurred by them in connection with defending any action, suit or proceeding (including governmental investigations) as provided in Section 4(c) hereof, insofar as such losses, claims, damages, liabilities or actions, suits or proceedings (including governmental investigations) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Shelf Registration Statement, or, if any Shelf Registration Statement shall be amended or supplemented, in the Shelf Registration Statement as so amended or supplemented, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any such untrue statement or alleged untrue statement or omission or alleged omission which was made in the Shelf Registration Statement or in the Shelf Registration Statement as so amended or supplemented, in reliance upon and in conformity with information furnished in writing to the Company by any Holder expressly for use therein. The Company's indemnity agreement contained in this Section 4(a), and the covenants, representations and warranties of the Company contained in this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any Person, and the indemnity agreement contained in this Section 4 shall survive any termination of this Agreement. 14 The liabilities of the Company in this Section 4 are in addition to any other liabilities of the Company under this Agreement or otherwise. (b) Each Holder agrees, severally and not jointly, to the extent permitted by law, to indemnify, hold harmless and reimburse the Company and each Person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent and upon the same terms as the indemnity agreement of the Company set forth in Section 4(a) hereof, but only with respect to alleged untrue statements or omissions made in the Shelf Registration Statement or in the Shelf Registration Statement, as amended or supplemented (if applicable), in reliance upon and in conformity with information furnished in writing to the Company by such Holder expressly for use therein. The indemnity agreement on the part of each Holder contained in this Section 4(b) shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other Person, and the indemnity agreement contained in this Section 4(b) shall survive any termination of this Agreement. (c) If a claim is made or an action, suit or proceeding (including governmental investigations) is commenced or threatened against any person as to which indemnity may be sought under Section 4(a) or 4(b) hereof, such Person (the "Indemnified Person") shall notify the Person against whom such indemnity may be sought (the "Indemnifying Person") promptly after any assertion of such claim threatening to institute an action, suit or proceeding or, if such an action, suit or proceeding is commenced against such Indemnified Person, promptly after such Indemnified Person shall have been served with a summons or other first legal process, giving information as to the nature and basis of the claim. Failure to so notify the Indemnifying Person shall not, however, relieve the Indemnifying Person from any liability which it may have on account of the indemnity under Section 4(a) or 4(b) hereof if the Indemnifying Person has not been prejudiced in any material respect by such failure. Subject to the immediately succeeding sentence, the Indemnifying Person shall assume the defense of any such litigation or proceeding, including the employment of counsel and the payment of all expenses, with such counsel being designated, subject to the immediately succeeding sentence, in writing by a majority in interest of the Holders in the case of parties indemnified pursuant to Section 4(b) hereof and by the Company in the case of parties indemnified pursuant to Section 4(a) hereof. Any Indemnified Person shall have the right to participate in such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include (x) the Indemnifying Person and (y) the Indemnified Person and, in the written opinion of counsel to such Indemnified Person, representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and expenses of counsel (including disbursements) for such Indemnified Person shall be reimbursed by the Indemnifying Person to the Indemnified Person. If there is a conflict as described in clause (ii) above, and the Indemnified Persons have participated in the litigation or proceeding utilizing separate counsel whose fees and expenses have been reimbursed by the Indemnifying Person, and the Indemnified Persons, or any of them, are found to be solely liable, such Indemnified Person shall repay to the Indemnifying Parties such fees and expenses of such separate counsel as the Indemnifying 15 Person shall have reimbursed. It is understood that the Indemnifying Person shall not, in connection with any litigation or proceeding or related litigation or proceedings in the same jurisdiction as to which the Indemnified Persons are entitled to such separate representation, be liable under this Agreement for the reasonable fees and out-of-pocket expenses of more than one separate firm (together with not more than one appropriate local counsel) for all such Indemnified Persons. Subject to the next paragraph, all such fees and expenses shall be reimbursed by payment to the Indemnified Persons of such reasonable fees and expenses of counsel promptly after payment thereof by the Indemnified Persons. In furtherance of the requirement above that fees and expenses of any separate counsel for the Indemnified Persons shall be reasonable, the Holders and the Company agree that the Indemnifying Person's obligations to pay such fees and expenses shall be conditioned upon the following: (1) in case separate counsel is proposed to be retained by the Indemnified Persons pursuant to clause (ii) of the preceding paragraph, the Indemnified Persons shall in good faith fully consult with the Indemnifying Person in advance as to the selection of such counsel; (2) reimbursable fees and expenses of such separate counsel shall be detailed and supported in a manner reasonably acceptable to the Indemnifying Person (but nothing herein shall be deemed to require the furnishing to the Indemnifying Person of any information, including, without limitation, computer print-outs of lawyers' daily time entries, to the extent that, in the judgment of such counsel, furnishing such information might reasonably be expected to result in a waiver of any attorney-client privilege); and (3) the Company and the Holders shall cooperate in monitoring and controlling the fees and expenses of separate counsel for Indemnified Persons for which the Indemnifying Person is liable hereunder, and the Indemnified Person shall use every reasonable effort to cause such separate counsel to minimize the duplication of activities as between themselves and counsel to the Indemnifying Person. The Indemnifying Person shall not be liable for any settlement of any litigation or proceeding effected without the written consent of the Indemnifying Person, but if settled with such consent or if there be a final judgment against the Indemnified Person, the Indemnifying Person agrees, subject to the provisions of this Section 4, to indemnify the Indemnified Person from and against any loss, damage, liability or expenses by reason of such settlement or judgment. The Indemnifying Person shall not, without the prior written consent of the Indemnified Persons, effect any settlement of any pending or threatened litigation, proceeding or claim in respect of which indemnity has been properly sought by the Indemnified Persons hereunder, unless such settlement includes an unconditional release by the claimant of all Indemnified Persons from all liability with respect to claims which are the subject matter of such litigation, proceeding or claim. 16 (d) If the indemnification provided for in this Section 4 is unavailable to or insufficient to hold harmless an Indemnified Person under this Section 4 in respect of any losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof) referred to therein, then each Indemnifying Person under this Section 4 shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other from the sale of the Registrable Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each Indemnifying Person shall contribute to such amount paid or payable by such Indemnified Person in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of each Indemnifying Person, if any, on the one hand and the Indemnified Person on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Holders on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 4. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental proceedings) in respect thereof) referred to in this Section 4 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such actions, suits or proceedings (including governmental proceedings) or claims, provided that the provisions of this Section 4 have been complied with (in all material respects) in respect of any separate counsel for such Indemnified Person. Notwithstanding the provisions of this Section 4, no Holder shall be required to contribute any amount greater than the excess of the amount by which the total received by such Holder with respect to the sale of its Registrable Securities pursuant to a Shelf Registration Statement exceeds the sum of (A) the amount paid by such Holder for such Registrable Securities plus (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations in this Section 4 to contribute are several in proportion to their respective obligations and not joint. The agreement with respect to contribution contained in this Section 4 shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any Holder, and shall survive any termination of this Agreement. 5. Miscellaneous. 17 (a) Rule 144 and Rule 144A. For so long as the Company is subject to the reporting requirements of Section 13 or 15 of the Exchange Act, the Company covenants that it will file the reports required to be filed by it under the Act and Section 13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the Commission thereunder. If the Company ceases to be so required to file such reports, the Company covenants that it will, upon the request of any Holder of Registrable Securities, (i) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the Act, (ii) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the Act and (iii) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the Act within the limitation of the exemptions provided by (A) Rule 144 under the Act, as such Rule may be amended from time to time, (B) Rule 144A under the Act, as such Rule may be amended from time to time or (C) any similar rules or regulations hereafter adopted by the Commission. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. (b) No Inconsistent Agreements. The Company has not entered into and the Company will not after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not and will not for the term of this Agreement in any way conflict with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Majority Holders of the Registrable Securities affected by such amendment, modification, supplement, waiver or departure. Without the consent of the Holder of each Security, however, no modification may change the provisions relating to the payment of Additional Dividends. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first-class mail, telecopier or any courier guaranteeing overnight delivery: (a) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 5(d), which address initially is the address set forth in the Purchase Agreement with respect to the Initial Purchasers; and (b) if to the Company, initially at the Company's address set forth in the Purchase Agreement, and thereafter at such other address of which notice is given in accordance with the provisions of this Section 5(d). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; two (2) Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. 18 (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such person shall be entitled to receive the benefits hereof. (f) Third Party Beneficiaries. The Initial Purchasers (even if the Initial Purchasers are not Holders of Registrable Securities) shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent they deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. Each Holder of Registrable Securities shall be a third party beneficiary to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights hereunder. (g) Specific Performance. Without limiting the remedies available to the Initial Purchasers and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under Section 2 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Section 2 hereof. (h) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (i) Headings. The headings in this Agreement are for the convenience of reference only and shall not limit or otherwise affect the meaning hereof. (j) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. (k) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 19 (l) Entire Agreement. This Agreement and other writings referred to herein (including the Purchase Agreement) represent the entire agreement among the parties hereto with respect to the subject matter hereof and supercedes and replaces any and all prior agreements and understandings, whether oral or written, with respect thereto. 20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CMS ENERGY CORPORATION By: /s/ Thomas J. Webb ---------------------- Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: CITIGROUP GLOBAL MARKETS INC., for itself and as Representative of the Initial Purchasers By: /s/ Jane Sadowsky ------------------- Name: Jane Sadowsky Title: Managing Director MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, for itself and as Representative of the Initial Purchasers By: /s/ Jeff Kulik ---------------------- Name: Jeff Kulik Title: Vice President EX-4.(M) 10 k82154aexv4wxmy.txt FOURTH AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 4(m) EXECUTION COPY - -------------------------------------------------------------------------------- $190,000,000 FOURTH AMENDED AND RESTATED CREDIT AGREEMENT Dated as of December 8, 2003, Among CMS ENERGY CORPORATION as a Borrower CMS ENTERPRISES COMPANY as a Borrower THE BANKS NAMED HEREIN as Banks CITICORP USA, INC. as Administrative Agent and Collateral Agent JPMORGAN CHASE BANK as Syndication Agent and BANK ONE, NA, UNION BANK OF CALIFORNIA, N.A. AND WACHOVIA BANK, NATIONAL ASSOCIATION as Documentation Agents ---------------------------- CITIGROUP GLOBAL MARKETS INC. AND JPMORGAN CHASE BANK as Joint Book Managers and Joint Lead Arrangers - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Section Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms.............................................. 2 SECTION 1.02. Computation of Time Periods; Construction.......................... 21 SECTION 1.03. Accounting Terms................................................... 21 ARTICLE II COMMITMENTS, LOANS, FEES, PREPAYMENTS AND OUTSTANDINGS SECTION 2.01. Making Loans....................................................... 22 SECTION 2.02. Fees............................................................... 22 SECTION 2.03. Commitments; Mandatory Prepayments................................. 23 SECTION 2.04. Computations of Outstandings....................................... 23 ARTICLE III LOANS SECTION 3.01. Loans.............................................................. 24 SECTION 3.02. Conversion of Loans................................................ 25 SECTION 3.03. Interest Periods................................................... 25 SECTION 3.04. Other Terms Relating to the Making and Conversion of Loans......... 25 SECTION 3.05. Repayment of Loans; Interest....................................... 27 ARTICLE IV PAYMENTS, COMPUTATIONS AND YIELD PROTECTION SECTION 4.01. Payments and Computations.......................................... 28 SECTION 4.02. Interest Rate Determination........................................ 30 SECTION 4.03. Prepayments........................................................ 30 SECTION 4.04. Yield Protection................................................... 30 SECTION 4.05. Sharing of Payments, Etc........................................... 32 SECTION 4.06. Taxes.............................................................. 32 SECTION 4.07. Apportionment of Payments.......................................... 34 SECTION 4.08. Proceeds of Collateral............................................. 35 ARTICLE V CONDITIONS PRECEDENT SECTION 5.01. Conditions Precedent to the Effectiveness of this Agreement........ 35 SECTION 5.02. Conditions Precedent to Each Extension of Credit................... 38 SECTION 5.03. Conditions Precedent to Certain Extensions of Credit............... 38 SECTION 5.04. Reliance on Certificates........................................... 39
i ARTICLE VI REPRESENTATIONS AND WARRANTIES SECTION 6.01. Representations and Warranties of the Borrowers.................... 39 ARTICLE VII COVENANTS OF THE BORROWERS SECTION 7.01. Affirmative Covenants.............................................. 43 SECTION 7.02. Negative Covenants................................................. 46 SECTION 7.03. Reporting Obligations.............................................. 54 ARTICLE VIII DEFAULTS SECTION 8.01. Events of Default.................................................. 58 SECTION 8.02. Remedies........................................................... 60 ARTICLE IX THE AGENTS SECTION 9.01. Authorization and Action........................................... 60 SECTION 9.02. Indemnification.................................................... 62 SECTION 9.03. Concerning the Collateral and the Loan Documents................... 62 SECTION 9.04. Release of Guarantors.............................................. 64 ARTICLE X MISCELLANEOUS SECTION 10.01. Amendments, Etc................................................... 64 SECTION 10.02. Notices, Etc...................................................... 65 SECTION 10.03. No Waiver of Remedies............................................. 65 SECTION 10.04. Costs, Expenses and Indemnification............................... 65 SECTION 10.05. Right of Set-off.................................................. 66 SECTION 10.06. Binding Effect.................................................... 67 SECTION 10.07. Assignments and Participation..................................... 67 SECTION 10.08. Confidentiality................................................... 70 SECTION 10.09. Waiver of Jury Trial.............................................. 71 SECTION 10.10. GOVERNING LAW; SUBMISSION TO JURISDICTION......................... 71 SECTION 10.11. Relation of the Parties; No Beneficiary........................... 71 SECTION 10.12. Execution in Counterparts......................................... 72 SECTION 10.13. Survival of Agreement............................................. 72 SECTION 10.14. Platform.......................................................... 72 ARTICLE XI CO-BORROWER PROVISIONS SECTION 11.01. Appointment....................................................... 73

ii SECTION 11.02. Separate Actions.................................................. 74 SECTION 11.03. Obligations Absolute and Unconditional............................ 74 SECTION 11.04. Waivers and Acknowledgements...................................... 74 SECTION 11.05. Contribution Among Borrowers...................................... 75 SECTION 11.06. Subrogation....................................................... 76 SECTION 11.07. Subordination..................................................... 76 ARTICLE XII NO NOVATION; REFERENCES TO THIS AGREEMENT IN LOAN DOCUMENTS SECTION 12.01. No Novation....................................................... 77 SECTION 12.02. References to This Agreement In Loan Documents.................... 77

iii Exhibits EXHIBIT A - Form of Notice of Borrowing EXHIBIT B - Form of Notice of Conversion EXHIBIT C - Form of Opinion of Belinda Foxworth, Esq., counsel to the Borrowers EXHIBIT D - Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the Borrowers EXHIBIT E - Form of Compliance Schedule EXHIBIT F - Form of Lender Assignment EXHIBIT G - Terms of Subordination (Junior Subordinated Debt) EXHIBIT H - Terms of Subordination (Guaranty of Hybrid Preferred Securities) EXHIBIT I - Form of Amended and Restated Guaranty EXHIBIT J - Form of Third Amended and Restated Pledge and Security Agreement (Company) EXHIBIT K - Form of Pledge and Security Agreement (Enterprises and Grantors) EXHIBIT L - AIG Pledge Agreement EXHIBIT M - Intercreditor Agreement Schedules COMMITMENT SCHEDULE SCHEDULE I Certain Debt SCHEDULE II Pledged Ownership Interests SCHEDULE III Notice Addresses ATTACHMENT A Reaffirmation iv FOURTH AMENDED AND RESTATED CREDIT AGREEMENT Dated as of December 8, 2003 THIS FOURTH AMENDED AND RESTATED CREDIT AGREEMENT (the "AGREEMENT") is made by and among: (i) CMS Energy Corporation, a Michigan corporation (the "COMPANY"), (ii) CMS Enterprises Company, a Michigan corporation ("ENTERPRISES" and, together with the Company, the "BORROWERS"), (iii) the banks (the "BANKS") listed on the signature pages hereof and the other Lenders (as hereinafter defined) from time to time party hereto, (iv) Citicorp USA, Inc. ("CUSA"), as administrative agent (the "ADMINISTRATIVE AGENT") for the Lenders hereunder and as collateral agent (the "COLLATERAL AGENT") for the Lenders hereunder, and (v) JPMorgan Chase Bank ("JPMORGAN CHASE"), as syndication agent (the "SYNDICATION AGENT"), and Bank One, NA, Union Bank of California, N.A. and Wachovia Bank, National Association, as documentation agents (the "DOCUMENTATION AGENTS"). PRELIMINARY STATEMENTS The Company has requested that the Banks amend and restate the Existing Credit Agreement (as hereafter defined) to provide the credit facility hereinafter described in the amount and on the terms and conditions set forth herein and to add Enterprises as a "Borrower" under the credit facility provided herein. The Banks have so agreed on the terms and conditions set forth herein, and the Agents have agreed to act as agents for the Lenders on such terms and conditions. The parties hereto acknowledge and agree that neither Consumers (as hereinafter defined) nor any of its Subsidiaries (as hereinafter defined) will be a party to, or will in any way be bound by any provision of, this Agreement or any other Loan Document (as hereinafter defined), and that no Loan Document will be enforceable against Consumers or any of its Subsidiaries or their respective assets. Accordingly, the parties hereto agree as follows: 1 ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "ABR LOAN" means a Loan that bears interest as provided in Section 3.05(b)(i). "ACCOUNTING CHANGE" is defined in Section 1.03. "ADJUSTED LIBO RATE" means, for each Interest Period for each Eurodollar Rate Loan made as part of the same Borrowing, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "ADMINISTRATIVE QUESTIONNAIRE" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "AFFILIATE" means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control another entity if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities, by contract, or otherwise. "AGENT" means, as the context may require, the Administrative Agent, the Collateral Agent, the Syndication Agent or the Documentation Agents, and "Agents" means any or all of the foregoing. "AIG PLEDGE AGREEMENT" means that certain Pledge and Security Agreement, dated as of January 8, 2003, by and among Enterprises and the other grantors parties thereto in favor of American Home Assurance Company, as collateral agent, a copy of which is attached hereto as Exhibit L, as amended, restated, supplemented or otherwise modified from time to time. "ALTERNATE BASE RATE" means, for any day, a rate per annum equal to the highest of (a) the Prime Rate in effect on such day, (b) 1/2 of one percent above the CD Rate, and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate, the CD Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate, CD Rate or the Federal Funds Effective Rate, respectively. "APPLICABLE LENDING OFFICE" means, with respect to each Lender, at the address specified for such Lender on its signature page to this Agreement or in the Lender 2 Assignment pursuant to which it became a Lender, as applicable, or at any office, branch, subsidiary or affiliate of such Lender specified in a notice received by the Administrative Agent and the Borrowers from such Lender. "APPLICABLE MARGIN" means, on any date of determination with respect to any Loans, the per annum rate specified in the table below for such Loans:
Applicable Margin - ------------------------------------- ~~ABR Loans 2.25% Eurodollar Rate Loans 3.25%~~
"APPLICABLE RATE" means: (i) in the case of each ABR Loan, a rate per annum equal at all times to the sum of the Alternate Base Rate in effect from time to time plus the Applicable Margin; and (ii) in the case of each Eurodollar Rate Loan comprising part of the same Borrowing, a rate per annum during each Interest Period equal at all times to the sum of the Adjusted LIBO Rate for such Interest Period plus the Applicable Margin. "ARRANGERS" means Citigroup Global Markets Inc. and JPMorgan Chase. "AVAILABLE COMMITMENT" means, for each Lender on any day, the unused portion of such Lender's Commitment, computed after giving effect to all Extensions of Credit or prepayments to be made on such day and the application of proceeds therefrom. "AVAILABLE COMMITMENTS" means the aggregate of the Lenders' Available Commitments. "BANKRUPTCY CODE" means Title 11 of the United States Code (11 U.S.C. Sections 101 et seq.), as amended from time to time, and any successor statute. "BOARD" means the Board of Governors of the Federal Reserve System of the United States of America. "BORROWING" means a borrowing consisting of Loans of the same Type, having the same Interest Period and made or Converted on the same day by the Lenders, ratably in accordance with their respective Percentages. Any Borrowing consisting of Loans of a particular Type may be referred to as being a Borrowing of such "TYPE". All Loans to the same Borrower of the same Type, having the same Interest Period and made or Converted on the same day shall be deemed a single Borrowing hereunder until repaid or next Converted. "BUSINESS DAY" means a day of the year on which banks are not required or authorized to close in New York City or Detroit, Michigan, and, if the applicable 3 Business Day relates to any Eurodollar Rate Loan, on which dealings are carried on in the London interbank market. "CASH DIVIDEND INCOME" means, for any period, the amount of all cash dividends received by the Company from its Subsidiaries during such period that are paid out of the net income or loss (without giving effect to: any extraordinary gains in excess of $25,000,000, the amount of any write-off or write-down of assets, including, without limitation, write-offs or write-downs related to the sale of assets, impairment of assets and loss on contracts, in each case in accordance with GAAP consistently applied, and up to $200,000,000 of other non-cash write-offs) of such Subsidiaries during such period. "CD RATE" means the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank, in either case, adjusted to the nearest 1/16 of one percent or, if there is no nearest 1/16 of one percent, to the next higher 1/16 of one percent. "CHANGE OF CONTROL" means (a) any "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the then outstanding voting capital stock of the Company, or (b) the majority of the board of directors of the Company shall fail to consist of Continuing Directors, or (c) a consolidation or merger of the Company shall occur after which the holders of the outstanding voting capital stock of the Company immediately prior thereto hold less than 50% of the outstanding voting capital stock of the surviving entity, or (d) more than 50% of the outstanding voting capital stock of the Company shall be transferred to any entity of which the Company owns less than 50% of the outstanding voting capital stock or (e) the Company shall cease to own, directly or indirectly, 80% of the outstanding capital stock of Enterprises. "CITIBANK" means Citibank, N.A., a national banking association. "CITIGROUP PARTIES" means Citibank, CUSA, Citigroup Global Markets Inc. and each of their respective Affiliates, and each of their respective officers, directors, employees, agents, advisors, and representatives. "CLOSING DATE" means December 8, 2003. "CMS GENERATION" means CMS Generation Co., a Michigan corporation, all of whose common stock is on the Closing Date owned by Enterprises and its permitted successors. 4 "COLLATERAL" means all property and interests in property now owned or hereafter acquired by any Loan Party upon which a Lien is granted under any of the Loan Documents. "COMMITMENT" means, for each Lender, the obligation of such Lender to make Loans to the Borrowers in an aggregate amount no greater than the amount set forth opposite such Lender's name on the Commitment Schedule under the heading "Commitment" or, if such Lender has entered into one or more Lender Assignments, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 10.07(h), in each case as such amount may be modified from time to time pursuant to Section 2.03. "COMMITMENTS" means the total of the Lenders' Commitments hereunder. As of the Closing Date the aggregate of all of the Lenders' Commitments equals $190,000,000. "COMMITMENT FEE MARGIN" means a per annum rate equal to 0.50%. "COMMITMENT SCHEDULE" means the Schedule identifying each Lender's Commitment as of the Closing Date attached hereto and identified as such. "COMMITMENT TERMINATION DATE" means the earlier of (i) the Maturity Date, and (iii) the date of termination or reduction in whole of the Commitments pursuant to Section 2.03 or 8.02. "COMMUNICATIONS" is defined in Section 10.14. "COMPANY INTEREST EXPENSE" means at any date, the total interest expense in respect of Debt of the Company for the four calendar quarters immediately preceding such date, including, without duplication, (i) interest expense attributable to capital leases, (ii) amortization of debt discount, (iii) capitalized interest, (iv) cash and noncash payments, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs under interest rate swap, "cap", "collar" or other hedging agreements (including amortization of discount) and (vii) interest expense in respect of obligations of Persons deemed to be Debt of the Company under clause (ix) of the definition of Debt, provided, however that Company Interest Expense shall exclude (1) any costs (including, without limitation, any prepayment or option premium or expenses incurred in connection with the Company's reset put securities due July 1, 2003) otherwise included in interest expense recognized on early retirement of debt and (2) any interest or dividends paid on Hybrid Preferred Securities. "CONFIDENTIAL INFORMATION" has the meaning assigned to that term in Section 10.08. "CONSOLIDATED DEBT" means, without duplication, as determined on a consolidated basis in accordance with GAAP, at any date of determination, the sum of the aggregate Debt of the Company plus the aggregate debt (as such term is construed in accordance with GAAP) of the Consolidated Subsidiaries; provided, however, that: 5 (a) Consolidated Debt shall not include any Support Obligation described in clause (iv) or (v) of the definition thereof if such Support Obligation or the primary obligation so supported is not fixed or conclusively determined or is not otherwise reasonably quantifiable as of the date of determination; (b) Consolidated Debt shall not include (i) any Junior Subordinated Debt owned by any Hybrid Preferred Securities Subsidiary or (ii) any guaranty by the Company of payments with respect to any Hybrid Preferred Securities, provided that such guaranty is subordinated to the rights of the Lenders hereunder and under the other Loan Documents pursuant to terms of subordination substantially similar to those set forth in Exhibit H, or pursuant to other terms and conditions satisfactory to the Required Lenders; (c) Consolidated Debt shall not include any debt issued by the Company that shall be (i) subordinated to the Obligations of the Loan Parties on terms acceptable to the Administrative Agent and (ii) required to be converted only into non-redeemable common stock of the Company; (d) with respect to any Support Obligations provided by the Company in connection with a purchase or sale by MS&T or its Subsidiaries of natural gas, natural gas liquids, gas condensates, electricity, oil, propane, coal, any other commodity, weather derivatives or any derivative instrument with respect to any commodity with any other Person (a "COUNTERPARTY"), Consolidated Debt shall include only the excess, if any, of (A) the aggregate amount of any Support Obligations provided by the Company in respect of MS&T's or any of its Subsidiary's obligations under any such purchase or sale transaction (a "COVERING TRANSACTION") entered into by MS&T or any of its Subsidiaries in connection with such purchase or sale over (B) the aggregate amount of (i) any Support Obligations provided by the direct or indirect parent company of such Counterparty (the "COUNTERPARTY GUARANTOR") and (ii) any irrevocable letter of credit provided by any financial institution for the account of such Counterparty or Counterparty Guarantor, in each case for the benefit of MS&T or any of its Subsidiaries in support of such Counterparty's payment obligations to MS&T or such Subsidiary arising from such purchase or sale, provided that (x) the senior, unsecured, non-credit enhanced indebtedness of such Counterparty Guarantor or such financial institution (as the case may be) is rated BBB- (or its equivalent) or higher by any two of S&P, Fitch and Moody's, provided that in the event that such Counterparty Guarantor has no such rated indebtedness, Dun & Bradstreet Inc. has rated such Counterparty Guarantor at least investment grade, (y) no default by such Counterparty Guarantor in respect of any such Support Obligations provided by such Counterparty Guarantor has occurred and is continuing and (z) such Counterparty Guarantor is not the Company or any Affiliate of the Company or any of its Subsidiaries; (e) Consolidated Debt shall not include any Project Finance Debt of the Company or any Consolidated Subsidiary; and 6 (f) Consolidated Debt shall not include the principal amount of any Securitized Bonds. "CONSOLIDATED EBITDA" means, with reference to any period, the pretax operating income of the Company and its Subsidiaries ("PRETAX OPERATING INCOME") for such period plus, to the extent deducted in determining Pretax Operating Income (without duplication), (i) depreciation, depletion and amortization, and (ii) any non-cash write-offs and write-downs contained in the Company's Pretax Operating Income, including, without limitation, write-offs or write-downs related to the sale of assets, impairment of assets and loss on contracts, in each case in accordance with GAAP consistently applied, all calculated for the Company and its Subsidiaries on a consolidated basis for such period; provided, however that Consolidated EBITDA shall not include any operating income attributable to that portion of the revenues of Consumers dedicated to the repayment of the Securitized Bonds. "CONSOLIDATED SUBSIDIARY" means any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Company in accordance with GAAP. "CONSUMERS" means Consumers Energy Company, a Michigan corporation, all of whose common stock is on the Closing Date owned by the Company. "CONSUMERS CREDIT FACILITY" means, collectively, Consumer's existing (i) $140,000,000 term loan facility and (ii) $400,000,000 revolving loan facility, as in effect on the date hereof. "CONSUMERS DIVIDEND RESTRICTION" means any restriction enacted or imposed after October 1, 1992 upon the ability of Consumers to pay cash dividends to the Company in respect of Consumers' capital stock, whether such restriction is imposed by statute, regulation, decisions or rulings by the Michigan Public Service Commission or the Federal Energy Regulatory Commission (or any successor agency or agencies), final judgments of any court of competent jurisdiction, indentures, agreements, contracts or restrictions to which Consumers is a party or by which it is bound or otherwise; provided, that no restriction on such dividends existing on October 1, 1992 shall be a Consumers Dividend Restriction at any time; provided, further, that any such restriction enacted or imposed by the Michigan Public Service Commission limiting such dividends to an amount not less than $190,000,000 during any twelve-month period shall not be a Consumers Dividend Restriction at any time. "CONTINUING DIRECTOR" means, as of any date of determination, any member of the board of directors of the Company who (a) was a member of such board of directors on the Closing Date, or (b) was nominated for election or elected to such board of directors with the approval of the Continuing Directors who were members of such board of directors at the time of such nomination or election; provided that an individual who is so elected or nominated in connection with a merger, consolidation, acquisition or similar transaction shall not be a Continuing Director unless such individual was a Continuing Director prior thereto. 7 "CONVERSION", "CONVERT" or "CONVERTED" refers to a conversion of Loans of one Type into Loans of another Type, or to the selection of a new, or the renewal of the same, Interest Period for Loans, as the case may be, pursuant to Section 3.02 or 3.03. "DEBT" means, for any Person, without duplication, any and all indebtedness, liabilities and other monetary obligations of such Person (whether for principal, interest, fees, costs, expenses or otherwise, and whether contingent or otherwise) (i) for borrowed money or evidenced by bonds, debentures, notes or other similar instruments, (ii) to pay the deferred purchase price of property or services (except trade accounts payable arising in the ordinary course of business which are not overdue), (iii) as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (iv) under reimbursement or similar agreements with respect to letters of credit issued thereunder (except reimbursement obligations and letters of credit that are cash collateralized), (v) under any interest rate swap, "cap", "collar" or other hedging agreements; provided, however, for purposes of the calculation of Debt for this clause (v) only, the actual amount of Debt of such Person shall be determined on a net basis to the extent such agreements permit such amounts to be calculated on a net basis, (vi) to pay rent or other amounts under leases entered into in connection with sale and leaseback transactions involving assets of such Person being sold in connection therewith, (vii) arising from any accumulated funding deficiency (as defined in Section 412(a) of the Internal Revenue Code of 1986, as amended) for a Plan, (viii) arising in connection with any withdrawal liability under ERISA to any Multiemployer Plan and (ix) arising from (A) direct or indirect guaranties in respect of, and obligations to purchase or otherwise acquire, or otherwise to warrant or hold harmless, pursuant to a legally binding agreement, a creditor against loss in respect of, Debt of others referred to in clauses (i) through (viii) above and (B) other guaranty or similar financial obligations in respect of the performance of others, including Support Obligations. Notwithstanding the foregoing, solely for purposes of the calculation required under Section 7.01(j)(ii), Debt shall not include any Junior Subordinated Debt issued by the Company and owned by any Hybrid Preferred Securities Subsidiary. "DEFAULT" means an event that, with the giving of notice or lapse of time or both, would constitute an Event of Default. "DEFAULT RATE" means a rate per annum equal at all times to (i) in the case of any amount of principal of any Loan that is not paid when due, 2% per annum above the Applicable Rate required to be paid on such Loan immediately prior to the date on which such amount became due, and (ii) in the case of any amount of interest, fees or other amounts payable hereunder that is not paid when due, 2% per annum above the Applicable Rate for an ABR Loan in effect from time to time. "DISCLOSED MATTERS" is defined in Section 6.01(f). "DIVIDEND COVERAGE RATIO" means, at any date, the ratio of (i) Pro Forma Dividend Amounts to (ii) Company Interest Expense. "DOLLARS" and the sign "$" each means lawful money of the United States. 8 "ELIGIBLE BANK" means any state or federally chartered bank or any state-licensed foreign bank branch or agency. "ENTERPRISES" means CMS Enterprises Company, a Michigan corporation, all of whose common stock is on the Closing Date owned by the Company and its permitted successors. "ENTERPRISES CREDIT AGREEMENT" means that certain $150,000,000 Credit Agreement, dated as of July 12, 2002, by and among Enterprises, as borrower, the Borrower, the lenders from time to time parties thereto, and Citicorp USA, Inc., as administrative agent and as collateral agent, which agreement has been paid in full and terminated. "ENVIRONMENTAL LAWS" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any governmental agency or authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Substance or to health and safety matters. "ENVIRONMENTAL LIABILITY" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Company or any of its Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Substances, (c) exposure to any Hazardous Substances, (d) the release or threatened release of any Hazardous Substances into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "EQUITY DISTRIBUTIONS" means, for any period, the aggregate amount of cash received by the Company from its Subsidiaries during such period that are paid out of proceeds from the sale of common equity of Subsidiaries of the Company. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE" means, with respect to any Person, any trade or business (whether or not incorporated) that is a member of a commonly controlled trade or business under Sections 414(b), (c), (m) and (o) of the Internal Revenue Code of 1986, as amended. "EURODOLLAR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "EURODOLLAR RATE LOAN" means a Loan that bears interest as provided in Section 3.05(b)(ii). 9 "EVENT OF DEFAULT" is defined in Section 8.01. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXISTING CREDIT AGREEMENT" means that certain $5,000,000 Third Amended and Restated Credit Agreement, dated as of September 12, 2003, among the Company, the lenders from time to time parties thereto, and CUSA, as administrative agent, as the same may have been amended, restated, supplemented or otherwise modified from time to time. "EXTENSION OF CREDIT" means the making of a Borrowing (including any Conversion). "FAIR MARKET VALUE" means, with respect to any asset, the value of the consideration obtainable in a sale of such asset in the open market, assuming a sale by a willing seller to a willing purchaser dealing at arm's length and arranged in an orderly manner over a reasonable period of time, each having reasonable knowledge of the nature and characteristics of such asset, neither being under any compulsion to act, and, if in excess of $50,000,000, as determined in good faith by the Board of Directors of the Company. "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FEE LETTER" is defined in Section 2.02(b). "FITCH" means Fitch, Inc. or any successor thereto. "FOREIGN LENDER" means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrowers are located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "FOREIGN SUBSIDIARY" is defined in Section 7.01(l). "GAAP" is defined in Section 1.03. "GOVERNMENTAL APPROVAL" means any authorization, consent, approval, license, permit, certificate, exemption of, or filing or registration with, any governmental authority or other legal or regulatory body, required in connection with (i) the execution, delivery, or performance of any Loan Document by any Loan Party, (ii) the grant and perfection of any Lien in favor of the Collateral Agent contemplated by the Loan 10 Documents, or (iii) the exercise by any Agent (on behalf of the Lenders) of any right or remedy provided for under the Loan Documents. "GRANTING LENDER" is defined in Section 10.07(f). "GRANTOR(S)" means each Guarantor and each of the following Subsidiaries of Enterprises: CMS Capital, L.L.C., a Michigan limited liability company, CMS Electric & Gas, L.L.C. (formerly known as CMS Electric and Gas Company), a Michigan limited liability company, MS&T, CMS International Ventures, L.L.C., a Michigan limited liability company, Dearborn Industrial Energy, L.L.C., a Michigan limited liability company, Dearborn Industrial Generation, L.L.C., a Michigan limited liability company, and CMS Generation Michigan Power L.L.C., a Michigan limited liability company. "GUARANTOR" means CMS Generation, CMS Gas Transmission Company, a Michigan corporation, and each other Restricted Subsidiary that has delivered, or shall be obligated to deliver, a guaranty under and pursuant to the terms of Section 7.01(l). "GUARANTY" means that certain Amended and Restated Guaranty (and any and all supplements thereto) executed from time to time by each Guarantor in favor of the Collateral Agent for the benefit of itself and the Lenders, in substantially the form of Exhibit I attached hereto, as amended, restated, supplemented or otherwise modified from time to time. "HAZARDOUS SUBSTANCE" means any waste, substance, or material identified as hazardous, dangerous or toxic by any office, agency, department, commission, board, bureau, or instrumentality of the United States or of the State or locality in which the same is located having or exercising jurisdiction over such waste, substance or material. "HYBRID PREFERRED SECURITIES" means any preferred securities issued by a Hybrid Preferred Securities Subsidiary, where such preferred securities have the following characteristics: (i) such Hybrid Preferred Securities Subsidiary lends substantially all of the proceeds from the issuance of such preferred securities to the Company or a wholly-owned direct or indirect Subsidiary of the Company in exchange for Junior Subordinated Debt issued by the Company or such wholly-owned direct or indirect Subsidiary, respectively; (ii) such preferred securities contain terms providing for the deferral of interest payments corresponding to provisions providing for the deferral of interest payments on the Junior Subordinated Debt; and (iii) the Company or a wholly-owned direct or indirect Subsidiary of the Company (as the case may be) makes periodic interest payments on the Junior Subordinated Debt, which interest payments are in turn used by the Hybrid Preferred Securities Subsidiary to make corresponding payments to the holders of the preferred securities. 11 "HYBRID PREFERRED SECURITIES SUBSIDIARY" means any Delaware statutory trust (or similar entity) (i) all of the common equity interest of which is owned (either directly or indirectly through one or more wholly-owned Subsidiaries of the Company or Consumers) at all times by the Company or a wholly-owned direct or indirect Subsidiary of the Company, (ii) that has been formed for the purpose of issuing Hybrid Preferred Securities and (iii) substantially all of the assets of which consist at all times solely of Junior Subordinated Debt issued by the Company or a wholly-owned direct or indirect Subsidiary of the Company (as the case may be) and payments made from time to time on such Junior Subordinated Debt. "INDEMNIFIED PERSON" is defined in Section 10.04(b). "INDENTURE" means that certain Indenture, dated as of September 15, 1992, between the Company and the Trustee, as supplemented by the First Supplemental Indenture, dated as of October 1, 1992, the Second Supplemental Indenture, dated as of October 1, 1992, the Third Supplemental Indenture, dated as of May 6, 1997, the Fourth Supplemental Indenture, dated as of September 26, 1997, the Fifth Supplemental Indenture, dated as of November 4, 1997, the Sixth Supplemental Indenture, dated as of January 13, 1998, the Seventh Supplemental Indenture, dated as of January 25, 1999, the Eighth Supplemental Indenture, dated as of February 3, 1999, the Ninth Supplemental Indenture, dated as of June 22, 1999, the Tenth Supplemental Indenture, dated as of October 12, 2000, the Eleventh Supplemental Indenture, dated as of March 29, 2001, and the Twelfth Supplemental Indenture, dated as of July 2, 2001, as said Indenture may be further amended or otherwise modified from time to time in accordance with its terms. "INTER-BORROWER DEBT" is defined in Section 11.07. "INTERCREDITOR AGREEMENT" means that certain Intercreditor and Lien Subordination Agreement, dated as of January 8, 2003, by and among Citicorp USA, Inc., as senior collateral agent, American Home Assurance Company, individually and as junior collateral agent, and St. Paul Fire and Marine Insurance Company, individually, a copy of which is attached hereto as Exhibit M, as amended, restated, supplemented or otherwise modified from time to time. "INTEREST PERIOD" is defined in Section 3.03. "JUNIOR SUBORDINATED DEBT" means any unsecured Debt of the Company or a Subsidiary of the Company (i) issued in exchange for the proceeds of Hybrid Preferred Securities and (ii) subordinated to the rights of the Lenders hereunder and under the other Loan Documents pursuant to terms of subordination substantially similar to those set forth in Exhibit G, or pursuant to other terms and conditions satisfactory to the Required Lenders. "LENDER ASSIGNMENT" is defined in Section 10.07(e). "LENDERS" means the Banks listed on the signature pages hereof, together with their successors and permitted assigns. 12 "LIBO RATE" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO RATE" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "LIEN" means any lien, security interest, or other charge or encumbrance (including the lien or retained security title of a conditional vendor) of any kind, or any other type of arrangement intended or having the effect of conferring upon a creditor a preferential interest upon or with respect to any of its properties of any character (including capital stock and other equity interests, intercompany obligations and accounts). "LOAN" means a loan by a Lender to a Borrower pursuant to Section 2.01, and refers to an ABR Loan or a Eurodollar Rate Loan (each of which shall be a "TYPE" of Loan). All Loans by a Lender to the same Borrower of the same Type having the same Interest Period and made or Converted on the same day shall be deemed to be a single Loan by such Lender until repaid or next Converted. "LOAN DOCUMENTS" means this Agreement, any Promissory Notes, the Fee Letter, the Guaranty, the Pledge Agreements, the Intercreditor Agreement and all other agreements, instruments and documents now or hereafter executed and/or delivered pursuant hereto or thereto. "LOAN PARTY" is defined in Section 5.01(a)(i). "MATERIAL ADVERSE CHANGE" means any event, development or circumstance that has had or could reasonably be expected to have a material adverse effect on (a) the business, assets, property, financial condition, results of operations or prospects of the Company and its Subsidiaries, considered as a whole, (b) the Borrowers' and the Guarantors' ability, taken as a whole, to perform their obligations under this Agreement or any other Loan Document to which it is or will be a party or (c) the validity or enforceability of any Loan Document or the rights or remedies of any Agent or the Lenders thereunder; provided that the occurrence of any Restatement Event shall not constitute a Material Adverse Change. 13 "MATURITY DATE" means the earlier to occur of (i) November 14, 2004, if the Company shall not have refinanced the Company's $175,800,000 senior notes due November 2004 on or prior to November 14, 2004 (provided that any refinancing indebtedness in respect thereof (or any subsequent refinancing thereof) shall have a maturity not earlier than December 3, 2004)) and (ii) December 3, 2004. "MEASUREMENT QUARTER" is defined in Section 7.01(i). "MOODY'S" means Moody's Investors Service, Inc. or any successor thereto. "MONETIZATION ENTITY" is defined in the definition of "Monetization Transaction". "MONETIZATION TRANSACTION" means a series of interrelated steps by which (i) all or any portion of CMS Generation's ownership interest in certain wholly-owned Delaware limited liability companies which own, directly or indirectly, interests in the Loy Yang project consisting of the 2,000-megawatt Loy Yang power plant and adjacent coal mine in Australia and related assets and (ii) all or any portion of CMS Gas Transmission Company's ownership interests in CMS Antrim Gas LLC, CMS Grand Lacs LLC, CMS Bay Area Pipeline LLC, CMS Jackson Pipeline Company and its interests in the Litchfield Lateral Gas pipeline and related assets are transferred to a limited liability company owned, directly or indirectly, by the Company (such special purpose entity the "MONETIZATION ENTITY"), and (iii) non-voting preferred interests in the Monetization Entity are acquired directly or indirectly by any Person (other than an Affiliate of the Company) for cash consideration not less than the Fair Market Value thereof. "MS&T" means CMS Marketing, Services and Trading Company, a Michigan corporation, all of whose capital stock is on the Closing Date owned by Enterprises. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NET PROCEEDS" means, with respect to any sale, assignment or other disposition of (but not the lease or license of) any property, or with respect to any sale or issuance of securities or incurrence of Debt, by any Person, gross cash proceeds received by such Person or any Subsidiary of such Person from such sale, assignment, disposition, issuance or incurrence (including cash received as consideration for the assumption or incurrence of liabilities incurred in connection with or in anticipation of such transaction) after (i) provision for all income or other taxes measured by or resulting from such transaction, (ii) payment of all customary underwriting commissions, auditing and legal fees, printing costs, rating agency fees and other customary and reasonable fees and expenses incurred by such Person in connection with such transaction, (iii) all amounts used to repay Debt (and any premium or penalty thereon) secured by a Lien on any asset disposed of in such sale, assignment or other disposition or which is or may be required (by the express terms of the instrument governing such Debt or by applicable law) to be repaid in connection with such sale, assignment, or other disposition, and (iv) deduction of appropriate amounts to be provided by such Person or a Subsidiary of such Person as a 14 reserve, in accordance with GAAP consistently applied, against any liabilities associated with the assets sold, transferred or disposed of in such transaction and retained by such Person or a Subsidiary of such Person after such transaction, provided that "Net Proceeds" shall include on a dollar-for-dollar basis all amounts remaining in such reserve after such liability shall have been satisfied in full or terminated; provided, however, that notwithstanding the foregoing, "Net Proceeds" shall exclude (a) any amounts received or deemed to be received by the Company for the purchase of the Company's capital stock in connection with the Company's dividend reinvestment program and (b) amounts received by the Company or any Subsidiary of the Company pursuant to any transaction with the Company or any Subsidiary of the Company otherwise permitted hereunder. "NET WORTH" means, with respect to any Person, the excess of such Person's total assets over its total liabilities, total assets and total liabilities each to be determined in accordance with GAAP consistently applied, excluding, however, from the determination of total assets (i) goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, licenses and rights in any thereof, and other similar intangibles, (ii) cash held in a sinking, escrow or other analogous fund established for the purpose of redemption, retirement or prepayment of capital stock or Debt, and (iii) any items not included in clauses (i) or (ii) above, that are treated as intangibles in conformity with GAAP. "NOTICE OF BORROWING" is defined in Section 3.01(a). "NOTICE OF CONVERSION" is defined in Section 3.02. "OBLIGATIONS" means all unpaid principal of and accrued and unpaid interest on the Loans, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrowers and other Loan Parties to any of the Agents, the Arrangers, the Lenders or any other indemnified party arising under the Loan Documents. "OECD" means the Organization for Economic Cooperation and Development. "OFF-BALANCE SHEET LIABILITY" of a Person shall mean any of the following obligations not appearing on such Person's consolidated balance sheet: (i) all lease obligations, leveraged leases, sale and leasebacks and other similar lease arrangements of such Person, (ii) any liability under any so called "synthetic lease" or "tax ownership operating lease" transaction entered into by such Person, and (iii) any obligation arising with respect to any other transaction if and to the extent that such obligation is the functional equivalent of borrowing but that does not constitute a liability on the consolidated balance sheet of such Person. "OTHER TAXES" is defined in Section 4.06(b). "OWNERSHIP INTEREST" of the Company in any Consolidated Subsidiary means, at any date of determination, the percentage determined by dividing (i) the aggregate amount of Project Finance Equity in such Consolidated Subsidiary owned or controlled, directly or indirectly, by the Company and any other Consolidated Subsidiary on such date, by (ii) the aggregate amount of Project Finance Equity in such Consolidated 15 Subsidiary owned or controlled, directly or indirectly, by all Persons (including the Company and the Consolidated Subsidiaries) on such date. Notwithstanding anything to the contrary set forth above, if the "Ownership Interest," calculated as set forth above, is 50% or less, such percentage shall be deemed to equal 0%. "PANHANDLE" means Panhandle Eastern Pipe Line Company, a Delaware corporation, all of whose capital stock has been, prior to the Closing Date, sold by Enterprises. "PARTICIPANT" is defined in Section 10.07(b). "PBGC" means the Pension Benefit Guaranty Corporation (or any successor entity) established under ERISA. "PERCENTAGE" means, for any Lender on any date of determination (a) prior to the Commitment Termination Date, the percentage obtained by dividing such Lender's Commitment on such day by the total of the Lenders' Commitments on such date, and multiplying the quotient so obtained by 100%, and (b) from and after the Commitment Termination Date, the percentage obtained by dividing the aggregate outstanding principal amount of such Lender's Loans on such day by the total of the Lenders' Loans on such date, and multiplying the quotient so obtained by 100%. "PERMITTED INVESTMENTS" means each of the following so long as no such Permitted Investment shall have a final maturity later than six months from the date of investment therein: (i) direct obligations of the United States, or of any agency thereof, or obligations guaranteed as to principal and interest by the United States or any agency thereof; (ii) certificates of deposit or bankers' acceptances issued, or time deposits held, or investment contracts guaranteed, by any Lender, any nationally-recognized securities dealer or any other commercial bank, trust company, savings and loan association or savings bank organized under the laws of the United States, or any State thereof, or of any other country which is a member of the OECD, or a political subdivision of any such country, and in each case having outstanding unsecured indebtedness that (on the date of acquisition thereof) is rated AA- or better by S&P or Aa3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured bank indebtedness); (iii) obligations with any Lender, any other bank or trust company described in clause (ii), above, or any nationally-recognized securities dealer, in respect of the repurchase of obligations of the type described in clause (i), above, provided that such repurchase obligations shall be fully secured by obligations of the type described in said clause (i) and the possession of such obligations shall be 16 transferred to, and segregated from other obligations owned by, such Lender, such other bank or trust company or such securities dealer; (iv) commercial paper rated (on the date of acquisition thereof) A-1 or P-1 or better by S&P or Moody's, respectively (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating commercial paper); (v) any eurodollar certificate of deposit issued by any Lender or any other commercial bank, trust company, savings and loan association or savings bank organized under the laws of the United States, or any State thereof, or of any country which is a member of the OECD, or a political subdivision of any such country, and in each case having outstanding unsecured indebtedness that (on the date of acquisition thereof) is rated AA- or better by S&P or Aa3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured bank indebtedness); and (vi) interests in any money market mutual fund which at the date of investment in such fund has the highest fund rating by each of Moody's and S&P which has issued a rating for such fund (which, for S&P, shall mean a rating of AAAm or AAAmg). "PERSON" means an individual, partnership, corporation (including a business trust), joint stock company, limited liability company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "PLAN" means, with respect to any Person, an "employee benefit plan" as defined in Section 3(3) of ERISA (other than a Multiemployer Plan) maintained for employees of such Person or any ERISA Affiliate of such Person that is subject to Title IV of ERISA and has "unfunded benefit liabilities" as determined under Section 4001(a)(18) of ERISA. "PLAN TERMINATION EVENT" means, (i) with respect to any Plan, a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder (other than a "reportable event" not subject to the provision for 30-day notice to the PBGC under such regulations or a "reportable event" for which the provision for the 30-day notice to the PBGC under such regulations has been waived), or (ii) the withdrawal by the Company or any of its ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA resulting in liability to the Company or any of its ERISA Affiliates under Section 4063 or 4064 of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the termination of a Plan under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the PBGC, or (v) any other event or condition which is reasonably likely to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. 17 "PLATFORM" is defined in Section 10.14 "PLEDGE AGREEMENTS" means each of (i) that certain Third Amended and Restated Pledge and Security Agreement, dated as of December 8, 2003, by and between the Company and the Collateral Agent, in substantially the form of Exhibit J attached hereto, and (ii) that certain Pledge and Security Agreement, dated as of July 12, 2002, by and among Enterprises, the Grantors and the Collateral Agent in substantially the form of Exhibit K hereto, in each case as the same may be amended, restated, supplemented or otherwise modified from time to time. "PRIME RATE" means the rate of interest per annum publicly announced from time to time by Citibank as its base rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "PRO FORMA DIVIDEND AMOUNT" means, from and after any date of any Consumers Dividend Restriction, the sum of (a) the aggregate amount which Consumers could have paid to the Company during the four calendar quarters immediately preceding such date had such Consumers Dividend Restriction been in effect during such quarters plus (b) cash dividends received by the Company from any other Subsidiary during such quarters. "PROJECT FINANCE DEBT" means Debt of any Person that is non-recourse to such Person (unless such Person is a special-purpose entity) and each Affiliate of such Person, other than with respect to the interest of the holder of such Debt in the collateral, if any, securing such Debt. "PROJECT FINANCE EQUITY" means, at any date of determination, consolidated equity of the common, preference and preferred stockholders of the Company and the Consolidated Subsidiaries relating to any obligor with respect to Project Finance Debt. "PROMISSORY NOTE" means any promissory note of the Borrowers payable to the order of a Lender (and, if requested, its registered assigns) issued pursuant to Section 3.01(c); and "PROMISSORY NOTES" means any or all of the foregoing. "PROSPECTIVE LENDER" is defined in Section 3.04(d). "RECIPIENT" is defined in Section 10.08. "REGISTER" is defined in Section 10.07(h). "RELATED PARTIES" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "REQUIRED LENDERS" means, on any date of determination, Lenders that, collectively, on such date hold more than 50% of the then aggregate unpaid principal amount of the Loans owing to Lenders or, if no Loans shall be outstanding as of such 18 date, Lenders that, collectively, hold more than 50% of the aggregate Commitments. Any determination of those Lenders constituting the Required Lenders shall be made by the Administrative Agent and shall be conclusive and binding on all parties absent manifest error. "RESTATEMENT" means the restatement of the financial statements of the Company or its Subsidiaries for any fiscal quarter of 2001, as well as any adjustment of previously announced quarterly results, but only if made to reflect the restatement of such quarters. "RESTATEMENT EVENT" means (i) the Restatement, (ii) any lawsuit or other action previously or hereafter brought against the Company, any of its Subsidiaries or any of their Affiliates or any present or former officer or director of the Company, any of its Subsidiaries or any of their Affiliates involving or arising out of the Restatement, and any settlement thereof, or other development with respect thereto, or (iii) the occurrence of any default or event of default under any indenture, instrument or other agreement or contract, or the exercise of any remedy in respect thereof, that arises directly or indirectly as a result of any of the matters described in any of the foregoing clauses (i) or (ii) or this clause (iii); provided, however, that, for purposes of the definition of "MATERIAL ADVERSE CHANGE", (a) the foregoing clause (ii) shall be inapplicable if such lawsuit or other action, settlement (in an amount in the aggregate together with all other settlements of such lawsuits or actions) or other development described in such clause (ii) could reasonably be expected, in each case, to result in liability to such Person in excess of $10,000,000 and (b) the foregoing clause (iii) shall be inapplicable if any such event described in such clause (iii) would constitute an Event of Default under Section 8.01(e). "RESTRICTED SUBSIDIARY" means any Subsidiary of the Company or Enterprises (other than Consumers and its Subsidiaries) that, on a consolidated basis with any of its Subsidiaries as of any date of determination, accounts for more than 10% of the consolidated assets of the Company and its Consolidated Subsidiaries. "S&P" means Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc., or any successor thereto. "SECURITIZED BONDS" means any nonrecourse bonds or similar asset-backed securities issued by a special-purpose Subsidiary of Consumers which are payable solely from specialized charges authorized by the utility commission of the relevant state in connection with the recovery of regulatory assets or other qualified costs. "SOLVENT", when used with respect to any Person, means that at the time of determination: (i) the fair market value of its assets is in excess of the total amount of its liabilities (including, without limitation, net contingent liabilities); and (ii) it is then able and expects to be able to pay its debts (including, without limitation, contingent debts and other commitments) as they mature; and 19 (iii) it has capital sufficient to carry on its business as conducted and as proposed to be conducted. For purposes of this definition, the amount of contingent liabilities at any time shall be computed as the amount that, in light of all the facts and circumstances known to such Person at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "SPC" is defined in Section 10.07(f). "STATUTORY RESERVE RATE" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Rate Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "SUBSIDIARY" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one or more other Subsidiaries). In the case of an unincorporated entity, a Person shall be deemed to have more than 50% of interests having ordinary voting power only if such Person's vote in respect of such interests comprises more than 50% of the total voting power of all such interests in the unincorporated entity. "SUPPORT OBLIGATION" means, for any Person, without duplication, any financial obligation, contingent or otherwise, of such Person guaranteeing or otherwise supporting any Debt or other obligation of any other Person in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect (including, but not limited to, letters of credit and surety bonds in connection therewith), (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Debt, (ii) to purchase property, securities or services for the purpose of assuring the owner of such Debt of the payment of such Debt, (iii) to maintain working capital, equity capital, available cash or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such Debt, (iv) to provide equity capital under or in respect of equity subscription arrangements (to the extent that such obligation to provide equity capital does not otherwise constitute Debt), or (v) to perform, or arrange for the performance of, any non-monetary obligations or non-funded debt payment obligations of the primary obligor. 20 "TAKORADI PROJECT" means the construction and operation of Takoradi 2, a power plant currently consisting of two 110 megawatt simple-cycle units built near Aboadze, Ghana by one or more Subsidiaries of the Company and the government of Ghana's Volta River Authority. "TAX SHARING AGREEMENT" means the Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits, dated as of January 1, 1994, by and among the Company, each of the members of the Consolidated Group (as defined therein), and each of the corporations that become members of the Consolidated Group. "TAXES" is defined in Section 4.06(a). "TRUSTEE" has the meaning assigned to that term in the Indenture. "TYPE" has the meaning assigned to such term (i) in the definition of "Loan" when used in such context and (ii) in the definition of "Borrowing" when used in such context. SECTION 1.02. COMPUTATION OF TIME PERIODS; CONSTRUCTION. (a) Unless otherwise indicated, each reference in this Agreement to a specific time of day is a reference to New York City time. In the computation of periods of time under this Agreement, any period of a specified number of days or months shall be computed by including the first day or month occurring during such period and excluding the last such day or month. In the case of a period of time "from" a specified date "to" or "until" a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". (b) The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes", and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (i) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (ii) any reference herein to any Person shall be construed to include such Person's successors and assigns, (iii) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (iv) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (v) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.03. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 6.01(e) ("GAAP"), it being understood that (i) such financial statements do not give effect to any Restatement Event other than the Restatement itself, and (ii) financial covenants set forth in 21 Sections 7.01(i) and (j) shall be calculated exclusive of all debt of any Affiliate of the Borrowers (other than a Subsidiary) that is (a) consolidated on the financial statements of the Company solely as a result of the effect and application of Financial Accounting Standards Board Interpretation No. 46 and of Accounting Research Bulletin No. 51, Consolidated Financial Statements, as modified by Statement of Financial Accounting Standards No. 94, and (b) non-recourse to any Borrower or any Guarantor. If any changes in generally accepted accounting principles are hereafter required or permitted and are adopted by the Company or any of its Subsidiaries, or the Company or any of its Subsidiaries shall change its application of generally accepted accounting principles with respect to any Off-Balance Sheet Liabilities, including, but not limited to, the application of Financial Accounting Standards Board Interpretation Nos. 45 and 46 and Financial Accounting Standards Board (FASB) Statement No. 150, in each case, with the agreement of its independent certified public accountants, and such changes result in a change in the method of calculation or the results of any of the financial covenants, tests, restrictions or standards herein or in the related definitions or terms used therein ("ACCOUNTING CHANGES"), the parties hereto agree, at the Borrowers' request, to enter into negotiations, in good faith, in order to amend such provisions in a credit neutral manner so as to reflect equitably such changes with the desired result that the criteria for evaluating the Company's and its Subsidiaries' financial condition shall be the same after such changes as if such changes had not been made; provided, however, until such provisions are amended in a manner reasonably satisfactory to the Administrative Agent and the Required Lenders, no Accounting Change shall be given effect in such calculations. In the event such amendment is entered into, all references in this Agreement to GAAP shall mean generally accepted accounting principles as of the date of such amendment. Notwithstanding the foregoing, all financial statements to be delivered by the Company pursuant to Section 7.03 shall be prepared in accordance with generally accepted accounting principles in effect at such time. ARTICLE II COMMITMENTS, LOANS, FEES, PREPAYMENTS AND OUTSTANDINGS SECTION 2.01. MAKING LOANS. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make revolving loans to the Borrowers during the period from the Closing Date until the Commitment Termination Date in an aggregate outstanding amount not to exceed on any day such Lender's Available Commitment (after giving effect to all Extensions of Credit to be made on such day and the application of the proceeds thereof). Within the limits hereinafter set forth, the Borrowers may request Extensions of Credit hereunder, prepay Loans, and use the resulting increase in the Available Commitments for further Extensions of Credit in accordance with the terms hereof. SECTION 2.02. FEES. (a) The Borrowers jointly and severally agree to pay to the Administrative Agent for the account of each Lender a commitment fee equal to the product of (i) the average daily amount of such Lender's Available Commitment from the Closing Date, in the case of each Bank, and from the effective date specified in the Lender Assignment pursuant to which it became a Lender, in the case of each other Lender, until the Commitment Termination Date multiplied by (ii) the Commitment Fee Margin. Such fees shall be payable quarterly in arrears 22 on the last day of each March, June, September and December, commencing the first such date to occur following the Closing Date, and on the Commitment Termination Date. (b) In addition to the fees provided for in subsection (a) above, the Borrowers shall pay to the Administrative Agent, for the account of CUSA and the other Persons entitled thereto, such other fees as are provided for in that certain letter agreement, dated November 6, 2003 among the Borrowers, the Agents, the Arrangers and the other parties thereto (the "FEE LETTER"), in the amounts and at the times specified therein. SECTION 2.03. COMMITMENTS; MANDATORY PREPAYMENTS. (a) Reduction of Commitments. The Borrowers may (and shall provide notice thereof to the Administrative Agent not later than 10:00 a.m. (New York City time) on the date of termination or reduction, and the Administrative Agent shall promptly distribute copies thereof to the Lenders) terminate in whole or reduce ratably in part the unused portions of the Commitments; provided that any such partial reduction shall be in the aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof. (b) Change of Control. Upon the occurrence of a Change of Control the Commitments shall be reduced to zero and the principal amount outstanding hereunder, all interest thereon and all other amounts payable under this Agreement and the other Loan Documents shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrowers. (c) Prepayment upon Issuance or Sale of Consumers Stock. The Company shall make a mandatory prepayment promptly and in any event within 3 Business Days after the Company's receipt of any Net Proceeds from the issuance, sale, assignment or other disposition of any capital stock or other equity interest in Consumers (other than the issuance of preferred securities of Consumers in respect of which the Net Proceeds received by Consumers for all such securities do not exceed $200,000,000 in the aggregate and such Net Proceeds shall not be distributed to the Company), together with (i) accrued interest to the date of such prepayment on the principal amount prepaid and (ii) in the case of Eurodollar Rate Loans, any amount payable to the Lenders pursuant to Section 4.04(b), and the Commitments shall be reduced, pro rata, in an aggregate amount equal to such Net Proceeds. Nothing in this Section 2.03(c) shall be construed to constitute the Lenders' consent to any transaction referenced in this clause (c) which is not expressly permitted by Article VII. The Company shall give the Administrative Agent prior written notice or telephonic notice promptly confirmed in writing (each of which the Administrative Agent shall promptly transmit to each Lender) of when a prepayment required by this Section 2.03(c) will be made (which date of prepayment shall be no later than the date on which such prepayment becomes due and payable pursuant to this Section 2.03(c)). All such prepayments shall be applied first to repay outstanding ABR Loans and then to repay outstanding Eurodollar Rate Loans with those Eurodollar Rate Loans which have earlier expiring Interest Periods being repaid prior to those which have later expiring Interest Periods. SECTION 2.04. COMPUTATIONS OF OUTSTANDINGS. Whenever reference is made in this Agreement to the principal amount outstanding on any date under this Agreement, such reference shall refer to the aggregate principal amount of all Loans outstanding on such date under this 23 Agreement after giving effect to all Extensions of Credit to be made on such date and the application of the proceeds thereof. At no time shall the outstanding principal amount of the Loans exceed the aggregate amount of the Commitments hereunder. References to the unused portion of the Commitments shall refer to the excess, if any, of the Commitments hereunder over the outstanding principal amount of the Loans; and references to the unused portion of any Lender's Commitment shall refer to such Lender's Percentage of the unused Commitments. ARTICLE III LOANS SECTION 3.01. LOANS. (a) A Borrower may request a Borrowing (other than a Conversion) by delivering a notice (a "NOTICE OF BORROWING") to the Administrative Agent no later than 12:00 noon (New York City time) on the third Business Day or, in the case of ABR Loans, on the first Business Day, prior to the date of the proposed Borrowing. The Administrative Agent shall give each Lender prompt notice of each Notice of Borrowing. Each Notice of Borrowing shall be in substantially the form of Exhibit A and shall specify the requested (i) date of such Borrowing, (ii) Type of Loans to be made in connection with such Borrowing, (iii) Interest Period, if any, for such Loans, (iv) amount of such Borrowing and (v) identity of the applicable Borrower. Each proposed Borrowing shall conform to the requirements of Sections 3.03 and 3.04. (b) Each Lender shall, before 12:00 noon (New York City time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at the Administrative Agent's offices at 2 Penns Way, Suite 200, New Castle, DE 19270, in same day funds, such Lender's Percentage of such Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article V, the Administrative Agent will make such funds available to the applicable Borrower at the Administrative Agent's aforesaid address. Notwithstanding the foregoing, unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's Percentage of such Borrowing, the Administrative Agent may assume that such Lender has made such Percentage available to the Administrative Agent on the date of such Borrowing in accordance with the first sentence of this subsection (b), and the Administrative Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount. (c) Any Lender may request that Loans made by it be evidenced by a Promissory Note. In such event, the Borrowers shall prepare, execute and deliver to such Lender a Promissory Note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such Promissory Note and interest thereon shall at all times (including after assignment pursuant to Section 10.07) be represented by one or more Promissory Notes in such form payable to the order of the payee named therein (or, if such Promissory Note is a registered note, to such payee and its registered assigns). 24 SECTION 3.02. CONVERSION OF LOANS. Each Borrower may from time to time Convert any of its Loans (or portions thereof) of any Type to one or more Loans of the same or any other Type by delivering a notice of such Conversion (a "NOTICE OF CONVERSION") to the Administrative Agent no later than 12:00 noon (New York City time) on (x) the third Business Day prior to the date of any proposed Conversion into a Eurodollar Rate Loan and (y) the first Business Day prior to the date of any proposed Conversion into an ABR Loan. The Administrative Agent shall give each Lender prompt notice of each Notice of Conversion. Each Notice of Conversion shall be in substantially the form of Exhibit B and shall specify (i) the requested date of such Conversion, (ii) the Type of, and Interest Period, if any, applicable to, the Loans (or portions thereof) proposed to be Converted, (iii) the requested Type of Loans to which such Loans (or portions thereof) are proposed to be Converted, (iv) the requested initial Interest Period, if any, to be applicable to the Loans resulting from such Conversion, (v) the aggregate amount of Loans (or portions thereof) proposed to be Converted and (vi) the identity of the applicable Borrower. Each proposed Conversion shall be subject to the provisions of Sections 3.03 and 3.04. SECTION 3.03. INTEREST PERIODS. The period between the date of each Eurodollar Rate Loan and the date of payment in full of such Loan shall be divided into successive periods of months ("INTEREST PERIODS") for purposes of computing interest applicable thereto. The initial Interest Period for each such Loan shall begin on the day such Loan is made, and each subsequent Interest Period shall begin on the last day of the immediately preceding Interest Period for such Loan. The duration of each Interest Period shall be 1, 2, 3, or 6 months, as the applicable Borrower may, in accordance with Section 3.01 or 3.02, select; provided, however, that: (i) the Borrowers may not select any Interest Period for a Eurodollar Rate Loan that ends after the Maturity Date; (ii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (iii) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. SECTION 3.04. OTHER TERMS RELATING TO THE MAKING AND CONVERSION OF LOANS. (a) Notwithstanding anything in Section 3.01 or 3.02 to the contrary: (i) each Borrowing shall be in an aggregate amount not less than $5,000,000, or an integral multiple of $1,000,000 in excess thereof (or such lesser amount as shall be equal to the total amount of the Available Commitments on such date, after giving effect to all other Extensions of Credit to be made on such date), and shall consist of Loans to the same Borrower of the same Type, having the same Interest Period and made or 25 Converted on the same day by the Lenders ratably according to their respective Percentages; (ii) at no time shall the number of Borrowings comprising Eurodollar Rate Loans outstanding hereunder be greater than ten (10); (iii) no Eurodollar Rate Loan may be Converted on a date other than the last day of the Interest Period applicable to such Loan unless the corresponding amounts, if any, payable to the Lenders pursuant to Section 4.04(b) are paid contemporaneously with such Conversion; (iv) if any Borrower shall either fail to give a timely Notice of Conversion pursuant to Section 3.02 in respect of any of its Loans or fail, in any Notice of Conversion that has been timely given, to select the duration of any Interest Period for any of its Loans to be Converted into Eurodollar Rate Loans in accordance with Section 3.03, such Loans shall, on the last day of the then existing Interest Period therefor, automatically Convert into, or remain as, as the case may be, ABR Loans; and (v) if, on the date of any proposed Conversion, any Event of Default or Default shall have occurred and be continuing, all Loans then outstanding shall, on such date, automatically Convert into, or remain as, as the case may be, ABR Loans. (b) If any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Applicable Lending Office to perform its obligations hereunder to make, or to fund or maintain, Eurodollar Rate Loans hereunder, (i) the obligation of such Lender to make, or to Convert Loans into, Eurodollar Rate Loans for any Borrowing from such Lender shall be forthwith suspended until the earlier to occur of the date upon which (A) such Lender shall cease to be a party hereto and (B) it is no longer unlawful for such Lender to make, fund or maintain Eurodollar Rate Loans, and (ii) if the maintenance of Eurodollar Rate Loans then outstanding through the last day of the Interest Period therefor would cause such Lender to be in violation of such law, regulation or assertion, the Borrowers shall either prepay or Convert all Eurodollar Rate Loans from such Lender within five days after such notice. Promptly upon becoming aware that the circumstances that caused such Lender to deliver such notice no longer exist, such Lender shall deliver notice thereof to the Administrative Agent (but the failure to do so shall impose no liability upon such Lender). Promptly upon receipt of such notice from such Lender (or upon such Lender's assigning all of its Commitment, Loans, participation and other rights and obligations hereunder pursuant to Section 10.07), the Administrative Agent shall deliver notice thereof to the Borrowers and the Lenders and such suspension shall terminate. (c) If the Required Lenders shall, at least one Business Day before the date of any requested Borrowing, notify the Administrative Agent that the Adjusted LIBO Rate for Eurodollar Rate Loans to be made in connection with such Borrowing will not adequately reflect the cost to such Required Lenders of making, funding or maintaining their respective Eurodollar Rate Loans for such Borrowing, or that they are unable to acquire funding in a reasonable manner so as to make available Eurodollar Rate Loans in the amount and for the Interest Period 26 requested, or if the Administrative Agent shall determine that adequate and reasonable means do not exist to be able to determine the Adjusted LIBO Rate, then the right of the Borrowers to select Eurodollar Rate Loans for such Borrowing and any subsequent Borrowing shall be suspended until the Administrative Agent shall notify the Borrowers and the Lenders that the circumstances causing such suspension no longer exist, and each Loan to be made or Converted in connection with such Borrowing shall be an ABR Loan. (d) If any Lender shall have delivered a notice to the Administrative Agent described in Section 3.04(b), and if and so long as such Lender shall not have withdrawn such notice in accordance with said Section 3.04(b), the Borrowers or the Administrative Agent may demand that such Lender assign in accordance with Section 10.07, to one or more Eligible Banks designated by the Borrowers or the Administrative Agent (each a "PROSPECTIVE LENDER"), all (but not less than all) of such Lender's Commitment, Loans, participation and other rights and obligations hereunder; provided, that any such demand by the Borrowers during the continuance of an Event of Default or Default shall be ineffective without the consent of the Required Lenders. If, within 30 days following any such demand by the Administrative Agent or the Borrowers, any such Prospective Lender so designated shall fail to consummate such assignment on terms reasonably satisfactory to such Lender, or the Borrowers and the Administrative Agent shall have failed to designate any such Prospective Lender, then such demand by the Borrowers or the Administrative Agent shall become ineffective, it being understood for purposes of this provision that such assignment shall be conclusively deemed to be on terms reasonably satisfactory to such Lender, and such Lender shall be compelled to consummate such assignment forthwith, if such Prospective Lender (i) shall agree to such assignment in substantially the form of the Lender Assignment attached hereto as Exhibit F and (ii) shall tender payment to such Lender in an amount equal to the full outstanding dollar amount accrued in favor of such Lender hereunder (as computed in accordance with the records of the Administrative Agent), including, without limitation, all accrued interest and fees and, to the extent not paid by the Borrowers, any payments required pursuant to Section 4.04(b). (e) Each Notice of Borrowing and Notice of Conversion shall be irrevocable and binding on the applicable Borrower. In the case of any Borrowing which the related Notice of Borrowing or Notice of Conversion specifies is to be comprised of Eurodollar Rate Loans, the applicable Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill, on or before the date specified in such Notice of Borrowing or Notice of Conversion for such Borrowing, the applicable conditions (if any) set forth in this Article III (other than failure pursuant to the provisions of Section 3.04(b) or (c) hereof) or in Article V, including any such loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Loan to be made by such Lender when such Loan, as a result of such failure, is not made on such date. SECTION 3.05. REPAYMENT OF LOANS; INTEREST (a) Principal. Each Borrower shall repay the outstanding principal amount of its Loans on the Maturity Date (or such earlier date as may be required pursuant to Section 2.03 or 8.02). 27 (b) Interest. All Loans shall bear interest on the unpaid principal amount thereof from the date of such Loan until such principal amount shall be paid in full, at the Applicable Rate for such Loan (except as otherwise provided in this subsection (b)), payable as follows: (i) ABR Loans. If such Loan is an ABR Loan, interest thereon shall be payable quarterly in arrears on the last day of each March, June, September and December, on the date of any Conversion of such ABR Loan and on the date such ABR Loan shall become due and payable or shall otherwise be paid in full; provided that any amount of principal that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate. (ii) Eurodollar Rate Loans. If such Loan is a Eurodollar Rate Loan, interest thereon shall be payable on the last day of such Interest Period and, if the Interest Period for such Loan has a duration of more than three months, on that day of each third month during such Interest Period that corresponds to the first day of such Interest Period (or, if any such month does not have a corresponding day, then on the last day of such month); provided that any amount of principal that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate. ARTICLE IV PAYMENTS, COMPUTATIONS AND YIELD PROTECTION SECTION 4.01. PAYMENTS AND COMPUTATIONS. (a) Each Borrower shall make each payment hereunder and under the other Loan Documents not later than 2:00 p.m. (New York City time) on the day when due in Dollars to the Administrative Agent at its offices at 2 Penns Way, Suite 200, New Castle, DE 19270, in same day funds; any payment received after 3:00 p.m. (New York City time) shall be deemed to have been received at the start of business on the next succeeding Business Day, unless the Administrative Agent shall have received from, or on behalf of, the applicable Borrower a Federal Reserve reference number with respect to such payment before 4:00 p.m. (New York City time). The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal, interest, fees or other amounts payable to the Lenders, to the respective Lenders to which the same are payable, for the account of their respective Applicable Lending Offices, in each case to be applied in accordance with the terms of this Agreement. If and to the extent that any distribution of any payment from a Borrower required to be made to any Lender pursuant to the preceding sentence shall not be made in full by the Administrative Agent on the date such payment was received by the Administrative Agent, the Administrative Agent shall pay to such Lender, upon demand, interest on the unpaid amount of such distribution, at a rate per annum equal to the Federal Funds Effective Rate, from the date of such payment by the applicable Borrower to the Administrative Agent to the date of payment in full by the Administrative Agent to such Lender of such unpaid amount. Upon the Administrative 28 Agent's acceptance of a Lender Assignment and recording of the information contained therein in the Register pursuant to Section 10.07, from and after the effective date specified in such Lender Assignment, the Administrative Agent shall make all payments hereunder and under any Promissory Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Lender Assignment shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) Each Borrower hereby authorizes the Administrative Agent and each Lender, if and to the extent payment owed to the Administrative Agent or such Lender, as the case may be, is not made when due hereunder (or, in the case of a Lender, under any Promissory Note held by such Lender), to charge from time to time against any or all of such Borrower's accounts with the Administrative Agent or such Lender, as the case may be, any amount so due. (c) All computations of interest based on the Alternate Base Rate (when the Alternate Base Rate is based on the Prime Rate) shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be. All other computations of interest and fees hereunder (including computations of interest based on the Adjusted LIBO Rate, the CD Rate and the Federal Funds Effective Rate) shall be made by the Administrative Agent on the basis of a year of 360 days. In each such case, such computation shall be made for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each such determination by the Administrative Agent or a Lender shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder or under any other Loan Document shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest and fees hereunder; provided, however, that if such extension would cause payment of interest on or principal of Eurodollar Rate Loans to be made in the next following calendar month, such payment shall be made on the next preceding Business Day and such reduction of time shall in such case be included in the computation of payment of interest hereunder. (e) Unless the Administrative Agent shall have received notice from the applicable Borrower prior to the date on which any payment is due to the Lenders hereunder that such Borrower will not make such payment in full, the Administrative Agent may assume that such Borrower has made such payment in full to the Administrative Agent on such date, and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent such Borrower shall not have so made such payment in full to the Administrative Agent, such Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender, together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Effective Rate. (f) Any amount payable by any Borrower hereunder or under any of the Promissory Notes that is not paid when due (whether at stated maturity, by acceleration or 29 otherwise) shall (to the fullest extent permitted by law) bear interest, from the date when due until paid in full, at a rate per annum equal at all times to the Default Rate, payable on demand. (g) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied, subject to Section 4.07, (i) first, toward payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, toward payment of principal then due hereunder, ratably among the parties entitled thereto. SECTION 4.02. INTEREST RATE DETERMINATION. The Administrative Agent shall give prompt notice to the Borrowers and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 3.05(b)(i) or (ii). SECTION 4.03. PREPAYMENTS. The Borrowers shall have no right to prepay any principal amount of any Loans other than as follows: (a) A Borrower may (and shall provide notice thereof to the Administrative Agent not later than 10:00 a.m. (New York City time) on the date of prepayment, and the Administrative Agent shall promptly distribute copies thereof to the Lenders), and if such notice is given, such Borrower shall, prepay the outstanding principal amounts of its Loans made as part of the same Borrowing, in whole or ratably in part, together with (i) accrued interest to the date of such prepayment on the principal amount prepaid and (ii) in the case of Eurodollar Rate Loans, any amount payable to the Lenders pursuant to Section 4.04(b); provided, however, that each partial prepayment shall be in an aggregate principal amount of not less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof (or such lesser amount as shall be equal to the total amount of Loans outstanding to such Borrower). (b) On the date of any termination or optional or mandatory reduction of the Commitments pursuant to Section 2.03, the Borrowers shall pay or prepay the principal outstanding on the Loans in full in cash in an amount equal to the excess of (i) the sum of the aggregate principal amount of the Loans outstanding (after giving effect to all Extensions of Credit to be made on such date and the application of the proceeds thereof) over (ii) the aggregate amount of the Commitments (following such termination or reduction, if any), together with (x) accrued interest to the date of such prepayment on the principal amount repaid and (y) in the case of prepayments of Eurodollar Rate Loans, any amount payable to the Lenders pursuant to Section 4.04(b). Any payments and prepayments required by this subsection (b) shall be applied to outstanding ABR Loans up to the full amount thereof before they are applied to outstanding Eurodollar Rate Loans. SECTION 4.04. YIELD PROTECTION. (a) Increased Costs. If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation after the Closing Date, or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) issued or made after the Closing Date, there shall be reasonably incurred any increase in the cost to any Lender of agreeing to make or making, funding or 30 maintaining Eurodollar Rate Loans, then the Borrowers shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost. A certificate as to the amount of such increased cost and giving a reasonable explanation thereof, submitted to the Borrowers and the Administrative Agent by such Lender, shall constitute such demand and shall be conclusive and binding for all purposes, absent manifest error. (b) Breakage. If, due to any prepayment pursuant to Section 4.03, an acceleration of maturity of the Loans pursuant to Section 8.02, or any other reason, any Lender receives payments of principal of any Eurodollar Rate Loan other than on the last day of the Interest Period relating to such Loan or if any Borrower shall Convert any Eurodollar Rate Loans on any day other than the last day of the Interest Period therefor, or if any Borrower shall fail to prepay a Eurodollar Rate Loan on the date specified in a notice of prepayment, the Borrowers shall, promptly after demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for additional losses, costs, or expenses (including anticipated lost profits) that such Lender may reasonably incur as a result of such payment, Conversion or failure to prepay, including any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain such Loan. For purposes of this subsection (b), a certificate setting forth the amount of such additional losses, costs, or expenses and giving a reasonable explanation thereof, submitted to the Borrowers and the Administrative Agent by such Lender, shall constitute such demand and shall be conclusive and binding for all purposes, absent manifest error. (c) Capital. If any Lender determines that (i) compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender, whether directly, or indirectly as a result of commitments of any Person controlling such Lender (but without duplication), and (ii) the amount of such capital is increased by or based upon (A) the existence of such Lender's commitment to lend hereunder, or (B) the issuance or maintenance of any Loan and (C) other similar such commitments, then, upon demand by such Lender, the Borrowers jointly and severally agree immediately to pay to the Administrative Agent for the account of such Lender from time to time as specified by such Lender additional amounts sufficient to compensate such Lender in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the transactions contemplated hereby. A certificate as to such amounts and giving a reasonable explanation thereof (to the extent permitted by law), submitted to the Borrowers and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. (d) Notices. Each Lender hereby agrees to use its best efforts to notify the Borrowers of the occurrence of any event referred to in subsection (a), (b) or (c) of this Section 4.04 promptly after becoming aware of the occurrence thereof. The failure of any Lender to provide such notice or to make demand for payment under said subsection shall not constitute a waiver of such Lender's rights hereunder; provided that, notwithstanding any provision to the contrary contained in this Section 4.04, the Borrowers shall not be required to reimburse any 31 Lender for any amounts or costs incurred under subsection (a), (b) or (c) above, more than 90 days prior to the date that such Lender notifies the Borrowers in writing thereof, in each case unless, and to the extent that, any such amounts or costs so incurred shall relate to the retroactive application of any event notified to the Borrowers which entitles such Lender to such compensation. If any Lender shall subsequently determine that any amount demanded and collected under this Section 4.04 was done so in error, such Lender will promptly return such amount to the Borrowers. (e) Survival of Obligations. Subject to subsection (d) above, the Borrowers' obligations under this Section 4.04 shall survive the repayment of all other amounts owing to the Lenders and the Agents under the Loan Documents and the termination of the Commitments. If and to the extent that the obligations of the Borrowers under this Section 4.04 are unenforceable for any reason, the Borrowers agree to make the maximum contribution to the payment and satisfaction thereof which is permissible under applicable law. SECTION 4.05. SHARING OF PAYMENTS, ETC. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Loans owing to it (other than pursuant to Section 4.04 or Section 4.06) in excess of its ratable share of payments obtained by all the Lenders on account of the Loans of such Lenders, such Lender shall forthwith purchase from the other Lenders such participation in the Loans owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrowers agree that any Lender so purchasing a participation from another Lender pursuant to this Section 4.05 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrowers in the amount of such participation. Notwithstanding the foregoing, if any Lender shall obtain any such excess payment involuntarily, such Lender may, in lieu of purchasing participations from the other Lenders in accordance with this Section 4.05, on the date of receipt of such excess payment, return such excess payment to the Administrative Agent for distribution in accordance with Section 4.01(a). SECTION 4.06. TAXES. (a) All payments by the Borrowers hereunder and under the other Loan Documents shall be made in accordance with Section 4.01, free and clear of and without deduction for all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and each Agent, taxes imposed on its overall net income, and franchise taxes imposed on it by the jurisdiction under the laws of which such Lender or Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its overall net income, and franchise taxes imposed on it by the jurisdiction of such Lender's Applicable Lending Office or 32 any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "TAXES"). If any Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document to any Lender or Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.06) such Lender or Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, each Borrower jointly and severally agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under any other Loan Document or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "OTHER TAXES"). (c) Each Borrower jointly and severally agrees to indemnify each Lender and Agent for the full amount of Taxes and Other Taxes (including any Taxes and any Other Taxes imposed by any jurisdiction on amounts payable under this Section 4.06) paid by such Lender or Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within thirty (30) days from the date such Lender or Agent (as the case may be) makes written demand therefor; provided, that such Lender or Agent (as the case may be) shall not be entitled to demand payment under this Section 4.06 for an amount if such demand is not made within one year following the date upon which such Lender or Agent (as the case may be) shall have been required to pay such amount. (d) Within thirty (30) days after the date of any payment of Taxes, the applicable Borrower will furnish to the Administrative Agent, at its address referred to in Section 10.02, the original or a certified copy of a receipt evidencing payment thereof. (e) Each Bank represents and warrants that either (i) it is organized under the laws of a jurisdiction within the United States or (ii) it has delivered to the Borrowers or the Administrative Agent duly completed copies of such form or forms prescribed by the United States Internal Revenue Service indicating that such Bank is entitled to receive payments without deduction or withholding of any United States federal income taxes, as permitted by the Internal Revenue Code of 1986, as amended. Each other Lender agrees that, on or prior to the date upon which it shall become a party hereto, and upon the reasonable request from time to time of a Borrower or the Administrative Agent, such Lender will deliver to the Borrowers and the Administrative Agent (to the extent that it is not prohibited by law from doing so) either (A) a statement that it is organized under the laws of a jurisdiction within the United States or (B) duly completed copies of such form or forms as may from time to time be prescribed by the United States Internal Revenue Service, indicating that such Lender is entitled to receive payments without deduction or withholding of any United States federal income taxes, as permitted by the Internal Revenue Code of 1986, as amended. Each Bank that has delivered, and each other Lender that hereafter delivers, to the Borrowers and the Administrative Agent the form or forms 33 referred to in the two preceding sentences further undertakes to deliver to the Borrowers and the Administrative Agent, to the extent that it is not prohibited by law from doing so, further copies of such form or forms, or successor applicable form or forms, as the case may be, as and when any previous form filed by it hereunder shall expire or shall become incomplete or inaccurate in any respect. Each Lender represents and warrants that each such form supplied by it to the Administrative Agent and the Borrowers pursuant to this subsection (e), and not superseded by another form supplied by it, is or will be, as the case may be, complete and accurate. SECTION 4.07. APPORTIONMENT OF PAYMENTS. (a) Subject to the provisions of Section 2.03 and Section 4.07(b), all payments of principal and interest in respect of outstanding Loans, all payments of fees and all other payments in respect of any other Obligations hereunder, shall be allocated among such of the Lenders as are entitled thereto, ratably or otherwise as expressly provided herein. Except as provided in Section 4.07(b) with respect to payments and proceeds of Collateral received after the occurrence of an Event of Default, all such payments and any other amounts received by the Administrative Agent from or for the benefit of any Borrower shall be applied: (i) first, to pay principal of and interest on any portion of the Loans which the Administrative Agent may have advanced on behalf of any Lender other than CUSA for which the Administrative Agent has not then been reimbursed by such Lender or any Borrower, (ii) second, to pay interest on and then the principal of the Loans then due and payable (in the order described hereinbelow), (iii) third, to pay all other Obligations of any Loan Party under any Loan Document then due and payable, ratably, and (iv) fourth, as the Borrowers so designate. All such principal and interest payments in respect of the Loans shall be applied first to repay outstanding ABR Loans and then to repay outstanding Eurodollar Rate Loans with those Eurodollar Rate Loans which have earlier expiring Interest Periods being repaid prior to those which have later expiring Interest Periods. (b) During the continuance of an Event of Default and after declaration thereof by written notice from the Administrative Agent to the Borrowers, the Administrative Agent shall apply all payments in respect of any Loans, and the Collateral Agent shall deliver all proceeds of Collateral to the Administrative Agent for application, in the following order: (i) first, to pay principal of and interest on any portion of the Loans which the Administrative Agent may have advanced on behalf of any Lender other than CUSA for which the Administrative Agent has not then been reimbursed by such Lender or the Borrowers; (ii) second, to pay any fees, expense reimbursements or indemnities then due to the Agents under any of the Loan Documents; 34 (iii) third, to the ratable payment of any fees, expense reimbursements or indemnities then due to the Lenders under any of the Loan Documents; (iv) fourth, to the ratable payment of interest due in respect of the Loans, in accordance with the Lenders' respective Percentages; (v) fifth, to the ratable payment or prepayment of principal outstanding on all Loans, in accordance with the Lenders' respective Percentages; (vi) sixth, to the ratable payment of all other Obligations of the Loan Parties then outstanding under the Loan Documents. The order of priority set forth in this Section 4.07(b) and the related provisions of this Agreement are set forth solely to determine the rights and priorities of the Agents and the Lenders as among themselves. SECTION 4.08. Proceeds of Collateral. During the continuance of an Event of Default and after declaration thereof by written notice from the Administrative Agent to the Borrowers, the Borrowers shall cause all proceeds of Collateral (other than Collateral in respect of which the Collateral Agent and/or the Administrative Agent shall have a prior security interest on behalf of the Lenders hereunder) to be deposited pursuant to arrangements for the collection of such amounts established by the Borrowers and the Administrative Agent (or the Collateral Agent, as applicable) for application pursuant to Section 4.07. All collections of proceeds of Collateral which are received directly by the Company or any Subsidiary of the Company shall be deemed to have been received by the Company or such Subsidiary of the Company as the Collateral Agent's trustee and, during the continuance of an Event of Default and after declaration thereof by written notice from the Administrative Agent to the Borrowers, upon the Company's or such Subsidiary's receipt thereof, the Borrowers shall immediately transfer or cause to be transferred all such amounts to the Administrative Agent for application pursuant to Section 4.07. All other proceeds of Collateral received by the Collateral Agent and/or the Administrative Agent, whether through direct payment or otherwise, will be deemed received by such Agent, will be the sole property of such Agent, and will be held by such Agent, for the benefit of the Lenders for application pursuant to Section 4.07. ARTICLE V CONDITIONS PRECEDENT SECTION 5.01. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AGREEMENT. The effectiveness of this Agreement is subject to the fulfillment of the following conditions precedent: (a) The Administrative Agent shall have received, on or before the Closing Date, the following, in form and substance satisfactory to each Lender (except where otherwise specified below) and (except for any Promissory Notes) in sufficient copies for each Lender: (i) Certified copies of the resolutions of the Board of Directors, or of the Executive Committee of the Board of Directors (or persons performing similar functions), of each Borrower, each Guarantor and each other Grantor (each a "LOAN 35 PARTY") authorizing each such Loan Party to enter into each Loan Document to which it is, or is to be, a party, and of all documents evidencing other necessary corporate or other action and Governmental Approvals, if any, with respect to each such Loan Document. (ii) A certificate of the Secretary or an Assistant Secretary of each Loan Party certifying the names, true signatures and incumbency of (A) the officers of such Loan Party authorized to sign the Loan Documents to which it is, or is to be, a party, and the other documents to be delivered hereunder and thereunder and (B) the representatives of such Loan Party authorized to sign notices to be provided under the Loan Documents to which it is, or is to be, a party, which representatives shall be acceptable to the Administrative Agent. (iii) Copies of the Certificate of Incorporation and by-laws (or comparable constitutive documents) of each Loan Party, together with all amendments thereto, certified by the Secretary or an Assistant Secretary of each such Loan Party. (iv) Good Standing Certificates (or other similar certificate) for each of the Loan Parties, issued by the Secretary of State of the jurisdiction of organization of each such Loan Party as of a recent date. (v) The Guaranty, duly executed by each Guarantor. (vi) The Pledge Agreements, duly executed by the Borrowers and each Grantor, as applicable. (vii) A certified copy of Schedule I hereto, in form and substance reasonably satisfactory to the Administrative Agent setting forth: (A) all Project Finance Debt of the Company and the Consolidated Subsidiaries, as of September 30, 2003; and (B) debt (as such term is construed in accordance with GAAP) of the Loan Parties as of September 30, 2003. (viii) A certificate, executed by a duly authorized officer of the Company, certifying that as of September 30, 2003 the Company was in compliance with the requirements of Section 4.4 of the AIG Pledge Agreement (which certificate shall set forth in reasonable detail the calculations upon which the Company determined such compliance). (ix) Favorable opinions of: (A) Belinda Foxworth, Esq., Deputy General Counsel of the Company and counsel for the other Loan Parties, in substantially the form of Exhibit C and as to such other matters as the Required Lenders, through the Administrative Agent, may reasonably request and (B) Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the Loan Parties, in substantially the form of Exhibit D and as to such other matters as the Required Lenders, through the Administrative Agent, may reasonably request. 36 (x) Duly executed copies of a Reaffirmation in the form of Attachment A attached hereto from each of the Company's Subsidiaries identified thereon. (b) The following statements shall be true and the Administrative Agent shall have received a certificate of a duly authorized officer of each Borrower, dated the Closing Date and in sufficient copies for each Lender stating that: (i) the representations and warranties set forth in Section 6.01 of this Agreement are true and correct with respect to such Borrower on and as of the Closing Date as though made on and as of such date, (ii) no event has occurred and is continuing that constitutes a Default or an Event of Default, and (iii) all Governmental Approvals necessary in connection with the Loan Documents and the transactions contemplated thereby and the continuing operations of such Borrower and its Subsidiaries have been obtained and are in full force and effect, and all third party approvals necessary or advisable in connection with the Loan Documents and the transactions contemplated thereby and the continuing operations of such Borrower and its Subsidiaries have been obtained and are in full force and effect, other than filings necessary to create or perfect security interests in the Collateral or as may be required under applicable energy, antitrust or securities laws in connection with the exercise of remedies with respect to certain Collateral. (c) The Administrative Agent shall have received evidence satisfactory to it that all financing statements relating to the Collateral have been completed for filing or recording and/or filed, and all certificates representing capital stock or other ownership interests included in the Collateral (including, without limitation, certificates, if any, representing the capital stock or other ownership interests identified on Schedule II hereto) have been delivered to the Collateral Agent (with duly executed stock powers). (d) The Borrowers shall have paid, on or before the Closing Date, all fees under or referenced in Section 2.02(b) and all expenses referenced in Section 10.04(a), in each case to the extent due and payable as of the Closing Date. (e) The Administrative Agent shall have received each of the following on or before the Closing Date, in each case in form and substance satisfactory to it with sufficient copies for each Lender: (i) A certificate, executed by the chief executive officer and the chief financial officer of the Company and Consumers, as applicable, in favor of the Agents and the Lenders with respect to the financial statements described in Sections 6.01(e)(i), (ii), (iii) and (iv) certifying that such financial statements have been prepared in accordance with GAAP (except for changes resulting from any Restatement Event other than the Restatement itself) and are true and correct as of the date of such certificate; (ii) Copies of the financial statements described in Sections 6.01(e)(i), (ii), (iii) and (iv); and 37 (iii) Copies of the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002. (f) The Administrative Agent shall have received evidence satisfactory to it that on the Closing Date all "Loans" under (and as defined in) the Existing Credit Agreement and all other amounts due under the Existing Credit Agreement have been paid in full by the Company. SECTION 5.02. CONDITIONS PRECEDENT TO EACH EXTENSION OF CREDIT. The obligation of each Lender to make an Extension of Credit (including the initial Extension of Credit, but excluding the Conversion of a Eurodollar Rate Loan into an ABR Loan) shall be subject to the further conditions precedent that, on the date of such Extension of Credit and after giving effect thereto: (a) The following statements shall be true (and each of the giving of the applicable notice or request with respect thereto and the making of such Extension of Credit without prior correction by the applicable Borrower shall (to the extent that such correction has been previously consented to by the Lenders) constitute a representation and warranty by such Borrower that, on the date of such Extension of Credit, such statements are true): (i) the representations and warranties contained in Section 6.01 of this Agreement (other than those contained in subsections (e)(v) and (f) thereof) are correct on and as of the date of such Extension of Credit, before and after giving effect to such Extension of Credit and to the application of the proceeds thereof, as though made on and as of such date; and (ii) no Default or Event of Default has occurred and is continuing, or would result from such Extension of Credit or the application of the proceeds thereof. (b) The Administrative Agent shall have received such other approvals, opinions and documents as any Lender, through the Administrative Agent, may reasonably request as to the legality, validity, binding effect or enforceability of the Loan Documents or the business, assets, property, financial condition, results of operations or prospects of the Company and its Consolidated Subsidiaries. SECTION 5.03. CONDITIONS PRECEDENT TO CERTAIN EXTENSIONS OF CREDIT. The obligation of each Lender to make an Extension of Credit (including the initial Extension of Credit) that would (after giving effect to all Extensions of Credit on such date and the application of proceeds thereof) increase the principal amount outstanding hereunder, shall be subject to the further conditions precedent that, on the date of such Extension of Credit and after giving effect thereto: (a) the following statements shall be true (and each of the giving of the applicable notice or request with respect thereto and the making of such Extension of Credit without prior correction by the applicable Borrower shall (to the extent that such correction has been previously consented to by the Lenders) constitute a representation and warranty by such Borrower that, on the date of such Extension of Credit, such statements are true): 38 (i) the representations and warranties contained in subsections (e)(v) and (f) of Section 6.01 of this Agreement are correct on and as of the date of such Extension of Credit, before and after giving effect to such Extension of Credit and to the application of the proceeds thereof, as though made on and as of such date; and (ii) no Default or Event of Default has occurred and is continuing, or would result from such Extension of Credit or the application of the proceeds thereof; (b) the Administrative Agent shall have received such other approvals, opinions and documents as any Lender, through the Administrative Agent, may reasonably request. SECTION 5.04. RELIANCE ON CERTIFICATES. The Lenders and each Agent shall be entitled to rely conclusively upon the certificates delivered from time to time by officers of the Loan Parties as to the names, incumbency, authority and signatures of the respective persons named therein until such time as the Administrative Agent may receive a replacement certificate, in form acceptable to the Administrative Agent, from an officer of such Person identified to the Administrative Agent as having authority to deliver such certificate, setting forth the names and true signatures of the officers and other representatives of such Person thereafter authorized to act on behalf of such Person. ARTICLE VI REPRESENTATIONS AND WARRANTIES SECTION 6.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. Each Borrower represents and warrants as follows: (a) Existence and Standing. Each of the Borrowers, Consumers and each of the Restricted Subsidiaries is duly organized, validly existing and in good standing under the laws of the state of its organization and is duly qualified to do business in, and is in good standing in, all other jurisdictions where the nature of its business or the nature of property owned or used by it makes such qualification necessary. (b) Authorization; No Conflicts. The execution, delivery and performance by each Loan Party of each Loan Document to which it is or will be a party (i) are within such Loan Party's powers, (ii) have been duly authorized by all necessary corporate or other organizational action or proceedings and (iii) do not and will not (A) require any consent or approval of the stockholders (or other applicable holder of equity) of such Loan Party (other than such consents and approvals which have been obtained and are in full force and effect), (B) violate any provision of the charter or by-laws (or other comparable constitutive documents) of such Loan Party or of law, (C) violate any legal restriction binding on or affecting such Loan Party, (D) result in a breach of, or constitute a default under, any indenture or loan or credit agreement or any other agreement, lease or instrument to which such Loan Party is a party or by which it or its properties may be bound or affected, or (E) result in or require the creation of any Lien (other than pursuant to the Loan Documents) upon or with respect to any of its respective properties. (c) Government Consent. No Governmental Approval is required, other than filings necessary to create or perfect security interests in the Collateral or as may be required 39 under applicable energy, antitrust or securities laws in connection with the exercise of remedies with respect to certain Collateral. (d) Security Interests; Enforceability. Each Loan Document executed on the Closing Date is, and each other Loan Document to which any Loan Party will be a party when executed and delivered hereunder will (i) where applicable, create valid and, upon filing of the financing statements delivered on the Closing Date and described in Section 5.01(c), perfected security interests in the Collateral covered thereby securing the payment of all of the Loans purported to be secured thereby, which security interests shall be first priority perfected security interests, subject to Liens permitted under Section 7.02(a), and (ii) be the legal, valid and binding obligation of such Loan Party enforceable against such Loan Party in accordance with its terms; subject to the qualification, however, that the enforcement of the rights and remedies herein and therein is subject to bankruptcy and other similar laws of general application affecting rights and remedies of creditors and the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). (e) Financial Statements; Material Adverse Change. (i) The consolidated balance sheets of the Company and its Consolidated Subsidiaries as at December 31, 2001 and December 31, 2002, and the related consolidated statements of income, retained earnings and cash flows of the Company and its Consolidated Subsidiaries for the fiscal years then ended, included in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, in each case as such financial statements have been restated in connection with the Restatement, copies of each of which have been furnished to the Administrative Agent for distribution to each Lender, fairly present the financial condition of the Company and its Consolidated Subsidiaries as at such dates and the results of operations of the Company and its Consolidated Subsidiaries for the periods ended on such dates (it being understood that such financial statements do not give effect to any Restatement Event other than the Restatement itself), all in accordance with generally accepted accounting principles consistently applied (except for changes resulting from any Restatement Event other than the Restatement itself); (ii) the consolidated balance sheets of Consumers and its consolidated Subsidiaries as at December 31, 2001 and December 31, 2002, and the related consolidated statements of income, retained earnings and cash flows of Consumers and its consolidated Subsidiaries for the fiscal years then ended, included in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, in each case as such financial statements have been restated in connection with the Restatement, copies of each of which have been furnished to the Administrative Agent for distribution to each Lender, fairly present the financial condition of Consumers and its consolidated Subsidiaries as at such dates and the results of operations of Consumers and its consolidated Subsidiaries for the periods ended on such dates (it being understood that such financial statements do not give effect to any Restatement Event other than the Restatement itself), all in accordance with generally accepted accounting principles consistently applied (except for changes resulting from any Restatement Event other than the Restatement itself); (iii) the consolidated balance sheets of the Company and its Consolidated Subsidiaries as at March 31, 2003, June 30, 2003 and September 30, 2003 and the related consolidated statements of income, retained earnings and cash flows of the Company and its Consolidated Subsidiaries for the fiscal quarter ending on each such date and for the period beginning January 1, 2003 and ending September 30, 2003, in each case as such financial statements have been restated in connection with the Restatement, copies of each of which have 40 been furnished to the Administrative Agent for distribution to each Lender, fairly present (subject to year-end audit adjustments) the financial condition of the Company and its Consolidated Subsidiaries as at each such date and the results of the Company and its Consolidated Subsidiaries for such periods (it being understood that such financial statements do not give effect to any Restatement Event other than the Restatement itself), all in accordance with generally accepted accounting principles consistently applied (except for changes resulting from any Restatement Event other than the Restatement itself); (iv) the consolidated balance sheets of Consumers and its Consolidated Subsidiaries as at March 31, 2003, June 30, 2003 and September 30, 2003 and the related consolidated statements of income, retained earnings and cash flows of Consumers and its Consolidated Subsidiaries for the fiscal quarter ending on each such date and for the period beginning January 1, 2003 and ending September 30, 2003, in each case as such financial statements have been restated in connection with the Restatement, copies of each of which have been furnished to the Administrative Agent for distribution to each Lender, fairly present (subject to year-end audit adjustments) the financial condition of Consumers and its Consolidated Subsidiaries as at each such date and the results of Consumers and its Consolidated Subsidiaries for such periods (it being understood that such financial statements do not give effect to any Restatement Event other than the Restatement), all in accordance with generally accepted accounting principles consistently applied (except for changes resulting from any Restatement Event other than the Restatement itself); (v) since December 31, 2002, except as disclosed in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002 and the Company's Quarterly Reports on Form 10-Q for the quarters ending March 31, 2003, June 30, 2003 and September 30, 2003 and Reports on Form 8-K filed with the Securities and Exchange Commission since December 31, 2002 but prior to the Closing Date, there has been no Material Adverse Change; and (vi) except as a result of any Restatement Event (other than the Restatement itself), no Loan Party has any material liabilities or obligations except as reflected in the foregoing financial statements and in Schedule I, as evidenced by the Loan Documents and as may be incurred, in accordance with the terms of this Agreement, in the ordinary course of business (as presently conducted) following the Closing Date. (f) Litigation. Except (i) as disclosed in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002 and the Company's Quarterly Reports on Form 10-Q for the quarters ending March 31, 2003, June 30, 2003 and September 30, 2003 and Reports on Form 8-K filed with the Securities and Exchange Commission since December 31, 2002 but prior to the Closing Date, and (ii) such other similar actions, suits and proceedings predicated on the occurrence of the same events giving rise to any actions, suits and proceedings described in the Reports filed with the Securities and Exchange Commission set forth in clause (i) above (all such matters in clauses (i) and (ii) being the "DISCLOSED MATTERS") and (iii) any Restatement Event, there are no pending or threatened actions, suits, investigations or proceedings against or, to the knowledge of such Borrower, affecting the Company or any of its Subsidiaries or the properties of the Company or any of its Subsidiaries before any court, governmental agency or arbitrator, that would, if adversely determined, reasonably be expected to materially adversely affect the financial condition, properties, business or operations of the Company and its Subsidiaries, considered as a whole, or affect the legality, validity or enforceability of this Agreement or any other Loan Document. There have been no material adverse developments with respect to the Disclosed Matters that have had or could reasonably be expected to result in a Material Adverse Change. 41 (g) Insurance. All insurance required by Section 7.01(b) is in full force and effect. (h) ERISA. No Plan Termination Event has occurred nor is reasonably expected to occur with respect to any Plan of the Company or any of its ERISA Affiliates which would result in a material liability to the Company, except as disclosed and consented to by the Required Lenders in writing from time to time. Except as disclosed in the Company's Annual Report on Form 10-K/A for the period ended December 31, 2002, since the date of the most recent Schedule B (Actuarial Information) to the annual report of the Company (Form 5500 Series), if any, there has been no material adverse change in the funding status of the Plans referred therein and no "prohibited transaction" has occurred with respect thereto which is reasonably expected to result in a material liability to the Company. Neither the Company nor any of its ERISA Affiliates has incurred nor reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan, except as disclosed and consented to by the Required Lenders in writing from time to time. (i) Casualty. No fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (except for any such circumstance, if any, which is covered by insurance which coverage has been confirmed and not disputed by the relevant insurer) affecting the properties, business or operations of any Borrower, Consumers or any Restricted Subsidiary has occurred that could reasonably be expected to have a material adverse effect on the business, assets, property, financial condition, results of operations or prospects of (A) the Company and its Subsidiaries, considered as a whole, or (B) Consumers and its Subsidiaries, considered as a whole. (j) Taxes. The Company and its Subsidiaries have filed all tax returns (Federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, or, to the extent the Company or any of its Subsidiaries is contesting in good faith an assertion of liability based on such returns, has provided adequate reserves for payment thereof in accordance with GAAP. (k) Legal Constraints on Dividends. No extraordinary judicial, regulatory or other legal constraints exist which limit or restrict Consumers' ability to declare or pay cash dividends with respect to its capital stock, other than (i) pursuant to the Consumers Credit Facility and (ii) any such restriction enacted or imposed by the Michigan Public Service Commission limiting such dividends to an amount not less than $190,000,000 during any twelve-month period. (l) Ownership of Certain Subsidiaries. The Company owns (i) not less than 80% of the outstanding shares of common stock of Enterprises and (ii) not less than 80% of the outstanding shares of common stock of Consumers. (m) Accuracy of Disclosures. The Consolidated 2003-2008 Projections of Consumers and the Borrowers (the "PROJECTIONS") are based upon assumptions that the Borrowers believed were reasonable at the time the Projections were delivered, and all other financial information delivered by the Borrowers to the Administrative Agent and the Banks on 42 and after December 8, 2003 is true and correct in all material respects as at the dates and for the periods indicated therein (it being understood that such Projections and financial information included therein do not give effect to any Restatement Event other than the Restatement itself). (n) Regulation U. (i) No Loan Party is engaged in the business of extending credit for the purpose of buying or carrying "margin stock" (within the meaning of Regulation U issued by the Board), (ii) and no proceeds of any Loan will be used to buy or carry any margin stock or to extend credit to others for the purpose of buying or carrying any margin stock and (iii) following application of the proceeds of each Extension of Credit, not more than 25 percent of the value of the assets of the Company and its Subsidiaries on a consolidated basis will be margin stock. (o) Investment Company Act. No Loan Party is an "investment company" (within the meaning of the Investment Company Act of 1940, as amended). (p) Acquisition of Securities. No proceeds of any Extension of Credit will be used to acquire any security in any transaction without the approval of the board of directors of the Person issuing such security if (i) the acquisition of such security would cause any Borrower to own, directly or indirectly, 5.0% or more of any outstanding class of securities issued by such Person, or (ii) such security is being acquired in connection with a tender offer. (q) PUHCA. No Loan Party is a registered "holding company" or a "subsidiary" or an "affiliate" of a registered "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, 15 USC 79 et seq. (r) Material Adverse Change Information. The Borrowers have not withheld any fact from the Administrative Agent or the Lenders in regard to the occurrence of any Material Adverse Change. (s) Solvency. After giving effect to the Loans to be made on the Closing Date or such other date as Loans requested hereunder are made, and the disbursement of the proceeds of such Loans pursuant to the applicable Borrower's instructions, the Company and its Subsidiaries, taken as a whole, are Solvent. (t) Project Finance Debt. Schedule I sets forth as of September 30, 2003 (i) all Project Finance Debt of the Company and the Consolidated Subsidiaries, and (ii) all debt (as such term is construed in accordance with GAAP) of the Loan Parties, and, as of the Closing Date, there are no defaults in the payment of principal or interest on any such Debt and no payments thereunder have been deferred or extended beyond their stated maturity (except as disclosed on such Schedule). ARTICLE VII COVENANTS OF THE BORROWERS SECTION 7.01. AFFIRMATIVE COVENANTS. So long as any Loan or any other amount payable hereunder or under any Promissory Note shall remain unpaid, or any Lender shall have any Commitment: 43 (a) Payment of Taxes, Etc. Each Borrower shall pay and discharge, and shall cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, all taxes, assessments and governmental charges, royalties or levies imposed upon it or upon its property except, in the case of taxes, to the extent such Borrower or any Subsidiary thereof, as the case may be, is contesting the same in good faith and by appropriate proceedings and has set aside adequate reserves for the payment thereof in accordance with GAAP. (b) Maintenance of Insurance. Each Borrower shall maintain, and shall cause each of the Restricted Subsidiaries and Consumers to maintain, insurance covering the Borrowers and each of the Restricted Subsidiaries and Consumers and their respective properties in effect at all times in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general geographical area in which the Borrowers and the Restricted Subsidiaries and Consumers operate, either with reputable insurance companies or, in whole or in part, by establishing reserves of one or more insurance funds, either alone or with other corporations or associations. (c) Preservation of Existence, Etc. Except as otherwise permitted by Section 7.02, each Borrower shall preserve and maintain, and shall cause each of the Restricted Subsidiaries and, in the case of the Company, Consumers to preserve and maintain, its corporate or limited liability company existence, material rights (statutory and otherwise) and franchises, and take such other action as may be necessary or advisable to preserve and maintain its right to conduct its business in the states where it shall be conducting its business. (d) Compliance with Laws, Etc. Each Borrower shall comply, and shall cause each of the Restricted Subsidiaries and Consumers to comply, in all material respects with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including any such laws, rules, regulations and orders relating to zoning, environmental protection, use and disposal of Hazardous Substances, land use, construction and building restrictions, and employee safety and health matters relating to business operations. (e) Inspection Rights. Subject to the requirements of laws or regulations applicable to such Borrower or its Subsidiaries, as the case may be, and in effect at the time, at any time and from time to time upon reasonable notice, each Borrower shall permit (i) each Agent and its agents and representatives to examine and make copies of and abstracts from the records and books of account of, and the properties of, such Borrower or any of its Subsidiaries and (ii) each Agent, each of the Lenders, and their respective agents and representatives to discuss the affairs, finances and accounts of such Borrower and its Subsidiaries with such Borrower and its Subsidiaries and their respective officers, directors and accountants. Each such visitation and inspection described in the preceding sentence by or on behalf of any Lender shall, unless occurring at a time when a Default or Event of Default shall be continuing, be at such Lender's expense; all other such inspections and visitations shall be at such Borrower's expense. (f) Keeping of Books. From and after December 31, 2002, each Borrower shall keep, and shall cause each of its Subsidiaries to keep, proper records and books of account, in which full and correct entries shall be made of all financial transactions of such Borrower and its Subsidiaries and the assets and business of such Borrower and its Subsidiaries, in accordance with GAAP (except as related to the Restatement). 44 (g) Maintenance of Properties, Etc. Each Borrower shall maintain, and shall cause each of the Restricted Subsidiaries to maintain, in substantial conformity with all laws and material contractual obligations, good and marketable title to all of its properties which are used or useful in the conduct of its business; provided, however, that the foregoing shall not restrict the sale or transfer of any asset of the Borrowers or any Restricted Subsidiary to the extent not otherwise prohibited by the terms of this Agreement. In addition, each Borrower shall preserve, maintain, develop, and operate, and shall cause each of its Subsidiaries to preserve, maintain, develop and operate, in substantial conformity with all laws and material contractual obligations, all of its material properties which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. (h) Use of Proceeds. The Borrowers shall use all Extensions of Credit for general corporate purposes (subject to the terms and conditions of this Agreement). (i) Consolidated Leverage Ratio. The Company shall maintain, as of the last day of each fiscal quarter (in each case, the "MEASUREMENT QUARTER"), a maximum ratio of (i) Consolidated Debt as of such day (calculated exclusive of Panhandle and its Subsidiaries), to (ii) Consolidated EBITDA for the immediately preceding four-fiscal-quarter period ending on such day (calculated exclusive of Panhandle and its Subsidiaries), of not more than 7.00 to 1.00, commencing with the Measurement Quarter ending December 31, 2003. (j) Cash Coverage Ratio. The Company shall maintain, as of the last day of each Measurement Quarter, a minimum ratio of (i) the sum of (A) Cash Dividend Income for the four-fiscal-quarter period ending on such day, plus (B) the lesser of (x) 25% of the Net Proceeds received by the Company from the sale, assignment or other disposition (but not the lease or license) of any property, including without limitation, any sale of capital stock or other equity interest in any of the Company's direct or indirect Subsidiaries during such period and (y) $50,000,000 to (ii) an amount equal to (A) interest expense (excluding (1) all arrangement, underwriting and other similar fees payable in connection with this Agreement, (2) all arrangement, underwriting and upfront fees paid in connection with the Borrowers' senior secured credit facilities dated March 30, 2003 and April 21, 2003 and (3) all interest or dividends paid on Hybrid Preferred Securities) accrued by the Company in respect of all Debt during such period, minus (B) cash interest income received by the Company from Persons other than any Subsidiary of the Company, during such period, minus (C) all amounts received by the Company from its Subsidiaries and Affiliates during such period constituting reimbursement of interest expense and commitment, guaranty and letter of credit charges of the Company to such Subsidiary or Affiliate, of not less than 1.20 to 1.00, commencing with the Measurement Quarter ending on December 31, 2003; provided, that the Company shall be deemed not to be in breach of the foregoing covenant if, during the Measurement Quarter, the Borrowers have permanently reduced the principal amount outstanding under this Agreement and the Promissory Notes, such that the amount determined pursuant to clause (ii) above, when recalculated on a pro forma basis assuming that the amount of such reduced principal amount outstanding under this Agreement and the Promissory Notes were in effect at all times during such four-fiscal-quarter period, would result in the Company being in compliance with such ratio. (k) Further Assurances. The Borrowers shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or that 45 any Lender through the Administrative Agent may reasonably request in order to give effect to the transactions contemplated by this Agreement and the other Loan Documents. In addition, the Borrowers will use all reasonable efforts to duly obtain or make Governmental Approvals required from time to time on or prior to such date as the same may become legally required. (l) Subsidiary Guarantees. The Borrowers will (i) with respect to each Person that becomes a Restricted Subsidiary after the Closing Date (other than (a) any Subsidiary of the Company organized under the laws of a jurisdiction located other than in the United States (each a "FOREIGN SUBSIDIARY") if the execution of the Guaranty by such Subsidiary would result in any materially adverse tax consequences to the Company and (b) MS&T), subject to any limitations under contractual restrictions as in effect as of the Closing Date or applicable law with respect to each Foreign Subsidiary, cause each such Restricted Subsidiary to execute the Guaranty pursuant to which it agrees to be bound by the terms and provisions of the Guaranty, and (ii) cause such Persons identified in clause (i) above to deliver resolutions, opinions of counsel and such other constitutive documentation as the Administrative Agent may reasonably request, all in form and substance reasonably satisfactory to the Administrative Agent. (m) Compliance with Fee Letter. The Borrowers shall comply with all of their respective obligations under the Fee Letter. (n) Payment of Declared Dividend. Each Borrower shall cause each of its direct Subsidiaries to, and Enterprises shall, pay all dividends within 30 days after declaration thereof. (o) Collateral. Each Borrower will cause, and will cause each of the other Loan Parties to cause, all of such Person's right, title and interest in, to and under the Collateral owned by it to be subject at all times to first priority, perfected security interests in favor of the Collateral Agent for the benefit of the Lenders to secure its respective Obligations, subject in any case to Liens permitted under Section 7.02(a). SECTION 7.02. NEGATIVE COVENANTS. So long as any Loan or any other amount payable hereunder or under any Promissory Note shall remain unpaid or any Lender shall have any Commitment, each Borrower agrees that it shall not, without the written consent of the Required Lenders: (a) Liens, Etc. (1) Create, incur, assume or suffer to exist, or permit any of the Loan Parties to create, incur, assume or suffer to exist, any Lien upon or with respect to any of its properties of any character (including capital stock and other ownership interests of the Borrowers' directly-owned Subsidiaries, intercompany obligations and accounts), whether now owned or hereafter acquired, or (2) file, or permit any of the other Loan Parties to file, under the Uniform Commercial Code of any jurisdiction a financing statement which names either Borrower or any other Loan Party as debtor (other than financing statements that do not evidence a Lien), or (3) sign, or permit any of the other Loan Parties to sign, any security agreement or other document authorizing any secured party thereunder to file any such financing statement, or (4) assign, or permit any of the other Loan Parties to assign, accounts, excluding, however, from the operation of the foregoing restrictions the Liens created under the Loan Documents and the following: 46 (i) Liens for taxes, assessments or governmental charges or levies to the extent not past due; (ii) cash pledges or deposits to secure (A) obligations under workmen's compensation laws or similar legislation, (B) public or statutory obligations of any of the other Loan Parties, (C) reimbursement obligations of Enterprises, CMS Generation or MS&T with respect to letters of credit issued by Bank of America, N.A. (or any of its affiliates), in connection with the settlement of claims related to MS&T's energy trading operations in an aggregate amount not to exceed $58,000,000, (D) Support Obligations of any Borrower or any Loan Party, or (E) obligations of Enterprises or MS&T in respect of hedging arrangements and commodity purchases and sales (including any cash margins with respect thereto); provided that with respect to clauses (D) and (E) above the aggregate amount of cash pledges or deposits securing such Support Obligations and such obligations of Enterprises or MS&T shall not exceed $400,000,000 at any one time outstanding; (iii) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's liens and other similar Liens arising in the ordinary course of business securing obligations which are not overdue or which have been fully bonded and are being contested in good faith; (iv) Liens securing the obligations under the Loan Documents; (v) Liens securing Off-Balance Sheet Liabilities (and all refinancings and recharacterizations thereof permitted under Section 7.02(b)(iv)) in an aggregate amount not to exceed $775,000,000; (vi) purchase money Liens or purchase money security interests upon or in property acquired or held by any Borrower or any other Loan Party in the ordinary course of business to secure the purchase price of such property or to secure indebtedness incurred solely for the purpose of financing the acquisition of any such property to be subject to such Liens or security interests, or Liens or security interests existing on any such property at the time of acquisition, or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided that no such Lien or security interest shall extend to or cover any property other than the property being acquired and no such extension, renewal or replacement shall extend to or cover property not theretofore subject to the Lien or security interest being extended, renewed or replaced, and provided, further, that the aggregate principal amount of the Debt at any one time outstanding secured by Liens permitted by this clause (vi) shall not exceed $15,000,000; (vii) utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of any Borrower or any other Loan Party; 47 (viii) Liens existing on any capital asset of any Person at the time such Person is merged or consolidated with or into, or otherwise acquired by, any Borrower or any other Loan Party and not created in contemplation of such event, provided that such Liens do not encumber any other property or assets and such merger, consolidation or acquisition is otherwise permitted under this Agreement; (ix) Liens existing on any capital asset prior to the acquisition thereof by any Loan Party and not created in contemplation thereof; provided that such Liens do not encumber any other property or assets; (x) Liens existing as of the Closing Date; (xi) Liens securing Project Finance Debt otherwise permitted under this Agreement; (xii) Liens arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses (v), (viii), (ix), (x) or (xi); provided that (a) such Debt is not secured by any additional assets, and (b) the amount of such Debt secured by any such Lien is otherwise permitted under this Agreement; (xiii) Liens on accounts receivable (other than intercompany receivables) and other contract rights of MS&T and its Subsidiaries arising on or after the Closing Date in favor of any Person (other than an Affiliate of the Company or any of its Subsidiaries) that facilitates the origination of such accounts receivable or other contract rights; (xiv) Liens on accounts receivable (other than intercompany receivables) of MS&T in favor of Bank of America, N.A. (or any of its affiliates) to secure the reimbursement obligations of Enterprises, CMS Generation and MS&T with respect to letters of credit issued by Bank of America, N.A. (or any of its affiliates) in connection with the settlement of claims related to MS&T's energy trading obligations in an aggregate amount not to exceed $58,000,000; (xv) subordinated Liens granted pursuant to the terms of the AIG Pledge Agreement, which Liens shall be subordinated pursuant to the terms of the Intercreditor Agreement, to secure certain surety bond obligations as described in the AIG Pledge Agreement; (xvi) assignment by MS&T of its rights under that certain Gas Purchase Agreement dated as of April 1, 1999 between MS&T and Quicksilver Resources, Inc. to Bank of America, N.A. (or any of its affiliates) in connection with the settlement of claims related to MS&T's energy trading operations; and (xvii) assignment of accounts constituting any portion of the assets transferred in connection with the Monetization Transaction. 48 (b) Debt. Permit Enterprises or any Subsidiary of Enterprises to create, incur, assume or suffer to exist any debt (as such term is construed in accordance with GAAP) other than: (i) debt arising by reason of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Enterprises' or its Subsidiaries' business; (ii) in the form of indemnities in respect of unfiled mechanics' liens and Liens affecting Enterprises' or its Subsidiaries' properties permitted under Section 7.02(a)(iii); (iii) debt arising under the Loan Documents; (iv) debt constituting Off-Balance Sheet Liabilities (including any recharacterization thereof as debt pursuant to any changes in generally accepted accounting principles hereafter required or permitted and which are adopted by the Company or any of its Subsidiaries with the agreement of its independent certified public accountants) to the extent permitted by Section 7.02(o), and any extensions, renewals, refundings or replacements thereof, provided that any such extension, renewal, refunding or replacement is in an aggregate principal amount not greater than the principal amount of, is an obligation of the same Person that is the obligor in respect of, and has a weighted average life to maturity not less than the weighted average life to maturity of, the debt so extended, renewed, refunded or replaced; (v) other debt of Enterprises and its Subsidiaries outstanding on the Closing Date (including the debt of the Loan Parties as of September 30, 2003 as set forth on Schedule I), and any extensions, renewals, refundings or replacements thereof, provided that any such extension, renewal, refunding or replacement is in an aggregate principal amount not greater than the principal amount of, is an obligation of the same Person that is the obligor in respect of, and has a weighted average life to maturity not less than the weighted average life to maturity of, the debt so extended, renewed, refunded or replaced; (vi) (a) unsecured, subordinated debt owed (i) to the Company by Enterprises, (ii) to Enterprises or CMS Capital, L.L.C. (or any successor by merger to CMS Capital, L.L.C.) and (iii) to any Grantor by any Loan Party, and (b) unsecured debt owed to any Subsidiary of Enterprises (other than a Grantor) by CMS Capital, L.L.C. (or any successor by merger to CMS Capital, L.L.C.), and (c) unsecured debt of any Foreign Subsidiary of Enterprises owed to another Foreign Subsidiary of Enterprises provided that the proceeds of any repayment of such debt are remitted to a Loan Party; (vii) Project Finance Debt of any Loan Party or any of its Subsidiaries incurred for working capital purposes (including construction) on or after the Closing Date; (viii) capital lease obligations and other Debt secured by purchase money Liens to the extent such Liens shall be permitted under Section 7.02(a)(vi); (ix) (a) Project Finance Debt incurred by Takoradi International Company in respect of the Takoradi Project (other than Project Finance Debt permitted to be incurred 49 pursuant to clause (vii) above) in an aggregate principal amount not to exceed $52,000,000 minus the Net Proceeds received by Takoradi International Company from the sale of accounts receivable; provided, that Takoradi International Company shall make a distribution of the Net Proceeds therefrom and the Company shall receive not less than its ratable share of such Net Proceeds; (x) reimbursement obligations of Enterprises, CMS Generation or MS&T with respect to letters of credit issued by Bank of America, N.A. (or any of its affiliates), in connection with the settlement of claims related to MS&T's energy trading operations in an aggregate amount not to exceed $58,000,000; (xi) Support Obligations of Enterprises or any Guarantor incurred in connection with the Takoradi Project, in an aggregate amount not to exceed $15,000,000; and (xii) preferred interests in the Monetization Entity acquired as part of the Monetization Transaction, even if classified as debt for GAAP purposes. (c) Lease Obligations. Create, incur, assume or suffer to exist, or permit any of the other Loan Parties to create, incur, assume or suffer to exist, any obligations as lessee for the rental or hire of real or personal property of any kind under leases or agreements to lease (other than leases which constitute Debt) having an original term of one year or more which would cause the aggregate direct or contingent liabilities of the Borrowers and the other Loan Parties in respect of all such obligations payable in any period of 12 consecutive calendar months to exceed $50,000,000. (d) Investments in Other Persons. Make, or permit any of the other Loan Parties to make, any loan or advance to any Person, or purchase or otherwise acquire any capital stock, obligations or other securities of, make any capital contribution to, or otherwise invest in, any Person, other than (i) Permitted Investments, (ii) pursuant to the contractual or contingent obligations of such Borrower or any other Loan Party as in effect as of the Closing Date and in amounts not to exceed the estimated amounts as set forth on Schedule I hereto (whether such obligation is conditioned upon a change in the ratings of the securities issued by such Person or otherwise) and, in each case, in an amount not to exceed such contractual or contingent obligation as in effect on the Closing Date, (iii) investments, directly or indirectly, by any Loan Party (x) in the capital of any Subsidiary of the Company that is a Loan Party and (y) in assets contributed to such Loan Party, provided that if any such assets constitute Collateral prior to such contribution, such assets shall remain Collateral after giving effect to such contribution and prior to such contribution such Borrower shall, and shall cause each applicable Subsidiary to, execute and deliver to the Administrative Agent all agreements, instruments and documents as may be necessary or reasonably requested by the Administrative Agent to perfect its security interest in such Collateral, (iv) investments in the capital stock or other ownership interests of any of the Company's Subsidiaries arising from the conversion of intercompany indebtedness to equity, (v) intercompany loans and advances to the extent the corresponding debt is permitted under Section 7.02(b)(vi), (vi) investments constituting non-cash consideration received in connection with the sale of any asset not otherwise prohibited under this Agreement, (vii) investments constituting the contribution of certain assets in connection with the initial capitalization of the Monetization 50 Entity within the scope of the definition of "Monetization Transaction", and (viii) additional loans, advances, purchases, contributions and other investments in an amount not to exceed $340,000,000 in the aggregate at any time; provided, however, that investments described in clauses (iv) (solely with respect to investments made in any Subsidiary that is not a Loan Party) and (vii) above shall not be permitted to be made at a time when either a Default or an Event of Default shall be continuing or would result therefrom; provided, further, that, notwithstanding the foregoing, neither such Borrower nor any Loan Party shall make any loans or advances to any of the Company's Subsidiaries other than, to the extent otherwise permitted hereunder, Enterprises or any Subsidiary of Enterprises. (e) Restricted Payments. Declare or pay, or permit any other Loan Party to declare or pay, directly or indirectly, any dividend, payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any share of any class of common stock of the Company or any share of any class of capital stock or other ownership interests of any of the other Loan Parties (other than (1) stock splits and dividends payable solely in nonconvertible equity securities of the Company (other than Redeemable Stock or Exchangeable Stock (as such terms are defined in the Indenture on the Closing Date)) and (2) dividends and distributions made to such Borrower or a Loan Party), or purchase, redeem, retire, or otherwise acquire for value, or permit any of the other Loan Parties to purchase, redeem, retire, or otherwise acquire for value, any shares of any class of common stock of the Company or any share of any class of capital stock or other ownership interests of any of the other Loan Parties or any warrants, rights, or options to acquire any such shares, now or hereafter outstanding, or make, or permit any of the other Loan Parties to make, any distribution of assets to any of its shareholders (other than distributions to such Borrower or any other Loan Party) (any such dividend, payment, distribution, purchase, redemption, retirement or acquisition being hereinafter referred to as a "RESTRICTED PAYMENT") other than (i) pursuant to the terms of any class of capital stock of the Company issued and outstanding (and as in effect on) the Closing Date, any purchase or redemption of capital stock of the Company made by exchange for, or out of the proceeds of the substantially concurrent sale of, capital stock of the Company (other than Redeemable Stock or Exchangeable Stock (as such terms are defined in the Indenture on the Closing Date)); and (ii) payments made by such Borrower or any other Loan Party pursuant to the Tax Sharing Agreement. (f) Compliance with ERISA. (i) Permit to exist any "accumulated funding deficiency" (as defined in Section 412(a) of the Internal Revenue Code of 1986, as amended), (ii) terminate, or permit any ERISA Affiliate to terminate, any Plan or withdraw from, or permit any ERISA Affiliate to withdraw from, any Multiemployer Plan, so as to result in any material (in the opinion of the Required Lenders) liability of such Borrower, any other Loan Party or Consumers to such Plan, Multiemployer Plan or the PBGC, or (iii) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, which presents a material (in the opinion of the Required Lenders) risk of such a termination by the PBGC of any Plan or withdrawal from any Multiemployer Plan so as to result in a material liability to such Borrower, any other Loan Party or Consumers. (g) Transactions with Affiliates. Enter into, or permit any of its Subsidiaries to enter into, any transaction with any of its Affiliates unless such transaction is on terms no less favorable to such Borrower or such Subsidiary than if the transaction had been negotiated in 51 good faith on an arm's-length basis with a non-Affiliate; provided that the Monetization Transaction and any transaction permitted under Sections 7.02(b), 7.02(e) or 7.02(h) shall be permitted hereunder. (h) Mergers, Etc. Merge with or into or consolidate with or into, or permit any of the other Loan Parties or Consumers to merge with or into or consolidate with or into, any other Person, except that (i) (x) any Loan Party may merge with or into any other Loan Party, (y) any Subsidiary of a Loan Party that is not a Loan Party may merge into such Loan Party or with or into any other Subsidiary of any Loan Party, provided that (a) in any such merger with or into a Borrower, such Borrower (or, in the case of a merger of the Company and Enterprises, the Company) is the surviving corporation, (b) in any such merger into a Loan Party under clause (y) above, the Loan Party is the survivor thereof, (c) no Default or Event of Default shall be continuing or result therefrom and (d) such Loan Party shall not be liable with respect to any Debt or allow its property to be subject to any Lien which it could not become liable with respect to or allow its property to become subject to under this Agreement or any other Loan Document on the date of such transaction, and (ii) any Loan Party may merge with or into any other Person, provided that (a) (x) such Loan Party is the survivor thereof, or (y) in the case of any Loan Party that is a corporation reconstituting itself as limited liability company, such limited liability company shall be the survivor thereof and shall confirm its obligations as successor to such Loan Party under the Loan Documents to which such Loan Party is a party in form and substance reasonably acceptable to the Administrative Agent (and any Loan Party that shall have pledged the capital stock of such predecessor Loan Party shall reconfirm the pledge of such survivor's ownership interests as Collateral under the Loan Documents) and such survivor shall be thereafter deemed to be a Loan Party hereunder, (b) no Default or Event of Default shall be continuing or result therefrom, (c) such Loan Party shall not be liable with respect to any Debt or allow its property to be subject to any Lien which it could not become liable with respect to or allow its property to become subject to under this Agreement or any other Loan Document on the date of such transaction, and (d) immediately after giving effect to such merger, the Net Worth of such Loan Party shall be equal to or greater than the Net Worth of such Loan Party as of the last day of the fiscal quarter immediately preceding the date of such merger. (i) Sales, Etc., of Assets. Sell, lease, transfer, assign, or otherwise dispose of all or any substantial part of its assets, or permit any of the other Loan Parties (other than MS&T) to sell, lease, transfer, or otherwise dispose of all or any substantial part of its assets, except to give effect to a transaction permitted by subsection (h) above or subsection (j) below, provided, further, that neither such Borrower nor any of the other Loan Parties (other than MS&T) shall sell, assign, transfer, lease, convey or otherwise dispose of any property, whether now owned or hereafter acquired, or any income or profits therefrom, or enter into any agreement to do so, except: (A) the sale of property for consideration not less than the Fair Market Value thereof so long as (i) any non-cash consideration resulting from such sale shall be pledged or assigned to the Collateral Agent, for the benefit of the Lenders, pursuant to an instrument in form and substance reasonably acceptable to the Collateral Agent, (ii) cash consideration resulting from such sale shall be (x) in an amount determined by such Borrower for any sale the consideration of which is $10,000,000 or less, or, together with all other such sales under this clause (x), $25,000,000 or less, or (y) for all other sales, not 52 less than 90% of the aggregate consideration resulting from such sale, and (iii) such Borrower complies with the mandatory prepayment provisions set forth in Section 2.03(c); (B) the transfer of property from a Loan Party to any Loan Party; (C) the transfer of property constituting an investment otherwise permitted under Section 7.02(d); (D) the sale of electricity and natural gas and other property in the ordinary course of the Company's and its Subsidiaries respective businesses consistent with past practice; (E) any transfer of an interest in receivables and related security, accounts or notes receivable on a limited recourse basis in connection with the incurrence of Off-Balance Sheet Liabilities, provided that such transfer qualifies as a legal sale and as a sale under GAAP and the incurrence of such Off-Balance Sheet Liabilities is permitted under Section 7.02(o); (F) a sale within the scope of the definition of "Monetization Transaction"; (G) the transfer of property constituting not more than two percent (2%) of the ownership interests held by the Company and its Subsidiaries as of the Closing Date in CMS International Ventures, L.L.C. to CMS Energy Foundation and/or Consumers Foundation and/or any other third-party 501(c)(3) charitable organization; and (H) the disposition of equipment if such equipment is obsolete or no longer useful in the ordinary course of such Borrower's or such Subsidiary's business. (j) Maintenance of Ownership of Subsidiaries. Sell, transfer, assign or otherwise dispose of any shares of capital stock or other ownership interests of any of the Loan Parties or any warrants, rights or options to acquire such capital stock or other ownership interests, or permit any other Loan Party to issue, sell, transfer, assign or otherwise dispose of any shares of its capital stock or other ownership interests or the capital stock or other ownership interests of any other Loan Party or any warrants, rights or options to acquire such capital stock or other ownership interests, except (i) to give effect to a transaction permitted by subsection (d), (h) or (i) above, and (ii) in connection with the foreclosure of any Liens permitted under Section 7.02(a)(iv). (k) Amendment of Tax Sharing Agreement. Directly or indirectly, amend, modify, supplement, waive compliance with, seek a waiver under, or assent to noncompliance with, any term, provision or condition of the Tax Sharing Agreement if the effect of such amendment, modification, supplement, waiver or assent is to (i) reduce materially any amounts otherwise payable to, or increase materially any amounts otherwise owing or payable by, such Borrower thereunder, or (ii) change materially the timing of any payments made by or to such Borrower thereunder. 53 (l) Prepayments of Indebtedness. Make or agree to pay or make, or permit any of the other Loan Parties to make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash, securities or other property) of or in respect of principal of or interest on any Debt (other than the obligations of the Loan Parties under the Loan Documents), or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Debt (other than the obligations of the Loan Parties under the Loan Documents), other than (i) any payments on account of (a) any Debt when and as such payment was due (including at the maturity thereof if the initial stated maturity thereof is on or prior to the Maturity Date) pursuant to the mandatory payment provisions applicable to such Debt at the time it was incurred (including, without limitation, regularly scheduled payment dates for principal, interest, fees and other amounts due thereon) or any extension thereof thereafter granted by the holder of such Debt, (b) refinancings of Debt otherwise permitted under this Agreement, (c) any Debt owed to the Company or any of its Subsidiaries, (d) Debt secured by a Lien on assets subject to an asset sale not otherwise prohibited under this Agreement and (e) the extinguishment of any intercompany Debt in connection with a dividend or distributions permitted under Section 7.02(e), (ii) payments constituting the exchange of the Company's common stock (other than Redeemable Stock or Exchangeable Stock (as such terms are defined in the Indenture on the Closing Date)) for the Company's outstanding Debt (and any cash payments made in lieu of the issuance of fractional shares) to the extent such exchange is permitted under the Exchange Act, and (iii) so long as no Loans or other Obligations shall be outstanding hereunder and the Company shall have Cash and Permitted Investments in an aggregate amount not less than $100,000,000 after giving effect thereto, any payment in respect of any other Debt. (m) Conduct of Business. Engage, or permit any Restricted Subsidiary to engage, in any business other than (a) the business engaged in by the Company and its Subsidiaries on the date hereof, and (b) any business or activities which are substantially similar, related or incidental thereto. (n) Organizational Documents. Amend, modify or otherwise change, or permit any Restricted Subsidiary to amend, modify or otherwise change any of the terms or provisions in any of their respective certificate of incorporation and by-laws (or comparable constitutive documents) as in effect on the Closing Date in any manner adverse to the interests of the Lenders. (o) Off-Balance Sheet Liabilities. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries (other than, in the case of the Company, Consumers and its Subsidiaries) to create, incur, assume or suffer to exist, Off-Balance Sheet Liabilities (exclusive of lease obligations otherwise permitted under Section 7.02(c)) in the aggregate in excess of $775,000,000 at any time. SECTION 7.03. REPORTING OBLIGATIONS. So long as any Loan or any other amount payable hereunder or under any Promissory Note shall remain unpaid or any Lender shall have any Commitment, the Company will, unless the Required Lenders shall otherwise consent in writing, furnish to the Administrative Agent (for delivery to each Lender), the following: 54 (a) as soon as possible and in any event within five days after any Borrower knows or should have reason to know of the occurrence of each Default or Event of Default continuing on the date of such statement, a statement of the chief financial officer or chief accounting officer of the Company setting forth details of such Default or Event of Default and the action that the Borrowers propose to take with respect thereto; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Company, commencing with the fiscal quarter ending on March 31, 2004, (i) a consolidated balance sheet and consolidated statements of income and retained earnings and of cash flows of the Company and its Subsidiaries as at the end of such quarter and for the period commencing at the end of the previous fiscal year and ending with the end of such quarter (which requirement shall be deemed satisfied by the delivery of the Company's quarterly report on Form 10-Q for such quarter), all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer or chief accounting officer of the Company as having been prepared in accordance with GAAP, (ii) a consolidated balance sheet and consolidated statements of income and retained earnings and of cash flows of Consumers and its Subsidiaries as at the end of such quarter and for the period commencing at the end of the previous fiscal year and ending with the end of such quarter (which requirement shall be deemed satisfied by the delivery of the Company's quarterly report on Form 10-Q for such quarter), all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer or chief accounting officer of Consumers as having been prepared in accordance with GAAP, (iii) a schedule (substantially in the form of Exhibit E appropriately completed) of (1) for the periods ending March 31, 2004 and thereafter, the computations used by the Company in determining compliance with the covenants contained in Sections 7.01(i) and 7.01(j) and the ratio set forth in Section 8.01(j), (2) all Project Finance Debt of the Company and the Consolidated Subsidiaries, together with the Company's Ownership Interest in each such Consolidated Subsidiary and (3) all Support Obligations of the Borrowers of the types described in clauses (iv) and (v) of the definition of Support Obligations (whether or not each such Support Obligation or the primary obligation so supported is fixed, conclusively determined or reasonably quantifiable), to the extent such Support Obligations have not been previously disclosed as "Consolidated Debt" pursuant to clause (1) above, and (iv) a certificate of the chief financial officer or chief accounting officer of each Borrower stating that no Default or Event of Default has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action that the Borrowers propose to take with respect thereto; (c) as soon as available and in any event within 120 days after the end of each fiscal year of the Company and its Subsidiaries, commencing with the fiscal year ending on December 31, 2003, a copy of the Annual Report on Form 10-K (or any successor form) for the Company and its Subsidiaries for such year, including therein (i) a consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year and consolidated statements of income and retained earnings and of cash flows of the Company and its Subsidiaries for such fiscal year, accompanied by a report thereon of a nationally-recognized independent public accounting firm, and (ii) a consolidated balance sheet of Consumers and its Subsidiaries as of the end of such fiscal year and consolidated statements of income and retained earnings and of cash flows of Consumers and its Subsidiaries for such fiscal year, accompanied by a report thereon of a nationally-recognized independent public accounting firm, together with (iii) a schedule in 55 form satisfactory to the Required Lenders of (1) the computations used by such accounting firm in determining, as of the end of such fiscal year, compliance with the covenants contained in Sections 7.01(i) and 7.01(j) and the ratio set forth in Section 8.01(j), (2) all Project Finance Debt of the Company and the Consolidated Subsidiaries, together with the Company's Ownership Interest in each such Consolidated Subsidiary and (3) all Support Obligations of the Borrowers of the types described in clauses (iv) and (v) of the definition of Support Obligations (whether or not each such Support Obligation or the primary obligation so supported is fixed, conclusively determined or reasonably quantifiable), to the extent such Support Obligations have not been previously disclosed as "Consolidated Debt" pursuant to clause (1) above, and (iv) a certificate of the chief financial officer or chief accounting officer of each Borrower stating that no Default or Event of Default has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action that the Borrowers propose to take with respect thereto; (d) as soon as available and in any event within 60 days after the end of each of each fiscal quarter of Enterprises, commencing with the fiscal quarter ending on March 31, 2004, a consolidated balance sheet and consolidated statements of income and retained earnings and of cash flows of Enterprises and its Subsidiaries as at the end of such quarter and for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer or chief accounting officer of Enterprises as having been prepared in accordance with GAAP; (e) as soon as available and in any event within 120 days after the end of each fiscal year of Enterprises and its Subsidiaries, commencing with the fiscal year ending on December 31, 2003, a consolidated balance sheet of Enterprises and its Subsidiaries as of the end of such fiscal year and consolidated statements of income and retained earnings and of cash flows of Enterprises and its Subsidiaries for such fiscal year, all in reasonable detail and duly certified by the chief financial officer or chief accounting officer of Enterprises as having been prepared in accordance with GAAP; (f) as soon as possible and in any event (A) within 30 days after the Company knows or has reason to know that any Plan Termination Event described in clause (i) of the definition of Plan Termination Event with respect to any Plan of the Company or any ERISA Affiliate of the Company has occurred and could reasonably be expected to result in a material liability to the Company and (B) within 10 days after the Company knows or has reason to know that any other Plan Termination Event with respect to any Plan of the Company or any ERISA Affiliate of the Company has occurred and could reasonably be expected to result in a material liability to the Company, a statement of the chief financial officer or chief accounting officer of the Company describing such Plan Termination Event and the action, if any, which the Company proposes to take with respect thereto; (g) promptly after receipt thereof by the Company or any of its ERISA Affiliates from the PBGC, copies of each notice received by the Company or any such ERISA Affiliate of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; 56 (h) promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan (if any) to which the Company is a contributing employer; (i) promptly after receipt thereof by the Company or any of its ERISA Affiliates from a Multiemployer Plan sponsor, a copy of each notice received by the Company or any of its ERISA Affiliates concerning the imposition or amount of withdrawal liability in an aggregate principal amount of at least $250,000 pursuant to Section 4202 of ERISA in respect of which the Company is reasonably expected to be liable; (j) promptly after the Company becomes aware of the occurrence thereof, notice of all actions, suits, proceedings or other events of the type described in Section 6.01(f); (k) promptly after the sending or filing thereof, notice to the Administrative Agent and each Lender of any sending or filing of all proxy statements, financial statements and reports which the Company sends to its public security holders (if any), all regular, periodic and special reports which the Company files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange, pursuant to the Exchange Act, and all final prospectuses with respect to any securities issued or to be issued by the Company or any of its Subsidiaries; (l) as soon as possible and in any event within five days after the occurrence of any material default under any material agreement to which the Company or any of its Subsidiaries is a party, which default would materially adversely affect the business, assets, property, financial condition, results of operations or prospects of the Company and its Subsidiaries, considered as a whole, any of which is continuing on the date of such certificate, a certificate of the chief financial officer of the Company setting forth the details of such material default and the action which the Company or any such Subsidiary proposes to take with respect thereto; (m) concurrently with the closing of the transaction described in clause (iii) of the definition of "Monetization Transaction", a certificate from the chief financial officer or chief accounting officer of the Company certifying that, as of the date thereof, no Default or Event of Default shall be continuing or result therefrom; (n) promptly after requested, such other information respecting the business, properties, condition or operations, financial or otherwise, of the Company and its Subsidiaries as any Agent or the Required Lenders may from time to time reasonably request in writing. The Company shall be deemed to have fulfilled its obligations pursuant to clauses (b), (c), (d), (e), (j) and (k) above to the extent the Administrative Agent (and the Lenders, if applicable) receives an electronic copy of the requisite document or documents in a format reasonably acceptable to the Administrative Agent, provided that a tangible copy of each requisite document delivered electronically is made available by the Company promptly upon request by any Agent or Lender. 57 ARTICLE VIII DEFAULTS SECTION 8.01. EVENTS OF DEFAULT. If any of the following events (each an "EVENT OF DEFAULT") shall occur and be continuing, the Administrative Agent and the Lenders shall be entitled to exercise the remedies set forth in Section 8.02: (a) The Borrowers shall fail to pay (i) any principal of any Loan when due or (ii) any interest thereon, fees or other Obligations (other than any principal of any Loan) payable hereunder within two Business Days after such interest, fees or other amounts shall have become due; or (b) Any representation or warranty made by or on behalf of any Loan Party in any Loan Document or certificate or other writing delivered pursuant thereto shall prove to have been incorrect in any material respect when made or deemed made; or (c) Any Borrower or any of its Subsidiaries shall fail to perform or observe any term or covenant on its part to be performed or observed contained in Section 7.01(c), (h), (i), (j), (l) or (n) or in Section 7.02 hereof (and the Borrowers, each Lender and each Agent hereby agrees that an Event of Default under this subsection (c) shall be given effect as if the defaulting Subsidiary were a party to this Agreement); or (d) Any Borrower or any of its Subsidiaries shall fail to perform or observe any other term or covenant on its part to be performed or observed contained in any Loan Document and any such failure shall remain unremedied, after written notice thereof shall have been given to the Borrowers by the Administrative Agent, for a period of 10 Business Days (and the Borrowers, each Lender and each Agent hereby agrees that an Event of Default under this subsection (d) shall be given effect as if the defaulting Subsidiary were a party to this Agreement); or (e) Any Borrower, any Restricted Subsidiary or Consumers shall fail to pay any of its Debt (including any interest or premium thereon but excluding Debt incurred under this Agreement) aggregating, in the case of the Borrowers and each Restricted Subsidiary, $10,000,000 or more or, in the case of Consumers, $25,000,000 or more, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in any agreement or instrument relating to such Debt; or any other default under any agreement or instrument relating to any such Debt (including any "amortization event" or event of like import in connection with any Off-Balance Sheet Liabilities), or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is (i) to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof; unless in each such case the obligee under or holder of such Debt shall have waived in writing such circumstance so that such circumstance is no longer continuing, or (ii) with respect to any such event occurring in connection with any Off-Balance Sheet Liabilities aggregating $10,000,000 or more, to terminate the reinvestment of collections or proceeds of receivables and related security under any 58 agreements or instruments related thereto (other than a termination resulting solely from the request of the Company or its Subsidiaries); or (f) (i) Any Borrower, any Restricted Subsidiary or Consumers shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make an assignment for the benefit of creditors; or (ii) any proceeding shall be instituted by or against any Borrower, any Restricted Subsidiary or Consumers seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of its debts under any law relating to bankruptcy, insolvency, or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, in the case of a proceeding instituted against a Borrower, either such proceeding shall remain undismissed or unstayed for a period of 60 days or any of the actions sought in such proceeding (including the entry of an order for relief against a Borrower, a Restricted Subsidiary or Consumers or the appointment of a receiver, trustee, custodian or other similar official for such Borrower, such Restricted Subsidiary or Consumers or any of its property) shall occur; or (iii) any Borrower, any Restricted Subsidiary or Consumers shall take any corporate or other action to authorize any of the actions set forth above in this subsection (f); or (g) Any judgment or order for the payment of money in excess of $10,000,000 shall be rendered against any Borrower, any Guarantor or any of their respective properties and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (h) Any material provision of any Loan Document, after execution hereof or delivery thereof under Article V, shall for any reason other than the express terms hereof or thereof cease to be valid and binding on any party thereto; or any Loan Party shall so assert in writing; or any Guarantor shall terminate or revoke any of its obligations under the Guaranty; or (i) Any "Event of Default" shall occur under and as defined in the AIG Pledge Agreement, as the same may be amended, restated, supplemented or otherwise modified from time to time; or (j) There shall be imposed or enacted any Consumers Dividend Restriction, the result of which is that the Dividend Coverage Ratio shall be less than 1.15 to 1.0 at any time after the imposition of such Consumers Dividend Restriction; or (k) At any time, for any reason (except to the extent permitted by the terms of the Loan Documents or due to any failure by the Collateral Agent to take any action on its part to be performed under applicable law in order to maintain the perfection or priority of any such Liens), (i) the Liens intended to be created under any of the Loan Documents with respect to Collateral having a Fair Market Value of $10,000,000 or more become, or the Company or any of its Subsidiaries seeks to render such Liens, invalid or unperfected, or (ii) Liens in favor of the Collateral Agent for the benefit of the Lenders contemplated by the Loan Documents with 59 respect to Collateral having a Fair Market Value of $10,000,000 or more shall, at any time, for any reason, be invalidated or otherwise cease to be in full force and effect, or such Liens shall not have the priority contemplated by this Agreement or the Loan Documents. SECTION 8.02. REMEDIES. If any Event of Default has occurred and is continuing, then the Administrative Agent or the Collateral Agent, as applicable, shall at the request, or may with the consent, of the Required Lenders, upon notice to the Borrowers (i) declare the Commitments and the obligation of each Lender to make or Convert Loans to be terminated, whereupon the same shall forthwith terminate, (ii) declare the principal amount outstanding hereunder, all interest thereon and all other amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon the principal amount outstanding hereunder, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by each Borrower, and (iii) exercise in respect of any and all Collateral, in addition to the other rights and remedies provided for herein or otherwise available to the Administrative Agent, the Collateral Agent or the Lenders, all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of New York and in effect in any other jurisdiction in which Collateral is located at that time; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to any Borrower or any Guarantor under the Bankruptcy Code, (A) the Commitments and the obligation of each Lender to make or Convert Loans shall automatically be terminated and (B) the principal amount outstanding hereunder, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by each Borrower. ARTICLE IX THE AGENTS SECTION 9.01. AUTHORIZATION AND ACTION. (a) Each of the Lenders hereby irrevocably appoints each Agent (other than the Syndication Agent and the Documentation Agents) as its agent and authorizes each such Agent to take such actions on its behalf and to exercise such powers as are delegated to such Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. (b) Any Lender serving as an Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not an Agent, and such Lender and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Company or any of its Subsidiaries or other Affiliate thereof as if it were not an Agent hereunder. (c) No Agent shall have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (i) no Agent shall be subject to any fiduciary or other implied duties, regardless of whether a Default or an Event of Default has occurred and is continuing, (ii) no Agent shall have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers 60 expressly contemplated by the Loan Documents that such Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 10.01), and (iii) except as expressly set forth in the Loan Documents, no Agent shall have any duty to disclose, or shall be liable for the failure to disclose, any information relating to the Company or any of its Subsidiaries or Affiliates that is communicated to or obtained by the Lender serving as such Agent or any of its Affiliates in any capacity. No Agent shall be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 10.01 or any other provision of this Agreement) or in the absence of its own gross negligence or willful misconduct. Each Agent shall be deemed not to have knowledge of any Default or Event of Default unless and until written notice thereof is given to such Agent by a Borrower or a Lender (in which case such Agent shall promptly give a copy of such written notice to the Lenders and the other Agents). No Agent shall be responsible for or have any duty to ascertain or inquire into (A) any statement, warranty or representation made in or in connection with any Loan Document, (B) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (C) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (D) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (E) the satisfaction of any condition set forth in Article V or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to such Agent. Neither the Syndication Agent nor the Documentation Agents shall have any duties or obligations in such capacity under any of the Loan Documents. (d) Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. Each Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. Each Agent may consult with legal counsel (who may be counsel for the Borrowers), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. (e) Each Agent may perform any and all its duties and exercise its rights and powers by or through one or more sub-agents appointed by such Agent. Each Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding subsections of this Section 9.01 shall apply to any such sub-agent and to the Related Parties of each Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as an Agent. (f) Subject to the appointment and acceptance of a successor Agent as provided in this subsection (f), any Agent may resign at any time by notifying the Lenders and the Borrowers. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrowers, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of 61 the Lenders, appoint a successor Agent which shall be a Lender with an office in New York, New York, or an Affiliate of any such Lender. Upon the acceptance of its appointment as an Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrowers to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrowers and such successor. After an Agent's resignation hereunder, the provisions of this Article and Section 10.04 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as an Agent. (g) Each Lender acknowledges that it has independently and without reliance upon any Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon any Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder. Each Lender agrees (except as provided in Section 10.05) that it will not take any legal action, nor institute any actions or proceedings, against any Borrower or any other obligor hereunder or with respect to any Collateral, without the prior written consent of the Required Lenders. Without limiting the generality of the foregoing, no Lender may accelerate or otherwise enforce its portion of the Loans, or unilaterally terminate its Commitment except in accordance with Section 8.02. SECTION 9.02. INDEMNIFICATION. The Lenders agree to indemnify each Agent (to the extent not reimbursed by the Borrowers), ratably according to the respective Percentages of the Lenders, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against such Agent in any way relating to or arising out of this Agreement or any action taken or omitted by such Agent under this Agreement, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agents and the Arrangers promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Agents and the Arrangers in connection with the preparation, syndication, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement to the extent that the Agents and the Arrangers are entitled to reimbursement for such expenses pursuant to Section 10.04 but are not reimbursed for such expenses by the Borrowers. SECTION 9.03. CONCERNING THE COLLATERAL AND THE LOAN DOCUMENTS. (a) Each Lender authorizes and directs the Collateral Agent to enter into the Loan Documents relating to the Collateral for the benefit of the Lenders. Each Lender agrees that any action taken by any Agent or the Required Lenders (or, where required by the express 62 terms of this Agreement, a greater proportion of the Lenders) in accordance with the provisions of this Agreement or the other Loan Documents, and the exercise by any Agent or the Required Lenders (or, where so required, such greater proportion) of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all of the Lenders. Without limiting the generality of the foregoing, the Collateral Agent shall have the sole and exclusive right and authority to (i) act as the disbursing and collecting agent for the Lenders with respect to all payments and collections arising in connection with this Agreement and the Loan Documents relating to the Collateral; (ii) execute and deliver each Loan Document relating to the Collateral and accept delivery of each such agreement delivered by any Borrower or any other Loan Party a party thereto; (iii) act as collateral agent for the Lenders for purposes of the perfection of all Liens created by such agreements and all other purposes stated therein; provided, however, the Collateral Agent hereby appoints, authorizes and directs the other Agents and the Lenders to act as collateral sub-agent for the Collateral Agent and the Lenders for purposes of the perfection of all Liens with respect to any property of the Company or any of its Subsidiaries at any time in the possession of such Lender, including, without limitation, deposit accounts maintained with, and cash held by, such Lender; (iv) manage, supervise and otherwise deal with the Collateral; (v) take such action as is necessary or desirable to maintain the perfection and priority of the Liens created or purported to be created by the Loan Documents; and (vi) except as may be otherwise specifically restricted by the terms of this Agreement or any other Loan Document, exercise all remedies given to the Collateral Agent or the Lenders with respect to the Collateral under the Loan Documents relating thereto, applicable law or otherwise. (b) The Administrative Agent and each Lender hereby directs, in accordance with the terms of this Agreement, the Collateral Agent to release any Lien held by the Collateral Agent for the benefit of the Lenders: (i) against all of the Collateral, upon payment in full of the Obligations of all of the Loan Parties under the Loan Documents and termination of this Agreement; (ii) against any part of the Collateral sold or disposed of by the Company or any of its Subsidiaries, if such sale or disposition is otherwise permitted under this Agreement, as certified to the Collateral Agent by the Borrowers, or is otherwise consented to by the Required Lenders; (iii) against any part of the Collateral consisting of a promissory note, upon payment in full of the Debt evidenced thereby; and/or (iv) against any of the Collateral and any Grantor upon the occurrence of any event described in Section 8.10 of the Pledge Agreement described in clause (i) of the definition of "Pledge Agreements" or in Section 9.10 of the Pledge Agreement described in clause (ii) of the definition of "Pledge Agreements". The Administrative Agent and each Lender hereby directs the Collateral Agent to execute and deliver or file such termination and partial release statements and do such other things as are necessary to release Liens to be released pursuant to this Section 9.03(b) promptly upon the effectiveness of any such release. 63 SECTION 9.04. RELEASE OF GUARANTORS. Upon (x) the liquidation or dissolution of any Guarantor, or sale of all of the capital stock or other ownership interests of any Guarantor, or the sale of assets of any Guarantor the result of which is that such Guarantor no longer qualifies as a Restricted Subsidiary, in each case which is permitted pursuant to the terms of any Loan Document or consented to in writing by the Required Lenders or all of the Lenders, as applicable, and upon at least five (5) Business Days' prior written request by the Borrowers or (y) the occurrence of any event described in Section 11 of the Guaranty, the Collateral Agent shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be necessary to evidence the release of the applicable Guarantor from its obligations under the Guaranty; provided, however, that (i) the Collateral Agent shall not be required to execute any such document on terms which, in the Collateral Agent's opinion, would expose the Collateral Agent to liability or create any obligation or entail any consequence other than the release of such Guarantor without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Loans, any other Guarantor's obligations under the Guaranty, or, if applicable, any obligations of any Borrower or any Subsidiary of any Borrower in respect of the proceeds of any such sale retained by any Borrower or any Subsidiary of any Borrower. ARTICLE X MISCELLANEOUS SECTION 10.01. AMENDMENTS, ETC. No amendment or waiver of any provision of any Loan Document, nor consent to any departure by any Borrower or any other Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following: (i) waive, modify or eliminate any of the conditions specified in Article V, (ii) increase the Commitments of the Lenders that may be maintained hereunder, (iii) reduce or forgive the principal of, or interest on, any Loan, any Applicable Margin, any Commitment Fee Margin or any fees or other amounts payable hereunder (other than fees payable to the Administrative Agent pursuant to Section 2.02(b)), (iv) postpone any date fixed for any payment of principal of, or interest on, any Loan or any fees or other amounts payable hereunder (other than fees payable to the Administrative Agent pursuant to Section 2.02(b)) (except with respect to any modifications of the provisions relating to amounts, timing or application of prepayments of Loans and other Obligations which modification shall require only the approval of the Required Lenders), (v) change the definition of "Required Lenders" contained in Section 1.01 or change any other provision that specifies the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans or the number of Lenders which shall be required for the Lenders or any of them to take any action hereunder, (vi) amend, waive or modify Section 2.03(b) or this Section 10.01, (vii) release the Collateral Agent's Lien on all of the Collateral or any portion of the Collateral in excess of $50,000,000 (except as provided in Section 9.03(b)), (viii) extend the Commitment Termination Date or the Maturity Date or (ix) amend, waive or modify any provision of Section 4.01(g), 4.05 or 4.07 that provides for or ensures ratable distributions to the Lenders; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by each affected Agent in addition to the Lenders required above to take such action, affect the rights or duties of any Agent under this Agreement or any other Loan Document. Any 64 request from the Borrowers for any amendment, waiver or consent under this Section 10.01 shall be addressed to the Administrative Agent. SECTION 10.02. NOTICES, ETC. Subject to Section 10.14, all notices and other communications provided for hereunder and under the other Loan Documents shall be in writing and mailed, sent by courier service, telecopied or delivered, (i) if to either Borrower, at its address at One Energy Plaza, Jackson, Michigan 49201, Attention: S. Kinnie Smith, Jr., General Counsel, with a copy to Laura L. Mountcastle, Vice President, Investor Relations and Treasurer, One Energy Plaza, Jackson, Michigan 49201; (ii) if to any Bank, at the address set forth on Schedule III hereto with respect to such Bank; (iii) if to any Lender other than a Bank, at its Applicable Lending Office specified in the Lender Assignment pursuant to which it became a Lender; (iv) if to the Administrative Agent with respect to funding or payment of any amounts hereunder, at its address at 2 Penns Way, Suite 200, New Castle, DE 19270, Attn: Dawn Conover, Telephone No. (302) 894-6063, Telecopy No. (302) 894-6120; (v) if to the Administrative Agent for any other reason or to the Collateral Agent, at its address at 388 Greenwich Street, New York, New York 10003, Attn: Nick McKee, Telephone No. (212) 816-8592, Telecopy No. (212) 816-8098; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. Each such notice or other communication shall be effective (i) if given by telecopy transmission, when transmitted to the telecopy number specified in this Section 10.02 and confirmation of receipt is received, (ii) if given by mail, 5 days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered at the address specified in this Section 10.02, except that notices and communications to any Agent pursuant to Article II, III, or IX shall not be effective until received by such Agent. SECTION 10.03. NO WAIVER OF REMEDIES. No failure on the part of any Borrower, any Lender or any Agent to exercise, and no delay in exercising, any right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 10.04. COSTS, EXPENSES AND INDEMNIFICATION. (a) The Borrowers jointly and severally agree to (i) reimburse on demand all reasonable costs and expenses of each Agent and each Arranger (including reasonable fees and expenses of counsel to the Agents) in connection with (A) the preparation, syndication, negotiation, execution and delivery of the Loan Documents and (B) the care and custody of any and all collateral, and any proposed modification, amendment, or consent relating to any Loan Document, and (ii) to pay on demand all reasonable costs and expenses of each Agent and, on and after the date upon which the principal amount outstanding hereunder becomes or is declared to be due and payable pursuant to Section 8.02 or an Event of Default specified in Section 8.01(a) shall have occurred and be continuing, each Lender (including fees and expenses of counsel to the Agents, special Michigan counsel to the Lenders and, from and after such date, counsel for each Lender (including the allocated costs and expenses of in-house counsel)) in connection with the workout, restructuring or enforcement (whether through negotiations, legal 65 proceedings or otherwise) of this Agreement, the other Loan Documents and the other documents to be delivered hereunder. (b) The Borrowers jointly and severally agree to indemnify each Agent, each Arranger, each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "INDEMNIFIED PERSON") against, and hold each Indemnified Person harmless from, any and all losses, claims, damages, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnified Person, incurred by or asserted against any Indemnified Person arising out of, in connection with, or as a result of (i) the execution or delivery of any Loan Document or any other agreement or instrument contemplated hereby or thereby, the performance by the parties to the Loan Documents of their respective obligations thereunder or the consummation of the transactions contemplated hereby or thereby, (ii) any Loan or other Extension of Credit or the use or proposed use of the proceeds therefrom, (iii) any actual or alleged presence or release of any Hazardous Substance on or from any property owned or operated by any Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to any Borrower or any of its Subsidiaries, (iv) the use of the Platform as contemplated herein, or (v) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnified Person is a party thereto; provided that such indemnity shall not, as to any Indemnified Person, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnified Person. (c) The Borrowers' other obligations under this Section 10.04 shall survive the repayment of all amounts owing to the Lenders and the Agents under the Loan Documents and the termination of the Commitments. If and to the extent that the obligations of any Borrower under this Section 10.04 are unenforceable for any reason, the Borrowers jointly and severally agree to make the maximum contribution to the payment and satisfaction thereof which is permissible under applicable law. SECTION 10.05. RIGHT OF SET-OFF. (a) Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 8.02 to authorize the Administrative Agent to declare the principal amount outstanding hereunder to be due and payable pursuant to the provisions of Section 8.02, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of any Borrower, against any and all of the obligations of such Borrower now or hereafter existing under this Agreement and the Promissory Notes held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such Promissory Notes, as the case may be, and although such obligations may be unmatured. Each Lender agrees to notify promptly the applicable Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off 66 and application. The rights of each Lender under this Section 10.05 are in addition to other rights and remedies (including other rights of set-off) which such Lender may have. (b) Each Borrower agrees that it shall have no right of off-set, deduction or counterclaim in respect of its obligations hereunder, and that the obligations of the Lenders hereunder are several and not joint. Nothing contained herein shall constitute a relinquishment or waiver of any Borrower's rights to any independent claim that such Borrower may have against any Agent or any Lender for such Agent's or such Lender's, as the case may be, gross negligence or willful misconduct, but no Lender shall be liable for any such conduct on the part of any Agent or any other Lender, and no Agent shall be liable for any such conduct on the part of any Lender or any other Agent. SECTION 10.06. BINDING EFFECT. This Agreement shall become effective when it shall have been executed by the Borrowers and the Agents and when the Administrative Agent shall have been notified by each Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrowers, the Agents and each Lender and their respective successors and assigns, except that, other than in connection with Enterprises reconstituting itself as a limited liability company as permitted under Section 7.02(h), neither Borrower shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 10.07. ASSIGNMENTS AND PARTICIPATION. (a) Any Lender may sell participations in all or a portion of its rights and obligations under this Agreement pursuant to subsection (b) below and any Lender may assign all or any part of its rights and obligations under this Agreement pursuant to subsection (c) below. (b) Any Lender may sell participations to one or more banks or other entities (each a "PARTICIPANT") in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and its outstanding Loan), provided that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrowers hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of the Loans of such Lender for all purposes of this Agreement and (iv) the Borrowers shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which would require consent of all of the Lenders pursuant to the terms of Section 10.01 or of any other Loan Document. The Borrowers agree that each Participant shall be deemed to have the right of set-off provided in Section 10.05 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of set-off provided in Section 10.05 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each 67 Participant, and each Participant, by exercising the right of set-off provided in Section 10.05, agrees to share with each Lender, any amount received pursuant to the exercise of its right of set-off, such amounts to be shared in accordance with Section 10.05 as if each Participant were a Lender. The Borrowers further agree that each Participant shall be entitled to the benefits of Sections 4.04 and 4.06 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 10.07(c); provided that (i) a Participant shall not be entitled to receive any greater payment under Section 4.04 or 4.06 than the Lender who sold the participating interest to such Participant would have received had it retained such interest for its own account, unless the sale of such interest to such Participant is made with the prior written consent of the Borrowers, and (ii) any Participant not incorporated under the laws of the United States of America or any State thereof agrees to comply with the provisions of Section 4.06 to the same extent as if it were a Lender. (c) Any Lender may, in the ordinary course of its business and in accordance with applicable law, with the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed), at any time assign to any other Lender or to any Eligible Bank all or any part of its rights and obligations under this Agreement, provided that the aggregate of the Commitments and the principal amount the Loans subject to any such assignment (other than assignments to a Federal Reserve Bank, or to any other Lender, or to any direct or indirect contractual counterparties in swap agreements relating to the Loans to the extent required in connection with the physical settlement of any Lender's obligations pursuant thereto) shall be $5,000,000 (or such lesser amount consented to by the Administrative Agent); provided that, unless such Lender is assigning all of its rights and obligations hereunder, after giving effect to such assignment the assigning Lender shall have Commitments and Loans in the aggregate of not less than $5,000,000 (unless otherwise consented to by the Administrative Agent). (d) Any Lender may, in connection with any sale or participation or proposed sale or participation pursuant to this Section 10.07 disclose to the purchaser or Participant or proposed purchaser or Participant any information relating to the Borrowers furnished to such Lender by or on behalf of the Borrowers, provided that prior to any such disclosure of non-public information, the purchaser or Participant or proposed purchaser or Participant (which Participant is not an affiliate of a Lender) shall agree to preserve the confidentiality of any confidential information (except any such disclosure as may be required by law or regulatory process) relating to the Borrowers received by it from such Lender. (e) Assignments under this Section 10.07 shall be made pursuant to an agreement (a "LENDER ASSIGNMENT") substantially in the form of Exhibit F hereto or in such other form as may be agreed to by the parties thereto and shall not be effective until a $3,500 fee has been paid to the Administrative Agent by the assignee, which fee shall cover the cost of processing such assignment, provided, that such fee shall not be incurred in the event of an assignment by any Lender of all or a portion of its rights under this Agreement to (i) a Federal Reserve Bank, (ii) a Lender (iii) an affiliate of the assigning Lender (which affiliate shall be an Eligible Bank) or (iv) to any direct or indirect contractual counterparties in swap agreements relating to the Loans to the extent required in connection with the physical settlement of any Lender's obligations pursuant thereto. 68 (f) Notwithstanding anything to the contrary contained herein, any Lender (a "GRANTING LENDER") may grant to a special purpose funding vehicle (an "SPC"), identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrowers, the option to provide to the Borrowers all or any part of any Loan that such Granting Lender is obligated to make to the Borrowers pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Loan, (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall remain obligated to make such Loan pursuant to the terms hereof, (iii) the Borrowers shall not be required to pay any amount under Section 4.06 that is greater than the amount which it would have been required to pay had there been no grant to an SPC and (iv) any SPC (or assignee of an SPC) will comply, if applicable, with the provisions contained in Section 4.06. No grant by any Granting Lender to an SPC agreeing to provide a Loan or the making of such Loan by such SPC shall operate to relieve such Granting Lender of its liabilities and obligations hereunder, except to the extent of the making of such Loan by such SPC. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In addition, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that any SPC may (i) with notice to, but without the prior written consent of, the Borrowers and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Administrative Agent in its sole discretion) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC. This Section 10.07(f) may not be amended without the written consent of any SPC that holds an option to provide Loans. No recourse under any obligation, covenant, or agreement of the SPC contained in this Agreement shall be had against any shareholder, officer, agent or director of the SPC as such, by the enforcement of any assessment or by any proceeding, by virtue of any statute or otherwise; it being expressly agreed and understood that this Agreement is a corporate obligation of the SPC and no personal liability shall attach to or be incurred by any officer, agent or member of the SPC as such, or any of them under or by reason of any of the obligations, covenants or agreements of the SPC contained in this Agreement, or implied therefrom, and that any and all personal liability for breaches by the SPC of any such obligations, covenants or agreements, either at law or by statute or constitution, of every such shareholder, officer, agent or director is hereby expressly waived by all parties to this Agreement as a condition of and consideration for the SPC entering into this Agreement; provided, however, that the foregoing shall not relieve any such person or entity of any liability they might otherwise have as a result of fraudulent actions or omissions taken by them. All parties to this Agreement acknowledge and agree that the SPC shall only be liable for any claims that each of them may have against the SPC only to the extent of the SPC's assets. The provisions of this clause shall survive the termination of this Agreement. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including without limitation any pledge or assignment to secure obligations to a Federal Reserve Bank; 69 provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. (h) The Administrative Agent shall maintain at its address referred to in Section 10.02 a copy of each Lender Assignment delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time (the "REGISTER"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrowers, the Agents and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by any Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. SECTION 10.08. CONFIDENTIALITY. In connection with the negotiation and administration of this Agreement and the other Loan Documents, the Borrowers have furnished and will from time to time furnish to the Agents and the Lenders (each, a "RECIPIENT") written information which is identified to the Recipient when delivered as confidential (such information, other than any such information which (i) was publicly available, or otherwise known to the Recipient, at the time of disclosure, (ii) subsequently becomes publicly available other than through any act or omission by the Recipient or (iii) otherwise subsequently becomes known to the Recipient other than through a Person whom the Recipient knows to be acting in violation of his or its obligations to the Borrowers, being hereinafter referred to as "CONFIDENTIAL INFORMATION"). The Recipient will not knowingly disclose any such Confidential Information to any third party (other than to those persons who have a confidential relationship with the Recipient), and will take all reasonable steps to restrict access to such information in a manner designed to maintain the confidential nature of such information, in each case until such time as the same ceases to be Confidential Information or as the Borrowers may otherwise instruct. It is understood, however, that the foregoing will not restrict the Recipient's ability to freely exchange such Confidential Information with its Affiliates or with prospective Participants in or assignees of the Recipient's position herein, but the Recipient's ability to so exchange Confidential Information shall be conditioned upon any such Affiliate's or prospective Participant's (as the case may be) entering into an agreement as to confidentiality similar to this Section 10.08. It is further understood that the foregoing will not prohibit the disclosure of any or all Confidential Information if and to the extent that such disclosure may be required (1) by a regulatory agency, self-regulatory body or otherwise in connection with an examination of the Recipient's records by appropriate authorities, (2) pursuant to court order, subpoena or other legal process or in connection with any proceeding, suit or other action relating to any Loan Document or (3) otherwise, as required by law; in the event of any required disclosure under clause (2) or (3), above, the Recipient agrees to use reasonable efforts to inform the Borrowers as promptly as practicable to the extent not prohibited by law. Notwithstanding any other provision of this Agreement, each party (and each Participant pursuant to Section 10.07) (and each employee, representative or other agent of such party (or Participant)) may disclose to any and all persons, without limitation of any kind, the U.S. tax treatment and U.S. tax structure of the transactions contemplated by the Loan Documents and all materials of any kind (including opinions or other tax analyses) that are provided to such party relating to such U.S. tax treatment and U.S. tax structure, other than any information for which nondisclosure is reasonably necessary in order to comply with applicable securities laws. 70 SECTION 10.09. Waiver of Jury Trial. THE BORROWERS, THE AGENTS AND THE LENDERS EACH HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OTHER INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER OR THEREUNDER. SECTION 10.10. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT AND THE PROMISSORY NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAWS OF THE STATE OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES). THE BORROWERS, THE LENDERS AND THE AGENTS, EACH (I) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT SITTING IN NEW YORK CITY IN ANY ACTION ARISING OUT OF ANY LOAN DOCUMENT, (II) AGREES THAT ALL CLAIMS IN SUCH ACTION MAY BE DECIDED IN SUCH COURT, (III) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM AND (IV) CONSENTS TO THE SERVICE OF PROCESS BY MAIL. A FINAL JUDGMENT IN ANY SUCH ACTION SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR AFFECT ITS RIGHT TO BRING ANY ACTION IN ANY OTHER COURT. EACH BORROWER AGREES THAT THE AGENTS SHALL HAVE THE RIGHT TO PROCEED AGAINST SUCH BORROWER OR ITS PROPERTY IN A COURT IN ANY LOCATION TO ENABLE THE AGENTS AND THE LENDERS TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF ANY AGENT OR ANY LENDER. EACH BORROWER AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY ANY AGENT OR ANY LENDER TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF ANY AGENT OR ANY LENDER. EACH BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH ANY AGENT OR ANY LENDER MAY COMMENCE A PROCEEDING DESCRIBED IN THIS SECTION. SECTION 10.11. RELATION OF THE PARTIES; NO BENEFICIARY. No term, provision or requirement, whether express or implied, of any Loan Document, or actions taken or to be taken by any party thereunder, shall be construed to create a partnership, association, or joint venture between such parties or any of them. No term or provision of this Agreement or any other Loan Document shall be construed to confer a benefit upon, or grant a right or privilege to, any Person other than the parties hereto or thereto. Each Borrower hereby acknowledges that neither any Agent nor any Lender has any fiduciary relationship with or fiduciary duty to such Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Agents and the Lenders, on the one hand, and such Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. 71 SECTION 10.12. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. SECTION 10.13. SURVIVAL OF AGREEMENT. All covenants, agreements, representations and warranties made herein and in the certificates pursuant hereto shall be considered to have been relied upon by the Agents and the Lenders and shall survive the making by the Lenders of the Extensions of Credit and the execution and delivery to the Lenders of any Promissory Notes evidencing the Extensions of Credit and shall continue in full force and effect so long as any Promissory Note or any amount due hereunder is outstanding and unpaid or any Commitment of any Lender has not been terminated. SECTION 10.14. PLATFORM. (a) Each Borrower shall use its commercially reasonable best efforts to transmit to the Administrative Agent all information, documents and other materials that it is obligated to furnish to the Administrative Agent pursuant to this Agreement and the other Loan Documents, including, without limitation, all notices, requests, financial statements, financial and other reports, certificates and other information materials, but excluding any such communication that (i) relates to a notice of borrowing or other extension of credit or a conversion of an existing interest rate on any Loan or Borrowing (including, without limitation, any Notice of Conversion), (ii) relates to the payment of any principal or other amount due hereunder prior to the scheduled date therefor, (iii) provides notice of any Default or Event of Default hereunder or (iv) is required to be delivered to satisfy any condition precedent to the effectiveness of this Agreement and/or any Extension of Credit hereunder (all such non-excluded communications being referred to herein collectively as "COMMUNICATIONS"), in an electronic/soft medium in a format reasonably acceptable to the Administrative Agent to oploanswebadmin@citigroup.com (or such other e-mail address designated by the Administrative Agent from time to time). In addition, each Borrower shall continue to provide the Communications to the Administrative Agent in the manner specified in this Agreement but only to the extent requested by the Administrative Agent. Each Lender and the Borrowers further agree that the Administrative Agent may make the Communications available to the Lenders by posting the Communications on IntraLinks or a substantially similar electronic transmission system (the "PLATFORM"); provided, however, that upon written notice to the Administrative Agent and the Company, any Lender (such lender a "DECLINING LENDER") may decline to receive Communications via the Platform and shall direct the Company to provide, and the Company shall so provide, such Communications to such Declining Lender by delivery to such Declining Lender's address set forth on Schedule III hereto, or as specified in the Lender Assignment pursuant to which it become a Lender or as otherwise directed in such notice. Subject to the conditions set forth in the proviso in the immediately preceding sentence, nothing in this Section 10.14 shall prejudice the right of the Administrative Agent to make the Communications available to the Lenders in any other manner specified herein. (b) Each Lender (other than a Declining Lender) agrees that e-mail notice to it (at the address provided pursuant to the next sentence and deemed delivered as provided in the next paragraph) specifying that Communications have been posted to the Platform shall 72 constitute effective delivery of such Communications to such Lender for purposes of this Agreement. Each Lender (other than a Declining Lender) agrees (i) to notify the Administrative Agent in writing (including by electronic communication) from time to time to ensure that the Administrative Agent has on record an effective e-mail address for such Lender to which the foregoing notice may be sent by electronic transmission and (ii) that the foregoing notice may be sent to such e-mail address. (c) Each party hereto (other than a Declining Lender) agrees that any electronic communication referred to in this Section 10.14 shall be deemed delivered upon the posting of a record of such communication as "sent" in the e-mail system of the sending party or, in the case of any such communication to the Administrative Agent, upon the posting of a record of such communication as "received" in the e-mail system of the Administrative Agent, provided that if such communication is not so received by the Administrative Agent during the normal business hours of the Administrative Agent, such communication shall be deemed delivered at the opening of business on the next business day for the Administrative Agent. (d) Each party hereto acknowledges that the distribution of material through an electronic medium is not necessarily secure and there are confidentiality and other risks associated with such distribution. (e) EACH PARTY HERETO FURTHER ACKNOWLEDGES AND AGREES THAT: (i) NONE OF THE ADMINISTRATIVE AGENT, ITS AFFILIATES NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ADVISORS OR REPRESENTATIVES (COLLECTIVELY, THE "CITIGROUP PARTIES") WARRANTS THE ADEQUACY OF THE PLATFORM OR THE ACCURACY OR COMPLETENESS OF ANY COMMUNICATIONS, AND EACH CITIGROUP PARTY EXPRESSLY DISCLAIMS LIABILITY FOR ERRORS OR OMISSIONS IN ANY COMMUNICATIONS, AND (ii) NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY CITIGROUP PARTY IN CONNECTION WITH ANY COMMUNICATIONS OR THE PLATFORM. (f) This Section 10.14 shall terminate on the date that neither CUSA nor any of the Citigroup Parties is the Administrative Agent under this Agreement. ARTICLE XI CO-BORROWER PROVISIONS SECTION 11.01. APPOINTMENT. Each of the Borrowers hereby irrevocably designates, appoints and authorizes the other Borrower as its agent and attorney-in-fact to take actions under this Agreement and the other Loan Documents, together with such powers as are reasonably incidental thereto. The Agents and the Lenders shall be entitled to rely, and shall be fully 73 protected in relying, upon any communication from or to any Borrower as having been delivered by or to all Borrowers. Any action taken by one Borrower under this Agreement and the other Loan Documents shall be binding upon the other Borrower. Each Borrower agrees that it is jointly and severally liable to the Agents and the Lenders for the payment of the Obligations and that such liability is independent of the Obligations of the other Borrower and whether such Obligations become unenforceable against the other Borrower. SECTION 11.02. SEPARATE ACTIONS. A separate action or actions may be brought and prosecuted against any Borrower whether such action is brought against the other Borrower or whether the other Borrower is joined in such action or actions. Each Borrower authorizes the Administrative Agent and the Lenders to release the other Borrower without in any manner or to any extent affecting the liability of such Borrower hereunder or under the Loan Documents. Each Borrower waives any defense arising by reason of any disability or other defense of the other Borrower, or the cessation for any reason whatsoever of the liability of the other Borrower with respect to any of the Obligations, or any claim that such Borrower's liability hereunder exceeds or is more burdensome than the liability of the other Borrower. SECTION 11.03. OBLIGATIONS ABSOLUTE AND UNCONDITIONAL. Each Borrower hereby agrees that its Obligations hereunder and under the Loan Documents shall be unconditional, irrespective of: (a) the validity, enforceability, avoidance or subordination of any of the Obligations or any of the Loan Documents as to the other Borrower; (b) the absence of any attempt by, or on behalf of, any Agent or any Lender to collect, or to take any other action to enforce, all or any part of the Obligations whether from or against the other Borrower; (c) any borrowing or grant of a security interest by the other Borrower or any receiver or assignee in relation to the other Borrower following the occurrence of any event described in Section 8.01(f), pursuant to any provision of applicable law comparable to Section 364 of the Bankruptcy Code; (d) the disallowance, under any provision of applicable law comparable to Section 502 of the Bankruptcy Code, of all or any portion of the claims against the other Borrower held by any Lender or any Agent, for repayment of all or any part of the Obligations; (e) the insolvency of the other Borrower; and (f) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of the other Borrower (other than payment in full in cash of the Obligations and the termination of the Commitments). SECTION 11.04. WAIVERS AND ACKNOWLEDGEMENTS. (a) Except as otherwise expressly provided under any provision of the Loan Documents or as required by any mandatory provision of applicable law, each Borrower hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of 74 receivership, insolvency or bankruptcy of any Borrower or any other Person, protest or notice with respect to the Obligations, all setoffs and counterclaims and all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor and notices of acceptance of this Agreement and the other Loan Documents, and all other demands whatsoever (and shall not require that the same be made on the other Borrower as a condition precedent to the other Borrower's Obligations hereunder), and covenants that this Agreement (and the joint and several liability of each Borrower under Section 11.01) will not be discharged, except by payment in full in cash of the Obligations and the termination of the Commitments. Each Borrower further waives all notices of the existence, creation or incurrence of new or additional Debt, arising either from additional loans extended to the other Borrower or otherwise, and also waives all notices that the principal amount, or any portion thereof, and/or any interest on any instrument or document evidencing all or any part of the Obligations is due, notices of any and all proceedings to collect from the maker, any endorser or any other guarantor of all or any part of the Obligations, or from any other Person, and, to the extent permitted by law, notices of exchange, sale, surrender or other handling of any security or Collateral given to any Agent or any Lender to secure payment of all or any part of the Obligations. (b) The Agents and/or the Lenders are hereby authorized, without notice or demand and without affecting the liability of the Borrowers hereunder, from time to time, (i) to accept partial payments on all or any part of the Obligations; (ii) to take and hold security or Collateral for the payment of all or any part of the Obligations, this Agreement, or any other guaranties of all or any part of the Obligations or other liabilities of the Borrowers, and (iii) to settle, release, exchange, enforce, waive, compromise or collect or otherwise liquidate all or any part of the Obligations, this Agreement, any guaranty of all or any part of the Obligations, and, subject to the terms of the Pledge Agreements, any security or Collateral for the Obligations or for any such guaranty, irrespective of the effect on the contribution or subrogation rights of the Borrowers. Any of the foregoing may be done in any manner, without affecting or impairing the obligations of each Borrower hereunder. SECTION 11.05. CONTRIBUTION AMONG BORROWERS. (a) To the extent that any payment is made on the Obligations by or on behalf of any Borrower under or pursuant to this Article 11 (a "Borrower Payment") which, taking into account all other Borrower Payments then previously or concurrently made by any other Borrower, exceeds the amount which otherwise would have been paid by or attributable to such Borrower if each Borrower had paid the aggregate Obligations satisfied by such Borrower Payment in the same proportion as such Borrower's "Allocable Amount" (as defined below) (as determined immediately prior to such Borrower Payment) bore to the aggregate Allocable Amounts of each of the Borrower as determined immediately prior to the making of such Borrower Payment, then, following payment in full in cash of the Obligations and the termination or expiration of all Commitments, such Borrower shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, the other Borrower for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Borrower Payment. (b) As of any date of determination, the "Allocable Amount" of any Borrower shall be equal to the maximum amount of the claim which could then be recovered from such 75 Borrower with respect to the Obligations without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law. (c) This Section 11.05 is intended only to define the relative rights of the Borrowers, and nothing set forth in this Section 11.05 is intended to or shall impair the obligations of the Borrowers to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Agreement. (d) The parties hereto acknowledge that the rights of contribution and indemnification hereunder shall constitute assets of the Borrower to which such contribution and indemnification is owing. (e) The rights of the indemnifying Borrower against the other Borrower with respect to any payments on the Obligations shall be exercisable upon the full payment of the Obligations in cash and the termination or expiry of the Commitments. SECTION 11.06. SUBROGATION; REINSTATEMENT. Until the Obligations shall have been paid in full in cash and the Commitments shall have been terminated, each Borrower hereby agrees that it (i) shall have no right of subrogation with respect to such Obligations (under contract, Section 509 of the Bankruptcy Code or any comparable provision of any other applicable law, or otherwise) or any other right of indemnity, reimbursement or contribution, and (ii) hereby waives any right to enforce any remedy which any Agent or any Lender may now have or may hereafter have against the other Borrower. The provisions of this Article XI shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Collateral Agent, the Administrative Agent or any Lender upon the insolvency, bankruptcy or reorganization of either Borrower or otherwise, all as though such payment had not been made. SECTION 11.07. SUBORDINATION. Each Borrower agrees that any and all claims of such Borrower against the other Borrower, the Guarantors or any endorser or other guarantor of all or any part of the Obligations, or against any of their respective properties, shall be subordinated to all of the Obligations; provided, that, for the avoidance of doubt, so long as no Event of Default shall be continuing, each Borrower may make loans to and receive payments in the ordinary course with respect to Inter-Borrower Debt (as hereinafter defined) from the other Borrower to the extent not prohibited by the terms of this Agreement and the other Loan Documents. Notwithstanding any right of any Borrower to ask for, demand, sue for, take or receive any payment from the other Borrower, all rights and Liens of such Borrower, whether now or hereafter arising and howsoever existing, in any assets of the other Borrower (whether constituting part of the Collateral or otherwise) shall be and hereby are subordinated to the rights of the Agents or the Lenders in those assets. Such Borrower shall have no right to possession of any such asset or to foreclose upon any such asset, whether by judicial action or otherwise, unless and until all of the Obligations shall have been paid in full in cash and the Commitments shall have been terminated. If all or any part of the assets of any Borrower, or the proceeds thereof, are subject to any distribution, division or application to the creditors of such Borrower, whether partial or complete, voluntary or involuntary, and whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors or any other action 76 or proceeding, or if the business of any Borrower is dissolved or if substantially all of the assets of any Borrower are sold, then, and in any such event, any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon or with respect to any Debt of any Borrower to the other Borrower ("INTER-BORROWER DEBT") shall be paid or delivered directly to the Administrative Agent for application to the Obligations, due or to become due, until such Obligations shall have been paid in full in cash. Each Borrower irrevocably authorizes and empowers the Administrative Agent and each of the Lenders to demand, sue for, collect and receive every such payment or distribution and give acquittance therefor and to make and present for and on behalf of such Borrower such proofs of claim and take such other action, in the Administrative Agent's or such Lender's own name or in the name of such Borrower or otherwise, as the Administrative Agent or any Lender may deem reasonably necessary or reasonably advisable for the enforcement of this Agreement. After the occurrence and during the continuance of a Default or an Event of Default, each Lender may vote, with respect to the Obligations owed to it, such proofs of claim in any such proceeding, receive and collect any and all dividends or other payments or disbursements made thereon in whatever form the same may be paid or issued and apply the same on account of any of the Obligations. Except as permitted under Sections 7.02(d) and (e), should any payment, distribution, security or instrument or proceeds thereof be received by any Borrower upon or with respect to the Inter-Borrower Debt during the continuance of any Event of Default and prior to the payment in full in cash of all of the Obligations and the termination of the Commitments, such Borrower shall receive and hold the same in trust, as trustee, for the benefit of the Agents and the Lenders and shall forthwith deliver the same to the Administrative Agent in precisely the form received (accompanied by the endorsement or assignment of such Borrower where necessary), for application to the Obligations, due or not due, and, until so delivered, the same shall be held in trust by such Borrower as the property of the Agents and the Lenders. After the occurrence and during the continuance of a Default or an Event of Default, if any Borrower fails to make any such endorsement or assignment to the Agents or the Lenders, the Agents or the Lenders (or any of their respective officers or employees) are hereby irrevocably authorized to make the same. Each Borrower agrees that until the Obligations have been paid in full in cash and the Commitments have been terminated, such Borrower will not assign or transfer to any Person any claim such Borrower has or may have against any other Borrower (other than in favor of the Administrative Agent pursuant to the Loan Documents). ARTICLE XII NO NOVATION; REFERENCES TO THIS AGREEMENT IN LOAN DOCUMENTS SECTION 12.01. NO NOVATION. It is the express intent of the parties hereto that this Agreement (i) shall re-evidence, in part, the Company's indebtedness under the Existing Credit Agreement, (ii) is entered into in substitution for, and not in payment of, the obligations of the Company under the Existing Credit Agreement, and (iii) is in no way intended to constitute a novation of any of the Company's indebtedness which was evidenced by the Existing Credit Agreement or any of the other Loan Documents. SECTION 12.02. REFERENCES TO THIS AGREEMENT IN LOAN DOCUMENTS. Upon the effectiveness of this Agreement, on and after the date hereof, each reference in any other Loan Document to the Existing Credit Agreement (including any reference therein to "the Credit 77 Agreement," "thereunder," "thereof," "therein" or words of like import referring thereto) shall mean and be a reference to this Agreement. [Signature pages follow.] 78 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. CMS ENERGY CORPORATION By: /s/ Laura L. Mountcastle ------------------------------------ Name: Laura L. Mountcastle Title: Vice President and Treasurer CMS ENTERPRISES COMPANY By: /s/ Laura L. Mountcastle ------------------------------------ Name: Laura L. Mountcastle Title: Vice President and Treasurer Signature Page to Fourth Amended and Restated Credit Agreement CITICORP USA, INC., as Collateral Agent and as Administrative Agent By: /s/ DHAYA RANGANATHAN ------------------------------------------ Name: DHAYA RANGANATHAN Title: Vice President CITIBANK, N.A., as a Lender By: /s/ DHAYA RANGANATHAN ------------------------------------------ Name: DHAYA RANGANATHAN Title: Vice President Signature Page to Fourth Amended and Restated Credit Agreement JPMORGAN CHASE BANK, individually as a Lender and as Syndication Agent By: /s/ Thomas L. Casey --------------------------------------------- Name: Thomas L. Casey Title: Vice President Signature Page to Fourth Amended and Restated Credit Agreement BANK ONE, NA, individually as a Lender and as a Documentation Agent By: /s/ Michael K. Murphy ------------------------------------------- Name: Michael K. Murphy Title: Managing Director Signature Page to Fourth Amended and Restated Credit Agreement UNION BANK OF CALIFORNIA, N.A., individually as a Lender and as a Documentation Agent By: /s/ Kevin M. Zitar --------------------------------------------- Name: Kevin M. Zitar Title: Vice President Signature Page to Fourth Amended and Restated Credit Agreement WACHOVIA BANK, NATIONAL ASSOCIATION, individually as a Lender and as a Documentation Agent By: /s/ D. Mitch Wilson ------------------------------------------------- Name: D. Mitch Wilson Title: Vice President Signature Page to Fourth Amended and Restated Credit Agreement BARCLAYS BANK PLC, as a Lender By: /s/ Sydney G. Dennis -------------------------- Name: Sydney G. Dennis Title: Director Signature Page to Fourth Amended and Restated Credit Agreement DEUTSCHE BANK TRUST COMPANY AMERICAS, as a Lender By: /s/ Marcus M. Tarkington --------------------------------- Name: Marcus M. Tarkington Title: Director Signature Page to Fourth Amended and Restated Credit Agreement MERRILL LYNCH BANK USA, as a Lender By: /s/ Louis Alder ------------------------------- Name: Louis Alder Title: Vice President Signature Page to Fourth Amended and Restated Credit Agreement COMMITMENT SCHEDULE
- ----------------------------------------------------------------------- LENDER Commitment - ----------------------------------------------------------------------- CITIBANK, N.A. $ 25,000,000 - ----------------------------------------------------------------------- JPMORGAN CHASE BANK $ 25,000,000 - ----------------------------------------------------------------------- BANK ONE, NA $ 25,000,000 - ----------------------------------------------------------------------- UNION BANK OF CALIFORNIA, N.A. $ 25,000,000 - ----------------------------------------------------------------------- WACHOVIA BANK, NATIONAL ASSOCIATION $ 25,000,000 - ----------------------------------------------------------------------- DEUTSCHE BANK TRUST COMPANY AMERICAS $ 25,000,000 - ----------------------------------------------------------------------- MERRILL LYNCH BANK USA $ 25,000,000 - ----------------------------------------------------------------------- BARCLAYS BANK PLC $ 15,000,000 - ----------------------------------------------------------------------- Total Commitments: $190,000,000 - ------------------------------------------------------------------------
SCHEDULE II Pledged Ownership Interests
GRANTOR PLEDGED SUBSIDIARIES ------- -------------------- CMS Energy Corporation CMS Enterprises Company (100%) Consumers Energy Company (100%) CMS Enterprises Company CMS Generation Co. (100%) CMS Gas Transmission Company (100%) CMS Capital, L.L.C. (100%) CMS Marketing, Services and Trading Company (100%) CMS International Ventures, L.L.C. (40.47%) CMS International Ventures, L.L.C. CMS Electric & Gas, L.L.C. (100%) CMS Generation Co. CMS International Ventures, L.L.C. (21.02%) Dearborn Industrial Energy, L.L.C. (100%) CMS Generation Michigan Power L.L.C. (100%) Dearborn Industrial Energy, L.L.C. Dearborn Industrial Generation, L.L.C. (100%) CMS Gas Transmission Company CMS International Ventures, L.L.C. (37.01%)
SCHEDULE III Notice Addresses Citibank, N.A. Address: 388 Greenwich St. New York, NY 10013 Attn: Nicholas McKee Telephone: (212) 816-8592 Fax: (212) 816-8098 JPMorgan Chase Bank [to be completed] ATTACHMENT A REAFFIRMATION Each of the undersigned hereby acknowledges receipt of a copy of the foregoing Fourth Amended and Restated Credit Agreement dated as of December 8, 2003 by and among CMS ENERGY CORPORATION and CMS ENTERPRISES COMPANY (collectively, the "Borrowers"), the financial institutions from time to time party thereto (the "Lenders"), and CITICORP USA, INC., in its capacity as contractual representative (the "Administrative Agent") (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"). Capitalized terms used in this Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement. Without in any way establishing a course of dealing by any Agent or any Lender, each of the undersigned reaffirms the grant of a security interest pursuant to the Pledge Agreement executed by it and acknowledges and agrees that each such Loan Document executed by the undersigned in connection with the Credit Agreement remains in full force and effect and is hereby reaffirmed, ratified and confirmed. All references to the Credit Agreement contained in the above-referenced documents shall be a reference to the Credit Agreement as the same may from time to time hereafter be amended, modified or restated. Dated as of December 8, 2003 CMS ENTERPRISES COMPANY CMS GENERATION CO. By:__________________________ By:__________________________ Its: Its: CMS GAS TRANSMISSION COMPANY CMS CAPITAL, L.L.C. By:__________________________ By:__________________________ Its: Its: CMS ELECTRIC & GAS, L.L.C. (formerly CMS INTERNATIONAL known as CMS Electric and Gas Company) VENTURES, L.L.C. By:__________________________ By:__________________________ Its: Its: CMS MARKETING, SERVICES AND TRADING COMPANY By:__________________________ Its: CMS GENERATION MICHIGAN DEARBORN INDUSTRIAL POWER L.L.C. ENERGY, L.L.C. By:__________________________ By:__________________________ Its: Its: DEARBORN INDUSTRIAL GENERATION, L.L.C. By:__________________________ Its: EX-4.(O) 11 k82154aexv4wxoy.txt 3RD AMENDED AND RESTATED PLEDGE AND SECURITY AGRMT EXHIBIT 4(o) EXECUTION COPY CMS ENERGY THIRD AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT THIS THIRD AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT (this "Security Agreement"), dated as of December 8, 2003, is made by CMS ENERGY CORPORATION, a corporation organized and existing under the laws of the State of Michigan (the "Grantor"), to CITICORP USA, INC. ("CUSA"), as Collateral Agent (the "Collateral Agent") for the lenders (the "Lenders") parties to the Credit Agreement (as hereinafter defined). PRELIMINARY STATEMENTS (1) The Grantor has previously entered into that certain Second Amended and Restated Pledge and Security Agreement, dated as of September 12, 2003 (said Agreement, as amended or otherwise modified from time to time prior to the date hereof, being the "Existing Security Agreement") in connection with that certain Third Amended and Restated Credit Agreement, dated as of September 12, 2003, among the Grantor, CUSA, as Administrative Agent and as Collateral Agent, and the Lenders named therein (said Agreement, as amended or otherwise modified from time to time prior to the date hereof, being the "Existing Credit Agreement"). (2) The Grantor, CMS Enterprises Company, a Michigan corporation, CUSA, as Administrative Agent and as Collateral Agent, and the Lenders have agreed to amend and restate the Existing Credit Agreement pursuant to that certain Fourth Amended and Restated Credit Agreement, dated as of December 8, 2003 (said Agreement, as it may hereafter be amended or otherwise modified from time to time, being the "Credit Agreement"). (3) The Grantor is the owner of the Collateral described in Exhibit "A" hereto. (4) It is a condition precedent to the effectiveness of the Credit Agreement that the Grantor shall have made the pledge contemplated by this Agreement. (5) It is the intention of the parties hereto that this Security Agreement be merely an amendment and restatement of the Existing Security Agreement and not constitute a novation of the grants of security or the obligations thereunder. NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to make Extensions of Credit under the Credit Agreement, the Grantor hereby agrees with the Collateral Agent, for its benefit and the ratable benefit of the other Secured Parties, that the Existing Security Agreement is amended and restated in its entirety as follows: ARTICLE I DEFINITIONS 1.1. Terms Defined in Credit Agreement. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement. 1 1.2. Terms Defined in New York Uniform Commercial Code. Terms defined in the New York UCC which are not otherwise defined in this Security Agreement are used herein as defined in the New York UCC. 1.3. Definitions of Certain Terms Used Herein. As used in this Security Agreement, in addition to the terms defined in the Preliminary Statements, the following terms shall have the following meanings: "Accounts" shall have the meaning set forth in Article 9 of the New York UCC. "Article" means a numbered article of this Security Agreement, unless another document is specifically referenced. "Collateral" means all Accounts and Instruments payable to the Grantor by Enterprises or any of its Subsidiaries (including, without limitation, the Instruments described on Exhibit "A"), the Investment Property described on Exhibit "A", all General Intangibles constituting payment obligations of Enterprises or any of its Subsidiaries to the Grantor and the Equity General Intangibles in which the Grantor now has or hereafter acquires any right or interest, and the proceeds (including Stock Rights) and products thereof, together with records related thereto. "Control" shall have the meaning set forth in Article 8 or, if applicable, in Section 9-104, 9-105, 9-106 or 9-107 of Article 9 of the New York UCC. "Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute an Event of Default. "Equity General Intangibles" shall mean any General Intangible constituting the Grantor's right, title and interest in any limited liability company or partnership described on Exhibit "A" in which the Grantor now has or hereafter acquires any right or interest. "Event of Default" means an event described in Section 5.1. "Exhibit" refers to a specific exhibit to this Security Agreement, unless another document is specifically referenced. "General Intangibles" shall have the meaning set forth in Article 9 of the New York UCC. "Instruments" shall have the meaning set forth in Article 9 of the New York UCC. "Investment Property" shall have the meaning set forth in Article 9 of the New York UCC. "Lenders" means the lenders party to the Credit Agreement and their successors and assigns. "New York UCC" means the New York Uniform Commercial Code as in effect from time to time. 2 "Permitted Liens" means the Liens permitted to be created, incurred or assumed or otherwise to exist pursuant to Section 7.02(a) of the Credit Agreement. "Section" means a numbered section of this Security Agreement, unless another document is specifically referenced. "Secured Obligations" means any and all existing and future indebtedness, obligations and liabilities of every kind, nature and character, direct or indirect, absolute or contingent (including all renewals, extensions and modifications thereof and all reasonable and reimbursable fees, costs and expenses incurred by any Secured Party in connection with the preparation, administration, collection or enforcement thereof), of the Grantor to any Secured Party, arising under or pursuant to this Security Agreement, the Credit Agreement and any other Loan Document. "Secured Parties" means the Collateral Agent, the Administrative Agent and each Lender. "Security" has the meaning set forth in Article 8 of the New York UCC. "Stock Rights" means any securities, dividends or other distributions and any other right or property which the Grantor shall receive or shall become entitled to receive for any reason whatsoever with respect to, in substitution for or in exchange for any securities or other ownership interests in a corporation, partnership, joint venture or limited liability company constituting Collateral and any securities, any right to receive securities and any right to receive earnings, in which the Grantor now has or hereafter acquires any right, issued by an issuer of such securities. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II GRANT OF SECURITY INTEREST 2.1. The Grantor hereby pledges, assigns and grants to the Collateral Agent, on behalf of and for the ratable benefit of the Secured Parties, a security interest in all of the Grantor's right, title and interest, whether now owned or hereafter acquired, in and to the Collateral to secure the prompt and complete payment and performance of the Secured Obligations, provided, however, that the principal amount of the Secured Obligations secured by the security interests granted pursuant to this Security Agreement shall not exceed the lesser of (x) an amount that would cause all secured Indebtedness of Grantor outstanding on the date hereof to exceed 5% of the "Consolidated Net Tangible Assets" (as defined in the Twelfth Supplemental Indenture dated as of July 2, 2001 between the Grantor and Bank One Trust Company, N.A. (successor to NBD Bank) with respect to the Grantor's original Indenture dated as of September 15, 1992) as of the date hereof and (y) an amount that would cause all secured Indebtedness of Grantor outstanding on the date hereof to exceed 10% of "Consolidated Assets" (as defined in the Sixth Supplemental Indenture dated as of March 19, 1996 between the Grantor and The Chase Manhattan Bank (National Association) with respect to the Grantor's original Indenture dated as of January 15, 1994) of Grantor at such date. 3 ARTICLE III REPRESENTATIONS AND WARRANTIES The Grantor represents and warrants to the Collateral Agent and the other Secured Parties that: 3.1. Title, Authorization, Validity and Enforceability. The Grantor has good and valid rights in or the power to transfer the Collateral and title to the Collateral with respect to which it has purported to grant a security interest hereunder, free and clear of all Liens (other than Permitted Liens), and has full power and authority to grant to the Collateral Agent the security interest in such Collateral pursuant hereto. The execution and delivery by the Grantor of this Security Agreement has been duly authorized by proper corporate or other proceedings, and this Security Agreement constitutes a legal, valid and binding obligation of the Grantor and creates a security interest which is enforceable against the Grantor in all now owned and hereafter acquired Collateral. When financing statements (or appropriate amendments to existing filings) have been filed in the appropriate offices against the Grantor in the locations listed on Exhibit "B", the Collateral Agent will have a fully perfected first priority security interest in the Collateral in which a security interest may be perfected by filing. 3.2. Conflicting Laws and Contracts. The execution, delivery and performance by the Grantor of this Security Agreement (i) are within the Grantor's powers, (ii) have been duly authorized by all necessary corporate or other organizational action or proceedings and (iii) do not and will not (A) require any consent or approval of the stockholders (or other applicable holder of equity) of the Grantor (other than such consents and approvals which have been obtained and are in full force and effect), (B) violate any provision of the charter or by-laws (or other comparable constitutive documents) of the Grantor or of law, (C) violate any legal restriction binding on or affecting the Grantor, (D) result in a breach of, or constitute a default under, any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Grantor is a party or by which it or its properties may be bound or affected, or (E) result in or require the creation of any Lien (other than pursuant to the Loan Documents as defined in the Credit Agreement) upon or with respect to any of its properties. 3.3. Type and Jurisdiction of Organization. The Grantor is a corporation organized under the laws of the State of Michigan. 3.4. Pledged Securities and Certain Pledged General Intangibles. Exhibit "A" sets forth a complete and accurate list of the Instruments, Securities and Equity General Intangibles delivered to the Collateral Agent. The Grantor is the direct and beneficial owner of each Instrument, Security and Equity General Intangible listed on Exhibit "A" as being owned by it, free and clear of any Liens, except for the security interest granted to the Collateral Agent for the benefit of the Secured Parties hereunder and other Permitted Liens. The Grantor further represents and warrants that (i) all such Securities or Equity General Intangibles which are shares of stock in a corporation or ownership interests in a partnership or limited liability company and in which the Grantor is granting a security interest pursuant to this Security Agreement have been (to the extent such concepts are relevant with respect to such Security or Equity General Intangible) duly and validly issued, are fully paid and non-assessable and constitute the percentage of the issued and outstanding shares of stock (or other equity interests) of the 4 respective issuers thereof indicated on Exhibit "A" hereto and (ii) with respect to any certificates delivered to the Collateral Agent representing an ownership interest in a partnership or limited liability company and in which the Grantor is granting a security interest pursuant to this Security Agreement, either such certificates are Securities as defined in Article 8 of the Uniform Commercial Code of the applicable jurisdiction as a result of actions by the issuer or otherwise, or, if such certificates are not Securities, the Grantor has so informed the Collateral Agent so that the Collateral Agent may take steps to perfect its security interest therein as a General Intangible. ARTICLE IV COVENANTS From the date of this Security Agreement, and thereafter until this Security Agreement is terminated: 4.1. General. 4.1.1 Inspection. The Grantor will permit the Collateral Agent or any Lender, by its representatives and agents (i) to inspect the Collateral, (ii) to examine and make copies of the records of the Grantor relating to the Collateral and (iii) to discuss the Collateral and the related records of the Grantor with, and to be advised as to the same by, the Grantor's officers and employees all at such reasonable times and intervals as the Collateral Agent or such Lender may determine. 4.1.2 Records and Reports. The Grantor will maintain complete and accurate books and records with respect to the Collateral, and furnish to the Collateral Agent, with sufficient copies for each of the Lenders, such reports relating to the Collateral as the Collateral Agent shall from time to time reasonably request. 4.1.3 Financing Statements and Other Actions; Defense of Title. The Grantor hereby authorizes the Collateral Agent to file, and if requested will execute and deliver to the Collateral Agent, all financing statements describing the Collateral and other documents and take such other actions as may from time to time be reasonably requested by the Collateral Agent in order to maintain a perfected security interest in and, if applicable, Control of, the Collateral. The Grantor will take any and all actions necessary to defend title to the Collateral against all persons and to defend the security interest of the Collateral Agent in the Collateral and the priority thereof against any Lien not expressly permitted hereunder. 4.1.4 Change in Corporate Existence, Type or Jurisdiction of Organization, Location, Name. The Grantor will preserve its existence as a corporation, not change its state of organization, and not change its mailing address, unless, in each such case, the Grantor shall have given the Collateral Agent not less than 10 days' prior written notice of such event or occurrence and the Collateral Agent shall have either (x) determined that such event or occurrence will not adversely affect the validity, perfection or priority of the Collateral Agent's security interest in the Collateral, or (y) taken such steps (with the cooperation of the Grantor to the extent necessary or advisable) as are necessary or advisable to properly maintain the validity, perfection and priority of the Collateral Agent's security interest in the Collateral. 5 4.2. Instruments and Securities. The Grantor will (i) deliver to the Collateral Agent immediately upon execution of this Security Agreement the originals of all Securities constituting Collateral (if any then exist), (ii) deliver to the Collateral Agent within thirty days after execution of this Security Agreement the originals of all Instruments constituting Collateral owned by the Grantor (if any then exist) and (iii) hold in trust for the Collateral Agent upon receipt and immediately thereafter deliver to the Collateral Agent any additional Securities and Instruments constituting Collateral, in each case together with a stock power or endorsement therefor executed in blank. 4.3. Uncertificated Securities and Equity General Intangibles. The Grantor will permit the Collateral Agent from time to time to cause the appropriate issuers (and, if held with a securities intermediary, such securities intermediary) of uncertificated Securities or Equity General Intangibles not represented by certificates which are Collateral to mark their books and records with the numbers and face amounts of all such uncertificated Securities or Equity General Intangibles not represented by certificates and all rollovers and replacements therefor to reflect the Lien of the Collateral Agent granted pursuant to this Security Agreement. The Grantor will use all commercially reasonable efforts, with respect to Investment Property constituting Collateral held with a financial intermediary, to cause such financial intermediary to enter into a control agreement with the Collateral Agent in form and substance reasonably satisfactory to the Collateral Agent. 4.4. Stock and Other Ownership Interests. The Grantor will permit any registerable Collateral to be registered in the name of the Collateral Agent or its nominee at any time at the option of the Required Lenders following the occurrence and during the continuance of an Event of Default. 4.5. Voting Rights and Dividends 4.5.1 Rights Prior to Default. So long as no Event of Default, and no Default under Section 8.01(f) of the Credit Agreement, shall have occurred and be continuing: (i) Until the Collateral Agent shall have notified the Grantor in writing to the contrary, the Grantor shall be entitled to exercise or refrain from exercising any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Security Agreement or the Credit Agreement; provided, however, that the Grantor shall not exercise or refrain from exercising any such right if such action would have a material adverse effect on the value of the Collateral. (ii) The Grantor shall be entitled to receive and retain any and all dividends and interest paid in respect of the Collateral, provided, however , that any and all (a) dividends and interest paid or payable other than in cash in respect of, and securities, instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral, and (b) dividends, interest and other distributions paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, shall be, and shall be forthwith delivered to the Collateral Agent to hold 6 as, Collateral and shall, if received by the Grantor, be received in trust for the benefit of the Collateral Agent, be segregated from the other property or funds of the Grantor, and be forthwith delivered to the Collateral Agent as Collateral in the same form as so received (with any necessary endorsement or assignment). (iii) The Collateral Agent shall execute and deliver (or cause to be executed and delivered) to the Grantor all such proxies and other instruments as the Grantor may reasonably request for the purpose of enabling the Grantor to exercise the voting and other rights which it is entitled to exercise pursuant to paragraph (i), above, and to receive the dividends and interest which it is authorized to receive and retain pursuant to paragraph (ii), above. 4.5.2 Rights During Default. Upon the occurrence and during the continuance of a Default under Section 8.01(f) of the Credit Agreement or an Event of Default: (i) Upon written notice to the Grantor by the Collateral Agent, which notice can only be given by the Collateral Agent with respect to the Collateral consisting of the common stock of Consumers after the Grantor has filed an application with the Federal Energy Regulatory Commission seeking approval pursuant to Section 203 of the Federal Power Act, 16 U.S.C. 824b, to transfer the common stock of Consumers to the Collateral Agent and received such approval from the Federal Energy Regulatory Commission, all rights of the Grantor to exercise or refrain from exercising the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 4.5.1(i) and to receive the dividends and interest which it would otherwise be authorized to receive and retain pursuant to Section 4.5.1(ii) shall cease, and all such rights shall thereupon become vested in the Collateral Agent who shall thereupon have the sole right to exercise or refrain from exercising such voting and other consensual rights and to receive and hold as Collateral such dividends and interest. The Grantor shall only file the application pursuant to Section 203 of the Federal Power Act referred to in the prior sentence if the Collateral Agent instructs it to do so in writing, and the Grantor shall have 10 days after receipt of such instruction in which to prepare and make the filing; provided, that the Collateral Agent can withdraw such instruction at any time before the expiration of the ninth day after its receipt. (ii) All dividends and interest and other property which are received by the Grantor after proper written notice has been received by the Grantor pursuant to paragraph (i) of this Section 4.5.2 shall be received in trust for the benefit of the Collateral Agent, shall be segregated from other funds of the Grantor and shall be forthwith paid over to the Collateral Agent as Collateral in the same form as so received (with any necessary endorsement). ARTICLE V DEFAULT 5.1. Default. The occurrence of any "Event of Default" under, and as defined in, the Credit Agreement shall constitute an Event of Default hereunder. 7 5.2. Acceleration and Remedies. Upon the acceleration of the Obligations under the Credit Agreement pursuant to Section 8.02 thereof, the Collateral Agent may, with the concurrence or at the direction of the Required Lenders, exercise any or all of the following rights and remedies: 5.2.1 Those rights and remedies provided in this Security Agreement, the Credit Agreement, or any other Loan Document, provided that this Section 5.2.1 shall not be understood to limit any rights or remedies available to the Collateral Agent and the other Secured Parties prior to an Event of Default. 5.2.2 Those rights and remedies available to a secured party under the New York UCC (whether or not the New York UCC applies to the affected Collateral) or under any other applicable law (including, without limitation, any law governing the exercise of a bank's right of setoff or bankers' lien) when a debtor is in default under a security agreement. 5.2.3 Without notice except as specifically provided herein, sell, lease, assign, grant an option or options to purchase or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, for cash, on credit or for future delivery, and upon such other terms as the Collateral Agent may deem commercially reasonable. The Collateral Agent may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral. ARTICLE VI WAIVERS, AMENDMENTS AND REMEDIES 6.1. No delay or omission of the Collateral Agent or any other Secured Party to exercise any right or remedy granted under this Security Agreement shall impair such right or remedy or be construed to be a waiver of any Event of Default or an acquiescence therein, and any single or partial exercise of any such right or remedy shall not preclude any other or further exercise thereof or the exercise of any other right or remedy. No waiver, amendment or other variation of the terms, conditions or provisions of this Security Agreement whatsoever shall be valid unless in writing signed by the Collateral Agent with the concurrence or at the direction of the Lenders required under Section 10.01 of the Credit Agreement and the Grantor, and then only to the extent in such writing specifically set forth. All rights and remedies contained in this Security Agreement or by law afforded shall be cumulative and all shall be available to the Collateral Agent and the other Secured Parties until the Secured Obligations have been paid in full in cash and all of the Commitments have been terminated. ARTICLE VII SUBORDINATION OF INTERCOMPANY INDEBTEDNESS 7.1. The Grantor agrees that any and all claims of the Grantor against any other Loan Party with respect to any "Intercompany Indebtedness" (as hereinafter defined), any endorser, obligor or any other guarantor of all or any part of the Secured Obligations, or against any of its 8 properties shall be subordinate and subject in right of payment to the prior payment, in full and in cash, of all Secured Obligations; provided, that, for the avoidance of doubt, so long as no Event of Default shall be continuing, each Guarantor may make loans to and receive payments in the ordinary course with respect to Intercompany Indebtedness (as hereinafter defined) from any other Loan Party to the extent not prohibited by the terms of the Credit Agreement and the other Loan Documents. If all or any part of the assets of any Loan Party, or the proceeds thereof, are subject to any distribution, division or application to the creditors of such Loan Party, whether partial or complete, voluntary or involuntary, and whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors or any other action or proceeding, or if the business of any such Loan Party is dissolved or if substantially all of the assets of any such Loan Party are sold, then, and in any such event (such events being herein referred to as an "Insolvency Event"), any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon or with respect to any indebtedness of any Loan Party to the Grantor ("Intercompany Indebtedness") shall be paid or delivered directly to the Collateral Agent for application to the Secured Obligations, due or to become due, until the Secured Obligations shall have been fully paid and satisfied in cash. Should any payment, distribution, security or instrument or proceeds thereof be received by the Grantor upon or with respect to the Intercompany Indebtedness after any Insolvency Event and prior to the satisfaction of all of the Secured Obligations, the Grantor shall receive and hold the same in trust, as trustee, for the benefit of the Secured Parties, and shall forthwith deliver the same to the Collateral Agent, for the benefit of the Secured Parties, in precisely the form received (except for any necessary endorsement or assignment of the Grantor), for application to the Secured Obligations, due or to become due, until the Secured Obligations shall have been fully paid and satisfied in cash, and, until so delivered, the same shall be held in trust by the Grantor as the property of the Secured Parties. ARTICLE VIII GENERAL PROVISIONS 8.1. Secured Party Performance of Grantor's Obligations. Without having any obligation to do so, the Collateral Agent may perform or pay any obligation which the Grantor has agreed to perform or pay in this Security Agreement and the Grantor shall reimburse the Collateral Agent for any reasonable amounts paid by the Collateral Agent pursuant to this Section 8.1. The Grantor's obligation to reimburse the Collateral Agent pursuant to the preceding sentence shall be an Obligation payable on demand. 8.2. Authorization for Secured Party to Take Certain Action. The Grantor irrevocably authorizes the Collateral Agent at any time and from time to time in the sole discretion of the Collateral Agent and appoints the Collateral Agent as its attorney in fact (i) to contact and enter into one or more agreements with the issuers of uncertificated securities which are Collateral and which are Securities or with financial intermediaries holding other Investment Property as may be necessary or advisable solely to give the Collateral Agent Control over such Securities or other Investment Property, (ii) following the occurrence and during the continuance of an Event of Default, to enforce payment of the Instruments, Accounts and General Intangibles (other than Equity General Intangibles) which are Collateral in the name of the Collateral Agent or the Grantor, (iii) following the occurrence and during the continuance of an Event of Default, to apply the proceeds of any Collateral received by the Collateral Agent to the Secured Obligations 9 and (iv) to discharge past due taxes, assessments, charges, fees or Liens on the Collateral (except for such Liens as are specifically permitted hereunder or under any other Loan Document), and the Grantor agrees to reimburse the Collateral Agent on demand for any reasonable payment made or any reasonable expense incurred by the Collateral Agent in connection therewith, provided that this authorization shall not relieve the Grantor of any of its obligations under this Security Agreement or under the Credit Agreement. 8.3. Benefit of Agreement. The terms and provisions of this Security Agreement shall be binding upon and inure to the benefit of the Grantor, the Collateral Agent and the other Secured Parties and their respective successors and assigns (including all persons who become bound as a debtor to this Security Agreement), except that the Grantor shall not have the right to assign its rights or delegate its obligations under this Security Agreement or any interest herein, without the prior written consent of the Collateral Agent. 8.4. Survival of Representations. All representations and warranties of the Grantor contained in this Security Agreement shall survive the execution and delivery of this Security Agreement. 8.5. Taxes and Expenses. Any stamp, documentary or (to the extent provided in the Credit Agreement) withholding taxes payable or ruled payable by Federal or State authority in respect of this Security Agreement shall be paid by the Grantor, together with interest and penalties, if any. The Grantor shall reimburse the Collateral Agent for any and all reasonable out-of-pocket expenses and internal charges (including reasonable attorneys', auditors' and accountants' fees and reasonable time charges of attorneys, paralegals, auditors and accountants who may be employees of the Collateral Agent) paid or incurred by the Collateral Agent in connection with the preparation, execution, delivery, administration, collection and enforcement of this Security Agreement and in the audit, analysis, administration, collection, preservation or sale of the Collateral (including the expenses and charges associated with any periodic or special audit of the Collateral). Any and all costs and expenses incurred by the Grantor in the performance of actions required pursuant to the terms hereof shall be borne solely by the Grantor. 8.6. Headings. The title of and section headings in this Security Agreement are for convenience of reference only, and shall not govern the interpretation of any of the terms and provisions of this Security Agreement. 8.7. CHOICE OF LAW. SUBMISSION TO JURISDICTION. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAWS OF THE STATE OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES). EACH OF THE GRANTOR AND THE COLLATERAL AGENT (I) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT SITTING IN NEW YORK CITY IN ANY ACTION ARISING OUT OF ANY LOAN DOCUMENT, (II) AGREES THAT ALL CLAIMS IN SUCH ACTION MAY BE DECIDED IN SUCH COURT, (III) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM AND (IV) CONSENTS TO THE 10 SERVICE OF PROCESS BY MAIL. A FINAL JUDGMENT IN ANY SUCH ACTION SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR AFFECT ITS RIGHT TO BRING ANY ACTION IN ANY OTHER COURT. THE GRANTOR AGREES THAT THE COLLATERAL AGENT SHALL HAVE THE RIGHT TO PROCEED AGAINST THE GRANTOR OR ITS PROPERTY IN A COURT IN ANY LOCATION TO ENABLE THE LENDERS TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE COLLATERAL AGENT OR THE LENDERS. THE GRANTOR AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY THE COLLATERAL AGENT TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE COLLATERAL AGENT. THE GRANTOR WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE COLLATERAL AGENT MAY COMMENCE A PROCEEDING DESCRIBED IN THIS SECTION. 8.8. Indemnity. The Grantor hereby agrees to indemnify the Collateral Agent and its successors, assigns, agents and employees (each, an "indemnified party"), from and against any and all liabilities, damages, penalties, suits, costs, and expenses of any kind and nature (including, without limitation, all expenses of litigation or preparation therefor whether or not the Collateral Agent is a party thereto) imposed on, incurred by or asserted against the Collateral Agent, or its successors, assigns, agents and employees, in any way relating to or arising out of this Security Agreement, or the ownership, delivery, possession, or other disposition of any Collateral except to the extent that such liabilities, damages, penalties, costs or expenses were caused by the gross negligence or willful misconduct of such indemnified party. 8.9. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including facsimile communication) and mailed, telegraphed, telecopied, telexed, cabled or delivered, if to the Grantor, at its address at One Energy Plaza, Jackson, Michigan 49201, Attention: S. Kinnie Smith, Jr., Attention: Laura L. Mountcastle, and if to the Collateral Agent, at its address specified in the Credit Agreement, or, as to either party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and other communications shall, when mailed or telecopied, be effective five days after when deposited in the mails, or when telecopied. 8.10. Continuing Security Interest; Assignments under Credit Agreement. This Security Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the earlier to occur of (x) the payment in full of all Secured Obligations now or hereafter existing under the Credit Agreement, whether for principal, interest, fees, expenses or otherwise, and all other amounts payable under this Security Agreement and the termination of all of the Commitments or (y) the release by the Collateral Agent of its security interest in all of the Collateral, (ii) be binding upon the Grantor, its successors and assigns, and (iii) inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of, and be enforceable by, the Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii) and Section 8.3 above, any Lender 11 may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement (including, without limitation, all or any portion of its Commitment, the Loans owing to it and any Promissory Note held by it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender herein or otherwise, subject, however to the provisions of Sections 9.03 and 10.07 of the Credit Agreement. Upon the earlier to occur of (A) the payment in full of all Secured Obligations now or hereafter existing under the Credit Agreement, whether for principal, interest, fees, expenses or otherwise, and all other amounts payable under this Security Agreement and the termination of all of the Commitments or (B) the release by the Collateral Agent of its security interest in all of the Collateral, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantor. In addition, the Collateral Agent shall release any Collateral as permitted or required pursuant to Section 9.03 of the Credit Agreement. Upon any such termination, the Collateral Agent will, at the Grantor's expense, return to the Grantor such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. 8.11. WAIVER OF JURY TRIAL. THE GRANTOR AND THE COLLATERAL AGENT EACH HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OTHER INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER OR THEREUNDER. 8.12. No Novation. It is the intention of the parties hereto that this Security Agreement be merely an amendment and restatement of the Existing Security Agreement and not constitute a novation of the grants of security or the obligations thereunder. [Remainder of page intentionally blank.] 12 IN WITNESS WHEREOF, the Grantor and the Collateral Agent have executed this Security Agreement as of the date first above written. CMS ENERGY CORPORATION By: /s/ LAURA L. MOUNTCASTLE -------------------------------- Title: Vice President and Treasurer AGREED AND ACKNOWLEDGED: CITICORP USA, INC., as Collateral Agent By: /s/ Dhaya Ranganathan ------------------------------- Title: Vice President Signature Page to Third Amended and Restated Pledge Agreement (CMS Energy) EXHIBIT "A" List of Pledged Securities and Pledged Instruments (See Section 3.4 of Security Agreement)
STOCK OWNED BY CMS ENERGY CORPORATION: Issuer Certificate Number Number of Shares Percentage Ownership Interest ------ ------------------ ---------------- ----------------------------- CMS Enterprises 01 100 100% Company Consumers Energy Company 04 84,108,789 100%

INSTRUMENTS OWNED BY CMS ENERGY CORPORATION Obligor Amount Interest Rate Maturity - ------- ------ ------------- -------- ~~None~~

GENERAL INTANGIBLES AND OTHER SECURITIES OR OTHER INVESTMENT PROPERTY (CERTIFICATED AND UNCERTIFICATED) OWNED BY CMS ENERGY CORPORATION: Issuer Description of Collateral Percentage Ownership Interest - ------ ------------------------- ----------------------------- ~~None~~
A-1 EXHIBIT "B" (See Section 3.1 of Security Agreement) OFFICES IN WHICH FINANCING STATEMENTS HAVE BEEN FILED Secretary of State of Michigan B-1 EX-4.(P) 12 k82154aexv4wxpy.txt AMENDED AND RESTATED GUARANTY DATED 12/08/2003 EXHIBIT 4(p) EXECUTION COPY AMENDED AND RESTATED GUARANTY THIS AMENDED AND RESTATED GUARANTY (this "GUARANTY"), dated as of December 8, 2003, is made by CMS Gas Transmission Company, a Michigan corporation, and CMS Generation Co., a Michigan corporation (together with its permitted successors and assigns under the Credit Agreement, each individually a "GUARANTOR" and collectively, together with any additional Subsidiaries of the Company (as defined below) that become a party to this Guaranty by executing a supplement hereto in the form attached hereto as Annex I, the "GUARANTORS"), in favor of the Lenders (the "LENDERS") parties to the Credit Agreement (as defined below) and Citicorp USA, Inc. ("CUSA"), as Collateral Agent (the "COLLATERAL AGENT") for the Lenders. PRELIMINARY STATEMENTS (1) Barclays Bank PLC, as administrative agent, the Collateral Agent and the lenders named therein were parties to two Amended and Restated Credit Agreements, each dated as of July 12, 2002, one (as amended, restated, supplemented or otherwise modified from time to time, the "SHORT TERM CREDIT AGREEMENT") maturing March 31, 2003 and the other (as amended, restated, supplemented or otherwise modified prior to September 12, 2003, the "LONG TERM CREDIT AGREEMENT") maturing December 15, 2003, with CMS Energy Corporation, a corporation organized and existing under the laws of the State of Michigan (the "COMPANY"). (2) The Guarantors entered into that certain Guaranty, dated as of July 12, 2002 (as amended or supplemented prior to the date hereof, the "EXISTING GUARANTY"), in favor of such lenders and the Collateral Agent with respect to the obligations of the Company under the Short Term Credit Agreement and the Long Term Credit Agreement. (3) The obligations of the Company under the Short Term Credit Agreement have been paid in full prior to the date hereof. (4) CUSA, as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT"), the Collateral Agent, the Lenders and the Company amended and restated the Long Term Credit Agreement pursuant to that certain Third Amended and Restated Credit Agreement, dated as of September 12, 2003 (as amended prior to the date hereof, the "EXISTING CREDIT AGREEMENT"). (5) The Administrative Agent, the Collateral Agent, the Lenders, the Company and CMS Enterprises Company, a Michigan corporation ("ENTERPRISES" and, collectively with the Company, the "BORROWERS"), have agreed to amend and restate the Existing Credit Agreement pursuant to that certain Fourth Amended and Restated Credit Agreement, dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined). (7) The Guarantors will derive substantial direct and indirect benefit from the transactions contemplated by the Credit Agreement. (8) Is the intention of the parties hereto that this Guaranty be merely an amendment and restatement of the Existing Guaranty and not constitute a novation of the obligations thereunder. (9) It is a condition precedent to the effectiveness of the Credit Agreement that the Guarantors shall have executed and delivered this Guaranty. NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to make Extensions of Credit under the Credit Agreement, the Guarantors hereby agree that the Existing Guaranty is amended and restated in its entirety as follows: SECTION 1. Guaranty. Each of the Guarantors hereby unconditionally guarantees, jointly with the other Guarantors and severally, the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all obligations of the Borrowers now or hereafter existing under the Credit Agreements and the Promissory Notes, whether for principal, interest, fees, expenses or otherwise (such obligations being the "OBLIGATIONS"), and agrees to pay any and all expenses (including reasonable fees and expenses of counsel) incurred by the Agents or the Lenders in enforcing any rights under this Guaranty. Without limiting the generality of the foregoing, the Guarantor's liability shall extend to all amounts which constitute part of the Obligations and would be owed by any Borrower to the Collateral Agent, the Administrative Agent or the Lenders under the Credit Agreement and the Promissory Notes but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving such Borrower. SECTION 2. Guaranty Absolute. Each of the Guarantors guarantee, jointly with the other Guarantors and severally, that the Obligations will be paid strictly in accordance with the terms of the Credit Agreement and the Promissory Notes, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Collateral Agent, the Administrative Agent or the Lenders with respect thereto against the Borrowers. The obligations of the Guarantors under this Guaranty are independent of the Obligations, and a separate action or actions may be brought and prosecuted against any or all of the Guarantors to enforce this Guaranty, irrespective of whether any action is brought against either Borrower or whether either Borrower is joined in any such action or actions. The liability of each of the Guarantors under this Guaranty shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of the Credit Agreement, the Promissory Notes, any other Loan Document, or any other agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from the Credit Agreement, the Promissory Notes, or any other Loan Document, including, without 2 limitation, any increase in the Obligations resulting from the extension of additional credit to any Borrower or any of the Borrowers' Subsidiaries or otherwise; (c) any taking, exchange, release or non-perfection of any collateral, or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Obligations; (d) the existence of any claim, set-off, defense or other right which any of the Guarantors may have at any time against the Collateral Agent, the Administrative Agent, any Lender or any other Person, whether in connection with this Guaranty, the transactions contemplated in any of the other Loan Documents, or any unrelated transaction; (e) any manner of application of collateral, or proceeds thereof, to all or any of the Obligations, or any manner of sale or other disposition of any collateral for all or any of the Obligations or any other assets of any Borrower or any of the Borrowers' Subsidiaries; (f) any change, restructuring or termination of the corporate structure or existence of any Borrower or any of the Borrowers' Subsidiaries; or (g) any other circumstance which might otherwise constitute a defense available to, or a discharge of, either Borrower or a guarantor. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Collateral Agent, the Administrative Agent or any Lender upon the insolvency, bankruptcy or reorganization of either Borrower or otherwise, all as though such payment had not been made. SECTION 3. Rights of Contribution with Respect to Obligations. (a) To the extent that any payment is made on the Obligations by or on behalf of any Guarantor or Grantor (each, an "OBLIGOR") under or pursuant to this Guaranty or any Pledge Agreement (an "OBLIGOR PAYMENT") which, taking into account all other Obligor Payments then previously or concurrently made by any other Obligor, exceeds the amount which otherwise would have been paid by or attributable to such Obligor if each Obligor had paid the aggregate Obligations satisfied by such Obligor Payment in the same proportion as such Obligor's "Allocable Amount" (as defined below) (as determined immediately prior to such Obligor Payment) bore to the aggregate Allocable Amounts of each of the Obligors as determined immediately prior to the making of such Obligor Payment, then, following payment in full in cash of the Obligations and the termination or expiration of all Commitments, such Obligor shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, each other Obligor for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Obligor Payment. (b) As of any date of determination, the "ALLOCABLE AMOUNT" of any Obligor shall be equal to the maximum amount of the claim which could then be recovered from such Obligor with respect to the Obligations without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law. 3 (c) This Section 3 is intended only to define the relative rights of the Obligors, and nothing set forth in this Section 3 is intended to or shall impair the obligations of the Obligors to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Guaranty or any Pledge Agreement. (d) The parties hereto acknowledge that the rights of contribution and indemnification hereunder shall constitute assets of the Guarantors and the other Obligors to which such contribution and indemnification is owing. (e) The rights of the indemnifying Obligors against other Obligors with respect to any payments on the Obligations shall be exercisable upon the full payment of the Obligations in cash and the termination or expiry of the Commitments. SECTION 4. Waiver. Each of the Guarantors hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Obligations and this Guaranty and any requirement that the Collateral Agent, the Administrative Agent or any Lender protect, secure, perfect or insure any security interest or lien or any property subject thereto or exhaust any right or take any action against either Borrower or any other Person or any collateral. SECTION 5. Subrogation; Subordination of Intercompany Indebtedness. (a) Subrogation. Notwithstanding any payment or payments made by any Guarantor hereunder, or any setoff or application of funds of any Guarantor by the Collateral Agent, the Administrative Agent or any Lender, each Guarantor hereby irrevocably waives any and all rights of subrogation to the rights of the Collateral Agent, the Administrative Agent and the Lenders against the Borrowers and any and all rights of reimbursement, assignment, indemnification or implied contract or any similar rights against the Borrowers or against any endorser or other guarantor of all or any part of the Obligations until the Lenders' claims with respect to the Obligations have been paid in full and the Commitments terminated. If, notwithstanding the foregoing, any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Collateral Agent, the Administrative Agent and the Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Collateral Agent in the exact form received by such Guarantor (duly endorsed by such Guarantor to the Collateral Agent), to be applied against the Obligations, whether matured or unmatured. (b) Subordination of Intercompany Indebtedness. Each Guarantor agrees that any and all claims of any Guarantor against any other Loan Party with respect to any "Intercompany Indebtedness" (as hereinafter defined), any endorser, obligor or any other guarantor of all or any part of the Obligations, or against any of its properties shall be subordinate and subject in right of payment to the prior payment, in full and in cash, of all Obligations; provided, that, for the avoidance of doubt, so long as no Event of Default shall be continuing, each Guarantor may make loans to and receive payments in the ordinary course with respect to Intercompany Indebtedness (as hereinafter defined) from any other Loan Party to the extent not prohibited by the terms of the Credit Agreement and the other Loan Documents. If all or any part of the assets 4 of any Loan Party, or the proceeds thereof, are subject to any distribution, division or application to the creditors of such Loan Party, whether partial or complete, voluntary or involuntary, and whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors or any other action or proceeding, or if the business of any such Loan Party is dissolved or if substantially all of the assets of any such Loan Party are sold, then, and in any such event (such events being herein referred to as an "INSOLVENCY EVENT"), any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon or with respect to any indebtedness of any Loan Party to any Guarantor ("INTERCOMPANY INDEBTEDNESS") shall be paid or delivered directly to the Collateral Agent for application to the Obligations, whether matured or unmatured. Should any payment, distribution, security or instrument or proceeds thereof be received by any Guarantor upon or with respect to the Intercompany Indebtedness after any Insolvency Event and prior to the satisfaction of all of the Obligations and the termination or expiration of all Commitments of the Lenders, such Guarantor shall receive and hold the same in trust, as trustee, for the benefit of the Lenders and shall forthwith deliver the same to the Collateral Agent, for the benefit of the Collateral Agent, the Administrative Agent and the Lenders, in precisely the form received (except for the endorsement or assignment of such Guarantor where necessary), for application to the Obligations, whether matured or unmatured, and, until so delivered, the same shall be held in trust by such Guarantor as the property of the Lenders. SECTION 6. Representations and Warranties. Each Guarantor hereby represents and warrants as follows: (a) Such Guarantor is a corporation, limited liability company or limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of the state of its organization and is duly qualified to do business in, and is in good standing in, all other jurisdictions where the nature of its business or the nature of property owned or used by it makes such qualification necessary. (b) The execution, delivery and performance by such Guarantor of this Guaranty (i) are within such Guarantor's powers, (ii) have been duly authorized by all necessary corporate or other organizational action or proceedings and (iii) do not and will not (A) require any consent or approval of the stockholders (or other applicable holder of equity) of such Guarantor (other than such consents and approvals which have been obtained and are in full force and effect), (B) violate any provision of the charter or by-laws (or other comparable constitutive documents) of such Guarantor or of law, (C) violate any legal restriction binding on or affecting such Guarantor, (D) result in a breach of, or constitute a default under, any indenture or loan or credit agreement or any other agreement, lease or instrument to which such Guarantor is a party or by which it or its properties may be bound or affected, or (E) result in or require the creation of any Lien (other than pursuant to the Loan Documents). (c) This Guaranty constitutes the legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms; subject to the qualification, however, that the enforcement of the rights and remedies herein is subject to bankruptcy and other similar laws of general application affecting rights and remedies of creditors and the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). 5 (d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by such Guarantor of this Guaranty. SECTION 7. Amendments, Etc. No amendment or waiver of any provision of this Guaranty, and no consent to any departure by any Guarantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Collateral Agent and, in the case of amendments, the Guarantors, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given, provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, (a) limit the liability of any Guarantor hereunder, (b) postpone any date fixed for payment hereunder, or (c) change the number of Lenders required to take any action hereunder. SECTION 8. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including facsimile communication) and mailed, telecopied or delivered, if to a Guarantor, to its address at One Energy Plaza, Jackson, Michigan 49201, Attention: General Counsel, and if to the Collateral Agent, the Administrative Agent or any Lender, at its address specified in the Credit Agreement, or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. All such notices and other communications shall, when mailed, be effective five days after when deposited in the mails, or when telecopied or delivered. SECTION 9. No Waiver; Remedies. No failure on the part of the Collateral Agent, the Administrative Agent or any Lender to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 10. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default under the Credit Agreement and (ii) the declaration that the Obligations shall become and be forthwith due and payable or the automatic acceleration of the Obligations, in either case pursuant to Section 8.02 of the Credit Agreement, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the applicable Guarantor against any and all of the obligations of such Guarantor now or hereafter existing under this Guaranty, whether or not such Lender shall have made any demand under this Guaranty and although such obligations may be contingent and unmatured. Each Lender agrees to notify promptly such Guarantor after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 10 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. SECTION 11. Continuing Guaranty; Assignments under Credit Agreement. This Guaranty is a continuing guaranty and shall (i) remain in full force and effect until the later of (x) the payment in full of the Obligations and all other amounts payable under this Guaranty and (y) 6 the expiration or termination of the Commitments, (ii) be binding upon each Guarantor, its successors and assigns, and (iii) inure to the benefit of, and be enforceable by, the Collateral Agent, the Administrative Agent, the Lenders and their respective successors, transferees and assigns. Notwithstanding the foregoing, if all or substantially all of the assets of any Guarantor or 100% of the stock of any Guarantor is sold in a transaction permitted under the Credit Agreement, such Guarantor shall automatically be released from its obligations under this Guaranty. Without limiting the generality of the foregoing clause (iii), any Lender may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement (including, without limitation, all or any portion of its Commitment, the Loans owing to it and any Promissory Note held by it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender herein or otherwise subject, however, to the provisions of Sections 9.04 and 10.07 of the Credit Agreement. SECTION 12. Waiver of Jury Trial. EACH OF THE GUARANTORS AND THE COLLATERAL AGENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS GUARANTY OR ANY OTHER LOAN DOCUMENT, OR ANY OTHER INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER OR THEREUNDER. SECTION 13. Governing Law; Submission to Jurisdiction. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAWS OF THE STATE OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES). EACH OF THE GUARANTORS AND THE COLLATERAL AGENT (I) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT SITTING IN NEW YORK CITY IN ANY ACTION ARISING OUT OF ANY LOAN DOCUMENT, (II) AGREES THAT ALL CLAIMS IN SUCH ACTION MAY BE DECIDED IN SUCH COURT, (III) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM AND (IV) CONSENTS TO THE SERVICE OF PROCESS BY MAIL. A FINAL JUDGMENT IN ANY SUCH ACTION SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR AFFECT ITS RIGHT TO BRING ANY ACTION IN ANY OTHER COURT. EACH GUARANTOR WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE COLLATERAL AGENT MAY COMMENCE A PROCEEDING DESCRIBED IN THIS SECTION. SECTION 14. no Novation. This Guaranty amends and restates in its entirety the Existing Guaranty and this Guaranty is in no way intended to constitute a novation of any obligations owed by the Guarantors to the Collateral Agent under the Existing Guaranty. [Remainder of page intentionally left blank.] 7 IN WITNESS WHEREOF, each of the Guarantors has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. CMS GAS TRANSMISSION COMPANY By /s/ LAURA L. MOUNTCASTLE -------------------------------- Title: Vice President and Treasurer CMS GENERATION CO. By /s/ LAURA L. MOUNTCASTLE -------------------------------- Title: Vice President and Treasurer Signature Page to Amended and Restated Guaranty Acknowledged and Agreed as of the date first above written: CITICORP USA, INC., as Collateral Agent By /s/ DHAYA RANGANATHAN --------------------------- Title: Vice President Signature Page to Amended and Restated Guaranty ANNEX I TO AMENDED AND RESTATED GUARANTY Reference is hereby made to the Amended and Restated Guaranty (the "GUARANTY") made as of December 8, 2003 by and among CMS Gas Transmission Company, a Michigan corporation, and CMS Generation Co., a Michigan corporation (each a "GUARANTOR" and along with any additional Subsidiaries of the Borrower that become parties to the Guaranty, including the undersigned by the execution of this Annex I to Guaranty, the "GUARANTORS") in favor of the Collateral Agent for the ratable benefits of the Lenders under the Credit Agreement. Capitalized terms used herein and not defined herein shall have the meanings given to them in the Guaranty. By its execution below, the undersigned [Name of New Guarantor], a __________, agrees to become a Guarantor under the Guaranty and agrees to be bound by such Guaranty as if originally a party thereto. By its execution below, the undersigned represents and warrants as to itself that all of the representations and warranties contained in the Guaranty are true and correct as of the date hereof. In witness whereof [Name of New Guarantor], a ________, has executed and delivered this ANNEX I counterpart to the Guaranty as of their _______, _____. [Name of New Guarantor] By______________________________ Title: EX-10.(G) 13 k82154aexv10wxgy.txt CMS ENERGY'S SALARIED EMPLOYEES MERIT PROGRAM EXHIBIT 10(g) SALARIED EMPLOYEES MERIT PROGRAM FOR 2003 SECTION 1. INTRODUCTION The objectives of the CMS Energy Salaried Employees Merit Program for 2003 ("SEM Plan" or the "Plan") are to conserve cash during the term of the Plan and to provide an incentive for eligible employees to remain with the CMS Companies. The effective date of the SEM Plan is January 1, 2003. SECTION 2. DEFINITIONS "CMS Energy Corporation" or "CMS" or the "Corporation" means CMS Energy Corporation. The Plan also applies to all of the subsidiary companies of CMS electing to be covered by it (the "CMS Companies"). "Change in Control of CMS Energy" means: 1. A Change in Control would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K, as in effect on January 1, 2003, pursuant to Sections 13 or 15(d) of the Exchange Act, whether or not the Corporation is then subject to such reporting requirement; 2. Any "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act becomes the "beneficial owner" as defined in Rule 13d-3 under the Exchange Act of more than 30% of the ten outstanding voting securities of the Corporation; 3. There is a sale by the Corporation within a three-year period of assets of the Corporation with either a book value or market value of 50% or more of the assets of the Corporation; or 4. A bidder as defined in Rule 14D-1(b) under the Exchange Act files a Tender Offer Statement with the Securities and Exchange Commission and the Corporation. "Closing Market Price" means, with respect to any particular period, the closing price for Common Stock, as published in The Wall Street Journal in its report of the New York Stock Exchange Composite Transactions, for the last business day on which the Exchange is open during such period. In the event that the Common Stock ceases, for any reason, to be listed on the Exchange, the Corporation will determine another reasonable method of calculating Closing Market Price or take such other action, as it deems appropriate. "Common Stock" means the Common Stock of CMS Energy Corporation. "Credit Period" means a 3-month calendar quarter beginning on or after January 1, 2003 and ending the last day of March, June, September or December of 2003 or 2004. Credit Period shall also include January 31, 2005. "Earnings" means Earnings as defined in the Pension Plan for Employees of Consumers Energy and other CMS Energy Corporation companies. 1 "Eligible Employee" means a salaried employee who satisfies both of the qualification requirements listed below: 1. The employee receives a credit in a Special Compensation Account effective on or after January 1, 2003, and 2. The employee either (a) Remains an active employee of the Corporation through January 31, 2005, or (b) Terminates employment prior to January 31, 2005 due to: (i) Retirement with Retirement Income or Disability Payments under the Pension Plan for Employees of Consumers Energy and other CMS Energy Corporation Employees, or (ii) Layoff for lack of work, or (iii) Death. In addition to any other reason by which an employee may no longer be considered an active employee, an employee will be deemed to have ceased being an active employee upon termination of the employee's continuous service in accordance with (i) the practices and procedures of CMS or the CMS Company by which the employee is employed, respectively and (ii) as specified in the Employee Handbook (except where continuous service is terminated solely because a full-time employee becomes a part-time employee). An employee terminated for cause forfeits all rights and benefits under the Plan. If a person ceases to be an active employee for any reason other than those mentioned in subparagraphs 2(b)(i) or 2(b)(ii), above, and is subsequently reemployed by CMS or one of the CMS Companies prior to December 31, 2003, eligibility, if any, will be based solely upon amounts credited to the Special Compensation Account on or after the date of rehire. "Leave of Absence" means any unpaid leave of greater than 30 days for which an individual received authorization from CMS or one of the Companies for any reason other than sickness or injury. Employees on leave for sickness or injury will be treated as if they are active employees for the purposes of this Plan. "Salaried Employee" means any exempt or non-exempt employee (as defined by the Fair Labor Standards Act) of CMS or one of the CMS Companies, other than those employees in a job classification that is represented by a labor union as of the effective date of the Plan, provided however, that if any such labor union elects to participate in the Plan, the employees represented by the labor union may participate under the same terms and conditions as a non-exempt salaried employee. Salaried employee does not include any person classified by the Company as being a leased employee, independent contractor, temporary employee, a co-op student, or an intern employee. "Special Compensation Account" or "Account "means a record-keeping account established by one of the CMS Companies for an Eligible Employee pursuant to the Plan. 2 "Special Increase" means any amount that may be designated as a special increase for a salaried employee on or after January 1, 2003 and prior to December 31, 2004. "Special Merit Increase" means any amount that may be designated as a special merit increase for a salaried employee on or after January 1, 2003 and prior to December 31, 2003. "Valuation Date" means the last day on which the New York Stock Exchange is open during a Credit Period. SECTION 3 SPECIAL MERIT INCREASES The full amount of any Special Merit Increases for each pay period will be credited to the Special Compensation Accounts for each Credit Period. SECTION 4 OTHER SPECIAL INCREASES Other amounts may be designated as Special Increases by CMS or one of the CMS Companies from time to time. For example, Outstanding Contributor Awards, or any amounts payable under the Annual Incentive Compensation Plans or other bonus or incentive plan or agreement may be designated a Special Increase. The full amount of any such Special Increases awarded for each pay period will be credited to the Special Compensation Accounts for each Credit Period. SECTION 5 DATE OF CREDIT All amounts credited to the Special Compensation Accounts will be credited as of the Credit Period during which a relevant paycheck is dated or, in the case of dividends, the Credit Period in which the record date occurs. These Credit Periods may or may not correspond with the Credit Period in which work was performed or dividends were declared. Retroactive payments or adjustments in pay status will be reflected as of the Credit Period during which the payment or adjustment is made and will not be applied retroactively. SECTION 6 SPECIAL COMPENSATION ACCOUNT Special Compensation Accounts will accrue units based upon the Closing Market Price of Common Stock at the end of each Credit Period and the amount of any Special Merit Increases, Special Promotion Increases or other Special Increases and Dividends credited to the Accounts during that Credit Period. One unit will represent the dollar value of one share of Common Stock at the Closing Market Price for that Credit Period. The total number of dollars credited for any Special Merit Increase, Special Promotion Increases or other Special Increases and Dividends credited to the Accounts during that Credit Period will be divided by the Closing Market Price. The resulting number will be the number of units to be accrued. The Special Compensation Accounts will be general liabilities of CMS or the CMS Companies. No money or stock will be set aside at the time the units are accrued. No guarantee of the dollar value of the Special Compensation Accounts can be made since the value of the Accounts will fluctuate with the price of Common Stock. The Special Compensation Accounts will remain 3 fully unfunded unless there is a Change of Control of CMS Energy. In the event of a Change of Control of CMS Energy, a trust will be established within no less than 30 days of the Change in Control of CMS Energy, and sufficient stock to satisfy the accrued obligations under this SEM Plan will be deposited into such account. The trust as established, will be subject only to the general creditors of CMS Energy or any successor entity or entities, but will not be available for any other corporate obligations. No additional participants or obligations shall be added to the trust as established without the consent of the majority of the then participating eligible employees. Subsequent to the Change in Control of CMS Energy, all additional amounts due under the terms of the SEM Plan shall be added to the trust within 10 days of the accrual of the additional amount to any Special Compensation Account. SECTION 7 DIVIDENDS If any dividends are paid on Common Stock after December 31, 2002 and prior to the Valuation Date used for distribution, an amount equivalent to any such dividends will be credited to the Special Compensation Accounts as if dividends were reinvested in Common Stock at the end of the Credit Period in which the record date occurs. SECTION 8 CONDITION PRECEDENT All Special Compensation Accounts are intended as an incentive for employees to remain at work. Consequently, the payout for Special Compensation Accounts for each employee is expressly conditioned upon the employee being an Eligible Employee. The failure of this condition to be satisfied by an employee for any reason whatsoever will result in the cancellation of any Special Compensation Account for that employee and will relieve the Company of any further obligations hereunder. SECTION 9 EFFECT ON OTHER EMPLOYEE BENEFIT PLANS The Pension Plan will be amended so that, to the extent allowed by law, any amounts credited to the Special Compensation Accounts for any Credit Period as Special Merit Increases will be treated as though they are Earnings during the year in which such Credit Period occurs for the purposes of calculating pension benefits for Eligible Employees. Any increase or decrease in the value of the Special Compensation Accounts due to dividends or changes in the price of Common Stock will not be reflected in Earnings for the purposes of calculating pension benefits. Other than as specified above, no amounts credited to the Special Compensation Accounts or payments or distributions under the Plan will be considered as salary or earnings for purposes of any employee benefit plan or practice of CMS or the CMS Companies, including but not limited to, the Pension Plan, The Savings Plan, the Long Term Disability Plan, Paid Personal Absence or the Group Term Life Insurance Plan. 4 SECTION 10 NATURE OF THE PLAN The Plan is an unfunded plan of CMS or the CMS Companies and is not intended to be a qualified employee benefit plan under the Internal Revenue Code. Any amounts that may become due are to be satisfied from the general corporate funds of CMS or the CMS Companies, which are subject to the claims of creditors. SECTION 11 DISTRIBUTIONS Eligible Employees will receive distribution of their Special Compensation Accounts in 2005. Payment may be made in cash, shares of Common Stock, or any combination thereof at the discretion of CMS or the CMS Companies. Each Eligible Employee will be eligible to receive one share of Common Stock for each unit in his or her Account, or cash or other Corporation marketable securities having a value equal to the number of units in such account multiplied by the Closing Market price of Common Stock as of the Valuation Date first preceding the date on which distribution is made (except as provided in Sections 13 and 14 below). Amounts shall be withheld for FICA tax, federal, state and local income taxes and such other amounts as may be authorized or required by law. The units accrued to the Accounts will be distributed in March 2005 based upon the Valuation Date as of January 31, 2005, or such earlier date as is the last business day for the New York Stock Exchange in January, 2005. For an Eligible Employee terminating employment on or before December 31, 2003 as set forth in the definition at 2 (b)(i), (ii) or (iii), the units accrued to the Accounts will be distributed as soon as practicable after January 1, 2004 but not later than March 31, 2004 based upon the Valuation Date as of December 31, 2003 or such earlier date as is the last business day for the New York Stock Exchange in December, 2003. For an Eligible Employee who dies prior to January 1, 2005, distribution will be made to the beneficiary as set forth at Section 14 in a single payment in March 2005. SECTION 12 SPECIAL RULES FOR EMPLOYEES ON LEAVE OF ABSENCE Any individual who fails to return to active pay status at the expiration of a leave of absence will be deemed to have ceased being an active employee effective as of the date the leave of absence began. Any individual who is on a leave of absence on January 1, 2003, and who is still on leave of absence on March 1 of the year a distribution would be made in accordance with Section 12, above, will not receive any distribution at that time because it cannot be determined if such individual is an Eligible Employee until the leave of absence expires or the employee returns to work, whichever comes first. Therefore, CMS or the CMS Companies will designate an amount as a number of shares of stock or an amount of cash or some combination thereof, based upon the units in the individual's Account as of the Valuation Date which would have been used had the individual not been on a leave of absence. If the individual becomes an Eligible Employee, 5 those amounts, with no addition for interest, dividends or any other reason, will be distributed to the individual not more than two months after the individual becomes an Eligible Employee. SECTION 13 OVERTIME When an employee receives overtime pay subject to a Special Merit Increase or other Special Increase, the Special Compensation Account will be credited appropriately. SECTION 14 BENEFICIARIES If the employee is deceased on the day distribution would otherwise be made, distribution may be made to beneficiaries determined in accordance with this section, and CMS or the CMS Companies will be relieved of all liability if distribution is made (i) to the estate of the decedent, or (ii) to the first of the following classes in which there exist survivors of the decedent. 1. Spouse of the decedent. 2. Children of the decedent. 3. Parents of the decedent. 4. Brothers and sisters of the decedent. Distribution may be delayed without payment of interest or any penalty or the accumulation of dividends for a reasonable period during which CMS or the CMS Companies may decide to whom to make a distribution. SECTION 15 NO ASSIGNMENT OF BENEFITS No interest in the Plan may be assigned or alienated by voluntary or involuntary assignment. Any attempt by an employee or beneficiary to assign or alienate any interest under the Plan will be void. SECTION 16 CLAIMS PROCEDURE Distributions under the Plan will normally be made without an employee having to file a claim for benefits. However, an employee or beneficiary who does not receive a distribution to which he believes he is entitled may present a claim to the Sr. Vice President, Human Resources. Each employee or beneficiary who wishes to file a claim for benefits will do so in writing, addressed to the Sr. Vice President, Human Resources at CMS Energy, One Energy Plaza, Jackson, MI 49201. All such claims must be submitted within one year after the date the employee or beneficiary claims distribution should have been made. Claims not made within one year will be forever barred. Within 90 days after receipt of a claim in writing, the Sr. Vice President, Human Resources will make a determination of the claim. If a claim is denied the claimant will be advised in writing of the reason for the denial and of any additional action or information that may be necessary to determine the claim. 6 An employee or beneficiary whose claim has been denied will have an opportunity to request a review of the claim, and may submit a written statement regarding issues relevant to his or her claim. Requests for review must be filed within 60 days after receipt of written notification of denial of a claim. The employee or beneficiary will be given the opportunity for an oral hearing on the claim and a determination will be made in writing within 30 days of the oral hearing or within 30 days after receiving notice that the claimant does not desire an oral hearing. All interpretations of the Plan by the Sr. Vice President, Human Resources and determinations of the Sr. Vice President, Human Resources concerning the Plan's administration and application will be final and binding upon all persons. SECTION 17 EARLY RESOLUTIONS OF POTENTIAL CLAIMS Employees will receive periodic statements and are encouraged to review the statements carefully for accuracy. Any questions as to the correctness of the statements should be raised in writing with the Human Resource Department of CMS or the CMS Companies as soon as possible after a problem is discovered. The statement will be reviewed and any inaccuracies discovered will be corrected, or an explanation of why the statement is correct will be provided to the employee. There will be a rebuttable presumption that if any statement has not been disputed within 6 months of the date delivered to the employee, such statement is correct in all particulars. This presumption may be rebutted by clear and convincing evidence. SECTION 18 COMPLIANCE WITH LAW This Plan will be construed, whenever possible, to be in conformity with the requirements of any applicable Federal law or law of the state of Michigan. The Plan is not, however, subject to the Employee Retirement Income Security Act (ERISA). The Plan may be amended to the extent deemed necessary or desirable due to Federal law or law of the State of Michigan, including but not limited to income tax laws. SECTION 19 TERMINATION OF PLAN This Plan will terminate on December 31, 2005. No distribution will be made to any person, nor will any other benefits of any kind be payable to any person under this Plan after December 31, 2005. 7 EX-10.(I) 14 k82154aexv10wxiy.txt ANNUAL OFFICER INCENTIVE COMPENSATION PLAN EXHIBIT 10(i) ANNUAL OFFICER INCENTIVE COMPENSATION PLAN FOR CMS ENERGY CORPORATION AND ITS SUBSIDIARIES Effective January 1, 2003 Approved by Committee on May 23, 2003 1 ANNUAL OFFICER INCENTIVE COMPENSATION PLAN FOR OFFICERS OF CMS ENERGY CORPORATION AND ITS SUBSIDIARIES I. GENERAL PROVISIONS 1.1 PURPOSE. The purpose of the Annual Officer Incentive Compensation Plan ("Plan") is to: (a) Provide an equitable and competitive level of compensation that will permit CMS Energy Corporation ("Company") and its subsidiaries to attract, retain and motivate highly competent Officers. (b) No payments to Officers in the form of incentive compensation shall be made unless pursuant to a plan approved by the Committee and after express approval of the Committee. 1.2 EFFECTIVE DATE. The predecessor to the Plan was initially effective as of January 1, 1986 and that predecessor, as amended, is hereby terminated. The Plan as described herein, is effective as of January 1, 2003. 1.3 DEFINITIONS. As used in this Plan, the following terms have the meaning described below: (a) "Annual Award" means an annual incentive award granted under the Plan. (b) "Base Salary" means the base salary on January 1 of a Performance Year, except as impacted by a Change in Status as defined in Article V. Deferred merit increases from the Salaried Employees Merit Program for the year 2003 shall be added to Base Salary being paid in cash for the 2003 and 2004 Performance Years. Deferred merit increases from the Salaried Employees Merit Program for the year 2004 shall be added to Base Salary being paid in cash for the 2004 Performance Year. For purposes of the Plan, an Officer's Base Salary must be subject to annual review and annual approval by the Committee. For any Code Section 162(m) Employee, the Base Salary upon which the Annual Award is based will be the amount in effect on January 1 of the Performance Year. (c) "CMS Energy" means CMS Energy Corporation. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Code Section 162(m)" means the "Million Dollar Cap" that may limit an employer's annual tax compensation deduction for certain compensation of covered employees, unless the compensation is based on specific performance goals that are adopted and administered in accordance with requirements set forth in Code Section 162(m) and regulations thereunder. (f) "Code Section 162(m) Employee" means an employee whose compensation is subject to the "Million Dollar Cap" under Code Section 162(m). Generally, this is the CEO and the four highest paid executive officers of the Company. (g) "Committee" means the Committee on Organization and Compensation of the Board of Directors of CMS Energy. (h) "Common Stock" means the common stock of CMS Energy. 2 (i) "Company" means CMS Energy Corporation. (j) "Corporate Free Cash Flow" (CFCF) means CMS Consolidated Cash Flow from operating activities, excluding pension contributions and adjusted for GCR Recovery, plus Cash Flow from Investing Activities. (k) "Earnings Per Share" (EPS) means the amount of ongoing net income per outstanding CMS Energy Share. (l) "Disability" means that a participant has terminated employment with the Company or a Subsidiary and is entitled to disability payments under the Pension Plan. (m) "GCR Recovery" means actual/forecast incremental GCR recovery during January and February of 2004 calculated as actual/forecast GCR cycle billed sales times above budget GCR factor. (n) "Leave of Absence" for purposes of this Plan means a leave of absence that has been approved by the Plan Administrator. (o) "Officer" means an employee of the Company or a Subsidiary in Salary Grade "E-3" or higher. (p) "Outside Directors" means directors of CMS Energy who are not employed by CMS Energy or a Subsidiary and satisfy the requirements of an "Outside Director" under Code Section 162(m). (q) "Pension Plan" means the Pension Plan for Employees of Consumers Energy and Other CMS Energy Companies. (r) "Performance Year" means the calendar year prior to the year in which an Annual Award is made by the Committee. (s) "Plan" means the Annual Officer Incentive Compensation Plan for Officers of CMS Energy Corporation and Its Subsidiaries, as effective January 1, 2003 and any amendments thereto. (t) "Plan Administrator" means the Chairman and Chief Executive Officer of CMS Energy, under the general direction of the Outside Directors on the Committee. (u) "Retirement" means that a Plan participant is no longer an active employee and qualifies for a retirement benefit other than a deferred vested retirement benefit under the Pension Plan. (v) "Subsidiary" means any direct or indirect subsidiary of the Company. 1.4 ELIGIBILITY. Officers are eligible for participation in the Plan. 1.5 ADMINISTRATION OF THE PLAN. (a) The Plan is administered by the Chairman and Chief Executive Officer of CMS Energy under the general direction of the Outside Directors who are members of the Committee. (b) The Committee, no later than March 30th of the Performance Year, will approve performance goals for the Performance Year. 3 (c) The Committee, no later than March 30th of the calendar year following the Performance Year, will review for approval proposed Annual Awards for all Officer participants, as recommended by the Chairman and CEO of the Company. All proposed Annual Awards are subject to approval of the Committee. Before the payment of any Annual Awards, the Committee will certify in writing that the performance goals were in fact satisfied in accordance with Code Section 162(m). (d) The Committee reserves the right to modify the performance goals with respect to unforeseeable circumstances or otherwise exercise discretion with respect to proposed Annual Awards as it deems necessary to maintain the spirit and intent of the Plan, provided that such discretion will be to decrease or eliminate, not increase, Annual Awards in the case of any Code Section 162(m) Employees. The Committee also reserves the right in its discretion to not pay Annual Awards for a Performance Year. All discretionary decisions of the Committee are final. II. CORPORATE PERFORMANCE GOALS 2.1 IN GENERAL. The composite Plan Performance Factor will depend on corporate performance in two areas: (1) the ongoing net income per outstanding CMS Energy share (EPS); and (2) the Corporate Free Cash Flow of CMS Energy (CFCF). There will be no payout under the Plan unless a composite Plan Performance Factor of at least 60% is achieved. The composite Plan Performance Factor to be used for payouts will be capped at a maximum of 200%. A table containing the composite Plan Performance Factors shall be created by the Committee for each Performance Year. The table for Performance Year 2003 is set forth below. (a) EPS COMPONENT. EPS performance shall constitute 40% of the composite Plan Performance Factor. The 100% EPS goal for the 2003 performance year is $.80 per share, and the EPS component shall increase or decrease by 50% for each $.10 per share change in performance. (Mathematical interpolation shall be used for actual results not shown in the table.) There will be no payout under the plan unless at least $.60 per share is achieved (regardless of CFCF performance). (b) CFCF COMPONENT. CFCF performance shall constitute 60% of composite Plan Performance Factor. The 100% CFCF goal for the 2003 performance year is $400 million, and the CFCF component shall increase or decrease by 25% for each $50 million change in performance. (Mathematical interpolation shall be used for actual results not shown in the table.) There will be no payout under the plan unless at least $250 million is achieved (regardless of EPS performance). COMPOSITE PERFORMANCE FACTORS FOR 2003 PERFORMANCE YEAR
CFCF Component $250 $300 $350 $400 $450 $500 $550 (Millions) ------------------------------------------------------------------------------------ EPS COMPONENT $ .60 NONE NONE NONE 60% 75% 90% 105% $ .70 NONE NONE 65% 80% 95% 110% 125% $ .80 NONE 70% 85% 100% 115% 130% 145% $ .90 75% 90% 105% 120% 135% 150% 165% $1.00 95% 110% 125% 140% 155% 170% 185% $1.10 115% 130% 145% 160% 175% 190% 200% $1.20 135% 150% 165% 180% 195% 200% 200% $1.30 155% 170% 185% 200% 200% 200% 200%
Notes: Mathematical interpolation shall be used for actual results not shown in the table. Target Award is Bolded 100% and Maximum Award is Bolded 200% 4 III. ANNUAL AWARD FORMULA 3.1 OFFICERS' ANNUAL AWARDS. Annual Awards for each eligible Officer will be based upon a standard award percentage of the Officer's Base Salary as in effect on January 1 of the Performance Year. The standard award percentages are set forth in the table below. The maximum amount that can be awarded under this Plan for any Code Section 162(m) Employee will not exceed $2.5 Million in any one Performance Year. The total amount of an Officer's Annual Award shall be computed according to the annual award formula set forth in Section 3.2.
SALARY STANDARD AWARD AS A % OF POSITION GRADE BASE SALARY ------------------------------ ------ ------------ Chairman & CEO E-9 66% President & COO/Vice Chairman E-8 57% Executive Vice President E-7 53% President, Subsidiary - Sr. VP E-6 49% Senior Vice President E-5 45% Vice President E-4 41% Vice President E-3 37%
3.2 Annual Awards for Officers will be calculated and made as follows: INDIVIDUAL AWARD = BASE SALARY TIMES STANDARD AWARD % TIMES PERFORMANCE FACTOR % IV. PAYMENT OF ANNUAL AWARDS 4.1 CASH ANNUAL AWARD. All Annual Awards for a Performance Year for Salary Grades E-5 and below will be paid in cash no later than March 30th of the calendar year following the Performance Year provided that they first have been reviewed and approved by the Committee, and provided further that the Annual Award for a particular Performance Year has not been deferred voluntarily pursuant to Section 4.3. The amounts required by law to be withheld for income and employment taxes will be deducted from the Annual Award payments. All Annual Awards become the obligation of the company on whose payroll the Officer is enrolled at the time the Committee makes the Annual Award. 4.2 MANDATORY DEFERRED ANNUAL AWARD. All Annual Awards for the 2003 performance year for Salary Grade E-6 and above will be credited to the individual officer's Salaried Employees Merit Plan special account and will be paid in accordance with that plan. 4.3 VOLUNTARY DEFERRED ANNUAL AWARDS. (a) The payment of all or one-half of a cash Annual Award may be deferred voluntarily at the election of an individual Plan participant. A separate irrevocable election must be made in the calendar year prior to the beginning of the Performance Year. Any Annual Award made by the Committee after termination of employment of an Officer or retirement of an Officer is not eligible for a voluntary deferral and will be paid in full in cash in the year in which the Annual Award is made. (b) A Voluntary Deferred Annual Award may be paid out in a lump sum or in five or ten annual installments beginning in the first January of the calendar year following retirement or termination of employment. If an Annual Award is paid in annual installments, each year the payment will be a fraction of the balance equal to one over the number of annual 5 installments remaining. In the event of the participant's death, all deferred amounts will be paid in total in January of the calendar year following the year of death. (c) At the time of electing to voluntarily defer payment, the participant must elect whether the sum deferred will be treated by the Company or Subsidiary, as applicable, in accordance with Paragraph I or Paragraph II below. i. A Voluntary Deferred Annual Award will be credited with sums in lieu of interest from the first day of the month following the month in which the Annual Award is determined to the date of payment. The interest accrual rate will be equivalent to the prime rate of interest as reported in The Wall Street Journal, compounded quarterly as of the first business day of January, April, July and October of each year during the deferral period. The prime rate in effect on the first business day of January, April, July and October will be the prime rate (described above) in effect for that quarterly period. ii. A Voluntary Deferred Annual Award will be treated as if it were invested as an optional cash payment under the CMS Energy Stock Purchase Plan including the accumulation of any dividends. The value of the deferred sum at the time of payment will be equal to the number of dollars such an investment would have been worth as measured by the purchase price of shares of Common Stock using the average closing price, as reported in The Wall Street Journal (NYSE - composite transactions) for the first five trading days in the December previous to a January payout. The amount of any Voluntary Deferred Annual Award is to be satisfied from the general corporate funds of the company on whose payroll the Officer was enrolled prior to the payout beginning and are subject to the claims of general creditors of that company. 4.4 PAYMENT IN THE EVENT OF DEATH. (a) A participant may name the beneficiary of his or her choice on a beneficiary form provided by the Company, and the beneficiary shall receive payment in the event that the Participant dies prior to receipt of either a cash Annual Award, a Mandatory Deferred Annual Award or a Voluntary Deferred Annual Award. If a beneficiary is not named, the payment will be made to the first surviving class as follows: 1. Widow or Widower 2. Children, per capita 3. Parents, per capita 4. Brothers and Sisters, per capita 5. Estate of the Deceased (b) A participant may change beneficiaries at any time, and the change will be effective as of the date the participant completes and signs the beneficiary form, whether or not the participant is living at the time the request is received by the Company. However, the Company or the applicable Subsidiary will not be liable for any payments made before receipt of a written request. V. CHANGE OF STATUS Payments in the event of a change in status will not apply if no awards are made for the performance year. 5.1 PRO-RATA ANNUAL AWARDS. A new Officer, whether hired or promoted to the position, or an Officer promoted to a higher salary grade during the Performance Year will receive a pro rata 6 Annual Award based on the percentage of the Performance Year in which the employee is in a particular salary grade. An Officer whose salary grade has been lowered, but whose employment is not terminated, during the Performance Year will receive a pro rata Annual Award based on the percentage of the Performance Year in which the employee is in a particular salary grade. 5.2 TERMINATION. An Officer whose employment is terminated pursuant to a violation of the Company code of conduct or other corporate policies will not be considered for an Annual Award. 5.3 RESIGNATION. An Officer who resigns during or after a Performance Year will not be eligible for an Annual Award. If the resignation is due to reasons such as a downsizing or reorganization, or the ill health of the Officer or ill health in the immediate family, the Officer may petition the Committee and may be considered, in the discretion of the Committee, for a pro rata Annual Award. The Committee's decision to approve or deny the request for a pro rata Annual Award shall be final. 5.4 DEATH, DISABILITY, RETIREMENT, LEAVE OF ABSENCE. An Officer whose status as an active employee is changed during the Performance Year due to death, Disability, Retirement, or Leave of Absence will receive a pro rata Annual Award. VI. MISCELLANEOUS 6.1 IMPACT ON BENEFIT PLANS. Payments made under the Plan will be considered as earnings for the Supplemental Executive Retirement Plan (Salary Grades E-3 through E-9) but not for purposes of the Employees' Savings Plan, Pension Plan, or other employee benefit programs. 6.2 IMPACT ON EMPLOYMENT. Neither the adoption of the Plan nor the granting of any Annual Award under the Plan will be deemed to create any right in any individual to be retained or continued in the employment of the Company or any corporation within the Company's control group. 6.3 TERMINATION OR AMENDMENT OF THE PLAN. The Company at any time may, in writing, terminate or amend the Plan. 6.4 GOVERNING LAW. The Plan will be governed and construed in accordance with the laws of the State of Michigan. 6.5 DISPUTE RESOLUTION. Any disputes related to the Plan should first be brought to the Plan Administrator. If that does not result in a mutually agreeable resolution, then the dispute shall be subject to final and binding arbitration before a single arbitrator selected by the parties to be conducted in Jackson, Michigan. The arbitration will be conducted and finished within 90 days of the selection of the arbitrator. The parties shall share equally the cost of the arbitrator and of conducting the arbitration proceeding, but each party shall bear the cost of its own legal counsel and experts and other out-of-pocket expenditures. 7 EX-10.(Y) 15 k82154aexv10wxyy.txt PURCHASE AGREEMENT DATED JULY 9, 2003 EXHIBIT 10(y) EXECUTION COPY $150,000,000 CMS ENERGY CORPORATION 3.375% Convertible Senior Notes due 2023 Purchase Agreement July 9, 2003 Citigroup Global Markets Inc. As Representative of the several Initial Purchasers named in Schedule I hereto 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: CMS Energy Corporation, a Michigan corporation (the "Company"), proposes to issue and sell to Citigroup Global Markets Inc. ("Citigroup") and each of the other Initial Purchasers named in Schedule I hereto (collectively, the "Initial Purchasers"), for whom Citigroup is acting as representative (in such capacity, the "Representative"), an aggregate of $150,000,000 in principal amount of its 3.375% Convertible Senior Notes due 2023 (the "Restricted Notes"), subject to the terms and conditions set forth herein. The Restricted Notes are to be issued pursuant to the provisions of the Indenture dated as of September 15, 1992 between the Company and Bank One Trust Company, N.A. (ultimate successor to NBD Bank, National Association), as trustee (the "Trustee"), as supplemented and amended by various supplemental indentures and as to be supplemented by the Thirteenth Supplemental Indenture, to be dated as of July 16, 2003, establishing the terms of the Restricted Notes (the "Supplemental Indenture") (as so supplemented, the "Indenture"). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Indenture. The Company has agreed to grant to the Initial Purchasers, severally and not jointly, an option to purchase up to $50,000,000 aggregate principal amount of additional Restricted Notes (the "Option Restricted Notes"), at a price per Option Restricted Note equal to the price per Restricted Note. Such option shall expire 45 days after the Time of Purchase (as defined below), and may be exercised in whole or in part from time to time. Such option may be exercised upon notice by the Representative to the Company setting forth the aggregate principal amount of Option Restricted Notes as to which the several Initial Purchasers are then exercising the option and the time, date and place of payment and delivery for such Option Restricted Notes. Any such time and date of payment and delivery shall be determined by the Representative, but shall not be later than seven full business days after the exercise of said option, nor, in any event, prior to the Time of Purchase, unless otherwise agreed upon by the Representative and the Company. Any such time and date of payment and delivery which falls after the Time of Purchase is referred to herein as a "Date of Option Delivery". If the option is exercised as to all or any portion of the Option Restricted Notes, each of the Initial Purchasers, severally and not jointly, will purchase that proportion of the aggregate principal amount of Option Restricted Notes then being purchased which the aggregate principal amount of Restricted Notes each such Initial Purchaser has severally agreed to purchase as set forth herein bears to the aggregate principal amount of Restricted Notes, subject to such adjustments as the Representative in its discretion shall make to eliminate any sales or purchases of an incremental principal amount of Option Restricted Notes less than $1,000. As used herein, the term "Restricted Notes" shall include the Restricted Notes and all or any portion of any Option Restricted Notes. Holders (including subsequent transferees) of the Restricted Notes will have the registration rights set forth in the registration rights agreement in the form attached hereto as Exhibit A (the "Registration Rights Agreement"), to be dated the Time of Purchase, for so long as such Restricted Notes constitute Registrable Securities (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, the Company will agree to file with the Securities and Exchange Commission (the "Commission") a shelf registration statement (the "Registration Statement") pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Act") relating to the resale by certain holders of the Restricted Notes and the sale of the shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), issuable upon conversion of the Restricted Notes (the "Issuable Common Stock"), and to use its best efforts to cause such Registration Statement to be declared and remain effective and usable for the periods specified in the Registration Rights Agreement. This Agreement, the Indenture, the Restricted Notes, the Issuable Common Stock and the Registration Rights Agreement are hereinafter sometimes referred to collectively as the "Operative Documents". 1. Offering Memorandum: The Restricted Notes will be offered and sold to the Initial Purchasers pursuant to one or more exemptions from the registration requirements under the Act. The Company has prepared a preliminary offering memorandum dated July 9, 2003 (the "Preliminary Offering Memorandum") and a confidential offering memorandum dated July 10, 2003 (the "Offering Memorandum") relating to the Restricted Notes, which incorporate by reference documents filed by the Company pursuant to Section 13, 14 or 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As used herein, the term "Preliminary Offering Memorandum" and "Offering Memorandum" shall include respectively the documents incorporated by reference therein. Any reference herein to the terms "amend", "amendment" or "supplement" with respect to the Preliminary Offering Memorandum and Offering Memorandum shall be deemed to include amendments or supplements to the Preliminary Offering Memorandum and Offering Memorandum, and documents incorporated by reference after the time of execution of this Agreement and prior to the termination of the offering of the Restricted Notes by the Initial Purchasers. Upon original issuance thereof, and until such time as the same is no longer required pursuant to the Indenture, the Restricted Notes and the Issuable Common Stock (and all securities issued in exchange therefor or in substitution thereof) shall bear the following legend: THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS 2 SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (IV) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, (V) TO CMS ENERGY CORPORATION OR (VI) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (VI) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN CLAUSE (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES THAT SUCH HOLDER WILL NOT ENGAGE IN HEDGING TRANSACTIONS INVOLVING THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THIS SECURITY AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS SECURITY TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS SECURITY SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT. THE HOLDER OF THIS SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS OF, A REGISTRATION RIGHTS AGREEMENT DATED AS 3 OF JULY 16, 2003 ENTERED INTO BY THE COMPANY FOR THE BENEFIT OF CERTAIN HOLDERS OF SECURITIES FROM TIME TO TIME. 2. Purchase and Sale: Upon the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to sell to the respective Initial Purchasers, severally and not jointly, and the respective Initial Purchasers, severally and not jointly, agree to purchase from the Company at the purchase price specified in Schedule I hereto (the "Purchase Price"), the respective principal amounts of Restricted Notes set opposite their names in Schedule I hereto. The Company hereby agrees that, without the prior written consent of the Representative, it will not offer, sell, contract to sell or otherwise issue debt securities substantially similar to the Restricted Notes for a period from the date of the execution of this Agreement until the Time of Purchase. 3. Terms of Offering: The Initial Purchasers have advised the Company that the Initial Purchasers will make offers (the "Exempt Resales") of the Restricted Notes purchased hereunder on the terms set forth in the Offering Memorandum solely to persons whom the Initial Purchasers reasonably believe to be "qualified institutional buyers" as defined in Rule 144A under the Act or, at the time any buy order for the Restricted Notes was or is originated, were or are outside the United States and were or are not "U.S. persons" within the meaning of Regulation S under the Act (such persons being referred to herein as the "Eligible Purchasers"). The Initial Purchasers will offer the Restricted Notes to Eligible Purchasers initially at a price equal to 100% of the principal amount thereof. Such price may be changed at any time without notice. 4. Payment and Delivery: Payment for the Restricted Notes shall be made to the Company in federal or other immediately available funds in New York City (or such other place or places of payment as shall be agreed upon by the Company and the Representative in writing), upon the delivery of the Restricted Notes at the offices of Pillsbury Winthrop LLP ("PW"), at One Battery Park Plaza, New York, New York 10004-1490 (or such other place or places of delivery as shall be agreed upon by the Company and the Representative) to the Representative for the respective accounts of the Initial Purchasers against receipt therefor signed by the Representative on behalf of themselves and as agent for the other Initial Purchasers. Such payment and delivery shall be made at 10:00 A.M., New York time on July 16, 2003 (or on such later business day as shall be agreed upon by the Company and the Representative in writing), unless postponed in accordance with the provisions of Section 11 hereof. The day and time at which payment and delivery for the Restricted Notes (without regard to any Option Restricted Notes) are to be made is herein called the "Time of Purchase". In addition, in the event that the Initial Purchasers have exercised their option to purchase any or all of the Option Restricted Notes, payment of the purchase price for, and delivery of, such Option Restricted Notes shall be made at the above mentioned offices, or at such other place as shall be agreed upon by the Representative and the Company on the relevant Date of Option Delivery as specified in the notice from the Representative to the Company. 4 Delivery of the Restricted Notes shall be made in definitive, fully registered form or global form, as specified by the Representative, in authorized denominations registered in such names as the Representative may request in writing to the Company not later than two full business days prior to the Time of Purchase, or, if no such request is received, in the names of the respective Initial Purchasers for the respective principal amounts of Restricted Notes set forth opposite the name of each Initial Purchaser in Schedule I, in denominations selected by the Company. The certificates evidencing the Restricted Notes shall be delivered at the Time of Purchase for the account of the Initial Purchasers, with any transfer taxes payable in connection with the transfer of the Restricted Notes to the Initial Purchasers duly paid, against payment of the Purchase Price therefor. The Company agrees to make the Restricted Notes available for inspection by the Initial Purchasers at the offices of PW at least 24 hours prior to the Time of Purchase, in definitive, fully registered form, and as requested pursuant to the preceding paragraph. 5. Conditions of Initial Purchasers' Obligations: The several obligations of the Initial Purchasers hereunder are subject to the accuracy of the representations and warranties, at and as of the Time of Purchase, on the part of the Company, and to the following other conditions: (a) That all legal proceedings to be taken in connection with the issue and sale of the Restricted Notes shall be reasonably satisfactory in form and substance to PW, counsel to the Initial Purchasers. (b) That, at the Time of Purchase, the Representative shall be furnished with the following opinions, dated the Time of Purchase: (i) Opinion of Robert C. Shrosbree, Esq., Assistant General Counsel of the Company, substantially to the effect set forth in Exhibit B attached hereto; (ii) Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Company, substantially to the effect set forth in Exhibit C-1 and Exhibit C-2 attached hereto; and (iii) Opinion of PW, counsel to the Initial Purchasers, in a form satisfactory to the Initial Purchasers. (c) (i) That, on the date hereof and on the date of the Time of Purchase, the Representative shall have received a letter from Ernst & Young LLP ("E&Y") in form and substance satisfactory to the Initial Purchasers, dated as of such date, (i) confirming that they are independent public accountants with respect to the Company within the meaning of the Act and the applicable published rules and regulations of the Commission thereunder, (ii) stating that in their opinion the financial statements examined by them and included or incorporated by reference in the Preliminary Offering Memorandum or Offering Memorandum, as the case may be, complied as to form in all material respects with the applicable accounting requirements of the Commission, including the applicable published rules and regulations of the Commission, and (iii) covering, as of a date not more than five business days prior to the date of such letter, such other matters as the Initial Purchasers reasonably request. 5 (ii) That, on the date hereof, the Representative shall have received a letter from each of PricewaterhouseCoopers LLP and Price Waterhouse, each in form and substance satisfactory to the Initial Purchasers, dated as of such date, (i) confirming that each are independent public accountants with respect to (A) the Company and the Midland Cogeneration Venture Limited Partnership, in the case of PricewaterhouseCoopers LLP, and (B) the Company and Jorf Lasfar Energy Company S.C.A., in the case of Price Waterhouse, each within the meaning of the Act and the applicable published rules and regulations of the Commission thereunder, (ii) stating that in each of their opinions the financial statements examined by them and referred to in the letter of E&Y complied as to form in all material respects with the applicable accounting requirements of the Commission, including the applicable published rules and regulations of the Commission, and (iii) covering, as of a date not more than five business days prior to the date of such letter, such other matters as the Initial Purchasers reasonably request. (d) Subsequent to the date hereof or, if earlier, the dates as of which information is given in the Offering Memorandum (exclusive of any amendment or supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in Section 5(c) hereof or (ii) any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries taken as a whole, except as set forth in or contemplated in the Offering Memorandum (exclusive of any amendment or supplement thereto), the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Representative, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Restricted Notes as contemplated in the Offering Memorandum (exclusive of any amendment or supplement thereto). (e) That, at the Time of Purchase, the Company shall have delivered to the Representative a certificate of an executive officer of the Company to the effect that, to the best of his or her knowledge, information and belief, (i) there shall have been no material adverse change in the condition (financial or otherwise), earnings, business or properties of the Company from that set forth in the Offering Memorandum (other than changes referred to in or contemplated by the Offering Memorandum) and (ii) the representations and warranties of the Company in this Agreement are true and correct on and as of the Time of Purchase with the same effect as if made at the Time of Purchase, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to the Time of Purchase. (f) That the Company shall have executed and delivered the Registration Rights Agreement and shall have furnished the Representative signed counterparts of the Supplemental Indenture. (g) That the Company shall have performed such of its obligations under this Agreement as are to be performed at or before the Time of Purchase by the terms hereof. (h) That the Company shall have complied with the provisions of Section 6(c) hereof with respect to the furnishing of the Offering Memorandum. 6 (i) That, at the Time of Purchase, the Restricted Notes shall be rated at least B+ by Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc. ("S&P"), B3 by Moody's Investors Service, Inc. ("Moody's") and B+ by Fitch, Inc. ("Fitch"), and the Company shall have delivered to the Representative a letter, dated the Time of Purchase, from each such rating agency, or other evidence reasonably satisfactory to the Representative, confirming that the Restricted Notes have been assigned such ratings; and between the date of the execution of this Agreement and the Time of Purchase, there has been no downgrading or withdrawal of the investment ratings of the Restricted Notes, securities of the Company or securities of Consumers Energy Company by any nationally recognized statistical rating agency, and no such rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, any such rating. (j) In the event that the Initial Purchasers exercise their option to purchase all or any portion of the Option Restricted Notes, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company hereunder shall be true and correct as of each Date of Option Delivery, and, at the relevant Date of Option Delivery, the Representative shall have received: (1) a certificate, dated such Date of Option Delivery, of an executive officer of the Company confirming that the certificate delivered at the Time of Purchase pursuant to Section 5(e) hereof remains true and correct as of such Date of Option Delivery; (2) opinions of Robert C. Shrosbree, Esq., Assistant General Counsel of the Company, Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Company, and PW, counsel to the Initial Purchasers, dated such Date of Option Delivery, relating to the Option Restricted Notes and otherwise to the same effect as the opinions required by Section 5(b) hereof; and (3) a letter from E&Y, dated such Date of Option Delivery, substantially in the same form and substance as the letter furnished to the Representative pursuant to Section 5(c) hereof, except that the date specified in Section 5(c)(iii) hereof shall be a date not more than five days prior to such Date of Option Delivery. (k) At the Time of Purchase, the Issuable Common Stock shall have been duly listed, subject only to official notice of issuance, on The New York Stock Exchange. (l) The Restricted Notes shall have been designated as PORTAL-eligible securities in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. ("NASD") and the Restricted Notes shall be eligible for clearance and settlement through The Depository Trust Company ("DTC"). (m) At the Time of Purchase, the Company shall have furnished to the Representative a letter substantially in the form of Exhibit D hereto addressed to the Representative from each person listed in Schedule II hereto. 7 (n) That any additional documents or agreements reasonably requested by the Initial Purchasers or their counsel to permit the Initial Purchasers to perform their obligations or permit their counsel to deliver opinions hereunder shall have been provided to them. 6. Certain Covenants of the Company: In further consideration of the agreements of the Initial Purchasers herein contained, the Company covenants as follows: (a) To advise the Representative promptly and, if requested by the Representative, confirm such advice in writing, of the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of any Restricted Notes for offering or sale in any jurisdiction designated by the Initial Purchasers pursuant to Section 6(d) hereof, or the initiation of any proceeding by any state securities commission or any other federal or state regulatory authority for such purpose. The Company shall use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption of any Restricted Notes under any state securities or blue sky laws and, if at any time any state securities commission or other federal or state regulatory authority shall issue an order suspending the qualification or exemption of any Restricted Notes under any state securities or blue sky laws, the Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To deliver to the Initial Purchasers, without charge, as soon as practicable, as many copies of the Offering Memorandum (as supplemented or amended if the Company shall have made any supplements or amendments thereto) as the Initial Purchasers may reasonably request. Subject to the Initial Purchasers' compliance with their representations and warranties and agreements set forth in Section 8 hereof, the Company consents to the use of the Offering Memorandum, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchasers in connection with Exempt Resales. (c) For such period of time as the Initial Purchasers are required by law or customary practice to deliver an offering memorandum in respect of the Restricted Notes, if any event shall have occurred as a result of which it is necessary to amend or supplement the Offering Memorandum in order to make the statements therein, in light of the circumstances when the Offering Memorandum is delivered to an Eligible Purchaser, not misleading, or if it becomes necessary to amend or supplement the Offering Memorandum to comply with law, to forthwith prepare an appropriate amendment or supplement to the Offering Memorandum and deliver to the Initial Purchasers, without charge, such number of copies thereof as may be reasonably requested. (d) To use its best efforts to qualify the Restricted Notes for offer and sale under the securities or blue sky laws of such jurisdictions as the Initial Purchasers may designate and to pay (or cause to be paid), or reimburse (or cause to be reimbursed) the Initial Purchasers and their counsel for, reasonable filing fees and expenses in connection therewith (including the reasonable fees and disbursements of counsel to the Initial Purchasers and filing fees and expenses paid and incurred prior to the date hereof), provided, however, that the Company shall not be required to qualify to do business as a foreign corporation or as a securities dealer or to file a general consent to service of process or to file annual reports or to comply with any other requirements deemed by the Company to be unduly burdensome. 8 (e) So long as the Restricted Notes are outstanding, (i) to mail and make generally available as soon as practicable after the end of each fiscal year to the record holders of the Restricted Notes a financial report of the Company on a consolidated basis, all such financial reports to include a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of cash flows and a consolidated statement of shareholders' equity as of the end of and for such fiscal year, together with comparable information as of the end of and for the preceding year, certified by the Company's independent public accountants and (ii) to mail and make generally available as soon as practicable after the end of each quarterly period (except for the last quarterly period of each fiscal year) to such holders, a consolidated balance sheet, a consolidated statement of operations and a consolidated statement of cash flows as of the end of and for such period, and for the period from the beginning of such year to the close of such quarterly period, together with comparable information for the corresponding periods of the preceding year. (f) So long as any of the Restricted Notes or Issuable Common Stock are "restricted securities" within the meaning of Rule 144(a)(3) under the Act and remain outstanding and during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act, to make available to any holder of Restricted Notes in connection with any sale thereof and any prospective purchaser of such Restricted Notes from such holder, the information required by Rule 144A(d)(4) under the Act. (g) To pay all expenses, fees and taxes (other than transfer taxes on sales by the respective Initial Purchasers) in connection with the issuance and delivery of the Restricted Notes and the Issuable Common Stock, except that the Company shall be required to pay the fees and disbursements (other than disbursements referred to in Section 6(d) hereof) of PW, counsel to the Initial Purchasers, only in the events provided in Section 6(h) hereof, the Initial Purchasers hereby agreeing to pay such fees and disbursements in any other event, and that except as provided in such Section 6(h), the Company shall not be responsible for any out-of-pocket expenses of the Initial Purchasers in connection with their services hereunder. (h) If the Initial Purchasers shall not take up and pay for the Restricted Notes due to the failure of the Company to comply with any of the conditions specified in Section 5 hereof, or, if this Agreement shall be terminated in accordance with the provisions of Section 12 hereof prior to the Time of Purchase or the Date of Delivery, as the case may be, to pay the reasonable fees and disbursements of PW, counsel to the Initial Purchasers, and, if the Initial Purchasers shall not take up and pay for the Restricted Notes due to the failure of the Company to comply with any of the conditions specified in Section 5 hereof, to reimburse the Initial Purchasers for their reasonable out-of-pocket expenses not to exceed $10,000 incurred in connection with the financing contemplated by this Agreement. (i) During the period referred to in Section 6(c) hereof, to not amend or supplement the Offering Memorandum unless the Company has furnished the Initial Purchasers and counsel to the Initial Purchasers with a copy for their review and comment a reasonable time prior to the making of such amendment or supplement and has reasonably considered any comments of the Initial Purchasers, and not to make any such amendment or supplement to which such counsel shall reasonably object on legal grounds in writing after consultation with the Initial Purchasers. 9 (j) During the period referred to in Section 6(c) hereof, to furnish the Initial Purchasers with copies of all documents required to be filed with the Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (k) During the period referred to in Section 6(c) hereof, to comply with all requirements under the Exchange Act relating to the timely filing with the Commission of its reports pursuant to Section 13 or 15(d) of the Exchange Act and of its proxy statements pursuant to Section 14 of the Exchange Act. (l) To comply in all material respects with all of its agreements set forth in the Registration Rights Agreement. (m) To obtain the approval of DTC for "book-entry" transfer of the Restricted Notes, and to comply in all material respects with all of its agreements set forth in the representation letter or letters of the Company to DTC relating to the approval of the Restricted Notes by DTC for "book-entry" transfer. (n) Not to (or permit any affiliate (as defined in Rule 144 under the Act) to) sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) that would be integrated with the sale of the Restricted Notes to the Initial Purchasers or pursuant to Exempt Resales in a manner that would require the registration of any such sale of the Restricted Notes under the Act. (o) Not to voluntarily claim, and to actively resist any attempts to claim, the benefit of any usury laws against the holders of any Restricted Notes. (p) During the period of two years after the Time of Purchase, not to, and not permit any of its affiliates (as defined in Rule 144 under the Act) to, resell any of the Restricted Notes which constitute "restricted securities" under Rule 144 under the Act that have been reacquired by any of them. (q) To take all reasonable action necessary to enable S&P, Moody's and Fitch to provide their respective credit ratings of the Restricted Notes. (r) Until the second anniversary of the Time of Purchase, not to, and not to permit any affiliates under its control to, purchase any Restricted Notes or Issuable Common Stock unless, immediately upon any such purchase, the Company or any such affiliate shall (1) submit such Restricted Notes to the Trustee for cancellation and/or (2) treat such Issuable Common Stock as treasury shares ineligible for re-issuance. (s) Not to, and not to permit any of its affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to which no agreement is made) to, directly or indirectly, make offers or sales of any security, or solicit offers to buy any security, under circumstances that would require the registration of the Restricted Notes or the Issuable Common Stock under the Act. (t) The Company will reserve and keep available at all times, free of preemptive rights, the full number of shares of Issuable Common Stock. 10 (u) The Company will use its best efforts to effect the listing of the Issuable Common Stock, prior to the Time of Purchase, on The New York Stock Exchange subject only to official notice of issuance. (v) The Company will not for a period of 60 days following the date hereof, without the prior written consent of the Representative, offer, sell or contract to sell, or otherwise dispose of (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company), directly or indirectly, or announce the offering of, any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, shares of Common Stock (other than the Restricted Notes); provided, however, that the Company may issue and sell Common Stock or securities convertible into or exchangeable for Common Stock pursuant to any employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company existing and in effect at the date hereof, and the Company may issue Common Stock issuable upon the conversion of securities or the exercise of warrants existing and outstanding at the date hereof. (w) Any information provided by the Company to publishers of publicly available databases about the terms of the Restricted Notes shall include a statement that the Restricted Notes have not been registered under the Act and are subject to restrictions under Rule 144A under the Act and Regulation S under the Act. (x) The Company will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Restricted Notes. (y) Between the date hereof and the Time of Purchase, the Company will not do or authorize any act or thing that would result in an adjustment of the conversion price. (z) The Company will cause the proceeds of the issuance and sale of the Restricted Notes to be applied for the purposes described in the Offering Memorandum. 7. Representations and Warranties of the Company: The Company represents and warrants to, and agrees with, each of the Initial Purchasers that: (a) Each of the Preliminary Offering Memorandum and the Offering Memorandum does not, and any supplement or amendment to it will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this Section 7(a) shall not apply to statements in or omissions from the Preliminary Offering Memorandum and the Offering Memorandum (or any supplement or amendment thereto) based upon information relating to the Initial Purchasers furnished to the Company in writing by the Initial Purchasers expressly for use therein. No stop order preventing the use of the Offering Memorandum, or any amendment or supplement thereto, or any order asserting that any of the 11 transactions contemplated by this Agreement are subject to the registration requirements of the Act, has been issued. (b) The documents incorporated by reference in the Preliminary Offering Memorandum and the Offering Memorandum, when they were filed (or, if an amendment with respect to any such document was filed, when such amendment was filed) with the Commission, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and any further documents so filed and incorporated by reference will, when they are filed with the Commission, conform in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder; none of such documents, when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and no such further document, when it is filed, will contain an untrue statement of a material fact or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. (c) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Michigan and has all requisite authority to own or lease its properties and conduct its business as described in the Preliminary Offering Memorandum and the Offering Memorandum and to consummate the transactions contemplated hereby, and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business as described in the Preliminary Offering Memorandum and the Offering Memorandum or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company. (d) The Restricted Notes are in the form contemplated by the Indenture and have been duly authorized by the Company. At the Time of Purchase, the Restricted Notes will have been duly executed and delivered by the Company and, when authenticated by the Trustee in the manner provided for in the Indenture and delivered against payment therefor as provided in this Agreement, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity), will be entitled to the security afforded by the Indenture equally and ratably with all securities outstanding thereunder, and will be convertible into Common Stock in accordance with their terms. Each of the Restricted Notes and the Issuable Common Stock conform in all material respects to the descriptions thereof in the Preliminary Offering Memorandum and the Offering Memorandum. Each significant subsidiary (as defined in Rule 405 under the Act, and hereinafter called a "Significant Subsidiary") of the Company has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its formation, has all requisite authority to own or lease its properties and conduct its business as described in the Offering Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business as 12 described in the Offering Memorandum or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Significant Subsidiaries, taken as a whole. (e) This Agreement has been duly authorized, executed and delivered by the Company, and the Company has full corporate power and authority to enter into this Agreement. (f) The Registration Rights Agreement has been duly authorized by the Company. At the Time of Purchase, the Registration Rights Agreement will have been duly executed and delivered by the Company and will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). The Registration Rights Agreement conforms in all material respects to the description thereof in the Preliminary Offering Memorandum and the Offering Memorandum. (g) The Indenture has been duly authorized by the Company. At the Time of Purchase, the Indenture will have been duly executed and delivered by the Company and will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity); the Indenture conforms in all material respects to the description thereof in the Preliminary Offering Memorandum and the Offering Memorandum; and the Indenture conforms to the requirements of the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). (h) Except for the outstanding shares of preferred stock of Consumers Energy Company, the 8.36% Trust Originated Preferred Securities of Consumers Power Company Financing I, the 8.20% Trust Originated Preferred Securities of Consumers Energy Company Financing II, the 9 1/4% Trust Originated Preferred Securities of Consumers Energy Company Financing III, the 9.00% Trust Preferred Securities of Consumers Energy Company Financing IV, the 7 3/4% Convertible Quarterly Income Preferred Securities of CMS Energy Trust I and the 7 1/4% PEPS Units of CMS Energy Trust III, all of the outstanding capital stock of each of Consumers Energy Company and CMS Enterprises Company is owned directly or indirectly by the Company, free and clear of any security interest, claim, lien or other encumbrance (except as disclosed in the Offering Memorandum) or preemptive rights, and there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in any of Consumers Energy Company and CMS Enterprises Company or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any such capital stock, any such convertible or exchangeable securities or any such rights, warrants or options. (i) The Company has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all federal, 13 state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct business in the manner described in the Preliminary Offering Memorandum and the Offering Memorandum, except to the extent that the failure to obtain or file would not have a material adverse effect on the Company. (j) No order, license, consent, authorization or approval of, or exemption by, or the giving of notice to, or the registration with, any federal, state, local or other governmental department, commission, board, bureau, agency or instrumentality, and no filing, recording, publication or registration in any public office or any other place, was or is now required to be obtained by the Company to authorize its execution or delivery of, or the performance of its obligations under, this Agreement or any of the other Operative Documents, except such as have been obtained or may be required under state securities or blue sky laws or as referred to in the Offering Memorandum. (k) None of the issuance, sale or conversion of the Restricted Notes, or the execution or delivery by the Company of, or the performance by the Company of its obligations under, this Agreement or the other Operative Documents, did or will conflict with, result in a breach of any of the terms or provisions of, or constitute a default or require the consent of any party under, the Company's Articles of Incorporation or by-laws, any material agreement or instrument to which it is a party, any existing applicable law, rule or regulation or any judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its properties or assets, or did or will result in the creation or imposition of any lien on the Company's properties or assets. (l) Except as disclosed in the Offering Memorandum, there is no action, suit, proceeding, inquiry or investigation (at law or in equity or otherwise) pending or, to the knowledge of the Company, threatened against the Company, by any governmental authority that (i) questions the validity, enforceability or performance of this Agreement or any of the other Operative Documents or (ii) if determined adversely, is likely to have a material adverse effect on the business or financial condition of the Company, or materially adversely affect the ability of the Company to perform its obligations hereunder or the consummation of the transactions contemplated by this Agreement. (m) There has not been any material and adverse change in the business, properties, prospects or financial condition of the Company from that set forth or incorporated by reference in the Offering Memorandum (other than changes referred to in or contemplated by the Offering Memorandum). (n) Except as set forth in the Offering Memorandum, no event or condition exists that constitutes, or with the giving of notice or lapse of time or both would constitute, a default or any breach or failure to perform by the Company in any material respect under any indenture, mortgage, loan agreement, lease or other material agreement or instrument to which the Company is a party or by which it or any of its properties may be bound. (o) The Offering Memorandum, as of its date, contained all the information specified in, and met the requirements of, Rule 144A(d)(4) under the Act. 14 (p) When the Restricted Notes are issued and delivered pursuant to this Agreement, the Restricted Notes and the Issuable Common Stock will not be of the same class (within the meaning of Rule 144A under the Act) as any security of the Company that is listed on a national securities exchange registered under Section 6 of the Exchange Act or that is quoted in a United States automated inter-dealer quotation system. No securities of the same class as the Restricted Notes have been issued and sold by the Company within the six-month period immediately prior to the date hereof. (q) Neither the Company nor any affiliate (as defined in Rule 144 under the Act) of the Company has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Act) which is or will be integrated with the sale of the Restricted Notes in a manner that would require the registration under the Act of the Restricted Notes or (ii) engaged in any form of general solicitation or general advertising in connection with the offering of the Restricted Notes (as those terms are used in Regulation D under the Act), or in any manner involving a public offering within the meaning of Section 4(2) of the Act, including, but not limited to, publication or release of articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. (r) None of the Company nor any of its affiliates (as defined in Rule 144 under the Act) or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company makes no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S under the Act with respect to the Restricted Notes. (s) No registration under the Act of the Restricted Notes is required for the sale of the Restricted Notes to the Initial Purchasers as contemplated hereby or for the Exempt Resales (assuming the accuracy of the Initial Purchasers' representation and warranty and agreement set forth in Section 8 hereof). (t) The Company, after giving effect to the offering and sale of the Restricted Notes, will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (u) The Company has an authorized capitalization as set forth in the Offering Memorandum and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable. The shares of Issuable Common Stock have been duly and validly authorized and reserved for issuance by the Company and, when issued and delivered in accordance with the provisions of the Indenture as it relates to the Restricted Notes, will be duly and validly issued, fully paid and non-assessable and will conform in all material respects to the description of the Common Stock contained in the Offering Memorandum and the issuance of the Issuable Common Stock is not, and will not be, subject to any preemptive or other similar right. (v) The Restricted Notes satisfy the eligibility requirements of Rule 144A(d)(3) under the Act. 15 (w) The Company has been advised by the NASD's PORTAL Market that the Restricted Notes and the Issuable Common Stock have been designated PORTAL-eligible securities in accordance with the rules and regulations of the NASD. (x) The Company's chief executive officer and chief financial officer are responsible for establishing and maintaining the Company's disclosure controls and procedures. The Company's management, under the direction of the Company's principal executive and financial officers, has evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days of the filing of the Company's most recent annual report on Form 10-K/A. Based on such evaluation, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective to ensure that material information was presented to them and properly disclosed. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to such evaluation. The Company acknowledges that the Initial Purchasers and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 5 hereof, counsel to the Company and counsel to the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 8. Representations and Warranties of Initial Purchasers: Upon the authorization by the Initial Purchasers of the release of the Restricted Notes, the Initial Purchasers propose to offer the Restricted Notes for sale upon the terms and conditions set forth in this Agreement and the Offering Memorandum and the Initial Purchasers hereby represent and warrant to, and agree with, the Company that: (a) they each will offer and sell the Restricted Notes only to Eligible Purchasers; (b) they each are Accredited Investors (as defined in Regulation D under the Act); and (c) they each will not offer or sell the Restricted Notes by any form of general solicitation or general advertising, including, but not limited to, the methods described in Rule 502(c) under the Act. 9. Indemnification: (a) The Company agrees, to the extent permitted by law, to indemnify and hold harmless each of the Initial Purchasers and each person, if any, who controls any such Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or otherwise, and to reimburse the Initial Purchasers and such controlling person or persons, if any, for any legal or other expenses incurred by them in connection with defending any action, suit or proceeding (including governmental investigations) as provided in Section 9(c) hereof, insofar as such losses, claims, damages, liabilities or actions, suits or proceedings (including governmental investigations) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in 16 the Preliminary Offering Memorandum or the Offering Memorandum, or, if the Preliminary Offering Memorandum or the Offering Memorandum shall be amended or supplemented, in the Preliminary Offering Memorandum or the Offering Memorandum as so amended or supplemented or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any such untrue statement or alleged untrue statement or omission or alleged omission which was made in the Preliminary Offering Memorandum or the Offering Memorandum or in the Preliminary Offering Memorandum or the Offering Memorandum as so amended or supplemented, in reliance upon and in conformity with information furnished in writing to the Company by, or through the Representative on behalf of, any Initial Purchaser expressly for use therein and except that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability or action, suit or proceeding arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Offering Memorandum if copies of the Offering Memorandum were timely delivered to the Initial Purchasers pursuant to Section 6 hereof and a copy of the Offering Memorandum (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Initial Purchasers to the person asserting such loss, claim, damage or liability or action, suit or proceeding and if the Offering Memorandum (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability or action, suit or proceeding. The Company's indemnity agreement contained in this Section 9 (a), and the covenants, representations and warranties of the Company contained in this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any person, and shall survive the delivery of and payment for the Restricted Notes hereunder, and the indemnity agreement contained in this Section 9 shall survive any termination of this Agreement. The liabilities of the Company in this Section 9(a) are in addition to any other liabilities of the Company under this Agreement or otherwise. (b) Each Initial Purchaser agrees, severally and not jointly, to the extent permitted by law, to indemnify, hold harmless and reimburse the Company, each other Initial Purchaser, and each person, if any, who controls the Company or any such other Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent and upon the same terms as the indemnity agreement of the Company set forth in Section 9(a) hereof, but only with respect to alleged untrue statements or omissions made in the Preliminary Offering Memorandum or the Offering Memorandum, as amended or supplemented (if applicable), in reliance upon and in conformity with information furnished in writing to the Company by such Initial Purchaser expressly for use therein. The indemnity agreement on the part of each Initial Purchaser contained in this Section 9(b) and the representations and warranties of such Initial Purchaser contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other person, and shall survive the delivery of and payment for the Restricted Notes hereunder, and the indemnity agreement contained in this Section 9(b) shall survive any termination of this Agreement. The liabilities of each Initial Purchaser in this 17 Section 9(b) are in addition to any other liabilities of such Initial Purchaser under this Agreement or otherwise. (c) If a claim is made or an action, suit or proceeding (including governmental investigations) is commenced or threatened against any person as to which indemnity may be sought under Section 9(a) or 9(b) hereof, such person (the "Indemnified Person") shall notify the person against whom such indemnity may be sought (the "Indemnifying Person") promptly after any assertion of such claim threatening to institute an action, suit or proceeding or if such an action, suit or proceeding is commenced against such Indemnified Person, promptly after such Indemnified Person shall have been served with a summons or other first legal process, giving information as to the nature and basis of the claim. Failure to so notify the Indemnifying Person shall not, however, relieve the Indemnifying Person from any liability which it may have on account of the indemnity under Section 9(a) or 9(b) hereof if the Indemnifying Person has not been prejudiced in any material respect by such failure. Subject to the immediately succeeding sentence, the Indemnifying Person shall assume the defense of any such litigation or proceeding, including the employment of counsel and the payment of all expenses, with such counsel being designated, subject to the immediately succeeding sentence, in writing by the Representative in the case of parties indemnified pursuant to Section 9(b) hereof and by the Company in the case of parties indemnified pursuant to Section 9(a) hereof. Any Indemnified Person shall have the right to participate in such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include (x) the Indemnifying Person and (y) the Indemnified Person and, in the written opinion of counsel to such Indemnified Person, representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and expenses of counsel (including disbursements) for such Indemnified Person shall be reimbursed by the Indemnifying Person to the Indemnified Person. If there is a conflict as described in clause (ii) above, and the Indemnified Persons have participated in the litigation or proceeding utilizing separate counsel whose fees and expenses have been reimbursed by the Indemnifying Person and the Indemnified Persons, or any of them, are found to be solely liable, such Indemnified Persons shall repay to the Indemnifying Person such fees and expenses of such separate counsel as the Indemnifying Person shall have reimbursed. It is understood that the Indemnifying Person shall not, in connection with any litigation or proceeding or related litigation or proceedings in the same jurisdiction as to which the Indemnified Persons are entitled to such separate representation, be liable under this Agreement for the reasonable fees and out-of-pocket expenses of more than one separate firm (together with not more than one appropriate local counsel) for all such Indemnified Persons. Subject to the next paragraph, all such fees and expenses shall be reimbursed by payment to the Indemnified Persons of such reasonable fees and expenses of counsel promptly after payment thereof by the Indemnified Persons. In furtherance of the requirement above that fees and expenses of any separate counsel for the Indemnified Persons shall be reasonable, the Initial Purchasers and the Company agree that the Indemnifying Person's obligations to pay such fees and expenses shall be conditioned upon the following: 18 (1) in case separate counsel is proposed to be retained by the Indemnified Persons pursuant to clause (ii) of the preceding paragraph, the Indemnified Persons shall in good faith fully consult with the Indemnifying Person in advance as to the selection of such counsel; (2) reimbursable fees and expenses of such separate counsel shall be detailed and supported in a manner reasonably acceptable to the Indemnifying Person (but nothing herein shall be deemed to require the furnishing to the Indemnifying Person of any information, including, without limitation, computer print-outs of lawyers' daily time entries, to the extent that, in the judgment of such counsel, furnishing such information might reasonably be expected to result in a waiver of any attorney-client privilege); and (3) the Company and the Representative shall cooperate in monitoring and controlling the fees and expenses of separate counsel for Indemnified Persons for which the Indemnifying Person is liable hereunder, and the Indemnified Person shall use reasonable effort to cause such separate counsel to minimize the duplication of activities as between themselves and counsel to the Indemnifying Person. The Indemnifying Person shall not be liable for any settlement of any litigation or proceeding effected without the written consent of the Indemnifying Person, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees, subject to the provisions of this Section 9, to indemnify the Indemnified Person from and against any loss, damage, liability or expenses by reason of such settlement or judgment. The Indemnifying Person shall not, without the prior written consent of the Indemnified Persons, effect any settlement of any pending or threatened litigation, proceeding or claim in respect of which indemnity has been properly sought by the Indemnified Persons hereunder, unless such settlement includes an unconditional release by the claimant of all Indemnified Persons from all liability with respect to claims which are the subject matter of such litigation, proceeding or claim. (d) If the indemnification provided for in Section 9 above is unavailable to or insufficient to hold harmless an Indemnified Person under this Section 9 in respect of any losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof) referred to therein, then each Indemnifying Person under this Section 9 shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other from the offering of the Restricted Notes. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each Indemnifying Person shall contribute to such amount paid or payable by such Indemnified Person in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of each Indemnifying Person, if any, on the one hand and the Indemnified Person on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof), as well as any other relevant equitable 19 considerations. The relative benefits received by the Company on the one hand and the Initial Purchasers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the total discounts or commissions received by the Initial Purchasers, in each case as set forth in the Offering Memorandum, bear to the aggregate public offering price of the Restricted Notes. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Initial Purchasers on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 9(d) were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 9(d). The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental proceedings) in respect thereof) referred to above in this Section 9(d) shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such actions, suits or proceedings (including governmental proceedings) or claim, provided that the provisions of this Section 9 have been complied with (in all material respects) in respect of any separate counsel for such Indemnified Person. Notwithstanding the provisions of this Section 9(d), in no case shall any Initial Purchaser be responsible for any amount in excess of the purchase discount or commission applicable to the Restricted Notes purchased by such Initial Purchaser hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations in this Section 9(d) to contribute are several in proportion to their respective obligations and not joint. The agreement with respect to contribution contained in this Section 9(d) shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any Initial Purchaser, and shall survive delivery of and payment for the Restricted Notes hereunder and any termination of this Agreement. 10. Survival: The respective indemnities, agreements, representations, warranties and other statements of the Company and the Initial Purchasers as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of the Initial Purchasers or any controlling person of the Initial Purchasers, the Company, or any officer, director or controlling person of the Company, and shall survive delivery of and payment for the Restricted Notes. 11. Substitution of Initial Purchasers: If any Initial Purchaser under this agreement shall fail or refuse (otherwise than for some reason sufficient to justify in accordance with the terms hereof, the termination of its obligations hereunder) to purchase the Restricted Notes which it had agreed to purchase on the Time of Purchase or any applicable Date of Option Delivery, the Representative shall immediately notify the Company and the Representative and the other Initial Purchasers may, within 36 hours of the giving of such notice, determine to 20 purchase, or to procure one or more other members of the NASD (or, if not members of the NASD, who are foreign banks, dealers or institutions not registered under the Exchange Act and who agree in making sales to comply with the NASD's Rules of Fair Practice), satisfactory to the Company, to purchase, upon the terms herein set forth, the principal amount of Restricted Notes which the defaulting Initial Purchaser had agreed to purchase. If any non-defaulting Initial Purchaser or Initial Purchasers shall determine to exercise such right, the Representative shall give written notice to the Company of such determination within 36 hours after the Company shall have received notice of any such default, and thereupon the Time of Purchase or Date of Option Delivery, as the case may be, shall be postponed for such period, not exceeding three business days, as the Company shall determine. If, in the event of such a default, the Representative shall fail to give such notice, or shall within such 36-hour period give written notice to the Company that no other Initial Purchaser or Initial Purchasers, or others, will exercise such right, then this Agreement may be terminated by the Company, upon like notice given to the Representative within a further period of 36 hours. If in such case the Company shall not elect to terminate this Agreement, it shall have the right, irrespective of such default: (a) to require such non-defaulting Initial Purchasers to purchase and pay for the respective principal amounts of Restricted Notes which they had severally agreed to purchase hereunder, as herein above provided, and, in addition, the principal amount of Restricted Notes which the defaulting Initial Purchaser shall have so failed to purchase up to a principal amount thereof equal to one-ninth (1/9) of the respective principal amounts of Restricted Notes which such non-defaulting Initial Purchasers have otherwise agreed to purchase hereunder; and/or (b) to procure one or more other members of the NASD (or, if not members of the NASD, who are foreign banks, dealers or institutions not registered under the Exchange Act and who agree in making sales to comply with the NASD's Rules of Fair Practice) to purchase, upon the terms herein set forth, the principal amount of Restricted Notes which such defaulting Initial Purchaser had agreed to purchase, or that portion thereof which the remaining Initial Purchasers shall not be obligated to purchase pursuant to Section 11(a) hereof. In the event the Company shall exercise its rights under Section 11(a) and/or Section 11(b) hereof, the Company shall give written notice thereof to the Representative within such further period of 36 hours, and thereupon the Time of Purchase or the Date of Option Delivery, as the case may be, shall be postponed for such period, not exceeding five business days, as the Company shall determine. In the event the Company shall be entitled to but shall not elect to exercise its rights under Section 11(a) and/or Section 11(b) hereof, the Company shall be deemed to have elected to terminate this Agreement. Any action taken by the Company under this Section 11 shall not relieve any defaulting Initial Purchaser from liability in respect of any default of such Initial Purchaser under this Agreement. Termination by the Company under this Section 11 shall be without any liability on the part of the Company or any non-defaulting Initial Purchaser. In the computation of any period of 36 hours referred to in this Section 11, there shall be excluded a period of 24 hours in respect of each Saturday, Sunday or legal holiday which would otherwise be included in such period of time. 21 12. Termination of Agreement: This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time prior to the Time of Purchase or any applicable Date of Option Delivery by the Representative if, prior to such time, any of the following events shall have occurred: (i) trading in the Company's Common Stock shall have been suspended by the Commission or the New York Stock Exchange or trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such exchange; (ii) a banking moratorium shall have been declared either by U.S. federal or New York State authorities; or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war or other calamity or crisis the effect of which on the financial markets of the United States is such as to impair, in the sole judgment of the Representative, the marketability of the Restricted Notes. If the Representative elects to terminate this Agreement, as provided in this Section 12, the Representative will promptly notify the Company and each other Initial Purchaser by telephone or telecopy, confirmed by letter. If this Agreement shall not be carried out by any Initial Purchaser for any reason permitted hereunder, or if the sale of the Restricted Notes to the Initial Purchasers as herein contemplated shall not be carried out because the Company is not able to comply with the terms hereof, the Company shall not be under any obligation under this Agreement and shall not be liable to any Initial Purchaser or to any member of any selling group for the loss of anticipated profits from the transactions contemplated by this Agreement and the Initial Purchasers shall be under no liability to the Company nor be under any liability under this Agreement to one another. Notwithstanding the foregoing, the provisions of Sections 6(e), 6(i), 9 and 10 shall survive any termination of this Agreement. 13. Notices: All notices hereunder shall, unless otherwise expressly provided, be in writing and be delivered at or mailed to the following addresses or be sent by telecopy as follows: (i) if to the Initial Purchasers or the Representative, to Citigroup Global Markets Inc., 388 Greenwich Street, New York, New York 10013, Attention: General Counsel (Telecopy 212-816-7912); and (ii) if to the Company, to CMS Energy Corporation, One Energy Plaza, Jackson, Michigan 49201, Attention: Executive Vice President and Chief Financial Officer (Telecopy 517-788-2186). 14. Parties in Interest: This Agreement has been and is made solely for the benefit of the Initial Purchasers, the Company, the Initial Purchasers' directors and officers and the controlling persons, if any, referred to herein, and their respective successors, assigns, executors and administrators, and, except as expressly otherwise provided in Section 11 hereof, no other person shall acquire or have any right under or by virtue of this Agreement. 15. Definition of Certain Terms: All obligations of the Initial Purchasers hereunder are several and not joint. The term "successors" as used in this Agreement shall not include any purchaser, as such purchaser, of any of the Restricted Notes from any of the respective Initial Purchasers. 22 16. Governing Law: This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 17. Waiver of Tax Confidentiality: Notwithstanding anything herein to the contrary, purchasers of the Restricted Notes (and each employee, representative or other agent of the Company) may disclose to any and all persons, without limitation of any kind, the U.S. tax treatment and U.S. tax structure of any transaction contemplated herein and all materials of any kind (including opinions or other tax analyses) that are provided to the purchasers of the Restricted Notes relating to such U.S. tax treatment and U.S. tax structure, other than any information for which nondisclosure is reasonably necessary in order to comply with applicable securities laws. 18. Counterparts: This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. 23 If the foregoing is in accordance with your understanding, please sign and return to us counterparts hereof, and, upon the acceptance hereof by you, this letter and such acceptance hereof shall constitute a binding agreement between each of the Initial Purchasers and the Company. Very truly yours, CMS ENERGY CORPORATION By: /s/ Laura Mountcastle ------------------------------ Name: Laura Mountcastle Title: Vice President and Treasurer Confirmed and accepted as of the date first written above: CITIGROUP GLOBAL MARKETS INC. As Representative of the several Initial Purchasers named in Schedule I hereto By: CITIGROUP GLOBAL MARKETS INC. By:/s/ Jane Sadowsky ----------------------------------- Name: Jane Sadowsky Title: Managing Director SCHEDULE I
Principal Amount of Restricted Initial Purchasers Notes Purchase Price - ------------------ ----- -------------- Citigroup Global Markets Inc. $ 60,000,000 $ 58,200,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated $ 52,500,000 $ 50,925,000 Deutsche Bank Securities Inc. $ 37,500,000 $ 36,375,000 ------------ ------------ Total $150,000,000 $145,500,000 ============ ============
I-1 SCHEDULE II 1. John F. Drake 2. James J. Duderstadt 3. Carl L. English 4. Thomas W. Elward 5. Kathleen R. Flaherty 6. Earl D. Holton 7. David W. Joos 8. David G. Mengebier 9. Michael T. Monahan 10. Joseph F. Paquette Jr. 11. William U. Parfet 12. Percy A. Pierre 13. John G. Russell 14. S. Kinnie Smith, Jr. 15. Kenneth L. Way 16. Thomas J. Webb 17. Ken Whipple 18. John B. Yasinsky II-1 EXHIBIT A This Registration Rights Agreement (this "Agreement") is made and entered into this 16th day of July, 2003 among CMS Energy Corporation, a Michigan corporation (the "Company"), and Citigroup Global Markets Inc., as representative (the "Representative") of the Initial Purchasers (the "Initial Purchasers") listed on Schedule I to the Purchase Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement dated July 9, 2003, among the Company and the Representative on behalf of the Initial Purchasers (the "Purchase Agreement"), which provides for the sale by the Company to the Initial Purchasers of an aggregate of $150,000,000 principal amount of the Company's 3.375% Convertible Senior Notes due 2023 (the "Firm Notes") and the granting by the Company to the Initial Purchasers of the option to purchase $50,000,000 additional principal amount of such Convertible Senior Notes (the "Option Notes" and, together with the Firm Notes, the "Notes"). The Notes are convertible into shares of common stock, par value $0.01 per share, of the Company at the initial conversion price set forth in the Offering Memorandum dated July 10, 2003, subject to adjustment in accordance with the Indenture (as defined below). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Additional Amounts" shall have the meaning set forth in Section 2(c)(i) hereof. "Additional Amounts Payment Date" shall have the meaning set forth in Section 2(c)(ii) hereof. "Agreement" shall have the meaning set forth in the preamble. "Applicable Conversion Price" shall mean, as of any date of determination, $1,000 principal amount of Notes as of such date of determination divided by the Conversion Rate (as defined below) in effect as of such date of determination or, if no Notes are then outstanding, the Conversion Rate that would be in effect were Notes then outstanding. "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. "Closing Date" shall mean the later of (i) the date on which the Firm Notes are issued and (ii) the date on which the Option Notes are issued. A-1 "Company" shall have the meaning set forth in the preamble and shall also include the Company's successors. "Conversion Rate" shall have the meaning assigned to such term in the Supplemental Indenture. "Depositary" shall mean The Depository Trust Company, or any other depositary for the Securities (as defined below) appointed by the Company; provided, however, that such depositary must have an address in the Borough of Manhattan, in The City of New York. "Firm Closing Date" shall mean the date on which the Firm Notes are issued. "Firm Notes" shall have the meaning set forth in the preamble. "Holder" shall mean an Initial Purchaser, for so long as it owns any Registrable Securities (as defined below), and each of its successors, assigns and direct and indirect transferees who become owners of Registrable Securities. "Indemnified Holder" shall have the meaning set forth in Section 4(a) hereof. "Indemnified Person" shall have the meaning set forth in Section 4(c) hereof. "Indemnifying Person" shall have the meaning set forth in Section 4(c) hereof. "Initial Purchasers" shall have the meaning set forth in the preamble. "Majority Holders" shall mean, on any date, Holders of a majority of the outstanding Shares (as defined below) constituting Registrable Securities; provided, that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company and other obligors on the Securities or any Affiliate (as defined in the Indenture) of the Company or other obligor shall be disregarded in determining whether such consent or approval was given by the Holders of such required percentage amount. For the purposes of this definition, Holders of Notes constituting Registrable Securities shall be deemed to be Holders of the number of Shares into which such Notes are or would be convertible as of such date. "Material Event" shall have the meaning set forth in Section 3(f) hereof. "Notes" shall have the meaning set forth in the preamble. "Notice and Questionnaire" shall mean a written notice delivered to the Company substantially in the form attached as Appendix I to the Offering Memorandum. "Notice Holder" shall mean, on any date, any Holder that has delivered a Notice and Questionnaire to the Company on or prior to such date. "Option Notes" shall have the meaning set forth in the preamble. A-2 "Person" shall mean any individual, corporation, partnership, joint venture, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof. "Prospectus" shall mean the prospectus included in the Shelf Registration Statement (as defined below), including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble. "Registrable Securities" shall mean the Securities; provided, however, that Securities shall cease to be Registrable Securities when (i) a Shelf Registration Statement with respect to such Securities shall have been declared effective under the Act and such Securities shall have been disposed of pursuant to such Shelf Registration Statement, (ii) such Securities have been sold to the public pursuant to Rule 144 under the Act or may be sold pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the Act or (iii) such Securities shall have ceased to be outstanding. "Registration Default" shall have the meaning set forth in Section 2(c)(i) hereof. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including, without limitation: (i) all Commission, stock exchange or NASD registration and filing fees, including, if applicable, the reasonable fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained by any Holder of Registrable Securities in accordance with the rules and regulations of the NASD; (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of one counsel for the placement agent or underwriters, if any, in connection with blue sky qualification of any of the Registrable Securities and any filings with the NASD); (iii) all expenses of any Persons in preparing or assisting in preparing word processing, printing and distributing any Shelf Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, any securities sales agreements and any other documents relating to the performance of and compliance with this Agreement; (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges; (v) all rating agency fees; (vi) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance; (vii) the fees and expenses of the Trustee, and any escrow agent or custodian; (viii) the reasonable fees and disbursements of one firm, at any one time, of legal counsel selected by the Representative (subject to the reasonable approval of the Company) to represent the Holders of Registrable Securities, which firm shall be PW unless otherwise requested in writing by the Majority Holders; and (ix) any reasonable fees and disbursements of the underwriters customarily required to be paid by issuers A-3 or sellers of securities and the fees and expenses of any special experts retained by the Company in connection with any Shelf Registration Statement, but excluding underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. "Representative" shall have the meaning set forth in the preamble. "Securities" shall mean collectively the Notes and the Shares. "Shares" shall mean the shares of common stock of the Company, par value $0.01 per share, into which the Notes are convertible or that have been issued upon any conversion of the Notes into common stock of the Company. "Shelf Registration" shall mean a registration effected pursuant to Section 2(a) hereof. "Shelf Registration Filing Date" shall have the meaning set forth in Section 2(a)(i) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(a) hereof which covers all of the Registrable Securities on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Suspension Period" shall have the meaning set forth in Section 2(a)(i) hereof. 2. Registration Under the Act. (a) Shelf Registration. (i) The Company agrees to use reasonable commercial efforts to file under the Act as promptly as practicable after the time that the Company becomes eligible to file registration statements on Form S-3 under the Act but in any event within 15 months after the Firm Closing Date (the "Shelf Registration Filing Date") a Shelf Registration Statement providing for the registration of, and the sale on a continuous or delayed basis by the Holders of, all of the Registrable Securities, pursuant to Rule 415 under the Act or any similar rule that may be adopted by the Commission. If the Company is not eligible to file registration statements on Form S-3 under the Act before the Shelf Registration Filing Date, then the Company shall file a Shelf Registration Statement on whatever form is then available for the Company to use. The Company agrees to use its reasonable commercial efforts to cause the Shelf Registration Statement to become or be declared effective within 120 days after the Shelf Registration Filing Date and to keep such Shelf Registration Statement continuously effective until the earliest of (i) the date on which all Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to such Shelf Registration Statement, (ii) the date on which all Registrable Securities have been sold pursuant to Rule 144 under A-4 the Act, (iii) such time as there are no longer any Registrable Securities outstanding and (iv) the second anniversary of the Closing Date (plus, in each case, the number of days in any Suspension Period); provided, however, that upon the occurrence of any event or the discovery of any facts as contemplated by Section 3(f)(iv) hereof, the Company shall not be obligated to keep the Shelf Registration Statement effective or to permit the use of any Prospectus forming a part of the Shelf Registration Statement if the Company promptly thereafter complies with the requirements of Section 3(k) hereof; provided, further, that the failure to keep the Shelf Registration Statement effective and usable for offers and sales of Registrable Securities for such reason shall last no longer than 45 consecutive calendar days or no more than an aggregate of 90 calendar days during any consecutive twelve-month period (whereafter a Registration Default shall occur and Additional Amounts shall accrue as set forth in Section 2.4(A)(v) hereof); any such period during which the Company is so excused from keeping the Shelf Registration Statement effective and usable for offers and sales of Registrable Securities is referred to herein as a "Suspension Period"; a Suspension Period shall commence on and include the date that the Company gives notice to the Holders that the Shelf Registration Statement is no longer effective or the Prospectus included therein is no longer usable for offers and sales of Registrable Securities as a result of the application of the proviso of the foregoing sentence, stating the reason therefor, and shall end on the earlier to occur of the date on which each seller of Registrable Securities covered by the Shelf Registration Statement either receives the copies of the supplemented or amended Prospectus or is advised in writing by the Company that use of the Prospectus may be resumed. (ii) Each Holder of Registrable Securities agrees that if such Holder wishes to sell Registrable Securities pursuant to the Shelf Registration Statement and related Prospectus, it will do so only in accordance with this Section 2(a)(ii) and the last paragraph of Section 3 hereof. To be named a selling holder in the Shelf Registration Statement when it first becomes effective, Holders must deliver a Notice and Questionnaire to the Company at least five (5) Business Days prior to the effectiveness of the Shelf Registration Statement. From and after the date the Shelf Registration Statement is declared effective, the Company shall, as promptly as is practicable after the date a Notice and Questionnaire is delivered, and in any event within five (5) Business Days after such date, (1) if required by applicable law, file with the Commission a post-effective amendment to the Shelf Registration Statement or prepare and, if required by applicable law, file a supplement to the related Prospectus or an amendment or supplement to any document incorporated therein by reference or file any other required document (including, if required, a new or amended Shelf Registration Statement) so that the Holder delivering such Notice and Questionnaire is named as a selling holder in the Shelf Registration Statement and the related Prospectus and so that such Holder is permitted to deliver such Prospectus to purchasers of the Registrable Securities in accordance with applicable law and, if the Company shall file a post-effective amendment to the Shelf Registration Statement, use commercially reasonable efforts to cause such post-effective amendment to be declared effective under the Act as promptly as is practicable, (2) provide such Holder copies of any documents filed pursuant to Section 2(a)(ii)(1) hereof and (3) notify such Holder as promptly as practicable after the effectiveness under the Act of any post-effective amendment filed pursuant to Section 2(a)(ii)(1) hereof; provided, that if such Notice and Questionnaire is delivered during a A-5 Suspension Period, the Company shall so inform the Holder delivering such Notice and Questionnaire and shall take the actions set forth in clauses (1), (2) and (3) above upon expiration of the Suspension Period. Notwithstanding anything contained herein to the contrary, the Company shall be under no obligation to name any Holder that is not a Notice Holder as a selling holder in the Shelf Registration Statement or related Prospectus; provided, however, that any Holder that becomes a Notice Holder pursuant to the provisions of this Section 2(a)(ii) (whether or not such Holder was a Notice Holder at the time the Shelf Registration Statement was declared effective) shall be named as a selling holder in the Shelf Registration Statement or related Prospectus in accordance with the requirements of this Section 2(a)(ii). (iii) The Company shall not permit any securities other than Registrable Securities to be included in the Shelf Registration Statement. The Company further agrees, if necessary, to supplement or amend the Shelf Registration Statement, as required by Section 3(b) hereof, and to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the Commission. (b) Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) hereof and the performance of its obligations under Section 2(a) and Section 3 hereof. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. (c) Interest. (i) If any of the following events (any such event a "Registration Default") shall occur, then additional amounts (the "Additional Amounts") shall become payable to Holders in respect of the Securities as follows: (1) if the Shelf Registration Statement is not filed with the Commission by the Shelf Registration Filing Date, then commencing on the day immediately after the Shelf Registration Filing Date, Additional Amounts shall accrue on the principal amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such day immediately after the Shelf Registration Filing Date and at a rate of 0.50% per annum thereafter; (2) if the Shelf Registration Statement is not declared effective by the Commission within 120 days following the Shelf Registration Filing Date, then commencing on the 121st day after the Shelf Registration Filing Date, Additional Amounts shall accrue on the principal amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such 121st day after the Shelf Registration Filing Date and at a rate of 0.50% per annum thereafter; A-6 (3) if the Company has failed to perform its obligations set forth in Section 2(a)(ii) hereof within the time periods required therein, then commencing on the first day after the date by which the Company was required to perform such obligations, Additional Amounts shall accrue on the principal amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days and at a rate of 0.50% per annum thereafter; (4) if the Shelf Registration Statement has been declared effective but such Shelf Registration Statement ceases to be effective at any time (other than as specifically permitted in Section 2(a)(i) hereof) without being succeeded within 30 days by an amendment thereto or an additional registration statement filed and declared effective, then commencing on the day such Shelf Registration Statement ceases to be effective, Additional Amounts shall accrue on the principal amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such date on which the Shelf Registration Statement ceases to be effective and at a rate of 0.50% per annum thereafter; or (5) if the aggregate duration of Suspension Periods in any period exceeds the number of days permitted in respect of such period pursuant to Section 2(a)(i) hereof, then commencing on the day the aggregate duration of Suspension Periods in any period exceeds the number of days permitted in respect of such period, Additional Amounts shall accrue on the principal amount of the outstanding Notes that are Registrable Securities and on the Applicable Conversion Price of any outstanding Shares that are Registrable Securities at a rate of 0.25% per annum for the first 90 days and at a rate of 0.50% per annum thereafter; provided, however, that the Additional Amounts on the Securities shall not exceed in the aggregate 0.50% per annum and shall not be payable under more than one clause above for any given period of time, except that if Additional Amounts would be payable under more than one clause above, but at a rate of 0.25% per annum under one clause and at a rate of 0.50% per annum under the other, then the Additional Amounts rate shall be the higher rate of 0.50% per annum; provided, further, however, that (1) upon the filing of the Shelf Registration Statement (in the case of Section 2(c)(i)(1) hereof), (2) upon the effectiveness of the Shelf Registration Statement (in the case of Section 2(c)(i)(2) hereof), (3) upon the Company's performing its obligations set forth in Section 2(a)(ii) hereof (in the case of Section 2(c)(i)(3) hereof), (4) upon the effectiveness of the Shelf Registration Statement which had ceased to remain effective (in the case of Section 2(c)(i)(4) hereof) or (5) upon the termination of the Suspension Period that caused the limit on the aggregate duration of Suspension Periods in a period set forth in Section 2(a)(i) hereof to be exceeded (in the case of Section 2(c)(i)(5) hereof), Additional Amounts on the Securities as a result of such Section, as the case may be, shall cease to accrue. A-7 (ii) Additional Amounts on the Securities, if any, will be payable in cash on January 15 and July 15 of each year (the "Additional Amounts Payment Date") to holders of record of outstanding Registrable Securities on each preceding January 1 and July 1, respectively. The date of determination of the Applicable Conversion Price of any outstanding Shares that are Registrable Securities shall be the Business Day immediately preceding the Additional Amounts Payment Date; provided, that in the case of an event of the type described in Section 2(c)(i)(3) hereof, such Additional Amounts shall be paid only to the Holders that have delivered Notice and Questionnaires that caused the Company to incur the obligations set forth in Section 2(a)(ii) hereof, the non-performance of which is the basis of such Registration Default; provided, further, that any Additional Amounts accrued with respect to any Notes or portion thereof called for redemption on a redemption date or purchased on a purchase date or converted into Shares on a conversion date prior to the Registration Default shall, in any such event, be paid instead to the Holder who submitted such Notes or portion thereof for redemption, purchase or conversion on the applicable redemption date, purchase date or conversion date, as the case may be, on such date (or promptly following the conversion date, in the case of conversion), and shall continue to accrue on the Shares issuable upon conversion of any Notes to the extent any Registration Default has not yet been cured. Following the cure of all Registration Defaults requiring the payment of Additional Amounts by the Company to the Holders of Registrable Securities pursuant to Section 2(c)(i) hereof, the accrual of Additional Amounts will cease without in any way limiting the effect of any subsequent Registration Default requiring the payment of Additional Amounts by the Company. The Trustee shall be entitled, on behalf of Holders of Securities, to seek any available remedy for the enforcement of this Agreement, including for the payment of any Additional Amounts. Notwithstanding the foregoing, the parties agree that the sole monetary damages payable for a violation of the terms of this Agreement with respect to which Additional Amounts are expressly provided shall be as set forth in this Section 2(c) in addition to any remedies available to the Holders of the Securities under the Indenture. Nothing shall preclude a Notice Holder or Holder of Registrable Securities from pursuing or obtaining specific performance or other equitable relief with respect to this Agreement. 3. Registration Procedures. In connection with the obligations of the Company with respect to Shelf Registration Statements pursuant to Section 2(a) hereof, the Company shall: (a) use reasonable commercial efforts to prepare and file with the Commission a Shelf Registration Statement, within the relevant time period specified in Section 2 hereof, on the appropriate form under the Act, which form shall (i) be selected by the Company, (ii) be available for the sale of the Registrable Securities by the selling Holders thereof and (iii) comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the Commission to be filed therewith or incorporated by reference therein, and use its reasonable commercial efforts to cause such Shelf Registration Statement to become effective and remain effective in accordance with Section 2 hereof; A-8 (b) use reasonable commercial efforts to cause (i) any Shelf Registration Statement and any amendment thereto, when it becomes effective, not to contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) subject to Section 2(a)(iii) hereof, any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (as amended or supplemented from time to time), not to include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (c) use reasonable commercial efforts to prepare and file with the Commission such amendments and post-effective amendments to the Shelf Registration Statement as may be necessary under applicable law to keep such Shelf Registration Statement effective for the applicable period; and cause each Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Act and comply with the provisions of the Act, the Exchange Act and the rules and regulations thereunder applicable to them with respect to the disposition of all securities covered by the Shelf Registration Statement during the applicable period in accordance with the intended method or methods of distribution reasonably requested by the selling Holders thereof; (d) (i) notify each Holder of Registrable Securities, at least fifteen (15) calendar days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holders that the distribution of Registrable Securities will be made in accordance with the methods reasonably requested by the Majority Holders participating in the Shelf Registration and as set forth in the Notices and Questionnaires, (ii) furnish to each Notice Holder of Registrable Securities and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto, and such other documents as such Notice Holder or underwriter may reasonably request, including financial statements and schedules and, if the Notice Holder so requests, all exhibits in order to facilitate the public sale or other disposition of the Registrable Securities and (iii) hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Notice Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto, save and except during any Suspension Period; (e) use its reasonable commercial efforts to register or qualify the Registrable Securities under such state securities or blue sky laws of such jurisdictions as any Notice Holder of Registrable Securities covered by a Shelf Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request in writing (which request shall be included in the Notice and Questionnaire) by the time such Shelf Registration Statement is declared effective by the Commission, and do any and all other acts and things which may be reasonably necessary or advisable to enable each such Notice Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Notice Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be A-9 required to qualify but for this Section 3(e) or (ii) take any action which would require it to file general consent to service of process or taxation or file annual reports or comply with any other requirement deemed by the Company in its reasonable judgment to be unduly burdensome; (f) notify promptly each Notice Holder of Registrable Securities under a Shelf Registration and, if requested by such Notice Holder, confirm such advice in writing promptly (i) when such Shelf Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the Commission or any state securities authority for post-effective amendments and supplements to such Shelf Registration Statement and Prospectus or for additional information after such Shelf Registration Statement has become effective, (iii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of such Shelf Registration Statement or the initiation of any proceedings for that purpose, (iv) of the happening of any event (but not the nature of the details concerning the same) or the discovery of any facts during the period the Shelf Registration Statement is effective which makes any statement made in such Shelf Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Shelf Registration Statement or Prospectus in order to make the statements therein not misleading (a "Material Event"); provided, however, that no notice by the Company shall be required pursuant to this clause (iv) in the event that the Company either promptly files a Prospectus supplement to update the Prospectus or a Form 8-K or other appropriate Exchange Act report that is incorporated by reference into the Shelf Registration Statement, which, in either case, contains the requisite information with respect to such Material Event that results in such Shelf Registration Statement no longer containing any untrue statement of material fact or omitting to state a material fact necessary to make the statements contained therein not misleading, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities, as the case may be, for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (vi) of any determination by the Company that a post-effective amendment to the Shelf Registration Statement would be appropriate other than post-effective amendments prepared and filed in accordance with Section 2(a)(ii) hereof; (g) furnish counsel for the Holders of Registrable Securities copies of any comment letters received from the Commission or any other request by the Commission or any state securities authority for amendments or supplements to a Shelf Registration Statement and Prospectus or for additional information; (h) use its reasonable commercial efforts to obtain the withdrawal of any order suspending the effectiveness of the Shelf Registration Statement as soon as practicable and provide prompt notice to legal counsel for the Holders of the withdrawal of any such order; (i) furnish to each Notice Holder of Registrable Securities, and each underwriter, if any, without charge, at least one conformed copy of each Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules (without documents incorporated therein by reference or all exhibits thereto, unless requested); A-10 (j) use its reasonable commercial efforts to cooperate with the selling Notice Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold to the extent not held with the Depositary through Cede & Co., to remove any restrictive legends, and to enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Notice Holders or the underwriters, if any, may reasonably request at least three (3) Business Days prior to the closing of any sale of Registrable Securities; (k) upon the occurrence of any event or the discovery of any facts, each as contemplated by Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) and Section 3(f)(vi) hereof and subject to the provisions of the first paragraph immediately following Section 3(t) hereof, as promptly as practicable after the occurrence of such an event, use its reasonable commercial efforts to prepare a supplement or post-effective amendment to the Shelf Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain at the time of such delivery any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. At such time as such public disclosure is otherwise made or the Company determines that such disclosure is not necessary, in each case to correct any misstatement of a material fact or to include any omitted material fact, the Company agrees promptly to notify each Notice Holder of such determination and to furnish each Notice Holder such number of copies of the Prospectus, as amended or supplemented, as such Notice Holder may reasonably request; (l) obtain a CUSIP number for all Registrable Securities covered by the Shelf Registration Statement not later than the effective date of such Shelf Registration Statement, and provide the Trustee for the Notes and the transfer agent for the Shares with printed certificates for the Registrable Securities that are in a form eligible for deposit with the Depositary; (m) unless the Indenture, as its relates to the Registrable Securities, has already been so qualified, use its reasonable commercial efforts to (i) cause the Indenture to be qualified under the Trust Indenture Act in connection with the registration of the Registrable Securities, as the case may be, (ii) cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the Trust Indenture Act and (iii) execute, and use its reasonable commercial efforts to cause the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the Commission to enable the Indenture to be so qualified in a timely manner; (n) enter into such customary agreements (including an underwriting or similar agreement) and make such representations and warranties and take all such other actions in connection therewith (including, without limitation, furnishing customary comfort letters and legal opinions pursuant to the terms of such agreement) in order to expedite or facilitate the disposition of the Registrable Securities pursuant to any Shelf Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder of Registrable Securities or underwriter in connection with any sale or resale pursuant to any Shelf Registration Statement contemplated by this Agreement; A-11 (o) upon reasonable notice, for a reasonable period prior to the filing of the Shelf Registration Statement and until the time at which there are no Registrable Securities, make available at reasonable times at the Company's principal place of business or such other reasonable place for inspection by a representative appointed by the Notice Holders in connection with an underwritten offering (or any underwriter, placement agent or counsel acting on their behalf), who shall certify to the Company that they have a current intention to sell their Registrable Securities pursuant to the Shelf Registration Statement, such financial and other information and books and records of the Company, and cause the officers, directors, employees and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the counsel to such Notice Holders, to conduct a reasonable "due diligence" investigation; provided, however, that such persons shall first agree in writing with the Company that any information that is reasonably and in good faith designated by the Company in writing as confidential at the time of delivery of such information shall be kept confidential by such persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, (ii) disclosure of such information is required by law (including any disclosure requirements pursuant to federal securities laws in connection with the filing of the Shelf Registration Statement or the use of any Prospectus), (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard such information by such persons or (iv) such information becomes available to such persons from a source other than the Company and its subsidiaries and such source is not known by such persons to be bound by a confidentiality agreement; provided, further, that the foregoing inspection and information gathering shall be coordinated by (x) the managing underwriter in connection with any underwritten offering pursuant to a Shelf Registration and (y) the Holder or Holders designated by the participating Majority Holders in connection with any non-underwritten offering pursuant to a Shelf Registration, together with one counsel designated by and on behalf of such persons; (p) if reasonably requested by the Initial Purchasers or any Notice Holder, promptly incorporate in a Prospectus supplement or post-effective amendment to the Shelf Registration Statement such information as the Initial Purchasers or such Notice Holder shall, on the basis of a written opinion of nationally-recognized counsel experienced in such matters, determine to be required to be included therein by applicable law and make any required filings of such Prospectus supplement or such post-effective amendment; provided, that the Company shall not be required to take any actions under this Section 3(p) that are not, in the reasonable opinion of counsel for the Company, in compliance with applicable law; (q) use its reasonable commercial efforts to (i) confirm that the ratings of the Notes will apply to the Notes covered by the Shelf Registration Statement or (ii) if the Notes were not previously rated, cause the Notes covered by the Shelf Registration Statement to be rated with the appropriate rating agencies, if so requested by the Majority Holders of Securities covered by such Shelf Registration Statement, or by the managing underwriters, if any; (r) otherwise comply with all applicable rules and regulations of the Commission and make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least 12 months which shall satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder; A-12 (s) use its reasonable commercial efforts to cause the Shares to remain listed on the New York Stock Exchange; and (t) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter and its counsel (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD). Each Holder agrees that upon receipt of any notice from the Company of the happening of any event or the discovery of any facts, each of the kind described in Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) or Section 3(f)(vi) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to such Shelf Registration Statement or Prospectus until the receipt by such Holder of either copies of the supplemented or amended Prospectus contemplated by Section 3(k) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in its possession of the Prospectus covering such Registrable Securities current at the time of receipt of such notice, or notice in writing from the Company that such Holder may resume disposition of Registrable Securities pursuant to such Shelf Registration Statement or Prospectus. If the Company shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Shelf Registration Statement as a result of the happening of any event or the discovery of any facts, each of the kind described in Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) or Section 3(f)(vi) hereof, the Company shall be deemed to have used its reasonable commercial efforts to keep such Shelf Registration Statement effective during such Suspension Period; provided, that the Company shall use its reasonable commercial efforts to file and have declared effective (if an amendment) as soon as practicable an amendment or supplement to such Shelf Registration Statement. The Company shall extend the period during which such Shelf Registration Statement shall be maintained effective or the Prospectus shall be used pursuant to this Agreement by the number of days during the period from and including the date of the giving of the notice described above to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions or notification that they may resume such disposition under an existing Prospectus. If any of the Registrable Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the underwriter or underwriters and manager or managers that will manage such offering will be selected by the Majority Holders of such Registrable Securities included in such offering and shall be reasonably acceptable to the Company. No Holder of Registrable Securities may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. The Company may require each Holder of Registrable Securities as to which any registration pursuant to Section 2(a) is being effected to furnish to the Company such information regarding such Holder and such Holder's intended method of distribution of such Registrable Securities as the Company may from time to time reasonably request in writing, but only to the extent that such information is required in order to comply with the Act. Each such A-13 Holder agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such Holder to the Company or of the occurrence of any event in either case as a result of which any Prospectus relating to such registration contains or would contain an untrue statement of a material fact regarding such Holder or such Holder's intended method of disposition of such Registrable Securities or omits to state any material fact regarding such Holder or such Holder's intended method of disposition of such Registrable Securities required to be stated therein or necessary to make the statements therein not misleading, and promptly to furnish to the Company any additional information required to correct and update any previously furnished information or required so that such Prospectus shall not contain, with respect to such Holder or the disposition of such Registrable Securities, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Each Holder agrees, by acquisition of the Registrable Securities, that such Holder shall not be entitled to sell any of such Registrable Securities pursuant to the Shelf Registration Statement or to receive a Prospectus related thereto, unless such Holder has furnished the Company with a Notice and Questionnaire. Each Notice Holder agrees to furnish to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not misleading and any other information regarding such Notice Holder and the distribution of such Registrable Securities as may be required to be disclosed in the Shelf Registration Statement under applicable law or pursuant to the Commission's comments. Each Holder further agrees not to sell any Registrable Securities pursuant to the Shelf Registration Statement without delivering or causing to be delivered a Prospectus to the purchaser thereof and, following the time at which there are no Registrable Securities, to notify the Company, within 10 business days of a request by the Company of the amount of Registrable Securities sold pursuant to the Shelf Registration Statement and, in the absence of a response, the Company may assume that all of the Holder's Registrable Securities were so sold. 4. Indemnification; Contribution. (a) The Company agrees, to the extent permitted by law, to indemnify and hold harmless each Holder and each Person, if any, who controls any Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or otherwise ("Indemnified Holder"), and to reimburse the Holders and such controlling Person or Persons, if any, for any legal or other expenses incurred by them in connection with defending any action, suit or proceeding (including governmental investigations) as provided in Section 4(c) hereof, insofar as such losses, claims, damages, liabilities or actions, suits or proceedings (including governmental investigations) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Shelf Registration Statement, or, if any Shelf Registration Statement shall be amended or supplemented, in the Shelf Registration Statement as so amended or supplemented, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any such untrue statement or alleged untrue statement or omission or alleged omission which was made in the Shelf Registration Statement or in the Shelf Registration Statement as so amended or supplemented, in reliance A-14 upon and in conformity with information furnished in writing to the Company by any Holder expressly for use therein. The Company's indemnity agreement contained in this Section 4(a), and the covenants, representations and warranties of the Company contained in this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any Person, and the indemnity agreement contained in this Section 4 shall survive any termination of this Agreement. The liabilities of the Company in this Section 4 are in addition to any other liabilities of the Company under this Agreement or otherwise. (b) Each Holder agrees, severally and not jointly, to the extent permitted by law, to indemnify, hold harmless and reimburse the Company and each Person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent and upon the same terms as the indemnity agreement of the Company set forth in Section 4(a) hereof, but only with respect to alleged untrue statements or omissions made in the Shelf Registration Statement or in the Shelf Registration Statement, as amended or supplemented (if applicable), in reliance upon and in conformity with information furnished in writing to the Company by such Holder expressly for use therein. The indemnity agreement on the part of each Holder contained in this Section 4(b) shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other Person, and the indemnity agreement contained in this Section 4(b) shall survive any termination of this Agreement. (c) If a claim is made or an action, suit or proceeding (including governmental investigations) is commenced or threatened against any person as to which indemnity may be sought under Section 4(a) or 4(b) hereof, such Person (the "Indemnified Person") shall notify the Person against whom such indemnity may be sought (the "Indemnifying Person") promptly after any assertion of such claim threatening to institute an action, suit or proceeding or, if such an action, suit or proceeding is commenced against such Indemnified Person, promptly after such Indemnified Person shall have been served with a summons or other first legal process, giving information as to the nature and basis of the claim. Failure to so notify the Indemnifying Person shall not, however, relieve the Indemnifying Person from any liability which it may have on account of the indemnity under Section 4(a) or 4(b) hereof if the Indemnifying Person has not been prejudiced in any material respect by such failure. Subject to the immediately succeeding sentence, the Indemnifying Person shall assume the defense of any such litigation or proceeding, including the employment of counsel and the payment of all expenses, with such counsel being designated, subject to the immediately succeeding sentence, in writing by a majority in principal amount of the Holders in the case of parties indemnified pursuant to Section 4(b) hereof and by the Company in the case of parties indemnified pursuant to Section 4(a) hereof. Any Indemnified Person shall have the right to participate in such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include (x) the Indemnifying Person and (y) the Indemnified Person and, in the written opinion of counsel to such Indemnified Person, representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest A-15 between them, in either of which cases the reasonable fees and expenses of counsel (including disbursements) for such Indemnified Person shall be reimbursed by the Indemnifying Person to the Indemnified Person. If there is a conflict as described in clause (ii) above, and the Indemnified Persons have participated in the litigation or proceeding utilizing separate counsel whose fees and expenses have been reimbursed by the Indemnifying Person, and the Indemnified Persons, or any of them, are found to be solely liable, such Indemnified Person shall repay to the Indemnifying Parties such fees and expenses of such separate counsel as the Indemnifying Person shall have reimbursed. It is understood that the Indemnifying Person shall not, in connection with any litigation or proceeding or related litigation or proceedings in the same jurisdiction as to which the Indemnified Persons are entitled to such separate representation, be liable under this Agreement for the reasonable fees and out-of-pocket expenses of more than one separate firm (together with not more than one appropriate local counsel) for all such Indemnified Persons. Subject to the next paragraph, all such fees and expenses shall be reimbursed by payment to the Indemnified Persons of such reasonable fees and expenses of counsel promptly after payment thereof by the Indemnified Persons. In furtherance of the requirement above that fees and expenses of any separate counsel for the Indemnified Persons shall be reasonable, the Holders and the Company agree that the Indemnifying Person's obligations to pay such fees and expenses shall be conditioned upon the following: (1) in case separate counsel is proposed to be retained by the Indemnified Persons pursuant to clause (ii) of the preceding paragraph, the Indemnified Persons shall in good faith fully consult with the Indemnifying Person in advance as to the selection of such counsel; (2) reimbursable fees and expenses of such separate counsel shall be detailed and supported in a manner reasonably acceptable to the Indemnifying Person (but nothing herein shall be deemed to require the furnishing to the Indemnifying Person of any information, including, without limitation, computer print-outs of lawyers' daily time entries, to the extent that, in the judgment of such counsel, furnishing such information might reasonably be expected to result in a waiver of any attorney-client privilege); and (3) the Company and the Holders shall cooperate in monitoring and controlling the fees and expenses of separate counsel for Indemnified Persons for which the Indemnifying Person is liable hereunder, and the Indemnified Person shall use every reasonable effort to cause such separate counsel to minimize the duplication of activities as between themselves and counsel to the Indemnifying Person. The Indemnifying Person shall not be liable for any settlement of any litigation or proceeding effected without the written consent of the Indemnifying Person, but if settled with such consent or if there be a final judgment against the Indemnified Person, the Indemnifying Person agrees, subject to the provisions of this Section 4, to indemnify the Indemnified Person from and against any loss, damage, liability or expenses by reason of such settlement or judgment. The Indemnifying Person shall not, without the prior written consent of the A-16 Indemnified Persons, effect any settlement of any pending or threatened litigation, proceeding or claim in respect of which indemnity has been properly sought by the Indemnified Persons hereunder, unless such settlement includes an unconditional release by the claimant of all Indemnified Persons from all liability with respect to claims which are the subject matter of such litigation, proceeding or claim. (d) If the indemnification provided for in this Section 4 is unavailable to or insufficient to hold harmless an Indemnified Person under this Section 4 in respect of any losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof) referred to therein, then each Indemnifying Person under this Section 4 shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other from the sale of the Registrable Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each Indemnifying Person shall contribute to such amount paid or payable by such Indemnified Person in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of each Indemnifying Person, if any, on the one hand and the Indemnified Person on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Holders on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 4. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental proceedings) in respect thereof) referred to in this Section 4 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such actions, suits or proceedings (including governmental proceedings) or claims, provided that the provisions of this Section 4 have been complied with (in all material respects) in respect of any separate counsel for such Indemnified Person. Notwithstanding the provisions of this Section 4, no Holder shall be required to contribute any amount greater than the excess of the amount by which the total received by such Holder with respect to the sale of its Registrable Securities pursuant to a Shelf Registration Statement exceeds the sum of (A) the amount paid by such Holder for such Registrable Securities plus (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations in this Section 4 to contribute are several in proportion to their respective obligations and not joint. A-17 The agreement with respect to contribution contained in this Section 4 shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any Holder, and shall survive any termination of this Agreement. 5. Miscellaneous. (a) Rule 144 and Rule 144A. For so long as the Company is subject to the reporting requirements of Section 13 or 15 of the Exchange Act, the Company covenants that it will file the reports required to be filed by it under the Act and Section 13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the Commission thereunder. If the Company ceases to be so required to file such reports, the Company covenants that it will, upon the request of any Holder of Registrable Securities, (i) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the Act, (ii) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the Act and (iii) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the Act within the limitation of the exemptions provided by (A) Rule 144 under the Act, as such Rule may be amended from time to time, (B) Rule 144A under the Act, as such Rule may be amended from time to time or (C) any similar rules or regulations hereafter adopted by the Commission. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. (b) No Inconsistent Agreements. The Company has not entered into and the Company will not after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not and will not for the term of this Agreement in any way conflict with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Majority Holders of the Registrable Securities affected by such amendment, modification, supplement, waiver or departure. Without the consent of the Holder of each Security, however, no modification may change the provisions relating to the payment of Additional Amounts. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first-class mail, telecopier or any courier guaranteeing overnight delivery: (a) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 5(d), which address initially is the address set forth in the Purchase Agreement with respect to the Initial Purchasers; and (b) if to the Company, initially at the Company's address set forth in the Purchase Agreement, and thereafter at such other address of which notice is given in accordance with the provisions of this Section 5(d). A-18 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; two (2) Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the person giving the same to the Trustee under the Indenture, at the address specified in the Indenture. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such person shall be entitled to receive the benefits hereof. (f) Third Party Beneficiaries. The Initial Purchasers (even if the Initial Purchasers are not Holders of Registrable Securities) shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent they deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. Each Holder of Registrable Securities shall be a third party beneficiary to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights hereunder. (g) Specific Performance. Without limiting the remedies available to the Initial Purchasers and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under Section 2 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Section 2 hereof. (h) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (i) Headings. The headings in this Agreement are for the convenience of reference only and shall not limit or otherwise affect the meaning hereof. A-19 (j) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. (k) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (l) Entire Agreement. This Agreement and other writings referred to herein (including the Indenture and the Purchase Agreement) represent the entire agreement among the parties hereto with respect to the subject matter hereof and supercedes and replaces any and all prior agreements and understandings, whether oral or written, with respect thereto. A-20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CMS ENERGY CORPORATION By: _____________________________ Name: Title: CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: CITIGROUP GLOBAL MARKETS INC., for itself and as Representative of the Initial Purchasers By: _________________________________ Name: Title: A-21 EXHIBIT B 1. The Company is a duly organized, validly existing corporation in good standing under the laws of the State of Michigan. 2. All legally required corporate proceedings in connection with the authorization, issuance and validity of the Restricted Notes and the sale of the Restricted Notes by the Company in accordance with the Purchase Agreement have been taken; and no approval, authorization, consent or order of any governmental regulatory body is required with respect to the issuance and sale of the Restricted Notes (other than in connection with or in compliance with the provisions of the securities or blue sky laws of any state, as to which I express no opinion). 3. I do not know of any legal or governmental proceedings that would be required to be described in the Offering Memorandum if it were a registration statement filed by the Company under the Act that are not described as required, nor of any contracts or documents of a character so required to be described in the Offering Memorandum that are not described as required. 4. The statements made in the Offering Memorandum under the caption "Description of the Notes", "Registration Rights", "Description of Common Stock" and "Material United States Federal Income Tax Considerations" constitute summaries of legal matters or documents referred to therein and are accurate in all material respects; and the Indenture, the Restricted Notes and the Issuable Common Stock conform as to legal matters to the descriptions thereof and to the statements in regard thereto contained in such section of the Offering Memorandum. 5. Each document incorporated in the Offering Memorandum as such document was originally filed pursuant to the Exchange Act (except for (i) the operating statistics, financial statements and schedules contained or incorporated by reference therein (including the notes thereto and the auditors' reports thereon) and (ii) the other financial or statistical information contained or incorporated by reference therein, as to which I express no opinion) complied as to form when so filed in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder. 6. The Purchase Agreement has been duly authorized, executed and delivered by the Company. 7. The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery thereof by the Initial Purchasers, is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 8. The Indenture has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery of the Indenture by the Trustee, will be a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally B-1 or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 9. The Indenture complies as to form in all material respects with the requirements of the Trust Indenture Act and the rules and regulations of the Commission applicable to an indenture that is qualified thereunder. It is not necessary in connection with the offer, sale and delivery of the Restricted Notes to the Initial Purchasers in the manner contemplated by the Purchase Agreement or in connection with the Exempt Resales to qualify the Indenture under the Trust Indenture Act. 10. The Restricted Notes are in the form contemplated by the Indenture, have been duly authorized, executed and delivered by the Company and, assuming the due authentication thereof by the Trustee and upon payment and delivery in accordance with the Purchase Agreement, will constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity); the Restricted Notes are entitled to the security afforded by the Indenture equally and ratably with all securities presently outstanding thereunder, and no stamp taxes in respect of the original issue thereof are payable; the Restricted Notes will be convertible into Common Stock in accordance with their terms. 11. The issuance, sale and conversion of the Restricted Notes in accordance with the terms of the Indenture and the Purchase Agreement do not violate the provisions of the Restated Articles of Incorporation or the Bylaws of the Company, and will not result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company is a party. 12. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 13. The Company (i) is a "holding company", as such term is defined in the Public Utility Holding Company Act of 1935, as amended, and (ii) is currently exempt from all provisions of the Public Utility Holding Company Act of 1935, as amended, except Section 9(a)(2) thereof. 14. No registration under the Act of the Restricted Notes is required for the sale of the Restricted Notes to the Initial Purchasers as contemplated by the Purchase Agreement or for the Exempt Resales assuming (i) that each of the Initial Purchasers is an Eligible Purchaser or an Accredited Investor (as defined in Regulation D under the Act), (ii) the accuracy of, and compliance with, the Initial Purchasers' representations and agreements contained in Section 8 of the Purchase Agreement, and (iii) the accuracy of the representations of the Company set forth in Sections 6(e), 6(n), 7(o), 7(q) and 7(s) of the Purchase Agreement. 15. Except for the outstanding shares of preferred stock of Consumers Energy Company, the 8.36% Trust Originated Preferred Securities of Consumers Power Company Financing I, the 8.20% Trust Originated Preferred Securities of Consumers Energy Company Financing II, the 9 B-2 1/4% Trust Originated Preferred Securities of Consumers Energy Company Financing III, the 9.00% Trust Preferred Securities of Consumers Energy Company Financing IV, the 7 3/4% Convertible Quarterly Income Preferred Securities of CMS Energy Trust I and the 7 1/4% PEPS Units of CMS Energy Trust III, all of the outstanding capital stock of each of Consumers Energy Company and CMS Enterprises Company is owned directly or indirectly by the Company, free and clear of any security interest, claim, lien or other encumbrance (except as disclosed in the Offering Memorandum) or preemptive rights, and there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in any of Consumers Energy Company and CMS Enterprises Company or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any such capital stock, any such convertible or exchangeable securities or any such rights, warrants or options. 16. The Company has an authorized capitalization as set forth in the Offering Memorandum and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable. The shares of Issuable Common Stock have been duly and validly authorized and reserved for issuance by the Company and, when issued and delivered in accordance with the provisions of the Indenture as it relates to the Restricted Notes, will be duly and validly issued, fully paid and non-assessable and will conform in all material respects to the description of the Common Stock contained in the Offering Memorandum and the issuance of the Issuable Common Stock is not, and will not be, subject to any preemptive or other similar right. 17. Nothing has come to my attention that would lead me to believe that the Offering Memorandum (other than (i) the operating statistics, financial statements and schedules contained or incorporated by reference therein (including the notes thereto and the auditors' reports thereon) and (ii) the other financial or statistical information contained or incorporated by reference therein, as to which I express no opinion), as of its date or at the date hereof contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-3 EXHIBIT C-1 1. The offer, sale and delivery of the Restricted Notes to the Initial Purchasers in the manner contemplated by the Purchase Agreement and the Offering Memorandum and the initial resale of the Restricted Notes by the Initial Purchasers in the manner contemplated in the Offering Memorandum and the Purchase Agreement, do not require registration under the Act and the Supplemental Indenture does not require qualification under the Trust Indenture Act, it being understood that we do not express any opinion as to any subsequent reoffer or resale of any of the Restricted Notes. 2. The Registration Rights Agreement is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. C-1-1 EXHIBIT C-2 No facts have come to our attention that have caused us to believe that the Offering Memorandum, as of its date and as of the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (except that in each case we do not express any view as to the financial statements, schedules and other financial data and financial projections included therein or excluded therefrom). For purposes of the foregoing, we note that the Offering Memorandum has been prepared in the context of a Rule 144A transaction and not as part of a registration statement under the Act and does not contain all the information that would be required in a registration statement under the Act. C-2-1 EXHIBIT D [Letterhead of officer or director of the Company] __________, 2003 Citigroup Global Markets Inc. As Representative of the several Initial Purchasers 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: This letter is being delivered to you in connection with a proposed Purchase Agreement (the "Purchase Agreement") between CMS Energy Corporation, a Michigan corporation (the "Company") and you as representative of a group of Initial Purchasers named therein, whereby the Initial Purchasers have agreed to purchase Convertible Senior Notes due 2023, convertible into shares of common stock, par value $0.01 per share (the "Restricted Notes"), of the Company pursuant to the Purchase Agreement. Terms used but not defined in this letter shall have the meanings ascribed to such terms in the Purchase Agreement. In order to induce you and the other Initial Purchasers to purchase the Restricted Notes pursuant to the Purchase Agreement, the undersigned will not, without the prior written consent of the Representative, offer, sell, contract to sell, pledge or otherwise dispose of, or file (or participate in the filing of) a registration statement with the Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act, and the rules and regulations of the Commission promulgated thereunder with respect to, any shares of capital stock of the Company or any securities convertible or exercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction, for a period of 60 days after the date of the Purchase Agreement, other than shares of Common Stock disposed of as bona fide gifts approved by the Representative, and up to 10,000 shares of Common Stock for any one executive officer or director of the Company with an aggregate limit of 100,000 shares of Common Stock for all executive officers or directors of the Company. If for any reason the Purchase Agreement shall be terminated prior to the Time of Purchase (as defined in the Purchase Agreement), the agreement set forth above shall likewise be terminated. Very truly yours, By:_________________________________ Name: Title: D-1 EX-10.(Z) 16 k82154aexv10wxzy.txt PURCHASE AGREEMENT DATED JULY 9, 2003 EXHIBIT 10(z) EXECUTION COPY $300,000,000 CMS ENERGY CORPORATION 7.75% Senior Notes due 2010 Purchase Agreement July 9, 2003 Citigroup Global Markets Inc. As Representative of the several Initial Purchasers named in Schedule I hereto 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: CMS Energy Corporation, a Michigan corporation (the "Company"), proposes to issue and sell to Citigroup Global Markets Inc. ("Citigroup") and each of the other Initial Purchasers named in Schedule I hereto (collectively, the "Initial Purchasers"), for whom Citigroup is acting as representative (in such capacity, the "Representative"), an aggregate of $300,000,000 in principal amount of its 7.75% Senior Notes due 2010 (the "Restricted Notes"), subject to the terms and conditions set forth herein. The Restricted Notes are to be issued pursuant to the provisions of the Indenture dated as of September 15, 1992 between the Company and Bank One Trust Company, N.A. (ultimate successor to NBD Bank, National Association), as trustee (the "Trustee"), as supplemented and amended by various supplemental indentures and as to be supplemented by the Fourteenth Supplemental Indenture, to be dated as of July 17, 2003, establishing the terms of the Restricted Notes (the "Supplemental Indenture") (as so supplemented, the "Indenture"). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Indenture. Holders (including subsequent transferees) of the Restricted Notes will have the registration rights set forth in the registration rights agreement in the form attached hereto as Exhibit A (the "Registration Rights Agreement"), to be dated the Time of Purchase, for so long as such Restricted Notes constitute Transfer Restricted Securities (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, the Company will agree to file with the Securities and Exchange Commission (the "Commission") a shelf registration statement (the "Registration Statement") pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Act") relating to the exchange or resale by certain holders of the Restricted Notes, and to use its best efforts to cause such Registration Statement to be declared and remain effective and usable for the periods specified in the Registration Rights Agreement. This Agreement, the Indenture, the Restricted Notes and the Registration Rights Agreement are hereinafter sometimes referred to collectively as the "Operative Documents". 1. Offering Memorandum: The Restricted Notes will be offered and sold to the Initial Purchasers pursuant to one or more exemptions from the registration requirements under the Act. The Company has prepared a preliminary offering memorandum dated July 9, 2003 (the "Preliminary Offering Memorandum") and a confidential offering memorandum dated July 9, 2003 (the "Offering Memorandum") relating to the Restricted Notes, which incorporate by reference documents filed by the Company pursuant to Section 13, 14 or 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As used herein, the term "Preliminary Offering Memorandum" and "Offering Memorandum" shall include respectively the documents incorporated by reference therein. Any reference herein to the terms "amend", "amendment" or "supplement" with respect to the Preliminary Offering Memorandum and Offering Memorandum shall be deemed to include amendments or supplements to the Preliminary Offering Memorandum and Offering Memorandum, and documents incorporated by reference after the time of execution of this Agreement and prior to the termination of the offering of the Restricted Notes by the Initial Purchasers. Upon original issuance thereof, and until such time as the same is no longer required pursuant to the Indenture, the Restricted Notes (and all securities issued in exchange therefor or in substitution thereof) shall bear the following legend: THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (IV) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, (V) TO CMS ENERGY CORPORATION OR (VI) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (VI) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE 2 SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN CLAUSE (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES THAT SUCH HOLDER WILL NOT ENGAGE IN HEDGING TRANSACTIONS INVOLVING THIS SECURITY UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THIS SECURITY AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS SECURITY TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS SECURITY SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT. THE HOLDER OF THIS SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS OF, A REGISTRATION RIGHTS AGREEMENT DATED AS OF JULY 17, 2003 ENTERED INTO BY THE COMPANY FOR THE BENEFIT OF CERTAIN HOLDERS OF SECURITIES FROM TIME TO TIME. 2. Purchase and Sale: Upon the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to sell to the respective Initial Purchasers, severally and not jointly, and the respective Initial Purchasers, severally and not jointly, agree to purchase from the Company at the purchase price specified in Schedule I hereto (the "Purchase Price"), the respective principal amounts of Restricted Notes set opposite their names in Schedule I hereto. The Company hereby agrees that, without the prior written consent of the Representative, it will not offer, sell, contract to sell or otherwise issue debt securities substantially similar to the Restricted Notes for a period from the date of the execution of this Agreement until the Time of Purchase. 3. Terms of Offering: The Initial Purchasers have advised the Company that the Initial Purchasers will make offers (the "Exempt Resales") of the Restricted Notes purchased hereunder on the terms set forth in the Offering Memorandum solely to persons whom the Initial Purchasers reasonably believe to be "qualified institutional buyers" as defined in Rule 144A under the Act or, at the time any buy order for the Restricted Notes was or is originated, were or are outside the United States and were or are not "U.S. persons" within the meaning of Regulation S under the Act (such persons being referred to herein as the "Eligible Purchasers"). The Initial Purchasers will offer the Restricted Notes to Eligible Purchasers initially at a price equal to 100% of the principal amount thereof. Such price may be changed at any time without notice. 3 4. Payment and Delivery: Payment for the Restricted Notes shall be made to the Company in federal or other immediately available funds in New York City (or such other place or places of payment as shall be agreed upon by the Company and the Representative in writing), upon the delivery of the Restricted Notes at the offices of Pillsbury Winthrop LLP ("PW"), at One Battery Park Plaza, New York, New York 10004-1490 (or such other place or places of delivery as shall be agreed upon by the Company and the Representative) to the Representative for the respective accounts of the Initial Purchasers against receipt therefor signed by the Representative on behalf of themselves and as agent for the other Initial Purchasers. Such payment and delivery shall be made at 10:00 A.M., New York time on July 17, 2003 (or on such later business day as shall be agreed upon by the Company and the Representative in writing), unless postponed in accordance with the provisions of Section 11 hereof. The day and time at which payment and delivery for the Restricted Notes are to be made is herein called the "Time of Purchase". Delivery of the Restricted Notes shall be made in definitive, fully registered form or global form, as specified by the Representative, in authorized denominations registered in such names as the Representative may request in writing to the Company not later than two full business days prior to the Time of Purchase, or, if no such request is received, in the names of the respective Initial Purchasers for the respective principal amounts of Restricted Notes set forth opposite the name of each Initial Purchaser in Schedule I, in denominations selected by the Company. The certificates evidencing the Restricted Notes shall be delivered at the Time of Purchase for the account of the Initial Purchasers, with any transfer taxes payable in connection with the transfer of the Restricted Notes to the Initial Purchasers duly paid, against payment of the Purchase Price therefor. The Company agrees to make the Restricted Notes available for inspection by the Initial Purchasers at the offices of PW at least 24 hours prior to the Time of Purchase, in definitive, fully registered form, and as requested pursuant to the preceding paragraph. 5. Conditions of Initial Purchasers' Obligations: The several obligations of the Initial Purchasers hereunder are subject to the accuracy of the representations and warranties, at and as of the Time of Purchase, on the part of the Company, and to the following other conditions: (a) That all legal proceedings to be taken in connection with the issue and sale of the Restricted Notes shall be reasonably satisfactory in form and substance to PW, counsel to the Initial Purchasers. (b) That, at the Time of Purchase, the Representative shall be furnished with the following opinions, dated the Time of Purchase: (i) Opinion of Robert C. Shrosbree, Esq., Assistant General Counsel of the Company, substantially to the effect set forth in Exhibit B attached hereto; (ii) Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Company, substantially to the effect set forth in Exhibit C-1 and Exhibit C-2 attached hereto; and 4 (iii) Opinion of PW, counsel to the Initial Purchasers, in a form satisfactory to the Initial Purchasers. (c) (i) That, on the date hereof and on the date of the Time of Purchase, the Representative shall have received a letter from Ernst & Young LLP ("E&Y") in form and substance satisfactory to the Initial Purchasers, dated as of such date, (i) confirming that they are independent public accountants with respect to the Company within the meaning of the Act and the applicable published rules and regulations of the Commission thereunder, (ii) stating that in their opinion the financial statements examined by them and included or incorporated by reference in the Preliminary Offering Memorandum or Offering Memorandum, as the case may be, complied as to form in all material respects with the applicable accounting requirements of the Commission, including the applicable published rules and regulations of the Commission, and (iii) covering, as of a date not more than five business days prior to the date of such letter, such other matters as the Initial Purchasers reasonably request. (ii) That, on the date hereof, the Representative shall have received a letter from each of PricewaterhouseCoopers LLP and Price Waterhouse, each in form and substance satisfactory to the Initial Purchasers, dated as of such date, (i) confirming that each are independent public accountants with respect to (A) the Company and the Midland Cogeneration Venture Limited Partnership, in the case of PricewaterhouseCoopers LLP, and (B) the Company and Jorf Lasfar Energy Company S.C.A., in the case of Price Waterhouse, each within the meaning of the Act and the applicable published rules and regulations of the Commission thereunder, (ii) stating that in each of their opinions the financial statements examined by them and referred to in the letter of E&Y complied as to form in all material respects with the applicable accounting requirements of the Commission, including the applicable published rules and regulations of the Commission, and (iii) covering, as of a date not more than five business days prior to the date of such letter, such other matters as the Initial Purchasers reasonably request. (d) Subsequent to the date hereof or, if earlier, the dates as of which information is given in the Offering Memorandum (exclusive of any amendment or supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in Section 5(c) hereof or (ii) any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries taken as a whole, except as set forth in or contemplated in the Offering Memorandum (exclusive of any amendment or supplement thereto), the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Representative, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Restricted Notes as contemplated in the Offering Memorandum (exclusive of any amendment or supplement thereto). (e) That, at the Time of Purchase, the Company shall have delivered to the Representative a certificate of an executive officer of the Company to the effect that, to the best of his or her knowledge, information and belief, (i) there shall have been no material adverse change in the condition (financial or otherwise), earnings, business or properties of the Company from that set forth in the Offering Memorandum (other than changes referred to in or contemplated by the Offering Memorandum) and (ii) the representations and warranties of the 5 Company in this Agreement are true and correct on and as of the Time of Purchase with the same effect as if made at the Time of Purchase, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to the Time of Purchase. (f) That the Company shall have executed and delivered the Registration Rights Agreement and shall have furnished the Representative signed counterparts of the Supplemental Indenture. (g) That the Company shall have performed such of its obligations under this Agreement as are to be performed at or before the Time of Purchase by the terms hereof. (h) That the Company shall have complied with the provisions of Section 6(c) hereof with respect to the furnishing of the Offering Memorandum. (i) That, at the Time of Purchase, the Restricted Notes shall be rated at least B+ by Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc. ("S&P"), B3 by Moody's Investors Service, Inc. ("Moody's") and B+ by Fitch, Inc. ("Fitch"), and the Company shall have delivered to the Representative a letter, dated the Time of Purchase, from each such rating agency, or other evidence reasonably satisfactory to the Representative, confirming that the Restricted Notes have been assigned such ratings; and between the date of the execution of this Agreement and the Time of Purchase, there has been no downgrading or withdrawal of the investment ratings of the Restricted Notes, securities of the Company or securities of Consumers Energy Company by any nationally recognized statistical rating agency, and no such rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, any such rating. (j) The Restricted Notes shall have been designated as PORTAL-eligible securities in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. ("NASD") and the Restricted Notes shall be eligible for clearance and settlement through The Depository Trust Company ("DTC"). (k) That any additional documents or agreements reasonably requested by the Initial Purchasers or their counsel to permit the Initial Purchasers to perform their obligations or permit their counsel to deliver opinions hereunder shall have been provided to them. 6. Certain Covenants of the Company: In further consideration of the agreements of the Initial Purchasers herein contained, the Company covenants as follows: (a) To advise the Representative promptly and, if requested by the Representative, confirm such advice in writing, of the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of any Restricted Notes for offering or sale in any jurisdiction designated by the Initial Purchasers pursuant to Section 6(d) hereof, or the initiation of any proceeding by any state securities commission or any other federal or state regulatory authority for such purpose. The Company shall use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption of any Restricted Notes under any state securities or blue sky laws and, if at any time any state securities commission or other federal or state regulatory authority 6 shall issue an order suspending the qualification or exemption of any Restricted Notes under any state securities or blue sky laws, the Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To deliver to the Initial Purchasers, without charge, as soon as practicable, as many copies of the Offering Memorandum (as supplemented or amended if the Company shall have made any supplements or amendments thereto) as the Initial Purchasers may reasonably request. Subject to the Initial Purchasers' compliance with their representations and warranties and agreements set forth in Section 8 hereof, the Company consents to the use of the Offering Memorandum, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchasers in connection with Exempt Resales. (c) For such period of time as the Initial Purchasers are required by law or customary practice to deliver an offering memorandum in respect of the Restricted Notes, if any event shall have occurred as a result of which it is necessary to amend or supplement the Offering Memorandum in order to make the statements therein, in light of the circumstances when the Offering Memorandum is delivered to an Eligible Purchaser, not misleading, or if it becomes necessary to amend or supplement the Offering Memorandum to comply with law, to forthwith prepare an appropriate amendment or supplement to the Offering Memorandum and deliver to the Initial Purchasers, without charge, such number of copies thereof as may be reasonably requested. (d) To use its best efforts to qualify the Restricted Notes for offer and sale under the securities or blue sky laws of such jurisdictions as the Initial Purchasers may designate and to pay (or cause to be paid), or reimburse (or cause to be reimbursed) the Initial Purchasers and their counsel for, reasonable filing fees and expenses in connection therewith (including the reasonable fees and disbursements of counsel to the Initial Purchasers and filing fees and expenses paid and incurred prior to the date hereof), provided, however, that the Company shall not be required to qualify to do business as a foreign corporation or as a securities dealer or to file a general consent to service of process or to file annual reports or to comply with any other requirements deemed by the Company to be unduly burdensome. (e) So long as the Restricted Notes are outstanding, (i) to mail and make generally available as soon as practicable after the end of each fiscal year to the record holders of the Restricted Notes a financial report of the Company on a consolidated basis, all such financial reports to include a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of cash flows and a consolidated statement of shareholders' equity as of the end of and for such fiscal year, together with comparable information as of the end of and for the preceding year, certified by the Company's independent public accountants and (ii) to mail and make generally available as soon as practicable after the end of each quarterly period (except for the last quarterly period of each fiscal year) to such holders, a consolidated balance sheet, a consolidated statement of operations and a consolidated statement of cash flows as of the end of and for such period, and for the period from the beginning of such year to the close of such quarterly period, together with comparable information for the corresponding periods of the preceding year. 7 (f) So long as any of the Restricted Notes are "restricted securities" within the meaning of Rule 144(a)(3) under the Act and remain outstanding and during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act, to make available to any holder of Restricted Notes in connection with any sale thereof and any prospective purchaser of such Restricted Notes from such holder, the information required by Rule 144A(d)(4) under the Act. (g) To pay all expenses, fees and taxes (other than transfer taxes on sales by the respective Initial Purchasers) in connection with the issuance and delivery of the Restricted Notes, except that the Company shall be required to pay the fees and disbursements (other than disbursements referred to in Section 6(d) hereof) of PW, counsel to the Initial Purchasers, only in the events provided in Section 6(h) hereof, the Initial Purchasers hereby agreeing to pay such fees and disbursements in any other event, and that except as provided in such Section 6(h), the Company shall not be responsible for any out-of-pocket expenses of the Initial Purchasers in connection with their services hereunder. (h) If the Initial Purchasers shall not take up and pay for the Restricted Notes due to the failure of the Company to comply with any of the conditions specified in Section 5 hereof, or, if this Agreement shall be terminated in accordance with the provisions of Section 12 hereof prior to the Time of Purchase or the Date of Delivery, as the case may be, to pay the reasonable fees and disbursements of PW, counsel to the Initial Purchasers, and, if the Initial Purchasers shall not take up and pay for the Restricted Notes due to the failure of the Company to comply with any of the conditions specified in Section 5 hereof, to reimburse the Initial Purchasers for their reasonable out-of-pocket expenses not to exceed $3,000 incurred in connection with the financing contemplated by this Agreement. (i) During the period referred to in Section 6(c) hereof, to not amend or supplement the Offering Memorandum unless the Company has furnished the Initial Purchasers and counsel to the Initial Purchasers with a copy for their review and comment a reasonable time prior to the making of such amendment or supplement and has reasonably considered any comments of the Initial Purchasers, and not to make any such amendment or supplement to which such counsel shall reasonably object on legal grounds in writing after consultation with the Initial Purchasers. (j) During the period referred to in Section 6(c) hereof, to furnish the Initial Purchasers with copies of all documents required to be filed with the Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (k) During the period referred to in Section 6(c) hereof, to comply with all requirements under the Exchange Act relating to the timely filing with the Commission of its reports pursuant to Section 13 or 15(d) of the Exchange Act and of its proxy statements pursuant to Section 14 of the Exchange Act. (l) To comply in all material respects with all of its agreements set forth in the Registration Rights Agreement. 8 (m) To obtain the approval of DTC for "book-entry" transfer of the Restricted Notes, and to comply in all material respects with all of its agreements set forth in the representation letter or letters of the Company to DTC relating to the approval of the Restricted Notes by DTC for "book-entry" transfer. (n) Not to (or permit any affiliate (as defined in Rule 144 under the Act) to) sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) that would be integrated with the sale of the Restricted Notes to the Initial Purchasers or pursuant to Exempt Resales in a manner that would require the registration of any such sale of the Restricted Notes under the Act. (o) Not to voluntarily claim, and to actively resist any attempts to claim, the benefit of any usury laws against the holders of any Restricted Notes. (p) During the period of two years after the Time of Purchase, not to, and not permit any of its affiliates (as defined in Rule 144 under the Act) to, resell any of the Restricted Notes which constitute "restricted securities" under Rule 144 under the Act that have been reacquired by any of them. (q) To take all reasonable action necessary to enable S&P, Moody's and Fitch to provide their respective credit ratings of the Restricted Notes. (r) Until the second anniversary of the Time of Purchase, not to, and not to permit any affiliates under its control to, purchase any Restricted Notes unless, immediately upon any such purchase, the Company or any such affiliate shall submit such Restricted Notes to the Trustee for cancellation. (s) Not to, and not to permit any of its affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to which no agreement is made) to, directly or indirectly, make offers or sales of any security, or solicit offers to buy any security, under circumstances that would require the registration of the Restricted Notes under the Act. (t) Any information provided by the Company to publishers of publicly available databases about the terms of the Restricted Notes shall include a statement that the Restricted Notes have not been registered under the Act and are subject to restrictions under Rule 144A under the Act and Regulation S under the Act. (u) The Company will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Restricted Notes. (v) The Company will cause the proceeds of the issuance and sale of the Restricted Notes to be applied for the purposes described in the Offering Memorandum. 7. Representations and Warranties of the Company: The Company represents and warrants to, and agrees with, each of the Initial Purchasers that: 9 (a) Each of the Preliminary Offering Memorandum and the Offering Memorandum does not, and any supplement or amendment to it will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this Section 7(a) shall not apply to statements in or omissions from the Preliminary Offering Memorandum and the Offering Memorandum (or any supplement or amendment thereto) based upon information relating to the Initial Purchasers furnished to the Company in writing by the Initial Purchasers expressly for use therein. No stop order preventing the use of the Offering Memorandum, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Act, has been issued. (b) The documents incorporated by reference in the Preliminary Offering Memorandum and the Offering Memorandum, when they were filed (or, if an amendment with respect to any such document was filed, when such amendment was filed) with the Commission, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and any further documents so filed and incorporated by reference will, when they are filed with the Commission, conform in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder; none of such documents, when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and no such further document, when it is filed, will contain an untrue statement of a material fact or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. (c) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Michigan and has all requisite authority to own or lease its properties and conduct its business as described in the Preliminary Offering Memorandum and the Offering Memorandum and to consummate the transactions contemplated hereby, and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business as described in the Preliminary Offering Memorandum and the Offering Memorandum or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company. (d) The Restricted Notes are in the form contemplated by the Indenture and have been duly authorized by the Company. At the Time of Purchase, the Restricted Notes will have been duly executed and delivered by the Company and, when authenticated by the Trustee in the manner provided for in the Indenture and delivered against payment therefor as provided in this Agreement, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement 10 is considered in a proceeding at law or in equity), and will be entitled to the security afforded by the Indenture equally and ratably with all securities outstanding thereunder. The Restricted Notes conform in all material respects to the descriptions thereof in the Preliminary Offering Memorandum and the Offering Memorandum. Each significant subsidiary (as defined in Rule 405 under the Act, and hereinafter called a "Significant Subsidiary") of the Company has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its formation, has all requisite authority to own or lease its properties and conduct its business as described in the Offering Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business as described in the Offering Memorandum or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Significant Subsidiaries, taken as a whole. (e) This Agreement has been duly authorized, executed and delivered by the Company, and the Company has full corporate power and authority to enter into this Agreement. (f) The Registration Rights Agreement has been duly authorized by the Company. At the Time of Purchase, the Registration Rights Agreement will have been duly executed and delivered by the Company and will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). The Registration Rights Agreement conforms in all material respects to the description thereof in the Preliminary Offering Memorandum and the Offering Memorandum. (g) The Indenture has been duly authorized by the Company. At the Time of Purchase, the Indenture will have been duly executed and delivered by the Company and will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity); the Indenture conforms in all material respects to the description thereof in the Preliminary Offering Memorandum and the Offering Memorandum; and the Indenture conforms to the requirements of the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). (h) Except for the outstanding shares of preferred stock of Consumers Energy Company, the 8.36% Trust Originated Preferred Securities of Consumers Power Company Financing I, the 8.20% Trust Originated Preferred Securities of Consumers Energy Company Financing II, the 9 1/4% Trust Originated Preferred Securities of Consumers Energy Company Financing III, the 9.00% Trust Preferred Securities of Consumers Energy Company Financing IV, the 7 3/4% Convertible Quarterly Income Preferred Securities of CMS Energy Trust I and the 7 1/4% PEPS Units of CMS Energy Trust III, all of the outstanding capital stock of each of Consumers Energy Company and CMS Enterprises Company is owned directly or indirectly by the Company, free and clear of any security interest, claim, lien or other encumbrance (except as disclosed in the Offering Memorandum) or preemptive rights, and there are no outstanding rights 11 (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in any of Consumers Energy Company and CMS Enterprises Company or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any such capital stock, any such convertible or exchangeable securities or any such rights, warrants or options. (i) The Company has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct business in the manner described in the Preliminary Offering Memorandum and the Offering Memorandum, except to the extent that the failure to obtain or file would not have a material adverse effect on the Company. (j) No order, license, consent, authorization or approval of, or exemption by, or the giving of notice to, or the registration with, any federal, state, local or other governmental department, commission, board, bureau, agency or instrumentality, and no filing, recording, publication or registration in any public office or any other place, was or is now required to be obtained by the Company to authorize its execution or delivery of, or the performance of its obligations under, this Agreement or any of the other Operative Documents, except such as have been obtained or may be required under state securities or blue sky laws or as referred to in the Offering Memorandum. (k) None of the issuance or sale of the Restricted Notes, or the execution or delivery by the Company of, or the performance by the Company of its obligations under, this Agreement or the other Operative Documents, did or will conflict with, result in a breach of any of the terms or provisions of, or constitute a default or require the consent of any party under, the Company's Articles of Incorporation or by-laws, any material agreement or instrument to which it is a party, any existing applicable law, rule or regulation or any judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its properties or assets, or did or will result in the creation or imposition of any lien on the Company's properties or assets. (l) Except as disclosed in the Offering Memorandum, there is no action, suit, proceeding, inquiry or investigation (at law or in equity or otherwise) pending or, to the knowledge of the Company, threatened against the Company, by any governmental authority that (i) questions the validity, enforceability or performance of this Agreement or any of the other Operative Documents or (ii) if determined adversely, is likely to have a material adverse effect on the business or financial condition of the Company, or materially adversely affect the ability of the Company to perform its obligations hereunder or the consummation of the transactions contemplated by this Agreement. (m) There has not been any material and adverse change in the business, properties, prospects or financial condition of the Company from that set forth or incorporated by reference in the Offering Memorandum (other than changes referred to in or contemplated by the Offering Memorandum). 12 (n) Except as set forth in the Offering Memorandum, no event or condition exists that constitutes, or with the giving of notice or lapse of time or both would constitute, a default or any breach or failure to perform by the Company in any material respect under any indenture, mortgage, loan agreement, lease or other material agreement or instrument to which the Company is a party or by which it or any of its properties may be bound. (o) The Offering Memorandum, as of its date, contained all the information specified in, and met the requirements of, Rule 144A(d)(4) under the Act. (p) When the Restricted Notes are issued and delivered pursuant to this Agreement, the Restricted Notes will not be of the same class (within the meaning of Rule 144A under the Act) as any security of the Company that is listed on a national securities exchange registered under Section 6 of the Exchange Act or that is quoted in a United States automated inter-dealer quotation system. No securities of the same class as the Restricted Notes have been issued and sold by the Company within the six-month period immediately prior to the date hereof. (q) Neither the Company nor any affiliate (as defined in Rule 144 under the Act) of the Company has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Act) which is or will be integrated with the sale of the Restricted Notes in a manner that would require the registration under the Act of the Restricted Notes or (ii) engaged in any form of general solicitation or general advertising in connection with the offering of the Restricted Notes (as those terms are used in Regulation D under the Act), or in any manner involving a public offering within the meaning of Section 4(2) of the Act, including, but not limited to, publication or release of articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. (r) None of the Company nor any of its affiliates (as defined in Rule 144 under the Act) or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company makes no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S under the Act with respect to the Restricted Notes. (s) No registration under the Act of the Restricted Notes is required for the sale of the Restricted Notes to the Initial Purchasers as contemplated hereby or for the Exempt Resales (assuming the accuracy of the Initial Purchasers' representation and warranty and agreement set forth in Section 8 hereof). (t) The Company, after giving effect to the offering and sale of the Restricted Notes, will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (u) The Restricted Notes satisfy the eligibility requirements of Rule 144A(d)(3) under the Act. 13 (v) The Company has been advised by the NASD's PORTAL Market that the Restricted Notes have been designated PORTAL-eligible securities in accordance with the rules and regulations of the NASD. (w) The Company's chief executive officer and chief financial officer are responsible for establishing and maintaining the Company's disclosure controls and procedures. The Company's management, under the direction of the Company's principal executive and financial officers, has evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days of the filing of the Company's most recent annual report on Form 10-K/A. Based on such evaluation, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective to ensure that material information was presented to them and properly disclosed. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to such evaluation. The Company acknowledges that the Initial Purchasers and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 5 hereof, counsel to the Company and counsel to the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 8. Representations and Warranties of Initial Purchasers: Upon the authorization by the Initial Purchasers of the release of the Restricted Notes, the Initial Purchasers propose to offer the Restricted Notes for sale upon the terms and conditions set forth in this Agreement and the Offering Memorandum and the Initial Purchasers hereby represent and warrant to, and agree with, the Company that: (a) they each will offer and sell the Restricted Notes only to Eligible Purchasers; (b) they each are Accredited Investors (as defined in Regulation D under the Act); and (c) they each will not offer or sell the Restricted Notes by any form of general solicitation or general advertising, including, but not limited to, the methods described in Rule 502(c) under the Act. 9. Indemnification: (a) The Company agrees, to the extent permitted by law, to indemnify and hold harmless each of the Initial Purchasers and each person, if any, who controls any such Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or otherwise, and to reimburse the Initial Purchasers and such controlling person or persons, if any, for any legal or other expenses incurred by them in connection with defending any action, suit or proceeding (including governmental investigations) as provided in Section 9(c) hereof, insofar as such losses, claims, damages, liabilities or actions, suits or proceedings (including governmental investigations) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in 14 the Preliminary Offering Memorandum or the Offering Memorandum, or, if the Preliminary Offering Memorandum or the Offering Memorandum shall be amended or supplemented, in the Preliminary Offering Memorandum or the Offering Memorandum as so amended or supplemented or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any such untrue statement or alleged untrue statement or omission or alleged omission which was made in the Preliminary Offering Memorandum or the Offering Memorandum or in the Preliminary Offering Memorandum or the Offering Memorandum as so amended or supplemented, in reliance upon and in conformity with information furnished in writing to the Company by, or through the Representative on behalf of, any Initial Purchaser expressly for use therein and except that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability or action, suit or proceeding arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Offering Memorandum if copies of the Offering Memorandum were timely delivered to the Initial Purchasers pursuant to Section 6 hereof and a copy of the Offering Memorandum (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Initial Purchasers to the person asserting such loss, claim, damage or liability or action, suit or proceeding and if the Offering Memorandum (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability or action, suit or proceeding. The Company's indemnity agreement contained in this Section 9(a), and the covenants, representations and warranties of the Company contained in this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any person, and shall survive the delivery of and payment for the Restricted Notes hereunder, and the indemnity agreement contained in this Section 9 shall survive any termination of this Agreement. The liabilities of the Company in this Section 9(a) are in addition to any other liabilities of the Company under this Agreement or otherwise. (b) Each Initial Purchaser agrees, severally and not jointly, to the extent permitted by law, to indemnify, hold harmless and reimburse the Company, each other Initial Purchaser, and each person, if any, who controls the Company or any such other Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent and upon the same terms as the indemnity agreement of the Company set forth in Section 9(a) hereof, but only with respect to alleged untrue statements or omissions made in the Preliminary Offering Memorandum or the Offering Memorandum, as amended or supplemented (if applicable), in reliance upon and in conformity with information furnished in writing to the Company by such Initial Purchaser expressly for use therein. The indemnity agreement on the part of each Initial Purchaser contained in this Section 9(b) and the representations and warranties of such Initial Purchaser contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other person, and shall survive the delivery of and payment for the Restricted Notes hereunder, and the indemnity agreement contained in this Section 9(b) shall survive any termination of this Agreement. The liabilities of each Initial Purchaser in this 15 Section 9(b) are in addition to any other liabilities of such Initial Purchaser under this Agreement or otherwise. (c) If a claim is made or an action, suit or proceeding (including governmental investigations) is commenced or threatened against any person as to which indemnity may be sought under Section 9(a) or 9(b) hereof, such person (the "Indemnified Person") shall notify the person against whom such indemnity may be sought (the "Indemnifying Person") promptly after any assertion of such claim threatening to institute an action, suit or proceeding or if such an action, suit or proceeding is commenced against such Indemnified Person, promptly after such Indemnified Person shall have been served with a summons or other first legal process, giving information as to the nature and basis of the claim. Failure to so notify the Indemnifying Person shall not, however, relieve the Indemnifying Person from any liability which it may have on account of the indemnity under Section 9(a) or 9(b) hereof if the Indemnifying Person has not been prejudiced in any material respect by such failure. Subject to the immediately succeeding sentence, the Indemnifying Person shall assume the defense of any such litigation or proceeding, including the employment of counsel and the payment of all expenses, with such counsel being designated, subject to the immediately succeeding sentence, in writing by the Representative in the case of parties indemnified pursuant to Section 9(b) hereof and by the Company in the case of parties indemnified pursuant to Section 9(a) hereof. Any Indemnified Person shall have the right to participate in such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include (x) the Indemnifying Person and (y) the Indemnified Person and, in the written opinion of counsel to such Indemnified Person, representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and expenses of counsel (including disbursements) for such Indemnified Person shall be reimbursed by the Indemnifying Person to the Indemnified Person. If there is a conflict as described in clause (ii) above, and the Indemnified Persons have participated in the litigation or proceeding utilizing separate counsel whose fees and expenses have been reimbursed by the Indemnifying Person and the Indemnified Persons, or any of them, are found to be solely liable, such Indemnified Persons shall repay to the Indemnifying Person such fees and expenses of such separate counsel as the Indemnifying Person shall have reimbursed. It is understood that the Indemnifying Person shall not, in connection with any litigation or proceeding or related litigation or proceedings in the same jurisdiction as to which the Indemnified Persons are entitled to such separate representation, be liable under this Agreement for the reasonable fees and out-of-pocket expenses of more than one separate firm (together with not more than one appropriate local counsel) for all such Indemnified Persons. Subject to the next paragraph, all such fees and expenses shall be reimbursed by payment to the Indemnified Persons of such reasonable fees and expenses of counsel promptly after payment thereof by the Indemnified Persons. In furtherance of the requirement above that fees and expenses of any separate counsel for the Indemnified Persons shall be reasonable, the Initial Purchasers and the Company agree that the Indemnifying Person's obligations to pay such fees and expenses shall be conditioned upon the following: 16 (1) in case separate counsel is proposed to be retained by the Indemnified Persons pursuant to clause (ii) of the preceding paragraph, the Indemnified Persons shall in good faith fully consult with the Indemnifying Person in advance as to the selection of such counsel; (2) reimbursable fees and expenses of such separate counsel shall be detailed and supported in a manner reasonably acceptable to the Indemnifying Person (but nothing herein shall be deemed to require the furnishing to the Indemnifying Person of any information, including, without limitation, computer print-outs of lawyers' daily time entries, to the extent that, in the judgment of such counsel, furnishing such information might reasonably be expected to result in a waiver of any attorney-client privilege); and (3) the Company and the Representative shall cooperate in monitoring and controlling the fees and expenses of separate counsel for Indemnified Persons for which the Indemnifying Person is liable hereunder, and the Indemnified Person shall use reasonable effort to cause such separate counsel to minimize the duplication of activities as between themselves and counsel to the Indemnifying Person. The Indemnifying Person shall not be liable for any settlement of any litigation or proceeding effected without the written consent of the Indemnifying Person, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees, subject to the provisions of this Section 9, to indemnify the Indemnified Person from and against any loss, damage, liability or expenses by reason of such settlement or judgment. The Indemnifying Person shall not, without the prior written consent of the Indemnified Persons, effect any settlement of any pending or threatened litigation, proceeding or claim in respect of which indemnity has been properly sought by the Indemnified Persons hereunder, unless such settlement includes an unconditional release by the claimant of all Indemnified Persons from all liability with respect to claims which are the subject matter of such litigation, proceeding or claim. (d) If the indemnification provided for in Section 9 above is unavailable to or insufficient to hold harmless an Indemnified Person under this Section 9 in respect of any losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof) referred to therein, then each Indemnifying Person under this Section 9 shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other from the offering of the Restricted Notes. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each Indemnifying Person shall contribute to such amount paid or payable by such Indemnified Person in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of each Indemnifying Person, if any, on the one hand and the Indemnified Person on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof), as well as any other relevant equitable 17 considerations. The relative benefits received by the Company on the one hand and the Initial Purchasers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the total discounts or commissions received by the Initial Purchasers, in each case as set forth in the Offering Memorandum, bear to the aggregate public offering price of the Restricted Notes. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Initial Purchasers on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 9(d) were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 9(d). The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental proceedings) in respect thereof) referred to above in this Section 9(d) shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such actions, suits or proceedings (including governmental proceedings) or claim, provided that the provisions of this Section 9 have been complied with (in all material respects) in respect of any separate counsel for such Indemnified Person. Notwithstanding the provisions of this Section 9(d), in no case shall any Initial Purchaser be responsible for any amount in excess of the purchase discount or commission applicable to the Restricted Notes purchased by such Initial Purchaser hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations in this Section 9(d) to contribute are several in proportion to their respective obligations and not joint. The agreement with respect to contribution contained in this Section 9(d) shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any Initial Purchaser, and shall survive delivery of and payment for the Restricted Notes hereunder and any termination of this Agreement. 10. Survival: The respective indemnities, agreements, representations, warranties and other statements of the Company and the Initial Purchasers as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of the Initial Purchasers or any controlling person of the Initial Purchasers, the Company, or any officer, director or controlling person of the Company, and shall survive delivery of and payment for the Restricted Notes. 11. Substitution of Initial Purchasers: If any Initial Purchaser under this agreement shall fail or refuse (otherwise than for some reason sufficient to justify in accordance with the terms hereof, the termination of its obligations hereunder) to purchase the Restricted Notes which it had agreed to purchase on the Time of Purchase, the Representative shall immediately notify the Company and the Representative and the other Initial Purchasers may, within 36 hours of the giving of such notice, determine to purchase, or to procure one or more other members of 18 the NASD (or, if not members of the NASD, who are foreign banks, dealers or institutions not registered under the Exchange Act and who agree in making sales to comply with the NASD's Rules of Fair Practice), satisfactory to the Company, to purchase, upon the terms herein set forth, the principal amount of Restricted Notes which the defaulting Initial Purchaser had agreed to purchase. If any non-defaulting Initial Purchaser or Initial Purchasers shall determine to exercise such right, the Representative shall give written notice to the Company of such determination within 36 hours after the Company shall have received notice of any such default, and thereupon the Time of Purchase shall be postponed for such period, not exceeding three business days, as the Company shall determine. If, in the event of such a default, the Representative shall fail to give such notice, or shall within such 36-hour period give written notice to the Company that no other Initial Purchaser or Initial Purchasers, or others, will exercise such right, then this Agreement may be terminated by the Company, upon like notice given to the Representative within a further period of 36 hours. If in such case the Company shall not elect to terminate this Agreement, it shall have the right, irrespective of such default: (a) to require such non-defaulting Initial Purchasers to purchase and pay for the respective principal amounts of Restricted Notes which they had severally agreed to purchase hereunder, as herein above provided, and, in addition, the principal amount of Restricted Notes which the defaulting Initial Purchaser shall have so failed to purchase up to a principal amount thereof equal to one-ninth (1/9) of the respective principal amounts of Restricted Notes which such non-defaulting Initial Purchasers have otherwise agreed to purchase hereunder; and/or (b) to procure one or more other members of the NASD (or, if not members of the NASD, who are foreign banks, dealers or institutions not registered under the Exchange Act and who agree in making sales to comply with the NASD's Rules of Fair Practice) to purchase, upon the terms herein set forth, the principal amount of Restricted Notes which such defaulting Initial Purchaser had agreed to purchase, or that portion thereof which the remaining Initial Purchasers shall not be obligated to purchase pursuant to Section 11(a) hereof. In the event the Company shall exercise its rights under Section 11(a) and/or Section 11(b) hereof, the Company shall give written notice thereof to the Representative within such further period of 36 hours, and thereupon the Time of Purchase shall be postponed for such period, not exceeding five business days, as the Company shall determine. In the event the Company shall be entitled to but shall not elect to exercise its rights under Section 11(a) and/or Section 11(b) hereof, the Company shall be deemed to have elected to terminate this Agreement. Any action taken by the Company under this Section 11 shall not relieve any defaulting Initial Purchaser from liability in respect of any default of such Initial Purchaser under this Agreement. Termination by the Company under this Section 11 shall be without any liability on the part of the Company or any non-defaulting Initial Purchaser. In the computation of any period of 36 hours referred to in this Section 11, there shall be excluded a period of 24 hours in respect of each Saturday, Sunday or legal holiday which would otherwise be included in such period of time. 12. Termination of Agreement: This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. 19 This Agreement may be terminated at any time prior to the Time of Purchase by the Representative if, prior to such time, any of the following events shall have occurred: (i) trading in the Company's common stock, par value $0.01 per share, shall have been suspended by the Commission or the New York Stock Exchange or trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such exchange; (ii) a banking moratorium shall have been declared either by U.S. federal or New York State authorities; or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war or other calamity or crisis the effect of which on the financial markets of the United States is such as to impair, in the sole judgment of the Representative, the marketability of the Restricted Notes. If the Representative elects to terminate this Agreement, as provided in this Section 12, the Representative will promptly notify the Company and each other Initial Purchaser by telephone or telecopy, confirmed by letter. If this Agreement shall not be carried out by any Initial Purchaser for any reason permitted hereunder, or if the sale of the Restricted Notes to the Initial Purchasers as herein contemplated shall not be carried out because the Company is not able to comply with the terms hereof, the Company shall not be under any obligation under this Agreement and shall not be liable to any Initial Purchaser or to any member of any selling group for the loss of anticipated profits from the transactions contemplated by this Agreement and the Initial Purchasers shall be under no liability to the Company nor be under any liability under this Agreement to one another. Notwithstanding the foregoing, the provisions of Sections 6(e), 6(i), 9 and 10 shall survive any termination of this Agreement. 13. Notices: All notices hereunder shall, unless otherwise expressly provided, be in writing and be delivered at or mailed to the following addresses or be sent by telecopy as follows: (i) if to the Initial Purchasers or the Representative, to Citigroup Global Markets Inc., 388 Greenwich Street, New York, New York 10013, Attention: General Counsel (Telecopy 212-816-7912); and (ii) if to the Company, to CMS Energy Corporation, One Energy Plaza, Jackson, Michigan 49201, Attention: Executive Vice President and Chief Financial Officer (Telecopy 517-788-2186). 14. Parties in Interest: This Agreement has been and is made solely for the benefit of the Initial Purchasers, the Company, the Initial Purchasers' directors and officers and the controlling persons, if any, referred to herein, and their respective successors, assigns, executors and administrators, and, except as expressly otherwise provided in Section 11 hereof, no other person shall acquire or have any right under or by virtue of this Agreement. 15. Definition of Certain Terms: All obligations of the Initial Purchasers hereunder are several and not joint. The term "successors" as used in this Agreement shall not include any purchaser, as such purchaser, of any of the Restricted Notes from any of the respective Initial Purchasers. 16. Governing Law: This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 20 17. Waiver of Tax Confidentiality: Notwithstanding anything herein to the contrary, purchasers of the Restricted Notes (and each employee, representative or other agent of the Company) may disclose to any and all persons, without limitation of any kind, the U.S. tax treatment and U.S. tax structure of any transaction contemplated herein and all materials of any kind (including opinions or other tax analyses) that are provided to the purchasers of the Restricted Notes relating to such U.S. tax treatment and U.S. tax structure, other than any information for which nondisclosure is reasonably necessary in order to comply with applicable securities laws. 18. Counterparts: This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. 21 If the foregoing is in accordance with your understanding, please sign and return to us counterparts hereof, and, upon the acceptance hereof by you, this letter and such acceptance hereof shall constitute a binding agreement between each of the Initial Purchasers and the Company. Very truly yours, CMS ENERGY CORPORATION By: /s/ Laura M. Mountcastle ------------------------------ Name: Laura M. Mountcastle Title: Vice President and Treasurer Confirmed and accepted as of the date first written above: CITIGROUP GLOBAL MARKETS INC. As Representative of the several Initial Purchasers named in Schedule I hereto By: CITIGROUP GLOBAL MARKETS INC. By:/s/ Jane Sadowsky ----------------------------------- Name: Jane Sadowsky Title: Managing Director SCHEDULE I
Principal Amount of Restricted Initial Purchasers Notes Purchase Price ------------------ ----- -------------- Citigroup Global Markets Inc. $120,000,000 $115,401,600 Merrill Lynch, Pierce, Fenner & Smith $105,000,000 $100,976,400 Incorporated Deutsche Bank Securities Inc. $ 75,000,000 $ 72,126,000 ------------ ------------ Total $300,000,000 $288,504,000 ============ ============
I-1 EXHIBIT A This Registration Rights Agreement (this "Agreement") is made and entered into as of July 17, 2003, by CMS Energy Corporation, a Michigan corporation (the "Company"), and Citigroup Global Markets Inc., as representative of the Initial Purchasers (the "Initial Purchasers") listed on Schedule I to the Purchase Agreement (as defined below), pursuant to which the Initial Purchasers have agreed to purchase the Company's $300,000,000 7.75% Senior Notes due 2010 (the "Restricted Notes"). This Agreement is made pursuant to the Purchase Agreement, dated July 9, 2003 (the "Purchase Agreement"), between the Company and Citigroup Global Markets Inc., as representative of the Initial Purchasers. In order to induce the Initial Purchasers to purchase the Restricted Notes, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchasers set forth in Section 5(f) of the Purchase Agreement. The parties hereby agree as follows: SECTION 1. DEFINITIONS Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Purchase Agreement. As used in this Agreement, the following capitalized terms shall have the following meanings: Act: The Securities Act of 1933, as amended. Advice: As defined in Section 6(d) hereof. Agreement: As defined in the first paragraph hereof. Broker-Dealer: Any broker or dealer registered under the Exchange Act. Broker-Dealer Transfer Restricted Securities: Exchange Notes that are acquired by a Broker-Dealer in the Exchange Offer in exchange for Restricted Notes that such Broker-Dealer acquired for its own account as a result of market-making activities or other trading activities (other than Restricted Notes acquired directly from the Company or any of its affiliates). Business Day: Any day except a Saturday, Sunday or other day in the City of New York, or in the city of the primary corporate trust office of the Trustee, on which banks are authorized to close. Certificated Securities: Notes that are not in Global Note form. Closing Date: The date hereof. Commission: The Securities and Exchange Commission. Company: As defined in the first paragraph hereof. A-1 Consummate: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Exchange Notes to be issued in the Exchange Offer, (b) the maintenance of such Exchange Offer Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the minimum period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Security Registrar of the Exchange Notes in the same aggregate principal amount as the aggregate principal amount of the Restricted Notes tendered by Holders thereof pursuant to the Exchange Offer. Damages Payment Date: With respect to the Restricted Notes, each Interest Payment Date. Exchange Act: The Securities Exchange Act of 1934, as amended. Exchange Notes: The Company's 7.75% Senior Notes due 2010, to be issued pursuant to the Indenture (i) in the Exchange Offer or (ii) upon the request of any Holder of Restricted Notes covered by a Shelf Registration Statement, in exchange for such Restricted Notes. Exchange Offer: The registration by the Company under the Act of the Exchange Notes pursuant to the Exchange Offer Registration Statement pursuant to which the Company shall offer the Holders of all outstanding Transfer Restricted Securities relating to Restricted Notes the opportunity to exchange all such outstanding Transfer Restricted Securities relating to Restricted Notes for Exchange Notes in an aggregate principal amount equal to the aggregate principal amount of the Transfer Restricted Securities relating to Restricted Notes tendered in such exchange offer by such Holders. Exchange Offer Registration Statement: The Registration Statement relating to the Exchange Offer, including the related Prospectus. Exempt Resales: The transactions in which the Initial Purchasers propose to sell the Restricted Notes to certain "qualified institutional buyers", as such term is defined in Rule 144A under the Act, or to persons who are not "U.S. persons", as such term is defined in Regulation S under the Act. Global Note: As defined in the Notes. Holder: As defined in Section 2 hereof. Indemnified Holder: As defined in Section 8(a) hereof. Indemnified Person: As defined in Section 8(c) hereof. Indemnifying Person: As defined in Section 8(c) hereof. Indenture: Indenture dated as of September 15, 1992, between the Company and the Trustee, as supplemented by various supplemental indentures. Initial Purchasers: As defined in the first paragraph hereof. A-2 Interest Payment Date: As defined in the Notes. NASD: National Association of Securities Dealers, Inc. Notes: The Restricted Notes and the Exchange Notes. Person: An individual, partnership, corporation, trust, limited liability company, unincorporated organization, or a government or agency or political subdivision thereof. Prospectus: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. Purchase Agreement: As defined in the second paragraph hereof. Record Holder: With respect to any Damages Payment Date, each Person who is a Holder of Notes on the record date with respect to the Interest Payment Date on which such Damages Payment Date shall occur. Registration Default: As defined in Section 5 hereof. Registration Statement: Any registration statement of the Company relating to (a) an offering of Exchange Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, in each case, (i) which is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. Restricted Broker-Dealer: Any Broker-Dealer which holds Broker-Dealer Transfer Restricted Securities. Restricted Notes: As defined in the first paragraph hereof. S-3 Ineligibility Date: As defined in Section 12(l) hereof. Security Registrar: As defined in the Indenture. Shelf Registration Statement: As defined in Section 4(a) hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture. Transfer Restricted Securities: Each Note, until the earliest to occur of (a) the date on which such Restricted Note is exchanged in the Exchange Offer and entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Restricted Note has been disposed of in accordance with a Shelf Registration Statement, (c) the date on which such Restricted Note is disposed of by a Broker- A-3 Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the Prospectus contained therein) or (d) the date on which such Restricted Note is distributed to the public pursuant to Rule 144 under the Act. Trustee: Bank One Trust Company, N.A. (ultimate successor to NBD Bank, National Association), as trustee under the Indenture. Underwritten Offering or Underwritten Registration: An offering or registration in which securities of the Company are sold to an underwriter for reoffering to the public. SECTION 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Securities (each, a "Holder") whenever such Person owns Transfer Restricted Securities. SECTION 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) hereof have been complied with), the Company shall (i) cause to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 240 days after the Closing Date, the Exchange Offer Registration Statement, (ii) use its reasonable best efforts to cause such Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 330 days after the Closing Date, (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause such Exchange Offer Registration Statement to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Exchange Notes to be made under the blue sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting registration of the Exchange Notes to be offered in exchange for the Restricted Notes that are Transfer Restricted Securities and to permit sales of Broker-Dealer Transfer Restricted Securities by Restricted Broker-Dealers as contemplated by Section 3(c) hereof. (b) The Company shall use its reasonable best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Company shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Notes shall be included in the Exchange Offer Registration Statement. The Company shall use its best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 days thereafter. A-4 (c) The Company shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Restricted Broker-Dealer who holds Restricted Notes that are Transfer Restricted Securities and that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities, may exchange such Restricted Notes (other than Transfer Restricted Securities acquired directly from the Company or any affiliate of the Company) pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of each Exchange Note received by such Broker-Dealer in the Exchange Offer, which prospectus delivery requirement may be satisfied by the delivery by such Broker-Dealer of the Prospectus contained in the Exchange Offer Registration Statement. Such "Plan of Distribution" section shall also contain all other information with respect to such sales of Broker-Dealer Transfer Restricted Securities by Restricted Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Notes held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy after the date of this Agreement. The Company shall use its best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented and amended as required by the provisions of Section 6(c) hereof to the extent necessary to ensure that it is available for sales of Broker-Dealer Transfer Restricted Securities by Restricted Broker-Dealers, and to ensure that such Registration Statement conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of one year from the date on which the Exchange Offer is Consummated. The Company shall promptly provide sufficient copies of the latest version of such Prospectus to such Restricted Broker-Dealers promptly upon request, and in no event later than one day after such request, at any time during such one-year period in order to facilitate such sales. SECTION 4. SHELF REGISTRATION (a) Shelf Registration. If (i) the Company is not required to file an Exchange Offer Registration Statement with respect to the Exchange Notes because the Exchange Offer is not permitted by applicable law or Commission policy (after the procedures set forth in Section 6(a)(i) hereof have been complied with) or (ii) any Holder of Transfer Restricted Securities shall notify the Company within 20 Business Days following the Consummation of the Exchange Offer that (A) such Holder was prohibited by law or Commission policy from participating in the Exchange Offer or (B) such Holder may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder, the Company shall, if, and when, the Company is eligible to use Act Form S-3, (x) cause to be filed on or prior to 180 days after the date on which the Company determines that it is not required to file the Exchange Offer Registration Statement pursuant to clause (i) above or 180 days after the date on which the Company receives the notice specified in clause (ii) above a shelf registration statement pursuant to Rule 415 under the Act (which may be an amendment to A-5 the Exchange Offer Registration Statement (in either event, the "Shelf Registration Statement")), relating to all Transfer Restricted Securities the Holders of which shall have provided the information required pursuant to Section 4(b) hereof, and (y) use its best efforts to cause such Shelf Registration Statement to become effective on or prior to 270 days after the date on which the Company becomes obligated to file such Shelf Registration Statement. If, after the Company has filed an Exchange Offer Registration Statement which satisfies the requirements of Section 3(a) hereof, the Company is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer shall not be permitted under applicable federal law, then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above. Such an event shall have no effect on the requirements of clause (y) above. The Company shall use its reasonable best efforts to keep the Shelf Registration Statement discussed in this Section 4(a) continuously effective, supplemented and amended as required by and subject to the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a), and to ensure that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least two years (as extended pursuant to Section 6(c)(i) hereof) following the date on which such Shelf Registration Statement first becomes effective under the Act. (b) Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 20 days after receipt of a request therefor, such information specified in Item 507 of Regulation S-K for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to liquidated damages pursuant to Section 5 hereof unless and until such Holder shall have used its best efforts to provide all such information. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. SECTION 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the date specified for such filing in this Agreement, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the date specified for such effectiveness in this Agreement, (iii) the Exchange Offer has not been Consummated within 30 calendar days after the Exchange Offer Registration Statement is first declared effective by the Commission or (iv) any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded within 15 Business Days by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective within five Business Days (each such event referred to in clauses (i) through (iv), a "Registration Default"), then the Company agrees to pay liquidated damages in the form of additional interest on the Transfer Restricted Securities to each Holder of Transfer Restricted A-6 Securities, from and including the date on which any Registration Default shall occur to, but excluding, the date on which such Registration Default has been cured, at a rate of 0.25% per annum during the 90-day period immediately following the occurrence of such Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall such rate exceed 0.50% per annum. Notwithstanding anything to the contrary set forth herein, (1) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of clause (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of clause (ii) above, (3) upon Consummation of the Exchange Offer, in the case of clause (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable, in the case of clause (iv) above, the liquidated damages payable with respect to the Transfer Restricted Securities as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All additional interest shall be paid on each payment date to the Holder of Global Notes by wire transfer of immediately available funds or by federal funds check and to Holders of Certificated Securities by mailing checks to their registered addresses on the books of the Company or the Trustee for such payment. All obligations of the Company set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Security at the time such security ceases to be a Transfer Restricted Security shall survive until such time as all such obligations with respect to such security shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) Exchange Offer Registration Statement. In connection with the Exchange Offer, the Company shall comply with all applicable provisions of Section 6(c) hereof, shall use its reasonable best efforts to effect such exchange and to permit the sale of Broker-Dealer Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof, and shall comply with all of the following provisions: (i) If, following the date hereof, there has been published a change in Commission policy with respect to exchange offers such as the Exchange Offer, such that in the reasonable opinion of counsel to the Company there is a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company hereby agrees to seek a no-action letter or other favorable decision from the Commission allowing the Company to Consummate an Exchange Offer for the Restricted Notes. The Company hereby agrees to pursue the issuance of such a decision to the Commission staff level. In connection with the foregoing, the Company hereby agrees to take all such other actions as are reasonably requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that such an A-7 Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff of such submission. (ii) As a condition to its participation in the Exchange Offer pursuant to the terms of this Agreement, each Holder of Transfer Restricted Securities shall furnish upon the request of the Company, prior to the Consummation of the Exchange Offer, a written representation to the Company (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any Person to participate in, a distribution of the Exchange Notes to be issued in the Exchange Offer and (C) it is acquiring the Exchange Notes in its ordinary course of business. Each Holder hereby acknowledges and agrees that any Broker-Dealer and any such Holder using the Exchange Offer to participate in a distribution of the securities to be acquired in the Exchange Offer (1) could not under Commission policy as in effect on the date of this Agreement rely on the position of the Commission enunciated in Morgan Stanley and Co. Inc. (available June 5, 1991) and Exxon Capital Holdings Corp. (available May 13, 1988), as interpreted in the Commission's letter to Shearman & Sterling (available July 2, 1993), and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K if the resales are of Exchange Notes obtained by such Holder in exchange for Restricted Notes acquired by such Holder directly from the Company or an affiliate thereof. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company shall provide a supplemental letter to the Commission (A) stating that the Company is registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corp. (available May 13, 1988), Morgan Stanley and Co. Inc. (available June 5, 1991) and, if applicable, any no-action letter obtained pursuant to clause (i) above, (B) including a representation that the Company has not entered into any arrangement or understanding with any Person to distribute the Exchange Notes to be received in the Exchange Offer and that, to the best of the Company's information and belief, each Holder participating in the Exchange Offer is acquiring the Exchange Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Exchange Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above. (b) Shelf Registration Statement. In connection with the Shelf Registration Statement, the Company shall comply with all the provisions of Section 6(c) hereof and shall use its best A-8 efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof. (c) General Provisions. In connection with any Registration Statement and any related Prospectus required by this Agreement to permit the sale or resale of Transfer Restricted Securities (including, without limitation, any Exchange Offer Registration Statement and the related Prospectus, to the extent that the same are required to be available to permit sales of Broker-Dealer Transfer Restricted Securities by Restricted Broker-Dealers), the Company shall: (i) use its best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 hereof, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain a material misstatement or omission or (B) not to be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement, (1) in the case of clause (A), correcting any such misstatement or omission, and (2) in the case of clauses (A) and (B), using its best efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter; (ii) prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise the underwriter(s), if any, and selling Holders promptly and, if requested by such Persons, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or A-9 supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or blue sky laws, the Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) furnish to the Initial Purchaser(s), each selling Holder named in any Registration Statement or Prospectus and each of the underwriter(s) in connection with such sale, if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review and comment of such Holders and underwriter(s) in connection with such sale, if any, for a period of at least five Business Days, and the Company will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which the selling Holders of the Transfer Restricted Securities covered by such Registration Statement or the underwriter(s) in connection with such sale, if any, shall reasonably object within five Business Days after the receipt thereof; (v) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide copies of such document to the selling Holders and to the underwriter(s) in connection with such sale, if any, make the Company's representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such selling Holders or underwriter(s), if any, reasonably may request; (vi) make available at reasonable times for inspection by the selling Holders, any managing underwriter participating in any disposition pursuant to such Registration Statement and any attorney or accountant retained by such A-10 selling Holders or any of such underwriter(s), all financial and other records, material corporate documents and properties of the Company and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Holder, underwriter, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; (vii) if requested by any selling Holders or the underwriter(s) in connection with such sale, if any, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such selling Holders and underwriter(s), if any, may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities, information with respect to the principal amount of Transfer Restricted Securities being sold to such underwriter(s), the purchase price being paid therefor and any other terms of the offering of the Transfer Restricted Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment; (viii) if requested in writing by any selling Holder and each of the underwriter(s) in connection with such sale, if any, furnish, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (ix) if requested in writing by any selling Holder and each of the underwriter(s), if any, deliver, without charge, as many copies of the Prospectus (including each preliminary Prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company hereby consents to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each of the selling Holders and each of the underwriter(s), if any, in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto; (x) enter into such agreements (including an underwriting or similar agreement) and make such representations and warranties and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder of Transfer Restricted Securities or underwriter in connection with any sale or resale pursuant to any Registration Statement contemplated by this Agreement, and in such connection, whether or not an underwriting or similar agreement is entered into and whether or not the registration is an Underwritten Registration, the Company shall: A-11 (A) furnish (or in the case of clauses (2) and (3) below, use its best efforts to furnish) to each selling Holder and each underwriter, if any, upon the effectiveness of the Shelf Registration Statement and to each Restricted Broker-Dealer upon Consummation of the Exchange Offer: (1) a certificate, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, signed on behalf of the Company by (x) the President or any Vice President and (y) a principal financial or accounting officer of the Company, confirming, as of the date thereof, the matters set forth in Sections 5(d) and 5(e) of the Purchase Agreement and such other similar matters as the Holders, underwriter(s) and/or Restricted Broker-Dealers may reasonably request; (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Company covering matters similar to those set forth in Section 5(b)(i) of the Purchase Agreement and such other matters as the Holders, underwriter(s) and/or Restricted Broker-Dealers may reasonably request, and in any event including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company and have considered the matters required to be stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing (relying as to materiality to a large extent upon facts provided to such counsel by officers and other representatives of the Company and without independent check or verification), no facts came to such counsel's attention that caused such counsel to believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment thereto became effective and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, A-12 contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements, Notes and schedules and other financial data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated as of the date of effectiveness of the Shelf Registration Statement or the date of Consummation of the Exchange Offer, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with primary underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 5(c)(i) and Section 5(c)(ii) of the Purchase Agreement, without exception; (B) set forth in full or incorporate by reference in the underwriting or similar agreement, if any, in connection with any sale or resale pursuant to any Shelf Registration Statement, the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section 8; and (C) deliver such other documents and certificates as may be reasonably requested by the selling Holders, the underwriter(s), if any, and Restricted Broker-Dealers, if any, to evidence compliance with clause (A) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company pursuant to this clause (C); the above shall be done at each closing under such underwriting or similar agreement, as and to the extent required thereunder, and if at any time the representations and warranties of the Company contemplated in clause (A)(1) above cease to be true and correct, the Company shall so advise the underwriter(s), if any, the selling Holders and each Restricted Broker-Dealer promptly and, if requested by such Persons, shall confirm such advice in writing; (xi) prior to any public offering of Transfer Restricted Securities, cooperate with the selling Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or blue sky laws of such jurisdictions as the selling Holders or underwriter(s), if any, may request and do any and all other A-13 acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; provided, however, that the Company shall not be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xii) issue, upon the request of any Holder of Restricted Notes covered by any Shelf Registration Statement contemplated by this Agreement, Exchange Notes having an aggregate principal amount equal to the aggregate principal amount of Restricted Notes surrendered to the Company by such Holder in exchange therefor or being sold by such Holder; such Exchange Notes to be registered in the name of such Holder or in the name of the purchaser(s) of such Notes, as the case may be; in return, the Restricted Notes held by such Holder shall be surrendered to the Company for cancellation; (xiii) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the selling Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and to register such Transfer Restricted Securities in such denominations and such names as the Holders or the underwriter(s), if any, may request at least two Business Days prior to such sale of Transfer Restricted Securities; (xiv) use its best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter(s), if any, to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (xi) above; (xv) subject to clause (i) above, if any fact or event contemplated by clause (iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (xvi) provide CUSIP numbers for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with The Depository Trust Company; A-14 (xvii) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD, and use its best efforts to cause such Registration Statement to become effective and approved by such governmental agencies or authorities as may be necessary to enable the Holders selling Transfer Restricted Securities to consummate the disposition of such Transfer Restricted Securities; (xviii) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earning statement meeting the requirements of Rule 158 under the Act (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xix) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders of Notes to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its best efforts to cause the Trustee to execute all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and (xx) provide promptly to each Holder upon request each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) Restrictions on Holders. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of a notice of actions to be taken as referred to in Section 6(c)(i) hereof or any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof, or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (the "Advice"). If so directed by the Company, each Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of either such notice. In the event the Company shall give any such notice, the time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(i) or Section 6(c)(iii)(D) hereof to and including the date when each selling Holder A-15 covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof or shall have received the Advice. SECTION 7. REGISTRATION EXPENSES (a) All expenses incident to the Company's performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees; (ii) all fees and expenses of compliance with federal securities and state blue sky or securities laws; (iii) all expenses of printing (including printing certificates for the Exchange Notes to be issued in the Exchange Offer and printing of Prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company and (other than in connection with the Exchange Offer) the Holders of Transfer Restricted Securities; (v) all application and filing fees, if any, in connection with listing the Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with the Shelf Registration Statement, the Company will reimburse the Holders of Transfer Restricted Securities registered pursuant to the Shelf Registration Statement for the reasonable fees and disbursements of not more than one counsel, who shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit the Shelf Registration Statement is being prepared in consultation with the Company. SECTION 8. INDEMNIFICATION AND CONTRIBUTION (a) The Company agrees, to the extent permitted by law, to indemnify and hold harmless each Holder and each Person, if any, who controls any Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or otherwise ("Indemnified Holder"), and to reimburse the Holders and such controlling Person or Persons, if any, for any legal or other expenses incurred by them in connection with defending any action, suit or proceeding (including governmental investigations) as provided in Section 8(c) hereof, insofar as such losses, claims, damages, liabilities or actions, suits or proceedings (including governmental investigations) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, or, if any Registration Statement shall be amended or supplemented, in the Registration Statement as so amended or supplemented, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any such untrue statement or alleged untrue statement or A-16 omission or alleged omission which was made in the Registration Statement or in the Registration Statement as so amended or supplemented, in reliance upon and in conformity with information furnished in writing to the Company by any Holder expressly for use therein. The Company's indemnity agreement contained in this Section 8(a), and the covenants, representations and warranties of the Company contained in this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any Person, and the indemnity agreement contained in this Section 8 shall survive any termination of this Agreement. The liabilities of the Company in this Section 8 are in addition to any other liabilities of the Company under this Agreement or otherwise. (b) Each Holder agrees, severally and not jointly, to the extent permitted by law, to indemnify, hold harmless and reimburse the Company and each Person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent and upon the same terms as the indemnity agreement of the Company set forth in Section 8(a) hereof, but only with respect to alleged untrue statements or omissions made in the Registration Statement or in the Registration Statement, as amended or supplemented (if applicable), in reliance upon and in conformity with information furnished in writing to the Company by such Holder expressly for use therein. The indemnity agreement on the part of each Holder contained in this Section 8(b) shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other Person, and the indemnity agreement contained in this Section 8(b) shall survive any termination of this Agreement. (c) If a claim is made or an action, suit or proceeding (including governmental investigations) is commenced or threatened against any person as to which indemnity may be sought under Section 8(a) or 8(b) hereof, such Person (the "Indemnified Person") shall notify the Person against whom such indemnity may be sought (the "Indemnifying Person") promptly after any assertion of such claim threatening to institute an action, suit or proceeding or, if such an action, suit or proceeding is commenced against such Indemnified Person, promptly after such Indemnified Person shall have been served with a summons or other first legal process, giving information as to the nature and basis of the claim. Failure to so notify the Indemnifying Person shall not, however, relieve the Indemnifying Person from any liability which it may have on account of the indemnity under Section 8(a) or 8(b) hereof if the Indemnifying Person has not been prejudiced in any material respect by such failure. Subject to the immediately succeeding sentence, the Indemnifying Person shall assume the defense of any such litigation or proceeding, including the employment of counsel and the payment of all expenses, with such counsel being designated, subject to the immediately succeeding sentence, in writing by a majority in principal amount of the Holders in the case of parties indemnified pursuant to Section 8(b) hereof and by the Company in the case of parties indemnified pursuant to Section 8(a) hereof. Any Indemnified Person shall have the right to participate in such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include (x) the Indemnifying Person and (y) the Indemnified Person and, in the written opinion of counsel to such Indemnified Person, representation of both A-17 parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and expenses of counsel (including disbursements) for such Indemnified Person shall be reimbursed by the Indemnifying Person to the Indemnified Person. If there is a conflict as described in clause (ii) above, and the Indemnified Persons have participated in the litigation or proceeding utilizing separate counsel whose fees and expenses have been reimbursed by the Indemnifying Person, and the Indemnified Persons, or any of them, are found to be solely liable, such Indemnified Person shall repay to the Indemnifying Parties such fees and expenses of such separate counsel as the Indemnifying Person shall have reimbursed. It is understood that the Indemnifying Person shall not, in connection with any litigation or proceeding or related litigation or proceedings in the same jurisdiction as to which the Indemnified Persons are entitled to such separate representation, be liable under this Agreement for the reasonable fees and out-of-pocket expenses of more than one separate firm (together with not more than one appropriate local counsel) for all such Indemnified Persons. Subject to the next paragraph, all such fees and expenses shall be reimbursed by payment to the Indemnified Persons of such reasonable fees and expenses of counsel promptly after payment thereof by the Indemnified Persons. In furtherance of the requirement above that fees and expenses of any separate counsel for the Indemnified Persons shall be reasonable, the Holders and the Company agree that the Indemnifying Person's obligations to pay such fees and expenses shall be conditioned upon the following: (1) in case separate counsel is proposed to be retained by the Indemnified Persons pursuant to clause (ii) of the preceding paragraph, the Indemnified Persons shall in good faith fully consult with the Indemnifying Person in advance as to the selection of such counsel; (2) reimbursable fees and expenses of such separate counsel shall be detailed and supported in a manner reasonably acceptable to the Indemnifying Person (but nothing herein shall be deemed to require the furnishing to the Indemnifying Person of any information, including, without limitation, computer print-outs of lawyers' daily time entries, to the extent that, in the judgment of such counsel, furnishing such information might reasonably be expected to result in a waiver of any attorney-client privilege); and (3) the Company and the Holders shall cooperate in monitoring and controlling the fees and expenses of separate counsel for Indemnified Persons for which the Indemnifying Person is liable hereunder, and the Indemnified Person shall use every reasonable effort to cause such separate counsel to minimize the duplication of activities as between themselves and counsel to the Indemnifying Person. The Indemnifying Person shall not be liable for any settlement of any litigation or proceeding effected without the written consent of the Indemnifying Person, but if settled with such consent or if there be a final judgment against the Indemnified Person, the Indemnifying Person agrees, subject to the provisions of this Section 8, to indemnify the Indemnified Person from and against any loss, damage, liability or expenses by reason of such settlement or judgment. The Indemnifying Person shall not, without the prior written consent of the Indemnified Persons, effect any settlement of any pending or threatened litigation, proceeding or A-18 claim in respect of which indemnity has been properly sought by the Indemnified Persons hereunder, unless such settlement includes an unconditional release by the claimant of all Indemnified Persons from all liability with respect to claims which are the subject matter of such litigation, proceeding or claim. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an Indemnified Person under this Section 8 in respect of any losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof) referred to therein, then each Indemnifying Person under this Section 8 shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other from the sale of the Transfer Restricted Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each Indemnifying Person shall contribute to such amount paid or payable by such Indemnified Person in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of each Indemnifying Person, if any, on the one hand and the Indemnified Person on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Holders on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 8. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental proceedings) in respect thereof) referred to in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such actions, suits or proceedings (including governmental proceedings) or claims, provided that the provisions of this Section 8 have been complied with (in all material respects) in respect of any separate counsel for such Indemnified Person. Notwithstanding the provisions of this Section 8, no Holder shall be required to contribute any amount greater than the excess of the amount by which the total received by such Holder with respect to the sale of its Transfer Restricted Securities pursuant to a Registration Statement exceeds the sum of (A) the amount paid by such Holder for such Transfer Restricted Securities plus (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations in this Section 8 to contribute are several in proportion to their respective obligations and not joint. A-19 The agreement with respect to contribution contained in this Section 8 shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any Holder, and shall survive any termination of this Agreement. SECTION 9. RULE 144A The Company hereby agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder of Transfer Restricted Securities, to any Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A. SECTION 10. UNDERWRITTEN REGISTRATIONS No Holder may participate in any Underwritten Registration hereunder unless such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on the basis provided in customary underwriting arrangements entered into in connection therewith and (b) completes and executes all reasonable questionnaires, powers of attorney, and other documents required under the terms of such underwriting arrangements. SECTION 11. SELECTION OF UNDERWRITERS For any Underwritten Offering, the investment banker or investment bankers and manager or managers for any Underwritten Offering that will administer such offering will be selected by the Holders of a majority in aggregate principal amount of the Transfer Restricted Securities included in such offering; provided, that such investment bankers and managers must be reasonably satisfactory to the Company. The Holders of Transfer Restricted Securities included in any such Underwritten Offering shall be responsible for paying all underwriting or placement fees charged, or costs or expenses incurred, by such investment bankers and managers in connection with such Underwritten Offering. Such investment bankers and managers are referred to herein as the "underwriters". SECTION 12. MISCELLANEOUS (a) Remedies. Each Holder, in addition to being entitled to exercise all rights provided herein, in the Indenture, in the Purchase Agreement or granted by law, including recovery of liquidated or other damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by the Company of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. A-20 The Company has not previously entered into any agreement granting any registration rights with respect to its securities to any Person. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. (c) Adjustments Affecting the Notes. The Company will not take any action, or voluntarily permit any change to occur, with respect to the Notes that would materially and adversely affect the ability of the Holders to Consummate any Exchange Offer. (d) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given, unless (i) in the case of Section 5 hereof and this Section 12(d)(i), the Company has obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities. Notwithstanding the foregoing, a waiver or consent to or departure from the provisions hereof that relates exclusively to the rights of Holders whose securities are being tendered pursuant to the Exchange Offer and that does not affect directly or indirectly the rights of other Holders whose securities are not being tendered pursuant to such Exchange Offer may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities subject to such Exchange Offer. (e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Security Registrar under the Indenture, with a copy to the Security Registrar; and (ii) if to the Company: CMS Energy Corporation One Energy Plaza Jackson, Michigan 49201 Telecopier No.: (517) 788-2186, Attention: Executive Vice President and Chief Financial Officer With a copy at the same address to: Robert C. Shrosbree, Esq. Telecopier No.: (313) 436-9225 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. A-21 Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. (f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders of Transfer Restricted Securities; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign acquired Transfer Restricted Securities directly from such Holder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein, with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (l) S-3 Ineligibility. If the Company is not eligible to use Act Form S-3 by the 270th day after the date on which it determines that it is not required to file the Exchange Offer Registration Statement pursuant to Section 4(a)(i) hereof or the 270th day after the date on which it receives the notice specified in Section 4(a)(ii) hereof (either, the "S-3 Ineligibility Date"), the Company shall (A) cause to be filed as soon as practicable after the S-3 Ineligibility Date a registration statement containing a resale prospectus on whatever Act form the Company is then eligible to use relating to all Transfer Restricted Securities the Holders of which shall have provided the information required pursuant to Section 4(b) hereof and (B) use its best efforts to cause such shelf registration statement to become effective as soon as practicable. A-22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CMS ENERGY CORPORATION By: ___________________________________ Name: Title: CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: CITIGROUP GLOBAL MARKETS INC., for itself and as Representative of the Initial Purchasers By: _________________________________ Name: Title: A-23 EXHIBIT B 1. The Company is a duly organized, validly existing corporation in good standing under the laws of the State of Michigan. 2. All legally required corporate proceedings in connection with the authorization, issuance and validity of the Restricted Notes and the sale of the Restricted Notes by the Company in accordance with the Purchase Agreement have been taken; and no approval, authorization, consent or order of any governmental regulatory body is required with respect to the issuance and sale of the Restricted Notes (other than in connection with or in compliance with the provisions of the securities or blue sky laws of any state, as to which I express no opinion). 3. I do not know of any legal or governmental proceedings that would be required to be described in the Offering Memorandum if it were a registration statement filed by the Company under the Act that are not described as required, nor of any contracts or documents of a character so required to be described in the Offering Memorandum that are not described as required. 4. The statements made in the Offering Memorandum under the caption "Description of the Notes" and "Exchange Offer; Registration Rights" constitute summaries of legal matters or documents referred to therein and are accurate in all material respects; and the Indenture and the Restricted Notes conform as to legal matters to the descriptions thereof and to the statements in regard thereto contained in such section of the Offering Memorandum. 5. Each document incorporated in the Offering Memorandum as such document was originally filed pursuant to the Exchange Act (except for (i) the operating statistics, financial statements and schedules contained or incorporated by reference therein (including the notes thereto and the auditors' reports thereon) and (ii) the other financial or statistical information contained or incorporated by reference therein, as to which I express no opinion) complied as to form when so filed in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder. 6. The Purchase Agreement has been duly authorized, executed and delivered by the Company. 7. The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery thereof by the Initial Purchasers, is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 8. The Indenture has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery of the Indenture by the Trustee, will be a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally B-1 or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 9. The Indenture complies as to form in all material respects with the requirements of the Trust Indenture Act and the rules and regulations of the Commission applicable to an indenture that is qualified thereunder. It is not necessary in connection with the offer, sale and delivery of the Restricted Notes to the Initial Purchasers in the manner contemplated by the Purchase Agreement or in connection with the Exempt Resales to qualify the Indenture under the Trust Indenture Act. 10. The Restricted Notes are in the form contemplated by the Indenture, have been duly authorized, executed and delivered by the Company and, assuming the due authentication thereof by the Trustee and upon payment and delivery in accordance with the Purchase Agreement, will constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity); the Restricted Notes are entitled to the security afforded by the Indenture equally and ratably with all securities presently outstanding thereunder, and no stamp taxes in respect of the original issue thereof are payable. 11. The issuance and sale of the Restricted Notes in accordance with the terms of the Indenture and the Purchase Agreement do not violate the provisions of the Restated Articles of Incorporation or the Bylaws of the Company, and will not result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company is a party. 12. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 13. The Company (i) is a "holding company", as such term is defined in the Public Utility Holding Company Act of 1935, as amended, and (ii) is currently exempt from all provisions of the Public Utility Holding Company Act of 1935, as amended, except Section 9(a)(2) thereof. 14. No registration under the Act of the Restricted Notes is required for the sale of the Restricted Notes to the Initial Purchasers as contemplated by the Purchase Agreement or for the Exempt Resales assuming (i) that each of the Initial Purchasers is an Eligible Purchaser or an Accredited Investor (as defined in Regulation D under the Act), (ii) the accuracy of, and compliance with, the Initial Purchasers' representations and agreements contained in Section 8 of the Purchase Agreement, and (iii) the accuracy of the representations of the Company set forth in Sections 6(e), 6(n), 7(o), 7(q) and 7(s) of the Purchase Agreement. 15. Nothing has come to my attention that would lead me to believe that the Offering Memorandum (other than (i) the operating statistics, financial statements and schedules contained or incorporated by reference therein (including the notes thereto and the auditors' reports thereon) and (ii) the other financial or statistical information contained or incorporated by B-2 reference therein, as to which I express no opinion), as of its date or at the date hereof contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-3 EXHIBIT C-1 1. The offer, sale and delivery of the Restricted Notes to the Initial Purchasers in the manner contemplated by the Purchase Agreement and the Offering Memorandum and the initial resale of the Restricted Notes by the Initial Purchasers in the manner contemplated in the Offering Memorandum and the Purchase Agreement, do not require registration under the Act and the Supplemental Indenture does not require qualification under the Trust Indenture Act, it being understood that we do not express any opinion as to any subsequent reoffer or resale of any of the Restricted Notes. 2. The Registration Rights Agreement is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. C-1-1 EXHIBIT C-2 No facts have come to our attention that have caused us to believe that the Offering Memorandum, as of its date and as of the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (except that in each case we do not express any view as to the financial statements, schedules and other financial data and financial projections included therein or excluded therefrom). For purposes of the foregoing, we note that the Offering Memorandum has been prepared in the context of a Rule 144A transaction and not as part of a registration statement under the Act and does not contain all the information that would be required in a registration statement under the Act. C-2-1 EX-10.(AA) 17 k82154aexv10wxaay.txt PURCHASE AGREEMENT DATED DECEMBER 1, 2003 EXHIBIT 10(aa) EXECUTION COPY 4,500,000 Shares CMS ENERGY CORPORATION 4.50% Cumulative Convertible Preferred Stock Purchase Agreement December 1, 2003 Citigroup Global Markets Inc. As Representative of the several Initial Purchasers named in Schedule I hereto 388 Greenwich Street New York, New York 10013 Merrill Lynch, Pierce, Fenner & Smith Incorporated As Representative of the several Initial Purchasers named in Schedule I hereto 4 World Financial Center New York, New York 10080 Ladies and Gentlemen: CMS Energy Corporation, a Michigan corporation (the "Company"), proposes to issue and sell to Citigroup Global Markets Inc. ("Citigroup"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill") and each of the other Initial Purchasers named in Schedule I hereto (collectively, the "Initial Purchasers"), for whom Citigroup and Merrill are acting as representatives (in such capacity, the "Representatives"), an aggregate of 4,500,000 shares of its 4.50% Cumulative Convertible Preferred Stock (the "Restricted Shares"), subject to the terms and conditions set forth herein. The Company has agreed to grant to the Initial Purchasers, severally and not jointly, an option to purchase up to 500,000 shares of additional Restricted Shares to cover over-allotments, if any (the "Option Restricted Shares"), at a price per Option Restricted Share equal to the price per Restricted Share. Such option shall expire 30 days after the date of the Offering Memorandum (as defined below), and may be exercised in whole or in part from time to time. Such option may be exercised upon notice by the Representatives to the Company setting forth the number of Option Restricted Shares as to which the several Initial Purchasers are then exercising the option and the time, date and place of payment and delivery for such Option Restricted Shares. Any such time and date of payment and delivery shall be determined by the Representatives, but shall not be later than seven full business days after the exercise of said option, nor, in any event, prior to the Time of Purchase (as defined below), unless otherwise agreed upon by the Representatives and the Company. Any such time and date of payment and delivery which falls after the Time of Purchase is referred to herein as a "Date of Option Delivery". If the option is exercised as to all or any portion of the Option Restricted Shares, each of the Initial Purchasers, severally and not jointly, will purchase that proportion of the number of Option Restricted Shares then being purchased which the number of Restricted Shares each such Initial Purchaser has severally agreed to purchase as set forth herein bears to the number of Restricted Shares, subject to such adjustments as the Representatives in their discretion shall make to eliminate any sales or purchases of an incremental number of Option Restricted Shares less than 1. As used herein, the term "Restricted Shares" shall include the Restricted Shares and all or any portion of any Option Restricted Shares. Holders (including subsequent transferees) of the Restricted Shares will have the registration rights set forth in the registration rights agreement in the form attached hereto as Exhibit A (the "Registration Rights Agreement"), to be dated the Time of Purchase, for so long as such Restricted Shares constitute Registrable Securities (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, the Company will agree to file with the Securities and Exchange Commission (the "Commission") a shelf registration statement (the "Registration Statement") pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Act") relating to the resale by certain holders of the Restricted Shares and the sale of the shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), issuable upon conversion of the Restricted Shares (the "Issuable Common Stock"), and to use its best efforts to cause such Registration Statement to be declared and remain effective and usable for the periods specified in the Registration Rights Agreement. This Agreement, the Restricted Shares, the Issuable Common Stock and the Registration Rights Agreement are hereinafter sometimes referred to collectively as the "Operative Documents". 1. Offering Memorandum: The Restricted Shares will be offered and sold to the Initial Purchasers pursuant to one or more exemptions from the registration requirements under the Act. The Company has prepared a preliminary offering memorandum dated December 1, 2003 (the "Preliminary Offering Memorandum") and a confidential offering memorandum dated December 1, 2003 (the "Offering Memorandum") relating to the Restricted Shares, which incorporate by reference documents filed by the Company pursuant to Section 13, 14 or 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As used herein, the term "Preliminary Offering Memorandum" and "Offering Memorandum" shall include respectively the documents incorporated by reference therein. Any reference herein to the terms "amend", "amendment" or "supplement" with respect to the Preliminary Offering Memorandum and Offering Memorandum shall be deemed to include amendments or supplements to the Preliminary Offering Memorandum and Offering Memorandum, and documents incorporated by reference after the time of execution of this Agreement and prior to the termination of the offering of the Restricted Shares by the Initial Purchasers. Upon original issuance thereof, and until such time as the same is no longer required pursuant to the certificate of designation relating to the Restricted Shares (the "Certificate of Designation"), the Restricted Shares and the Issuable Common Stock (and all securities issued in exchange therefor or in substitution thereof) shall bear the following legend: THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE 2 TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (IV) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, (V) TO CMS ENERGY CORPORATION OR (VI) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (VI) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN CLAUSE (A) ABOVE. THE HOLDER OF THIS SECURITY AGREES THAT SUCH HOLDER WILL NOT ENGAGE IN HEDGING TRANSACTIONS INVOLVING THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION HEREOF UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THIS SECURITY AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS SECURITY TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS SECURITY SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT. 3 THE HOLDER OF THIS SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS OF, A REGISTRATION RIGHTS AGREEMENT DATED AS OF DECEMBER 5, 2003 ENTERED INTO BY THE COMPANY FOR THE BENEFIT OF CERTAIN HOLDERS OF SECURITIES FROM TIME TO TIME. 2. Purchase and Sale: Upon the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to sell to the respective Initial Purchasers, severally and not jointly, and the respective Initial Purchasers, severally and not jointly, agree to purchase from the Company at the purchase price specified in Schedule I hereto (the "Purchase Price"), the respective numbers of Restricted Shares set opposite their names in Schedule I hereto. 3. Terms of Offering: The Initial Purchasers have advised the Company that the Initial Purchasers will make offers (the "Exempt Resales") of the Restricted Shares purchased hereunder on the terms set forth in the Offering Memorandum solely to persons whom the Initial Purchasers reasonably believe to be "qualified institutional buyers" as defined in Rule 144A under the Act or, at the time any buy order for the Restricted Shares was or is originated, were or are outside the United States and were or are not "U.S. persons" within the meaning of Regulation S under the Act (such persons being referred to herein as the "Eligible Purchasers"). The Initial Purchasers will offer the Restricted Shares to Eligible Purchasers initially at the offering price set forth on the cover page of the Offering Memorandum. Such price may be changed at any time without notice. 4. Payment and Delivery: Payment for the Restricted Shares shall be made to the Company in federal or other immediately available funds in New York City (or such other place or places of payment as shall be agreed upon by the Company and the Representatives in writing), upon the delivery of the Restricted Shares at the offices of Pillsbury Winthrop LLP ("PW"), at One Battery Park Plaza, New York, New York 10004-1490 (or such other place or places of delivery as shall be agreed upon by the Company and the Representatives) to the Representatives for the respective accounts of the Initial Purchasers against receipt therefor signed by the Representatives on behalf of themselves and as agent for the other Initial Purchasers. Such payment and delivery shall be made at 10:00 A.M., New York time on December 5, 2003 (or on such later business day as shall be agreed upon by the Company and the Representatives in writing), unless postponed in accordance with the provisions of Section 11 hereof. The day and time at which payment and delivery for the Restricted Shares (without regard to any Option Restricted Shares) are to be made is herein called the "Time of Purchase". In addition, in the event that the Initial Purchasers have exercised their option to purchase any or all of the Option Restricted Shares, payment of the purchase price for, and delivery of, such Option Restricted Shares shall be made at the above mentioned offices, or at such other place as shall be agreed upon by the Representatives and the Company on the relevant Date of Option Delivery as specified in the notice from the Representatives to the Company. Delivery of the Restricted Shares shall be made in definitive, fully registered form or global form, as specified by the Representatives, in authorized denominations registered in such names as the Representatives may request in writing to the Company not later than two full business days prior to the Time of Purchase, or, if no such request is received, in the names of 4 the respective Initial Purchasers for the respective numbers of Restricted Shares set forth opposite the name of each Initial Purchaser in Schedule I, in denominations selected by the Company. The certificates evidencing the Restricted Shares shall be delivered at the Time of Purchase for the account of the Initial Purchasers, with any transfer taxes payable in connection with the transfer of the Restricted Shares to the Initial Purchasers duly paid, against payment of the Purchase Price therefor. The Company agrees to make the Restricted Shares available for inspection by the Initial Purchasers at the offices of PW at least 24 hours prior to the Time of Purchase, in definitive, fully registered form, and as requested pursuant to the preceding paragraph. 5. Conditions of Initial Purchasers' Obligations: The several obligations of the Initial Purchasers hereunder are subject to the accuracy of the representations and warranties, at and as of the Time of Purchase, on the part of the Company, and to the following other conditions: (a) That all legal proceedings to be taken in connection with the issue and sale of the Restricted Shares shall be reasonably satisfactory in form and substance to PW, counsel to the Initial Purchasers. (b) That, at the Time of Purchase, the Representatives shall be furnished with the following opinions, dated the Time of Purchase: (i) Opinion of Robert C. Shrosbree, Esq., Assistant General Counsel of the Company, substantially to the effect set forth in Exhibit B attached hereto; (ii) Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Company, substantially to the effect set forth in Exhibit C-1 and Exhibit C-2 attached hereto; and (iii) Opinion of PW, counsel to the Initial Purchasers, in a form satisfactory to the Initial Purchasers. (c) (i) That, on the date hereof and at the Time of Purchase, the Representatives shall have received a letter from Ernst & Young LLP ("E&Y") in form and substance satisfactory to the Initial Purchasers, dated as of such date, (i) confirming that they are independent public accountants with respect to the Company within the meaning of the Act and the applicable published rules and regulations of the Commission thereunder, (ii) stating that in their opinion the financial statements examined by them and included or incorporated by reference in the Preliminary Offering Memorandum or Offering Memorandum, as the case may be, complied as to form in all material respects with the applicable accounting requirements of the Commission, including the applicable published rules and regulations of the Commission, and (iii) covering, as of a date not more than five business days prior to the date of such letter, such other matters as the Initial Purchasers reasonably request. (ii) That, on the date hereof and at the Time of Purchase, the Representatives shall have received a letter from each of PricewaterhouseCoopers LLP and Price Waterhouse, each in form and substance satisfactory to the Initial Purchasers, dated as of such 5 date, (i) confirming that each are independent public accountants with respect to (A) the Company and the Midland Cogeneration Venture Limited Partnership, in the case of PricewaterhouseCoopers LLP, and (B) the Company and Jorf Lasfar Energy Company S.C.A., in the case of Price Waterhouse, each within the meaning of the Act and the applicable published rules and regulations of the Commission thereunder, (ii) stating that in each of their opinions the financial statements examined by them and referred to in the letter of E&Y complied as to form in all material respects with the applicable accounting requirements of the Commission, including the applicable published rules and regulations of the Commission, and (iii) covering, as of a date not more than five business days prior to the date of such letter, such other matters as the Initial Purchasers reasonably request; provided, that the Initial Purchasers acknowledge that the Price Waterhouse letter received on the date hereof (but not the Price Waterhouse letter received at the Time of Purchase or either of the PricewaterhouseCoopers LLP letters) shall not be required to address October 2003 financial data. (d) Subsequent to the date hereof or, if earlier, the dates as of which information is given in the Offering Memorandum (exclusive of any amendment or supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in Section 5(c) hereof or (ii) any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries taken as a whole, except as set forth in or contemplated in the Offering Memorandum (exclusive of any amendment or supplement thereto), the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Representatives, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Restricted Shares as contemplated in the Offering Memorandum (exclusive of any amendment or supplement thereto). (e) That, at the Time of Purchase, the Company shall have delivered to the Representatives a certificate of an executive officer of the Company to the effect that, to the best of his or her knowledge, information and belief, (i) there shall have been no material adverse change in the condition (financial or otherwise), earnings, business or properties of the Company from that set forth in the Offering Memorandum (other than changes referred to in or contemplated by the Offering Memorandum) and (ii) the representations and warranties of the Company in this Agreement are true and correct on and as of the Time of Purchase with the same effect as if made at the Time of Purchase, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to the Time of Purchase. (f) That the Company shall have executed and delivered the Registration Rights Agreement. (g) That the Company shall have performed such of its obligations under this Agreement as are to be performed at or before the Time of Purchase by the terms hereof. (h) That the Company shall have complied with the provisions of Section 6(c) hereof with respect to the furnishing of the Offering Memorandum. 6 (i) That, at the Time of Purchase, the Restricted Shares shall be rated at least B by Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc. ("S&P"), Ca by Moody's Investors Service, Inc. ("Moody's") and B- by Fitch, Inc. ("Fitch"), and the Company shall have delivered to the Representatives a letter, dated the Time of Purchase, from each such rating agency, or other evidence reasonably satisfactory to the Representatives, confirming that the Restricted Shares have been assigned such ratings; and between the date of the execution of this Agreement and the Time of Purchase, there has been no downgrading or withdrawal of the investment ratings of the Restricted Shares, securities of the Company or securities of Consumers Energy Company by any nationally recognized statistical rating agency, and no such rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, any such rating. (j) In the event that the Initial Purchasers exercise their option to purchase all or any portion of the Option Restricted Shares, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company hereunder shall be true and correct as of each Date of Option Delivery, and, at the relevant Date of Option Delivery, the Representatives shall have received: (1) a certificate, dated such Date of Option Delivery, of an executive officer of the Company confirming that the certificate delivered at the Time of Purchase pursuant to Section 5(e) hereof remains true and correct as of such Date of Option Delivery; (2) opinions of Robert C. Shrosbree, Esq., Assistant General Counsel of the Company, Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Company, and PW, counsel to the Initial Purchasers, dated such Date of Option Delivery, relating to the Option Restricted Shares and otherwise to the same effect as the opinions required by Section 5(b) hereof; and (3) a letter from E&Y, dated such Date of Option Delivery, substantially in the same form and substance as the letter furnished to the Representatives pursuant to Section 5(c) hereof, except that the date specified in Section 5(c)(iii) hereof shall be a date not more than five days prior to such Date of Option Delivery. (k) At the Time of Purchase, the Issuable Common Stock shall have been duly listed, subject only to official notice of issuance, on The New York Stock Exchange. (l) The Restricted Shares shall have been designated as PORTAL-eligible securities in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. ("NASD") and the Restricted Shares shall be eligible for clearance and settlement through The Depository Trust Company ("DTC"). (m) At the Time of Purchase, the Company shall have furnished to the Representatives a letter substantially in the form of Exhibit D hereto addressed to the Representatives from each person listed in Schedule II hereto. 7 (n) That any additional documents or agreements reasonably requested by the Initial Purchasers or their counsel to permit the Initial Purchasers to perform their obligations or permit their counsel to deliver opinions hereunder shall have been provided to them. 6. Certain Covenants of the Company: In further consideration of the agreements of the Initial Purchasers herein contained, the Company covenants as follows: (a) To advise the Representatives promptly and, if requested by the Representatives, confirm such advice in writing, of the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of any Restricted Shares for offering or sale in any jurisdiction designated by the Initial Purchasers pursuant to Section 6(d) hereof, or the initiation of any proceeding by any state securities commission or any other federal or state regulatory authority for such purpose. The Company shall use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption of any Restricted Shares under any state securities or blue sky laws and, if at any time any state securities commission or other federal or state regulatory authority shall issue an order suspending the qualification or exemption of any Restricted Shares under any state securities or blue sky laws, the Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To deliver to the Initial Purchasers, without charge, as soon as practicable, as many copies of the Offering Memorandum (as supplemented or amended if the Company shall have made any supplements or amendments thereto) as the Initial Purchasers may reasonably request. Subject to the Initial Purchasers' compliance with their representations and warranties and agreements set forth in Section 8 hereof, the Company consents to the use of the Offering Memorandum, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchasers in connection with Exempt Resales. (c) For such period of time as the Initial Purchasers are required by law or customary practice to deliver an offering memorandum in respect of the Restricted Shares, if any event shall have occurred as a result of which it is necessary to amend or supplement the Offering Memorandum in order to make the statements therein, in light of the circumstances when the Offering Memorandum is delivered to an Eligible Purchaser, not misleading, or if it becomes necessary to amend or supplement the Offering Memorandum to comply with law, to forthwith prepare an appropriate amendment or supplement to the Offering Memorandum and deliver to the Initial Purchasers, without charge, such number of copies thereof as may be reasonably requested. (d) To use its best efforts to qualify the Restricted Shares for offer and sale under the securities or blue sky laws of such jurisdictions as the Initial Purchasers may designate and to pay (or cause to be paid), or reimburse (or cause to be reimbursed) the Initial Purchasers and their counsel for, reasonable filing fees and expenses in connection therewith (including the reasonable fees and disbursements of counsel to the Initial Purchasers and filing fees and expenses paid and incurred prior to the date hereof), provided, however, that the Company shall not be required to qualify to do business as a foreign corporation or as a securities dealer or to file a general consent to service of process or to file annual reports or to comply with any other requirements deemed by the Company to be unduly burdensome. 8 (e) So long as the Restricted Shares are outstanding, (i) to mail and make generally available as soon as practicable after the end of each fiscal year to the record holders of the Restricted Shares a financial report of the Company on a consolidated basis, all such financial reports to include a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of cash flows and a consolidated statement of shareholders' equity as of the end of and for such fiscal year, together with comparable information as of the end of and for the preceding year, certified by the Company's independent public accountants and (ii) to mail and make generally available as soon as practicable after the end of each quarterly period (except for the last quarterly period of each fiscal year) to such holders, a consolidated balance sheet, a consolidated statement of operations and a consolidated statement of cash flows as of the end of and for such period, and for the period from the beginning of such year to the close of such quarterly period, together with comparable information for the corresponding periods of the preceding year. (f) So long as any of the Restricted Shares or Issuable Common Stock are "restricted securities" within the meaning of Rule 144(a)(3) under the Act and remain outstanding and during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act, to make available to any holder of Restricted Shares in connection with any sale thereof and any prospective purchaser of such Restricted Shares from such holder, the information required by Rule 144A(d)(4) under the Act. (g) To pay all expenses, fees and taxes (other than transfer taxes on sales by the respective Initial Purchasers) in connection with the issuance and delivery of the Restricted Shares and the Issuable Common Stock, except that the Company shall be required to pay the fees and disbursements (other than disbursements referred to in Section 6(d) hereof) of PW, counsel to the Initial Purchasers, only in the events provided in Section 6(h) hereof, the Initial Purchasers hereby agreeing to pay such fees and disbursements in any other event, and that except as provided in such Section 6(h), the Company shall not be responsible for any out-of-pocket expenses of the Initial Purchasers in connection with their services hereunder. (h) If the Initial Purchasers shall not take up and pay for the Restricted Shares due to the failure of the Company to comply with any of the conditions specified in Section 5 hereof, or, if this Agreement shall be terminated in accordance with the provisions of Section 12 hereof prior to the Time of Purchase or the Date of Delivery, as the case may be, to pay the reasonable fees and disbursements of PW, counsel to the Initial Purchasers, and, if the Initial Purchasers shall not take up and pay for the Restricted Shares due to the failure of the Company to comply with any of the conditions specified in Section 5 hereof, to reimburse the Initial Purchasers for their reasonable out-of-pocket expenses not to exceed $10,000 incurred in connection with the financing contemplated by this Agreement. (i) During the period referred to in Section 6(c) hereof, to not amend or supplement the Offering Memorandum unless the Company has furnished the Initial Purchasers and counsel to the Initial Purchasers with a copy for their review and comment a reasonable time prior to the making of such amendment or supplement and has reasonably considered any comments of the Initial Purchasers, and not to make any such amendment or supplement to which such counsel shall reasonably object on legal grounds in writing after consultation with the Initial Purchasers. 9 (j) During the period referred to in Section 6(c) hereof, to furnish the Initial Purchasers with copies of all documents required to be filed with the Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (k) During the period referred to in Section 6(c) hereof, to comply with all requirements under the Exchange Act relating to the timely filing with the Commission of its reports pursuant to Section 13 or 15(d) of the Exchange Act and of its proxy statements pursuant to Section 14 of the Exchange Act. (l) To comply in all material respects with all of its agreements set forth in the Registration Rights Agreement. (m) To obtain the approval of DTC for "book-entry" transfer of the Restricted Shares, and to comply in all material respects with all of its agreements set forth in the representation letter or letters of the Company to DTC relating to the approval of the Restricted Shares by DTC for "book-entry" transfer. (n) Not to (or permit any affiliate (as defined in Rule 144 under the Act) to) sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) that would be integrated with the sale of the Restricted Shares to the Initial Purchasers or pursuant to Exempt Resales in a manner that would require the registration of any such sale of the Restricted Shares under the Act. (o) Not to voluntarily claim, and to actively resist any attempts to claim, the benefit of any usury laws against the holders of any Restricted Shares. (p) During the period of two years after the Time of Purchase, not to, and not permit any of its affiliates (as defined in Rule 144 under the Act) to, resell any of the Restricted Shares which constitute "restricted securities" under Rule 144 under the Act that have been reacquired by any of them. (q) To take all reasonable action necessary to enable S&P, Moody's and Fitch to provide their respective credit ratings of the Restricted Shares. (r) Until the second anniversary of the Time of Purchase, not to, and not to permit any affiliates under its control to, purchase any Restricted Shares or Issuable Common Stock unless, immediately upon any such purchase, the Company or any such affiliate shall (1) cancel such Restricted Shares and/or (2) treat such Issuable Common Stock as treasury shares ineligible for re-issuance. (s) Not to, and not to permit any of its affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to which no agreement is made) to, directly or indirectly, make offers or sales of any security, or solicit offers to buy any security, under circumstances that would require the registration of the Restricted Shares or the Issuable Common Stock under the Act. (t) The Company will reserve and keep available at all times, free of preemptive rights, the full number of shares of Issuable Common Stock. 10 (u) The Company will use its best efforts to effect the listing of the Issuable Common Stock, prior to the Time of Purchase, on The New York Stock Exchange subject only to official notice of issuance. (v) The Company will not for a period of 60 days following the date hereof, without the prior written consent of the Representatives, offer, sell or contract to sell, or otherwise dispose of (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company), directly or indirectly, or announce the offering of, any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, shares of Common Stock (other than the Restricted Shares); provided, however, that the Company may issue and sell Common Stock or securities convertible into or exchangeable for Common Stock pursuant to any employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company existing and in effect at the date hereof, and the Company may issue Common Stock issuable upon the conversion of securities or the exercise of warrants existing and outstanding at the date hereof. (w) Any information provided by the Company to publishers of publicly available databases about the terms of the Restricted Shares shall include a statement that the Restricted Shares have not been registered under the Act and are subject to restrictions under Rule 144A under the Act and Regulation S under the Act. (x) The Company will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Restricted Shares. (y) Between the date hereof and the Time of Purchase, the Company will not do or authorize any act or thing that would result in an adjustment of the conversion price. (z) The Company will cause the proceeds of the issuance and sale of the Restricted Shares to be applied for the purposes described in the Offering Memorandum. 7. Representations and Warranties of the Company: The Company represents and warrants to, and agrees with, each of the Initial Purchasers that: (a) Each of the Preliminary Offering Memorandum and the Offering Memorandum does not, and any supplement or amendment to it will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this Section 7(a) shall not apply to statements in or omissions from the Preliminary Offering Memorandum and the Offering Memorandum (or any supplement or amendment thereto) based upon information relating to the Initial Purchasers furnished to the Company in writing by the Initial Purchasers expressly for use therein. No stop order preventing the use of the Offering Memorandum, or any amendment or supplement thereto, or any order asserting that any of the 11 transactions contemplated by this Agreement are subject to the registration requirements of the Act, has been issued. (b) The documents incorporated by reference in the Preliminary Offering Memorandum and the Offering Memorandum, when they were filed (or, if an amendment with respect to any such document was filed, when such amendment was filed) with the Commission, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and any further documents so filed and incorporated by reference will, when they are filed with the Commission, conform in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder; none of such documents, when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and no such further document, when it is filed, will contain an untrue statement of a material fact or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. (c) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Michigan and has all requisite authority to own or lease its properties and conduct its business as described in the Preliminary Offering Memorandum and the Offering Memorandum and to consummate the transactions contemplated hereby, and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business as described in the Preliminary Offering Memorandum and the Offering Memorandum or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company. (d) The Restricted Shares have been duly authorized by the Company. At the Time of Purchase, when delivered against payment therefor as provided in this Agreement, the Restricted Shares will have been duly and validly issued, fully paid and non-assessable, and will be convertible into Common Stock in accordance with their terms. Each of the Restricted Shares and the Issuable Common Stock conform in all material respects to the descriptions thereof in the Preliminary Offering Memorandum and the Offering Memorandum. Each significant subsidiary (as defined in Rule 405 under the Act, and hereinafter called a "Significant Subsidiary") of the Company has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its formation, has all requisite authority to own or lease its properties and conduct its business as described in the Offering Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business as described in the Offering Memorandum or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Significant Subsidiaries, taken as a whole. (e) This Agreement has been duly authorized, executed and delivered by the Company, and the Company has full corporate power and authority to enter into this Agreement. 12 (f) The Registration Rights Agreement has been duly authorized by the Company. At the Time of Purchase, the Registration Rights Agreement will have been duly executed and delivered by the Company and will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). The Registration Rights Agreement conforms in all material respects to the description thereof in the Preliminary Offering Memorandum and the Offering Memorandum. (g) Except for the outstanding shares of preferred stock of Consumers Energy Company, the 8.36% Trust Originated Preferred Securities of Consumers Power Company Financing I, the 8.20% Trust Originated Preferred Securities of Consumers Energy Company Financing II, the 9 1/4% Trust Originated Preferred Securities of Consumers Energy Company Financing III, the 9.00% Trust Preferred Securities of Consumers Energy Company Financing IV and the 7 3/4% Convertible Quarterly Income Preferred Securities of CMS Energy Trust I, all of the outstanding capital stock of each of Consumers Energy Company and CMS Enterprises Company is owned directly or indirectly by the Company, free and clear of any security interest, claim, lien or other encumbrance (except as disclosed in the Offering Memorandum) or preemptive rights, and there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in any of Consumers Energy Company and CMS Enterprises Company or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any such capital stock, any such convertible or exchangeable securities or any such rights, warrants or options. (h) The Company has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct business in the manner described in the Preliminary Offering Memorandum and the Offering Memorandum, except to the extent that the failure to obtain or file would not have a material adverse effect on the Company. (i) No order, license, consent, authorization or approval of, or exemption by, or the giving of notice to, or the registration with, any federal, state, local or other governmental department, commission, board, bureau, agency or instrumentality, and no filing, recording, publication or registration in any public office or any other place, was or is now required to be obtained by the Company to authorize its execution or delivery of, or the performance of its obligations under, this Agreement or any of the other Operative Documents, except such as have been obtained or may be required under state securities or blue sky laws or as referred to in the Offering Memorandum. (j) None of the issuance, sale or conversion of the Restricted Shares, or the execution or delivery by the Company of, or the performance by the Company of its obligations under, this Agreement or the other Operative Documents, did or will conflict with, result in a breach of any of the terms or provisions of, or constitute a default or require the consent of any 13 party under, the Company's Articles of Incorporation or by-laws, any material agreement or instrument to which it is a party, any existing applicable law, rule or regulation or any judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its properties or assets, or did or will result in the creation or imposition of any lien on the Company's properties or assets. (k) Except as disclosed in the Offering Memorandum, there is no action, suit, proceeding, inquiry or investigation (at law or in equity or otherwise) pending or, to the knowledge of the Company, threatened against the Company, by any governmental authority that (i) questions the validity, enforceability or performance of this Agreement or any of the other Operative Documents or (ii) if determined adversely, is likely to have a material adverse effect on the business or financial condition of the Company, or materially adversely affect the ability of the Company to perform its obligations hereunder or the consummation of the transactions contemplated by this Agreement. (l) There has not been any material and adverse change in the business, properties, prospects or financial condition of the Company from that set forth or incorporated by reference in the Offering Memorandum (other than changes referred to in or contemplated by the Offering Memorandum). (m) Except as set forth in the Offering Memorandum, no event or condition exists that constitutes, or with the giving of notice or lapse of time or both would constitute, a default or any breach or failure to perform by the Company in any material respect under any indenture, mortgage, loan agreement, lease or other material agreement or instrument to which the Company is a party or by which it or any of its properties may be bound. (n) The Offering Memorandum, as of its date, contained all the information specified in, and met the requirements of, Rule 144A(d)(4) under the Act. (o) When the Restricted Shares are issued and delivered pursuant to this Agreement, the Restricted Shares and the Issuable Common Stock will not be of the same class (within the meaning of Rule 144A under the Act) as any security of the Company that is listed on a national securities exchange registered under Section 6 of the Exchange Act or that is quoted in a United States automated inter-dealer quotation system. No securities of the same class as the Restricted Shares have been issued and sold by the Company within the six-month period immediately prior to the date hereof. (p) Neither the Company nor any affiliate (as defined in Rule 144 under the Act) of the Company has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Act) which is or will be integrated with the sale of the Restricted Shares in a manner that would require the registration under the Act of the Restricted Shares or (ii) engaged in any form of general solicitation or general advertising in connection with the offering of the Restricted Shares (as those terms are used in Regulation D under the Act), or in any manner involving a public offering within the meaning of Section 4(2) of the Act, including, but not limited to, publication or release of articles, notices or other communications published in any newspaper, magazine, or similar 14 medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. (q) None of the Company nor any of its affiliates (as defined in Rule 144 under the Act) or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company makes no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S under the Act with respect to the Restricted Shares. (r) No registration under the Act of the Restricted Shares is required for the sale of the Restricted Shares to the Initial Purchasers as contemplated hereby or for the Exempt Resales (assuming the accuracy of the Initial Purchasers' representation and warranty and agreement set forth in Section 8 hereof). (s) The Company, after giving effect to the offering and sale of the Restricted Shares, will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (t) The Company has an authorized capitalization as set forth in the Offering Memorandum and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable. The shares of Issuable Common Stock have been duly and validly authorized and reserved for issuance by the Company and, when issued and delivered in accordance with the provisions of the Certificate of Designation, will be duly and validly issued, fully paid and non-assessable and will conform in all material respects to the description of the Common Stock contained in the Offering Memorandum and the issuance of the Issuable Common Stock is not, and will not be, subject to any preemptive or other similar right. (u) The Restricted Shares satisfy the eligibility requirements of Rule 144A(d)(3) under the Act. (v) The Company has been advised by the NASD's PORTAL Market that the Restricted Shares and the Issuable Common Stock have been designated PORTAL-eligible securities in accordance with the rules and regulations of the NASD. (w) The Company's chief executive officer and chief financial officer are responsible for establishing and maintaining the Company's disclosure controls and procedures. The Company's management, under the direction of the Company's principal executive and financial officers, has evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days of the filing of the Company's most recent annual report on Form 10-K/A. Based on such evaluation, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective to ensure that material information was presented to them and properly disclosed. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to such evaluation. (x) Except as described in the Offering Memorandum and except as would not, singly or in the aggregate, result in a material adverse effect on the Company, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, 15 law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products, asbestos-containing materials or mold (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that would reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. The Company acknowledges that the Initial Purchasers and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 5 hereof, counsel to the Company and counsel to the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 8. Representations and Warranties of Initial Purchasers: Upon the authorization by the Initial Purchasers of the release of the Restricted Shares, the Initial Purchasers propose to offer the Restricted Shares for sale upon the terms and conditions set forth in this Agreement and the Offering Memorandum and the Initial Purchasers hereby represent and warrant to, and agree with, the Company that: (a) they each will offer and sell the Restricted Shares only to Eligible Purchasers; (b) they each are Accredited Investors (as defined in Regulation D under the Act); and (c) they each will not offer or sell the Restricted Shares by any form of general solicitation or general advertising, including, but not limited to, the methods described in Rule 502(c) under the Act. 9. Indemnification: (a) The Company agrees, to the extent permitted by law, to indemnify and hold harmless each of the Initial Purchasers and each person, if any, who controls any such Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or otherwise, and to reimburse the Initial Purchasers 16 and such controlling person or persons, if any, for any legal or other expenses incurred by them in connection with defending any action, suit or proceeding (including governmental investigations) as provided in Section 9(c) hereof, insofar as such losses, claims, damages, liabilities or actions, suits or proceedings (including governmental investigations) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Offering Memorandum or the Offering Memorandum, or, if the Preliminary Offering Memorandum or the Offering Memorandum shall be amended or supplemented, in the Preliminary Offering Memorandum or the Offering Memorandum as so amended or supplemented or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any such untrue statement or alleged untrue statement or omission or alleged omission which was made in the Preliminary Offering Memorandum or the Offering Memorandum or in the Preliminary Offering Memorandum or the Offering Memorandum as so amended or supplemented, in reliance upon and in conformity with information furnished in writing to the Company by, or through the Representatives on behalf of, any Initial Purchaser expressly for use therein and except that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability or action, suit or proceeding arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Offering Memorandum if copies of the Offering Memorandum were timely delivered to the Initial Purchasers pursuant to Section 6 hereof and a copy of the Offering Memorandum (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Initial Purchasers to the person asserting such loss, claim, damage or liability or action, suit or proceeding and if the Offering Memorandum (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability or action, suit or proceeding. The Company's indemnity agreement contained in this Section 9(a), and the covenants, representations and warranties of the Company contained in this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any person, and shall survive the delivery of and payment for the Restricted Shares hereunder, and the indemnity agreement contained in this Section 9 shall survive any termination of this Agreement. The liabilities of the Company in this Section 9(a) are in addition to any other liabilities of the Company under this Agreement or otherwise. (b) Each Initial Purchaser agrees, severally and not jointly, to the extent permitted by law, to indemnify, hold harmless and reimburse the Company, each other Initial Purchaser, and each person, if any, who controls the Company or any such other Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent and upon the same terms as the indemnity agreement of the Company set forth in Section 9(a) hereof, but only with respect to alleged untrue statements or omissions made in the Preliminary Offering Memorandum or the Offering Memorandum, as amended or supplemented (if applicable), in reliance upon and in conformity with information furnished in writing to the Company by such Initial Purchaser expressly for use therein. The indemnity agreement on the part of each Initial Purchaser contained in this Section 9(b) and the representations and warranties of such Initial Purchaser contained in this 17 Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other person, and shall survive the delivery of and payment for the Restricted Shares hereunder, and the indemnity agreement contained in this Section 9(b) shall survive any termination of this Agreement. The liabilities of each Initial Purchaser in this Section 9(b) are in addition to any other liabilities of such Initial Purchaser under this Agreement or otherwise. (c) If a claim is made or an action, suit or proceeding (including governmental investigations) is commenced or threatened against any person as to which indemnity may be sought under Section 9(a) or 9(b) hereof, such person (the "Indemnified Person") shall notify the person against whom such indemnity may be sought (the "Indemnifying Person") promptly after any assertion of such claim threatening to institute an action, suit or proceeding or if such an action, suit or proceeding is commenced against such Indemnified Person, promptly after such Indemnified Person shall have been served with a summons or other first legal process, giving information as to the nature and basis of the claim. Failure to so notify the Indemnifying Person shall not, however, relieve the Indemnifying Person from any liability which it may have on account of the indemnity under Section 9(a) or 9(b) hereof if the Indemnifying Person has not been prejudiced in any material respect by such failure. Subject to the immediately succeeding sentence, the Indemnifying Person shall assume the defense of any such litigation or proceeding, including the employment of counsel and the payment of all expenses, with such counsel being designated, subject to the immediately succeeding sentence, in writing by the Representatives in the case of parties indemnified pursuant to Section 9(b) hereof and by the Company in the case of parties indemnified pursuant to Section 9(a) hereof. Any Indemnified Person shall have the right to participate in such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include (x) the Indemnifying Person and (y) the Indemnified Person and, in the written opinion of counsel to such Indemnified Person, representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and expenses of counsel (including disbursements) for such Indemnified Person shall be reimbursed by the Indemnifying Person to the Indemnified Person. If there is a conflict as described in clause (ii) above, and the Indemnified Persons have participated in the litigation or proceeding utilizing separate counsel whose fees and expenses have been reimbursed by the Indemnifying Person and the Indemnified Persons, or any of them, are found to be solely liable, such Indemnified Persons shall repay to the Indemnifying Person such fees and expenses of such separate counsel as the Indemnifying Person shall have reimbursed. It is understood that the Indemnifying Person shall not, in connection with any litigation or proceeding or related litigation or proceedings in the same jurisdiction as to which the Indemnified Persons are entitled to such separate representation, be liable under this Agreement for the reasonable fees and out-of-pocket expenses of more than one separate firm (together with not more than one appropriate local counsel) for all such Indemnified Persons. Subject to the next paragraph, all such fees and expenses shall be reimbursed by payment to the Indemnified Persons of such reasonable fees and expenses of counsel promptly after payment thereof by the Indemnified Persons. 18 In furtherance of the requirement above that fees and expenses of any separate counsel for the Indemnified Persons shall be reasonable, the Initial Purchasers and the Company agree that the Indemnifying Person's obligations to pay such fees and expenses shall be conditioned upon the following: (1) in case separate counsel is proposed to be retained by the Indemnified Persons pursuant to clause (ii) of the preceding paragraph, the Indemnified Persons shall in good faith fully consult with the Indemnifying Person in advance as to the selection of such counsel; (2) reimbursable fees and expenses of such separate counsel shall be detailed and supported in a manner reasonably acceptable to the Indemnifying Person (but nothing herein shall be deemed to require the furnishing to the Indemnifying Person of any information, including, without limitation, computer print-outs of lawyers' daily time entries, to the extent that, in the judgment of such counsel, furnishing such information might reasonably be expected to result in a waiver of any attorney-client privilege); and (3) the Company and the Representatives shall cooperate in monitoring and controlling the fees and expenses of separate counsel for Indemnified Persons for which the Indemnifying Person is liable hereunder, and the Indemnified Person shall use reasonable effort to cause such separate counsel to minimize the duplication of activities as between themselves and counsel to the Indemnifying Person. The Indemnifying Person shall not be liable for any settlement of any litigation or proceeding effected without the written consent of the Indemnifying Person, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees, subject to the provisions of this Section 9, to indemnify the Indemnified Person from and against any loss, damage, liability or expenses by reason of such settlement or judgment. The Indemnifying Person shall not, without the prior written consent of the Indemnified Persons, effect any settlement of any pending or threatened litigation, proceeding or claim in respect of which indemnity has been properly sought by the Indemnified Persons hereunder, unless such settlement includes an unconditional release by the claimant of all Indemnified Persons from all liability with respect to claims which are the subject matter of such litigation, proceeding or claim. (d) If the indemnification provided for in Section 9 above is unavailable to or insufficient to hold harmless an Indemnified Person under this Section 9 in respect of any losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof) referred to therein, then each Indemnifying Person under this Section 9 shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other from the offering of the Restricted Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each Indemnifying Person shall contribute to such amount paid or payable 19 by such Indemnified Person in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of each Indemnifying Person, if any, on the one hand and the Indemnified Person on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Initial Purchasers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the total discounts or commissions received by the Initial Purchasers, in each case as set forth in the Offering Memorandum, bear to the aggregate offering price of the Restricted Shares. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Initial Purchasers on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 9(d) were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 9(d). The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental proceedings) in respect thereof) referred to above in this Section 9(d) shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such actions, suits or proceedings (including governmental proceedings) or claim, provided that the provisions of this Section 9 have been complied with (in all material respects) in respect of any separate counsel for such Indemnified Person. Notwithstanding the provisions of this Section 9(d), in no case shall any Initial Purchaser be responsible for any amount in excess of the purchase discount or commission applicable to the Restricted Shares purchased by such Initial Purchaser hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations in this Section 9(d) to contribute are several in proportion to their respective obligations and not joint. The agreement with respect to contribution contained in this Section 9(d) shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any Initial Purchaser, and shall survive delivery of and payment for the Restricted Shares hereunder and any termination of this Agreement. 10. Survival: The respective indemnities, agreements, representations, warranties and other statements of the Company and the Initial Purchasers as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of the Initial Purchasers or any controlling person of the Initial Purchasers, the Company, or any officer, director or controlling person of the Company, and shall survive delivery of and payment for the Restricted Shares. 20 11. Substitution of Initial Purchasers: If any Initial Purchaser under this agreement shall fail or refuse (otherwise than for some reason sufficient to justify in accordance with the terms hereof, the termination of its obligations hereunder) to purchase the Restricted Shares which it had agreed to purchase at the Time of Purchase or any applicable Date of Option Delivery, the Representatives shall immediately notify the Company and the Representatives and the other Initial Purchasers may, within 36 hours of the giving of such notice, determine to purchase, or to procure one or more other members of the NASD (or, if not members of the NASD, who are foreign banks, dealers or institutions not registered under the Exchange Act and who agree in making sales to comply with the NASD's Rules of Fair Practice), satisfactory to the Company, to purchase, upon the terms herein set forth, the number of Restricted Shares which the defaulting Initial Purchaser had agreed to purchase. If any non-defaulting Initial Purchaser or Initial Purchasers shall determine to exercise such right, the Representatives shall give written notice to the Company of such determination within 36 hours after the Company shall have received notice of any such default, and thereupon the Time of Purchase or Date of Option Delivery, as the case may be, shall be postponed for such period, not exceeding three business days, as the Company shall determine. If, in the event of such a default, the Representatives shall fail to give such notice, or shall within such 36-hour period give written notice to the Company that no other Initial Purchaser or Initial Purchasers, or others, will exercise such right, then this Agreement may be terminated by the Company, upon like notice given to the Representatives within a further period of 36 hours. If in such case the Company shall not elect to terminate this Agreement, it shall have the right, irrespective of such default: (a) to require such non-defaulting Initial Purchasers to purchase and pay for the respective number of Restricted Shares which they had severally agreed to purchase hereunder, as herein above provided, and, in addition, the number of Restricted Shares which the defaulting Initial Purchaser shall have so failed to purchase up to a number thereof equal to one-ninth (1/9) of the respective number of Restricted Shares which such non-defaulting Initial Purchasers have otherwise agreed to purchase hereunder; and/or (b) to procure one or more other members of the NASD (or, if not members of the NASD, who are foreign banks, dealers or institutions not registered under the Exchange Act and who agree in making sales to comply with the NASD's Rules of Fair Practice) to purchase, upon the terms herein set forth, the number of Restricted Shares which such defaulting Initial Purchaser had agreed to purchase, or that portion thereof which the remaining Initial Purchasers shall not be obligated to purchase pursuant to Section 11(a) hereof. In the event the Company shall exercise its rights under Section 11(a) and/or Section 11(b) hereof, the Company shall give written notice thereof to the Representatives within such further period of 36 hours, and thereupon the Time of Purchase or the Date of Option Delivery, as the case may be, shall be postponed for such period, not exceeding five business days, as the Company shall determine. In the event the Company shall be entitled to but shall not elect to exercise its rights under Section 11(a) and/or Section 11(b) hereof, the Company shall be deemed to have elected to terminate this Agreement. Any action taken by the Company under this Section 11 shall not relieve any defaulting Initial Purchaser from liability in respect of any default of such Initial Purchaser under this 21 Agreement. Termination by the Company under this Section 11 shall be without any liability on the part of the Company or any non-defaulting Initial Purchaser. In the computation of any period of 36 hours referred to in this Section 11, there shall be excluded a period of 24 hours in respect of each Saturday, Sunday or legal holiday which would otherwise be included in such period of time. 12. Termination of Agreement: This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time prior to the Time of Purchase or any applicable Date of Option Delivery by the Representatives if, prior to such time, any of the following events shall have occurred: (i) trading in the Company's Common Stock shall have been suspended by the Commission or the New York Stock Exchange or trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such exchange; (ii) a banking moratorium shall have been declared either by U.S. federal or New York State authorities; or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war or other calamity or crisis the effect of which on the financial markets of the United States is such as to impair, in the sole judgment of the Representatives, the marketability of the Restricted Shares. If the Representatives elect to terminate this Agreement, as provided in this Section 12, the Representatives will promptly notify the Company and each other Initial Purchaser by telephone or telecopy, confirmed by letter. If this Agreement shall not be carried out by any Initial Purchaser for any reason permitted hereunder, or if the sale of the Restricted Shares to the Initial Purchasers as herein contemplated shall not be carried out because the Company is not able to comply with the terms hereof, the Company shall not be under any obligation under this Agreement and shall not be liable to any Initial Purchaser or to any member of any selling group for the loss of anticipated profits from the transactions contemplated by this Agreement and the Initial Purchasers shall be under no liability to the Company nor be under any liability under this Agreement to one another. Notwithstanding the foregoing, the provisions of Sections 6(g), 6(h), 9 and 10 shall survive any termination of this Agreement. 13. Notices: All notices hereunder shall, unless otherwise expressly provided, be in writing and be delivered at or mailed to the following addresses or be sent by telecopy as follows: (i) if to the Initial Purchasers or the Representatives, to Citigroup Global Markets Inc., 388 Greenwich Street, New York, New York 10013, Attention: General Counsel (Telecopy 212-816-7912), and Merrill Lynch, Pierce, Fenner & Smith Incorporated, 4 World Financial Center, New York, New York 10080, Attention: Jeff Kulik (Telecopy 212-449-1787); and (ii) if to the Company, to CMS Energy Corporation, One Energy Plaza, Jackson, Michigan 49201, Attention: Executive Vice President and Chief Financial Officer (Telecopy 517-788-2186). 14. Parties in Interest: This Agreement has been and is made solely for the benefit of the Initial Purchasers, the Company, the Initial Purchasers' directors and officers and the 22 controlling persons, if any, referred to herein, and their respective successors, assigns, executors and administrators, and, except as expressly otherwise provided in Section 11 hereof, no other person shall acquire or have any right under or by virtue of this Agreement. 15. Definition of Certain Terms: All obligations of the Initial Purchasers hereunder are several and not joint. The term "successors" as used in this Agreement shall not include any purchaser, as such purchaser, of any of the Restricted Shares from any of the respective Initial Purchasers. 16. Governing Law: This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 17. Waiver of Tax Confidentiality: Notwithstanding anything herein to the contrary, purchasers of the Restricted Shares (and each employee, representative or other agent of such purchasers) may disclose to any and all persons, without limitation of any kind, the U.S. federal and state tax treatment and U.S. federal and state tax structure of any transaction contemplated herein and all materials of any kind (including opinions or other tax analyses) that are provided to the purchasers of the Restricted Shares relating to such U.S. federal and state tax treatment and U.S. federal and state tax structure, other than any information for which nondisclosure is reasonably necessary in order to comply with applicable securities laws. 18. Counterparts: This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. 23 If the foregoing is in accordance with your understanding, please sign and return to us counterparts hereof, and, upon the acceptance hereof by you, this letter and such acceptance hereof shall constitute a binding agreement between each of the Initial Purchasers and the Company. Very truly yours, CMS ENERGY CORPORATION By: /s/ Thomas J. Webb ------------------------ Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer Confirmed and accepted as of the date first written above: CITIGROUP GLOBAL MARKETS INC. As Representative of the several Initial Purchasers named in Schedule I hereto By: CITIGROUP GLOBAL MARKETS INC. By: /s/ Jane Sadowski ------------------------- Name: Jane Sadowski Title: Managing Director MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED As Representative of the several Initial Purchasers named in Schedule I hereto By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Jeff Kulik ------------------------- Name: Jeff Kulik Title: Vice President SCHEDULE I
Number of Initial Purchasers Restricted Shares Purchase Price ------------------ ----------------- -------------- Citigroup Global Markets Inc. 1,485,000 $ 72,022,500 Merrill Lynch, Pierce, Fenner & Smith 1,485,000 $ 72,022,500 Incorporated J.P. Morgan Securities, Inc. 900,000 $ 43,650,000 Deutsche Bank Securities Inc. 270,000 $ 13,095,000 Wachovia Capital Markets, LLC 270,000 $ 13,095,000 Banc One Capital Markets, Inc. 90,000 $ 4,365,000 ------------ ------------ Total 4,500,000 $218,250,000 ============ ============
I-1 SCHEDULE II 1. John F. Drake 2. James J. Duderstadt 3. Carl L. English 4. Thomas W. Elward 5. Kathleen R. Flaherty 6. Earl D. Holton 7. David W. Joos 8. David G. Mengebier 9. Michael T. Monahan 10. Joseph F. Paquette Jr. 11. William U. Parfet 12. Percy A. Pierre 13. John G. Russell 14. S. Kinnie Smith, Jr. 15. Kenneth L. Way 16. Thomas J. Webb 17. Ken Whipple 18. John B. Yasinsky II-1 EXHIBIT A This Registration Rights Agreement (this "Agreement") is made and entered into this 5th day of December, 2003 among CMS Energy Corporation, a Michigan corporation (the "Company"), and Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives (the "Representatives") of the Initial Purchasers (the "Initial Purchasers") listed on Schedule I to the Purchase Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement dated December 1, 2003, among the Company and the Representatives on behalf of the Initial Purchasers (the "Purchase Agreement"), which provides for the sale by the Company to the Initial Purchasers of an aggregate of 4,500,000 shares of the Company's 4.50% Cumulative Convertible Preferred Stock (the "Firm Shares") and the granting by the Company to the Initial Purchasers of the option to purchase an additional 500,000 shares of such Cumulative Convertible Preferred Stock to cover over-allotments, if any (the "Option Shares" and, together with the Firm Shares, the "Shares"). The Shares are convertible into shares of common stock, par value $0.01 per share, of the Company at the initial conversion price set forth in the Offering Memorandum dated December 1, 2003. In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Additional Dividends" shall have the meaning set forth in Section 2(c)(i) hereof. "Additional Dividends Payment Date" shall have the meaning set forth in Section 2(c)(ii) hereof. "Affiliate" of any specified Person shall mean any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any specified Person shall mean the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" shall have meanings correlative to the foregoing. "Agreement" shall have the meaning set forth in the preamble. "Applicable Conversion Price" shall mean, as of any date of determination, the number of Shares as of such date of determination divided by the Conversion Rate (as defined below) in effect as of such date of determination or, if no Shares are then outstanding, the Conversion Rate that would be in effect were Shares then outstanding. A-1 "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. "Closing Date" shall mean the later of (i) the date on which the Firm Shares are issued and (ii) the date on which the Option Shares are issued. "Company" shall have the meaning set forth in the preamble and shall also include the Company's successors. "Conversion Rate" shall mean 5.0541 shares of common stock, par value $0.01 per share, of the Company per share of Preferred Stock. "Depositary" shall mean The Depository Trust Company, or any other depositary for the Securities (as defined below) appointed by the Company; provided, however, that such depositary must have an address in the Borough of Manhattan, in The City of New York. "Firm Closing Date" shall mean the date on which the Firm Shares are issued. "Firm Shares" shall have the meaning set forth in the preamble. "Holder" shall mean an Initial Purchaser, for so long as it owns any Registrable Securities (as defined below), and each of its successors, assigns and direct and indirect transferees who become owners of Registrable Securities. "Indemnified Holder" shall have the meaning set forth in Section 4(a) hereof. "Indemnified Person" shall have the meaning set forth in Section 4(c) hereof. "Indemnifying Person" shall have the meaning set forth in Section 4(c) hereof. "Initial Purchasers" shall have the meaning set forth in the preamble. "Majority Holders" shall mean, on any date, Holders of a majority of the outstanding shares of Stock (as defined below) constituting Registrable Securities; provided, that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company and other obligors on the Securities or any Affiliate of the Company or other obligor shall be disregarded in determining whether such consent or approval was given by the Holders of such required percentage amount. For the purposes of this definition, Holders of Shares constituting Registrable Securities shall be deemed to be Holders of the number of shares of Stock into which such Shares are or would be convertible as of such date. "Material Event" shall have the meaning set forth in Section 3(f) hereof. "Notice and Questionnaire" shall mean a written notice delivered to the Company substantially in the form attached as Appendix I to the Offering Memorandum. A-2 "Notice Holder" shall mean, on any date, any Holder that has delivered a Notice and Questionnaire to the Company on or prior to such date. "Option Shares" shall have the meaning set forth in the preamble. "Person" shall mean any individual, corporation, partnership, joint venture, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof. "Prospectus" shall mean the prospectus included in the Shelf Registration Statement (as defined below), including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble. "Registrable Securities" shall mean the Securities; provided, however, that Securities shall cease to be Registrable Securities when (i) a Shelf Registration Statement with respect to such Securities shall have been declared effective under the Act and such Securities shall have been disposed of pursuant to such Shelf Registration Statement, (ii) such Securities have been sold to the public pursuant to Rule 144 under the Act or may be sold pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the Act or (iii) such Securities shall have ceased to be outstanding. "Registration Default" shall have the meaning set forth in Section 2(c)(i) hereof. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including, without limitation: (i) all Commission, stock exchange or NASD registration and filing fees, including, if applicable, the reasonable fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained by any Holder of Registrable Securities in accordance with the rules and regulations of the NASD; (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of one counsel for the placement agent or underwriters, if any, in connection with blue sky qualification of any of the Registrable Securities and any filings with the NASD); (iii) all expenses of any Persons in preparing or assisting in preparing word processing, printing and distributing any Shelf Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, any securities sales agreements and any other documents relating to the performance of and compliance with this Agreement; (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges; (v) all rating agency fees; (vi) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance; (vii) the fees and expenses A-3 of the transfer agent (if not the Company) and any escrow agent or custodian; (viii) the reasonable fees and disbursements of one firm, at any one time, of legal counsel selected by the Representatives (subject to the reasonable approval of the Company) to represent the Holders of Registrable Securities, which firm shall be PW unless otherwise requested in writing by the Majority Holders; and (ix) any reasonable fees and disbursements of the underwriters customarily required to be paid by issuers or sellers of securities and the fees and expenses of any special experts retained by the Company in connection with any Shelf Registration Statement, but excluding underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. "Representatives" shall have the meaning set forth in the preamble. "Securities" shall mean collectively the Shares and the Stock. "Shares" shall have the meaning set forth in the preamble. "Shelf Registration" shall mean a registration effected pursuant to Section 2(a) hereof. "Shelf Registration Filing Date" shall have the meaning set forth in Section 2(a)(i) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(a) hereof which covers all of the Registrable Securities on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Stock" shall mean the shares of common stock of the Company, par value $0.01 per share, into which the Shares are convertible or that have been issued upon any conversion of the Shares into common stock of the Company. "Suspension Period" shall have the meaning set forth in Section 2(a)(i) hereof. 2. Registration Under the Act. (a) Shelf Registration. (i) The Company agrees to use reasonable commercial efforts to file under the Act as promptly as practicable after the time that the Company becomes eligible to file registration statements on Form S-3 under the Act but in any event within 11 months after the Firm Closing Date (the "Shelf Registration Filing Date") a Shelf Registration Statement providing for the registration of, and the sale on a continuous or delayed basis by the Holders of, all of the Registrable Securities, pursuant to Rule 415 under the Act or any similar rule that may be adopted by the Commission. If the Company is not eligible to file registration statements on Form S-3 under the Act before the Shelf Registration Filing Date, then the Company shall file a Shelf Registration A-4 Statement on whatever form is then available for the Company to use. The Company agrees to use its reasonable commercial efforts to cause the Shelf Registration Statement to become or be declared effective within 120 days after the Shelf Registration Filing Date and to keep such Shelf Registration Statement continuously effective until the earliest of (i) the date on which all Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to such Shelf Registration Statement, (ii) the date on which all Registrable Securities have been sold pursuant to Rule 144 under the Act, (iii) such time as there are no longer any Registrable Securities outstanding and (iv) the second anniversary of the Closing Date (plus, in each case, the number of days in any Suspension Period); provided, however, that upon the occurrence of any event or the discovery of any facts as contemplated by Section 3(f)(iv) hereof, the Company shall not be obligated to keep the Shelf Registration Statement effective or to permit the use of any Prospectus forming a part of the Shelf Registration Statement if the Company promptly thereafter complies with the requirements of Section 3(k) hereof; provided, further, that the failure to keep the Shelf Registration Statement effective and usable for offers and sales of Registrable Securities for such reason shall last no longer than 45 consecutive calendar days or no more than an aggregate of 90 calendar days during any consecutive twelve-month period (whereafter a Registration Default shall occur and Additional Dividends shall accumulate as set forth in Section 2.4(A)(v) hereof); any such period during which the Company is so excused from keeping the Shelf Registration Statement effective and usable for offers and sales of Registrable Securities is referred to herein as a "Suspension Period"; a Suspension Period shall commence on and include the date that the Company gives notice to the Holders that the Shelf Registration Statement is no longer effective or the Prospectus included therein is no longer usable for offers and sales of Registrable Securities as a result of the application of the proviso of the foregoing sentence, stating the reason therefor, and shall end on the earlier to occur of the date on which each seller of Registrable Securities covered by the Shelf Registration Statement either receives the copies of the supplemented or amended Prospectus or is advised in writing by the Company that use of the Prospectus may be resumed. (ii) Each Holder of Registrable Securities agrees that if such Holder wishes to sell Registrable Securities pursuant to the Shelf Registration Statement and related Prospectus, it will do so only in accordance with this Section 2(a)(ii) and the last paragraph of Section 3 hereof. To be named a selling holder in the Shelf Registration Statement when it first becomes effective, Holders must deliver a Notice and Questionnaire to the Company at least five (5) Business Days prior to the effectiveness of the Shelf Registration Statement. From and after the date the Shelf Registration Statement is declared effective, the Company shall, as promptly as is practicable after the date a Notice and Questionnaire is delivered, and in any event within five (5) Business Days after such date, (1) if required by applicable law, file with the Commission a post-effective amendment to the Shelf Registration Statement or prepare and, if required by applicable law, file a supplement to the related Prospectus or an amendment or supplement to any document incorporated therein by reference or file any other required document (including, if required, a new or amended Shelf Registration Statement) so that the Holder delivering such Notice and Questionnaire is named as a selling holder in the Shelf Registration Statement and the related Prospectus and so that such Holder is permitted to deliver such Prospectus to purchasers of the Registrable Securities in A-5 accordance with applicable law and, if the Company shall file a post-effective amendment to the Shelf Registration Statement, use commercially reasonable efforts to cause such post-effective amendment to be declared effective under the Act as promptly as is practicable, (2) provide such Holder copies of any documents filed pursuant to Section 2(a)(ii)(1) hereof and (3) notify such Holder as promptly as practicable after the effectiveness under the Act of any post-effective amendment filed pursuant to Section 2(a)(ii)(1) hereof; provided, that if such Notice and Questionnaire is delivered during a Suspension Period, the Company shall so inform the Holder delivering such Notice and Questionnaire and shall take the actions set forth in clauses (1), (2) and (3) above upon expiration of the Suspension Period. Notwithstanding anything contained herein to the contrary, the Company shall be under no obligation to name any Holder that is not a Notice Holder as a selling holder in the Shelf Registration Statement or related Prospectus; provided, however, that any Holder that becomes a Notice Holder pursuant to the provisions of this Section 2(a)(ii) (whether or not such Holder was a Notice Holder at the time the Shelf Registration Statement was declared effective) shall be named as a selling holder in the Shelf Registration Statement or related Prospectus in accordance with the requirements of this Section 2(a)(ii). (iii) The Company shall not permit any securities other than Registrable Securities to be included in the Shelf Registration Statement. The Company further agrees, if necessary, to supplement or amend the Shelf Registration Statement, as required by Section 3(b) hereof, and to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the Commission. (b) Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) hereof and the performance of its obligations under Section 2(a) and Section 3 hereof. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. (c) Interest. (i) If any of the following events (any such event a "Registration Default") shall occur, then additional dividends (the "Additional Dividends") shall become payable to Holders in respect of the Securities as follows: (1) if the Shelf Registration Statement is not filed with the Commission by the Shelf Registration Filing Date, then commencing on the day immediately after the Shelf Registration Filing Date, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such day immediately after the Shelf Registration Filing Date and at a rate of 0.50% per annum thereafter; A-6 (2) if the Shelf Registration Statement is not declared effective by the Commission within 120 days following the Shelf Registration Filing Date, then commencing on the 121st day after the Shelf Registration Filing Date, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such 121st day after the Shelf Registration Filing Date and at a rate of 0.50% per annum thereafter; (3) if the Company has failed to perform its obligations set forth in Section 2(a)(ii) hereof within the time periods required therein, then commencing on the first day after the date by which the Company was required to perform such obligations, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 days and at a rate of 0.50% per annum thereafter; (4) if the Shelf Registration Statement has been declared effective but such Shelf Registration Statement ceases to be effective at any time (other than as specifically permitted in Section 2(a)(i) hereof) without being succeeded within 30 days by an amendment thereto or an additional registration statement filed and declared effective, then commencing on the day such Shelf Registration Statement ceases to be effective, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 days following such date on which the Shelf Registration Statement ceases to be effective and at a rate of 0.50% per annum thereafter; or (5) if the aggregate duration of Suspension Periods in any period exceeds the number of days permitted in respect of such period pursuant to Section 2(a)(i) hereof, then commencing on the day the aggregate duration of Suspension Periods in any period exceeds the number of days permitted in respect of such period, Additional Dividends shall accumulate on the outstanding Shares that are Registrable Securities and on the Applicable Conversion Price of any outstanding Stock that are Registrable Securities at a rate of 0.25% per annum for the first 90 days and at a rate of 0.50% per annum thereafter; provided, however, that the Additional Dividends on the Securities shall not exceed in the aggregate 0.50% per annum and shall not be payable under more than one clause above for any given period of time, except that if Additional Dividends would be payable under more than one clause above, but at a rate of 0.25% per annum under one clause and at a rate of 0.50% per annum under the other, then the Additional Dividends rate shall be the higher rate of 0.50% per annum; provided, further, however, that (1) upon the filing of the Shelf Registration Statement (in the case of Section 2(c)(i)(1) hereof), (2) upon the effectiveness of the Shelf Registration Statement (in the case of Section 2(c)(i)(2) A-7 hereof), (3) upon the Company's performing its obligations set forth in Section 2(a)(ii) hereof (in the case of Section 2(c)(i)(3) hereof), (4) upon the effectiveness of the Shelf Registration Statement which had ceased to remain effective (in the case of Section 2(c)(i)(4) hereof) or (5) upon the termination of the Suspension Period that caused the limit on the aggregate duration of Suspension Periods in a period set forth in Section 2(a)(i) hereof to be exceeded (in the case of Section 2(c)(i)(5) hereof), Additional Dividends on the Securities as a result of such Section, as the case may be, shall cease to accumulate. (ii) Additional Dividends on the Securities, if any, will be payable in cash on March 1, June 1, September 1 and December 1 of each year (the "Additional Dividends Payment Date") to holders of record of outstanding Registrable Securities on each preceding February 15, May 15, August 15 and November 15, respectively. The date of determination of the Applicable Conversion Price of any outstanding Stock that are Registrable Securities shall be the Business Day immediately preceding the Additional Dividends Payment Date; provided, that in the case of an event of the type described in Section 2(c)(i)(3) hereof, such Additional Dividends shall be paid only to the Holders that have delivered Notice and Questionnaires that caused the Company to incur the obligations set forth in Section 2(a)(ii) hereof, the non-performance of which is the basis of such Registration Default; provided, further, that any Additional Dividends accumulated with respect to any Shares or portion thereof called for redemption on a redemption date or purchased on a purchase date or converted into Stock on a conversion date prior to the Registration Default shall, in any such event, be paid instead to the Holder who submitted such Shares or portion thereof for redemption, purchase or conversion on the applicable redemption date, purchase date or conversion date, as the case may be, on such date (or promptly following the conversion date, in the case of conversion), and shall continue to accumulate on the Stock issuable upon conversion of any Shares to the extent any Registration Default has not yet been cured. Following the cure of all Registration Defaults requiring the payment of Additional Dividends by the Company to the Holders of Registrable Securities pursuant to Section 2(c)(i) hereof, the accumulation of Additional Dividends will cease without in any way limiting the effect of any subsequent Registration Default requiring the payment of Additional Dividends by the Company. Notwithstanding the foregoing, the parties agree that the sole monetary damages payable for a violation of the terms of this Agreement with respect to which Additional Dividends are expressly provided shall be as set forth in this Section 2(c). Nothing shall preclude a Notice Holder or Holder of Registrable Securities from pursuing or obtaining specific performance or other equitable relief with respect to this Agreement. 3. Registration Procedures. In connection with the obligations of the Company with respect to Shelf Registration Statements pursuant to Section 2(a) hereof, the Company shall: (a) use reasonable commercial efforts to prepare and file with the Commission a Shelf Registration Statement, within the relevant time period specified in Section 2 hereof, on the appropriate form under the Act, which form shall (i) be selected by the Company, (ii) be available for the sale of the Registrable Securities by the selling Holders thereof and (iii) comply A-8 as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the Commission to be filed therewith or incorporated by reference therein, and use its reasonable commercial efforts to cause such Shelf Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) use reasonable commercial efforts to cause (i) any Shelf Registration Statement and any amendment thereto, when it becomes effective, not to contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) subject to Section 2(a)(iii) hereof, any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (as amended or supplemented from time to time), not to include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (c) use reasonable commercial efforts to prepare and file with the Commission such amendments and post-effective amendments to the Shelf Registration Statement as may be necessary under applicable law to keep such Shelf Registration Statement effective for the applicable period; and cause each Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Act and comply with the provisions of the Act, the Exchange Act and the rules and regulations thereunder applicable to them with respect to the disposition of all securities covered by the Shelf Registration Statement during the applicable period in accordance with the intended method or methods of distribution reasonably requested by the selling Holders thereof; (d) (i) notify each Holder of Registrable Securities, at least fifteen (15) calendar days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holders that the distribution of Registrable Securities will be made in accordance with the methods reasonably requested by the Majority Holders participating in the Shelf Registration and as set forth in the Notices and Questionnaires, (ii) furnish to each Notice Holder of Registrable Securities and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto, and such other documents as such Notice Holder or underwriter may reasonably request, including financial statements and schedules and, if the Notice Holder so requests, all exhibits in order to facilitate the public sale or other disposition of the Registrable Securities and (iii) hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Notice Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto, save and except during any Suspension Period; (e) use its reasonable commercial efforts to register or qualify the Registrable Securities under such state securities or blue sky laws of such jurisdictions as any Notice Holder of Registrable Securities covered by a Shelf Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request in writing (which request A-9 shall be included in the Notice and Questionnaire) by the time such Shelf Registration Statement is declared effective by the Commission, and do any and all other acts and things which may be reasonably necessary or advisable to enable each such Notice Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Notice Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(e) or (ii) take any action which would require it to file general consent to service of process or taxation or file annual reports or comply with any other requirement deemed by the Company in its reasonable judgment to be unduly burdensome; (f) notify promptly each Notice Holder of Registrable Securities under a Shelf Registration and, if requested by such Notice Holder, confirm such advice in writing promptly (i) when such Shelf Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the Commission or any state securities authority for post-effective amendments and supplements to such Shelf Registration Statement and Prospectus or for additional information after such Shelf Registration Statement has become effective, (iii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of such Shelf Registration Statement or the initiation of any proceedings for that purpose, (iv) of the happening of any event (but not the nature of the details concerning the same) or the discovery of any facts during the period the Shelf Registration Statement is effective which makes any statement made in such Shelf Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Shelf Registration Statement or Prospectus in order to make the statements therein not misleading (a "Material Event"); provided, however, that no notice by the Company shall be required pursuant to this clause (iv) in the event that the Company either promptly files a Prospectus supplement to update the Prospectus or a Form 8-K or other appropriate Exchange Act report that is incorporated by reference into the Shelf Registration Statement, which, in either case, contains the requisite information with respect to such Material Event that results in such Shelf Registration Statement no longer containing any untrue statement of material fact or omitting to state a material fact necessary to make the statements contained therein not misleading, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities, as the case may be, for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (vi) of any determination by the Company that a post-effective amendment to the Shelf Registration Statement would be appropriate other than post-effective amendments prepared and filed in accordance with Section 2(a)(ii) hereof; (g) furnish counsel for the Holders of Registrable Securities copies of any comment letters received from the Commission or any other request by the Commission or any state securities authority for amendments or supplements to a Shelf Registration Statement and Prospectus or for additional information; (h) use its reasonable commercial efforts to obtain the withdrawal of any order suspending the effectiveness of the Shelf Registration Statement as soon as practicable and provide prompt notice to legal counsel for the Holders of the withdrawal of any such order; A-10 (i) furnish to each Notice Holder of Registrable Securities, and each underwriter, if any, without charge, at least one conformed copy of each Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules (without documents incorporated therein by reference or all exhibits thereto, unless requested); (j) use its reasonable commercial efforts to cooperate with the selling Notice Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold to the extent not held with the Depositary through Cede & Co., to remove any restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as the selling Notice Holders or the underwriters, if any, may reasonably request at least three (3) Business Days prior to the closing of any sale of Registrable Securities; (k) upon the occurrence of any event or the discovery of any facts, each as contemplated by Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) and Section 3(f)(vi) hereof and subject to the provisions of the first paragraph immediately following Section 3(s) hereof, as promptly as practicable after the occurrence of such an event, use its reasonable commercial efforts to prepare a supplement or post-effective amendment to the Shelf Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain at the time of such delivery any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. At such time as such public disclosure is otherwise made or the Company determines that such disclosure is not necessary, in each case to correct any misstatement of a material fact or to include any omitted material fact, the Company agrees promptly to notify each Notice Holder of such determination and to furnish each Notice Holder such number of copies of the Prospectus, as amended or supplemented, as such Notice Holder may reasonably request; (l) obtain a CUSIP number for all Registrable Securities covered by the Shelf Registration Statement not later than the effective date of such Shelf Registration Statement, and provide the transfer agent for the Shares and the Stock with printed certificates for the Registrable Securities that are in a form eligible for deposit with the Depositary; (m) enter into such customary agreements (including an underwriting or similar agreement) and make such representations and warranties and take all such other actions in connection therewith (including, without limitation, furnishing customary comfort letters and legal opinions pursuant to the terms of such agreement) in order to expedite or facilitate the disposition of the Registrable Securities pursuant to any Shelf Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder of Registrable Securities or underwriter in connection with any sale or resale pursuant to any Shelf Registration Statement contemplated by this Agreement; (n) upon reasonable notice, for a reasonable period prior to the filing of the Shelf Registration Statement and until the time at which there are no Registrable Securities, make available at reasonable times at the Company's principal place of business or such other A-11 reasonable place for inspection by a representative appointed by the Notice Holders in connection with an underwritten offering (or any underwriter, placement agent or counsel acting on their behalf), who shall certify to the Company that they have a current intention to sell their Registrable Securities pursuant to the Shelf Registration Statement, such financial and other information and books and records of the Company, and cause the officers, directors, employees and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the counsel to such Notice Holders, to conduct a reasonable "due diligence" investigation; provided, however, that such persons shall first agree in writing with the Company that any information that is reasonably and in good faith designated by the Company in writing as confidential at the time of delivery of such information shall be kept confidential by such persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, (ii) disclosure of such information is required by law (including any disclosure requirements pursuant to federal securities laws in connection with the filing of the Shelf Registration Statement or the use of any Prospectus), (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard such information by such persons or (iv) such information becomes available to such persons from a source other than the Company and its subsidiaries and such source is not known by such persons to be bound by a confidentiality agreement; provided, further, that the foregoing inspection and information gathering shall be coordinated by (x) the managing underwriter in connection with any underwritten offering pursuant to a Shelf Registration and (y) the Holder or Holders designated by the participating Majority Holders in connection with any non-underwritten offering pursuant to a Shelf Registration, together with one counsel designated by and on behalf of such persons; (o) if reasonably requested by the Initial Purchasers or any Notice Holder, promptly incorporate in a Prospectus supplement or post-effective amendment to the Shelf Registration Statement such information as the Initial Purchasers or such Notice Holder shall, on the basis of a written opinion of nationally-recognized counsel experienced in such matters, determine to be required to be included therein by applicable law and make any required filings of such Prospectus supplement or such post-effective amendment; provided, that the Company shall not be required to take any actions under this Section 3(o) that are not, in the reasonable opinion of counsel for the Company, in compliance with applicable law; (p) use its reasonable commercial efforts to (i) confirm that the ratings of the Shares will apply to the Shares covered by the Shelf Registration Statement or (ii) if the Shares were not previously rated, cause the Shares covered by the Shelf Registration Statement to be rated with the appropriate rating agencies, if so requested by the Majority Holders of Securities covered by such Shelf Registration Statement, or by the managing underwriters, if any; (q) otherwise comply with all applicable rules and regulations of the Commission and make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least 12 months which shall satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder; (r) use its reasonable commercial efforts to cause the Stock to remain listed on the New York Stock Exchange; and A-12 (s) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter and its counsel (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD). Each Holder agrees that upon receipt of any notice from the Company of the happening of any event or the discovery of any facts, each of the kind described in Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) or Section 3(f)(vi) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to such Shelf Registration Statement or Prospectus until the receipt by such Holder of either copies of the supplemented or amended Prospectus contemplated by Section 3(k) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in its possession of the Prospectus covering such Registrable Securities current at the time of receipt of such notice, or notice in writing from the Company that such Holder may resume disposition of Registrable Securities pursuant to such Shelf Registration Statement or Prospectus. If the Company shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Shelf Registration Statement as a result of the happening of any event or the discovery of any facts, each of the kind described in Section 3(f)(ii), Section 3(f)(iii), Section 3(f)(iv), Section 3(f)(v) or Section 3(f)(vi) hereof, the Company shall be deemed to have used its reasonable commercial efforts to keep such Shelf Registration Statement effective during such Suspension Period; provided, that the Company shall use its reasonable commercial efforts to file and have declared effective (if an amendment) as soon as practicable an amendment or supplement to such Shelf Registration Statement. The Company shall extend the period during which such Shelf Registration Statement shall be maintained effective or the Prospectus shall be used pursuant to this Agreement by the number of days during the period from and including the date of the giving of the notice described above to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions or notification that they may resume such disposition under an existing Prospectus. If any of the Registrable Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the underwriter or underwriters and manager or managers that will manage such offering will be selected by the Majority Holders of such Registrable Securities included in such offering and shall be reasonably acceptable to the Company. No Holder of Registrable Securities may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. The Company may require each Holder of Registrable Securities as to which any registration pursuant to Section 2(a) is being effected to furnish to the Company such information regarding such Holder and such Holder's intended method of distribution of such Registrable Securities as the Company may from time to time reasonably request in writing, but only to the extent that such information is required in order to comply with the Act. Each such Holder agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such Holder to the Company or of the occurrence of any event in either case as a result of which any Prospectus relating to such registration contains or A-13 would contain an untrue statement of a material fact regarding such Holder or such Holder's intended method of disposition of such Registrable Securities or omits to state any material fact regarding such Holder or such Holder's intended method of disposition of such Registrable Securities required to be stated therein or necessary to make the statements therein not misleading, and promptly to furnish to the Company any additional information required to correct and update any previously furnished information or required so that such Prospectus shall not contain, with respect to such Holder or the disposition of such Registrable Securities, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Each Holder agrees, by acquisition of the Registrable Securities, that such Holder shall not be entitled to sell any of such Registrable Securities pursuant to the Shelf Registration Statement or to receive a Prospectus related thereto, unless such Holder has furnished the Company with a Notice and Questionnaire. Each Notice Holder agrees to furnish to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not misleading and any other information regarding such Notice Holder and the distribution of such Registrable Securities as may be required to be disclosed in the Shelf Registration Statement under applicable law or pursuant to the Commission's comments. Each Holder further agrees not to sell any Registrable Securities pursuant to the Shelf Registration Statement without delivering or causing to be delivered a Prospectus to the purchaser thereof and, following the time at which there are no Registrable Securities, to notify the Company, within 10 business days of a request by the Company of the amount of Registrable Securities sold pursuant to the Shelf Registration Statement and, in the absence of a response, the Company may assume that all of the Holder's Registrable Securities were so sold. 4. Indemnification; Contribution. (a) The Company agrees, to the extent permitted by law, to indemnify and hold harmless each Holder and each Person, if any, who controls any Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or otherwise ("Indemnified Holder"), and to reimburse the Holders and such controlling Person or Persons, if any, for any legal or other expenses incurred by them in connection with defending any action, suit or proceeding (including governmental investigations) as provided in Section 4(c) hereof, insofar as such losses, claims, damages, liabilities or actions, suits or proceedings (including governmental investigations) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Shelf Registration Statement, or, if any Shelf Registration Statement shall be amended or supplemented, in the Shelf Registration Statement as so amended or supplemented, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any such untrue statement or alleged untrue statement or omission or alleged omission which was made in the Shelf Registration Statement or in the Shelf Registration Statement as so amended or supplemented, in reliance upon and in conformity with information furnished in writing to the Company by any Holder expressly for use therein. A-14 The Company's indemnity agreement contained in this Section 4(a), and the covenants, representations and warranties of the Company contained in this Agreement, shall remain in full force and effect regardless of any investigation made by or on behalf of any Person, and the indemnity agreement contained in this Section 4 shall survive any termination of this Agreement. The liabilities of the Company in this Section 4 are in addition to any other liabilities of the Company under this Agreement or otherwise. (b) Each Holder agrees, severally and not jointly, to the extent permitted by law, to indemnify, hold harmless and reimburse the Company and each Person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent and upon the same terms as the indemnity agreement of the Company set forth in Section 4(a) hereof, but only with respect to alleged untrue statements or omissions made in the Shelf Registration Statement or in the Shelf Registration Statement, as amended or supplemented (if applicable), in reliance upon and in conformity with information furnished in writing to the Company by such Holder expressly for use therein. The indemnity agreement on the part of each Holder contained in this Section 4(b) shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other Person, and the indemnity agreement contained in this Section 4(b) shall survive any termination of this Agreement. (c) If a claim is made or an action, suit or proceeding (including governmental investigations) is commenced or threatened against any person as to which indemnity may be sought under Section 4(a) or 4(b) hereof, such Person (the "Indemnified Person") shall notify the Person against whom such indemnity may be sought (the "Indemnifying Person") promptly after any assertion of such claim threatening to institute an action, suit or proceeding or, if such an action, suit or proceeding is commenced against such Indemnified Person, promptly after such Indemnified Person shall have been served with a summons or other first legal process, giving information as to the nature and basis of the claim. Failure to so notify the Indemnifying Person shall not, however, relieve the Indemnifying Person from any liability which it may have on account of the indemnity under Section 4(a) or 4(b) hereof if the Indemnifying Person has not been prejudiced in any material respect by such failure. Subject to the immediately succeeding sentence, the Indemnifying Person shall assume the defense of any such litigation or proceeding, including the employment of counsel and the payment of all expenses, with such counsel being designated, subject to the immediately succeeding sentence, in writing by a majority in interest of the Holders in the case of parties indemnified pursuant to Section 4(b) hereof and by the Company in the case of parties indemnified pursuant to Section 4(a) hereof. Any Indemnified Person shall have the right to participate in such litigation or proceeding and to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include (x) the Indemnifying Person and (y) the Indemnified Person and, in the written opinion of counsel to such Indemnified Person, representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and expenses of counsel (including disbursements) for such Indemnified Person shall be reimbursed by the Indemnifying Person to the Indemnified Person. If there is a conflict as described in clause (ii) above, and the A-15 Indemnified Persons have participated in the litigation or proceeding utilizing separate counsel whose fees and expenses have been reimbursed by the Indemnifying Person, and the Indemnified Persons, or any of them, are found to be solely liable, such Indemnified Person shall repay to the Indemnifying Parties such fees and expenses of such separate counsel as the Indemnifying Person shall have reimbursed. It is understood that the Indemnifying Person shall not, in connection with any litigation or proceeding or related litigation or proceedings in the same jurisdiction as to which the Indemnified Persons are entitled to such separate representation, be liable under this Agreement for the reasonable fees and out-of-pocket expenses of more than one separate firm (together with not more than one appropriate local counsel) for all such Indemnified Persons. Subject to the next paragraph, all such fees and expenses shall be reimbursed by payment to the Indemnified Persons of such reasonable fees and expenses of counsel promptly after payment thereof by the Indemnified Persons. In furtherance of the requirement above that fees and expenses of any separate counsel for the Indemnified Persons shall be reasonable, the Holders and the Company agree that the Indemnifying Person's obligations to pay such fees and expenses shall be conditioned upon the following: (1) in case separate counsel is proposed to be retained by the Indemnified Persons pursuant to clause (ii) of the preceding paragraph, the Indemnified Persons shall in good faith fully consult with the Indemnifying Person in advance as to the selection of such counsel; (2) reimbursable fees and expenses of such separate counsel shall be detailed and supported in a manner reasonably acceptable to the Indemnifying Person (but nothing herein shall be deemed to require the furnishing to the Indemnifying Person of any information, including, without limitation, computer print-outs of lawyers' daily time entries, to the extent that, in the judgment of such counsel, furnishing such information might reasonably be expected to result in a waiver of any attorney-client privilege); and (3) the Company and the Holders shall cooperate in monitoring and controlling the fees and expenses of separate counsel for Indemnified Persons for which the Indemnifying Person is liable hereunder, and the Indemnified Person shall use every reasonable effort to cause such separate counsel to minimize the duplication of activities as between themselves and counsel to the Indemnifying Person. The Indemnifying Person shall not be liable for any settlement of any litigation or proceeding effected without the written consent of the Indemnifying Person, but if settled with such consent or if there be a final judgment against the Indemnified Person, the Indemnifying Person agrees, subject to the provisions of this Section 4, to indemnify the Indemnified Person from and against any loss, damage, liability or expenses by reason of such settlement or judgment. The Indemnifying Person shall not, without the prior written consent of the Indemnified Persons, effect any settlement of any pending or threatened litigation, proceeding or claim in respect of which indemnity has been properly sought by the Indemnified Persons hereunder, unless such settlement includes an unconditional release by the claimant of all A-16 Indemnified Persons from all liability with respect to claims which are the subject matter of such litigation, proceeding or claim. (d) If the indemnification provided for in this Section 4 is unavailable to or insufficient to hold harmless an Indemnified Person under this Section 4 in respect of any losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof) referred to therein, then each Indemnifying Person under this Section 4 shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Person on the one hand and the Indemnified Person on the other from the sale of the Registrable Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each Indemnifying Person shall contribute to such amount paid or payable by such Indemnified Person in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of each Indemnifying Person, if any, on the one hand and the Indemnified Person on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental investigations) in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Holders on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 4. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities (or actions, suits or proceedings (including governmental proceedings) in respect thereof) referred to in this Section 4 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such actions, suits or proceedings (including governmental proceedings) or claims, provided that the provisions of this Section 4 have been complied with (in all material respects) in respect of any separate counsel for such Indemnified Person. Notwithstanding the provisions of this Section 4, no Holder shall be required to contribute any amount greater than the excess of the amount by which the total received by such Holder with respect to the sale of its Registrable Securities pursuant to a Shelf Registration Statement exceeds the sum of (A) the amount paid by such Holder for such Registrable Securities plus (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations in this Section 4 to contribute are several in proportion to their respective obligations and not joint. The agreement with respect to contribution contained in this Section 4 shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any Holder, and shall survive any termination of this Agreement. A-17 5. Miscellaneous. (a) Rule 144 and Rule 144A. For so long as the Company is subject to the reporting requirements of Section 13 or 15 of the Exchange Act, the Company covenants that it will file the reports required to be filed by it under the Act and Section 13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the Commission thereunder. If the Company ceases to be so required to file such reports, the Company covenants that it will, upon the request of any Holder of Registrable Securities, (i) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the Act, (ii) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the Act and (iii) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the Act within the limitation of the exemptions provided by (A) Rule 144 under the Act, as such Rule may be amended from time to time, (B) Rule 144A under the Act, as such Rule may be amended from time to time or (C) any similar rules or regulations hereafter adopted by the Commission. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. (b) No Inconsistent Agreements. The Company has not entered into and the Company will not after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not and will not for the term of this Agreement in any way conflict with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Majority Holders of the Registrable Securities affected by such amendment, modification, supplement, waiver or departure. Without the consent of the Holder of each Security, however, no modification may change the provisions relating to the payment of Additional Dividends. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first-class mail, telecopier or any courier guaranteeing overnight delivery: (a) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 5(d), which address initially is the address set forth in the Purchase Agreement with respect to the Initial Purchasers; and (b) if to the Company, initially at the Company's address set forth in the Purchase Agreement, and thereafter at such other address of which notice is given in accordance with the provisions of this Section 5(d). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; two (2) Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. A-18 (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such person shall be entitled to receive the benefits hereof. (f) Third Party Beneficiaries. The Initial Purchasers (even if the Initial Purchasers are not Holders of Registrable Securities) shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent they deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. Each Holder of Registrable Securities shall be a third party beneficiary to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights hereunder. (g) Specific Performance. Without limiting the remedies available to the Initial Purchasers and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under Section 2 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Section 2 hereof. (h) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (i) Headings. The headings in this Agreement are for the convenience of reference only and shall not limit or otherwise affect the meaning hereof. (J) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. (k) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. A-19 (l) Entire Agreement. This Agreement and other writings referred to herein (including the Purchase Agreement) represent the entire agreement among the parties hereto with respect to the subject matter hereof and supercedes and replaces any and all prior agreements and understandings, whether oral or written, with respect thereto. A-20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CMS ENERGY CORPORATION By: _______________________________________________ Name: Title: CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: CITIGROUP GLOBAL MARKETS INC., for itself and as Representative of the Initial Purchasers By: __________________________________ Name: Title: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, for itself and as Representative of the Initial Purchasers By: _________________________________ Name: Title: A-21 EXHIBIT B 1. The Company is a duly organized, validly existing corporation in good standing under the laws of the State of Michigan. 2. All legally required corporate proceedings in connection with the authorization, issuance and validity of the Restricted Shares and the sale of the Restricted Shares by the Company in accordance with the Purchase Agreement have been taken; and no approval, authorization, consent or order of any governmental regulatory body is required with respect to the issuance and sale of the Restricted Shares (other than in connection with or in compliance with the provisions of the securities or blue sky laws of any state, as to which I express no opinion, and the filing with and acceptance by the Michigan Department of Consumer and Industry Services, Bureau of Commercial Services of the Certificate of Designation, which has been so filed and accepted). 3. I do not know of any legal or governmental proceedings that would be required to be described in the Offering Memorandum if it were a registration statement filed by the Company under the Act that are not described as required, nor of any contracts or documents of a character so required to be described in the Offering Memorandum that are not described as required. 4. The statements made in the Offering Memorandum under the caption "Description of the Preferred Stock", "Registration Rights", "Description of our Capital Stock" and "Certain Material United States Federal Income Tax Considerations" constitute summaries of legal matters or documents referred to therein and are accurate in all material respects; and the Restricted Shares and the Issuable Common Stock conform as to legal matters to the descriptions thereof and to the statements in regard thereto contained in such section of the Offering Memorandum. 5. Each document incorporated in the Offering Memorandum as such document was originally filed pursuant to the Exchange Act (except for (i) the operating statistics, financial statements and schedules contained or incorporated by reference therein (including the notes thereto and the auditors' reports thereon) and (ii) the other financial or statistical information contained or incorporated by reference therein, as to which I express no opinion) complied as to form when so filed in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder. 6. The Purchase Agreement has been duly authorized, executed and delivered by the Company. 7. The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery thereof by the Initial Purchasers, is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). B-1 8. The Restricted Shares have been duly authorized, executed and delivered by the Company and, when delivered against payment therefor as provided in the Purchase Agreement, will have been duly and validly issued, fully paid and non-assessable; no stamp taxes in respect of the original issue thereof are payable; and the Restricted Shares will be convertible into Common Stock in accordance with their terms. 9. The issuance, sale and conversion of the Restricted Shares in accordance with the terms of the Certificate of Designation and the Purchase Agreement do not violate the provisions of the Restated Articles of Incorporation or the Bylaws of the Company, and will not result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company is a party. 10. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 11. The Company (i) is a "holding company", as such term is defined in the Public Utility Holding Company Act of 1935, as amended, and (ii) is currently exempt from all provisions of the Public Utility Holding Company Act of 1935, as amended, except Section 9(a)(2) thereof. 12. No registration under the Act of the Restricted Shares is required for the sale of the Restricted Shares to the Initial Purchasers as contemplated by the Purchase Agreement or for the Exempt Resales assuming (i) that each of the Initial Purchasers is an Eligible Purchaser or an Accredited Investor (as defined in Regulation D under the Act), (ii) the accuracy of, and compliance with, the Initial Purchasers' representations and agreements contained in Section 8 of the Purchase Agreement, and (iii) the accuracy of the representations of the Company set forth in Sections 6(e), 6(n), 7(n), 7(p) and 7(r) of the Purchase Agreement. 13. Except for the outstanding shares of preferred stock of Consumers Energy Company, the 8.36% Trust Originated Preferred Securities of Consumers Power Company Financing I, the 8.20% Trust Originated Preferred Securities of Consumers Energy Company Financing II, the 9 1/4% Trust Originated Preferred Securities of Consumers Energy Company Financing III and the 9.00% Trust Preferred Securities of Consumers Energy Company Financing IV, all of the outstanding capital stock of each of Consumers Energy Company and CMS Enterprises Company is owned directly or indirectly by the Company, free and clear of any security interest, claim, lien or other encumbrance (except as disclosed in the Offering Memorandum) or preemptive rights, and there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in any of Consumers Energy Company and CMS Enterprises Company or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any such capital stock, any such convertible or exchangeable securities or any such rights, warrants or options. 14. The Company has an authorized capitalization as set forth in the Offering Memorandum and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable. The shares of Issuable Common B-2 Stock have been duly and validly authorized and reserved for issuance by the Company and, when issued and delivered in accordance with the provisions of the Certificate of Designation, will be duly and validly issued, fully paid and non-assessable and will conform in all material respects to the description of the Common Stock contained in the Offering Memorandum and the issuance of the Issuable Common Stock is not, and will not be, subject to any preemptive or other similar right. 15. Nothing has come to my attention that would lead me to believe that the Offering Memorandum (other than (i) the operating statistics, financial statements and schedules contained or incorporated by reference therein (including the notes thereto and the auditors' reports thereon) and (ii) the other financial or statistical information contained or incorporated by reference therein, as to which I express no opinion), as of its date or at the date hereof contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-3 EXHIBIT C-1 1. The offer, sale and delivery of the Restricted Shares to the Initial Purchasers in the manner contemplated by the Purchase Agreement and the Offering Memorandum and the initial resale of the Restricted Shares by the Initial Purchasers in the manner contemplated in the Offering Memorandum and the Purchase Agreement, do not require registration under the Act, it being understood that we do not express any opinion as to any subsequent reoffer or resale of any of the Restricted Shares. 2. The Registration Rights Agreement is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. C-1-1 EXHIBIT C-2 No facts have come to our attention that have caused us to believe that the Offering Memorandum, as of its date and as of the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (except that in each case we do not express any view as to the financial statements, schedules and other financial data and financial projections included therein or excluded therefrom). For purposes of the foregoing, we note that the Offering Memorandum has been prepared in the context of a Rule 144A transaction and not as part of a registration statement under the Act and does not contain all the information that would be required in a registration statement under the Act. C-2-1 EXHIBIT D [Letterhead of officer or director of the Company] __________, 2003 Citigroup Global Markets Inc. As Representative of the several Initial Purchasers 388 Greenwich Street New York, New York 10013 Merrill Lynch, Pierce, Fenner & Smith Incorporated As Representative of the several Initial Purchasers 4 World Financial Center New York, New York 10080 Ladies and Gentlemen: This letter is being delivered to you in connection with a proposed Purchase Agreement (the "Purchase Agreement") between CMS Energy Corporation, a Michigan corporation (the "Company"), and you as representatives of a group of Initial Purchasers named therein, whereby the Initial Purchasers have agreed to purchase Cumulative Convertible Preferred Stock, convertible into shares of common stock, par value $0.01 per share (the "Restricted Shares"), of the Company pursuant to the Purchase Agreement. Terms used but not defined in this letter shall have the meanings ascribed to such terms in the Purchase Agreement. In order to induce you and the other Initial Purchasers to purchase the Restricted Shares pursuant to the Purchase Agreement, the undersigned will not, without the prior written consent of the Representatives, offer, sell, contract to sell, pledge or otherwise dispose of, or file (or participate in the filing of) a registration statement with the Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act, and the rules and regulations of the Commission promulgated thereunder with respect to, any shares of capital stock of the Company or any securities convertible or exercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction, for a period of 60 days after the date of the Purchase Agreement, other than shares of Common Stock disposed of as bona fide gifts approved by the Representatives, and up to 10,000 shares of Common Stock for any one executive officer or director of the Company with an aggregate limit of 100,000 shares of Common Stock for all executive officers or directors of the Company. If for any reason the Purchase Agreement shall be terminated prior to the Time of Purchase (as defined in the Purchase Agreement), the agreement set forth above shall likewise be terminated. Very truly yours, D-1 By: _______________________________ Name: Title: D-2 EX-10.(CC) 18 k82154aexv10wxccy.txt ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN EXHIBIT 10(cc) ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN FOR CMS ENERGY CORPORATION AND ITS SUBSIDIARIES Effective January 1, 2003 Approved by Committee on May 23, 2003 1 ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN FOR CMS ENERGY CORPORATION AND ITS SUBSIDIARIES I. GENERAL PROVISIONS 1.1 PURPOSE. The purpose of the Annual Management Incentive Compensation Plan ("MIC Plan") is to: (a) Provide an equitable and competitive level of compensation that will permit CMS Energy Corporation ("Company") and its subsidiaries to attract, retain and motivate certain highly competent Management and Professional Employees. (b) No payments to Management and Professional Employees in the form of incentive compensation shall be made unless pursuant to a plan approved by the Committee and after express approval of the Committee. 1.2 EFFECTIVE DATE. The predecessor to the MIC Plan was initially effective as of January 1, 1986 and that predecessor, as amended, is hereby terminated. The MIC Plan as described herein, is effective as of January 1, 2003. 1.3 DEFINITIONS. As used in this MIC Plan, the following terms have the meaning described below: (a) "Annual Award" means an annual incentive award granted under the MIC Plan. (b) "CMS Energy" means CMS Energy Corporation. (c) "Committee" means the Committee on Organization and Compensation of the Board of Directors of CMS Energy. (d) "Common Stock" means the common stock of CMS Energy. (e) "Company" means CMS Energy Corporation. (f) "Corporate Free Cash Flow" (CFCF) means CMS Consolidated Cash Flow from operating activities, excluding pension contributions and adjusted for GCR Recovery, plus Cash Flow from Investing Activities. (g) "Earnings Per Share" (EPS) means the amount of ongoing net income per outstanding CMS Energy Share. (h) "Disability" means that a participant has terminated employment with the Company or a Subsidiary and is entitled to disability payments under the Pension Plan. (i) "GCR Recovery" means actual/forecast incremental GCR recovery during January and February of 2004 calculated as actual/forecast GCR cycle billed sales times above budget GCR factor. 2 (j) "Leave of Absence" for purposes of this MIC Plan means a leave of absence that has been approved by the Plan Administrator. (k) "Management and Professional Employee" means an employee of the Company or a Subsidiary in the salary grades specified in the table contained in Article III of the MIC Plan. (l) "MIC Plan" means the Annual Management Incentive Compensation Plan for CMS Energy Corporation and Its Subsidiaries, as effective January 1, 2003 and any amendments thereto. (m) "Outside Directors" means directors of CMS Energy who are not employed by CMS Energy or a Subsidiary and satisfy the requirements of an "Outside Director" under Code Section 162(m). (n) "Pension Plan" means the Pension Plan for Employees of Consumers Energy and Other CMS Energy Companies. (o) "Performance Year" means the calendar year prior to the year in which an Annual Award is made by the Committee. (p) "Plan Administrator" means the Sr. Vice President - Human Resources of CMS Energy, under the general direction of the Outside Directors on the Committee. (q) "Retirement" means that an MIC Plan participant is no longer an active employee and qualifies for a retirement benefit other than a deferred vested retirement benefit under the Pension Plan. (r) "Subsidiary" means any direct or indirect subsidiary of the Company. 1.4 ELIGIBILITY. Certain Management and Professional Employees are eligible for participation in the MIC Plan. 1.5 ADMINISTRATION OF THE PLAN. (a) The MIC Plan is administered by the Sr. Vice President - Human Resources of CMS Energy under the general direction of the Outside Directors who are members of the Committee. (b) The Committee, no later than March 30th of the Performance Year, will approve performance goals for the Performance Year. (c) The Committee, no later than March 30th of the calendar year following the Performance Year, will review for approval proposed Annual Awards for all MIC Plan participants, as recommended by the Chairman and CEO of the Company. All proposed Annual Awards are subject to approval of the Committee. Before the payment of any Annual Awards, the Committee will certify in writing that the performance goals were in fact satisfied in accordance with Code Section 162(m). (d) The Committee reserves the right to modify the performance goals with respect to unforeseeable circumstances or otherwise exercise discretion with respect to proposed Annual Awards as it deems necessary to maintain the spirit and intent of the MIC Plan. 3 (e) The Committee also reserves the right in its discretion to not pay Annual Awards for a Performance Year. All discretionary decisions of the Committee are final. II. CORPORATE PERFORMANCE GOALS 2.1 IN GENERAL. The composite Plan Performance Factor will depend on corporate performance in two areas: (1) the ongoing net income per outstanding CMS Energy share (EPS); and (2) the Corporate Free Cash Flow of CMS Energy (CFCF). There will be no payout under the Plan unless a composite Plan Performance Factor of at least 60% is achieved. The composite Plan Performance Factor to be used for payouts will be capped at a maximum of 200%. A table containing the composite Plan Performance Factors shall be created by the Committee for each Performance Year. The table for Performance Year 2003 is set forth below. (a) EPS COMPONENT. EPS performance shall constitute 40% of the composite Plan Performance Factor. The 100% EPS goal for the 2003 performance year is $.80 per share, and the EPS component shall increase or decrease by 50% for each $.10 per share change in performance. (Mathematical interpolation shall be used for actual results not shown in the table.) There will be no payout under the plan unless at least $.60 per share is achieved (regardless of CFCF performance). (b) CFCF COMPONENT. CFCF performance shall constitute 60% of the composite Plan Performance Factor. The 100% CFCF goal for the 2003 performance year is $400 million, and the CFCF component shall increase or decrease by 25% for each $50 million change in performance. (Mathematical interpolation shall be used for actual results not shown in the table.) There will be no payout under the plan unless at least $250 million is achieved (regardless of EPS performance). COMPOSITE PERFORMANCE FACTORS FOR 2003 PERFORMANCE YEAR
CFCF COMPONENT $250 $300 $350 $400 $450 $500 $550 (MILLIONS) ------------------------------------------------------------------------------------------------- ---------- EPS COMPONENT $ .60 NONE NONE NONE 60% 75% 90% 105% $ .70 NONE NONE 65% 80% 95% 110% 125% $ .80 NONE 70% 85% 100% 115% 130% 145% $ .90 75% 90% 105% 120% 135% 150% 165% $1.00 95% 110% 125% 140% 155% 170% 185% $1.10 115% 130% 145% 160% 175% 190% 200% $1.20 135% 150% 165% 180% 195% 200% 200% $1.30 155% 170% 185% 200% 200% 200% 200%
Notes: Mathematical interpolation shall be used for actual results not shown in the table. Target Award is Bolded 100% and Maximum Award is Bolded 200% III. ANNUAL AWARD FORMULA 3.1 ANNUAL AWARDS. Annual Awards for each eligible MIC Plan participant will be based upon a standard award as set forth in the table below. The total amount of an MIC participant Annual Award shall be computed according to the annual award formula set forth in Section 3.2. 4
SALARY POSITION GRADE STANDARD AWARD AMOUNT --------------------------------- ------ ---------------------- Senior Mangers/Directors E-2 $48,700 Senior Managers/Directors E-1/F $36,500 Managers/Directors 13 $29,200 Managers/Directors 12/E $21,900 Managers/Directors & Equivalent 11 $16,400 Managers/Directors & Equivalent D $12.300
3.2 Annual Awards for MIC participants will be calculated and made as follows: INDIVIDUAL AWARD = STANDARD AWARD AMOUNT TIMES PERFORMANCE FACTOR % IV. PAYMENT OF ANNUAL AWARDS 4.1 CASH ANNUAL AWARD. All Annual Awards for a Performance Year will be paid in cash no later than March 30th of the calendar year following the Performance Year provided that they first have been reviewed and approved by the Committee, and provided further that the Annual Award for a particular Performance Year has not been deferred voluntarily pursuant to Section 4.3. The amounts required by law to be withheld for income and employment taxes will be deducted from the Annual Award payments. All Annual Awards become the obligation of the company on whose payroll the Employee is enrolled at the time the Committee makes the Annual Award. 4.2 VOLUNTARY DEFERRED ANNUAL AWARD (a) The payment of all or one-half of a cash Annual Award may be deferred voluntarily at the lection of an individual MIC Plan participant. A separate irrevocable election must be made in the calendar year prior to the beginning of the Performance Year. Any Annual Award made by the Committee after termination of employment of a participant or retirement of a participant is not eligible for a voluntary deferral and will be paid in full in cash in the year in which the Annual Award is made. (b) A Voluntary Deferred Annual Award may be paid out in a lump sum or in five or ten annual installments beginning in the first January of the calendar year following retirement or termination of employment. If an Annual Award is paid in annual installments, each year the payment will be a fraction of the balance equal to one over the number of annual installments remaining. In the event of the participant's death, all deferred amounts will be paid in total in January of the calendar year following the year of death. (c) At the time of electing to voluntarily defer payment, the participant must elect whether the sum deferred will be treated by the Company or Subsidiary, as applicable, in accordance with Paragraph I or Paragraph II below. i. A Voluntary Deferred Annual Award will be credited with sums in lieu of interest from the first day of the month following the month in which the Annual Award is determined to the date of payment. The interest accrual rate will be equivalent to the prime rate of interest as reported in The Wall Street Journal, compounded quarterly as of the first business day of January, April, July and October of each year during the deferral period. The prime rate in effect on the first business day of January, April, July and October will be the prime rate (described above) in effect for that quarterly period. 5 ii. A Voluntary Deferred Annual Award will be treated as if it were invested as an optional cash payment under the CMS Energy Stock Purchase Plan including the accumulation of any dividends. The value of the deferred sum at the time of payment will be equal to the number of dollars such an investment would have been worth as measured by the purchase price of shares of Common Stock using the average closing price, as reported in The Wall Street Journal (NYSE - composite transactions) for the first five trading days in the December previous to a January payout. The amount of any Voluntary Deferred Annual Award is to be satisfied from the general corporate funds of the company on whose payroll the MIC Plan participant was enrolled prior to the payout beginning and are subject to the claims of general creditors of that company. 4.3 PAYMENT IN THE EVENT OF DEATH. (a) A participant may name the beneficiary of his or her choice on a beneficiary form provided by the Company, and the beneficiary shall receive payment in the event that the Participant dies prior to receipt of either a cash Annual Award, or a Voluntary Deferred Annual Award. If a beneficiary is not named, the payment will be made to the first surviving class as follows: 1. Widow or Widower 2. Children, per capita 3. Parents, per capita 4. Brothers and Sisters, per capita 5. Estate of the Deceased (b) A participant may change beneficiaries at any time, and the change will be effective as of the date the participant completes and signs the beneficiary form, whether or not the participant is living at the time the request is received by the Company. However, the Company or the applicable Subsidiary will not be liable for any payments made before receipt of a written request. V. CHANGE OF STATUS Payments in the event of a change in status will not apply if no awards are made for the performance year. 5.1 PRO-RATA ANNUAL AWARDS. A new MIC participant, whether hired or promoted to the position, or an MIC employee promoted to a higher salary grade during the Performance Year will receive a pro rata Annual Award based on the percentage of the Performance Year in which the employee is in a particular salary grade. An MIC participant whose salary grade has been lowered, but whose employment is not terminated during the Performance Year will receive a pro rata Annual Award based on the percentage of the Performance Year in which the employee is in a particular salary grade. 5.2 TERMINATION. An MIC participant whose employment is terminated pursuant to a violation of the Company code of conduct or other corporate policies will not be considered for an Annual Award. 5.3 RESIGNATION. An MIC participant who resigns during or after a Performance Year will not be eligible for an Annual Award. If the resignation is due to reasons such as a downsizing or 6 reorganization, or the ill health of the employee or ill health in the immediate family, the employee may petition the Committee and may be considered, in the discretion of the Committee, for a pro rata Annual Award. The Committee's decision to approve or deny the request for a pro rata Annual Award shall be final. 5.4 DEATH, DISABILITY, RETIREMENT, LEAVE OF ABSENCE. An MIC participant whose status as an active employee is changed during the Performance Year due to death, Disability, Retirement, or Leave of Absence will receive a pro rata Annual Award. VI. MISCELLANEOUS 6.1 IMPACT ON BENEFIT PLANS. Payments made under the Plan will be considered as earnings for the Supplemental Executive Retirement Plan (Salary Grades E-1, E-2 and F) but not for purposes of the Employees' Savings Plan, Pension Plan, or other employee benefit programs. 6.2 IMPACT ON EMPLOYMENT. Neither the adoption of the Plan nor the granting of any Annual Award under the Plan will be deemed to create any right in any individual to be retained or continued in the employment of the Company or any corporation within the Company's control group. 6.3 TERMINATION OR AMENDMENT OF THE PLAN. The Company at any time may, in writing, terminate or amend the Plan. 6.4 GOVERNING LAW. The Plan will be governed and construed in accordance with the laws of the State of Michigan. 6.5 DISPUTE RESOLUTION. Any disputes related to the Plan should first be brought to the Plan Administrator. If that does not result in a mutually agreeable resolution, then the dispute shall be subject to final and binding arbitration before a single arbitrator selected by the parties to be conducted in Jackson, Michigan. The arbitration will be conducted and finished within 90 days of the selection of the arbitrator. The parties shall share equally the cost of the arbitrator and of conducting the arbitration proceeding, but each party shall bear the cost of its own legal counsel and experts and other out-of-pocket expenditures. 7 EX-10.(DD) 19 k82154aexv10wxddy.txt ANNUAL EMPLOYEE INCENTIVE COMPENSATION PLAN EXHIBIT 10(dd) ANNUAL EMPLOYEE INCENTIVE COMPENSATION PLAN FOR CMS ENERGY CORPORATION AND ITS SUBSIDIARIES Effective January 1, 2003 Approved by Committee on May 23, 2003 1 ANNUAL EMPLOYEE INCENTIVE COMPENSATION PLAN FOR CMS ENERGY CORPORATION AND ITS SUBSIDIARIES I. GENERAL PROVISIONS 1.1 PURPOSE. The purpose of the Annual Employee Incentive Compensation Plan ("EIC Plan") is to: (a) Provide an equitable and competitive level of compensation that will permit CMS Energy Corporation ("Company") and its subsidiaries to attract, retain and motivate their Employees. (b) No payments to Employees in the form of incentive compensation shall be made unless pursuant to a plan approved by the Committee and after express approval of the Committee. 1.2 EFFECTIVE DATE. The predecessor to the EIC Plan was initially effective as of January 1, 1986 and that predecessor, as amended, is hereby terminated. The EIC Plan as described herein, is effective as of January 1, 2003. 1.3 DEFINITIONS. As used in this EIC Plan, the following terms have the meaning described below: (a) "Annual Award" means an annual incentive award granted under the EIC Plan. (b) "CMS Energy" means CMS Energy Corporation. (c) "Committee" means the Committee on Organization and Compensation of the Board of Directors of CMS Energy. (d) "Common Stock" means the common stock of CMS Energy. (e) "Company" means CMS Energy Corporation. (f) "Corporate Free Cash Flow" (CFCF) means CMS Consolidated Cash Flow from operating activities, excluding pension contributions and adjusted for GCR Recovery, plus Cash Flow from Investing Activities. (g) "Earnings Per Share" (EPS) means the amount of ongoing net income per outstanding CMS Energy Share. (h) "Disability" means that a participant has terminated employment with the Company or a Subsidiary and is entitled to disability payments under the Pension Plan. (i) "EIC Plan" means the Annual Employee Incentive Compensation Plan for CMS Energy Corporation and Its Subsidiaries, as effective January 1, 2003 and any amendments thereto. 2 (j) "Employee" means a regular fulltime employee of the Company or a Subsidiary in the salary grades specified in the table contained in Article III of the EIC Plan. (k) "GCR Recovery" means actual/forecast incremental GCR recovery during January and February of 2004 calculated as actual/forecast GCR cycle billed sales times above budget GCR factor. (k) "Leave of Absence" for purposes of this EIC Plan means a leave of absence that has been approved by the Company or a Subsidiary. (l) "Outside Directors" means directors of CMS Energy who are not employed by CMS Energy or a Subsidiary and satisfy the requirements of an "Outside Director" under Code Section 162(m). (m) "Pension Plan" means the Pension Plan for Employees of Consumers Energy and Other CMS Energy Companies. (n) "Performance Year" means the calendar year prior to the year in which an Annual Award is made by the Committee. (o) "Plan Administrator" means the Sr. Vice President - Human Resources of CMS Energy, under the general direction of the Outside Directors on the Committee. (p) "Retirement" means that an EIC Plan participant is no longer an active employee and qualifies for a retirement benefit other than a deferred vested retirement benefit under the Pension Plan. (q) "Subsidiary" means any direct or indirect subsidiary of the Company. 1.4 ELIGIBILITY. Regular fulltime employees are eligible for participation in the EIC Plan. 1.5 ADMINISTRATION OF THE PLAN. (a) The EIC Plan is administered by the Sr. Vice President - Human Resources of CMS Energy under the general direction of the Outside Directors who are members of the Committee. (b) The Committee, no later than March 30th of the Performance Year, will approve performance goals for the Performance Year. (c) The Committee, no later than March 30th of the calendar year following the Performance Year, will review for approval proposed Annual Awards for all EIC Plan participants, as recommended by the Chairman and CEO of the Company. All proposed Annual Awards are subject to approval of the Committee. Before the payment of any Annual Awards, the Committee will certify in writing that the performance goals were in fact satisfied in accordance with Code Section 162(m). (d) The Committee reserves the right to modify the performance goals with respect to unforeseeable circumstances or otherwise exercise discretion with respect to proposed Annual Awards as it deems necessary to maintain the spirit and intent of the EIC Plan. The Committee also reserves the right in its discretion to not pay Annual Awards for a Performance Year. All discretionary decisions of the Committee are final. 3 II. CORPORATE PERFORMANCE GOALS 2.1 IN GENERAL. The composite Plan Performance Factor will depend on corporate performance in two areas: (1) the net ongoing income per outstanding CMS Energy share (EPS); and (2) the Corporate Free Cash Flow of CMS Energy (CFCF). There will be no payout under the Plan unless a composite Plan Performance Factor of at least 60% is achieved. The composite Plan Performance Factor to be used for payouts will be capped at a maximum of 200%. A table containing the composite Plan Performance Factors shall be created by the Committee for each Performance Year. The table for Performance Year 2003 is set forth below. (a) EPS COMPONENT. EPS performance shall constitute 40% of the composite Plan Performance Factor. The 100% EPS goal for the 2003 performance year is $.80 per share, and the EPS component shall increase or decrease by 50% for each $.10 per share change in performance. (Mathematical interpolation shall be used for actual results not shown in the table.) There will be no payout under the plan unless at least $.60 per share is achieved (regardless of CFCF performance). (b) CFCF COMPONENT. CFCF performance shall constitute 60% of the composite Plan Performance Factor. The 100% CFCF goal for the 2003 performance year is $400 million, and the CFCF component shall increase or decrease by 25% for each $50 million change in performance. (Mathematical interpolation shall be used for actual results not shown in the table.) There will be no payout under the plan unless at least $250 million is achieved (regardless of EPS performance). COMPOSITE PERFORMANCE FACTORS FOR 2003 PERFORMANCE YEAR - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- CFCF Component (Millions) $250 $300 $350 $400 $450 $500 $550 - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- EPS COMPONENT - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- $.60 NONE NONE NONE 60% 75% 90% 105% - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- $.70 NONE NONE 65% 80% 95% 110% 125% - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- $.80 NONE 70% 85% 100% 115% 130% 145% - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- $.90 75% 90% 105% 120% 135% 150% 165% - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- $1.00 95% 110% 125% 140% 155% 170% 185% - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- $1.10 115% 130% 145% 160% 175% 190% 200% - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- $1.20 135% 150% 165% 180% 195% 200% 200% - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ---------- $1.30 155% 170% 185% 200% 200% 200% 200% - ------------------------ ----------- ------------ ----------- ----------- ----------- ----------- ----------
Notes: Mathematical interpolation shall be used for actual results not shown in the table. Target Award is Bolded 100% and Maximum Award is Bolded 200% III. ANNUAL AWARD FORMULA 3.1 ANNUAL AWARDS. Annual Awards for each eligible EIC Plan participant will be based upon a standard award as set forth in the table below. The total amount of an EIC participant Annual Award shall be computed according to the annual award formula set forth in Section 3.2. 4
YEAR END SALARY POSITION GRADE STANDARD AWARD AMOUNT ---------------------------- Sr. Consultants & Equivalent 8-10/C $1,000 Consultants & Equivalent 5-7/B $ 750 Advisors & Equivalent 1-4/A $ 625 All Non-exempt Employees various $ 500
3.2 Annual Awards for EIC participants will be calculated and made as follows: INDIVIDUAL AWARD = STANDARD AWARD AMOUNT TIMES PERFORMANCE FACTOR % IV. PAYMENT OF ANNUAL AWARDS 4.1 CASH ANNUAL AWARD. All Annual Awards for a Performance Year will be paid in cash no later than March 31st of the calendar year following the Performance Year provided that they first have been reviewed and approved by the Committee. The amounts required by law to be withheld for income and employment taxes will be deducted from the Annual Award payments. All Annual Awards become the obligation of the company on whose payroll the Employee is enrolled at the time the Committee makes the Annual Award. 4.2 PAYMENT IN THE EVENT OF DEATH. (a) A participant may name the beneficiary of his or her choice on a beneficiary form provided by the Company, and the beneficiary shall receive payment in the event that the Participant dies prior to receipt of a cash Annual Award. If a beneficiary is not named, the payment will be made to the first surviving class as follows: 1. Widow or Widower 2. Children, per capita 3. Parents, per capita 4. Brothers and Sisters, per capita 5. Estate of the Deceased (b) A participant may change beneficiaries at any time, and the change will be effective as of the date the participant completes and signs the beneficiary form, whether or not the participant is living at the time the request is received by the Company. However, the Company or the applicable Subsidiary will not be liable for any payments made before receipt of a written request. V. CHANGE OF STATUS Payments in the event of a change in status will not apply if no awards are made for the performance year. 5.1 PRO-RATA ANNUAL AWARDS. A new EIC participant, hired during the Performance Year will receive a pro rata Annual Award based on the percentage of the Performance Year in which the employee is employed. 5 5.2 TERMINATION. An EIC participant whose employment is terminated pursuant to a violation of the Company code of conduct or other corporate policies will not be considered for an Annual Award. 5.3 RESIGNATION. An EIC participant who resigns during or after a Performance Year will not be eligible for an Annual Award. If the resignation is due to reasons such as a downsizing or reorganization, or the ill health of the employee or ill health in the immediate family, the employee may petition the Committee and may be considered, in the discretion of the Committee, for a pro rata Annual Award. The Committee's decision to approve or deny the request for a pro rata Annual Award shall be final. 5.4 DEATH, DISABILITY, RETIREMENT, LEAVE OF ABSENCE. An EIC participant whose status as an active employee is changed during the Performance Year due to death, Disability, Retirement, or Leave of Absence will receive a pro rata Annual Award. VI. MISCELLANEOUS 6.1 IMPACT ON BENEFIT PLANS. Payments made under the Plan will be not be considered as earnings for purposes of the Employees' Savings Plan, Pension Plan, or other employee benefit programs. 6.2 IMPACT ON EMPLOYMENT. Neither the adoption of the Plan nor the granting of any Annual Award under the Plan will be deemed to create any right in any individual to be retained or continued in the employment of the Company or any corporation within the Company's control group. 6.3 TERMINATION OR AMENDMENT OF THE PLAN. The Company at any time may, in writing, terminate or amend the Plan. 6.4 GOVERNING LAW. The Plan will be governed and construed in accordance with the laws of the State of Michigan. 6.5 DISPUTE RESOLUTION. Any disputes related to the Plan should first be brought to the Plan Administrator. If that does not result in a mutually agreeable resolution, then the dispute shall be subject to final and binding arbitration before a single arbitrator selected by the parties to be conducted in Jackson, Michigan. The arbitration will be conducted and finished within 90 days of the selection of the arbitrator. The parties shall share equally the cost of the arbitrator and of conducting the arbitration proceeding, but each party shall bear the cost of its own legal counsel and experts and other out-of-pocket expenditures. 6 EX-12.(A) 20 k82154aexv12wxay.txt CMS ENERGY'S RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT (12) (a) Exhibit (12) (a) CMS ENERGY CORPORATION Ratio of Earnings to Fixed Charges and Preferred Securities Dividends and Distributions (Millions of Dollars)
Years Ended December 31 - 2003 2002 2001 2000 1999 --------------------------------------------- Restated Restated (b) (c) (d) (e) Earnings as defined (a) - ----------------------- Consolidated net income $ (44) $(650) $(459) $ 5 $ 277 Discontinued operations (23) 274 128 (83) (70) Income taxes 58 (41) (94) 72 64 Exclude equity basis subsidiaries (41) (39) 68 (171) (45) Fixed charges as defined, adjusted to exclude capitalized interest of $9, $16, $35, $47, and $41 million for the years ended December 31, 2003, 2002, 2001, 2000, and 1999, respectively 608 565 631 562 625 --------------------------------------------- Earnings as defined $ 558 $ 109 $ 274 $ 385 $ 851 ============================================= Fixed charges as defined (a) - ---------------------------- Interest on long-term debt $ 531 404 $ 420 $ 420 $ 502 Estimated interest portion of lease rental 8 10 11 11 11 Other interest charges 59 32 83 34 58 Preferred securities dividends and distributions 19 135 152 144 95 --------------------------------------------- Fixed charges as defined $ 617 $ 581 $ 666 $ 609 $ 666 ============================================= Ratio of earnings to fixed charges and preferred securities dividends and distributions - - - - 1.28 =============================================
NOTES: (a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K. (b) For the year ended December 31, 2003, fixed charges exceeded earnings by $59 million. Earnings as defined include $95 million of asset impairment charges. The ratio of earnings to fixed charges and preferred Securities dividends and distributions would have been 1.06 excluding these amounts. (c) For the year ended December 31, 2002, fixed charges exceeded earnings by $472 million. Earnings as defined include $602 million of asset impairment charges. The ratio of earnings to fixed charges and preferred securities dividends and distributions would have been 1.22 excluding these amounts. (d) For the year ended December 31, 2001, fixed charges exceeded earnings by $392 million. Earnings as defined include $323 million of asset impairment charges. (e) For the year ended December 31, 2000, fixed charges exceeded earnings by $224 million. Earnings as defined include a $329 million pretax impairment loss on the Loy Yang investment. The ratio of earnings to fixed charges and preferred securities dividends and distributions would have been 1.17 excluding this amount. EX-12.(B) 21 k82154aexv12wxby.txt COMPUTATION OF CONSUMERS' RATIO OF EARNINGS EXHIBIT (12) (b) Exhibit (12) (b) CONSUMERS ENERGY COMPANY Ratio of Earnings to Fixed Charges and Preferred Securities Dividends and Distributions (Millions of Dollars)
Years Ended December 31 - 2003 2002 2001 2000 1999 ------------------------------------------------------- (c) (b) Earnings as defined (a) - ----------------------- Consolidated net income $ 196 $ 363 $ 199 $ 284 $ 340 Income taxes 137 180 97 137 172 Exclude equity basis subsidiaries (42) (53) (38) (57) (50) Include equity basis dividends received 45 15 8 10 10 Fixed charges as defined, adjusted to 252 178 197 194 192 exclude capitalized interest of $9, $12, $6, $2, and $- million for years ended December 31, 2003, 2002, 2001, 2000, and 1999, respectively ------------------------------------------------------- Earnings as defined $ 588 $ 683 $ 463 $ 568 $ 664 ======================================================= Fixed charges as defined (a) - ---------------------------- Interest on long-term debt (d) $ 241 $ 153 $ 151 $ 141 $ 140 Estimated interest portion of lease rental 7 10 11 11 11 Other interest charges 13 27 41 44 41 Preferred securities dividends and 3 47 44 37 30 distributions (d) ------------------------------------------------------- Fixed charges as defined $ 264 $ 237 $ 247 $ 233 $ 222 ======================================================= Ratio of earnings to fixed charges and preferred securities dividends and distributions 2.23 2.88 1.87 2.44 2.99 =======================================================
NOTES: (a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K. (b) Excludes a cumulative effect of change-in-accounting after-tax loss of $11 million; if included, ratio would be 1.81. (c) Excludes a cumulative effect of change-in-accounting after-tax gain of $18 million; if included, ratio would be unchanged, since the change-in-accounting resulted from the equity based subsidiary MCV Partnership. The total net incomes of equity based subsidiaries are excluded from determining earnings as defined. (d) We determined that we do not hold the controlling interest in our trust preferred security structures. Accordingly, those securities have been deconsolidated as of December 31, 2003. Therefore, our trust preferred securities that were previously included in mezzanine equity, have been eliminated due to deconsolidation and are reflected in Long-term debt -- related parties. EX-23.(A) 22 k82154aexv23wxay.txt CONSENT OF ERNST & YOUNG LLP FOR CMS ENERGY EXHIBIT (23)(a) Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-32229 and No. 333-58686) pertaining to CMS Energy Corporation Performance Incentive Stock Plan and Executive Stock Option Plan, respectively, (Form S-8 No. 333-76347) pertaining to the Employee Savings and Incentive Plan of Consumers Energy Company, in the Registration Statements (Form S-3 No. 333-51932, No. 333-52560, No. 333-27849, No. 333-37241, No. 333-74958 and No. 333-45556 and Form S-4 No. 33-60007) of CMS Energy Corporation and in the related Prospectuses of our report dated February 27, 2004, with respect to the consolidated financial statements and schedule of CMS Energy Corporation and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 2003. /s/ Ernst & Young LLP Detroit, Michigan March 9, 2004 .. EX-23.(B) 23 k82154aexv23wxby.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP-MCV EXHIBIT 23(b) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos.333-32229, 333-58686 and No. 333-76347), S-3 (Nos. 333-51932, 333-52560, 333-27849, 333-37241, 333-74958, 333-45556) and S-4 (No. 33-60007) of CMS Energy Corporation of our report dated February 18, 2004 relating to the financial statements of Midland Cogeneration Venture L.P. which appears in the CMS Energy Corporation Form 10-K for the year ended December 31, 2003. PricewaterhouseCoopers LLP Detroit, Michigan March 10, 2004 EX-23.(C) 24 k82154aexv23wxcy.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP-JORF LASFAR EXHIBIT 23(c) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos.333-32229, 333-58686 and No. 333-76347), S-3 (Nos. 333-51932, 333-52560, 333-27849, 333-37241, 333-74958, 333-45556) and S-4 (No. 33-60007) of CMS Energy Corporation of our report dated February 10, 2004 relating to the financial statements of Jorf Lasfar Energy Company S.C.A. which appears in the CMS Energy Corporation Form 10-K for the year ended December 31, 2003. Price Waterhouse Casablanca, Morocco March 8, 2004 EX-23.(D) 25 k82154aexv23wxdy.txt CONSENT OF ERNST & YOUNG LLP FOR CONSUMERS EXHIBIT (23)(d) Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-76347) pertaining to Employee Savings and Incentive Plan of Consumers Energy Company and in the Registration Statements (Form S-3 No. 333-73922 and Form S-4 No. 333-111220) of Consumers Energy Company and in the related Prospectuses of our report dated February 27, 2004, with respect to the consolidated financial statements and schedule of Consumers Energy Company and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 2003. /s/ Ernst & Young LLP Detroit, Michigan March 9, 2004 .. EX-23.(E) 26 k82154aexv23wxey.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP-CONSUMERS EXHIBIT 23(e) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-76347) and S-3 (Nos. 333-73922) of Consumers Energy Company of our report dated February 18, 2004 relating to the financial statements of Midland Cogeneration Venture L.P. which appears in the Consumers Energy Company Form 10-K for the year ended December 31, 2003. PricewaterhouseCoopers LLP Detroit, Michigan March 10, 2004 EX-24.(A) 27 k82154aexv24wxay.txt POWER OF ATTORNEY FOR CMS ENERGY EXHIBIT 24(a) February 27, 2004 Mr. S. Kinnie Smith, Jr. Mr. Thomas J. Webb Mr. Michael D. VanHemert CMS Energy Corporation One Energy Plaza Jackson, MI 49201-2276 CMS Energy Corporation is required to file an Annual Report on Form 10-K for the year ended December 31, 2003 with the Securities and Exchange Commission within 90 days after the end of the year. We hereby make, constitute and appoint each of you our true and lawful attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission said Annual Report with any necessary exhibits, and any amendments thereto that may be required. Very truly yours, /s/ Kenneth Whipple /s/ Joseph F. Paquette, Jr. - ----------------------------------- ------------------------------------- Kenneth Whipple Joseph F. Paquette, Jr. /s/ James J. Duderstadt /s/ William U. Parfet - ----------------------------------- ------------------------------------- James J. Duderstadt William U. Parfet /s/ Kathleen R. Flaherty /s/ Percy A. Pierre - ----------------------------------- ------------------------------------- Kathleen R. Flaherty Percy A. Pierre /s/ Earl D. Holton /s/ S. Kinnie Smith, Jr. - ----------------------------------- ------------------------------------- Earl D. Holton S. Kinnie Smith, Jr. /s/ David W. Joos /s/ Kenneth L. Way - ----------------------------------- ------------------------------------- David W. Joos Kenneth L. Way /s/ Michael T. Monahan /s/ John B. Yasinsky - ----------------------------------- ------------------------------------- Michael T. Monahan John B. Yasinsky EX-24.(B) 28 k82154aexv24wxby.txt POWER OF ATTORNEY FOR CONSUMERS EXHIBIT 24(b) February 27, 2004 Mr. S. Kinnie Smith, Jr. Mr. Thomas J. Webb Mr. Michael D. VanHemert Consumers Energy Company One Energy Plaza Jackson, MI 49201-2276 Consumers Energy Company is required to file an Annual Report on Form 10-K for the year ended December 31, 2003 with the Securities and Exchange Commission within 90 days after the end of the year. We hereby make, constitute and appoint each of you our true and lawful attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission said Annual Report with any necessary exhibits, and any amendments thereto that may be required. Very truly yours, /s/ Kenneth Whipple /s/ Joseph F. Paquette, Jr. ------------------------------------ ------------------------------------ Kenneth Whipple Joseph F. Paquette, Jr. /s/ James J. Duderstadt /s/ William U. Parfet ------------------------------------ ------------------------------------ James J. Duderstadt William U. Parfet /s/ Kathleen R. Flaherty /s/ Percy A. Pierre ------------------------------------ ------------------------------------ Kathleen R. Flaherty Percy A. Pierre /s/ Earl D. Holton /s/ S. Kinnie Smith, Jr. ------------------------------------ ------------------------------------ Earl D. Holton S. Kinnie Smith, Jr. /s/ David W. Joos /s/ Kenneth L. Way ------------------------------------ ------------------------------------ David W. Joos Kenneth L. Way /s/ Michael T. Monahan /s/ John B. Yasinsky ------------------------------------ ------------------------------------ Michael T. Monahan John B. Yasinsky EX-31.(A) 29 k82154aexv31wxay.txt CMS ENERGY'S CERTIFICATION OF CEO TO SECTION 302 Exhibit (31)(a) CERTIFICATION OF KENNETH WHIPPLE I, Kenneth Whipple, certify that: 1. I have reviewed this annual report on Form 10-K of CMS Energy Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 11, 2004 By: /s/ Kenneth Whipple ---------------------------------------- Kenneth Whipple Chairman of the Board and Chief Executive Officer EX-31.(B) 30 k82154aexv31wxby.txt CMS ENERGY'S CERTIFICATION OF CFO TO SECTION 302 Exhibit (31)(b) CERTIFICATION OF THOMAS J. WEBB I, Thomas J. Webb, certify that: 1. I have reviewed this annual report on Form 10-K of CMS Energy Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 11, 2004 By: /s/ Thomas J. Webb ---------------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer EX-31.(C) 31 k82154aexv31wxcy.txt CONSUMERS' CERTIFICATION OF CEO TO SECTION 302 Exhibit (31)(c) CERTIFICATION OF KENNETH WHIPPLE I, Kenneth Whipple, certify that: 1. I have reviewed this annual report on Form 10-K of Consumers Energy Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 11, 2004 By: /s/ Kenneth Whipple ---------------------------------------- Kenneth Whipple Chairman of the Board and Chief Executive Officer EX-31.(D) 32 k82154aexv31wxdy.txt CONSUMERS' CERTIFICATION OF CFO TO SECTION 302 Exhibit (31)(d) CERTIFICATION OF THOMAS J. WEBB I, Thomas J. Webb, certify that: 1. I have reviewed this annual report on Form 10-K of Consumers Energy Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 11, 2004 By: /s/ Thomas J. Webb ---------------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer EX-32.(A) 33 k82154aexv32wxay.txt CMS ENERGY'S CERTIFICATIONS PURSUANT TO SEC. 906 Exhibit (32)(a) CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of CMS Energy Corporation (the "Company") for the annual period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Kenneth Whipple, as Chairman of the Board and Chief Executive Officer of the Company, and Thomas J. Webb, as Executive Vice President and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kenneth Whipple - ------------------------------------- Name: Kenneth Whipple Title: Chairman of the Board and Chief Executive Officer Date: March 11, 2004 /s/ Thomas J. Webb - ------------------------------------- Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer Date: March 11, 2004 EX-32.(B) 34 k82154aexv32wxby.txt CONSUMERS' CERTIFICATIONS PURSUANT TO SECTION 906 Exhibit (32)(b) CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Consumers Energy Company (the "Company") for the annual period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Kenneth Whipple, as Chairman of the Board and Chief Executive Officer of the Company, and Thomas J. Webb, as Executive Vice President and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kenneth Whipple - ------------------------------------- Name: Kenneth Whipple Title: Chairman of the Board and Chief Executive Officer Date: March 11, 2004 /s/ Thomas J. Webb - ------------------------------------- Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer Date: March 11, 2004 EX-99.(A) 35 k82154aexv99wxay.htm FINANCIAL STATEMENTS FOR MIDLAND COGENERATION exv99wxay

Exhibit 99(a)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page Reference

in Annual Report

on Form 10-K

Report of Independent Auditors – PricewaterhouseCoopers LLP
F-2

Report of Independent Public Accountants – Arthur Andersen, LLP
F-3

Consolidated Balance Sheets as of December 31, 2003 and 2002
F-4

Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002, and 2001
F-5

Consolidated Statements of Partners’ Equity for the Years Ended December 31, 2003, 2002, and 2001
F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001
F-7

Notes to Consolidated Financial Statements
F-8

F-1

Report of Independent Auditors
To the Partners and the Management Committee of
Midland Cogeneration Venture Limited Partnership:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, partners’ equity and cash flows present fairly, in all material respects, the financial position of the Midland Cogeneration Limited Partnership (a Michigan limited partnership) and its subsidiaries (MCV) at December 31, 2003 and 2002, and the results of their operations and their cash flows for the each of the two years ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of MCV’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements of MCV for the year ended December 31, 2001, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 18, 2002.
As explained in Note 2 to the financial statements, effective April 1, 2002, Midland Cogeneration Venture Limited Partnership changed its method of accounting for derivative and hedging activities in accordance with Derivative Implementation Group (“DIG”) Issue C-16.
Detroit, Michigan
February 18, 2004
F-2

THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR
ANDERSEN LLP (ANDERSEN). THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN, AND
ANDERSEN DID NOT CONSENT TO THE INCLUSION OF THIS REPORT INTO THIS FORM 10-K.
THE FOOTNOTE SHOWN BELOW WAS NOT PART OF ANDERSEN’S REPORT.
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners and the Management Committee of the
Midland Cogeneration Venture Limited Partnership:
We have audited the accompanying consolidated balance sheets of the MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP (a Michigan limited partnership) and subsidiaries (MCV) as of December 31, 2001 and 2000*, and the related consolidated statements of operations, partners’ equity and cash flows for each of the three years in the period ended December 31, 2001*. These financial statements are the responsibility of MCV’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Midland Cogeneration Venture Limited Partnership and subsidiaries as of December 31, 2001 and 2000*, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001*, in conformity with accounting principles generally accepted in the United States.
As explained in Note 2 to the financial statements, effective January 1, 2001, Midland Cogeneration Venture Limited Partnership changed its method of accounting related to derivatives and hedging activities.
Arthur Andersen LLP

Detroit, Michigan
January 18, 2002

*The MCV’s consolidated balance sheets as of December 31, 2001 and 2000 and the consolidated statements of operations, partners’ equity and cash flows for the years ended December 31, 1999 and 2000 are not included in this Annual Report on Form 10-K.
F-3

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
(In Thousands)

2003 2002

ASSETS

CURRENT ASSETS:

Cash and cash equivalents
$ 173,651 $ 160,425

Accounts and notes receivable – related parties
43,805 48,448

Accounts receivable
38,333 32,479

Gas inventory
20,298 19,566

Unamortized property taxes
17,672 18,355

Derivative assets
86,825 73,819

Broker margin accounts and prepaid expenses
8,101 5,165

Total current assets
388,685 358,257

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment
2,463,931 2,449,148

Pipeline
21,432 21,432

Total property, plant and equipment
2,485,363 2,470,580

Accumulated depreciation
(991,556 ) (920,614 )

Net property, plant and equipment
1,493,807 1,549,966

OTHER ASSETS:

Restricted investment securities held-to-maturity
139,755 138,701

Derivative assets non-current
18,100 31,037

Deferred financing costs, net of accumulated amortization of $17,285 and $15,930, respectively
7,680 9,035

Prepaid gas costs, materials and supplies
21,623 11,077

Total other assets
187,158 189,850

TOTAL ASSETS
$ 2,069,650 $ 2,098,073

LIABILITIES AND PARTNERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable and accrued liabilities
$ 57,368 $ 58,080

Gas supplier funds on deposit
4,517 —

Interest payable
53,009 56,386

Current portion of long-term debt
134,576 93,928

Total current liabilities
249,470 208,394

NON-CURRENT LIABILITIES:

Long-term debt
1,018,645 1,153,221

Other
2,459 2,148

Total non-current liabilities
1,021,104 1,155,369

COMMITMENTS AND CONTINGENCIES

TOTAL LIABILITIES
1,270,574 1,363,763

PARTNERS’ EQUITY
799,076 734,310

TOTAL LIABILITIES AND PARTNERS’ EQUITY
$ 2,069,650 $ 2,098,073

The accompanying notes are an integral part of these statements.
F-4

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)

2003 2002 2001

OPERATING REVENUES:

Capacity
$ 404,681 $ 404,713 $ 409,633

Electric
162,093 177,569 184,707

Steam
17,638 14,537 16,473

Total operating revenues
584,412 596,819 610,813

OPERATING EXPENSES:

Fuel costs
254,988 255,142 288,167

Depreciation
89,437 88,963 92,176

Operations
16,943 16,642 16,082

Maintenance
15,107 12,666 13,739

Property and single business taxes
30,040 27,087 26,410

Administrative, selling and general
9,959 8,195 16,404

Total operating expenses
416,474 408,695 452,978

OPERATING INCOME
167,938 188,124 157,835

OTHER INCOME (EXPENSE):

Interest and other income
5,100 5,555 16,725

Interest expense
(113,247 ) (119,783 ) (126,296 )

Total other income (expense), net
(108,147 ) (114,228 ) (109,571 )

NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
59,791 73,896 48,264

Cumulative effect of change in method of accounting for derivative option contracts (to April 1, 2002) (Note 2)
— 58,131 —

NET INCOME
$ 59,791 $ 132,027 $ 48,264

The accompanying notes are an integral part of these statements.
F-5

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)

General Limited

Partners Partners Total

BALANCE, DECEMBER 31, 2000
$ 448,100 $ 79,638 $ 527,738

Comprehensive Income

Net Income
42,020 6,244 48,264

Other Comprehensive Income

Cumulative effect of accounting change
13,688 2,034 15,722

Unrealized loss on hedging activities
(42,444 ) (6,307 ) (48,751 )

Reclassification adjustments recognized in net income above
7,608 1,131 8,739

Total other comprehensive income
(21,148 ) (3,142 ) (24,290 )

Total Comprehensive Income
20,872 3,102 23,974

BALANCE, DECEMBER 31, 2001
$ 468,972 $ 82,740 $ 551,712

Comprehensive Income

Net Income
114,947 17,080 132,027

Other Comprehensive Income

Unrealized gain on hedging activities since beginning of period
33,311 4,950 38,261

Reclassification adjustments recognized in net income above
10,717 1,593 12,310

Total other comprehensive income
44,028 6,543 50,571

Total Comprehensive Income
158,975 23,623 182,598

BALANCE, DECEMBER 31, 2002
$ 627,947 $ 106,363 $ 734,310

Comprehensive Income

Net Income
52,056 7,735 59,791

Other Comprehensive Income

Unrealized gain on hedging activities since beginning of period
34,484 5,125 39,609

Reclassification adjustments recognized in net income above
(30,153 ) (4,481 ) (34,634 )

Total other comprehensive income
4,331 644 4,975

Total Comprehensive Income
56,387 8,379 64,766

BALANCE, DECEMBER 31, 2003
$ 684,334 $ 114,742 $ 799,076

The accompanying notes are an integral part of these statements.
F-6

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)

2003 2002 2001

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income
$ 59,791 $ 132,027 $ 48,264

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization
90,792 90,430 93,835

Cumulative effect of change in accounting principle
— (58,131 ) —

(Increase) decrease in accounts receivable
(1,211 ) 48,343 55,127

(Increase) decrease in gas inventory
(732 ) 133 (5,225 )

(Increase) decrease in unamortized property taxes
683 (1,730 ) (415 )

(Increase) decrease in broker margin accounts and prepaid expenses
(4,778 ) 31,049 (26,587 )

(Increase) decrease in derivative assets
4,906 (20,444 ) —

(Increase) decrease in prepaid gas costs, materials and supplies
(8,704 ) 1,376 8,414

Increase (decrease) in accounts payable and accrued liabilities
(712 ) 8,774 (43,704 )

Increase in gas supplier funds on deposit
4,517 — —

Decrease in interest payable
(3,377 ) (3,948 ) (7,082 )

Increase (decrease) in other non-current liabilities
311 (24 ) 245

Net cash provided by operating activities
141,486 227,855 122,872

CASH FLOWS FROM INVESTING ACTIVITIES:

Plant modifications and purchases of plant equipment
(33,278 ) (29,529 ) (30,530 )

Maturity of restricted investment securities held-to-maturity
601,225 377,192 538,327

Purchase of restricted investment securities held-to-maturity
(602,279 ) (374,426 ) (539,918 )

Net cash used in investing activities
(34,332 ) (26,763 ) (32,121 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of financing obligation
(93,928 ) (182,084 ) (155,632 )

Net cash used in financing activities
(93,928 ) (182,084 ) (155,632 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
13,226 19,008 (64,881 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
160,425 141,417 206,298

CASH AND EQUIVALENTS AT END OF PERIOD
$ 173,651 $ 160,425 $ 141,417

The accompanying notes are an integral part of these statements.
F-7

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) THE PARTNERSHIP AND ASSOCIATED RISKS

MCV was organized to construct, own and operate a combined-cycle, gas-fired cogeneration facility (the “Facility”) located in Midland, Michigan. MCV was formed on January 27, 1987, and the Facility began commercial operation in 1990.

In 1992, MCV acquired the outstanding common stock of PVCO Corp., a previously inactive company. MCV and PVCO Corp. entered into a partnership agreement to form MCV Gas Acquisition General Partnership (“MCV GAGP”) for the purpose of buying and selling natural gas on the spot market and other transactions involving natural gas activities. Currently, MCV GAGP is not actively engaged in any business activity.

The Facility has a net electrical generating capacity of approximately 1500 MW and approximately 1.5 million pounds of process steam capacity per hour. MCV has entered into three principal energy sales agreements. MCV has contracted to (i) supply up to 1240 MW of electric capacity (“Contract Capacity”) to Consumers Energy Company (“Consumers”) under the Power Purchase Agreement (“PPA”), for resale to its customers through 2025, (ii) supply electricity and steam to The Dow Chemical Company (“Dow”) under the Steam and Electric Power Agreement (“SEPA”) through 2015 and (iii) supply steam to Dow Corning Corporation (“DCC”) under the Steam Purchase Agreement (“SPA”) through 2011. From time to time, MCV enters into other sales agreements for the sale of excess capacity and/or energy available above MCV’s internal use and obligations under the PPA, SEPA and SPA. Results of operations are primarily dependent on successfully operating the Facility at or near contractual capacity levels and on Consumers’ ability to perform its obligations under the PPA. Sales pursuant to the PPA have historically accounted for over 90% of MCV’s revenues.

The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the Michigan Public Service Commission (“MPSC”) does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA (the “regulatory-out” provision). Until September 15, 2007, however, the capacity charge may not be reduced below an average capacity rate of 3.77 cents per kilowatt-hour for the available Contract Capacity notwithstanding the “regulatory-out” provision. Consumers and MCV are required to support and defend the terms of the PPA.

The Facility is a qualifying cogeneration facility (“QF”) originally certified by the Federal Energy Regulatory Commission (“FERC”) under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”). In order to maintain QF status, certain operating and efficiency standards must be maintained on a calendar-year basis and certain ownership limitations must be met. In the case of a topping-cycle generating plant such as the Facility, the applicable operating standard requires that the portion of total energy output that is put to some useful purpose other than facilitating the production of power (the “Thermal Percentage”) be at least 5%. In addition, the Facility must achieve a PURPA efficiency standard (the sum of the useful power output plus one-half of the useful thermal energy output, divided by the energy input (the “Efficiency Percentage”)) of at least 45%. If the Facility maintains a Thermal Percentage of 15% or higher, the required Efficiency Percentage is reduced to 42.5%. Since 1990, the Facility has achieved the applicable Thermal and Efficiency Percentages. For the twelve months ended December 31, 2003, the Facility achieved a Thermal Percentage of 21.0% and an Efficiency Percentage of 47.4%. The loss of QF status could, among other things, cause the Facility to lose its rights under PURPA to sell power to Consumers at Consumers’ “avoided cost” and subject the Facility to additional federal and state regulatory requirements. MCV believes that the Facility will meet the required Thermal Percentage and the corresponding Efficiency Percentage in 2003 and beyond, as well as the PURPA ownership limitations.

The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility’s operating expenses consist of the costs of natural gas. MCV recognizes that its existing gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of the existing gas contracts. In addition, to the extent that the costs associated with production of electricity rise faster than the energy charge payments, MCV’s financial performance will be negatively affected. The extent of such impact will depend upon the

F-8

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

amount of the average energy charge payable under the PPA, which is based upon costs incurred at Consumers’ coal-fired plants and upon the amount of energy scheduled by Consumers for delivery under the PPA. However, given the unpredictability of these factors, the overall economic impact upon MCV of changes in energy charges payable under the PPA and in future fuel costs under new or existing contracts cannot accurately be predicted.

At both the state and federal level, efforts continue to restructure the electric industry. A significant issue to MCV is the potential for future regulatory denial of recovery by Consumers from its customers of above market PPA costs Consumers pays MCV. At the state level, the MPSC entered a series of orders from June 1997 through February 1998 (collectively the “Restructuring Orders”), mandating that utilities “wheel” third-party power to the utilities’ customers, thus permitting customers to choose their power provider. MCV, as well as others, filed an appeal in the Michigan Court of Appeals to protect against denial of recovery by Consumers of PPA charges. The Michigan Court of Appeals found that the Restructuring Orders do not unequivocally disallow such recovery by Consumers and, therefore, MCV’s issues were not ripe for appellate review and no actual controversy regarding recovery of costs could occur until 2008, at the earliest. In June 2000, the State of Michigan enacted legislation which, among other things, states that the Restructuring Orders (being voluntarily implemented by Consumers) are in compliance with the legislation and enforceable by the MPSC. The legislation provides that the rights of parties to existing contracts between utilities (like Consumers) and QFs (like MCV), including the rights to have the PPA charges recovered from customers of the utilities, are not abrogated or diminished, and permits utilities to securitize certain stranded costs, including PPA charges.

In 1999, the U.S. District Court granted summary judgment to MCV declaring that the Restructuring Orders are preempted by federal law to the extent they prohibit Consumers from recovering from its customers any charge for avoided costs (or “stranded costs”) to be paid to MCV under PURPA pursuant to the PPA. In 2001, the United States Court of Appeals (“Appellate Court”) vacated the U.S. District Court’s 1999 summary judgment and ordered the case dismissed based upon a finding that no actual case or controversy existed for adjudication between the parties. The Appellate Court determined that the parties’ dispute is hypothetical at this time and the QFs’ (including MCV) claims are premised on speculation about how an order might be interpreted by the MPSC, in the future.

MCV continues to monitor and participate in these industry restructuring matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. MCV management cannot, at this time, predict the impact or outcome of these matters.

(2) SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Following is a discussion of MCV’s significant accounting policies.

Principles of Consolidation

The consolidated financial statements include the accounts of MCV and its wholly owned subsidiaries. All material transactions and balances among entities, which comprise MCV, have been eliminated in the consolidated financial statements.

Revenue Recognition

MCV recognizes revenue for the sale of variable energy and fixed energy when delivered. Capacity and other installment revenues are recognized based on plant availability or other contractual arrangements.

F-9

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Fuel Costs

MCV’s fuel costs are those costs associated with securing natural gas, transportation and storage services necessary to generate electricity and steam from the Facility. These costs are recognized in the income statement based upon actual volumes burned to produce the delivered energy. In addition, MCV engages in certain cost mitigation activities to offset the fixed charges MCV incurs for these activities. The gains or losses resulting from these activities have resulted in net gains of approximately $7.7 million, $3.9 million and $5.5 million for the years ended 2003, 2002 and 2001, respectively. These net gains are reflected as a component of fuel costs.

In July 2000, in response to rapidly escalating natural gas prices and since Consumers electric rates were frozen, MCV entered into transactions with Consumers whereby Consumers agreed to reduce MCV’s dispatch level and MCV agreed to share with Consumers the savings realized by not having to generate electricity (“Dispatch Mitigation”). For the years ended 2003, 2002 and 2001, MCV estimates that Dispatch Mitigation resulted in net savings of approximately $13.0 million, $2.5 million and $7.6 million, respectively, a portion of which will be realized in reduced maintenance expenditures in future years.

Subsequently, on January 1, 2004, Dispatch Mitigation ceased and Consumers began dispatching MCV pursuant to the 915 MW Settlement and the 325 MW Settlement “availability caps” provision (i.e., minimum dispatch of 1100 MW on- and off-peak (“Forced Dispatch”)). On February 12, 2004, MCV and Consumers entered into a Resource Conservation Agreement (“RCA”) which, among other things, provides that Consumers will economically dispatch MCV, if certain conditions are met. Such dispatch is expected to reduce electric production from what would have occurred under the Forced Dispatch, as well as decrease gas consumption by MCV. The RCA provides that Consumers has a right of first refusal to purchase, at market prices, the gas conserved under the RCA. The RCA further provides for the parties to enter into another agreement implementing the terms of the RCA including the sharing of savings realized by not having to generate electricity. The RCA is subject to MPSC approval and MCV and Consumers must accept the terms of the MPSC order as a condition precedent to the RCA becoming effective. The MPSC has not yet acted upon Consumers’ application for approval of the RCA. MCV cannot predict the outcome of the MPSC proceedings necessary to effectuate the RCA.

Inventory

MCV’s inventory of natural gas is stated at the lower of cost or market, and valued using the last-in, first-out (“LIFO”) method. Inventory includes the costs of purchased gas, variable transportation and storage. The amount of reserve to reduce inventories from first-in, first-out (“FIFO”) basis to the LIFO basis at December 31, 2003 and 2002, was $8.4 million and $7.4 million, respectively. Inventory cost, determined on a FIFO basis, approximates current replacement cost.

Materials and Supplies

Materials and supplies are stated at the lower of cost or market using the weighted average cost method. The majority of MCV’s materials and supplies are considered replacement parts for MCV’s Facility.

Depreciation

Original plant, equipment and pipeline were valued at cost for the constructed assets and at the asset transfer price for purchased and contributed assets, and are depreciated using the straight-line method over an estimated useful life of 35 years, which is the term of the PPA, except for the hot gas path components of the GTGs which are primarily being depreciated over a 25-year life. Plant construction and additions, since commercial operations in 1990, are depreciated using the straight-line method over the remaining life of the plant which currently is 22 years. Major renewals and replacements, which extend the useful life of plant and equipment

F-10

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

are capitalized, while maintenance and repairs are expensed when incurred. Major equipment overhauls are capitalized and amortized to the next equipment overhaul. Personal property is depreciated using the straight-line method over an estimated useful life of 5 to 15 years. The cost of assets and related accumulated depreciation are removed from the accounts when sold or retired, and any resulting gain or loss reflected in operating income.

Federal Income Tax

MCV is not subject to Federal or State income taxes. Partnership earnings are taxed directly to each individual partner.

Statement of Cash Flows

All liquid investments purchased with a maturity of three months or less at time of purchase are considered to be current cash equivalents.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents and short-term investments approximate fair value because of the short maturity of these instruments. MCV’s short-term investments, which are made up of investment securities held-to-maturity, as of December 31, 2003 and December 31, 2002 have original maturity dates of approximately one year or less. The unique nature of the negotiated financing obligation discussed in Note 6 makes it unnecessary to estimate the fair value of the Owner Participants’ underlying debt and equity instruments supporting such financing obligation, since SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” does not require fair value accounting for the lease obligation.

Accounting for Derivative Instruments and Hedging Activities

Effective January 1, 2001, MCV adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” which was issued in June 1998 and then amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of SFAS No. 133,” SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities – An amendment of FASB Statement No. 133” and SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activity (collectively referred to as “SFAS No. 133”). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges in some cases allows a derivative’s gains and losses to offset related results on the hedged item in the income statement or permits recognition of the hedge results in other comprehensive income, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

Electric Sales Agreements

MCV believes that its electric sales agreements currently do not qualify as derivatives under SFAS No. 133, due to the lack of an active energy market (as defined by SFAS No. 133) in the State of Michigan and the transportation cost to deliver the power under the contracts to the closest active energy market at the Cinergy hub in Ohio and as such does not record the fair value of these contracts on its balance sheet. If an active energy market emerges, MCV intends to apply the normal purchase, normal sales exception under SFAS No. 133 to its electric sales agreements, to the extent such exception is applicable.

Forward Foreign Exchange Contracts

An amended service agreement was entered into between MCV and Alstom Power Company (“Alstom”) (the “Amended Service Agreement”), under which Alstom will provide hot gas path parts for MCV’s twelve

F-11

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

gas turbines. The payments due to Alstom under the Amended Service Agreement are adjusted annually based on the U.S. dollar to Swiss franc currency exchange rate.

To manage this currency exchange rate risk and hedge against adverse currency fluctuations impacting the payments under the Amended Service Agreement, MCV maintained a foreign currency hedging program whereby MCV periodically entered into forward purchase contracts for Swiss francs. Under SFAS No. 133, the forward foreign currency exchange contracts qualified as fair value hedges, since they hedged the identifiable foreign currency commitment of the Amended Service Agreement. As of December 31, 2003, MCV did not have any such transactions outstanding and does not anticipate any future transactions since the Alstom Agreement is expected to be terminated in the near future. As of December 31, 2002, MCV had a forward purchase contract involving Swiss francs in the notional amount of $5.0 million. This hedge was considered highly effective, therefore, there was no material gain or loss recognized in earnings during the twelve months ended December 31, 2002.

Natural Gas Supply Contracts

MCV management believes that its long-term natural gas contracts which do not contain volume optionality qualify under SFAS No. 133 for the normal purchases and normal sales exception. Therefore, these contracts are currently not recognized at fair value on the balance sheet.

The FASB issued DIG Issue C-16, which became effective April 1, 2002, regarding natural gas commodity contracts that combine an option component and a forward component. This guidance requires either that the entire contract be accounted for as a derivative or the components of the contract be separated into two discrete contracts. Under the first alternative, the entire contract considered together would not qualify for the normal purchases and sales exception under the revised guidance. Under the second alternative, the newly established forward contract could qualify for the normal purchases and sales exception, while the option contract would be treated as a derivative under SFAS No. 133 with changes in fair value recorded through earnings. At April 1, 2002, MCV had nine long-term gas contracts that contained both an option and forward component. As such, they were no longer accounted for under the normal purchases and sales exception and MCV began mark-to-market accounting of these nine contracts through earnings. Based on the natural gas prices, at the beginning of April 2002, MCV recorded a $58.1 million gain for the cumulative effect of this accounting change. During the fourth quarter of 2002, MCV removed the option component from three of the nine long-term gas contracts, which should reduce some of the earnings volatility. Since April 2002, MCV has recorded an additional mark-to-market gain of $16.9 million for these gas contracts for a cumulative mark-to-market gain through December 31, 2003 of $75.0 million, which will reverse over the remaining life of these gas contracts, ranging from 2004 to 2007.

For the twelve months ended December 31, 2003, MCV recorded in “Fuel costs” a $5.0 million net mark-to-market loss in earnings associated with these contracts. In addition, as of December 31, 2003 and December 31, 2002, MCV recorded “Derivative assets” in Current Assets in the amount of $56.9 million and $48.9 million, respectively, and for the same periods recorded “Derivative assets” in Other Assets in the amount of $18.1 million and $31.0 million, respectively, representing the mark-to-market gain on these long-term natural gas contracts.

Natural Gas Supply Futures and Options

To manage market risks associated with the volatility of natural gas prices, MCV maintains a gas hedging program. MCV enters into natural gas futures and option contracts in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are being utilized principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize MCV’s existing gas supply, storage and transportation arrangements.

These financial instruments are derivatives under SFAS No. 133 and the contracts that are utilized to secure the anticipated natural gas requirements necessary for projected electric and steam sales qualify as cash flow

F-12

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

hedges under SFAS No. 133, since they hedge the price risk associated with the cost of natural gas. MCV also engages in cost mitigation activities to offset the fixed charges MCV incurs in operating the Facility. These cost mitigation activities include the use of futures and options contracts to purchase and/or sell natural gas to maximize the use of the transportation and storage contracts when it is determined that they will not be needed for Facility operation. Although these cost mitigation activities do serve to offset the fixed monthly charges, these cost mitigation activities are not considered a normal course of business for MCV and do not qualify as hedges under SFAS No. 133. Therefore, the resulting mark-to-market gains and losses from cost mitigation activities are flowed through MCV’s earnings.

Cash is deposited with the broker in a margin account at the time futures or options contracts are initiated. The change in market value of these contracts requires adjustment of the margin account balances. The margin account balance as of December 31, 2003 and December 31, 2002 was recorded as a current asset in “Broker margin accounts and prepaid expenses,” in the amount of $4.1 million and $.8 million, respectively.

For the twelve months ended December 31, 2003, MCV has recognized in other comprehensive income, an unrealized $5.0 million increase on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas. This resulted in a net $31.3 million gain in other comprehensive income as of December 31, 2003. This balance represents natural gas futures and options with maturities ranging from January 2004 to December 2007, of which $21.8 million of this gain is expected to be reclassified into earnings within the next twelve months. MCV also has recorded, as of December 31, 2003, a $29.9 million current derivative asset in “Derivative assets,” representing the mark-to-market gain on natural gas futures for anticipated projected electric and steam sales accounted for as hedges. In addition, for the twelve months ended December 31, 2003, MCV has recorded a net $35.0 million gain in earnings included in fuel costs from hedging activities related to MCV natural gas requirements for Facility operations and a net $1.0 million gain in earnings from cost mitigation activities.

For the twelve months ended December 31, 2002, MCV recognized an unrealized $50.6 million increase in other comprehensive income on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas, resulting in a $26.3 million gain balance in other comprehensive income as of December 31, 2002. As of December 31, 2002, MCV had recorded a $24.9 million current derivative asset in “Derivative assets.” For the twelve months ended December 31, 2002, MCV had recorded a net $12.2 million loss in earnings from hedging activities related to MCV natural gas requirements for Facility operations and a net $.4 million gain in earnings from cost mitigation activities.

Interest Rate Swaps

To manage the effects of interest rate volatility on interest income while maximizing return on permitted investments, MCV established an interest rate hedging program. The notional amounts of the hedges are tied directly to MCV’s anticipated cash investments, without physically exchanging the underlying notional amounts. Cash is deposited with the broker in a margin account at the time the interest rate swap transactions are initiated. The change in market value of these contracts may require further adjustment of the margin account balance. The margin account balance at December 31, 2002, of approximately $25,000, which was recorded as a current asset in “Broker margin accounts and prepaid expenses,” was returned to MCV during the month of January 2003 since MCV currently does not have any outstanding interest rate swap transactions.

As of December 31, 2002, MCV had one interest rate swap, with a notional amount of $20.0 million with a period of performance that extended to December 1, 2002, which did not qualify as a hedge under SFAS No. 133. The gains and losses on this swap were recorded currently in earnings. For the twelve months ended December 31, 2002, MCV recorded an immaterial loss in earnings.

F-13

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Reclassification

Certain prior period amounts have been reclassified to conform to the current year financial statement presentation.

New Accounting Standards

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This SFAS amends SFAS No. 133 for decisions made (1) as part of the Derivative Implementations Group process that effectively required amendments to SFAS No. 133, (2) for other Financial Accounting Standards Board projects dealing with financial instruments and (3) for implementation issues raised in relation to the application of this definition of a derivative. The changes in this SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly, which will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This standard is effective for contracts entered into or modified after June 30, 2003, with some exceptions. MCV has adopted this standard and does not expect the application to materially affect its financial position or results of operations.

(3) RESTRICTED INVESTMENT SECURITIES HELD-TO-MATURITY

Non-current restricted investment securities held-to-maturity have carrying amounts that approximate fair value because of the short maturity of these instruments and consist of the following at December 31 (in thousands):

2003 2002

Funds restricted for rental payments pursuant to the Overall Lease Transaction
$ 137,296 $ 136,554

Funds restricted for management non-qualified plans
2,459 2,147

Total
$ 139,755 $ 138,701

(4) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following at December 31 (in thousands):

2003 2002

Accounts payable

Related parties
$ 7,386 $ 12,224

Trade creditors
34,786 27,935

Property and single business taxes
12,548 14,842

Other
2,648 3,079

Total
$ 57,368 $ 58,080

(5) GAS SUPPLIER FUNDS ON DEPOSIT

Pursuant to individual gas contract terms with counterparties, deposit amounts may be required by one party to the other based upon the net amount of exposure. The net amount of exposure will vary with changes in market prices, credit provisions and various other factors. Collateral paid or received will be posted by one party to

F-14

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

the other based upon the net amount of exposure. The net amount of exposure will vary with changes in market prices, credit provisions and various other factors. Collateral paid or received will be posted by one party to the other based on the net amount of the exposure. Interest is earned on funds on deposit. As of December 31, 2003 MCV was not supplying any credit support in the form of cash or letters of credit. As of December 31, 2003 MCV was holding $4.5 million of cash on deposit and letters of credit totaling $116.6 million from two gas suppliers as collateral support.

(6) LONG-TERM DEBT

Long-term debt consists of the following at December 31 (in thousands):

2003 2002

Financing obligation, maturing through 2015, payable in semi-annual installments of principal and interest, collateralized by property, plant and equipment
$ 1,153,221 $ 1,247,149

Less current portion
(134,576 ) (93,928 )

Total long-term debt
$ 1,018,645 $ 1,153,221

Financing Obligation

In June 1990, MCV obtained permanent financing for the Facility by entering into sale and leaseback agreements (“Overall Lease Transaction”) with a lessor group, related to substantially all of MCV’s fixed assets. Proceeds of the financing were used to retire borrowings outstanding under existing loan commitments, make a capital distribution to the Partners and retire a portion of notes issued by MCV to MEC Development Corporation (“MDC”) in connection with the transfer of certain assets by MDC to MCV. In accordance with SFAS No. 98, “Accounting For Leases,” the sale and leaseback transaction has been accounted for as a financing arrangement.

The financing obligation utilizes the effective interest rate method, which is based on the minimum lease payments required through the end of the basic lease term of 2015 and management’s estimate of additional anticipated obligations after the end of the basic lease term. The effective interest rate during the remainder of the basic lease term is approximately 9.4%.

Under the terms of the Overall Lease Transaction, MCV sold undivided interests in all of the fixed assets of the Facility for approximately $2.3 billion, to five separate owner trusts (“Owner Trusts”) established for the benefit of certain institutional investors (“Owner Participants”). U.S. Bank National Association (formerly known as State Street Bank and Trust Company) serves as owner trustee (“Owner Trustee”) under each of the Owner Trusts, and leases undivided interests in the Facility on behalf of the Owner Trusts to MCV for an initial term of 25 years. CMS Midland Holdings Company (“CMS Holdings”), currently a wholly owned subsidiary of Consumers, acquired a 35% indirect equity interest in the Facility through its purchase of an interest in one of the Owner Trusts.

The Overall Lease Transaction requires MCV to achieve certain rent coverage ratios and other financial tests prior to a distribution to the Partners. Generally, these financial tests become more restrictive with the passage of time. Further, MCV is restricted to making permitted investments and incurring permitted indebtedness as specified in the Overall Lease Transaction. The Overall Lease Transaction also requires filing of certain periodic operating and financial reports, notification to the lessors of events constituting a material adverse change, significant litigation or governmental investigation, and change in status as a qualifying facility under FERC proceedings or court decisions, among others. Notification and approval is required for plant modification, new business activities, and other significant changes, as defined. In addition,

F-15

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

MCV has agreed to indemnify various parties to the sale and leaseback transaction against any expenses or environmental claims asserted, or certain federal and state taxes imposed on the Facility, as defined in the Overall Lease Transaction.

Under the terms of the Overall Lease Transaction and refinancing of the tax-exempt bonds, approximately $25.0 million of transaction costs were a liability of MCV and have been recorded as a deferred cost. Financing costs incurred with the issuance of debt are deferred and amortized using the interest method over the remaining portion of the 25-year lease term. Deferred financing costs of approximately $1.4 million, $1.5 million and $1.7 million were amortized in the years 2003, 2002 and 2001, respectively.

Interest and fees incurred related to long-term debt arrangements during 2003, 2002 and 2001 were $111.9 million, $118.3 million and $124.6 million, respectively.

Interest and fees paid during 2003, 2002 and 2001 were $115.4 million, $122.1 million and $131.7 million, respectively.

Minimum payments due under these long-term debt arrangements over the next five years are (in thousands):

Principal Interest Total

2004
$ 134,576 $ 108,233 $ 242,809

2005
76,547 97,836 174,383

2006
63,459 92,515 155,974

2007
62,916 87,988 150,904

2008
67,753 83,163 150,916

$ 405,251 $ 469,735 $ 874,986

Revolving Credit Agreement

MCV has also entered into a working capital line (“Working Capital Facility”), which expires August 29, 2004. Under the terms of the existing agreement, MCV can borrow up to the $50 million commitment, in the form of short-term borrowings or letters of credit collateralized by MCV’s natural gas inventory and earned receivables. At any given time, borrowings and letters of credit are limited by the amount of the borrowing base, defined as 90% of earned receivables and 50% of natural gas inventory, capped at $15 million. During 2003, MCV did not utilize the Working Capital Facility. At December 31, 2003, MCV had no outstanding borrowings or letters of credit.

Intercreditor Agreement

MCV has also entered into an Intercreditor Agreement with the Owner Trustee, Working Capital Lender, U.S. Bank National Association as Collateral Agent (“Collateral Agent”) and the Senior and Subordinated Indenture Trustees. Under the terms of this agreement, MCV is required to deposit all revenues derived from the operation of the Facility with the Collateral Agent for purposes of paying operating expenses and rent. In addition, these funds are required to pay construction modification costs and to secure future rent payments. As of December 31, 2003, MCV has deposited $137.3 million into the reserve account. The reserve account is to be maintained at not less than $40 million nor more than $137 million (or debt portion of next succeeding basic rent payment, whichever is greater). Excess funds in the reserve account are periodically transferred to MCV. This agreement also contains provisions governing the distribution of revenues and rents due under the Overall Lease Transaction, and establishes the priority of payment among the Owner Trusts, creditors of the Owner Trusts, creditors of MCV and the Partnership.

F-16

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

(7) COMMITMENTS AND OTHER AGREEMENTS

MCV has entered into numerous commitments and other agreements related to the Facility. Principal agreements are summarized as follows:

Power Purchase Agreement

MCV and Consumers have executed the PPA for the sale to Consumers of a minimum amount of electricity, subject to the capacity requirements of Dow and any other permissible electricity purchasers. Consumers has the right to terminate and/or withhold payment under the PPA if the Facility fails to achieve certain operating levels or if MCV fails to provide adequate fuel assurances. In the event of early termination of the PPA, MCV would have a maximum liability of approximately $270 million if the PPA were terminated in the 12^th through 24^th years. The term of this agreement is 35 years from the commercial operation date and year-to-year thereafter.

Steam and Electric Power Agreement

MCV and Dow executed the SEPA for the sale to Dow of certain minimum amounts of steam and electricity for Dow’s facilities.

If the SEPA is terminated, and Consumers does not fulfill MCV’s commitments as provided in the Backup Steam and Electric Power Agreement, MCV will be required to pay Dow a termination fee, calculated at that time, ranging from a minimum of $60 million to a maximum of $85 million. This agreement provides for the sale to Dow of steam and electricity produced by the Facility for terms of 25 years and 15 years, respectively, commencing on the commercial operation date and year-to-year thereafter.

Steam Purchase Agreement

MCV and DCC executed the SPA for the sale to DCC of certain minimum amounts of steam for use at the DCC Midland site. Steam sales under the SPA commenced in July 1996. Termination of this agreement, prior to expiration, requires the terminating party to pay to the other party a percentage of future revenues, which would have been realized had the initial term of 15 years been fulfilled. The percentage of future revenues payable is 50% if termination occurs prior to the fifth anniversary of the commercial operation date and 33-1/3% if termination occurs after the fifth anniversary of this agreement. The term of this agreement is 15 years from the commercial operation date of steam deliveries under the contract and year-to-year thereafter.

Gas Supply Agreements

MCV has entered into gas purchase agreements with various producers for the supply of natural gas. The current contracted volume totals 227,561 MMBtu per day annual average for 2004. As of January 1, 2004, gas contracts with U.S. suppliers provide for the purchase of 149,423 MMBtu per day while gas contracts with Canadian suppliers provide for the purchase of 78,138 MMBtu per day. Some of these contracts require MCV to pay for a minimum amount of natural gas per year, whether or not taken. The estimated minimum commitments under these contracts based on current long term prices for gas for the years 2004 through 2008 are $267.3 million, $338.6 million, $344.1 million, $340.4 million and $283.9 million, respectively. A portion of these payments may be utilized in future years to offset the cost of quantities of natural gas taken above the minimum amounts.

Gas Transportation Agreements

MCV has entered into firm natural gas transportation agreements with various pipeline companies. These agreements require MCV to pay certain reservation charges in order to reserve the transportation capacity.

F-17

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

MCV incurred reservation charges in 2003, 2002 and 2001, of $34.8 million, $35.1 million and $36.2 million, respectively. The estimated minimum reservation charges required under these agreements for each of the years 2004 through 2008 are $34.9 million, $33.8 million, $30.0 million, $21.6 million and $21.6 million, respectively. These projections are based on current commitments.

Gas Turbine Service Agreement

MCV entered into a Service Agreement, as amended, with Alstom, which commenced on January 1, 1990 and was set to expire upon the earlier of the completion of the sixth series of major GTG inspections or December 31, 2009. Under the terms of this agreement, Alstom sold MCV an initial inventory of spare parts for the GTGs and provides qualified service personnel and supporting staff to assist MCV, to perform scheduled inspections on the GTGs, and to repair the GTGs at MCV’s request. Upon termination of the Service Agreement (except for nonperformance by Alstom), MCV must pay a cancellation payment. MCV and Alstom amended the Service Agreement, effective December 31, 1993, to include the supply of hot gas path parts. Under the amended Service Agreement, Alstom provides hot gas path parts for MCV’s twelve gas turbines through the fourth series of major GTG inspections, which were completed in 2002. In January 1998, MCV and Alstom amended the length of the amended Service Agreement to extend through the sixth series of major GTG inspections, which are expected to be completed by year end 2008, for a lump sum fixed price covering the entire term of the amended Service Agreement of $266.5 million (in 1993 dollars, which is adjusted based on exchange rates and Swiss inflation indices), payable on the basis of operating hours as they occur over the same period. MCV has made payments totaling approximately $200.7 million under this amended Service Agreement through December 31, 2003.

MCV signed a new maintenance service and parts agreement with General Electric International, Inc. (“GEII”), effective December 31, 2002 (“GEII Agreement”). GEII will provide maintenance services and hot gas path parts for MCV’s twelve GTG’s. Under terms and conditions similar to the MCV/Alstom Service Agreement, as described above the GEII Agreement will cover four rounds of major GTG inspections, which are expected to be completed by the year 2015, at a savings to MCV as compared to the Service Agreement with Alstom. The GEII Agreement is expected to replace the current Alstom Service Agreement commencing July 1, 2004. The GEII Agreement can be terminated by either party for cause or convenience. Should termination for convenience occur, a buy out amount will be paid by the terminating party with payments ranging from approximately $19.0 million to $.9 million, based upon the number of operating hours utilized since commencement of the GEII Agreement.

MCV terminated the Alstom Service Agreement in February 2004, for cause and therefore does not owe the approximately $5.8 million termination payment to Alstom. MCV has a claim against Alstom for approximately $3.0 million for adjustments due to reduced equivalent operating hours experienced under the Service Agreement, that was paid by MCV and a claim against Alstom for one set of hot gas path spare parts (valued within a range of $3.0 million to $7.0 million). These matters may be disputed by Alstom and other disputes may arise. MCV will seek final resolution of all claims that may arise between the parties. At this time, MCV has not recognized any liability to or receivable from Alstom in connection with these claims or termination.

Steam Turbine Service Agreement

MCV entered into a nine year Steam Turbine Maintenance Agreement with General Electric Company effective January 1, 1995, which is designed to improve unit reliability, increase availability and minimize unanticipated maintenance costs. In addition, this contract includes performance incentives and penalties, which are based on the length of each scheduled outage and the number of forced outages during a calendar year. Effective February 1, 2004, MCV and GE amended this contract to extend its term through August 31, 2007. MCV will continue making monthly payments over the life of the contract, which will total

F-18

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

$22.3 million (subject to escalation based on defined indices). The parties have certain termination rights without incurring penalties or damages for such termination. Upon termination, MCV is only liable for payment of services rendered or parts provided prior to termination.

Site Lease

In December 1987, MCV leased the land on which the Facility is located from Consumers (“Site Lease”). MCV and Consumers amended and restated the Site Lease to reflect the creation of five separate undivided interests in the Site Lease as of June 1, 1990. Pursuant to the Overall Lease Transaction, MCV assigned these undivided interests in the Site Lease to the Owner Trustees, which in turn subleased the undivided interests back to MCV under five separate site subleases.

The Site Lease is for a term which commenced on December 29, 1987, and ends on December 31, 2035, including two renewal options of five years each. The rental under the Site Lease is $.6 million per annum, including the two five-year renewal terms.

Gas Turbine Generator Compressor Blade Agreement

MCV entered into an agreement with MTS Machinery Tools & Services AG (“MTS”), in January 2002. Under this agreement MTS redesigned and will manufacture and install new design compressor blades for MCV’s twelve GTG’s, which is expected to increase the overall electrical capacity and efficiency of each GTG. MCV has purchased three sets of such blades and has the option to purchase an additional nine sets. The first set of compressor blades was installed in the second quarter of 2003 for approximately $4.2 million. At this time, an additional two sets have been ordered at a cost of $4.1 million.

(8) PROPERTY TAXES

In 1997, MCV filed a property tax appeal against the City of Midland at the Michigan Tax Tribunal contesting MCV’s 1997 property taxes. Subsequently, MCV filed appeals contesting its property taxes for tax years 1998 through 2003 at the Michigan Tax Tribunal. A trial was held for tax years 1997 – 2000. The appeals for tax years 2001-2003 are being held in abeyance. On January 23, 2004, the Michigan Tax Tribunal issued its decision in MCV’s tax appeal against the City of Midland for tax years 1997 through 2000. MCV management has estimated that the decision will result in a refund to MCV for the tax years 1997 through 2000 of approximately $29 million in taxes plus $7 million of interest. The decision is subject to reconsideration at the Tribunal and may be appealed to the Michigan Appellate Court and Michigan Supreme Court. The City of Midland has filed a motion for reconsideration at the Michigan Tax Tribunal, asking the Tribunal to make certain technical corrections, as well as substantive changes to the decision. MCV has opposed this motion. MCV management cannot predict the outcome of these further legal proceedings. MCV has not recognized any of the above stated refunds (net of approximately $15.5 million of deferred expenses) in earnings at this time.

(9) RETIREMENT BENEFITS

Postretirement Health Care Plans

In 1992, MCV established defined cost postretirement health care plans (“Plans”) that cover all full-time employees, excluding key management. The Plans provide health care credits, which can be utilized to purchase medical plan coverage and pay qualified health care expenses. Participants become eligible for the benefits if they retire on or after the attainment of age 65 or upon a qualified disability retirement, or if they have 10 or more years of service and retire at age 55 or older. The Plans granted retroactive benefits for all employees hired prior to January 1, 1992. This prior service cost has been amortized to expense over a five

F-19

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

year period. MCV annually funds the current year service and interest cost as well as amortization of prior service cost to both qualified and non-qualified trusts. The MCV accounts for retiree medical benefits in accordance with SFAS 106, “Employers Accounting for Postretirement Benefits Other Than Pensions.” This standard required the full accrual of such costs during the years that the employee renders service to the MCV until the date of full eligibility. The accumulated benefit obligation of the Plans were $3.3 million at December 31, 2003 and $2.7 million at December 31, 2002. The measurement date of these Plans was December 31, 2003.

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. At this time, because of various uncertainties related to this legislation and the appropriate accounting methodology, MCV has elected to defer financial recognition of this legislation until the FASB issues final accounting guidance. When issued, that final guidance could require MCV to change previously reported information. This deferral election is permitted under SFAS 106-1.

The following table reconciles the change in the Plans’ benefit obligation and change in Plan assets as reflected on the balance sheet as of December 31 (in thousands):

2003 2002

Change in benefit obligation:

Benefit obligation at beginning of year
$ 2,741.9 $ 2,405.1

Service cost
212.5 197.3

Interest cost
178.2 188.7

Actuarial gain (loss)
147.4 (44.6 )

Benefits paid during year
(4.0 ) (4.6 )

Benefit obligation at end of year
3,276.0 2,741.9

Change in Plan assets:

Fair value of Plan assets at beginning of year
2,045.8 2,088.0

Actual return on Plan assets
527.5 (270.9 )

Employer contribution
257.5 233.3

Benefits paid during year
(4.0 ) (4.6 )

Fair value of Plan assets at end of year
2,826.8 2,045.8

Unfunded (funded) status
449.2 696.1

Unrecognized prior service cost
(170.3 ) (184.6 )

Unrecognized net gain (loss)
(278.9 ) (511.5 )

Accrued benefit cost
$ — $ —

Net periodic postretirement health care cost for years ending December 31, included the following components (in thousands):

2003 2002 2001

Components of net periodic benefit cost:

Service cost
$ 212.5 $ 197.3 $ 173.5

Interest cost
178.2 188.7 142.9

Expected return on Plan assets
(163.7 ) (167.0 ) (171.3 )

Amortization of unrecognized net (gain) or loss
30.5 14.3 (12.6 )

Net periodic benefit cost
$ 257.5 $ 233.3 $ 132.5

F-20

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):

1-Percentage-Point 1-Percentage-Point

Increase Decrease

Effect on total of service and interest cost components
$ 48.6 $ 41.8

Effect on postretirement benefit obligation
$ 358.1 $ 310.9

Assumptions used in accounting for the Post-Retirement Health Care Plan were as follows:

2003 2002 2001

Discount rate
6.00 % 6.75 % 7.25 %

Long-term rate of return on Plan assets
8.00 % 8.00 % 8.00 %

Inflation benefit amount

1998 through 2004
0.00 % 0.00 % 0.00 %

2005 and later years
4.00 % 4.00 % 4.00 %

The long-term rate of return on Plan assets is established based on MCV’s expectations of asset returns for the investment mix in its Plan (with some reliance on historical asset returns for the Plans). The expected returns for various asset categories are blended to derive one long-term assumption.

Plan Assets. Citizens Bank has been appointed as trustee (“Trustee”) of the Plan. The Trustee serves as investment consultant, with the responsibility of providing financial information and general guidance to the MCV Benefits Committee. The Trustee shall invest the assets of the Plan in the separate investment options in accordance with instructions communicated to the Trustee from time to time by the MCV Benefit Committee. The MCV Benefits Committee has the fiduciary and investment selection responsibility for the Plan. The MCV Benefits Committee consists of MCV Officers (excluding the President and Chief Executive Officer).

The MCV has a target allocation of 80% equities and 20% debt instruments. These investments emphasis total growth return, with a moderate risk level. The MCV Benefits Committee reviews the performance of the Plan investments quarterly, based on a long-term investment horizon and applicable benchmarks, with rebalancing of the investment portfolio, at the discretion of the MCV Benefits Committee.

MCV’s Plan’s weighted-average asset allocations, by asset category are as follows as of December 31:

2003 2002

Asset Category:

Cash and cash equivalents
11 % 1 %

Fixed income
17 % 23 %

Equity securities
72 % 76 %

Total
100 % 100 %

Contributions. MCV expects to contribute approximately $.2 million to the Plan in 2004.

Retirement and Savings Plans

MCV sponsors a defined contribution retirement plan covering all employees. Under the terms of the plan, MCV makes contributions to the plan of either five or ten percent of an employee’s eligible annual compensation dependent upon the employee’s age. MCV also sponsors a 401(k) savings plan for employees. Contributions and costs for this plan are based on matching an employee’s savings up to a maximum level. In

F-21

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

2003, 2002 and 2001, MCV contributed $1.3 million, $1.2 million and $1.1 million, respectively under these plans.

Supplemental Retirement Benefits

MCV provides supplemental retirement, postretirement health care and excess benefit plans for key management. These plans are not qualified plans under the Internal Revenue Code; therefore, earnings of the trusts maintained by MCV to fund these plans are taxable to the Partners and trust assets are included in the assets of MCV.

F-22

MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

(10) PARTNERS’ EQUITY AND RELATED PARTY TRANSACTIONS

The following table summarizes the nature and amount of each of MCV’s Partner’s equity interest, interest in profits and losses of MCV at December 31, 2003, and the nature and amount of related party transactions or agreements that existed with the Partners or affiliates as of December 31, 2003, 2002 and 2001, and for each of the twelve month periods ended December 31 (in thousands).

Beneficial Owner, Equity Partner,

Type of Partner and Nature of Related Party Equity Interest Interest Related Party Transactions and Agreements 2003 2002 2001

CMS Energy Company

CMS Midland, Inc. Power purchase agreements $ 513,774 $ 557,149 $ 550,477

General Partner; wholly-owned subsidiary of Consumers Energy Company Purchases under gas transportation agreements 14,294 23,552 24,059

Purchases under spot gas agreements 663 3,631 3,756

Purchases under gas supply agreements 2,330 11,306 10,725

Gas storage agreement 2,563 2,563 2,563

Land lease/easement agreements 600 600 600

Accounts receivable 40,373 44,289 48,843

Accounts payable 1,025 3,502 4,772

$ 391,546 49.0 % Sales under spot gas agreements 3,260 1,084 7,107

El Paso Corporation

Source Midland Limited Partnership (“SMLP”) General Partner; owned by subsidiaries of El Paso Corporation⁽¹⁾ Purchase under gas transportation agreements 13,023 12,463 13,653

Purchases under spot gas agreement 610 15,655 45,130

Purchases under gas supply agreement 54,308 47,136 5,912

Gas agency agreement 238 365 1,989

Deferred reservation charges under gas purchase agreement 4,728 — 7,880

Accounts receivable — 523 —

Accounts payable 5,751 7,706 5,198

Sales under spot gas agreements 3,474 14,007 28,451

$ 139,421 18.1 % Partner cash withdrawal (including accrued interest)⁽²⁾ — — 56,714

El Paso Midland, Inc. (“El Paso Midland”) General Partner; wholly-owned subsidiary of El Paso Corporation⁽¹⁾ See related party activity listed under SMLP.

83,653 10.9

MEI Limited Partnership (“MEI”) See related party activity listed under SMLP.

A General and Limited Partner; 50% interest owned by El Paso Midland, Inc. and 50% interest owned by SMLP⁽¹⁾

General Partnership Interest 69,714 9.1

Limited Partnership Interest 6,969 .9

Micogen Limited Partnership 34,854 4.5 See related party activity listed under SMLP.

(“MLP”) Limited Partner, owned subsidiaries of El Paso Corporation⁽¹⁾

Total El Paso Corporation $ 334,611 43.5 %

The Dow Chemical Company

The Dow Chemical Company Steam and electric power agreement 36,207 29,385 33,727

Limited Partner Steam purchase agreement - Dow Corning Corp (affiliate) 4,017 3,746 3,781

Purchases under demineralized water supply agreement 6,396 6,605 6,913

Accounts receivable 3,431 3,635 3,191

Accounts payable 610 1,016 948

Standby and backup fees 731 734 696

$ 72,918 7.5 % Sales of gas under tolling agreement — 6,442 —

Alanna Corporation

Alanna Corporation Note receivable 1 1 1

Limited Partner; wholly-owned subsidiary of Alanna Holdings Corporation $ 1 ⁽³⁾ .00001 %

Footnotes to Partners’ Equity and Related Party Transactions

⁽¹⁾ On January 29, 2001, El Paso Corporation (“El Paso”) announced that it had completed its merger with The Coastal Corporation (“Coastal”). Coastal was the previous parent company of El Paso Midland (formerly known as Coastal Midland, Inc.), SMLP, MLP and, through SMLP, MEI. After the merger, Coastal became a wholly-owned subsidiary of El Paso and has changed its name to El Paso CGP Company.

⁽²⁾ A letter of credit has been issued and recorded as a note receivable from El Paso Midland, this amount includes their share of cash available, as well as, cash available to MEI, MLP and SMLP.

⁽³⁾ Alanna’s capital stock is pledged to secure MCV’s obligation under the lease and other overall lease transaction documents.

F-23

SUPPLEMENTAL INFORMATION
Supplemental information is to be furnished with reports filed pursuant to Section 15 (d) of the Act by registrants, which have not registered securities pursuant to Section 12 of the Act. No such annual report or proxy statement has been sent to security holders.
F-24

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MIDLAND COGENERATION VENTURE
LIMITED PARTNERSHIP

Date: March 1, 2004 By /s/ James M. Kevra

James M. Kevra

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature Title Date

/s/ James M. Kevra
James M. Kevra President and Chief Executive Officer
(Principal Executive Officer) March 1, 2004

/s/ James M. Rajewski
James M. Rajewski Chief Financial Officer, Vice President and Controller
(Principal Accounting Officer) March 1, 2004

/s/ John J. O’Rourke
John J. O’Rourke Chairman, Management Committee March 1, 2004

/s/ David W. Joos
David W. Joos Member, Management Committee March 1, 2004

F-25 EX-99.(B) 36 k82154aexv99wxby.txt FINANCIAL STATEMENTS FOR JORF LASFAR EXHIBIT 99(b) Jorf Lasfar Energy Company S.C.A JLEC CENTRALE THERMIQUE DE JORF LASFAR B P 99 SIDI BOUZID EL JADIDA MOROCCO Tel : 212 23 34 53 71 Fax : 212 23 34 54 05 US GAAP FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003, 2002 AND 2001 AUDITED - -------------------------------------------------------------------------------- R.C. n(degree)86655 - Patente n(degree)35511273 - Identification Fiscale (I.S TVA) n(degree)1021595 JORF LASFAR ENERGY COMPANY INDEX TO FINANCIAL STATEMENTS
Page(s) ------------- Balance Sheet As of December 31, 2003, 2002, and 2001 ........................................ 4 Statement of Income For year ending December 31, 2003, 2002, and 2001 .............................. 5 Statement of Stockholders' Equity For year ending December 31, 2003, 2002, and 2001 .............................. 6 Statement of Cash Flows For year ending December 31, 2003, 2002, and 2001 .............................. 7 Notes to US GAAP Financial Statements ....................................................... 8-29
Report of Independent Auditors We have audited the accompanying balance sheets of Jorf Lasfar Energy Company S.C.A (the "Company") as of December 31, 2003, 2002 and 2001, and the related statements of income, of stockholders' equity and of cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jorf Lasfar Energy Company S.C.A at December 31, 2003, 2002 and 2001, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Price Waterhouse Casablanca, Morocco, February 10, 2004 JORF LASFAR ENERGY COMPANY BALANCE SHEET
Note December 31, 2003 December 31, 2002 December 31, 2001 ---- ----------------- ----------------- ----------------- (000) U.S. Dollars (000) U.S. Dollars (000) U.S. Dollars ASSETS Current Assets Cash .............................................. 3.1 65,611 46,683 67,106 Inventories ....................................... 2.c & 4 38,548 40,615 31,759 Account Receivable ................................ 5 85,486 76,175 86,515 Prepayments ....................................... 6 8,138 10,431 4,477 Net investment from $ DFL model ................... 2.b & 17.3 38,461 20,206 56,061 Net investment from Euro DFL model ................ 2.b & 17.3 40,942 31,298 21,301 Other ............................................. 0 0 0 ---------- ---------- ---------- Total current assets ....................... 277,186 225,408 267,219 Long Term Assets, net Restricted Cash ................................... 3.2 83,049 53,778 17,140 Fixed Assets ...................................... 7 9,603 6,554 6,284 Net investment from $ DFL model ................... 2.b & 17.3 638,004 678,549 686,660 Net investment from Euro DFL model ................ 2.b & 17.3 411,100 374,509 339,492 $ Capacity Charges less than $ DFL model .......... 13.1 713 0 9,907 Euro Capacity Charges less than Euro DFL model .... 13.2 0 0 4,225 Other Long Term Assets ............................ 9 19,058 10,968 9,445 ---------- ---------- ---------- Total Long Term Assets ..................... 1,161,527 1,124,357 1,073,153 ---------- ---------- ---------- Total assets ............................... 1,438,713 1,349,765 1,340,372 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable to third parties ................. 10 47,851 25,498 34,764 Accounts payable to related parties ............... 11 176,693 145,065 74,704 VAT Liability .................................... 8 3,972 2,871 3,078 Taxes payable ..................................... 12 7,527 4,866 873 Current part of Long-term loans in US Dollars ..... 15 25,749 25,749 24,873 Current part of Long-term loans in Euro ........... 15 44,491 36,855 31,167 Other current liabilities ......................... 14 7,739 7,955 18,607 ---------- ---------- ---------- Total current liabilities .................. 314,023 248,859 188,066 Non-Current Liabilities Long-term loans in US Dollars ..................... 15 212,426 238,174 251,667 Long-term loans in Euro ........................... 15 367,052 340,912 319,457 $ Capacity Charges greater than $ DFL model ....... 13.1 0 2,441 0 Euro Capacity Charges greater than Euro DFL model.. 13.2 422 236 0 Deferred Tax Liability ............................ 2.f 0 13,005 6,097 Derivative Instrument Liability ................... 20 22,050 21,410 10,665 Unfunded Pension Obligations ...................... 19.1 9,878 5,693 0 ---------- ---------- ---------- Total non-current liabilities .............. 611,828 621,872 587,886 Commitment and Contingencies .......................... 22 Stockholders' Equity Common Stock ...................................... 16.1 58 58 58 Convertible Stockholders' Securities .............. 16.2 201,425 201,425 201,425 Preferred Stock ................................... 16.3 185,930 185,930 185,930 Retained Earnings ................................. 16.4 147,499 113,031 187,672 Other Comprehensive Income or (Loss) .............. 20 (22,050) (21,410) (10,665) ---------- ---------- ---------- Total stockholders' equity ................. 512,862 479,033 564,420 ---------- ---------- ---------- Total liabilities and stockholders' equity.. 1,438,713 1,349,765 1,340,372
The accompanying Notes 1 to 23 are an integral part of these financial statements. Page 4 JORF LASFAR ENERGY COMPANY STATEMENT OF INCOME
January 1, 2003 January 1, 2002 January 1, 2001 to to to Note December 31, 2003 December 31, 2002 December 31, 2001 -------- ------------------ ------------------ ------------------ (000) U.S. Dollars (000) U.S. Dollars (000) U.S. Dollars REVENUE Lease Revenue from $ DFL model ......... 2.b 17.2 81,793 88,464 100,679 Lease Revenue from Euro DFL model ...... 2.b 17.2 104,635 95,078 94,545 Energy Payments ........................ 128,981 130,446 116,709 O&M Revenue ............................ 45,066 42,930 38,809 Supplemental Capacity Charges .......... 3,949 4,017 3,887 Sale of Fly Ash ........................ 214 247 303 License Tax Reimbursement .............. 4,102 0 0 Others ................................. 138 3,090 2,364 -------- -------- -------- TOTAL REVENUE 368,878 364,272 357,296 OPERATING EXPENSES Coal Cost .............................. 129,935 126,957 115,066 Fuel Oil Cost .......................... 1,280 910 754 O&M Costs .............................. 33,554 25,057 20,329 Operator's Incentive ................... 2,784 3,721 2,099 Generator Costs ........................ 11,994 11,397 12,547 License Tax Costs ...................... 4,102 0 0 Amortization of Major Maintenance ...... 9.1 1,935 1,128 261 Depreciation of Other Assets ........... 2,093 1,624 470 Provision For Future Pension Obligations 2,902 5,427 0 -------- -------- -------- TOTAL OPERATING EXPENSES 190,580 176,222 151,525 OPERATING INCOME ............................. 178,299 188,050 205,771 FINANCIAL ITEMS Financial Income ....................... 2,025 1,764 4,735 Exchange Gain (+) or Loss (-) .......... 2.d (8,605) (1,558) 8,197 Financial Expenses ..................... 18 (49,425) (44,834) (50,617) -------- -------- -------- TOTAL FINANCIAL ITEMS (56,005) (44,628) (37,685) INCOME BEFORE TAXES 122,293 143,422 168,086 Income Taxes Current ......................... 2.e 15,448 4,226 603 Deferred ........................ 2.f (13,005) 6,908 6,097 -------- -------- -------- NET INCOME 16.4 & 21 119,850 132,288 161,386
The accompanying Notes 1 to 23 are an integral part of these financial statements. Page 5 JORF LASFAR ENERGY COMPANY STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 2003 January 1, 2002 January 1, 2001 to to to Note December 31, 2003 December 31, 2002 December 31, 2001 ------ ----------------- ------------------ ----------------- COMMON STOCK At beginning and end of period in number of shares 16.1 5,500 5,500 5,500 At beginning and end of period in thousands of USD 16.1 58 58 58 (000) U.S. Dollars CONVERTIBLE STOCKHOLDERS' SECURITIES ------------------ At beginning of period 201,425 201,425 387,355 Conversion of Convertible Stockholders' Securities to Preferred Stock 0 0 (185,930) Conversion of Convertible Stockholders' Securities to Common Stock 0 0 0 ----------------- ----------------- ---------------- At end of period 16.2 201,425 201,425 201,425 PREFERRED STOCK At beginning of period 185,930 185,930 0 Conversion of Convertible Stockholders' Securities to Preferred Stock 0 0 185,930 Conversion of Preferred Stock to Common Stock 0 0 0 ----------------- ----------------- ---------------- At end of period 16.3 185,930 185,930 185,930 RETAINED EARNINGS (DEFICIT) At beginning of period 113,031 187,672 296,409 Net income 119,850 132,288 161,386 Common stock dividend (64,973) (184,891) (270,123) Preferred stock dividend (9,796) (9,942) 0 Convertible stockholders' securities (10,613) (12,096) 0 ----------------- ----------------- ---------------- At end of period 16.4 147,499 113,031 187,672 OTHER COMPREHENSIVE INCOME (LOSS) (a) Derivative Instruments At beginning of period (21,410) (10,665) 0 Reclassification of gains (losses) included in net income 6,871 5,811 699 Unrealized gain (loss) on derivative instruments (7,511) (16,556) (11,364) ----------------- ----------------- ---------------- At end of period 20 (22,050) (21,410) (10,665) ----------------- ----------------- ---------------- 512,862 479,034 564,420 ================= ================= ================ (a) Disclosure of Comprehensive Income (Loss) Net income 119,850 132,288 161,386 Derivative instruments Reclassification of gains (losses) in net income 6,871 5,811 699 Unrealized gain (loss) on derivative instruments (7,511) (16,556) (11,364) ----------------- ----------------- ---------------- Total Comprehensive Income 119,211 121,543 150,721 ================= ================= ================
The accompanying Notes 1 to 23 are an integral part of these financial statements. Page 6 JORF LASFAR ENERGY COMPANY STATEMENT OF CASH FLOWS
January 1, 2003 January 1, 2002 January 1, 2001 to to to December 31, 2003 December 31, 2002 December 31, 2001 ------------------ ------------------ ------------------ Note (000) U.S. Dollars (000) U.S. Dollars (000) U.S. Dollars ------ CASH FLOWS FROM OPERATING ACTIVITIES Payments received from ONE ....................... $ 426,250 $ 471,044 $ 411,872 Interest received ................................ 1,870 1,748 4,543 Insurance Payments ............................... (5,699) (5,665) (7,104) Payments of Operating Costs ...................... (233,068) (249,255) (228,771) Cash Effect of Value Added Tax ................... 2,463 (321) 4,430 --------- --------- --------- Net cash provided by operating activities.. 21 191,816 217,551 184,970 CASH FLOWS USED FOR INVESTING ACTIVITIES Net (increase) in restricted cash ................ (25,942) (36,638) (17,140) Acquisition of fixed assets ...................... (2,300) (3,957) (5,501) Payment of Major Maintenance costs ............... (6,261) (93) (21,504) --------- --------- --------- Net cash used in investing activities ..... (34,503) (40,688) (44,145) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans .............................. 0 0 92,589 Proceeds of share capital payments ............... 0 0 0 Repayment of loans ............................... (65,639) (57,964) (41,961) Payment of Convertible Securities interest ....... (11,417) (12,386) 0 Payment of Preferred Stock dividend .............. (10,539) (10,181) 0 Payment of Common Stock dividend ................. (54,877) (121,933) (189,600) Repayment of Stockholders loans .................. 0 0 0 Purchase of Preferred Stock shares ............... 0 0 0 Purchase of Common Stock shares .................. 0 0 0 --------- --------- --------- Net cash provided by financing activities.. (142,472) (202,464) (138,972) Effect of exchange rate changes on cash .......... 4,087 5,178 (1,950) CASH AT BEGINNING OF PERIOD ............................. 46,683 67,106 67,203 NET INCREASE (DECREASE) IN CASH DURING PERIOD ........... 18,928 (20,422) (97) --------- --------- --------- CASH AT END OF PERIOD ................................... 3.1 $ 65,611 $ 46,683 $ 67,106 ========= ========= ========= SUPPLEMENTAL CASH FLOWS INFORMATION Cash paid during the year- Interest 49,136 56,054 45,486 Income taxes 12,826 5,150 6,173
The accompanying Notes 1 to 23 are an integral part of these financial statements. Page 7 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 1. GENERAL A. BACKGROUND The power station at Jorf Lasfar is located on the Atlantic coast of Morocco, adjacent to the Port of Jorf Lasfar, in the Province of El Jadida. This location is approximately 127 km south--west of Casablanca. Units 1 and 2 of the power station were constructed by GEC Alstom for the Moroccan Electricity Company, Office National de l'Electricite ("ONE"), and are now in commercial operation. Each of these existing Units is 330 MW, fired by coal. In October of 1994, the ONE issued a public tender for international companies to expand the power station at Jorf Lasfar. In February of 1995, the ONE selected the "Consortium" of ABB Energy Ventures and CMS Generation as the preferred bidder and exclusive partner for negotiation. In April of 1996, the Consortium and the ONE reached agreement in principle, and initialed the necessary Project Agreements. B. ESTABLISHMENT In order to officially conclude and implement these Project Agreements, the Consortium established the Jorf Lasfar Energy Company (the "Company" or "JLEC") on January 20, 1997. The Company was established as a limited partnership ("societe en commandite par actions") in accordance with the Laws of the Kingdom of Morocco, with Commercial Registration Number 86655, Fiscal Identification Number 1021595, and Patente Number 35511274. In accordance with its charter documents, the Company's objective and purpose is to construct, operate, manage and maintain the power station at Jorf Lasfar, including the development, financing, engineering, design, construction, commissioning, testing, operation and maintenance of two (2) new coal-fired Units, which are very similar in size and technology to the existing Units. In order to secure its fuel supply the Company also operates and maintains the coal-unloading pier in the Port of Jorf Lasfar. For these activities, the Company received a "right of possession" ("droit de jouissance") for the Site, the existing Units, the new Units and coal unloading pier. This "right of possession" will continue for the duration of the Project Agreements, which is anticipated to be in the range from 15 to 30 years. C. COMPANY LOAN, TRANSFER OF POSSESSION, PROJECT FINANCING AND INITIAL DISBURSEMENT On September 12, 1997, all Project Agreements were signed, the Company Loan Agreement was executed and the first disbursement of the Company Loan was used to pay the TPA fee to ONE. As a consequence, JLEC received possession of the power station at Jorf Lasfar on September 13, 1997, and began to sell its available capacity and net generation to ONE. All remaining requirements for project financing were completed in November, and initial disbursement of the Project Loans occurred on November 25, 1997. D. CONSTRUCTION, COMMERCIAL OPERATION, PURCHASE OF COMPANY LOAN AND REPAYMENT OF PROJECT LOANS After a period of construction lasting 33 months and 41 months, Unit 3 and 4 began normal commercial operation on June 9, 2000, and February 2, 2001, respectively. Consequently, the JLEC stockholders purchased 100% of the Company Loan Notes on December 11, 2000, and JLEC began the repayment of all Project Loans on May 15, 2001. After JLEC completes the repayment of all Project Loans (which is scheduled for February 15, 2013), ONE has the option to pay JLEC the Termination Amount, and then terminate all Project Agreements and retake possession of the Site and power station at Jorf Lasfar. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PREPARATION OF FINANCIAL STATEMENTS The Company's financial statements are prepared using the historical cost convention. The accounting and reporting policies of the Company are in accordance with the generally accepted accounting principles of Morocco, which are called "Code General de Normalisation Comptable" or "CGNC". Financial statements are prepared in accordance with these CGNC standards, and expressed in Dirhams. In addition to and separately from Moroccan (CGNC) financial statements in Dirhams, the Company uses the U.S Dollar as functional currency, and has prepared these financial statements in accordance with generally accepted accounting principles of the United States. Page 8 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 B. REVENUE RECOGNITION On September 12, 1997, the Company and the Office National de L'Electricite executed a set of contracts related to the power station at Jorf Lasfar. In accordance with Statement of Financial Accounting Standard (SFAS) No. 13, these contracts are accounted for as a direct financing lease. Accordingly, JLEC (the "Lessor") will receive a stream of payments from ONE (the "Lessee") over the term of the lease. The term of the lease is determined in accordance with SFAS No. 13 Section (5)(f) which has been superseded by SFAS No. 98 Section 22(a). The following policies are used to calculate the minimum lease payments and the unearned income from the lease. MINIMUM LEASE PAYMENTS are determined in accordance with SFAS No. 13 Section 5(j), and are based on the capacity payments that ONE will take to JLEC. These minimum lease payments do not include reimbursable or executory costs such as the reimbursement of coal costs. The sum of these capacity payments equal the gross investment under the lease. This gross investment minus the net investment in the plants is defined to be the UNEARNED INTEREST INCOME. This unearned interest income will be accreted and recognized into earnings as LEASE REVENUE over the lease term using the effective interest method so as to produce a constant periodic rate of return on the net investment. The NET INVESTMENT represents the cost of acquiring and constructing the leased assets. These ACQUISITION AND CONSTRUCTION COSTS include the following items which are capitalized and allocated to Units 1 and 2 and Units 3 and 4 based upon appropriate allocation methodologies: TRANSFER OF POSSESSION AGREEMENT (TPA): The TPA payment is included in the cost basis of the leased assets. DIRECT CONSTRUCTION COSTS: All direct costs related to construction are included in the cost basis of the leased assets. CAPITALIZED COSTS: Interest and financing costs incurred during construction are capitalized and included in the cost of the constructed units. PROJECT DEVELOPMENT COSTS AND FEES: These costs and fees are also capitalized and included in the cost basis of the leased assets. FINANCING COSTS: Interest expense is recognized on the effective interest method over the life of the debt. Other financing costs such as commitment fees, guarantee fees, etc. are considered a component of the interest expense of the related debt or financing. As such, they are amortized into expense using the effective interest method over the life of the related debt or financing. C. INVENTORIES The Company accounts for inventories by consistently applying the FIFO or average cost method to each item, and uses the conservatism principle (lesser of market value or cost) in its procedures for valuing inventories. Page 9 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 D. FOREIGN CURRENCY TRANSACTIONS The books and records of the Company for U.S. GAAP are maintained in U.S. Dollars, which is both the reporting and functional currency. Transactions in other currencies are translated to U.S. Dollars at the spot rate for current period expenses and at the settlement rate for non-period transactions. Monetary assets and monetary liabilities outstanding in other foreign currencies on balance sheet dates are translated into U.S. Dollars at rates prevailing on such balance sheet dates. Exchange gains and losses on those foreign currency operations are included in determining net income for the period in which exchange rates change. E. CORPORATE TAX Current Income tax is determined under Moroccan Income tax rules. In 1997, JLEC signed a "tax incentive" convention with the Moroccan tax authorities. The main principles of this convention are summarized below: - - Income is subject to corporate tax and "Produit de Solidarite National" tax (PSN) - - PSN tax rate is 8.75% and is not subject of any tax holiday - - Income tax holiday period is ten years - - income tax holiday period starts on the "commercial operation date" for each unit - - income tax holiday is 100% during the first five-year period then at 50% of the income tax rate during the second five-year period - - income not related to the sale of electricity is subject to a tax rate of 35% The "commercial operation date" for Units 1 and 2, Unit 3 and Unit 4 were September 1997, June 2000 and February 2001, respectively. On September 13, 2002, income related to Units 1 and 2 became taxable at 17.5%. Unit 3 and Unit 4 are still in the 100% tax holiday period. The PSN tax was eliminated on January 1, 2001. F. DEFERRED INCOME TAX Starting September 13, 2002, JLEC tax rate on Units 1&2 is 17.5%. JLEC determines and books the current income tax (US$ 15,448,426 for 2003 ) as required by the tax laws and regulations of Morocco. Temporary differences between the US GAAP and the CGNC balance sheets are creating the need to record deferred income taxes. The main temporary differences result from the use of the Direct Financing Lease method under US GAAP. In particular, the treatment of Net Investment and revenue recognition (as disclosed in note 2.b above) under US GAAP are quite different from the treatment of these items under Moroccan GAAP . The total of all the deferred tax liabilities is $ 0 ($13,005,298 as of December 31, 2002 minus $13,005,298 for 2003). G. OFF BALANCE SHEET COMMITMENTS The Company discloses all off-balance sheet commitments, if any, on balance sheet dates. H. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual result could differ from these estimates and assumptions. Page 10 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 3. CASH 3.1 Cash The Company's cash as of December 31, 2003, includes the initial capital deposits of the Company's stockholders, as explained further in Note 16.1 . Such cash is held in Moroccan Dirhams in accounts at CITIBANK MAGHREB, which is located at Zenith Millenium Immeuble 1, Lotissement Attaoufik, Sidi Maarouf, Casablanca Morocco. The remainder of the company's cash is held by the Offshore Collateral Agent, Deutsche Bank Trust Company Americas in US$ and Euro, and by the Onshore Collateral Agent, BMCI - Banque Marocaine pour le Commerce et l'Industrie in Morocain Dirhams and US$. The cash balances includes the following categories:
12/31/03 12/31/02 12/31/01 US$ US$ US$ --------------- ----------------- -------------------- Off-shore Revenue in US$ 24,426,875 22,666,875 36,223,422 Off-shore Revenue in Euro 6,590,224 5,331,124 5,000,414 -------------- ----------------- -------------------- Total Off-Shore Revenue 31,017,099 27,997,998 41,223,836 On-shore O&M Account - Generator 6,946,245 793,293 2,899,102 On-shore O&M Account - Operator 4,279,000 3,258,836 2,298,642 Off-shore O&M Accounts 4,546 10,607 8,464 -------------- ----------------- -------------------- Total O&M Accounts 11,229,792 4,062,735 5,206,208 Fuel & Spare Part Accounts 12,929,694 5,289,381 12,080,028 On-shore Construction Accounts 0 0 1,100,363 Off-shore Debt Service Accrual Accounts in US$ 3,734,278 3,843,187 3,540,479 Off-shore Debt Service Accrual Accounts in Euro 6,637,737 5,433,301 3,898,143 -------------- ----------------- -------------------- Total Debt Service Accrual Accounts 10,372,015 9,276,488 7,438,623 Stockholder capital deposits 62,863 56,624 56,624 -------------- ----------------- -------------------- Total 65,611,462 46,683,227 67,105,682 ============== ================= ==================== 3.2 Restricted Cash The Reserve Accounts are as follow: Major Maintenance Reserve Account in US$ 3.4 a 2,500,000 2,500,000 5,000,000 Fixed O&M Reserve Account in US$ 3.4 b 4,800,000 4,800,000 9,600,000 Debt Service Reserve Account in US$ 3.4 c 11,200,000 11,730,000 730,000 Super Reserve Account in US$ 3.4 d 45,600,000 18,100,000 0 Distribution Account in US$ 0 0 0 -------------- ----------------- -------------------- Off-shore Reserve Accounts in US$ 64,100,000 37,130,000 15,330,000 Fixed O&M Reserve Account in Euro 243,656 197,262 161,372 Debt Service Reserve Account in Euro 3.4 e 18,705,220 16,450,805 1,649,031 -------------- ----------------- -------------------- Off-shore Reserve Accounts in Euro 18,948,876 16,648,067 1,810,404 -------------- ----------------- -------------------- Total Reserve Accounts 83,048,876 53,778,067 17,140,404 ============== ================= ==================== 3.3 Total Cash Cash 3.1 65,611,462 46,683,227 67,105,682 Restricted Cash in Reserve Accounts 3.2 83,048,876 53,778,067 17,140,404 -------------- ----------------- -------------------- 148,660,339 100,461,294 84,246,086 ============== ================= ====================
3.4 Letters of Credit Additional liquidity is available, if needed for debt service, from Sponsor (CMS and ABB) Letters of Credit in the following accounts:
12/31/03 12/31/02 12/31/01 -------------------- ------------------- -------------------- a. Major Maintenance Reserve Account US$ 2,500,000 2,500,000 0 b. Fixed O&M Reserve Account US$ 4,800,000 4,800,000 0 c. Debt Service Reserve Account US$ 11,300,000 11,300,000 22,600,000 d. Super Reserve Account US$ 39,086,700 47,900,000 36,800,000 e. Debt Service Reserve Account Euro 15,000,000 15,000,000 30,000,000
Page 11 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 4. INVENTORIES The inventories are detailed as follows for the year ending:
12/31/03 12/31/02 12/31/01 US$ US$ US$ ------------------ ------------------- ------------------- Stock of Coal 4.1 24,763,321 22,499,748 23,305,684 Stock of Fuel-oil 4.2 1,638,256 2,078,600 2,988,752 Stock of Spare Parts 4.3 10,940,862 15,081,606 4,952,377 Other Stocks (Chemicals, Oils,...) 1,205,566 954,692 512,445 ------------------ ------------------- ------------------- 38,548,005 40,614,646 31,759,259 ================== =================== ===================
4.1 The stock of coal represents the value of 397,745 tones existing in the coal storage area plus 184,318 tones in transit to Jorf Lasfar, for a total inventory of 582,063 tones as of December 31, 2003 (606,115 tones total as of December 31, 2002 and 643,042 tones total as of December 31, 2001). 4.2 The stock of fuel oil represents 9,471 m3 existing in the fuel tanks as of December 31, 2003 (12,300 m3 as of December 31, 2002). 4.3 The stock of Spare Parts represents the value of spare parts as of December 31, 2003, that were purchased after the close-out of the Net Investment on December 31, 2000. ($ 15,081,606 as of December 31, 2002). 5. RECEIVABLES The "Accounts Receivables" as of December 31, 2003 are detailed as follows:
12/31/03 12/31/02 12/31/01 US$ US$ US$ ------------------ ------------------- ------------------- Account Receivable - ONE 5.1 85,214,510 76,098,673 85,811,099 Account Receivable - Others 5.2 271,345 76,097 704,024 ------------------ ------------------- ------------------- 85,485,855 76,174,769 86,515,123 ================== =================== ===================
5.1 The account receivable - ONE includes November 2003 and December 2003 invoices The account receivable balance as of December 31, 2002 was US$ 76,098,673 (Nov. and Dec. Invoices). 5.2 The other receivables include a) invoices to Valcen Gie (association of Moroccan cement companies) for purchases of fly ash during 4Q 2003 (US$ 71,101), b) accrued interest earned by investment of JLEC's cash balances ($ 67,425), and c) other receivable (US$ 132,819). 6. PREPAYMENTS The "Prepayments" as of December 31, 2003 are detailed as follows:
12/31/03 12/31/02 12/31/01 US$ US$ US$ ----------------- ------------------- ------------------- Prepaid Insurance 3,599,349 3,582,404 3,822,746 Prepayments for Income Tax 3,929,580 5,194,869 0 Other Prepayments 609,277 1,653,537 653,896 ----------------- ------------------- ------------------- 8,138,206 10,430,810 4,476,641 ================= =================== ===================
7. FIXED ASSETS The "Fixed Assets" are detailed as follows for year ending:
12/31/03 12/31/02 12/31/01 US$ US$ US$ ------------------ ------------------- ------------------- Fixed Asset - Gross 11,694,954 7,455,511 5,314,528 Depreciation -2,516,437 -1,884,137 -260,099 Construction in Progress 424,902 982,455 1,229,571 ------------------ ------------------- ------------------- 9,603,420 6,553,829 6,284,000 ================== =================== ===================
8. V.A.T LIABILITY The "V.A.T Liability" account represents the net amount of Value Added Tax as shown below:
12/31/03 12/31/02 12/31/01 US$ US$ US$ ------------------ ---------------- ------------------- Value Added Tax received from ONE to be declared 5,179,969 4,805,614 8,415,330 Value Added Tax to be paid & declared -1,207,918 -1,934,168 -5,337,662 ------------------ ---------------- ------------------- 3,972,052 2,871,446 3,077,668 ================== ================ ===================
9. OTHER LONG TERM ASSETS The Other Long Term Assets are as follows:
12/31/03 12/31/02 12/31/01 US$ US$ US$ -------------- ------------- ------------- Long Term Receivables Loan 3,372,930 2,754,540 2,016,161 Long Term Ash Disposal Site 1,389,307 1,913,308 0 Major Maintenance capitalized during 2001 Unit 1 turbine overhaul outage 7,898,850 7,898,850 7,898,850 Less: Amortization of Unit 1 Major Maintenance in 2001 and 2002 -1,598,577 -470,170 -470,170 9.1 Less: Amortization of Unit 1 Major Maintenance in 2003 -1,036,582 -1,128,407 0 Less: Adjustments due to changes in methodes -599,070 0 0 Major Maintenance capitalized during 2003 - Unit 2 turbine overhaul outage 10,529,148 0 0 9.1 Less: Amortization of Unit 2 Major Maintenance in 2003 -898,320 0 0 -------------- ------------- ------------ 19,057,685 10,968,120 9,444,841 ============== ============= ============
9.1 Capitalized major maintenance costs are amortized over the estimated useful life of the investment, which for the turbine overhauls is 7 years (84 months). Page 12 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 10. ACCOUNTS PAYABLE TO THIRD PARTIES The "Account Payable to Third Parties" includes the main suppliers of JLEC as of December 31, 2003 and are detailed as follows:
12/31/03 12/31/02 12/31/01 US$ US$ US$ --------------------------------------------- Billiton (coal supplier) 2,800,790 4,119,817 16,060,510 Anglo (coal supplier) 6,320,391 2,245,218 5,281,412 RAG Trading (coal supplier) 0 4,499,958 0 Glencore (coal supplier) 20,030,571 2,187,744 0 BULK (coal supplier) 4,470,349 0 0 Total (coal supplier) 0 0 2,267,178 Alstom Power 1,507,931 2,845,357 2,607,834 ONE - Rebate 4,139,908 2,767,010 3,547,774 Other suppliers 8,581,419 6,832,615 4,999,250 --------------------------------------------- Total 47,851,359 25,497,718 34,763,957 =============================================
11. RELATED PARTY TRANSACTIONS During the year 2003, JLEC has booked a number of related parties transactions as follows:
----------------------------------------------------------------------------------------------------- ABB ABB CMS CMS CMS Total EV MAROC MOPCO MOPCO RD & GEN Currencies US$ MAD MAD MAD US$ US$ Acc. Payable 12/31/02 105,764 125,880 -1,452,394 46,253,345 82,686 2003: Management Fees 32,938,795 Incentive Accrual 29,320,319 Other 214,644 237,916 3,582,315 Total Payments 2003 230,400 363,796 30,311,126 46,253,688 82,686 Acc. Payable 90,007 0 4,757,590 29,319,976 0 Acc. Pay. in US$ 90,007 0 542,101 3,340,851 0 3,972,960

Jorf Lasfar Jorf Lasfar Tre Kronor Common Stock Energiaktie- Power Energy Jorf Lasfar Investment AB Cythere 61 AB Cythere 63 bolag AB Handelsbolag AB Total Currencies MAD MAD MAD MAD MAD MAD MAD Acc. Payable 12/31/02 220,166,565 202,553,239 17,613,325 39,682,115 2,164,464 950,199,532 1,432,379,240 Dividend Payable Oct 30, 2003 151,250,000 139,150,000 12,100,000 12,100,000 660,000 289,740,000 605,000,000 Total Payments 2003 156,487,853 143,968,825 12,519,028 8,343,124 455,079 199,779,902 521,553,812 Acc. Payable 214,928,711 197,734,415 17,194,297 43,438,991 2,369,384 1,040,159,631 1,515,825,428 B/S FX Rate MAD/USD 8.776 8.776 8.776 8.776 8.776 8.776 8.776 Acc. Pay. in US$ 24,489,951 22,530,755 1,959,196 4,949,635 269,978 118,520,502 172,720,019

Preferred Stock & Convertible Jorf Lasfar Jorf Lasfar Tre Kronor AB AB Securities Energiaktie- Power Energy Jorf Lasfar Investment Cythere 61 Cythere 63 Total bolag AB Handelsbolag AB Currencies MAD MAD MAD MAD MAD MAD MAD Preferred Stock Dividend payable 0 0 0 0 226,840 99,666,957 99,893,797 Convertible Securities Interest payable 52,028,019 47,865,778 4,162,242 4,162,242 0 0 108,218,281 Total Payments 2003 52,028,019 47,865,778 4,162,242 4,162,242 226,840 99,666,957 208,112,078 Acc. Payable 0 0 0 0 0 0 0 B/S FX Rate MAD/USD 8.776 8.776 8.776 8.776 8.776 8.776 8.776 Acc. Pay. in US$ 0 0 0 0 0 0 0 ----------- Total Accounts Payable to Related Parties 176,692,979
Page 13 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 11. RELATED PARTY TRANSACTIONS (CONTINUED) During 2002, related party transactions consisted of the following:
ABB ABB CMS CMS CMS Total EV MAROC MOPCO MOPCO RD & GEN Currencies US$ MAD MAD MAD US$ US$ Acc. Payable 12/31/01 137,581 78,576 7,726,314 44,598,493 76,753 Management Fees 35,654,033 Incentive Accrual 46,253,517 Other 207,059 778,086 6,139,521 114,510 Total Payments 2002 238,876 730,782 38,693,220 44,598,665 108,577 Acc. Payable 12/31/02 105,764 125,880 1,452,394 46,253,345 82,686 Acc. Pay. in US$ 12/31/02 105,764 12,345 142,433 4,535,976 82,686 4,594,337

Jorf Lasfar Jorf Lasfar Tre Kronor Common Stock Energiaktie- Power Energy Jorf Lasfar Investment AB Cythere 61 AB Cythere 63 Total bolag AB Handelsbolag AB Currencies MAD MAD MAD MAD MAD MAD MAD Acc. Payable 12/31/01 202,826,993 186,600,834 16,226,160 16,226,160 885,063 388,542,764 811,307,973 Dividend Payable Oct 29, 2002 495,000,000 455,400,000 39,600,000 39,600,000 2,160,000 948,240,000 1,980,000,000 Total Payments 2002 477,660,429 439,447,594 38,212,834 16,144,045 880,600 386,583,232 1,358,928,734 Acc. Payable 12/31/02 220,166,565 202,553,239 17,613,325 39,682,115 2,164,464 950,199,532 1,432,379,240 B/S FX Rate MAD/USD 10.197 10.197 10.197 10.197 10.197 10.197 10.197 Acc. Pay. in US$ 12/31/02 21,591,308 19,864,003 1,727,305 3,891,548 212,265 93,184,224 140,470,652

Preferred Stock & Jorf Lasfar Jorf Lasfar Tre Kronor Convertible Securities Energiaktie- Power Energy Jorf Lasfar Investment AB Cythere 61 AB Cythere 63 Total bolag AB Handelsbolag AB Currencies MAD MAD MAD MAD MAD MAD MAD Preferred Stock Dividend payable 0 0 0 0 261,774 115,016,078 115,277,852 Convertible Securities Interest payable 63,882,171 58,771,597 5,110,574 5,110,574 16,749 7,359,167 140,250,832 Total Payments 2002 63,882,171 58,771,597 5,110,574 5,110,574 278,523 122,375,245 255,528,684 Acc. Payable 12/31/02 0 0 0 0 0 0 0 B/S FX Rate MAD/USD 10.197 10.197 10.197 10.197 10.197 10.197 10.197 Acc. Pay. in US$ 12/31/02 0 0 0 0 0 0 0 Total Accounts Payable to Related Parties 145,064,990
During 2001, related party transactions consisted of the following:
ABB ABB ABB ABB CMS CMS CMS Total EV Secheron Secheron MAROC MOPCO MOPCO RD & GEN Currencies US$ DEM CHF MAD MAD MAD US$ US$ Acc. Payable 12/31/00 43,545 - - - 16,747,904 96,757,074 200,667 Management Fees 35,287,098 Incentive Accrual 44,314,093 Other 331,716 375,000 25,200 469,461 5,873,718 471,870 Total Payments 2001 237,679 375,000 25,200 390,885 38,434,970 96,472,673 595,784 Acc. Payable 12/31/01 137,581 - - 78,576 7,726,314 44,598,493 76,753 Acc. Pay. in US$ 12/31/01 137,581 - - 6,777 666,349 3,846,356 76,753 4,733,816

Jorf Lasfar Jorf Lasfar Tre Kronor Jorf Lasfar AB AB Cythere 63 Energiaktie- Power Energy Investment Handels- Cythere Total bolag AB AB bolag 61 Currencies MAD MAD MAD MAD MAD MAD MAD Dividend Payable Apr 24, 2001 790,200,000 412,500,000 379,500,000 33,000,000 33,000,000 1,800,000 1,650,000,000 Dividend Payable Oct 29, 2001 650,598,000 339,625,000 312,455,000 27,170,000 27,170,000 1,482,000 1,358,500,000 Total Payments 2001 1,052,255,236 549,298,007 505,354,166 43,943,841 43,943,841 2,396,937 2,197,192,027 Acc. Payable 12/31/01 388,542,764 202,826,993 186,600,834 16,226,160 16,226,160 885,063 811,307,973 B/S FX Rate MAD/USD 11.60 11.60 11.60 11.60 11.60 11.60 11.60 Acc. Pay. in US$ 12/31/01 33,509,510 17,492,626 16,093,216 1,399,410 1,399,410 76,331 69,970,502 Total Accounts Payable to Related Parties 74,704,318
Page 14 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 12. TAXES PAYABLE: The "taxes payable" includes the following items as of December 31, 2003:
12/31/03 12/31/02 12/31/01 US$ US$ US$ --------------- ---------------- -------------- Value Added Tax on behalf of foreign suppliers 309,190 299,199 312,044 Income Tax 2001 0 0 186,202 Income Tax 2002 0 4,226,098 0 Income Tax 2003 5,393,931 0 0 Withholding Tax 260,841 155,281 192,380 Payroll Tax 237,358 185,575 182,715 Licence Tax 1,325,971 0 0 --------------- ---------------- -------------- Total 7,527,291 4,866,153 873,340 =============== ================ ==============
13. CAPACITY CHARGES
13.1 $ Capacity Charges greater than $ DFL Model Actual DFL model --------------- ---------------- $ Capacity Min Lease --------------- ---------------- Charges Payments Difference --------------- ---------------- -------------- CGNC US GAAP US GAAP --------------- ---------------- -------------- USD USD USD --------------- ---------------- -------------- $ Capacity Charges 103,690,956 104,516,335 -825,379 $ O.N.E Rebate -2,761,910 -2,874,199 112,289 --------------- ---------------- -------------- 2003 in USD 100,929,046 101,642,136 -713,090 $ Capacity Charges greater than $ DFL Model -713,090 --------

Actual DFL model --------------- ---------------- 13.2 Euro Capacity Charges greater than Euro DFL Model Euro Capacity Min Lease --------------- ---------------- Charges Payments Difference --------------- ---------------- -------------- CGNC US GAAP US GAAP --------------- ---------------- -------------- Euro Euro Euro/USD --------------- ---------------- -------------- Euro Capacity Charges 125,149,979 124,917,610 232,369 Euro O.N.E Rebate -3,333,492 -3,435,234 101,742 --------------- ---------------- -------------- 2003 in Euro 121,816,487 121,482,376 334,111 B/S FX Rate X 1.263417 -------------- Euro Capacity Charges greater than Euro DFL Model in USD 422,122

13.1 $ Capacity Charges greater than $ DFL Model Actual DFL model --------------- ---------------- $ Capacity Min Lease --------------- ---------------- Charges Payments Difference --------------- ---------------- -------------- CGNC US GAAP US GAAP --------------- ---------------- -------------- USD USD USD --------------- ---------------- -------------- $ Capacity Charges 152,243,461 148,653,918 3,589,543 $ O.N.E Rebate -7,466,514 -6,317,791 -1,148,723 --------------- ---------------- -------------- 2002 in USD 144,776,947 142,336,127 2,440,820 $ Capacity Charges greater than $ DFL Model 2,440,820 ---------

Actual DFL model --------------- ---------------- 13.2 Euro Capacity Charges greater than Euro DFL Model Euro Capacity Min Lease --------------- ---------------- Charges Payments Difference --------------- ---------------- -------------- CGNC US GAAP US GAAP --------------- ---------------- -------------- Euro Euro Euro/USD --------------- ---------------- -------------- Euro Capacity Charges 131,283,947 130,150,792 1,133,155 Euro O.N.E Rebate -6,438,591 -5,531,409 -907,183 --------------- ---------------- -------------- 2002 in Euro 124,845,355 124,619,384 225,971 - ------------ B/S FX Rate X 1.046582 -------------- Euro Capacity Charges greater than Euro DFL Model in USD 236,497
Page 15 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 13. CAPACITY CHARGES (CONTINUED)
13.1 $ Capacity Charges greater than $ DFL Model Actual DFL model --------------- ---------------- $ Capacity Min Lease --------------- ---------------- Charges Payments Difference --------------- ---------------- --------------- CGNC US GAAP US GAAP --------------- ---------------- --------------- USD USD USD --------------- ---------------- --------------- $ Capacity Charges 167,725,226 174,863,943 -7,138,718 $ O.N.E Rebate -4,643,978 -1,876,144 -2,767,834 --------------- ---------------- --------------- 2001 in USD 163,081,248 172,987,799 -9,906,551 $ Capacity Charges greater than $ DFL Model -9,906,551 ----------

Actual DFL model --------------- ---------------- 13.2 Euro Capacity Charges greater than Euro DFL Model Euro Capacity Min Lease --------------- ---------------- Charges Payments Difference --------------- ---------------- --------------- CGNC US GAAP US GAAP --------------- ---------------- --------------- Euro Euro Euro/USD --------------- ---------------- --------------- Euro Capacity Charges 114,874,856 117,731,467 -2,856,611 Euro O.N.E Rebate -3,180,600 -1,263,161 -1,917,440 --------------- ---------------- --------------- 2001 in Euro 111,694,256 116,468,307 -4,774,051 - ------------ B/S FX Rate X 0.88504 --------------- Euro Capacity Charges greater than Euro DFL Model in USD -4,225,210
14. OTHER CURRENT LIABILITIES The "Other Current Liabilities" as of December 31, 2003 are detailed as follows:
12/31/03 12/31/02 12/31/01 US$ US$ US$ --------------- ---------------- --------------- Accrued Expenses: interest, swaps and fees 14.1 5,904,937 6,072,924 17,293,488 Accrued salaries expense 1,198,164 1,390,179 986,669 Liability for Compensated Absences 298,523 307,449 108,027 Other Liabilities 337,780 184,470 218,670 --------------- ---------------- --------------- 7,739,404 7,955,022 18,606,854 =============== ================ ===============
14.1 The accrued interests and fee expenses are detailed by loans as follows:
12/31/03 12/31/02 12/31/01 US$ US$ US$ --------------- ---------------- --------------- OPIC 728,141 807,914 907,733 SACE 1,586,760 1,522,740 1,413,325 WB 1,712,739 1,629,541 1,146,864 US EXIM - Exposure Fees 0 0 12,255,922 US EXIM 1,574,138 1,823,435 1,370,400 ERG 303,158 289,295 199,245 --------------- ---------------- --------------- 5,904,937 6,072,924 17,293,488 =============== ================ ===============
Page 16 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 15. LONG TERM LOANS Long term loans are detailed as follows as of December 31, 2003:
Interest Reimbursement Borrowing Principal --------------- Interest -------------------------- Loan Date Currency Amount Type Rate Payment Maturity Periodicity - ---- --------- -------- --------- ---- ---- ------- -------- ----------- US EXIM 9/12/02 US$ 181,363,762 Fixed 7.2000% Quarterly Feb. 15, 2013 Quarterly OPIC Note A 11/25/97 US$ 46,635,417 Fixed 10.2300% Quarterly Feb. 15, 2013 Quarterly OPIC Note B 02/11/98 US$ 10,175,000 Fixed 9.9200% Quarterly Feb. 15, 2013 Quarterly ----------- 56,810,417 ----------- Total L.T loan in US$ 238,174,179 ----------- Current part in USD 25,748,560 ----------- Non-Current part in USD 212,425,619 -----------

Interest Reimbursement Borrowing Principal --------------- Interest -------------------------- Loan Date Currency Amount Type Rate Payment Maturity Periodicity - ---- --------- -------- --------- ---- ---- ------- -------- ----------- SACE 11/17/03 Euro 179,332,929 Fixed 5.7300% Quarterly Feb. 15, 2013 Quarterly ERG 11/17/03 Euro 23,045,939 Variable 4.16888% Quarterly Feb. 15, 2013 Quarterly World Bank 11/17/03 Euro 123,359,818 Variable 3.9189% Quarterly Feb. 15, 2013 Quarterly ----------- Total L.T loan in Euro 325,738,687 ----------- B/S FX Rate Euro/USD 1.26342 ----------- Total L.T loan in USD 411,543,784 ----------- Current part in USD 44,491,219 ----------- Non-Current part in USD 367,052,565 -----------
Total principal repayments for the next five years are detailed below. Forecasts of interest payments, interest-rate swap payments and guarantee fees are also shown below. For further information regarding swaps, see Note 20.
Remaining Remaining Remaining Principal Principal Principal Principal Principal Interest Swap Guarantee Repayment in Repayment in Repayment in Repayment in Repayment in Payments Payments Fees 2004 2005 2006 2007 2008 2004-2013 2004-2013 2004-2013 In USD US EXIM 19,606,893 19,606,893 19,606,893 19,606,893 19,606,893 62,017,946 0 0 OPIC A 5,041,667 5,041,666 5,041,666 5,041,666 5,041,666 22,657,888 0 0 OPIC B 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 4,793,735 0 0 Total in USD 25,748,560 25,748,559 25,748,559 25,748,559 25,748,559 89,469,569 0 0 In Euro SACE 19,387,344 19,387,344 19,387,344 19,387,344 19,387,344 49,481,105 0 0 ERG 2,491,452 2,491,452 2,491,452 2,491,452 2,491,452 4,730,553 4,774,063 0 WB 13,336,197 13,336,197 13,336,197 13,336,197 13,336,197 22,600,374 25,202,063 5,472,842 Total in Euro 35,214,993 35,214,993 35,214,993 35,214,993 35,214,993 76,812,032 29,976,126 5,472,842 B/S FX Rate Euro/USD 1.26342 1.26342 1.26342 1.26342 1.26342 1.26342 1.26342 1.26342 Total in USD 44,491,219 44,491,219 44,491,219 44,491,219 44,491,219 97,045,624 37,872,347 6,914,481
Page 17 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 15. LONG TERM LOANS (CONTINUED) Long term loans are detailed as follows as of December 31, 2002:
Interest Reimbursement Borrowing Principal ---------------- Interest --------------------------- Loan Date Currency Amount Type Rate Payment Maturity Periodicity US EXIM 9/12/02 US$ 200,971,655 Fixed 7.2% Quarterly Feb. 15, 2013 Quarterly OPIC Note A 11/25/97 US$ 51,677,083 Fixed 10.23% Quarterly Feb. 15, 2013 Quarterly OPIC Note B 02/11/98 US$ 11,275,000 Fixed 9.92% Quarterly Feb. 15, 2013 Quarterly ----------- 62,952,083 ----------- Total L.T loan in US$ 263,923,738 ----------- Current part in USD 25,748,560 ----------- Non-Current part in USD 238,175,178 ----------- Interest Reimbursement Borrowing Principal ---------------- Interest --------------------------- Loan Date Currency Amount Type Rate Payment Maturity Periodicity SACE 11/15/02 Euro 198,720,273 Fixed 5.73% Quarterly Feb. 15, 2013 Quarterly ERG 11/15/02 Euro 25,537,392 Variable 5.14% Quarterly Feb. 15, 2013 Quarterly World Bank 11/15/02 Euro 136,696,015 Variable 4.89% Quarterly Feb. 15, 2013 Quarterly ----------- Total L.T loan in Euro 360,953,680 ----------- B/S FX Rate Euro/USD 1.04658 ----------- Total L.T loan in USD 377,767,743 ----------- Current part in USD 36,855,389 ----------- Non-Current part in USD 340,912,354 -----------
Total principal repayments for the next five years are detailed below. Forecasts of interest payments, interest-rate swap payments and guarantee fees are also shown below. For further information regarding swaps, see Note 20.
Remaining Remaining Remaining Principal Principal Principal Principal Principal Interest Swap Guarantee Repayment in Repayment in Repayment in Repayment in Repayment in Payments Payments Fees 2003 2004 2005 2006 2007 2003-2013 2003-2013 2003-2013 In USD US EXIM 19,606,893 19,606,893 19,606,893 19,606,893 19,606,893 76,033,383 0 0 OPIC A 5,041,667 5,041,666 5,041,666 5,041,666 5,041,666 27,754,052 0 0 OPIC B 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 5,871,955 0 0 Total in USD 25,748,560 25,748,559 25,748,559 25,748,559 25,748,559 109,659,390 0 0 In Euro SACE 19,387,344 19,387,344 19,387,344 19,387,344 19,387,344 60,663,342 0 0 ERG 2,491,452 2,491,452 2,491,452 2,491,452 2,491,452 7,093,552 4,535,473 0 WB 13,336,197 13,336,197 13,336,197 13,336,197 13,336,197 36,148,188 23,844,995 6,757,469 Total in Euro 35,214,993 35,214,993 35,214,993 35,214,993 35,214,993 103,905,082 28,380,468 6,757,469 B/S FX Rate Euro/USD 1.04658 1.04658 1.04658 1.04658 1.04658 1.04658 1.04658 1.04658 Total in USD 36,855,389 36,855,389 36,855,389 36,855,389 36,855,389 108,745,223 29,702,496 7,072,248
Page 18 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 15. LONG TERM LOANS (CONTINUED) Long term loans are detailed as follows as of December 31, 2001:
Drawdown Drawdown Interest Interest Reimbursement Loan Date Currency Amount Type Rate Payment Maturity Periodicity US EXIM 11/15/2001 US$ 207,446,204 Variable 4.14% Quarterly Feb. 15, 2013 Quarterly OPIC Note A 11/25/97 US$ 56,718,750 Fixed 10.48% Quarterly Feb. 15, 2013 Quarterly OPIC Note B 02/11/98 US$ 12,375,000 Fixed 10.17% Quarterly Feb. 15, 2013 Quarterly 69,093,750 Total L.T loan in US$ 276,539,954 Current part in USD 24,873,137 Non-Current part in USD 251,666,817

Drawdown Drawdown Interest Interest Reimbursement Loan Date Currency Amount Type Rate Payment Maturity Periodicity SACE 11/15/2001 Euro 218,107,617 Fixed 5.73% Quarterly Feb. 15, 2013 Quarterly ERG 11/15/2001 Euro 28,028,845 Variable 5.34% Quarterly Feb. 15, 2013 Quarterly World Bank 11/15/2001 Euro 150,032,211 Variable 5.09% Quarterly Feb. 15, 2013 Quarterly Total L.T loan in Euro 396,168,673 B/S FX Rate Euro/USD 0.885 Total L.T loan in USD 350,623,797 Current part in USD 31,166,559 Non-Current part in USD 319,457,237
Total principal repayments for the next five years are detailed below. Forecast interest payments, interest-rate swap payments and guarantee fees are also shown below. For further information regarding swaps, see Note 20.
Principal Principal Principal Principal Principal Remaining Remaining Remaining Repayment in Repayment in Repayment in Repayment in Repayment in Interest Swap Guarantee 2002 2003 2004 2005 2006 Payments Payments Fees 2002-2013 2002-2013 2002-2013 In USD US EXIM 18,731,470 19,606,893 19,606,893 19,606,893 19,606,893 87,235,810 0 1,176,315 OPIC A 5,041,667 5,041,666 5,041,666 5,041,666 5,041,666 33,499,497 0 0 OPIC B 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 7,088,426 0 0 Total in USD 24,873,137 25,748,559 25,748,559 25,748,559 25,748,559 127,823,733 0 1,176,315 In Euro SACE 19,387,344 19,387,344 19,387,344 19,387,344 19,387,344 72,907,871 0 0 ERG 2,491,452 2,491,452 2,491,452 2,491,452 2,491,452 8,830,924 4,982,063 0 WB 13,336,197 13,336,197 13,336,197 13,336,197 13,336,197 45,081,853 25,824,728 8,173,329 Total in Euro 35,214,993 35,214,993 35,214,993 35,214,993 35,214,993 126,820,648 30,806,791 8,173,329 B/S FX Rate USD/Euro 0.88504 0.88504 0.88504 0.88504 0.88504 0.88504 0.88504 0.88504 Total in USD 31,166,559 31,166,559 31,166,559 31,166,559 31,166,559 112,240,922 27,265,139 7,233,696
Page 19 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 15. LONG TERM LOANS (CONTINUED) PLEADGE OF STOCK AND OTHER ASSETS As security for the repayment of the loans, and the payment of all related interest, fees and swap obligations, JLEC and its stockholders have entered into various pledge agreements with Deutsche Bank Trust Company Americas, as Offshore Collateral Agent, and with Banque Marocaine pour le Commerce et l'Industrie, as Onshore Collateral Agent, for the benefit of such lenders and other secured parties. Such security shall continue in effect until the repayment in full of all outstanding principal amounts and the payment in full of all related interest, fee and swap obligations, which is scheduled to occur in February of 2013. The principle pledge agreements are: 1. The Stockholder Pledge and Security Agreements, in which each of JLEC's stockholders pledges all of its shares, claims, rights and interests in JLEC to the Offshore Collateral Agent. 2. The Security and Assignment Agreement, in which JLEC assigns to the Offshore Collateral Agent a security interest in all of JLEC's rights, title and interest in the following collateral, among others: a. all of JLEC's contractual rights, b. all rents, profits, income and revenues derived by JLEC from its ownership of the Project, c. all cash deposits and other assets in any of JLEC's accounts with financial institutions, d. all permits, licenses and other governmental authorizations obtained by JLEC in connection with its ownership of the Project, e. all of JLEC's insurance policies and related claims and proceeds, and f. all personal property and inventories of JLEC. 3. The Agreement for Pledge of Shares, in which each of JLEC's stockholders pledges all of its shares, claims, rights and interests in JLEC to the Onshore Collateral Agent, and assigns to the Onshore Collateral Agent the direct payment by JLEC of all dividends and other stockholder distributions if and whenever a Default has occurred and is continuing. 4. The General Delegation of Contract Claims, in which JLEC assigns to the Onshore Collateral Agent the direct payment of any and all contract claims due to JLEC if and whenever a Default has occurred and is continuing. 5. The Pledge over General Operating Accounts, in which JLEC pledges to the Onshore Collateral Agent any and all monies in JLEC's accounts with the Onshore Collateral Agent. 6. The Master Agreement for Assignment of Accounts Receivable as Security, in which JLEC assigns to the Onshore Collateral Agent a security interest in all of the accounts receivable payable by ONE to JLEC under the Power Purchase Agreement. COVENANTS The covenants on the loans also place restrictions on JLEC's payment of dividends and other distributions to JLEC's stockholders. Specifically, JLEC may not: 1. Pay any dividends to its stockholders, or 2. Make any distribution, payment or delivery of property or cash to its stockholders, or 3. Redeem, retire, purchase or otherwise acquire any shares of its capital stock, or 4. Purchase or redeem any subordinated debt except, on quarterly repayment dates and only then after first satisfying all debt service obligations and satisfying all of the following conditions, among others: a. No default shall have occurred, b. The cash balance in all JLEC reserve and accrual accounts shall equal or exceed required levels, c. JLEC's actual debt service coverage ratios for the current quarter and preceding four quarters have all been greater than 1.3, and d. JLEC's forecasted debt service coverage ratios for the next succeeding two quarters are greater than 1.3 JLEC has complied with these covenants since May 2001, when the loans began to be repaid. Page 20 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 16. STOCKHOLDERS' EQUITY The composition of Stockholders' Equity as of December 31, 2003 was: 16.1 COMMON STOCK
Common Stock --------------------------------------------- Number Par value Par value Stockholders of Shares Dirham US Dollar - ----------------------- --------------------------------------------- AB Cythere 63, Sweden.................. 2,634 263,400 27,668 Jorf Lasfar Energiaktiebolag, Sweden... 1,375 137,500 14,443 Jorf Lasfar Power Energy AB, Sweden.... 1,265 126,500 13,288 Tre Kronor Investment AB, Sweden....... 110 11,000 1,155 Jorf Lasfar Handelsbolag, Sweden....... 110 11,000 1,155 AB Cythere 61, Sweden 6 600 63 --------------------------------------------- Total 5,500 550,000 57,773
16.2 CONVERTIBLE STOCKHOLDERS' SECURITIES On December 11, 2000, the JLEC stockholders purchased 100% of all Company Loan Notes for $387,355,000, and amended the Company Loan Agreement to make such stockholder securities convertible into Preferred Stock or Common Stock. On January 1, 2001, the convertible securities (Company Loan Principal) held by AB Cythere 61 and AB Cythere 63 were converted into Preferred Stock as shown below on Note 16.3. Such conversions shall be made into a fixed number of JLEC shares as listed below:
---------------------------------------------- Number Par value Par value Stockholders of Shares Dirham US Dollar - ---------------------- ---------------------------------------------- AB Cythere 63, Sweden................... 0 0 0 Jorf Lasfar Energiaktiebolag, Sweden.... 10,537,024 1,053,702,400 96,838,750 Jorf Lasfar Power Energy AB, Sweden..... 9,694,062 969,406,200 89,091,650 Tre Kronor Investment AB, Sweden........ 842,962 84,296,200 7,747,100 Jorf Lasfar Handelsbolag, Sweden........ 842,962 84,296,200 7,747,100 AB Cythere 61, Sweden................... 0 0 0 ---------------------------------------------- Total 21,917,010 2,191,701,000 201,424,600
Under the terms of the amended Company Loan Agreement summarized below, these convertible securities constitute an hybrid instrument which are delt with in accordance with the substance of the transaction, i.e. as a Preferred Stock equivalent: (a) Expression of the Loan in MAD The outstanding USD 201,424,600 principal amount is expressed as MAD 2,191,701,000 for the purpose of computing interest and principal payments due under this Agreement. However, interest and principal payments will be paid to the stockholders in USD, provided that the Company is not responsible for any losses realized by the stockholders resulting from the depreciation of the value of the MAD relative to the USD. (b) Repayment or conversion into Stock Under the terms of the amended Agreement: - - the Security may only be repaid, in whole or in part, at the Company's option; - - the part of the Security principal held by other Company Lenders listed above may be converted into Common Stock at any time, using the same conversion ratio used for the conversion of the parts of AB Cythere 61 and AB Cythere 63; - - the shares of Preferred Stock issued to AB Cythere 61 and AB Cythere 63 may be converted into Common Stock. In this case, all outstanding Security principal held by other Company Lenders will be mandatorily converted into Common Stock at the same conversion ratio. (c) Interest payment and accruals as Retained Earning In accordance with Amendment N(degree).2, the Company will pay interest on the unpaid principal amount once per year, at the interest rate per annum equal to the greater of (1) the Moroccan maximum deductible rate, and (2) 4.00%. The applicable interest rate for 2003 is 4.00%. Accruals for such interest payments are reported as part of the Retained Earning allocation in Note 16.4, and are not expensed. Page 21 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 16.3 PREFERRED STOCK In accordance with Section 3.01 par.(b) of the amended Company Loan Agreement (see note 16.2 above), the Company as converted on January 1, 2001, all outstanding Company Loan principal held by AB Cythere 61 and AB Cythere 63, at the conversion ratio of one (1) share of Preferred Stock for each one hundred (100) MAD of such Company Loan principal converted into Preferred Stock, as follows:
Preferred Stock ------------------------------------------------- Number Par value Par value Stockholders of Shares Dirham US Dollar -------------------------------------------- ------------------------------------------------- AB Cythere 63, Sweden....................... 20,185,145 2,018,514,500 185,508,183 Jorf Lasfar Energiaktiebolag, Sweden ....... 0 0 0 Jorf Lasfar Power Energy AB, Sweden......... 0 0 0 Tre Kronor Investment AB, Sweden............ 0 0 0 Jorf Lasfar Handelsbolag, Sweden............ 0 0 0 AB Cythere 61, Sweden....................... 45,941 4,594,100 422,217 ------------------------------------------------- Total 20,231,086 2,023,108,600 185,930,400
Such shares are non-participating voting shares of convertible Preferred Stock of the Company, and: - - are convertible at any moment into shares of Common Stock; - - give right to the collection of a minimum priority dividend, at least equal to 4% of the aggregate par value of the preferred shares, - - do not participate in the distribution of the remaining balance of Retained Earning, which is divided among the shares of Common Stock as shown in Note 16.4. 16.4 RECONCILIATION AND ALLOCATION OF RETAINED EARNINGS
US$ ---------------- 2003 ---- Retained Earnings as of December 31, 2002 113,030,506 Retained Earnings increase during 2003 119,850,319 Retained Earnings decrease during 2003 Convertible Securities interest payable as of January 1, 2003 -10,612,757 108,218,281 Dirhams 10.1970 Dirhams per US Dollar Preferred Stock Dividend payable as of January 1, 2003 -9,796,391 99,893,797 Dirhams 10.1970 Dirhams per US Dollar Common Stock Dividend payable as of October 30, 2003 -64,972,722 5,500 Common Stock Shares 110,000 Dirhams per share 605,000,000 Dirhams 9.3116 Dirhams per US Dollar on October 30, 2003 ---------------- Total Retained Earnings 147,498,955
The Retained Earnings are allocated among the stockholders as follows:
Common Convertible Securities Preferred Stock Stock Total --------------------------------------------------------------------------------------- Stockholders Dirhams US Dollars Dirhams US Dollars US Dollars US Dollars - ----------------------------------------- --------------------------------------------------------------------------------------- AB Cythere 63, Sweden.................... 0 0 81,861,977 9,327,725 61,310,884 70,638,608 Jorf Lasfar Energiaktiebolag, Sweden..... 42,733,486 4,869,247 0 0 32,005,492 36,874,739 Jorf Lasfar Power Energy AB, Sweden...... 39,314,807 4,479,707 0 0 29,445,052 33,924,760 Tre Kronor Investment AB, Sweden......... 3,418,679 389,540 0 0 2,560,439 2,949,979 Jorf Lasfar Handelsbolag, Sweden......... 3,418,679 389,540 0 0 2,560,439 2,949,979 AB Cythere 61, Sweden.................... 0 0 186,316 21,230 139,660 160,890 --------------------------------------------------------------------------------------- Total 88,885,652 10,128,034 82,048,293 9,348,954 128,021,967 147,498,955
The allocations for Convertible Securities (88,885,652 Dirhams) and Preferred Stock (82,048,293 Dirhams) are payable as of January 1, 2004, and are scheduled for payment on May 17, 2004. Page 22 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 16.4 RECONCILIATION AND ALLOCATION OF RETAINED EARNINGS (CONTINUED)
2002 US$ ---- -------------- Retained Earnings as of December 31, 2001 187,671,644 Retained Earnings increase during 2002 132,287,908 Retained Earnings decrease during 2002: Convertible Securities interest payable as of January 1, 2002 -12,095,803 140,250,832 Dirhams 11.5950 Dirhams per US Dollar Preferred Stock Dividend payable as of January 1, 2002 -9,942,031 115,277,852 Dirhams 11.5950 Dirhams per US Dollar Common Stock Dividend payable as of October 29, 2002 -184,891,213 5,500 Common Stock Shares 360,000 Dirhams per share 1,980,000,000 Dirhams 10.7090 Dirhams per US Dollar on October 29, 2002 -------------- Total Retained Earnings 113,030,506
The Retained Earnings are allocated among the shareholders as follows:
Common Convertible Securities Preferred Stock Stock Total ------------------------------------------------------------------------------------------ Shareholders Dirhams US Dollars Dirhams US Dollars US Dollars US Dollars - ------------------------------------------------------------------------------------------------------------------------------------ AB Cythere 63, Sweden.................... 0 0 99,666,957 9,774,145 44,357,210 54,131,355 Jorf Lasfar Energiaktiebolag, Sweden..... 52,028,019 5,102,287 0 0 23,155,340 28,257,626 Jorf Lasfar Power Energy AB, Sweden...... 47,865,778 4,694,104 0 0 21,302,912 25,997,016 Tre Kronor Investment AB, Sweden......... 4,162,242 408,183 0 0 1,852,427 2,260,610 Jorf Lasfar Handelsbolag, Sweden......... 4,162,242 408,183 0 0 1,852,427 2,260,610 AB Cythere 61, Sweden 0 0 226,840 22,246 101,041 123,287 ------------------------------------------------------------------------------------------ Total 108,218,281 10,612,757 99,893,797 9,796,391 92,621,358 113,030,506

2001 USD ---- -------------- Retained Earnings as of December 31, 2000 296,408,600 Retained Earnings increase during 2001 161,385,686 Retained Earnings decrease during 2001 Common Stock dividend declared payable on April 24, 2001 -151,362,260 5,500 Common Stock Shares 300,000 Dirhams per share 1,650,000,000 Dirhams 10.9010 Dirhams per US Dollar on April 24, 2001 Common Stock dividend declared payable on October 29, 2001 -118,760,381 5,500 Common Stock Shares 247,000 Dirhams per share 1,358,500,000 Dirhams 11.4390 Dirhams per US Dollar on October 29, 2001 -------------- Total Retained Earnings 187,671,644
The Retained Earnings are allocated among the shareholders as follows:
Common Convertible Securities Preferred Stock Stock Total ------------------------------------------------------------------------------------------- Shareholders Dirhams US Dollars Dirhams US Dollars US Dollars US Dollars - ------------------------------------------------------------------------------------------------------------------------------------ AB Cythere 63, Sweden.................. 7,359,167 634,685 115,016,078 9,919,455 79,323,538 89,877,677 Jorf Lasfar Energiaktiebolag, Sweden... 63,882,171 5,509,458 0 0 41,408,453 46,917,911 Jorf Lasfar Power Energy AB, Sweden.... 58,771,597 5,068,702 0 0 38,095,776 43,164,478 Tre Kronor Investment AB, Sweden....... 5,110,574 440,757 0 0 3,312,676 3,753,433 Jorf Lasfar Handelsbolag, Sweden....... 5,110,574 440,757 0 0 3,312,676 3,753,433 AB Cythere 61, Sweden.................. 16,749 1,445 261,774 22,576 180,691 204,712 ------------------------------------------------------------------------------------------- Total 140,250,833 12,095,803 115,277,852 9,942,031 165,633,810 187,671,644
Page 23 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 17. DIRECT FINANCING LEASE - (D.F.L) As explained in Note 2b, JLEC is using the Direct Financing Lease methodology. Specific accounts were created to reflect this method. These accounts are detailed below. Direct Financing Lease - (D.F.L) as of December 31, 2003 17.1 LONG TERM RECEIVABLES AS OF DECEMBER 31, 2003
US$ Euro ---------------- ------------------ Units 1 to 4 Units 1 to 4 ---------------- ------------------ Total Minimum Lease Payments 1,283,596,155 956,285,785 Minimum Lease Payments for 2003 -101,642,136 -121,482,375 --------------- ----------------- Total of Future Minimum Lease Payments 1,181,954,019 834,803,410 X 1.263417 --------------- ----------------- Total of Future Minimum Lease Payments in US$ 17.3 1,181,954,019 1,054,704,794 ============= =============
The minimum lease payments under the US GAAP model for the next five years are as follows:
US$ Euro ---------------- ---------------- Year Units 1 to 4 Units 1 to 4 --------------- ---------------- ---------------- 2004 116,664,592 116,635,941 2005 116,371,118 107,167,144 2006 108,749,430 92,362,540 2007 96,617,923 85,060,254 2008 104,467,842 84,500,888
17.2 UNEARNED INCOME AS OF DECEMBER 31, 2003
US$ Euro ---------------- ---------------- Units 1 to 4 Units 1 to 4 ---------------- ---------------- Total Unearned Income 587,282,368 568,767,180 ---------------- Lease Revenue 2003 -81,792,828 -91,756,966 X 1.14035 104,635,053 --------------- --------------- ---------------- 505,489,540 477,010,214 X 1.263417 --------------- --------------- Total Remaining Unearned Income in US$ 17.3 505,489,540 602,662,799 =========== ===========
The minimum lease payments under the US GAAP model for the next five years are as follows:
US$ Euro ---------------- ---------------- Year Units 1 to 4 Units 1 to 4 --------------- ---------------- ---------------- 2004 78,203,985 84,230,456 2005 73,392,008 76,117,547 2006 68,172,214 69,587,224 2007 64,172,868 64,534,124 2008 59,591,568 58,711,491
17.3 NET INVESTMENT IN DIRECT FINANCING LEASES AS OF DECEMBER 31, 2003
US$ Euro ---------------- ---------------- Units 1 to 4 Units 1 to 4 ---------------- ---------------- Total of Future Minimum Lease Payments in US$ 17.1 1,181,954,019 1,054,704,794 Total Remaining Unearned Income in US$ 17.2 -505,489,540 -602,662,799 -------------- --------------- Net investment in direct financing leases in US$ 676,464,479 452,041,995 =========== =========== Current part in US$ 38,460,607 40,941,639 Non-Current part in US$ 638,003,872 411,100,356
Page 24 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 Direct Financing Lease - (D.F.L) as of December 31, 2002 17.1 LONG TERM RECEIVABLES AS OF DECEMBER 31, 2002
US$ Euro ---------------- ----------------- Units 1 to 4 Units 1 to 4 ---------------- ----------------- Total Minimum Lease Payments 1,426,008,468 1,081,037,348 Minimum Lease Payments for 2002 -142,336,127 -124,619,384 --------------- ---------------- Total of Future Minimum Lease Payments 1,283,672,341 956,417,964 ------------- ----------- X 1.046582 --------------- ---------------- Total of Future Minimum Lease Payments in US$ 17.3 1,283,672,341 1,000,970,139 ============= =============
The minimum lease payments under the US GAAP model for the next five years are as follows:
US$ Euro ---------------- ---------------- Year Units 1 to 4 Units 1 to 4 --------------- ---------------- ---------------- 2003 101,642,136 121,482,376 2004 116,664,592 116,635,941 2005 116,371,118 107,167,144 2006 106,872,046 90,768,049 2007 96,617,923 85,060,254
17.2 UNEARNED INCOME AS OF DECEMBER 31, 2002
US$ Euro ---------------- ----------------- Units 1 to 4 Units 1 to 4 ---------------- ----------------- Total Unearned Income 673,381,447 668,603,895 ---------------- Lease Revenue 2002 -88,463,713 -99,930,507 X 0.95144 95,077,872 --------------- ---------------- ---------------- 584,917,734 568,673,388 ----------- ----------- X 1.046582 --------------- ---------------- Total Remaining Unearned Income in US$ 17.3 584,917,734 595,163,517 =========== ===========
The Lease Revenue under the US GAAP model for the next five years are as follows:
US$ Euro ---------------- ---------------- Year Units 1 to 4 Units 1 to 4 --------------- ---------------- ---------------- 2003 81,436,213 91,576,926 2004 77,831,811 84,020,822 2005 73,012,360 75,871,769 2006 67,896,425 69,487,000 2007 64,019,517 64,661,480
17.3 NET INVESTMENT IN DIRECT FINANCING LEASES AS OF DECEMBER 31, 2002
US$ Euro ---------------- ----------------- Units 1 to 4 Units 1 to 4 ---------------- ----------------- Total of Future Minimum Lease Payments in US$ 17.1 1,283,672,341 1,000,970,139 Total Remaining Unearned Income in US$ 17.2 -584,917,734 -595,163,517 --------------- ---------------- Net investment in direct financing leases in US$ 698,754,607 405,806,622 =========== =========== Current part in US$ 20,205,960 31,298,090 Non-Current part in US$ 678,548,647 374,508,532
Page 25 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 Direct Financing Lease - (D.F.L) as of December 31, 2001 17.1 LONG TERM RECEIVABLES AS OF DECEMBER 31, 2001
US$ Euro ---------------- ---------------- Units 1 to 4 Units 1 to 4 ---------------- ---------------- Total Minimum Lease Payments 1,638,683,000 1,210,483,496 Minimum Lease Payments for 2001 -172,987,799 -116,468,307 --------------- ---------------- Total of Future Minimum Lease Payments 1,465,695,201 1,094,015,189 ------------- ------------- X 0.88504 --------------- ---------------- Total of Future Minimum Lease Payments in US$ 17.3 1,465,695,201 968,243,542 ============= ===========
The minimum lease payments under the US GAAP model for the next five years are as follows:
US$ Euro ---------------- ---------------- Year Units 1 to 4 Units 1 to 4 --------------- ---------------- ---------------- 2002 147,453,739 125,654,878 2003 108,352,169 125,448,188 2004 121,415,209 118,233,920 2005 120,444,202 108,413,086 2006 109,842,978 91,398,693
17.2 UNEARNED INCOME AS OF DECEMBER 31, 2001
US$ Euro ---------------- ---------------- Units 1 to 4 Units 1 to 4 ---------------- ---------------- Total Unearned Income 823,653,897 792,223,192 ------------ Lease Revenue 2001 -100,679,205 -105,867,406 X 0.89305 94,544,727 ---------------- ---------------- ------------ 722,974,692 686,355,786 ----------- ----------- 91,398,693 ---------------- ---------------- Total Remaining Unearned Income in US$ 17.3 722,974,692 607,450,028 =========== ===========
The Lease Revenue under the US GAAP model for the next five years are as follows:
US$ Euro ---------------- ---------------- Year Units 1 to 4 Units 1 to 4 --------------- ---------------- ---------------- 2002 91,392,805 101,298,144 2003 87,462,185 94,047,617 2004 83,519,951 86,014,881 2005 78,375,499 77,627,453 2006 73,017,083 71,189,178
17.3 NET INVESTMENT IN DIRECT FINANCING LEASES AS OF DECEMBER 31, 2001
US$ Euro ---------------- ---------------- Units 1 to 4 Units 1 to 4 ---------------- ---------------- Total of Future Minimum Lease Payments in US$ 17.1 1,465,695,201 968,243,542 Total Remaining Unearned Income in US$ 17.2 -722,974,692 -607,450,028 ---------------- ---------------- Net investment in direct financing leases in US$ 742,720,509 360,793,514 =========== =========== Current part in US$ 56,060,930 21,301,261 Non-Current part in US$ 686,659,570 339,492,340
Page 26 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 18. FINANCIAL EXPENSES The Financial Expenses are detailed as follows, for the year ending:
12/31/03 12/31/02 12/31/01 US$ US$ US$ ----------- ----------- ----------- Interest, Fees and Swaps incurred from inception to December 31, 2003 Up-Front Fees 25,609,073 25,609,073 25,609,073 Interest Costs 287,290,576 246,526,514 210,187,205 Premiums 23,808,481 23,808,481 23,808,481 Commitment Fees 19,312,672 19,312,672 18,136,357 Arrangement Fees 2,396,273 2,396,273 2,396,273 Other Fees (acceptance fees, Agent fees...etc) 9,754,617 9,297,751 8,875,953 Guarantee Fees 20,598,822 19,101,732 5,496,128 Swaps 37,238,114 30,362,978 25,851,201 ----------- ----------- ----------- 426,008,628 376,415,474 320,360,671 Accrued Interest, Fees, Swaps (see Note 14.1) 5,904,937 6,072,924 17,293,488 ----------- ----------- ----------- Total Interest, Fees and Swaps 431,913,565 382,488,398 337,654,159 Interest, fees and swaps capitalized as part of the project construction for Units 3&4 -210,949,363 -210,949,363 -210,949,363 ----------- ----------- ----------- Interest and swaps expensed - Total 220,964,202 171,539,035 126,704,796 Interest and swaps expensed from 1997 through 2002 -171,539,035 -126,704,796 -76,088,286 ----------- ----------- ----------- Interest and swaps expensed 49,425,167 44,834,239 50,616,510 =========== =========== ===========
19. PENSION PLANS JLEC contributes to the following pension plans: 19.1 COMMON FUND FOR RETIREMENT (CAISSE COMMUNE DES RETRAITES OR CCR) As required by PPA Section 23.2.4, most of JLEC's employees (259 employees of 313, or 84%) plus 1 recent retiree are participants in the CCR defined benefit pension plan. This plan is funded by employee payroll deductions equal to 9% of the employee's gross pay, plus JLEC contributions equal to 18% of the participating employee's gross pay. In 2003, 2002 and 2001, JLEC contributed to the CCR US$ 350,071, US$ 291,036 and US$ 266,972, respectively. Benefits provided under this plan include pension and retiree health insurance. As of December 31, 2003, the benefit obligation totalled US$ 14,584,092 (MAD 127,992,907/8.7762). The fair value of assets contributed to the CCR was US$ 4,705,965 (MAD 41,300,493/8.7762) as of December 31, 2003. The net unfunded benefit obligation as of December 31, 2003 reflected in the accompanying balance sheet was US$ 9,878,126 (MAD 86,692,413/8.7762). The following assumptions were used to perform the actuarial valuations:
2003 2002 2001 ---- ---- ---- ~~Discount rate 6.00% 7.58% 7.58% Rate of compensation increase 6.50% 6.50% 6.50%~~
19.2 MOROCCAN RETIREMENT FUND FOR PROFESSIONALS (CAISSE INTERPROFESSIONNELLE MAROCAINE DE RETRAITES OR CIMR) Employees of JLEC not covered by CCR participate in a fund to which the employer contributes an amount equal to 12 percent of the employee's gross pay. This fund is carried in the employee's name, and the pension benefits an employee will receive depend only on the amount contributed to this account and the returns earned on investments of those contributions. In 2003, JLEC's contribution to that fund amounted to USD 145,677 (USD 109,147 in 2002, and USD 105,912 in 2001) Page 27 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 20. DERIVATIVE INSTRUMENT LIABILITY / OTHER COMPREHENSIVE INCOME JLEC adopted SFAS N(degree). 133 on January 1, 2001. This standard requires JLEC to recognize at fair value on the balance sheet, as assets or liabilities, all contracts that meet the definition of a derivative instrument. Details of all JLEC derivative instruments (interest rate swaps) are provided in the following table as of December 31, 2003, and all such swaps qualify with 100% effectiveness as cash flow hedge for JLEC's variable interest rate loans. Therefore, in accordance with SFAS N(degree). 133, the changes in fair value of these interest rate swaps are reflected directly in Stockholders' Equity under "Other Comprehensive Income or (Loss)". JLEC determines fair value based upon market price estimations provided by the swap providers.
2003 - ------------------------------------------------------------------------------------------------------------------------------------ Fixed Rate Current Current Settlement Forecast of Valuation Credit Swap Paid by Libor Paid Notional and Termination Remaining in Facility Providers Currency JLEC to JLEC Amount Amortization Date Payments Euro - ------------------------------------------------------------------------------------------------------------------------------------ World Bank BNP Euro 6.4115% 2.16888% 41,119,939 Quarterly 2/15/2013 8,400,358 4,942,789 ABN Euro 6.4175% 2.16888% 41,119,939 Quarterly 2/15/2013 8,412,238 4,940,969 CSFB Euro 6.4060% 2.16888% 41,119,939 Quarterly 2/15/2013 8,389,468 4,733,058 ----------- ---------- ---------- 123,359,818 25,202,063 14,616,816 - ------------------------------------------------------------------------------------------------------------------------------------ ERG BNP Euro 6.4700% 2.16888% 7,681,980 Quarterly 2/15/2013 1,590,984 942,887 ABN Euro 6.4750% 2.16888% 7,681,980 Quarterly 2/15/2013 1,592,834 942,179 CSFB Euro 6.4680% 2.16888% 7,681,980 Quarterly 2/15/2013 1,590,245 950,471 ----------- ---------- ---------- 23,045,940 4,774,063 2,835,537 - ----------------------------------------------------------------------------------------------------------------------------------- Total in Euro 17,452,353 ---------- B/S FX rate X 1.26342 Total in USD 22,049,599 ==========

2002 - ------------------------------------------------------------------------------------------------------------------------------------ Fixed Rate Current Current Settlement Forecast of Valuation Credit Swap Paid by Libor Paid Notional and Termination Remaining in Facility Providers Currency JLEC to JLEC Amount Amortization Date Payments Euro - ------------------------------------------------------------------------------------------------------------------------------------ World Bank BNP Euro 6.4115% 3.13725% 45,565,338 Quarterly 2/15/2013 7,947,927 5,729,083 ABN Euro 6.4175% 3.13725% 45,565,338 Quarterly 2/15/2013 7,962,491 5,739,581 CSFB Euro 6.4060% 3.13725% 45,565,338 Quarterly 2/15/2013 7,934,576 5,719,459 ----------- ---------- ---------- 136,696,014 23,844,995 17,188,122 - ----------------------------------------------------------------------------------------------------------------------------------- ERG BNP Euro 6.4700% 3.13725% 8,512,464 Quarterly 2/15/2013 1,511,371 1,089,437 ABN Euro 6.4750% 3.13725% 8,512,464 Quarterly 2/15/2013 1,513,638 1,091,072 CSFB Euro 6.4680% 3.13725% 8,512,464 Quarterly 2/15/2013 1,510,464 1,088,783 ----------- ---------- ---------- 25,537,392 4,535,473 3,269,292 - ------------------------------------------------------------------------------------------------------------------------------------ Total in Euro 20,457,415 ---------- B/S FX rate X 1.04658 Total in USD 21,410,369 ==========

2001 - ------------------------------------------------------------------------------------------------------------------------------------ Fixed Rate Current Current Settlement Forecast of Valuation Credit Swap Paid by Libor Paid Notional and Termination Remaining in Facility Providers Currency JLEC to JLEC Amount Amortization Date Payments Euro - ------------------------------------------------------------------------------------------------------------------------------------ World Bank BNP Euro 6.4300% 3.34000% 48,899,387 Quarterly 12/17/2012 8,614,748 3,369,696 ABN Euro 6.4300% 3.34000% 48,899,387 Quarterly 12/17/2012 8,614,748 3,369,696 CSFB Euro 6.4230% 3.34000% 48,899,387 Quarterly 12/17/2012 8,595,232 3,362,062 ----------- ---------- ---------- 146,698,162 25,824,728 10,101,454 - ----------------------------------------------------------------------------------------------------------------------------------- ERG BNP Euro 6.3600% 3.34000% 9,654,551 Quarterly 12/17/2012 1,662,339 650,231 ABN Euro 6.3600% 3.34000% 9,654,551 Quarterly 12/17/2012 1,662,339 650,231 CSFB Euro 6.3510% 3.34000% 9,654,551 Quarterly 12/17/2012 1,657,385 648,293 ----------- ---------- ---------- 28,963,653 4,982,063 1,948,755 - ------------------------------------------------------------------------------------------------------------------------------------ Total in Euro 12,050,209 ---------- B/S FX rate X 0.88504 Total is USD 10,664,877 ==========
Page 28 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2003 21. CASH FLOWS FOR 2003 Reconciliation of net income to net cash from operating activities under the Direct Method is as follows :
2003 2002 2001 US$ US$ US$ -------------------------------------------- Net Income ..................................................................... 119,850,319 132,287,908 161,385,686 Adjustment to reconcile Net Income to cash provided from operating activities : Depreciation and amortization ......................................... 4,028,115 2,752,641 731,003 Deferred taxes ........................................................ (13,005,297) 6,908,298 6,097,093 Lease Revenue ......................................................... (186,427,881) (183,541,585) (195,223,932) Finance tariff cash revenue ........................................... 246,405,730 263,559,812 262,829,803 Changes in operating assets and liabilities: Inventories ........................................................... 2,066,641 (8,855,387) (9,242,424) Accounts receivable ................................................... (9,311,086) 10,340,353 (22,975,149) Prepayments ........................................................... 2,292,604 (5,954,169) 979,429 Accounts payable ...................................................... 22,353,640 (9,266,000) (20,701,000) Unfunded pension obligation ........................................... 4,185,183 5,692,943 -- Other liabilities ..................................................... (2,445,519) (608,934) 3,093,490 Effect of exchange rate changes ....................................... 1,824,028 4,235,487 (2,003,877) -------------------------------------------- Net cash provided by operating activities ...................................... 191,816,478 217,551,367 184,970,122
22. UNCERTAINTIES AS OF DECEMBER 31, 2003 22.1 JLEC's corporate tax return, payroll tax and VAT returns for the years 2000 to 2003 are open to audit by the Moroccan Tax Authorities. JLEC is periodically involved in other legal, tax and other proceedings regarding matters arising in the ordinary course of business. JLEC believes that the outcome of these matters will not materially affect its results of operations or liquidity. 22.2 Discussions are currently underway between JLEC and ONE, which may result in amendments of the Power Purchase Agreement (PPA) and the Transfer of Possession Agreement (TPA). As currently drafted, such amendments would eliminate ONE's right of termination for convenience (which right ONE could otherwise exercise starting on September 13, 2012) and reduce ONE's right of termination due to adverse economic circumstances (which right ONE might otherwise be entitled to exercise after all of the principal amount of JLEC's indebtedness to the project lenders has been repaid); and thereby, the proposed amendments would increase the likelihood that the PPA and TPA continue in effect until their scheduled expiration on September 13, 2027. In exchange, it is proposed that the PPA's gross capacity charges be reduced by means of a new rebate (to be paid by JLEC to ONE on a quarterly basis, and calculated starting from September 13, 2003) and future tariff reductions (starting from September 13, 2014). These possible PPA and TPA amendments are still under negotiation, and such negotiations may or may not converge on agreements acceptable to both JLEC and ONE. Furthermore, any potential PPA and TPA amendments agreed between JLEC and ONE would still be subject to change by and the approval of ONE's Board of Directors, JLEC's shareholders and JLEC's lenders before coming into effect. This process of negotiation, review and approval will require several months at least, and may possibly never result in any amendments. This uncertainty exists as of the date of these financial statements. 23. NEW ACCOUNTING STANDARDS In June 2002, FASB issued SFAS No 146, "Accounting for Costs Associated with Exit or Disposal Activities.". This statement addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities and nullifies EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to exit an Activity (Including Certain costs incurred in a Restructuring)". Under SFAS 146, the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date the company committed to the exit plan. This statement became effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No 146 did not have a material impact on JLEC's results of operations or its financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The Standard specifies that instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. The Standard is effective for interim or fiscal periods ending after June 15, 2003. JLEC is currently assessing the new standard and has not yet determined the impact on its financial statements. Page 29 EX-99.(C) 37 k82154aexv99wxcy.txt REPRESENTATION OF FINANCIAL STATEMENTS EXHIBIT 99(c) Pursuant to Regulation S-X, Rule 3-09, the financial statements for the fiscal years ended December 31, 2001, 2002 and 2003 for Emirates CMS Power Company, which is a foreign business, will be filed by June 30, 2004. EX-99.(D) 38 k82154aexv99wxdy.txt REPRESENTATION OF FINANCIAL STATEMENTS EXHIBIT 99(d) Pursuant to Regulation S-X, Rule 3-09, the financial statements for the fiscal years ended June 30, 2002, 2003 and 2004 for SCP Investments (1) PTY. LTD., which is a foreign business, will be filed by December 31, 2004. -----END PRIVACY-ENHANCED MESSAGE-----


	Page Reference
	in Annual Report
	on Form 10-K

Report of Independent Auditors – PricewaterhouseCoopers LLP		F-2
Report of Independent Public Accountants – Arthur Andersen, LLP		F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002		F-4
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002, and 2001		F-5
Consolidated Statements of Partners’ Equity for the Years Ended December 31, 2003, 2002, and 2001		F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001		F-7
Notes to Consolidated Financial Statements		F-8


			2003			2002

ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	173,651		$	160,425
	Accounts and notes receivable – related parties			43,805			48,448
	Accounts receivable			38,333			32,479
	Gas inventory			20,298			19,566
	Unamortized property taxes			17,672			18,355
	Derivative assets			86,825			73,819
	Broker margin accounts and prepaid expenses			8,101			5,165

		Total current assets		388,685			358,257

PROPERTY, PLANT AND EQUIPMENT
	Property, plant and equipment			2,463,931			2,449,148
	Pipeline			21,432			21,432

		Total property, plant and equipment		2,485,363			2,470,580
	Accumulated depreciation			(991,556	)		(920,614	)

		Net property, plant and equipment		1,493,807			1,549,966

OTHER ASSETS:
	Restricted investment securities held-to-maturity			139,755			138,701
	Derivative assets non-current			18,100			31,037
	Deferred financing costs, net of accumulated amortization of $17,285 and $15,930, respectively			7,680			9,035
	Prepaid gas costs, materials and supplies			21,623			11,077

		Total other assets		187,158			189,850

TOTAL ASSETS			$	2,069,650		$	2,098,073

LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable and accrued liabilities		$	57,368		$	58,080
	Gas supplier funds on deposit			4,517			—
	Interest payable			53,009			56,386
	Current portion of long-term debt			134,576			93,928

		Total current liabilities		249,470			208,394

NON-CURRENT LIABILITIES:
	Long-term debt			1,018,645			1,153,221
	Other			2,459			2,148

		Total non-current liabilities		1,021,104			1,155,369

COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES				1,270,574			1,363,763

PARTNERS’ EQUITY				799,076			734,310

TOTAL LIABILITIES AND PARTNERS’ EQUITY			$	2,069,650		$	2,098,073


			2003			2002			2001

OPERATING REVENUES:
	Capacity		$	404,681		$	404,713		$	409,633
	Electric			162,093			177,569			184,707
	Steam			17,638			14,537			16,473

		Total operating revenues		584,412			596,819			610,813

OPERATING EXPENSES:
	Fuel costs			254,988			255,142			288,167
	Depreciation			89,437			88,963			92,176
	Operations			16,943			16,642			16,082
	Maintenance			15,107			12,666			13,739
	Property and single business taxes			30,040			27,087			26,410
	Administrative, selling and general			9,959			8,195			16,404

		Total operating expenses		416,474			408,695			452,978

OPERATING INCOME				167,938			188,124			157,835

OTHER INCOME (EXPENSE):
	Interest and other income			5,100			5,555			16,725
	Interest expense			(113,247	)		(119,783	)		(126,296	)

		Total other income (expense), net		(108,147	)		(114,228	)		(109,571	)

NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE				59,791			73,896			48,264
Cumulative effect of change in method of accounting for derivative option contracts (to April 1, 2002) (Note 2)				—			58,131			—

NET INCOME			$	59,791		$	132,027		$	48,264


			General			Limited
			Partners			Partners			Total

BALANCE, DECEMBER 31, 2000			$	448,100		$	79,638		$	527,738
Comprehensive Income
	Net Income			42,020			6,244			48,264
	Other Comprehensive Income
		Cumulative effect of accounting change		13,688			2,034			15,722
		Unrealized loss on hedging activities		(42,444	)		(6,307	)		(48,751	)
		Reclassification adjustments recognized in net income above		7,608			1,131			8,739

		Total other comprehensive income		(21,148	)		(3,142	)		(24,290	)

	Total Comprehensive Income			20,872			3,102			23,974

BALANCE, DECEMBER 31, 2001			$	468,972		$	82,740		$	551,712
Comprehensive Income
	Net Income			114,947			17,080			132,027
	Other Comprehensive Income
		Unrealized gain on hedging activities since beginning of period		33,311			4,950			38,261
		Reclassification adjustments recognized in net income above		10,717			1,593			12,310

		Total other comprehensive income		44,028			6,543			50,571

	Total Comprehensive Income			158,975			23,623			182,598

BALANCE, DECEMBER 31, 2002			$	627,947		$	106,363		$	734,310
Comprehensive Income
	Net Income			52,056			7,735			59,791
	Other Comprehensive Income
		Unrealized gain on hedging activities since beginning of period		34,484			5,125			39,609
		Reclassification adjustments recognized in net income above		(30,153	)		(4,481	)		(34,634	)

		Total other comprehensive income		4,331			644			4,975

	Total Comprehensive Income			56,387			8,379			64,766

BALANCE, DECEMBER 31, 2003			$	684,334		$	114,742		$	799,076

(1)		THE PARTNERSHIP AND ASSOCIATED RISKS

		MCV was organized to construct, own and operate a combined-cycle, gas-fired cogeneration facility (the “Facility”) located in Midland, Michigan. MCV was formed on January 27, 1987, and the Facility began commercial operation in 1990.

		In 1992, MCV acquired the outstanding common stock of PVCO Corp., a previously inactive company. MCV and PVCO Corp. entered into a partnership agreement to form MCV Gas Acquisition General Partnership (“MCV GAGP”) for the purpose of buying and selling natural gas on the spot market and other transactions involving natural gas activities. Currently, MCV GAGP is not actively engaged in any business activity.

		The Facility has a net electrical generating capacity of approximately 1500 MW and approximately 1.5 million pounds of process steam capacity per hour. MCV has entered into three principal energy sales agreements. MCV has contracted to (i) supply up to 1240 MW of electric capacity (“Contract Capacity”) to Consumers Energy Company (“Consumers”) under the Power Purchase Agreement (“PPA”), for resale to its customers through 2025, (ii) supply electricity and steam to The Dow Chemical Company (“Dow”) under the Steam and Electric Power Agreement (“SEPA”) through 2015 and (iii) supply steam to Dow Corning Corporation (“DCC”) under the Steam Purchase Agreement (“SPA”) through 2011. From time to time, MCV enters into other sales agreements for the sale of excess capacity and/or energy available above MCV’s internal use and obligations under the PPA, SEPA and SPA. Results of operations are primarily dependent on successfully operating the Facility at or near contractual capacity levels and on Consumers’ ability to perform its obligations under the PPA. Sales pursuant to the PPA have historically accounted for over 90% of MCV’s revenues.

		The PPA permits Consumers, under certain conditions, to reduce the capacity and energy charges payable to MCV and/or to receive refunds of capacity and energy charges paid to MCV if the Michigan Public Service Commission (“MPSC”) does not permit Consumers to recover from its customers the capacity and energy charges specified in the PPA (the “regulatory-out” provision). Until September 15, 2007, however, the capacity charge may not be reduced below an average capacity rate of 3.77 cents per kilowatt-hour for the available Contract Capacity notwithstanding the “regulatory-out” provision. Consumers and MCV are required to support and defend the terms of the PPA.

		The Facility is a qualifying cogeneration facility (“QF”) originally certified by the Federal Energy Regulatory Commission (“FERC”) under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”). In order to maintain QF status, certain operating and efficiency standards must be maintained on a calendar-year basis and certain ownership limitations must be met. In the case of a topping-cycle generating plant such as the Facility, the applicable operating standard requires that the portion of total energy output that is put to some useful purpose other than facilitating the production of power (the “Thermal Percentage”) be at least 5%. In addition, the Facility must achieve a PURPA efficiency standard (the sum of the useful power output plus one-half of the useful thermal energy output, divided by the energy input (the “Efficiency Percentage”)) of at least 45%. If the Facility maintains a Thermal Percentage of 15% or higher, the required Efficiency Percentage is reduced to 42.5%. Since 1990, the Facility has achieved the applicable Thermal and Efficiency Percentages. For the twelve months ended December 31, 2003, the Facility achieved a Thermal Percentage of 21.0% and an Efficiency Percentage of 47.4%. The loss of QF status could, among other things, cause the Facility to lose its rights under PURPA to sell power to Consumers at Consumers’ “avoided cost” and subject the Facility to additional federal and state regulatory requirements. MCV believes that the Facility will meet the required Thermal Percentage and the corresponding Efficiency Percentage in 2003 and beyond, as well as the PURPA ownership limitations.

		The Facility is wholly dependent upon natural gas for its fuel supply and a substantial portion of the Facility’s operating expenses consist of the costs of natural gas. MCV recognizes that its existing gas contracts are not sufficient to satisfy the anticipated gas needs over the term of the PPA and, as such, no assurance can be given as to the availability or price of natural gas after the expiration of the existing gas contracts. In addition, to the extent that the costs associated with production of electricity rise faster than the energy charge payments, MCV’s financial performance will be negatively affected. The extent of such impact will depend upon the

		amount of the average energy charge payable under the PPA, which is based upon costs incurred at Consumers’ coal-fired plants and upon the amount of energy scheduled by Consumers for delivery under the PPA. However, given the unpredictability of these factors, the overall economic impact upon MCV of changes in energy charges payable under the PPA and in future fuel costs under new or existing contracts cannot accurately be predicted.

		At both the state and federal level, efforts continue to restructure the electric industry. A significant issue to MCV is the potential for future regulatory denial of recovery by Consumers from its customers of above market PPA costs Consumers pays MCV. At the state level, the MPSC entered a series of orders from June 1997 through February 1998 (collectively the “Restructuring Orders”), mandating that utilities “wheel” third-party power to the utilities’ customers, thus permitting customers to choose their power provider. MCV, as well as others, filed an appeal in the Michigan Court of Appeals to protect against denial of recovery by Consumers of PPA charges. The Michigan Court of Appeals found that the Restructuring Orders do not unequivocally disallow such recovery by Consumers and, therefore, MCV’s issues were not ripe for appellate review and no actual controversy regarding recovery of costs could occur until 2008, at the earliest. In June 2000, the State of Michigan enacted legislation which, among other things, states that the Restructuring Orders (being voluntarily implemented by Consumers) are in compliance with the legislation and enforceable by the MPSC. The legislation provides that the rights of parties to existing contracts between utilities (like Consumers) and QFs (like MCV), including the rights to have the PPA charges recovered from customers of the utilities, are not abrogated or diminished, and permits utilities to securitize certain stranded costs, including PPA charges.

		In 1999, the U.S. District Court granted summary judgment to MCV declaring that the Restructuring Orders are preempted by federal law to the extent they prohibit Consumers from recovering from its customers any charge for avoided costs (or “stranded costs”) to be paid to MCV under PURPA pursuant to the PPA. In 2001, the United States Court of Appeals (“Appellate Court”) vacated the U.S. District Court’s 1999 summary judgment and ordered the case dismissed based upon a finding that no actual case or controversy existed for adjudication between the parties. The Appellate Court determined that the parties’ dispute is hypothetical at this time and the QFs’ (including MCV) claims are premised on speculation about how an order might be interpreted by the MPSC, in the future.

		MCV continues to monitor and participate in these industry restructuring matters as appropriate, and to evaluate potential impacts on both cash flows and recoverability of the carrying value of property, plant and equipment. MCV management cannot, at this time, predict the impact or outcome of these matters.

(2)		SIGNIFICANT ACCOUNTING POLICIES

		The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Following is a discussion of MCV’s significant accounting policies.

		Principles of Consolidation

		The consolidated financial statements include the accounts of MCV and its wholly owned subsidiaries. All material transactions and balances among entities, which comprise MCV, have been eliminated in the consolidated financial statements.

		Revenue Recognition

		MCV recognizes revenue for the sale of variable energy and fixed energy when delivered. Capacity and other installment revenues are recognized based on plant availability or other contractual arrangements.

		Fuel Costs

		MCV’s fuel costs are those costs associated with securing natural gas, transportation and storage services necessary to generate electricity and steam from the Facility. These costs are recognized in the income statement based upon actual volumes burned to produce the delivered energy. In addition, MCV engages in certain cost mitigation activities to offset the fixed charges MCV incurs for these activities. The gains or losses resulting from these activities have resulted in net gains of approximately $7.7 million, $3.9 million and $5.5 million for the years ended 2003, 2002 and 2001, respectively. These net gains are reflected as a component of fuel costs.

		In July 2000, in response to rapidly escalating natural gas prices and since Consumers electric rates were frozen, MCV entered into transactions with Consumers whereby Consumers agreed to reduce MCV’s dispatch level and MCV agreed to share with Consumers the savings realized by not having to generate electricity (“Dispatch Mitigation”). For the years ended 2003, 2002 and 2001, MCV estimates that Dispatch Mitigation resulted in net savings of approximately $13.0 million, $2.5 million and $7.6 million, respectively, a portion of which will be realized in reduced maintenance expenditures in future years.

		Subsequently, on January 1, 2004, Dispatch Mitigation ceased and Consumers began dispatching MCV pursuant to the 915 MW Settlement and the 325 MW Settlement “availability caps” provision (i.e., minimum dispatch of 1100 MW on- and off-peak (“Forced Dispatch”)). On February 12, 2004, MCV and Consumers entered into a Resource Conservation Agreement (“RCA”) which, among other things, provides that Consumers will economically dispatch MCV, if certain conditions are met. Such dispatch is expected to reduce electric production from what would have occurred under the Forced Dispatch, as well as decrease gas consumption by MCV. The RCA provides that Consumers has a right of first refusal to purchase, at market prices, the gas conserved under the RCA. The RCA further provides for the parties to enter into another agreement implementing the terms of the RCA including the sharing of savings realized by not having to generate electricity. The RCA is subject to MPSC approval and MCV and Consumers must accept the terms of the MPSC order as a condition precedent to the RCA becoming effective. The MPSC has not yet acted upon Consumers’ application for approval of the RCA. MCV cannot predict the outcome of the MPSC proceedings necessary to effectuate the RCA.

		Inventory

		MCV’s inventory of natural gas is stated at the lower of cost or market, and valued using the last-in, first-out (“LIFO”) method. Inventory includes the costs of purchased gas, variable transportation and storage. The amount of reserve to reduce inventories from first-in, first-out (“FIFO”) basis to the LIFO basis at December 31, 2003 and 2002, was $8.4 million and $7.4 million, respectively. Inventory cost, determined on a FIFO basis, approximates current replacement cost.

		Materials and Supplies

		Materials and supplies are stated at the lower of cost or market using the weighted average cost method. The majority of MCV’s materials and supplies are considered replacement parts for MCV’s Facility.

		Depreciation

		Original plant, equipment and pipeline were valued at cost for the constructed assets and at the asset transfer price for purchased and contributed assets, and are depreciated using the straight-line method over an estimated useful life of 35 years, which is the term of the PPA, except for the hot gas path components of the GTGs which are primarily being depreciated over a 25-year life. Plant construction and additions, since commercial operations in 1990, are depreciated using the straight-line method over the remaining life of the plant which currently is 22 years. Major renewals and replacements, which extend the useful life of plant and equipment

		are capitalized, while maintenance and repairs are expensed when incurred. Major equipment overhauls are capitalized and amortized to the next equipment overhaul. Personal property is depreciated using the straight-line method over an estimated useful life of 5 to 15 years. The cost of assets and related accumulated depreciation are removed from the accounts when sold or retired, and any resulting gain or loss reflected in operating income.

		Federal Income Tax

		MCV is not subject to Federal or State income taxes. Partnership earnings are taxed directly to each individual partner.

		Statement of Cash Flows

		All liquid investments purchased with a maturity of three months or less at time of purchase are considered to be current cash equivalents.

		Fair Value of Financial Instruments

		The carrying amounts of cash and cash equivalents and short-term investments approximate fair value because of the short maturity of these instruments. MCV’s short-term investments, which are made up of investment securities held-to-maturity, as of December 31, 2003 and December 31, 2002 have original maturity dates of approximately one year or less. The unique nature of the negotiated financing obligation discussed in Note 6 makes it unnecessary to estimate the fair value of the Owner Participants’ underlying debt and equity instruments supporting such financing obligation, since SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” does not require fair value accounting for the lease obligation.

		Accounting for Derivative Instruments and Hedging Activities

		Effective January 1, 2001, MCV adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” which was issued in June 1998 and then amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of SFAS No. 133,” SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities – An amendment of FASB Statement No. 133” and SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activity (collectively referred to as “SFAS No. 133”). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges in some cases allows a derivative’s gains and losses to offset related results on the hedged item in the income statement or permits recognition of the hedge results in other comprehensive income, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

			Electric Sales Agreements

			MCV believes that its electric sales agreements currently do not qualify as derivatives under SFAS No. 133, due to the lack of an active energy market (as defined by SFAS No. 133) in the State of Michigan and the transportation cost to deliver the power under the contracts to the closest active energy market at the Cinergy hub in Ohio and as such does not record the fair value of these contracts on its balance sheet. If an active energy market emerges, MCV intends to apply the normal purchase, normal sales exception under SFAS No. 133 to its electric sales agreements, to the extent such exception is applicable.

			Forward Foreign Exchange Contracts

			An amended service agreement was entered into between MCV and Alstom Power Company (“Alstom”) (the “Amended Service Agreement”), under which Alstom will provide hot gas path parts for MCV’s twelve

			gas turbines. The payments due to Alstom under the Amended Service Agreement are adjusted annually based on the U.S. dollar to Swiss franc currency exchange rate.

			To manage this currency exchange rate risk and hedge against adverse currency fluctuations impacting the payments under the Amended Service Agreement, MCV maintained a foreign currency hedging program whereby MCV periodically entered into forward purchase contracts for Swiss francs. Under SFAS No. 133, the forward foreign currency exchange contracts qualified as fair value hedges, since they hedged the identifiable foreign currency commitment of the Amended Service Agreement. As of December 31, 2003, MCV did not have any such transactions outstanding and does not anticipate any future transactions since the Alstom Agreement is expected to be terminated in the near future. As of December 31, 2002, MCV had a forward purchase contract involving Swiss francs in the notional amount of $5.0 million. This hedge was considered highly effective, therefore, there was no material gain or loss recognized in earnings during the twelve months ended December 31, 2002.

			Natural Gas Supply Contracts

			MCV management believes that its long-term natural gas contracts which do not contain volume optionality qualify under SFAS No. 133 for the normal purchases and normal sales exception. Therefore, these contracts are currently not recognized at fair value on the balance sheet.

			The FASB issued DIG Issue C-16, which became effective April 1, 2002, regarding natural gas commodity contracts that combine an option component and a forward component. This guidance requires either that the entire contract be accounted for as a derivative or the components of the contract be separated into two discrete contracts. Under the first alternative, the entire contract considered together would not qualify for the normal purchases and sales exception under the revised guidance. Under the second alternative, the newly established forward contract could qualify for the normal purchases and sales exception, while the option contract would be treated as a derivative under SFAS No. 133 with changes in fair value recorded through earnings. At April 1, 2002, MCV had nine long-term gas contracts that contained both an option and forward component. As such, they were no longer accounted for under the normal purchases and sales exception and MCV began mark-to-market accounting of these nine contracts through earnings. Based on the natural gas prices, at the beginning of April 2002, MCV recorded a $58.1 million gain for the cumulative effect of this accounting change. During the fourth quarter of 2002, MCV removed the option component from three of the nine long-term gas contracts, which should reduce some of the earnings volatility. Since April 2002, MCV has recorded an additional mark-to-market gain of $16.9 million for these gas contracts for a cumulative mark-to-market gain through December 31, 2003 of $75.0 million, which will reverse over the remaining life of these gas contracts, ranging from 2004 to 2007.

			For the twelve months ended December 31, 2003, MCV recorded in “Fuel costs” a $5.0 million net mark-to-market loss in earnings associated with these contracts. In addition, as of December 31, 2003 and December 31, 2002, MCV recorded “Derivative assets” in Current Assets in the amount of $56.9 million and $48.9 million, respectively, and for the same periods recorded “Derivative assets” in Other Assets in the amount of $18.1 million and $31.0 million, respectively, representing the mark-to-market gain on these long-term natural gas contracts.

			Natural Gas Supply Futures and Options

			To manage market risks associated with the volatility of natural gas prices, MCV maintains a gas hedging program. MCV enters into natural gas futures and option contracts in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are being utilized principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize MCV’s existing gas supply, storage and transportation arrangements.

			These financial instruments are derivatives under SFAS No. 133 and the contracts that are utilized to secure the anticipated natural gas requirements necessary for projected electric and steam sales qualify as cash flow

			hedges under SFAS No. 133, since they hedge the price risk associated with the cost of natural gas. MCV also engages in cost mitigation activities to offset the fixed charges MCV incurs in operating the Facility. These cost mitigation activities include the use of futures and options contracts to purchase and/or sell natural gas to maximize the use of the transportation and storage contracts when it is determined that they will not be needed for Facility operation. Although these cost mitigation activities do serve to offset the fixed monthly charges, these cost mitigation activities are not considered a normal course of business for MCV and do not qualify as hedges under SFAS No. 133. Therefore, the resulting mark-to-market gains and losses from cost mitigation activities are flowed through MCV’s earnings.

			Cash is deposited with the broker in a margin account at the time futures or options contracts are initiated. The change in market value of these contracts requires adjustment of the margin account balances. The margin account balance as of December 31, 2003 and December 31, 2002 was recorded as a current asset in “Broker margin accounts and prepaid expenses,” in the amount of $4.1 million and $.8 million, respectively.

			For the twelve months ended December 31, 2003, MCV has recognized in other comprehensive income, an unrealized $5.0 million increase on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas. This resulted in a net $31.3 million gain in other comprehensive income as of December 31, 2003. This balance represents natural gas futures and options with maturities ranging from January 2004 to December 2007, of which $21.8 million of this gain is expected to be reclassified into earnings within the next twelve months. MCV also has recorded, as of December 31, 2003, a $29.9 million current derivative asset in “Derivative assets,” representing the mark-to-market gain on natural gas futures for anticipated projected electric and steam sales accounted for as hedges. In addition, for the twelve months ended December 31, 2003, MCV has recorded a net $35.0 million gain in earnings included in fuel costs from hedging activities related to MCV natural gas requirements for Facility operations and a net $1.0 million gain in earnings from cost mitigation activities.

			For the twelve months ended December 31, 2002, MCV recognized an unrealized $50.6 million increase in other comprehensive income on the futures contracts, which are hedges of forecasted purchases for plant use of market priced gas, resulting in a $26.3 million gain balance in other comprehensive income as of December 31, 2002. As of December 31, 2002, MCV had recorded a $24.9 million current derivative asset in “Derivative assets.” For the twelve months ended December 31, 2002, MCV had recorded a net $12.2 million loss in earnings from hedging activities related to MCV natural gas requirements for Facility operations and a net $.4 million gain in earnings from cost mitigation activities.

			Interest Rate Swaps

			To manage the effects of interest rate volatility on interest income while maximizing return on permitted investments, MCV established an interest rate hedging program. The notional amounts of the hedges are tied directly to MCV’s anticipated cash investments, without physically exchanging the underlying notional amounts. Cash is deposited with the broker in a margin account at the time the interest rate swap transactions are initiated. The change in market value of these contracts may require further adjustment of the margin account balance. The margin account balance at December 31, 2002, of approximately $25,000, which was recorded as a current asset in “Broker margin accounts and prepaid expenses,” was returned to MCV during the month of January 2003 since MCV currently does not have any outstanding interest rate swap transactions.

			As of December 31, 2002, MCV had one interest rate swap, with a notional amount of $20.0 million with a period of performance that extended to December 1, 2002, which did not qualify as a hedge under SFAS No. 133. The gains and losses on this swap were recorded currently in earnings. For the twelve months ended December 31, 2002, MCV recorded an immaterial loss in earnings.

			Reclassification

			Certain prior period amounts have been reclassified to conform to the current year financial statement presentation.

		New Accounting Standards

		In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This SFAS amends SFAS No. 133 for decisions made (1) as part of the Derivative Implementations Group process that effectively required amendments to SFAS No. 133, (2) for other Financial Accounting Standards Board projects dealing with financial instruments and (3) for implementation issues raised in relation to the application of this definition of a derivative. The changes in this SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly, which will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This standard is effective for contracts entered into or modified after June 30, 2003, with some exceptions. MCV has adopted this standard and does not expect the application to materially affect its financial position or results of operations.

(3)		RESTRICTED INVESTMENT SECURITIES HELD-TO-MATURITY

		Non-current restricted investment securities held-to-maturity have carrying amounts that approximate fair value because of the short maturity of these instruments and consist of the following at December 31 (in thousands):


	2003		2002

Funds restricted for rental payments pursuant to the Overall Lease Transaction	$	137,296	$	136,554
Funds restricted for management non-qualified plans		2,459		2,147

Total	$	139,755	$	138,701


		2003		2002

Accounts payable
	Related parties	$	7,386	$	12,224
	Trade creditors		34,786		27,935
Property and single business taxes			12,548		14,842
Other			2,648		3,079

Total		$	57,368	$	58,080

(5)		GAS SUPPLIER FUNDS ON DEPOSIT

		Pursuant to individual gas contract terms with counterparties, deposit amounts may be required by one party to the other based upon the net amount of exposure. The net amount of exposure will vary with changes in market prices, credit provisions and various other factors. Collateral paid or received will be posted by one party to

		the other based upon the net amount of exposure. The net amount of exposure will vary with changes in market prices, credit provisions and various other factors. Collateral paid or received will be posted by one party to the other based on the net amount of the exposure. Interest is earned on funds on deposit. As of December 31, 2003 MCV was not supplying any credit support in the form of cash or letters of credit. As of December 31, 2003 MCV was holding $4.5 million of cash on deposit and letters of credit totaling $116.6 million from two gas suppliers as collateral support.

(6)		LONG-TERM DEBT

		Long-term debt consists of the following at December 31 (in thousands):


	2003			2002

Financing obligation, maturing through 2015, payable in semi-annual installments of principal and interest, collateralized by property, plant and equipment	$	1,153,221		$	1,247,149
Less current portion		(134,576	)		(93,928	)

Total long-term debt	$	1,018,645		$	1,153,221

		Financing Obligation

		In June 1990, MCV obtained permanent financing for the Facility by entering into sale and leaseback agreements (“Overall Lease Transaction”) with a lessor group, related to substantially all of MCV’s fixed assets. Proceeds of the financing were used to retire borrowings outstanding under existing loan commitments, make a capital distribution to the Partners and retire a portion of notes issued by MCV to MEC Development Corporation (“MDC”) in connection with the transfer of certain assets by MDC to MCV. In accordance with SFAS No. 98, “Accounting For Leases,” the sale and leaseback transaction has been accounted for as a financing arrangement.

		The financing obligation utilizes the effective interest rate method, which is based on the minimum lease payments required through the end of the basic lease term of 2015 and management’s estimate of additional anticipated obligations after the end of the basic lease term. The effective interest rate during the remainder of the basic lease term is approximately 9.4%.

		Under the terms of the Overall Lease Transaction, MCV sold undivided interests in all of the fixed assets of the Facility for approximately $2.3 billion, to five separate owner trusts (“Owner Trusts”) established for the benefit of certain institutional investors (“Owner Participants”). U.S. Bank National Association (formerly known as State Street Bank and Trust Company) serves as owner trustee (“Owner Trustee”) under each of the Owner Trusts, and leases undivided interests in the Facility on behalf of the Owner Trusts to MCV for an initial term of 25 years. CMS Midland Holdings Company (“CMS Holdings”), currently a wholly owned subsidiary of Consumers, acquired a 35% indirect equity interest in the Facility through its purchase of an interest in one of the Owner Trusts.

		The Overall Lease Transaction requires MCV to achieve certain rent coverage ratios and other financial tests prior to a distribution to the Partners. Generally, these financial tests become more restrictive with the passage of time. Further, MCV is restricted to making permitted investments and incurring permitted indebtedness as specified in the Overall Lease Transaction. The Overall Lease Transaction also requires filing of certain periodic operating and financial reports, notification to the lessors of events constituting a material adverse change, significant litigation or governmental investigation, and change in status as a qualifying facility under FERC proceedings or court decisions, among others. Notification and approval is required for plant modification, new business activities, and other significant changes, as defined. In addition,

		MCV has agreed to indemnify various parties to the sale and leaseback transaction against any expenses or environmental claims asserted, or certain federal and state taxes imposed on the Facility, as defined in the Overall Lease Transaction.

		Under the terms of the Overall Lease Transaction and refinancing of the tax-exempt bonds, approximately $25.0 million of transaction costs were a liability of MCV and have been recorded as a deferred cost. Financing costs incurred with the issuance of debt are deferred and amortized using the interest method over the remaining portion of the 25-year lease term. Deferred financing costs of approximately $1.4 million, $1.5 million and $1.7 million were amortized in the years 2003, 2002 and 2001, respectively.

		Interest and fees incurred related to long-term debt arrangements during 2003, 2002 and 2001 were $111.9 million, $118.3 million and $124.6 million, respectively.

		Interest and fees paid during 2003, 2002 and 2001 were $115.4 million, $122.1 million and $131.7 million, respectively.

		Minimum payments due under these long-term debt arrangements over the next five years are (in thousands):


	Principal		Interest		Total

2004	$	134,576	$	108,233	$	242,809
2005		76,547		97,836		174,383
2006		63,459		92,515		155,974
2007		62,916		87,988		150,904
2008		67,753		83,163		150,916

	$	405,251	$	469,735	$	874,986

		Revolving Credit Agreement

		MCV has also entered into a working capital line (“Working Capital Facility”), which expires August 29, 2004. Under the terms of the existing agreement, MCV can borrow up to the $50 million commitment, in the form of short-term borrowings or letters of credit collateralized by MCV’s natural gas inventory and earned receivables. At any given time, borrowings and letters of credit are limited by the amount of the borrowing base, defined as 90% of earned receivables and 50% of natural gas inventory, capped at $15 million. During 2003, MCV did not utilize the Working Capital Facility. At December 31, 2003, MCV had no outstanding borrowings or letters of credit.

		Intercreditor Agreement

		MCV has also entered into an Intercreditor Agreement with the Owner Trustee, Working Capital Lender, U.S. Bank National Association as Collateral Agent (“Collateral Agent”) and the Senior and Subordinated Indenture Trustees. Under the terms of this agreement, MCV is required to deposit all revenues derived from the operation of the Facility with the Collateral Agent for purposes of paying operating expenses and rent. In addition, these funds are required to pay construction modification costs and to secure future rent payments. As of December 31, 2003, MCV has deposited $137.3 million into the reserve account. The reserve account is to be maintained at not less than $40 million nor more than $137 million (or debt portion of next succeeding basic rent payment, whichever is greater). Excess funds in the reserve account are periodically transferred to MCV. This agreement also contains provisions governing the distribution of revenues and rents due under the Overall Lease Transaction, and establishes the priority of payment among the Owner Trusts, creditors of the Owner Trusts, creditors of MCV and the Partnership.

(7)		COMMITMENTS AND OTHER AGREEMENTS

		MCV has entered into numerous commitments and other agreements related to the Facility. Principal agreements are summarized as follows:

		Power Purchase Agreement

		MCV and Consumers have executed the PPA for the sale to Consumers of a minimum amount of electricity, subject to the capacity requirements of Dow and any other permissible electricity purchasers. Consumers has the right to terminate and/or withhold payment under the PPA if the Facility fails to achieve certain operating levels or if MCV fails to provide adequate fuel assurances. In the event of early termination of the PPA, MCV would have a maximum liability of approximately $270 million if the PPA were terminated in the 12^th through 24^th years. The term of this agreement is 35 years from the commercial operation date and year-to-year thereafter.

		Steam and Electric Power Agreement

		MCV and Dow executed the SEPA for the sale to Dow of certain minimum amounts of steam and electricity for Dow’s facilities.

		If the SEPA is terminated, and Consumers does not fulfill MCV’s commitments as provided in the Backup Steam and Electric Power Agreement, MCV will be required to pay Dow a termination fee, calculated at that time, ranging from a minimum of $60 million to a maximum of $85 million. This agreement provides for the sale to Dow of steam and electricity produced by the Facility for terms of 25 years and 15 years, respectively, commencing on the commercial operation date and year-to-year thereafter.

		Steam Purchase Agreement

		MCV and DCC executed the SPA for the sale to DCC of certain minimum amounts of steam for use at the DCC Midland site. Steam sales under the SPA commenced in July 1996. Termination of this agreement, prior to expiration, requires the terminating party to pay to the other party a percentage of future revenues, which would have been realized had the initial term of 15 years been fulfilled. The percentage of future revenues payable is 50% if termination occurs prior to the fifth anniversary of the commercial operation date and 33-1/3% if termination occurs after the fifth anniversary of this agreement. The term of this agreement is 15 years from the commercial operation date of steam deliveries under the contract and year-to-year thereafter.

		Gas Supply Agreements

		MCV has entered into gas purchase agreements with various producers for the supply of natural gas. The current contracted volume totals 227,561 MMBtu per day annual average for 2004. As of January 1, 2004, gas contracts with U.S. suppliers provide for the purchase of 149,423 MMBtu per day while gas contracts with Canadian suppliers provide for the purchase of 78,138 MMBtu per day. Some of these contracts require MCV to pay for a minimum amount of natural gas per year, whether or not taken. The estimated minimum commitments under these contracts based on current long term prices for gas for the years 2004 through 2008 are $267.3 million, $338.6 million, $344.1 million, $340.4 million and $283.9 million, respectively. A portion of these payments may be utilized in future years to offset the cost of quantities of natural gas taken above the minimum amounts.

		Gas Transportation Agreements

		MCV has entered into firm natural gas transportation agreements with various pipeline companies. These agreements require MCV to pay certain reservation charges in order to reserve the transportation capacity.

		MCV incurred reservation charges in 2003, 2002 and 2001, of $34.8 million, $35.1 million and $36.2 million, respectively. The estimated minimum reservation charges required under these agreements for each of the years 2004 through 2008 are $34.9 million, $33.8 million, $30.0 million, $21.6 million and $21.6 million, respectively. These projections are based on current commitments.

		Gas Turbine Service Agreement

		MCV entered into a Service Agreement, as amended, with Alstom, which commenced on January 1, 1990 and was set to expire upon the earlier of the completion of the sixth series of major GTG inspections or December 31, 2009. Under the terms of this agreement, Alstom sold MCV an initial inventory of spare parts for the GTGs and provides qualified service personnel and supporting staff to assist MCV, to perform scheduled inspections on the GTGs, and to repair the GTGs at MCV’s request. Upon termination of the Service Agreement (except for nonperformance by Alstom), MCV must pay a cancellation payment. MCV and Alstom amended the Service Agreement, effective December 31, 1993, to include the supply of hot gas path parts. Under the amended Service Agreement, Alstom provides hot gas path parts for MCV’s twelve gas turbines through the fourth series of major GTG inspections, which were completed in 2002. In January 1998, MCV and Alstom amended the length of the amended Service Agreement to extend through the sixth series of major GTG inspections, which are expected to be completed by year end 2008, for a lump sum fixed price covering the entire term of the amended Service Agreement of $266.5 million (in 1993 dollars, which is adjusted based on exchange rates and Swiss inflation indices), payable on the basis of operating hours as they occur over the same period. MCV has made payments totaling approximately $200.7 million under this amended Service Agreement through December 31, 2003.

		MCV signed a new maintenance service and parts agreement with General Electric International, Inc. (“GEII”), effective December 31, 2002 (“GEII Agreement”). GEII will provide maintenance services and hot gas path parts for MCV’s twelve GTG’s. Under terms and conditions similar to the MCV/Alstom Service Agreement, as described above the GEII Agreement will cover four rounds of major GTG inspections, which are expected to be completed by the year 2015, at a savings to MCV as compared to the Service Agreement with Alstom. The GEII Agreement is expected to replace the current Alstom Service Agreement commencing July 1, 2004. The GEII Agreement can be terminated by either party for cause or convenience. Should termination for convenience occur, a buy out amount will be paid by the terminating party with payments ranging from approximately $19.0 million to $.9 million, based upon the number of operating hours utilized since commencement of the GEII Agreement.

		MCV terminated the Alstom Service Agreement in February 2004, for cause and therefore does not owe the approximately $5.8 million termination payment to Alstom. MCV has a claim against Alstom for approximately $3.0 million for adjustments due to reduced equivalent operating hours experienced under the Service Agreement, that was paid by MCV and a claim against Alstom for one set of hot gas path spare parts (valued within a range of $3.0 million to $7.0 million). These matters may be disputed by Alstom and other disputes may arise. MCV will seek final resolution of all claims that may arise between the parties. At this time, MCV has not recognized any liability to or receivable from Alstom in connection with these claims or termination.

		Steam Turbine Service Agreement

		MCV entered into a nine year Steam Turbine Maintenance Agreement with General Electric Company effective January 1, 1995, which is designed to improve unit reliability, increase availability and minimize unanticipated maintenance costs. In addition, this contract includes performance incentives and penalties, which are based on the length of each scheduled outage and the number of forced outages during a calendar year. Effective February 1, 2004, MCV and GE amended this contract to extend its term through August 31, 2007. MCV will continue making monthly payments over the life of the contract, which will total

		$22.3 million (subject to escalation based on defined indices). The parties have certain termination rights without incurring penalties or damages for such termination. Upon termination, MCV is only liable for payment of services rendered or parts provided prior to termination.

		Site Lease

		In December 1987, MCV leased the land on which the Facility is located from Consumers (“Site Lease”). MCV and Consumers amended and restated the Site Lease to reflect the creation of five separate undivided interests in the Site Lease as of June 1, 1990. Pursuant to the Overall Lease Transaction, MCV assigned these undivided interests in the Site Lease to the Owner Trustees, which in turn subleased the undivided interests back to MCV under five separate site subleases.

		The Site Lease is for a term which commenced on December 29, 1987, and ends on December 31, 2035, including two renewal options of five years each. The rental under the Site Lease is $.6 million per annum, including the two five-year renewal terms.

		Gas Turbine Generator Compressor Blade Agreement

		MCV entered into an agreement with MTS Machinery Tools & Services AG (“MTS”), in January 2002. Under this agreement MTS redesigned and will manufacture and install new design compressor blades for MCV’s twelve GTG’s, which is expected to increase the overall electrical capacity and efficiency of each GTG. MCV has purchased three sets of such blades and has the option to purchase an additional nine sets. The first set of compressor blades was installed in the second quarter of 2003 for approximately $4.2 million. At this time, an additional two sets have been ordered at a cost of $4.1 million.

(8)		PROPERTY TAXES

		In 1997, MCV filed a property tax appeal against the City of Midland at the Michigan Tax Tribunal contesting MCV’s 1997 property taxes. Subsequently, MCV filed appeals contesting its property taxes for tax years 1998 through 2003 at the Michigan Tax Tribunal. A trial was held for tax years 1997 – 2000. The appeals for tax years 2001-2003 are being held in abeyance. On January 23, 2004, the Michigan Tax Tribunal issued its decision in MCV’s tax appeal against the City of Midland for tax years 1997 through 2000. MCV management has estimated that the decision will result in a refund to MCV for the tax years 1997 through 2000 of approximately $29 million in taxes plus $7 million of interest. The decision is subject to reconsideration at the Tribunal and may be appealed to the Michigan Appellate Court and Michigan Supreme Court. The City of Midland has filed a motion for reconsideration at the Michigan Tax Tribunal, asking the Tribunal to make certain technical corrections, as well as substantive changes to the decision. MCV has opposed this motion. MCV management cannot predict the outcome of these further legal proceedings. MCV has not recognized any of the above stated refunds (net of approximately $15.5 million of deferred expenses) in earnings at this time.

(9)		RETIREMENT BENEFITS

		Postretirement Health Care Plans

		In 1992, MCV established defined cost postretirement health care plans (“Plans”) that cover all full-time employees, excluding key management. The Plans provide health care credits, which can be utilized to purchase medical plan coverage and pay qualified health care expenses. Participants become eligible for the benefits if they retire on or after the attainment of age 65 or upon a qualified disability retirement, or if they have 10 or more years of service and retire at age 55 or older. The Plans granted retroactive benefits for all employees hired prior to January 1, 1992. This prior service cost has been amortized to expense over a five

		year period. MCV annually funds the current year service and interest cost as well as amortization of prior service cost to both qualified and non-qualified trusts. The MCV accounts for retiree medical benefits in accordance with SFAS 106, “Employers Accounting for Postretirement Benefits Other Than Pensions.” This standard required the full accrual of such costs during the years that the employee renders service to the MCV until the date of full eligibility. The accumulated benefit obligation of the Plans were $3.3 million at December 31, 2003 and $2.7 million at December 31, 2002. The measurement date of these Plans was December 31, 2003.

		On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. At this time, because of various uncertainties related to this legislation and the appropriate accounting methodology, MCV has elected to defer financial recognition of this legislation until the FASB issues final accounting guidance. When issued, that final guidance could require MCV to change previously reported information. This deferral election is permitted under SFAS 106-1.

		The following table reconciles the change in the Plans’ benefit obligation and change in Plan assets as reflected on the balance sheet as of December 31 (in thousands):


	2003			2002

Change in benefit obligation:
Benefit obligation at beginning of year	$	2,741.9		$	2,405.1
Service cost		212.5			197.3
Interest cost		178.2			188.7
Actuarial gain (loss)		147.4			(44.6	)
Benefits paid during year		(4.0	)		(4.6	)

Benefit obligation at end of year		3,276.0			2,741.9

Change in Plan assets:
Fair value of Plan assets at beginning of year		2,045.8			2,088.0
Actual return on Plan assets		527.5			(270.9	)
Employer contribution		257.5			233.3
Benefits paid during year		(4.0	)		(4.6	)

Fair value of Plan assets at end of year		2,826.8			2,045.8

Unfunded (funded) status		449.2			696.1
Unrecognized prior service cost		(170.3	)		(184.6	)
Unrecognized net gain (loss)		(278.9	)		(511.5	)

Accrued benefit cost	$	—		$	—


	1-Percentage-Point		1-Percentage-Point
	Increase		Decrease

Effect on total of service and interest cost components	$	48.6	$	41.8
Effect on postretirement benefit obligation	$	358.1	$	310.9

		The long-term rate of return on Plan assets is established based on MCV’s expectations of asset returns for the investment mix in its Plan (with some reliance on historical asset returns for the Plans). The expected returns for various asset categories are blended to derive one long-term assumption.

		Plan Assets. Citizens Bank has been appointed as trustee (“Trustee”) of the Plan. The Trustee serves as investment consultant, with the responsibility of providing financial information and general guidance to the MCV Benefits Committee. The Trustee shall invest the assets of the Plan in the separate investment options in accordance with instructions communicated to the Trustee from time to time by the MCV Benefit Committee. The MCV Benefits Committee has the fiduciary and investment selection responsibility for the Plan. The MCV Benefits Committee consists of MCV Officers (excluding the President and Chief Executive Officer).

		The MCV has a target allocation of 80% equities and 20% debt instruments. These investments emphasis total growth return, with a moderate risk level. The MCV Benefits Committee reviews the performance of the Plan investments quarterly, based on a long-term investment horizon and applicable benchmarks, with rebalancing of the investment portfolio, at the discretion of the MCV Benefits Committee.

		MCV’s Plan’s weighted-average asset allocations, by asset category are as follows as of December 31:


		2003			2002

Asset Category:
Cash and cash equivalents			11	%		1	%
Fixed income			17	%		23	%
Equity securities			72	%		76	%

	Total		100	%		100	%